At the heart of the continuing debate over the efforts of the U.S. government to stabilize the financial system and revive the economy lies the question of when, if ever, a bank or other corporation becomes so large that its failure poses an unacceptable risk to the nation’s well-being. The Bush and Obama Administrations determined that Fannie Mae, Freddie Mac, AIG and General Motors, to cite four of the most conspicuous examples, were “too big to fail” and therefore required Federal rescues, lest the collateral damage of their demise pull down the national economic house upon the innocent.
To read and hear most of the commentary about the “too big to fail” phenomenon, including that by a score or more Senators and Congressmen, one might think the phenomenon and the debate are recent—the result of globalization, perhaps, or of the repeal of the 1933 Glass-Steagall Act a decade ago, or of the folly of credit-default swaps and other examples of what Warren Buffet has called “financial weapons of mass destruction.” In fact, the debate over what constitutes excessive size in corporate entities, and what ought to be done when corporations achieve such size, is more than a century old.
The arguing began with the emergence of the trusts in the late 19th century. These industrial behemoths—railroad companies first, followed by combines in oil, steel, tobacco, sugar, insurance, banking and a dozen other industries—outgrew the institutions of government that had overseen their predecessors in the preindustrial age. In the persistent contest between capitalism and democracy, they tilted the field sharply in capitalism’s direction. Democracy struck back, or tried to, with the Sherman Antitrust Act of 1890, but the courts interpreted the law in such a capitalist-friendly fashion that the only combinations effectively constrained were labor unions. In the early 20th century, the courts became somewhat more sympathetic to Progressive anti-trusters. In 1911, the Supreme Court mandated the breakup of John D. Rockefeller’s Standard Oil. Yet the verdict, while welcome to the foes of big business, left considerable doubt as to what precisely made bigness bad in the corporate world.
The question became a pivot of the 1912 presidential race. Progressivism—modern-day liberalism minus the concern for racial and ethnic equality—was the prevailing motif. The two leading candidates, Woodrow Wilson and Theodore Roosevelt, embraced the progressive idea that democracy needed to seize back some of the territory captured by big capitalism during the previous decades.
Wilson won the Democratic nomination the old-fashioned way, by beating Champ Clark in a marathon convention at Baltimore. The Democrats’ two-thirds rule, dating from the Jacksonian era, was supposed to ensure party unity behind the standard-bearer; in this case it did, but not without also guaranteeing that delegates would be exhausted for weeks afterward and confused as to what they had agreed upon. Roosevelt lost the Republican nomination in novel fashion. Party primaries were just then coming into practice, a sop from the party bosses to the rank and file. The primaries registered preference but carried little weight, as the bosses still controlled the nomination. Thus Roosevelt, despite multiple primary victories over Republican incumbent William Howard Taft (whom TR himself, while President-boss of the GOP, had selected as his successor), got the cold shoulder at the Chicago convention. Roosevelt thereupon bolted the Republicans for the Progressives, who happily accepted the nickname “Bull Moose” when Roosevelt likened his ruddy good health to that of the antlered beast.
The contest between Roosevelt and Wilson—the two quickly left Taft behind—showcased their contrasting personalities and views of great size in the capitalist sector. Roosevelt had tangled with the trusts personally. Upon assuming the presidency after the assassination of William McKinley, he announced that he would break up the Northern Securities railroad trust, J. P. Morgan’s latest brainchild. Morgan had dealt with previous Presidents as equals, and he was incensed to be treated as a mere citizen by this unelected cowboy. He traveled in his private rail car to Washington and insisted on an interview with the President. “If we have done something wrong”, he told Roosevelt, “send your man to my man and they can fix it up.”
“That can’t be done”, Roosevelt replied. Philander Knox, a former railroad lawyer and now Roosevelt’s Attorney General, seconded, “We don’t want to fix it up. We want to stop it.”
“Are you going to attack my other interests?” Morgan demanded. “The steel trust and the others?”
“Not unless we find out that in any case they have done something that we regard as wrong”, Roosevelt said.
Roosevelt’s remarks to Morgan summarized his attitude toward the trusts. He had no animus against capitalists as such. “We cordially believe in the rights of property”, he declared in the run-up to the 1912 campaign. “Normally, and in the long run, the rights of humanity, the rights of mankind, coincide with the rights of property.” Nor was Roosevelt intrinsically opposed to corporate bigness, which he considered an integral part of the modernization process. “Combinations in industry are the result of an imperative economic law which cannot be repealed by political legislation”, he said. Bigness, in fact, could be benign, when its economies of scale allowed ordinary men and women to raise their standard of living. “The past century has been one of gigantic material prosperity, of gigantic accumulation of prosperity.”
But big businesses weren’t always benign, as Roosevelt saw it, and when they weren’t they had to be chastised, occasionally even dismantled. Roosevelt’s reputation as a trustbuster was overblown; he employed the breakup option quite selectively, to remind the corporate barons that in the end democracy, not capitalism, set the rules for the American political economy. In the long intervals between the exemplary amputations, he relied on careful regulation of big business. “The effort at prohibiting all combination has substantially failed”, he said. “The way out lies, not in attempting to prevent such combinations, but in completely controlling them in the interest of the public welfare.”
Roosevelt called his approach the “New Nationalism”, and its essence was his desire to employ the power of big government to offset the power of big business. Roosevelt proposed strengthening Federal regulatory agencies and in some cases creating new agencies, like the Food and Drug Administration, in order to ensure that Washington possessed the expertise to understand the machinations of the trusts and the authority to keep them in line. The goal was to harness the efficiency of big business and put it to the service of the national good:
The great captains of industry do well and are entitled to great rewards only in so far as they render great service; they are invaluable as long as they in good faith act as efficient servants of the public; they become intolerable when they behave as masters of the public. The corporation is the creature of the people; and it must not be allowed to become the ruler of the people.
Woodrow Wilson had no such confidence in the ability of government to control big business. He lacked Roosevelt’s taste for power, in part because he himself had never possessed enough of it to matter. His career in academia had culminated in the presidency of Princeton University at a time when university presidents were respected public figures, but he nonetheless understood the basic irrelevance of his experience for the larger world. He was said to have coined the since-ubiquitous observation about campus politics, that the fights are so bitter because the stakes are so small.
Wilson’s upbringing, too, had made him skeptical of power. He was a boy in Georgia during the Civil War and a young man at the end of Reconstruction. Power to him meant the destructive and coercive capacity of the North. To the extent power could be positive, it ought to be moral power or—a favorite for one who studied history’s great orators—rhetorical power.
Wilson rejected Roosevelt’s formula for enhancing government power to offset corporate power. Instead, he insisted that corporate power be diminished. Where Roosevelt distinguished between good trusts and bad trusts, Wilson believed the trusts were all bad precisely because they were trusts—that is, entities so large that they subverted the rules of the marketplace. “The center of all of our economic difficulties is that there is not freedom of enterprise in the United States”, Wilson declared during the 1912 campaign. The creators of the great trusts—Morgan, Rockefeller and the rest—had strangled the competition that provided capitalism’s principal justification:
The inventive genius and initiative of the American people is being held back by the fact that our industrial field is so controlled that new entries, newcomers, new adventurers, independent men are feared, and if they will not go partners in the game with those already in the control of it, they will be excluded.
Roosevelt was wrong to accept trusts as inevitable, Wilson said. They had emerged not on account of any irresistible technological trends, but because government had been asleep. Awake, government must not cohabit with the trusts; it must dismantle them. Great size in business was inherently dangerous, Wilson believed. The danger would persist until the trusts were eliminated, and their elimination would restore a vital aspect of the American dream:
What I am interested in is laws that will give the little man a start, that will give him a chance to show these fellows that he has brains enough to compete with them and can presently make his local market a national market and his national market a world market, and put them to their mettle to do the business more intelligently and economically and systematically than he can.
Acceptance of bigness was a bargain with the devil, Wilson said. Americans must choose:
Here at the turning of the ways, when we are at last asking ourselves, ‘Can we get a free government that will serve us, and when we get it, will it set us free?’ They say, ‘No, you can’t have a free government, and you ought not to desire to be set free. We know your interests. We will obtain everything you need by beneficent regulation. It isn’t necessary to set you free. It is only necessary to take care of you.’ Ah, that way lies the path of tyranny; that way lies the destruction of independent, free institutions.
The choice for voters in 1912 between two philosophies for dealing with great size in business—between Roosevelt’s confidence that the trusts could be regulated and Wilson’s insistence that they be broken up—would have been clearer in a two-candidate race. But murky or not, Wilson’s comfortable victory over Roosevelt (and Taft) allowed him to claim a mandate to act on his distrust of big business.
In the event, however, he moved slowly, governing in certain respects more like Roosevelt than like the President he had promised to be. Some of his change of heart reflected the ambition-creep that often occurs when outs become ins. Wilson discovered that power wasn’t so scary when he wielded it, and rather than bust up business he decided to bulk up government. The Federal Trade Commission, established in 1914, could have come straight from a Roosevelt blueprint—in fact, it built on TR’s own idea of a Bureau of Corporations. The FTC set rules for fair trade and prescribed penalties for breaking the rules. Rather than restore the competition of the pre-trust era, as Wilson had pledged to do, it regulated the competition of the trust era, as Roosevelt had recommended. Size wasn’t the issue, Wilson belatedly determined; behavior was.
Yet the flip-flop wasn’t Wilson’s doing alone. The world changed dramatically during his first term; the summer that saw passage of the law establishing the FTC also witnessed the descent of Europe into war. One of Roosevelt’s arguments for letting American businesses get big was that American defense required the efficiencies only big industry could deliver. War had been on few voters’ minds in 1912; had it been, Wilson would not have won. But two years later, war was on everyone’s mind, and Wilson decided, quietly to be sure, that the Rough Rider had a point. And after America eventually entered the war in 1917 and Wilson sought to mobilize the American economy for that struggle, he appreciated that directing a few big corporations in a given industry was easier than herding a myriad of smaller firms.
In one crucial respect, though, Wilson delivered on his pledge to disarm the trusts. The most important law passed during his tenure was the Federal Reserve Act of 1913, which essentially resolved the most persistently vexing question of American political economy from independence to the early 20th century. This was the money question, which came in two parts: What was money in America, and who controlled it? Was it gold, silver, greenbacks, bank notes or something else? (At one time or another it had been all of these things.) Did the government control it, or did private bankers? (Both had played a part.) The battle raged for decades, pitting advocates of gold against partisans of silver, national bankers against state bankers, lenders against debtors, capitalists against democrats. And it was understood at the time that this was a battle whose outcome would shift economic advantage to the side that prevailed; huge sums of money, relative to the size of the economy, were at stake.
The fight came to a head near the end of Roosevelt’s presidency. In October 1907, the Knickerbocker Trust Company of New York announced that it couldn’t meet its obligations. The news caused panic on Wall Street and threatened to paralyze credit across the country. The government lacked the tools and authority to stem the crisis. TR for once was at a loss for both words and action. Into the breach stepped the private titan of finance, J. P. Morgan. Morgan summoned the big bankers of New York and lectured them on their duty to themselves and to the solvency of the nation. He extracted sufficient new money from them to stabilize the situation and then proceeded to lecture the American people on what they needed to do. “If people will keep their money in banks”, Morgan said, “everything will be all right.”
Morgan’s intervention bought time, but a fresh threat emerged when the City of New York itself declared that it couldn’t pay its creditors. Morgan promised the needed funds in return for control of the city budget. City officials reluctantly acquiesced.
To complete his rescue package, Morgan called the presidents of the major trust companies to his private library and locked the doors behind them. The air grew foul with their cigar smoke and the tension mounted, but gradually they reached an agreement that let them live to speculate another day. A final holdout, Edward King of Union Trust, balked almost till the end. “Here’s the place, King”, Morgan growled, pointing to the document the others had signed. “Here’s the pen.”
Morgan’s rescue of the financial system won him the gratitude of the nation, but only briefly. Americans learned that Morgan had negotiated some sweetheart deals for himself amid the fright, and in any case most Progressives thought that in a democracy no capitalist should wield the kind of power Morgan did. Congress commenced hearings into the “money trust”, and Morgan was called as a witness. He refused to cooperate, obstinately asserting that his business was his affair alone. The committee compiled a report demonstrating the extraordinary influence Morgan and a handful of other big bankers exerted upon the American economy by means of interlocking directorates, shared ownership and numerous other leveraging devices. The committee declared that the safety of the nation required that the money trust be neutralized. “The peril is manifest.”
The Federal Reserve Act of December 1913 was the Progressives’ response. It wrested control of the nation’s money supply from the hands of the bankers and delivered it to the Fed. The wresting killed off the system Morgan had created—and killed off Morgan, too, according to friends who blamed the congressional inquisitors for breaking the old man’s health and precipitating his sudden and otherwise inexplicable death in March 1913.
The Fed provided the Progressive era’s answer to the question of when big is too big, at least in the critical realm of finance. Strikingly, the answer followed not a failure of the old system but a success—a success, however, that showed a degree of dependence on unelected, private individuals that Americans decided was unacceptable.
Our age is, by most measures, less progressive than that of Roosevelt and Wilson. It is also, at least in some respects, less candid about the differential effects of various ways of organizing the nation’s financial infrastructure. And it is perhaps more resigned to limits on the flexibility of public policy. In 1912, Wilson, at least, believed that a democratic polity could determine the character of its own economic arrangements and that those determinations could be based on political agency in the best sense of the term. Today, however, as the desultory history of 20th-century anti-trust legislation and litigation shows, most American lawmakers act as though their hands are tied in the face of technological inevitability.
This suggests that such radical reform of the financial sector as Congress mandated in 1913 is unlikely. Yet the arguments of the Progressives still resonate, and their boldness in tackling the money trust ought to give courage to those today who confront similar concentrations of power. President Obama has been compared to Franklin Roosevelt; certainly, the situations the two Presidents inherited have often been noted. But perhaps just as useful a comparison is Obama and Wilson—both the ambitious Wilson of the 1912 campaign and the more circumspect Wilson who occupied the White House. Ambition and circumspection combined in Wilson to produce the Fed; what they might yield for Obama remains to be seen.