NINE
THE END OF REFORM

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The beginning of the end of the Progressive Era in business took place on June 25, 1914. That was the day the Claflin dry goods empire declared the largest bankruptcy in American history and the day that President Wilson chose to pronounce himself as unambiguously for business. The preceding fifteen months had been among the most active business and financial reform periods in American history. By the end of his first year in office Wilson had played a major role in pushing through Congress two controversial bills, a major tariff revision and the Federal Reserve Act, which he signed into law on December 23, 1913. Wilson also worked hard for the 1914 passage of the Clayton and FTC Acts, which ended twenty-five years of political agitation for antitrust regulation. The FTC Act reflected Wilson’s reform blend of progressivism and conservatism, representing a compromise between executive, judicial and market control of the antitrust issue. It lodged regulatory supervision in an independent federal agency, giving the new FTC authority “to investigate, publicize, and prohibit all ‘unfair methods of competition.’ ” But it left the Sherman Act in place with the courts, following the 1911 Supreme Court embrace of the rule of reason, as the source of final judgment, and with it the power to review FTC decisions.¹

When Wilson abandoned the Progressive business agenda he left two pieces of legislation on the cutting-room floor of the Congress he had thus far so effectively led. The Rayburn bill, a version of which would ultimately pass in 1920, was a railroad regulation bill that was a direct descendant of S. 232 and the corporate finance measures cut out of the Mann-Elkins Act. Cast in terms of securities regulation, it was an antitrust measure that, following the dominant pattern of antitrust thinking, addressed overcapitalization as the principal problem. Its method was to give the ICC power to determine whether or not individual railroads could issue new securities. True to its heritage, shareholder protection was no direct part of its concern.210

The less intrusive yet more controversial Owen bill was the first true securities regulation measure. But it was not yet modern securities regulation. It grew out of the same concerns as the investigations of the Hughes Committee and Hadley Commission, the effect of securities speculation on economic stability. At the same time it demonstrated an interest in protecting stockholders, picking up on strands of the earlier investigative and legislative efforts. The Owen bill would never pass. But it was a great leap forward. Securities regulation was now federal business.

Woodrow Wilson made almost no direct contribution to securities regulation. But his indirect contribution, his philosophy of regulation, emerged in the legislation that finally passed under his Assistant Secretary of the Navy, Franklin Roosevelt. Neither a radical progressive, a Jeffersonian conservative, nor a classic Southern Democrat, Wilson was far more economically and business savvy than most historians acknowledge. His peculiar blend of ideas included progressive realism forged by his teachers at Johns Hopkins and refined by his observations of the world around him, Southern conservatism that included at least an intellectual appreciation of, and sometimes political commitment to, states’ rights, a belief in a strong and active presidency and an understanding that big business had become the centerpiece of American life and politics. Together this created a style of regulation that drew from, even as it moderated, Teddy Roosevelt’s, and that helped to transform political ideas about business regulation. As I will show in the next chapter, by the time Wilson was engaged in his futile battle for Versailles and the League of Nations, the modern stock market had emerged and modern regulatory ideas with it.²

THE DEMOCRATS RETURN

The 1912 election provided a Democratic sweep of Congress and the White House. The party had been out of power since 1895, which meant that inexperienced leaders were continuing the job of establishing and managing a ruling party that had begun with their gaining control of the House in 1911. It also meant that a significant number of important congressional and executive positions were filled by Southerners, including almost all of the relevant committee chairmanships. Historians dispute the extent to which Southern Democrats shared a consistent, common ideology, but while it seems clear that there were significant Progressive and even radical voices from the South, those voices were a counterpoint to a fundamentally conservative chorus.

Southern conservatism, unlike the business conservatism of the Republican Senate leaders, unlike the conservatism of Taft, was an older sort of American conservatism, a conservatism of individualism, states’ rights and limited federal power. Thus it is all the more striking that almost every leader of the Wilson reforms that established the federal government’s dominance in business and financial regulation was Southern born. The president, his treasury secretary William Gibbs McAdoo, advisors Samuel Untermyer and Louis Brandeis and congressmen Carter Glass, Robert Latham Owen, Robert Lee Henry, Henry Clayton and Arsène Pujo, among others, all were raised in the South. While their views were hardly monolithic, they came together to create the modern financial regulatory state.211

The Republican Party had effectively protected business from meaningful regulation for twenty-five years, even as it preached progressive regulation from the bully pulpit. Progressive and pledged to business at the same time, it failed to achieve sufficient regulatory reforms that would have maintained that protection while at the same time responding to the almost universal demand for some measure of federal control. To be fair, it was the Republicans who were in charge during the most rapid, and thus perplexing, period of American economic transition. Nevertheless the natives of Jeffersonian soil, the anticorporate heirs of Jackson, the states’ rights Democrats, achieved exactly the kind of balanced regulation the progressive Republicans had sought. It was this group of Southern Democrats that made America safe for business.³

WILSON AND BUSINESS

Wilson, a minister’s son, grew up in comfortable middle-class circumstances. He spent most of his youth in the South both before and, for a time, after his college years at Princeton, studying first at Davidson and later at Virginia, where he spent a year working toward a law degree. The traditionalism that characterized the instruction at these institutions was exploded at Johns Hopkins, where Wilson earned his doctorate under some of the most innovative economic and political thinkers of the day. As a son of the South, his birthright was both Democratic and conservative. It was a birthright he used well in delivering the Democratic Party from the radical ineffectuality of William Jennings Bryan. Yet this conservative Southern Democrat who spent his formative years in a South dominated by the Civil War and Reconstruction was no real conservative. Wilson’s presidency defined the Progressive Era. It also ended it.

Wilson was hardly the type of candidate that newspaperman William Allen White, a staunch Republican, expected to find himself hailing as the great hope for American progressivism. But as governor of New Jersey he fought the party regulars to win battles ranging from civil service reform to remaking that state’s infamous corporation law into one of the strictest in the country. He campaigned for president first and foremost on a platform of completing the antitrust program that had been almost twenty years in the making. But he was also the president who insisted upon segregating the United States Civil Service. A Southern gentleman with that character’s notion of chivalry toward women, he opposed women’s suffrage until the war forced him to it, asserting states’ rights grounds even as he promised suffragettes his support in 1918. He politically opposed a variety of progressive social reforms he had specifically advocated in his early writings, including child labor laws, minimum wage laws and federal aid to health care and education, in part on the same states’ rights grounds. Wilson’s neo-Jeffersonian New Freedom, according to Herbert Croly, one of the leading intellectual spirits of the progressive movement, was in direct opposition to the collective, communitarian and regulatory aims of progressivism.⁴212

Croly was right. Wilson talked far more of the importance of the individual than the orthodoxy of progressivism allowed. But Croly was also wrong. The New Freedom was a political campaign, not a complete social vision. And the man who was the candidate was still Tommy Wilson, the young professor who was a founding member of the iconoclastic American Economic Association. Wilson’s graduate education at Johns Hopkins under Herbert Baxter Adams and Richard Ely and Wilson’s own intellectual development helped him try to weave together a philosophy that combined a Jeffersonian vision of individual responsibility with acceptance of the evolutionary and consequently natural collective reality of modern life. The New Freedom, properly understood, was the translation into presidential politics of the young century’s attempt to find the place of the individual in collective urban industrial society.⁵

The Centrality of Business Regulation

As early as 1889 in his book The State, Wilson had attempted to navigate between the goals of socialism, which he described as having “the right end in view” even if its methods were “mistaken enough to provoke the laughter of children,” and laissez-faire competition, which was harsh and destructive. His conclusion at that time, a conclusion he maintained throughout his economic legislative program, was that competition was desirable, but it was only just when it occurred between equals. Given modern circumstances, equality of competition could only be achieved through regulation. Socialist regulation was extreme. “The regulation I mean is not interference: it is the equalization of conditions so far as possible, in all its branches of endeavor; and the equalization of conditions is the very opposite of interference.” That regulation, equalizing information, access and power, was the type of regulation embodied in the FTC Act. Even more, it was the very essence of the New Deal securities acts.⁶213

Business regulation was part of the very nature of the state, as Wilson saw it, and as his views evolved he came to understand it as central to the state’s function. Business and the state were deeply tied together. The state must not only regulate but also learn from business. In his famous 1887 article, The Study of Administration, Wilson wrote that administration of the government itself was but a branch of business. But while the state was to regulate, it was to do so with a light hand. As he noted in 1912, “You cannot establish competition by law, but you can take away the obstacles by law that stand in the way of competition.” At that time this meant preventing monopolies from blocking access to capital and opportunities for individual entrepreneurs and smaller businesses. But regulation should be approached with caution. It should be carefully tailored so that business would not become “partners or creatures of the government itself.”

Roosevelt’s approach had been far too interventionist. “Recent proposals of regulation have looked too much like a wholesale invasion by government itself of the field of business management.” It would be characteristic of the Wilson style of regulation that it left business largely to business. And indeed candidate Wilson, accepting the 1912 presidential nomination of the Democratic Party, proclaimed “I am not one of those who think that competition can be established by law against the drift of world-wide economic tendency.” The very trend toward cooperation he and his teachers observed in the 1880s had become reality. But there was no mistaking Wilson’s demand for regulation. Although, as Martin Sklar points out, Wilson scholars have attempted to classify his thought into periods moving from various types of conservatism to “militant progressivism,” Wilson’s economic progressivism was a leitmotif of his writings and speeches throughout his adult life, even when superimposed upon a Southern conservative foundation. The early influences of Ely, Hopkins and the American Economic Association never really left him.⁷

Jeffersonian Business

To the extent Wilson can properly be classified as conservative, his conservatism was a function of the manner in which he believed that progressive change should take place rather than the question of whether change should take place at all. As such, his conservatism was pragmatic, not principled. Indeed he understood that modern circumstances left the state and society no choice but to change. The world had become what it was, and it was for the state to adapt rather than to combat. The historicist views of his German-trained teachers remained important components of his thinking. As he noted in his first inaugural address, in words consistent with those he had been speaking for twenty-five years: “We shall deal with our economic system as it is and as it may be modified, not as it might be if we had a clean sheet of paper to write upon.” At the same time, “practical wisdom,” not the “long process of historical experience,” was what allowed states to change their practices with changing circumstances. New theories followed new experience, not the other way around. This very pragmatism was consistent with “the rule of historical continuity,” rejecting clean breaks with the past and instead adopting past ideas to new circumstances.⁸214

Nowhere was this evolutionary, historically sensitive, yet eminently practical approach more evident than in Wilson’s rhetorical attempts as a politician to connect Jeffersonian thought to the new world of big business. Wilson clearly was not a Jeffersonian. As early as the late 1880s, he favored cooperation over the real-world state of individual competition as long as it did not lead to monopoly. And very much like progressives of both parties, he was untroubled by big business, a position he continued to articulate with increasing frequency as he came closer to assuming progressive leadership. “I regard the corporation as indispensable to modern business enterprise,” he told the American Bar Association. “I am not jealous of its size or might.” In fact, “modern business is no doubt best conducted upon a great scale.” The problem was not the existence of huge combinations, but monopolies that deprived others of business opportunities. And as he moved toward the presidency, Wilson argued that it was combinations of combinations, including the Money Trust, that posed the threat to individual initiative, not the great combinations taken individually. Indeed in the winter of 1912 he reiterated the evolutionary understanding he had developed at Hopkins, telling the General Assembly of Virginia that “I am not here to enter an indictment against business. No man indicts natural history.”⁹

He drew on Jeffersonian metaphors even as he rejected Jeffersonian thinking. Federal regulation was not inconsistent with Jeffersonian ideals. Wilson transformed the maxim often attributed to Jefferson, “that government is best which governs least,” into an understanding that the best government should regulate as far as it had to in order to eliminate arbitrary interference with individuals and to eliminate “undesirable transactions.” He might depart from Jefferson on the need for federal regulation, on the one hand, but on the other hand find common ground in the fact that it was for the sake of the individual that regulation was to be had.¹⁰215

Wilson reconceptualized the corporation as a Jeffersonian form of property much in the same way that business leaders and other thinkers had been encouraging the American middle class to discover stock as a substitute for the land: “The corporation … is an arrangement by which hundreds of thousands of men who would in days gone by have set up in business for themselves put their money into a single huge accumulation and place the entire direction of its employment in the hands of men they have never seen, with whom they never confer.” The yeoman farmer had become the yeoman stockholder, but the separation of stock ownership from corporate control limited the manner in which the individual could assert his individual autonomy through his ownership of property. Jeffersonian terms were insufficient for modern conditions, no matter how evocative of American tradition. “We have changed our economic conditions from top to bottom, and with our economic conditions has changed also the organization of life. The old party formulas do not fit the present problems.” This required changes in the laws, which were still based upon the idea of business done by individuals. They needed to be adapted for business done by giant corporations in order to liberate the individual within the organization.¹¹

Sklar describes a fairly sharp break between Wilson and Jeffersonian thought. But there was some continuity that is consistent enough with Wilson’s writings that Wilson’s talk of Jefferson seems to have transcended mere political rhetoric. In his address at the 1912 New York Jefferson Day banquet, in a remarkable speech entitled What Jefferson Would Do, Wilson not only built on the Jeffersonian theme of individual opportunity but also transformed the Jeffersonian ideal of competition among individuals to competition among corporations. Completely dismissive of Jeffersonian fears of bigness, he said: “[I]n the general field of business [Jefferson’s thought] would … see that, whether big or little, business was not dominated by anything but the law itself, and that that law was made in the interest of plain, unprivileged men everywhere.” Squared with Wilson’s acceptance of the reality of the giant modern corporation, he seems to have meant that the individual would be free to enjoy the Jeffersonian ideal as long as economic opportunity, in its new form, was not denied him.¹²

Wilson tried his best to maintain a healthy respect for states’ rights, but ultimately his view of the presidency overcame his native instincts. In The State, as well as in his later work, he argued that most business regulation should be left to the states and, indeed, if the variety and inconsistency of state regulations were causing business problems it was up to the states to get together and correct them. At the same time he described commercial regulation, which was necessary to ensure the survival of the states, as “the chief object of the Union.”216

Gradually the states more or less disappeared from his business legislative program. This was an inevitable result as Wilson refined and to a degree achieved the imperial presidency developed by Roosevelt. He lamented the fact that the presidency had faded into irrelevancy as early as 1897. The contrast between the strong leadership of the nation’s first three decades with the pallid presidential leadership (excepting Lincoln) that followed had given rise to scattered congressional government. He acknowledged that Congress was rightly jealous of its legislative prerogatives. But as president he did not hesitate to wade into the legislative chamber, participating actively and consistently in the legislative process, trumping even Roosevelt’s heavy involvement. It was Wilson who broke the century-long tradition that barred the president physically from the Capitol as he began the practice of addressing Congress in person.¹³

One final place where the classic American individualistic thought commonly associated with Jefferson appears consistently in Wilson’s thinking is his demand for individual accountability, even in the context of the corporate form of business. Corporations themselves were unpunishable. “Corporate responsibility lacks vitality, corrects nobody.” The individual was the actor, whether within a corporation or otherwise, and only the individual could be punished and corrected, just as the individual was the only bearer of natural rights, the only appropriate political actor. Collective responsibility simply would not do.¹⁴

Woodrow Wilson, son of the South but grafted onto the North, adapted traditional notions of individualism to the permanence of the new collective society that he fully accepted, from the collectivity of life in cities, in tenement houses and apartment buildings, to the collectivity that was the corporation. He knew that this collective society could not flourish under the minimalist state that preceded the transformative presidency of Roosevelt, no matter how ideally attractive. Organizational life demanded a government that did more than simply prevent harm. It required a government that regulated organizations.

THE COLLECTIVE SOCIETY

The society of private individuals conducting their lives through private ordering had been transmogrified in large part into a society where safety in housing and employment, for example, could no longer be left to private arrangements but had become matters of public concern. The society of individuals had become a society of groups, with the consequence that the concerns of individuals had become the concerns of groups, including the giant corporations. Only the federal government was in a position to lay down the rules for group behavior in American life.217

Wilson’s regulatory approach therefore centered upon the ideas of publicity necessary to ensure competition among equals, whether those equals were individuals or corporations, by ensuring access to capital, information and opportunity for those with initiative. The idea of the regulated free market was Wilson’s attempt to square classical American philosophical liberalism with the economic reality of the new collectivism. The regulated free market was Wilson’s lasting legacy to American economic life.

As part of this vision of a regulated free market, Wilson was interested in securities regulation as a means of providing opportunity. “When you offer the securities of a great corporation to anybody who wishes to purchase them, you must open that corporation to the inspection of everybody who wants to purchase.” Disclosure would permit the individual to make free economic choices. But by the time securities disclosure was on the legislative table, other matters had become more pressing. An industrial depression had persisted for almost two years along with a flat and lifeless stock market. Even new demands created by the war in Europe that would bolster American industry would take time to show. Meanwhile Wilson, facing the midterm elections of 1914, had grown increasingly impatient with economic stagnation and was under significant political pressure from Wall Street to slow the pace of reform. As a result, he shifted rather quickly from his philosophy of conservative progressivism to firm support for big business. Business had been regulated enough. He withdrew his support for securities regulation and, indeed, any other economic reform. Another twenty years would pass before securities regulation was provided by the federal government. When that regulation came, it embraced the regulated free market, progressive conservatism of the Wilson philosophy.¹⁵

THE FEDERAL RESERVE

When Wilson took office, the House Banking and Currency Committee had been hard at work. It had created two subcommittees in delayed response to the flaws in the American monetary system revealed by the Panic of 1907 and continuing populist agitation over the perceived concentration of the American economy on Wall Street. One subcommittee was chaired by Virginia Representative Carter Glass and had been directed to draft remedial banking legislation that would make the necessary currency reforms. The other, chaired by Louisiana Congressman Arsène Pujo, was charged with investigating Wall Street’s control over American finance.218

The work of the Glass committee would culminate in 1913 with passage of the Federal Reserve Act creating the central banking system of the United States. Controversial currency legislation was already in place. Nelson Aldrich had introduced an emergency measure after the Panic of 1907 that took form as the Aldrich-Vreeland Act of 1908. That act lay completely dormant until its one moment of glory, when it served to stabilize the American economy following the collapse of the European currency markets at the start of World War I.

Almost everybody agreed that some form of currency reform was needed. But, as we have already seen, a long-running political dispute centered on the twin questions of the appropriate powers of the federal government and the desirability of centralizing power in Washington. Even more frightening to some than centralizing power in Washington was centralizing power on Wall Street. The very real possibility of the latter was reflected in the predominant reform proposal, the Aldrich plan, which had been developed by Aldrich as head of the Monetary Commission and banker Paul Warburg. Aldrich wanted a central bank controlled by the bankers. This deeply worried progressives of both parties who were concerned with Wall Street’s already concentrated financial power.

The legislation that emerged, with its balance of centralization and decentralization, government and business control, was very much in the Wilsonian style of regulation. The Bryanite wing of the Democratic Party favored complete federal control of the money supply. This idea troubled those who disliked too much government power and naturally bothered the bankers themselves. When the Southerner Glass became chair of the subcommittee in 1912, he was opposed to a central bank at all. But, working with his friend Warburg, he developed a more decentralized version of the Aldrich plan. The progressives opposed this, as did Treasury Secretary William McAdoo who, with the support of Untermyer and Owen, wanted to establish the central bank within the Treasury Department. Wilson, on the advice of Louis Brandeis, backed the plan for government control. Enormous controversy raged from all sides as Wilson, McAdoo and Glass carefully fought one battle after another until the Federal Reserve Act, linking the federal government with the existing private banking system, became law on December 23, 1913. The fast-moving legislation and its enormous impact on the banking and currency system held much of the country’s attention as the Pujo Committee was preparing its report.

THE PUJO COMMITTEE

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The Pujo Committee had been appointed by the House after years of clamoring for an investigation of the financiers of Wall Street, dubbed the “Money Trust.” To some, the Money Trust, of which J. P. Morgan was reputedly the head, was just like any other trust, a conspiracy in restraint of trade. In this view, the trust was a loosely bound small group of banks and investment banks that controlled the money supply and the New York Stock Exchange. Thus it controlled the ordinary person’s access to credit and to fair terms on the stock market itself. Others, including Pujo Committee counsel Samuel Untermyer, saw the Money Trust simply as an excessive concentration of financial power in several New York (and some Boston) banks and investment houses. Whatever the Money Trust was or might have been, populist agitation demanded an investigation. The House had little choice but to authorize it.¹⁶

Looking back from the prosperity of 1926 on the economic history of these early Wilson days, Alexander Noyes gave credit only to the work of the Glass Committee. The Pujo Committee, the subcommittee focused on the Money Trust and the stock market, was “long forgotten.” Long forgotten it may have been in the sunny days of 1926. But not in 1933, when Untermyer was one of the first experts to be asked by his old colleague from the Wilson administration, Franklin Roosevelt, to draft a securities bill. More, the Pujo Committee’s hearings and recommendations produced the Owen bill of 1914 and thus put securities regulation squarely on the federal agenda.¹⁷

The Owen bill failed for a lot of reasons, including the president’s political needs, Wall Street opposition, widespread fear of centralized government power and, perhaps, some congressional exhaustion after frustrating decades of debating economic regulation. Also among the reasons for its failure was, I suspect, the controversial character of the bill’s principal proponent, Samuel Untermyer.

The Crusader

[T]he [Pujo] subcommittee might more properly bear the counsel’s name than the name of its chairman.¹⁸

There is no doubt that the Pujo Committee was Untermyer’s committee. One of the most colorful members of the Wilson circle, Samuel Untermyer was born in 1858 in Lynchburg, Virginia, two years after Wilson and only sixty miles as the crow flies across the Shenandoah Mountains. The two men were dramatically different in background, style and upbringing, but they shared both idealism and ideals. Their uncompromising idealism led each to his own separate downfall, Untermyer in the Pujo-Owen fight, and Wilson in the settlement of the war.¹⁹220

Untermyer was an early Wilson supporter and a major, if largely unofficial, influence on Wilson’s economic policies. Despite an early hint of personal distaste for Untermyer that crops up periodically if subtly in Wilson’s papers, Republican Simeon Fess could say of him, if perhaps hyperbolically, that his “utterances are the final word for this administration.” As time wore on, Wilson appears to have developed a real fondness and deep respect for Untermyer.²⁰

Untermyer began life as a Southerner but his was not a Southern life. The garrulous and passionate Untermyer recalled, as one of his first childhood memories, running out of his house in Lynchburg and crying “Hurrah for Jeff Davis” as Union troops marched through the city’s streets. His father, a Confederate lieutenant who lost a fortune in Confederate bonds, died shortly after Appomattox, and Untermyer’s mother moved the family to New York, where she opened a boardinghouse. While Wilson was formed by Princeton, Virginia and Hopkins, Untermyer’s work as an office boy in a New York law firm served as his undergraduate education. He started at fifteen, and a few years later enrolled in Columbia Law School, graduating in 1878. With his half brother, Randolph Guggenheimer, he formed the firm of Guggenheimer & Untermyer. The firm remained a prominent institution in New York business law until its dissolution in 1986.

Untermyer was smart and ambitious. By the age of twenty-five he was earning $50,000 annually as a lawyer and trust promoter, and was a millionaire by age thirty. According to his obituary, which rated a page-one placement in The New York Times, “he was one of the first lawyers to see the advantage of combination of capital in great industrial enterprises.” And, employing the business ethics of the era, he sometimes got into trouble, as we saw in the American Smelting and Columbia Straw Paper cases.²¹

Untermyer was an idealist. The kind of passion that led to the young Untermyer’s protest against Union occupation led him to turn, like his older contemporary Brandeis, from trust promotion to economic reform. He cut his reformist teeth working with Charles Evans Hughes on the insurance industry investigation of 1905; he challenged controlling shareholders of giant corporations who he thought were trampling on the rights of minority shareholders; and he fought his most famous battle against the irresponsibility of the New York Stock Exchange. His life was a life of causes, undertaken typically without pay. He was involved in drafting the Federal Trade Commission Act, the Clayton Act, the Federal Reserve Act and numerous other measures. Like Brandeis, Untermyer turned a successful business law career into a career as a lawyer for the people.²²221

He was an early supporter of Wilson’s presidential candidacy as well as a member of the Tammany-controlled New York delegation to the 1912 Democratic National Convention in Baltimore, which he left before the final balloting for his annual trip to Baden-Baden. He wrote to candidate Wilson from the R.M.S. Caronia and from the spa in order to fill him in on the Pujo Committee’s preliminary findings and to offer him whatever help he might need.²³

Despite his influence, Untermyer was frustrated in his attempt to obtain an official appointment in the Wilson administration. He wanted the ambassadorship to Germany and, failing that, France. But Wilson was conflicted in his early feelings about Untermyer, in part because of his earlier notoriety as a trust promoter. When Colonel House reported in April 1913 that he had received word that “Samuel Untermyer would like to become Ambassador to Germany … the President smiled and said it was interesting and he was glad to know that Mr. Untermyer would be pleased if he should be sent.” House further reported in his diary a conversation with the president on November 29, 1913, concerning Untermyer’s possible appointment to the French mission. Wilson noted that Democratic Party Chairman William McCombs had suggested Untermyer and House pressed the case, but Wilson was “quite emphatic in his decision not to appoint him. … I related a discussion I had heard concerning Untermyer, one man taking the stand that his success had a bad influence upon the youth of the country, the other contended that his failure to obtain public recognition was in itself a good lesson to the youth of the country. The President thought both gentlemen were correct.”²⁴

Untermyer was both charming and abrasive. He was arrogant, controlling and unrelenting in the pursuit of what he perceived as justice. His partner in reform and Lynchburg neighbor, Carter Glass, despised him, characterizing him most kindly with sarcasm as “that shy and painfully reserved gentleman, Mr. Samuel Untermyer, of New York City, well known and greatly admired for his fine aversion to notoriety of every description.” While Glass had a personal ax to grind, it is true that Untermyer had no trouble grabbing the spotlight when he wanted it.²⁵

The Pujo Committee’s creation, no less than its ultimate success, appeared to depend upon Untermyer’s participation. In January 1912, while resolutions forming the Committee were being drafted and debated, Robert Henry, chair of the powerful House Rules Committee, penned this postscript to a letter pleading for Untermyer’s help: “You must not fail me—Action will soon be taken—delay and postponement are dangerous—So to carry forward plans you must obey the request and summons—Henry.”²⁶222

The Committee

House Resolution 405 authorized the creation of a special committee to investigate whether a money trust really existed on Wall Street and the extent of its power over American business and banking. The committee would have been charged with discovering the relationship between the bankers and the New York Stock Exchange and investigating the methods by which interstate corporations were financed and their securities marketed. H.R. 405 was rejected by the Democratic leadership. But progressive House Democrats continued to push the issue.²⁷

As a result, a second significantly diluted resolution did pass and simply empowered the committee “to obtain full and complete information of the banking and currency conditions of the United States for the purpose of determining what legislation is needed.” In the end, at Untermyer’s insistence, Arsène Pujo of Louisiana successfully introduced an amending resolution on April 22, House Resolution 504, which largely reinstated the failed H.R. 405. That final resolution gave broad investigative powers to the committee for the purpose of gathering information and suggesting “remedial and other legislative purposes.”²⁸

The successful H.R. 504 followed directly from the legislative activity we have seen developing in previous chapters. The opening clauses refer to bills “pending or under consideration to regulate industrial corporations engaged in interstate commerce through Federal incorporation, supervision, and otherwise,” and legislation “believed to be necessary to further control the incorporation, management, and financial operations of railroad corporations.” The committee also was empowered “to investigate the methods of financing the cash requirement [sic] of interstate corporations and of marketing their securities.” Securities regulation of industrial corporations was finally going to receive thorough congressional investigation.²⁹

The Counsel

Untermyer’s application for the job of counsel to the Pujo Committee was characteristically unsubtle. In late 1911, when agitation for the investigation was growing, he gave what The New York Times characterized as an “unusual address” before The New York County Lawyer’s Association, calling for substantial corporate reform, mostly in state law. In late December 1911, he made a widely reported speech before the Finance Forum of New York City, in which he argued that a Money Trust did indeed exist in the concentration of finance on Wall Street.³⁰223

There was never any question that Untermyer would be retained as counsel. The infamous stock speculator turned muckraker, Thomas Lawson, described him as having “either prosecuted, defended, or had an inquisitorial finger in every sword-swallowing, dissolving-view, frenzied finance game that has been born or naturalized in Wall Street within the decade.” It was Untermyer who, at Henry’s request, drafted the original H.R. 405. After its defeat and the passage of the watered-down substitute resolution, he claimed to have lost interest in the investigation because of the Committee’s limited power. Writing to Henry in April 1912, he complained of the “very narrow scope of the Investigation” and concluded that “[u]nder the present restricted form of Resolution the Inquiry is bound to prove worse than fruitless.” Henry invited him to draft a new resolution, incorporating the powers that originally had been included in the defeated H.R. 405. Meanwhile Pujo invited Untermyer to become counsel to the Committee. Untermyer declined. But he artfully described in his response the powers the Committee would need to be granted in order for him to change his mind. These were the broad investigatory powers that had been contained in Untermyer’s failed H.R. 405. The next day, after some back and forth, he conditionally accepted the position. On April 25, 1912, H.R. 504, introduced by Pujo in the form demanded by Untermyer, passed by a vote of 237 to 15.³¹

Pujo appointed James Farrar of New Orleans to serve as co-counsel to the Committee. But there would be no doubt as to who was in charge. Writing, at first somewhat diffidently, to Henry on April 15, 1912, Untermyer noted the honor it would be to serve with Farrar as associate counsel. “At the same time I am unwilling to make the sacrifices that would be involved in my undertaking this work unless I am to direct—with the aid of the Committee—the lines of policy on which it is to be conducted and am to have the leading part in its conduct.” He was even more direct with Pujo. He would not represent the Committee unless he could “have charge of the preparation and presentation of the evidence and the examination of witnesses incident thereto.”

Untermyer was not entirely comfortable with his imperious demands. He lied about drafting the initial resolution that created the Committee, even to Pujo himself. Later, while presenting the Owen bill to the Committee in January 1914, he denied that he was the sole draftsman of the resolution and even more strenuously denied that he had demanded or been given the exclusive power of questioning witnesses.³²

Yet, on May 6, Untermyer asserted his authority to the Pujo Committee in a letter, cosigned by Farrar, so breathtakingly demanding that it amounted to a bloodless coup. Untermyer laid out exactly how and when things would be done and concluded: “We cannot undertake any such task unless it is clearly understood that we are to have the widest possible latitude and authority from the Committee as to the scope of the Inquiry and the witnesses who are to be examined.” Not only did Untermyer effectively usurp the Committee’s power, he did so while holding it hostage: “We desire also at this time to expressly, and separately as to each of us, reserve the right to resign our employment and to publicly state the reasons for so doing if an irreconcilable difference should hereafter arise between the Committee and Counsel as to the scope or manner of conducting the Investigation.” The investigation was followed closely by the public. The Committee members would have faced political disaster if Untermyer had resigned.224

These hearings would be Untermyer’s hearings and both the investigation and the bill that came out of them bore the stamp of his personality and ideology. He was warned by Wall Street critic and NCF member Alfred Owen Crozier that, if the Democratic Party failed to pursue the financial reform plank in their platform and the investigation failed to produce concrete results, Untermyer would be blamed: “But you have long been known as a great corporation lawyer with offices on Wall Street. When the people find, if they do, that they have been tricked and betrayed … and that the barn door was deliberately left open by the Committee until the horse was stolen, you will be made the one ‘scapegoat’ of the whole proceeding and the country will believe that you were put in charge by Wall Street ‘interests’ for the express purpose of accomplishing that very result.” Untermyer’s reputation as crusader was at stake.³³

Untermyer raised a significant problem almost immediately after his appointment, one that would ultimately cripple the investigation. On April 30 he wrote to Henry noting that the National Banking Act contained a provision that would have prevented the Committee and its staff from investigating the records—particularly the client records—of the banks that would be the subject of investigation. A judicial order or an amendment to the Banking Act was needed or Untermyer and the Committee would be unable to follow the money. On May 18 the House unanimously passed an amendment to the Banking Act giving the Committee the powers it needed. It would never find its way out of the Senate.³⁴

With no progress on the Senate side, Untermyer turned in the fall to the administration for help. He could not demand the banks’ records, but the comptroller of the currency had at least some of the information the Committee wanted. Taft had never been in favor of the investigation, but on September 24 Untermyer wrote to him to ask that he release the comptroller’s information. Taft turned the matter over to Wickersham and Untermyer started to push harder. He got nowhere until, late in December, a lame-duck Taft instructed the comptroller to release some information. It was, wrote Untermyer, only “the least important of this data.” As a result, he felt that the Committee had never properly completed its investigation. In January 1913, Pujo retired from Congress after an unsuccessful campaign for the Senate, leaving Glass in charge of the Committee. It was left to the unelected Untermyer to wrap up the work.³⁵225

As persistent as he was, Untermyer was also sensitive, and took criticism personally. Before the Pujo Committee had even been created he was complaining to Henry about his treatment in the press. His complaints would continue throughout the process in letters to friends like Henry and Bryan, associates like Pujo and the press itself, ranging from field reporters and Washington correspondents to William Randolph Hearst. He became particularly angry when his character was challenged, as it was at times because of his aggressive behavior and at times because of anti-Semitism.

One event in particular was a tremendous source of personal agitation: his insistence on obtaining the testimony of the allegedly dying William Rockefeller. Although Untermyer traveled to Rockefeller’s home on Jekyll Island and worked with his doctors to obtain that testimony as painlessly as possible (he allowed Rockefeller’s own lawyers to put the questions to him and waited on Jekyll Island for days until doctors were willing to let Rockefeller speak), he was roundly lambasted for his inhumanity. The fact that Rockefeller was healthy enough to return to New York shortly after the hearings ended and lived until 1922 went more or less unremarked upon.³⁶

Untermyer professed his customary confidence in the ultimate results of the investigation from the very beginning. His later statements that he had begun without bias simply are not credible, especially in light of his early speeches and letters. On January 16, 1912, a week before his first appearance before Congress and months before passage of the Committee’s authorizing resolution, he wrote to Henry: “Further reflection confirms me in the opinion that a thorough, painstaking, well-directed investigation will uncover a vicious financial system which must be corrected by remedial legislation before we can hope for any fundamental relief in the existing Trust and Monetary conditions.” By June 12, when the investigation had barely begun, he was writing Henry that “[w]e have already shown more than enough basis for remedial legislation affecting Clearing House and Stock Exchange to justify Investigation.” On June 28: “We have however already proved enough to satisfy reasoning men of the despotism of the financial concentration of money in New York.” And, as I noted earlier, he wrote to candidate Wilson from Baden-Baden, laying out the “facts”—a full indictment of Wall Street—as the Committee had already found them, even while its investigation was still very much in progress.226

Untermyer did try to maintain the appearance of fairness during the hearings, despite his predetermined conclusion and aggressive questioning of witnesses. His correspondence shows him reaching out to his former friends on Wall Street. Among other conciliatory gestures, he arranged a conference at New York’s Lotos Club in October 1912 to discuss possible legislative solutions with some of the leading villains of the Money Trust: Albert Wiggin of Chase National Bank, Frank Vanderlip of National City Bank, A. Barton Hepburn of Chase National Bank, Walter Frew of the Corn Exchange Bank and Morgan partner William H. Porter, among others. He negotiated appearance dates with witnesses, perhaps most elaborately with Francis Lynde Stetson. He may well have believed that he was being fair. On the first day of hearings on the Owen bill on February 4, 1914, he said: “I resent the suggestion that there was anything unfair or partisan about the conduct of that investigation.” Unfair? Probably not. Partisan? Without question.³⁷

The Report

Pujo submitted the Committee’s interim report to the House on February 28, 1913. It was the only report the Committee ever delivered. The Report itself reveals why the Committee never finished its work. As I noted earlier, the Committee had suspended its hearings in the early summer of 1912. Part of the reason was to give the Senate time to pass the necessary Banking Act amendment. Perhaps equally important was the Committee’s expressed concern that the hearings not appear to be partisan and influence the upcoming presidential election. (It is likely that the Democratic House was far more concerned with the possibility that widespread Republican opposition to the hearings might energize Taft’s campaign than that populist and progressive approval of the investigation would help Wilson.)

The Committee felt pressured to deliver something to show its progress. Time was short, with a new Congress to take office in 1913 and, with it, no assurance that the investigation would continue. Important witnesses would be left unexamined. The Senate’s failure to amend the Banking Act and the Comptroller’s refusal to disclose information to the Committee “seriously embarrassed your committee” in its efforts to explore the ties between banking houses. Thus the Committee presented its report as interim and suggested that its work be continued in the new Congress. It never was.³⁸

Interim or not, it was hardly a surprise that the Report concluded that American finance and industry were controlled by a small group of men principally associated with Morgan, including the First National Bank; National City Bank; Lee, Higginson; and Kidder, Peabody. The Committee made a number of recommendations designed to break up this concentrated control and restore stability and opportunity to the financial system. Among these was a draft of the bill that would be introduced the next year as the Owen bill.227

THE OWEN BILL

The ground had been laid for the Owen bill during the first two stages of stock market growth. The Hughes Committee, the Hadley Commission and a spate of bills in Congress reflected growing concern with the stock market as a matter of national financial stability. They struggled with ways to curb speculation, especially futures trading, margin buying, short selling and wash sales that by general consensus had turned the nation’s securities markets into gambling dens. Recall that this concern grew from the Panic of 1907, which was blamed at least in part on the banks’ irresponsibility in financing the securities industry and in securing their own collateral. A common tool that runs throughout these bills is disclosure. The goal of disclosure was, as it had been in the overcapitalization debates, to provide otherwise unavailable information necessary to permit the executive branch to enforce the law.³⁹

The Owen bill was in this tradition but it was also something different. Its structure of self-regulation, supervised loosely by state governments through the medium of exchange incorporation and the federal government through its power to regulate the mails, was very much in keeping with the Wilsonian progressive approach to federal regulation. While aimed at economic stability, it also would have worked to improve the safety of investors. As such, it tried to correct for some of the problems in corporate governance and finance created by state law. The bill would have required exchanges, most of which were unincorporated associations, to incorporate under state law, with their charters and bylaws to include regulations to protect the integrity of transactions and quotations. These regulations were to prohibit members from using their customers’ securities as collateral for their own loans, from lending securities left by customers with them as collateral, from engaging in certain types of fraudulent speculation, and to require them to keep full and complete records of all transactions, which would have been open for inspection by the Postmaster General.⁴⁰

Incorporation was the prerequisite necessary to permit the exchanges and their members to use the mails to transmit offering information, advertisements, quotations and purchase and sale information with respect to securities. The incorporation requirement was the basis for allowing the government to insist upon effective exchange self-regulation to ensure investor protection and economic stability.228

Other provisions of the bill aimed directly at investor protection. The rules of all exchanges engaged in interstate commerce had to require listed corporations to provide financial information, approved by resolution of the corporation’s board, “verified by the oath of an officer thereof,” and “certified by an independent accountant or firm of accountants,” including balance sheets describing “the nature, amount, and value of the tangible and other property, assets, and effects of the corporation” along with its liabilities, an income statement covering the preceding three years and similar statements as to corporate subsidiaries. The corporation’s filing package also had to include every contract, written or not, relating to the corporation’s sale of its securities.

Other provisions for investor protection focused on the treatment of investors by management. Listed corporations were required at least annually to file with the Postmaster General, “for public inspection and use,” updated profit and loss statements, agreements with officers and directors or entities with which they were affiliated, and of the “profits, emoluments, salaries, commissions, or other compensation or benefits” received by the officers and directors. Charters of all listed companies had to have provisions preventing officers and directors from engaging in short selling unless reported to the corporation’s board of directors and entered into its minutes.⁴¹

The bill received some, but not extensive, attention in the press, possibly because the president’s indifference to its passage made it unlikely that it would become law. The absence of a committee report for the Owen bill makes it difficult to say more. A report was prepared by the Committee and submitted to the Senate on the day of the Claflin bankruptcy. Owen himself had just sailed for Europe, and Gilbert Hitchcock of Nebraska rose almost immediately to challenge the Report on the ground that it had never been approved by a quorum of the Senate Banking and Currency Committee. A lengthy parliamentary debate took place the next day and Hitchcock’s motion to recommit the bill was approved. Hitchcock then requested that the report be “withdrawn from the files.”⁴²

Unlike previous proposals, the Owen bill was directed at least in part at investor protection, although the bill primarily was, like its predecessors, aimed at ensuring the integrity of the market for the sake of the health of the economy and the banking system. This conclusion is reinforced by a jurisdictional fight between the Banking Committee and the Post Office Committee following reintroduction of the bill in 1915. Owen argued that his committee had jurisdiction over the measure precisely because it was designed to protect the banking and currency systems. Securities were used as collateral for bank loans, so “the stability of the banking system of the United States is vitally concerned in the proper conduct of the stock exchanges.” The Post Office Committee’s argument for jurisdiction was that the bill regulated the use of the mail. This aspect of the bill was the one most clearly directed at investor protection, and investor protection served as a leitmotif throughout the hearings. Although the Owen bill retained the traditional concern with broad economic factors that had been the focus of the Pujo hearings, it did for the first time bring investor protection to center stage. And it did so in a particularly Wilsonian way, by leveling the playing field for all investors. When the president finally came out in support of securities regulation in 1919 it was for a bill that marked the third stage of securities development, a bill that was almost entirely a consumer disclosure measure for the benefit of investors.⁴³229

INCORPORATING THE EXCHANGES—THE PATH TO ENFORCEMENT

The incorporation requirement was central to the hearings and the bill. A substantial portion of the debate revolved around this provision. The issue of exchange incorporation had a fairly developed recent history. In England, a committee of Parliament had examined the question in 1875 and concluded that it would be unwise to force the incorporation of the London Stock Exchange. A German committee also recommended against incorporation for the Berliner Börse in 1892. The idea seems to have made its first public appearance in the United States with the Report of the Hughes Committee, which also rejected it. Governor Sulzer (who, as a congressman, had battled the Littlefield bill) proposed it to the New York legislature in 1913. Untermyer argued in opposition to this particular measure. It was, he said, “nothing but a blind,” because it would have put the books of NYSE members beyond public inspection. The New York measure was overwhelmingly defeated, although Untermyer continued to argue in favor of meaningful exchange incorporation. During the Owen hearings, the NYSE’s central argument was that traditional exchange self-regulation would produce better broker conduct than would law.⁴⁴

Incorporating the exchanges might seem like a curious thing to fight about. Yet exchange officials fought this proposal more fiercely than any other. Untermyer insisted that it was necessary to the entire regulatory program in order to ensure adequate publicity of brokers’ transactions, the integrity of price quotations, the proper enforcement of exchange regulations and the facilitation of federal regulation. The exchanges’ principal objection was that incorporation would subject their charters to constant legislative amendment and would deprive them of the right to discipline their members.⁴⁵230

On the face of it, neither side’s reaction makes much sense. New York did not have a particularly stringent general incorporation law. By the time of the Pujo Report, the state had passed rules against stock manipulation, the “bucket shop” laws proposed by the Hughes Committee. It also had enacted the country’s first statute permitting no-par stock that made overcapitalization either undetectable or impossible, depending on one’s point of view. There was no reason to believe that the state would make its corporations law tighter. The Committee and the NYSE officials knew this, as they also knew that New York had already rejected exchange incorporation. With lax corporation laws that by this time resembled New Jersey’s, what did the Exchange have to fear from the New York legislature?⁴⁶

One reason for the Committee’s approach might be found in Wilsonian progressive thought and political realities. The Federal Reserve Act, the FTC Act and the Owen bill all avoided centralized federal regulation as much as possible in a manner consistent with giving the legislative and executive branches and, in the case of the FTC Act, the courts, an opportunity to provide needed controls. Regulation should, as much as possible, remain with the states and private entities such as corporations under broad federal guidance. Incorporation was perhaps the surest way to achieve this kind of regulation through state and federal charter requirements built into the corporation’s very structure, allowing the corporation to otherwise act freely in the market. As the Pujo Report stated:

Whilst, of course, [the exchanges] can not now do anything contrary to law, nevertheless the State can not exercise in their case that comprehensive control and close and summary supervision which it may exact of corporate bodies as a condition of permitting them to exist at all. If such exchanges were required to incorporate, the State could write into and enforce in their charters provisions calculated to restrict them to legitimate purposes and suppress the abuses described.⁴⁷

To Wall Street, the Owen bill appeared to centralize in the federal government the power to interfere with the operations of what had become the very heart of American capitalism and to make a matter of public control an institution that nearly the whole financial community considered to be private business. Concerns over the effective transformation of wholly private property into quasi-public property had been pervasive in the railroad regulation and antitrust debates. Untermyer must have realized that too much centralized power in the federal government, especially in the executive branch, would surely have killed any chance that the bill had for passage. As it was, the bill’s opponents correctly noted that, incorporation or not, the exchanges could be subjected to the authority of the Postmaster General, who was given supervision over the act in order to avoid jurisdictional questions of federal regulation under the commerce clause. Decentralization, self-regulation and continued private ownership were essential if any form of the bill was to pass.231

These arguments seem sensible enough. They fit the market-oriented progressive ideology of the president and the central concerns of his party. But these were not the terms of the debate, nor do they cast stock exchange incorporation in a light that suited the Committee’s attitude and its ultimate agenda. For the Pujo Report also noted the Committee’s desire to correct the inconsistency and laxity of state law by using the exchange to create uniform and responsible regulation. Witnesses at the Owen bill hearings as well as opponents in the press argued that this sort of regulation, including regulation over corporations’ securities issuances, should be directly done by the federal government rather than indirectly through the stock exchanges.

It does seem odd that legislation designed to fix irresponsible state law would rely upon incorporating the exchanges under those lax state laws that were supposed to ensure that the exchanges imposed meaningful corporate regulation. And no Wilsonian progressive, no matter how committed to localism, could possibly have wanted to embrace the State of New York as a laboratory for regulatory experimentation through incorporation of the NYSE. That state traditionally had been reluctant to regulate the Exchange and the lobbying pressures the Exchange and its friends in Wall Street would have brought to bear on the legislature would most likely have resulted in very weak corporate regulation. It was easy enough for the state legislature to prohibit outright fraud, especially since the NYSE had recently adopted some of the recommendations of the Hughes Committee. It seems highly unlikely that the Committee assumed that New York would have adequately regulated the Exchange.⁴⁸

Even if these arguments support the Committee’s proposal, they do not suggest any good reason for strong opposition by the Exchange. It is not enough to think that the members of the Exchange simply reactively objected to any regulation. Indeed, one of the Exchange’s persistent objections to the duties that Washington sought to impose on it was its position that securities regulation should be a federal responsibility, not an Exchange responsibility. And this was not just talk. The Exchange was, for example, in favor of the Rayburn bill precisely because it placed regulatory responsibility for railroad securities on the federal government and not on the Exchange. The underlying issue of private property, reflected in the club-like structure of the exchanges, was an understandable fighting point. But the kind of regulation proposed by the Owen bill hardly rose to the level of interference entailed by stringent railroad rate regulation or federal control of corporate capitalization.232

The Exchange’s formal response, summarized in a brief submitted to the Committee by its counsel, John Milburn, argued that incorporation would interfere with its ability to discipline its members by involving the courts, that legislation would result in “constant appeals to the legislature” for modifications and amendments, and that incorporation was unnecessary in order for Congress to impose regulation. These were the arguments the Exchange had used to defeat incorporation legislation in New York, and they seem just as irrelevant as Untermyer’s.

The biggest problem the Exchange had with judicial intervention was the difference between disciplinary decisions made “from a strictly legal point of view and with the legal habit of mind” and those made by the Exchange’s governors “looking at it from the point of view of practical men of great experience in the actual transactions of the exchange.” No doubt the Exchange believed it was a better regulator, but Milburn gave neither evidence nor a principled defense of this position. Moreover, New York had earlier adopted a statute permitting unincorporated associations like the NYSE to be sued in their own names, much like corporations, and judicial review of internal decisions by associations was a common, if not completely settled, practice.⁴⁹

The idea that lobbying would create uncertainty and weaken the power of the Exchange was at once overstated and beside the point. Lobbying occurs with respect to all legislation and there is no reason to have expected the State of New York, which had already shown deference to the Exchange, to become more aggressive. Finally, the Exchange was right—incorporation was not necessary to regulation.

The incorporation debate does not seem to make a lot of sense as it was presented by the parties. Handing over the job of regulating to New York was not likely to tighten or ensure the enforcement of the rules by which the Exchange operated. There was no significant public benefit and no serious potential for harm to the Exchange. And Untermyer’s continued insistence on incorporation threatened the likelihood of the entire bill’s passage. While it appears from the record and the parties’ correspondence that their arguments were sincere and should thus be taken at face value, another driving force, discernible from both legal analysis and indirect historical support, may have been at stake.233

The explanation lies in the way compelled exchange incorporation would have affected the members’ property, exposing it to legal liability in a manner that was not possible with unincorporated exchanges. Milburn correctly noted that an unincorporated association like the NYSE could be sued in its own name just as it could have been were it incorporated, but this evaded the underlying property issue. In order to give regulation real teeth by exposing the exchanges’ wealth to legal liability, the federal government or any private plaintiff would have had to satisfy itself with the meager assets of the NYSE or prosecute each member individually in order to collect damages. Incorporating the exchange would most likely have collectivized its members’ wealth, at least to the extent of their exchange memberships, and made that wealth available to satisfy judgments.

Although the Owen bill’s penalties were modest fines for crimes that would have been classified as misdemeanors, and the exchanges’ own central economic risk (in contrast to that of their members) was prohibition of the use of the mails, this specter of increased financial exposure that would have resulted from incorporation clearly troubled several witnesses. The hearings provide some evidence that collective liability was an important, if unspoken, issue. Hjalmar Boyesen, counsel for the Consolidated Stock Exchange, noted in passing that the members of an unincorporated association could not be held liable for one another’s debts. Milburn’s testimony revealed that the NYSE had no tangible assets. The purchase and sale of seats were private matters between members for which the Exchange received no compensation. Its building was worth $5 million, placed in a corporation owned by the Exchange for the benefit of its members. But the collective value of members’ seats (individually worth $55,000) was $50 million. Incorporating the NYSE would presumably have required members to exchange their seats for shares in the newly incorporated Exchange, thereby giving it a net worth of at least $50 million and exposing that newly collective wealth to federal (and perhaps private) judgments in litigation against the Exchange, a result not possible under its status as an association. Seen in the context of the weak arguments articulated on both sides, this issue appears to justify the intensity of the battle over exchange incorporation.⁵⁰

The controversy early in the century over the incorporation of labor unions supports the conclusion that while collective exposure was largely unarticulated, it was nevertheless a deep background concern. As one illustration, a debate of sorts had taken place in 1902 between Louis Brandeis and Samuel Gompers over this issue. Underlying that debate was a recent British decision holding an unincorporated union liable in damages for the actions of its members during a strike. Brandeis supported incorporation, arguing that it would enhance the responsibility of union leaders and members and make the unions more acceptable to the public. Broadly stating the laws applicable to unions, he made a comment that could not have been especially persuasive to union members and makes precisely the point I believe underlay the battle over exchange incorporation: “[W]hile the rules of legal liability apply fully to the unions, though unincorporated, it is, as a practical matter, more difficult for the plaintiff to conduct the litigation, and it is particularly difficult to reach the funds of the union with which to satisfy any judgment that may be recovered.” It should be obvious that Gompers opposed the measure. Every participant in the stock exchange debate had to have been aware of this issue. It is striking that it never explicitly came up.⁵¹234

In order for the federal government to regulate through the exchanges, it was best if they were incorporated.⁵²

The Owen bill and the FTC bill were two logical outgrowths of the federal incorporation debate. In its disclosure provisions aimed at responsible corporate governance and finance, the Owen bill bridged the gap between federal incorporation and economic stabilization through securities regulation. The FTC Act took up the dimension of federal incorporation proposals that demanded meaningful federal antitrust legislation. Both the Owen bill and the FTC Act completed the separation of the two major problems that had confounded the federal incorporation movement. And both measures, like most of the federal incorporation proposals that preceded them, relied upon disclosure and relatively light federal control to encourage the self-regulation of business. Both provided remedies when self-regulation failed.

The New Deal securities acts imposed a slightly heavier federal hand but still maintained the spirit of the Owen bill and the Wilsonian approach to regulation in general. They had important similarities, particularly in the areas of corporate disclosure and the regulation of brokers and dealers. Like the 1934 Securities Exchange Act, the Owen bill relied largely on the exchanges themselves for self-regulation rather than detailed federal control, directly addressing itself only to those practices—manipulation, short selling and margin trading—that the NYSE had shown itself unwilling to correct effectively for itself. Finally, like the FTC and Federal Reserve Acts, it relied more heavily on voluntary cooperative conduct with the private sector than it did on heavy-handed federal regulation.235

THE END OF BUSINESS PROGRESSIVISM

The economic context in which the Pujo hearings concluded, the Owen bill was debated and business progressivism ended was complex. Nineteen thirteen, the year of Wilson’s inauguration, was a depression year, a continuation of the lackluster economy that had prevailed since the panic. Alexander Noyes described it as an odd time, with indications of potentially improving trade owing to expected bumper crops, an influx of gold and some industries, like iron, working almost at full capacity. But there was no recovery despite the optimistic atmosphere in which the year began. Some blamed the tariff reduction bill, others the ICC’s failure to raise railroad freight rates. Some blamed the uncertainty in European markets that were evaluating the possibility of war.⁵³

Despite occasional bursts of activity from 1911 to August 1914, the depression continued, affecting Wilson’s taste for business regulation. Hope dawned with 1914. Surveys of businessmen as well as the general economic environment promised improvement. The Federal Reserve Act had been passed and the tariff revised downward. Wilson expressed the hopes of many that the economy would improve as this legislation took effect, even as he signaled that it was time for the government to leave business alone. The settlement of the government’s antitrust suit against the New York, New Haven & Hartford also suggested the possibility of better government-business relations. Railroad executives in Chicago were looking forward to passage of the pending Rayburn bill, which would provide uniformity in an area complicated by divergent state regulations.

But hope was not uniform across the nation. Boston had been particularly bowed by the depression and the collapse of the New Haven, precipitated by that city’s own Louis Brandeis, had hit New England investors especially hard. Businessmen in Boston remained gloomy. The Wall Street Journal reported with less optimism than others, too, focusing on the tightness of the money supply and the undeniable problems in the railroad industry caused by low freight rates, problems that in turn dragged down related industries like steel. Finally, despite his reassurances to business, Wilson clearly intended to push his trust legislation, and its ultimate form was uncertain. The fate of the Owen bill was still unclear. While many businessmen expected the trust legislation to be rather mild, the uncertainty produced anxiety.⁵⁴

The year also began with another hopeful sign. After two years of badgering by the Pujo Committee, five major Morgan partners announced their resignations from a total of thirty directorships on January 2. Thomas Lamont, speaking for the firm, noted that these resignations had been long-planned because the directorships simply were too time consuming, and that it had only been the partners’ senses of obligation toward their clients that had kept them on. The move met with broad approval. Untermyer, characteristically, complained that the resignations did not go far enough. They were in fact relatively insignificant because, busy or not, these Morgan partners remained on the boards of most banks and financial companies and of their most important industrial companies as well.⁵⁵236

Interest rates dropped throughout the month and the stock market began to rally. Wilson gave a real boost to the market in his personal address to a joint session of Congress on January 20. Most striking in this speech was his announced conciliation with business. Calling his business legislative agenda and its approaching end a “constitution of peace” with business, he declared that “the antagonism between business and government is over.” He acknowledged the damage that continued legislative uncertainty caused business and pledged to complete his program quickly. The market rallied, but it was a rally that would barely survive the month. The president may have declared a truce but business was far from certain.⁵⁶

Wilson was clear about what he would and would not support. His basic guideline was the Democratic platform of 1912. This meant that he would push trust legislation and also support the Rayburn bill. He would not, however, support federal incorporation, nor the Owen bill, on which hearings were to begin in February. Neither measure was part of the platform.

The strength of Wilson’s opposition to the Owen bill was unclear. The New York Times described him as firmly opposing it, but the Wisconsin State Journal, among other papers, more tentatively described him as not opposing but not supporting the bill either. It appears that Wilson was of a mind to do the minimum amount of business regulation that he had promised and no more. As he would make clear by June, he was ready to let business be business.⁵⁷

The hopeful air of January rapidly faded. Congress got to work on the legislative program, which the administration began to push hard to complete despite some recalcitrance in Congress. The beginning of February found the capital markets—stocks, bonds and money—substantially improved. The president was given credit for boosting investor confidence and for distancing himself from the Owen bill, which one commentator called “the most advanced proposal toward the Federal espionage over and regulation of private affairs and personal ethics that the radical tendencies of the age have yet evolved.” Strong European buying also helped. But the first week of February was to prove the financial high point of the year.⁵⁸237

Legislation that had begun in an atmosphere of promise hit major snags by March. The Investment Bankers’ Association opposed even the relatively mild trust legislation that would become the FTC and Clayton Acts, as did former President Taft. Securities markets had been flat and trade had slowed considerably. The odd thing about this situation that puzzled almost everyone was that the money supply was easing and business inventories were low, both of which ought to have produced a boost in commercial activity. But no such boost was forthcoming. Legislative uncertainty continued to be identified as a cause of the malaise, as did a lack of confidence created by a number of fraud-induced railroad failures.⁵⁹

Mid-April saw a significant price break on the stock market. The downward trend this started was to continue until the New York Stock Exchange and, with it, all other American stock exchanges, closed for war on July 31. Wilson’s increasing insistence on passing trust legislation before Congress adjourned gave business some reason to be afraid that perhaps the resulting statute would not be quite so benign as it had hoped. The proposed antistock-watering provisions, which would have given the federal government supervisory powers over all corporate securities issues and prohibited corporations with watered stock from engaging in interstate trade, became a major sticking point in the trust bill. The Rayburn bill had been on track but railroad presidents were now trying to derail it, pushing for federal incorporation instead as a measure that would provide much greater efficiency. Opposition to the program was beginning to infest the president’s own party. The market dropped again and the new possibility of war with Mexico did not help.⁶⁰

Not all was lost. The Rayburn bill was reported to the House in May with the approval of the New York Stock Exchange. This bill provided the kind of federal securities regulation, instead of exchange regulation, that the NYSE had called for in the Owen hearings. The measure was designed, as I have noted, to prevent common carriers from issuing watered stock, and it principally served as an antitrust measure. Indeed all of the antitrust reasons that had made stock watering a major public issue for years formed the rationale underlying the bill. While Rayburn himself made it clear that its goal was not to protect investors, Chairman William Adamson of the Interstate Commerce Committee proclaimed that, in addition to its antitrust effect, it also targeted people who were “buncoing innocent investors out of hundreds of millions of dollars and embarrassing other innocent investors by unloading on them worthless stocks and bonds.”

At the same time small investors were still active despite the torpid market. In May, the Chicago Daily Tribune began a weekly investment advice column on individual securities in answer to specific questions from readers. As the Tribune reported, demand for such a column was high, with a “flood of inquiries” from “financial houses welcoming an investigation of their securities,” securities promoters, brokerages recommending stock they had for sale and, most of all, “from persons who have been solicited to make investments and are seeking disinterested advice.” Similar columns began to appear in other newspapers and magazines that circulated among the middle class.⁶¹238

It had been an intense winter and spring, mid-term elections were approaching, trust legislation was stalling, the economy was not moving and the market was declining. It was in this atmosphere that the president lost his cool, and it was in this atmosphere that he completed his transformation from business progressive to business defender. It was in this atmosphere that he called an end to the Progressive Era in business.

JUST BELIEVE

The end was foreshadowed on June 1 when Wilson gave a widely reported speech in which he declared that the business depression was not widespread, that other countries were in much worse shape and that the only real depression was in railroads and steel. It was then that he delivered the phrase that was to haunt him. The depression was “psychological.” Like the recently created Peter Pan, the president insisted that prosperity would return if businessmen would only believe. “While admitting that he had no particular facts on which to base his assertion,” he declared that the economy was sound. An outpouring of public ridicule built slowly throughout the month, tempered by the House passing the FTC and the Rayburn bills in early June.

The Wall Street Journal and the Los Angeles Times were especially hard on the president. The Journal described him as “unlearned in economics, or in business practice,” and the Los Angeles Times suggested that “If President Wilson would only consent to psychologize into his swollen cabesa the idea that businessmen understand” the conditions for business success far better “than he ever did or ever can or ever will” there would be economic hope: “Oh, how the man in the White House needs a mind cure!”⁶²

Criticism continued during the month. In mid-June, taking a page from Roosevelt’s book, Wilson publicly revealed that a letter had been sent by W. P. Ahnfelt, president of The Pictorial Review Company of New York, to an undisclosed number of businesses along with a form letter to be addressed to congressmen and administration officials. Ahnfelt asked that all who agreed that Wilson’s trust program should be stopped, that railroad freight rates should be increased and that business should be given a rest by the administration should send letters and telegrams along the lines of the form letter to their representatives and other officials. Wilson jumped on this as evidence of a business campaign to stop trust reform, suggesting that the wealthy and powerful were opposing the people. He continued his retaliation by publicizing supporting letters from businessmen who had written to him and meeting with the Democratic leadership to build support for pushing through the trust legislation.⁶³239

The president’s satisfaction was short-lived. On June 25, H. B. Claflin Co., a respected dry goods wholesaler that had been in business since 1843, declared bankruptcy after surviving the Civil War, the Panics of 1873, 1893 and 1907, and several depressions. Over $30 million in notes remained unpaid, making it the largest bankruptcy in the nation’s history. While its effect on the stock market was minimal, its broader impact on public opinion was far more significant. On that same day, Wilson gave a short speech in the White House to the Virginia Editorial Association. While the group was small, the newspapers were unanimous that the speech was intended to be one of the president’s most important.⁶⁴

Reading the accounts of the speech make it easy to guess at the president’s emotions. He was variously described as “defiant,” with snapping jaws and flashing eyes. Virtually every report commented on his “clenched fists.” Perhaps the most obvious emotion that comes to mind is frustration, frustration that business failed to understand his desire to help, frustration with the pace of trust legislation, frustration with opposition members of his own party, frustration at the mockery to which he had been subjected for his psychoanalysis of the economy and frustration especially that his January prediction of a return to prosperity had fallen flat on its face. Frustration seems to have been coupled with Wilson’s characteristic self-righteous anger, on display whenever his will appeared to be thwarted, the same self-righteous anger that led him to lose the graduate school battle at Princeton that led to his resignation and the same anger that would help to doom Versailles and the League of Nations.

Whatever his emotions, Wilson was indubitably ready to declare for business and almost to will a return to prosperity. Everything he said resounded with his effort to blame the depression on Roosevelt.

There is nothing more fatal to business than to be kept guessing from month to month and from year to year whether something serious is going to happen to it or not and what in particular is going to happen to it if anything does…. The guessing went on, the air was full of interrogation points, for ten years or more, then came an administration which for the first time had a definite programme of constructive correction.240

He stated that the antitrust legislation would serve as a “new constitution of freedom” for business.

It will not be postponed, and it will not be postponed because we are the friends of business…. Because when the programme is finished, it is finished; the interrogation points are rubbed off the slate; business is given its constitution of freedom and is bidden go forward under that constitution. And just so soon as it gets that leave and freedom there will be a boom of business in this country such as we have never witnessed in the United States.

Perhaps Wilson’s most astonishing statement came near the beginning of the speech. “We are in the presence of a business situation which is variously interpreted. Here in Washington … we are perhaps in a position to judge of the actual conditions of business better than those can judge who are at any other single point in the country” and, in his judgment, a business revival was around the corner. “We know what we are doing; we purpose to do it under the advice, for we have been fortunate enough to obtain the advice of men who understand the business of the country; and we know that the effect is going to be exactly what the effect of the currency reform was, a sense of relief and security.” Few presidents have ever displayed such arrogance. Few have been so fortunate as to face an impending war.⁶⁵

Nobody was terribly impressed. Even the friendly Times suggested that perhaps the president had overstated the extent to which recovery was imminent. The Los Angeles Times headlined that Wilson Rages Impotently, particularly pained by the criticism he received for his psychological diagnosis of the depression. The New York Press asked: “Could the United States government send to the fallen house [of Claflin] 30 or 40 millions of relief in a psychological form, instead of hard cash, and lift it from its ruins? President Wilson must stop talking—and acting, too—what to ordinary business intelligence is almost criminal nonsense, or this whole country, big as it is and strong as it is, will be threatened with a Claflin collapse.” B. C. Forbes, writing in the New York American, blamed the Claflin failure partly on the president’s “perpetual attack on business,” and complained that his repeated description of the depression as psychological “is worse than puerile—it is becoming exasperating to the many thousands of business men who are wrestling with heartbreaking problems to keep things going as well as to workers who have either been thrown idle or put on starvation hours.” The Wall Street Journal also gave no ground. Wilson’s optimism was, it noted, “apparently based on a plentiful absence of the right kind of information,” commenting that “In Wall Street there is no such self-deception. Its aggregate information exceeds that of all the country put together, and is brought down to date.” Finally, “official opinion is not only valueless but misleading. It sees what it wishes to see, when the wish is so evidently father to the thought.” Wilson had called an end to economic progressivism. But the business community to whom he opened his soul responded with contempt.⁶⁶241

Business did not improve. The president’s supporter, The New York Times, put a happy headline on a national survey of businessmen in July, but the content of their comments was no more optimistic than it had been all year. Southern and Western bankers were concerned as well, and their worry deepened as the summer progressed. Crops were predicted to be bumper, the automobile industry produced one of the economic bright spots and the trust bill was nearing passage. None of these had any discernible effect.⁶⁷

And then the war in Europe began. The New York Stock Exchange shut down on July 31. The European sell-off of securities, many of which had been bought only that spring, had dramatically dropped stock prices over the preceding week and threatened to drain the nation’s gold supply. The Exchange’s closing was supported throughout the country. As the Atlanta Constitution put it, “the New York stock exchange would have been called upon to bear the weight of the world’s financial burdens” had it not closed for business. With the NYSE closed until December and only the pending Clayton Act to finish, the administration had completed its economic reforms. A friend of business it was, and business would soon reap the benefits of the president’s diplomacy. The Progressive Era in business had come to an end.⁶⁸

PROPHET OF PROSPERITY

Wilson’s June performance as an economic prophet had been rightly ridiculed. But in the event it was Wilson and not the critics who proved correct, although not for the reasons Wilson expected. The economy had indeed been suffering. Railroads in the East and related industries like steel were in genuine pain because the ICC held rates too low to permit maintenance and expansion and still allow for dividends. Railroads were in such bad shape that a group of prominent railroad presidents met with Wilson on September 9 to ask for various forms of relief, including postponement of the Rayburn bill. But the war gave the railroads what they needed. Not only was the Rayburn bill postponed for almost six years but also, on December 18, the ICC finally gave the railroads the rate relief they had been seeking, allowing an increase of 5 percent. Railroad and steel stocks reacted shortly thereafter as headlines announced that the increase would mean a “big revenue jump” of at least $30 million. By December 9, McAdoo confidently stated that prosperity already had begun to return. The absence of panic during the lengthy depression was, he said, “phenomenal” and the railroad rate increase and the easing of money that came with the operation of the new Federal Reserve banks were having good effects. Americans had started saving and had money to invest in domestic industrial expansion. “‘Any war is injurious to the world, yet we have reached the point where the present war is in some ways an actual benefit.’”⁶⁹242

The benefits were not immediate. The first new order of business facing McAdoo and the bankers immediately after the declaration of war was to stave off a possible currency crisis. Gold reserves dropped by almost $160 million on a base of $1.1 billion because European creditors could not collect gold from their own debtors to pay off U.S. debt and because they dumped their American securities prior to the exchange closings. This brought Mc-Adoo to New York immediately after July 31 to negotiate the issuance of clearinghouse certificates and increase available currency by $500 million under the Aldrich-Vreeland Act.⁷⁰

Emergency revenue measures also placed a short-term burden on increased commerce. House Democrats backed the president’s proposal for war taxes on items like beer, wine, tobacco, licenses, gasoline, bankers and brokers and a stamp tax on bonds, stock and other financial instruments, which alone was estimated to raise $35 million. Despite significant Republican opposition, the measure was supported by the NYSE as a patriotic gesture and was backed in force by Democrats, passing on October 22 as the Federal Emergency Revenue Act.⁷¹

American investors reflected their new optimism even before there was any discernible improvement in economic fundamentals. Despite the market closures, or perhaps because of them, there was significant pent-up investment demand. Restricted bond trading opened on the NYSE on September 20 and, on the 21st, a New York City bond issue was oversubscribed within twenty-four hours. Trading in unlisted stocks resumed on September 25 subject, like bonds, to price review by a stock exchange committee, and bond trading volume had increased significantly by the end of September. Investor confidence continued despite dividend cuts or suspensions by railroads and industrials preparing for war finance. Plummeting foreign exchange rates, bumper wheat crops and a balance of trade increasingly in favor of the United States helped to keep confidence high. Only the South continued to suffer as the interruption in the cotton trade, especially with Britain, made the crop virtually illiquid and led to bailout plans by banks and the federal government.⁷²243

Signs were sufficiently good that Wilson, demonstrating perhaps that his judgment had not improved much since June but bolstered by the improving balance of trade figures, proclaimed on October 12 that business conditions were “improving rapidly,” noting that “he had not made any systematic canvas, but that from reports received from here and there he is of the opinion that business is rapidly assuming normal conditions.” Luckily for the president, this time he was right. The next day the New York Stock Exchange announced that it would allow restricted stock dealings to resume between members. On October 15 Wilson signed the Clayton Act and legislative reform was over.⁷³

The Federal Reserve System opened for business in the middle of November, releasing $400 million into the economy. Britain took American cotton off its contraband list even as the plan to bail out cotton growers was about to be put into effect. The bond market had normalized, and indeed demand for bonds was substantial. Steel was beginning to pick up. The stock market remained sticky, but this was attributed to the fact that prices were being held where they were when the Exchange closed. In fact European investors had begun buying American securities as well rather than dumping them on the market as Wall Street had initially feared. Savings banks returned to the bond market in significant numbers by early November and as the month progressed investors’ demands for stock exceeded the supply. On November 30, the NYSE reopened for bond trading, and stock trading resumed on December 12, with prices rising by month’s end.⁷⁴

The American economy was poised to take off after more than three years in the doldrums. But not just yet. Nineteen fifteen dawned with bank clearings down, business failures up and a continued “unsatisfactory state of industry and trade.” No wonder Wilson had panicked in June. As one commentator noted in April 1915, “everyone seems agreed on the fact that the Wilson administration, in its first two years, has so identified itself with financial and industrial legislation that the conditions of business will have a determining effect upon the results of the next presidential campaign, unless, indeed, our foreign relations grow so acute as to sweep out of sight all the issues raised in the last ten years of agitation.” Fortunately for the president, that would be precisely the case. And, as a result, the United States would engage in its first serious public war financing since the Civil War, using the same techniques that Jay Cooke had then used. The difference was that this time the securities markets had reached the threshold of their modern form and were ready for their complete integration into American culture.⁷⁵244