altogether the harsh necessity of competition.
All cartels, however, have an internal self-destruct mechanism.
Sooner or later, one of the members inevitably becomes dissatisfied with his agreed-upon piece of the pie. He decides to compete once again and seeks a greater share of the market. It was quickly recognized that the only way to prevent this from happening was to use the police power of government to enforce the cartel agreement. The procedure called for the passage of laws disguised as measures to protect the consumer but which actually worked to ensure the elimination of competition. Henry P. Davison, who was a Morgan partner, put it bluntly when he told a Congressional committee in 1912: 'I would rather have regulation and control than free competition.'1 John D. Rockefeller was even more to the point in one of his often repeated comments: 'Competition is a sin.
This trend was not unique to the banking industry. Ron Paul and Lewis Lehrman provide the historical perspective:
After 1896 and 1900, then, America entered a progressive and predominantly Republican era. Compulsory cartelization in the name of 'progressivism' began to invade every aspect of American economic life. The railroads had begun the parade with the formation of the ICC in the 1880s, but now field after field was being centralized and cartelized in the name of 'efficiency,' 'stability,' 'progress,' and the general welfare.... In particular, various big business groups, led by the J.P. Morgan interests, often gathered in the National Civic Federation and other think tanks and pressure organizations, saw that the voluntary cartels and the industrial merger movements of the late 1. Quoted by Gabriel Kolko,
2. Quoted by William Hoffman,
r
COMPETITION IS A SIN
435
1890s had failed to achieve monopoly prices in industry. Therefore, they decided to turn to governments, state and federal, to curb the winds of competition and to establish forms of compulsory cartels, in the name, of course, of 'curbing big business monopoly' and advancing the general welfare.1
The challenge no longer was how to overcome one's adversaries, but how to keep new ones from entering the field. When John D. used his enormous profits from Standard Oil to take control of the Chase National Bank, and his brother, William, bought the National City Bank of New York, Wall Street had yet one more gladiator in the financial arena. Morgan found that he had no choice except to allow the Rockefellers into the club but, now that they were in, they all agreed that the influx of competitors had to be stopped. And that was to be the hidden purpose of federal legislation and government control. Gabriel Kolko explains: The sheer magnitude of many of the mergers, culminating in U.S.
Steel, soon forced him [Morgan] to modify his stand, though at times he would have preferred total control. More important, by 1898 he could not ignore the massive power of new financial competitors and had to treat them with deference. Standard Oil Company, utilizing National City Bank for its investments, had fixed resources substantially larger than Morgan's, and by 1899 was ready to move into the general economy.... The test came, of course, in the Northern Securities battle, which was essentially an expensive draw. Morgan and Standard paid deference to each other thereafter, and mutual toleration among bankers increased sharply.... A benign armed neutrality, rather than positive affection, is as much a reason as any for the high number of interlocks among the five major New York banking houses.
Writing in the year 1919, from the perspective of an inside view of Wall Street at that time, John Moody completes the picture: This remarkable welding together of great corporate interests could not, of course, have been accomplished if the 'masters of capital' in Wall Street had not themselves during the same period become more closely allied. The rivalry of interests which was so characteristic during the reorganization period a few years before had very largely disappeared. Although the two great groups of financiers, represented on the one hand by Morgan and his allies and on the other by the Standard Oil forces, were still distinguishable, they were now 1- Paul and Lehrman, p. 119.
2- Kolko,
436 THE CREATURE FROM JEKYLL ISLAND
working in practical harmony on the basis of a sort of mutual
'community of interest' of their own. Thus the control of capital and credit through banking resources tended to become concentrated in the hands of fewer and fewer men.... Before long it could be said, indeed, that two rival banking groups no longer existed, but that one vast and harmonious banking power had taken their place.
THE ALDRICH-VREELAND ACT
The monetary contractions of 1879 and 1893 were handled by Wall Street fairly easily and without government intervention, but the crisis of 1907 pushed their resources close to the abyss. It became clear that two changes had to be made: all remnants of banking competition now had to be totally eliminated and replaced by a national cartel; and far greater sums of fiat money had to be made available to the banks to protect them from future runs by depositors. There was now no question that Congress would have to be brought in as a partner in order to use the power of government to accomplish these objectives. Kolko continues: The crisis of 1907, on the other hand, found the combined banking structure of New York inadequate to meet the challenge, and chastened any obstreperous financial powers who thought they might b u i l d their f o r t u n e s i n d e p e n d e n t l y of the entire banking community.... The nation had grown too large, banking had become too complex. Wall Street, humbled and almost alone, turned from its own resources to the national government.2
