The Decline of Laissez-Faire

0:00Here we saw a situation where it seemed to be an ideal setup for a cartel. We had three railroads going in a key area from Chicago to Omaha, where the Union Pacific had its eastern terminus. There were three railroads, two of which were owned by the same guy. So you had something like that. And these two guys then got together and formed a cartel and said, okay, we'll cut the shipments, we'll raise the freight rates, and the Union Pacific won't be able to do anything about it, and we suck. And we saw, it started in 1870, we saw that even under these ideal situations, the cartel was smashed.

0:45What happened, to repeat, is that Union Pacific began to look around for ways of getting around this and they finally put together or discovered there's another Burlington system that's been all the way down to St. Louis and up and dealt with them and thereby breaking the cartel, even though of course it was a longer route, but since these three railroads are

1:40undercut the whole cartel. So on a free market a cartel does not work, cannot work even in a situation when you have only a couple of railroads, even in a seemingly ideal situation for cartellists. The same thing happened with the big four, big five, so-called trunk lines.

2:02The trunk lines were the, I think I've mentioned already but I'll just repeat it, so-called The Trump lines were basically the basic lines to Chicago or from Chicago to the Eastern seaboard. In other words, there were originally four competing railroads, the New York Central which went to Buffalo and then Albany and down to New York City, the Erie Railroad which I think went to Ohio or something like that, and the Pennsylvania Rail which went to Philadelphia, note that Philadelphia and New York City are competing for mid-East-West trade, and the Baltimore and Ohio, the last one going to Baltimore, B&O, and I think the Baltimore Ohio was the last one to be built, at least four. I think it was built 1874. I think it was the final building of B&O. So all these railroads competed, and they tried to get together and have a cartel. And they would, first of all, it took them a long time to organize.

3:12I mentioned before, each one wanted to have a different pricing system. New York Central had an easier grade. They wanted to do it by grades or whatever. So finally they got together and they make some kind of quota system. In other words, they agree on the The Chunk Line Cartel System, the thing that's called the Seaboard Agreement, and they say all right, here's what we'll do, we'll have a, don't forget, thousands, literally thousands of rates, all sorts of things, they have a very complex system here, they decide to have a quarter system, they'll have a, one time they had a quarter system, Erie will take one third of the business, and New York Central one third, Pennsylvania a quarter, and B&O ten percent, something like that, and then they have to have some sort of internal policing agency to regulate this.

3:59So they had a guy, they set up a whole association, because it was not illegal then, a whole association to regulate this, to run it, have representatives, a whole internal bureaucracy. They picked a guy who was a German engineer, a railroad engineer, came over, he became a professional cartelist, his name was Albert Fink, and he wound up as the head of a whole and a whole bunch of railroad cartel associations in the south and the east and the west later on and he became a professional railroad cartelist and his job was to try to police the agreements and try to make sure that nobody cheats and all that sort of stuff and there's also put together, helping these four people put together was J.P. Morgan and company, Drexel Morgan which now becomes, since the panic of 1873 became the big investment banker, Morgan was He was heavily invested in railroads and underwriting railroads and he gets all these guys together to arrive at the cartel.

4:55So you have his partner Anthony Drexel, still a big name in Philadelphia, still a big name in Wall Street, and J.P. Morgan himself, who was the son of a British banker who also had important connections. He didn't start off on the ground up, he started off as a wealthy and important banker, English banker father named Junius Morgan. Pretty soon Morgan became the senior partner here, became the dominant force. So Morgan and Drexel, they get these guys, they whip them into shape, okay, let's have a cartel, great, great. But it's very difficult, you have to agree on a quota, they always wanted to change the quota. If you have a quota system, you're in a business or in a railroad, next year when the cartel agreements last for a year or two, you want to change the quota, now I can have a more efficient system, I've got a better product, I've got a better machine, why should I be I was already stuck with a damn quota that I was engineered into signing two years ago.

5:47You're trying to reopen the quota system and get a larger quota. Constant fights among the railroads themselves, between the railroads, or any other business, any kind of business, you're trying to have a cartel agreement, there's a constant argument about quotas. Because everybody wants to produce more, every firm wants to produce more, every railroad wants to ship more, and you're always kicking against the quota, no, I should have more of a quota because I've got a better machine now, I've got a better product, I'm entitled to a better quota. I said, no, no, you're not. So at any rate, you have endless bickering and endless opportunities for the whole system to collapse, for the whole quota system to collapse and recrimination. At any rate, what would happen? They sign the quota, they have the agreement, and then would go bust, and they'd be cheating and whatever. And literally, the system only lasts for a year. The 1877 pool seaboard agreement lasted for about six months, and bingo, it

6:37collapses again. They have another quota. They reorganize the quotas again. It's almost So it's like new summit agreements, you know, and actually six months later the whole thing collapsed. In the case of the trunk lines, something else happened, namely because of the increased profits, because of the expected increased profits of the cartel, a new railroad developed, a new trunk line, a grand, I mentioned already, but it's called a grand trunk, which goes from Chicago to Boston through Canada, around Canada. And it wasn't part of any agreement. What do you do with this crummy grand trunk? Also, the grant fund was inefficiently managed, they were constantly cutting rates, they had nothing to lose in a sense, they were constantly on the edge of bankruptcy. You have to realize another thing about bankruptcy. Most people think, I'll come back to this again later, because most people think, for example, it's easy to get another firm out of business, let's say you have a big business and you have a smaller business, smaller firm, it's easy to force the other guy out, you

7:34undercut the rate of a price war, you go down to almost zero, the other firm goes bankrupt And then you raise the price. It doesn't work that way. Because even if you do that, the other firm goes bankrupt, the bankrupt plant does not disappear. It doesn't go up in a whiff of smoke. It's still there. If you raise the price and your profits go up again, somebody else buys the bankrupt firm's assets and comes in with almost no cost. A great position undercuts a bigger firm again. Just because you go bankrupt doesn't mean the plant disappears. It's still there. If it's bankrupt, you can buy it for a song. You're in new firms and business again and it's still competing once again, and this is what happens, a constant attempt to establish this kind of a cartel, a constant attempt, constantly going bust, so the Grand Trunk comes in and all bets are off and they, and of course they want, but when a new cartel firm always

8:19says, okay, cut us into the, give us a quota system, they can't do that, they already think they're not producing enough, they're not shipping enough, they can't get it, they can't strip their own quota by 10% and make room for the Grand Trunk, so the whole thing collapses The same thing happened on the Western Railroad, they try to have a cartel, usually Fink is the head of it, and again it doesn't work, and finally Fink says, he makes a statement as early as 1876, after a few years' experience with this, he says, he thinks about this and he says, quote, whether this cooperation can be secured, meaning a cartel, by voluntary Reaction of the transportation companies is doubtful. Governmental supervision and authority may be required to some extent to accomplish the object in view.

9:06And as he keeps going, he keeps more and more of this position. We've got to have the government to enforce the cartel. Cartels won't work on the free market. And since he's in favor of the cartels, he says, we have to have governmental action, state and then federal. See, state is okay, but states only are interested in state, as well as railroads that go throughout the whole country. You can't really do much in a state action. So you start having state commissions by the 1850s and 60s, and what he says is this, by 1879 he works out a whole proposal, I think, he says, what we need is a federal law, a federal commission of course to regulate it, doing the following thing, so somehow to outlaw railroad rate discrimination. By discrimination of course it's a fancy word for saying, changes in rates, cutting Paying a rate, a rebate, charging less for long haul than short haul because, you know, you have a lower fixed cost per unit and you're having a longer ride.

10:05This is another word, these are the way you compete. Railroads compete by just quote discriminating on a car, by giving discounts for a longer ride, giving discounts for a fuller car instead of having to load up a car, a railroad car

10:47So, and talk a lot about compulsory publicity, see it sounds democratic, in other words you put it in such a way, you sucker in the public and it's thinking you're doing something in favor of competition. We want publicity. All these guys in one cartel saying we don't want full regulation, we don't want the railroad commission to set rates, we want them to have compulsory publicity so the public will know what's going on. The public doesn't have to know what's going on, they don't need to know the internal processes of the corporation. What they really meant was they want every railroad to know what their competitors are doing so they can enforce, it wouldn't be any secret price cutting, they can enforce a cartel agreement. You also wanted a federal commission to enforce it, okay, and to arbitrate, and also to ratify, to have the railroads get together and make decisions about rates and have the government enforce it.

11:46Government commission ratifying rates, ratifying agreements, rate agreements. This is basically what happens, this is precisely, this plan of things, proposed in May 1879, was precisely what the government did in 1887, passing the Interstate Commerce Act, putting in the Interstate Commerce Commission, 1886, I guess 1887 they set it up, precisely what they did. The first government regulatory commission in the country was in railroads, it was passed in 1886, the Interstate Commerce Act, and it was enforced by putting an Interstate Commerce Commerce Commission, and of course there are many forces in favor of the Interstate Commerce Act, guerrilla regulation, ICC, which I think is going to go out of existence, I think there's a drive on how to eliminate the ICC, I can't believe it, that it might actually happen, for a hundred years of messing everything up, at any rate, the, yeah, that's for that, The civil aeronautics board has now disappeared at the end of last year, there is no more civil aeronautics board.

13:19There is a little bit of rate regulation in the FAA but not much. Basically we have a free market now in airlines and in trucks, we don't have it for railroads yet. But there's been a big deregulation move since the end of the last two years of the Carter administration, into the Reagan administration. So we now have a, the reason why there is, by the way, they found out after a hundred years that it wasn't working, to such an extent the railroads were all going bankrupt. And the airlines were going in bad shape. And so they finally realized the game is up. After a hundred years of mess ups, I'll go into, I actually can go into airlines a little bit, but the procedure is the same. In other words, the procedure is, try to keep out competition, and you do it in the name of monopoly. How do you do it? I mean, in the name of competition. The airlines get together, let's say, and this happened in the mid-30s, 1930s in the

14:06airlines. The object is to keep out competition, so you do it, cut the supply curve to the left, keeping out competitors, assigning, in the case of airlines, they actually assign routes, you know, it's very recently. It set up the Civil Aeronautics Board, CAB, which by the way has nothing to do with safety, that's the FAA, which is still in existence, and Civil Aeronautics Board, which fixed the rates at a very high level by the way and kept an assigned rationed route. In other words, they said, for example, the Boston-New York route has to go to Eastern Airlines and that's it. Nobody else. In other words, they granted monopoly routes to specific airlines. As a matter of fact, in the old days, Pan Am had a total monopoly of the entire Pacific area, no other American airline could fly in the Pacific.

14:56I think Pan Am was a Republican airline, I think the United was a Democratic or something. Early Republican years, I think they set up a total Pan Am monopoly, which was finally broken after a while. But the main thing is, they assigned routes, and nobody else could compete. If you competed, you were tossed out, it was illegal, and you had a, the CAB issued certificates of Convenience and Necessity, allowing people to fly in that route. Now originally what happened was, there of course were a lot of small airlines, and the small airlines used to be, used to compete a lot, and the first thing the CAB did, they said, well, you are not permitted to fly scheduled, in other words, schedule is important, you have a timetable, and the schedule says you will take off at 10 a.m., right, for Chicago Small airlines are not permitted to do it. They're not permitted to have a schedule.

15:47They're only permitted to fly when they fill up a certain route. In other words, you went to take a small airline, and you didn't know when you're taking off. Authority, of course, is a tremendous competitive disadvantage to small airlines. There was a lovable asset called Trans-American Airlines there, as I remember. Now you have small airlines, by now I mean before the recent deregulation, but they're only permitted to fly on small routes. In other words, Air Wisconsin permitted a flight from Chicago to Appleton, who no major airline wants to fly to Appleton, it's a one-horse town, so they permitted a small airline to be a feeder line. They did not permit small airlines to fly from New York, Chicago, New York, Washington, those are the key routes, New York to Los Angeles. So these small airlines used to fly on the major routes. First thing that happened was they were not permitted a schedule, no timetables were permitted.

16:36But even so, even as a so-called non-sched, non-scheduled airline, they still out-competed. What they did was this. In those days, it means up through the 1950s, there was no such thing as coaching and first class. Everything was first class. Airlines were extremely expensive. You really had to be almost a millionaire to fly from Los Angeles. So what the trans-America and these other one-horse airlines did was they simply charged half the fee. The ancestor of the beginning of the so-called no-frills movement. No-frills was to this extent. For example, there used to be cheap airlines that flew to Europe, but they fly to Luxembourg. They fly from Iceland and New York, they fly to, not New York, they fly to some dump in New Hampshire, some little field in New Hampshire, to Iceland and then Luxembourg and it'd be about half the price of the regular flights. So, it's true they The reason they were not thrilled is such an extent that, for example, they used to weigh

17:33you along with a luggage, kind of humiliating for us fat people, in other words, they have a maximum weight for the person plus his or her luggage. Well, all right, it's your choice as a consumer, you take a little bit of humiliation for half the price or not. My wife once took an airline from Los Angeles, New York, a small airline, not only was she The Theory of Money and Credit

18:26to give you a feeling of great confidence, but it got there and it was a half-faire. So finally, all the CA bidders, they just outlawed them, just some early one, they just put all these long-skate airlines out of business. But by that time, this force, the competition of these small airlines forced the major airlines to go to start a little coach thing, you know, to cut their fares in half or coach, and that was the beginning of the first-class coach thing, because as I said before that, everything was first-class. You know, you had to be a millionaire or be on an expensive counter force to get the flying And then the whole thing changed because of the heroic competition of these small semi-illegal airlines. They're always on the brink of illegality. And so finally, but then what happened was you have, at one point by the way, since the rates were fixed, began to have competition in quality so that you have, if you can't compete in price, you compete in other things.

19:17So you have, remember one time, we still have a very strong international cartel in Europe. of the European flights, the flight from London to Paris is almost more expensive than flying from New York to London because of the tight intergovernmental cartel fixing all the rates, keeping them very high. So at one point, let's say if you can't compete in price, you should compete in quality, they started giving luxurious food. So then the goddamn international cartel, if I can remember the name, I think IATA, the International Airlines Authority or something, issued a decree that no airline traveling in Europe can serve anything except sandwiches and you couldn't serve real food. It's part of a cartel. So what the individual airlines began to do was undercut this. They used to serve the entire beef bourguignon, except they put a piece of bread on it and they called it an open sandwich. There's always ways. It shows you economic history is a constant fight between the market and the government. The government's constantly trying to screw

20:13things up. The market's trying to evade the restrictions and serve the consumers. So this This is, again, a beautiful example of that in the airlines. What finally happened is that the, after 50 years of this, the airlines got so inefficient that they're so monopolistic. First of all, as the costs go up, second of all, the salaries get did up, so the pilots are making enormous, pilots and stewardesses are making enormous amount of money, way above the market level because they're all getting pushy, monopolistic jobs, so to speak, and the airlines wound up not really making any money because they were so inefficient, so So bureaucratic. Then when a deregulation movement came along in the late 1970s, they sent out a howl at it, maybe we should have deregulation. And so the airlines sort of reluctantly went along with it.

20:59And what finally, what happened as a result of deregulation was a whole shift in the industry and of course much better service and lower prices and all the rest of it. Some of the airlines went busted because they couldn't adjust to the new pre-marking conditions, others prospered. People have expressed, of course, a beautiful example, and those girls, again, you find and lousy service in the sense that you never know when you're taking it off but much cheaper. It weighs two things. I have a colleague at this university who I shall remain nameless and protect the guilty who was a big Marxist and his life as an airline stewardess, some note, he was against deregulation because he said, and for a proper economic reason he said, geez, if there's deregulation Her salary is going to go down. It was a monopoly fact, so to speak, and these airlines are going to go down. Of course, that's exactly what happened.

21:52At any rate, you'd think it's far removed from the railroads, but it's the same damn thing. It's the same principle, just applied again in a different form. The railroads, it took a little longer for this to happen. The airlines started with the big five or something, but basically the same principles have worked. The use of the government in the name of the common good, public welfare, all the rest of the general name of humanity and democracy and whatever other names you can think of, putting in a law in order to cartelize the system and put in by the railroads themselves or by the airlines themselves. In the case of the ICC, sure, some farmers are in favor of it, some shippers are in favor of it, but they acknowledge the railroads are the main force behind it and they acknowledge afterwards the shippers and farmers and railroads, gee, we're worse off now than we were before, the rates are higher.

22:37which of course they should have been able to predict, Morgan was trying to raise the rates. When the ICC kind of came in, the Interstate Commerce Commission, they started maneuvering, they started establishing rates, usually by ratifying cartels, they get the trade associations together, they set the rates. They set the rates at exactly where, in other words, the rates are such and such, they're always going down, remember, Morgan was trying to get the rates to, let's say, here. The ICC came in, they fixed the rates up, pushed them up to exactly where Morgan had one of them, and had failed to do it because of the free market action. In other words, the use of the railroads, using the government, in the name of competition and democracy and whatever other nonsense you can think of, using the government to cartelize the system. In other words, using the government to cartelize the industry where they couldn't establish a cartel price in the free market.

23:25This is the essence of the current system, by the way, the essence of the welfare state, The essence of all government regulation, in fact this whole course is really a process by demonstrating this in different areas, that the welfare state, the government, the mixed economy, whatever you want to call it, is a system by which big business groups establish cartels, use the government to establish a cartel and call it competition, democracy, whatever. That's essentially the essence of the situation. If you go down the list, as Coco points out in his book, Railroads and Regulations, interested and looking at it more deeply, the one area he doesn't talk about in the Tri-Associate Conservatives is in the railroads because he has a special book on that, if you go through this thing, if you look at the, most people think that big business is always against government regulation, it's not true, if you go through the hearings and you find out what these guys are in favor of, the hearings before Congress, the governor, the railroad officials

24:23almost to a man were in favor of these bills, of course they were different bills, the jockeying for Power. The House bill, the Senate bill, all sorts of maneuvering within the system. That's not really very important, but the key is that they all want a government regulation, they all want a race to go up, they all want an outlaw secret rebounding, they all want an outlaw of price discrimination, the whole bit. And because they realize this is what the situation was, and there's only a couple of railroad people with the no-no-shouldn't-should-be-free competition, a small minority. All the others were in favor of this new system of government control. Before I get to that further, I just want to talk about one of my heroes in this whole setup. One of my heroes, I already said, is James J. Hill, who actually built the Transcontinental Railroad without government subsidy, the Great Northern, and outcompeted Northern Pacific, which had lots of subsidies.

25:17Another one of my heroes, a guy named J. Gould, there's a more of a biography of Gould by Julius Groszczynski, a long, very interesting biography if you're interested in this, called J. Gould. Groszczynski, by the way, wrote another book on the Iowa pool, if you're interested in that, he wrote a small book, definitive work on the Iowa pool. Anyway, Gould was a He was a great character, he was not, his forte was not building great railroads, he wasn't cross-conscious, he wasn't a great manager or anything like that. He had one aim in life, his aim was to bust the cartel, he was known as a rate buster, he was hated by all the other railroad people. He'd buy a railroad, he'd immediately break the agreement, he'd immediately start secret price cutting all the other stuff, and he made a lot of money that way.

26:04because you see here's the situation economically, going a little bit of economic theory which is important to understand this, every firm faces an elastic demand curve and it was every firm, individual firm, you cut the price, you'll increase your sales at such an extent your total revenue will go up, for example if Wonder Bread were cut from a dollar a loaf, 60 cents a loaf and all the other bread prices remain the same, that's the key, they'd make a lot of money because everybody would shift from Pepperidge Farm The Wondered Bread. Every firm has an elastic demand curve. As a matter of fact we can prove in economic theory that every firm must have an elastic demand curve. On the other hand, the demand curve for the industry is much less elastic. In some cases it will be inelastic like this, the demand curve for industry. So that means, this is a setup for a cartel, that means if you can organize a cartel, wonder bread prices, if you cut wonder bread prices

27:01you can pick up a lot of revenue. If you cut all the bread prices you probably wouldn't So, the idea of the cartel is this, if the demand curve of the firm is elastic, if the demand curve of the industry is quite inelastic, then if you can organize it, you can cut the production from here to here, raise the price in such a way that total revenue will increase, you can then parcel out the increases to the different firms. In other words, say you have 10 firms in the industry, if you can get everybody to increase

28:01The idea is to try to, so what Jay Gould would do, he would buy a railroad, and he would

28:31and start going down as elastic as a man carver, picking up all these great sales and making enormous profits. Boy was he hated. It's very much like unionists hate strikebreakers, called them scabs, because their unions are trying to raise the wage rate, keep other employees out. The people they hate the most are not the employers, but the non-union people who take the jobs of the strikers. Same way, people in other manufacturers or other railroad people hate most other railroad men or other manufacturers who break the cartel agreement. That was Gould's function. He looked for a good high profit place. He figured out the high profits were due to an agreement. He'd nip in there and buy the railroad and undercut them. Magnificent. He was called the Disturber of the Peace because he competed and his whole career was out of breaking rate agreements of this sort.

29:18He'd go in, he'd buy a railroad, undercut, smash the agreement, smash the cartel and clean up. He did it when he was in charge of Union Pacific. He bought Union Pacific during the 1870s, did it there. And of course, in the long run, he benefited the railroads because he meant that they had to compete, they had to lower their costs. If the price goes down, the price is cut, it means that they have to shape up, lower their costs, get rid of waste and that sort of stuff. But of course, they didn't like to be shaped up in that way, as you can imagine. And he was a great character, hated by everybody, consumers didn't appreciate him either, they didn't understand what was going on, of course they liked the late cuts, they didn't understand that he was different from the other so-called Robert Barons.

30:05And look at Gould, he was again a self-made man, he fit the image of Hill, also Carnegie and Rockefeller later on, these people were all born with nothing, no capital, he was a He was, his parents were quite poor, born in upstate New York, he was short, five foot tall, gagooled, short and thin, of course everybody was shorter in that period, but he thought he was unusually short, didn't have an average of five foot, this is a height theory of history I keep coming up with here. He was self-taught before he didn't go to college, none of these guys went to college, by the way, it's another thing, whole college nonsense, he didn't have, in the United States in that period, very few people went to college, and the people didn't seem to suffer from not going to college. They started working at the age of 12 or whatever it was, and by the age of 20 they could be millionaires.

30:53The rest of the people were slogging away to go to college. I'm not knocking college for a say, you have to realize there's another side of this picture. You waste a lot of time in college. He was a self-taught surveyor, he started as a railroad surveyor, and he started speculating, He was frail also, he was half-dead most of the time, and he was a great corporate financier. He saw the rates, you know, he started maneuvering with that, he plowed back profits, he was cool, detached, emotionless, all that sort of stuff, he was a little stereotype, he was a great guy, I love him, he benefited consumers, he benefited the industry, and he made a lot of enemies along the way, I'll bless him. Well, this is, I think I've done this before too, the point is that the, that the, every firm faces an elastic demand curve, okay, huh, yeah, okay, right, right, demand for the industry is less elastic, can be very inelastic, depends on the conditions of the

32:01Industry. By the way, the demand curve here is simply price equal, price times quantity is total revenue. So if you cut the price, you have an elastic demand curve, the quantity will go up much more than price four when you have an increase in total revenue. If you have an inelastic demand curve, you cut the price, the total revenue will go down. Quantity only goes up a little bit. So what I'm saying is, if you have this very high price, the cartel price, each firm, they can cut the demand curve, they can make an enormous amount of money, if they can go down their firm demand curve, in other words, if they can cut the price and the other guy doesn't find out about it, they can pick up an enormous amount of money and they can do that for six months if they keep it quiet. It just eventually forces the competitors to find out about it and there's mutual recrimination and hatred and the whole cartel goes bust.

32:51So, that's essentially what it is. The graph will be explaining that. Anyway, so this is, the Railroad Commissions begin in the state level, they begin in the, I think the first commission was Massachusetts, and the drive-in comes from the National Commission. The first bill, the House bill, the first bill submitted to Congress was written by the attorney for one of the top railroads. Matter of fact, one of the things we'll see later with oil, the standard oil was getting a lot of discounts from railroads because they were having a big oil business and therefore since they had a bigger quantity they were getting bigger discounts.

33:41A lot of the smaller oil companies wanted to have a railroad cartel in order to screw standard oil. So you got together with a railroad attorney, and in Pennsylvania you had to drive for railroad commissions, state railroad commissions, to raise the rate, to cartelize, with the railroads of course behind it, plus some of the small oil people in one of the, to put the screws to San Antonio. So you had different interests on the part of the shippers, but the railroad was almost unanimously in favor of a cartel. They had the two bills and three bills and all that, and a lot of jockeying for victory, et cetera, and finally in 1886, 1887, they passed the Interstate Commerce Act, which outlawed discrimination, the same thing as Fink had really proposed, it outlawed rebates, it had compulsory publicity, the whole bit, it turned out the enforcement procedures weren't super, Anyway, that was their first attempt, and they set up the Interstate Commerce Commission.

34:45One of the things the railroads didn't like is they outlawed cartel pools which were not part of the process of the commission, so the railroads tried to eliminate that, but basically the railroads all loved it. When the Interstate Commerce Bill was passed in 1887, the railroad magazines loved it, the Railroad Gazette and Railway Review, which are the two major railroad magazines, praised These are the highlights, this is great, so forth and so on. Then the question is, who should be a commissioner? Of course, if you have something like this, in order for the railroad to really run it, they had to control the commission in all these situations. And this, by the way, I might have said this before, but I'll repeat it. This is counter to the usual liberal, what we call the Ralph Nader myth.

35:30The Ralph Nader myth is that these commissions were originally in favor of lowering prices, and lowering rates, and they were taken over by the industry later, they were dominated by the industry after 20 or 30 years, but originally it had a golden age situation, originally it was pro-competition, anti-monopoly, a lot of nonsense, but those were written by the railroads, lobbied for by the railroads, and staffed from the very beginning by the railroads interests. For example, by the way, the major person, the chairman of the Interstate Commerce Commission, The First Commission, 1887, an distinguished judge, Thomas McIntyre Cooley, who was unfortunately pictured by most historians as being a great laissez-faire advocate.

36:20He might have been a laissez-faire advocate except in railroad. He was, of course, it's true he was a judge of the Michigan Supreme Court, he was Chief Justice of the Michigan Supreme Court, he was Dean of the University of Michigan Law School. He was also, however, a railroad pool member, he was a railroad pool arbitrator, so like Fink, he was one of Fink's, I mean, Fink was not the only professional railroad pool person, he was also Cooley. and he was an old arbitrator, paid our assistance to think in many of his pools, he was a railroad lawyer and he was a very pro-cartel, pro-pool. Other members of the ICC, the first ICC were, well one guy was an old Democratic Congress hack, he was unimportant, named Morrison, another guy was Walter Bragg who was formerly The Alabama Railroad Commission, in other words, Alabama Railroad Cartelist, a guy named Schoenmaker, Schoenmaker I guess you could ask it, which was a former railroad attorney, and a guy named Walker, was a railroad person, so much of a railroad person, he wound up after he left the commission, he wound up as chairman of the board of the Atchison Topeka in Santa Fe, it's one of the biggest railroads in the country.

37:47The idea was the ICC would not set rates directly, they would help the railroad to set the rates and outlaw discrimination and all the rest of it. So Cooley is one person that's focused on, another guy is one of my particular pet peeves, because I don't like the type, I guess. Charles Francis Adams, Jr. was a Boston Brahmin, a distinguished member of the Adams family, not an Indian Brahmin, the Bostonians are kind of an interesting group, they're all interconnected, some elite, power elite, people who are families of about half a dozen, maybe a dozen families all been interconnected since the 17th century, the Lees, the Adams, the Higginsons, the Cabots, The Lodges, The Lowells. There was a famous jingle when I was growing up, something to the effect that, ah, Boston, the land of the bean and the cod, where the Lowells talk only to Cabots and the Cabots talk only to God. And it's sort of that sort of attitude. Adams was always, the Adams family was always sneering at commerce and manufacturing things, sort

39:03of the Low-Type and Unaristocratic, Adams himself was a great big advocate of cartels and railroad commissions. As a matter of fact, he said when the Interstate Commerce Commission Act was passed, he said it should be rigidly and literally enforced, every provision should be rigidly and literally enforced. He became the first Massachusetts railroad commissioner, and he then became, when the Interstate Commerce Act was passed, he was chairman of the board of Union Pacific Railroad. So here's a guy, you see, who was not only a pretend aristocrat, always balayaking about the evils of commerce and industry, here he is, head of the Union Pacific Railroad and a big advocate of forces, let's say, of government-enforced cartels. The next question to ask is, how come, oh, by the way, after the Interstate Commerce Act was passed, they still couldn't enforce, then the Interstate Commerce Commission tried to establish the cartel through government action, they still weren't very successful at it.

40:02The railroad industry is so vast, I think we're still having rates going busted, even cartels are going busted, even with the government, even with the ICC, enforcing fixed pools, enforcing final enforcement rights, there's going to be competition, there's going to be rates busting, there's going to be new railroads coming in and so the railroads kept calling for more and more enforcement and over the years they kept tightening the Interstate Commerce Act, Hepburn Act, all these acts which kind of improve the enforcement, increase the enforcement to try to outlaw competition. So the market was still successful, undercutting, even with the ICC, trying to use the power of the Federal Government to enforce Sphinx quotas, it still wasn't very successful. But it's successful enough to sort of screw up the industry over the years, no question about that.

40:53The shippers finally said, well, gee, we're worse off now than when the act was before the act was passed. We find out rates are going up instead of going down, and they were eukaryotic, they I didn't understand the situation. The next question to ask here is, which we'll ask next time, how come the Interstate Commerce Act was passed during the first democratic administration since the Civil War, the Cleveland administration? What you have to realize is that the, most historians used to talk about the period from 1865 to 1912 as being totally Republican-dominated, was not Republican-dominated, was very close. The election was very close. In 1876, the Democrats really won the election. The election, Samuel Tilden in New York, really won the election. The election was stolen from them by fraud and eukary.

41:40So that Hayes wins by one electoral vote. He really, Tilden won the election by far. As a matter of fact, the popular vote, Tilden had 4.3 million votes in 1876 and Hayes only had 4.0 million. That was a big victory by Tilden, which was only taken away from by fraudulent means by various Reconstruction governments, and apparently what happened was that Hayes made a deal with the Southern Democrats, and some of the Southern Democrats would throw their vote to Hayes, but why did the Federal troops get out of the South? That was the end of Reconstruction, get the Federal troops out. So the Democrats really won the election of 1876, as a matter of fact I'll just give you a very quick popular vote here. The other elections were extremely close. Usually the Democrats had at least one house of Congress for this whole period. In 1876, Hayes had 4.0 million votes and Tillman had 4.3 million. In 1880, Garfield was the Republican victor, had 4.45 million votes and Hancock

42:53Democrat at 4.44 million, it was almost tied, it was like 60,000 votes or something, very, very close. In 1884 when Cleveland won, first Democrat to win, he had 4.9 million votes. And Blaine, known as a continental liar from the state of Maine, 4.85 million, 4.91, very, very, very, very close elections. Anyway, Cleveland wins the first time and Democrats are committed to laissez-faire, free trade, all the rest of it. How come the Interstate Commerce Act was passed and signed in the Democratic administration by Cleveland? How come Cleveland violated his own laissez-faire principles and passed to agree to a railroad regulation? That's the next question we will look at next on Tuesday, namely the mystery of this which will be solved and how it is that Cleveland, who has basically all of his life a laissez-faire person, how come he He limped out this key area of railroad regulation and there's a lesson to be learned by that.

43:56Why did Cleveland pass an Interstate Commerce Act, the first federal regulatory commission when Cleveland was a laissez-faire Democrat, laissez-faire liberal? Cleveland was an interesting figure anyway. Cleveland was in many ways a heroic figure. He was, first of all, he came from Buffalo, and you have to realize, New York State, I talk about Yankee pietism in the first class or so, that the fanatical drive for stamping out sin and so forth and so on, which led to statism and economic fraud by Yankees, who later became the basic members of the League Party and then the Republican Party. Well, Yankees were settled from rural Massachusetts, all the way out to Michigan and Wisconsin, but the heartland of Yankee-dom, the real guts of Yankee-land, was western New York, approximately from the Hudson Valley west of Buffalo, in other words, this whole area, which is the heart and soul of Yankee pietism.

45:08It was called by the people then and by historians after that, the Burned Over District, there's a charming name for it, burned over by repeated fires of religious fanaticism. You name it and it started in Western New York. The Mormon Church, I don't want to attack Mormonism, but the Mormon Church started in Western New York. The Shakers started in Western New York, the Oneida community people who were in favor of celibacy and they found it difficult therefore to rep to. means in order to continue the movement you have to have continual converts because you can't reproduce anybody it's kind of, apparently, in the long run difficult to sustain this so this is the heartland of pietist fanaticism and many of the leaders of the Republican Party and Whig Party came from Western New York for that reason Thurlow Weed, William Seward, etc., etc., on and on and on but here's Cleveland, comes from Western New York, he's a Protestant from Buffalo, how does that fit in?

46:04in. The way it fits in is this, it's very interesting. Cleveland was an old school Presbyterian. In other words, he was part of a small minority of the Presbyterian Church and the Congregationalist Church and other Protestant churches which resisted and were very much opposed to the planetist, revivalist kind of evangelical framework. There's no style count on it to leave him obeying, in that sense he's very much like Catholics and Lutherans in the sense he's in favor of So obeying church law, the way to get saved, if you can get saved, because you know Calvinist is kind of difficult anyway, the way to get saved is you join the church, you obey the law and that's it, obey the church law. So you don't worry about being born again and all the other stuff, you don't worry about compulsory stamping out of sin, all that stuff is anathema to old-style Calvinists as it is to Catholics and Lutherans, and even to this day I have friends of mine who are

46:54old-style Calvinists and take exactly the same position. So Cleveland was an old-style Calvinist and therefore was in the Democratic Party and he was, in a sense, he stamped his mark on the Democratic Party. He ran for president in 1884, the first Democrats since the Civil War, which is a big thing. He ran for president in 88 and just lost by a fraction. He got his vote, maybe I mentioned this already, his vote was 5.54 million in 1888 and Benjamin William Harrison, a Republican from Indiana who defeated him, had a vote of 5.544 million. Cleveland won on a popular vote and lost in the Electoral College, and in 1892 he wins again on a relative landslide.

47:45So Cleveland was the leader of the Democratic Party for many years, and so as a matter of fact when Charles Beard wrote an excellent book, now forgotten, he was a very good historian, Wrote a book in World War II called The Republic, a charming book, a sort of a fashion pattern after Plato's Republic with three guys or four guys sitting around to discuss political philosophy for the whole book, it's very well done. And the guy who represents for Beard, laissez-faire, libertarian-type Democrat, they call him a Cleveland Democrat, old-fashioned Cleveland Democrat, this is 1944, so Cleveland put his because Mark is the leader of the laissez-faire wing of the Democratic Party, so the mystery becomes even greater. Why did Cleveland then, and for everything's favor of and put through in his administration the first Federal Regulatory Commission for Railroads and so that's just the stage of the problem.

48:40Well the answer, the basic answer is this, Cleveland, the first, yeah? Yes, no, he beat Blaine in 1884. Beat Blaine. Now in 1876, Tilden, the Democrat, ran and beat Hayes to the loss of, got the election stolen in the Electoral College. Cleveland beat Blaine in 1884. So Cleveland was the first Democrat and become president since the Civil War. You're a complete Democratic. Well, it wasn't a complete Democratic era. It was very closely knit. It was almost tied. But the point is that Cleveland was exactly the major figure in the Democratic Party for many years, for like 20 years or so.

49:28Tilden, who was Cleveland's mentor and was a New York Democrat, who really should have won, and really did win in 1876. He was from New York City. The question is what was, Tilden was also a late-age Democrat, but Tilden was above all things a railroad lawyer. He's probably the most distinguished, most highly paid railroad lawyer in the country. We also have to realize that one of the things that happens, I'll mention later on today about the rise of manufacturing and industry after the Civil War period, but one of the things that happened was the rise and the rise of corporate law because lawyers before the Civil War were really, everybody was a lawyer in politics, they didn't make much money. For example, the highest paid lawyer, the highest income lawyer before the Civil War was Daniel Webster, by far the highest paid.

50:13He made about $20,000 a year, $25,000 a year. He was the highest paid lawyer. In current terms, if you multiply that by seven or eight, he means he's making about $840,000 a year, which is not bad, but it's not a top lawyer salary, obviously. He was the top lawyer. After the Civil War, after the 20,000 year, after the Civil War, lawyers were making much more. And there was corporate law that comes in because corporations come in. Railroads were the big corporations. They were coming in. And so top lawyers were essentially railroad lawyers. And so the top lawyers were making about $200,000 a year, which in our terms is like a million dollars a year, which is damn good, to say the least. So this is, the whole profession of corporate law becomes a very important one.

51:01In other words, before that, most lawyers were trial lawyers, you know, they defended people and that sort of stuff. Since there were no corporations, there wasn't much corporate law. There were very few corporations, banks and canals. So we have Tillen as a railroad lawyer and railroads, of course, were mostly in favor of this kind of government regulation, in favor of this new system of cartelization. In particular, in favor of a new system, was J.P. Morgan & Company, we've already mentioned with the, becomes a big investment banker, a big railroad banker, certainly after the panic of 1873. The Cleveland administration, from top to bottom, including Cleveland, was very heavily tied in with the railroads and with Morgan, railroads in general, and Morgan specifically.

51:47And so what we have then is the, with Morgan beginning to dominate the democratic party, Especially in the higher reaches and the top elite reaches, he began to be able to shift their attitude toward railroad cartelization, government interference and government cartelization. Cleveland himself, before he became mayor of Buffalo, in other words, when he was in the private sector, was a railroad lawyer. His partner was, one of his major partners, was Francis Lynn Stetson, who will appear later, Jill Lawton of course, by the time, who, when Cleveland, after Cleveland leaves He used the presidency finally in 1896, he then joined Stetson again, and Stetson was the top Morgan lawyer, he was JP Morgan's personal lawyer, he was a partner of a law firm, was JP Morgan & Company's lawyer, so he was sort of the top Morgan lawyer.

52:50Also Cleveland's, one of Cleveland's major clients was New York Central Railroad, which which was the largest railroad in New York State and also originally owned by Commodore Vanderbilt, a very famous character, an interesting character himself, who then was more or less taken over by Morgan. So you have essentially Vanderbilt-Morgan. So in later years Morgan essentially runs it in an alliance with the Vanderbilt family. So you have, so Cleveland himself then is essentially a Morgan railroad lawyer type person, which accounts, you see, very neatly for his deviation from laissez-faire in this particular key area, his shift to so-called progressive, or whatever you want to call it, a compulsory cartelization government.

53:44And let's look at the rest of the Cleveland cabinet. The whole cabinet, almost the whole cabinet, is either a Morgan cabinet or very closely allied.

54:02Secretary of State was Thomas Bayard. There were several, of course, during the years, but he was a major of Delaware, a senator of Delaware. Bayard was essentially, he came from an old aristocratic family in Delaware, but he essentially was a disciple and tool almost of August Belmont. To such an extent, Belmont was a German investment banker who was an agent of Rothschild, Rothschild company, which is the most famous investment bank in France, Britain and Germany, international and Financial Investment Bankers. Belmont came to New York as a, his name was Schoenberg, and came to New York as a Rothschild agent, and continued to be a Rothschild agent all of his life, even though he himself, of course, became a millionaire on his own.

54:54He, of course, was the founder of Belmont Racetrack and the rest of the Belmont family. Anyway, Belmont, Bayard was virtually a tool of Belmont. Belmont's son, Perry Belmont, not only was Bayard's main administrative assistant for many years, he also lived in his house, and sort of like a close buddy secretary and I guess we now call him his control in espionage terms. At any rate, so Belmont, and Melmont was the secretary treasurer of the National Democratic Party for decades, you know, like for 40 years, so, and Morgans and Rothschilds were quite close, they weren't always close, but they were basically an alliance. So again, again you have the Rothschild wing, so to speak, of an investment banker grouping here. So, that's the Secretary of State under Cleveland, the Secretary of Treasury, first person Secretary of Treasury, a guy named Daniel Manning supports his key post, and Manning was a close friend of Tilden, sort of one of his top lieutenants, Tillman was still around, Tillman was sort of like elder statesman of the New York Democratic

56:11Party and also a lawyer and director of the Albany and Susquehanna Railroad which not only was a Morgan-type railroad, it also had J.P. Morgan himself on the board of directors which showed that it was very intimately Morgan-oriented. So once again we can put parenthesis Morgan around the name of Daniel Manning. and he got ill after a year or two and resigned, and Hoppe's sister then takes over, the secretary of the treasury, and that was Charles Fairchild, again a wealthy family here, and see, one cabinet member or one president could be an accident, but if you have a whole cabinet as a mortgage orient, you begin to see there's a pattern here which can't be denied.

57:02At any rate, Charles Fairchild was Attorney General of New York. Before that, he was a disciple of Tilden, once again, and into the Tilden machine, so to speak. He married the niece of Henry Seymour, Henry Seymour, who had run from the present in 1868 in New York. His father, Sidney Fairchild, was the Board of Directors of Erie Railroad, Erie and Pittsburgh Railroad, and also Attorney Chief Counsel of the New York Central Railroad. In other words, this guy's father was a chief counsel in New York Central, which was Morgan.

57:42You have these patterns, this cannot be an accident, it can't be a coincidence, or the whole damn gang becomes a Morgan tightly, tightly in with a Morgan embatt. The Attorney General, a guy named Garland of Arkansas, he's a railroad director, Secretary of War, in other words, there was no Secretary of Defense in those days, it was frankly called the War Department. The name Defense Department only comes in after World War II as a euphemism. Anyway, Secretary of War, especially with the Army, there was a Secretary of War those This guy's name was William Endicott, of course the very name Endicott means that he's a Boston Brahmin type, and indeed he was.

58:33Boston patrician, lawyer, former judge, and the guy who almost got the first choice, almost got the post of John Quincy Adams Jr. He was the son of the former president of the Addams Jr., of course another Boston-bound member of the Addams family, son of the former president. He was urged upon Clevelanders to pick this guy by Francis Lynn Stetson, his former law partner and Morgan lawyer, and he was very much connected with the Boston financial elite. In particular, his wife, you always have to look at the wife connections in these people, Because life was one of the Peabody, Peabody I guess is pronounced, family, a very distinguished Boston family, the head of whom, George Peabody, I guess it was the uncle I think, George Peabody who was the head of a banking firm which had as a partner J.P. Morgan's father, Junius Junius Morgan, a British banker. It's always very good to have a partner who's either Morgan himself or his father. It's good for your career. His partner is Morgan's father. And

59:58also one of the Peabody's, another uncle, is the best man at JP Morgan's wedding. It's Another thing you have to realize about the whole Boston Financial Group after about 1870, from then on until the present day, Boston, first of all they're all interconnected, the whole Boston Group, the Lees, the Higginsons, the Lowells, the Cabots, the Lodges, the Adamses, this whole group becomes connected through first Boston Corporation, another big bank, to the Morgans. got to the point where Morgan equals, in Boston, they were the Morgan people, and this is I think still, I'm not sure what's going on now, but certainly until, at least until World War II, the Boston Foundation will be explaining Henry Cabot Lodge equals Morgan, in other words, so that was part of the whole equation, which we'll see later on, becomes important, the Secretary of the Navy was the guy who really had it made, a member of the Whitney family, which has the Whitney Museum here, things like that, And you have to realize the Navy in those days was more important than the Army because the Navy was permanent, the Army only comes in during wartime.

1:01:06So, William C. Whitney, Secretary of the Navy, close friend and disciple of Tilden politically, once again, comes from New York, and a close friend, not only a close friend of Cleveland, also Cleveland's campaign manager during the campaign and a big railroad board, member of the board of directors of two railroads in New York, most of which were Vanderbilt and therefore connected with the Morgans, and therefore connected with the Morgans, it's really Morgan-Vanderbilt, so it's important, maybe today.

1:01:54There's also the son-in-law of Whitney, Henry B. Payne, that's why there are people right now whose name is Payne Whitney, connected with two mighty families and Henry Payne was He was the director of several of our four Vandervoet railroads, and his brother Oliver Payne was the director, officer of all his life, for Standard Oil in New Jersey, Standard Oil of course being the big Rockefeller. As we'll see later, I think today, I hope, the Rockefeller family essentially dominated the Republican Party in about 1876, probably until now, at least until the 1960s.

1:02:47Anyway, so here's the two mighty titanic competing financial forces in the United States. The Morgans essentially run the Democratic Party, the Rockefellers essentially run the Republican Party. Here's this guy, the whole pain when they are in with both camps, that's a very good thing to be, be both in with the Morgan's and be a relative of the Rockefellers, can't hurt, relative I mean relative to somebody whose family connected with the Rockefellers. The Rockefellers, as we'll see later, have a whole group of families who have invested with them since 1870, the same group until right now, the Bedfurds, the Prats, the whole bunch of the Hartnesses, etc., etc., all of whom act with the Rockefellers and invest with them, which of course makes the Rockefeller power much greater than just one family. Secretary of the Interior, which is very important because the Interior ran the whole public land system, of course it still does.

1:03:37There's a guy from Mississippi who happened to be a top railroad lawyer, which usually means Morgan. And then another guy from Wisconsin, actually he's a great guy, who had been Postmaster General, who was a Vanderbilt-Morgan railroad lawyer and the attorney for the Chicago Northwestern Railroad, which was Vanderbilt. of the Railroad, which was Vanderbilt. So you have the whole, really the whole cabinet, I think, the whole cabinet was connected with the Morgans, also the Ambassador to Great Britain, which is always a top post, Ambassador to the Court of St. James was a Vermont guy who was the chairman of the big, of the railroad, which was Vanderbilt. And also afterward he resigned, another guy comes in who's, who's the, the chairman of the board of the, New York Central, which of course was Vanderbilt-Morgan. The Ambassador to France, in those days, was The Second Most Important Postman of the Atlantic Service was a guy named McLean, whose father was the president of the Baltimore-Ohio Railroad, which was also in with the Morgans.

1:04:37So the whole cabinet, the whole damn cabinet, those days, of course, the cabinet was much smaller than it is now. The whole cabinet was a Morgan cabinet, or Morgan Vanderbilt cabinet. The exception of the secretary of state was a Rothschild person. But closely allied, of course. So there we have our answer. I think the second administration of Cleveland is very much very similar. You don't have to go into that. As a matter of fact, by the way, the interesting thing about Stetson was the top, as I mentioned before, the top Morgan lawyer. His law firm, which was core of those, I think, Stetson Jennings and something or other. Law firms are never corporations. They're always partnerships. They can keep, the names keep changing as new guys come in. This is the same law firm which is now Davis Polk and Wardwell, which is probably still one of the top Morgan law firms right now, but it's like a hundred years later.

1:05:29We have a continuity. By the way, I'll leave the head a little bit to show you what's happening in American politics. In 1924, Calvin Coolidge runs for president, runs for re-election. He'd come in because Harding died in office. Harding, by the way, was an Ohio Republican and therefore a Rockefeller person. Coolidge was a Boston-type person and tied him with a Morgan, therefore tied him with a Morgan. And this usually happens in American politics. If two factions in the party, whatever the party is, the winning faction is the presidency, the losing faction is the vice presidency. is continued until Kennedy-Johnson.

1:06:15So if you have Harding, who was an Ohio Republican, we'll see in a minute, who was therefore a Rockefeller Republican. It was President Coolidge, from Massachusetts, and therefore, and was connected personally also with the Boston Financial Group, and therefore, Morgan. Rockefeller dies, Coolidge becomes president. In 1924, Coolidge runs again for president, for re-election, on the Republican ticket. Democrats pick up 103 ballots, the titanic struggle for power, which we'll get to later on in the course, I hope, emerging as a dark horse after the 102nd ballot. I mean, nowadays, you have, usually somebody wins on the first ballot, you understand. In my living memory, Wendell Wilkie, I think, won on the eighth ballot, that's about the longest I can think of.

1:07:04103 ballots, that's a magnificent, anyway. So on the 103rd or 104th ballot, Davis emerged, John W. Davis, the Democratic President, head of the top Morgan law firm, Morgan's personal lawyer, and the Morgan guy running for Republican ticket, and the Morgan guy running for Democratic ticket, and the Morgan versus Morgan heaven in 1924. Really he controlled both presidential nominations. Alright, so this is the reason I've now answered the question why it is that Cleveland deviated from Laissez-Faire, and it's one crucial point, namely railroad regulation, because he was a Morgan Railroad lawyer, and his whole cabinet reflected this Morgan influence. Morgan gets increasingly, by the way, status as time goes on, but what happens is, to leap ahead a little bit, the Morgans decided in the late 1890s when the industry, manufacturing begins to incorporate, manufacturing was a partnership until the 1890s, none of these When they begin to incorporate and become much larger in 1890s, they try to achieve monopoly prices through mergers on the free market. They can't do it, they lose out and then they shift. The Morgan's then shift to a general status program, not just for the whole United States economy. They become progressives, quote unquote, general status by around 1900s. And then the whole party shifts along with them.

1:08:31The next step is to show the rise of, after the Civil War, especially as time goes on, of manufacturing, a big business, not just in railroads but in manufacturing in general. There are various statistics for this, there's G&P statistics. One way to look at it is, this is statistics, value added by selected industries and you You look at, and this is constant prices, 1879 prices, it was eliminating price changes. In those days, of course, prices were falling every year, it was magnificent. A value added by different industries.

1:09:201869, agriculture was 1.7 billion. 1899, it was 3.9 billion. This is, I say, a constant dollar. You can forget about inflation and deflation here. So it's about more than double. In other words, it reflects real output, more or less. I mean, it's not precise, but it gives you an idea. Mining goes up from 0.07 billion to 0.55, so eightfold increase, this is about, there's more than double, this is an eightfold increase. Construction goes up from 0.4 billion to 1.0, it's like two and a half fold.

1:10:12Manufacturing goes up from 1.1 to 6.3, basically a six-fold increase in these 30 years. That's one way of looking, one gauge, one way of looking at it. Pig Iron, now we're looking at physical units. Pig Iron went up from, this is basically our and Industrial Revolution, so to speak. Pig iron goes up from 1848, pig iron was, these are pig iron shipments, thousands of short tons. Pig iron goes up from 900,000 short tons in 1848, 1865 to 1930, not much difference,

1:11:081899, 15,250,000, that was 15.2 million, enormous increase, approximately 16-fold increase. No, it's not one slice, I'm correcting, you know, correcting for, actually those days was deflation, prices were going down in this period, correcting for price change, it was There's a magnificent period, I guess I'll get right into this. Prices were falling throughout, all the way from 1865, 1896. Magnificent. Imagine waking up in the morning and knowing in your heart and your gut that next year prices will be 3% less. Savings are encouraged. People don't have to worry about their dollar being wiped out.

1:11:56But salaries remained about the same in money terms and the prices kept falling. The real income kept going up. The salary would stay the same per age of the person, and then, you know, the prices, of course, the living kept going down, real wages went up. Great. Okay. Marvelous period of living. Of course, there was no air conditioning then, and we can't remember everything. Steel ingots and castings and other... steel, of course, comes in, really starts with the Civil War period. So, around there, steel ingots and castings produced, in 1867, 20,000 long tons, I don't know if some of these things are measured in short terms, tons and tons in long, I don't know exactly why, but anyway, it doesn't make any difference.

1:12:511899, it was 10.6 million, so that's about 500 fold increase of steel ingots. There is an index of physical production, a very difficult physical manufacturing production, very tricky and you can't really do it very well, but it actually went up by about six fold in this period. With steel ingots again, most of it, one of the things that reflects this is a change in technology of steel. In 1867, most of the steel was crucible steel, which is apparently Most of the steel was crucible steel which is apparently high quality but you can't make much of it, crucible which was about 17,000 tons, a little bit of Bessemer, but Bessemer Bessemer just coming in then, starts in Europe, it's 2.7. Bessemer, I think it's a product, don't ask me in any detail, Bessemer is probably a force hot air and a force oxygen at high temperatures, which makes it more malleable. And so, 1899, Husserl goes up to 101.2 thousand, for 7.6 million, this is all thousand, this is 1.6 million, and coming up fast on the

1:14:31outside is open hearth steel which comes in which starts about 1870 and is zero in 1867, open hearth is even hotter, injections or whatever, and then it's 3.0 million and passes Bessemer by about 1905 or something like that, open Hawaii comes with the key steel, remains the key steel thing until the 1930s or something, what was it, Oxygen Converter, what's the name of that, Oxygen Conversion or something, that again starts, yeah something like Oxygen Conversion or something. We'll see later the US Steel which was supposed to be a monopoly, the design of the monopoly and Steel was the last company to introduce any of these things, the last corporation in the world in steel to introduce this current process, they've always been a flop-a-roo.

1:15:30So Bessemer that they ruled the roost until about 1906 when open hearth essentially takes over, 1908, and then rolled iron and steel comes in, something again new, which didn't It didn't exist in 1867, rolled iron and steel, contrasted casting and ingots, so zero in 1867, and by 1885 it's 3.1 million tons, and by 1899 it's about 10.3 million, it's coming out very fast, it's an addition to all the other stuff, it's rolled iron and steel. So, enormous, enormous increase in iron, obvious iron and steel production.

1:16:18Where were you using it? Where were we using it? All over the place. Railways? Railways, rail lines, steel rails, and manufacturing, all sorts of other things. It's just a basic thing, an element for machine tool machines in general, all sorts of stuff. We were talking about it before. Huh? We were talking about it before. Well, no, this is just an indication of what was going on, as I'm showing a tremendous increase in production. I mean, just taking different industries, this is an example, an illustration of what's going on. Tremendous flowering of production all over the place, manufacturing, size of, the factory comes in, I'll mention this in a minute. Factories really come in in this period, didn't really exist before much, except in arms manufacturing. So I mean, the whole thing, just an explosion of, and they all fit together.

1:17:06The most produced steel rails go up about six-fold. In 1867, there were 4,500 tons. In 1899, there were 2.3 million tons. This is a period, by the way, when there wasn't much railway increase in railway mileage by this time. There's gold, I think, outpouring of rails, so this is, let's see, this is about four hundred and fifteen thousand. It goes up by about six-fold.

1:17:47Structural iron and steel goes in a lot, goes in by about ten-fold. Bricks go up by about three-fold. cotton textiles increased by fivefold, coal increased by 14 times, crude oil of course increased by 19 times, we'll get to crude oil in a minute, it's a big new industry, an oil industry, it's virtually brand new Kuhler oil increases from 1867, it really begins in 1859, the first oil well dug in Titusville, Pennsylvania, 1867, 3.3 million barrels, a big increase of question zero, 1899 is 57.1 million barrels, a 19-fold increase.

1:18:35The, again, most of these processes, Bessemer begins in England, the open horse process begins in Germany, Siemens-Martin process, essentially the United States, however, is the most, greatest increase in these things, the Industrial Revolution really takes off. Iron begins to tap, the Minnesota iron mines are going to come into production, and the The Sabe Iron Range in the Great Lake Minnesota area comes into production, coal starts in Pennsylvania and spreads to Illinois, West Virginia, and Kentucky, and crude oil, as we'll see, begins in Pennsylvania, continues there and spreads to Ohio and Indiana, so also before the Civil War, most of the power in industry was water power, let's say you got the power, and of course in water power, water power wasn't that bad, but you had to situate near and the Federal Reserve with some kind of waterfall, those kinds of limited locations.

1:19:35For example, you go up in New England, you see lots of these circular things, what do they call these things? Turbine or whatever, the water goes over it and produces power. Steam comes in after the Civil War and takes over. And one of the great things about steam is you don't have to worry about being near a waterfall. It could be anyplace. So you can locate near markets, you can locate near a fuel supply, you're not stuck with New England, of course, has a lot of streams of waterfalls, but other places are very difficult to find one. Steam turbine comes in, et cetera, et cetera. Factory comes in, as I mentioned a little bit. Before the Civil War, basically, there were no factories. What happens is you have a capitalist who buys, invests, saves up and invests in material, raw material, say cotton textile, and he finds weavers, knitters and weavers and he hires them using a piecework basis to produce this stuff and he sells it down the line.

1:20:37The weavers and men have to have their own equipment, have your own loom in the basement or whatever the basement is, the ground floor. And so this obviously limits production, you have a very, it's called a putting out system or a domestic system. and where the merchant essentially saves up and invests in this thing and then the workers own their equipment. There was no quote alienation unquote of workers in that capital. They had to own their equipment. That's a big problem. In other words, if you're a weaver, you have to own your loom, which means you have to have a lot of money to buy the loom or build it or whatever you're going to get it putting out systems. So after the Civil War, a factory comes in, we bring the workers together into one spot and you have a continuous flow of some sort of equipment, you have the machines together, the capitalist owns the machines, the worker doesn't have to invest in the machine, this

1:21:32is a big benefit to the worker, it means anybody can get a job, you don't have to own a loom, or whatever else, you don't have to own iron forging equipment or whatever happens to them. So, the factory has been defined, I guess it's a pretty good definition, as a place where, quote, raw material can be converted into finished goods by consecutive harmonious processes carried along by a central power, some kind of power source. So that was the growth of the factory system, and meant, of course, an enormous increase in productivity, and how many goods could be produced coming out of the factory, and A whole bunch of people, each one with a loom. Of course, it meant you had a supervisor or employees, you have buildings where everybody gets together, you have machines located now in the same spot.

1:22:23You have much larger aggregations of capital equipment than you could have before that. It means, I'd say, the worker doesn't have to save up the money to buy his own loom, he can then have a central location system. By the way, one interesting thing is that anti-capitalist types left us and so forth, and then belly-aching about the factory system from about 150 years, that this alienates the people from their labor, they don't, in good old days you used to work at home like on the farm, work at home, family works at home and now you're, the father or husband of something is yanked away from his, a love of heart, and has to go to the work place and works in the factory and is alienated and so forth and so on. And now we have a situation, now a very high tech, and more and more of a situation where people can work at home as you know, with computers and so forth, and so now they're

1:23:09They're belly-aching again, the leftists, the anti-capitalists, but now they don't talk about alienation, they want to stop belly-aching, it's a terrible thing, they can be exploited when they're at home. This happened with the beloved knitting-cap ladies of Vermont, I think they were, a few years ago. Apparently in Vermont, I forget if it was Vermont or New Hampshire, anyway, a whole bunch of ladies who sit at home and knit ski caps and sweaters and stuff like that, I think ski caps. And they were happily, you know, knitting away. It was great shape. They were making money they couldn't have made before. They could work at home. They didn't have to have babysitters and that sort of stuff. However, it violated the Department of Labor regulations. You can't have homework. Homework is illegal for most occupations. This was put in by labor unions in the 30s.

1:23:57Somebody who's working at home is not going to join a union, obviously, it's very rare for a home-work person to join some damn union. So the unions have a law passed to outlaw homework, and when the Department of Labor a few years ago found out, I think it was the Carter administration, found out that these people were illegal, they cracked down, they said you can't do any ski-capping anymore. There's a lot of complaints, but pictures of these lovable middle-aged ladies now deprived of their homework. and they were getting, and the unions were claiming they were being exploited, they were getting below the minimum wage, it turned out they weren't getting below the minimum wage they were exploited under evil conditions, of course they didn't think their homes were evil working conditions, their homes were in pretty good shape so in general, the agitation, the result was the Reagan administration came in, what they did was they passed a law saying, I think they say that

1:24:47C-cap knitting was outerwear, C-cap knitting or something was legal, and nothing else. Sweaters were still illegal, knitting sweaters at home, everything else was illegal, just C-caps and some other things, some other subcategories now legal. I hope it's not legal, I think they'd probably blow that through after Titanic's struggle. So anyway, they don't talk anymore about alienation, how great it is to work at home, now they're complaining. As a matter of fact, now you have a situation like computer types in Little Island are working in Home, and people are beginning to complain because they have visitors, they have traffic blocking the roads and stuff like that. There's a constant struggle, they violate zoning laws, we're not supposed to do anything at home. And yeah, the whole big nonsense that involves us shrinks often stay at home, and they try to outlaw that.

1:25:35The whole, yeah, it goes on and on. So anyway, somehow homework, even though allegedly beloved by status, leftist types, and it didn't And it exists much, now that it can exist, and does much more than I was belaying about that, too.

1:25:56Okay, corporations come in first, let's say, for railroads, and next for manufacturing, but much later. For example, Standard Oil was a partnership until quite late, and so was almost all the other companies. Corporations, the advantage of corporate, the corporation, the corporate form, over partnerships, okay, is several obvious advantages. First of all, the corporate form is permanent. In other words, you have a bunch of people, they all, yeah. Deflation? Well, yeah, only in the sense that there was no worry about inflation, no worry about the dollar. of Dollar, with deflation, yeah, that's right, yeah, oh yeah, yeah, your real income Well, I don't think deflation creates the situation.

1:27:12Just that deflation permits productivity to the lower price. In other words, works the other way around. An increase in productivity, saving investment. And this increases the supply of goods. In other words, high curve shift to the right. Prices go down. This increases everybody's real income in terms of purchasing power, so they can invest more and spend more. Yeah, sure. Well, okay, I wouldn't say deflation in the sense of just, in other words, the causal force factor is you have an increase in, you don't have much monetary inflation, so you permit the price to fall, this increases everybody's real income, yeah, that's that, yeah. Right. There was nothing that somehow, it's good to have deflation per se, it's good when it's caused by increasing productivity and allows everybody to have increased real income, right. Because naturally, when you have inflation, a lot of people have decreased real income because their wages don't catch up with prices, but they don't have that problem here because prices don't really go up.

1:28:07Okay, let's take a 10-minute break or so, and then we'll be in cooperation for a lot to make. I'm able to acquire large amounts of capital. First place, I mean, I just sort of, it's not the rank order, it's different advantages. One is permanent, in other words, if you have a partnership, you and your brother-in-law and your friends or whatever, when one partner dies, it's a big headache, you usually have to reorganize the partnership and redistribute the assets, stuff like that. Corporation is permanent, if one stockholder dies, nobody cares, and the entity itself just continues on with other stockholders. Second of all, and this is part of the whole picture, you can transfer your stock, in other In other words, transferability of ownership In other words, if you have a corporation with a million shareholders, let's say you have a ten million dollar corporation with ten million dollars in assets, and you have a million shareholders, that means you own If you own one share, you essentially own one-tenth of the, excuse me, one share means you're

1:29:23owning one-tenth, yeah, right, what's the, one-one million, one-ten million, one-ten million, right? One million. Sorry, okay. You own one-one million of the corporation. So, if you own a whole million shares, you own the whole ball of wax. Each share is worth ten dollars. A share would be ten dollars, and if you own one share, you own one millionth of a corporation. The thing is, you can sell your share. In other words, if you're a partner, there are four partners in this firm, you can't sell your share. I mean, you're sort of stuck, you have to ask your partner to buy you out, but sometimes they don't want to buy you out, and then you're stuck.

1:30:11So, if you have transferability, very important, you're liquid, in other words, you can sell out tomorrow. I want to buy ten shares of IBM, I want to sell it to the market and do it, like that. I don't have to wait, negotiate with somebody, etc., etc. So this means if you know that you can transfer ownership whenever you want, you're much more likely to invest in the corporation, obviously, because it's a real sort of lifetime commitment to be a partner in some firm. And three, the stockholder is only liable for the assets that's in the corporation, in other words, limited liabilities, it's cool. So in the case of, if you own, in other words, $10 worth of General Motors, whatever it is, if the General Motors goes bankrupt, you lose your $10.

1:30:58Let's say you lose the whole thing, you usually don't because they can resell it and whatever, But anyway, let's assume the whole corporation disappears, it just goes bluey. All you lose is 10 bucks. In other words, the maximum you can lose is 10 million dollars of the total assets. But if you're a personal liability, if you're a partnership, you can lose all your personal assets. In other words, if you owe a partnership, you owe a million dollars and you liquidate, you go bankrupt, you can only raise 100,000. You're liable for the other 900,000, you can have to sell your house and whatever. I mean, usually bankruptcy law is limited, but the point is, your personal assets are involved. Your personal assets are never at risk in a corporation. Now you can say, isn't this, there are many arguments about this, many libertarians, free market types argue that corporations are immoral because the government limits the liability.

1:31:49In other words, this is an artificial limiting, it's a subsidy of the corporation. That was the argument. I don't think the argument is correct because the thing is, when you're in a corporation, You put your creditors on notice. In other words, essentially, if you want to lend money to General Motors or IBM or if you're a worker and you're waiting for money, if you buy a bond or whatever the loan happens to be, you know that the corporation's software is a limited liability and you take that risk. So it isn't as if the government suddenly interferes and says, no, no, the person can't attach the personal assets of whoever owns the corporation. You know that at the beginning, you take that chance. So I do not consider The only subsidy that comes in here is when a corporation commits a tort, in other words, a tort is when a corporation somehow injures some person or whatever, a third party injury, in other words, when the person doesn't contract for it.

1:32:43I don't know what the, you know, corporation, the truck of a corporation kills somebody, whatever, or pollution or something, or a nuclear accident. These things, of course, are tort and therefore you can't contract a limited liability. The corporation has a limited liability for tort. That is a subsidy because it's not part of a contract when a creditor agrees to it because if you're a third party, a victim of a corporation one way or the other, you haven't agreed to any limitation of liability. Outside of that, and this doesn't happen very often, a corporation is perfectly legitimate from the point of view of the free market or a libertarian legal structure. At any rate, the existence of the corporation means that you're going to acquire a vast amount of capital. Somebody's willing to invest because they know they can sell their shares at any time and so forth and so on.

1:33:30It's a tremendous advantage to the company, to the investor, and enable an enormous amount of growth in the enforcement of manufacturing and in railroad corporations. The other thing that comes in after the Civil War, almost from nothing, is the whole concept of insurance. Insurance really begins after the Civil War period, more or less, and it keeps growing until this day. Life insurance, accident insurance, a whole bunch of stuff. Assets keep growing. Now, the thing about insurance companies, for example, to give you an idea of a tremendous This increase, in 1860, the total assets of life insurance companies, which has been a major pileup of insurance, we'll see, total assets of 24 million dollars of all life insurance in the United States. By 1897, total assets were 1.35 billion and it's been growing almost And it's been growing almost at this rate since then, an enormous increase in capital.

1:34:39And they invested in railroads and stuff like that, and the thing is that life insurance is a very peculiar industry, much more peculiar than accident insurance or fire insurance. Principles of insurance are, I'd say with fire accidents, essentially you're pooling risks, let's say there are a thousand buildings in some town and you're worried about fire So you pool your risk, and statistically, if you have a large number like that, you can pretty well predict that one billion will burn down in a year, or two billion, whatever that may be. So everybody pools their risk, they all contribute a certain amount of premiums, and then when one billion burns down, they pay off the guy who suffers this loss, and they're going to calculate it fairly neatly, precisely, on an actuarial basis, so that if you know that 1 billion turned out and the billion worth say under $1000. You pool these billings, you get together and you charge the premiums which more or less fit this competitively.

1:35:37You wind up, you pay the guy off and that's it. There's no amassment of capital, assets don't matter, there's no big capital investment, it's just you're pooling risk and you pay off the guys, the losers. So this kind of insurance, fire insurance, action insurance doesn't pile up about capital, it's no great advantage to any group of financial interests to control it, because who cares, in a sense, in a pure sense, the assets disappear at the end of the year, you know, you pile up 100,000, each guy can, let's say there's 10 people, each one contributes a certain amount of money, or let's say a thousand, a hundred people, each contributes a thousand dollars a year premium, they collect a hundred thousand dollars, they pay off one dollar a year, a hundred thousand, they don't have any assets at all, except you know, a little bit of salary or something. So, there's no reason for insurance companies to become big financial plums, so to speak.

1:36:26And of course with insurance, by the way, another thing about insurance, the thing which screws up insurance is when the loser, how should we put this, the loser creates his own loss. In other words, you have to assume these are acts of God or nature. In New York, for example, there's an old tradition of burning down, if you're losing money on a store, let's say you burn down the store and collect the fire insurance. You're not supposed to do that. It's obviously illegal because you're defrauding the insurance company. You're not supposed to be paying for somebody who consciously burns down something. You're only paying for an accidental fire, obviously. So setting your own fire for your so-called loss is obviously a no-no.

1:37:13In life insurance, the whole life insurance system is different from all the rest of it. Life insurance is a very peculiar industry because in life insurance, with so-called term insurance, it's more or less like this. In other words, you can tell more or less how many people will die in each age group in the United States every year, and then people pool their resources, they can set premiums in such a way they pay off the people. With term insurance, you don't build up a large amount of capital, but the way life insurance has functioned mostly in the United States is so-called whole life insurance, where you pile up enormous amount, you charge much more than the competitive rate, you pile up an enormous amount of capital which sits there until somebody dies. As a result of this, you're essentially paying double, in other words, you're amassing, it becomes sort of a capital investment industry where the policyholder doesn't really benefit.

1:38:05In other words, he still pays a high premium and the insurance company has an enormous amount and the amount of capital which they can use to lower their, increase their profits, so their amount of capital amassed. The reason why this is allowed to take place is because as you see with the progressive period, in addition to everything else, they cartelize the insurance industry and outlaw the so-called racketeering insurance, in other words, insurance where they charge a low rate. You have to have licenses that are very heavily regulated in the industry for each state. As a result, you have the whole thing become the quasi-racket where they have a monopolized are cartelized industry, which then when they charge a very high premium, now whole life has become more or less discredited, they're getting away from that, because people obviously lose a lot of money. If you start at the age of 21 or something, keep pouring in premiums and try to, you wind up by about 40 or something, you're really paying the insurance companies.

1:38:56In other words, what you should really do if you have a whole life policy is keep churning it over, cash the policy in, get your cash surrender value and then get another policy somewhere else. Insurance companies hate that because that destroys the whole racket. As a result, the insurance salesmen are always told not to encourage people to do it as a matter of fact try to prevent them from doing it, you don't want to churn it over, that's unethical competition, they would say. It's okay to have a new policy, but not to get your new policy by getting a person to cash in the other policy. Once they do that, they realize the whole thing is a racket. At any rate, it results in an enormous piling up of resources and assets. Plus the fact that insurance companies are mostly non-profit, they're mutually owned. Most of them.

1:39:42Which means that the trustees don't really own the assets. Here they have, they pile up an enormous amount of assets, they don't make any profits on them, as long as they don't go bankrupt. It's like colleges, as long as they don't go bankrupt they can take on forever. But there's no incentive to maximize your profits because there's no stockholders, there's no partners even, just trustees. The trustees, members of the board who have a sort of altruistic function of keeping this thing going. But so in other words, you have an enormous amount of capital piled up in life insurance and it's a plum for financial groups to take hold of it. And the way the trustees are self-appointed, in other words, nobody chooses them, they're those stockholders. And so in the mutually owned companies, they have things like the depositor, quote, an owner unquote. And so technically, the depositor could vote for the ship, for the board of directors.

1:40:30The unhanned deposits can never vote. In other words, in a fine print it says you can't vote. So what happens is that there are 8 trustees or 12 trustees, they keep reappointing vacancies, they're self-reflectuating oligarchies. So what happens is, by the late 19th century, these were taken over by various financial groups, the Morgans, the Rockefellers, they all had their own insurance company, and then they could take the assets and vote them to control their company they want to control. That was the best of the Standard Oil, the Morgan company, and to vote with the way the Morgan people of the Rockefeller people They become allies, they don't actually lose a lot of money and go bankrupt, they don't care about making profits. So they become, in other words, voting allies of the Morgans, Rockefellers, Vanderbilt, whoever, you know, whatever the financial group is. So this is by the late 19th century, by the 1890s or so, this becomes an important consideration.

1:41:20So New York, for example, Metropolitan, I forget now which it is, one of them, two of them are Rockefellers, two of them are Morgans, something like that. Now, investment banking I've already talked about, investment banking oddly enough has never been a corporation, it's always been a partnership. Morgan, Kuhn, Lowell, all these companies, right now, as of this moment, they're becoming corporations. But until, from the beginning of investment banking until the present, they've been partnerships. One of the reasons for that is because they maintain secrecy. In other words, if you're in partnership, you don't have to have, you know, make public accounting, you don't have to fulfill requirements, nobody really knows what's going on. They could have secret deals without being in the public eye. They could just increase the number of partners, but in the case of the Morgans, as we'll see in particular, they had political partners, in other words, two or three guys were assigned the task, almost did no investment banking.

1:42:15Their job was to put mergers together in the lobby and government, get government regulations they want, stuff like that. They became sort of political partners rather than strict investment bankers in the United in a narrow sense, so by the, as we'll see, by the 1890s, as we begin to have corporations in manufacturing, and the Morgan's get into that, the Morgan's begin to promote the idea of mergers, either cartels or mergers, cartels didn't work very well with railroads, so instead of cartels, they got another gimmick, namely, why don't we have a situation where all the companies, if there are eight companies in one industry, why don't they all pool their resources and become one company and then they'll have a monopoly, then they can raise the price.

1:43:02That was the idea. The so-called great merger movement. We'll go into some details on this probably next time, maybe Tuesday, the next Tuesday. So the idea of the merger was, it would act like a cartel except you wouldn't have to worry about internal competition and cheating because they just merge into one corporation, one holding company, one trust as it was called, it was called a trust and they used a trust instrument, they have a trusteeship instrument, so the idea is this, okay, we'll take the steel, all the steel companies, let's say there are 80 steel companies all competing very vigorously, why don't they all merge into one steel company, US Steel, which is the origin of US Steel by 1901, and we'll have, and then you see they can take all these, They can leverage everything and then they can take supply and they can cut the production and raise price.

1:43:54That's the whole point. They can dump some of the plants which are inefficient or whatever, dump that and then we'll cut production and raise price and achieve their monopoly profits that they've been longing for. So that's the, that was the, and they did this by the way in late 1890s with two merger ways. One of the early 90s, a major one, a few years 1898 to 1901, where literally several 100 industries all have these monopoly mergers, a whole raft of them. I'll go into some examples a little bit later. Sugar refining, oil, steel, agricultural machinery, the whole bit. And the interesting thing is that every one of these cases virtually, the whole thing is a flop-a-roo. They're usually put through by the Morgans. U.S. Steel was a Morgan merger. General Electric, the idea of General Electric was to have one merger monopoly company that was also a Morgan. AT&T was Morgan, of course. They achieved a monopoly through government Regulation through Patents and Federal Communications Commission later.

1:44:55All these things are reflections of an attempt, usually led by Morgan and others, to have a monopoly and then they can cut production and raise fights. It's flopped every time. The reason it's flopped was, first of all, monopolies are inefficient. We'll get to this a little later because the National Biscuit Company was originally a monopoly attempt to have a monopoly, monopolize all biscuits and cookies in the country, packaged cookies. Roll a flop-a-roo, because new companies will come in, even though they didn't cheat, even though they merged, they raise their profits and immediately, hey, this is a monopoly company, got high profits, let's zip in there, a new plant, a better plant, all of a sudden they have new guys, new cookies, new sugar refining, new oil, new whatever, and then they're stuck, then the whole cartel or merger is broken, the company loses a percentage of share all the time, and then they're stuck with two or three new permanent companies with good competitors have modern equipment, much more modern because they're new. They come and zip brand new

1:45:49equipment and they're stuck from then on. All these, US Steel, for example, is a classic case of a company which was a total flop of rules from the very beginning. It started with, they tried to get 100% of the market. They only achieved about 80% or something at the peak. They kept losing shares all the time. They kept losing money, having suffering losses, and from that day, from 1901 until the present, you're still in a crummy company, they've been constantly losing their share of the market, always behind the new technology, the last people to put in the oxygen and whatever process, and always stumbling through life, and because they were constructed as a monopoly and not as an efficient free market competitive kind of company. And the same thing happened to all the others, as we'll see, and what they had to do to really So even though they didn't have any internal cheating, the external pressure was enormous to come in and nip in with new plants, new steel plants, new oil refineries and all the

1:46:56rest of it. But this is, I'm just giving you a sort of an indication of the future. Yeah? Oh, that would be a tough thing to do, but they'd merge and each one, they'd all pool their shares into one giant company, it's a standard oil deal, it's a U.S. deal, they have like 80 companies, 20 companies, whatever it is, they take their shares and they pool them, they all become pro-rata shareholders in a new company, with one big company. Of course, there are a lot of headaches to do it, but they usually agree like you're ahead of One Company and your merger becomes president of the division of that company, something like that. They do that now, in a sense, you merge with publishers, let's say, merge all the time, and the old publisher becomes, is brought out, he still remains president for the life of his division, you know, until he retires, stuff like that.

1:47:46So they do things like that, they have agreements to do that. Well, yeah, they've done, I mean, Carnegie, for example, built, as we'll see later, we Carnegie built up a giant Carnegie Steel Corporation, he was a very good entrepreneur, a great steel man, but then he gets a little old, he figures out he's ready to retire, he sells out to Morgan, he becomes part of U.S. Steel, he gets a huge amount of money and he retires and becomes an older statesman. So that's the way it's done, you get to the point where you figure out, I've had it, I'm going to go to Europe or something, and you become part of the great Morgan Empire. So, the key thing is it didn't work, it was a flop-a-roo, because of this fantastic amount of new competition coming in, and we'll see how the same thing with standard oil.

1:48:34With standard oil, by the way, I'll just repeat this in detail later, what happens with standard oil, Rockefeller never attempted to get a monopoly in crude oil or distribution or anything like that, he could never do it. You try for monopoly oil refining, because refining is the most highly capitalized part of the industry. And he got at one point, he did it by buying them out, by having mergers, like what's your price when you buy oil refinery. He got to the point where he got about, peaked about 90% of oil refinery in the United States. And then what began to happen was that people began to say, I'll do this in more detail later, we'll run a little bit later, but what happened is this. People would know in the industry, hey, this guy Rockefeller is willing to buy every refinery built and then put, you know, not use it.

1:49:21He became sort of a sucker, in other words, people ran into the business of building refineries so that Rockefeller had to buy it. They didn't expect to use it, hell, there's this jerk over there that's going to buy my refinery, and so they started using, also, building fake refineries, like it looks like a refinery, except there's nothing in those old equipment, you know, a Potemkin refinery, if you want to call it that. This is a takeover of the so-called Potemkin village in Tsarist Russia. They have a big shot visitor to show that the peasants are happy and smiling. They have a fake village consisting mostly of Tsarist police agents. Here's a village of happy peasants, and they show the people too. And six hours later, when they go on, the village disappears. Of course, the communists did something similar later on. Anyway, it's called the Potemkin village. It has essentially a Potemkin refinery. It looks like a refinery, but there's no stuff in it.

1:50:09So finally Rockefeller at one point says, I'm sick of this, I'm losing money, I'm buying these damn refineries, I have nothing to do with them, and he put, I'm sick of saying blackmail these people, I'm stopping the whole thing, he stopped trying to keep the monopolies refining. What then happened to him later on, by the way, I'm really skipping a lot, but what happened to him, he was concentrated as we'll see in western Pennsylvania, that was his oil wells and his refinery was in Cleveland, so he had pipelines and transportation stuff, railroads to get the oil, his whole life was built on Pennsylvania crude oil. and they started around 1900 or so, they started oil discoveries, food oil discoveries in Texas and Oklahoma. Rockefeller didn't believe it. The standard oil people were asked to flash in the pan, their whole life was geared toward Pennsylvania. As a result, new firms, new young, tiny firms popped up like Texaco and Gulf to exploit the Texas oil fields and Rockefeller, the standard oil was way behind on that.

1:51:01This is what happens when monopoly companies begin to lose out, they're going to get less and they lose out on a competitive framework. Same thing happened, by the way, to skip totally to the current post-World War II period, in the photography industry, same thing happened in Eastman Kodak, Eastman Kodak used to have a monopoly of American, at least American photography, of course, worldwide. And so, in two cases, with two of the most dramatic improvements in photography in World War II, namely Polaroid and Xerox. In both cases, Dr. Land, the inventor of the Polaroid Instance Hammer, and whoever the guy was invented Xerox, I forget his name, in each case they went to Eastman Kodak and said, here's the process, and offered to sell it to them, you know, in each case the guy's the expert, they said it won't work, it won't work, it's too expensive, blah, blah, blah.

1:51:53They rejected it, they finally had to go to some bank or friends and get capital and just build their own company. Of course, I wish I had been in on the beginning, first ten shares of Xerox or Polaroid, so So in both cases, these monopoly firms, or quote monopoly firms, unquote, were too set in their way, too bureaucratic, just missed out on the top innovations in photography. So that's what happens. At any rate, another big thing that comes in the late 19th century, of course, is electricity. fantastic new thing in power. And we'll see, by the way, how Stanley Welles got caught short and sent something like that. The great guy there, we've got one guy, heroic figure there, the first is Thomas Edison, great inventor and all that, the electric bulb and everything else connected with it. The interesting thing about Edison was, and also Westinghouse, the other great, I should say also Nikola Tesla. In both the case of, in both the case of the

1:53:01Thomas Edison, George Westinghouse neither of them went to college, neither of them were scientifically trained it's not true that they were anti-science, they had scientists working for them but they were creative geniuses, no question about that the interesting thing about Edison in particular, he was very cost oriented his whole schtick was, how do we get cheap electricity, cheap electric light for the masses, cheap electric power the other inventors who were competing with him on the electric bulb, electric light front were too entranced with the technology, they wanted elegant technologies and they were like people like Maxim and other very good inventors, but they lost out on their competitive rights so they were interested in getting an example of a light bulb question, they wanted a perfect bulb that would last a long time, a high resistance or low resistance, I forget which is, they wanted a low resistance bulb that would last twenty years, unfortunately it cost an enormous amount of money, it cost like a thousand dollars a bulb, that was the sort of thing they were

1:53:58working on, Edison immediately saw that in order to have a cheap, you have a filament of high resistance, you want to have a cheap bulb, and he starts working on that, even though technologically it wasn't as elegant, a bulb which would blow out in a year or six months, it would be much cheaper, and he starts in on that and he gets a high resistance wire, copper wire, etc., which is very cheap, and then he gets it cheaper yet, he starts looking And he gets enormous reductions in the cost so he can get a mass product, a cheaper product. And he gets the same thing with the dynamo, and he goes to the power station and the whole business and each step of the way he looks at where can we cut the cost. So instead of having electricity as sort of a toy for very rich people, which is essentially what it was beginning, the multi-millionaire could have one light bulb, but if you go to

1:54:47the mass productions you get a lot of profits, and so that's the way he went at it, it was He was a purely economically oriented inventor. And then he starts with an example. In 1883, Edison has a light bulb. He has a three-wire system. He couldn't figure out the cost of copper was still very high, and the cost of each bulb was $25. It was not going to work. And he's looking around for some way, and he's meant to have a three-wire system, which cuts in the filament, which cuts the cost of copper per lamp for $25.00 to a buck and a half. That's the way he was doing it. It was a dramatic, enormous reduction in cost so he could have a mass production system. And after he works out the transmission work and the dynamo and everything else, and finally he says, we gotta charge for this baby, you're not gonna have free electricity.

1:55:35And he events the meter system, the whole idea of metering and hooks it up with the rest of it. So, the metering per kilowatt hour used, et cetera, et cetera. So while his competitors like Maxim and Swann were looking for an elegant, technologically elegant, very durable bulb of low resistance, he immediately says, no, we aren't cheap bulbs, we need a high resistance filament that starts reducing the copper cost. Still, these guys, I mean, people like Edison wasn't right about everything. He had tremendous genius type ideas, take 10 of them, 8 of which would be great, 2 of which were totally off the wall This is the way inventors apparently operate So, for example, when he was working out his electric system, he had a direct current And George Westinghouse, another brilliant young, untrained, unscientific inventor, comes to him and says, No, he's with the idea of alternating current With direct current, you're limited in like a 10 block area, alternating current you can go forever, practically

1:56:34So Edison says, no, it won't work, and Westinghouse has to go and get capital somewhere and start the Westinghouse Electric Corporation based on alternating current, again with a much lower cost system. Westinghouse also had his own peculiar ideas. By the way, Edison insisted on running everything himself, every detail of every area, and with him it worked, it It doesn't work with everybody. Westinghouse, for example, tried to find an atmospheric engine, in other words, he wanted to get power out of the atmosphere, and he insisted it could work, and they said it couldn't work, and in fact it didn't work. Although they tell me my engineering colleagues say they're now beginning to talk about that again. I don't know if they've actually done it. I'm glad they haven't done it.

1:57:20Obviously, if they ever do that, it's an unlimited source of cheap power. So to say these guys were right most of the time and very wrong other times, that's the way the thing works, you can't win them all. So with the electric light, with Edison and Westinghouse and all that coming in, as you will see with oil, again with standard oil, kerosene was a big oil product and kerosene And so, by 1890-1900, kerosene lamps were replaced by electric lamps, and once again, Rockefeller didn't quite cotton of this, he kept insisting that kerosene stole the waves of the future when it was dying out. He didn't realize that gasoline was going to be a key, as automobiles, roads come in and automobiles and engines come in and trucks, et cetera.

1:58:11So again, standard oil, starting with a virtual monopoly of refining, begins to lose out to to other firms, newer ones like Texaco and Golf, et cetera, said, no, no, we think gasoline is more important, I've got to catch the, you know, the new trends. So the, okay, so with the corporations coming in, stock exchange of course comes in, the New York Stock Exchange began around 1819, it was just a few stocks, really government and the bonds and a couple of banks and companies, and then railroads come in, and by the late, by the 1870s, 1880s, stock exchange becomes a big thing, and it goes indoors. By the way, the American stock exchange used to be called the New York Curb Exchange until about the 1960s. The reason it's called the Curb Exchange, people used to sell stuff on the curb.

1:58:58They'd stand there on the street and they'd trade, and so eventually go indoors when, you know, it gets too big and the weather becomes unpleasant. So we begin to have the, Edison sets up the Edison Electric Light Company, Westinghouse sets up the Westinghouse Corporation, which of course is still around. Edison was not impoverished. It's good to see somebody with a great inventor that did not die impoverished. He died, of course, a millionaire. And Edison Electric Company then falls into the Morgan ambit and by, I think, forms General Electric by the late 90s, on the exact date somewhere. This was an attempt to have a monopoly which never worked because we always had Westinghouse So he refused to go along with it. So Westinghouse stood outside, refused to go into the Morgan Ambit and slugged it out. And he got funds from his own friends himself, as we'll see later the next time. Rockefeller essentially got funds from himself, his partner, his father, Okay, we now get to oil and I'll spend the next time talking in depth about the oil industry.

2:00:13Oil starts, interestingly enough, petroleum starts, petroleum is, you think about, usually it's charged with capitalist development, industrial development, waste, use a lot of resources. You have a lot of natural resources and the industry comes in, the natural resources disappear. In the case of petroleum, petroleum was not a natural resource until the industry came along. Petroleum is just a pain in the neck, it was a big waste product, just black ooze, considered, you know, blah, because there's nothing to do with it, nobody knew what to do with it, nothing to be done with petroleum. What happened was, before the Civil War, the major lighting source was whale oil, whale oil lamps. You've probably seen it in old movies, 18th century movies, of sailing ships in a whale lamp. A whale was a common resource, okay, so Well, unfortunately, as you can say, it was whale communism in the sense that if you kill a whale, you own it.

2:01:04If the whale's swimming around on the ocean, nobody owns their unowned property. You can't own a school of whales, you still can't own a school of fish. As a result, the incentive was to kill as many whales as possible. If you didn't kill a whale, your competitor would kill a whale. There's no incentive to conserve the whale population because there's no private property in the whale school or whale's bed, and what do we call these guys? So it's usually a different word for collective group of fish. As a result of fish communism or whale communism and the resource, they have an overuse of whales. And they begin to have a big whale shortage, a big whale scarcity. So, since there was a free market in whale energy, so to speak, what happened then is that as the supply of whales began to go down, the price of whale oil went up.

2:01:53As the price of whale oil went up and they got more and more expensive. People began to look around for alternative energy sources. They didn't have an international energy commission to try to plan this. It's purely free market sort of setup. They saw the oil prices were going down and we gotta do something about it. Why don't we do about lamps? They started then looking at a technology and maybe an alternative source of lighting and they came up with petroleum, the kerosene lamp. And they started using petroleum this... originally they started with petroleum which was sort of hanging around the surface of whatever, I don't know where it is, lakes and all of it. and, obviously, it's not much of it. In the old days, nobody was using any. They had surface petroleum, they started using that, and they thought of the technology now, hey, this looks good, you can use kerosene lamps that are even better than oil, and they smell less badly and all that sort of stuff, and it's cheaper. And as a result of that, they began

2:02:40a drill for oil. The first oil well was Titusville, Pennsylvania, Western Pennsylvania, and by God, they found lots of oil. As I said, Western Pennsylvania becomes the big oil area, and And this remains that way until after 1900. And so, and then you begin to get refineries, the first big refineries were in Cleveland, they weren't very big at first, they were sort of small refineries and using, starting with commercial equipment or whatever. And John D. Rockefeller, by the way, took the same so-called period type as Hill and Dool, and was going to be really short, he was thin, 5'2 or something, 5 foot, started off in fairly Stanley impoverished his father with sort of a quack patent medicine salesman.

2:03:26He went around, one of these guys, like in the movies, he said, buy this bottle and cure your hepatic, sciatica and cancer or whatever. And so he was born, by the way, again in western New York, therefore of course he's a Republican. If you're not a Calvinist or a Catholic, there are very few Catholics in New York, you're of course a Republican. and move, family moved to Cleveland, I think it's family moved to Cleveland, it's in high school and as with Morgan you'll find out the key Republican figures and key people figures in the oil industry turn out to be guys who knew Rockefeller in high school or in grade school. If you knew Rockefeller in high school or in grammar school you were in. Okay we'll resume that on Thursday.