A Patriot's History of the United States: From Columbus's Great Discovery to the War on Terror (93 page)

Cleveland would have none of it. He had no reluctance to give legitimate pensioners what was due them, but he considered most of the claims an outrage. Congress had learned to enact special pension bills late on Friday nights—on one night alone the Senate enacted four hundred special pension grants. Worse, each “bill” required that Cleveland sign or veto it personally. This absorbed monumental amounts of the president’s time and energy. Cleveland had enough and vetoed as many as he could, finally delivering the death blow to the bogus pension system in 1887. His veto of the so-called Blair bill, which represented a massive expansion of federal benefits, was sustained. After that, a chastened Congress submitted no more pension legislation.

In 1888 the Republicans nominated Benjamin Harrison, the grandson of William Henry Harrison and the second of four pairs of family presidents (the Adamses, the Harrisons, the Roosevelts, and the Bushes). “Little Ben” stood five feet six inches tall, was strong yet chubby, and grew up on a farm. He attended Miami University in Ohio, the “Yale of the West,” then settled with his wife, Carrie, in Indianapolis. There he practiced law and worked a second job as a court crier that paid $2.50 a day. The couple had a son and daughter (a third child died in infancy), and Harrison made important political connections. When the Civil War came, Harrison was a colonel in the infantry, fighting at Atlanta and Nashville and earning a promotion to brigadier general. Returning as a war hero, Harrison nevertheless lost a race for the governorship of Indiana in 1876, but four years later he was elected by the state legislature to the U.S. Senate.

Garfield offered him a cabinet spot, but he declined because he had just taken his seat as a senator. From the floor of the upper house, he impressed the Republican hierarchy with his stinging criticisms of Cleveland. When James G. Blaine refused to be the Republican candidate in 1888, Harrison’s name came forward as having the prerequisite military and political experience.

Republican Interlude

Whereas Grover Cleveland had antagonized many Democrats in his first term, Harrison ran a remarkably error-free campaign. Running from his front porch in Indianapolis, where he granted interviews and spoke to the more than 300,000 people who came to see him, Harrison emphasized the tariff. As had been the case four years earlier, the margin of victory in 1888 was remarkably slim. For example, Harrison received only 2,300 more votes in his home state than had Cleveland, who lost Connecticut by 336 votes. In the end Cleveland learned the hard way that America is a republic, not a democracy: he won the popular vote, but Harrison became president with a majority in the electoral college (this also happened in 1824, 1876, and 2000).

The electoral situation in America was quite simple: the two parties geographically split the nation east of the Mississippi. Whereas Republicans could count on the votes of freedmen—a shrinking vote because of intimidation, literacy tests, and poll taxes in the South—the Democrats in the North drew support from city immigrants, debtor groups angry at hard money, and from labor. Cleveland had offended the second group of Democratic voters with his monetary policies, throwing a wild card into the deck. With this sectional division, from 1876 to 1896, the West, including parts of the Old Northwest as well as the new plains areas and Pacific states, became the fulcrum on which elections swung. Historian Paul Kleppner has pinned down the swing areas to specific counties within some of these states, and further identified the source of change as essentially religious, between Catholics and two variants of Lutherans.
⁸⁰
No doubt these ethnocultural factors existed, but probably they shaped, and were shaped by, other important views. The fact was, white Southerners wanted nothing to do with the party of emancipation, and freedmen and veterans of the Union Army would never vote for the Democrats. That put each election into the hands of farmers and immigrants who saw much to applaud and condemn in each party. Republicans still stood for the tariff and the gold standard, which seemed oppressive to low-income groups. Democrats wanted cheap money, which frightened eastern businessmen. Each party contained advocates of patronage reform. Thus, the elections were close, contested, and often came down to which candidate had the best party machine in key states on election day.

Harrison, therefore, entered the presidency as had many of his immediate predecessors—without a clear mandate. In 1889 the Republicans had a ten-seat advantage in the Senate and a bare twelve-seat majority in the House. Harrison’s cabinet—entirely Presbyterian, with four Missourians and several war heroes—was politically obscure. Worse, he had ignored the party bosses, touching off an immediate battle between Congress and the president over spoils. When considering John Hay, Lincoln’s private secretary, for an appointment, Harrison observed, “This would be a fine appointment,…but there isn’t any politics in it.”
⁸¹
Seeking to sustain the patronage reforms, Harrison placed Theodore Roosevelt on the Civil Service Commission, whereupon the New Yorker promptly irritated and aggravated his fellow members with his energetic but abrasive style. As president, Harrison hoped to restrain the growth of government. But his administration overall constituted a remarkable inversion of the parties’ positions. He signed the inflationary Sherman Silver Purchase Act and enthusiastically supported the Sherman Antitrust Act (both signed in July 1890). This was ironic, in that Grover Cleveland, Harrison’s Democratic opponent, essentially supported the gold standard and was more favorable toward business than Harrison. Yet neither bill’s passage came as a surprise.

Sherman’s antitrust legislation had overwhelming support (52 to 1 in the Senate, and passed without dissent in the House). The bill lacked specifics, which was common in state antitrust law and corporate regulation, but it played to the public’s demand that government “do something” about unfair business practices. Yet backers of the Sherman Act, with language prohibiting combinations “in restraint of trade” and its focus on the trust as a business organization, unwittingly placed more power than ever in the hands of big business. Since the railroad age, businesses had grown by attracting capital through sales of stocks. Multiplying the number of stockholder-owners, in turn, required that professional managers take over the operations of the companies. Obsessed with efficiency and cost control (which then meant profits), the managers looked for ways to essentially guarantee prices. They tried a number of unsuccessful forms, including pools, whereby competitors would jointly contribute to a member who agreed to maintain a higher price, but who lost money doing so, and territorial enforcement of markets, in which members would agree not to compete past certain geographic boundaries. Then there was the famous horizontal combination, which is the form of business most people associate with monopoly control. Under a horizontal combination a competitor seeks to eliminate all other firms in the field. Rockefeller’s Standard Oil was accused of acquiring competing refineries to achieve such a monopoly.

Unfortunately for the monopolists—but luckily for the public—none of these arrangements ever achieved anything but the most temporary gains. At the time that Rockefeller’s Standard Oil controlled upward of 90 percent of the refining capacity, oil prices were steadily falling. If there was a theoretical monopoly price to be gained, no company in the late 1800s had successfully demonstrated it in practice, and certainly none had capitalized on one through higher prices.
⁸²

Indeed, the best evidence that none of these arrangements worked is that firms had to constantly keep coming up with other gimmicks. One of the most hated was the trust company, the brainchild of Standard Oil attorney S.C.T. Dodd, who suggested using a standard legal fiduciary device to manage the property of another to trade stock in a voting trust. In a trust arrangement, a company creates a new business organization that exchanges shares of its trust certificates for shares in the stock of the acquired companies. Essentially, smaller businesses give 100 percent control of their company to a trust in return for trust certificates of equal value. The owners of any new firms the trust company acquires do not lose money, but do lose control. Standard Oil formed its trust in Ohio in 1879, and within three years forty companies had exchanged their stock for Standard Oil trust shares. It was all quite reasonable to Rockefeller. Soon, large-scale trusts existed in almost every manufacturing industry, including sugar, whiskey, paint, lead, and petroleum.

To legislators this apparatus seemed dishonest and shifty—a mere paper creation to hide control by “wealthy monopolists.”
⁸³
Congress thus felt compelled to pass the Sherman Act to constrain these entities, at which time corporations merely turned to another form of organization called a holding company, which acquired special chartering legislation from the state government (that many trusts lacked) allowing one company to hold stock in another. New Jersey liberalized its general incorporation laws in 1889 permitting companies to “hold” other companies, even if the “held” companies were located in other states. Within a decade, several companies established themselves in New Jersey, including the newly recapitalized Standard Oil.

Long before that, however, professional managers had already started to abandon the horizontal combination and the trust in favor of yet another, far more efficient and profitable structure, the vertical combination.
⁸⁴
Rather than concerning themselves with competitors, the vertical combinations focused exclusively on achieving efficiencies in their own products by acquiring sources of raw materials, transportation, warehousing, and sales. Standard Oil, for example, not only had its own oil in the ground, but also made its own barrels, refined the oil itself, had its own railroad cars and ships, and literally controlled the oil from the ground to its final form as refined kerosene. Similarly, Gustavus Swift, the meatpacker, owned his own cattle ranches, transportation networks, slaughterhouses, refrigerated railroad cars, and even wholesale meat distributors.
⁸⁵
Managers could take advantage of the top-to-bottom control to reduce costs and, above all, plan for the acquisition of new raw materials and factories.

In the 1890s, the Sherman Act was only marginally employed against corporations, but as it came into use, it drove firms out of the inefficient trusts and into the more efficient vertical combinations. With trusts prohibited, even those firms not inclined to adopt vertical combinations abandoned other forms of organization. Sherman, paradoxically, forced American business into an organizational structure that made it larger and more powerful than it otherwise would have been, funneling the corporation into the most efficient form it could possibly take, making the average industrial firm several times larger than if it had adopted either a horizontal combination or a trust structure. Thanks to Sherman, American industry embarked on the first great merger wave toward truly giant-sized companies. The most famous of these was Morgan’s reorganization of Carnegie Steel, which, when merged with John Warne Gates’s American Wire Company and other smaller businesses, became U.S. Steel, the world’s first billion-dollar corporation. Most of the mergers took place under the administration of McKinley, but it was the Sherman Act that had slammed shut alternative paths.
⁸⁶

Meanwhile, Sherman’s other bill, the Silver Purchase Act, was nearly fatal to the nation’s economy in Harrison’s tenure. Sherman authorized the government to purchase 4.5 million ounces of silver a month at the stipulated price of 16
¹
?
₂
to 1—not enough to ensure the inflation the silverites wanted, but just enough to turn the arbitragers loose. Over the subsequent three years the government purchased $147 million worth of silver, often paying for it in gold, bringing into play Gresham’s Law, which postulated that “bad money drives out good.” Prosilver forces set into motion a dynamic of arbitrage that would encourage speculators to exchange cheap silver for undervalued gold. Harrison would escape blame for the brunt of the damage—which occurred under the unfortunate Cleveland’s second term—but he had set those forces loose.

One of Harrison’s most successful programs involved his rebuilding of U.S. naval power. When Harrison took office, a series of modern steel cruisers had been authorized (in 1885) by Congress—the so-called A, B, C, D ships (
Atlanta
,
Boston
,
Chicago
, and
Dolphin
)—to supplement five medium-sized cruisers, two large cruisers, and two battleships. But at the time Harrison assumed office, only the
Atlanta
and
Boston
were seaworthy, and soon the nation was stunned by a major storm that devastated three ships, or 10 percent of the active fleet, including the
Trenton
, the navy’s newest vessel aside from the A, B, C, D ships. Brigadier General Benjamin Franklin Tracy, the secretary of the navy, took the initiative to reinvigorate the navy, beginning with support for the Naval War College and naming Alfred Thayer Mahan as its president. As soon as the
Chicago
became operational, Tracy had its squadron perform in several displays designed to raise public awareness and generate congressional support. Even so, the United States, with the new cruisers, would be, at best, the twelfth-ranked naval power in the world, behind “powerhouses” like Chile and Turkey!

Independent of the Department of the Navy, a commission called the Naval Policy Board had come to similar conclusions, advocating a navy that would rank second only to Great Britain’s. The result was the Naval Act of 1890, which authorized the
Indiana
,
Massachusetts
, and
Oregon
, all 10,000-ton battleships, supplemented with other large cruisers. To meet the new demand, the navy negotiated a contract with Carnegie Steel for armor plating. Although Congress did not fund every ship, by 1899, Harrison had jumped the U.S. Navy up to the sixth position in the world, behind the traditional European powers of Great Britain, France, Russia, Italy, and Germany. Within just a few more years, new construction programs would lift the American fleet up to the second spot—just behind Britain.