Progressives, Cartelists, the FED, and trust busting

Murray Rothbard wrote about the vastly wealthy in America fooling the progressives and then re-writing history as to what happened in a small article in 1999. Here is a short portion of that article:

The Federal Reserve Act of December 23, 1913, was part and parcel of the wave of Progressive legislation on local, state, and federal levels of government that began about 1900. Progressivism was a bipartisan movement that, in the course of the first two decades of the 20th century, transformed the American economy and society from one of roughly laissez-faire to one of centralized statism.

Until the 1960s, historians had established the myth that Progressivism was a virtual uprising of workers and farmers who, guided by a new generation of altruistic experts and intellectuals, surmounted fierce big business opposition in order to curb, regulate, and control what had been a system of accelerating monopoly in the late 19th century. A generation of research and scholarship, however, has now exploded that myth for all parts of the American polity, and it has become all too clear that the truth is the reverse of this well-worn fable.

In contrast, what actually happened was that business became increasingly competitive during the late 19th century, and that various big-business interests, led by the powerful financial house of J. P. Morgan and Company, tried desperately to establish successful cartels on the free market. The first wave of such cartels was in the first large-scale business — railroads. In every case, the attempt to increase profits — by cutting sales with a quota system — and thereby to raise prices or rates, collapsed quickly from internal competition within the cartel and from external competition by new competitors eager to undercut the cartel.

During the 1890s, in the new field of large-scale industrial corporations, big-business interests tried to establish high prices and reduced production via mergers, and again, in every case, the merger collapsed from the winds of new competition. In both sets of cartel attempts, J. P. Morgan and Company had taken the lead, and in both sets of cases, the market, hampered though it was by high protective, tariff walls, managed to nullify these attempts at voluntary cartelization.

It then became clear to these big-business interests that the only way to establish a cartelized economy, an economy that would ensure their continued economic dominance and high profits, would be to use the powers of government to establish and maintain cartels by coercion, in other words, to transform the economy from roughly laissez-faire to centralized, coordinated statism. But how could the American people, steeped in a long tradition of fierce opposition to government-imposed monopoly, go along with this program? How could the public’s consent to the New Order be engineered?

Fortunately for the cartelists, a solution to this vexing problem lay at hand. Monopoly could be put over in the name of opposition to monopoly! In that way, using the rhetoric beloved by Americans, the form of the political economy could be maintained, while the content could be totally reversed.

Monopoly had always been defined, in the popular parlance and among economists, as “grants of exclusive privilege” by the government. It was now simply redefined as “big business” or business competitive practices, such as price-cutting, so that regulatory commissions, from the Interstate Commerce Commission (ICC) to the Federal Trade Commission (FTC) to state insurance commissions, were lobbied for and staffed with big-business men from the regulated industry, all done in the name of curbing “big-business monopoly” on the free market.

In that way, the regulatory commissions could subsidize, restrict, and cartelize in the name of “opposing monopoly,” as well as promoting the general welfare and national security. Once again, it was railroad monopoly that paved the way.

For this intellectual shell game, the cartelists needed the support of the nation’s intellectuals, the class of professional opinion molders in society. The Morgans needed a smokescreen of ideology, setting forth the rationale and the apologetics for the New Order. Again, fortunately for them, the intellectuals were ready and eager for the new alliance.

The enormous growth of intellectuals, academics, social scientists, technocrats, engineers, social workers, physicians, and occupational “guilds” of all types in the late 19th century led most of these groups to organize for a far greater share of the pie than they could possibly achieve on the free market. These intellectuals needed the State to license, restrict, and cartelize their occupations, so as to raise the incomes for the fortunate people already in these fields.

In return for their serving as apologists for the new statism, the State was prepared to offer not only cartelized occupations, but also ever-increasing and cushier jobs in the bureaucracy to plan and propagandize for the newly statized society. And the intellectuals were ready for it, having learned in graduate schools in Germany the glories of statism and organicist socialism, of a harmonious “middle way” between dog-eat-dog laissez-faire on the one hand and proletarian Marxism on the other. Big government, staffed by intellectuals and technocrats, steered by big business, and aided by unions organizing a subservient labor force, would impose a cooperative commonwealth for the alleged benefit of all.

And that transformation of a “roughly laissez-faire economy and society” to one of “centralized statism” came just in time to begin over a century of war and empire expansion that continues until this day. We have seen how the government can use the central bank to inflate money and pay for things they could never get with just taxes or borrowing (as bad as these two are). The main point of that Rothbard post is the idea that the progressives brought you the wonders of central banking which funds endless war and control by the rich.


Steven Horwitz Professor of Economics at St. Lawrence University tells us:

Like other legislation of that era, the Fed was a government intervention supported both by ideologically-motivated and well-meaning reformers and by the industry being regulated. Rather than being this as some sort of unique conspiracy to take control of the US monetary system, it was a story very similar to those found in the history of everything from railroad regulation, to meatpacking regulation, to the regulation of monopolies and trusts as historians from Gabriel Kolko onward have documented. Unique historical factors in the monetary system affected the particular form the Fed took, but its broad history places it squarely in the tradition of the Progressive Era. If the Fed is the product of some nefarious conspiracy, so is a whole bunch of other legislation passed around that time.

The Fed emerged not as a response to failures of a free market in banking, nor as the result of shadowy banking conspiracies, but instead as a response to the failures of the National Banking System (1863-1913) that preceded it. The US banking system has never been a free market, as the National Banking System (NBS) was itself a response to pre-existing state-level regulations on banking. Under the NBS, and many of the state systems that came before it, banks were subject to three major regulations: 1) limits on the ability of banks to operate branches; 2) minimum reserve requirements; and 3) requirements that banks that produced currency buy up certain bonds or other financial assets as collateral.

The first and third of these regulations were particularly problematic. The limits on branching varied. During the pre-Civil War years, branch banks of any kind were illegal – banks could only operate one office. During the NBS, interstate branching was illegal, as no state would allow branches of banks chartered in other states to open up in that state, and some states still prohibited banks from opening branch offices within their state. The result was a banking system with few inter-bank institutions and too many banks that were too small and not sufficiently diversified, and therefore overly prone to failure.

The bond collateral requirements were also a problem. Before the Civil War, they often served as a form of crony capitalism as some states required that banks buy the bonds of railroads and other nominally private enterprises instead of, or in addition to, government bonds to serve as collateral. In the NBS, federally chartered banks were required to buy federal government bonds as a way of financing the Civil War. Regardless of whose bonds were required, forcing banks to purchase bonds when they want to expand their issues of currency became a problem as the required bonds were sometimes found to be either worthless or in short supply. One result was periodic currency panics that continued throughout the century.

In this episode of twisted fate, we see the progressives built the very edifice that they would then spend more than a century decrying. Now that is irony. They were had by a shell game played by the most wealthy class in America and they lost even as everyone celebrated their apparent victory. The central factor that the progressives failed to understand is that the monopoly is a product of government privilege and does not arise via laissez-faire free market forces. The “leaders of industry” got tired of so many newcomers competing successfully with them and their business concerns and so looked to government to protect them.

Friedrich von Hayek won the Nobel Prize for his theory of the business cycle and that theory puts the blame for the boom-bust business cycle squarely on the shoulders of the government and its controlled banking system. When government encourages bank credit expansion through its central bank and control of the banking system, this causes price inflation as well as increasing malinvestments. Most importantly this credit expansion encourages unsound investments in capital goods and underproduction of consumer goods. In spite of this knowledge, most Americans still believe that the monopoly control of their money by government is somehow a “good thing”. The progressives were fooled into giving the government the means whereby they could finance a world wide empire as well as dominate the domestic economy to everyone’s disadvantage.

It was the same thing with the idea that the government needed to be in the “trust busting” business. This hoary old canard hangs on till this day and you will hear it anytime you talk to a progressive or even most public school educated Americans. They really think that without their protector government the corporations would grow without bound until only a few, or even just one, dominated the whole world. They simply don’t understand competition nor have they read the history of the USA in the 1800s and 1900s. If they did understand, they would realize that it is government itself that helps the largest corporations to grow and dominate us. (crony-capitalism)

Big-business interests did try in the late 1800s to establish predatory high prices and reduced production and failed to do so. They tried the mergers that modern liberals tell us would lead to their total control of the people without government to stop them; and yet, they tried and the large business interests all failed due to market forces.  In every case the merger collapsed due to competition just as Hayek, Rothbard, and Mises have demonstrate must happen. Even hampered by the intervention of government through protective tariffs the market nullified these attempts by private concerns to create monopoly. And so the state was called upon to do by force, coercion, and intimidation what the big business moguls could not do by themselves.

The American big business leaders knew well that governments can hand out monopolies. The knew about the English monopolies in the period just before the industrial revolution. As Rothbard has pointed out; the creation of monopolies reached its climax in the reign of Queen Elizabeth. He quoted the words of historian Professor S.T. Bindoff, “… the restrictive principle had, like some giant squid, fastened its embracing tentacles round many branches of domestic trade and manufacture,” and “in the last decade of Elizabeth’s reign scarcely an article in common use – coal, soap, starch, iron, leather, books, wine, fruit – was unaffected by patents of monopoly.”

In the 1900s, as in America today, we have seen that lobbyists use the lure of monetary gain to obtain government sponsors to fight for their petitions for grants of monopoly. The American businessmen knew that using the law to secure their place was far easier and safer than competition! And once granted their privileges the monopolists proceed to loot the public just like Ma Bell of old. Now don’t be fooled, today’s grants of monopoly are crafted to make it look like they are promoting competition even as they do the exact opposite. There are many “barriers to entry” into an industry and mountains of expensive regulations that hold down new competition and allow the businesses protected to whine about “government regulation” even as those very regulations protect them. The propaganda of the government, lobbyists, and big business is far more sophisticated than is was in the 1900s and the manipulators are still fooling the common man — especially the “progressives”.

Ironic evil is the evil good men do while they think they are doing good. Many well meaning but economically ignorant men and women have helped get the USA to this sad juncture in its history. I hope more people will study Austrian Economics and arm themselves with the knowledge of how the world really works. Ron Paul has tried his best to explain economics to the masses and has done a great job of it; but all of us need to study more and to tell our friends and family.

1 thought on “Progressives, Cartelists, the FED, and trust busting

  1. The Constitution established the political framework necessary for a free market. It provided for the protection of private property (the Fifth Amendment) including intellectual property (Article I, Section 8), the enforcement of private contracts (Article 1, Section 10), and the establishment of sound (gold or silver) 3 money (Article I, Sections 8 and 10). It prohibited the states from erecting trade barriers (Article I, Section 9), thereby establishing the whole nation as one large free-trade zone. It permitted direct taxes such as the income tax only if apportioned among the states on the basis of population (Article 1, Sections 2 and 9), which made them very difficult to levy. 4 Finally, it specifically enumerated and therefore limited Congress’s powers (Article I, Section 8), severely constraining the government’s power to intervene in the marketplace.

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