Goliath: the 100-year war between monopoly power and democracy

tags

Competition New Brandeis movement

Notes

Preface

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Liberals were the face of the coup, but bankers were quietly organizing the rebellion from behind the scenes.

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The Watergate Babies didn’t understand they were being manipulated. They were antiwar, not anti-bank.

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Patman’s politics, which focused on financial and monopoly power, was irrelevant.

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For two hundred years, Americans had fought concentrated power, relying on leaders like Patman. But now there was no one left to carry on the tradition. The new generation had, unwittingly, committed patricide.

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Without guidance, the new generation panicked. Rudderless and afraid, they turned to a group of scholars who promised them efficiency, progress, and freedom. All they had to do was undo the chains on concentrated power that men like Patman had spent their lives securing. And so they did.

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Our leaders responded to a financial collapse caused by a concentration of wealth and power by pushing even more wealth and power into the hands of the same people that caused it. Why?

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The policy choices around the financial crisis were odd because they were destabilizing.

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the answer to the question is ideology, and in particular, turning our back decades ago on an old populist way of organizing our culture.

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There was an entirely different set of stories and traditions in the heads of policymakers before the 1970s than there was after the 1970s.

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few were aware of the origins of their own intellectual traditions. They believed, proudly, that they were nonideological and pragmatic.

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The financial crisis of 2008 was not a technocratic problem that happened in the banking system. It was a political crisis that happened everywhere.

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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.

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Somehow, we took the greatest communication platform ever created and used it to manufacture a new generation of Nazis.

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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.

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The baby boom generation did not mean to build the world that they did. They wanted a world based on justice and equality, and responded to the problems they saw based on what they knew. They were simply never taught to understand corporate power.

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We attack or praise capitalism, or socialism, or the free market. All of this misses the point. The fight has always been about whether monopolists run our world, or whether we the people do.

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Chapter One: 1912

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Teddy Roosevelt was, as Mark Twain put it, “the most popular human being that has ever existed in the United States.”

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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.”

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A belief in aristocracy, a distrust of, as he put it, “the mob,”

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Teddy Roosevelt had a dark side.

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He venerated war and violence; manhood meant proving oneself in combat.

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Roosevelt, in this speech, was to openly take the side of monopoly.

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powerful proponent of plutocracy and monopoly, a believer in the importance of the upper class.

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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.”

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the Civil War was not just a war against slavery, but also against a plutocracy of planters, in some ways similar to the men who controlled the great corporations they now faced. By the time of that war, cotton planters had concentrated ownership of land and slaves. In 1860, an oligarchy of eight thousand men ruled over millions of enslaved blacks, and poor whites, in the South. The wealthiest men in the country were cotton kings; half the millionaires in 1850 lived in one town in Mississippi.

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“the Pacific railroads have settled the Indian question.”

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state corporate charters did not allow one corporation to buy stock in another.

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Virtually the entire commercial order of late-nineteenth-century America was oriented around small and midsized proprietorships,

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Unregulated competition in networked industries like railroads, which had high fixed costs, could be catastrophic.

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throughout the 1890s, courts used an interpretation of the Sherman Act to rule that price-fixing among competitors tended to be illegal, but mergers were not. This inverted the meaning of the antitrust laws and ended up encouraging mergers.

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The strike pitted emerging tycoons against iron and steelworkers. The tycoons were led by a slender, ruthless, Hamilton-admiring coal baron named Henry Clay Frick, who was running Carnegie Steel at the time. Frick hired mercenaries known as the Pinkerton detectives and built walls around the Homestead mill with apertures for guns. In a ferocious battle between guards and strikers, sixteen people died. Frick had more than a hundred strikers arrested, some for murder, and the union ran out of money. Carnegie Steel, with tens of millions of dollars of capitalization, held out until the union was destroyed.

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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.

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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.”

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animus toward corruption was paired with disdain for farmer populists, who he felt threatened the natural ruling order.

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Roosevelt desired to build a great American empire through combat. “The clamor of the peace faction,” he said in the 1890s before the American war with Spain, “has convinced me that this country needs a war.”

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while Roosevelt did invest the antitrust laws with real power, he generally did not want to break up monopolies. Roosevelt’s hunger for authority, his desire to centralize commercial and political authority, his aristocratic bearing, were inconsistent with decentralizing power.

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“Gary dinners,” where steel company heads shared pricing information

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To challenge a monopoly, the government would now have to prove not only that there was a restraint of trade involved, but also that such a restraint was unreasonable.

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the court also allowed John D. Rockefeller to keep his stakes garnered from the monopolistic practices. He had gotten away with what Democrats thought was a billion-dollar crime. William Jennings Bryan cried out, “The Trusts have won.”

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THE ELECTION OF 1912: WILSON VERSUS ROOSEVELT

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Men might vote, but they would be the better sort, ensconced in government- chartered private banks and corporations, who would do the governing.

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Croly updated Hamilton’s theories, with scientific experts replacing wealthy merchants as the arbiters of the public good. He argued “huge corporations” induced efficiency and cooperation, and “all civilized societies” should seek such values when possible.

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proposal was to nullify the antitrust laws for monopolies that agreed to obey government orders.

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Eugene Debs, a socialist who saw monopoly as inevitable and efficient, sought not to break up trusts, but to nationalize them.

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Just twenty years earlier, Wilson noted, men used to work for themselves. Now, great corporations had become “our masters.”

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Brandeis would formalize the populist social sentiment of the late nineteenth century into a rigorous set of legally actionable ideas, becoming a founding figure of twentieth-century Constitutional thinking. America, well into the twentieth century, would be a nation of entrepreneurs because of Brandeis.

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Brandeis beat the Morgan syndicate by proving that the company had been lying about its financial condition. At first, his allegations that this railroad was losing money subjected Brandeis to scorn and ridicule;

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The New Haven was grossly mismanaged. It invested little in safety equipment, and its board of directors comprised financiers so busy they paid no attention to the company.

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Brandeis’s goal was to achieve what he called “industrial liberty.”

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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.

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envisioned a system of regulated competition.

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a public set of institutions to reduce the power of the private government.

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undergirded by a political coalition of farmers and labor unions, who would form the backbone of the Democratic Party.

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“When Brandeis’s nomination came in,” a Washington correspondent wrote, “the Senate simply gasped.”

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Chapter Two: Mellonism

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WILSON’S DOWNFALL

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just two weeks after the ICC’s report on the Morgan-Rockefeller control of the New Haven, war broke out in Europe. Everything but the war became irrelevant.

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The social sciences, focusing on knowledge, efficiency, and an aesthetic of scientific objectivity, replaced prewar reform movements oriented around popular democracy.

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Domestically, two unseen forces were at work undermining Wilson’s peace plan. The first was concentrated capital.

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In late 1919 and early 1920, inflation was running at 25 percent annually. Companies like GE and U.S. Steel seized this moment to go on the offensive. In the most significant episode, U.S. Steel’s Elbert Gary refused to recognize a labor union, and 365,000 workers went on strike. To contain them, the company used 25,000 private security guards in Pennsylvania alone, with martial law in the steel town of Gary, Indiana. Twenty people died in the strike.

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U.S. Steel prevailed totally, and talk of industrial democracy in the steel industry ended forever.

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THREE PRESIDENTS AND THEIR BOSS ANDREW MELLON

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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.

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Mellon overcame these legal restrictions by pretending to sell his assets to his brother.

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Mellon, by contrast, would remain treasury secretary for eleven years, under three presidents.

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MELLON’S MILLIONS

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Mellon’s empire was unavoidable for ordinary Americans in myriad other ways. The Mellon system was a set of industrial and financial enterprises that aided each other and had interlocking boards of directors and even personnel.

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With Mellon interests came the Frick model of labor relations, which used ethnic divisions to strip workers of power. One of the worst race riots in American history, in East St. Louis in 1917, started outside an aluminum facility, as white workers on strike faced 470 black strikebreakers recruited from the South. The local authorities stood aside as white mobs murdered over two hundred African Americans.

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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.

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KING ANDREW

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When he couldn’t win through Congress, he could win through administration, and through his control of the Bureau of Internal Revenue, the forerunner of the Internal Revenue Service.

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There was, Kent wrote, no longer a Democratic or Republican Party, but instead, “a Mellon party and a small non-Mellon party.”

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Copeland “frankly admits that it is on account of fear of the power of this corporation to bring distress, poverty, and unemployment to the American toiling masses” that he supported the Mellon monopoly tariff.

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Treasury Secretary Mellon told voters that there were immutable economic laws that could not be evaded. “Just as labor cannot be forced to work against its will, so it can be taken for granted that capital will not work unless the return is worth while.”

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THE ROARING TWENTIES

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Inventors and scientists were bringing an unending stream of inventions and improvements to daily life. But it was the financiers, not the inventors, who governed this system, choosing how these inventions were unleashed and ensuring that it would be centralized powerful corporations that controlled them.

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In 1926, the Supreme Court limited the FTC’s authority to block mergers.60 This decision may not have mattered in any case, as the FTC in the 1920s largely confined itself to bringing businessmen together to set informal codes over their industries.

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under the Harding, Coolidge, and Hoover administrations, industry enjoyed, to all intents and purposes, a moratorium from the Sherman Act,

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Lax antitrust enforcement induced a giant merger wave.

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A 1911 Supreme Court decision allowed stores to sell below cost and drive their competitors out of business.

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Chain stores became part of the increasingly consumer-oriented American experience, growing their share of the grocery market from 4 percent to 19.2 percent from 1921 to 1929.

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MELLONISM

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In 1921, a New York Post reporter said it simply: “West Virginia is today in a state of civil war.”

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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.

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In 1928, Mellon’s brother Richard had let slip in a congressional hearing that his management model required machine guns. “You could not run a mine without them,” he said.

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The American Federation of Labor fell from 5 million to 3.6 million members from 1920 to 1923 and continued falling through the decade. Productivity jumped by 30 percent, but wages were up by just 8 percent in the decade.

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stark regional inequality. Most assets, such as 90 percent of money-producing patents and over 90 percent of all dividends and interest payments, were held in the North, starving the South and the West of capital.

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The South put its tax burden on the poorest through the sales tax,

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MELLON AND MUSSOLINI

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In a 1924 campaign speech, Mellon lauded Mussolini as an exemplar of laissez-faire economics and a key bulwark against Bolshevism, attacking socialists in Italy. Mellon’s admiration fortified Mussolini in American financial circles.

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Mellon offered fascist Italy the best postwar financial terms available to any nation in Europe.

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Chapter Three: The Impeachment of the Old Order

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THE GREAT CRASH

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By 1928, the top one percent of the population received nearly a quarter of all income.9 This excess income flooded into the stock market, and into speculation.

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Hoover seemed to be the best of America. Not a politician, but a successful businessman, a progressive forward-looking leader. He was the Great Engineer, the Great Humanitarian, the Great Idealist, the Great Administrator. And now he was president, with seemingly limitless potential. And yet behind the image, Hoover was deeply conservative, skeptical of federal action, paralyzed by his own brilliance, and a mean-spirited micromanager. It would be hard to find a worse leader for a crisis.

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Speculators learned their lesson: never be out of the market.

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Mellon told the president that the speculators “deserved it.” The economy, he announced, would recover by the spring of 1930

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DESPERATION

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Union leaders warned Congress that no talk of “Americanism or our Constitution” would stand against empty bellies.

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Bankers were afraid to lend money to cities;

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It was starvation or revolt, according to John Edelman of the Pennsylvania Federation of Labor.

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Reactionaries prepared, not to aid the people, but in fear of them.

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THE LAST POPULIST IN HIS FIRST CRUSADE

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Sam Rayburn, his good friend, would much later gently mock Patman by saying that “if he got shipwrecked on a lonely island with Liz Taylor, Liz in the nude, he’d say, ‘Ms. Taylor, do you know the workings of the Federal Reserve Board?’”

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Yet Patman’s key local political booster in 1928 was James “Cyclone” Davis, a People’s Party organizer in the 1890s who became a KKK member in the 1920s. And Patman was a supporter of segregation in the 1950s and 1960s and signed the Southern Manifesto in opposition to civil rights legislation because, he argued late in his career, he would have lost his seat had he not supported it. He was no racial demagogue, and his focus was economic equality regardless of race. But neither was he willing to challenge his white constituents on their racism and lose his political office. It was a cynical deal his constituents, white and black, understood. After blacks got the right to vote, they tended to vote for Patman.

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within his arguments one can see how he connected the power of monopolists in an individual market with the functioning of the economy at large.

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Big business opposition to payment of the soldier’s Bonus enraged veterans.

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The war cost $52 billion, he wrote, while total profits from the war were $16 billion. Losses to possible profits, he noted, were structured to be limited by contract, but “there is nothing in this scheme, apparently, that says not more than 12 per cent of a regiment shall be wounded in battle, or that not more than 7 per cent in a division shall be killed.” The government, he noted, “cannot be bothered with such trifling matters.”

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In 1920, the U.S. Chamber of Commerce argued that if the Bonus were paid out, “the half million Negroes in the South, who probably would receive $500 or $600 each, would immediately quit work until the money was spent.”

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Congress authorized special certificates for veterans, redeemable in 1945. Because of this long period, and the number of veterans dying young, it became known as “The Tombstone Bonus.”

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The Bonus Bill even became a focal point for intellectual combat over the nature of money.

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Inflationists wanted to put money in the hands of the plain people—the farmers in bankruptcy, the girls prostituting themselves for food, the homeless. Inflation during a depression would restore 1929 prices. Farmers had borrowed in 1929 prices; shouldn’t they be able to sell their commodities at 1929 prices so they could service those debts?

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Patman had found his army, and his villain. In 1931, Patman started telling people that he was going to impeach Mellon.

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By the mid-1930s, the threat from Congress to abolish the commission forced the FTC to reorganize into a much closer version of what Brandeis had envisioned originally.

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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.

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

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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.”

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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. After the impeachment, his phone was tapped and “his offices were ransacked; Capitol police were ordered to patrol the hallways outside his office.”

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Mellon was represented by a former solicitor for the Bureau of Internal Revenue, and a high-powered Pittsburgh attorney. But they were no match for the populist from Cumberland Law School, who had been obsessed with Mellon for years.

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Mellon’s lawyer admitted that Mellon had been in the private car with all of the key negotiators. But, he said, Mellon looked out the window the whole time and didn’t take part or pay attention to any conversations.93 Suddenly, impeachment seemed plausible.

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On February 4, 1932, less than a month after Patman filed his articles of impeachment, Mellon resigned. Hoover appointed him ambassador to England,

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In every town, on every rail line, it was a conflict between the railroad employees to help the Bonus Marchers, and the management, which tried to kick them off the cars.

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President Hoover, determined that the government should not be “coerced by mob rule,” ordered General Douglas MacArthur, then Army chief of staff, to drive the veterans from the city.106 Troops from the Third Cavalry, led down Pennsylvania Avenue by George Patton himself, wielded naked sabers, followed by a machine gun detachment, bayonet-equipped infantrymen, and six tanks tearing up the street’s asphalt.

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Patman would never become a New Deal insider; he continued to prod Roosevelt and his advisors, publicly pushing, teaching, inspiring and annoying not just Roosevelt, but every president, until the 1970s.

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Billions of dollars would now be handed out to veterans. None of the downsides warned of by opponents came true. There was no economic collapse. In 2013, an economist analyzed the effect of the Bonus Bill, using data gathered by the American Legion on what veterans spent the money on. They bought cars and houses, and the Bonus added “2.5 to 3 percentage points to 1936 GDP growth.”113 That year, the U.S. economy grew by 13 percent, the biggest peacetime expansion in history. Roosevelt won a smashing reelection victory on the back of this growth, and Democrats took seventy-six Senate seats for their biggest majority of all time.

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Chapter Four: Populists Take Power

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Like Wilson, Roosevelt attacked the corruption of experts. There was, he said, a “deliberate and definite attempt on the part of some of the power companies’ publicity agents to make the average citizen think that the electrical industry is so vast and so complicated that nobody but highly trained experts in the employ of the private companies can possibly carry it on.”

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The bankers and utility men who funded the party wanted Democrats to continue this strategy in 1932. They encouraged leading candidates to run on social issues, specifically whether to repeal the unpopular ban on liquor, or Prohibition. The liquor question split the country along ethnic lines, but didn’t offend business interests. The DuPont and Rockefeller interests supported repeal; legal liquor taxes could serve as a way to reduce taxes on the wealthy.

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Roosevelt’s campaign was building a constituency for the laws Congress would pass. More importantly, he was publicly naming the enemy, financiers who had concentrated private power. Roosevelt went on a speaking tour to criticize these domestic oligarchs, and their methods of concentration. He saw these men and this centralization as a rival governing system. “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.”

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THE WINTER OF DESPAIR

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This lame-duck period was terrifying, a giant sustained banking panic to cap the Hoover administration’s record of mismanagement.

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In areas with no banking system, cash became king. Crime and theft were no longer simple hazards, but a threat to survival.

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“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.”

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Abroad, the situation was much worse.

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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

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One man who could bring this about in the U.S., a man “endowed with charm, tradition, and majestic appearance” was, Roosevelt told Tugwell, Douglas MacArthur.

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Roosevelt put together his cabinet, assuring a Democratic colleague that it would be a “radical” cabinet, that “there will be no one in it who knows the way to 23 Wall Street”

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He said he would inflate the currency.

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A POPULIST PECORA

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What framed the winter for the bankers, and paralleled the bitter and public back-and-forth between Hoover and Roosevelt, was the most far-reaching public investigation of the financial sector ever undertaken, originating from the United States Senate.

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There was immense pride, a haughtiness among aristocratic American financiers. New York Stock Exchange president Richard Whitney said the stock exchange was a “perfect institution,” and that America had been “built by speculation.”

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He sought to strip away their veil of respectability, and instead treat them as a seasoned prosecutor would address common crooks.

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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.

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Mitchell himself was revealed to be deeply unethical,

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avoided income taxes in 1929 by selling stock at a loss to his wife, then buying it back for an artificial loss.

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The National City hearings lasted just nine days, but as Pecora put it, “in those nine days a whole era of American financial life passed away.”

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J. P. Morgan Jr. himself, son of the deceased J. P. Morgan, hadn’t paid taxes in years. Neither had Thomas Lamont, and many other Morgan partners.

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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.

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The Senate Banking Committee voted 7–4 to make J. P. Morgan’s preferred list public (with the rumor that Pecora threatened to resign if they refused).66 The list of names was explosive. It included the establishment in both parties.

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The investigation would last until 1934, when Congress set up a regulatory agency, the Securities and Exchange Commission (SEC), to police the practices Pecora had uncovered, and Roosevelt named Pecora to the SEC.

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THE FIRST HUNDRED DAYS

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Two days after Pecora finished his hearings on National City, President Franklin Delano Roosevelt swore the oath of office.

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Roosevelt’s first act was to declare a bank holiday, to shut the system down, and in effect end the gold standard.

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The day the banks began reopening, Americans rushed to the banks. But they did not withdraw money; they deposited cash they had stuffed in their mattresses. They believed. The stock market had its greatest gain in history, up 15 percent in one day.

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In these first hundred days, Pecora, Roosevelt, and populists in Congress exposed that the political economy of Wall Street and big business was a top- down concentrated system of corruption and lawlessness. The public responded by rejecting the old order with protests.

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FALL OF THE HOUSE OF MELLON

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Almost immediately, Roosevelt signaled he would hold the bankers accountable. Roosevelt asked the new attorney general, Homer Cummings, to “vigorously prosecute any violations of the law” that emerged from the investigations.

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Mitchell was eventually fined over $1 million for tax fraud

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a tip that Mellon was evading taxes.78 The Republican appointee running the tax bureau, refusing to take a position, passed the case on to his successor.

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Mellon was right to take the matter personally. His entire edifice of monopoly control was falling apart.

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Mellon was a ruthless and savvy old man, with access to the most expensive tax attorneys. His finances were endlessly complex, and the tax laws seemed vague, especially as they applied in an unusual economic situation like the depression. In the trial, there would be forty-seven witnesses, roughly ten thousand pages of testimony, and 847 exhibits in evidence.

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The board often seemed to act as Mellon partisans,

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Mellon’s financial secretary, Howard Johnson, revealed on the stand that Mellon was betting against stocks in 1931 as secretary of the treasury. More damning, Mellon employed a former Bureau of Internal Revenue employee, D. D. Sheppard, as a tax attorney,

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Mellon’s arguments that he had set aside his management of his financial empire so he could serve dispassionately in public service seemed like obvious, and increasingly ridiculous, lies.

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Hogan’s initial strategy to get favorable coverage for Mellon’s art donations backfired. “It is now a joke around here that every time we bring out a bad point, Hogan brings out a picture,”

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He admitted he had made no commitment to build an art gallery anywhere, and the paintings for which he had taken tax deductions were hanging on his wall.

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As the trial dragged on, it became clear that Mellon was trying to refight the 1932 election, to prove to the whole country that the New Deal was madness.

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In the 1936 election, Andrew Mellon responded to his tax trial by attempting to defeat Roosevelt politically. He gave $20,000 to the Republican Party, with Richard K. Mellon giving another $20,000. The entire old order fought back against the various insults of the New Deal. The DuPont family donated $144,430 and J. P. Morgan kicked in $50,000.

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The crushing victory for Roosevelt, and the overwhelming number of Democrats in the House and Senate, made the Republican Party irrelevant.

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Jackson’s fear was partially realized. The board did dismiss the fraud charge. But importantly, it also required the payment of back taxes.

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Jackson, Patman, and La Guardia all believed that the verdict had not been harsh enough, that the museum donation by Mellon had been the real settlement.

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Andrew Mellon was never jailed, but he would be the last of the great robber barons.

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Chapter Five: Trustbusters Against Hitler

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Mellon had cemented this control during the banking crisis, using his treasury secretary position not to arrest the crisis, but to take advantage of it.

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Mellon sought to use confidential information acquired via his position as a government official to capture either the Bank of Pittsburgh, or by keeping it shut, its business.

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seamless linking of public and private power;

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“Modern European history,” Jackson said, “teaches us that free enterprise cannot exist alongside of monopolies and cartels.”

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antimonopoly policy not only to address what Brandeis called industrial absolutism, but as a means to return control of national security to the people.

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THE ROOSEVELT RECESSION

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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,

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Negotiations of a different Munich-style agreement were underway in the industrial sphere. The next year, British industries pledged cooperation with German cartels, with French industrialists working to collaborate as well.31 In these cartel agreements, non-German companies would cut their output, while German companies would not. German companies used patent agreements to manipulate American companies, like Standard Oil, over vital materials like synthetic rubber.

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A WAR OF PRODUCTION

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The war against Hitler would require conflict within each country almost as much as it did between countries.

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DESTROYING THE ECONOMIC ROYALISTS

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What Roosevelt called in 1932 the “unofficial… economic Government of the United States” had to be dismantled, and replaced with democratic means of wielding power.

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THE ALCOA DANGER

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in terms of pure military necessity, aluminum—controlled by Alcoa—was at the top.

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Alcoa was unique. It had 100 percent of the market. Mellon had made sure of it, from the beginning.

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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.

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The Wilson administration forced Alcoa to modernize.

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After the war, Alcoa moved to protect its market power. Mellon protected Alcoa’s domestic market from foreign competition by encouraging Harding to raise tariffs. The company returned to prioritizing control above production;

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THE ALCOA CASE

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In April of 1937, Robert Jackson brought the suit in what was often called “the largest proceeding in the history of Anglo-American law.”

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Alcoa executives had unloaded blocks of shares prior to the suit being made public.

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Alcoa-friendly officers in the planning division sought to hide the records. One colonel got rid of the report by mailing it back to the company under the “innocuous” pretense he wanted the company to update it with new information

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With the conflict at the cabinet level, the secretary of war said no, the report had been returned to Alcoa for updating and he had to protect the company’s confidential information. Unwilling to name their informant and show that the Army officers had deliberately destroyed evidence, the DOJ couldn’t move the military.

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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.

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Judges believed in a Constitutional system known as “Lochnerism,” in which it was simply unconstitutional for the state to write laws protecting workers or otherwise interfering with private business.

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the president proposed restructuring the Supreme Court. Finally, the Supreme Court caved,

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In Alcoa’s case, the problem wasn’t just the conservative nature of the judiciary, but judicial corruption.

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Gibson had been appointed in the 1920s, upon the recommendation of Mellon himself.

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Since the passage of the Sherman Act, it had not been clear whether being a monopoly was illegal.

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It was abusive behavior, not the holding of a monopoly, that courts had held as illegal.

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Alcoa withheld documents. The company believed the threat was existential,

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hard for the government to rebut this claim with its own experts as nearly everyone with expertise in aluminum worked for Alcoa.

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Davis had promised that Alcoa could easily meet any aluminum needs for the war. As soon became apparent, it could not. And Arnold would publicly wrap Alcoa in the Nazi flag as punishment.

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THE BREAKING OF THE BANKERS

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Big business leaders organized to defeat FDR in the 1936 reelection.

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Eccles asserted that it was the sovereign right of government to print money, to run deficits, to organize whether the economy would boom or ebb.

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If there was a lack of money in the economy, the government could provide more of it.

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Before John Maynard Keynes would formalize the economics of deficit spending, Eccles recommended it as policy.

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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.

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Eccles wanted Roosevelt to go on a government spending binge, to have big government counteract the slump in spending from the private sector.

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Eccles persuaded Roosevelt to jump-start spending with government support for the Federal Housing Administration. This would expand fixed rate mortgages and induce a pick-up in the residential construction industry. He also pushed for investment in low cost housing, a national health program, and a revitalization of railroads.

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During the war, the federal government ran budget deficits as high as 26 percent of GDP, but the Fed offered as much money as needed, at low fixed interest rates set by the Fed. Eccles oversaw the most successful experiment in central banking history,

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By 1940, J. P. Morgan Jr. sold his seat on the New York Stock Exchange for $40,000, a seat that had been selling eleven years earlier at $625,000. There was no Morgan sitting in the stock market for the first time since 1871.

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A DEMOCRATIC GOVERNMENT REPLACES THE BANKERS

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Within a few months, as Reynolds put it, “French bauxite was being returned to France in the shape of German planes.”

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the defense buildup in the U.S. was agonizingly slow.

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Hitler was receiving more material from French factories he had taken over than Britain was receiving from the United States.

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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.

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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.

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Davis’s prediction proved laughable. In November of 1940, the Northrop Aircraft Company cut hours by 20 percent due to a metal shortage. By May 1941, work on bombers by one of the more promising American aerospace companies, Boeing, had ceased because of inadequate aluminum supplies.

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Reynolds decided to enter the aluminum manufacturing business himself and compete with Alcoa, if the government would lend him the money to do so.

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Durr saw that the government would have to finance an armaments buildup, and lobbied Congress to charter a large public bank to lend money to build factories.

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“government financing for private capital was ‘a short cut to national socialism.’”

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antimonopolists ensured that government owned the plants it financed, and hired businesses leaders and engineers to run them. After the war, the government could then use its disposal of plants to create less concentrated markets.

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Senator Harry Truman, a Brandeis disciple, used the word “treason” to hit the Rockefeller concern.

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Across the economy, American firms rushed to break the cartel agreements they had with German firms.

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Alcoa had been withholding the production of aluminum metal, thus preventing the development of an American air force. Senator Robert La Follette Jr. later attacked the company as a Nazi collaborator, accusing it of having “intimate and dangerous ties” with the Nazis.

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Eventually, the military blocked the Antitrust Division from prosecuting more suits;

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started attacking international cartel arrangements.

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A NEW DEMOCRACY

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businessmen would line up outside of Arnold’s office; “they come in and say, ‘Show us a consent decree and we’ll sign it.’”

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Arnold spent five years in office. In that time, he brought a little fewer than half of all antitrust cases that had been brought in the first fifty-three years of the Sherman Act.

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Alcoa was so important, and had had so many investigations for so long, that four Supreme Court justices—now including Justice Robert Jackson—had recused themselves. Congress created a special lower court to hear the case.

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Alcoa decision settled an important debate in antitrust law. Being an industrial monopoly was now illegal.

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By the end of the war, the government “held title to 90 percent or more of the synthetic rubber, aircraft, and magnesium industries, owned 55 percent of the nation’s aluminum capacity and the bulk of the nation’s machine tools, and had significant ownership in a variety of other industries.”

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After the passage of the Wagner Act in 1935, the government and strikers unionized some of the most powerful firms in the economy,

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Large and innovative aerospace companies, along with their communications and electronics suppliers, emerged in this period.

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And there was the memory, the deep memory, of how monopoly and fascists were intertwined.

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Roosevelt, in 1944, wrote to Secretary of State Cordell Hull that destruction of Nazi armies had to be followed by the “eradication of these cartel weapons of economic warfare.”

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THE POSTWAR ORDER

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U.S. policymakers, stung by the failure of Wilson after the First World War, sought to bind the Europeans together into one economic unit,

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The military sought to have new war plants moved out of any concentrated geographic area. Some would be placed in the Deep South, because, as wartime planner and later famous economist John Kenneth Galbraith argued in 1940, there were large groups of unemployed poor blacks and whites, and putting plants there would raise the region out of poverty.

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Many black Americans and Hispanics found better jobs, with blacks seeing the beginnings of the rate of income growth double that of whites, a trend that lasted for thirty years.

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World War I had allowed a whole class of “mushroom millionaire” war profiteers to exploit shortages of materials and contracting opportunities. In World War II, New Dealers made sure that this experience wouldn’t be repeated.

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Chapter Six: A Democracy of Small Businesses

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New Deal rhetoric of liberty, like Jefferson’s, retained deep inequities. Land and property ownership in the South was concentrated among whites. Even into the 1940s, just one out of eight blacks owned their own land; most blacks worked as sharecroppers.9 Orienting aid to farmers solely through those who owned land retained the structural racism of the American order, often driving black sharecroppers off their land.10 FDR argued this was “political expediency.”

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the most powerful chain store America had faced since the East India Company: the Great Atlantic & Pacific Tea Company, or the A&P.

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“Walmart before Walmart,” as well known “as McDonald’s or Google is today.”

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Preventing price-cutting among discounters had been a common practice since the rise of mass production and retailing in the nineteenth century.

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resale price maintenance as a means of concentrating on quality, and on building out sound networks of independent distributors and retailers

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block the ability of concentrated capital to monopolize and dominate retailing and manufacturing by a) predatory pricing aimed to drive rivals out of business, and b) manipulation of pricing that interfered with the ability of producers to control their own businesses.

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After the Dr. Miles decision, chains could specifically pick well-known branded goods to discount at a loss to drive competitors out of business,

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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.

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Chapter Seven: The New Deal Constitution

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after more than twenty years of monopoly busting and populist programs, Americans did believe in their government. In 1958, 73 percent of Americans trusted the federal government most or some of the time,

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By the 1950s antimonopoly policy was integrated into the governing fabric of society.

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THE NEW DEAL IN BANKING

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With budget deficits of roughly 30 percent of GDP, there were plenty of bonds to sell.10 By 1946, 57 percent of all financial assets were government securities.

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Americans could borrow to repair their cars so they could get to work, but not for home improvements.

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Depression-scarred Americans wouldn’t allow bankers anywhere near power, preferring their bankers inoffensive, white, male, Protestant, and dull.

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From 1929 to 1950, the New York Stock Exchange hired a total of eight floor traders. There was an entire “missing generation” in banking and Wall Street, multiple decades where few entered the profession.

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Corporations no longer needed Wall Street, because every large business, Kaysen wrote, “is its own banker.”

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Between 1948 and 1952, industrial corporations devoted almost all their investment dollars to building new factories and buying new equipment, spending less than 3 percent of the total on acquiring other corporations.

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Banks became essentially public utilities, unconcerned even with profit.

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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.

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Regulation Q.25 The law blocked banks from paying interest on checking deposits, and Regulation Q imposed a cap on what banks could pay for savings deposits.

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Now money center banks couldn’t buy deposits from small country and regional banks, so they needed to gather deposits from local areas and from corporate customers. Bankers had to beg from corporations, instead of being able to tell corporations what to do.

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THE NEW DEAL IN INDUSTRY

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This new financial system also freed the American businessperson from the banker. Corporations could finance their own expansion

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in 1966 the Supreme Court blocked a merger between two grocery chains that had just 7.5 percent of the Los Angeles market.

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an astonishing 49.7 percent of returning veterans from World War II eventually started businesses.

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A NEW POLITICAL CULTURE

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two new responsibilities for the government. First, the government would use competition policy to make sure no financial or corporate entity became too powerful or dominated unchecked in any critical market. Two, it would use its central banking, taxing, and government spending power to make sure that everyone could have a job. The Truman administration and later the Eisenhower administration saw these goals—full employment and regulated competition—as compatible and mutually reinforcing.

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I think it is just as immoral for the Congress to enact special tax favors into law as it is for a tax official to connive in a crooked tax return.

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Legislation that favored the greed of monopoly and the trickery of Wall Street was a form of corruption that did the country four times as much harm as Teapot Dome ever did.”

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year in and year out, there is no more serious problem affecting our country and its free institutions than the distortions and abuses of our economic system which result when unenlightened free enterprise turns to monopoly.”

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In 1940, there were 3,906 American corporations per million individuals. That number jumped to 4,367 in 1950, to 6,211 in 1960, and 7,936 by 1968.

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A WORKER DEMOCRACY

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In the 1930s and 1940s, America became a much more equal society, and into the 1960s, wage gains spread evenly across income brackets.

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when there were strikes, the police were on the side of the miners, confiscating the guns that the company had bought for its private police force.

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THE ADVANCES OF THE FUTURE

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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.

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The Antitrust Division also broke up the Hollywood boss system, whereby five large studios and three small ones controlled distribution of movies through ownership or coercive deals with theaters.

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a fully electronic computer, which threatened to make IBM’s business obsolete.

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Thomas Watson Sr. was not ignorant of these technological advances. He just didn’t think that electronic computers were a good business.

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Morison was filing a lawsuit against IBM for attempting to control the tabular punch card industry.

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Morison even said he was being lenient. “IBM really deserves a criminal suit, but I’ve only filed a civil suit against your company.”

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found a way to sell punch card machines to both Nazi Germany and the United States during the war.

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we were going to be passed by and just the pressure of this decree, because he dominated the company, was the only thing that saved us.”

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similar suits as part of government policy “to open up the electronics field.”

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Chapter Eight: Corporatists Strike Back

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In time, the Red Scare impacted the nature of the economic debate. Economists retreated into mathematized technical jargon to disguise political leanings.

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THE CORPORATIST COMEBACK

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The anticommunist environment of the 1940s and early 1950s threw the New Deal coalition into disarray.

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A corporate lawyer and Roosevelt advisor, Adolf Berle, along with a social circle of New Dealers, took advantage of this moment to centralize control over liberalism.19 Berle was part of the Americans for Democratic Action, a group that sought to eject communists and assertive leftists from the Democratic Party.

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powerful network of corporate executives who were happy to work with this new corporatist left.

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Berle was deeply anti-populist, a Bull Moose progressive planner.

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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.

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A liberal, Roosevelt said, broke from the past, but not too quickly to provoke violence.

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Berle would again redefine the term “liberal,” slowly changing it to mean a form of soft corporatism.

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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.

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A&P’s sophisticated attacks on the antitrust laws took their toll. Two-thirds of Americans supported the chain over the government.

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The Truman administration attempted to sever DuPont’s control of General Motors, in one of the most ambitious antitrust suits of the era. DuPont embarked on a public relations campaign,

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general approval of bigness and central planning.

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These men respected expert planning, not small-town yeoman citizenry. These writers looked at the world the way A&P executives did; Americans, in their view, were not citizens, but consumers.

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The anticapitalist Mills, who popularized the term “New Left” to describe the emerging young counterculture generation, mocked labor leaders for failing to fight for the nationalization of industry. He lauded “more efficient and cheaper” chain stores

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Mills reserved special venom for small businessmen, such as those who ran groceries and small stores competing with A&P. These were the “lumpen-bourgeoisie,” petty, aggressive, repressed, patriarchal, and dull.

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RICHARD HOFSTADTER: CONSENSUS HISTORY AND STATUS ANXIETY

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the election of Eisenhower was a replacement of “the New Dealers by the car dealers.”

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an “apocalypse for intellectuals in public life.”

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especially Freudian arguments about “status anxiety.”

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conservative politics was a mental disease, a condition called the “Authoritarian Personality.”

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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.

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Hofstadter sought to avoid service in World War II, a decision that nagged at his conscience.

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he wouldn’t have had the courage for war.

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these traditions were not ideological but cultural, founded upon the nefarious force of Anglo-Saxon puritanism of the Midwest and southern “heartland.” 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.

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Hofstadter began the process of erasing the key intellectual and political struggle of the New Deal and the entire Jeffersonian tradition.

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In Hofstadter’s telling, as one contemporary critic noted, Americans had no real ideological disagreements over political economy.

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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,”

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It was a book written for frightened elitist liberals in the McCarthy era, and in 1956 Hofstadter won the Pulitzer Prize for history.

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Several contemporary historians considered Hofstadter’s writing “highly manipulative,” and his work was not based in actual historical primary source evidence.

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what Hofstadter meant was that there were no conflicts in America in political economy, only social anxiety. It was too scary for Hofstadter to concede that democratic movements were anything but a rabid mob.

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JOHN KENNETH GALBRAITH: THE POLITICS OF AFFLUENCE

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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.

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It was far easier to work with chain stores such as A&P to fix prices. Galbraith wanted to standardize product quality and fix prices, instead of allowing independent brands and pricing.

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America’s economic system was composed of big, powerful, and efficient corporate enterprises willing to work with government, and smaller reactionary ones

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Galbraith had the confidence to stand up against nascent Cold War militarism, and later became an early opponent of the war in Vietnam, which endeared him to the emerging New Left.

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Galbraith, unlike most liberals who were afraid of attacks from the right, responded with verve and flair.

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Galbraith downplayed the idea of class conflict, or even conflict within the political economy in general.

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ludicrously famous, a television talk show star and a New York Times contributor, a “skier, wit, and bon vivant.”

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countervailing power as the process by which concentrated private economic power would naturally and organically generate a counterbalancing force.

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Dismissing long decades of political struggle by workers and antimonopolists, Galbraith posited that countervailing power was an inevitable and automatic process that happened concurrently with industrial concentration.

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today even the white collar man has little prospect of ever becoming an independent enterprise.”

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By 1967, Galbraith was openly disdaining the idea that democratic deliberation had anything to do with commerce. “It is part of the vanity of modern man that he can decide the character of his economic system.” Technology and organization meant that “much of what happens is inevitable and the same… on all societies.”86 The Cold War was foolish, as the Soviet Union’s large bureaucracy and the modern Western corporation were increasingly similar. Man’s “area of decision is, in fact, exceedingly small.”

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THE TRIUMPH OF THE EGGHEADS

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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.

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A key animus behind antitrust, Hofstadter argued, was not the desire to protect democracy, or promote a more open and innovative economy. It was, he wrote, the traditional Anglo-Saxon belief that competition formed “character,”

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Like Galbraith, Hofstadter made his arguments without bothering to acknowledge a single one of the myriad legal changes over the previous forty years to how corporations were governed, both externally and internally. Instead, borrowing from Galbraith’s concept of countervailing power, he argued that big government and big labor had simply offset the sway of big business, automatically.

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driven by the older generation’s still-potent fear of domestic fascism.

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had no framework to understand, or even to see, the monopolists and financiers who were slowly reemerging and taking control of the big banks and giant corporations they so deeply trusted.

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Chapter Nine: The Free Market Study Project

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believed the world was heading toward leftist totalitarianism.

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this older generation of conservatives, while opposed to central planning, had an egalitarian streak, opposing private monopolies as fiercely as labor unions. Simons was no fan of the New Deal, but neither did he appreciate Herbert Hoover’s governance.

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When Hayek visited this conservative intellectual community, it was the left that was ascendant.

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Conservatives in England were petrified; the Anglo-American tradition of protecting property rights was in jeopardy.

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Hayek had written a book, The Road to Serfdom, in which he had diagnosed the cause of mass social dysfunction as too much central direction of economic activity, or collectivism, which inherently led to totalitarianism.

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Victory over the Nazis was only a first step, he believed. Now came the harder part, uprooting the central planning impulse in the democracies as well.

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movement to restore nineteenth-century liberalism, which came to be known as “neoliberalism.”

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men like Hayek who were dissidents against Nazi ideology, who saw in an aggressive decentralization of both state and monopoly power a means of protecting themselves against the return of fascism.

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Hayek’s specialty was the then-obscure field of the economics of information. His insight was on the purpose of pricing. A market-based price system carried information from large numbers of buyers and sellers to one another.

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arguing, like Brandeis, that human beings were imperfect, that too much power in too few hands—either by the state or by monopoly—would lead to autocracy.

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In 1945, Hayek toured the United States to promote The Road to Serfdom. Right-wing American businessmen loved the Austrian, who seemed to rail against the New Deal.

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Director is an obscure figure who wrote little and left little of a written record. But he, through his students and converts, would play the key role in rebuilding Mellonism.

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Director broke from a classic conservative ethos, fusing conservative rhetoric with the radical elitism of Veblen and Mencken. The Chicago School transformed into a vehicle to rebuild Mellonism and corporate power.

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private monopolies could only emerge and exert power due to government action.

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“A lot of us who took the antitrust course or the economics course underwent what can only be called a religious conversion,” said one convert, Robert Bork, of Director’s converts. “It changed our view of the entire world.”

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A sense of victimization, infused from the beginning, unified the members of the project. They saw themselves as radicals up against an all-powerful establishment of liberals.

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Luhnow’s money was enormously well spent; the Volker Fund would finance five different Nobel Prize winners in economics.

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UNDER SIEGE BY LIBERALS

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Practicing corporate law brought him, as he later put it in advising a young lawyer, “thoughts of despair and the rope.”

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in 1958 predicting that the USSR would overtake America.

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Nixon imposed price controls on virtually every good, service, and wage in the economy, earning the grudging admiration of none other than the devil himself: John Kenneth Galbraith.

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Nixon, though conservative, would not deviate from the New Deal status quo on political economy. “We’re all Keynesians now,” he said.

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THE MAKING OF THE NEW MELLONISM

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use the language of Jeffersonian democracy, framed around attacks on monopolies and the promotion of individual liberty. They appropriated this language through Hayek.

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

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Director used Hayek’s language, but removed corporate power from the list of potential threats to liberty.

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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.

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

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one author proved logically that democratic systems shouldn’t address private monopolies while another author proved there was a method to determine the scientifically correct size of a firm.

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prove that Standard Oil, contrary to nearly all scholarship and common understanding, had not engaged in predatory behavior.

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In the 1960s, George Stigler began developing a new theory of why most public regulations to constrain corporate power were problematic, and in 1971 he popularized it with the notion of “regulatory capture.”

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rent controls protected low-income tenants from landlords. In the Chicago School’s capable hands, this became “rent seeking,”

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the Chicago School had to allow business leaders to have both social respectability and reassert their right to rule. Achieving their social vision would require reorienting language itself.

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BORK AND GOLDWATER

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The hiring of Bork at Yale was a big deal for the Chicago network, and Bork would serve as a key piece in Director’s empire building.

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In August of 1963, Bork published a piece in The New Republic titled “Civil Rights—A Challenge.” In this article, he made the case against Title II of the Civil Rights Act, the public accommodations part of the bill, which prohibited racial discrimination in privately owned hotels and restaurants. This part of the bill was, he argued, “legislation by which the morals of the majority are self-righteously imposed upon a minority.” This attack on property rights, he argued, is “likely to be subversive of free institutions.”

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Bork argued that owning a public-facing business meant that the owner had no obligations to the public, and could discriminate at will.

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In opposing the Civil Rights Act, Bork was standing all at once against the New Deal, the movement for racial equality, and the long tradition of common carriage law.

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Bork’s article gave him credibility with another important opponent of the Civil Rights Act: Barry Goldwater,

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Goldwater was the political analog to the Chicago School intellectuals. His was a radical takeover of the Republican Party, the rejection of milquetoast compromise, and the bold assertion of a different vision,

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Goldwater asserted vehemently that he favored freedom and liberty, and used a hard-core anticommunist and anti- collectivist set of arguments.

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Milton Friedman became an aggressive promoter of Goldwater,

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Baroody brought in Bork specifically to work against the Civil Rights Act. Bork dove right in, writing a seventy-five-page legal analysis of the Civil Rights Act to back up the arguments against the law by another Goldwater lawyer, William Rehnquist.

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Goldwater lost the election, badly. But Goldwater’s defeat validated the Chicago network, including Bork.

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Bork argued that when Congress first passed the law in 1890, its sole intent was to promote what he now called “consumer welfare,” which he defined as meaning solely efficient production.

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The financing of Bork was the beginning of a broader campaign by corporate America to grow the law and economics movement.

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THE CAPTURE OF THE LIBERALS

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The antitrust division, Pearson said, was becoming the “deadest division in Justice.”

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Attacked by populist muckraker Pearson for being passive, mocked by the corporate left-winger Galbraith for being aggressive, Turner didn’t know what to do.

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Turner responded by retreating into technocratic solutions. In 1968, he wrote formal merger guidelines to give instructions to industry,

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Nixon did appoint four Supreme Court justices who joined Potter Stewart to create a Bork-friendly majority on the court.

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In the mid-1970s, the high court began striking down precedents that had made it easy to block mergers.

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Turner and Areeda were then hired by IBM and set to work.

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the two men wrote the paper to make it impossible for courts to ever rule against an incident of predatory pricing.

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Chapter Ten: The Rebirth of Wall Street

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Onassis saw the postwar boom in shipping, and was buying every tanker he could find to handle the burgeoning oil trade, profiting enormously from the demand. The only limit on Onassis’s business expansion was financing.

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Wriston had come up with a way to make lending seem less risky,

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The new lending model was a subtle but transformative shift in the politics of banking and business, from caretaking to profit maximizing.

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Citibank organized a syndicate of banks, each of whom would lend part of the money. This was, again, a subtle shift in the politics of banking,

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the Waterman deal was the beginnings of the reconversion of the corporation, from a legal institution chartered to build a product or run a service for profit, to a financial asset meant solely to generate cash for its investors. McClean had bought a corporation by borrowing against that corporation’s own assets.

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Patman, by contrast, thought high interest rates were immoral. Since everything required money to be built, increasing the cost of money increases costs of borrowing to businesses, municipalities, utilities like water, gas, telephone, and electricity, as well as government borrowing. Taxpayers, businesses, and citizens get hurt, to the benefit of bankers.

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the logic that financial concentration led to industrial concentration which led to fascism.

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When forced to choose between such monopoly and some ism, countries invariably have chosen the ism.”

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CREATING THE SHADOW BANKING SYSTEM

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“convergence theory,” by economist Simon Kuznets. This theory rested on the assumption that economic equality just happened naturally as the economy produced more.

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It had lost tremendous market share in finance to other institutions. Between 1945 and 1960, the assets of life insurance companies tripled, savings and loan banks increased by nine times, and pension funds went up fifteen-fold. Commercial banks, in contrast, increased by just 60 percent.

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“We looked at the data,” Wriston said, “and it turned out that demand deposits in New York City had not grown for ten years. You didn’t have to be a rocket scientist to know we were going to go out of business.”28 Citibank was not in danger of going out of business, but it was in danger of becoming far less important, a regulatory design choice made because New Dealers wanted it that way.

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if structured correctly, a CD could basically act like a high-interest deposit account, and help Citibank blow through Regulation Q.

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Wriston and Exter asked Herbert Repp, the chairman of Discount Corporation, one of the most important Treasury bill dealers in the country, to create a market for CDs. Repp agreed, under one condition. He wanted a $10 million loan, which was both a violation of Citibank’s policy of not lending to unsecured brokers and a violation of conflict of interest provisions in New Deal regulations.33 Wriston said yes anyway. This transaction was a way to avoid New Deal laws and rules designed to stop hot money from corrupting the banking system. But in the new and more permissive environment, the Fed, while not pleased, condoned it.

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Wriston bet that by the time the Fed decided to act, the CD would be too important for the Fed to kill it off.

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The CD was considered a tremendous financial innovation, but it was really just a clever way of getting around New Deal constraints. More such “innovations” occurred later in the decade. But all of these were variants of the negotiable CD, a way of creating a redeemable deposit-like instrument that was not regulated, as regulators looked the other way.

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Attempts to restrict lending by raising interest rates, or changing reserve requirements, no longer worked

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Wriston was no cultural conservative; he fought to bring women, Jews, and Catholics into Citibank, saying talent has “no passport, gender, color, or anything else.”

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S&Ls made long-term mortgage loans, and their portfolios turned over slowly. They could not compete in a high-interest world with sudden changes in rates. A housing shortage was developing.

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CDs were technically regulated under Regulation Q. The Federal Reserve, however, began to worry that if it tried to stop banks from offering these high- interest deposits, it would cause a sort of bank run in this parallel financial system. Depositors in CDs would flee the banks and banks would stop lending, causing a credit crunch. As Wriston had foreseen, by the time the Fed tried to step in, the CD had become so entrenched in the gears of the credit system that regulating it might cause significant damage.

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Every time the interest rate of CDs came close to the limit set by Regulation Q, the Federal Reserve would avoid a conflict with money center banks by raising the rate ceiling. The standoff grew more intense.

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The interest rate hit the rate ceiling of Regulation Q. This time the Fed decided it would not allow banks to continue to raise deposit rates in CD accounts. This caused a bank run in the new parallel banking system. Corporations withdrew their CD deposits from banks, so banks had to curtail their lending.

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The credit crunch in the financial system moved quickly into the real economy.

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The old boom-and-bust cycle of the robber barons had returned, but with a twist. During boom times, the private financiers would steer money into speculation and away from public priorities such as housing. But when the bust came, private bankers would turn the wheel over to public officials. Instead of nineteenth-century bank failures, because of the regulated banking sector, there would now be twentieth-century bank bailouts.

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THE GO-GO YEARS OF THE STOCK MARKET

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The gunslinger model of mutual fund performance investing began changing the American relationship with money. Savings and investing started becoming personal finance. Instead of holding stocks for decades, mutual funds would seek performance, selling stocks and bonds as necessary to do so.

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THE CONGLOMERATE CRAZE AND THE RECONSTRUCTION OF THE MONEY TRUST

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Steinberg used accounting assumptions to make his company look like a highly profitable and fast-growing “tech” company.

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cash-rich corporations like RCA and LTV invested in entirely unrelated lines of business—Hertz or Wilson Sporting Goods, say—the argument being that an excellent executive team could manage any line of business well.

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There were strict restrictions on market shares in any one market, and strict limits on acquiring suppliers or customers in the same industrial supply chain. So one response by financiers was to buy totally unrelated lines of business

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The actual business model underlying these business arrangements was the same as that of John Raskob or any other speculator. They were borrowing money to buy assets when the stock market was going up. Conglomerates were just doing it with entire companies.

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The conglomerate accounting illusion and a booming stock market were Steinberg’s tools. He would use Leasco’s high-flying stock, or its borrowing capacity, to buy actual assets earning income, and then use that income to justify his company’s stock price.

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looked like a classic “bear raid,” or the now-illegal manipulation of a stock common on Wall Street from the 1860s to 1920s.

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“I always knew there was an Establishment,” he said. “I just used to think I was part of it.”

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Chapter Eleven: Wriston Versus Patman

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“Patman must have been frightened by a banker while a fetus.”

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Like Brandeis, Patman believed that the power of bankers was based on the public’s perception of banking as complex and mysterious. He intended to break this power by teaching the public how banks actually operated.

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ROUND ONE: THE BANK MERGER FIGHT

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split over merger authority between bank regulators and the Department of Justice Antitrust Division.

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bank regulators approved 1,001 out of 1,035 merger requests, rejecting only 34, despite the Department of Justice finding antitrust problems in over half

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until Patman spoke. “If you exempt banks from anti-trust,” he said, “you might as well also shoot the policeman on the corner.”

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for the control of such vast power for the benefit of our competitive, free enterprise economy, democratic government may prove inadequate,

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Bankers thought that the bill would restrict bank merger challenges, but because of Patman’s language, it had the opposite effect.

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ROUND TWO: THE ONE-BANK HOLDING COMPANY FIGHT

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A bank could now, through its holding company, own any business it chose, and use its control over credit to give that business a competitive advantage. The new bank strategy struck at the heart of Glass-Steagall, as well as the even longer- standing separation of banking and commerce.

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bank-owned travel agencies were driving independent agencies out of business because of their unparalleled access to data about who traveled and who was creditworthy. “Any time I deposited checks from my customers,” he said, “I was providing the banks with the names of my best clients.”

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Insurance agents, afraid of being undercut if big banks were able to enter their business, were so effective and aggressive

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National Farmers Union, a powerful liberal farm group, had made some bad pension investments and gotten into debt with a Denver bank, which was then acquired by a conglomerate in 1968. The bank then collected its favor from the NFU; the NFU asked the three liberal senators to change their votes.

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In 1969, when the prime rate was 8.5 percent (meaning most borrowers paid much more than that), one Washington, D.C., bank was lending money to over a hundred congressmen at a little over 6 percent.

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fear of robber barons or monopolists was not meaningful to a younger generation.

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ran against him as a feminist based on Celler’s opposition to the Equal Rights Amendment.

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Patman would play his role, and would have one more victory. But the financiers were gaining power, and there were no political or intellectual reinforcements behind him.

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Chapter Twelve: Penn Central

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railroad managers themselves began stripping their companies of value, trading stocks on inside information, rewarding themselves with lavish pay, and engaging in empire building through unworkable mergers.

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classic railroad robber baron technique: paying dividends instead of maintaining the track and rolling stock.

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A DYING RAILROAD BUSINESS

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Without the company, the northeastern United States “would be paralyzed.”

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For years, Americans had noticed that something was wrong with the trains.

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executives who—even while speculating in roller coasters —had not spent enough to maintain its equipment, or buy new equipment, for decades.

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Saunders enraged New Yorkers when he tore down the grand landmark of that city, the “Greco-Roman temple to railroading,” Pennsylvania Station, to sell development rights for an ugly, boxy set of office buildings and the Madison Square Garden sports arena.

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FROM A RAILROAD TO A CONGLOMERATE

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they knew this was illegal. Bevan convinced the board to buy liability insurance to protect high-ranking executives and directors in the event they were personally sued. Until 1968, Pennsylvania corporations were prohibited from paying the full premium on officers’ liability insurance, but a Penn Central lawyer successfully lobbied the state legislature to change the law.

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THE BAILOUT FIASCO

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While 1966, with the drying up of lending to homeowners and cities, was worrisome, it was not terrifying. But this was.

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the Pennsylvania Railroad had seventeen interlocking directorships with major banking institutions.

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The crisis didn’t end but immediately shifted from the railroad to its creditor banks, as well as corporations that were in similar dire circumstances after having used the same exotic borrowing techniques as Penn Central. All of these institutions were now in trouble. The corporation’s bankruptcy filing caused its over 100,000 creditors, including every major Wall Street bank, to lunge for safety in the commercial paper market,

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The Fed kept its discount window open over the following weekend, and in doing so, prevented a credit crunch. There was a pullback in lending, but there was no domino effect, and no depression.

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Chapter Thirteen: The Collapse of the New Deal Consensus

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The economy was out of kilter in other ways. Real wages for manufacturing workers started falling in the mid-1960s, as did labor productivity.

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America ran its first postwar trade deficit in 1971.

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something subtle had changed. The Federal Reserve had allowed bankers to recentralize credit risk, remaking corporate America and creating dangerous fragility in finance. And then when this newly fragile system nearly collapsed in 1966 and again in 1970, the Fed bailed out the credit instruments it had allowed to become systemically important. Any unregulated instrument or bank, if it became critical enough, was now effectively guaranteed.

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now one financial system for normal people, which was heavily regulated in the lending and borrowing one could undertake. There was another for big banks and corporations, who could operate in an unregulated land of exotic financial instruments, all backed by the Fed in the event of a crash.

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Galbraith archly lauded Nixon for socializing Penn Central with a proposed bailout, and praised similar bailouts of Lockheed and the New York Stock Exchange.

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THE POPULIST PATH

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Hart’s answer was simple. His bill, the Industrial Reorganization Act, aimed to implement the Neal Commission’s recommendations of breaking up most large corporations in the U.S. legislation to “responsibly restructure industry,” Hart wrote in the bill’s preamble, which was necessary not only to preserve a market economy but “a democratic society.”

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THE PATH OF BIG BUSINESS

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The big business lobby radicalized and professionalized across the board, turning from primrose New Deal corporate “statesmanship” to aggressive advocacy.

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The Chicago Schoolers didn’t win the substantive argument against antimonopolist economists. Despite the language of science, little of what the Chicago School economists put forward was ever rooted in empirical proof.

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THE NEW POLITICS AND THE NADER ATTACK ON THE FTC

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leaders of a rising generation of baby boomers influenced by the countercultural form of politics, young, numerous, self-righteous, dubbed “The New Left.”

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Much of the political energy in the 1960s was oriented around race relations, environmentalism, and the war in Vietnam, often organized on the college campuses

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White-collar youth opposed the war while young, working-class people fought it.

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For Dutton, this new Democratic Party coalition, born in affluence, had moved beyond material needs.

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for young people it was increasingly the Vietnam War that shaped what it meant to be a liberal or a conservative.

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Nader did not particularly care who had control of commerce as long as the consumer was protected.

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In 1963, the FTC issued 215 complaints and 252 orders on Robinson- Patman violations; by 1972, the number of complaints dropped to one and the number of orders to four.

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Chapter Fourteen: Watergate Babies

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“Here,” he said, barely looking up from his work. “Take these papers to my office.”2 “Go fuck yourself!” replied the young man. “Take them yourself!” Barrett had just met Thomas J. Downey of Long Island,

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the newly elected officials were young, idealistic, fierce, and aggressive, disgusted by Nixon and the Vietnam War.

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seventy-five new Democrats in Congress, many young, eager, and disdainful of the party hierarchy. More than 40 percent of the entire Democratic Caucus had served for less than four years.

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THE “RED GUARD OF THE REVOLUTION”

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After the elections, just 18 percent of voters identified themselves with the GOP, and two thirds of voters, when asked to think of something positive about the party, couldn’t name anything.

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In the face of this moral, economic, and political meltdown, neither party had a clear leader or clear philosophy.

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ORGANIZING A REVOLUTION

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DSG members picked fights within the Democratic Party, defeating conservatives who had been using complex procedural techniques to bottle up civil rights legislation.

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The Watergate Babies class sent out invitations to sitting chairman to come and talk to the group; the chairmen refused. Wirth said the group responded by saying, “Well that’s fine, we’ll vote against every one of you.”

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THE KILLING OF WRIGHT PATMAN

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Members of the class of 1974 pledged to vote against Hays, but he was one of the most powerful members of the House, because his committee dispensed critical favors to members, like the location of their parking space. Hays launched a lobbying campaign, offering perks and a pay hike for members of Congress. He kept his chairmanship.

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“Patman couldn’t sell pussy on a troop train.”

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his colleagues crushed him 152–117, a far worse showing than any of the other deposed chairmen.

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Chapter Fifteen: The Liberal Crack-Up

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In many respects, the entire edifice of twentieth-century antimonopolism stood on the foundation of fair trade and other laws designed to keep the capitalist—and the trading companies they controlled—from interfering in the process of pricing

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“Far-seeing organized capital secures,” he wrote, “the cooperation of the short-sighted unorganized consumer to his own undoing.

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WALMART POLITICS

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Walton was a ruthless competitor. As a child, he had traveled throughout Missouri with his father, a debt collector foreclosing on defaulting farmers during the Great Depression.

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This legal shift reshaped American commerce; over the next thirty years, it allowed capitalists to use chains to kill small retailers focused on service.

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Ultimately, the embrace by the Democrats of discounting—for the sake of the “consumer”—helped to remake the political structure of both parties. As this civic leadership class that had been buttressed by fair trade and similar laws fell apart, so did the Democratic organizing base in the South. Walmart spread, first in the rural South, and then into the Midwest, the Rocky Mountains, and Rust Belt cities, paralleling the Republican conquest of the same territory.26 The Republicans became rooted in a far more right-wing base in the South, and the Democrats began moving away from their long support for the small businessperson and small farmer.

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THE LAST HURRAH FOR ANTITRUST

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charged IBM with monopolization of the general-purpose digital computer market.28 The DOJ complaint was, as one lawyer put it to Congress, “equal in significance to the Standard Oil case of 1911.”

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IBM unbundled its hardware and software, changing its pricing formula so that customers could purchase the products separately. Unbundling these two products was a “major restructuring” of the computer market, and led to the creation of an independent software industry.

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The company then hit at a vulnerability within the antitrust laws, which was the difficulty and length in administering a complex case of business law.

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Like GM and U.S. Steel, both hulking giants perceived as management marvels until nimble foreign and smaller competitors undermined them, IBM would have been better off had it been broken up.

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chalked up the competition in the technology industry to nature, rather than antitrust policy. A mythos emerged around Silicon Valley, that a set of institutions built on democratic protection of the engineer and scientist from the monopolist was instead born from antigovernment garage tinkerers.

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THE CHICAGO SCHOOL TAKEOVER

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In the middle of the 1970s, Democrats held almost two thirds of Congress. The Republican Party was in disgrace. But the Chicago School could do no wrong.

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though Republicans were losing elections, conservative ideas—or rather, radical libertarian ideology—were ascendant.

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The concept of “deregulation” was naturally incoherent—there is no such thing as a market without regulation; the question had always been whether public institutions or financiers organize market rules. But like most Chicago School concepts, “deregulation” was a rhetorical strategy designed to undermine traditional American political philosophy.

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In the early 1970s, Manne had created an “Economics Summer Camp” to teach economics to law professors. A dozen companies concerned about antitrust funded the “camp,”

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In 1976, Manne extended his “summer camp” to judges,

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40 percent of sitting federal judges eventually took Manne’s classes and learned how to use “economics” to help guide their judicial decision making, to substitute “science” for law.

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Monopoly power existed, they argued, because it was efficient. This argument wasn’t a political statement, it wasn’t liberal or conservative, or Republican or Democrat—it had become accepted “science.” Chicago School law and economics was now internalized by all,

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THE CARTER CATASTROPHE

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A new type of thinking focused on efficiency, consumerism, and technocracy was taking hold. Congress created a budget and planning office, the Congressional Budget Office, in 1974 to constrain its own ability to wield taxing and spending power, and placed Alice Rivlin, a corporate technocrat, in charge of it.

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Chapter Sixteen: The Reagan Revolution

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Reagan’s harsh anti-union stance was a signal to the private sector; Phelps Dodge and International Paper imitated Reagan by replacing strikers rather than negotiating.8 When Reagan took office, roughly a quarter of American workers were in a union; by the end of the decade it had fallen to 16 percent.

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The triumph of the Chicago Schoolers wasn’t just a matter of Reagan’s election, but the collapse of all coherent intellectual opposition. Leading Democratic thinkers sounded exactly like leading Republican thinkers.

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Citibank had been grappling with New York state lawmakers to lift that state’s usury cap for years, but the state wouldn’t budge. Finally the bank moved its credit card operation to South Dakota, and New York politicians took notice. As New York assemblyman Denny Farrell put it, “suddenly I became in favor of deregulation.

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THE MERGER BOOM

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Over a series of congressional hearings in 1981 and 1982, Baxter explained that he would be restructuring antitrust and merger law to prioritize economic efficiency, and no longer enforce the law consistent with congressional purpose of restraining corporate size and power.

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Supreme Court might assert that certain forms of price-fixing were illegal, but Baxter didn’t care and said he wouldn’t enforce the law regardless.29 And he simply would not enforce laws he didn’t like, such as Robinson-Patman,

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Over the course of the decade, the administration cut the division’s staff by nearly half.

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Baxter held that economics was a science and that the law should conform to that science, regardless of what the political intent of lawmakers was. Once confirmed, Baxter elevated the head economist to a full deputy assistant attorney general, on par with the enforcement and litigation chief.

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His second key innovation was a shift in the merger guidelines. Baxter’s new 1982 guidelines were, as a Department of Justice official put it twenty years later, a “revolutionary leap.” These guidelines made it much harder to challenge mergers. The 1968 guidelines had been simple and based on market shares. The Baxter guidelines “integrated the new economic learning” by introducing the need for complex economic analysis of costs and benefits of any particular potential mergers and/or market structure.

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Baxter dropped the thirteen-year suit against the monster of technology, IBM.

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From 1929 to 1974, a big respected company doing a hostile deal was, as merger specialist Martin Lipton said, “like spitting on the floor. It just wasn’t done.”

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The new rule in corporate America was not to build products or services—it was to buy or be bought.

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Hospitals began a furious merger wave, and costs in the American health care began exploding.

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Welch sold all mass market manufacturing lines, except big appliances and light bulbs. GE ditched its consumer electronics business. Under Welch, the company began a policy of firing 10 percent of its employees every year, as well as spending billions of dollars to buy back stock.

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focus on industrial activities that could be protected through interaction with regulators (Thomson’s medical device business) or the Pentagon (RCA’s defense business, which Welch kept).”

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Welch also began to outsource much of GE’s work to other companies, often those abroad with lower labor and environmental costs.

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By the 2000s, the company founded by Thomas Edison didn’t even manufacture light bulbs, sourcing them from Chinese contractors and branding them as GE products.

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CRAZY EDDIE AND THE SHOPPING MALL

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Around 1970, Eddie Antar started discounting electronics, gleefully ignoring the fair trade prices set by manufacturers.

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With its emphasis on low prices instead of quality products and service, Crazy Eddie created a template for who would have power in American retail in the 1980s. It would not be the maker of things, or the community store. It would be the middleman.

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when manufacturers could no longer set prices, customer service disappeared. Customers could now get free advice from a smaller store, and then do the buying at the big ones who sold cheap.

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in this new discount world, what replaced customer service? Branding.

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In 1972, shortly after Crazy Eddie opened its doors, there were a little over 1.9 million retail establishments. Ten years later, that number had fallen by about a quarter, and didn’t recover. And the sales volume per store skyrocketed.

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HIGH-TECH MONOPOLIES

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Baxter believed AT&T was using the revenue from the regulated local telephone networks to subsidize its other businesses.

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By breaking up AT&T, Baxter would end the anticompetitive cross-subsidies and create a new competitor to IBM in one stroke.

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the end of cross-subsidization in the telephone business, and a hit to the pocketbooks of most Americans. Local phone rates increased by 35 percent, while the cost of long-distance phone service fell.

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burst of competition and innovation in the communications and technology industries.

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There were fears AT&T would cut its research and development if it lost its natural monopoly; the opposite occurred, as the company feared competitive pressure.

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The information revolution had been bottlenecked by AT&T; Baxter broke the bottleneck and unleashed the rest of the electronic century.

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clear signal to business leaders in these new areas that their goal should be the acquisition of monopoly power.

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The burst of innovation and competition released after the breakup was temporary, a free-for- all to see who would become the new monopolists.

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LOCKING IN THE REAGAN REVOLUTION

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Chapter Seventeen: The Morgans, the Mellons, and the Milkens

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By the 1980s, it was no longer just Texas oil fraud, but Texas land fraud and Texas savings and loan fraud that minted the new millionaires.

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After the Iranian revolution in 1979, the skyrocketing of the prices of oil resulted in one of the largest transfers of wealth in history, from oil consumers in the West to oil producers. No one but Arabs, Venezuelans, and Texans seemed to be doing well.

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a “limited liability corporation could borrow money, pay it into the private account of the owners, and then default on its debt.”8 This danger was especially acute when the person in charge of lending the money was in on the scam.

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Michael Milken became the architect of a complex and corrupt financial system based on engaging in this kind of looting.

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Milken stood in the middle between a lender and a borrower, and would ensure bond buyers were paid back regardless of how the borrower did. He could do this because he was stashing losses within captive pools of capital he controlled,

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The junk bond looked like an active market, with lots of buyers and sellers. But as Akerlof and Romer put it, “The junk bond market of the 1980s was not a thick, anonymous auction market characterized by full revelation of information. To a very great extent, the market owed its existence to a single individual, Michael Milken, who acted, literally, as the auctioneer.”

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transformation through financial deregulation of the savings and loan industry into giant pools of unregulated government-backed money. These S&Ls were designed to finance the American home, and Patman had sought to carefully fence them off

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S&Ls could now pay depositors any interest rate, and more importantly, they could enter any line of business they wanted, from commercial real estate to junk bonds. And the U.S. taxpayer backed all of it, through deposit insurance.

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S&L fraud remade the American landscape, funding white elephant shopping centers and luxury hotels built mainly to be looted. The total cost ran into the hundreds of billions of dollars.

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the federal government basically repealed Glass-Steagall if an investment bank just called its commercial banking captive a ‘savings and loan.’

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If the raider lost, he would still make money by having his shares bought out at higher prices.

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If the raider won the company, he would then saddle it with the debt he had incurred. It worked like buying a home with a mortgage. Essentially he would buy the company by borrowing against the company’s own assets.

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unlike most attempts to buy stock with borrowed money, there were no margin requirements.

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Once the acquisition was complete, the company would pay out large salaries, fees, and service the extremely high-cost junk bonds. Sometimes the companies would go bankrupt and disappear, sometimes the debt would be restructured. It didn’t matter.

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Corporate CEOs, most of whom were initially resistant to the takeover wave, were bribed into submission.

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As important as the fees was the information Milken acquired about which companies were being sold before raiders bid up the price of bonds or stock.

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SEC staff attorney John Hewitt was collecting a “mountain of research” about Drexel showing “stupendous price fixing and bond-price rigging” by Milken. There was, he wrote, “clear-cut—or at least impressive—evidence that a Milken partnership, Otter Creek, was trading illegally on inside information.”

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As Milken became more powerful, he became a philosopher-king of the decade. He mimicked the weird political language developed of the era, talking about job formation, education, and “human capital.”

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Jensen’s theory was that corporate managers had an incentive to run the company inefficiently because shareholders were dispersed and powerless.

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A financier would load up these companies with debt and pay out cash dividends, thus, in Jensen’s theory, disciplining corporate management. In reality the leveraged buyout firm was just a mechanism for financiers to loot corporations and strip them of their assets,

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Goodyear had put too much capital into its tire business, accounting for 25 percent of the research and development of the entire industry. Goodyear was the industry leader, and aimed to stay that way by making ever safer, longer-lasting tires. But Goodyear management’s very success made the corporation a target for the raiders, as the one-two combination of low debt and high levels of investment was perfect for looting.

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one man backed by billions of dollars raised essentially by pledging our own assets.”

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Goodyear cut research, capital investment, advertising, training, closed three plants, and reduced employment by 4,300 workers. It had been a well-managed company. There were plant expansions in Alabama in 1976, Tennessee in 1981, and North Carolina in 1982. In 1977, they built a $260 million plant in Oklahoma, and a $250 million plant in Texas to take on Korean competition. But, for three years after the raid, the company announced it would undertake no new investment to “focus on debt repayment.” “Did we create wealth?” a Goodyear executive wondered later about these years. “I think not. In the long run, I think we destroyed wealth.”

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The leveraged buyout industry, stung with bad publicity, rebranded as “private equity.”

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the only businesses that were sustainable in the new legal environment were those that could withstand the pressures of financial raiders.

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In previous eras in American history, the wreckage caused by such widespread looting would have led to substantial legal reforms. And there were some. But the key innovation, that the corporate structure exists as a mechanism for the extraction of cash for insiders from either the company itself or from a market that company monopolized, was here to stay.

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Chapter Eighteen: Tech Goliaths and Too Big to Fail

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Reagan paid the farmers back by breaking the back of farm country.

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The Reagan administration responded by cutting payments to farmers. But who could you shoot?

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U.S. Steel, having started mass layoffs in 1979, continued into the next decade, laying off more than 6,000 workers in that community alone. Youngstown, Johnson, Gary—all the old industrial cities were going, in the words of the writer Studs Terkel, from “Steel Town” to “Ghost Town.” And the headlines kept on coming. John Deere idled 1,500 workers, GE’s turbine division cut 1,500 jobs, AT&T laid off 2,900 in its Shreveport plant, Eastern Air Lines fired 1,010 flight attendants, and docked pay by 20 percent. “You keep saying it can’t get worse, but it does,” said a United Autoworker member.

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the emptying farm towns, the hollowing of manufacturing as executives began searching for any way to be in any business but one that made things in America.

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THE CORRUPTION OF THE DEMOCRATS

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Throughout American history, the triumph of plutocrats in a decade provoked a backlash, and the opposing party would win a series of elections and reorient political economy. But the Chicago School had dismantled this political fail-safe. By the 1980s, the Democrats as a party had lost the ability even to think about the problem of concentrated economic power,

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older industries such as steel and automobiles were low-value “sunset” industries, and that it was smart to allow Wall Street to milk these older industries for cash to be invested in “sunrise” industries such as computer chips and video games.

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“In markets where international trade exists or could exist, national antitrust laws no longer make sense,”

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government should serve concentrated business institutions, under the guise that the job of political leaders was to cooperate with big business and forge consensus. New Democrats thought of the government’s assertion of public power against big business as illegitimate,

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Jesse Jackson derided the DLC as the “Democrats for the Leisure Class.” But the Democratic betrayal of farmers, small business, and labor meant there was no longer institutional working-class support for the Democratic Party, except a fast-shrinking core group in labor. The result was that the DLC proved to be spectacularly successful.

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When the junk bond market crashed at the end of the 1980s, the Democrats could have turned the collapse of this economy-wide Ponzi scheme into a political cudgel to use against Republicans. But they not only had no ideological framework to do so, many top Democrats were now implicated.

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THE REVOLUTION OF 1992

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The end of the junk-bond-fueled real estate boom of the 1980s brought forth a new kind of recession. After the economy started growing again, jobs didn’t come back in what became known as a “jobless recovery.” America had military might, but its economic power seemed to be ebbing.

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for the first time since 1880 there was no mention of antitrust or corporate power, despite a decade with the worst financial manipulation America had seen since the 1920s. This revolution would be against government, in government, around government.

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When Clinton took office, the Democrats finally had a majority in the House, a majority in the Senate, and the presidency. Clinton not only entrenched Reagan’s antitrust principles into the DOJ by making them bipartisan, but expanded the Reagan revolution more broadly.

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In 1999, Clinton and a now-Republican Congress passed the Gramm-Leach-Bliley Act, which fully repealed the Glass-Steagall Act

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The very last bill Clinton signed was the Commodity Futures Modernization Act of 2000, which removed public rules limiting the use of exotic gambling instruments known as derivatives by now- enormous banks.

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before the Reagan era, big agribusinesses were confined to one or two stages of the food system. In the 1990s, the agricultural sector consolidated under a small number of sprawling conglomerates that organized the entire supply chain.

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concentrating power even further into “clusters of firms.” He identified three such clusters—Cargill/Monsanto, ConAgra, and Novartis/ADM—as controlling the global food supply.

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profit would increasingly flow to middlemen, not farmers themselves.

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The Montana state legislature passed a resolution demanding vigorous antitrust investigations into the meatpacking, grain-handling, and food retail industries, and the state farmer’s union asked for a special unit at the Department of Justice to review proposed agricultural mergers. There was so little interest in the Clinton antitrust division that when Burns held a Senate Commerce Committee hearing on concentration in the agricultural sector, the assistant attorney general for antitrust, Joel Klein, didn’t bother to show up.

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Clinton allowed Walmart to reorder world trade itself. Even in the mid-1990s, only a small percentage of its products were made abroad. But the passage of NAFTA—which eliminated tariffs on Mexican imports—as well as Clinton’s embrace of Chinese imports allowed Walmart to force its suppliers to produce where labor and environmental costs were lowest.

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The defense industrial base turned from focusing on engineering wonders like cruise missiles and B-2 Stealth Bombers to balance sheet engineering.

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Under just seven years of Clinton, there were 166,310 deals valued at $9.8 trillion.45 This merger wave was larger than that of the Reagan era, and larger even than any since the turn of the twentieth century when the original trusts were created.46 Hotels, hospitals, banks, investment banks, defense contractors, technology, oil, everything was merging.

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When Clinton appointed Supreme Court justices, he picked Stephen Breyer and Ruth Bader Ginsburg. Both sailed through the Senate, not because of a tradition of bipartisanship, but because neither worried powerful business interests. Both were adherents of the same basic monopoly-friendly philosophy promoted by the Chicago School.

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THE RISE OF THE TECH GIANTS

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New Deal enforcers had enabled this freewheeling culture. AT&T and IBM were both under constant threat by antitrust authorities,

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The key political economy question was whether industry standard setting would be public and open, or proprietary and monopolistic. This was not a new problem; there was a reason John D. Rockefeller named his company Standard Oil.

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IBM allowed Gates to sell his OS to other producers of personal computers. By 1983, Microsoft controlled the industry standard on-ramp to the personal computer. Gates soon realized how powerful this intermediary position was, and he moved quickly to entrench his monopoly power by forcing computer makers to take a “per processor” license fee. Under this arrangement, computer makers paid Microsoft for every computer shipped, regardless of whether it had a Microsoft operating system.

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It gave its own internal teams secret information about upcoming changes to its operating system product, Windows, leveraging its monopoly in operating systems into another monopoly for business software. Programmers at Microsoft used to say, “DOS ain’t done till Lotus don’t run.”

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Gates was openly contemptuous of the FTC, reportedly calling one commissioner a “Communist” and telling BusinessWeek, “The worst that could come of this is that I could fall down on the steps of the FTC, hit my head, and kill myself.”

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In July of 1994, the DOJ settled with the company, allowing Microsoft to retain its market position

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Microsoft soon dominated the market for key business tools, including databases, presentation software, and word processing, with massive monopoly profits to match. Its stock jumped from $48 to $62 in the four months after the settlement.

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Gates decided to create a competitive product, Internet Explorer, and leverage his power to destroy Netscape. The company updated its operating system, Windows 95, bundling its browser and seeking to, as one rival executive testified he heard from a Microsoft executive, “cut off Netscape’s air supply.”

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put forward a plan to split up Microsoft into two companies, one that held the operating systems and the other that controlled the Microsoft software businesses that ran on top of the operating system, similar to how Congress had split railroads from other businesses. It was a cautious decision; Microsoft would still retain its monopolies, even if they were now in separate companies. But Gates appealed the decision anyway, and the most conservative circuit court in America overturned the breakup order. In 2001, the George W. Bush administration essentially dropped the remainder of the case.

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Microsoft never dominated the internet the way it had the personal computer, because it was never able to leverage its hold over the browser market to control how users interacted with third-party websites.

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after this case the Department of Justice would cease bringing forward monopolization cases entirely.

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THE ROARING 2000S

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something odd about this new wonderful 1990s economy. She was conducting the first mass-scale research project asking the question, Why are Americans going bankrupt?

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Americans, with a record high stock market and a record low unemployment rate, weren’t doing well. The “trick and traps” of Wall Street were preying on their finances.

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Financiers and regulators thoroughly corrupted the mortgage industry, inflating a bubble that masked underlying deterioration of American industry.

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Though Gates didn’t get a “vig” on every piece of commerce online, the successor monopolies to Microsoft did. Amazon, Google, and Facebook followed the business model of Microsoft, leveraging their essential platforms to take power throughout swaths of the economy.

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TOO BIG TO FAIL

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Starting with the recession in 2001 and continuing through the recovery, the total share of income in the entire economy going to workers—a measure that had been stable for fifty years—began declining.

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economists had lost the ability to measure economic activity accurately.

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On September 15, 2008, the old-line investment bank Lehman Brothers declared bankruptcy. Lehman’s fall was the largest collapse in American corporate and banking history, a super-sized Penn Central, setting off a bank run that threatened every single commercial institution in the world. The art of modern politics had become so disconnected from any understanding of commerce that the president, George W. Bush, simply didn’t understand what was happening.

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Activity in the nonfinancial “real” economy—factories, shipping yards, housing—took a sickening slide, as millions of Americans began liquidating their savings in an unsuccessful battle to ward off foreclosures.

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Alan Greenspan told a congressional oversight committee that he was in a “state of shocked disbelief” that the “self-interest of lending institutions” had not protected the integrity of finance.

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the idea of using public power to structure markets was not only off the table, it was outrageous.

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The result was upward of nine million foreclosures. America’s middle class lost between $5 and $7 trillion in wealth.

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prioritizing the stability of a concentrated financial system over risking an attempt to end the foreclosure wave threatening the American housing market, or engaging in white-collar criminal prosecution, antitrust enforcement, or any sort of crackdown on concentrated financial power.

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Toward the end of Obama’s second term, the life span of white men and women without a college education began dropping as suicide, alcoholism, and drug addiction caused a die-off, what policymakers began calling “deaths of despair.”

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Conclusion

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in 2018 Sri Lanka banned Facebook because the company was unable to prevent the use of its platform to foment ethnic hate crimes.

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Google and Facebook, in 2018, took roughly 60 percent of all online ad revenue in America,

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Google has about 90 percent of the search ad market, can track users across 80 percent of websites, and its ad subsidiary AdMob has 83 percent of the market for Android apps and 78 percent of iOS apps. Facebook has 77 percent of mobile social networking trafficking, and roughly two thirds of Americans get news on social media.

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“Every publisher knows that, at best, they are sharecroppers on Facebook’s massive industrial farm.… And journalists know that the man who owns the farm has the leverage. If Facebook wanted to, it could quietly turn any number of dials that would harm a publisher—by manipulating its traffic, its ad network, or its readers.”

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Roughly 1,800 local newspapers in America have disappeared since 2004, and over 2,000 of the 3,143 counties in America now have no daily newspaper.8 Pittsburgh has become the first midsized regional city without a daily newspaper.

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Specialty newspapers are dying as well; from 1999 to 2009 the number of black newspapers was cut in half.

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From 2005 to 2015, roughly 26 percent of newspaper journalists—including digital outlets—were laid off.

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massive declines in the workforce of related industries, like radio, book publishing, magazines, and music. In other words, America is increasingly a news desert.

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the increasing number of seeming options for information masks a smaller and smaller amount of original reported news.

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Amazon captures nearly one of every two dollars Americans spend online,

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number one threat to independent retailers.

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Book publishing and distribution, media financed by advertising, and social media are how we communicate ideas with one another, and all three channels for information are increasingly in the hands of a monopolist.

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THE RISE OF AMAZON

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As Bezos’s hedge fund boss, who helped conceptualize the notion, put it in 1999, “The idea was always that someone would be allowed to make a profit as an intermediary. The key question is: Who will get to be that middleman?” Amazon was born to be a monopolist.

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The end of Robinson-Patman enforcement meant Amazon could use bulk discounts to monopolize product markets. Bezos also used predatory pricing

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losing $100 million in three months selling diapers below cost to force a company called Diapers.com to sell to him,

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There is no perfect analogy to Amazon, but it is a mixture of Standard Oil, the A&P chain store, the Microsoft software monopoly, and the Mellon system of interlinked businesses. Bezos came from the hedge fund world, learned from Walmart and Microsoft, and took advantage of the legal framework structured by Director, Bork, and the law and economics movement.

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A GOD’S-EYE VIEW: THE RISE OF GOOGLE AND FACEBOOK

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Google was, like the “Everything Store,” monopolistic from inception, with a goal of “organizing the world’s information.”

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Schmidt, Page, and Brin soon turned Google toward an advertising-supported model, despite earlier misgivings about the basic conflict of interest such a model would inherently incur.

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In 2007, encouraged by industry lobby groups, the FTC offered principles for self-regulation in the behavioral advertising market, largely oriented around the industry regulating itself voluntarily.

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a merger wave. AOL, Yahoo!, Microsoft, Verizon, WPP, and Oracle all became major buyers of behavioral targeting analytics companies, ad exchanges, publishers, and ad networks. But Google led the pack. From 2004 to 2014, Google spent at least $23 billion buying 145 companies.

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in 2007, the FTC permitted Google to purchase its rival in the online advertising space, DoubleClick.

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Facebook piggybacked on this libertarian legal framework and purchased over seventy companies to attain monopoly power over social media advertising.

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Facebook and Google are both essential infrastructures for the digital economy, with little public accountability.

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Google, Amazon, and Facebook are conglomerates who monopolize ad markets, and have done so through a range of tactics and mergers that were until very recently illegal.

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most radical centralization of the power of global communications that has ever existed in history.

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TOWARD A NEW DEMOCRACY

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For decades after World War II, preventing economic concentration was understood as a bulwark against tyranny. From the 1970s until the financial crisis, this rhetoric seemed ridiculous. No longer.

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It was not outlandish in the 1930s to imagine restructuring corporate America, as corporate America was relatively new.

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Acknowledgments

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About the Author

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Bibliography

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Notes

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Index

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Copyright

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