CARTELS AND MONOPOLIES

Excerpts from

THE CASE AGAINST THE FED
By Murray N. Rothbard

Putting Cartelization Across: The Progressive Line

....It is important to realize that the problem faced by the big bankers was only one facet of a larger problem. Finance capital, led once again and not coincidentally by the Morgan Bank, had been trying without success to cartelize the economy on the free market. First, in the 1860s and 1870s, the Morgans, as major financiers and underwriters of America’s first big business, the railroads; tried desperately and repeatedly to cartelize railroads: to arrange railroad “pools” to restrict shipments, allocate shipments among themselves, and raise freight rates, in order to increase profits in the railroad industry. Despite the Morgan clout and a ready willingness by most of the railroad magnates, the attempts kept floundering, shattered on the rock of market competition, as individual railroads cheated on the agreement in order to pick up quick profits, and new venture capital built competing railroads to take advantage of the high cartel prices. Finally, the Morgan-led railroads turned to the federal government to regulate railroads and thereby to enforce the cartel that they could not achieve by the free market. Hence the Interstate Commerce Commission, established in 1887. (16)

In general, manufacturing firms did not become large enough to incorporate until the 1890s, and at that point the investment bankers financing the corporations, again led by the Morgans, organized a large series of giant mergers, covering literally hundreds of industries. Mergers would avoid the problem of cheating by separate individual firms, and monopoly firms could then proceed peacefully to restrict production, raise prices and increase profits for all the merged firms and stockholders. The mighty merger movement peaked from 1898 - 1902. Unfortunately, once again virtually all of these mergers flopped badly, failing to establish monopolies or monopoly prices, and in some cases steadily losing market shares from then on and even plunging into bankruptcy. Again the problem was new venture capital entering the industry and, armed with up-to-date equipment, outcompeting the cartel at the artificially high price. And once again, the Morgan financial interests, joined by other financial and big business groups, decided that they needed the government, in particular the federal government, to be their surrogate in establishing and, better yet, enforcing the cartel. (17)

The famed Progressive Era, an era of a Great Leap Forward in massive regulation of business by state and federal government, stretched approximately from 1900 or the late 1890s through World War I. The Progressive Era was essentially put through by the Morgans and their allies in order to cartelize American business and industry, to take up more effectively where the cartel and merger movements had left off. It should be clear that the Federal Reserve System, established in 1913, was part and parcel of that Progressive movement: just as the large meat packers managed to put through costly federal inspection of meat in 1906, in order to place cripplingly high costs on competing small meat packers, so the big bankers cartelized banking through the Federal Reserved System seven years later. (18)

Just as the big bankers, in trying to set up a Central Bank, had to face a public opinion suspicious of Wall Street and hostile to Central Banking, so the financiers and industrialists faced a public steeped in a tradition and ideology of free competition and hostility to monopoly. How could they get the public and legislators to go along with the fundamental transformation of the American economy toward cartels and monopoly?

The answer was the same in both cases: the big businessmen and financiers had to form an alliance with the opinion-molding classes in society, in order to engineer the consent of the public by means of crafty and persuasive propaganda. The opinion-molding classes, in previous centuries the Church, but now consisting of media people, journalists, intellectuals, economists and other academics, professionals, educators as well as ministers, had to be enlisted in this cause......

Hence the new alliance of State and Opinion-Molder, an old-fashioned union of Throne and Altar recycled and updated into a partnership of government, business leader, intellectual, and expert. During the Progressive Era, by far the most important forum established by Big Business and Finance which drew together all the leaders of these groups, hammered out a common ideology and policy program, and actually drafted and lobbied for the leading new Progressive measures of state and federal intervention, was the National Civic Federation; other similar and more specialized groups followed. (19)

It was not enough, however, for the new statist alliance of Big Business and Big Intellectuals to be formed; they had to agree, propound , and push for a common ideological line, a line that would persuade the majority of the public to adopt the new program and even greet it with enthusiasm. The new line was brilliantly successful if deceptive: that the new Progressive measures and regulations were necessary to save the public interest from sinister and exploitive Big Business monopoly, which business was achieving on the free market. Government policy, led by intellectuals, academics and disinterested experts in behalf of the public weal, was to “save” capitalism, and correct the faults and failures of the free market by establishing government control and planning in the public interest. In other words, policies, such as the Interstate Commerce Act, drafted and operated to try to enforce railroad cartels, were to be advocated in terms of bringing the the Big Bad Railroads to heel by means of democratic government action.


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16 See Gabriel Kolko, Railroads and Regulation, 1877-1916 (Princeton: Princeton University Press, 1965).
17 See Kolko, Triumph of Conservatism, pp. 1-56; Naomi Lamoureaux, The Great Merger Movement in American Business, 1895-104 (New York: Campbridge University Press, 1985); Arthur S. Dewing, Corporate Promotions and Reorganizations (Cambridge, Mass.: Harvard University Press, 1914) and idem, The Financial Policy of Corporations, 2 vols., 5th ed. (New York: Ronald Press, 1953).
18 On meatpacking, see Kolko, Triumph of Conservatism, pp. 98 -108.
19 On the National Civic Federation, see James Weinstein, The Corporate Ideal in the Liberal State, 1890 -1918 (Boston: Beacon Press, 1968). Also see David Eakins, “The Development of Corporate Liberal Policy Research in the United States 1885 - 1965” (doctoral dissertation, Department of History, University of Wisconsin, 1966).