The Finance Curse. Nicholas Shaxson
It takes time, Tarbell noted, to crush men who are pursuing legitimate trade:
But one of Mr. Rockefeller’s most impressive characteristics is patience. He was like a general who, besieging a city surrounded by fortified hills, views from a balloon the whole great field, and sees how, this point taken, that must fall; this hill reached, that fort is commanded. And nothing was too small: the corner grocery in Browntown, the humble refining still on Oil Creek, the shortest private pipe line. Nothing, for little things grow.12
In the early days of Rockefeller’s business operations, corporations weren’t allowed to do business across state lines, but he had found a loophole. He brought all his different state corporations together under the ownership of a trust, a flexible and powerful mechanism of central control that could operate at a national level and in great secrecy. (This is why anti-monopoly laws and actions have been known as “antitrust” measures ever since.) Through his trust mechanism, Rockefeller soon controlled over 90 percent of the oil refined in the United States, extracting vast wealth from consumers and generating fountains of profit, which were funneled beyond the core business into railroads, banking, steel, copper, and more.13 If this reminds you of today’s Amazon, you’re on the right track. It is no coincidence that Rockefeller was America’s biggest monopolist and also its first billionaire—and that Amazon’s boss, Jeff Bezos, is the richest person in world history. Monopoly was, and still is, where the big money is.
Rockefeller was in fact just one of several robber barons dominating the American economic landscape in Veblen’s day. There were monopolies in beef, sugar, whiskey, shipping, railroads, steel, cotton, textiles, and furs, and the rulers of these fiefdoms amassed fortunes so great that their names (Rockefeller, Carnegie, Vanderbilt) still resonate today.
But one force eclipsed them all, a financial monopoly. In 1913, nearly a decade after Veblen published The Theory of Business Enterprise, a US congressional committee produced its now famous Money Trust Investigation, a report exposing a grand conspiracy of American business leaders to rig half the national economy. Rockefeller was implicated, but it was bigger than him or Standard Oil. The Money Trust documented a monstrous interlocking lattice of at least eighteen major financial corporations and more than three hundred crosscutting directorships and secret lines of control that governed much of industrial America and manipulated the financial clearinghouses and the New York Stock Exchange.14 It was based on a rogues’ charter known insidiously as “banking ethics,” by which the conspirators agreed not to compete with one another. Atop it all sat a banker, John Pierpont Morgan.
The report warned chillingly that there were forces more dangerous than monopoly in industry: the greater danger was monopoly in finance, control of the means by which credit was allocated to industry and across the economy. If you controlled credit, it warned, you controlled it all. “The acts of this inner group [have] been more destructive of competition than anything accomplished by the trusts, for they strike at the very vitals of potential competition in every industry that is under their protection,” it said, adding, “The arteries of credit [are] now clogged well-nigh to choking by the obstructions created through the control of these groups.” Finance doesn’t have quite the same brutal style or degree of control today, but as this book will show, it has gone a long way in this direction.
When the Money Trust report went public, national fury ensued. Political cartoonists drew octopuses with their tentacles wrapped around buildings, men in top hats grasping the globe, bankers sitting on sacks of money while the poor queued up to hand them their savings. Devils with pitchforks pranced with bags of cash. A scowling eight-armed J. P. Morgan cranked eight handles turning machinery inside eight banks; or he was a giant Pied Piper, leading great crowds in a merry dance into the wilderness. Louis Brandeis, the best-known lawyer of Veblen’s era, summarized the report’s findings with a perfectly aimed metaphor for the wealth extraction:
The goose that lays the golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by someone else’s goose. The investment bankers now enjoy that privilege. The dominant element in our financial oligarchy is the investment banker.… We must break the Money Trust or the Money Trust will break us.15
Brandeis pointed to something else too: a lesson that recurs again and again in the story of the finance curse. At the heart of all the extraction and predation there usually lies a genuinely useful function. The central problem isn’t finance but too much finance, the wrong kind of finance, and finance that is too powerful, unchecked by democracy.
Beyond monopolies, there were many other varieties of sabotage around in Veblen’s time, many of which were international in scope. One of the biggest, which the Money Trust Investigation didn’t even mention, also involved Morgan’s bank. This saga began in 1899, when William Cromwell, Morgan’s legal counsel, incorporated a new company, the Panama Canal Company of America. At the time, Panama was a province of Colombia and had a profitable railroad running across the narrow isthmus connecting North and South America. Cargo ships could unload on the Atlantic side, have their goods shipped by rail to the Pacific coast, and avoid sailing around the entire South American continent. President Theodore Roosevelt, in league with Morgan, armed and supported separatists who wanted to wrest Panama away from Colombia and get their hands on those lucrative rail transit fees. And if they could build a canal to replace the railroad, why, the profits would multiply. To cut a long conspiracy short, Panama won independence from Colombia, but only under effective US control. The Panama Canal opened in 1914, and the new country’s first official fiscal agent was J. P. Morgan. “Wall Street planned, financed and executed the entire independence of Panama,” summarized Ovidio Diaz Espino, a former Morgan lawyer who wrote a book about the affair entitled How Wall Street Created a Nation. This episode “brought down [the] Colombian government, created a new republic, shook the political foundations in Washington with corruption and gave birth to American imperialism in Latin America.”16
Essentially, Wall Street interests had harnessed their government’s military resources to build and operate a mighty tollbooth at the biggest choke point in one of the world’s great trade arteries. Communities of American financial toads soon became happily ensconced there, with the flies and spiders of Veblen’s imagination replaced by giant ships. In 1919, as Panama was taking the first steps in setting up its deregulated, ask-no-questions shipping registry, Veblen summarized the game, where the wealth extractors got their government to support them as if it were its patriotic duty:
In this international competition the machinery and policy of the state are in a peculiar degree drawn into the service of the larger business interests; so that, both in commerce and industrial enterprise, the business men of one nation are pitted against those of another and swing the forces of the state, legislative, diplomatic, and military, against one another in the strategic game of pecuniary advantage.17
This was sabotage, he said, appealingly wrapped in the flag. To help the national champions “compete” on a global stage, the common man must shoulder the burden and, in doing so, should be made to swell with patriotic pride.
Veblen wasn’t talking about Panama, but he might as well have been. And he identified what was then and remains today one of the most important and misunderstood themes of international finance: the “competitiveness” of nations. This term could mean many things, but Veblen understood that big banks and businesses loved to promote a particular meaning of the term, which I call the “competitiveness agenda.” Under this view, America is in some sort of giant global economic race, in which our biggest international firms must constantly be given subsidies—corporate tax cuts, deregulation, a free pass to let them build monopolies or abuse their American suppliers or employees, or whatever—in order that they can better compete in this race. If we don’t give them these handouts, these interests warn, they’ll run away to more “competitive” places like London, Hong Kong, or Geneva. I will show how this competitiveness agenda goes a long way toward explaining why some modern banks are too big to fail, why big bankers are too important to jail, why our schools aren’t getting funded, why your favorite local bookshop closed down, and why tax havens seem so hard to tackle. I’ll expose the fallacies,