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When in 1902, Roosevelt ordered Attorney General Philander Knox to prosecute Morgan’s Northern Securities Corporation for violating the Sherman Antitrust Act, Morgan visited the White House and told the president, “If we have done anything wrong, send your man to my man and they can fix it up.” After Morgan departed, TR told Knox: “Mr. Morgan could not help regarding me as a big rival operator, who either intended to ruin all his interests or else could be induced to come to an agreement to ruin none.” Their clashes did not prevent Morgan along with other major financiers and industrialists from contributing money to Roosevelt’s 1904 election campaign, on the grounds that the agrarian populist Democrats were a greater threat than the patrician progressive. But Morgan never forgave Roosevelt. When he learned that the recently retired president had gone to Africa on a hunting expedition, Morgan told friends: “I hope the first lion he meets does his duty.”
³⁵

As an alternative to the blunt instrument of antitrust, TR supported a federal incorporation law. Representative William P. Hepburn of Iowa in 1908 introduced a bill inspired by a 1907 report of the National Civic Federation. Founded in 1900 by a Chicago Republican editor named Ralph Montgomery Easley, the National Civic Federation brought together leaders from the realms of business, labor, politics, the academy, the clergy, and journalism who shared a common interest in moderate reform that avoided the extremes of radicalism and reaction. Mark Hanna was the first president and Samuel Gompers the first vice president. Andrew Carnegie and August Belmont belonged to the NCF, as did John R. Commons of the University of Wisconsin, one of the most important of the progressive economic reformers.

The Hepburn bill proposed federal incorporation of firms engaged in interstate commerce and exempted not only unions but also farms and business combinations “in the public interest.” A commissioner of corporations in the Commerce Department, rather than lawyers in the Justice Department, would have supervised corporate behavior. Jeffersonian paranoia doomed this sensible Hamiltonian reform. The Senate Judiciary Committee denounced the proposed registration of companies engaged in interstate commerce with the commissioner of corporations: “Shall we confer power upon the mere head of a bureau that the Parliament of England were unwilling to accord the King, and which they regarded as a menace to their liberties?”
³⁶

WILSON, BRANDEIS, AND THE NEW FREEDOM

Like Theodore Roosevelt, Woodrow Wilson recognized that there could be no return to an American economy dominated entirely by small enterprises. In 1900, he complained about populists like William Jennings Bryan: “Most of our reformers are retro-reformers. They want to hale us back to an old chrysalis which we have broken; they want us to resume a shape which we have outgrown.”
³⁷
In 1908, Wilson told the National Democratic Club: “No one now advocates the old
laissez faire
.”
³⁸
In 1912, at the Democratic Party’s annual Jefferson Day banquet, Wilson dismissed the relevance of Jeffersonian political economy, arguing that the United States “is not the simple, homogeneous, rural nation that she was in Jefferson’s time.” He concluded: “We live in a new and strange age and reckon with new affairs alike in economics and politics of which Jefferson knew nothing.”
³⁹
In 1912, Wilson declared: “Nobody can fail to see, no matter how clearly you perceive the evils that have come upon the country by the use of them—nobody can fail to see that modern business is going to be done by corporations.
The old time of individual competitiveness is probably gone by
. . . . We will do business henceforth when we do it on a great and successful scale, by means of corporations” (emphasis in original).
⁴⁰
On accepting the presidential nomination of the Democratic Party in the same year, Wilson emphasized, “I daresay we shall never return to the old order of individual competition, and that the organization of business upon a great scale of co-operation is, up to a certain point, itself normal and inevitable.”
⁴¹

Nevertheless, Wilson had misgivings about centralized power, which he shared with another southern-born Progressive, Louis Brandeis. The first Jewish justice of the Supreme Court, appointed by Wilson in 1916, the Kentucky-born Brandeis campaigned all his life against what he called “the curse of bigness,” inspiring a school of influential Brandeisian liberals including Felix Frankfurter and Benjamin Cardozo.

Brandeis denied the very existence of increasing returns to scale in technology-based industries: “I am so firmly convinced that the large unit is not as efficient—I mean the very large unit—is not as efficient as the smaller unit, that I believe that if it were possible today to make corporations act in accordance with what doubtless all of us agree should be the rules of trade no huge corporations would be created, or if created, would be successful.”
⁴²
He attributed the large size of modern industrial and infrastructure corporations not to economies of scale but to a conspiracy of New York bankers: “There is the consolidation of railroads into huge systems, the large combinations of public service corporations and the formation of industrial trusts, which, by making businesses so ‘big’ that locally independent banking concerns cannot alone supply the necessary funds, has created dependence upon the associated New York bankers.”
⁴³
He did not explain why large enterprises in manufacturing were common in other industrial countries beyond the reach of New York bankers. Brandeis would have resolved the emergent contradiction between large corporations and small unit banks—“locally independent banking concerns”—by cutting companies down to the scale of unit banks. Brandeis’s neo-Jeffersonian alternative to industrial corporate capitalism was a vague vision of a social order based upon small enterprises and cooperatives, of a kind that has not existed in any modern industrial country since the nineteenth century.

The Brandeisian wing of progressivism stoked Jeffersonian and Jacksonian dread of “the trusts,” a pejorative term for large enterprise that continued to be used long after New Jersey’s incorporation law permitted companies to abandon the unwieldy form of trusts in order to expand. Charles Francis Adams complained that every plan to coordinate railroads was immediately “characterized in the papers as a vast ‘trust’—in these days, everything is a ‘trust’—and denounced as a conspiracy.”
⁴⁴
The journalist Ida Tarbell, who had written a bestselling attack on John D. Rockefeller and Standard Oil, wrote in her autobiography that the public was wrong to believe “that the inevitable result of corporate industrial management was exploitation, neglect, bullying, crushing of labor, that the only hope was in destroying the system.”
⁴⁵

Many Brandeisians believed mistakenly that large corporations survived only because of high tariffs. They hoped that the Underwood Tariff Act of 1913, by slashing tariff rates, might cause industrial trusts to crumble under new competition. In fact, the most successful industrial corporations no longer needed the tariff and favored a policy of reciprocal trade liberalization so that they could export more to foreign markets, especially Europe. When the United States adopted low tariffs after World War II, most of the Morgan-created behemoths, instead of crumbling, as Brandeisian theory predicted they would, dominated the global market as well as the American market.

For critics of the trusts like Brandeis, the real purpose of antitrust was not to protect consumers, who often benefited when economies of scale permitted lower prices, but rather to protect small, inefficient producers who sought to use the state to compensate for their own lack of competitiveness. Anti–chain-store legislation similarly sought to protect small stores from competition by national retailers.

While the New Nationalists in the Hamiltonian tradition sought to remove economic governance from the adversarial environment of judges and juries to the realm of federal public administration, the neo-Jeffersonian advocates of the New Freedom sought to strengthen the prosecutorial antitrust system. In 1914, the Clayton Act backed by the Wilson administration sought to make the Sherman Antitrust Act even harsher by specifying monopoly practices. The Federal Trade Commission, created in 1914, was empowered to police restraints of trade, in addition to the courts.

Another progressive reform directed at the new elite of industrial and financial millionaires was the federal income tax. The Constitution provided that any federal direct tax be apportioned on the basis of the population of a state rather than its wealth. This meant that if New York had 30 percent of income but only 10 percent of the population, only 10 percent of an income tax’s revenue could come from New York. This provision did not prevent Congress from passing a federal income tax during the Civil War. It expired in 1872, but in 1895, Congress passed a law taxing all personal and corporate income. In a narrow five-to-four decision, the Supreme Court ruled that the income tax was unconstitutional because it was not apportioned among the states by population. Congress responded by approving the Sixteenth Amendment in 1909, and the amendment became part of the Constitution in 1913 after three-fourths of the states ratified it. In the same year, the Revenue Act imposed rates from 1 to 6 percent on incomes and a 1 percent rate on corporate incomes. Rates were raised in World War I but cut again in the 1920s, when Treasury Secretary Andrew Mellon argued that reducing taxes on the rich would stimulate economic growth, an argument revived in the form of “supply-side economics” during the Reagan era that began in 1981.

THE MONEY TRUST

As governor of New Jersey, Wilson argued in 1911: “The great monopoly in this country is the money monopoly.” This was an absurd statement, given the existence of thousands of legally privileged and protected unit banks, but one that appealed to the Jeffersonian and Jacksonian prejudices of the largely southern and western Democratic Party of his time.

A southern Democrat, Louisiana congressman Arsène Pujo, used his subcommittee of the House Banking and Currency Committee to investigate Wall Street’s role in American finance. In December 1912, Morgan was forced to testify before the Pujo Committee. With the aid of committee counsel Samuel Untermyer, a progressive lawyer, the Pujo Committee issued its report on February 28, 1913. According to the report, American industry and finance were dominated by associates of J. P. Morgan, including the investment banking firms Kidder, Peabody; Lee, Higginson; National City Bank; and First National Bank.

Brandeis drew on the Pujo Committee hearings in a series of essays in
Harper’s Weekly
and a book,
Other People’s Money: And How the Bankers Use It
(1914). Brandeis argued that the leaders of three banks—J. P. Morgan, George F. Baker at First National, and James Stillman at National City Bank—were at the center of a “money trust” that had captured the American economy. Brandeis complained that members of J. P. Morgan and Co. had seventy-two directorships in forty-seven of America’s largest corporations, while Baker and his First National colleagues served on forty-nine boards, and Stillman and his colleagues at National City served on forty-eight. George F. Baker, a Morgan partner who was also head of First National Bank, sat on the boards of six railroads that owned 90 percent of Pennsylvania anthracite coal. Membership by bankers on corporate boards has been commonplace and uncontroversial in other countries, including the democratic Federal Republic of Germany after 1945. But Brandeis insisted: “The practice of interlocking directorates is the root of many evils. It offends laws human and divine. It is the most potent instrument of the Money Trust.”
⁴⁶

BETWEEN THE NEW NATIONALISM AND THE NEW FREEDOM

Veering between the poles of the New Nationalism and the New Freedom, federal antitrust policy set by courts and executive branch officials produced an incoherent pattern, producing uncertainty for American businesses and investors. Supreme Court rulings in
E. C. Knight
(1895) and
Addyston Pipe and Steel
(1898) suggested that the Sherman Act would not be used by the federal judiciary to block mergers. However, the Supreme Court created confusion in 1904 by ordering the dissolution of Northern Securities—a holding company created with the help of J. P. Morgan to merge the Great Northern and Northern Pacific railroads. The court found an intent to restrain trade and forced a breakup.

The Supreme Court ordered that American Tobacco and Standard Oil be broken up as well. The penalty against Standard Oil was the equivalent of half the money coined by the US government in a year. Mark Twain responded to news of the fine by quoting the bride on the morning after her wedding night: “I expected it but didn’t suppose it would be so big.”
⁴⁷
Then in 1920, the court decided in favor of US Steel, even though its president, Elbert Gary, had made no secret of his company’s cooperation with other firms in stabilizing prices in the industry, at meetings known as “Gary dinners.”

The Supreme Court announced a “rule of reason,” but from the beginning US antitrust policy has lacked rhyme and reason. The fact that the United States was the only leading industrial nation that repeatedly harassed and sought to destroy many of its successful industrial enterprises merely on account of their scale can be explained only by the lingering residues of preindustrial Jeffersonian ideology in the radically different circumstances of industrial America.

As the second decade of the twentieth century began, both the New Nationalism and the New Freedom could claim victories in the struggle to shape the emerging American economy based on the technologies of the second industrial revolution. US entry into World War I would shift the balance of power in favor of the New Nationalism, leaving a legacy that would shape American institutions for generations.

We are passing from a period of extremely individualistic action into a period of associational activities.

—Herbert Hoover, 1924
¹

A
ddressing a special session of Congress on April 2, 1917, President Woodrow Wilson called on Congress to declare war on Germany: “With a profound sense of the solemn and even tragical character of the step I am taking and of the grave responsibilities which it involves, but in unhesitating obedience to what I deem my constitutional duty, I advise that the Congress declare the recent course of the Imperial German Government to be in fact nothing less than war against the Government and people of the United States; that it formally accept the status of belligerent which has thus been thrust upon it, and that it take immediate steps not only to put the country in a more thorough state of defense but also to exert all its power and employ all its resources to bring the Government of the German Empire to terms and end the war.”

On April 6, Congress voted for war. American participation in World War I was brief, lasting only between April 1917 and the armistice declared on November 11, 1918, but it was decisive in bringing about the defeat of Germany and its allies.

After the imposition of a draft on May 18, 1917, the US Army of 200,000 rapidly expanded. Ultimately a total of nearly five million Americans served in uniform during the war. Two million American troops were sent to Europe. Of those, 53,400 were killed, a fraction of the thirteen million lost by the other powers combined.

US industrial production tipped the balance in World War I, as it did in World War II. In 1914, US gross domestic produce (GDP) was greater than the combined GDP of Germany, Britain, and France. The US accounted for 32 percent of global manufacturing, Germany for 14 percent. When the war began in 1914, Britain, France, and the other Allied powers had 28 percent of the world’s manufacturing capacity, compared to 19 percent for Germany and its allies, the Central Powers. When the United States joined the war in April 1917 on the side of the Allies, the Allied share rose to 52 percent of the global total.
²

Around a quarter of America’s workforce, 9.4 million out of 37 million, took part in production for war.
³
All Americans were affected by the lasting changes produced by the wartime mobilization of America’s industrial resources and financial sector. As a result of the war, the progressive income tax became a permanent pillar of federal taxation.

An even more important legacy of World War I was the wartime partnership between the federal government and self-regulating trade associations in many industries. This experience of public-private collaboration inspired the associationalist movement led by Secretary of Commerce Herbert Hoover during the 1920s. The institutions and methods of World War I also inspired the responses to the Great Depression undertaken by both Hoover and Franklin Roosevelt in the 1930s. The spirit of the War Industries Board, the War Finance Committee, and other agencies of World War I would be reincarnated in multiple forms from the 1920s until the late twentieth century. The organization of the American economy during World War I is a key to understanding the reorganization of the American economy in the generations that followed.
⁴

GERMAN-AMERICAN RIVALRY: PRELUDE TO WAR

Few subjects in American history are more contested than the US entry into World War I. For generations, some have denounced the American effort as a tragic and unnecessary war, engineered by Wall Street financiers to make sure that their loans to Britain, France, and other combatants would be paid. Others have dismissed material factors and explained American participation in the conflict as a tragic mistake caused by Woodrow Wilson’s utopian vision of a liberal international order.

But geopolitical strategy, not corruption or idealism, motivated America’s participation. The entry of the United States into the war in April 1917 was the culmination of a deepening rivalry between the United States and Imperial Germany that dated back to the 1880s.

When the German states outside of the Hapsburg monarchy were unified under Prussia’s Hohenzollern dynasty by Otto von Bismarck in 1871, the newly united Germany immediately became the most populous and powerful state in Europe. Worried about provoking the antagonism of Germany’s neighbors, Bismarck favored a cautious foreign policy. But he was dismissed in 1890 by the young Kaiser William II, who wanted Germany to be not just first among several European powers but a “world power.” Even before 1900, Germany was viewed as a threat by the powers that would form an alliance twice in the twentieth century to defeat it—Russia, Britain, France, and the United States.

The American naval imperialism of the late 1800s and early 1900s was in part a response to Germany’s drive to obtain naval bases in the Caribbean, Mexico and Central America, and the Pacific. The United States clashed with Germany over Samoa, and one motivation for the Spanish-American War of 1898, which led to US domination of Cuba, and annexation of Puerto Rico and the Philippines, along with Hawaii, was to deny potential island bases to the German navy.

In 1902, Germany, Britain, and Italy blockaded Venezuela to punish the country for not paying creditors among their citizens. In his 1904 annual address to Congress, Theodore Roosevelt announced the Roosevelt Corollary to the Monroe Doctrine—the United States would intervene in the region on behalf of extrahemispheric parties, when necessary. Although presented as a public service to other countries, the purpose of the Roosevelt Corollary was to deny Germany the ability to use controversies involving its citizens and businesses as a pretext for military intervention near US borders. The United States intervened in the Dominican Republic (1916–1924), Haiti (1915–1934), and Nicaragua (1912–1933). In 1917, the United States purchased the Virgin Islands from Denmark.

To impress the other great powers with America’s new blue-water power-projection capabilities, President Theodore Roosevelt sent a US battle fleet, the “great white fleet,” around the world from 1907 to 1909. Roosevelt also fulfilled the generations-old dream of a Central American canal, which would allow the US fleet to move forces more easily from the Atlantic to the Pacific, in the event of future overseas wars, with Germany and Japan regarded as the most likely opponents. A French attempt to build a canal through the Panama region of Colombia had begun in 1880 but had been abandoned because of the difficulties and the high mortality rate among workers caused by yellow fever and malaria. In 1902, with the help of the US Navy, rebels in Panama backed by the Roosevelt administration won their independence from Colombia and negotiated a treaty with the US. Chief Engineer Colonel George Washington Goethals of the US Army Corps of Engineers directed construction of the canal. More than five thousand workers died of disease, but the numbers were a fraction of those who had died during the earlier French attempt, thanks to Dr. Walter Reed’s promotion of screening, sanitation, and other programs to combat mosquito-borne diseases. Begun in 1904, the “big ditch” was completed two years ahead of schedule in 1914—the year that World War I began.

The Mexican Revolution that erupted in 1911 turned into a proxy war between the United States and Imperial Germany. In order to minimize the United States as a factor in future conflicts in Europe or Asia, Germany sought to tie American forces down on the southwestern border. Germany armed General Victoriano Huerta, one of the rival Mexican leaders. To prevent a German arms shipment to Huerta’s forces from arriving, the Wilson administration occupied Veracruz in April 1914. Huerta died in a jail in El Paso, Texas, in 1916, having been arrested for violating US neutrality laws by negotiating with German agents in New York.

American neutrality in the first years of World War I was little more than a pretense. The United States accepted the British blockade of German-controlled Europe, but denounced German submarine warfare for interrupting the supplies streaming to Britain and France from the “neutral” United States. After German submarines sank the
Lusitania
in 1915 and the
Sussex
in 1916, killing American citizens aboard, President Wilson in 1916 threatened to sever diplomatic relations with Germany. To forestall direct US intervention, Germany ended submarine warfare for a time.

President Wilson hoped that the United States, as a neutral, could use its good offices to broker a peace acceptable to all sides, along the lines of Wilson’s Fourteen Points, a visionary plan for a peaceful postwar world. Wilson was reelected in November 1916 in part because “he kept us out of war.” But in 1917, Germany resumed submarine warfare to cut off American aid to Britain. In the hope of tying down the United States along the border, the German ambassador to Mexico, Arthur Zimmerman, encouraged Mexico to attack the United States. The Zimmerman telegram, intercepted and decoded by Britain and publicized in the American press, outraged the American public, which supported Congress’s declaration of war against Germany on April 6, 1917.

THE HOUSE OF MORGAN GOES TO WAR

Between January 1915 and April 1917, when the United States entered the war, J. P. Morgan and Company acted as the exclusive purchasing agent in the United States for the governments of Britain and France.
⁵
To carry out its procurement duties, the House of Morgan created an export department that purchased and shipped arms and supplies. The department was headed by Edward R. Stettinius, formerly the president of the Diamond Match Company. Stettinius went on to work for General Motors and US Steel, to administer the lend-lease program during World War II, and to serve as secretary of state for presidents Franklin D. Roosevelt and Harry S. Truman from 1944 to 1945.

During the war, US trade with the Allies expanded rapidly, growing from $825 million in 1914 to $3.2 billion in 1916, while trade with Germany and Austria-Hungary collapsed from $169.3 million to $1.16 million.
⁶
As American exports to the Allies boomed, J. P. Morgan accounted for a large share—84 percent of American exports of war materials and munitions and 21 percent of overall US exports.
⁷
The House of Morgan also arranged for private loans to Britain and France. In total, between January 1915 and April 1917, the Allies borrowed $2.6 billion, of which $2.1 billion went to Britain and France, while Canada and Australia received $405 million, and Russia and Italy $75 million.
⁸

A member of the firm observed that the functions carried out by J. P. Morgan “assumed in many of their aspects a governmental rather than a commercial character.”
⁹
When the United States formally entered the war in April 1917, the Wilson administration spurned offers of help by the Morgan leadership and public lending by the federal government replaced private lending.

In the 1920s and 1930s, isolationists like North Dakota senator Gerald P. Nye accused J. P. Morgan and other “merchants of death” of dragging the United States into an unnecessary war in order to assure the repayment of their loans. War profiteering presumably explained the fortune of the wealthy guardian of the popular cartoon character Little Orphan Annie. His name was Daddy Warbucks.

PAYING FOR WAR

In all the United States spent $38 billion in World War I. The government paid for the war by a combination of borrowing (61.4 percent), taxation (24.5 percent), and the creation of new money (14.1 percent).
¹⁰

Secretary of the Treasury William Gibbs McAdoo sponsored rallies across the country featuring actors and other celebrities to encourage Americans to buy bonds. Between May 1917 and April 1919, the US government, replacing J. P. Morgan and other private lenders, provided the Allies with four Liberty Loans and a postwar Victory Loan, with a total amount of $9.6 billion.

The contribution of taxes in paying for World War I was lower than in the Civil War but higher than in World War II.
¹¹
As a percentage of US GNP, wartime spending peaked in the last quarter of 1918 at 28.6 percent.
¹²
As in World War II a generation later, tax revenues came primarily from progressive income taxes and corporate income and excess profits taxes.

To pay for the war, the government taxed the rich heavily. The Emergency Revenue Act of 1916 increased the income tax. The highest personal income tax rate, levied on incomes greater than $1 million, rose from 10.3 percent in 1916 to 70.3 percent in 1918. On top of this was added a surcharge on incomes over $20,000 with a maximum of 13 percent, raising the effective income tax of the richest Americans to 15 percent. Other taxes on the wealthy took the form of increased estate taxes and corporate income taxes.
¹³

THE WAR INDUSTRIES BOARD

One participant in the mobilization effort, Howard E. Coffin, vice president of the Hudson Motor Car Company, explained, “Twentieth century warfare demands that the blood of the soldier must be mingled with from three to five parts of the sweat of the man in the factories, mills, mines, and fields of the nation in arms.”
¹⁴

Following America’s entry into the war, in July 1917, the National Defense Advisory Committee, created in August 1916, was replaced by the War Industries Board (WIB). Initially the mandate of the WIB was not clear, and the War Department and other government agencies continued with their own independent procurement policies. The chaos that resulted threatened the war effort by the winter of 1917–1918. In March 1918, President Wilson empowered the WIB to direct the mobilization of the economy as a whole.

To head the WIB, President Wilson turned to Bernard Mannes Baruch. Born in Camden, New Jersey, in 1870, Baruch was the son of a German immigrant who attended South Carolina Medical College and Richmond’s Medical College of Virginia and became a Confederate Army surgeon on the staff of Robert E. Lee. His mother was a proud Confederate and Baruch, whose Southern accent formed before his family moved to New York when he was ten, kept in touch with his southern roots by buying a huge estate in South Carolina, called Hobscaw Barony.