The following is an excellent excerpt from the book “THE RICH DON’T ALWAYS WIN: The Forgotten Triumph Over Plutocracy That Created the American Middle Class, 1900-1970” written by Sam Pizzigati from Chapter One titled “Plutocracy Triumphant” on page 18 and I quote: “Congress had levied an income tax in 1894, a relatively minor nuisance that placed a 2 percent tax on all income over $4,000, an income level high enough at the time to ensure that only the richest 2 percent or so of Americans would face any income tax liability. But the Supreme Court took pity on those inconvenienced rich and deemed the new levy unconstitutional in 1895. By 1900, almost all federal revenue was coming from taxes that disproportionately burdened the poor. High “protective tariffs”–federal levies on imports—raised prices on basic consumer goods. Federal excise taxes raised prices on alcohol and tobacco, the only two daily “luxuries” working people could afford.
At the local level, all property owners, extremely rich ones included, did pay a property tax. But the traditional property tax only applied to real estate. Property in other forms went totally tax-free. Farmers faced property taxes on their land. Financiers faced no tax at all on the Wall Street securities that filled their safe-deposit boxes.
With no taxes on income and levies on only one category of property, grand fortunes in the new twentieth century could continue to multiply unencumbered and at the same dazzling pace that nation’s financially favored had first set during the Civil War years. The United States had hosted, of course, exceedingly wealthy people before the Civil War. The word “millionaire” traces all the way back to 1843, the year obituary writers needed a label to convey the immensity of the fortune banker and tobacco king Peter Lorillard had left behind. But few pre-Civil War deep pockets would ever amass much more than a single million. America’s real rich would not appear until after Fort Sumter.
The shooting war that began at Fort Sumter created almost overnight what America had never had: a huge national market for mass-produced goods. In 1861, at the first Battle of Bull Run, only thirty-seven thousand troops were wearing Union blue. All these soldiers needed to be outfitted and transported. New factories would do the outfitting. New railroad lines would do the transporting. By the war’s end, a broad array of new and expanded local businesses had the capacity to market goods well beyond their local borders.
This new reality ushered in far more lucrative opportunities for grand fortune than had ever existed. In America’s pre-Civil War marketplace, men of commerce faced limits on the quantity of product they could sell—and the quantity of profit they could reap. In the new national market the Civil War opened, quantities and profits seemed limitless. With a national market soon stretching from sea to shining sea, stupendous fortune awaited any “captains of industry” able to grab significant market share. And grab they did—by any means necessary. They grabbed from government. The railroad giants swallowed up 155 million acres of land grants from various public authorities. In Minnesota alone, these gifts would total an area twice the size of Massachusetts. They grabbed from workers, violently suppressing those who objected, sometimes with police, sometimes with private thugs. And they grabbed from any business competitor they met in the marketplace, in a relentless commercial cavalcade of industrial espionage, bribery, and cutthroat pricing.
All the grabbing would pay enormous dividends. In 1861, America’s grandest fortune topped out at about $15 million. By 1900, analysts were placing the value of John D. Rockefeller’s oil dynasty at somewhere between $300 and $400 million. Steel king Andrew Carnegie held a net worth of equal grandeur.
Inflation accounted for little of this huge surge in net worth. Prices hardly changed at all in the decades after the Civil War. But America did. And the Rockefellers and the Carnegies, by means fair and foul, exploited every opportunity that change created. In the new 1900s, America’s defeated and depleted ranks of reformers expected to see more of the same. More new markets. More corporate scrambling to dominate these markets. More swindles at worker, consumer, and taxpayer expense.
The biggest new market would soon emerge out of America’s urban explosion. Immigrants from foreign lands—and America’s farmlands—were packing the nation’s cities. By 1910, city dwellers had come to make up nearly half the nation’s population. An incredible one-tenth of the entire nation lived within the city limits of just three cities alone, New York, Philadelphia, and Chicago. All of America’s newly overstuffed cities, big and small alike, needed to move and warm and light their ever-denser populations. Private corporations rushed in to deliver these services. Municipalities showered down franchises worth hundreds of millions of dollars for street railways, gas lines, electricity, and telephones. In some cities, companies bid honestly against each other to win the lucrative franchises. In most, honesty would not be among the bidding criteria. Private utility companies passed politicians kickbacks. Politicians passed utilities monopoly pricing power—and signed franchise agreements that locked down exorbitant phone and gas and light rates for years to come.
“In no other way,” historian Otis Pease would later note, “can wealth be obtained so easily.”
Well, maybe one other way: insurance.
American families on the farm had always had their land to fall back on when times turned hard. They could raise their own food and get by without much cash. In rural America, “store-bought” bread—or clothes, for that matter—had always been novelties. In America’s rapidly growing cities, working families had no safety net beyond their paychecks. If those paychecks stopped coming, the results could be catastrophic since government did nothing to help average Americans make up for the loss of a job or, even worse, the sudden loss of a loved one. Into that void raced a massive new life insurance industry.
Small businessmen and those Americans fortunate enough to have a regular salary bought “whole life” policies that guaranteed their families a sense of security should they die unexpectedly. And should they live, the cash value these whole life policies built up over time could provide welcome and badly needed income for retirement. Average American workers couldn’t take advantage of this whole life insurance. They couldn’t afford the annual or quarterly premiums that whole life policies required. For these workers, insurance companies had a different product, “term life” policies that would continue in effect only as long as policyholders kept paying the tiny weekly premiums, as low as twenty-five cents per week. But workers who lost their jobs couldn’t afford even that quarter. They would lose their coverage and have absolutely nothing to show for their previous premium payments, since term life policies built up no cash value. Only one in twelve of the insurance industry’s term life policies ever had to pay a benefit.
Overall, forty cents of every premium dollar the insurance companies collected went into insurance company salaries, commissions, and stock dividends. By 1905, the nation’s ninety “chartered legal reserve insurance firms” held three times as much in assets as the nation’s over five thousand banks, and the industry’s three largest insurers—the Equitable, the Mutual, and New York Life—held almost half the industry’s asset base. The big three’s top executives were riding a veritable money machine. The Mutual’s president spent $12,000, the equivalent of more than a quarter million today, on a single office rug.
A new breed of journalists–”muckrakers,” as they came to be called—would chronicle these sorts of depredations as the early 1900s unfolded, exhaustively illustrating “the methods of the spoliators engaged in perpetual schemes of deception and plunder.” The great French novelist Honore de Balzac had once opined that a crime lurked behind every great fortune. Muckraker tales would confirm his suspicion. America’s rich, “these devotees to the Faith of Greed,” muckraking author William Vickroy Marshall thundered in 1909, “are in the eyes of the moral law, if not in that of the criminal law, villains a hundredfold more perfidious and deserving of punishment than are the most bloodthirsty anarchists or howling bomb throwers.”
That same year, Gustavus Myers, a journalist famed for his expose of the New York Tammany Hall political ring, produced a massive three-volume industry-by-industry compendium of this moral and legal criminality, with mind-numbing detail that aimed to explain the “accelerated concentration of immense wealth.” Americans now found pressing down so heavily upon them. But America’s immensely wealthy, other more subtle observers realized, hadn’t just broken the law. They had changed the law, rewritten the rules that govern how America’s capitalist economy operates—and, with that rewriting opened the door to a ferocious amassing of wealth that dwarfed the thievery of the post-Civil War robber-baron years.
The businesses the robber barons created had typically operated as closely held corporations or partnerships. In effect, the founders of these companies owned the entire business, sometimes with family, friends, and close associates. If these companies needed money, notes financial historian Lawrence Mitchell, “they dipped into their earnings, went to the bank, or sold bonds.” Few of them sold stock in their enterprises to raise capital. New York’s stock market played a distinctly second-tier role in this “founder capitalism.”
That would suddenly change in the1890s. In a few short years, as Lawrence Mitchell observes, the stock market evolved from a “disruptive game, played by a few professionals and thrill-seeking amateurs that from time to time erupted into a major frenzy,” into American capitalism’s new “genetic material.” American corporations, as originally constituted in the decades after the Civil War, manufactured products and offered services. To prosper, they needed to sell more of what they made and brought to market. The new corporation that leaped onto the scene in the late 1890s existed, by contrast, to sell shares of stock, not products—stock, explains Mitchell, “that would make its promoter and financiers rich.”
None of this would have been possible without changes in America’s economic rules. Traditional corporate law had prohibited one corporation from buying and holding stock in another. In 1889, New Jersey enacted legislation that invited corporations to buy and hold as much stock in other companies as they pleased. By 1896, companies could do even more: They could use their own stock to buy up other companies. These stock swaps, notes historian Mitchell, left “the matter of price entirely within the discretion of corporate directors,” a subtle and incredibly lucrative alteration.
In earlier times, any enterprise issuing shares of stock had to take into account the actual hard value of the enterprise’s assets, in much the same way that borrowers have traditionally ha oto present collateral when they go after a bank loan. If a borrower wants $10,000, the traditional banker will want to see collateral worth that same $10,000 in case the borrower defaults on the loan. The new corporate order that New Jersey introduced severed this link between real assets and share value. Wheelers and dealers of companies could do their own asset valuing, and they had, as Mitchell points out, “almost irresistible incentives to put high values on the assets they were buying.”
“The more they valued their assets, the higher the amount of capital they could justify and the more stock they could issue,” he explains. “The more stock they could issue, the more stock they could take for themselves. And the more they could take for themselves, the more they could sell on the market for cash.”
These wheelers and dealers only needed one other piece in place to realize their windfalls: a stock market flush with cash. And that would come in 1896 with McKinley’s White House triumph. The elimination of those pesky Populists from the political scene sent a surge of confidence throughout Wall Street. Interest rates dropped. Investors could now much more cheaply access what would come to be called “other people’s money.” Still more investible cash would come from the growing global demand for US grain. Higher prices for American agricultural commodities nurtured new strata of wealthy investors looking for investment outlets. Wall Street’s finest would graciously provide them. In 1897, they began underwriting a gigantic merger wave that would sweep the economy.
The sweeper-in-chief would be J. Pierpont Morgan, Wall Street’s most powerful financier. Morgan had begun his career in high finance with $5 million and a transatlantic network of business contacts that his banker father had left him. By the end of 1901, the younger Morgan had combined under his new US Steel—the plants, the mines, the railroads, and all the rest—held a hard value of $676 million. Morgan “capitalized” the entire enterprise at $1.4 billion, over twice that amount. He created for investors, in effect, over $700 million out of thin air. For his own investment banking operation, Morgan took 1.3 million shares in US Steel as a fee for putting the giant steel combination together—and then unloaded those shares onto the stock market for a sweet $62.5 million, clearing the equivalent of about $1.65 billion in today’s dollars.
Giant “trusts” like US Steel would soon be rising up all across America’s economic landscape. DuPont held over 70 percent of the chemical market, International Harvester the same mastery over farm machinery. The “trusts,” one 1905 report concluded, held a fifth of the nation’s wealth, with no more than sixty men, analysts estimated, controlling this entire vast block of power. Five years into the new century, the great merger wave had washed away over 2,200 independent companies. The same wave left behind a host of colossal individual fortunes. Andrew Carnegie sold his steel businesses into US Steel in 1901 and retired from active business life with $226 million from the sale, enough to make him, at least for the moment, the richest man in the world.”
(SAM PIZZIGATI PORTRAYED EXACTLY WHAT HAPPENED IN THE LATE 1800s AND EARLY 1900s. TRUE, IN HISTORY, THE RICH DON’T ALWAYS WIN BECAUSE OF PEOPLE LIKE PRESIDENT TEDDY ROOSEVELT, WHO, WHEN HE GOT TO BE PRESIDENT, BROKE UP THE BIG CORPORATE MONOPOLIES, SUCH AS STANDARD OIL. THIS WAS PORTRAYED IN AN EXCELLENT SERIES ON PBS RECENTLY TITLED “THE ROOSEVELTS” WHICH PROFILED THEODORE, FRANKLIN AND ELEANOR ROOSEVELT. THE SMALL SEGMENT I’M PORTRAYING OUT OF THIS EXCELLENT BOOK COMPARES JUST EXACTLY WITH WHAT TOOK PLACE IN THE PBS SERIES WRITTEN BY KEN BURNS. AND HOPEFULLY, AGAIN WE CAN COME UP WITH A PRESIDENT, SUCH AS A TEDDY OR FRANKLIN ROOSEVELT, TO SAVE OUR COUNTRY.
LaVern Isely, Overtaxed Independent Middle Class Taxpayer and Public Citizen and AARP Members