The Lords of Creation
The History of America’s 1 Percent
Frederick Lewis Allen
With a New Introduction by Gretchen Morgenson
To A. R. A.
CONTENTS
SERIES INTRODUCTION
INTRODUCTION
PREFACE
I. MORGAN CALLS THE TUNE
II. THE HARRIMAN CHALLENGE
III. THE OVERLORDS
IV. PANIC
V. COUNTER-OFFENSIVE
VI. PUJO
VII. WAR
VIII. THE SEVEN FAT YEARS
IX. BUILDING THE PYRAMIDS
X. BANKERS, SALESMEN, AND SPECULATORS
XI. INTO THE STRATOSPHERE
XII. THE OVERLORDS, 1929
XIII. DOWNFALL AND CONFUSION
XIV. ALL CHANGE
APPENDIX: SOURCES AND OBLIGATIONS
INDEX
ABOUT THE AUTHOR
Series Introduction
I
We the people seem to have the freest book trade in the world. Certainly we have the biggest. Cruise the mighty Amazon, and you will see so many books for sale in the United States today as would require more than four hundred miles of shelving to display them—a bookshelf that would stretch from Boston’s Old North Church to Fort McHenry in South Baltimore.
Surely that huge catalog is proof of our extraordinary freedom of expression: The US government does not ban books, because the First Amendment won’t allow it. While books are widely banned in states like China and Iran, no book may be forbidden by the US government at any level (although the CIA censors books by former officers). Where books are banned in the United States, the censors tend to be private organizations-church groups, school boards, and other local (busy)bodies roused to purify the public schools or libraries nearby.
Despite such local prohibitions, we can surely find any book we want. After all, it’s easy to locate those hot works that once were banned by the government as too “obscene” to sell, or mail, until the courts ruled otherwise on First Amendment grounds—Fanny Hill, Howl, Naked Lunch. We also have no trouble finding books banned here and there as “antifamily,” “Satanic,” “racist,” and/or “filthy,” from Huckleberry Finn to Heather Has Two Mommies to the Harry Potter series, just to name a few.
II
And yet, the fact that those bold books are all in print, and widely read, does not mean that we have the freest book trade in the world. On the contrary: For over half a century, America’s vast literary culture has been disparately policed, and imperceptibly contained, by state and corporate entities well placed and perfectly equipped to wipe out wayward writings. Their ad hoc suppressions through the years have been far more effectual than those quixotic bans imposed on classics like The Catcher in the Rye and Fahrenheit 451. For every one of those bestsellers scandalously purged from some provincial school curriculum, there are many others (we can’t know how many) that have been so thoroughly erased that few of us, if any, can remember them, or have ever heard of them.
How have all those books (to quote George Orwell) “dropped into the memory hole” in these United States? As America does not ban books, other means—less evident, and so less controversial—have been deployed to vaporize them. Some almost never made it into print, as publishers were privately warned off them from on high, either on the grounds of “national security” or with blunt threats of endless corporate litigation. Other books were signed enthusiastically—then “dumped,” as their own publishers mysteriously failed to market them, or even properly distribute them. But it has mainly been the press that stamps out inconvenient books, either by ignoring them, or—most often—laughing them off as “conspiracy theory,” despite their soundness (or because of it).
Once out of print, those books are gone. Even if some few of us have not forgotten them, and one might find used copies here and there, these books have disappeared. Missing from the shelves and never mentioned in the press (and seldom mentioned even in our schools), each book thus neutralized might just as well have been destroyed en masse—or never written in the first place, for all their contribution to the public good.
III
The purpose of this series is to bring such vanished books to life—first life for those that never saw the light of day, or barely did, and second life for those that got some notice, or even made a splash, then slipped too quickly out of print, and out of mind.
These books, by and large, were made to disappear, or were hastily forgotten, not because they were too lewd, heretical, or unpatriotic for some touchy group of citizens. These books sank without a trace, or faded fast, because they tell the sort of truths that Madison and Jefferson believed our Constitution should protect—truths that the people have the right to know, and needs to know, about our government and other powers that keep us in the dark.
Thus the works on our Forbidden Bookshelf shed new light—for most of us, it’s still new light—on the most troubling trends and episodes in US history, especially since World War II: America’s broad use of former Nazis and ex-Fascists in the Cold War; the Kennedy assassinations, and the murders of Martin Luther King Jr., Orlando Letelier, George Polk, and Paul Wellstone; Ronald Reagan’s Mafia connections, Richard Nixon’s close relationship with Jimmy Hoffa, and the mob’s grip on the NFL; America’s terroristic Phoenix Program in Vietnam, US support for South America’s most brutal tyrannies, and CIA involvement in the Middle East; the secret histories of DuPont, ITT, and other giant US corporations; and the long war waged by Wall Street and its allies in real estate on New York City’s poor and middle class.
The many vanished books on these forbidden subjects (among others) altogether constitute a shadow history of America—a history that We the People need to know at last, our country having now become a land with billionaires in charge, and millions not allowed to vote, and everybody under full surveillance. Through this series, we intend to pull that necessary history from the shadows at long last—to shed some light on how America got here, and how we might now take it somewhere else.
Mark Crispin Miller
Introduction
Financial panics and crises occur so frequently in the United States nowadays that the boom-and-bust pattern is becoming alarmingly commonplace. During the past twentyyears, for example, US investors have weathered the $4 billion failure of the Long-Term Capital Management hedge fund, the Internet stock blast-off and crash, and the massive Enron and WorldCom accounting frauds and bankruptcies. Of course, the economic conflagration of 2008, which began as a financial brushfire among subprime mortgage lenders, superseded all of these events in size and devastation.
It is not immediately clear why the frequency and severity of financial scandals is increasing in the United States. What is clear is that we need to understand the origins of these disasters,as well as the policies and people that bring them on.
Studying past crises is one way to do that. While distant actions may seem unrelated to current events, rereading about the past almost always provides surprising insights into the present.
Such is surely the case with TheLords of Creation, written by longtimeHarper’s Magazineeditor Frederick Lewis Allen. First published in 1935, the account chronicles the vast expansion of corporations and finance in the United States between the 1890s and the 1930s and analyzes the people and practices spanning that period of epic boom and bust.
Some might contend that an examination of this period has little relevance today. Certainly a lot about the world of finance has changed during the past century: derivatives, collateralized debt obligations, negative amortization mortgages, and other financial instruments of mass destruction were not around at the turn of the twentieth century.
B
ut Allen’s history of sharp practices on Wall Street and in company boardrooms—practices likeinsider trading by executives, which became rampant and acceptable, as well as the various government responses to the financial woes of 1907 and 1929—shows not only how different those years were but also how little has changed about our markets and our government.
Consider this assessment from Allen, which could easily have come from yesterday’s news report:“Though there was much sheer rascality in the Wall Street of the nineteen-twenties, much sheer greed roaming at large, and a widespread betrayal of the fiduciary principle, it may be that none of these things did as much damage to the country, in the sum total, as the sheer irresponsibility of men who, possessing vast powers, played the game of profit and loss without regard for the general public interest.”
Central to Allen’s riveting story is the amalgamation of industries and financial organizations that took place at the turn of the twentieth century, and the effects ofthis consolidation on society. Because that trend continues to this day, understanding its impacts over a century ago can help show what may lieahead for us.
The merging Allen describes occurred in all manner of industries—railroads, finance, retail, and automobiles. And yet, while this practiceenriched corporate insiders and their Wall Street bankers, Main Street felt a sense of foreboding.
“The outside public looked on in mingled admiration and alarm and bewilderment,” Allen writes. “They feared the power which was now concentrating in downtown New York and the other financial centers of the country, they watched with dismay the inroads being made on the domain of free competition, and yet the processes of change were so multiple, so obscure, and so baffling that they did not know what to do.”
Allen’s tone in The Lords ofCreation is that of a knowledgeable observer. But it is also amusing and wry. Describing the New York Stock Exchange, he writes:“During those years it might well have been called the Association for Improving the Condition of the Rich.” He is equally trenchant on the power of government regulation, which“depends upon the vigilance, imagination, and honesty of officials—very variable qualities, all of them.”
In telling his story, Allen introduces readers to well-known characters as well as those who have been lost to history. Among the latter is John W. Gates, a steel industry giant and “jovial buccaneer of finance” who, during the late 1890s,worked on many corporate combinations. Allen tells of Gates’s impoverished upbringing in Illinois, followed by a rapid rise in the barbed-wire business. Gates was soon rubbing shoulders and doing deals with J. P. Morgan himself.
“He was a good fellow and a remorseless trader,” Allen writes of Gates. “The sort of man who will sit up all night at a friend’s bedside and then destroy the man financially the next day.”
Some of the events recounted in The Lords of Creation highlight the differences between the turn of the twentieth century and today. For example, the Glass-Steagall legislation—the government’s chief response to the dubious Wall Street practices that led to the Crash of 1929—had real teeth. Until 1999 when Congress killed it off, that law had helped protect the public from rapacious bankers for almost seventyyears.
Contrast this with the Dodd-Frank law, Congress’s response to the debacle of 2008. It is riddled with loopholes and does little to protect taxpayers against future bailouts of reckless financial institutions.
Far more of Allen’s history, however, shows how little has changed on Wall Street and in Washington. Listen, for example, to hisdescription of the zeitgeist during the seven fat years of 1922 through 1929: “The overwhelming majority of the American people believed with increasing certainty that business men knew better than anybody else what was good for the country, and that the government had better keep its hands off their affairs and thus permit economic nature to take its course.”
Such words could easily have been written about the 1990s and early 2000s, when Alan Greenspan, the former head of the Federal Reserve, held sway and deregulatory fervor ran high.
Allen also tells readers ofthe ineffectual regulators in the 1920s, ancestors to the see-no-evil government officials who allowed and enabled the 2008 disaster. Indeed, Allen’s description of regulation during the Roaring Twenties has a very familiar ring.
“Although most of the regulatory legislation of the two preceding decades remained on the books, the public zeal for enforcement had weakened,” he writes. “The officials responsible for enforcement were naturally not always selected for their vigilance. More often they were selected for their party regularity or their pliability. Some were exasperatingly ignorant of the industries which they were supposed to supervise; others, in the process of learning about them, had become so inoculated with the ideas of the men who ran them that they could hardly see the need for any supervision at all.”
Equally familiar is Allen’s description of the individual stockholders of the early twentieth century, an impotent group whose ownership of company shares granted zero ability to effect change at those institutions. “The working control of most of the very large corporations rested in the hands of groups of insiders who owned only a fraction of the stock,” Allen writes. “The vast majority of shareholders regarded their stock certificates as token of liquid wealth rather than as tokens of responsible ownership.” Insiders, he added, were subject “to very little effective check by the scattered majority owners.”
Ditto for today.
But perhaps the best proof of the relevance of The Lords of Creation to our current financial system is Allen’s call to arms at the book’s end:
“The problem was nothing less than how to adjust our institutions under the new circumstances created by the vast financial and economic changes of the past generation, so as to multiply effectively and distribute with some decent approach to fairness the products of the earth, the fruits of labor, and the unprecedented gifts of science—and to do this without destroying human liberty.”
Thatideal,so beautifully articulated by Allen eighty years ago, remains maddeningly out of reach to this day.
Gretchen Morgenson
PREFACE
THIS book is an attempt to tell the story of the immense financial and corporate expansion which took place in the United States between the depression of the eighteennineties and the crisis of the nineteen-thirties; to show how profoundly it altered the circumstances and quality of American life, why and how it ended in collapse, and what the collapse meant to all of us.
One reason why I decided to make this attempt was that the theme seemed to me to be vitally important. One need not accept in toto the economic theory of history to recognize that in our recent American history the economic thread has become a rope to which almost everything else in our lives appears to be attached. I do not believe that anybody can understand how the United States reached its present predicament without some sort of understanding of the economic processes, and particularly the almost revolutionary financial processes, which were at work during the great age of financial expansion. In a very real sense, this story is the story of forces which dictated the terms of American life yesterday and today. The theme is important also because of the pervasive social influence—in the broadest sense—of the financial and industrial leaders; for they largely constituted our American upper class, and their standards and ideas tended to permeate the whole population.
Another reason why I decided to make the attempt was that although thousands of volumes had been written upon one phase of this subject or another, nobody else had told this story as a whole, with an eye not merely to the economic facts and figures, but also to their dramatic and human interest and their social significance.
There seemed to me to be room for a volume which would be true to the facts, in so far as they could be determined; which would survey the whole subject and yet enliven it by recounting in detail certain characteristic and exciting episodes; which would give some impression of the conflict and suspense of the market place, the personal quality of the peop
le involved, and the influence which they exercised; and which would be as impartial as a writer not immune to prejudices and misconceptions could make it.
A very large order, I am afraid; in the two years during which I have been engaged in trying to fill it I have been constantly aware of its size. Research upon such a topic could be endless; almost every chapter of this book has been the subject of previous books, articles, reports, to the point not merely of fatigue but of dismay to the historian who is trying to piece together the connected story without spending several lifetimes upon it. A great deal of essential material is missing; some, of course, has been diligently concealed. Of the material which is available, much is so biased, either for or against the financiers, that a writer who tries to umpire the disputed points has many opportunities to go astray. For possible errors or lapses of understanding I can only plead these difficulties as a partial excuse.
Yet I might add that I have found the task continuously and absorbingly interesting. I should be very glad if I were able to communicate some of this interest to at least some readers.
My principal sources and obligations are set forth in the Appendix.
F. L. A.
Chapter One
MORGAN CALLS THE TUNE
ON THE evening of the 12th of December, 1900, two gentlemen of New York gave a large dinner to Charles M. Schwab, the energetic young president of Andrew Carnegie’s great steel company.
The dinner was private and unpublicized; as one turns the yellowed and brittle pages of the New York Times of the following morning, one finds no mention of it whatever. The two most striking events of December the twelfth, 1900, to judge from the front-page headlines of the Times, were an advantage gained by DeWet, the Boer general, over the British in the war in South Africa, and an accident in a six-day bicycle race in Madison Square Garden. Yet the Schwab dinner at the University Club on Fifth Avenue was one of those events which direct the destinies of a nation.
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