Politics & Policy

T.R. and T.B.T.F

“Too big to fail” a century ago

We are currently engaged in a lively debate on whether our financial institutions are too big, whether government policies such as Dodd-Frank are making them bigger, and whether the government should break up big banks instead.

Just over a century ago, breaking up big business — “trusts,” as they were then called — was the central issue in American politics. Ex-president Theodore Roosevelt led the charge defending bigness, and this was the principal factor that destroyed his relationship with his friend and hand-picked successor, William Howard Taft. The resulting schism in the Republican party gave the election to Woodrow Wilson.

Despite a few dramatic, high-profile efforts like preventing J. P. Morgan from establishing a northwestern railroad conglomerate, Roosevelt had adopted what might be called an anti-antitrust policy, calling for regulation of big business rather than “busting” it into smaller units. His high-profile trust-busting cases amounted to little more than image-making combined with an assertion of the government’s superiority to business — all to gratify his personal urge to cow the magnates. Roosevelt admitted that economics were beside the point. “I do not care a rap what proportion [J. P. Morgan and John D. Rockefeller] own of the industry,” he explained to William Jennings Bryan. “What I am interested in is getting the hand of government put on all of them — this is what I want.”

When Roosevelt left the presidency in 1909 to go big-game hunting in Africa, Morgan was rumored to have said, “Let every lion do his duty.” But despite his cultivated image as the scourge of the robber barons, T.R. actually got along well with Morgan, who contributed to his electoral campaigns. They were, in a word, cronies.

Roosevelt chose William Howard Taft, his secretary of war, to be his successor. Taft more aggressively enforced the Sherman Antitrust Act, initiating almost twice as many suits as Roosevelt in half as many years. Yet Taft did not think the act applied to every combination in restraint of trade. As a circuit-court judge, he had helped to construct what came to be called the “rule of reason” — that only combinations that harmed consumer welfare violated the act. The Supreme Court approved Taft’s approach in the Standard Oil and American Tobacco cases in 1911 — in large part due to the four new justices whom Taft had appointed. These prosecutions, which broke up the oil and tobacco trusts, threw the business community into some alarm. Taft’s attorney general, George Wickersham, said the administration had helped to turn the Sherman Act into “an actual, effective weapon to the accomplishment of the purposes for which it was primarily enacted.”

Taft’s antitrust-enforcement policy irritated Roosevelt, who had arranged what were known as “gentlemen’s agreements” with the industrialists, limiting the application of the law in exchange for good behavior. (“If we have done anything wrong, send your man to my man and they can fix it up” was how Morgan put it.) He was also willing to work with the trusts to prevent financial meltdowns. In October 1907, the stock market began to slide when the Knickerbocker Trust Company failed. J. P. Morgan had to arrange a fund of $20 million from private bankers to keep the New York Stock Exchange in operation. In November, the brokerage firm of Moore and Schley was facing failure because its loans were secured by stock in the Tennessee Coal & Iron Company, whose shares had declined. The directors of U.S. Steel were willing to purchase T.C.I. and shore up the price of its stock, but they wanted an assurance that they would not face an antitrust prosecution.

T.R. agreed to the deal, even though U.S. Steel was paying $45 million for a rival worth anywhere from four to 20 times that amount. When the Taft administration initiated an antitrust suit against U.S. Steel, Roosevelt was chagrined. Taft’s Justice Department maladroitly revealed information suggesting that Roosevelt had yielded to U.S. Steel for political reasons; Roosevelt responded with the unjust claim that Taft, then secretary of war, had approved of his decision. He even appeared before a congressional investigating committee to defend his conduct. T.R. likened the Panic of 1907 to the Civil War, particularly to Lincoln’s suspension of habeas corpus. He argued that the U.S. Steel suit showed the futility of a legal approach to industrial regulation.

Roosevelt then reentered the political arena, and in 1912 he challenged Taft for the G.O.P. nomination, tearing the Republican party apart. The Democratic nominee, Woodrow Wilson, made Roosevelt’s policy of “regulated monopoly” the centerpiece of his campaign. With the counsel of his éminence grise, the lawyer Louis D. Brandeis, Wilson called for the breakup of big business, convinced that bigness always resulted from some great crime.

Yet half of Sherman Act prosecutions had been against small, “peripheral” firms, whose cartel-like agreements to limit competition were easier to identify and prosecute. Brandeis wanted to preserve small-firm collusion; as he put it, “The proper role of the government is to encourage not combination, but cooperation.” Giant holding companies were bad, but middling cartels were good.

This tension produced the watered-down Clayton Antitrust Act of 1914. It did not attempt to repeal the “rule of reason” and aggressively break up trusts. It did enumerate some specific illegal practices, such as tying and interlocking directorates, but only when these “substantially lessened competition or tended to promote monopoly.” The act had the same negligible impact on American industrial structure as the Sherman Act, but not because Wilson was actually a “corporate liberal.” He did maintain a vigorous series of antitrust prosecutions against big business — most notably continuing Taft’s case against United States Steel. But World War I led the government to require products on a scale that only gargantuan business could provide, killing their antitrust efforts. And Roosevelt may have been right after all. In 1920, the government finally lost its antitrust suit against U.S. Steel, whose market share continued to fall.

Today, the two men’s contrasting styles have implications that stretch far beyond banking or antitrust. T.R.’s approach to just about everything amounted to a regulated monopoly: Get a few powerful men in a room, knock their heads together, and hash things out. That’s how he solved the Panic of 1907, how he brokered a peace in the Russo-Japanese War (for which he won a Nobel Peace Prize in 1905), and even how he saved college football, as NR’s John J. Miller wrote. And that’s how he regulated business. This approach can work if you have an honest and energetic person in charge, which by and large T.R. was (though misguided in many ways). But if that person is corrupt or lazy or simply ineffectual, it makes things worse.

Taft, by contrast, was a lawyer and a judge, so he took a more legalistic approach: Enact the necessary rules and enforce them. If the rules are clear and not too numerous, and they are enforced evenhandedly, applying the rule of reason, this approach can turn out well. If not, it’s a great burden on whoever is being regulated, and there is plenty of room for corruption and favoritism.

President Obama combines the worst of these two approaches. Obamacare is 2,000-plus pages of regulations, many of which direct the HHS secretary to write even more regulations. That’s the essence of Obamacare, and it’s Taft-like, if Taft had been crazy enough to try to regulate health care nationwide. On the other hand, it strongly encourages consolidation of practitioners and hospitals into big corporations for the sake of efficiency, as T.R. would have done. As with most Obama programs, you can get an exemption if you play ball with them, which is the “send your man to my man” side of T.R. And it all began with T.R.-style meetings of the major health-care players, leading to deals like the one Billy Tauzin made for PhRMA, where they agreed to support Obamacare if Obama would promise not to tax them too heavily.

So Obama’s system combines the cronyism and big-is-beautiful spirit of T.R.’s approach with the potential for legalism and heavy-handedness of Taft’s. This is what happens when a charismatic, visionary leader meets the modern bureaucratic state, as administered by brass-knuckled Chicago politicians. And whatever their differences, T.R. and Taft would both be dismayed at the results.

— Paul Moreno is the director of academic programs at Hillsdale College’s Kirby Center for Constitutional Studies and Citizenship.

Paul Moreno holds the William and Berniece Grewcock Chair in Constitutional History at Hillsdale College, where he is a professor of history and dean of social sciences.


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