FIVE
THE COMPLEX WHOLE

113

By 1900, the creation of the giant modern corporation and its outpouring of watered stock brought the problems of antitrust into alignment with the first stage of federal securities regulation in the form of the federal incorporation movement. The bond that united them was overcapitalization. While some Americans, especially in the West and South, were anxious about the sheer size of the new enterprises, most were agitated by their perceptions of monopolistic price gouging to satisfy the demands of capital and that individual opportunity was rapidly being wiped out by the giant combinations. Some, especially in the South, tempered their qualms with envy. They looked longingly toward the wealth of the North and hoped for a piece of the action. They did not get it.¹

Businessmen had their own problems. The Supreme Court’s somewhat schizophrenic interpretations of the Sherman Act created troubling uncertainty as to the lawful methods of cooperation. Congress was struggling too, fitfully feeling its way to the limits of its authority. The Court had clearly severed federal jurisdiction at the state line, restricting the range of the government’s power. Manufacturing was beyond the federal government’s regulatory reach, even if the entirety of a factory’s output ultimately found its way outside the state of production. States, courts and Congress made their own attempts to regulate the new monopolies. The difficult issues sprang from questions of federal jurisdiction, states’ rights and, most important, the two tablets of private property and contractual freedom. The Senate business leadership impeded reform and McKinley’s indifference in the face of the merger wave made regulatory progress increasingly unlikely.²

The novelty and complexity of the issues often confused the regulatory agenda throughout the first decade of the twentieth century. Like nesting snakes, issues of monopoly, overcapitalization, speculation, railroad regulation, currency reform, minority shareholder protection, tariffs and the like, swarmed together in the hands of lawmakers. For a moment or two one might peel off from the others, only to be drawn back into the tangle. It was not until each issue grew and matured with the developing economy, not until each began to present a clear identity of its own, that reformers could get their hands around them and tame them on their own terms.114

Antitrust concerns dominated the public agenda. Monopoly was a relatively easy concept to grasp and the issue had been receiving attention for years. But the merger wave also spawned a second set of problems that centered on the new securities. The merger wave delivered into the American economy a new kind of corporation, the finance corporation, created by promoters to reap their profits by producing and selling stock. Contemporary observers failed at first to understand that many of the issues raised by the financing techniques used by the giant combinations were qualitatively different from those created by the earlier industrial monopolies. The combination of competitors with the currency of securities produced waves of water that cascaded through the stock market, swamping investors and destabilizing the economy. But reformers saw the problems of antitrust and overcapitalization as sufficiently intertwined that they typically took them up as one. The issue centered on monopoly. The integrity of the new securities for the investment market was, for the time being, a distant concern.³

Reform was the topic of the day, but for the federal government it remained little more than a topic of discussion, debate and legislative failure for more than a decade. What successful legislation there was aimed at the more focused problems of the railroads, with which lawmakers had developed experience over forty years. The problems of industry were of only recent vintage, and industry was inseparable from increasing American prosperity. All but the most radically populist Republicans and Democrats took care to avoid damaging the economy. This was especially true in the Senate, which was run by the business quartet of Nelson Aldrich, Orville Platt, John C. Spooner and William B. Allison. This senate leadership group was completed by two powerful outliers. Matthew Quay, Pennsylvania’s ruthless boss, was a free agent but chose to use his power for the security of capital. Ohio’s Marcus Hanna, a self-made businessman, generated his independent power as the architect of McKinley’s rise to the presidency. Despite occasional tensions and conflicts among the “Big Four” and Quay and Hanna, business was politically secure. By 1888 the Republicans had undeniably become the party of big business.⁴

Political pressure for some kind of reform became intense. Almost the entire assortment of business and financial issues drew together after 1900 in the form of the first major federal incorporation movement. Calls for federal corporation laws were heard from time to time during the century that followed. None were as hotly pursued or so protracted as the efforts that took place during the long decade from 1900 to 1914.115

There were two distinct models of federal incorporation. The most sweeping would have required state corporations engaged in interstate business to reorganize themselves under a federal incorporation law. The law that governed the financing, management and managerial responsibilities of these corporations would have been significantly more stringent than, say, the laws of New Jersey or Delaware or West Virginia. More typical and less organic were proposals that would have required state corporations to obtain federal licenses before they could engage in interstate business. These licenses would carry with them a set of governance, financing and disclosure regulations that would overlie the fundamental laws of state incorporation.

The federal incorporation movement joined two related but distinct problems into a single legislative chorus and kept them there for most of the first decade of the twentieth century. Antitrust was the tune, but overcapitalization was the counterpoint that harmonized them into one. By the end of the decade these themes began to unravel, with antitrust reform leading to the creation of the Federal Trade Commission (FTC) and the Clayton Antitrust Act of 1914 and overcapitalization growing into the new issue of securities regulation, designed to curb speculation and stabilize the economy.

The federal incorporation movement failed, but it provided the foundation for the Department of Commerce, the Bureau of Corporations, the Federal Trade Commission and the Clayton Antitrust Act and enhanced railroad regulation through various amendments to the Interstate Commerce Act. It also created the fundamental conceptual underpinnings of the New Deal securities laws.

THE FAILURE OF FEDERAL INCORPORATION

Federal incorporation failed for five major reasons. It failed because almost all of the proposals were either too limited in the problems they confronted or too ambitious in their sweep; because it aggravated deep-seated fears of centralized federal power, enhanced by Roosevelt’s aggressive pursuit of the imperial presidency; because disempowered Southern Democrats remained committed to notions of states’ rights; because a growing fear of socialist influences made aggressive federal regulation difficult to achieve; and because the problems presented by the giant modern corporation changed during the long first decade of the twentieth century even as Congress grappled with the issues of the nineteenth century.

Federal incorporation proposals often encompassed regulation aimed at antitrust concerns, corporate finance, the obligations of directors and officers, stock speculation and railroad rate regulation in the same bill. Congress, like the rest of the nation, was trying to sort through its bewilderment with the dramatic transformations in American economics and business. Political pressures on each party (and within parties) pulled in different directions. The issues created by the giant modern corporation were new and difficult to keep conceptually distinct. Congress could hardly be blamed for its failure to achieve legislative coherence when the relationships among the problems were often ambiguous.116

The next three reasons for the failure of federal incorporation are distinct but at the same time deeply related. First was the pronounced and often stridently articulated public concern with centralizing power in the federal government—the very same concern that had led the Constitutional Convention to reject Madison’s bid for federal incorporation, leaving the matter to the states. Some longed for the Jeffersonian romance of a limited central government and would fight any attempt to expand its power past that necessary for defense and the protection of interstate commerce. Romantic or not, the fear of centralized federal power at times united Southern Democrats and big business Republicans, although for different reasons.

Teddy Roosevelt’s personality and revolutionary ideas about presidential power made these fears tangible. While Roosevelt remained relatively cautious following the public shock of his inauguration, he did little to conceal his belief in a strong executive branch led by a particularly strong president. Roosevelt the reformer became an obstacle to reform because the imperial Roosevelt scared even the reformers into passing pale legislation. The far more modest and politically conservative Taft, less skilled in dealing with the legislature, pursued statutory reform half-heartedly. The successful regulatory compromises blended federal oversight with a largely self-regulatory approach that characterized the progressive politics of Woodrow Wilson.⁵

The third stumbling block for federal incorporation lay in a more painful history. Reconstruction was a deep scar, and Southerners ceded states’ rights reluctantly. Nonetheless, Democrats, the party of the South, had long fought for trust reform. They held extensive hearings on trusts in the late 1880s under Grover Cleveland and, although they produced no legislation, their campaign platforms of 1900 and 1908 included a federal incorporation plank, and their platforms of 1896, 1904 and 1912 all demanded trust regulation. Bryan, the party’s presidential candidate from 1896 to 1908 (relieved by Alton Parker in 1904) was a persistent fan of federal incorporation. But the issue of federal corporate control unavoidably irritated the sore spot of states’ rights. The Democrats wanted regulation. Yet the idea of federal incorporation overriding the prerogatives of the states fueled strong emotions.⁶117

Also related to the fear of centralized power was the widespread concern with creeping socialism that raised its head during the federal incorporation debates. America was becoming far more of a collectivist society than its self-image and founding myths allowed its leaders to acknowledge. Corporations, labor unions, trade associations, civic associations and a variety of other collective centers of identity and interest formed quickly. Intellectuals of the era were keenly aware of, and wrote widely about, the phenomenon, while the public sensed it and the leadership warned of it. Cries of imminent socialism were echoed by Democrats and Republicans throughout the country.⁷

The final reason that federal incorporation failed was that the problems changed during the fourteen years of reform efforts. The monopoly powers of the giant industrial combinations proved less than enduring. The Supreme Court’s interpretation of the Sherman Act evolved into workable and often effective regulation. The securities markets underwent dramatic transformation. Banking practices changed. Yet the regulatory approach remained constant, even as the nature of the problems was quickly shifting.⁸

Federal incorporation sometimes came close, but it never really had a chance.

A PRELUDE TO FEDERAL INCORPORATION—THE CHICAGO CONFERENCE ON TRUSTS

The trust problem had become a subject of serious study even before the federal debate got rolling. The meteoric rise of Standard Oil, which in less than a decade had captured virtually the entire domestic petroleum market, was perhaps stimulus enough. Economists and popular writers had been studying the problem since the 1880s, but the merger wave brought with it a literary explosion. Economist Charles Bullock, in his 1901 review of the popular and scholarly literature on trusts, wrote that in a three-year period “the production of trust literature has kept pace with the process of industrial consolidation.”⁹

Widespread public interest in the trust issue led to action as concerned citizens grouped together to find their own solutions. The congressionally created Industrial Commission provided the beginnings of a federal response in 1898, but that organization was designed as much to placate the public, and especially labor, as it was to pave the path to meaningful reform. McKinley, who was indebted to business for his presidency, paid no attention to the trust issue until the election of 1900 drew near. Only then did he reluctantly conclude that political wisdom required the administration to affect concern about the trusts. Safe again after the election, McKinley completely ignored the trust problem in his second inaugural address and even hinted that public agitation over the issue was counterproductive. By the summer of 1901, he recognized that he had little choice but to engage the problem directly or leave it exclusively to his voluble, energetic and ambitious vice president. Yet even in his fateful final speech in Buffalo on September 5, McKinley did not mention trust regulation. He took the occasion to praise the accomplishments of American industry.¹⁰118

Public activism on the trust question had begun to coalesce during the last year of the century. Its first organized manifestation was the Chicago Conference on Trusts, which convened in the Central Music Hall on September 13, 1899, and ran for almost four days. The Conference, sponsored by the Civic Federation of Chicago, was the first major public trust event following the formation of the Industrial Commission. Naturally it drew wide attention from a national press serving a people hungry for information and for action.

The Civic Federation of Chicago (CFC) had been created in 1894 by a reform leader named Ralph Easley as a group of “business men, professional people, social workers, labor leaders, and rank and file citizens” coming together to address the problems visited especially heavily on Chicago by the depression of 1893-97. Political corruption and industrial crisis were its main focal points, sharpened by rising unemployment and poverty, increasing labor agitation, evaporating philanthropy and general social turmoil as the order of the day. Jacob Coxey’s Army went on the march in 1894 to protest the federal government’s passivity, frightening thousands with the specter of mass revolt. The CFC had much to occupy itself.

By 1900 Easley had transformed the CFC into the National Civic Federation (NCF). The NCF was probably the era’s most visible civic force behind legislative and social reform. Both the CFC and its successor gained legitimacy and influence from the range and variety of its members, including labor leader Samuel Gompers, social reformer Jane Addams and an assortment of businessmen and their lawyers, among them steel leader Elbert Gary, Morgan partner George Perkins, Andrew Carnegie, August Belmont, Jr., Cyrus McCormick and prominent lawyer Charles Bonaparte. But they were, for all the diversity of their membership and their progressive agenda, more or less resolutely in favor of big business and it was largely from business and finance that they drew their leadership. The NCF reform proposals followed suit.¹¹

The Chicago Conference on Trusts was capacious both in its attendance and its scope of inquiry. The organizers asked the state governors to appoint delegates to the conference. Among them were “represented every interest in the respective states, including congressmen, ex-congressmen, ex-governors, ex-supreme court judges, attorneys-general, presidents of banks, presidents of railroads, manufacturing and commercial organizations, and representatives of labor, agricultural, and educational interests.” Despite the impressive list of delegates, The New York Times reported that “less than half the delegates appointed by the various States” were present on opening day but that tardiness and absences had been expected. Ultimately there appears to have been broad participation and substantial attendance. The official roll reported 744 attendees.¹²119

CFC President Franklin H. Head of the conservative National Business Men’s League called the conference to order, identifying education as its goal. The CFC claimed to be responding to what it perceived as the great public interest in the trust question and a paucity of public education and information about the matter. Men of “every shade of opinion” had been invited to pursue this great inquiry into the nature and problems of trusts. With this in mind, Head claimed: “It is not a trust or an anti-trust conference, but a conference in search of truth and light. With this end in view the attendance has been solicited of men of every shade of opinion upon the general subject.”

And men (and a barely perceptible handful of women) of every shade of opinion they were, as the lengthy published proceedings attest. In addition to the gubernatorially appointed delegates, representatives of almost every type of relevant organization imaginable filled the hall. There were members of Granges; industrial associations like the Millers National Association, the Association of Western Manufacturers and the Farmers’ National Congress; labor unions; civic organizations ranging from the New Orleans Board of Trade to the Commercial Club of Terre Haute; regulatory bodies like the Interstate Commerce Commission, the U.S. Industrial Commission and a variety of state railroad commissions; and representatives of issue-oriented groups like the Single Tax League of the United States, the American Anti-Trust League and the Tariff Reform Committee of the Reform Club of New York. There were presidents and faculty of universities, representatives of the American Academy of Political and Social Science and a variety of at-large representatives from thirty-three states and territories, all forming, as appears from the proceedings, not only a formidable program but a rather active and vocal gallery as well.¹³

As to it being “neither a trust nor an anti-trust conference,” one could be forgiven for some doubt. Head and a number of other speakers took note of the “crying need for education” to distinguish beneficial trusts from harmful monopolies, suggesting at least some attempt to clear big business of the general charges of evil being levied against it in the heartland.120

The proceedings were lively, often detailed and sophisticated in their discussion of the issues, and sometimes hotly debated. There were speakers who worked to be analytical and balanced. Jeremiah Jenks, a trust supporter, opened the substance of the conference with characteristically noncommittal remarks: “It is certainly true that a long step has been taken toward the solution of any problem when the problem itself has been clearly stated.” He then proceeded, in good scholarly and painfully dull fashion, to analyze each aspect of the problem, finishing each section with a series of unanswered questions that required resolution before trusts could be thoroughly understood.

The tedium of speakers like Jenks was relieved by the performances of the real crowd pieasers—partisans whose flourishing rhetoric maintained the entertainment value of the proceedings. Dudley G. Wooten of the Texas legislature opened his remarks by reflecting on the decline in American values that was causing concern among progressives and conservatives alike. “We [Texans] believe that there are some things more valuable, more to be desired and more worthy to be contended for by a free people than mere industrial activity, commercial progress or the accumulation of worldly wealth.” The proceedings show that Wooten’s remarks—the first of the conference taking an antitrust standpoint—were well received. “The gallery audience was sympathetic with [Wooten’s] views, and carried away by the eloquence of the gifted orator, punctuated his address with salvo after salvo of applause,” especially labor delegates and those from the South and West; “the Easterners generally smiled critically and kept their arms folded.”¹⁴

Charles Bonaparte was a Baltimore attorney who would, in 1908, become Teddy Roosevelt’s attorney general and thus the man charged with enforcing the antitrust laws. He foreshadowed in his remarks a strain of what, within a decade, would become mainstream Progressive thought. “I regard the tendency of combination as an inevitable feature of modern civilization from which no free and enlightened country can escape, and which has force in proportion to each country’s freedom and enlightenment.”

All eyes were upon the Great Commoner as William Jennings Bryan indulged in his customary flamboyant rhetoric. He was received with “warm and vigorous” applause. “I want to start with the declaration that a monopoly in private hands is indefensible from any standpoint, and intolerable.” But even Bryan showed some caution in defining the enemy. The target was monopoly, not big business per se, and Bryan was careful to state that he used the term “trust” interchangeably with “monopoly.” “I venture the opinion that few people will defend monopoly as a principle, or a trust organization as a good thing, but I imagine our great difference will be as to remedy.” He proceeded to discuss the need for a federal remedy, saving especially harsh words for New Jersey and Delaware. Federal incorporation was Bryan’s answer, and it is fair to say that his enthusiasm for it raised suspicion among those Republicans who were otherwise inclined to see its virtues. It was naturally hard to separate economics from politics, even as some broad consensus was developing on the appropriate contours of the economic landscape.¹⁵121

While the proceedings were sometimes analytical, sometimes raucous and sometimes plain dull, the conference produced more show than substance. Conference President William Howe, speaking unofficially, summarized what he saw to be the common themes of the speeches and papers. States should pass laws to outlaw those trusts and restraints of trade that judicial opinion had condemned. Such legislation should be as uniform as possible. States should pass corporation laws that were as uniform as possible. Watered stock should be prohibited. Corporations should be required to make reports and subject themselves to government inspection to the extent that it preserved their legitimate need for secrecy. The lowest common denominator of the conference clearly was very modest.¹⁶

The formal conclusion of the conference was even more of a disappointment for those who demanded reform. Introduced as a resolution by Cyrus G. Luce, former governor of Michigan and chair of the committee on resolutions, it was probably the only aspect of the conference about which there was no debate. Luce disarmed the reformers by emphasizing the educational, nonpolitical purpose of the conference, concluding: “Therefore, be it resolved, That in the opinion of the committee on resolutions, this conference is without authority, and it would be inexpedient for it to adopt resolutions purporting to declare the sense of the conference upon any aspect of the subject of discussion.” It would have been hard to get excited about a resolution resolving nothing. But the public debate had begun to coalesce.¹⁷

FROM ANTITRUST TO FEDERAL INCORPORATION

The CFC, as a voluntary civic organization, could afford to follow through on its stated educational mission without any resolution of the debate. McKinley, whose constituency was grounded in the business community, was not in any rush to do much, either. It might be an understatement to say that the administration was hardly vigorous in enforcing the antitrust laws. In fact, McKinley initiated only three of all lawsuits ever brought under the Sherman Act. Harrison and Cleveland, whose presidencies took place before the trust issue became nearly as pressing, together brought twelve.

Congress and Trust Reform Before the Turn of the Century

122

McKinley could afford to ignore the trust issue. Attention to his political fortunes certainly encouraged his disinterest. Congress did not have the same luxury. Trust agitation was widespread and elected representatives could not afford to ignore the groundswell of public opinion that led to the Chicago Conference. Congress responded. Between 1881 and Roosevelt’s rise to the presidency in 1901, congressmen introduced forty-five separate pieces of antitrust legislation. Three constitutional amendments were also proposed during this period, designed to resolve the debate over the federal government’s power to regulate trusts.¹⁸

In order to see what Congress was worried about before the turn of the century, it is worth taking a moment to examine what these bills were designed to do. Most proposals directly outlawed trusts. A handful of them proposed to deal with the problem by defining and taxing trusts. Taxation as a remedy for corporate ills was consistently suggested from the beginning of the antitrust debate through the New Deal era. It became especially important during the first years of the new century for several reasons. The federal power to tax, unlike its commerce power, was relatively unambiguous as a constitutional matter. It could also be used, as Taft wanted, as a form of regulatory disclosure designed to squeeze information from corporations.¹⁹

Two bills were unique in focusing on the causes of trusts rather than attempting to regulate them directly. A bill introduced in 1894 proposed eliminating tariffs on any trust-produced articles. This followed the widespread, if contested, belief that tariffs encouraged trust formation (although there was little doubt that the Sugar Trust had blossomed thanks to the protection of high tariffs). The idea was that tariffs protected American industry from foreign competition and created artificial price discrimination between foreign and domestic goods. Trusts were spawned in the shelter of these pricing privileges. Eliminating the tariff with respect to trust-produced categories of goods became an important part of the Democrats’ position during the next decade.²⁰

Another bill introduced later that same year aimed at a different perceived cause of trusts—patents. The whole purpose of patents was to create temporary monopolies by giving their holders the exclusive use of the subject inventions. The idea that patents substantially aided in the creation and protection of trusts had substantial support. Innovative means of production were vitally important both to the growth and the products of industry. Patents, even if limited in duration, even if other inventors could get around them, provided significant starting advantages to those who held them. The proposed bill would have nullified patents used by trusts.²¹123

The U.S. Industrial Commission and its successor Bureau of Corporations, both conservative in conception and orientation, downplayed the role of tariffs and patents in trust formation. In the end, neither bill received any consideration. Tariff reform created a rift between conservative and progressive Republicans, and Democrats watched this internecine battle with amusement until the issue helped to provide an opportunity for them in 1913, when Wilson and his Democratic Congress succeeded in reducing tariffs.²²

A shift in the approaches of proposed legislation began to occur around 1897. Republican Phillip Low of New York introduced a bill in the House to provide national supervision of corporations. The bill was interesting for two reasons. It was the first federal incorporation bill introduced in Congress. It was also the first proposed trust measure of any kind to use the word “corporation” instead of “trust.” I do not want to overstate the significance of this shift, but by moving from the word “trust” to the word “corporation” the bill reflected the increasing threat of monopoly posed by businesses that were taking advantage of New Jersey’s legal reforms. It also conceptually expanded the nature of the thing that was being regulated. No longer was it the trust alone that was the subject of regulation, but also the giant modern corporation in and of itself. Part of the explanation for the shift is a change in the form of business cooperation from trusts, pools and communities of interest to large corporations that contained within them the assets of former competitors. It was not clear that the Sherman Act’s prohibition of agreements in restraint of trade applied to the corporation, because a corporation, as a single entity, could not contract or conspire with itself. So the regulatory focus shifted to the Sherman Act’s proscription of monopoly and thus a concern with how even the unitary corporate entity behaved, rather than on combination per se. Beyond this, though, the new legislative efforts also focused on problems caused by aspects of corporate governance and finance that had been made possible by states like New Jersey. The conflation of trusts—that is, monopolies—with corporations, could and sometimes did exacerbate the confusion of issues in the federal incorporation debate.²³

Only three bills proposing any form of federal corporate supervision were introduced during this period, along with three bills that would have prevented overcapitalization. These latter bills were introduced during the merger wave. This makes perfect sense, because it was during the merger wave that overcapitalization as a serious and widespread public problem first came to characterize corporate combinations in the minds of many. Antitrust reform remained an important legislative concern until its resolution by the creation of the Federal Trade Commission in 1914, but, starting around 1903, it began to share the stage with other important corporate issues. The overall record suggests that the early 1880s up to 1900 should be classified legislatively as the golden age of antitrust. Despite widespread public concern, little federal attention was paid to other aspects of liberalized state corporate law until the end of this period.²⁴124

The United States Industrial Commission

The real beginning of legislative attempts to regulate corporations in a more sweeping way than simply controlling monopolies came in 1898. That was the year when Congress created the U.S. Industrial Commission, charging it, among other things, to “investigate questions pertaining to … manufacturing, and to business, and to report to Congress and to suggest such legislation as it may deem best upon the subjects.” The Commission was important—it was the first concerted federal effort to investigate what was going on inside the new giant corporations. Remember that corporations were highly secretive. The only information most people, including lawmakers, had to go on in evaluating their behavior was rumor, capitalization, dividends and securities prices. The Commission was organized to investigate all aspects of the new economic conditions of the United States.

But the Commission was also created as a parry, an attempt by the Republican Congress to satisfy public opinion at the same time that it delayed any serious regulation. Writing in The North American Review, one of the Commission’s own members, S.N.D. North, admitted as much: “It recognizes in itself a sort of safety valve for the country.” A “large part” of Congress’ motivation in creating the Commission was to provide a forum for anybody who felt wronged in the new economic order to come and complain, understanding that “people who suffer wrongs, either real or imaginary, always feel better when they are allowed an opportunity to ventilate them before some recognized governmental authority.” The Commission was created to placate more than to reform.²⁵

The Commission was instructed to hold hearings should it deem them necessary, and in this respect it did its work quite well. It took extensive testimony over the course of its existence, with several sessions focused largely on the problems created by the liberalization of New Jersey law. Those testifying were a who’s who of American business and finance, including John D. Rockefeller, Charles Schwab, John Dos Passos, James B. Dill, H. O. Havemeyer, Elbert Gary, “Morgan’s Attorney General” Francis Lynde Stetson, a number of officers of New Jersey corporation trust companies and a wide range of industrialists, financiers, labor representatives, lawyers and economists.²⁶125

The Commission’s broad mandate led it to study a variety of topics, ranging from the trust problem generally to issues of transportation, labor and agriculture, among others. In just a few short years it produced thousands of pages of transcripts and reports, published in nineteen volumes. The first direct federal salvo against state corporate regulation was fired in one of the closing sentences of the Commission’s seven-hundred-page Final Report:

It is important to observe that whenever any State has put conservative restrictions upon corporations, either as to their formation or their management, other States have taken advantage of the situation and enacted such liberal laws that corporations have removed to them from other States. Two or three States have apparently, for the sake of securing a certain revenue easily collected, bid against each other by offering more liberal inducements to corporations. This demoralizing tendency in corporation legislation, and the great variety of corporation laws in our forty-five States and four Territories, makes the task of controlling large corporations exceedingly difficult.

New Jersey! Delaware! West Virginia! The states were unreliable. The states were irresponsible. The states were greedy. So the Commission discussed federal incorporation and federal franchising as solutions to the problem of state corporate control. The specific issue creating perhaps the most controversy was whether it was constitutional for the federal government to regulate corporations doing interstate business and supplant various aspects of state corporate law. Special attention was reserved for New Jersey law, especially the provisions that eased the way for corporate combinations and overcapitalization.²⁷

Disclosure was also an issue, although disclosure at this point meant regulatory disclosure, a tool to facilitate legislation and prosecution rather than a remedy to protect investors. The supplementary opinion filed by Commissioner Thomas W. Phillips with the Final Report put it squarely on the table. Whatever the method of regulation, the government needed information. And most state law, as we have seen, did little or nothing to compel corporations to provide it. Anticipating the securities laws by thirty-one years, Phillips wrote: “[For federal control of corporations] to be efficient, a system of public accounting must adopt two separate methods. First, each corporation should be required to make periodical reports of its business, supplemented by other reports upon official demand, all verified by the oaths of certain of its officers.” Some variation on this suggestion would be present in virtually all of the proposed federal incorporation measures.²⁸126

As early as 1866 the New York Stock Exchange required listed companies to file annual reports. In 1900 it demanded balance sheets and income statements as part of a corporation’s listing application. As we have seen, these requirements were more often than not ignored. Such financials as were provided were relatively meaningless, and were not available to the public or stockholders. So it was during the Industrial Commission hearings that publicity as an essential tool in law enforcement received its first thorough airing.

One centrally important issue for the Commission was corporate valuation and proper corporate capitalization. The Commission was confused by the issues of valuation that underlay the problem of overcapitalization, as we saw in Chapter Three. But everyone questioned seemed to agree on one point: the absolute size of a corporation did not matter. This is an especially important observation, because progressive corporate reform in this era has often been identified with attacks on corporate size. It is true that some reformers, most prominently Louis Brandeis, held to a populist notion of small business and condemned large business as an evil in and of itself. But it is clear from the historical record that progressive reformers—from Eugene Debs to Woodrow Wilson—were not troubled by bigness alone. Indeed many saw large corporate size as the product of the inevitable evolution of business.

The Industrial Commission was commendably thorough in its work. But it was not without bias. For the most part the Commission, appointed by the Republican-controlled Congress, was in favor of big business. At a minimum it accepted the natural inevitability of big business. Much more important than sheer size was whether bigness necessarily led to monopoly, whether it allowed a particular trust or corporation to drive out competition, squelch entrepreneurial opportunity, dictate prices and harm consumers. This was a heavily debated issue.²⁹

The eventual result—encouraged by big businessmen themselves—was the creation of the FTC, which was intended in part to work through regulatory disclosure by engaging in investigations and eventually providing regulatory determinations of the antitrust implications of their intended combinations and contracts, giving businessmen some of the certainty they were seeking. But that was a solution for the future.³⁰

The Final Report of the U.S. Industrial Commission

127

The Commission’s Final Report was published in 1902. By this time Roosevelt was feeling his oats as president. Despite his initial assurance to the American people, and especially the business representatives of his own party, that he would continue McKinley’s policies, he enthusiastically took up the issue of trusts. While his actions were more tentative than his words, and even his words were often measured, he saw the need for action more clearly than his predecessor. Less than three weeks after the Commission submitted its Final Report, Attorney General Knox (a former trust lawyer who had been appointed by McKinley) sued the Northern Securities Holding Company under the Sherman Act. A furious J. P. Morgan met with Knox and Roosevelt. Morgan, referring respectively to Knox and Stetson, told Roosevelt that “if we have done anything wrong … send your man to my man and they can fix it up.” When Roosevelt demurred and Morgan anxiously inquired as to whether he planned to attack “my other interests,” the new president responded: “Not… unless we find out… they have done something that we regard as wrong.” The McKinley days were over.³¹

The Commission’s Final Report was especially important in this new environment. It contained massive amounts of information about the way big business was put together and run, and also made recommendations that would provide the legislative themes for the next decade.

The Commission rejected federal incorporation as a solution, mostly because it would centralize business regulation in the federal government “to a degree to most people unthought of, in connection with our form of government.” Instead, it recommended a federal licensing law that would require all corporations engaged in interstate commerce to be licensed and registered with a bureau of corporations. The law aimed at two major issues: controlling monopolies and, vitally tied to this goal, mandatory corporate publicity (which anticipated greater accountability of corporate officials). The Commission also recommended a federal law prohibiting stock watering (and thus overcapitalization) modeled on the Massachusetts anti-stock watering law. Much more than the monopoly issue itself, this attack on overcapitalization aimed at the heart of business—finance—that had been controlled entirely by the states.³²

There was broad public sentiment in favor of some form of federal corporate law. Leading businessmen and lawyers who were frustrated by having to comply with a variety of conflicting state laws were among its supporters. John D. Rockefeller favored the idea. James B. Dill himself, speaking at Harvard in 1902, dismissed the modest proposal of federal licensing and wanted to go all the way with federal incorporation: “I view with favor the enactment of a National Incorporation Act as distinguished from a national control of state-created corporations.” Continuing, and with an apparent complete lack of self-consciousness as the Mephistopheles of New Jersey’s Faustian bargain, he said:128

A national corporation act should be based upon the public demand for cleaner legislation and for purer politics premised upon the assumption that it is more feasible to obtain from the national body proper regulation and control than in and from various state legislatures, some of which are to-day engaged in a competitive warfare for revenue from corporations.

Like other business leaders, he bemoaned the fragmented nature of corporate regulation: “We have the members of the great financial combinations practically located in New York, with their millions of capital, relegated to the courts of New Jersey for a determination of their rights as stockholders.”³³

Dill’s sincerity is difficult to judge. He remained on the record as stridently in favor of federal incorporation, yet his business was based largely on his status as the leading expert in New Jersey corporate law. Lincoln Steffens, who was fascinated not only by the trust issue but also by Dill himself, expressed his chagrin after he listened to Dill recount what Steffens regarded as horror stories of the behavior of New Jersey corporations. Late in his life, Dill explained to Steffens why he had fed the muckraker such detailed inside stories of legalized corporate misbehavior: “‘Why, Dr. Innocent,’ he said, ‘I was advertising my wares and the business of my State. When you and the other reporters and critics wrote as charges against us what financiers could and did actually do in Jersey, when you listed, with examples, what the trust-makers were doing under our laws, you were advertising our business—free.’”³⁴

Alton Adams, writing in 1903 in the Political Science Quarterly, also noted the benefits to business of federal incorporation: “Trust advocates … see in national incorporation laws a means of escape from state regulation.” While state law had become lax, the states still had the power to “tax, regulate, and exclude.” The prospect of tightened regulation in each state in which they did business worried businessmen. Scholarly examination of the possibilities of federal incorporation was rapidly becoming a popular pastime.³⁵

The Democrats’ Dilemma: Regulating Trusts and Federal Power

On May 15, 1900, the House Judiciary Committee reported on a joint resolution of Congress calling for the Sixteenth Amendment to the Constitution to be passed by Congress and submitted to the states for approval. The amendment was designed to put to rest all doubts about the federal government’s constitutional power to regulate trusts. Had it passed, it would also have ensured the constitutionality of federal incorporation. While there were several proposals, the amendment as reported was simple and direct. First: “All powers conferred by this article shall extend to the several States … and all territory under the sovereignty and subject to the jurisdiction of the United States.” In its operative language, it would have given Congress the power to “define, regulate, prohibit, or dissolve trusts, monopolies, or corporations.” Finally, it acknowledged “the rights of the states to exercise any of their own powers not inconsistent with the amendment.”³⁶129

It is unnecessary here to discuss the details of the committee report. It spoke of the need to regulate trusts and the desire to ensure the regulation’s constitutionality. I will review many of these arguments in the next chapter when I discuss the debate over the Littlefield bill. The minority report is much more important for now.

The Democrats, more than the Republicans, had long favored trust regulation. While a number of progressive Republicans sincerely wanted to regulate trusts to protect the public, the party of McKinley was a latecomer to the cause. The Senate in particular, under the firm control of the Big Four, was not especially eager to see meaningful trust regulation enacted. The Democrats were wholly in favor of trust regulation, but the Supreme Court’s interpretation of the commerce clause following the E. C. Knight case (which drew a sharp distinction between manufacturing, which Congress lacked the power to regulate, and interstate commerce, as to which it did have power) left real questions about the constitutional scope of federal trust regulation. The proposed Sixteenth Amendment would have resolved all doubts in favor of federal regulation. But the Democrats opposed it. Indeed, the Republicans used this opposition to accuse them of forsaking their regulatory opportunity.

Why did the Democrats oppose a real solution to a problem they had been trying to address for years? The answer is revealed in a minority report filed by De Armond of Missouri, Lanham of Texas, Fleming of Georgia, Terry of Arkansas, Elliott of South Carolina, Clayton of Alabama and Smith of Kentucky. The Democrats’ legal argument was that the amendment was unnecessary. Trusts could be controlled by amending or eliminating the high tariff, using the undisputed federal taxing power to tax trusts, amending the federal patent laws to prevent monopoly and using the federal postal laws to prevent interstate fraud through the mails. The federal government had unquestionable jurisdiction over these matters, and any of these remedies, separately or together, would have gone a long way toward regulating trusts. But the majority had proposed a constitutional amendment.130

The Democrats made clear their general disdain for constitutional amendments. Noting that only three had been adopted since the nation’s founding era (which, it is worth noting, were the Civil War amendments), the minority expressed some horror at constitutional amendment as a general proposition. States’ rights was the reason.

The minority report devoted only a few paragraphs to states’ rights and they were among the most moderate of the minority’s arguments against the amendment, except in their conclusion: “But State [sic] rights need not be involved in the discussion, and we leave them for consideration at a more convenient season. The proposed amendment would take power from the States and lodge it in Congress, with the proviso that if the States could find something left when all had been taken away they might make use of what they might find where there remains nothing to be found.”³⁷

Corporate regulation traditionally had been left to the states. Federal power was limited and adequate. The issue of states’ rights had a powerful grip on the South and thus on the Democratic Party. This particular amendment, broadly drafted as it was, would have invited Congress to take over almost the entire field of corporate regulation. The Supreme Court’s holding that the commerce clause did not apply to manufacturing would have disappeared. The federal government would have the power not only to regulate but also to define what “trusts, monopolies, or combinations” meant, “whether existing in the form of a corporation or otherwise.” Such limitations as were read into the commerce clause would have evaporated. Congress could effectively have defined its own power. While the Democrats would eventually vote unanimously in favor of the one piece of federal corporate regulation to reach a vote during the decade, they preferred to take their chances with judicial interpretations of the commerce clause rather than with a new amendment that would have indisputably increased federal power.

ROOSEVELT DISCOVERS THE TRUSTS

The executive branch and its attitudes toward big business had changed by the time the Industrial Commission had published its final report. With McKinley’s assassination in September 1901 and the feisty Teddy Roosevelt’s descent from the Adirondack Mountains to ascend to the presidency, public scrutiny of business shifted from congressional commissions and civic associations to the White House. The myth of Roosevelt as “trust buster” was largely false; he was far more sympathetic to the concerns of big business than legend suggests. But while he saw its inevitability and benefits as clearly as anyone, Roosevelt wanted the federal government to take a more active role in business regulation. By federal government, Roosevelt meant himself, and this is one of the reasons that the regulation that Congress actually passed was far less reaching than it might have been.³⁸131

It is difficult to tell how strongly Roosevelt really opposed the trusts. His initial interest in the issue seems to have been largely to ensure his own political safety. In fact, he thought public antitrust agitation was overblown. In a letter to editor and sometime power-broker Hermann Kohlsaat in August 1899, while governor of New York, he wrote: “How about trusts? I know this is a very large question, but more and more it seems to me that there will be a good deal of importance to the trust matter in the next campaign, and I want to consult with men whom I most trust as to what line of policy should be pursued.” He went on to note his concern with “popular unrest and popular distrust on the question,” as to which he wrote: “It is largely aimless and baseless,” but without some plan “multitudes will follow the crank who advocates an absurd policy.” Two days later, writing to his close friend Henry Cabot Lodge, he described “the agitation against trusts … [as] largely unreasonable and … [as] fanned into activity by the Bryan type of demagogue,” again articulating his fear that some “quack” would make bad policy unless cooler heads began to develop more reasonable measures. In other correspondence of the time he described the agitation against trusts as “largely irrational.” But toward the end of August with an election year approaching, he had started to develop his own trust policy based on his belief in the benefits of disclosure.³⁹

Despite his apparent uncertainty as to how serious the trust problem might be, if indeed there was a problem beyond the political, it is possible that Roosevelt’s increasing desire to address the issue was partially motivated by his reaction to significant business opposition to his governorship. As early as January 1898 he saw that “the great corporations” were working hard to raise money for his opponents. He did not much endear himself to corporate interests by signing the Ford Franchise Tax Act in May 1899 after a hotly contested fight. The “interests” represented by “Easy Boss” Thomas Platt set out to push him from office. In fact it was Roosevelt’s firm (and correct) belief that New York corporate interests put enormous pressure on Senator Platt and other party leaders to make sure Roosevelt was nominated for the vice presidency, an office that rarely led to the presidency and from which he could cause no trouble for New York corporations. This was a fate Roosevelt wanted to avoid. He revealed his fears to Lodge in a letter penned on April 9, 1900: “The big corporation men … are especially anxious to have me gotten out of New York somehow. In default of any other way, they would like to kick me upstairs.”⁴⁰132

Roosevelt was also frustrated by business opposition because businessmen failed to understand, or so he claimed, that his policies ultimately would protect business. He wrote that his balanced approach to trusts was the only way to maintain Republican control in New York and protect corporations from regulation by fanatics. He could not understand why business leaders did not appreciate that he was really their friend.

Roosevelt’s unhappiness with being misunderstood was coupled with the need to be liked, both by Platt and by people in general. He was almost fawningly courteous in an extraordinary letter to Platt on May 8, 1899, during the fight over the Ford Franchise Tax Act. At the same time, he tried to persuade the senator that his position was really favorable to corporations, if for no other reason than that it would help to keep the party in office and prevent more damaging legislation. He also tried to absolve himself for taking the position he did: “… I only did take action when it was forced upon me, after an immense amount of thought and worry.” To a correspondent in April 1900 he protested that because he supported corporations “when they are right,” they ought to know that this gave him a corresponding right to demand their responsible behavior. And writing to Joseph Bishop that same month he insisted that Platt personally liked him, despite the growing corporate pressure on Platt to oppose him, repeating this assertion to John Proctor Clark that same week: “Platt and Odell really like me.” To Samuel Hill he wrote: “I cannot help thinking that in the end the big corporation men whose support is really worth having, will understand that I am their friend.” The same pattern would repeat itself with the formerly antagonistic “Uncle Mark” Hanna when Roosevelt became president and with whom he developed a warm if complex personal relationship. Roosevelt wanted to be liked and wanted to be understood. He also very much wanted to be elected.⁴¹

Reading the correspondence leads to the conclusion that part of the reason Roosevelt’s trust rhetoric heated up and he became increasingly interested in the problem was that he came to take business’s antagonism toward him quite personally. The letters range from defiant to hurt, and some of his antagonism also seems to have developed from his firsthand view of corporate political attitudes and tactics. Both of these reactions are illustrated once he became president, by his authorizing Knox to start the Northern Securities litigation in 1902 and his interactions with the coal operators during the anthracite coal strike later that year. But emotional or not, Roosevelt knew politics. As we will see in Chapter Six, his overwhelming ambition to be elected president in his own right led him to make a dramatic shift from promoting a fairly strong antitrust measure to one that was largely toothless.⁴²133

Both Roosevelt’s emotional attitude and his political astuteness can be seen in the way he developed his annual governor’s message for 1900. In early December he sent a draft to Secretary of War Elihu Root, asking him to pass it on to the attorney general. He made a point of noting that he had asked for assistance from Jenks, Hadley and Dill, all of whom were trust supporters and could hardly be described as anything other than conservative.⁴³

Roosevelt, like many progressives as well as conservatives, believed the large corporations that were then being assembled “are an inevitable development of modern industrialism.” As governor of New York, he gradually began to speak out against trust abuses in a moderate and measured way and concluded his last annual message to the New York State Legislature by listing a catalogue of trust evils and calling for corporate publicity. Corporate misrepresentation of material facts, overcapitalization, unfair competition, monopoly pricing and unfair treatment of workers had to be stopped. In his letter accepting the nomination for the vice presidency he took a stronger position on trusts balanced with respect for the accomplishments of business, noting “real abuses” at the same time that he repeated his caution against unwise legislation. He clearly saw the need to mollify the antitrust agitators for the sake of American prosperity. Publicity, taxation and “regulation, by close supervision, and the unsparing excision of all unhealthy, destructive and anti-social elements” were Roosevelt’s remedies.⁴⁴

As president a year later he delivered a message to a joint session of Congress in which he argued for federal supervision of trusts to be coordinated with regulation by the states. (In the same speech he proposed the creation of the Department of Commerce and, within it, the Bureau of Corporations.) Caution and moderation were again the watchwords: “Many of those who have made it their vocation to denounce the great industrial combinations which are popularly, although with technical inaccuracy, known as ‘trust,’ appeal especially to hatred and fear. These are precisely the two emotions, particularly when combined with ignorance, which unfit men for the exercise of cool and steady judgment.”

Speaking on April 9, 1902, at the Charleston Exposition, Roosevelt packaged his ideas about business regulation as compactly as possible while he also made clear the need for federal intervention:

This is an era of great combinations both of labor and of capital. In many ways these combinations have worked for good; but they must work under the law, and the laws concerning them must be just and wise, or they will inevitably do evil; and this applies as much to the richest corporation as to the most powerful labor union. Our laws must be wise, sane, healthy, conceived in the spirit of those who scorn the mere agitator, the mere inciter of class or sectional hatred; who wish justice for all men; who recognize the need of adhering so far as possible to the old American doctrine of giving the widest possible scope for the free exercise of individual initiative, and yet who recognize also that after combinations have reached a certain stage it is indispensable to the general welfare that the Nation should exercise over them, cautiously and with self-restraint, but firmly, the power of supervision and regulation.134

Roosevelt tried to preserve the good of big business while carefully regulating its excesses despite the occasional bold public gesture like the Northern Securities suit. Of all the remedies he favored, the one he called for most frequently and before all others was publicity, one of the most conservative of the various approaches to trust regulation then on the table. In the end he neither attacked the trusts aggressively through litigation nor presided over the passage of meaningful trust law reform.⁴⁵

Roosevelt’s speeches regarding trust regulation were typically reasonably balanced and respectful of honest big business, despite the occasional war whoop. As the 1902 midterm elections drew closer and his attempt to settle the anthracite coal strike that fall antagonized many business leaders, he became cautious again as the administration embarked on the project of drafting trust legislation. But he was keenly aware of the loud public demand for some kind of reform. The trick was to keep both sides happy and, at least until the elections had passed, Roosevelt did a masterful job.

A speech he gave in Cincinnati on September 20 following a late-summer speaking tour through New England illustrates his caution. A hand-edited copy of a typed draft of the speech is included in the Roosevelt papers. The speech was much like others on the subject, praising the contributions of great businessmen and big business even as he called for regulation of unscrupulous businessmen and monopolies. The edits are especially revealing of Roosevelt’s efforts to temper himself in his comments about business and to increase the intensity of praise he heaped upon businessmen.

For example, the phrase “Wherever monopolistic tendency exists” became “Wherever a substantial monopolistic tendency can be shown to exist.” Instead of arguing that monopolies should be “curbed,” he wrote they should be “controlled.” “The evils in big corporations” became “any evils in the conduct of big corporations.” “The trusts” became “the so called trusts.” “Moreover, in but very few cases” do trusts monopolize became “in very few, if any, cases,” do trusts monopolize. Similar changes appear in the markup of a speech given at Providence in August. If nothing else, this illustrates Roosevelt’s considerable political skill as he tried to walk the tightrope between the progressives and plutocrats of his own party.⁴⁶135

The trust problem was a fast-moving target. Early in the summer of 1902, Roosevelt publicly designated Maine Representative Charles Edgar Little-field as the administration’s congressional point man to develop trust legislation. Knox worked with Littlefield to prepare what became the Littlefield bill, H.R. 17, taken up by Congress in a slightly different form in February 1903. The Littlefield bill inaugurated the federal incorporation era. It would also serve as its high point.⁴⁷