Goliath ← We Can Solve This

Jim Wright, later Speaker of the House, eulogized Patman’s life. “He often comforted the afflicted and afflicted the comfortable,”

The original modern housing finance system was designed with political goals in mind. In the words of William Levitt, the founder of the first postwar suburb, “No man who owns his own house and lot can be a Communist. He has too much to do.”

Jane D’Arista, told me how and why the financial system was blowing up, almost in real time. At the time, no one else, not the bankers or lobbyists or government officials, had any idea what the system they had constructed was doing. But she did, and pointed me to old papers she had written on why the system would blow up.

Barack Obama and his generation had learned their politics from the Watergate Babies, a generation born in rebellion against Patman’s populism. Policymakers in 2009 didn’t understand this at the time; few of them had ever heard of Patman, and few were aware of the origins of their own intellectual traditions. They believed, proudly, that they were nonideological and pragmatic. But most of these officials had a visceral reaction toward populism. They wore the armor of Ivy League degrees, believing that being an economist or having some sort of widely respected credential offered them the divine right to rule.

We didn’t always organize our world around the ideas of highly educated technocrats with bad judgment. We once could do greatness in our politics.

The musical celebrated a telling of history in which Alexander Hamilton, the founding father Democrats had traditionally associated with the banker-friendly Republican Party and a self-proclaimed elitist who created Wall Street and distrusted democracy, had somehow become an icon of progressive thinking and national greatness. He had become a left-wing political hero, instead of the traditional enemy of democracy that historians—and members of the Democratic Party—understood him as for two hundred years.

The bailouts from 2008 to 2010 were not intended to stop a depression, they were intended to stop a New Deal. And so they did.

largely, we are a sullen people, frustrated at unseen forces we cannot describe, squabbling among ourselves. Those of us who demand some sense of control over our economic lives are marginalized as emotional, or racist, or ignorant, whatever stereotype is most useful.

There are many arguments for what is at the root cause of our current social dysfunction. Various explanations include the prevalence of racism, automation, the rise of China, inadequate education or training, the spread of the internet, Donald Trump, the collapse of political norms, or globalization. Many of these explanations have merit. But there’s another much simpler explanation of what is going on. Our systems are operating the way that they were designed to.

In the 1970s, we decided as a society that it would be a good idea to allow private financiers and monopolists to organize our world. As a result, what is around us is a matrix of monopolies, controlling our lives and manipulating our communities and our politics.

A generation ago, there was a revolution. It was not a left-wing or right-wing revolution. It was a revolution of ideas. That revolution was so powerful and dominant that it stole from us not just our liberties but even the words that helped us describe our world. Words like “liberty” and “markets” and “competition” and “monopoly” and “citizen” have been perverted, taken by technocrats who hide the levers of power from most of us. Popular debates are stuck in the 1970s. We attack or praise capitalism, or socialism, or the free market.

Teddy Roosevelt was, as Mark Twain put it, “the most popular human being that has ever existed in the United States.”4 He was a warrior, against greed and dishonor,

Teddy Roosevelt was, as Mark Twain put it, “the most popular human being that has ever existed in the United States.”4 He was a warrior, against greed and dishonor, and for an America bristling with industrial muscle.

While president, he had done what no political leader in America had yet managed. He had taken on the great trusts, the corporations and railroads, the powerful plutocrat J. P. Morgan. And he had won. “Of all forms of tyranny,” Roosevelt argued, “the least attractive and the most vulgar is the tyranny of mere wealth, the tyranny of plutocracy

The Triangle Shirtwaist Fire of 1911 killed hundreds, illustrating the lack of safety provisions and poor treatment of workers.13 Radicalism even invaded the middle class, as grisly train accidents produced hundreds of mangled bodies every year due to bad management of the rail lines. The

The barons of industry were unapologetic, almost gleeful. “One human being is killed every hour and one injured every ten minutes,” said W. L. Park, general superintendent of the Union Pacific Railroad. “There is a steady grinding and crunching of human flesh and bone under the juggernaut of modern car wheels. It is the price we pay for progress, for the great industrial conquest of the country.”14 And there was endless corruption, corporate payoffs

Virtually the entire commercial order of late-nineteenth-century America was oriented around small and midsized proprietorships, from independent farmers to drugmakers, pharmacists, printers, stationers, booksellers, manufacturers, specialty producers of brand-name foodstuffs, grocers, and distillers. All distrusted railroads.

This made it illegal for competitors to fix prices as separate entities, but if competitors combined and fixed prices as a single giant corporation, the law offered sanction. This inversion created a central tension in antitrust law that remains to this day. Cartels were often illegal, but monopolies or trusts—including those achieved through massive combination—might not be.

This conflict took place near Pittsburgh, in the rough-and-tumble world of rail, steel, and oil that grew out of the rich coal lands of western Pennsylvania. Strikers, like their rebel forebears, targeted Carnegie Steel, the high-tech corporation of the 1890s.

Bryan saw the election as a “struggle between the idle holders of idle capital and the struggling masses who produce the wealth and pay the taxes of the country.”

Morgan continued with his great centralizing project. In a merger wave that ran from 1894 to 1904, Morgan centralized business into modern corporate America, structuring companies such as General Electric and International Harvester. Consolidation followed consolidation. American Tobacco rolled up 250 firms into one. At least seventy-two consolidations led to a situation in which one entity controlled at least 40 percent of an industry, and forty-two consolidations created situations where one entity controlled upward of 70 percent of an industry.

Morgan had his greatest triumph of financial engineering, the creation of U.S. Steel, which was a final combination of two hundred companies in 127 cities. A Morgan partner noted, upon signing the last paper necessary for the merger, this “signature is the last one necessary to put the Steel industry, on a large scale, into the hands of men who do not know anything about it.”

The oligarchs behind Northern Securities had never had to pay attention to the vagaries of politicians. William Vanderbilt, son of the first tycoon, once explained the attitude of the great centralizers with the unofficial slogan of the railroads, when he said “the public be damned.” But Roosevelt was a different kind of politician. Roosevelt

Roosevelt’s hunger for authority, his desire to centralize commercial and political authority, his aristocratic bearing, were inconsistent with decentralizing power. Roosevelt respected Morgan as a fellow aristocrat, more so than rabble farmers. His view was that Morgan had erred, not in the merger, but in presuming to act as the nation’s boss. That job was for the president—Roosevelt.

Roosevelt came to a “gentleman’s agreement” with Morgan’s U.S. Steel. The company’s president, Elbert Gary, cooperated with Roosevelt’s newly founded agency, the Bureau of Corporations, in return for an acceptance of Gary’s role as the head of the steel industry

J. P. Morgan tens of millions in government deposits, allowing the financier

In 1911, the Supreme Court broke up Rockefeller’s Standard Oil into thirty-five separate companies, but in a pyrrhic victory for antimonopolists, the court simultaneously gutted antitrust law. The Sherman Act prohibited all restraints of trade, but the court ruled that the federal government could only halt “unreasonable” restraints of trade.

Roosevelt had used his self-righteous drive to become the youngest president in history. But soon, Roosevelt would face a real opponent as brilliant as he, a man named Woodrow Wilson, who was the Democratic Party nominee. Wilson, unlike anyone Roosevelt had ever had to defeat, saw through the crowd-friendly politician, the attention seeking, to the would-be demagogue underneath.

He contrasted American politics, where men were free to vote, and American commerce, where they were under the thumb of petty tyrants. These two systems were in conflict, a contrast “between our political liberty and industrial absolutism.”

Wilson had believed that the way to address trusts was to punish the guilty individuals behind them. Brandeis argued that it was the system itself and the legal context, not any specific individual, that created a commercial system oriented toward cheating and monopolization. The solution was not to regulate monopoly or just punish wrongdoers. The government should both break up concentrations of power, and then regulate markets so monopolies didn’t return.

Wilson pledged to break up monopolies, and attacked Roosevelt’s plan of putting together a board of experts to govern monopolies. “What I fear,” said the Princeton professor, “is a government of experts.”

The ability of trusts to set the terms of trade would now be challenged by the Federal Trade Commission, a public body that would structure markets for the people. The Clayton Act set rules to protect workers and stop predatory pricing by trusts, and lower tariffs that limited the ability of manufacturing monopolies to ward off competition from abroad. This structure would be undergirded by a political coalition of farmers and labor unions, who would form the backbone of the Democratic Party.

A world of European empires run by monarchs gave way to a world where communism and nascent fascism existed alongside democracies and de-colonizers. The British empire was wracked with independence movements. Within just three years, Portugal, Spain, Italy, Greece, Turkey, Russia, Poland, Czechoslovakia, and Belgium “endured” dictators. A little more than a decade after the war, Austria, Hungary, Germany, and Yugoslavia became dictatorships as well.

In 1922, Walter Lippmann, who had advised Wilson before the Treaty of Versailles, expressed despair in his book Public Opinion, noting that man was easily manipulated by symbols; in 1925, he published The Phantom Public, concluding democracy was unworkable. This became a common view in magazines and in popular novels. A 1928 U.S. Army Training Manual even concluded that democracy resulted in “demogogism, license, agitation, discontent, anarchy.”

The loss of faith in democracy penetrated academic institutions. Out of the war came standardized testing, which had been used to screen soldiers, and professionalized public relations, perfected by Wilson’s censorship board, the Committee on Public Information.

The postwar decade was, for those who believed in democracy, an era of despair. The autocrats were not only winning, but perhaps, better at governing than the progressives had been. As a Christian Century editorial put it, “The hope of democracy will revive when it learns how to do the things that need to be done as efficiently as autocracy does them.”

The Democratic Party’s pro-monopoly conservative wing also returned in force. In 1924, the party nominated as its presidential candidate a powerful corporate lawyer named John W. Davis. By 1928, the party was being run by a DuPont executive, John Jakob Raskob, who in 1929 was peddling a high-risk get-rich-quick scheme for small investors under the slogan “Everybody Ought to Be Rich.”

The people “are docile, and they will not recover from being so for many years,” observed leading progressive Hiram Johnson.28 The country had been aroused by idealism, but now, even Democratic Party leaders had given up on the New Freedom. In this decade, one of cynicism and fear, people turned to those who promised them distraction, or anger, or get-rich-quick prosperity and nothing more.

The triumph over progressives was total. Harding had restored the old coalition of 1896, winning sixteen million votes to the Democratic nominee’s nine million, 60.3 percent to 34.1 percent. The GOP even penetrated the Confederate South, taking Tennessee, and safe Democratic states such as Arizona and Oklahoma. Not a single Democrat won a Senate or governor seat anywhere outside the South.

President Warren G. Harding formally appointed Mellon under the pretense that a plutocrat like Mellon was so rich he couldn’t be bought.30 The real reason was that a Mellon Bank had lent $1.5 million to Harding’s campaign in 1920. Mellon had become bored with being a mere tycoon. As one of his enemies put it, “Mellon needed a change, and the Grand Old Party needed the cash.”

Mellon’s appointment was probably illegal. A statute from 1789 prohibits the treasury secretary from engaging in commerce or trade, an absurd expectation for a man with such industrial power.32 The founders had also written a law blocking the treasury secretary from holding bank stocks, another absurdity. Mellon overcame these legal restrictions by pretending to sell his assets to his brother.

Harding, so healthy at his inauguration, became consumed by corruption scandals, and ended up dying within three years of taking office.

Mellon was also the “financial angel” of the Pennsylvania Republican Party, so powerful that when his ill-considered marriage fell apart in a scandalous split, he had the state legislature pass a law giving judges the right to deny women a trial by jury in divorce cases.44 Local newspapers, afraid or in thrall to the Mellon family, reported little on the matter.

At first little known, the Republican-dominated press gradually gave Mellon more and more credit for the boom times, especially after the horrific economic experience of 1919–1920. Millions of Americans soon revered him. He was commonly known as the best secretary of the treasury “since Alexander Hamilton.”58 Indeed, it was Mellon who placed Hamilton, America’s original proponent of monopoly, on the $10 bill.

a strike in coal country. “I have seen horrible things there; things which I almost hesitate to enumerate and describe.” It was a far cry from anything he had ever witnessed. “We saw thousands of women and children literally starving to death. We found hundreds of destitute families living in crudely constructed bare-board shacks. They had been evicted from their homes by the coal companies.” This was not just a story of desperation, a story of political absolutism within a supposedly free country. “We unearthed a system of despotic tyranny reminiscent of Czar-ridden Siberia at its worst. We found police brutality and industrial slavery.”

In the Roaring Twenties, steelworkers and coal miners in Appalachia faced “coal and iron” police who wielded the power of the state but who were paid by private interests.

In 1921, a New York Post reporter said it simply: “West Virginia is today in a state of civil war.”70 The war was over the right of miners to form a union. While the financiers could organize together, the miners could not.

Railroads controlled by Morgan or Mellon interests would refuse to ship coal from mine owners who didn’t cooperate.

Banks threatened to call in loans.

Local mine owners were no more independent of the great financiers than the miners they employed. Large buyers of coal, such as the DuPont-controlled General Motors, threatened to stop buying coal from mine owners who wouldn’t crush unions. Railroads controlled by Morgan or Mellon interests would refuse to ship coal from mine owners who didn’t cooperate. Banks threatened to call in loans.

“Mellon banking interests,” said one mine owner, would “ruin me” if he recognized the union.72 Mellon didn’t just provide symbolism for the era, but was one of the key leaders who could control thousands of companies, and millions of lives. When Wilson and Brandeis and their allies talked of “autocracy” in business, this is what they meant.

Crop prices were low throughout the decade, and Mellon and the Republicans blocked relief and farm supports. “Farmers have never made money,” said Calvin Coolidge to the Farm Loan Board. “I don’t believe there is much we can do about it.”

Roughly 10 percent of the children in the South worked, accounting for three fourths of all child labor in the entire country. The most productive workers of the region simply left the region. By 1928, 30 percent of households in the South were headed by women past middle age. Fifteen percent of South Carolinians were illiterate, and 1,500 school centers in Mississippi lacked school buildings.

For misery, voters could elect Democrats. For prosperity, they should place their faith in big business leadership. In the boom times of the 1920s, many Americans had become docile, placid, increasingly tolerant of living under big business masters, less and less interested in high ideals.

Nearly a generation had passed since the heyday of populism, and millions of Americans had known only centralized control, by the state during the world war, and by the monopolists since.

A man stood and addressed the chamber. “On my own responsibility as a member of this House,” said Congressman Wright Patman, “I impeach Andrew W. Mellon, Secretary of the Treasury of the United States, for high crimes and misdemeanors.”3 With these words, on January 6, 1932, five and a half years after Andrew Mellon’s summer meeting with Mussolini, Patman began the next great campaign to destroy monopoly power in America.

Perhaps more important, outside the Capitol Dome, fifteen thousand unemployed people were demanding action.8 Theirs would not be the last large-scale protest of the economic emergency. Mellon’s political shield, a vibrant prosperous economy, had been shattered.

By 1928, the top one percent of the population received nearly a quarter of all income.

the Federal Reserve, created by Wilson to give the public control over banking, was instead controlled by shortsighted private bankers who could not or would not stop speculative bubbles. It was a dangerously unstable system.

In 1923 buying in mosquito-infested Florida seemed lunacy, but two years later, according to a book by a best-seller social observer of the time, speculators “were buying anything, anywhere, so long as it was in Florida.” An ad offered luxurious estates near the “fast-growing city of Nettie,” which had the unfortunate problem of not existing

These schemes mean either that the investing public will be robbed, or that the rate payer in the utilities thus controlled will be robbed.” Hull, a prominent opponent of the Republicans, agreed. But Mellon had the votes. There was nothing Hull could do until the get-rich-quick “period of psychology” had passed.

The Florida bubble popped in the middle of the decade. Several hurricanes hit the Sunshine State, and the Florida fever collapsed into a tangle of lawsuits. But rather than end the national euphoria, the Florida collapse only proved a prelude. Speculative fever shifted to Wall Street.

John Jakob Raskob, the head of the Democratic National Committee, was setting up plans to run a highly leveraged stock market fund to let ordinary people get rich at a price of just $15 a month.

The Fed gingerly tried to pull back credit from speculators, but the head of the large National City Bank (now Citigroup) offered, over the Fed’s objection, loans to speculators at lower interest rates to buy stocks. The market soared again. Speculators learned their lesson: never be out of the market.15 Yet the underlying economy was sputtering; residential construction was dropping, consumer spending was slowing, and commodities prices kept falling.

On October 2, 1929, brokers’ loans reached $6.8 billion, a new record. The market began to wobble, but bravado continued, with a lead banker saying, “The industrial condition of the United States is absolutely sound and our credit situation is in no way critical.”

The stock ticker itself was hours behind the actual trading business, so far behind that no one could tell what actual stock prices were.

The problem increasingly became one of deflation, or a collapse in prices and wages. When a bank went bust, that bank would stop lending and deposits would be frozen. This meant credit would contract, and money would be taken out of circulation. People and businesses would in turn have less purchasing power to buy goods and services, and to service their debts. So they would buy less, hire fewer people, pay less in taxes as well as default on loans. Prices and wages would go down. Farmers, having borrowed on the assumption that the corn or cotton they grew would sell at a certain price, would find their crops selling at half or a quarter of what they thought they’d be able to get. As farm mortgage defaults spiked, more banks would in turn go bankrupt. Politicians, in thrall to the notion the government had to balance the budget, would often raise taxes as tax revenue fell, making the problem worse.

Their solution was to have the government get more currency into circulation through government spending so prices would go back up. But having the government print money and interfere deeply in the affairs of private bankers was anathema to the orthodox thinking of the time.

Mellon, for instance, blocked federal relief action, because he believed that deflationary periods were natural and helpful moments. When prices were low, prudent financiers were rewarded and could buy up industrial assets cheap.

The old order did not know what to do. The depression wasn’t just an industrial or credit shock, but a political crisis.

“He went to Congress in 1928 and since his election has kept himself in a conspicuous light because of his lack of deference for hide-bound rules and regulations pertaining to the assembled Congress.”45 Patman was persistent, dogged, and, while polite, he didn’t let up, even on small matters.

“Deflation cheats the man who is in debt just as much as undue inflation cheats the creditor,”

the American Legion, an organization formed for world war veterans by wealthy Americans who sought to ensure that veteran politics would not be tempted by the communism to which they had been exposed in Europe.

“We should not start putting out money at the top with the hope that the money will percolate down to the needy and the poor,” Patman argued, “but we should start at the bottom.”

Through this campaign, Patman and his allies were learning how power in government and banking worked. His investigation of Mellon led him to see how the government administered taxes, organized its debt, managed the money supply, enforced trade relationships and foreign affairs, regulated banks, and related to monopolies. New Deal policies on progressive taxation, securities regulation, and antitrust would be debated, in germ form, in this investigation. Patman attacked the FTC during the investigation

The Bonus Bill was a flashpoint of political controversy, and Patman encouraged Democratic House candidates to use it in their campaigns to get votes.

Mellon, meanwhile, admitted in 1931 that he had sabotaged the ability of the government to pay out the Bonus. He had paid down $3 billion of the national debt prematurely, so there wouldn’t be any cash for the veterans

In December 1931, communists launched a “hunger march” in D.C., in an attempt to incite violence from the authorities so as to generate sympathy.

In December 1931, communists launched a “hunger march” in D.C., in an attempt to incite violence from the authorities so as to generate sympathy. D.C. police chief Pelham Glassford, who had been a young general in the war, met them with soup, not guns, trying to defuse the situation instead of creating martyrs.

The marchers were less communist than they were hungry; they ate.

Father James Cox of Pittsburgh worried about the communist-inspired marches. So he held his own march. On January 6, 1932, Cox brought ten thousand men to Washington to demand jobs. “Our president is still trying to give money to the bankers, but none to the people,”

The government sent Al Capone to jail for cheating it out of $100,000, yet John D. Rockefeller is giving $4,000,000 to his son to escape the inheritance tax.”

The Republicans waged a counterattack. During Patman’s investigation of the Mellon empire, the FBI, the White House, and the Treasury Department would send security officers to break into Patman’s congressional office and destroy papers relating to the investigation.

Hoover established the Reconstruction Finance Corporation, a government bank that could lend to failing railroads and banks. The public interpreted this as a corporate bailout. Comedian Will Rogers mocked Hoover, noting “you can’t get a room in Washington.… Every hotel is jammed to the doors with bankers from all over America to get their ‘hand out’ from the Reconstruction Finance Corporation.” The bankers, it seemed to Rogers, had “the honor of being the first group to go on the ‘dole’ in America.”

Until Hoover drove them out of the city, the Bonus Marchers’ claim had been controversial, a case of special pleading. But when Hoover set the Army on the marchers, that dynamic changed. La Guardia wired an angry message to Hoover: “Soup is cheaper than tear gas bombs.”109 These “ragged and hungry people have as much right to petition Congress as those who arrive in Washington on special trains,”

Patman brought forward what the farmers of the 1890s demanded of their society, a democracy with an egalitarian system of free enterprise, where small business had the same shot as Andrew Mellon to compete. He stood up to Mellon.

He attacked banks, the concentration of wealth and power, and argued that policymakers should implement new rules to restrain financial power immediately. “The public has burned its fingers in the flame of wild speculation and has learned to fear the fire. While it still fears the fire is the time for us to act.”

Oklahoma governor William “Alfalfa Bill” Murray, a power-hungry reactionary who, faced with a drought, once announced crops would grow best if planted when the moon was right and ran against the “Three C’s”—Corporations, Carpetbaggers, and Coons.”

Raskob knew Roosevelt was popular, so he had to win in the back rooms, rather than among voters. Raskob made a power grab, calling for a DNC meeting at the Mayflower Hotel

Meeting the threat of radicalism with “reaction,” rather than a “workable program of reconstruction,” meant American political and business leaders were inviting disaster.

“We find two-thirds of American industry concentrated in a few hundred corporations,” he said, “and actually managed by not more than five human individuals.”

Rumors of banking weakness would draw mobs of panicked savers, seeking to withdraw their savings before the bank ran out of cash. Bank runs could cause otherwise healthy banks to fail. And even healthy banks might try to call in loans early out of fear, which could cause otherwise healthy borrowers to default. Panic fed on itself and accelerated the deflationary spiral.

In Storm Lake, Iowa, farmers stopped a lawyer about to conduct a foreclosure with the persuasive argument that they might hang him if he went through with it.

In Pleasanton, Kansas, someone discovered the corpse of a man who had succeeded in foreclosing on a farm.

“In one bankruptcy proceeding after another, friends of the debtor, using unspoken intimidation to cut off other bids, bought back the property for a few cents and restored it to its owner.”

American intellectuals and businessmen began embracing increasingly autocratic ideas. A movement called “technocracy” became a fad; technocrats sought to replace elected politicians with engineers and scientists who could plan without the need to respond to voters.

Roosevelt told advisor Rexford Tugwell that “there was latent… not far below the surface of our disrupted society, an impulse among a good many ‘strong’ men, men used to having their way, mostly industrialists who directed affairs without being questioned, a feeling that democracy had run its course and that the totalitarians had grasped the necessities of the time. People wanted strong leadership; they were sick of uncertainty, anxious for security, and willing to trade liberty for it.”

The Republicans mocked Roosevelt for being unable to bring in the big brains of the party, the heavies. “Where are Young, Baruch, Smith, and Baker?” they jeered, mocking FDR for failing to attract what they perceived as the most prominent corporate leaders on the Democratic side of the aisle (Owen Young, Bernard Baruch, Al Smith, and Newton Baker). Republican operatives were of course missing the point.

During much of the first part of the depression, the public still believed banks were, as Pecora put it, “captained by men of unimpeachable integrity, possessing almost mythical business genius and foresight.”

National City had ceased to be a bank to service the payment needs of the nation. Using its banking arm, it captured control of the savings of American workers and businessmen. National City had used its gilded reputation to trick people into buying stocks and bonds that it issued and in which it had an interest.

Edgar Brown of Pottsville, Pennsylvania, testified to the Senate that he lost his fortune of $225,000 through National City’s scams. He had run a chain of theaters, but after contracting tuberculosis, he sold his business interests and left to California while entrusting the money to National City. He asked that they put his money into bonds and safe investments. Nevertheless, his City broker instead used Brown’s savings to buy Peruvian bonds, Anaconda copper, and even the stock of National City itself. National City had interests in all of these. Brown ended up in poverty.

Pecora also uncovered the extensive system of bribery by which the Morgan firm paid off political, military, and financial elites through the stock market, a system known as the “preferred list.” The preferred list was a list of people from whom the company sought to keep in their graces, and to whom it would offer below-cost stock that could be resold immediately at a profit. This trick hid bribery in the swirling eddies of financial markets.

at the height of the stock market boom in 1929, large corporations were lending tens of billions of dollars in “call loans” to encourage speculation.67 Standard Oil of New Jersey alone lent an aggregate of $17 billion in twenty thousand separate loans; the oil company was making so much cash it had nowhere else to invest it other than the stock market.

His Chicago bank had received a $90 million bailout from the government, yet he was refusing to lend money to the city of Chicago so that the city could meet payroll. A month after FDR’s inauguration, five thousand teachers

His Chicago bank had received a $90 million bailout from the government, yet he was refusing to lend money to the city of Chicago so that the city could meet payroll.

One of the few Democrats on the board, Charles Trammell, “mysteriously resigned” toward the end of the trial to represent the DuPont family before the very Board of Tax Appeals on which he had recently sat.

At one point, Jackson asked Hogan if he was going to ask a technical set of questions on tax law toward a witness, and Hogan made fun of him for being unfamiliar with the intricacies of tax law. A moment later, a technical piece of a tax return in turn confused Hogan. “Do you want to borrow a tax attorney?” asked Jackson. Hogan reddened.

Jackson was privately jubilant over the prospects for the case. His team was not only working to perfect their argument, but trying to “give the newspaper boys a sensation a day.”113 This approach annoyed Hogan so much that he said to the press, “I regret that Mr. Jackson still finds it impossible to refrain from trying this case in the newspapers.”114 But the approach was working, and Hogan knew it.

this trial was also political. It was a proxy war between the barons of industry and a new political system that populists had been trying to organize. It was, as Morgenthau put it, democracy on trial. Jackson felt the trial, and its attendant publicity, were key to undermining the undemocratic habits of the “old order, which many of the enemies of the President are interested in maintaining.”124 The revelations of how Mellon had done business as treasury secretary prompted revulsion, and reform.125 In May, the case venue was moved to Washington, D.C., and the trial wrapped by June. More New Dealers were

Andrew Mellon was never jailed, but he would be the last of the great robber barons. His son, Paul, would have the aristocratic life of a wealthy gentleman of leisure and a patron of the arts, but would run no corporate empire. The Mellon family kept their money, but not their power.

Decades later, in taxi rides to the Federal Reserve, Patman would point to the National Gallery and say to accompanying staff, “That’s Uncle Andy’s mausoleum, and I helped build that.”

“Today there is only one force in the world big enough to cope with the Mellons in Pittsburgh,” Jackson wrote. “That is the Federal government and I sometimes doubt whether it, bound by a myriad of technicalities and limitations, can effectively… restore economic freedom.”

Within the National Industrial Recovery Act, however, government regulators, often deferring to industry trade associations, wrote “codes” for every industry, to determine pricing, output, and wages.

The National Recovery Administration’s regulations were a disaster, with price-fixing inducing high consumer prices and unworkable instructions for many businesses. Separate codes, for instance, dealt with hauling coal, sand, and gravel, all of which were handled by the same company

Jackson’s speeches were aggressive, and he proudly noted, “Instead of asking what they can do to the New Deal, ‘big business’ is now asking what the New Deal is going to do to them.”25 For five years, New Dealers had attempted to reduce the danger to democracy from big business, and Jackson wasn’t going to give up on that fight.

Roosevelt made this clear in a fireside chat over the radio. “Democracy has disappeared in several other great nations,” he said. “Not because the people of those nations disliked democracy, but because they had grown tired of unemployment and insecurity, of seeing their children hungry while they sat helpless in the face of government confusion and government weakness through lack of leadership in government. Finally, in desperation, they chose to sacrifice liberty in the hope of getting something to eat.”

Hitler was using corporate law and trading power to undermine Western democracies. In 1938, Nazi Germany threatened the tax haven of Liechtenstein, which had no army. There was no rationale behind this threat, except that Liechtenstein held the charters of many holding companies that, according to one senator, “[controlled] the commerce and industry of the Northern Hemisphere.” These were not just European concerns. “Some corporations, the principal sphere of activity of which is in the United States, were created by the government of diminutive Liechtenstein.”

Despite two and a half years of warning, the U.S. entered the First World War unprepared. By 1918, the American field army numbered five million men but still relied on British and French allies for artillery and other equipment.

As Morgan, and then Mellon, took a set of businesses and turned them into monopolies, power passed from the engineers, workers, and communities who created, invented, and produced, to financiers, salesmen, and lawyers who controlled, restrained, and manipulated.

The second input is electricity. Processing aluminum required enormous quantities of electricity, so making aluminum meant being near cheap water power.

Aluminum is difficult to produce. Today it is cheap and disposable, used to wrap sandwiches and cigarettes. But in the 1800s, it was twice as valuable as gold. Though aluminum is 8 percent of the earth’s crust, the smelting process for commercializing its production was not discovered until the 1880s. In the mid-nineteenth century, aluminum was more fashionable than gold or silver, and more expensive

Mellon used finance to block competition. In the 1910s, a French businessman tried to start a competitor to Alcoa, but couldn’t get the money to do so. He “made the rounds of Wall Street—J. P. Morgan, GE, Lee, Higginson, First National—and even appealed to International Nickel and Henry Ford. All declined.” Eventually he was forced to turn to Mellon’s Union Trust, the financial guardian of the industry. Alcoa picked up the assets of the French company cheap.

In the 1930s, Alcoa was so powerful that it could raise the price of aluminum ingots from 19 cents to 20 cents a pound, with no economic rationale. The cost of pots, pans, airplanes, radios, trains, bullets, and refrigerators went up. Senators joked, when the U.S. went off the gold standard, that the country should adopt the aluminum standard. Without competition, the only check on the power of Alcoa to change the price of aluminum was the “despair of industrialists like Henry Ford” who would use nickel or steel or another substitute,

In the 1930s, American judges were by and large old men who didn’t like the New Deal, labor unions, liberal young lawyers, or the president. When the Roosevelt administration entered office in 1933, three quarters of the federal judiciary were conservative Republicans; the average lower court judge was sixty years old and had gone to law school in the McKinley administration.69 In the summer of 1935, “more than 100 district court judges held Acts of Congress unconstitutional; federal courts issued more than 1,600 injunctions blocking enforcement of New Deal laws.”

the problem wasn’t just the conservative nature of the judiciary, but judicial corruption. Just six days after the suit was filed, District Judge Robert Gibson, from Mellon’s hometown of Pittsburgh, claimed jurisdiction over the case even though it had been filed in New York.

Hatton Sumners, who demanded to know if there was anything “crooked” involved in the judge’s decision.73 There was. An Alcoa lawyer was married to Gibson’s niece, Gibson’s daughter was employed by Mellon’s Koppers company, and his son was with the law firm employed by another Mellon concern, the Pittsburgh Coal Company.74 The judge’s nephew-in-law, who worked at a law firm employed by Alcoa, had even paid traveling expenses for the clerk to serve subpoenas in Washington on each Department of Justice official, with the goal of preventing further action by the government.

Balanced budgets were foolish, he said; the federal government needed to create and distribute money across the land.

Eccles had warned speculation was being caused by “monopolistic practices” leading to price hikes. He was telling Roosevelt that steelmakers were raising prices far more quickly than they were raising wages, and this led to unused resources in terms of both unemployment and inflation. When the speculative bubble about which he warned popped and the economy slid rapidly, he fell in with antimonopolists. Pointing to the steel industry, he said that “those industries that have maintained prices and curtailed output should seek the restoration of profits through increased rather than restricted output.”

“The greatest threat to democracy today,” he told FDR, “lies in the growing conviction that it cannot work.” Only by bold “democratic leadership” to make the system function “can the growing threat of Fascism be overcome.”

“Prime Minister Churchill said of the Royal Air Force that never in history did so many owe so much to so few,” wrote investigative journalist I. F. Stone. “It might be said of us,” wrote Stone, about American monopolies, “that never did a people do so little with so much.”

Alcoa, and its habit of withholding desperately needed aluminum production—for planes and other war-related industrial parts—to preserve the price of the metal. To Stone, American financial masters were colluding with the fascist powers. And there was proof, in the cartel deals that Standard Oil of New Jersey and Alcoa, among others, had with German chemical and metal companies.

There were 185 investigations ongoing, and just launching an investigation dropped prices by 18–33 percent.

Learned Hand

A trading system based on eroding barriers to trade, both formal tariffs and private cartels, came to fruition as both a means to spread democracy among allies and a mechanism to block the expansion of Soviet influence.

therefore, an important part of U.S. economic foreign policy to press for the elimination of cartel arrangements which block the expansion of multilateral, competitive, international trade.”

In 1940, poverty in America was endemic; nearly a third of homes had no running water or indoor toilets. Many lacked bathtubs, and 60 percent had no central heating. The war, and the postwar economy, lifted huge numbers out of poverty and offered a better life than millions had ever had.

New Dealers and their opponents saw the debate over industrialization in terms of updating the founding principles of the nation

Just as Mellon Republicans put Alexander Hamilton on the $10 bill in the 1920s, it was during the New Deal that Democrats constructed the Jefferson Memorial.

The Homestead Act and emancipation were together the most radical redistributionist policy in American history. A quarter of all U.S. adults alive in 2000 were descendants of Homestead recipients.5 The Homestead Act was the New Deal of that era, a bounty and economic independence awarded to citizens

Justice Oliver Wendell Holmes issued a stinging dissent, writing, “I cannot believe that in the long run the public will profit by this course, permitting knaves to cut reasonable prices for mere ulterior purposes of their own.”

“Americans should be under no illusions as to the value or effect of price-cutting. It has been the most potent weapon of monopoly—a means of killing the small rival to which the great trusts have resorted most frequently.”

After the Dr. Miles decision, chains could specifically pick well-known branded goods to discount at a loss to drive competitors out of business, and then use their purchasing volume to demand lower prices, and thus lower quality, from the maker. The court had removed power from the small producer, and placed power in the hands of the financial middlemen who controlled the chain stores.

Increasingly, the corporation was able to exploit a “buying monopoly” (or in economic literature “monopsony”). Because A&P controlled so much of America’s food market, it was able to demand that food suppliers give the company better prices, which it could then use to further undercut rivals. It also forced suppliers to pay kickbacks to stock their products. These bribes took the form of “advertising allowances,” or payments by manufacturers for A&P to advertise its products. The chain would then use this special pricing advantage to underprice its retail competitors, and acquire yet more power to extract concessions from suppliers

in 1923, A&P hired private detectives to beat up strikers in Newark, with the police arresting one of the company’s security guards. John Hartford blamed the union.

the depression accelerated the popular movement against chain stores. The collapse in commodities prices in 1930 served to offer even more power to A&P’s buying hulk. By the summer, John Hartford announced the company had cut prices by an average of 6 percent.32 In the 1920s, such an announcement would have incurred eagerness to shop; now it stoked fear among helpless producers. The company’s power over pricing of basic goods served as a potent symbol of the depression, as symbolic in many communities as Rockefeller, Mellon, and Morgan.

Meanwhile, the FTC found that large chain stores threatened manufacturers to secure kickbacks unavailable to smaller stores.

In 1951, once again the Supreme Court attacked fair trade practices. It ruled that producers, who had been able to control minimum prices for their products, could only do so against sellers who contractually agreed. A retailer who didn’t sign a contract with the producer could break fair trade prices. Once again, Congress overrode the court with a law called the McGuire Act.

Ultimately Byoir used $1.6 million of fees and expenses paid by A&P to fight chain store laws, often by setting up groups that pretended to have mass membership, but were controlled by the company.48

As one businessman put it, when encountering a Yale grad at a bank, one needed to speak “very slowly.” Banking was, as a later CEO of Citibank, put it, “kind of a nice club.”16 One old banker, asked of the most important

From 1929 to 1950, the New York Stock Exchange hired a total of eight floor traders.

The flow of power between businesses and banks had been reversed; bankers sometimes sat on the boards of industrial firms, but more often industrialists were on the boards of banks.

by the 1950s they had worked remarkably well, and corporate stocks were now in the hands of a large number of small investors who rarely sold. Getting the permission of the stockholders took more work. It was hard to buy the stock in small lots without driving up the price in an era without significant institutional block trading of shares.

Banks became essentially public utilities, unconcerned even with profit. Public control of finance in the U.S. by the 1940s was organized consistent with the scale of the collapse in the 1930s. Banks were also tightly restricted from branching or seeking any financing for loans aside from gathering deposits wherever they happened to be located, becoming dependent on the wealth of their local communities.24 Government

The centerpiece of the entire system was a powerful regulation, one that blocked both speculation with hot money by banks, and forced decentralization in banking, moving lending decisions from New York and Chicago back to thousands of local bankers across the country.

Corporations could finance their own expansion and build valuable assets like research divisions. They were safe from bankers attempting to buy the company through the stock market and seize the assets. Large businesses would be organized by a range of stakeholders, from their CEOs to workers to smaller suppliers and innovative competitors to the national defense sector.

America became, once again, a nation of tradespeople. In this newly decentralized economy, an astonishing 49.7 percent of returning veterans from World War II eventually started businesses.

Antitrust enforcers and public officials thought of themselves as instruments of democratic power. Many had been influenced by Thurman Arnold, and fought in World War II. They learned a will to power, a respect for commercial systems, and skepticism toward bankers and would-be robber barons.

“the way to defeat crooks is not to join them but to fight them relentlessly, to fight them without mercy or quarter.”

He went after Kennecott Copper,

New Deal antitrust culture, built by Jackson and Arnold, and nurtured by Truman and Eisenhower, was so entrenched that in the late 1960s, Attorney General Ramsey Clark complained to Lyndon Johnson that he and his Antitrust Division head, Donald Turner, couldn’t control his Antitrust Division, that they were a bunch of “wild horses.”48 Senators, high-level officials, and businessmen lobbied Morison, but the system was solid enough to withstand political meddling.

In 1940, 35 percent of Americans did not have flush toilets, including over 80 percent of residents in Mississippi and more than 70 percent of people in North Dakota.

did.Less than half of households had washing machines or refrigerators in 1940. By 1970, more than 90 percent did.

The civil rights, gay rights, and women’s rights movements were built on top of the New Deal.

The railroad era had given birth to the first generation of robber barons, and every significant technological wave had opened up an opportunity for financiers to capture control of markets. The television and the computer could have as easily been captured as well.

The Federal Communications Commission (FCC), set up in 1934 to oversee the telephone trust AT&T, as well as radio, wire, and eventually television,

The Antitrust Division pushed to have knowledge developed inside the big corporation shared broadly, by forcing IBM to license its patents. AT&T and RCA encountered similar suits as part of government policy “to open up the electronics field.” AT&T’s Bell Labs invented the transistor. Because of the antitrust suit, however, the company had to allow anyone to use its knowledge, and a whole set of companies emerged to build electronic transistors. These three suits opened up the data processing, consumer electronics, and telecommunications fields to both American and foreign competitors, and shaped the evolution of the computer.

“To have failed to solve the problem of producing goods would have been to continue man in his oldest and most grievous misfortune. But to fail to see that we have solved it, and to fail to proceed thence to the next tasks, would be fully as tragic.”

The House Un-American Activities Committee scoured academia and Hollywood, not just for foreign agents, but those sympathetic toward organized labor and the New Deal.

“the same Fascism that was fabricated in Italy and finished in Germany is now being peddled in America.” He named prominent Republican media tycoons and lobbyists, and said they would “attack, defame and destroy, and especially destroy labor and fool the farmers,” using fear of communism as a weapon.

The newly professionalizing field of economics, increasingly ensconced in the academies and using anti-plutocratic Keynesian economic theories, was vulnerable to the anticommunist charges.

Berle was also deeply ideological, with a dream of becoming the “American Karl Marx.” And he transformed the meaning of the word “liberal” into something meaning top-down elitist planning, subtly recrafting the New Deal into something it hadn’t been.

Over the next twenty-five years, liberalism would come to mean a gentle form of elitism. And since Roosevelt had called himself a liberal, this became what Democratics increasingly believed the New Deal had been.

With Berle as chairman, the Twentieth Century Fund sought to assert intellectual leadership over liberalism. It developed relationships with nascent television stations, as well as newspapers, large corporations, civil society institutes, and political officials. Everything from the problem of inflation to tariffs to technological progress to urban planning to economic foreign policy was covered by its network of scholars, labor allies, and business leaders. The results of the think tank’s studies were blasted out over the air, and written about in newspapers, magazines, and among columnists.

Hofstadter would shape a new vision of history, while Galbraith would create a popularized version of technocracy on the left. They would win prizes and accolades, and shape the minds of Americans, who, now living in a world free of robber barons, were soon told, gently, and over and over, that robber barons had never really existed. They would—in time—displace Brandeis’s creed.

Hofstadter agreed with Stevenson, that the election of Eisenhower was a replacement of “the New Dealers by the car dealers.”

The Red Scare had terrified Hofstadter; Eisenhower’s victory even more so. So he did what he could to fight back, combining his skills as a historian and polemicist.

He began to study right-wing extremism, and created a social language to root it in American history. He used new tools, tools developed by sociologists, iconoclasts such as Thorstein Veblen and Sigmund Freud, especially Freudian arguments about “status anxiety.” He began to imply, though not state outright, that conservative politics was a mental disease, a condition called the “Authoritarian Personality.”45 Angry and increasingly elitist liberals, in thrall to the pull of corporatism, loved it.

He turned elitist, coming to believe there was no place for intellectuals among the working class. In 1940, he confided to a friend that he feared striking American autoworkers were more likely to adopt fascism than socialism. Were those workers to gain power, he believed they would target intellectuals like himself.

Historians had traditionally seen mass movements of the Midwest and South, such as the farmers’ revolts of the nineteenth century, as populist; Hofstadter recast them as oppressive cultural reactions to modernization. He contrasted Anglo-Saxonism with polyglot, tolerant, and forward-looking immigrant cultures of eastern cities.

This narrative, however, created a problem. It was impossible to ignore the many mass movements and American figures who stood outside such a consensus, such as the populists of the nineteenth century or independent retailers opposed to A&P’s power. Hofstadter solved this problem by recasting such factions not as ideological rivals to concentrated capital, but as groups of nostalgia-driven Anglo-Saxon white men irrationally adhering to an “American mythology,” seeking to return to a time when their racial group was the most important part of the social order and struggling with modernity and cosmopolitanism.

The populists of the 1890s were not so much against monopolies, he implied in his next book, The Age of Reform, as they were nascent fascists.

Several contemporary historians considered Hofstadter’s writing “highly manipulative,” and his work was not based in actual historical primary source evidence.55 Nevertheless, with his succinct writing style, his placement within powerful Democratic networks, and keen sense of what kinds of ideas could sell, his work would prove to become essential to dampening the American intellectual suspicion toward concentrated financial power.

Democrats had found a way to structure commerce around the concept of industrial liberty. Whether farmers, manufacturers, shopkeepers, or workers, this kind of competition policy centered on engineering maximum liberty for the producer as opposed to the financier or monopolist. In 1958, a new concept replaced industrial liberty: affluence

Galbraith’s argument was simple: America was rich. Modern institutions, meaning big government, big business, and big labor, had evolved to produce more and more over time, using the fabulous technology that came from the corporate research labs and new universities. Yet, politics was still rooted in questions of scarcity, poverty, and class conflict. “These—productivity, inequality and insecurity—were the ancient preoccupations of economics,” he wrote. No longer.

By 1970, economist Juanita Kreps, later commerce secretary under Jimmy Carter, testified that productivity and computerization should in a few years allow Americans to retire by age thirty-eight.

Galbraith’s job was to fight inflation, a difficult task in a wartime economy straining to produce consumer and military goods at maximum volume. The OPA under Galbraith put in place a structure for restraining price increases of farm products and canned foods, but one that was especially confusing to farmers and small stores. This experience reinforced his belief in command-and-control statism and the virtues of concentration. It was far easier to work with chain stores such as A&P to fix prices.

Galbraith benefited from the new direction of economics. The newly professionalizing field of economists stopped writing for a mass audience. Galbraith seized the opportunity to write for the public. While economists increasingly hid their political ideas inside of formulas under the pretense that they were physicists and thus doing science impenetrable to the layman, Galbraith wrote best-sellers in plain English with clear and playfully sardonic passages about power.

Hofstadter and Galbraith together created a new language and new frame of analysis designed to eliminate the antimonopoly tradition in American politics. A new villain, the grubby racist small businessman, had replaced the money trust. The antimonopolists, far from noble, were just motivated by status anxiety. Countervailing power, operating automatically, addressed any ills from concentrated corporations, which brought modernity, wealth, and technological progress. The real political questions for liberals centered on how to promote art and beauty, end racial bigotry, stop environmental pollution, and promote peace. Corporate power nowhere on the list.

Men trained in Brandeis’s thinking still ran policy in government agencies, the courts, and law schools, and would remain in control for the next generation. In no small part, this was driven by the older generation’s still-potent fear of domestic fascism. As late as 1961, Kennedy’s Antitrust head reminded the public that the “cartels of Western Europe led directly to the corporate fascist states of Mussolini and Hitler, that represented extremes in concentration of power.”91 Populists with long memories remained in powerful positions in Congress.

Luhnow morphed into a strange figure. He eventually began telling subordinates he had “unique but unspecified spiritual power”

As one Chicago Schooler put it, the strategy was “to ridicule the Supreme Court’s treatment of antitrust as well as of other forms of government interference with the market.”

Stigler expressed despair, exclaiming it was “shocking that more Americans have read ‘The Affluent Society’ than ‘The Wealth of Nations.’ ”27 Galbraith responded, “Professor Stigler’s sorrow may be not that so many read Galbraith and so few read Smith but that hardly anyone reads Stigler at all.”

The New Deal had been accepted, internalized everywhere. In 1954, the Republican president, Dwight Eisenhower, consigned to irrelevance those few “Texas oil millionaires” and the “occasional politician or business man” who wanted to eliminate the New Deal era of reforms. “Their number is negligible and they are stupid,” he said.

Chicago Schoolers sought to do what they could do within the constraints of economics, which was to build their own forums for publication away from the cloistered liberal establishment. In 1958, Director started The Journal of Law and Economics,

By the early 1960s, this nascent conservative movement would finally have the basic ideas in place to overturn much of the New Deal. By the 1970s, they would have the institutions to promote those ideas.

In the 1950s, this rhetoric was willingly ceded by younger members of the Democratic establishment, as Galbraith-dominated liberal intellectuals increasingly began orienting around command-and-control elitism and disdain for commerce.

What Director constructed was a highly sophisticated rhetorical movement. Like Hofstadter, Director realized the key to subverting populism was to alter language itself.

opting the rhetoric of liberty was essential in persuading Americans who had been raised on populist suspicion of centralized power.

co-opting the rhetoric of liberty was essential in persuading Americans who had been raised on populist suspicion of centralized power.

To someone unaware of the meaning behind the rhetoric, this new Director-altered language made it sound like Chicago Schoolers opposed monopolies and collusive arrangements, and that it fit squarely within a conservative tradition. But Director was creating an elaborate rhetorical trap. Monopolies and collusive arrangements had been understood as emerging from the corporate sphere. Chicago Schoolers, led by Director, used monopolies to refer to things like public schools and labor unions. Director was, as Hofstadter had on the left, making corporate monopolists the protectors of liberty.

The idea of a scientific consensus was a key rhetorical weapon, used to exclude those who disagreed with the underlying political assumptions. The problem was, to make this argument, Chicago Schoolers had to pretend that economic analysis was new, so they could claim they had discovered it.

The law and economics movement of the Chicago School was metaphysical, designed to replace law with science in the form of economics, with measurements of efficiency.

The advance of Chicago School policies would be couched in scientific terms, as economic expertise, as incorporating science and fancy terms such as “price theory” into legal rhetoric. This replacement of the democratic structuring of power by pseudoscience was evident from the beginning.

Freedom, particularly economic, required “the removal of certain decisions from majority-vote determination.”55 He and Gordon Tullock later used a scientific veneer in The Calculus of Consent to argue a one-person, one-vote system was inefficient.

Corporate titan Taggart Whipple at Davis Polk, who had represented Standard Oil of New Jersey before the Truman Committee during World War II (as well as arguing against Thurgood Marshall in Brown v. Board of Education), expressed his appreciation for noting the absurdity of government action.

The legendary Howard Ellis of his former firm showered him with praise. “Thank you so much for your paper defending the ‘Malefactors of Great Wealth,’

Bork was receiving funding from AEI to rewrite the history of antitrust. He chose to do a historical study, in theory to determine what Congress meant when it passed various antitrust statutes, starting with the Sherman Act in 1890. The correct rational way to do antitrust, he said, would “grow naturally out of this study.”89 Over the course of the next year, AEI kept offering Bork money, as much as he needed to finish the study. The result was the germ of the book that, beginning a decade later, would entirely change how Washington elites understood—and enforced—America’s antimonopoly laws.