Why Nations Fail: The Origins of Power, Prosperity, and Poverty (50 page)

He continued: “It should be as much the aim of those who seek for social betterment to rid the business world of crimes of cunning as to rid the entire body politic of crimes of violence.” His conclusion was that

Roosevelt proposed that Congress establish a federal agency with power to investigate the affairs of the great corporations and that, if necessary, a constitutional amendment could be used to create such an agency. By 1902 Roosevelt had used the Sherman Act to break up the Northern Securities Company, affecting the interests of J.P. Morgan, and subsequent suits had been brought against Du Pont, the
American Tobacco Company, and the Standard Oil Company. Roosevelt strengthened the Interstate Commerce Act with the Hepburn Act of 1906, which increased the powers of the Interstate Commerce Commission, particularly allowing it to inspect the financial accounts of railways and extending its authority into new spheres. Roosevelt’s successor, William Taft, prosecuted trusts even more assiduously, the high point of this being the breakup of the Standard Oil Company in 1911. Taft also promoted other important reforms, such as the introduction of a federal income tax, which came with the ratification of the Sixteenth Amendment in 1913.

The apogee of Progressive reforms came with the election of Woodrow Wilson in 1912. Wilson noted in his 1913 book,
The New Freedom
, “If monopoly persists, monopoly will always sit at the helm of government. I do not expect to see monopoly restrain itself. If there are men in this country big enough to own the government of the United States, they are going to own it.”

Wilson worked to pass the Clayton Antitrust Act in 1914, strengthening the Sherman Act, and he created the Federal Trade Commission, which enforced the Clayton Act. In addition, under the impetus of the investigation of the Pujo Committee, led by Louisiana congressman Arsene Pujo, into the “money trust,” the spread of monopoly into the financial industry, Wilson moved to increase regulation of the financial sector. In 1913 he created the Federal Reserve Board, which would regulate monopolistic activities in the financial sector.

The rise of Robber Barons and their monopoly trusts in the late nineteenth and early twentieth centuries underscores that, as we already emphasized in
chapter 3
, the presence of markets is not by itself a guarantee of inclusive institutions. Markets can be dominated by a few firms, charging exorbitant prices and blocking the entry of more efficient rivals and new technologies. Markets, left to their own devices, can cease to be inclusive, becoming increasingly dominated by the economically and politically powerful. Inclusive economic institutions require not just markets, but inclusive markets that create a level playing field and economic opportunities for the majority of the people. Widespread monopoly, backed by the political power of the elite, contradicts this. But the reaction to the monopoly trusts also illustrates
that when political institutions are inclusive, they create a countervailing force against movements away from inclusive markets. This is the virtuous circle in action. Inclusive economic institutions provide foundations upon which inclusive political institutions can flourish, while inclusive political institutions restrict deviations away from inclusive economic institutions. Trust busting in the United States, in contrast to what we have seen in Mexico (
this page
–
this page
), illustrates this facet of the virtuous circle. While there is no political body in Mexico restricting Carlos Slim’s monopoly, the Sherman and Clayton Acts have been used repeatedly in the United States over the past century to restrict trusts, monopolies, and cartels, and to ensure that markets remain inclusive.

The U.S. experience in the first half of the twentieth century also emphasizes the important role of free media in empowering broad segments of society and thus in the virtuous circle. In 1906 Roosevelt coined the term
muckraker
, based on a literary character, the man with the muckrake in Bunyan’s
Pilgrim’s Progress
, to describe what he regarded as intrusive journalism. The term stuck and came to symbolize journalists who were intrusively, but also effectively, exposing the excesses of Robber Barons as well as corruption in local and federal politics. Perhaps the most famous muckraker was Ida Tarbell, whose 1904 book,
History of the Standard Oil Company
, played a key role in moving public opinion against Rockefeller and his business interests, culminating in the breakup of Standard Oil in 1911. Another key muckraker was lawyer and author Louis Brandeis, who would later be named Supreme Court justice by President Wilson. Brandeis outlined a series of financial scandals in his book
Other People’s Money and How Bankers Use It
, and was highly influential on the Pujo Committee. The newspaper magnate William Randolph Hearst also played a salient role as muckraker. His serialization in his magazine
The Cosmopolitan
in 1906 of articles by David Graham Phillips, called “The Treason of the Senate,” galvanized the campaign to introduce direct elections for the Senate, another key Progressive reform that happened with the enactment of the Seventeenth Amendment to the U.S. constitution in 1913.

The muckrakers played a major role in inducing politicians to take action against the trusts. The Robber Barons hated the muckrakers,
but the political institutions of the United States made it impossible for them to stamp out and silence them. Inclusive political institutions allow a free media to flourish, and a free media, in turn, makes it more likely that threats against inclusive economic and political institutions will be widely known and resisted. In contrast, such freedom is impossible under extractive political institutions, under absolutism, or under dictatorships, which helps extractive regimes to prevent serious opposition from forming in the first place. The information that the free media provided was clearly key during the first half of the twentieth century in the United States. Without this information, the U.S. public would not have known the true extent of the power and abuses of the Robber Barons and would not have mobilized against their trusts.

Franklin D. Roosevelt, the Democratic Party candidate and cousin of Teddy Roosevelt, was elected president in 1932 in the midst of the Great Depression. He came to power with a popular mandate to implement an ambitious set of policies for combating the Great Depression. At the time of his inauguration in early 1933, one-quarter of the labor force was unemployed, with many thrown into poverty. Industrial production had fallen by over half since the Depression hit in 1929, and investment had collapsed. The policies Roosevelt proposed to counteract this situation were collectively known as the New Deal. Roosevelt had won a solid victory, with 57 percent of the popular vote, and the Democratic Party had majorities in both the Congress and Senate, enough to pass New Deal legislation. However, some of the legislation raised constitutional issues and ended up in the Supreme Court, where Roosevelt’s electoral mandate cut much less ice.

One of the key pillars of the New Deal was the National Industrial Recovery Act. Title I focused on industrial recovery. President Roosevelt and his team believed that restraining industrial competition, giving workers greater rights to form trade unions, and regulating working standards were crucial to the recovery effort. Title II established the Public Works Administration, whose infrastructure projects include such landmarks as the Thirtieth Street railroad station in
Philadelphia, the Triborough Bridge, the Grand Coulee Dam, and the Overseas Highway connecting Key West, Florida, with the mainland. President Roosevelt signed the bill into law on June 16, 1933, and the National Industrial Recovery Act was put into operation. However, it immediately faced challenges in the courts. On May 27, 1935, the Supreme Court unanimously ruled that Title I of the act was unconstitutional. Their verdict noted solemnly, “Extraordinary conditions may call for extraordinary remedies. But … extraordinary conditions do not create or enlarge constitutional power.”

Before the Court’s ruling came in, Roosevelt had moved to the next step of his agenda and had signed the Social Security Act, which introduced the modern welfare state into the United States: pensions at retirement, unemployment benefits, aid to families with dependent children, and some public health care and disability benefits. He also signed the National Labor Relations Act, which further strengthened the rights of workers to organize unions, engage in collective bargaining, and conduct strikes against their employers. These measures also faced challenges in the Supreme Court. As these were making their way through the judiciary, Roosevelt was reelected in 1936 with a strong mandate, receiving 61 percent of the popular vote.

With his popularity at record highs, Roosevelt had no intention of letting the Supreme Court derail more of his policy agenda. He laid out his plans in one of his regular Fireside Chats, which was broadcast live on the radio on March 9, 1937. He started by pointing out that in his first term, much-needed policies had only cleared the Supreme Court by a whisker. He went on:

Obviously, this should not be risked again. Roosevelt continued:

Roosevelt then pointed out that the U.S. Constitution had not actually endowed the Supreme Court with the right to challenge the constitutionality of legislation, but that it had assumed this role in 1803. At the time, Justice Bushrod Washington had stipulated that the Supreme Court should “presume in favor of [a law’s] validity until its violation of the Constitution is proved beyond all reasonable doubt.” Roosevelt then charged:

Roosevelt claimed that he had an electoral mandate to change this situation and that “after consideration of what reform to propose the only method which was clearly constitutional … was to infuse new blood into all our courts.” He also argued that the Supreme Court judges were overworked, and the load was just too much for the
older justices—who happened to be the ones striking down his legislation. He then proposed that all judges should face compulsory retirement at the age of seventy and that he should be allowed to appoint up to six new justices. This plan, which Roosevelt presented as the Judiciary Reorganization Bill, would have sufficed to remove the justices who had been appointed earlier by more conservative administrations and who had most strenuously opposed the New Deal.

Though Roosevelt skillfully tried to win popular support for the measure, opinion polls suggested that only about 40 percent of the population was in favor of the plan. Louis Brandeis was now a Supreme Court justice. Though Brandeis sympathized with much of Roosevelt’s legislation, he spoke against the president’s attempts to erode the power of the Supreme Court and his allegations that the justices were overworked. Roosevelt’s Democratic Party had large majorities in both houses of Congress. But the House of Representatives more or less refused to deal with Roosevelt’s bill. Roosevelt then tried the Senate. The bill was sent to the Senate Judiciary Committee, which then held highly contentious meetings, soliciting various opinions on the bill. They ultimately sent it back to the Senate floor with a negative report, arguing that the bill was a “needless, futile and utterly dangerous abandonment of constitutional principle … without precedent or justification.” The Senate voted 70 to 20 to send it back to committee to be rewritten. All the “court packing” elements were stripped away. Roosevelt would be unable to remove the constraints placed on his power by the Supreme Court. Even though Roosevelt’s powers remained constrained, there were compromises, and the Social Security and the National Labor Relations Acts were both ruled constitutional by the Court.

More important than the fate of these two acts was the general lesson from this episode. Inclusive political institutions not only check major deviations from inclusive economic institutions, but they also resist attempts to undermine their own continuation. It was in the immediate interests of the Democratic Congress and Senate to pack the court and ensure that all New Deal legislation survived. But in the same way that British political elites in the early eighteenth century understood that suspending the rule of law would endanger the gains
they had wrested from the monarchy, congressmen and senators understood that if the president could undermine the independence of the judiciary, then this would undermine the balance of power in the system that protected them from the president and ensured the continuity of pluralistic political institutions.