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MUCH ADO ABOUT NOTHING

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THE FEDERAL INCORPORATION ERA

The long decade from 1900 to 1914 unleashed a flood of corporate reform activity in Congress. No fewer than sixty-two unsuccessful bills embraced federal incorporation or federal licensing. An additional eight attacked overcapitalization and seven more tried to create some form of securities regulation. Six would have protected minority shareholders from abuses by controlling interests, signaling that this new class of public investor was becoming an increasingly influential force in American economic life. A slowly dawning comprehension of the complexity of the corporations problem is reflected by the fact that only five purely antitrust measures were introduced.

Antitrust concerns remained central. But the growing congressional understanding that the corporations problem was bigger than monopoly alone led federal incorporation or licensing proposals to become the most frequently introduced type of antitrust legislation. Antitrust reform came to share the stage with other matters.

Thirty-two federal incorporation bills were introduced between the Industrial Commission’s final report in 1902 and the Panic of 1907, with an average of about five a year during the next three years and only three in each of 1912, 1913 and 1914. The relatively steady march of the bills reflects the strong desire of the elected branches to constrain the Supreme Court’s freedom to interpret the Sherman Act, a desire that began to relax only when the Court adopted the flexible and economically sensitive rule of reason in the 1911 Standard Oil case. The trajectory of the bills tracks Congress’ expanding appreciation of the distinct issues of trust regulation, corporate regulation and financial regulation.

Internal corporate governance matters, which traditionally were regulated by the states, sometimes figured in the federal incorporation debate. A number of bills proposed during this period would have imposed strict federal standards of managerial and directorial conduct. A few were so bold as to demand prison for malfeasant managers.¹137

Bills introduced in 1905 and 1906 focused largely on monopoly and required federal incorporation or licensing for interstate businesses. A frequent target was businesses supplying food or fuel products for which consumer demand was relatively inelastic. Bills of this sort were introduced as late as 1909 as were federal incorporation bills in 1910. Proof that a corporation was neither overcapitalized nor a monopoly was a universal requirement.²

The shift in issues addressed by federal incorporation bills over time shows the influence of the developing stock market. All of the bills that dealt only with overcapitalization, and thus securities, were proposed between 1907 and 1910. This was a natural response to the Panic of 1907, which exposed the speculative risks some banks and trust companies had taken and the serious damage they inflicted upon the nation’s economy. Regulating overcapitalization now was treated as much as a banking and economic problem as it was as an antitrust problem. Securities bills, starting in 1907, focused on the same concerns.³

A few measures demonstrated a growing understanding of the way the giant modern corporation had shifted American business from industry to finance and had transformed the stock market from a forum for allocating capital to an institution that facilitated the accumulation of wealth from speculation. Perhaps the most extraordinary illustration of this increasing awareness is S. 232, introduced in the Senate late in the game in 1911. Its focus on overcapitalization aimed at the heart of the antitrust attack. It would have replaced traditional state corporate finance law by preventing companies from issuing “new stock” for more than the cash value of their assets, addressing both traditional antitrust concerns and newer worries about the stability of the stock market by preventing overcapitalization. But it would have done much more.

S. 232 was designed to restore industry to its primary role in American business, subjugating finance to its service. It would have directed the proceeds of securities issues to industrial progress by preventing corporations from issuing stock except “for the purpose of enlarging or extending the business of such corporation or for improvements or betterments,” and only with the permission of the Secretary of Commerce and Labor. Corporations would only be permitted to issue stock to finance revenue-generating industrial activities rather than to finance the ambitions of sellers and promoters.

S. 232 would have restored the industrial business model to American corporate capitalism and prevented the spread of the finance combination from continuing its domination of American industry. Following as it did the Panic of 1907 and the resulting depression, it also was designed to preserve the market as a tool for allocating capital rather than as a speculative playground.138

Just as S. 232 tied together antitrust, business and securities issues, traces of the new interest in securities regulation appeared throughout the federal incorporation period. Securities regulation as an independent force would slowly begin to emerge from a legislative chrysalis after 1907. Conceived in the wake of the panic and the investigations that followed, it pursued its own legislative path to maturity in the aftermath of the Great Crash. On its way, it passed through three stages, each with a different focus: the antitrust stage, the antispeculation stage and the final and successful consumer protection stage. Securities regulation for trust control was a perennial aspiration and with it came a more subtle but nonetheless palpable hope that new laws could control the economically destabilizing speculation that distorted the market’s allocative functions. Speculative binges brought on by the instability of watered stock increased margin trading and short selling and threatened the stability of a banking system suspended within a decentralized and loosely regulated currency system. Banks held barrels of stock as collateral for margin loans, collateral that could turn back into water after a bad week or two on Wall Street. Sheltered by the dark corners of the National Banking Act, banks sometimes conjured up other ways to profit from speculation. Securities regulation scored for banking and economic stability became the theme following the Panic of 1907. The first two stages, the antitrust stage and the antispeculation stage, united, with no success, in 1914.

The federal incorporation period mostly involved regrafting antitrust reform onto a matrix woven of publicity, corporate finance and, to a lesser but nonetheless distinct extent, corporate governance. Overcapitalization was the central antitrust issue that held the framework together; while it started to lose its grip by the end of the decade, it remained important for several decades more, particularly with respect to products with inelastic demand like agricultural commodities. Railroads, as natural monopolies, received perennial attention and attempts to control utility overcapitalization followed later in the decade. The disclosure remedy envisioned by the proposed legislation was a regulatory tool aimed principally at exposing overcapitalization to reveal monopoly and speculation, yet hints of investor protection began to emerge.⁴

This was the landscape of the federal incorporation era. It was gradually laid out over the economic and financial topography of the United States. Congress and the executive tried to shape these developments at the start of the century, to take hold of the new corporate economy and mold it in ways that would subjugate corporate behavior to some notion of responsible public conduct. But resistance by conservative Republicans and Roosevelt’s own erratic behavior disrupted any regulation that might seriously have interfered with business. Rather than control the developing corporate economy, they chased it, so that business regulation became a cooperative project between business and government rather than one of federal control. In the end, business was allowed to organize, capitalize and manage as it saw fit. By the time of the major federal antitrust reforms in 1914, the Clayton Act and FTC Act, the moment for federal regulation of business had passed. All eyes were turning to the stock market.139

The federal incorporation movement was a failure, but some modest reform did emerge. The only significant corporate legislation, except for some railroad rate regulation that gradually increased the powers of the ICC, was the Nelson amendment to the Department of Commerce bill. The resulting Bureau of Corporations, an investigative body, essentially served as a continuation of the Industrial Commission. One political effect of its creation was perhaps at least as important as its work. Its introduction into the debate over federal incorporation threw sand in the gears of progress of far more extensive regulation. It succeeded admirably. It also placed such minimal regulatory power as was created directly into the hands of Theodore Roosevelt.

THE LITTLEFIELD BILL OF 1903

The most important bill in the history of the federal incorporation movement was the Littlefield bill. First introduced in the House in 1901, the Littlefield bill was reintroduced as a substantially changed draft in 1903, debated by the House in February 1903 and passed unanimously before it was amended and killed in the Senate. The Littlefield bill was important because it was the only federal incorporation measure during the fourteen-year period from the turn of the century to the start of World War I to be seriously debated in either house and passed by at least one. Only the tepid Nelson amendment, which created the Bureau of Corporations within the Department of Commerce and Labor, succeeded as an indirect corporate control measure.⁵

The Littlefield Bill as Federal Incorporation

The Littlefield bill was called an antitrust measure. Its principal focus was overcapitalization. But it was also among the very first federal incorporation proposals. As the Committee Report both stated and illustrates, the premise of the bill was that overcapitalization was the principal “evil” created by the trusts and the cause of all others. These included monopoly, corporate financial irresponsibility, managerial misbehavior and, almost as an afterthought, investor fraud. While nominally an antitrust measure, the Littlefield bill would have operated precisely like most federal incorporation bills. The only meaningful difference was the absence of a federal incorporation or licensing requirement. But the bill’s reporting requirements and its proposed ICC rulemaking and investigatory powers served the primary purposes of federal licensing. Coming as it did directly on the cusp of the transition from direct antitrust regulation to federal incorporation, and in light of its broad substantive overlap, the Littlefield bill should be considered to be among the latter. The story of its failure reveals a lot about why the federal incorporation movement failed. It is also a personal drama of political rise, betrayal and fall.⁶140

Littlefield

Charles Edgar Littlefield was Teddy Roosevelt’s choice to lead the charge for trust reform in Congress. He was first elected to the House as a Republican from Maine in 1899 and almost instantly asserted leadership, making several impressive and bold speeches on important issues. He was “admired almost without exception throughout the party in the House.” McKinley consulted him on matters of policy, which both reflected and increased Littlefield’s early influence. And Littlefield was known as a leader in the antitrust crusade, as one account put it, a “household name.”

Littlefield’s prominence and reformist bent made him an understandable choice to represent trust reform. But he was, perhaps, a poor political choice to manage the antitrust fight for a controversial president only recently described by Mark Hanna as “that damned cowboy.” He had many of the more fearsome qualities the plutocracy attributed to Roosevelt without the underlying political wiliness. He was idealistic, persistent and, perhaps fatal for any politician but Roosevelt, arrogant and obstinate to a fault.

Littlefield’s capacity to make enemies almost equaled his president’s. In November 1902 he led an unsuccessful insurgency to topple Joe Cannon and make himself speaker of the House. Cannon emerged with little more than a scratch. The Chicago Daily Tribune reported the president’s neutrality during the battle and described Littlefield’s “pretensions” as meeting “with laughter,” at least in part because he had “bolted his party on practically every important question which has arisen since he became a member of the house.” Littlefield found himself increasingly isolated. The powerful conservative Republicans on the Senate side fretted over his increasing radicalism. But he had been named as Roosevelt’s lieutenant and worked with Attorney General Knox throughout the fall of 1902. In light of public attitudes toward Littlefield it is hard to imagine that the politically savvy Roosevelt would have taken him very seriously. In the end Litflefield’s president and party would desert him.⁷141

The Bill

The issues raised by the Littlefield bill and during the course of its debate encompassed most of the problems that plagued all later efforts to pass a federal incorporation law. Littlefield introduced H.R. 17 on December 2, 1901, and it was immediately referred to the House Judiciary Committee. That relatively modest piece of legislation required every corporation engaged in interstate commerce to file financial and capitalization reports with the secretary of the treasury, who would publish annually “for free public distribution” a list of all filing corporations together with information on their financial conditions. False filings were to be prosecuted as perjury. More aggressively, all corporations with watered stock had to pay an annual tax equal to 1 percent of their issued and outstanding capital stock.⁸

When the Committee brought the substitute H.R. 17 before the House on January 26, 1903, it was a bill transformed. In some measures it had been diluted, in others strengthened. Filing was no longer to be with the executive-branch secretary of the treasury but with the independent Interstate Commerce Commission. The filing requirement no longer applied to “every corporation engaged in interstate commerce” but instead to “every corporation which may be hereafter organized” and which engages in interstate commerce. This protected the combinations formed during the great merger wave from the bill’s reach. Instead of annual reports, corporations only had to file reports “at the time of engaging in interstate or foreign commerce,” which may or may not have made a practical difference depending upon how the ICC interpreted it. The Committee bill no longer required the report to include a balance sheet and income statement, but it did give the Commission rulemaking power to enforce the law.

The bill’s finance provisions had changed, too. The overcapitalization tax was gone. On the stronger side, while corporations still had to report their capital, the bill now required them to disclose the method they used to determine the cash market value of property received for stock, “especially” whether they had done so by capitalizing earnings.

The substitute bill did cover corporate governance matters not addressed in the original. Each corporation had to file its charter and also “a full, true, and correct copy of any and all rules, regulations, and bylaws adopted for the management and control of its business and the direction of its officers, managing agents, and directors.” In contrast to the earlier bill, which asked only the corporation’s treasurer to certify its information, the Committee bill required that the “president, treasurer, and a majority of the directors of such corporation shall make oath in writing on said return that said return is true.”142

While the overcapitalization tax had been dropped, the committee bill approached the underlying issue of monopoly in a more traditional way. The three new substantive sections it added would be its downfall in the Senate, said Alabama Representative Henry Clayton, reflecting the Democrats’ skepticism that the Republicans had drafted a bill that was intended to pass. A new section 5 prohibited common carriers from granting rebates and other similar advantages to shippers in interstate commerce. Section 6 denied the use of the means of interstate commerce to any “corporation engaged in the production, manufacture, or sale of any article of commerce” that accepted rebates granted in violation of section 5, tried to monopolize its industry, or otherwise attempted to destroy competition in “any particular locality.” And section 7 penalized interstate common carriers for knowingly transporting products that were produced, manufactured, or sold in violation either of the Littlefield bill or the Sherman Act. Finally, the committee bill added a provision for a private right of action and treble damages for any person or corporation injured by any behavior made illegal by the act.⁹

The minority report issued on January 29 foreshadowed the terms of the debate. The Democrats wanted the bill to make overcapitalization a ground for declaring bankruptcy, ensure that corporations operating in interstate commerce remained subject to state jurisdiction, impose a capitalization tax on all corporations with capital of more than $200,000 and remove the tariff from a list of domestically trust-produced items.¹⁰

The Debate

The Littlefield bill failed because of politics. But the debate itself remains important because a number of policy arguments aired during its course were repeatedly used to block federal incorporation throughout the decade. Both sides understood that the American public demanded some kind of trust legislation and that Congress had to provide it. Almost any congressman voting against the bill would have put himself in political jeopardy. Hence the bill passed the House without amendment on February 7, 1903. The vote was 246 to 0, with 6 members answering “present” and 99 members not voting. Nobody could vote against it. But not everybody would vote for it. Many Democrats did not think the bill had gone far enough in regulating trusts or corporations. Many Republicans were beholden to their big business constituents.¹¹143

The Democrats’ Support

Democratic support for the measure was clear and conflicted. Contrary to some accounts of their position during this period, one issue that was not on the table was corporate size. Democrats were not opposed to big business and they did not ground their opposition to trusts in the notion that big was bad. In fact, leading members of the Party repeatedly acknowledged the efficiencies and other benefits created by large corporations.

The real issue was the way the large enterprise was used. Combinations created for monopoly should be restrained. So should combinations created for the sake of finance. Even the largest industrial corporations were legitimate as long as they stuck to their business.

The first aspect was distilled by the brilliant Mississippi congressman John Sharp Williams: “The Democratic party is not afraid of the right sort of combinations of capital. Nobody is afraid of combinations of capital…. It is not a question of the amount, but it is a question of the method in which the combination of capital uses, and is permitted by law to use, its energies after the combination is formed.” Corporations formed to monopolize industries were improper uses of capital combination.¹²

Democrats also meant to maintain the business of business as business. Corporations formed for the purpose of industry, to make and sell things, were legitimate. Corporations formed for the purpose of serving the financial goals of their promoters were not. North Carolina Representative Claude Kitchin captured his party’s appreciation of the distinction between finance and industry: “We are not against men or riches, or corporations, or big corporations. We admit that large capital or large manufacturing plants can produce more cheaply than small ones. No man denies their right to this advantage. We deny the necessity of enormous combinations for economical production.” Industrial corporations, even the very biggest, were assets to the nation. Combinations that were formed for financial purposes were not.¹³

The Democrats were also chagrined that regulation they believed they had nurtured as their birthright might be stolen by a Republican congress. Federal incorporation had been a plank in the Democrat’s platform in 1900, and the Democrats had, for years, been clamoring for strong trust legislation. But Congress and the executive branch had been controlled by Republicans since 1895 and Republican Benjamin Harrison had presided over the brief interlude between 1889 and 1891 during which the Republicans again controlled both houses. It was on this Republican watch that the Sherman Act was passed. The Sherman Act had proven to be difficult to use in the hands of the Supreme Court and new legislation was needed. Palpable in the debates was the Democrats’ resentment that Republicans, having come late to the cause of effective trust regulation, would be credited with its enactment.¹⁴144

Henry Clayton made the point: “Hereafter, when you discuss the Darwinian theory, which is applicable in the case of mollusks and monkeys, make some application of it to the Republican party…. That party has at last reached the monkey stage, where it has vertebrae and a tail, and monkey-like imitates some of the good actions of the Democratic party.”¹⁵

The Democrats were also convinced that the Republicans were hypocrites. The Littlefield bill was weak regulation to begin with and had been further watered down by the committee. Stronger measures were needed. It also rapidly became clear to all involved that the Senate, under the firm control of the pro-business Republican leaders, would never allow it to pass. Thus the House Democrats were especially bitter that their Republican rivals would reap the political rewards of trust reform without bearing the burden of alienating the plutocrats.

Support it as they did, the Democrats were unhappy about having to rally behind such inadequate reform legislation. One particular complaint was that the Littlefield bill failed to address the high tariffs that many Democrats and a number of economists and businessmen credited with substantially stimulating the growth of trusts by creating a protectionist environment in which they could flourish. Besides, the bill was mostly a publicity measure and the Democrats thought that publicity alone simply was not enough to address the trust problem.

The Issues

The overwhelming concern with overcapitalization and overcharged consumers as the primary problems created by trusts resounded throughout the reports and debates. The Committee Report was quite explicit. It began by surveying the statements of a number of policymakers and authorities. It quoted Roosevelt as well as the attorney general on overcapitalization: “Overcapitalization is the chief of these [trust evils] and the source from which the minor ones flow.” It also quoted at length from James B. Dill’s testimony before the Industrial Commission on this issue and the Chicago Conference on Trusts transcript as well as from other sources on the value of publicity in preventing trust overcapitalization. Overcapitalization was believed to hurt investors too, but few people yet treated this as an important concern.

Publicity was the principal remedy proposed by the bill. Its main purpose was to expose overcapitalization to the public, especially consumers, in a way that would discourage the practice or lead to government action against the trusts. While the concerns with large corporations were broad and general, it nevertheless becomes clear upon a careful reading of the literature of the period that the major problem was monopoly above all else, and certainly above investor welfare. Only some Americans were investors, but all Americans were consumers. At a time when trusts dominated the supplies of necessities like beef, sugar, kerosene and the like, the problem of overcapitalization leading to overpricing was serious.145

The Committee Report made this clear. “It is through the medium of consumers, the purchasers of its products, that the overcapitalized combination finds its most extensive and oppressive contact with the public.” While there was some concern expressed for investors, it was far from central.

The real purposes of overcapitalization are believed to be of an entirely different character, and they all have an injurious effect upon the public. The purpose to create for the stock a fictitious value and thus arbitrarily increase the wealth of the persons interested is undoubtedly the main purpose in overcapitalization. In order to accomplish this, in nearly every instance the price to the consumer must either be increased or maintained above its natural normal level…. As capital is entitled to a fair return, the public is vitally interested in the amount of capital necessary to carry on a given enterprise.

Finance caused monopoly. “The attempt to monopolize the market is not the principal purpose, but an incident thereto, and follows as a necessary corollary of the condition…. Unwarranted dividends and not monopoly are the moving cause. Monopoly is invoked to produce that result.”¹⁶

This was a striking statement, coming as it did from a Republican-controlled Congress and Committee. The principal beneficiaries of stock with “fictitious” values were the very financiers the Republicans were accused of helping. The benefit was not so much in holding the overcapitalized stock but in the ability to unload it on the public that expected the large dividends promised by promoters. To sustain these dividends on the stock of an overcapitalized company, and thus to retain the credibility to create and unload more watered stock, meant promoters had to ensure that their corporations charged high consumer prices.

Overcapitalization was not the only issue. The Democrats repeatedly described the high tariff as creating an incubator for trusts. Railroad rebates had been an issue in trust formation since the 1860s and were a particular hot button for congressmen from the South and West, whose constituents had to pay published shipping rates as they watched the trusts ship for a relative pittance. Issues of states’ rights and federal jurisdiction were sometimes raised during the debate and it appears clear that the Democrats as a whole were uncomfortable with the federal government’s power to regulate trusts using the potentially elastic commerce clause. As we have seen, the Democrats preferred to use the more limited federal taxing power in their proposed legislation as, for example, to tax watered stock. The Democrats could accept federal power within clearly defined constitutional limits but did not want to create the opportunity to allow it to expand.146

Later in the decade, when public investment in common stock became more widespread, public attention returned to more general issues of corporate regulation. When it did, its focus was no longer on governance and overcapitalization. It was on the securities markets.

THE FAILURE OF THE LITTLEFIELD BILL

The Sovereign President

The Littlefield bill presented Roosevelt with a prime political opportunity. The president wanted trust legislation, and indeed needed trust legislation, in order to demonstrate the Republican commitment to reform as the critical midterm elections approached in November 1902. As the issue evolved over time, he also came to see how the right kind of trust legislation could satisfy his personal need for power.

Roosevelt and Knox signed on with Littlefield in July 1902. The campaign for trust reform began in Pittsburgh on Independence Day. The president and his attorney general were in that leading industrial city to attend a dinner in honor of Knox, its native son. Roosevelt’s speech kicked off the administration’s drive to pass trust legislation during the 57th Congress, well in time for him to begin his presidential campaign. It also marked the subtle beginning of what would become a blatant reach for power.

The Pittsburgh address was similar in tone to Roosevelt’s other early speeches calling for intelligent and moderate federal regulation. But now he slipped in another theme, the theme of the administration of wealth. Among the problems caused by modern industrialization, he said, were the rise of great individual and corporate fortunes that skewed the national distribution of wealth and power. But wealth was good. Its image stimulated, and its achievement sustained, the creation of great and beneficent enterprise. The thing that really mattered was how the wealth was used. “It is immensely in the interests of the country” that great wealth existed, as long as it was used for good. The polestar was to be justice. And the administration of justice required a powerful authority. New legislation was required, but, whatever its form, “it is infinitely more important that [the new laws] be administered in accordance with the principles that have marked honest administration from the beginning of recorded history.”¹⁷147

The speech is intriguing. It contains some hints about why, by February 17 of the following year, Roosevelt would describe the Littlefield bill as “perfectly idiotic.” It also begins to reveal his vision of the presidency. Roosevelt gave no details of the proposed bill in the Pittsburgh speech. But he did stress several times the overwhelming importance that any legislation be fairly and justly administered. Administration, more than the law itself, was the key to justice and efficiency. It is not surprising that administration of the law would be a natural theme in a speech that ended by honoring Roosevelt’s chief legal administrator. It is also quite evident that administration of the laws was the constitutional function of the president, not Congress or the courts. The powerful authority that would administer justice was none other than Roosevelt himself.

Roosevelt’s desire for personal control of trust regulation had been developing over the course of his young presidency. A good example is his speech at Providence in August in which he characteristically called for judicious, careful and intelligent control of trusts rather than radical measures and noted:

I believe that the nation must assume this power of control by legislation; and where or if it becomes evident that the constitution will not permit needed legislation, then by constitutional amendment. The immediate need in dealing with trusts is to place them under the real, not nominal, control of some sovereign to which, as its creature, the trust shall owe allegiance, and in whose courts the sovereign’s orders may with certainty be enforced… In my judgment, this sovereign must be the National Government.

He was even more direct in Cincinnati in September: “The necessary supervision and control in which I firmly believe as the only method of eliminating the real evils of the trusts must come through wisely and cautiously framed legislation which shall aim in the first place to give definite control to some sovereign over the great corporations.” This would be followed by a system of disclosure. While these speeches do not directly identify executive power, in contrast to general federal power, as the repository for trust regulation, the Nelson amendment creating the investigative Bureau of Corporations, which Roosevelt would turn to instead of the Littlefield bill as his most important trust reform, put the power squarely in the hands of the president.¹⁸148

There is more underlying Roosevelt’s reach for presidential control than a simple desire for power, although that there surely was. Implicit in these addresses, as in many of Roosevelt’s trust speeches of the period, was a strongly held belief in the supremacy of a leader of a certain type, a supremacy necessary for the public good. It was a belief born of his intellectual and class heritage, a heritage that had passed through Henry Adams to the difficult and imperious John Hay and was the birthright, too, of Roosevelt’s close friend Henry Cabot Lodge. It was a peculiarly mandarin philosophy that understood a certain class of best men to be the appropriate repository of American leadership. Roosevelt saw himself as the embodiment of the qualities of his class. The Littlefield bill would have dispersed what Roosevelt came to believe was his rightful power into the new model of the relatively uncontrollable and dangerously democratic independent regulatory agency. In the end, as Roosevelt recognized, the federal government got less power than it might have, but at least it was power in his own hands.¹⁹

By the time the Littlefield bill was taken up in the House, Roosevelt was already more confident of his own command following the party’s success in the midterm elections. Yet he remained cautious in light of his powerful ambition to be elected president in his own right. His confidence in his political ability and policy judgment had also been reinforced by positive public reaction to the way he helped settle the disruptive and very public Pennsylvania anthracite coal strike that took place during the summer and fall. Perhaps a bit immodestly and with a touch of exaggeration, in letters to Lodge and his Harvard classmate (and Morgan partner) Robert Bacon, he compared both his travails and his instincts to Lincoln’s, the last president to have accumulated and exercised the strong centralized power that Roosevelt sought. He identified the modern struggle for justice between labor and capital as comparable to Lincoln’s own struggle to save the Union and saw his duty as achieving that goal: “[I]f I had failed to attempt [to settle the strike] I should have held myself worthy of comparison with Franklin Pierce and James Buchanan,” Lincoln’s two predecessors whose inactivity and appeasement helped to bring about the Civil War.²⁰

Roosevelt was personally disgusted by the behavior of the coal mine operators during the strike and their expressed attitudes toward the miners themselves. In contrast he was, at least at first, deeply impressed by the quiet dignity and common sense of United Mine Workers’ President John Mitchell. The plutocrats needed to be controlled by someone with the strength to control them and the working man—elevated in Roosevelt’s estimation by Mitchell’s demeanor—deserved protection.²¹149

Roosevelt walked a fine line during that autumn of 1902. His sympathy for the miners, especially after he had supported Knox’s filing of the Northern Securities suit, brought the wrath of Wall Street crashing down on his head. Its already intransigent friends in the Senate were resistant to reform. The Littlefield bill was perceived to be highly regulatory and the Senate leaders made their opposition clear. Although the debate over the Department of Commerce bill had been strenuous enough, its Nelson amendment provided for emasculated regulatory power and, as a consequence, had a fighting chance of passing. The combination of political feasibility and Roosevelt’s desire to expand his own powers, his power to administer the laws with justice, were important factors in the way the successful legislation was drafted and Littlefield defeated. His antitrust rhetoric and the fact that power under the bill was lodged in the hands of the “trust buster” assured reasonable public support.²²

Roosevelt Betrays Littlefield

The combination of political realities and Roosevelt’s growing desire for the personal power to regulate business led to his betrayal of his chosen lieutenant. While Littlefield’s fall from presidential grace appeared to be swift, it had begun almost from the moment Roosevelt asked him to join forces. On July 5, The New York Times reported from Oyster Bay that Roosevelt and Knox had asked Littlefield to work with Knox to prepare the administration’s trust bill. Although correspondence with powerful senators during this period is sparse, it must have been the case that swift reaction from the Senate leadership, and presumably others, quickly diminished Roosevelt’s enthusiasm for the command of the scrappy congressman from Maine.

Roosevelt embarrassed Littlefield in an incident widely reported by the press that foreshadowed what was to come. He began his speaking tour through New England and the Middle West in August. Among the stops he was scheduled to make was, at Littlefield’s personal request, the latter’s hometown of Rockland, Maine. Roosevelt simply cancelled the appearance without any explanation. The press had a bit of a field day at the expense of the controversial congressman, with the Times noting that the “fact that Rockland had been dropped from the itinerary excited widespread speculation and many smiles.” Commenting on the event the paper interjected, perhaps disingenuously, that “[o]f course there is not the slightest reason to believe that Mr. Littlefield has been ‘turned down’ by the President after the latter had encouraged him to go ahead with his anti-trust plans.” The Times more generously attributed the cancellation to Roosevelt’s wish to avoid further talk of the trust “triumvirate of Roosevelt, Knox and Littìefield,” perhaps motivated by Roosevelt’s desire to avoid the appearance of a power grab.²³150

It is a curious fact that Roosevelt’s papers include no correspondence between Roosevelt and Littlefield during the entire period from July 4 through the adjournment of Congress the following March. One might have expected to see some written communication between the two of them on a matter of such great importance to the president. Correspondence might be all the more expected because Roosevelt spent most of the summer in relative official seclusion at Sagamore Hill and would not likely have had much personal contact with Littlefield. It is at least plausible to infer that, between July and late August, Roosevelt had been lobbied heavily by Republican senators, although there is little written evidence to back this up. Indeed, the manuscripts show very little correspondence to or from Roosevelt with anybody on the trust issue between July 1902 and March 1903. Nonetheless, in several letters written from Oyster Bay in August 1902, he reported that the Republican National Congressional Committee was expressing deep concern about the midterm elections, especially about the lack of campaign contributions, acknowledging that perhaps he had alienated business Republicans by overstating his case against the trusts. Roosevelt’s fall correspondence was focused mainly on the coal strike and the midterm congressional elections, while foreign affairs began to dominate somewhat later in the winter of 1903.²⁴

Knox gave an important speech in October in Pittsburgh, where he had been sent by Roosevelt as a personal substitute. In it he confirmed the administration’s determination to pass the kind of comprehensive legislation Littlefield was drafting. Knox outlined trust measures more aggressive even than Littlefield’s approach and certainly more intrusive than the measures ultimately passed. The speech was considered so important that it became the public touchstone for discussions of the administration’s antitrust policy. As we have seen, the House Committee Report treated it as authoritative. The New York Times referred to it as “being accepted on all sides as a classic on the subject of trust legislation.”²⁵

Meanwhile, and apparently unknown to Littlefield, Roosevelt had been meeting with Senate Republican leaders and came to realize that a bill as “radical” as the Littlefield measure could not pass. As early as November 1, it was reported that the president was supporting “‘the Attorney General’s antitrust bill,’” an apparent reference to Knox’s outline in the Pittsburgh speech. Knox drafted three bills representing the administration’s position for the House Judiciary Committee in the late fall. At the same time, “the administration” signaled that the Nelson amendment and the Elkins anti-rebate bill were acceptable substitutes. Massachusetts Senator George Hoar introduced his own bill in early January and his close friendship with Roosevelt’s confidante, Henry Cabot Lodge, led to some public speculation that his was the bill that the administration would support. While Littlefield continued to work on the basis of Roosevelt’s earlier support and his association with Knox, the ground was shifting beneath him.²⁶151

Perhaps he should have sensed this shift in all of the confusion of reports. It is hard to believe that he did not read the newspapers. Perhaps he did, and did not care. Littlefield, in the heat of his crusade and perhaps intoxicated by the public attention after his defeat for the speakership, worked either oblivious to or in disregard of the president’s changing attitudes. As early as the fight with Cannon, the Times reported that there had in fact been no solid basis to conclude that Littlefield was leading the administration’s charge on trust matters, and indeed that Roosevelt had largely cut him out. Subsequent events suggest that this was true. On January 23 it was reported that the president was not happy with the Littlefield bill: “It is made clear that it is not an administration measure and does not represent entirely the views of the administration on what anti-trust legislation should be enacted by this congress.” But it was only when the bill was languishing in the Senate several weeks later that Littlefield visited Roosevelt to affirm his backing. It was then, and evidently for the first time, that the president told him, with characteristic bluntness, that his bill was worthless. Without telling Littlefield, and even as the debate over his bill proceeded in the House, Roosevelt had shifted his support to three separate, and ultimately successful, measures: the Elkins Anti-Rebate Act outlawing price discrimination by railroads; a bill to allow the courts to expedite antitrust prosecutions; and the Department of Commerce Act which, with the Nelson amendment creating the Bureau of Corporations, became known as the administration’s antitrust measure.²⁷

It is hard to feel terribly sorry for Littlefield. It appears that few of his contemporaries did. He must have read the newspapers and felt the lack of communication from Roosevelt. Perhaps he was reassured of the president’s support because of Knox’s cooperation, but by early November it was clear to everyone else that the president himself had cut Littlefield out of the antitrust campaign and that Knox was drafting his own bill. Perhaps his own “tenacity of opinion when he once makes up his mind” contributed to a certain blindness that extended to his party’s fairly strong opposition to trust legislation in the Senate. The Department of Commerce bill had been making its way through the Senate since its introduction on December 4, 1901, and the Nelson amendment finally had been introduced on February 9, 1903. He had to have seen that the politically vital Senate, where real control of the Republican Party rested, would be pushing its own measures.²⁸152

Roosevelt’s own account of the matter suggests a later date for his abandonment of Littlefield at the same time that he provided evidence of an earlier switch. In a single letter where he specified the timing of his change, he described his own embrace of the new approach to have been as early as Knox’s Pittsburgh speech. Writing on February 3 to Lawrence Abbott, the son of Roosevelt’s friend and frequent editor, Lyman Abbott of The Outlook, he explained: “In the trust matters I am having one astounding development here. A month ago I had the fight definitely as to whether we should have legislation or not…. I then asked for the three measures which Knox had been devoting himself to preparing along the lines of his Pittsburgh speech.” Those measures were the three successful measures introduced in and pushed by the Senate, of which only the rebate measure was at all similar to anything in the Littlefield bill. Of these he wrote, “[p]ersonally I regard the Nelson amendment on account of the supervision and publicity clauses as the most important.” Roosevelt reported “very much secret opposition” to the Elkins and Littlefield bills, with “the extremists” plotting to have the House reject the Nelson amendment and the Senate reject Littlefield, leaving no trust legislation at all.²⁹

Political Realities

It made good political sense for Roosevelt to shift to the Nelson amendment, which focused on investigation and publicity as the remedy, rather than the Littlefield bill, which even in its diluted form provided more intrusive and substantive regulation. The Nelson bill allowed him to claim victory in the trust battle and thus to have fulfilled his promise to the public without unduly alienating the conservatives of his own party. At the same time, the location of the Bureau of Corporations in the cabinet-level Department of Commerce gave him the centralized control he so badly wanted.

Despite his own professed success, Roosevelt remained sensitive to possible public accusations of betraying the cause of trust reform. On December 27 he complained bitterly to a correspondent who was pushing him to insist on stricter trust measures than the simple and attenuated publicity contained in the Nelson amendment, claiming with some justification that he had always stood for publicity as the appropriate regulatory approach: “But are you aware that to make publicity an issue is mere nonsense unless I frame legislation which will give us a chance to get it? Are you also aware of the extreme unwisdom of my irritating Congress by fixing the details of a bill, concerning which they are very sensitive, instead of laying down the general policy?” Knox and he had started to work more cooperatively with Congress, Roosevelt having come to understand that dictating legislation was sure to cause him trouble.³⁰153

Roosevelt had not exactly ingratiated himself with Wall Street, either. The Northern Securities suit that Knox filed the previous spring had “stunned” Morgan. Roosevelt’s sympathy for the workers and undisguised distaste for the operators during the anthracite coal strike made things worse. The New York Sun, edited by Morgan’s friend and client, William Laffan, had attacked Roosevelt so bitterly that he impugned Laffan’s editorial integrity by accusing him of speaking the voice of Morgan. In response, Laffan denied that Morgan had applied any pressure on the paper to attack Roosevelt and took full responsibility for the article. Roosevelt’s friend, “the professional journalist, sycophant, and anti-Semite, Joseph Bucklin Bishop,” on the other hand, wrote that Morgan indeed was behind the Sun’s attack, describing “his bitter personal feeling toward you.” But Roosevelt’s troubles ran deeper: “There is in his circle in Wall Street an undercurrent of hatred toward you of which this is a surface indication.” While it is likely that this is overstatement, it must have hurt Roosevelt who, as we have seen, cared deeply that the powerful liked and respected him.³¹

Roosevelt did keep a pipeline open to Morgan through Bacon and Bacon’s partner in the Morgan firm, George Perkins. Roosevelt had also developed a real friendship with Hanna, who seems to have become both fond and respectful of Roosevelt following his initial dismay, grounded only partly in his genuine affection for McKinley, at Roosevelt’s ascension to the White House. Hanna was a particularly important asset to Roosevelt because he was independent of Aldrich, Spooner, Platt and Allison at the same time that his business bona fides were unquestionable. His childhood friendship with John D. Rockefeller gave Hanna even greater business credibility. Roosevelt had to have realized through these allies that he would have significant trouble achieving any sort of trust legislation and that it was critical that anything he supported would at least be acceptable to Wall Street.

The End of the Littlefield Bill and the
Creation of the Bureau of Corporations

The shift from proposals to statutes happened fast. Politics was the driving force. And Roosevelt was at least as much a follower as a leader. Pressure came both from Republicans and Democrats. On January 17, J. C. Shaffer, president of the Chicago Evening Post, warned him, “I discovered in the past three days that there was a great change in the sentiment of some of the leading senators, and the progressive men in the house, in regard to needed legislation on trusts [and] finances.” The scheming was not over. On February 3, Jeremiah Jenks wrote a somewhat agitated letter to Roosevelt describing “an ingenious plan” by the Democrats that he learned of while in New York several days earlier. Jenks reported that they were plotting to introduce a bill permitting corporations to incorporate voluntarily under a federal law that would mimic the New York Business Companies Act of 1900. Roosevelt had approved that very law while governor. “They think that it will rather seriously embarrass the Republicans to reject it, and that it is too rigid a bill for them to approve.” Jenks characteristically waffled, noting to the president at this late date and with rumors of the Democratic plot, that federal incorporation “is probably constitutional.” He had earlier objected to federal incorporation while he served the Industrial Commission because “it was altogether too centralizing.” Now Jenks changed his mind and informed the increasingly imperial Roosevelt that he would support such a bill if proposed. But the path of legislation had been plotted out and was in the process of following its course. House debate on the Littlefield bill would begin the next day.³²154

The Littlefield bill’s progress was closely followed by the national press, which reported every step along the way. But it progressed through a legislative obstacle course. The Department of Commerce bill had been debated, passed by both houses and was in conference committee at the time the Littlefield bill was taken up. On February 9, the Senate conferees approved the Nelson amendment. That amendment added a new Bureau of Corporations to the Department of Commerce and was considered, in its investigatory and publicity capacities, to be the Senate’s antitrust measure. The House strenuously objected to this last-minute Senate interjection into its own antitrust debate, correctly fearing that it was designed to displace the Littlefield bill. The Elkins Anti-Rebate bill, covering railroad rebates and thus overlapping Section 5 of the Littlefield bill, had been introduced in the Senate on January 21, 1903: Senate leaders were pressuring Littlefield to drop the anti-rebate section of his own bill on the same day that debate on that measure had begun in the House. A legislative race to set the terms of trust legislation had begun between the House and Senate.³³

During the three-day House debate on the Littlefield bill, the Senate passed with almost no comment the Elkins bill, the expediting bill and the Nelson amendment. It referred these measures to the House before that latter body’s debate on the Littlefield bill had even ended. The day after the Littlefield bill passed, the conference committee on the Department of Commerce bill agreed to include the Nelson amendment which, according to The New York Times, was “the anti-trust measure favored by the administration.” It was clear by then that nobody thought the Littlefield bill had a prayer.³⁴155

The Littlefield bill was killed off in the Senate on February 27 after that body voted to strengthen it by amendment. Littlefield, almost completely isolated now and refusing to accept reality, fought to the end, voting as the lone House Republican against the Department of Commerce bill and refusing to vote at all on the Elkins bill. That latter measure passed the House with lukewarm Democratic support on February 13. The expediting bill and the Department of Commerce Act along with the Nelson amendment passed on February 5 and 14, respectively. These results were celebrated in some quarters as the best that could be achieved, while most accounts recognized the acts as relatively ineffectual. Business interests were generally pleased. What had happened?³⁵

Teddy Roosevelt’s political survival instincts had gotten the better of him. The Republican Senate, despite the presence of some reformers, was run by Aldrich and his cronies, and as discussions continued throughout January it became obvious to Roosevelt that he would never win the more aggressive measures he favored. But his political survival might have been in jeopardy if it looked as though he were running from the strong trust program he had announced and that he and Knox had been publicly pursuing. Even as his agenda changed, he could not withdraw his support for the Littlefield bill without a credible alternative that would pass with the conservatives but at the same time could be displayed as a public victory against the trusts. Thus, until he was secure that trust legislation of some form would pass, he had to remain publicly committed to the Littlefield bill.³⁶

The Department of Commerce and Bureau of Corporations promised to give Roosevelt considerable control. The Department itself, as a cabinet-level agency, concentrated a great deal of plenary authority for American business regulation in the nation’s chief executive. As Nelson’s biographer put it: “President Roosevelt was quite enthusiastic over the establishment of the department of commerce and labor and the reorganization and rearrangement of boards and bureaus which it affected.”³⁷

Even when the new legislation was at hand, Roosevelt was hardly home free. Although House Democrats were skeptical of the Littlefield bill’s chances from the beginning, Roosevelt had to deal with a united House in the face of the Senate’s last-minute, and considerably weaker, measures. There was hardly consensus in the Senate, with the pro-business Republican wing still balking at the idea of any trust legislation at all. Roosevelt was also keenly aware that the public had been expecting strong antitrust action.

Roosevelt threatened to call a special session of Congress as a House-Senate standoff became a real possibility. It was at that point that he pulled off a political stunt that assured that the Nelson amendment would pass.³⁸156

On February 7, the day the Littlefield bill passed the unanimous House, Roosevelt announced that it had come to his attention that telegrams had been sent by Standard Oil to six key senators stating Standard’s opposition to any antitrust legislation and bearing the signature of the retired John D. Rockefeller. The telegrams notified the senators that they would be called upon to discuss the matter by Standard’s counsel. With this, it was also revealed that Standard had been pressuring the administration to kill the Littlefield bill and was especially dismayed by the Nelson amendment. The opposition certainly was plausible. It would have been consistent with the interests of the notoriously secretive Rockefeller in light of the investigative and publicity powers the bill would have given the Bureau of Corporations. As Roosevelt intended, the news set off a tempest in Congress and among the public and gave the president the kind of political leverage he needed to kick through the Nelson amendment over conservative opposition. In fact, one story reported him as “very well satisfied with the effect produced” by reports of the telegrams. It was apparent that the Littlefield bill would die in the Senate. It all worked as he had planned. But there was a catch.

Roosevelt’s story was not true—or at least not entirely. One of the senators identified as receiving a telegram said the telegrams were fake. Four of the identified senators denied receiving telegrams at all. One senator close to the administration confirmed the story, but when asked to show his telegram it obviously had not been signed by John D. Rockefeller. Matt Quay published the telegram he had received but its text made clear that it was sent as a response to Quay’s own letter. While some reports credited Roosevelt’s account as true, at least in part, far more suspected that any telegrams that had been sent were instigated by Roosevelt in order to ensure passage of the Nelson amendment. One historical account, although not identifying source materials, claimed that the telegrams never had existed, were Roosevelt’s pure invention, and that he later admitted this, claiming the important thing was that he had gotten his legislation.

Rockefeller’s biographer, Allan Nevins, told a different story. He reported that Rockefeller did not send the telegram, “but it can now be revealed that his son had done so.” John D. Rockefeller, Jr., wrote to Senators Allison, Lodge, Hale and Teller articulating Standard’s objection to all legislation except the Elkins Act. Other Standard employees wrote telegrams opposing the Nelson amendment. John Archbold, Standard’s counsel, did intend to meet with senators, although in the end he thought it necessary to meet only with Aldrich who had, after all, become part of the Standard Oil family after his daughter’s marriage to John D. Rockefeller, Jr., in 1901. Nevins, sympathetic biographer that he was, did not let Roosevelt off the hook. He noted that Lodge had all the facts and could have told them to the president and, implying that Roosevelt either knew or ignored what Lodge knew, concluded that “it is evident that he had deliberately used the Rockefeller bogey to promote his special purposes.”³⁹157

What happened to Littlefield? By early February, Roosevelt was calling the Littlefield bill “idiotic.” Even as debate on the bill had begun, members of the House became aware of the fact that the president had withdrawn his support, which, along with the activity in the Senate, accounts for repeated Democratic comments during the debate accusing the Republicans of cynicism in their support for it. This evidently was the first time that Littlefield showed that he was aware of the fact that his president had abandoned him. He went to the White House and was told rather pointedly that the administration’s support was for Elkins, Nelson and the expediting bill. Littlefield continued anyway, railing like King Lear in the face of an increasingly dwindling audience. By the end of the debate he was being openly mocked.⁴⁰

Things went downhill for Littlefield from that point on. He had been so ostracized by his own party that he was not permitted to speak during the brief House debate on the Elkins bill. His downfall pleased the House leaders whose positions he had so recently challenged. Although he lost the fight for the speakership, he had earlier led the insurgents against the House leadership and won significant internal reforms. He had risen to power quickly, exhibited hubris and fell just as fast. The battle over the Littlefield bill left him politically weakened and publicly ridiculed. But Littlefield was resilient and, evidently, forgiving. Before he retired in 1908 to practice law in New York, he and Roosevelt had one last chance at federal incorporation, in the Hepburn bill of 1908.⁴¹

Federal incorporation as a regulatory approach failed for a number of reasons. But the Littlefield bill failed largely because of Roosevelt’s ambition.⁴²

SOUND AND FURY—THE FIRST REPORT OF THE BUREAU OF CORPORATIONS

Congress was not going to get explicit constitutional power to regulate trusts. Neither was Roosevelt going to be granted the power he wanted for himself. He was not shy about his goals. In his Autobiography he wrote: “My view was that every executive officer in high position, was a steward of the people bound actively and affirmatively to do all he could for the people, and not to content himself with the negative merit of keeping his talents undamaged in a napkin.” The president did not need specified powers to fulfill this stewardship, wrote Roosevelt. He was to do his duty implicit in the office, unless his action was specifically prohibited by the Constitution or under law. Sensitive to charges about his desire for power, he continued: “I did not usurp power, but I did greatly broaden the use of executive power.”⁴³158

The early phase of the federal incorporation debate ended with the creation of the Bureau of Corporations. Its charge was to gather information about trusts and industry and report that information to the president, who would decide whether to publicly disclose it, initiate litigation, or propose legislation. Thus the Bureau of Corporations, headed by the highly respected and politically connected lawyer (and son of a former president) James R. Garfield, served almost the same mission as the Industrial Commission had, except for its position in the federal government. And so the Bureau picked up where the Industrial Commission left off, engaging in elaborate and detailed industrial studies and recommending legislation and litigation. For all its good work, though, the Bureau reinvented the wheel. The Bureau’s recommendations returned precisely to those of the Industrial Commission.⁴⁴

The Bureau set upon its task quickly and aggressively with a distinguished staff of economists and lawyers under Garfield’s able direction. During its existence from 1903 until its merger into the FTC in 1914 it produced a substantial number of thorough industry studies, ranging from meatpacking to oil (both of which resulted in successful antitrust litigation against the Beef Trust and Standard Oil, respectively). But the Bureau’s function that is relevant here—its first official act—was to recommend a federal franchise law to address a variety of corporate problems. On December 21, 1904, President Roosevelt delivered the first Report of the Commissioner of Corporations to Congress.⁴⁵

The Report had been eagerly awaited. According to the New York Times, even the Report’s release date was significant, coming as it did immediately before a congressional recess “so as to give the fullest opportunity for consideration and discussion while Congress is not in session, so that when Congress returns it will be able to deal with the subject more fairly and with better information.” The Times also noted the Report’s direct attack on the products of the merger wave: “The report does not mince words in denouncing the present State system. It contrasts the corporation law of Massachusetts with the ‘piratical possibilities’ of other States, and it declares that ‘a majority of the corporations organized of late years have been organized for the stock market.’ “ The Times article picked up the “leading evils” identified in the Report as being secret and dishonest promotion, overcapitalization, rate discrimination in transportation, unfair competition and dishonest financial disclosures.⁴⁶

The rest of the national and local press also jumped on the news. As the Philadelphia Public Ledger reported on December 25, 1904: “Mr. Garfield is keeping in close touch with the newspapers on his annual report, recently made public. ‘These criticisms are welcome,’ said Mr. Garfield. ‘We want the views of every man on the subject, because the question is an important one and deserving of the most careful consideration of the more thoughtful of the American people.’ “⁴⁷159

Garfield had a great deal of criticism (and praise) with which to contend and the Public Ledger’s account of his attention to the newspapers is borne out by a file consisting of hundreds of pages of newspaper clippings, arranged by state, in the Bureau’s records. This mass of articles, often on the front pages of their respective papers, appeared mainly between December 22, 1904 and early January 1905. Surely this is testimony to the intense degree of public attention paid to the matter—and Garfield’s concern with it.⁴⁸

One reading these articles could be forgiven for reaching the conclusion that the Report argued for a sweeping change in America’s founding ideals and its very way of life. One could be forgiven for reaching the conclusion that the Report recommended a massive overhaul of corporate law and even of the structure of the nation’s republican form of government. One could certainly be forgiven for concluding that the Report advocated changes that would radically alter the complexion of corporate America and, with it, the nation itself. But a careful reading of the Report would rapidly disabuse one of these conclusions. For what that reading reveals is that the alarmism of so many newspapers picks up on what might be referred to as the Report’s “sound and fury.” In the end, while not exactly signifying nothing, the Bureau’s reform suggestions were very modest indeed.

Nonetheless public debate, at least as reflected in the newspapers, was intense. The political aspect of the debate that perhaps is hardest to sort out is that favorable and critical reactions were not clearly drawn along party lines or regional lines. (There were more than a few newspapers that suggested that Roosevelt both anticipated and manipulated this nonpartisan reaction, a perfectly plausible suggestion.) The Report’s reception among big business leaders was, at worst, tolerant and, more commonly, wholly supportive. After all, many of them—including John D. Rockefeller—had testified in support of such a plan before the Industrial Commission. There was a substantial midday decline on the New York Stock Exchange the day the Report was released, but the market’s recovery by day’s end suggests that Wall Street took the plan in stride. Traders seemed to discount the likelihood that serious regulation would result.⁴⁹

In contrast to the support of business leaders, more than a few newspaper accounts reported that leading corporation lawyers were opposed to it. This was misleading. Certainly one, the ubiquitous James B. Dill, was opposed, but on the ground that the Report did not go far enough toward recommending federal control of trusts. A similar “oppositional attitude was expressed by Sam Untermyer.⁵⁰160

Indeed, the fact that big business supported the plan was one of the critical refrains in the press. Even worse, one Ohio newspaper reported that the Report’s recommendation was virtually identical to a plan suggested by both John Archbold of Standard Oil during his testimony before the Industrial Commission and by John D. Rockefeller himself. The Cincinnati Commercial Tribune referred to this revelation as an “interesting and somewhat humorous development,” noting that it had “attracted much attention” in Ohio, although the newspapers of that state, where the reviled Standard had been spawned and had left its indelible mark, were virtually unanimous in support of the plan. Some failed to see the humor. The Mansfield (Ohio) Shield, misstating the nature of the plan, wrote: “The fact that the Rockefeller interests approve the proposition of Commissioner Garfield for the federal incorporation of the trusts throws a strong shade over the plan.”⁵¹

Reports critical of the plan repeated the idea that business support proved that the federal government would make it easier for the trusts than did the states. In one critique, the New York World stated its opposition to any such federal reform until “a corrupt-practices law is enacted” forbidding corporate contributions to federal elections.⁵²

Virtually none of the opposition was directed to the general idea of regulating big business. The Wheeling (West Virginia) Register, while opposing the plan, gave a remarkably frank assessment of the situation, noting that the leading states in charter mongering, specifically West Virginia, New Jersey and Delaware, were “wholly to blame” for the federal proposal. The newspapers more or less universally recognized that the uncontrolled growth of big business regulated by lax state laws allowed for the evils of overcapitalization, overcharging, fraud and managerial self-dealing.⁵³

The central objection was the way the plan diminished state power in favor of the federal government. There is some weak evidence that the opposition on these grounds broke down over state lines, with more opposition in the South and in chartermongering states like New Jersey and West Virginia, and somewhat more mixed views among the New England states and those of the far West.⁵⁴

New York City is where the newspaper battleground was the most bloodsoaked. The Democratic New York Times printed dozens of articles on the subject in this short period, sometimes writing on what appears to be the verge of hysteria. (Although the Times was Democratic, it does bear noting in light of its strong opposition to the plan that Morgan had helped finance Adolph Ochs’s purchase of the paper in 1896 and briefly remained as an investor.) In one article the Times suggested that the plan was designed to “abolish the states.” In another, it howled that Garfield was attempting to erect “a trust Gibraltar” in Washington and in yet another it claimed that Roosevelt had duplicated Bryan’s plan and that “The Socialists are highly satisfied with both of these rivals in radicalism.” The progressive New York World equally opposed the plan, seeing in it the “nullification of constitutional government” and suggesting that “Emperor” would be a title inadequate to describe Roosevelt’s aspirations. The New York Daily News predicted that Roosevelt would soon be running American business and the New York Commercial Bulletin called the plan “a complete subversion of the policy established by the Constitution of the United States.” What appears to the modern eye to be a suggestion for the most modest of business regulations was at the time treated as rising to the level of a constitutional crisis.”⁵⁵161

The Wall Street Journal was a relatively strong supporter of the plan. It described the states’ rights arguments as a tactic used by regulation’s opponents to give legally (and politically) legitimate cover to their general opposition to regulating business, a claim that correctly represented the views of many Republican states’ righters but was unfair to the understandable concerns of the proregulation Democrats. While the Journal was no fan of centralized federal power, it nonetheless concluded: “However much we may deplore and fear the increased centralization of power in the Federal government, which is involved in this direct control of interstate commerce, it cannot be doubted that it is the only solution of the corporation problem that now appears feasible.” And what was that problem? The failure of the states “to protect those dealing with corporations as employes [sic], creditors or consumers, and to protect the public from the abuse of economic power coupled with little personal responsibility [among directors and officers].”⁵⁶

That the debate over the Roosevelt-Garfield Plan should have so confused interests, regions and parties, both in support and in opposition, may be attributed at least in part to what several papers referred to as the “Rooseveltian” nature of the plan. This was its capacity to steer between (or, less charitably, pander to) both sides in the trust debate, without fully satisfying either. Continuing states’ rights concerns, exacerbated by Roosevelt’s aggressive talk of centralization, also hindered rational evaluation of the proposal. The intense negative reaction to the Report was more a function of Roosevelt’s increasingly strong rhetoric in favor of executive power, coupled with his actions in the coal strike, than the specific details of the plan itself. Controversial or not, Congress would ultimately not let go of the idea of federal incorporation or licensing until 1914.”⁵⁷162

The Bureau’s Recommendations—A Modest Proposal

The fact that the Garfield plan aroused such strong emotions is surprising in light of how conservative it was, measured even by Roosevelt’s ambitions as expressed by Knox in his Pittsburgh speech two years earlier:

The conspicuous noxious feature of trusts existent and possible are these: Overcapitalization, lack of publicity of operation, discrimination in prices to destroy competition, insufficient personal responsibility of officers and directors for corporate management, tendency to monopoly and lack of appreciation in their management of their relations to the people, for whose benefit they are permitted to exist.

Knox had articulated the administration’s policy as attacking a set of concerns that, when taken together, amounted to much of the regulation traditionally expected under state corporate law. But Roosevelt wound up backing something far different and aimed almost exclusively at only one feature of that platform—monopoly.⁵⁸

Consistent with the Industrial Commission’s concerns, the Report concluded: “Under present industrial conditions, secrecy and dishonesty in promotion, overcapitalization, unfair discrimination by means of transportation and other rebates, unfair and predatory competition, secrecy of corporate administration, and misleading or dishonest financial statements are generally recognized as the principal evils.” It is no surprise that at the conclusion of a merger wave in which overcapitalization appeared as one of the most prominent issues, dishonest promotion and capitalization ranked high among the Bureau’s concerns. It is also clear that the railroads remained an active problem, as did the fear of monopoly expressed by the Bureau in its talk of “unfair and predatory competition.” Finally, corporate secrecy and dishonesty in financial reporting remained paramount as a consistent refrain throughout these reform efforts, leading mostly to calls for regulatory disclosure.⁵⁹

The Bureau invoked its congressional charge to find remedies for these ills through legislation, noting its desire to reserve criminal sanctions for only the gravest abuses. Its preferred solution was to create better processes. Its approach, by its own admission, was to be “conservative” in keeping with the Roosevelt administration’s practical approach to regulating big business. Suing a financial holding company like Northern Securities was one thing (and it did not hurt that the suit allowed Roosevelt to make a symbolic statement that he was beholden to nobody). But killing the goose that had laid the golden egg, the engine of American prosperity, was entirely another. Reform, if it were to proceed, would proceed cautiously.⁶⁰163

The Report acknowledged the degree to which industry had become overtaken by finance. It noted that the speed of corporate growth and combination had allowed corporate America to be captured by the financiers, the segment of corporate America that the Report most strongly criticized. The Report acknowledged that “the forces that have shaped” corporation law fail to distinguish the “purely financial interests” from “production,” showing sophisticated economic sensitivity to the difference between industry and finance. Elaborating on this concern, the Report noted that the divisibility of corporate interests into shares “permits the creation of stock and its use as a sort of currency; taken in connection also with the transferability of stock interests, it allows speculative manipulation.” Finally, this divisibility of interests allowed the controlling interests of a corporation to take advantage of the minority shareholders, an observation consistent with the recent history of promoters dumping buckets of watered stock on the market. The Bureau of Corporations understood that finance dominated industry. It did precious little about the matter.

The focus on the way the merger wave privileged finance over industry and the Bureau’s concern with it was clear. But the Bureau, and thus the Roosevelt administration, squandered the chance for the federal government to take control of regulating business away from the states.

The Bureau’s solution makes this apparent. After examining the crazy quilt of state laws and the cupidity of state legislatures (for chartermongering at this point had spread well beyond the borders of New Jersey), the Report concluded: “The present situation of corporation law may be summed up roughly by saying that its diversity is such that in operation it amounts to anarchy.” And, rather more pointedly, “The net result of this State system is thoroughly vicious.” The Bureau’s solution to this anarchy was clear; the federal government had to seize some control over corporate regulation, bring order to the process of interstate and foreign trade and stop the abuses of the preceding decade.

The Report presented and discussed two possible solutions: federal chartering for corporations engaged in interstate commerce and federal licensing or franchising of such corporations. The Bureau rejected federal chartering. One reason was the lingering uncertainty as to whether Congress constitutionally could create corporations engaged in interstate trade with the power to “produce or manufacture” within the states. The Supreme Court had clearly distinguished between trade and manufacture. If Congress had no power to regulate manufactures, it could not create useful corporations to operate within state lines.164

The second reason the Bureau rejected federal incorporation is more puzzling. The Bureau expressed significant concern over the constitutionality of state power to tax federally chartered corporations. Interstate corporations were producing substantial amounts of taxable income, and if the states could not tax them they would lose a significant source of revenue. While one can easily see the federal government’s practical desire to preserve state revenue, the Bureau’s position was a bit of a paradox. The successful modernization of state corporation law had its genesis in New Jersey’s financial problems. It was precisely the states’ attempts to make money by abusing their powers to regulate corporations that created the demand for federal regulation in the first place. While one can imagine that the federal government did not want to pick up the bill, the Bureau’s reasoning left the corporations problem right back where it was created.

Finally, the Report expressed concern that federal incorporation might accelerate “the centralization of power in the Federal government,” an odd concern in light of Roosevelt’s express desires. Given the political battles of February 1903, it is obvious that federal incorporation was the least feasible option. Yet it probably would have been the most effective regulatory approach as the giant modern corporations were growing sufficiently powerful potentially to dominate the federal government itself.

The Bureau’s recommended approach was federal licensing or franchising. Federal franchising would maintain the status quo of state chartering under state law and preserve the states’ abilities to tax their corporations. At the same time it would allow the federal government to impose standards of conduct, mandate regulatory disclosure and prohibit corporations that violated those requirements from engaging in interstate commerce. It was regulation of a sort. But it was not business regulation.

The Garfield plan was a peculiar compromise. Peculiar because, in its conservatism, it failed to allow for enough federal regulation to address the problems of disparate state laws; peculiar because the Report, short on details, did not specify whether and how federal licensing would address the main problems the Bureau identified (overcapitalization, financial misbehavior and the abuse of minority shareholders); peculiar because it seems as though the plan was designed as much to avoid legal and political challenge as it was to solve the problems identified by the Bureau and the Industrial Commission.165

While the federal licensing plan was never passed, it would find its ultimate realization, albeit in a purely antitrust form, in the FTC, a body that used regulatory disclosure to aid its enforcement. It was only an administrative body with particular expertise that could make judgments based on the particulars of each case. So while the antitrust problem was eventually resolved, the federal government would never adequately address the internal problems of corporate finance and minority shareholder abuse that were the subjects of so much public concern.

The Garfield Plan came to nothing. Its legacy was to set the subject of federal incorporation squarely on the legislative table as the administration’s project. Roosevelt was hardly a quitter, and while he turned his attention to railroad regulation for the next several years, he would bring back a comprehensive and far-reaching federal incorporation measure as his second term drew to a close. That term was also marked by the Panic of 1907, an event that brought the economic dangers of speculation in the securities of the giant modern corporation to the forefront of public concern and gave Roosevelt a last chance at achieving federal incorporation. As federal incorporation proceeded, so did the first federal steps toward securities regulation.