Daron Acemoglu & James Robinson
Page 36
The conservative English commentator Edmund Burke, who steadfastly opposed the French Revolution, wrote in 1790, “It is with infinite caution that any man should venture upon pulling down an edifice, which has answered in any tolerable degree for ages the common purposes of society, or on building it up again without having models and patterns of approved utility before his eyes.” Burke was wrong on the big picture. The French Revolution had replaced a rotten edifice and opened the way for inclusive institutions not only in France, but throughout much of Western Europe. But Burke’s caution was not entirely off the mark. The gradual process of British political reform, which had started in 1688 and would pick up pace three decades after Burke’s death, would be more effective because its gradual nature made it more powerful, harder to resist, and ultimately more durable.
BUSTING TRUSTS
Inclusive institutions in the United States had their roots in the struggles in Virginia, Maryland, and the Carolinas during the colonial period (this page–this page). These institutions were reinforced by the Constitution of the United States, with its system of constraints and its separation of powers. But the Constitution did not mark the end of the development of inclusive institutions. Just as in Britain, these were strengthened by a process of positive feedback, based on the virtuous circle.
By the middle of the nineteenth century, all white males, though not women or blacks, could vote in the United States. Economic institutions became more inclusive—for example, with the passage of the Homestead Act in 1862 (this page), which made frontier land available to potential settlers rather than allocating these lands to political elites. But just as in Britain, challenges to inclusive institutions were never entirely absent. The end of the U.S. Civil War initiated a rapid spurt of economic growth in the North. As railways, industry, and commerce expanded, a few people made vast fortunes. Emboldened by their economic success, these men and their companies became increasingly unscrupulous. They were called the Robber Barons because of their hard-nosed business practices aimed at consolidating monopolies and preventing any potential competitor from entering the market or doing business on an equal footing. One of the most notorious of these was Cornelius Vanderbilt, who famously remarked, “What do I care about the Law? Hain’t I got the power?”
Another was John D. Rockefeller, who started the Standard Oil Company in 1870. He quickly eliminated rivals in Cleveland and attempted to monopolize the transportation and retailing of oil and oil products. By 1882 he had created a massive monopoly—in the language of the day, a trust. By 1890 Standard Oil controlled 88 percent of the refined oil flows in the United States, and Rockefeller became the world’s first billionaire in 1916. Contemporary cartoons depict Standard Oil as an octopus wrapping itself around not just the oil industry but also Capitol Hill.
Almost as infamous was John Pierpont Morgan, the founder of the modern banking conglomerate J.P. Morgan, which later, after many mergers over decades, eventually became JPMorgan Chase. Along with Andrew Carnegie, Morgan founded the U.S. Steel Company in 1901, the first corporation with a capitalized value of more than $1 billion and by far the largest steel corporation in the world. In the 1890s, large trusts began to emerge in nearly every sector of the economy, and many of them controlled more than 70 percent of the market in their sector. These included several household names, such as Du Pont, Eastman Kodak, and International Harvester. Historically the United States, at least the northern and midwestern United States, had relatively competitive markets and had been more egalitarian than other parts of the country, particularly the South. But during this period, competition gave way to monopoly, and wealth inequality rapidly increased.
The pluralistic U.S. political system already empowered a broad segment of society that could stand up against such encroachments. Those who were the victims of the monopolistic practices of the Robber Barons, or who objected to their unscrupulous domination of their industries, began to organize against them. They formed the Populist and then subsequently the Progressive movements.
The Populist movement emerged out of a long-running agrarian crisis, which afflicted the Midwest from the late 1860s onward. The National Grange of the Order of Patrons of Husbandry, known as the Grangers, was founded in 1867 and began to mobilize farmers against unfair and discriminatory business practices. In 1873 and 1874, the Grangers won control of eleven midwestern state legislatures, and rural discontent culminated in the formation of the People’s Party in 1892, which got 8.5 percent of the popular vote in the 1892 presidential election. In the next two elections, the Populists fell in behind the two unsuccessful Democratic campaigns by William Jennings Bryan, who made many of their issues his own. Grass-roots opposition to the spread of the trusts had now organized to try to counteract the influence that Rockefeller and other Robber Barons were exerting over national politics.
These political movements slowly began to have an impact on political attitudes and then on legislation, particularly concerning the role of the state in the regulation of monopoly. The first important piece of legislation was the Interstate Commerce Act of 1887, which created the Interstate Commerce Commission and initiated the development of the federal regulation of industry. This was quickly followed by the Sherman Antitrust Act of 1890. The Sherman Act, which is still a major part of U.S. antitrust regulation, would become the basis for attacks on the Robber Barons’ trusts. Major action against the trusts came after the election of presidents committed to reform and to limiting the power of the Robber Barons: Theodore Roosevelt, 1901–1909; William Taft, 1909–1913; and Woodrow Wilson, 1913–1921.
A key political force behind antitrust and the move to impose federal regulation of industry was again the farm vote. Early attempts by individual states in the 1870s to regulate railroads came from farmers’ organizations. Indeed, nearly all the fifty-nine petitions that concerned trusts sent to Congress prior to the enactment of the Sherman Act came from farming states and emanated from organizations such as the Farmers’ Union, Farmers’ Alliance, Farmers’ Mutual Benefit Association, and Patrons of Animal Husbandry. Farmers found a collective interest in opposing the monopolistic practices of industry.
From the ashes of the Populists, who seriously declined after throwing their weight behind the Democrats, came the Progressives, a heterogeneous reform movement concerned with many of the same issues. The Progressive movement initially gelled around the figure of Teddy Roosevelt, who was William McKinley’s vice president and who assumed the presidency following McKinley’s assassination in 1901. Prior to his rise to national office, Roosevelt had been an uncompromising governor of New York and had worked hard to eliminate political corruption and “machine politics.” In his first address to Congress, Roosevelt turned his attention to the trusts. He argued that the prosperity of the United States was based on market economy and the ingenuity of businessmen, but at the same time,
there are real and grave evils … and a … widespread conviction in the minds of the American people that the great corporations known as trusts are in certain of their features and tendencies hurtful to the general welfare. This springs from no spirit of envy or un-charitableness, nor lack of pride in the great industrial achievements that have placed this country at the head of the nations struggling for commercial supremacy. It does not rest upon a lack of intelligent appreciation of the necessity of meeting changing and changed conditions of trade with new methods, nor upon ignorance of the fact that combination of capital in the effort to accomplish great things is necessary when the world’s progress demands that great things be done. It is based upon sincere conviction that combination and concentration should be, not prohibited, but supervised and within reasonable limits controlled; and in my judgment this conviction is right.
He continued: “It should be as much the aim of those who seek for social betterment to rid the business world of crimes of cunning as to rid the entire body politic of crimes of violence.” His conclusion was that
in the interest of the whole people, t
he nation should, without interfering with the power of the states in the matter itself, also assume power of supervision and regulation over all corporations doing an interstate business. This is especially true where the corporation derives a portion of its wealth from the existence of some monopolistic element or tendency in its business.
Roosevelt proposed that Congress establish a federal agency with power to investigate the affairs of the great corporations and that, if necessary, a constitutional amendment could be used to create such an agency. By 1902 Roosevelt had used the Sherman Act to break up the Northern Securities Company, affecting the interests of J.P. Morgan, and subsequent suits had been brought against Du Pont, the American Tobacco Company, and the Standard Oil Company. Roosevelt strengthened the Interstate Commerce Act with the Hepburn Act of 1906, which increased the powers of the Interstate Commerce Commission, particularly allowing it to inspect the financial accounts of railways and extending its authority into new spheres. Roosevelt’s successor, William Taft, prosecuted trusts even more assiduously, the high point of this being the breakup of the Standard Oil Company in 1911. Taft also promoted other important reforms, such as the introduction of a federal income tax, which came with the ratification of the Sixteenth Amendment in 1913.
The apogee of Progressive reforms came with the election of Woodrow Wilson in 1912. Wilson noted in his 1913 book, The New Freedom, “If monopoly persists, monopoly will always sit at the helm of government. I do not expect to see monopoly restrain itself. If there are men in this country big enough to own the government of the United States, they are going to own it.”
Wilson worked to pass the Clayton Antitrust Act in 1914, strengthening the Sherman Act, and he created the Federal Trade Commission, which enforced the Clayton Act. In addition, under the impetus of the investigation of the Pujo Committee, led by Louisiana congressman Arsene Pujo, into the “money trust,” the spread of monopoly into the financial industry, Wilson moved to increase regulation of the financial sector. In 1913 he created the Federal Reserve Board, which would regulate monopolistic activities in the financial sector.
The rise of Robber Barons and their monopoly trusts in the late nineteenth and early twentieth centuries underscores that, as we already emphasized in chapter 3, the presence of markets is not by itself a guarantee of inclusive institutions. Markets can be dominated by a few firms, charging exorbitant prices and blocking the entry of more efficient rivals and new technologies. Markets, left to their own devices, can cease to be inclusive, becoming increasingly dominated by the economically and politically powerful. Inclusive economic institutions require not just markets, but inclusive markets that create a level playing field and economic opportunities for the majority of the people. Widespread monopoly, backed by the political power of the elite, contradicts this. But the reaction to the monopoly trusts also illustrates that when political institutions are inclusive, they create a countervailing force against movements away from inclusive markets. This is the virtuous circle in action. Inclusive economic institutions provide foundations upon which inclusive political institutions can flourish, while inclusive political institutions restrict deviations away from inclusive economic institutions. Trust busting in the United States, in contrast to what we have seen in Mexico (this page–this page), illustrates this facet of the virtuous circle. While there is no political body in Mexico restricting Carlos Slim’s monopoly, the Sherman and Clayton Acts have been used repeatedly in the United States over the past century to restrict trusts, monopolies, and cartels, and to ensure that markets remain inclusive.
The U.S. experience in the first half of the twentieth century also emphasizes the important role of free media in empowering broad segments of society and thus in the virtuous circle. In 1906 Roosevelt coined the term muckraker, based on a literary character, the man with the muckrake in Bunyan’s Pilgrim’s Progress, to describe what he regarded as intrusive journalism. The term stuck and came to symbolize journalists who were intrusively, but also effectively, exposing the excesses of Robber Barons as well as corruption in local and federal politics. Perhaps the most famous muckraker was Ida Tarbell, whose 1904 book, History of the Standard Oil Company, played a key role in moving public opinion against Rockefeller and his business interests, culminating in the breakup of Standard Oil in 1911. Another key muckraker was lawyer and author Louis Brandeis, who would later be named Supreme Court justice by President Wilson. Brandeis outlined a series of financial scandals in his book Other People’s Money and How Bankers Use It, and was highly influential on the Pujo Committee. The newspaper magnate William Randolph Hearst also played a salient role as muckraker. His serialization in his magazine The Cosmopolitan in 1906 of articles by David Graham Phillips, called “The Treason of the Senate,” galvanized the campaign to introduce direct elections for the Senate, another key Progressive reform that happened with the enactment of the Seventeenth Amendment to the U.S. constitution in 1913.
The muckrakers played a major role in inducing politicians to take action against the trusts. The Robber Barons hated the muckrakers, but the political institutions of the United States made it impossible for them to stamp out and silence them. Inclusive political institutions allow a free media to flourish, and a free media, in turn, makes it more likely that threats against inclusive economic and political institutions will be widely known and resisted. In contrast, such freedom is impossible under extractive political institutions, under absolutism, or under dictatorships, which helps extractive regimes to prevent serious opposition from forming in the first place. The information that the free media provided was clearly key during the first half of the twentieth century in the United States. Without this information, the U.S. public would not have known the true extent of the power and abuses of the Robber Barons and would not have mobilized against their trusts.
PACKING THE COURT
Franklin D. Roosevelt, the Democratic Party candidate and cousin of Teddy Roosevelt, was elected president in 1932 in the midst of the Great Depression. He came to power with a popular mandate to implement an ambitious set of policies for combating the Great Depression. At the time of his inauguration in early 1933, one-quarter of the labor force was unemployed, with many thrown into poverty. Industrial production had fallen by over half since the Depression hit in 1929, and investment had collapsed. The policies Roosevelt proposed to counteract this situation were collectively known as the New Deal. Roosevelt had won a solid victory, with 57 percent of the popular vote, and the Democratic Party had majorities in both the Congress and Senate, enough to pass New Deal legislation. However, some of the legislation raised constitutional issues and ended up in the Supreme Court, where Roosevelt’s electoral mandate cut much less ice.
One of the key pillars of the New Deal was the National Industrial Recovery Act. Title I focused on industrial recovery. President Roosevelt and his team believed that restraining industrial competition, giving workers greater rights to form trade unions, and regulating working standards were crucial to the recovery effort. Title II established the Public Works Administration, whose infrastructure projects include such landmarks as the Thirtieth Street railroad station in Philadelphia, the Triborough Bridge, the Grand Coulee Dam, and the Overseas Highway connecting Key West, Florida, with the mainland. President Roosevelt signed the bill into law on June 16, 1933, and the National Industrial Recovery Act was put into operation. However, it immediately faced challenges in the courts. On May 27, 1935, the Supreme Court unanimously ruled that Title I of the act was unconstitutional. Their verdict noted solemnly, “Extraordinary conditions may call for extraordinary remedies. But … extraordinary conditions do not create or enlarge constitutional power.”
Before the Court’s ruling came in, Roosevelt had moved to the next step of his agenda and had signed the Social Security Act, which introduced the modern welfare state into the United States: pensions at retirement, unemployment benefits, aid to families with dependent children, and some public health care and disability benefits. He also
signed the National Labor Relations Act, which further strengthened the rights of workers to organize unions, engage in collective bargaining, and conduct strikes against their employers. These measures also faced challenges in the Supreme Court. As these were making their way through the judiciary, Roosevelt was reelected in 1936 with a strong mandate, receiving 61 percent of the popular vote.
With his popularity at record highs, Roosevelt had no intention of letting the Supreme Court derail more of his policy agenda. He laid out his plans in one of his regular Fireside Chats, which was broadcast live on the radio on March 9, 1937. He started by pointing out that in his first term, much-needed policies had only cleared the Supreme Court by a whisker. He went on:
I am reminded of that evening in March, four years ago, when I made my first radio report to you. We were then in the midst of the great banking crisis. Soon after, with the authority of the Congress, we asked the nation to turn over all of its privately held gold, dollar for dollar, to the government of the United States. Today’s recovery proves how right that policy was. But when, almost two years later, it came before the Supreme Court its constitutionality was upheld only by a five-to-four vote. The change of one vote would have thrown all the affairs of this great nation back into hopeless chaos. In effect, four justices ruled that the right under a private contract to exact a pound of flesh was more sacred than the main objectives of the Constitution to establish an enduring nation.