SOCIAL AND POLITICAL RESULTS The events which I have narrated in the two pre. ceding chapters were of a character to influence profoundly social and political conditions, and no review of the period would be at all adequate which did not make careful account of developments in such directions. The advance in commodity prices; the growth of industrial combinations, on a scale of mag nitude beyond the imagination of the previous decade; the sensational speculation in securities and com modities; the overshadowing power acquired, through their bank and company affiliations, by a handful of immensely wealthy capitalists—these were the typical phenomena of the day. They were dominant influences on financial markets; but they also touched closely the every-day life and habits of the ordinary citizen. Socially, they had two distinct and opposite effects. The first was extravagance of living—more spectacular in the case of men, like the independent steel-producers of 1901, whom the "deals" of the great trade combinations had suddenly made millionaires many times over, but noticeable also in the community at large. Belief in impregnable prosperity was general, and with that belief came not only lavish private ex penditure, but appetite for speculation. Newspapers of 1935 were full of advertisements of mining, oil, and miscellaneous ventures—many of them fraudulent on their face. The known losses incurred in one group of enterprises of the sort seemed to impose no check on the public's response to the next invitation; people were apparently determined to speculate, and even in the villages, the talk of "tips" and "sure things" was of constant recurrence in every-day con versation. Announcements of bureaus which, at the subscription price of $5 to $ro per month, would pro vide "advance tips" on stocks which were bound to rise, filled columns of advertising space. One notorious expert in the business was accustomed to buy up a full page in the daily papers, using it to entice the thrifty middle classes into his speculations. The objective point in nearly all such schemes was reached: the public, East and West, threw its money into them, and the result, as in the closely parallel conditions of 1872 and 1856 and 1836, was to create among great bodies of our people a false point of view and de moralizing business standards.
But step by step with the progress of this tendency, another and a very different kind of public sentiment was growing. Rise in the cost of living bore heavily on all classes of society whose incomes remained fixed or were not advanced in proportion to the higher prices.
On people in this position—and their number in creased with great rapidity during 1905 and 1906— visible evidence that a few great capitalists were getting control of the sources of production and transportation could not fail to make impression. It may be that the public mind exaggerated the facts. When nearly all the cheap magazines, and a good part of the daily news papers, were treating the sensational aspects of the situation, it would have been strange had no mis apprehensions been created. But actual events were of a nature to disturb even experienced men of affairs. That prices of commodities might, in certain cases, be controlled and manipulated by the great trade com binations, in the interests of the men behind them, had been shown by the Amalgamated Copper Com pany, and the steel, sugar, oil, and lead trades were equally in the grasp of powerful trusts. Independent railway companies were fast disappearing into the hands of four great systems—commonly known as the Vanderbilt, Pennsylvania, Hill, and Harriman groups —and the Northern Securities merger suggested what might happen even to these four systems.
This, it is true, was not a new tendency of the day, and had long been discussed as a factor in the growth of industrial efficiency. It was declared, even by many eminent economic scholars, that the day of unrestrained competition was past, and that it was best that it should be. Similar industrial tendencies, so far as regards great combinations, were visible in England and Germany as well as in this country.
But in America the manner in which the Captains of Industry acquired and exercised their powers put a different face on things. The Steel Corporation, in the face of remonstrance from its shareholders and almost unanimous protest from outside critics, undertook to turn $20o,00o,00o of its stock into mort gage bonds, employed an enormously expensive syndi cate for the purpose, and was eventually stopped only by revolt of some of its own A $52,00o,000 company, controlling all the street car lines of New York City, was leased to a small suburban trolley company with four miles of track, and shareholders who, at the ratifying meeting, demanded investigation of the plan before approving it, were calmly told by the chairman to "vote for it first and discuss it afterwards. It was very much discussed a few years later, when the whole enterprise went into bankruptcy with evidence of " inside" trickery, mismanagement, and plunder.
The question was no longer merely that of the size of combinations, but of the purposes of the controlling interests. Mr. J. P. Morgan frankly and publicly avowed his belief in creating corporations with capital stock so large that existing managements could not be unseated. 3 Mr. Harriman, who had won repute not only as a skilful railway manager but as a daring speculator, was authorized by the Union Pacific board, of which he was chairman, to "borrow such sums of money as may be required for the uses of this company, and to execute in the name and on behalf of this com pany a note or notes for the amount so borrowed."' What use he proposed to make of this autocratic power was shown by his purchase on the Union Pacific's credit, during seven months following June, 1906, of $131,97o,000 stocks of other railways, some of them on the other side of the continent from his Had Harriman achieved his purpose of capturing the North ern Pacific in 1901, his success, combined with his previous acquisitions, the Interstate Commerce Com mission declared, "would have subjected to a common will and policy nearly one-half of the territory of the United States—a comparatively undeveloped, rapidly growing, and extremely rich territory, into which must necessarily extend the population and business of the Eastern States." Even as regarded the rest of the United States, Harriman defiantly testified, in a public hearing, that if the law would let him alone, he would "spread not only over the Pacific coast, but spread over the Atlantic." "I would," he declared of his policy of buying up one group of railroads on the credit of another, "go on as long as I live."3 When the Northern Securities holding company, formed to own a majority interest in the Northern Pacific and Great Northern railways, came before the court, and its counsel was setting forth the good influence of the merger, he was asked from the United States Supreme Bench if the same machinery might not be employed to buy up all the railways of the United States, and place control of the whole of them in the hands of three or four individuals. He answered that such use of it would be highly improbable, but that it might be so It was not alone, however, the possibilities arising from such power on which public interest was con verged by the movement of events, but the manner of acquiring the power. On this question, what was deemed at the time an accident poured a sudden flood of light. It had long been suspected, by the general public, that the great promoters were somehow em ploying in their projects the funds of life-insurance companies. How convenient such recourse should have been, was manifest from the fact that three New York institutions of this class, at the end of 19o4, reported investments in stocks and bonds footing up In February, 1905, a quarrel broke out between the President and Vice-president of the Equitable Life, a joint-stock institution with $413, 000,000 total resources but a share capital of only $1oo,000, of which $51,000 was owned by one James H. Hyde, a young man of twenty-seven, son of the founder of the company. This stock carried only 7 per cent. dividends; but the majority holding gave to its owner unusual power for overruling policies of the president and trustees. 1 The president of the Equitable sent to his fellow-directors, over his signature and that of other active officers, a flat declaration that the re-election of Mr. Hyde as vice-president "would be most prejudicial to the welfare and progress of the society and the conservation of the trust funds." 2 At the ensuing annual meeting of the Equitable trustees, this protest was again submitted, and a petition to turn the society from a joint-stock into a mutual company was added. 3 The course of the personal dispute need not concern us further; in the event, Mr. Hyde and Mr. Alexander both retired from the company. The real significance of the episode was that it compelled investigation and publicity regarding the use of the Equitable's funds.
First, the trustees appointed a committee of their own; this committee, three months later, submitted a report which threw the directors' meeting into dis order, and led to a searching inquiry by the New York Legislature. The Frick committee found that officers of the Equitable had used the company's funds as subscriptions to "underwritings" organized by themselves, thereby violating the insurance that one of them had without authority carried in his own name large blocks of securities owned by the that the Equitable, which was de barred by law from speculative undertakings in Wall Street, had bought control of three trust companies with broader and had kept on deposit with those companies the greater part of its own cash sur plus*; that in 1903, with $36,000,000 thus deposited, it had been unable to use for its own legitimate invest ments any part of the money thus deposited, undoubt edly because the deposit had been tied up, through these other banking institutions, in illegitimate financial ventures'; and that its president, with that huge sum in bank and with standard investment securities at a most inviting price, had written to a fellow-officer that "we would be buying a good many of such things were it not that we are so strapped for money by en gagements already made." 6 When a committee of trustees had exposed such per formances with the trust funds of the people, it was plain that the State would have to take a hand. The New York Legislature promptly named a committee of investigation. Under the leadership of its counsel, Charles E. Hughes, it began, oti September 6, 1905, a searching examination. This committee sat until the close of 1905, and the secrets of the "life insurance connections" of high finance were laid bare. The committee found relatively little of the sale of se curities to companies by their own trustees, as exposed by the Frick committee, but very much use of the companies' funds to participate in syndicates in which trustees were personally Employment of life insurance funds, through subsidiary companies, for investment in undertakings forbidden to the life concerns themselves—including the United States Steel and " Shipping Trust" promotions—was found to have prevailed on an extensive scale, and occasionally with misleading entries on the legislators, political committees, and even newspapers had been subsidized in enormous Along with this, ex orbitant salaries and nepotism had but dividends to policy-holders had not only decreased actually, but had fallen far below official and published estimates. S The climax of this extraordinary testi mony was capped by the president of one of the largest companies, who, when confronted with the above conditions, declared on the stand that the promoters of his company had acted "from a pure spirit of phi lanthropy and benevolence," establishing "a missionary enterprise, so to speak "; but that it "was n't the object to declare a dividend to a man," in order that a policy-holder, having paid his annual premium, should "then at the end of the year get seven dollars and go home and spend it for cigars. 1 This investigation, publicly conducted during four successive months, and reported in every newspaper, had an influence on public sentiment which was difficult to measure. Much has been said and written, since, in deprecation of the campaign of sensational ex posure, insinuation, and investigation, regarding "graft" in high finance, which at once became the popular newspaper and magazine topic of the day. The White House itself publicly disapproved the "muck-raking" tendencies of the day. 2 But the muck-raking was not a popular demonstration without a cause, and we have seen what the causes were. Both causes and consequence were among the social phe nomena which gave the period its character, and both had an important hand in subsequent events. The insurance scandal itself ended, as was inevitable, in a thorough reform law for life insurance in New York State, whereby not only were the practices thus exposed prevented for the future, but the life companies were prohibited from owning other institutions, and the unlimited increase of capital resources in a single corporation's hands stopped by providing that no company should thereafter accept more premiums when its total outstanding policies had reached $150, 000,000. Yet the fact that, after all this series of exposures, a notorious promoter should have bought Mr. Hyde 's controlling interest in the Equitable for $2,500,000, and should have then engaged in an angry quarrel with another speculating capitalist, as to whether one of them, or both, should own it, did not throw an agreeable light even on the conclusion of the episode. Mr. Ryan did indeed place the Equitable stock in the hands of trustees of high reputation. But Mr. Harri man's proposition—"I will take half your stock; I don't know what it cost and I don't care"—even though rejected, left the public more than ever convinced of the determination of such capitalists to control our fiduciary We have seen in what frame of mind the American public regarded these various episodes in high finance. It was a mixture of misgiving, exasperation, and help lessness; for belief was general, in such periods of industrial consolidation as 1899 and 1901, that the interests behind the movement were as strongly in trenched in politics as in finance. What the outcome would have been in our political history, had the conditions which people then described as the "existing order of things" continued to prevail at Washington, is a question full of interest. We possess no means of judging confidently how far President McKinley's policies, after his second inauguration in IgoI, might have been shaped or altered by the new industrial problems which came suddenly into view that year. All we can say is, that his traditions and temperament were not such as to have invoked a collision between the Executive and the corporations. The question was never tested; it was only five months after his second term began that he was shot by an anarchist at Buffalo, where he died on September 14, 1901.
Mr. Roosevelt, who then succeeded him, had been nominated for Vice-President against his own wish and therefore without pledges or commitments. His long record in public life—as legislator at Albany, Civil Ser vice Commissioner at Washington, Police Commissioner at New York City, Assistant Secretary of the Navy, Colonel in the Spanish War, and Governor of New York State—had presented him to the people as a man of abounding energy, of vehement ideas on a great variety of subjects, of party regularity but independent leanings, and with a for bah social and political innovation. Knowledge of these qualities caused some financial perturbation when he rose to the Presidency on McKinley's death. In his speech on taking the oath of office, however, Mr. Roosevelt declared his purpose "to continue absolutely unbroken the policy of President McKinley for the peace, prosperity, and honor of our beloved country," and he at once requested all of McKinley's cabinet ministers to retain office dur ing the full term for which they had been selected. In his first message to Congress, two months later, he declared the "startling increase . . . in the number of very large individual, and especially of very large cor porate, fortunes" to be due "to natural causes in the business world "—a process which "has aroused much antagonism, a great part of which is wholly without warrant." He advised "caution in dealing with corporations," because "to strike with ignorant violence at the interests of one set of men almost inevitably endangers the interests of all," and because "the mechanism of modern business is so delicate that extreme care must be taken not to interfere with it in a spirit of rashness or ignorance." All this was reassuring to those capitalists whose plans had apparently been disconcerted by McKinley's death. They paid less attention, therefore, to the
new President's further declarations that "there are real and grave evils, one of the chief being overcapital ization"; that "combination and concentration should be, not prohibited, but supervised and within reasonable limits controlled," and that "corporations engaged in interstate commerce should be regulated if they are found to exercise a license working to the public injury." 2 It was out of these three declarations, however, that what are now known as the policies of the Roosevelt Administration grew.
These policies soon placed the Government in direct and formidable antagonism with the ambitious designs of capitalists which we have already had occasion to review. The case, in my opinion, was such that any and all available measures for protection of the public welfare would have been invoked by any government resolved on challenging the pretensions of the great promoters of the day. The instrument selected as the most serviceable on the statutes was the so-called "Sherman Anti-Trust Law" of 189o, and, since that law was largely made the basis of the Government's subsequent moves against over-ambitious corporations, under the Roosevelt regime, the law itself requires some careful examination.
The Anti-Trust Law was introduced by Senator John Sherman on March 2I, 189o. It was drawn up in response to the very strong public feeling excited by the movement of that day, to which I have heretofore referred, for combination of manufacturing enter prises in this country into single powerful corporations. From the debates on the bill, it is evident that the legislators had in mind primarily such industrial under takings, and not combinations of the This was not strange, in view of the novelty of the phenome non of industrial trusts, of the pledge of political con vention platforms to restrain the powers of such amalgamations, and of the fact that railway combina tions were not an incident of the period. With the railways of 189o, indeed, the problem was rather to make both ends meet in the finances of any given company, than to reach out for acquisition of com But on the other hand, the legislation of 1890 unquestionably did not exclude the railways—a point of much importance in its bearing on subsequent discussion. As originally proposed, the Act of 1890 declared illegal "all arrangements, contracts, agree ments, trusts, or combinations . . . to prevent full and free competition," not only in the sale of articles of production and manufacture, but in their trans As finally amended and enacted, the law made the very broad declaration that "every con tract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations, is hereby declared to be illegal," and it declared it to be the duty of the federal attorney-general and the several district attorneys "to institute proceedings in equity to pre vent and restrain such It was alleged, in the controversy during and after 1902, in the courts and in the press, that since Congress manifestly had the industrial trusts in mind in framing its legislation, the law of 1890 did not fairly apply to railways. But the United States Supreme Court, in upholding in 1897 a suit against the so-called Trans Missouri Freight Association, whereby the railways of that section undertook to prescribe uniform rates, declared that "we see nothing either in contempo raneous history, or in the legal situation at the time of the passage of the statute, in its legislative history, or in any general difference in the nature or kind of these trading and manufacturing companies from the railroad companies, which would lead us to the con clusion that it cannot be supposed the legislature . . . intended to include railroads within the purview of the Act."' Out of five leading cases decided against the companies by the Supreme Court under the Law of 1890, up to 1902, two were directly concerned with railway agreements or combinations, and a third re sulted in the declaration that the law covered "inter course for all the purposes of trade, in any and all its forms, including the transportation, purchase, sale, and exchange of commodities between citizens of differ ent states." It was clear, then, that, in the opinion of the highest court, the Anti-Trust Law applied, not alone to in . dustrial but to railway combinations. We have seen to what extent, under the auspices of the ambitious railway promoters of 1901 and 1906, this consolida tion movement had gone forward, and to what results it seemed to point. In large measure, the subsequent moves of the Roosevelt Administration's law de partment were concerned with the industrial trusts or combinations; but it was not illogical that in 1902, its first challenge should have been directed against these railway projects. The note was sounded in Febru ary, 1902, when the Attorney-General, Mr. P. C. Knox, entered suit for the Government against the Northern Securities Company. This concern was an outgrowth of the famous "Northern Pacific corner" of May 9, 1901, when the disastrous contest between the Harriman and Morgan interests, for ownership of the Northern Pacific Railway, was compromised by deposit of their stock and that of the parallel Great Northern Railway Company in the hands of a holding corporation. This corporation had a stock of $400,000,000, which it exchanged for shares in the two railways; its directors were selected from the rival boards.
Mr. Knox attacked the merger as "a virtual con solidation of two competing transcontinental lines," whereby not only would "monopoly of the interstate and foreign commerce, formerly carried on by them as competitors, be created," but whereby, through use of the same machinery, "the entire railway systems of the country may be absorbed, merged, and con solidated." A year after its introduction, on April 9, 1903, the Circuit Court before which the suit was brought decided for the Government, the essential part of its decision being the dictum that the merger "de stroyed every motive for competition between the two roads engaged in interstate traffic, which were nat ural competitors for business." Appealing thence to the Federal Supreme Court, the company's counsel fought on the theory that the merger was no restraint of trade because the Northern Securities had com mitted no overt act in such direction, and because the combination had primarily been formed to protect and develop The court, in its decision of March 14, 1904, found that, "necessarily, the con stituent companies ceased, under such a combination, to be in active competition for trade and commerce," and that, independently of overt acts, "the mere ex istence of such a combination, and the power acquired by the holding company, . . . constitute a menace to, and a restraint upon, that freedom of commerce which Congress intended to recognize and protect." In a bench of nine, four justices ruled on this ground against the appeal and four in favor of it. The ninth member, Justice Brewer, dissented from the larger application of the above-cited principles, on the ground that "the broad and sweeping language of the opinion of the court might tend to unsettle legitimate business enterprises, stifle or retard wholesome business ac tivities," and he rejected the application of the Anti Trust Law to "minor contracts in partial restraint of trade," already recognized by common law. But he held the Northern Securities device to be one which "might be extended until a single corporation whose stock was owned by three or four parties would be in practical control . . . of the whole transportation system of the country," and on that ground concurred in dismissing the appeal. The order of the lower court, that the Northern Securities Company be dissolved, was therefore reaffirmed. In due course, though not until after another legal fight over methods of redistributing its holdings to owners of Northern Securities shares, the company surrendered its North ern Pacific and Great Northern stock, and practically went out of existence.
It was a victory of high importance, and a check, whose completeness was not fully recognized at first, to the effort of consolidated capital to seat itself in complete and impregnable control of industry. Much was made, by critics of the Administration's attitude, of the fact that redistribution of the holdings left the Morgan and Harriman interests still in possession of their part of the disputed shares. But this argument overlooked the facts that the stocks were now again very largely on the open market, and that the most promising machinery ever contrived for complete event ual monopoly had been shattered. In my judgment, the overthrow of the Northern Securities combination was the most positive achievement of the Roosevelt Administration in the field of corporation finance. It was something more even than protection of the citi zen from the aggression of capital suggested by Justice Brewer; the interest of investors, of the financial mar kets themselves, would have been placed in the most serious jeopardy had that merger been upheld. For the promoters of the Northern Securities were travel ling on a path of capital inflation which logically had no end except in eventual exhaustion of credit and general bankruptcy.
The Northern Securities victory by no means ended the activities of the Government prosecutors against corporations, though no subsequent achievement was of equal importance. To a large extent, the later moves of the Roosevelt Administration had to do with secret discriminations in railway rates. In some of these suits the gravity of the abuse was not so clear, and in others the outcome much less gratifying, than in the Northern Securities case. The Standard Oil prose cution, announced by the President in a special message of May 4, ended in such a way as largely to defeat the Government's own purposes. The exploits of the Standard Oil Company, in the matter of secret con cessions from the railways, had been exposed sensa tionally in the popular magazines, and the Government won a jury verdict, in August, 1907, wholly against the company. The Elkins Law, on which the suit was based, provided that "every person or corporation who shall offer, grant, give or solicit, accept or receive" from a railway any "rebates, concession, or discrimina tion," should on conviction be punished for each offence by a fine of not less than S1000 or more than $20,000." Judge Landis, sitting in the Federal District Court of Indiana, had to pass on the question how many separate offences were to be subject to such fine. The railway rebates had been granted during the period from September, 1903, to March, 1905, inclusive; counsel for the company asked, first, that the whole series be adjudged one infraction of the law, or, second, that the violations be fixed at three in number, be cause the rate was determined once a year, or, third, that the number be declared as thirty-six, because that number of bills were rendered. The court rejected all three suggestions; declared on August 3, 1907, that each of the 1,462 loaded cars forwarded at the discriminating rate was a separate offence; imposed for each the maxi mum fine of $2o,00o, and thereby arrived at the some what extraordinary penalty of $29,24o,00o. This fine, imposed as it was, not on the $98,00o,000 "Standard Oil Trust," but on the immediate offender, the $i,000,000 subsidiary Standard Oil Company of Indiana, went, even in the popular judgment of the day, beyond the bounds of reason; it was commonly expected that the higher courts would set it aside, and, as a matter of fact, the Illinois Circuit Court, in July, 1908, found that a fine thus computed "had no basis in any inten tion or fixed rule discoverable in the statute," anci was many times confiscatory. The Court to whom the case was remanded for retrial directed, in March, 19o9, a verdict of acquittal for lack of proper evidence.
In this matter, despite an overwhelming and not unfounded dislike to the methods of the Standard Oil Company, public sympathy was with the corporation. On the railway rate legislation, passed by Congress in response to the President's urgent messages, popular approval and disapproval were more evenly balanced than in the two great suits above referred to. There had been abundant provocation in the past relations of numerous important railways with favored com munities and favored corporations; the demand for regulation was urgent, in the West especially; and the Hepburn Act, passed by the House in February, 1906, by a vote of 346 to 7, and by the Senate in June, on a vote of 71 to 3, authorized the Inter-State Commerce Commission, on complaint, "to determine and prescribe what will be the just and reasonable rate or rates . . . to be thereafter observed in such case as the maximum to be charged." It further declared that for each vio lation of the laws by a railway's officer or agent a fine of $5000 should be imposed, and that "every distinct violation shall be a separate offence, and in case of a continuing violation, each day shall be deemed a sepa rate offence." This law is an important landmark, because the railway interests have ever since ascribed to it, and to the sweeping powers conferred on the inter-state tribunal, the financial disorder of the ensu ing year. It became, in 1908 and 1909, the common place of every annual railway report to ascribe the panic of x9o7, and the reduced railway traffic which ensued, to the Hepburn Law of 1906.
The law was undoubtedly regarded with much mis giving by the railways; it was dissected and opposed, on grounds of constitutionality, of the rights of prop erty, and of the dangerous public policy invoked through committing such powers to a board of commissioners, by some of the ablest Congressional Yet it is not easy to doubt, conditions being what we have seen them to be in the great corporations of the coun try, that the good results of the Government's policy, taken as a whole, very far outweighed the incidental evils. In the case particularly of the great combinations, the dangers and abuses which existed were most formidable; it may be questioned whether a cautious and deliberate policy of restriction would have stopped them. Much was achieved for the general welfare by the mere assurance that the Government's hand would be laid instantly and heavily on the conspicuous offenders, and the people at large, who understood the gravity of the situation better than Wall Street under stood it, had reason for their overwhelming support of Mr. Roosevelt's general plan of action.
As for the theory that the Rate Law caused financial disaster and collapse of credit, that theory may be readily tested by reviewing the actual response of the markets to the legislation. The Hepburn Act became law in July, 1906. Its enactment, on the theory sup posed, should have been preceded and followed by immediate withdrawal of foreign capital from our railway industries, and by wholesale liquidation of such investments by American investors. What followed, on the contrary, was such excess of confidence in our investments, on the part of European money-lenders, that almost all traditional restraint was abandoned in the advancing of money to the great railway opera tors who were dominating Wall Street. The facilities thus provided were used to the full. Instead of realizing on the investments which they declared to be jeopar dized through Mr. Roosevelt's activities, certain rail way managers, who were as active in Wall Street speculation as they were in transportation matters, started a speculation for the rise during August,. 1906, in shares of the very railways affected by the law, which reached such proportions as to alarm the whole con servative community. That is to say, the administra tive and legislative action which is presumed to have been a cause of financial trouble was, in the immedi ate sequel, followed by enthusiastic confidence, by increased credit facilities, and by unbridled specula tion for the rise. It remains to inquire what was the real cause for this singular response, and to see how the extraordinary financial situation which had arisen throughout the world was now to end.