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We learned long ago that liberty could be preserved only by limiting in some way the freedom of action of individuals; that otherwise liberty would necessarily yield to absolutism; and in the same way we have learned that unless there be regulation of competition, its excesses will lead to the destruction of competition, and monopoly will take its place.

– Louis Brandeis

Railroads helped network America in the late 19^th century but were increasingly owned by a dwindling number of expanding conglomerates at the same time. The three-time Republican presidential candidate and Senator from Ohio, John Sherman, believed he had a bead on where this train was headed. “If we will not endure a king as a political power we should not endure a king over the production, transportation, and sale of any of the necessaries of life,” he said.¹

The influential 20^th century economist Joseph Schumpeter revisited this same period in U.S. history but was ambivalent about what the consolidation trend meant. On the one hand, he saw that competition between local, independent railways led to price cutting and then mergers, and that once a few big players were left standing, fierce competition gave way to a state of “mutual dependence”. He saw this as part of an industry maturation process, writing, “The more an innovation becomes established, the more it loses the character of an innovation and the more it begins to follow impulses instead of giving them.”² On the other hand, Schumpeter understood that big companies also enjoyed improved economies of scale and he couldn’t fault them for pursing that edge. Such titans helped usher in “new units of control, new principles of management, new possibilities of industrial research, and, at least eventually, new types of plant and equipment.”³

It wasn’t just railroad ownership that consolidated around the turn of the 20^th century. A tidal wave of mergers and acquisitions, in fact, rolled through the U.S. economy in a brief period called the Great Merger Movement. In 1900 alone, the value of the firms acquired spiked to an unprecedented 20% of GDP.⁴ From 1897 to 1904, more than 4,200 companies merged down to about 250 behemoth businesses.⁵ Many of these organizations relied on a novel governance and ownership structure: the trust. The concept was pioneered by a Standard Oil attorney, Samuel Dodd, in 1882. Standard Oil properties were put in the hands of a board of trustees that each received shares of Standard Oil stock. These nine trustees set dividends organization-wide and had the power to hire and the fire managers at portfolio companies, thereby controlling them.⁶ This idea went viral among big business.

This new meta-governance structure, the trust, was overlaid onto many, and sometimes scores of previously independent businesses during the Great Merger Movement. Popular brands that are still around today debuted at this time, including Pepsico, Kellogg, Gillette, Monsanto, 3M, DuPont and General Electric.⁷ Schumpeter considered these trusts an innovation in finance as well as business management. He thought that “without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capitalist propulsion. The atmosphere of industrial revolutions – of ‘progress’ – is the only one in which capitalism can survive.”⁸ Constant change and the ups and downs of business cycles were capitalism’s norm, not the exception to the rule. The rise of mega trusts was a form of capitalist evolution in his view.

The historian Brooks Adams, the great grandson of president John Adams, also witnessed the Great Merger Movement and seconded Schumpeter’s take. An occasional lecturer at Boston University’s Law School, concluded Adams circa 1900, “If expansion and concentration are necessary, because the administration of the largest mass is the least costly, then America must expand and concentrate until the limit of the possible is attained; for Governments are simply huge corporations in competition, in which the wasteful and slow are undersold and eliminated.”⁹ Adams embraced social Darwinism on both the corporate and national governance fronts, and blew a kiss to the Federalists while at it.

The question of the day could be phrased as, “Are corporations like governments and should they be allowed to consolidate down to a single organization, a monopoly, that yields the greatest economies of scale dividend possible, or are there countervailing social interests that are more important to maintain and that justify the denial of M&A among big business (and movement towards a single global government) and the attendant economies of scale upsides?” Should socioeconomic Gini coefficients move towards one and are monopolies are the logical last stop on capitalism’s track or not?

From the perspective of the Arrow-Smith ideal, as Chapter 2 laid out in painstaking detail, the answer is clear: Schumpeter’s and Adams’ vision both pervert Darwinism and defeat capitalism’s core rationale, that highly competitive markets are efficient and foster more innovation, and markets with those characteristics produce more socioeconomic prosperity, more rocket thrust, leading to society’s relative success.

John Sherman had been Rutherford B. Hayes’ Treasury Secretary. He knew some states had passed legislation that tried to rein in big trusts, but he also understood that Congress alone had the Constitutional power to regulate interstate commerce. That was the legal hook he and his colleagues that landed in the pro-competition camp used to hang Sherman. Large trusts’ business activities frequently crossed state lines. By the time the legislation was ready for a vote, the public’s appetite for counterweight measures had been well-whetted. Most Americans sided with Sherman and company. The Act passed the Senate by a vote of 51-1 and fluttered through the House on unanimous wings.¹⁰

The Sherman Antitrust Act barred companies from monopolizing a trade or industry. Business leaders found guilty of breaking the law faced a year in jail and a $5,000 fine. These new laws didn’t stop monopolies from forming, but it gave the federal government the power to dissolve monopolies for the first time, making it landmark of legislation in the history of national public policies that address business competition dynamics.¹¹

Five years later, the judicial branch slapped the legislative and executive branches on the wrist. In United States v. E. C. Knight Company, the Supreme Court ruled that the American Sugar Refining Company, the defendant in the case, hadn’t violated Sherman despite refining 98% of the sugar sold in America. The court ruled that because American Sugar didn’t own the sugar cane and the sugar beet farms and the plantations that produced the raw products used to make sugar, the company wasn’t vertically integrated enough to qualify as a monopoly and so warrant dissolution.¹² Consternation and head-scratching ensued inside the pro-competition camp. The definition of a trust, a monopoly, and of collusive and cartel-like business behaviors needed work. Sleeves were rolled up and work commenced.

The mantle of progressive populism passed to the likes of Theodore “Teddy” Roosevelt, Louis “The People’s Lawyer” Brandeis, William “The Great Commoner” Jennings Bryan, Eugene “Gene” Victor Debs, Robert “Fighting Bob” La Follette Sr. and others in the wake of the Great Merger Movement. Bryan was a Nebraskan Congressman with Populist Party roots. He lambasted trusts as he ran for president as a Democrat, the last time in 1908 (his ticket lost but it got 43% of the popular vote).¹³ Debs was a Democrat turned Socialist who ran for president five times – he peaked out at 6% of the vote tally in 1912 – and he co-founded the Industrial Workers of the World, a trade union with socialist/anarchist ties that had a membership of 150,000 in North America and Australia by 1917.¹⁴ La Follette served Wisconsin from both chambers of Congress as a Republican, eventually became governor of the state, and ran for president under the Progressive banner in 1924 (he got ~17% of the national vote).¹⁵

When it comes to chalking up wins against trusts, though, it’s hard to argue that Teddy Roosevelt and Louis Brandeis weren’t the progressive populist movement’s most effective leaders. One acted from the oval office and the other, eventually, from the Supreme Court bench, but both played crucial roles in defining what’s today called the Progressive Era. Roosevelt was renowned for saying, “Speak softly and carry a big stick, and you will go far,” but he was a potent orator in his own right. Built like a bull moose, he used all his 210 pounds to make his points with force when he spoke in public. His big stick regularly landed on trusts. In his two terms as president, which ended in 1909, Roosevelt’s Justice Department filed more than 40 antitrust lawsuits. Sherman may have been slapped on the wrist by the Supreme Court, but that didn’t stop Roosevelt from jamming his hand back in the antitrust cookie jar dozens of times.

Brandeis helped define monopolies from a legal angle and was a key player in making the public case that monopolies undermined capitalism, and democracy by extension. Brandeis was slight of build and soft-spoken, a brainy Democrat to Roosevelt’s energetic Republicanism (and Populism late in his career). The razor blade that Brandeis wielded, though, was more effective against trusts in the long run than Roosevelt’s blunt, bombastic “bully pulpit” stick.

“To destroy this invisible Government, to dissolve the unholy alliance between corrupt business and corrupt politics is the first task of the statesmanship of the day,” proclaimed Roosevelt in 1912. “This country belongs to the people. Its resources, its business, its laws, its institutions, should be utilized, maintained, or altered in whatever manner will best promote the general interest.” You don’t go up on Mount Rushmore without your views resonating deeply with the public.

Brandeis graduated from Harvard Law School at age 20 and with the highest GPA in the institution’s history.¹⁶ To say he had a great legal mind sells him short, no pun intended. The “Brandies Brief” changed jurisprudence. This innovation appeared in a 1908 in a case that he argued as a private attorney before the Supreme Court, Muller v. Oregon.¹⁷ The brief itself was short. The case turned on whether or not a state could limit the number of hours that female workers were required by their employers to work. The preceding consensus was that states didn’t have such a right since it infringed on private employer-employee “freedom of contract” precedents. Brandies discovered that the court had previously ruled, though, that these contract rights could be limited if they had “a real or substantial relation to public health or welfare.”

Brandeis backed up the terse brief with over a hundred pages of science-backed evidence culled from a range of credible sources that all pointed to one conclusion: t”[W]hen women worked long hours, it was destructive to their health and morals.” The state of Oregon won the case. It was the first time the Supreme Court took science-based social conditions into account rather than the legal facts of the case alone. Science was a new type of evidence after that. Brandeis’ approach went viral. In 1954, the Brandies Brief model underlay the landmark decision that desegregated the U.S. public school system in Brown v. Board of Education.

A Brandeis quip, “Sunlight is said to be the best of disinfectants” evolved into the sunshine laws and open meeting and reporting requirements that have permeated all levels of government, and that have made the actions of public officials more transparent and accountable to the people (and provided a model for companies to adopt as well). Brandeis was an early advocate of taking on pro bono, public interest cases done at zero cost to clients with limited groats.

In a 1905 address before law students at his alma mater, when he was 49, Brandeis urged his future colleagues to defend the interests of all Americans. “Instead of holding a position of independence, between the wealthy and the people, prepared to curb the excesses of either, able lawyers have, to a large extent, allowed themselves to become adjuncts of great corporations and have neglected the obligation to use their powers for the protection of the people. We hear much of the ‘corporation lawyer,’ and far too little of the ‘people’s lawyer.’ The great opportunity of the American Bar is and will be to stand again as it did in the past, ready to protect also the interests of the people.”¹⁸

Brandeis reputation as “the people’s lawyer” and a “Robin Hood of the law” was cemented around the time of the Great Merger Movement. He and Roosevelt were already complimentary forces by that point. Philippa Strum, a Brandies biographer, noted that the idealistic Bostonian had concluded circa 1900 that:¹⁹

Government had taken the side of capital in a multiplicity of ways, most significantly by turning corporations into constitutionally protected “persons” while simultaneously denying legal protection to the activities of labor unions. It was governmental action that had permitted businesses to grow to the point where they had become massive concentrations of power unmatched by any entity outside the government itself and certainly not by labor…To Brandeis, if government not only permitted but abetted the development of a power center that made democracy impossible, it had lost its legitimacy.

Mega-trusts were inimical to democracy in Brandeis’ view. The late 19^th century’s laissez-faire philosophy, coupled with perverted Darwinism, had been translated by lawmakers, lawyers and judges into “The devil take the hindmost” in practice.²⁰ Brandies rose to oppose this shift in the social contract in the most Utilitarian and Enlightened of senses.

In 1907, he embarked on a six-year campaign to prevent J. P. Morgan from monopolizing New England’s railroads. Morgan was another Gilded Age tycoon who was at the beating heart of the “money trust.” The fight got ugly. Brandies was savaged in the press and attracted a host of new and extremely wealthy enemies, and yet he persisted. He got two meetings with President Roosevelt. The Justice Department leveled antitrust charges against Morgan’s New Haven line.

“There is no way to safeguard the people from despotism except to prevent despotism,” wrote Brandies. “The objections to despotism and to monopoly are fundamental to human nature. They rest upon the innate and ineradicable selfishness of man. They rest upon the fact that absolute power inevitably leads to abuse. They rest upon the fact that progress only flows from struggle” and rigorous competition.²¹ For Brandeis, Schumpeter’s state of “mutual dependence” was neither moral nor good for democracy or capitalism. He and Roosevelt were squarely in Sherman’s pro-competition camp.

Morgan lost and sold off all related stock. In the wake of this stunning defeat, wrote the banking historian Ron Chernow, “For the House of Morgan, Louis Brandeis was more than just a critic, he was an adversary of almost mythical proportion.”²²

Social theorists postulated that people and governments in democratic republics co-developed the terms of their social contract over time. The U.S. Constitution had fifteen amendments by 1907, breathing specificity and life into this theory. Brandies and other progressive leaders understood a potent third voice had elbowed its way into this debate by that point: big businesses and trusts. These entities had altered “the very nature of society. The Constitution said nothing about ‘industrial absolutism,’ a phenomenon that did not yet exist when it was written and could not have been anticipated. And yet if the objectives of the social contract were the negation of absolutism and the safeguard of liberty, the social contract was now not working,” writes Strum, summarizing Brandies’ views. “Corporate money could buy government policies, which, by the terms of the social contract, were to be created by the people.”²³

In a speech before Boston’s Central Labor Union in 1907, elaborated Brandies, “Labor unions should strive to make labor share all the earnings of a business except what is required for capital and management.” Business owners deserved a “fair return” on their investment, but all profit above that point should go to workers. This was part of Brandeis’ response to big business elbowing its way into social contract discussions: workers deserved to take home a much larger share of profits that these huge entities generated in order to rebalance the socioeconomic power scale.²⁴ Depending on where “fair returns” ended, it was a roadmap to rising frontline employee incomes, and falling Gini coefficients around pay/benefits. Progressive populism was next-gen Utilitarianism under new management, just as Utilitarianism had been next-gen Enlightenment thinking under new management. Those threads connect historically.

♦

The application of Roosevelt’s big stick to the hind end of big businesses might have been popular but it didn’t break the back of America’s boom and bust cycle. A financial panic occurred in 1901 in the wake of a stock market crash.²⁵ A tug-o-war had broken out over control of the Northern Pacific Railway as E. H. Harriman and Jacob Schiff squared off against J. P. Morgan and James Hill; the crash was a side-effect of this brawl. Thousands of small investors were wiped out along the way and a stampede for the casino door followed.²⁶ The NYSE shut down. The titans of capital that triggered the crash, meanwhile, set their differences aside to form a joint trust, the Northern Securities Company.

Roosevelt swung his antitrust hammer at Northern Securities in 1902. (At this point I must give a shout out to my maternal great grandfather, Samuel Van Sant, the Republican governor of Minnesota at that time; Van Sant filed the antitrust lawsuit that Roosevelt ran with federally.²⁷) Northern Securities lost and was dissolved in 1904, but the country was in recession by then. The downturn lasted about two years. GDP mainly dropped due to declines in commercial and industrial production, and unemployment spiked. (Another panic had occurred in 1893 and it was followed by a recession that lasted until 1897; that downturn helped fuel the progressive movement’s fire because unemployment ranged from 8% all the way up to 18%, and some 15,000 companies, including hundreds of banks, failed.²⁸)

What became the American Stock Exchange (AMEX) coalesced in 1907, just in time to witness another panic. There was a run on deposits at the Knickerbocker Trust Company, New York City’s third biggest trust, late that year.²⁹ The panic spread after the trust imploded and as more people withdrew their deposits from regional banks. J.P. Morgan and other New York financial titans pledged vast sums of money to backstop the banking system. The nation’s weak Treasury Department was either unwilling or unprepared to stabilize the shrinking banking/finance sector.³⁰ Giant banks effectively colluded to limit their collective losses.

Seeds of the Federal Reserve System were planted in the recession that followed. This one lasted about a year. Most Americans and many lawmakers were desperate to find a way out of the boom and bust cycle by that point. The U.S. economy had been swinging between feast and famine for fifty years or more.

Part of the answer that the public and lawmakers settled on was to increase taxes on trusts and other giant corporations. These entities had a track record of generating huge profits in the good years, and their stock prices skyrocketed as a result, but in the bad years, they quickly furloughed or fired workers, circled their wagons, and paid minimal taxes until the economy recovered. The basic idea was to capture more corporate “heat” in the boom years and to use it to offset some of the “cold” of recession years by way of new government programs. The outlines of a minimal social safety net took shape. Congress passed an excise tax on corporate incomes in 1909. It took until 1913 for enough states to ratify the Sixteenth Amendment to the Constitution – and to override an attempted Supreme Court abortion in the process – but America’s federal corporate tax system was off and running.

A new Republican President, William Howard Taft, picked up where Roosevelt left off. His Justice Department, in fact, sued ~70 companies via Sherman.³¹ Monopolies in tobacco, meatpacking and even bathtub fixtures were dissolved. Hundreds of executives who’d met to illegally fix prices eventually went to federal prison.³² The antitrust hammer landed on Standard Oil in 1911.

The Standard Oil Trust eventually shattered into dozens of companies because many of its 41 constituent businesses owned controlling stock in other portfolio companies. Per Daniel Yergin, the Pulitzer Prize-winning author of 1990’s The Prize: The Epic Quest for Oil, Money, and Power, Standard Oil controlled 91% of U.S. kerosene and oil production and 85% of all related sales in 1904.³³ The federal Commissioner of Corporations found that “the dominant position of the Standard Oil Co. in the refining industry was due to unfair practices—to abuse of the control of pipe-lines, to railroad discriminations, and to unfair methods of competition in the sale of the refined petroleum products.”

Standard Oil used a dumping technique to weaken domestic competitors before acquiring them. Standard Oil also got its allies in Congress to pass protective trade tariffs that helped freeze out foreign competition (Adam Smith’s old pet peeve). The remnants of the shattered trust’s petroleum assets eventually oozed back together to form the forerunners of Exxon, Amoco, Mobil and Chevron, a a family reunion we’ll attend in Chapter 4.

Taft’s Justice Department tried but failed to break up U.S. Steel in 1911. That company had produced two-thirds of the nation’s steel as recently as 1902.³⁴ Carnegie and company dodged the antitrust bullet.

Let’s pause to underscore the Progressive Era’s main policy thrusts as it relates to reinforcing competitive dynamics around the apex of large industries. It had two prongs: the federal government worked to downsize trusts and big business monopolies and conglomerates by way of Sherman and related policies, and the government hiked taxes on America’s largest businesses and wealthiest households. President Lincoln’s capital gains tax was resuscitated in 1913. Its max rate was initially 7% (the same rate as ordinary income) but was raised to 12.5% in 1921.³⁵

The modern estate tax debuted in 1916. It maxed out at 10% on the portion of inherited wealth above $5 million.³⁶ Andrew Carnegie, believe it or not, was a fan of the tax. He’d been the wealthiest man in America around 1900; his steel and railroad empire represented nearly half of GNP at that point – it was our domestic equivalent of Britain’s East India Company circa 1860.³⁷ Wrote Carnegie in 1899:³⁸

Of all forms of taxation this seems the wisest. Men who continue hoarding great sums all their lives, the proper use of which for public ends would work good to the community from which it chiefly came, should be made to feel that the community, in the form of the State, cannot thus be deprived of its proper share. By taxing estates heavily at death the State marks its condemnation of the selfish millionaire’s unworthy life.

A fervent believer in capitalism, meritocracy and God, Carnegie wove these threads together into an influential article, “The Gospel of Wealth”. It argued that stiff inheritance taxes were in the public interest because it forced those who’d benefited the most from American capitalism to turn around and uplift others, to heal the sick and afflicted, and to otherwise do for “the least of these.”³⁹ Anyone who believes in a strict meritocracy, as Carnegie did, must also believe that each generation should start over at the same starting line. No leg up for trust fund babies.

Carnegie’s policy prescription also squared with Thomas Jefferson’s vision of using the tax code to preclude “the accumulation and perpetuation of wealth in select families”. A stiff estate tax was a guardrail that helped prevent the rise of an American aristocracy. “He who dies with wealth, dies in shame,” said Carnegie bluntly. Many of today’s leading philanthropists, including William Gates, Sr. and Jr., Warren Buffet and Eli Broad to name a few, are walking in Carnegie’s footsteps. Some have helped fund nonprofits like United for a Fair Economy that urge more high net worth individuals to give most of their fortunes away to causes that help uplift people of limited means and to reduce other societal inequities.⁴⁰

Out of office, Teddy Roosevelt helped get the modern estate tax over the finish line, as this excerpt from a 1910 speech makes clear:⁴¹

The absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power. The prime need to is to change the conditions which enable these men to accumulate power which it is not for the general welfare that they should hold or exercise…No man should receive a dollar unless that dollar has been fairly earned. Every dollar received should represent a dollar’s worth of service rendered – not gambling in stocks, but service rendered. The really big fortune, the swollen fortune, by the mere fact of its size, acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means. Therefore, I believe in a graduated income tax on big fortunes, and in another tax which is far more easily collected and far more effective – a graduated inheritance tax on big fortunes, properly safeguarded against evasion, and increasing rapidly in amount with the size of the estate.

The economies of scale advantages that accrue to large corporations also accrue to the families of their largest shareholders and related stock speculators because these families chiefly gain from the associated profit and dividend stream. Tax progressivity should keep rising at the very highest end of the corporate and personal income scales, Roosevelt maintained. The Progressive Era is called that, in part, because the Arrow-Smith ideal’s public good container started to get woven at in this time frame time and two major threads were antitrust enforcement actions and higher taxes on top 1% families and businesses.

Another recession arrived in 1913-14 that wouldn’t subside until after World War I. The Federal Reserve Act was passed during this recession.⁴² Many of J.P. Morgan’s directors also resigned when it was revealed that his “money trust” held nearly 350 directorships in over 100 businesses that, in turn, controlled over $22 billion in assets.⁴³ It was scandalous, front page news. Few had grasped that his empire was so vast.

Against this backdrop, after nearly two decades of deliberation and work, lawmakers were finally ready for another bite at the antitrust apple. The Clayton Acts were introduced by Henry De Lamar Clayton Jr., a Democratic congressman and judge from Alabama. The legislation passed the House 277-54 and sailed through the Senate, 46-16.⁴⁴ President Woodrow Wilson signed it into law in October 1914. The Sherman and Clayton Acts are part of Title 15 today, which partly states:⁴⁵

No person shall acquire, directly or indirectly, the whole or any part of the stock or other share capital…of the assets of one or more persons engaged in commerce or in any activity affecting commerce, where…the effect of such acquisition, of such stocks or assets, or of the use of such stock by the voting or granting of proxies or otherwise, may be substantially to lessen competition, or to tend to create a monopoly.

Wilson pledged to strengthen antitrust laws on the campaign trail. While Sherman had been used to break up many prominent trusts, many more had formed during and after the Great Merger Movement. Labor unions had been deemed a type of cartel by subsequent court rulings at the same time, and were hamstrung by associated restrictions. Many large corporations effectively sidestepped the spirit of Sherman by consolidating through the trust legal structure.

The Clayton Acts addressed this problem. Its language was more expansive. The acts banned several anticompetitive practices in the areas of discriminatory pricing, exclusive dealing, interlocking directorates and more. They bit more deeply into the real-world activities of trusts and cartels circa World War I than did Sherman’s now generation-old approach. The Federal Trade Commission (FTC) was also established at this point. With Wilson’s enthusiastic support, it began sharing jurisdictional responsibilities with the DOJ on federal antitrust cases. Now there were two agencies gunning for anticompetitive trusts and cartels.

Brandeis’ fingerprints were all over the FTC’s design as well as the Clayton Acts’ language. Initially a supporter of the Republican La Follette in the 1912 election cycle, Brandeis swung into the Democratic camp after a meeting with Wilson early that year. Brandeis accepted an economic advisor role in the Wilson campaign. Wilson’s New Freedom platform, which emphasized limited government and the vigorous prosecution of trusts and monopolies, was partly developed by Brandeis.⁴⁶ Wilson started uses Brandeis’ phrase, “regulated competition” in his stump speeches.⁴⁷ The FTC and Clayton Acts were initially cut from this same cloth.

Aside from barring anticompetitive practices, the acts established a process for dismantling trusts and spelled out criteria that regulators could use to judge if a proposed merger/acquisition might result in a near-monopoly. Concerns about monopolies had shifted downstream to M&A proposals. That was new. Brandeis swum further downstream than most. He thought companies with >40% market share in large, systemically vital industries should be dissolved.⁴⁸ Coupled with his vision of robust profit-sharing plans that would cover rank-and-file workers, a pathway to falling socioeconomic Gini coefficients was illuminated.

World War I then intervened, precluding more near-term movement along the progressive populist track. The U.S. attempted to stay neutral when the war broke out. The country soon tipped its hand, though, by ramping up production of war materials destined for Europe’s Allied powers. Once Germany started sinking these American merchant ships and badgering Mexico to attack the U.S., the pretense of neutrality melted away. America declared war on Germany in early 1917, and her people and businesses rolled up their sleeves and went to work.

♦

World War I devastated Europe much as the Civil War had devastated America roughly half a century earlier. More than nine million military combatants and between seven and eleven million civilians died as a result of the war, which raged from mid-1914 to late 1918.⁴⁹ The number of permanently disabled or injured persons was several times higher. France, Germany and Austria-Hungary lost between 10.5% and 17.1% of their male populations.⁵⁰ The effect of the war was exacerbated by the outbreak of a deadly influenza pandemic that killed between 17 and 50 million people worldwide.⁵¹

The United States came through World War I relatively unscathed. Of the nation’s 4.7 million men who served, less than 120,000 died – and over half of that total fell victim to the the 1918 flu pandemic.⁵² The country’s civilian death count and the level of its infrastructure destruction were similarly modest.

The trauma of World War I shredded Europe’s geographic, economic and political maps. Seventeen monarchies and three republics (France, Switzerland and Portugal) existed in mainland Europe before the war. Between the end of the war and the eve of World War II, European governance pivoted en masse toward democracy and parliamentary republicanism.⁵³ Macaulay hadn’t been just wrong about America’s experiment with democracy, he’d been wrong about the broad direction of global geopolitics. The Allies won World War I. The U.S. economy surged forward in the wake of the war as Europe rebuilt. Many Europeans turned to the U.S. for modernization guidance. Our model democracy and capitalism redounded across the Atlantic and helped rewire Europe.

“Even the First World War did not shake American confidence in the strong tendency of things”, writes the historian Russell Kirk of this period. “[I]n its result, it seemed a vindication, rather, of liberal, humanitarian and pragmatic impulses; and it reinforced tremendously, out of its frightful energy, three social impulses which the critical conservatives detested: the conversion of political power to the ends of a leveling humanitarianism, the development of a new and complex American imperialism, and the infection of all segments of society by a gross hedonism.”⁵⁴ (Hip, hip hooray for the Allies! Part of this hedonism might be reflected in the rising number of public companies in Britain following the war; that nation was home to a little over 700 of these businesses in 1924, but by 1939, this figure exceeded 1,700.⁵⁵)

Kirk clarified what he meant by the first social impulse. “The instrument of the first was the graduated income tax…Together with the inheritance tax, this device was irresistibly tempting to social reformers,” he wrote. “The power to tax certainly is the power to destroy; humanitarians confidently believed it was the power to create, as well…The only matter for surprise is that the transfer of wealth from propertied persons to propertyless persons, by means of positive legislation, has not proceeded even faster since 1918…”⁵⁶

Democratic governments in the late Progressive Era indeed moved to pull down the top and uplift the bottom of society through “positive legislation” with particular vigor (taxes on top 1% families and corporations went up and additional social programs were created or expended in a way that helped uplift SMBs and individuals and families of moderate to modest means). World War I was broadly viewed as a vindication of Utilitarianism and democratic governance. Europe’s vestigial monarchies shattered like Sauron’s tower at the end of the Lord of the Rings trilogy.

America stepped out of Europe’s shadow after World War I and became a globally recognized superpower. The U.S. had the largest economy in the world by that point.⁵⁷ Not that everything was wine and roses on the home front. America plunged into an acute recession in late 1918 as hyperinflation tore through Europe. The rapid ramp down in American wartime production, coupled with the huge influx of returning troops and limited domestic job prospects, precipitated the downturn. The fallout of the flu pandemic also likely undercut the U.S. economy at the margins.⁵⁸

The Progressive Party was lost in the postwar hubbub. It never managed to reassert itself on the national stage as a legitimate third party threat to Republican and Democratic Party dominion. In the decades that followed World War I, both halves of America’s effective political duopoly took credit for causes first championed by, if not hard-fought battles won by Progressive candidates and the huge swath of the voting public that supported them.

Louis Brandeis ascended to the Supreme Court during World War I. Nominated by Wilson and opposed by most Republicans – including the former president Taft, presumably because Brandies publicly questioned his commitment to bold antitrust enforcement – Brandies again made history along the way.⁵⁹ Never before had the Senate Judiciary Committee held hearings and called in witnesses to testify prior to such a vote. The contentious process dragged on for four months.

In the Wall Street Journal’s opinion, Brandies’ “anti-corporation agitation” was “rabid”, making him unfit to serve of the land’s highest court. Others believed that antisemitism played a role in the attacks on his character.⁶⁰ In mid-1916, the Senate nevertheless confirmed Brandies by a vote of 47 to 22. It was largely a partisan affair. Three Republicans, including La Follette, voted for him, and a lonely Democrat, Nevada’s Francis Newlands, a renowned white supremacist, voted against him.⁶¹ Brandies was 60.

Across the pond, Harold Laski, an up-and-coming British Labor Party leader and part-time lecturer on government at the London School of Economics, though he had a bead on what made Brandies so controversial.⁶² In a 1922 letter to Brandeis’ fellow Justice, Oliver Wendell Holmes Jr., Laski confided that Brandeis was “really a Jeffersonian Democrat, trying to use to the power of the State to enforce an environment in which competition may be really free and equal…[He’s] a romantic anachronism.”⁶³

Part of what made the U.S. Constitution radical for its day, and part of lead Macaulay and company to consider it deeply flawed, was the separation of powers the document proscribed. The establishment of three co-equal branches of government – the executive, the legislative and the judicial – was an untested innovation at that point and, among the Founding Fathers, Jefferson was a leading proponent of this division.⁶⁴ Brandeis was indeed well-read on these matters. His position, captured in a 1926 court decision, was that “The doctrine of the separation of powers was adopted by the Convention of 1787, not to promote efficiency but to preclude the exercise of arbitrary power. The purpose was, not to avoid friction, but, by means of the inevitable friction incident to the distribution of the governmental powers among three departments, to save the people from autocracy.”

Laski’s bead was true. Brandies wanted to distill Jefferson’s long-term vision of universal suffrage and of a complementary commercial/economic system that deeply and widely distributed power and make it real in early 20^th century America. That’s what made him “rabid” in the eyes of his pro-aristocratic, pro laissez-faire opponents: he wanted to return the social contract to one that overwhelmingly recognized, and acted upon, the interests of flesh and blood citizens and the basic needs of their representative government.

Brandies sought to push corporations and big trusts back out of the social contract debate. His concept of generous profit-sharing plans that would benefit frontline workers if adopted, his support for the increasingly stiff taxes levied on the biggest corporations and on the millionaire families that typically controlled them, and his belief that the antitrust hammer had to be swung now and then all point to this deeper desire. He opposed corporate monopolies for the same reason the Founding Fathers opposed installing a king at the apex of the government: they both inevitably devolved into an exercise of “arbitrary power.”

America’s justice system relies on public juries for the same reason. It would be easier, faster and cheaper to have judges hear cases and meet out verdicts as they see fit. The downside is that these bottlenecks of power are far more prone to corruption and abuse. The door to arbitrary, Draconian justice is left wide open in such a model, making a mockery of any alleged principle of the rule of law. Juries decide the fate of American defendants in court trails because that distribution of decision-making power pours additional light on the judging process and forces participants to rely on explicit precedents. It slows down the process but it also reduces the chance that corruption or abuse will affect the result.

Do you want justice done fast and cheap or slow and right (more objectively “blind”)? You have to pick one. Like Jefferson, Brandeis believed that distributed power structures not only made democracy different from monarchal and other forms of monopoly-centric governance, but better than them over the long haul. It was a rational and a moral judgement.

In August 1920, the 19^th Amendment to the U.S. Constitution became law. Women had finally won the right to vote. A century-long struggle involving the tireless work of countless Utilitarians, progressive populists and Enlightened souls of all stripes and backgrounds…but mostly by steely-eyed women…had paid off. UK suffragettes fully won out in 1928.⁶⁵ The ratification of the 19^th Amendment was a sort of swan song for the Progressive Era, which many historians maintain wound down circa 1920.

If one steps back to appreciate its scope, it’s clear that progressive populists and fellow travelling Democrats and Republicans had gone on an impressive policy win streak since 1890, which including the:⁶⁶

• Passage of the 16^th amendment to the U.S. Constitution, which legalized income taxes. Associated tax rates on personal, capital gains and corporate income taxes grew more progressive over time in this era, as did estate tax progressivity.
• Passage of the 17^th amendment to the U.S. Constitution, which made the election of senators a direct vote process. The aim of this change was to reduce political corruption and abuse of office.
• Passage of ballot initiatives in many states that allowed laws to be enacted directly through the popular vote, plus the passage of state-level referendum/recall processes that could be used to remove corrupt/abusive public officials while in office.
• Passage of the 19^th amendment to the U.S. Constitution, which extended the vote to women.
• Passage of the Sherman Antitrust Act and the Clayton Acts, which were designed to combat monopolistic corporations and trusts. Dozens of big businesses were dissolved in the Progressive Era, and “muckraking” journalists publicly shamed scores of others, calling out their owners/executives by name, and forcing more modest changes in their business practices.
• Creation of the FTC to oversee and regulate large corporations in particular and, in concert with the DOJ, to prosecute antitrust cases when needed.
• Creation of the Fed, which was initially intended to be a countercyclical weight applied to attenuate the frequency and severity of economic downturns.
• Establishment of the Food and Drug Administration (FDA), which was tasked with protecting the health of the people. Companies that made tainted food faced higher legal/financial consequences once the agency found its footing, and quack doctors and snake oil salesmen ran for the hills.
• Forced the repeal of or amendment to many poll taxes, voting literacy tests and related Jim Crow laws that were most common in the states of the former Confederate South.
• Dramatically stepped-up investment in the nation’s public school and university systems.
• Reductions in a range of import tariffs, many of which had been enacted at the behest of big businesses to freeze out foreign competition.
• Increased infrastructure spending on roads, ports/harbors, bridges, tunnels, urban lighting, transit systems and more.
• Establishment of the eight-hour workday and the weekend. Organized labor was mainly instrumental in that win. You’re welcome.
• Passage of a ban on child labor. This also came about through union agitating (i.e., Congress’ passage of the Keating-Owen Act).

All these changes to the social contract were designed to attenuate socioeconomic inequalities in one respect or another. That’s what made the Progressive Era the Progressive Era. The aristocratic class advanced socioeconomically from the end of the Civil War to about 1890. Then the pendulum of power started slowing down and even started swinging back the other way in some respects through 1920. Teddy Roosevelt, Louis Brandeis and others helped lead this momentum shift. If Twitter had been around, those two would have gotten #progpop trending.

♦

The breadth and depth of America’s embrace of #progpop norms are perhaps best illustrated by rise of organized labor. As Figure 16 shows, the share of nonagricultural workers that belonged to a union went from the low single digits in the late 1800s to >25% by 1940 in the U.S., according to Harvard’s esteemed economics professor Richard Freeman (the details are laid out in an NBER paper he wrote the late ’90s).⁶⁷ At its peak in the 1940s, more than one in three nonagricultural workers belonged to union, and after that point, this share drifted back down toward 25% circa 1970.

About a million workers belonged to a union in 1900, out of a nonagricultural workforce of ~15.2 million, Freeman’s research shows. By 1920, these respective figures had jumped to 4.5 million and 27.4 million. By 1940, they were 8.4 million and 32.4 million. There were 16.4 million union workers out of 52.4 million nonagricultural workers by 1960. The U.S. didn’t climb on the union bandwagon in a vacuum, by the way. Between 1930 and 1940, union density peaked at around 22% in Canada, 25% in the France, 33% in the UK, 39% in Australia, and >53% in Sweden.⁶⁸ Unionization swept through Western countries like a flash flood World War I.

The term redneck originated in West Virginia in the 1920s. Rednecks were coal miners who didn’t sport their red bandanas to make fashion statements. Sucking coal dust all day long, well, really sucked, and covering one’s mouth and nose while working was the only ticket to survival in those stuffy, dark shafts. Rednecks formed loose confederations and began discussing the often deplorable and dangerous working conditions with managers and mine owners. If you wore a red bandana you were in the club, and the rest of your coworkers and everybody else in coal country knew it. Rednecks wore their union cards around their necks.

Confrontations with mine owners and managers became inevitable since capital didn’t want their workers unionized and had little interest in negotiating workplace changes that cost them money/profit. The main point of a union was, and is, to collectively bargain with company/organization owners to get more pay and benefits, and to win other workplace condition improvements on behalf of workers. That approach broadly paid off beginning in the late 1880s. Unions helped pull down the top and uplift the bottom of companies and the broader U.S. economy. Gunfights broke out between rednecks and mine owners’ private security forces in the 1920s. If you were a redneck in West Virginia at that time, you were one badass hombre. You wore a target around your neck. You fought to advance the interests of the men working on either side of you. The original redneck mined the vein of progressive populism.

After another short, severe recession in 1921, America embarked on a remarkably long stretch of smooth sailing. Two rather mild recessions, each lasting about a year, ended in 1924 and 1927. If a severe recession is defined as one that lasts >1.5 years and that sees foreign trade and domestic industrial activity both fall by at least 25%, neither of these ‘20s recessions qualified. The U.S. hadn’t gone ~8 years without a severe downturn since at least 1880, and perhaps not since before the Civil War.⁶⁹

Some began to think America’s #progpop reforms had filed down capitalism’s rough edges. Despite Prohibition, champagne corks popped in speakeasys coast to coast. Jazz was hitting its stride and radios began selling by the millions, filling the air with music in a way that had never previously existed. A teenage Billie Holiday envisioned herself singing before audiences packed into Harlem’s nightclubs.⁷⁰ Hipster women sported risqué knee-length skirts, short hair, and puffed on cigarettes in holders in public. F. Scott Fitzgerald busily scribbled The Great Gatsby. Movie theaters and movie stars became “a thing”. Ford’s angular, black Model T’s gave way to curvy, colorful Packard Twin 6’s, Studebaker Roadsters and Rolls Royce limos.

The horrors of World War I faded in the rear-view mirror. GDP rose year-on-year. The NYSE’s Dow Jones Industrial Average (DJIA) went of a tear from 1921 to early 1928, roughly tripling from 63 to 191.⁷¹ Kirk’s hedonism was on gaudy display in the Roaring Twenties.

With all apparently going so swimmingly, President Coolidge attempted to repeal the estate tax (but was forced to accept a trim instead).⁷² His Treasury Secretary, Andrew Mellon, who’d made a fortune in banking, began advocating “scientific taxation”, which got the ball rolling on what we now call supply-side economics.⁷³ Mellon, like Lincoln, nonetheless believed that capital gains should be taxed at a higher rate than ordinary income. In a 1924 book, wrote Mellon:⁷⁴

The fairness of taxing more lightly incomes from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs. Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earning capacity is at an end.

He and Carnegie must have curled up with the same good book.

In early 1929, rumors surfaced that the Fed was considering taking proactive measures to address what it perceived to be a stock bubble.⁷⁵ Such a novel action was viewed as out of character and roundly criticized. Joseph Stagg Lawrence, a Princeton-based economist and author, summed up the prevailing sentiment. The Fed, he wrote, was “doing its utmost to cast the proverbial monkey wrench into the machinery of prosperity.”⁷⁶ The “consensus of judgment of the millions whose valuations function on that admirable market, the Stock Exchange, is that stocks are not at present over-valued,” wrote Lawrence in mid-1929. “Where is that group of men with the all-embracing wisdom which will entitle them to veto the judgment of this intelligent multitude?”⁷⁷

The American people had been to the bubble and crash party countless times by then, and perhaps the newly elected Republican President, Herbert Hoover, sensed their wariness. Hoover called in an NYSE exec that summer and implored him to do something to curb the rampant speculation. The DJIA had gone from roughly 190 to an unprecedented 380 between the spring of ’28 and the summer of ’29.⁷⁸ Nothing of consequence came of the discussion. Laissez-faire had come roaring back in the Roaring Twenties. Even big business M&A picked up, and antitrust enforcement efforts were ratcheted down.⁷⁹

There was no “intelligent multitude” controlling the NYSE in 1929, for what it’s worth. Lawrence had a way with words but was wrong. America’s deep inequality problems had been partly checked though the Progressive Era’s “positive legislation”, but the country’s inequality problems hadn’t been fundamentally resolved. In the 1920s, socioeconomic inequality started rising again because a tiny fraction of total shareholders held most of the NYSE’s stock. Lawrence argued that that when a tiny number of people (Fed regulators) exerted control over a market that bad things would follow, when a tiny number of people (nouveau riche multimillionaires, Gilded Age billionaire tycoons and their heirs) already “exerted control” over the NYSE based on their overwhelming share of stock ownership. Those with a lot of capital got richer in the 1920s, driving up national Gini coefficients.

Shakespeare couldn’t have penned a more ironic case of the pot calling the kettle black. This drama was about to end in tragedy. The DJIA sank like a stone in late 1929. Nobody knew it yet, but the starting bell of the Great Depression had rung, and #progpop was about to get a next-gen steroid shot in the tush.

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