A Few Scattered Notes, Observations, and Examples of Graphs and Diagrams in Teaching and Doing Economics/The Honest Broker

Robber Barons: Honest Broker/Hoisted from 1998

J. Bradford DeLong (1998): Robber Barons:

First draft October 13, 1997; second draft January 1, 1998.

I. Introduction

'Robber Barons': that was what U.S. political and economic commentator Matthew Josephson (1934) called the economic princes of his own day. Today we call them 'billionaires.' Our capitalist economy--any capitalist economy--throws up such enormous concentrations of wealth: those lucky enough to be in the right place at the right time, driven and smart enough to see particular economic opportunities and seize them, foresighted enough to have gathered a large share of the equity of a highly-profitable enterprise into their hands, and well-connected enough to fend off political attempts to curb their wealth (or well-connected enough to make political favors the foundation of their wealth).

Matthew Josephson called them 'Robber Barons'. He wanted readers to think back to their European history classes, back to thugs with spears on horses who did nothing save fight each other and loot merchant caravans that passed under the walls of their castles. He judged that their wealth was in no sense of their own creation, but was like a tax levied upon the productive workers and craftsmen of the American economy. Many others agreed: President Theodore Roosevelt--the Republican Roosevelt, president in the first decade of this century--spoke of the 'malefactors of great wealth' and embraced a public, political role for the government in 'anti-trust': controlling, curbing, and breaking up large private concentrations of economic power.

Their defenders--many bought and paid for, a few not--painted a different picture: the billionaires were examples of how America was a society of untrammeled opportunity, where people could rise to great heights of wealth and achievement on their industry and skill alone; they were public benefactors who built up their profitable enterprises out of a sense of obligation to the consumer; they were well-loved philanthropists; they were 'industrial statesmen.'

Over the past century and a half the American economy has been at times relatively open to, and at times closed to the ascension of 'billionaires.' Becoming a 'billionaire' has never been 'easy.' But it was next to impossible before 1870, or between 1929 and 1980. And at other times--between 1870 and 1929, or since 1980--there has been something about the American economy that opened roads to the accumulation of great wealth that were at other times closed.

Does it matter whether an economy is open to the accumulation of extraordinary amounts of private wealth? When the economy is more friendly to the creation of billionaires, is economic growth faster? Or slower? And what role does politics play? Are political forces generally hostile to great fortunes, or are they generally in partnership? And when the political system turns out to be corrupt--to serve as a committee for extracting wealth from the people and putting it into the pockets of the politically well-connected super-rich--what is to be done about it? What can be done to curb explicit and implicit corruption without also reducing the pressure in the engine of capital accumulation and economic growth?

These are big questions. This essay makes only a start at answering them.

After this introductory section, the second part of this essay reviews the economic history of America's great fortunes over the past hundred and fifty years. It tries to draw connections between the wealth of those at the very top of the wealth distribution, and wider measures of economic inequality and growth.

The third section of this essay focuses on the robber barons of a century ago. How did they make their money, by and large? The fourth section focuses on a few case studies in which politics--political influence and leverage--turned out to be more than usually important in creating and maintaining great fortunes.

The fifth and last section draws somewhat optimistic conclusions. If the presence of billionaires does not seem to materially accelerate economic growth, at least it does not significantly retard it--and it may reflect eras of structural change that lay the groundwork for subsequent rapid leaps of economic growth. If democratic politics withes to curb private accumulations of wealth, it can do so without materially affecting long-run rates of growth. There are cases in which wealth and political power work in partnership, and in which the government becomes a committee for the exploitation of the rest of society for the sake of the politically powerful. But even corrupt democratic governments are not that corrupt, and genuine public purposes are accomplished in the making of great fortunes.

Since this is a Carnegie Endowment publication, I should pause here for an aside: among the chief of the robber barons was Andrew Carnegie, the turn-of-the-last-century steelmaster who dominated American heavy industry and who subsequently established the Carnegie Endowment to promote world peace--to try to work toward a world in which Ministers of Foreign Affairs would cease to think of bombs and bullets and think, instead, of trade and dialogue. Like most of the robber barons, Carnegie was a mass of contradictions--as if he was not one but three or four different people at once.

There was the son of the Scottish peasant, who had been forced off the land to America when the landlords wanted to replace peasant farmers with grazing sheep and when the coming of the power loom to Britain had destroyed the livelihood of the perhaps 4% of the British population who wove thread into cloth by hand in their cottages--the so-called 'handloom weavers.' There was the extremely energetic and intelligent young-man-in-a-hurry in the U.S. telegraph and railroad industries, trying to impress his supervisor Thomas Scott, a high Pennsylvania Railroad executive, with his diligence and foresight.

There was the iron master who had the best grasp in America of what the best technologies for making iron and steel were going to be--and who had the (rare) sensibility to recognize where potential economies of scale were so large that the best business strategy was to build up capacity well ahead of demand and then use it by underselling all your competitors.

There was the union-buster who unleashed his lieutenant Henry Clay Frick to destroy the Amalgamated Iron and Steel Workers union's control over the Homestead, Pennsylvania steel plant: one of the bloodiest episodes in the already-bloody nineteenth century history of American labor relations.

There was the senior industrialist who threatened the financial capitalist J.P. Morgan with an extended price war that would cost Carnegie perhaps $100 million (a large sum, at that time: think of it as the equivalent of perhaps $8 billion today) but that would in all likelihood bankrupt the sprawling, less-efficient steel firms that Morgan had assembled--who threatened Morgan with this unless Morgan were to raise the money on Wall Street to buy Carnegie out. Morgan did so, and claimed that he had made Carnegie the richest man in the world.

And there was the philanthropist trying to figure out what to do with all his money--and deciding that the thing to do was to establish the Carnegie Endowment for International Peace, and to subsidize the building of libraries all across the United States. He was a man of great powers, of great flaws, of great benevolence, and great ruthlessness.

II. Wealth Concentration and 'Billionaires'

A. Economy-Wide Wealth Concentration

When the United States was founded in 1776 it was--Black slavery very much definitely aside--a relatively equal, and relatively free, society (see Jones, 1980). It was relatively equal because the indigenous population had not yet recovered from the wave of Eurasian diseases brought by Christopher Columbus, and they had no military technology to match that of the European settlers. So land was essentially free. And landlords--and rent--were unknown.

The United States was relatively equal because it was only relatively free. If you were white, the country was sparsely populated enough that anyone who did try to make you an 'indentured servant'--essentially a serf--soon found that he had to treat you like a free laborer, or see you leave town with no possibility of return.

But if your skin was anywhere near black, the presumption was that you were somebody's slave.


As best we can tell, the United States at its founding had about the same level of wealth concentration as in the mid-1970s, at the high tide of the redistributional push of the post-Great Depression social insurance state. Perhaps 18 percent of the wealth was held by the wealthiest one percent of households.

Between the Declaration of Independence and the end of America's Civil War in 1865 wealth concentration increased a little. On the one hand the slaves were freed (although their 'freedom' was a transition from being chattel property to being a despised and oppressed minority). On the other hand agricultural land located close to major transportation routes was no longer effectively free. We acquired landlords, and the first industrialists.

Between 1870 and 1900 the United States became an industrialized economy--the leading industrial nation in the world. And wealth became markedly more concentrated. We think that the share of national wealth held by the richest one percent of households peaked at around 45 percent sometime around 1900.

After 1900 the concentration of wealth began a slow decline. Wars--and the higher taxes and inflation that accompanied them--took a heavy toll of the financial wealth of the rich. Stock market booms (like the 1920s and the 1960s) saw wealth concentration take a step upward; but prolonged bear markets (like the 1930s and the 1970s) eroded wealth concentration. The coming of the social-democratic social insurance state eroded wealth concentration: near-universal education boosted the productivity and wages of those near the bottom of the pyramid, progressive income and estate taxes trimmed some wealth off the top, and explicit government wage policy--minimum wages, restrictions on connections between finance and industry, and support for union-centered collective bargaining--shifted the distribution of income and wealth toward labor without producing mammoth amounts of classical unemployment (see Lindert and Williamson, 1976).

Economists still argue over the extent to which the severe restrictions on immigration introduced in the 1920s diminished the supply of unskilled labor and so led to diminished wealth concentration (see O'Rourke and Williamson, forthcoming).

Whatever the causes, wealth concentration fell, and further in the 1960s as a result of the expansion of social democracy and in the 1970s as a result the collapse of the real value of the stock market and the inflation of the 1970s.

And whatever the causes, the period since the mid-1970s has seen wealth concentration in the United States increase more rapidly than ever before--even during the heyday of industrialization in the last decades of the nineteenth century. Aggregate measures of wealth concentration today are greater than at any time since the election of Franklin D. Roosevelt in the Great Depression, and are within striking distance of the peak in wealth concentration reached during the Gilded Age (see Wolff, 1994).

B. Billioniares

Overall shifts in wealth concentration are matched by changes in the wealth of those at the very top of the income distribution. Today we call those at the very top of the income distribution 'billionaires'--for their wealth is more than one billion dollars. According to Forbes Magazine's attempts to count, the year 1996 saw some 132 billionaires in America--and of the top twenty, at least four owed their wealth to Microsoft: the three Microsoft billionaires William Gates, Paul Allen, and Steven Ballmer, and Intel founder Gordon Moore whose wealth has been greatly multiplied by the synergies between Microsoft software and Intel microprocessors over the past two decades.

Generalize the idea of a 'billionaire': a billionaire in the past is someone whose estimated total wealth then was as large a multiple of average GDP per worker in the United States then as a billion dollars today is a multiple of average GDP per worker in the United States today. Note that this generalization arbitrarily ignores a number of issues. Let me mention one: perhaps we are more concerned not with wealth but with control. After the death of the elder J.P. Morgan, Standard Oil company president John D. Rockefeller reportedly remarked that Morgan--who had died with an estate worth (then) less than $100 million or so (the equivalent in relative income terms of perhaps $8 billion today)--was 'not even a very rich man' (see Carosso, 1987). And Morgan was not very rich, if you happened to be John D. Rockefeller. But during the panic of 1907 when all factions of New York's financial oligarchy were working together to try to keep the network of financial claims from collapsing into near-universal over-leveraged bankruptcy, Rockefeller and his people had done exactly what Morgan and his people had asked when they had asked them to do it (see Corey, 1930). Morgan's power appeared to vastly exceed his wealth.

Focusing on wealth relative to the median income, however, on this definition there are today in America five and a half times as many billionaires today as there were in 1982--132 compared to 23. And there were half again as many billionaires in 1982 as there had been in 1957--when it appears that there were 16. That was a low point. 1925 saw approximately 32 billionaires. 1918 saw approximately 30. And 1900 saw approximately 22.

Robber Barons

A generation before 1900 we find few. In 1865 there may have been two billionaires--William B. Astor (whose father John J. Astor had made a fortune in the fur export trade, and who had compounded it by investing in New York City real estate), and Jay Cooke (who had sold the bonds that had financed the United States government's successful suppression of the slaveholders' rebellion in the Civil War of 1861-65). But perhaps not.

A billion dollars today is the total economic product of 20,000 average workers in the United States. Not even the richest of the pre-Civil War southern slaveholders disposed of that much property. And probably William Astor and Jay Cooke did not, at least not at the end of the Civil War.

It is striking how closely numbers of 'billionaire' match shifts in aggregate wealth inequality: when the frequency of billionaires in the labor force is high, wealth concentration is high. A simple linear regression predicts that the frequency of billionaires would drop to zero should the share of wealth held by the top one percent drop to twenty percent or so--and, indeed, we find no billionaires back when wealth concentration was so low.

Economic historians try to account for the history of wealth concentration byf the changing dynamic of the supplies of factors of production and of the changing technologies of production. Their stories sound convincing. But the factors they appeal to are very different from those factors that lead to the appearance and disappearance of very great fortunes. Very great fortunes have three origins:

  • inheritance, plus a stock market boom.
  • persuading the government to do your enterprise a truly massive favor. being at the right place at the right time: creating an enterprise of truly enormous social utility--and thereafter both retaining the market power to turn a large chunk of that extra social utility into firm profits, and
  • retaining a sufficient ownership share and access to capital markets to turn capitalized firm profits into an enormous fortune.

These causes of immense wealth have nothing to do with the determinants of the relative supplies of skilled and unskilled workers, or with the technological requirements of production. It makes me think that the overall level of wealth concentration is much more a 'political' and a 'cultural' phenomenon than an 'economic' one: that we through our political systems and our attitudes have much more to do with the concentration of wealth than does the dance of factor supplies and technology-driven factor demands.

III. The Robber Barons of a Century Ago

A. The Robber Barons of 1900

Look at America's billonaires as they stood at the peak of wealth concentration--and the peak of the relative frequency of billionaires-- in approximately 1900. Nine out of the twenty-two fortunes were railroad fortunes: fortunes made constructing and operating the 200,000 miles of railroad track that were built to cover the United States in the nineteenth century. Three of the fortunes were inherited. Five were in finance--and in 1900 finance meant almost exclusively railroad finance.

Robber Barons

There were a few non-railroad fortunes: one ironmaster (Andrew Carnegie), a couple of department store owners, and stray fortunes derived from other industries. But you do not go too far wrong if you remember that the first wave of American billionaires' fortunes were railroad fortunes.

So how do we evaluate these railroad fortunes? What do we think of names like Leland Stanford, Colis Huntington, Jay Gould, and James J. Hill?

First, we think that they were very different people. James J. Hill was a superb engineer and manager. E.H. Harriman had extraordinary abilities to pick engineers to improve the operations of the Union Pacific Railroad. His friends said that E.H. Harriman (father of future U.S. Ambassador to the Soviet Union Averell Harriman) was honest and incorruptible.

His enemies had a different view. There was one stockholder's meeting at which E.H. Harriman, as chairman, made the surprise ruling that because the corporation laws of the state of Illinois did not recognize proxies, that the part of the corporation's bylaws which did recognize proxy votes was illegal and could not be applied. Hence the proxy votes of his clients that J.P. Morgan had brought to the meeting were invalid, and J.P. Morgan's candidates for the Board of Directors would not be elected (see Corey, 1930).

This is the second thing about the robber barons: they all were ruthless.

But everyone agreed that they would rather do business with E.H. Harriman than with Jay Gould, who never bothered to learn anything about railroad operations, costs, or technology. While Secretary of the Erie Railroad, Jay Gould refused to enter the shares that British investors had bought on the company's books--hence disenfranchising foreign investors. The Erie's stock price plummeted, as investors concluded that Jay Gould was paying the railroad's money into shell construction companies that Gould owned and were doing no work. Eventually Jay Gould mortgaged his other assets, bought up shares of the Erie, and announced his retirement from involvement in the railroad. The Erie's stock price jumped--investors rejoiced that Gould would not be around in the future to loot the railroad. But approximately one-fifth of the capitalized expected future value of not having to deal with Jay Gould in the future went straight into Gould's own pockets (see Adams, 1886; Adams, 1916).

And this is the third thing to note about the turn of the century robber barons: even though the base of their fortunes was the railroad industry, they were for the most part more manipulators of finance than builders of new track. Fortune came from the ability to acquire ownership of a profitable railroad and then to capitalize those profits by selling securities to the public. Fortune came from profiting from a shift--either upward or downward--in investors' perceptions of the railroad's future profits. It was the tight integration of industry with finance that made the turn of the twentieth century fortunes possible.

The fourth thing that stands out about the robber barons is how completely, totally corrupt they all were--or, rather, if we allow them to defend themselves, how completely and totally corrupt was the system in which they were embedded. As Californian Collis Huntington reportedly wrote in 1877, explaining why he was in Washington D.C. pouring bribe money out like water:

If you have to pay money [to a politician] to have the right thing done, is is only just and fair to do it.... If a [politician] has the power to do great evil and won't do right unless he is bribed to do it, I think... it is a man's duty to go up and bribe (see Josephson, 1934) ...

B. Early in the Twentieth Century

Between 1900 and 1930 the list of billionaires grows (from 22 to 30 or so). It loses its concentration around railroads and their financing. The industries in which the billionaires of 1918 made their fortunes are highly diverse: photography, retailing, chemicals, tobacco, farm machinery, automobiles, food processing, local municipal railroads, oil, steel, and finance.

Two things are worthy of note about the billionaires of 1918:

First, their industries are almost identical to those that Chandler (1982) studied in his book on the rise of the modern managerial corporation. They were all industries in which there was the potential for enormous economies of manufacturing scale through the application of technology. They were all industries in which attaining the volume of sales necessary to come anywhere close to realizing such economies of scale depended on the ability to sell to a national market. The railroad network had to be in place to allow the products to be shipped cheaply and quickly, and firms had to invest in building up a sales network to support nationwide distribution.

Robber Barons

In industry after industry Chandler finds the seeming paradox: near monopoly or near oligopoly (as larger competitors take advantage of economies of scale to drive out smaller ones), coupled with falling prices (as near-monopolists and oligopolists find their marginal cost curves falling as output expands).

The billionaires of 1918 or so come as close as we will ever find to being examples of situations in which enormous wealth comes from being in the right place at the right time--able to build large organizations to take advantage of hitherto unexploited economies of scale, and retaining large enough ownership stakes and access to the capital market to then transform expected future profits into present wealth.

Second, what turned these individuals into billionaires was Wall Street's willingness to buy their companies. In case after case--and this is where the financiers of 1918 got their billion dollar fortunes--the financier's job was to allow the founding entrepreneur to retire, to bring in a professional management to keep the business going, and to reassure those who are going to purchase the founding entrepreneur's ownership share that this is a prudent and worthwhile investment.

The jump in wealth of the founders of these lines of business was intimately tied up with the creation of a thick, well-functioning market for industrial securities. And that would turn out to be a source of weakness when Wall Street came under fire during the Great Depression.

C. Other People's Money

Many in America in the first thirty years of this century feared and hated the super-rich. Some feared and hated the super-rich because they thought that the rich corrupted the legislature. They were not completely wrong: Senator Aldrich from Rhode Island, for example, was called the 'Senator from Standard Oil.' Indeed, his descendants married the Standard Oil clan: recall that the American Vice President in the 1970s, Nelson A. Rockefeller, was Nelson Aldrich Rockefeller. People who wanted to compete with the Pennsylvania Railroad by building an alternative line from west to east across the Apallachian mountains somehow found that their requests for Pennsylvania corporation charters never emerged from the committees of the Pennsylvania legislature.

But rather more feared the super-rich not because they corrupted politics (or, in the view of the super-rich, were exploited by a politics that was already corrupt), but because they had power.

'They control the people through the people's own money.' So wrote left-wing crusader and future Supreme Court Justice Louis Brandeis in 1913, as he tried to mobilize Progressives for a political offensive to break the financial stranglehold that he saw John Pierpont Morgan, Morgan's partners, and their few peers hold over America at the turn of the century (see Brandeis, 1913). Every time in the first decade of the twentieth century that an American corporation had sought to raise more than $10,000,000 in capital, it had done so by hiring the services of and paying commissions to the partnership of J.P. Morgan & Co or one of three other, smaller investment banks.

If Morgan did not think he should help a corporation raise money, money would not be raised. The firm's expansion plans would not be carried out. The flow of investment in the United States was thus directed to and the expansion of industrial capacity took place in industries and firms that Morgan and his few peers wished to see expand, not elsewhere.

This was the reverse side of the role played by J.P. Morgan and his peers in helping entrepreneurs retire from their companies and capitalize their fortunes. To the extent that successful participation by a company in the market for industrial securities required that Morgan or one of his peers validate the company's prospects--and Morgan and his peers did all think alike--the Wall Street financial oligarchy did have a surprisingly large ability to direct American investment in large corporations around the time of World War I (see U.S. Congress, 1913).

The perspective from the high seats of the partnership of J.P. Morgan and Company, or from those of the other billionaires of 1920 whose wealth was founded upon dominant market positions in industries with increasing returns to scale was very different. In the view of Morgan's partners, they appeared to have power over the economy only because investors trusted their financial judgment. If they did anything other than fund those lines of business that promised the highest profit, they would soon find their ability to direct the flow of capital vanishing. In the view of any of the others, their wealth depended on their commitment to sell at the lowest price and in the highest volume. If they did anything else, they would soon find one of their competitors outstripping them in economies of scale, and they would soon vanish (see Carosso, 1987).

Their attitude was similar to that you find the Microsoft billionaires expressing today. 'Yes,' they say:

We have a dominant market position and enormous profits. But IBM had a dominant market position and enormous profits in 1988. Wang Laboratories had a dominant market position and enormous profits in 1983. If we do not pay close attention to the market, Novell or Netscape or Sun or some competitor now unknown could destroy our business in the next decade--even though we do have 90% of the market today.

But the Progressives did not believe that the billionaires were just the helpless puppets of market forces. In 1896 Democratic presidential candidate William Jennings Bryan called for the end to the crucifixion of the farmer by a gold standard working in the interests of Morgan and his fellow plutocrats. Fifteen years later Louis Brandeis warned Morgan partner Thomas Lamont--after whom Harvard University's main undergraduate library is named-that it was in fact in Morgan's interest to support the Progressive reform program. If Morgan's partners did not do so, Brandeis warned, the Progressives would recede. Their successors on the left wing of American politics would be real anarchists and real socialists (DeLong, 1991).

Louis Brandeis and company did not much care whether the billionaires of what they called the 'money trust' were in any sense economically efficient. In Brandeis's mind, they evil because their interests were large. Brandeis saw American development as depending on:

the freedom of the individual. The only way we are going to work out our problems in this country is to have the individualfree to work and to trade without the fear of some gigantic power threatening to engulf him every moment.

Thus size alone made a billionaire's fortune 'dangerous, highly dangerous.'

Given the heat of political hostility, it is somewhat surprising to me that the large fortunes lasted as long as they did. The so-called 'money trust' was subject to two major congressional investigations. The first took place in 1912-1913, and was conducted by a special House committee counseled by Samuel Untermyer (a former lawyer for the Rockefeller interests whom, it appears, was unhappy at least in part because he thought he had not received his proper share of the profits from the creation of the Amalgamated Copper Company; see U.S. Congress, 1913; Lawson, 1905). The second took place in 1932-1933, and was conducted by the Senate Banking Committee.

Populists from the American midwest found this set of issues a reliable one, and their senators took turns calling for political and economic changes to reduce the power exercised by the super-rich. (Note, however, that the son of one of these midwestern senators--the Charles Lindbergh who was the first to fly nonstrop across the Atlantic Ocean--married Anne Morrow, the daughter of J.P. Morgan and Company partner Dwight Morrow.)

The political debate was resolved only by the Great Depression. The presumed link between the stock market crash and the Depression left the securities industry without political defenders. The old guard of Progressives won during the 1930s what they had not been able to win in the three earlier decades.

Ironically, it was Republican president Herbert Hoover who triggered the process. Hoover thought that Wall Street speculators were prolonging the Depression and refusing to take steps to restore prosperity. He threatened investigations to persuade New York financiers to turn the corner around which he was sure prosperity waited. Thus, as Franklin D. Roosevelt put it, 'the money changers were cast down from their high place in the temple of our civilization.' The Depression's financial market reforms act broke the links between board membership, investment banking, and commercial banking-based management of asset portfolios that had marked American finance before 1930. Investment bankers could no longer be commercial bankers. Depositors' money could not be directly used to support the prices of newly-issued securities. Directorates could not be interlocked: that bankers could not be on the boards of directors of firms that were their clients.

D. The Drying-Up of the Flow of Billionaires

Whatever else Depression-era financial reforms did (and there are those who think it crippled the ability of Wall Street to channel finance to new corporations) and whatever else the New Deal did (and it did a lot to bring social democracy to the United States and to level the income distribution), one important--and intended--consequence was that thereafter it was next to impossible to become a billionaire.

Not that it was ever easy to become a billionaire, mind you, but the channels through which lucky, skilled, dedicated, and ruthless entrepreneurs had ascended were largely closed off.

Power to commit large sums of money to industrial or other enterprises no longer rested in the hands of Wall Street financiers: there was no possibility for someone who was basically on operating company executive Leland Stanford or a Charles Schwab raising money on Wall Street or otherwise by large-scale borrowing: to borrow on a large scale you had to be an investment banker divorced from manufacturing or construction operations, or a commercial banker divorced from both operations and from securities issues.

A Charles Schwab or a Leland Stanford could then direct the flow of finance to an enterprise that would provide him with an enormous fortune. But after 1933 an investment banker--a Douglas Dillon or a Prescott Bush--would have to turn the money raised over to professional operating managers because of the separation of ownership from control.

Thus between the late 1920s and the mid 1950s the number of billionaires in America dropped in half as the labor force grew by at least forty percent. Old billionaires dropped off the list; new ones were rarely added. If not for two industries--aluminum, and oil--the proportion of billionaires would have dropped much further and faster. Aluminum proved to be a source of enormous wealth because of aluminum's unique, lightweight role in the aircraft industry (especially the military aircraft industry) and because of the near-monopoly over Jamaican sources of ore held by Alcoa, the Aluminum Corporation of America. Oil proved to be a source of enormous wealth because there was a lot of oil in the ground, and a lot of people willing to make very risky bets on undeveloped Texas oilfields in the hope of becoming very rich.

Robber Barons

The hostility of Roosevelt's New Deal to massive private concentrations of economic power was effective: the flow of new billionaires dried up, as the links between finance and industry that they had used to climb to the heights of fortune were cut.

Did the hostility of America's political and economic environment to billionaires between 1930 and 1980 harm the American economy? Did it slow the rate of economic growth by discouraging entrepreneurship? As an economist--someone who believes that there are always tradeoffs--I would think 'yes.' I would think that there must have been a price paid by the closing off of the channels of financing for entrepreneurship through which E.H. Harriman, James J. Hill, George F. Baker, Louis Swift, George Eastman, and others had made their fortunes.

But if so, there are no signs of it in aggregate growth data. Taken together the 1930s and the 1940s were average decades as far as long-run economic growth is concerned. And the 1950s and 1960s were definitely above-average decades as well. There were worries that the absence of industrial princes was harming the American economy. Early in the 1930s Adolf Berle and Gardiner Means (1932) raised the possibility that the relative decline of investment banking meant that firm executives had become effectively independent. Executives could use the resources of the firm to rally support for their slates of candidates in annual meetings, while slates of potential executives opposed to current management had no effective channels to use to rally support.

Before 1929 a potential insurgent management team seeking a change in a firm's policy could have gone to talk to Morgan. If he found their arguments convincing the old management might soon be gone and old policies reversed. After 1945 they had to find some way of reaching widely-scattered individual shareholders and of convincing them that it was worth their while to support a change of control. This lack of long-term relationships between those investors who provided the money and the managers who governed the corporation frightened even John Maynard Keynes. But it is very hard to put a solid quantitative shape onto these fears: it is hard to see any quantitative evidence that the political backlash against the billionaires harmed the American economy.

E. The Return of the Super-Rich

The years since 1980 have seen the return of the super-rich in the United States. Some of this is due to the great stock market boom of the past decade and a half, which has carried many of those who inherited their wealth and whose ancestors had never achieved 'billionaire' status into the billionaire category. These are America's first true inherited aristocracy: the first generation of those with immense social and economic power who have inherited it.

More of the return of the super-rich is due to the blurring of the lines between financiers and corporate managers as the Depression-era order of American finance has fallen apart. It is once again possible to raise large sums of money and then direct them to suit one's own interest, rather than turning them over to salaried managers interested in perpetuating organizations.

And perhaps we can discern the rise of a new 'leading sector,' akin in the creation of many of America's present-day billionaires to the role played by the railroads in late nineteenth century America. Combine electronics, software, entertainment, and telecommunications, and you have what may become one single industry early in the next century--and an industry that is producing a very large share of the current crop of billionaires: a quarter or more.

Robber Barons

IV. Wealth and Politics

In the 1860s, on the western slope of California's Sierra Nevada mountain range, Colis Huntington and Leland Stanford won a government contract to build a railroad from San Francisco to the east. The government offered them, in incentives, $24 million in government financing and 9 million acres of land. They had then negotiated with the cities and towns of central California: if a town did not contribute funding to the railroad, the railroad would avoid that town--and it would in due course disappear.

It was claimed that Huntington, Stanford--then also Governor of California--and their partners had built the railroad without putting up a dime of their own money (see U.S. Congress, 1873).

By 1869 they had built the Central Pacific Railroad was built, from San Francisco out to Ogden, Utah, where it met the Union Pacific. The stockholders of the Central Pacific then discovered that the railroad was in horrible financial shape.

Some $79 million of stocks and bonds (including the $24 million from the government) had been floated, and the cash had been expended. $79 millon in cost of materials and payment for construction had been paid to the Central Pacific Credit and Finance Corporation. The Central Pacific Credit and Finance Corporation had spent some $50 million in wages and materials costs to build the railroad, and its shareholders had pocketed the remaining $30 million.

Who were these shareholders? Colis Huntington, Leland Stanford, and two of their other partners. Who were the Central Pacific executives who had approved this arrangement with the Credit and Finance Corporation? Colis Huntington, and Leland Stanford...

Stanford University, in Palo Alto, California, is today a very nice place indeed.

The financing of the other half of the United States's first transcontinental railroad line was even worse. The Union Pacific which ran from the Missouri River to meet the Huntington-Stanford line used the same plan on a larger scale: skim off the profits into a contstruction company owned by insiders, the Credit Mobilier, and leave the government and the other invetors with a railroad near bankruptcy.

To keep political support--to keep the government land grant and construction subsidies flowing--the officers of the Credit Mobilier used Massachusetts congressman Oakes Ames as an intermediary, to distribute stock not in the railroad but in the construction company to influential members of the legislature. In 1873 Oakes Ames panicked, thinking that he was about to be sacrificed to a public outraged at corruption in railroad subsidies. So he testified that he had given stock to: Representative James Brooks, legislative leader of the opposition Party; future President James Garfield, the Vice President, the Vice President elect, several of President Grant's cousins, perhaps thirty others.

The legislative uproar ended in the impeachment of Ames and Brooks--one member from each party--and with the agreement of the two major political parties to try their best to forget that the whole thing had ever happened (see U.S. Congress, 1873).

From this narrative it is easy to reach a judgment: the post-Civil War program providing subsidies to western railroads was a disaster, a way of transferring $100 million of the people's wealth to a few politically well-connected plutocrats. It would have been much better if the program had never been attempted.

Yet a closer look at the situation dissolves the certainties that underlie this judgment. For even with all the political influence that a judicious channeling of wealth back into the pockets of legislators could buy, and even with mammoth government subsidies to build long-distance railroads, their construction was still a near-run thing.

Consider the fate of the Northern Pacific Railroad.

Jay Cooke had been one of the principal financiers of the Civil War era: he and his staff of salesmen had found buyers for the bonds that enabled Abraham Lincoln to pay for the armies that marched down the Mississippi, through Georgia, and to Richmond--and that freed the slaves. During the war Cooke had become a close friend of the leading union general, Ulysses S. Grant, who was president from 1868 to 1876.

After the Civil War ended, Jay Cooke went into the business of railroad finance and construction. He proposed to build not through the deserts of the south, and not over the high Rocky Mountains and the Sierra Nevada (the route of the Central-Union Pacific line), but from the Great Lakes in the northern United States to the Pacific coast, roughly to Seattle.

Perhaps Jay Cooke did not get as lavish a deal in subsidies. Perhaps he and his executives were worse at supervising construction. They were certainly worse at bribing the Congress: the executives of the Northern Pacific seemed to think that Congress should vote subsidies primarily because they were in the public interest, and only secondarily because their palms had been greased.

In any event, by the middle of 1871 it was clear that the Northern Pacific needed more money. It was also clear that there was no point in having half a northern transcontinental railroad. No one lived between the Mississippi-Missouri valley in the middle of the country and the Pacific Coast.

As financiers tend to do when they run into trouble, Jay Cooke borrowed and bet again: he committed the borrowing capacity of his banking house to funding the railroad. But that was not enough. Revelations from the Credit Mobilier scandal helped scare off British investors in the Northern Pacific, who wondered if they would be left with a highly-leveraged and unprofitable railroad while the profits went into the hands of some insiders' construction company. In the fall of 1873 the Northern Pacific Railroad and Jay Cooke--who had been one of the richest men in the United States five years before--went bankrupt. The collapse of the Northern Pacific triggered the panic of 1873. The share of the non-agricultural labor force employed in railroad construction fell from 10% in 1873 to 2% three years later. The U.S. economy went into a depression, and did not emerge from depression until 1879.

Thus of the three groups--all with mammoth government subsidies, and all willing to pour bribe money out like water to keep the flow of subsidies coming--that tried to build transcontinental railroads in the 1860s and 1870s, one (the southern route) never got private financing, one (the two groups combining to build the central route) built a railroad line and together pocketed a spectacular $70 million in profits, and one (the northern route) went bankrupt, dragging the American economy into depression as a result.

And when the dust settled the United States did have a transcontinental railroad. You could travel from New York to San Francisco. And without the offer of mammoth government subsidies such railroad construction would not have happened for another two decades. It was not until the late 1880s and 1890s that transcontinental railroads were built without the offer of mammoth government subsidies.

So there is an alternative reading of the situation: that the subsidies promised were sufficient to call forth the desired investment, but not large enough to make riskless fortunes for politically well-connected entrepreneurs. (After all, the most politically well-connected entrepreneur, Jay Cooke, went bankrupt trying to build his transcontinental railroad.) That the bribes paid out to congressmen were an unfortunate consequence of the corruption of Gilded Age politics, but were only a small part of the capital gambled (and in the Northern Pacific's case, lost) on linking the Atlantic and Pacific coasts. And that the fact that legislators skimmed off a share of the profits for themselves does not mean that the policy of railroad construction was bad policy.

Now not every political interference in railroad building represented sound public policy. What was the sound public policy when judges beholden to Jay Gould refused to order him to allow British shareholders of the Erie Railroad to vote in corporate elections? The case of the transcontinental railroads, in which the policy of subsidization had a rationale is probably an exception (although it was the source of the largest of the railroad fortunes).

Nevertheless, it seems that--given the corruption of American politics at the time--allowing Colis Huntington and Leland Stanford to make their fortune (and to pay off congressmen) was an inescapable part of the price of building a transcontinental railroad in the 1860s. And to those who value the railroad and the economic development that such works of infrastructure made possible, this particular set of robber barons becomes harder to condemn.

As we move away from railroads, government plays a smaller and smaller role. Meat packers based in Chicago used federal government regulation as a competitive weapon, but as a defensive weapon to protect themselves from exclusion from eastern urban markets where local economic interests could dominate legislatures and exclude competition under color of regulating 'health and safety.' The Texas oil fortunes of the 1950s and 1960s depended upon the successful price-fixing strategies of the Texas Railroad Commission, which kept oil prices higher and thus the fortunes of the Hunts and Gettys far higher than would otherwise have been the case.

But once one leaves the railroads behind, government power seems to be exerted as often to try to curb the power of billionaires as to enhance it. Consider today: Microsoft's fortunes owe little to government actions to establish its market share and market power, yet the Justice Department's antitrust division is the principal threat to Microsoft's continued existence. Beyond the railroads, the principal dynamic appears to be populist American distrust of large fortunes, rather than political influence exerted by billionaires.


V. Tentative Conclusions

So what can Americans expect from their current crop of billionaires? Or rather what can they expect from the processes that have allowed their creation?

They should be extremely dubious about billionaires' social utility.

Their relative absence from the 1930s to the 1970s did not seem to harm economic growth in the United States. Their predecessors' claim to much of their wealth is, to see the least, dubious. And their large-scale presence was associated with the serious corruption of American politics.

Perhaps those who are going to be industrial statesmen have as reasonable a chance of truly being industrial statesmen in an environment hostile to billionaires, as in an environment friendly to their creation: at that level of operations, after all, money is just how people keep the score in their competitions against nature and against each other. Theodore N. Vail was a powerful industrial statesman in his role as head of the American telephone company, yet he did not become a billionaire (see DeLong, 1991).

On the other hand, their personal consumption is only an infinitesimal proportion of their total wealth. Much less of Andrew Carnegie's fortune from his steel mills went to his own personal consumption than has gone to his attempts to promote international peace, or to build libraries to increase literacy.

The child who in mid-nineteenth century Scotland painfully learned to read from the handful of books he had access to in his family's two-room cottage as they fell closer and closer to the edge of starvation--that child is visible in the Carnegie libraries that still stand in several hundred cities and towns in the United States, and is visible around us now.

Adam Smith wrote about the rich of his day that they:

only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only... the gratification of their own vain and insatiable desires, they [inevitably] divide with the poor the produce of all their improvements. They are [thus] led by an invisible hand to make nearly the same distribution of the necessaries of life [as] ...had the earth been divided into equal portions (Smith, 1776)...

He was not completely wrong.

So if there is a lesson, it is roughly as follows: Politics can put curbs on the accumulation of extraordinary amounts of wealth. And there is a very strong sense in which an unequal society is an ugly society. I like the distribution of wealth in the United States as it stood in 1975 much more than I like the relative contribution of wealth today. But would breaking up Microsoft five years ago have increased the pace of technological development in software? Probably not. And diminishing subsidies for railroad construction would not have given the United States a nation-spanning railroad network more quickly.

So there are still a lot of questions and few answers. At what level does corruption become intolerable and undermine the legitimacy of democracy? How large are the entrepreneurial benefits from the finance-industrial development nexus through which the truly astonishing fortunes are developed? To what extent are the Jay Goulds and Leland Stanfords embarrassing but tolerable side-effects of successful and broad economic development?

I know what the issues are. But I do not yet--not even for the late nineteenth- and early twentieth-century United States--feel like I have even a firm belief on what the answers will turn out to be.


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