The Business Class vs. The Free Market: Episodes from History

0:00You know, there was some discussion yesterday about the speakers being limited to 30-minute presentations, and it seems to me it makes perfect sense because you go to most academic conferences and give a presentation on anything. You're usually given an hour, but you usually have to spend the first half of that time explaining your philosophic principles. And at a conference with this particular title, The Economics of Fascism, you'd have to explain, I'm going to take a good 15 minutes to explain what fascism is and more so how to explain why you're opposed to it. And then you'd have 30 minutes to actually get into the meat of the presentation. And here we can cut through all of that and just get right to the meat of it without having to establish a lot of credentials.

0:47I first got introduced to the area of economic historical revisionism through Murray Rothbard back in 1963. I'd written a rather lengthy, one of these five, six page scathing attacks was directed to the author of a, an academic author of a textbook on antitrust law and take him to task for all of his erroneous thinking and I sent a carbon copy of it to Murray. Now this was back in the days for some of the younger people. People, there was actually a time when we didn't have copying machines, and you had to use carbon paper. So I sent a carbon copy to Murray, and he was kind enough to send me back one of his traditional letters, you know, that no margins, all the way across the page, typed three or four page letter, introducing me to this whole field of economic revisionism, and particularly the work of Gabriel Coco, who has just come out, titled The Triumph of Conservatism, which dealt with how the business community had

1:49I've been responsible for creating the bulk of the economic regulation that existed in this country. I've been familiar with the NRA. This, by the way, is the National Recovery Administration. I have a license plate up on my wall in my office from the motor carrier industry from the NRA. People come in and say, oh, nice and rightful association. I said, no, and it's not the National Restaurant Association either. It was the old National Recovery Administration. I was familiar with that from having read the Schechter case when I was in law school in constitutional law and discovered one of my enduring folk heroes, someone who continues to be a folk hero of mine, that was Joseph Schechter, a kosher poultry slaughtering, ran a poultry slaughtering business in South Brooklyn in a building which I've since seen not the building but where the building once stood is now a vacant lot and it's about 50% larger than in this particular room.

2:45So here's a very small businessman who brought down the cornerstone of this system that the business community had worked so hard to put together. So he became one of my heroes and began doing some research on the origins of the NRA, which eventuated in this particular book, titled In Restraint of Trade, dealing with not so much the history of the NRA as much with the history of business thinking

3:41and the elaborate and pervasive exercise of government regulation of economic activity undertaken within America up until that time. Aided by a myriad of other agencies and sub-agencies, the War Industries Board afforded the business community the unprecedented opportunity to experience business-directed government planning as a tool for the central direction of American industry. And with the Board functioning under 57 different commodity sections, it had the power to control production and distribution, to fix prices at which government bodies would purchase commodities, and virtually all other major facets of economic decision making in this country. Historian Frederick Allen, or Frederick Lewis Allen, stated that the War Industries Board had, quote, and the most dictatorial power to decide to what uses the industrial machinery of the country might be applied.

4:36Historians Robert Wiebe and Robert Cuff provide further depth into the extent to which the War Industries Board encouraged the business system to seek an effective cartelization of commerce and industry. And men of commerce and industry found in the wartime management of the War Industries Board temporary respite from what many regarded as the killing pace of competition. Prior to becoming president of AT&T, Walter Gifford told the U.S. Chamber of Commerce at a meeting in 1917, quote, we have never needed such organized industry as much as we need it now when we are engaged in this great war, and we have never needed it as much as we shall need it after this war is over when we shall be in the midst of a world Competition of Unknown Proportions. Robert Cuff got to the essence of the response of most business leaders to the War Industries Board as a model for the business cooperation.

5:32That became the slogan for this time period between 1918 and the early New Deal. But with a properly rationalized state system directed by businessmen and government, America would be able to combine the traditional genius of individualism and free enterprise with a modern efficiency of administrative centralization and state regulation, end of quote. The World War cliché of making the world safe for democracy very quickly morphed into a business campaign to make competition safe for business firms. The Trade Association was greatly energized during the 1920s as a vehicle for fostering voluntary restraints on competition. One of the champions of the Trade Association movement was our old pal Herbert Hoover, who I trust that no one this gathering will mistake for an advocate of laissez-faire economics, who observed, while still Secretary of Commerce, quote, we are passing from a period of extremely individualistic action into a period of associational activities, end of quote.

6:34and the trade associations developed a number of codes of fair competition and they're all over the lot. I have outlined and discussed a great number of them here. I won't try to summarize or even characterize them other than to say that they essentially were directed toward businessmen Quote, wanting to respect the position of their competitors, not undercutting prices, not engaging in trade piracy, which became a synonym for engaging in competition, trying to attract a buyer away from another businessman with whom that businessman was already in negotiation for a contract, aggressive advertising campaigns and so forth.

7:20It was aggressive competition that became unfair competition to these people and got these concepts worked into these voluntary trade association codes. One of the principal champions of a system of industry-regulated competition, what came to be known as the new competition, was Arthur Jerome Eddy, who proposed what many trade associations adopted, namely an open pricing system that sought to stabilize prices through an open system of price reporting by individual firms. So depending upon how open pricing systems actually functioned, they received a mixed response from the courts and antitrust prosecutions. Eddie also proposed the creation of a federal commission along the lines of the ICC that would license all corporations engaged in commerce and could punish those who engaged in, quote, dishonest, fraudulent, oppressive and unfair business methods, end of quote.

8:17Unfair again being competitive methods that have an adverse effect on your competition. Unfair methods of competition became the boogeyman for business leaders and their trade associations with the word unfair being basically synonymous with the word effective. It was aggressive competition in which individual firms were more concerned with the furtherance of their specific interests than with the collective interests of their industries that most troubled industry leaders. Those of you who are familiar with Mansur Olson's classic study, The Logic of Collective Action, will recognize the dynamics that are at work here. is a continual tension between individual and collective interests that, in my view, tends through the marketplace to always keep business organizations relatively small.

9:06It's the interplay between individual and collective interests that makes cartels inherently unstable. And again, I trust that no one here has any unfamiliarity with cartel as a very unstable type of a system because of the individual interests. While there may be collective interests associated with the maintenance of a particular pricing policy, it will always be to the individual firm's interest to undercut that with special deals and the like. A competition, which was a product of the freedom to pursue one's self-interest, became a threat to firms whose greater size and vertically structured organization made them increasingly less resilient and less adaptive to change.

9:54In his 1930 study, Arthur Doing noted, quote, the difficulties attending the administrative management of a large business, end of quote, a problem that tended to make mergers a disappointment to many. and a study involving ten unrelated companies doing observe that combined post-consolidation earnings averaged about 65% of pre-consolidation earnings. Gabriel Coco has demonstrated that following the 1901 merger that created United States Steel, its market share dropped from 61.6% in 1901 to 39.9% by 1920. Likewise, the 1902 merger that produced International Harvester saw a decline in market share from 85% in 1902 to 64% by 1918.

10:42From the early 1900s and continuing well into the 1930s, competition had become quite intense. Not simply the kind of competition that arose in the form of new entrants into existing industries, But the emergence of major new industries, along with major new methods of manufacture and product distribution, automobiles, airplanes, electrical power, along with products powered by electricity, including the radio, motion pictures, consumer appliances, and the phonograph were developed. And so these increased the tempo of competition during this time period. The petroleum industry, for example, which heretofore existed primarily as a source of lighting, became the fuel source for automobiles.

11:30And we now found petroleum, coal, and electricity now in sharp competition with one another as power sources. So this is what's going on during this period. Joseph Schumpeter's process of creative destruction helps to explain the condition which many businesses found themselves. noting that price competition was not the most significant factor to which firms had to respond, quote, but the competition from the new commodity, the new technology, the new source of supply, the new type of organization, end of quote. Inciting retailing, as an example, Schumpeter observed that it was not, quote, the additional shops of the same type that provided the greatest competitive threat, but the department store, the chain store, the mail order house and the supermarket, end of quote.

12:17A kind of mentality, a kind of thinking that one continues to find expressed in the continuing mindless wars against Walmart and other freestanding stores today. It's the same thinking. It just continues. The intensity of competition has been found in the patterns of prices in various industries. The petroleum industry saw production levels rise from 442.9 million barrels in 1920 to 901.1 million barrels in 1927. As a consequence, average prices for crude oil fell from just over $3 a barrel in 1920 to $1.25 a barrel by 1929. 2009. Again, sometimes comparing that with today, there was actually one piece of research I ran across that it was an aberration.

13:08It wasn't typical, but it was in the mid-continent area that at one time barrels of oil were selling for 10 cents a barrel. Coal prices, which rose from $1.13 per ton in 1915 to $3.75 per ton by 1920, and this largely because of the demands of war, which, keeping in mind this was all being carefully managed and directed by the War Industries Board, encouraged the opening of new mines and a proliferation of supply along with aggressive competition among coal companies. As a result, from the 1920 average price of $3.75 per ton, prices plummeted to an average of $1.31 per ton by 1932. Regarding retailing, the development again of chain stores, direct selling by manufacturers, vertically integrated retailing organizations and new consumer credit practices added competitive pressures to which industry members made a variety of responses and keeping in mind they're trying to make some of these responses through these voluntary trade association arrangements. The steel industry was also experiencing the price reducing consequences of free competition. No one in all of business

14:20George W. Perkins, the right-hand man of J.P. Morgan, and a director of both U.S. Steel and International Finance. His message was encapsulated in these words, quote, I do think that sometimes competition, which I have said is a great thing for all the people, has been carried too far, and from the motives of selfishness we sometimes secure business for ourselves that really, justly, and naturally belongs to some of our competitors, end of quote. George W. Perkins, the right-hand man of J.P. Morgan and a director of both U.S. Steel and International Harvester, echoed Gary's remarks. He said, quote, I believe in cooperation and organization in industry. I believe in this for both labor and capital under strict regulation and control of the federal government, end of quote. Julius Kahn, president of Truscan Steel Company, declared in 1928, keep the year 1928 in mind, it's going to be kind of interesting here, Quote, the government must assume the trusteeship of our welfare, end of quote.

15:15Adding that quote, every solution to the problems of bad business I feel must emanate from a guiding central authority, namely our government, end of quote. In what was to prove to be a poor piece of prophecy, Kahn saw on the government direction of business the opportunity to achieve greater industrial stability. quote, just as it has been made possible to regulate against financial depressions and panics through a central body, our Federal Reserve Board, end of quote. And I believe that Murray just rolled over in his grave on that one. So Ayn Rand would have looked in vain for a real-life Hank Reardon in the American steel industry, at least at this particular point in time. Industries endeavored futilely to restrain aggressive competition through trade association codes of fair competition, which sought to appeal to social peer pressure for compliance, but as with any kind of a marketplace cartel, the absence of coercive means of enforcement led many industries to turn to the sector that could supply coercive force, and that was the state.

16:18Following the Great Depression in 1929, many business interests saw an opportunity to reinstitutionalize the old war industries board model. In 1931, Gerard Swope, president of General Electric, gave a speech to the National Electrical Manufacturers Association in which he developed what came to be known appropriately as the Swope Plan. It would force all companies with 50 or more employees into trade associations to be supervised by the federal government. The trade associations would be permitted, among other powers, to define and enforce, quote, trade practices, business ethics, methods of standard accounting and cost practice, end of quote, as well as to quote, collect and distribute information on volume of business transactions, transacted inventories of merchandise on hand, simplification and standardization of products, stabilization of prices and all matters which may arise from time to time relating to the growth and development of industry and commerce, you know, in other words, whatever they want to regulate. In words that could well have been provided by George Orwell, this plan spoke of the quote, voluntary acceptance of decentralized mandatory government of industry, end of quote.

17:25Major business leaders immediately fell in love with the smoke plan, including officials from the U.S. Chamber of Commerce and the National Association of Manufacturers. General Electric' Owen Young got to the heart of the fascist nature of this proposal when he declared, Every advance in social organization requires the voluntary surrender of a certain amount of individual freedom by the majority and the ultimate coercion of the minority. U.S. Chamber of Commerce President Henry I. Harriman added that any business that did not choose to cooperate with the recovery plan would be treated like any maverick. They'll be roped, branded and made to run with the herd. End of quote.

18:11Lest anyone here be deluded by Ayn Rand's notion of big business as America's persecuted minority, the history of this era reveals how attracted major business leaders were to having the coercive arm of the state available to serve their anti-competitive ends. One of my other moderate heroes, General Smedley Butler, I don't know if you're familiar with him, who wrote the book War is a Racket. I like to imagine he's probably a relative of mine. My first name is my Irish grandmother's old family name. So maybe Smedley and I had some relationship there. But his first-hand narrative of the realities of government regulation and John P. Diggins' study that Tom just referred to a little while ago, The View from America confirmed the prevailing corporate-state partnership.

19:00Diggins has documented the enthusiasm that so many business leaders had with Mussolini. Julius Barnes and Lewis Pearson, each of whom had served as president of the U.S. Chamber of Commerce, were eager supporters of Mussolini. Pearson hailed El Duce for having restored, quote, the ideals of individualism. His words, not mine. Other business praise for Mussolini came from Willis Booth, Vice President of Guarantee Trust Company, James Emery, Council for the NAM, E. H. H. Simmons, President of New York Stock Exchange, Albert Gary of U.S. Steel, Thomas W. Lamont, head of J.P. Morgan, Otto Kahn of Kuhn, Leopold & Company, and Andrew W. Mellon. Lamont went so far as to refer to himself as a, quote, missionary, end of quote, for Italian fascism.

19:46Well, by 1932, with the presidential campaign afoot and with the depression not having, the effects of it not having subsided, due largely to some of the policies that Rothbard talks about in his book, The Great Depression, about Hoover saying that he was not a do-nothing president, he was a do-everything president, Hoover was an engineer, engineers like to tinker, and as Murray said, you know, there are about six or eight different things that a government and what it could do to prevent the recovery of a depression and Hoover did every one of them. And so during the presidential campaign, the business community turns to these two presidential candidates, Hoover and FDR, to see if they will support the Swope Plan as a system for national industrial cartelization, I mean recovery.

20:39Hoover says no, not so much because he's opposed to that kind of a system, but he thought that the proposal would violate the antitrust laws, which I don't quite understand because the antitrust laws and the NRA would be co-equal and you couldn't say one takes priority over the other. and the other. FDR of course eagerly embraced it and the business community responded by overwhelmingly embracing FDR with his industrial recovery plan which became the cornerstone of the New Deal. So this old myth that FDR brought the business community kicking and screaming into a system of government regulation is about as silly as you can imagine. It's When FDR got elected, the basic structure of the Swope Plan was enacted on June 13, 1933, as a National Industrial Recovery Act, and it had a life of two years, they had to put a sunset provision in there.

21:43General Hugh Johnson, who had been the right-hand man to Bernard Baruch under the Old War Industries Board, and you notice how military leaders always seem to be assigned to take over regimenting functions in our society, was appointed to head the N IRA. And the NIRA, the National Industrial Recovery Administration, was sort of made fun of, I think it was by a Business Week article that referred to NIRA as NERA, as in NERA, my god to thee. And Johnson took great offense at this. Johnson had described the NRA as, quote, a holy thing, the greatest social advance since the days of Jesus Christ, end of quote. In the fascist spirit of the system, Baruch proposed the creation of NRA insignias for businesses to use to identify themselves as, quote, soldiers against the common enemy within, end of quote, and to differentiate them from those who, quote, are on the other side, end of quote.

22:51Fascists do have a love for insignias, whatever they may be. Hundreds of NRA codes were developed, about 557 basic codes and 208 supplementary codes. One writer has suggested there may have been as many as 2,000 codes by the time you get a lot of these cross-reference codes. In other words, a particular industry could be subject to a number of separate codes of fair competition, as they were referred to. Some of them were major industries, steel, cement, auto manufacturing, cotton textiles, motor carriers and so forth, and some were rather esoteric industries, corn cob pipe manufacturers, umbrella handle manufacturers, envelope manufacturers, steel wool manufacturers, even burlesque theater had a code, and you remember the model for it, if you ever see any movie that takes place in America The most popular code provisions dealt with pricing policies in virtually every imaginable form, while others dealt with defamation of a competitor, plant expansions, and trade piracy, again, trying to secure business from a customer who's negotiating with one's competitor.

24:18One commentator observed, quote, many of the pending codes have no purpose other than to destroy some strategic advantage gained by the foresight, the energy or the skill of some individuals or groups to the envy of their competitors. Historian Paul Konkin observed that, quote, usually without direct price setting, most industry codes achieve the same result indirectly by limiting production, preventing price cutting and forbidding unfair competition. Businessweek commented in the early days of the code formation, commented about the, quote, wild rush of businessmen to Washington who want to know everything, but mostly how to punish the rascal who has been cutting prices in their industry and how to fix some nice new prices, end of quote. You know, once the price structure becomes broken, we've got to fix it, you know, and that seems to be the logic here.

25:03That the stabilization of prices is precisely the wrong strategy for promoting recovery following the depression was was paradoxically not a consideration for an agency supposedly devoted to recovery, something that was spoken of yesterday. Contrary to the bunkum that passes for social enlightenment in our culture, the business community loved the NRA. Its support arose not from a desperate reaction to the depression, but from years of dedication to a state, getting a state-enforced system of of Controlled Trade Practices. Harry Thayer, the former president of Western Electric, went so far as to say that, quote, the enactment of the NRA seemed to be almost worth the price of the Depression, end of quote. As the NRA moved closer to its two-year sunset date, businessmen worked behind the scenes to reenact it as a permanent system. In the late 1934 referendum of the members of the U.S. Chamber of Commerce showed overwhelming allegiance to the idea of a compulsory system for regulating trade practices. While 87% favored allowing the Act to expire in June 1935, they also voiced support for the following,

26:12for enactment of new legislation prior to expiration of the NRA, 78.1%, to permit industry to formulate its own rules of fair competition subject to government approval, 95.2 percent, to restricting the power of the government agency to approval or veto 94.6 percent, to have rules of fair competition enforceable against all concerns in the industry 91.8 percent. And what these polls reflect on, and you see this kind of across the board, wherever you see any kind of reference to business attitudes, they reflect the discontent that many business leaders had with how the NRA was being In other words, they wanted more direct control and administration by business people themselves rather than bureaucrats. They were not opposed to the idea of government enforcement of some of these industry created codes.

27:01As long as the business committee could employ the power of the state to enforce price stabilization and trade practice standards, they favored these kinds of restraints on the market. There were a number of exceptions, lovable exceptions. One of them, and I would like to do some more research into this sometime if I ever day out of the time, the Illinois Manufacturers Association. I don't know if anyone is familiar with them, but they fought this whole pattern of governmental regulation from day one on. And I suspect there was probably someone who ran the Illinois Manufacturers Association who may have ridden Mises or had some sort of a philosophic opposition to this. But they were, every time some of this question comes up, here's the Illinois Manufacturing Association saying no when everyone else is saying yes.

27:47The Philadelphia New York Boards of Trade favored termination of the NRA when it was winding down. And of course my old folk hero, Joseph Schechter, who I referred to earlier, a small kosher poultry slaughterer in Brooklyn who brought down this whole system. I always thought it would be nice to put up all these monuments in Washington and put up some monuments to some real heroes. One of them would be Joe Schechter. Nor would my presentation be complete without making favorable comments to another of my folk heroes, and the one to whom I have dedicated my book, and that was a journalist, John T. Flynn, who Tom mentioned earlier, who had the Menkenesq quality of being both able and eager to discover and reveal the agreed upon lies and foolishness whose absence would be fatal to all political systems.

28:45Well, kind of running short on time, but following the collapse of the NRA, and it was brought about through the court saying in this particular case, as applied to Schechter, there were two reasons for its collapse. The Unlawful Delegation of Legislative Power from Congress to the Executive Branch The other was in the case involving Schechter, it didn't satisfy that definition of commerce And so afterwards you get a lot of industries that are out promoting individualized agencies or individualized legislation The Food and Drug and Cosmetic Act of 38, the Agriculture and Marketing Agreement Act of 37, the Motor Carrier Act of 35 so they're not exactly 38, on and on, different industries getting in to do for their specific industries what the NRA had tried to do across the board.

29:36The appetite for fascism within the business community reached such a point that many within the independent retailing trades, anxious to overcome the competition from chain stores, became eager supporters of Texas Congressman Wright Patman's proposed, quote, death sentence, and that was what was referred to as the death sentence bill that would have allowed the federal taxation powers to literally confiscate chain stores out of existence. And anyone needing a reminder of what confiscate means should remember Charlie Anderson's definition in the movie Shenandoah when he says it's to steal. Well, the A&P chain, for example, with 1938 earnings of just over $9 million would have paid a chain store tax of $471.6 million. Kroger's earnings of just over $3.7 million would have been offset by a federal tax of over $71.8 million.

30:23Had this measure been enacted into law, the 24 largest chains would have paid a total tax of $874 million in the first year alone, a figure that was almost ten times their combined earnings and which would have supplied the federal government with some 13% of their total budget. This bill, of course, was supported by many so-called independent retailers. Most of the independent retailing organizations associations were eager to get behind it and to put a stop to this wicked system. Well, I think one can't understand the dynamics of what has long been generating an increased politicization of society, particularly within the economy, without understanding some of the institutionalizing processes at work.

31:08and I think this is something that needs to be understood in the light of what we're talking about here in terms of fascism. As Leopold Korr, I don't know if you're familiar with him, if not, very interesting writer. He is an Austrian by birth. I don't know if you can consider yourself an Austrian in terms of his economic theories, but he considers himself both a libertarian and an anarchist, or he did when he was living. Observe that there is a dysfunctional quality to organizational size. and he termed the size theory of social misery. Quote, whenever something is wrong, something is too big, end of quote. And he developed an analysis that ties in rather interestingly with Olson's treatment of collective action. I think what this does is to generate what I would call a dinosaur effect that when a system becomes so specialized to a particular set of conditions that it loses resiliency and adaptability, then it really is unable to sustain itself.

32:06And I think this is what happens with many large business organizations. And eventually they lose that sense of competitiveness, that creativity. They become, as Koko called it, very conservative. They may have the advantages of economies of scale, but they're more than offset by the lack of resiliency and adaptability, and they can't respond to change very effectively. I'm long been convinced, I'm thoroughly convinced, and I'll probably go to the gallows. Some of the last words, and H.O. Mencken once said, my last words on the gallow will be to take a who to socialism. Mine will probably be to emphasize this whole notion that large organizations of any size are quite incompatible with a free market.

32:52But a free market will tend to keep organizations, particularly business organizations, down to a much smaller level than they are now. But it takes a nation-state to prop up big corporations. There are a few corporations, I think, that probably could do this, but the only way they could really do it would be to retain this inwardly sense of resiliency that now seems to be lacking. Well, that's probably as good a place as any, and I notice that the time is about up, but perhaps the years of separating the war industry boarded in the New Deal, and whose anti-market influences have metastasized into the present, offer a stark confirmation of the classic libertarian sentiments of Adam Smith, who observed that, quote, people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.

33:53It is impossible indeed to prevent such meetings by any law which either could be executed or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.