WEBVTT

NOTE The Decline of Laissez-Faire

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Here we saw a situation where it seemed to be an ideal setup for a cartel. We had three railroads going in a key area from Chicago to Omaha, where the Union Pacific had its eastern terminus.

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There were three railroads, two of which were owned by the same guy. So you had something like that.

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And these two guys then got together and formed a cartel and said, okay, we'll cut the shipments, we'll raise the freight rates, and the Union Pacific won't be able to do anything about it, and we suck.

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And we saw, it started in 1870, we saw that even under these ideal situations, the cartel was smashed.

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What happened, to repeat, is that Union Pacific began to look around for ways of getting around

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this and they finally put together or discovered there's another Burlington system that's

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been all the way down to St. Louis and up and dealt with them and thereby breaking the

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cartel, even though of course it was a longer route, but since these three railroads are

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undercut the whole cartel. So on a free market a cartel does not work, cannot work even in

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a situation when you have only a couple of railroads, even in a seemingly ideal situation

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for cartellists. The same thing happened with the big four, big five, so-called trunk lines.

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The trunk lines were the, I think I've mentioned already but I'll just repeat it, so-called

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The Trump lines were basically the basic lines to Chicago or from Chicago to the Eastern

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seaboard.

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In other words, there were originally four competing railroads, the New York Central

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which went to Buffalo and then Albany and down to New York City, the Erie Railroad which

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I think went to Ohio or something like that, and the Pennsylvania Rail which went to Philadelphia,

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note that Philadelphia and New York City are competing for mid-East-West trade, and the

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Baltimore and Ohio, the last one going to Baltimore, B&O, and I think the Baltimore

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Ohio was the last one to be built, at least four. I think it was built 1874. I think it

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was the final building of B&O. So all these railroads competed, and they tried to get together

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and have a cartel. And they would, first of all, it took them a long time to organize.

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I mentioned before, each one wanted to have a different pricing system. New York Central

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had an easier grade. They wanted to do it by grades or whatever. So finally they got

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together and they make some kind of quota system. In other words, they agree on the

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The Chunk Line Cartel System, the thing that's called the Seaboard Agreement, and they say all right, here's what we'll do, we'll have a, don't forget, thousands, literally thousands of rates, all sorts of things, they have a very complex system here, they decide to have a quarter system, they'll have a, one time they had a quarter system, Erie will take one third of the business, and New York Central one third, Pennsylvania a quarter, and B&O ten percent, something like that,

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and then they have to have some sort of internal policing agency to regulate this.

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So they had a guy, they set up a whole association, because it was not illegal then, a whole association

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to regulate this, to run it, have representatives, a whole internal bureaucracy.

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They picked a guy who was a German engineer, a railroad engineer, came over, he became

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a professional cartelist, his name was Albert Fink, and he wound up as the head of a whole

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and a whole bunch of railroad cartel associations in the south and the east and the west later

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on and he became a professional railroad cartelist and his job was to try to police the agreements

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and try to make sure that nobody cheats and all that sort of stuff and there's also put

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together, helping these four people put together was J.P. Morgan and company, Drexel Morgan

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which now becomes, since the panic of 1873 became the big investment banker, Morgan was

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He was heavily invested in railroads and underwriting railroads and he gets all these guys together

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to arrive at the cartel.

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So you have his partner Anthony Drexel, still a big name in Philadelphia, still a big name

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in Wall Street, and J.P. Morgan himself, who was the son of a British banker who also had

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important connections.

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He didn't start off on the ground up, he started off as a wealthy and important banker, English

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banker father named Junius Morgan.

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Pretty soon Morgan became the senior partner here, became the dominant force.

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So Morgan and Drexel, they get these guys, they whip them into shape, okay, let's have

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a cartel, great, great.

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But it's very difficult, you have to agree on a quota, they always wanted to change the

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quota.

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If you have a quota system, you're in a business or in a railroad, next year when the cartel

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agreements last for a year or two, you want to change the quota, now I can have a more

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efficient system, I've got a better product, I've got a better machine, why should I be

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I was already stuck with a damn quota that I was engineered into signing two years ago.

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You're trying to reopen the quota system and get a larger quota.

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Constant fights among the railroads themselves, between the railroads, or any other business,

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any kind of business, you're trying to have a cartel agreement, there's a constant argument

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about quotas.

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Because everybody wants to produce more, every firm wants to produce more, every railroad

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wants to ship more, and you're always kicking against the quota, no, I should have more

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of a quota because I've got a better machine now, I've got a better product, I'm entitled

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to a better quota.

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I said, no, no, you're not. So at any rate, you have endless bickering and endless opportunities

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for the whole system to collapse, for the whole quota system to collapse and recrimination.

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At any rate, what would happen? They sign the quota, they have the agreement, and then

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would go bust, and they'd be cheating and whatever. And literally, the system only lasts

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for a year. The 1877 pool seaboard agreement lasted for about six months, and bingo, it

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collapses again. They have another quota. They reorganize the quotas again. It's almost

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So it's like new summit agreements, you know, and actually six months later the whole thing

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collapsed.

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In the case of the trunk lines, something else happened, namely because of the increased

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profits, because of the expected increased profits of the cartel, a new railroad developed,

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a new trunk line, a grand, I mentioned already, but it's called a grand trunk, which goes

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from Chicago to Boston through Canada, around Canada.

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And it wasn't part of any agreement.

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What do you do with this crummy grand trunk?

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Also, the grant fund was inefficiently managed, they were constantly cutting rates, they had

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nothing to lose in a sense, they were constantly on the edge of bankruptcy.

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You have to realize another thing about bankruptcy.

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Most people think, I'll come back to this again later, because most people think, for

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example, it's easy to get another firm out of business, let's say you have a big business

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and you have a smaller business, smaller firm, it's easy to force the other guy out, you

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undercut the rate of a price war, you go down to almost zero, the other firm goes bankrupt

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And then you raise the price. It doesn't work that way. Because even if you do that, the

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other firm goes bankrupt, the bankrupt plant does not disappear. It doesn't go up in a

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whiff of smoke. It's still there. If you raise the price and your profits go up again, somebody

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else buys the bankrupt firm's assets and comes in with almost no cost. A great position undercuts

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a bigger firm again. Just because you go bankrupt doesn't mean the plant disappears. It's still

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there. If it's bankrupt, you can buy it for a song. You're in new firms and business again

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and it's still competing once again, and this is what happens, a constant attempt to establish

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this kind of a cartel, a constant attempt, constantly going bust, so the Grand Trunk comes

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in and all bets are off and they, and of course they want, but when a new cartel firm always

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says, okay, cut us into the, give us a quota system, they can't do that, they already think

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they're not producing enough, they're not shipping enough, they can't get it, they can't

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strip their own quota by 10% and make room for the Grand Trunk, so the whole thing collapses

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The same thing happened on the Western Railroad, they try to have a cartel, usually Fink is

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the head of it, and again it doesn't work, and finally Fink says, he makes a statement

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as early as 1876, after a few years' experience with this, he says, he thinks about this and

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he says, quote, whether this cooperation can be secured, meaning a cartel, by voluntary

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Reaction of the transportation companies is doubtful.

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Governmental supervision and authority may be required to some extent to accomplish the

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object in view.

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And as he keeps going, he keeps more and more of this position.

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We've got to have the government to enforce the cartel.

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Cartels won't work on the free market.

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And since he's in favor of the cartels, he says, we have to have governmental action,

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state and then federal.

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See, state is okay, but states only are interested in state, as well as railroads that go throughout

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the whole country.

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You can't really do much in a state action.

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So you start having state commissions by the 1850s and 60s, and what he says is this,

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by 1879 he works out a whole proposal, I think, he says, what we need is a federal

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law, a federal commission of course to regulate it, doing the following thing, so somehow

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to outlaw railroad rate discrimination.

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By discrimination of course it's a fancy word for saying, changes in rates, cutting

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Paying a rate, a rebate, charging less for long haul than short haul because, you know,

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you have a lower fixed cost per unit and you're having a longer ride.

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This is another word, these are the way you compete.

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Railroads compete by just quote discriminating on a car, by giving discounts for a longer

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ride, giving discounts for a fuller car instead of having to load up a car, a railroad car

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So, and talk a lot about compulsory publicity, see it sounds democratic, in other words you

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put it in such a way, you sucker in the public and it's thinking you're doing something in

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favor of competition.

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We want publicity.

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All these guys in one cartel saying we don't want full regulation, we don't want the railroad

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commission to set rates, we want them to have compulsory publicity so the public will know

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what's going on.

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The public doesn't have to know what's going on, they don't need to know the internal processes

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of the corporation.

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What they really meant was they want every railroad to know what their competitors are

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doing so they can enforce, it wouldn't be any secret price cutting, they can enforce

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a cartel agreement.

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You also wanted a federal commission to enforce it, okay, and to arbitrate, and also to ratify,

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to have the railroads get together and make decisions about rates and have the government enforce it.

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Government commission ratifying rates, ratifying agreements, rate agreements.

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This is basically what happens, this is precisely, this plan of things, proposed in May 1879,

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was precisely what the government did in 1887, passing the Interstate Commerce Act, putting

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in the Interstate Commerce Commission, 1886, I guess 1887 they set it up, precisely what

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they did.

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The first government regulatory commission in the country was in railroads, it was passed

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in 1886, the Interstate Commerce Act, and it was enforced by putting an Interstate Commerce

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Commerce Commission, and of course there are many forces in favor of the Interstate Commerce

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Act, guerrilla regulation, ICC, which I think is going to go out of existence, I think there's

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a drive on how to eliminate the ICC, I can't believe it, that it might actually happen,

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for a hundred years of messing everything up, at any rate, the, yeah, that's for that,

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The civil aeronautics board has now disappeared at the end of last year, there is no more civil aeronautics board.

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There is a little bit of rate regulation in the FAA but not much.

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Basically we have a free market now in airlines and in trucks, we don't have it for railroads yet.

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But there's been a big deregulation move since the end of the last two years of the Carter administration, into the Reagan administration.

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So we now have a, the reason why there is, by the way, they found out after a hundred years that it wasn't working, to such an extent the railroads were all going bankrupt.

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And the airlines were going in bad shape. And so they finally realized the game is up.

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After a hundred years of mess ups, I'll go into, I actually can go into airlines a little bit, but the procedure is the same.

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In other words, the procedure is, try to keep out competition, and you do it in the name

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of monopoly.

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How do you do it?

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I mean, in the name of competition.

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The airlines get together, let's say, and this happened in the mid-30s, 1930s in the

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airlines.

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The object is to keep out competition, so you do it, cut the supply curve to the left,

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keeping out competitors, assigning, in the case of airlines, they actually assign routes,

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you know, it's very recently.

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It set up the Civil Aeronautics Board, CAB, which by the way has nothing to do with safety,

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that's the FAA, which is still in existence, and Civil Aeronautics Board, which fixed the

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rates at a very high level by the way and kept an assigned rationed route.

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In other words, they said, for example, the Boston-New York route has to go to Eastern

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Airlines and that's it.

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Nobody else.

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In other words, they granted monopoly routes to specific airlines.

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As a matter of fact, in the old days, Pan Am had a total monopoly of the entire Pacific

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area, no other American airline could fly in the Pacific.

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I think Pan Am was a Republican airline, I think the United was a Democratic or something.

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Early Republican years, I think they set up a total Pan Am monopoly, which was finally

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broken after a while.

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But the main thing is, they assigned routes, and nobody else could compete.

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If you competed, you were tossed out, it was illegal, and you had a, the CAB issued certificates

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of Convenience and Necessity, allowing people to fly in that route.

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Now originally what happened was, there of course were a lot of small airlines, and the

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small airlines used to be, used to compete a lot, and the first thing the CAB did, they

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said, well, you are not permitted to fly scheduled, in other words, schedule is important, you

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have a timetable, and the schedule says you will take off at 10 a.m., right, for Chicago

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Small airlines are not permitted to do it. They're not permitted to have a schedule.

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They're only permitted to fly when they fill up a certain route.

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In other words, you went to take a small airline, and you didn't know when you're taking off.

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Authority, of course, is a tremendous competitive disadvantage to small airlines.

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There was a lovable asset called Trans-American Airlines there, as I remember.

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Now you have small airlines, by now I mean before the recent deregulation,

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but they're only permitted to fly on small routes.

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In other words, Air Wisconsin permitted a flight from Chicago to Appleton, who no major

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airline wants to fly to Appleton, it's a one-horse town, so they permitted a small airline to

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be a feeder line.

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They did not permit small airlines to fly from New York, Chicago, New York, Washington,

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those are the key routes, New York to Los Angeles.

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So these small airlines used to fly on the major routes.

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First thing that happened was they were not permitted a schedule, no timetables were permitted.

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But even so, even as a so-called non-sched, non-scheduled airline, they still out-competed.

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What they did was this.

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In those days, it means up through the 1950s, there was no such thing as coaching and first

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class.

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Everything was first class.

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Airlines were extremely expensive.

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You really had to be almost a millionaire to fly from Los Angeles.

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So what the trans-America and these other one-horse airlines did was they simply charged

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half the fee.

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The ancestor of the beginning of the so-called no-frills movement. No-frills was to this

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extent. For example, there used to be cheap airlines that flew to Europe, but they fly

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to Luxembourg. They fly from Iceland and New York, they fly to, not New York, they fly

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to some dump in New Hampshire, some little field in New Hampshire, to Iceland and then

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Luxembourg and it'd be about half the price of the regular flights. So, it's true they

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The reason they were not thrilled is such an extent that, for example, they used to weigh

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you along with a luggage, kind of humiliating for us fat people, in other words, they have

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a maximum weight for the person plus his or her luggage.

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Well, all right, it's your choice as a consumer, you take a little bit of humiliation for half

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the price or not.

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My wife once took an airline from Los Angeles, New York, a small airline, not only was she

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The Theory of Money and Credit

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to give you a feeling of great confidence, but it got there and it was a half-faire.

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So finally, all the CA bidders, they just outlawed them, just some early one, they just

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put all these long-skate airlines out of business.

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But by that time, this force, the competition of these small airlines forced the major airlines

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to go to start a little coach thing, you know, to cut their fares in half or coach, and that

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was the beginning of the first-class coach thing, because as I said before that, everything

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was first-class.

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You know, you had to be a millionaire or be on an expensive counter force to get the flying

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And then the whole thing changed because of the heroic competition of these small semi-illegal airlines.

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They're always on the brink of illegality.

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And so finally, but then what happened was you have, at one point by the way, since the rates were fixed,

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began to have competition in quality so that you have, if you can't compete in price, you compete in other things.

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So you have, remember one time, we still have a very strong international cartel in Europe.

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of the European flights, the flight from London to Paris is almost more expensive than flying

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from New York to London because of the tight intergovernmental cartel fixing all the rates,

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keeping them very high.

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So at one point, let's say if you can't compete in price, you should compete in quality, they

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started giving luxurious food.

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So then the goddamn international cartel, if I can remember the name, I think IATA,

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the International Airlines Authority or something, issued a decree that no airline traveling

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in Europe can serve anything except sandwiches and you couldn't serve real food. It's part

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of a cartel. So what the individual airlines began to do was undercut this. They used to

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serve the entire beef bourguignon, except they put a piece of bread on it and they called

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it an open sandwich. There's always ways. It shows you economic history is a constant

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fight between the market and the government. The government's constantly trying to screw

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things up. The market's trying to evade the restrictions and serve the consumers. So this

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This is, again, a beautiful example of that in the airlines.

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What finally happened is that the, after 50 years of this, the airlines got so inefficient

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that they're so monopolistic.

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First of all, as the costs go up, second of all, the salaries get did up, so the pilots

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are making enormous, pilots and stewardesses are making enormous amount of money, way above

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the market level because they're all getting pushy, monopolistic jobs, so to speak, and

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the airlines wound up not really making any money because they were so inefficient, so

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So bureaucratic.

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Then when a deregulation movement came along in the late 1970s, they sent out a howl at

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it, maybe we should have deregulation.

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And so the airlines sort of reluctantly went along with it.

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And what finally, what happened as a result of deregulation was a whole shift in the industry

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and of course much better service and lower prices and all the rest of it.

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Some of the airlines went busted because they couldn't adjust to the new pre-marking conditions,

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others prospered.

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People have expressed, of course, a beautiful example, and those girls, again, you find

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and lousy service in the sense that you never know when you're taking it off but much cheaper.

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It weighs two things.

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I have a colleague at this university who I shall remain nameless and protect the guilty

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who was a big Marxist and his life as an airline stewardess, some note, he was against deregulation

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because he said, and for a proper economic reason he said, geez, if there's deregulation

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Her salary is going to go down. It was a monopoly fact, so to speak, and these airlines are going to go down. Of course, that's exactly what happened.

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At any rate, you'd think it's far removed from the railroads, but it's the same damn thing. It's the same principle, just applied again in a different form.

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The railroads, it took a little longer for this to happen. The airlines started with the big five or something, but basically the same principles have worked.

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The use of the government in the name of the common good, public welfare, all the rest

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of the general name of humanity and democracy and whatever other names you can think of,

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putting in a law in order to cartelize the system and put in by the railroads themselves

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or by the airlines themselves.

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In the case of the ICC, sure, some farmers are in favor of it, some shippers are in favor

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of it, but they acknowledge the railroads are the main force behind it and they acknowledge

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afterwards the shippers and farmers and railroads, gee, we're worse off now than we were before,

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the rates are higher.

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which of course they should have been able to predict, Morgan was trying to raise the

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rates.

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When the ICC kind of came in, the Interstate Commerce Commission, they started maneuvering,

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they started establishing rates, usually by ratifying cartels, they get the trade associations

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together, they set the rates.

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They set the rates at exactly where, in other words, the rates are such and such, they're

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always going down, remember, Morgan was trying to get the rates to, let's say, here.

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The ICC came in, they fixed the rates up, pushed them up to exactly where Morgan had

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one of them, and had failed to do it because of the free market action.

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In other words, the use of the railroads, using the government, in the name of competition

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and democracy and whatever other nonsense you can think of, using the government to

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cartelize the system.

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In other words, using the government to cartelize the industry where they couldn't establish

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a cartel price in the free market.

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This is the essence of the current system, by the way, the essence of the welfare state,

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The essence of all government regulation, in fact this whole course is really a process

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by demonstrating this in different areas, that the welfare state, the government, the

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mixed economy, whatever you want to call it, is a system by which big business groups establish

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cartels, use the government to establish a cartel and call it competition, democracy,

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whatever.

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That's essentially the essence of the situation.

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If you go down the list, as Coco points out in his book, Railroads and Regulations, interested

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and looking at it more deeply, the one area he doesn't talk about in the Tri-Associate

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Conservatives is in the railroads because he has a special book on that, if you go through

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this thing, if you look at the, most people think that big business is always against

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government regulation, it's not true, if you go through the hearings and you find out what

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these guys are in favor of, the hearings before Congress, the governor, the railroad officials

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almost to a man were in favor of these bills, of course they were different bills, the jockeying

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for Power.

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The House bill, the Senate bill, all sorts of maneuvering within the system.

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That's not really very important, but the key is that they all want a government regulation,

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they all want a race to go up, they all want an outlaw secret rebounding, they all want

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an outlaw of price discrimination, the whole bit.

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And because they realize this is what the situation was, and there's only a couple of

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railroad people with the no-no-shouldn't-should-be-free competition, a small minority.

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All the others were in favor of this new system of government control.

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Before I get to that further, I just want to talk about one of my heroes in this whole

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setup.

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One of my heroes, I already said, is James J. Hill, who actually built the Transcontinental

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Railroad without government subsidy, the Great Northern, and outcompeted Northern Pacific,

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which had lots of subsidies.

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Another one of my heroes, a guy named J. Gould, there's a more of a biography of Gould by

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Julius Groszczynski, a long, very interesting biography if you're interested in this, called

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J. Gould. Groszczynski, by the way, wrote another book on the Iowa pool, if you're interested

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in that, he wrote a small book, definitive work on the Iowa pool. Anyway, Gould was a

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He was a great character, he was not, his forte was not building great railroads, he wasn't cross-conscious, he wasn't a great manager or anything like that.

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He had one aim in life, his aim was to bust the cartel, he was known as a rate buster, he was hated by all the other railroad people.

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He'd buy a railroad, he'd immediately break the agreement, he'd immediately start secret price cutting all the other stuff, and he made a lot of money that way.

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because you see here's the situation economically, going a little bit of economic theory which is important to understand this, every firm faces an elastic demand curve and it was every firm, individual firm, you cut the price, you'll increase your sales at such an extent your total revenue will go up, for example if Wonder Bread were cut from a dollar a loaf, 60 cents a loaf and all the other bread prices remain the same, that's the key, they'd make a lot of money because everybody would shift from Pepperidge Farm

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The Wondered Bread. Every firm has an elastic demand curve. As a matter of fact we can prove

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in economic theory that every firm must have an elastic demand curve. On the other hand,

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the demand curve for the industry is much less elastic. In some cases it will be inelastic

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like this, the demand curve for industry. So that means, this is a setup for a cartel,

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that means if you can organize a cartel, wonder bread prices, if you cut wonder bread prices

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you can pick up a lot of revenue. If you cut all the bread prices you probably wouldn't

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So, the idea of the cartel is this, if the demand curve of the firm is elastic, if the

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demand curve of the industry is quite inelastic, then if you can organize it, you can cut the

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production from here to here, raise the price in such a way that total revenue will increase,

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you can then parcel out the increases to the different firms.

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In other words, say you have 10 firms in the industry, if you can get everybody to increase

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The idea is to try to, so what Jay Gould would do, he would buy a railroad, and he would

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and start going down as elastic as a man carver, picking up all these great sales and making enormous profits.

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Boy was he hated. It's very much like unionists hate strikebreakers, called them scabs, because their unions are trying to raise the wage rate, keep other employees out.

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The people they hate the most are not the employers, but the non-union people who take the jobs of the strikers.

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Same way, people in other manufacturers or other railroad people hate most other railroad men or other manufacturers who break the cartel agreement.

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That was Gould's function. He looked for a good high profit place. He figured out the high profits were due to an agreement. He'd nip in there and buy the railroad and undercut them.

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Magnificent. He was called the Disturber of the Peace because he competed and his whole career was out of breaking rate agreements of this sort.

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He'd go in, he'd buy a railroad, undercut, smash the agreement, smash the cartel and clean up.

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He did it when he was in charge of Union Pacific. He bought Union Pacific during the 1870s, did it there.

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And of course, in the long run, he benefited the railroads because he meant that they had to compete, they had to lower their costs.

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If the price goes down, the price is cut, it means that they have to shape up, lower their costs, get rid of waste and that sort of stuff.

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But of course, they didn't like to be shaped up in that way, as you can imagine.

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And he was a great character, hated by everybody, consumers didn't appreciate him either, they

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didn't understand what was going on, of course they liked the late cuts, they didn't understand

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that he was different from the other so-called Robert Barons.

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And look at Gould, he was again a self-made man, he fit the image of Hill, also Carnegie

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and Rockefeller later on, these people were all born with nothing, no capital, he was a

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He was, his parents were quite poor, born in upstate New York, he was short, five foot

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tall, gagooled, short and thin, of course everybody was shorter in that period, but he

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thought he was unusually short, didn't have an average of five foot, this is a height theory

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of history I keep coming up with here.

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He was self-taught before he didn't go to college, none of these guys went to college,

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by the way, it's another thing, whole college nonsense, he didn't have, in the United States

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in that period, very few people went to college, and the people didn't seem to suffer from

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not going to college.

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They started working at the age of 12 or whatever it was, and by the age of 20 they could be

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millionaires.

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The rest of the people were slogging away to go to college.

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I'm not knocking college for a say, you have to realize there's another side of this picture.

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You waste a lot of time in college.

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He was a self-taught surveyor, he started as a railroad surveyor, and he started speculating,

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He was frail also, he was half-dead most of the time, and he was a great corporate financier.

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He saw the rates, you know, he started maneuvering with that, he plowed back profits, he was

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cool, detached, emotionless, all that sort of stuff, he was a little stereotype, he was

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a great guy, I love him, he benefited consumers, he benefited the industry, and he made a lot

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of enemies along the way, I'll bless him.

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Well, this is, I think I've done this before too, the point is that the, that the, every

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firm faces an elastic demand curve, okay, huh, yeah, okay, right, right, demand for

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the industry is less elastic, can be very inelastic, depends on the conditions of the

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Industry.

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By the way, the demand curve here is simply price equal, price times quantity is total

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revenue.

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So if you cut the price, you have an elastic demand curve, the quantity will go up much

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more than price four when you have an increase in total revenue.

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If you have an inelastic demand curve, you cut the price, the total revenue will go down.

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Quantity only goes up a little bit.

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So what I'm saying is, if you have this very high price, the cartel price, each firm, they

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can cut the demand curve, they can make an enormous amount of money, if they can go down

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their firm demand curve, in other words, if they can cut the price and the other guy doesn't

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find out about it, they can pick up an enormous amount of money and they can do that for six

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months if they keep it quiet.

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It just eventually forces the competitors to find out about it and there's mutual recrimination

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and hatred and the whole cartel goes bust.

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So, that's essentially what it is. The graph will be explaining that.

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Anyway, so this is, the Railroad Commissions begin in the state level, they begin in the,

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I think the first commission was Massachusetts, and the drive-in comes from the National Commission.

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The first bill, the House bill, the first bill submitted to Congress was written by

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the attorney for one of the top railroads.

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Matter of fact, one of the things we'll see later with oil, the standard oil was getting

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a lot of discounts from railroads because they were having a big oil business and therefore

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since they had a bigger quantity they were getting bigger discounts.

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A lot of the smaller oil companies wanted to have a railroad cartel in order to screw

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standard oil.

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So you got together with a railroad attorney, and in Pennsylvania you had to drive for railroad

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commissions, state railroad commissions, to raise the rate, to cartelize, with the railroads

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of course behind it, plus some of the small oil people in one of the, to put the screws

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to San Antonio.

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So you had different interests on the part of the shippers, but the railroad was almost

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unanimously in favor of a cartel.

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They had the two bills and three bills and all that, and a lot of jockeying for victory, et cetera, and finally in 1886, 1887, they passed the Interstate Commerce Act, which outlawed discrimination, the same thing as Fink had really proposed, it outlawed rebates, it had compulsory publicity, the whole bit, it turned out the enforcement procedures weren't super,

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Anyway, that was their first attempt, and they set up the Interstate Commerce Commission.

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One of the things the railroads didn't like is they outlawed cartel pools which were not

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part of the process of the commission, so the railroads tried to eliminate that, but

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basically the railroads all loved it.

406
00:34:54.880 --> 00:35:01.440
When the Interstate Commerce Bill was passed in 1887, the railroad magazines loved it,

407
00:35:01.440 --> 00:35:08.360
the Railroad Gazette and Railway Review, which are the two major railroad magazines, praised

408
00:35:08.360 --> 00:35:13.160
These are the highlights, this is great, so forth and so on.

409
00:35:13.160 --> 00:35:14.160
Then the question is, who should be a commissioner?

410
00:35:14.160 --> 00:35:17.720
Of course, if you have something like this, in order for the railroad to really run it,

411
00:35:17.720 --> 00:35:21.520
they had to control the commission in all these situations.

412
00:35:21.520 --> 00:35:27.720
And this, by the way, I might have said this before, but I'll repeat it.

413
00:35:27.720 --> 00:35:30.680
This is counter to the usual liberal, what we call the Ralph Nader myth.

414
00:35:30.680 --> 00:35:36.080
The Ralph Nader myth is that these commissions were originally in favor of lowering prices,

415
00:35:36.080 --> 00:35:39.680
and lowering rates, and they were taken over by the industry later, they were dominated

416
00:35:39.680 --> 00:35:43.560
by the industry after 20 or 30 years, but originally it had a golden age situation,

417
00:35:43.560 --> 00:35:48.720
originally it was pro-competition, anti-monopoly, a lot of nonsense, but those were written

418
00:35:48.720 --> 00:35:52.280
by the railroads, lobbied for by the railroads, and staffed from the very beginning by the

419
00:35:52.280 --> 00:35:53.280
railroads interests.

420
00:35:53.280 --> 00:36:03.080
For example, by the way, the major person, the chairman of the Interstate Commerce Commission,

421
00:36:03.080 --> 00:36:15.600
The First Commission, 1887, an distinguished judge, Thomas McIntyre Cooley, who was unfortunately

422
00:36:15.600 --> 00:36:20.200
pictured by most historians as being a great laissez-faire advocate.

423
00:36:20.200 --> 00:36:26.880
He might have been a laissez-faire advocate except in railroad.

424
00:36:26.880 --> 00:36:34.900
He was, of course, it's true he was a judge of the Michigan Supreme Court, he was Chief

425
00:36:34.900 --> 00:36:37.560
Justice of the Michigan Supreme Court, he was Dean of the University of Michigan Law

426
00:36:37.560 --> 00:36:38.560
School.

427
00:36:38.560 --> 00:36:44.000
He was also, however, a railroad pool member, he was a railroad pool arbitrator, so like

428
00:36:44.000 --> 00:36:48.280
Fink, he was one of Fink's, I mean, Fink was not the only professional railroad pool

429
00:36:48.280 --> 00:36:52.800
person, he was also Cooley.

430
00:36:52.800 --> 00:36:57.680
and he was an old arbitrator, paid our assistance to think in many of his pools, he was a railroad

431
00:36:57.680 --> 00:37:03.440
lawyer and he was a very pro-cartel, pro-pool.

432
00:37:03.440 --> 00:37:11.720
Other members of the ICC, the first ICC were, well one guy was an old Democratic Congress

433
00:37:11.720 --> 00:37:17.520
hack, he was unimportant, named Morrison, another guy was Walter Bragg who was formerly

434
00:37:17.520 --> 00:37:47.520
The Alabama Railroad Commission, in other words, Alabama Railroad Cartelist, a guy named Schoenmaker, Schoenmaker I guess you could ask it, which was a former railroad attorney, and a guy named Walker, was a railroad person, so much of a railroad person, he wound up after he left the commission, he wound up as chairman of the board of the Atchison Topeka in Santa Fe, it's one of the biggest railroads in the country.

435
00:37:47.520 --> 00:38:02.160
The idea was the ICC would not set rates directly, they would help the railroad to set the rates

436
00:38:02.160 --> 00:38:06.360
and outlaw discrimination and all the rest of it.

437
00:38:06.360 --> 00:38:10.480
So Cooley is one person that's focused on, another guy is one of my particular pet peeves,

438
00:38:10.480 --> 00:38:13.520
because I don't like the type, I guess.

439
00:38:13.520 --> 00:38:19.160
Charles Francis Adams, Jr. was a Boston Brahmin, a distinguished member of the Adams family,

440
00:38:19.160 --> 00:38:30.160
not an Indian Brahmin, the Bostonians are kind of an interesting group, they're all interconnected,

441
00:38:30.160 --> 00:38:35.120
some elite, power elite, people who are families of about half a dozen, maybe a dozen families

442
00:38:35.120 --> 00:38:40.520
all been interconnected since the 17th century, the Lees, the Adams, the Higginsons, the Cabots,

443
00:38:40.520 --> 00:38:46.240
The Lodges, The Lowells. There was a famous jingle when I was growing up, something to

444
00:38:46.240 --> 00:38:52.320
the effect that, ah, Boston, the land of the bean and the cod, where the Lowells talk only

445
00:38:52.320 --> 00:38:58.520
to Cabots and the Cabots talk only to God. And it's sort of that sort of attitude. Adams

446
00:38:58.520 --> 00:39:03.800
was always, the Adams family was always sneering at commerce and manufacturing things, sort

447
00:39:03.800 --> 00:39:10.640
of the Low-Type and Unaristocratic, Adams himself was a great big advocate of cartels

448
00:39:10.640 --> 00:39:11.640
and railroad commissions.

449
00:39:11.640 --> 00:39:18.840
As a matter of fact, he said when the Interstate Commerce Commission Act was passed, he said

450
00:39:18.840 --> 00:39:23.400
it should be rigidly and literally enforced, every provision should be rigidly and literally

451
00:39:23.400 --> 00:39:24.880
enforced.

452
00:39:24.880 --> 00:39:29.320
He became the first Massachusetts railroad commissioner, and he then became, when the

453
00:39:29.320 --> 00:39:32.520
Interstate Commerce Act was passed, he was chairman of the board of Union Pacific Railroad.

454
00:39:32.520 --> 00:39:38.240
So here's a guy, you see, who was not only a pretend aristocrat, always balayaking about

455
00:39:38.240 --> 00:39:42.000
the evils of commerce and industry, here he is, head of the Union Pacific Railroad and

456
00:39:42.000 --> 00:39:47.520
a big advocate of forces, let's say, of government-enforced cartels.

457
00:39:47.520 --> 00:39:54.520
The next question to ask is, how come, oh, by the way, after the Interstate Commerce

458
00:39:54.520 --> 00:39:58.240
Act was passed, they still couldn't enforce, then the Interstate Commerce Commission tried

459
00:39:58.240 --> 00:40:01.120
to establish the cartel through government action, they still weren't very successful

460
00:40:01.120 --> 00:40:02.120
at it.

461
00:40:02.120 --> 00:40:32.120
The railroad industry is so vast, I think we're still having rates going busted, even cartels are going busted, even with the government, even with the ICC, enforcing fixed pools, enforcing final enforcement rights, there's going to be competition, there's going to be rates busting, there's going to be new railroads coming in and so the railroads kept calling for more and more enforcement and over the years they kept tightening the Interstate Commerce Act, Hepburn Act, all these acts which kind of improve the enforcement, increase the enforcement to try to outlaw competition.

462
00:40:32.120 --> 00:40:39.520
So the market was still successful, undercutting, even with the ICC, trying to use the power

463
00:40:39.520 --> 00:40:44.320
of the Federal Government to enforce Sphinx quotas, it still wasn't very successful.

464
00:40:44.320 --> 00:40:48.200
But it's successful enough to sort of screw up the industry over the years, no question

465
00:40:48.200 --> 00:40:53.600
about that.

466
00:40:53.600 --> 00:40:56.720
The shippers finally said, well, gee, we're worse off now than when the act was before

467
00:40:56.720 --> 00:40:57.720
the act was passed.

468
00:40:57.720 --> 00:41:01.000
We find out rates are going up instead of going down, and they were eukaryotic, they

469
00:41:01.000 --> 00:41:03.000
I didn't understand the situation.

470
00:41:03.000 --> 00:41:06.280
The next question to ask here is, which we'll ask next time,

471
00:41:06.280 --> 00:41:08.420
how come the Interstate Commerce Act was passed

472
00:41:08.420 --> 00:41:10.920
during the first democratic administration

473
00:41:10.920 --> 00:41:13.320
since the Civil War, the Cleveland administration?

474
00:41:14.700 --> 00:41:17.040
What you have to realize is that the,

475
00:41:17.040 --> 00:41:19.800
most historians used to talk about the period

476
00:41:19.800 --> 00:41:24.800
from 1865 to 1912 as being totally Republican-dominated,

477
00:41:25.280 --> 00:41:27.040
was not Republican-dominated, was very close.

478
00:41:27.040 --> 00:41:29.000
The election was very close.

479
00:41:29.000 --> 00:41:32.360
In 1876, the Democrats really won the election.

480
00:41:32.360 --> 00:41:34.420
The election, Samuel Tilden in New York,

481
00:41:34.420 --> 00:41:35.260
really won the election.

482
00:41:35.260 --> 00:41:40.260
The election was stolen from them by fraud and eukary.

483
00:41:40.820 --> 00:41:42.820
So that Hayes wins by one electoral vote.

484
00:41:42.820 --> 00:41:45.180
He really, Tilden won the election by far.

485
00:41:45.180 --> 00:41:47.140
As a matter of fact, the popular vote,

486
00:41:48.220 --> 00:41:51.020
Tilden had 4.3 million votes in 1876

487
00:41:51.020 --> 00:41:52.420
and Hayes only had 4.0 million.

488
00:41:52.420 --> 00:41:54.980
That was a big victory by Tilden,

489
00:41:54.980 --> 00:41:57.420
which was only taken away from by fraudulent means

490
00:41:57.420 --> 00:42:03.460
by various Reconstruction governments, and apparently what happened was that Hayes made

491
00:42:03.460 --> 00:42:07.200
a deal with the Southern Democrats, and some of the Southern Democrats would throw their

492
00:42:07.200 --> 00:42:09.860
vote to Hayes, but why did the Federal troops get out of the South?

493
00:42:09.860 --> 00:42:14.680
That was the end of Reconstruction, get the Federal troops out.

494
00:42:14.680 --> 00:42:18.700
So the Democrats really won the election of 1876, as a matter of fact I'll just give you

495
00:42:18.700 --> 00:42:23.580
a very quick popular vote here.

496
00:42:23.580 --> 00:42:27.860
The other elections were extremely close. Usually the Democrats had at least one house

497
00:42:27.860 --> 00:42:39.340
of Congress for this whole period. In 1876, Hayes had 4.0 million votes and Tillman had

498
00:42:39.340 --> 00:42:53.540
4.3 million. In 1880, Garfield was the Republican victor, had 4.45 million votes and Hancock

499
00:42:53.540 --> 00:42:59.100
Democrat at 4.44 million, it was almost tied, it was like 60,000 votes or something, very,

500
00:42:59.100 --> 00:43:00.100
very close.

501
00:43:00.100 --> 00:43:10.580
In 1884 when Cleveland won, first Democrat to win, he had 4.9 million votes.

502
00:43:10.580 --> 00:43:18.060
And Blaine, known as a continental liar from the state of Maine, 4.85 million, 4.91, very,

503
00:43:18.060 --> 00:43:19.980
very, very, very close elections.

504
00:43:19.980 --> 00:43:25.340
Anyway, Cleveland wins the first time and Democrats are committed to laissez-faire, free trade, all the rest of it.

505
00:43:25.340 --> 00:43:30.380
How come the Interstate Commerce Act was passed and signed in the Democratic administration by Cleveland?

506
00:43:30.380 --> 00:43:37.340
How come Cleveland violated his own laissez-faire principles and passed to agree to a railroad regulation?

507
00:43:37.340 --> 00:43:43.100
That's the next question we will look at next on Tuesday, namely the mystery of this which will be solved

508
00:43:43.100 --> 00:43:46.940
and how it is that Cleveland, who has basically all of his life a laissez-faire person, how come he

509
00:43:46.940 --> 00:43:53.940
He limped out this key area of railroad regulation and there's a lesson to be learned by that.

510
00:43:56.900 --> 00:44:02.220
Why did Cleveland pass an Interstate Commerce Act, the first federal regulatory commission

511
00:44:02.220 --> 00:44:07.580
when Cleveland was a laissez-faire Democrat, laissez-faire liberal?

512
00:44:07.580 --> 00:44:11.460
Cleveland was an interesting figure anyway. Cleveland was in many ways a heroic figure.

513
00:44:11.460 --> 00:44:23.260
He was, first of all, he came from Buffalo, and you have to realize, New York State, I

514
00:44:23.260 --> 00:44:28.580
talk about Yankee pietism in the first class or so, that the fanatical drive for stamping

515
00:44:28.580 --> 00:44:33.620
out sin and so forth and so on, which led to statism and economic fraud by Yankees,

516
00:44:33.620 --> 00:44:38.540
who later became the basic members of the League Party and then the Republican Party.

517
00:44:38.540 --> 00:44:46.860
Well, Yankees were settled from rural Massachusetts, all the way out to Michigan and Wisconsin,

518
00:44:46.860 --> 00:44:52.780
but the heartland of Yankee-dom, the real guts of Yankee-land, was western New York,

519
00:44:52.780 --> 00:45:02.500
approximately from the Hudson Valley west of Buffalo, in other words, this whole area,

520
00:45:02.500 --> 00:45:08.100
which is the heart and soul of Yankee pietism.

521
00:45:08.100 --> 00:45:12.300
It was called by the people then and by historians after that, the Burned Over District, there's

522
00:45:12.300 --> 00:45:21.060
a charming name for it, burned over by repeated fires of religious fanaticism.

523
00:45:21.060 --> 00:45:23.620
You name it and it started in Western New York.

524
00:45:23.620 --> 00:45:26.540
The Mormon Church, I don't want to attack Mormonism, but the Mormon Church started in

525
00:45:26.540 --> 00:45:27.540
Western New York.

526
00:45:27.540 --> 00:45:33.140
The Shakers started in Western New York, the Oneida community people who were in favor of

527
00:45:33.140 --> 00:45:35.900
celibacy and they found it difficult therefore to rep to.

528
00:45:35.900 --> 00:45:40.900
means in order to continue the movement you have to have continual converts because you can't reproduce anybody

529
00:45:40.900 --> 00:45:44.900
it's kind of, apparently, in the long run difficult to sustain this

530
00:45:44.900 --> 00:45:48.900
so this is the heartland of pietist fanaticism

531
00:45:48.900 --> 00:45:54.900
and many of the leaders of the Republican Party and Whig Party came from Western New York for that reason

532
00:45:54.900 --> 00:45:59.900
Thurlow Weed, William Seward, etc., etc., on and on and on

533
00:45:59.900 --> 00:46:04.900
but here's Cleveland, comes from Western New York, he's a Protestant from Buffalo, how does that fit in?

534
00:46:04.900 --> 00:46:08.940
in. The way it fits in is this, it's very interesting. Cleveland was an old school

535
00:46:08.940 --> 00:46:14.260
Presbyterian. In other words, he was part of a small minority of the Presbyterian

536
00:46:14.260 --> 00:46:18.980
Church and the Congregationalist Church and other Protestant churches which

537
00:46:18.980 --> 00:46:23.380
resisted and were very much opposed to the planetist, revivalist kind of

538
00:46:23.380 --> 00:46:27.140
evangelical framework. There's no style count on it to leave him obeying, in that

539
00:46:27.140 --> 00:46:30.500
sense he's very much like Catholics and Lutherans in the sense he's in favor of

540
00:46:30.500 --> 00:46:36.260
So obeying church law, the way to get saved, if you can get saved, because you know Calvinist

541
00:46:36.260 --> 00:46:40.420
is kind of difficult anyway, the way to get saved is you join the church, you obey the

542
00:46:40.420 --> 00:46:43.620
law and that's it, obey the church law.

543
00:46:43.620 --> 00:46:46.300
So you don't worry about being born again and all the other stuff, you don't worry

544
00:46:46.300 --> 00:46:50.220
about compulsory stamping out of sin, all that stuff is anathema to old-style Calvinists

545
00:46:50.220 --> 00:46:54.300
as it is to Catholics and Lutherans, and even to this day I have friends of mine who are

546
00:46:54.300 --> 00:46:57.380
old-style Calvinists and take exactly the same position.

547
00:46:57.380 --> 00:47:06.580
So Cleveland was an old-style Calvinist and therefore was in the Democratic Party and he

548
00:47:06.580 --> 00:47:12.380
was, in a sense, he stamped his mark on the Democratic Party.

549
00:47:12.380 --> 00:47:17.780
He ran for president in 1884, the first Democrats since the Civil War, which is a big thing.

550
00:47:17.780 --> 00:47:20.740
He ran for president in 88 and just lost by a fraction.

551
00:47:20.740 --> 00:47:27.100
He got his vote, maybe I mentioned this already, his vote was 5.54 million in 1888 and Benjamin

552
00:47:27.100 --> 00:47:37.100
William Harrison, a Republican from Indiana who defeated him, had a vote of 5.544 million.

553
00:47:37.100 --> 00:47:42.940
Cleveland won on a popular vote and lost in the Electoral College, and in 1892 he wins

554
00:47:42.940 --> 00:47:45.780
again on a relative landslide.

555
00:47:45.780 --> 00:47:51.260
So Cleveland was the leader of the Democratic Party for many years, and so as a matter of

556
00:47:51.260 --> 00:47:55.820
fact when Charles Beard wrote an excellent book, now forgotten, he was a very good historian,

557
00:47:55.820 --> 00:48:00.520
Wrote a book in World War II called The Republic, a charming book, a sort of a fashion pattern

558
00:48:00.520 --> 00:48:04.520
after Plato's Republic with three guys or four guys sitting around to discuss political

559
00:48:04.520 --> 00:48:07.320
philosophy for the whole book, it's very well done.

560
00:48:07.320 --> 00:48:14.320
And the guy who represents for Beard, laissez-faire, libertarian-type Democrat, they call him a

561
00:48:14.320 --> 00:48:21.120
Cleveland Democrat, old-fashioned Cleveland Democrat, this is 1944, so Cleveland put his

562
00:48:21.120 --> 00:48:27.640
because Mark is the leader of the laissez-faire wing of the Democratic Party, so the mystery

563
00:48:27.640 --> 00:48:28.640
becomes even greater.

564
00:48:28.640 --> 00:48:32.600
Why did Cleveland then, and for everything's favor of and put through in his administration

565
00:48:32.600 --> 00:48:39.040
the first Federal Regulatory Commission for Railroads and so that's just the stage of

566
00:48:39.040 --> 00:48:40.040
the problem.

567
00:48:40.040 --> 00:48:44.040
Well the answer, the basic answer is this, Cleveland, the first, yeah?

568
00:48:44.040 --> 00:48:48.040
Yes, no, he beat Blaine in 1884.

569
00:48:48.040 --> 00:48:52.040
Beat Blaine.

570
00:48:52.040 --> 00:48:56.040
Now in 1876, Tilden, the Democrat, ran

571
00:48:56.040 --> 00:49:00.040
and beat Hayes to the loss of, got the election stolen

572
00:49:00.040 --> 00:49:04.040
in the Electoral College. Cleveland beat Blaine in 1884.

573
00:49:04.040 --> 00:49:08.040
So Cleveland was the first Democrat

574
00:49:08.040 --> 00:49:11.040
and become president since the Civil War.

575
00:49:11.040 --> 00:49:14.040
You're a complete Democratic.

576
00:49:14.040 --> 00:49:18.040
Well, it wasn't a complete Democratic era. It was very closely knit. It was almost tied.

577
00:49:18.040 --> 00:49:24.040
But the point is that Cleveland was exactly the major figure in the Democratic Party for many years,

578
00:49:24.040 --> 00:49:28.040
for like 20 years or so.

579
00:49:28.040 --> 00:49:34.040
Tilden, who was Cleveland's mentor and was a New York Democrat, who really should have won,

580
00:49:34.040 --> 00:49:40.760
and really did win in 1876. He was from New York City. The question is what was, Tilden

581
00:49:40.760 --> 00:49:45.200
was also a late-age Democrat, but Tilden was above all things a railroad lawyer. He's probably

582
00:49:45.200 --> 00:49:52.200
the most distinguished, most highly paid railroad lawyer in the country. We also have to realize

583
00:49:52.200 --> 00:49:56.440
that one of the things that happens, I'll mention later on today about the rise of manufacturing

584
00:49:56.440 --> 00:50:00.600
and industry after the Civil War period, but one of the things that happened was the rise

585
00:50:00.600 --> 00:50:06.600
and the rise of corporate law because lawyers before the Civil War were really, everybody was a lawyer in politics, they didn't make much money.

586
00:50:06.600 --> 00:50:13.600
For example, the highest paid lawyer, the highest income lawyer before the Civil War was Daniel Webster, by far the highest paid.

587
00:50:13.600 --> 00:50:18.600
He made about $20,000 a year, $25,000 a year. He was the highest paid lawyer.

588
00:50:18.600 --> 00:50:27.600
In current terms, if you multiply that by seven or eight, he means he's making about $840,000 a year, which is not bad, but it's not a top lawyer salary, obviously.

589
00:50:27.600 --> 00:50:37.600
He was the top lawyer. After the Civil War, after the 20,000 year, after the Civil War, lawyers were making much more.

590
00:50:37.600 --> 00:50:42.600
And there was corporate law that comes in because corporations come in. Railroads were the big corporations. They were coming in.

591
00:50:42.600 --> 00:50:51.600
And so top lawyers were essentially railroad lawyers. And so the top lawyers were making about $200,000 a year,

592
00:50:51.600 --> 00:50:55.600
which in our terms is like a million dollars a year, which is damn good, to say the least.

593
00:50:55.600 --> 00:51:01.600
So this is, the whole profession of corporate law becomes a very important one.

594
00:51:01.600 --> 00:51:07.600
In other words, before that, most lawyers were trial lawyers, you know, they defended people and that sort of stuff.

595
00:51:07.600 --> 00:51:10.600
Since there were no corporations, there wasn't much corporate law.

596
00:51:10.600 --> 00:51:14.600
There were very few corporations, banks and canals.

597
00:51:14.600 --> 00:51:21.600
So we have Tillen as a railroad lawyer and railroads, of course, were mostly in favor of this kind of government regulation,

598
00:51:21.600 --> 00:51:24.600
in favor of this new system of cartelization.

599
00:51:24.600 --> 00:51:29.000
In particular, in favor of a new system, was J.P. Morgan & Company, we've already mentioned

600
00:51:29.000 --> 00:51:34.680
with the, becomes a big investment banker, a big railroad banker, certainly after the

601
00:51:34.680 --> 00:51:37.840
panic of 1873.

602
00:51:37.840 --> 00:51:41.880
The Cleveland administration, from top to bottom, including Cleveland, was very heavily

603
00:51:41.880 --> 00:51:47.320
tied in with the railroads and with Morgan, railroads in general, and Morgan specifically.

604
00:51:47.320 --> 00:51:51.960
And so what we have then is the, with Morgan beginning to dominate the democratic party,

605
00:51:51.960 --> 00:52:03.960
Especially in the higher reaches and the top elite reaches, he began to be able to shift their attitude toward railroad cartelization, government interference and government cartelization.

606
00:52:03.960 --> 00:52:08.960
Cleveland himself, before he became mayor of Buffalo, in other words, when he was in the private sector, was a railroad lawyer.

607
00:52:08.960 --> 00:52:22.760
His partner was, one of his major partners, was Francis Lynn Stetson, who will appear

608
00:52:22.760 --> 00:52:32.840
later, Jill Lawton of course, by the time, who, when Cleveland, after Cleveland leaves

609
00:52:32.840 --> 00:52:38.840
He used the presidency finally in 1896, he then joined Stetson again, and Stetson was

610
00:52:38.840 --> 00:52:45.360
the top Morgan lawyer, he was JP Morgan's personal lawyer, he was a partner of a law

611
00:52:45.360 --> 00:52:50.520
firm, was JP Morgan & Company's lawyer, so he was sort of the top Morgan lawyer.

612
00:52:50.520 --> 00:52:58.040
Also Cleveland's, one of Cleveland's major clients was New York Central Railroad, which

613
00:52:58.040 --> 00:53:04.040
which was the largest railroad in New York State and also originally owned by Commodore

614
00:53:04.040 --> 00:53:09.280
Vanderbilt, a very famous character, an interesting character himself, who then was more or less

615
00:53:09.280 --> 00:53:10.280
taken over by Morgan.

616
00:53:10.280 --> 00:53:13.600
So you have essentially Vanderbilt-Morgan.

617
00:53:13.600 --> 00:53:23.680
So in later years Morgan essentially runs it in an alliance with the Vanderbilt family.

618
00:53:23.680 --> 00:53:31.900
So you have, so Cleveland himself then is essentially a Morgan railroad lawyer type person, which

619
00:53:31.900 --> 00:53:37.360
accounts, you see, very neatly for his deviation from laissez-faire in this particular key area,

620
00:53:37.360 --> 00:53:43.160
his shift to so-called progressive, or whatever you want to call it, a compulsory cartelization

621
00:53:43.160 --> 00:53:44.160
government.

622
00:53:44.160 --> 00:53:50.040
And let's look at the rest of the Cleveland cabinet.

623
00:53:50.040 --> 00:53:58.040
The whole cabinet, almost the whole cabinet, is either a Morgan cabinet or very closely allied.

624
00:54:02.040 --> 00:54:13.040
Secretary of State was Thomas Bayard. There were several, of course, during the years, but he was a major of Delaware, a senator of Delaware.

625
00:54:13.040 --> 00:54:22.240
Bayard was essentially, he came from an old aristocratic family in Delaware, but he essentially

626
00:54:22.240 --> 00:54:26.280
was a disciple and tool almost of August Belmont.

627
00:54:26.280 --> 00:54:35.720
To such an extent, Belmont was a German investment banker who was an agent of Rothschild, Rothschild

628
00:54:35.720 --> 00:54:41.680
company, which is the most famous investment bank in France, Britain and Germany, international

629
00:54:41.680 --> 00:54:43.800
and Financial Investment Bankers.

630
00:54:43.800 --> 00:54:47.280
Belmont came to New York as a, his name was Schoenberg,

631
00:54:47.280 --> 00:54:50.080
and came to New York as a Rothschild agent,

632
00:54:50.080 --> 00:54:51.880
and continued to be a Rothschild agent all of his life,

633
00:54:51.880 --> 00:54:52.720
even though he himself, of course,

634
00:54:52.720 --> 00:54:54.880
became a millionaire on his own.

635
00:54:54.880 --> 00:54:57.280
He, of course, was the founder of Belmont Racetrack

636
00:54:57.280 --> 00:54:59.820
and the rest of the Belmont family.

637
00:55:01.840 --> 00:55:04.680
Anyway, Belmont, Bayard was virtually a tool of Belmont.

638
00:55:04.680 --> 00:55:07.320
Belmont's son, Perry Belmont,

639
00:55:07.320 --> 00:55:09.880
not only was Bayard's main administrative assistant

640
00:55:09.880 --> 00:55:11.640
for many years, he also lived in his house,

641
00:55:11.640 --> 00:55:17.440
and sort of like a close buddy secretary and I guess we now call him his control in espionage

642
00:55:17.440 --> 00:55:18.440
terms.

643
00:55:18.440 --> 00:55:23.400
At any rate, so Belmont, and Melmont was the secretary treasurer of the National Democratic

644
00:55:23.400 --> 00:55:29.520
Party for decades, you know, like for 40 years, so, and Morgans and Rothschilds were quite

645
00:55:29.520 --> 00:55:33.520
close, they weren't always close, but they were basically an alliance.

646
00:55:33.520 --> 00:55:38.720
So again, again you have the Rothschild wing, so to speak, of an investment banker grouping

647
00:55:38.720 --> 00:55:39.720
here.

648
00:55:39.720 --> 00:56:07.720
So, that's the Secretary of State under Cleveland, the Secretary of Treasury, first person Secretary of Treasury, a guy named Daniel Manning supports his key post, and Manning was a close friend of Tilden, sort of one of his top lieutenants,

649
00:56:07.720 --> 00:56:11.400
Tillman was still around, Tillman was sort of like elder statesman of the New York Democratic

650
00:56:11.400 --> 00:56:18.480
Party and also a lawyer and director of the Albany and Susquehanna Railroad which not

651
00:56:18.480 --> 00:56:22.640
only was a Morgan-type railroad, it also had J.P. Morgan himself on the board of directors

652
00:56:22.640 --> 00:56:27.440
which showed that it was very intimately Morgan-oriented.

653
00:56:27.440 --> 00:56:35.280
So once again we can put parenthesis Morgan around the name of Daniel Manning.

654
00:56:35.280 --> 00:56:40.160
and he got ill after a year or two and resigned, and Hoppe's sister then takes over, the secretary

655
00:56:40.160 --> 00:56:55.160
of the treasury, and that was Charles Fairchild, again a wealthy family here, and see, one

656
00:56:55.160 --> 00:56:58.280
cabinet member or one president could be an accident, but if you have a whole cabinet

657
00:56:58.280 --> 00:57:02.720
as a mortgage orient, you begin to see there's a pattern here which can't be denied.

658
00:57:02.720 --> 00:57:06.720
At any rate, Charles Fairchild was Attorney General of New York.

659
00:57:06.720 --> 00:57:12.720
Before that, he was a disciple of Tilden, once again, and into the Tilden machine, so to speak.

660
00:57:12.720 --> 00:57:19.720
He married the niece of Henry Seymour, Henry Seymour, who had run from the present in 1868 in New York.

661
00:57:19.720 --> 00:57:25.720
His father, Sidney Fairchild, was the Board of Directors of Erie Railroad, Erie and Pittsburgh Railroad,

662
00:57:25.720 --> 00:57:29.720
and also Attorney Chief Counsel of the New York Central Railroad.

663
00:57:29.720 --> 00:57:35.160
In other words, this guy's father was a chief counsel in New York Central, which was Morgan.

664
00:57:42.360 --> 00:57:45.000
You have these patterns, this cannot be an accident, it can't be a coincidence,

665
00:57:45.000 --> 00:57:49.720
or the whole damn gang becomes a Morgan tightly, tightly in with a Morgan embatt.

666
00:57:49.720 --> 00:58:02.820
The Attorney General, a guy named Garland of Arkansas, he's a railroad director, Secretary

667
00:58:02.820 --> 00:58:07.120
of War, in other words, there was no Secretary of Defense in those days, it was frankly called

668
00:58:07.120 --> 00:58:10.000
the War Department.

669
00:58:10.000 --> 00:58:13.600
The name Defense Department only comes in after World War II as a euphemism.

670
00:58:13.600 --> 00:58:18.480
Anyway, Secretary of War, especially with the Army, there was a Secretary of War those

671
00:58:18.480 --> 00:58:33.480
This guy's name was William Endicott, of course the very name Endicott means that he's a Boston Brahmin type, and indeed he was.

672
00:58:33.480 --> 00:58:44.480
Boston patrician, lawyer, former judge, and the guy who almost got the first choice, almost got the post of John Quincy Adams Jr.

673
00:58:44.480 --> 00:58:51.480
He was the son of the former president of the Addams Jr., of course another Boston-bound member of the Addams family, son of the former president.

674
00:58:51.480 --> 00:58:57.480
He was urged upon Clevelanders to pick this guy by Francis Lynn Stetson, his former law partner and Morgan lawyer,

675
00:58:57.480 --> 00:59:03.480
and he was very much connected with the Boston financial elite.

676
00:59:03.480 --> 00:59:10.480
In particular, his wife, you always have to look at the wife connections in these people,

677
00:59:10.480 --> 00:59:16.080
Because life was one of the Peabody, Peabody I guess is pronounced, family, a very distinguished

678
00:59:16.080 --> 00:59:23.240
Boston family, the head of whom, George Peabody, I guess it was the uncle I think, George Peabody

679
00:59:23.240 --> 00:59:34.080
who was the head of a banking firm which had as a partner J.P. Morgan's father, Junius

680
00:59:34.080 --> 00:59:40.880
Junius Morgan, a British banker. It's always very good to have a partner who's either Morgan

681
00:59:40.880 --> 00:59:57.880
himself or his father. It's good for your career. His partner is Morgan's father. And

682
00:59:58.080 --> 01:00:02.400
also one of the Peabody's, another uncle, is the best man at JP Morgan's wedding. It's

683
01:00:02.400 --> 01:00:10.200
Another thing you have to realize about the whole Boston Financial Group after about 1870,

684
01:00:10.200 --> 01:00:16.320
from then on until the present day, Boston, first of all they're all interconnected, the

685
01:00:16.320 --> 01:00:22.640
whole Boston Group, the Lees, the Higginsons, the Lowells, the Cabots, the Lodges, the Adamses,

686
01:00:22.640 --> 01:00:28.160
this whole group becomes connected through first Boston Corporation, another big bank,

687
01:00:28.160 --> 01:00:29.160
to the Morgans.

688
01:00:29.160 --> 01:00:59.160
got to the point where Morgan equals, in Boston, they were the Morgan people, and this is I think still, I'm not sure what's going on now, but certainly until, at least until World War II, the Boston Foundation will be explaining Henry Cabot Lodge equals Morgan, in other words, so that was part of the whole equation, which we'll see later on, becomes important, the Secretary of the Navy was the guy who really had it made, a member of the Whitney family, which has the Whitney Museum here, things like that,

689
01:00:59.160 --> 01:01:06.160
And you have to realize the Navy in those days was more important than the Army because the Navy was permanent, the Army only comes in during wartime.

690
01:01:06.160 --> 01:01:20.160
So, William C. Whitney, Secretary of the Navy, close friend and disciple of Tilden politically, once again, comes from New York,

691
01:01:20.160 --> 01:01:27.160
and a close friend, not only a close friend of Cleveland, also Cleveland's campaign manager

692
01:01:27.840 --> 01:01:34.840
during the campaign and a big railroad board, member of the board of directors of two railroads

693
01:01:37.560 --> 01:01:44.560
in New York, most of which were Vanderbilt and therefore connected with the Morgans,

694
01:01:44.560 --> 01:01:53.760
and therefore connected with the Morgans, it's really Morgan-Vanderbilt, so it's important,

695
01:01:53.760 --> 01:01:54.760
maybe today.

696
01:01:54.760 --> 01:02:03.000
There's also the son-in-law of Whitney, Henry B. Payne, that's why there are people right

697
01:02:03.000 --> 01:02:13.000
now whose name is Payne Whitney, connected with two mighty families and Henry Payne was

698
01:02:13.000 --> 01:02:35.000
He was the director of several of our four Vandervoet railroads, and his brother Oliver Payne was the director, officer of all his life, for Standard Oil in New Jersey, Standard Oil of course being the big Rockefeller.

699
01:02:35.000 --> 01:02:40.240
As we'll see later, I think today, I hope, the Rockefeller family essentially dominated

700
01:02:40.240 --> 01:02:47.880
the Republican Party in about 1876, probably until now, at least until the 1960s.

701
01:02:47.880 --> 01:02:53.840
Anyway, so here's the two mighty titanic competing financial forces in the United States.

702
01:02:53.840 --> 01:02:56.560
The Morgans essentially run the Democratic Party, the Rockefellers essentially run the

703
01:02:56.560 --> 01:02:57.560
Republican Party.

704
01:02:57.560 --> 01:03:00.920
Here's this guy, the whole pain when they are in with both camps, that's a very good

705
01:03:00.920 --> 01:03:07.080
thing to be, be both in with the Morgan's and be a relative of the Rockefellers, can't

706
01:03:07.080 --> 01:03:12.680
hurt, relative I mean relative to somebody whose family connected with the Rockefellers.

707
01:03:12.680 --> 01:03:16.000
The Rockefellers, as we'll see later, have a whole group of families who have invested

708
01:03:16.000 --> 01:03:22.680
with them since 1870, the same group until right now, the Bedfurds, the Prats, the whole

709
01:03:22.680 --> 01:03:26.640
bunch of the Hartnesses, etc., etc., all of whom act with the Rockefellers and invest

710
01:03:26.640 --> 01:03:30.840
with them, which of course makes the Rockefeller power much greater than just one family.

711
01:03:30.840 --> 01:03:37.840
Secretary of the Interior, which is very important because the Interior ran the whole public land system, of course it still does.

712
01:03:37.840 --> 01:03:43.840
There's a guy from Mississippi who happened to be a top railroad lawyer, which usually means Morgan.

713
01:03:43.840 --> 01:03:49.840
And then another guy from Wisconsin, actually he's a great guy, who had been Postmaster General,

714
01:03:49.840 --> 01:03:57.840
who was a Vanderbilt-Morgan railroad lawyer and the attorney for the Chicago Northwestern Railroad, which was Vanderbilt.

715
01:03:57.840 --> 01:04:00.960
of the Railroad, which was Vanderbilt. So you have the whole, really the whole cabinet,

716
01:04:00.960 --> 01:04:04.480
I think, the whole cabinet was connected with the Morgans, also the Ambassador to Great

717
01:04:04.480 --> 01:04:09.600
Britain, which is always a top post, Ambassador to the Court of St. James was a Vermont guy

718
01:04:09.600 --> 01:04:17.000
who was the chairman of the big, of the railroad, which was Vanderbilt. And also afterward he

719
01:04:17.000 --> 01:04:23.320
resigned, another guy comes in who's, who's the, the chairman of the board of the, New

720
01:04:23.320 --> 01:04:27.800
York Central, which of course was Vanderbilt-Morgan. The Ambassador to France, in those days, was

721
01:04:27.800 --> 01:04:37.800
The Second Most Important Postman of the Atlantic Service was a guy named McLean, whose father was the president of the Baltimore-Ohio Railroad, which was also in with the Morgans.

722
01:04:37.800 --> 01:04:42.800
So the whole cabinet, the whole damn cabinet, those days, of course, the cabinet was much smaller than it is now.

723
01:04:42.800 --> 01:04:45.800
The whole cabinet was a Morgan cabinet, or Morgan Vanderbilt cabinet.

724
01:04:45.800 --> 01:04:54.800
The exception of the secretary of state was a Rothschild person. But closely allied, of course.

725
01:04:54.800 --> 01:04:59.800
So there we have our answer. I think the second administration of Cleveland is very much very similar.

726
01:04:59.800 --> 01:05:01.800
You don't have to go into that.

727
01:05:01.800 --> 01:05:09.800
As a matter of fact, by the way, the interesting thing about Stetson was the top, as I mentioned before, the top Morgan lawyer.

728
01:05:09.800 --> 01:05:15.800
His law firm, which was core of those, I think, Stetson Jennings and something or other.

729
01:05:15.800 --> 01:05:20.800
Law firms are never corporations. They're always partnerships. They can keep, the names keep changing as new guys come in.

730
01:05:20.800 --> 01:05:29.800
This is the same law firm which is now Davis Polk and Wardwell, which is probably still one of the top Morgan law firms right now, but it's like a hundred years later.

731
01:05:29.800 --> 01:05:42.800
We have a continuity. By the way, I'll leave the head a little bit to show you what's happening in American politics.

732
01:05:42.800 --> 01:05:51.280
In 1924, Calvin Coolidge runs for president, runs for re-election. He'd come in because

733
01:05:51.280 --> 01:05:57.680
Harding died in office. Harding, by the way, was an Ohio Republican and therefore a Rockefeller

734
01:05:57.680 --> 01:06:02.800
person. Coolidge was a Boston-type person and tied him with a Morgan, therefore tied him with a Morgan.

735
01:06:02.800 --> 01:06:08.320
And this usually happens in American politics. If two factions in the party, whatever the party is,

736
01:06:08.320 --> 01:06:12.160
the winning faction is the presidency, the losing faction is the vice presidency.

737
01:06:12.160 --> 01:06:15.160
is continued until Kennedy-Johnson.

738
01:06:15.160 --> 01:06:18.480
So if you have Harding, who was an Ohio Republican,

739
01:06:18.480 --> 01:06:21.480
we'll see in a minute, who was therefore a Rockefeller Republican.

740
01:06:24.080 --> 01:06:27.840
It was President Coolidge, from Massachusetts,

741
01:06:27.840 --> 01:06:31.240
and therefore, and was connected personally also

742
01:06:31.240 --> 01:06:34.240
with the Boston Financial Group, and therefore, Morgan.

743
01:06:36.600 --> 01:06:40.360
Rockefeller dies, Coolidge becomes president.

744
01:06:40.360 --> 01:06:46.360
In 1924, Coolidge runs again for president, for re-election, on the Republican ticket.

745
01:06:46.360 --> 01:06:51.800
Democrats pick up 103 ballots, the titanic struggle for power, which we'll get to later

746
01:06:51.800 --> 01:06:56.480
on in the course, I hope, emerging as a dark horse after the 102nd ballot.

747
01:06:56.480 --> 01:06:59.920
I mean, nowadays, you have, usually somebody wins on the first ballot, you understand.

748
01:06:59.920 --> 01:07:03.760
In my living memory, Wendell Wilkie, I think, won on the eighth ballot, that's about the

749
01:07:03.760 --> 01:07:04.760
longest I can think of.

750
01:07:04.760 --> 01:07:07.840
103 ballots, that's a magnificent, anyway.

751
01:07:07.840 --> 01:07:13.320
So on the 103rd or 104th ballot, Davis emerged, John W. Davis, the Democratic President, head

752
01:07:13.320 --> 01:07:18.360
of the top Morgan law firm, Morgan's personal lawyer, and the Morgan guy running for Republican

753
01:07:18.360 --> 01:07:21.640
ticket, and the Morgan guy running for Democratic ticket, and the Morgan versus Morgan heaven

754
01:07:21.640 --> 01:07:24.640
in 1924.

755
01:07:24.640 --> 01:07:27.920
Really he controlled both presidential nominations.

756
01:07:27.920 --> 01:07:34.600
Alright, so this is the reason I've now answered the question why it is that Cleveland deviated

757
01:07:34.600 --> 01:07:39.080
from Laissez-Faire, and it's one crucial point, namely railroad regulation, because he was

758
01:07:39.080 --> 01:07:46.580
a Morgan Railroad lawyer, and his whole cabinet reflected this Morgan influence.

759
01:07:46.580 --> 01:07:50.040
Morgan gets increasingly, by the way, status as time goes on, but what happens is, to leap

760
01:07:50.040 --> 01:07:55.080
ahead a little bit, the Morgans decided in the late 1890s when the industry, manufacturing

761
01:07:55.080 --> 01:08:01.160
begins to incorporate, manufacturing was a partnership until the 1890s, none of these

762
01:08:01.160 --> 01:08:31.160
When they begin to incorporate and become much larger in 1890s, they try to achieve monopoly prices through mergers on the free market. They can't do it, they lose out and then they shift. The Morgan's then shift to a general status program, not just for the whole United States economy. They become progressives, quote unquote, general status by around 1900s. And then the whole party shifts along with them.

763
01:08:31.160 --> 01:08:36.040
The next step is to show the rise of, after the Civil War, especially as time goes on,

764
01:08:36.040 --> 01:08:43.160
of manufacturing, a big business, not just in railroads but in manufacturing in general.

765
01:08:43.160 --> 01:08:47.440
There are various statistics for this, there's G&P statistics.

766
01:08:47.440 --> 01:08:53.200
One way to look at it is, this is statistics, value added by selected industries and you

767
01:08:53.200 --> 01:09:03.200
You look at, and this is constant prices, 1879 prices, it was eliminating price changes.

768
01:09:03.200 --> 01:09:12.200
In those days, of course, prices were falling every year, it was magnificent.

769
01:09:12.200 --> 01:09:20.200
A value added by different industries.

770
01:09:20.200 --> 01:09:38.200
1869, agriculture was 1.7 billion. 1899, it was 3.9 billion. This is, I say, a constant dollar. You can forget about inflation and deflation here.

771
01:09:38.200 --> 01:09:47.200
So it's about more than double. In other words, it reflects real output, more or less. I mean, it's not precise, but it gives you an idea.

772
01:09:47.200 --> 01:09:59.480
Mining goes up from 0.07 billion to 0.55, so eightfold increase, this is about, there's

773
01:09:59.480 --> 01:10:03.140
more than double, this is an eightfold increase.

774
01:10:03.140 --> 01:10:12.680
Construction goes up from 0.4 billion to 1.0, it's like two and a half fold.

775
01:10:12.680 --> 01:10:22.920
Manufacturing goes up from 1.1 to 6.3, basically a six-fold increase in these 30 years. That's

776
01:10:22.920 --> 01:10:27.320
one way of looking, one gauge, one way of looking at it.

777
01:10:27.320 --> 01:10:38.800
Pig Iron, now we're looking at physical units. Pig Iron went up from, this is basically our

778
01:10:38.800 --> 01:10:41.500
and Industrial Revolution, so to speak.

779
01:10:41.500 --> 01:10:48.500
Pig iron goes up from 1848, pig iron was, these are pig iron shipments, thousands of

780
01:10:49.280 --> 01:10:56.280
short tons.

781
01:10:58.720 --> 01:11:05.720
Pig iron goes up from 900,000 short tons in 1848, 1865 to 1930, not much difference,

782
01:11:08.800 --> 01:11:21.800
1899, 15,250,000, that was 15.2 million, enormous increase, approximately 16-fold increase.

783
01:11:21.800 --> 01:11:32.300
No, it's not one slice, I'm correcting, you know, correcting for, actually those days

784
01:11:32.300 --> 01:11:35.800
was deflation, prices were going down in this period, correcting for price change, it was

785
01:11:35.800 --> 01:11:38.300
There's a magnificent period, I guess I'll get right into this.

786
01:11:38.300 --> 01:11:42.100
Prices were falling throughout, all the way from 1865, 1896.

787
01:11:42.100 --> 01:11:45.360
Magnificent. Imagine waking up in the morning and knowing in your heart and your gut

788
01:11:45.360 --> 01:11:49.400
that next year prices will be 3% less.

789
01:11:49.400 --> 01:11:52.120
Savings are encouraged.

790
01:11:52.120 --> 01:11:56.200
People don't have to worry about their dollar being wiped out.

791
01:11:56.200 --> 01:12:00.040
But salaries remained about the same in money terms and the prices kept falling.

792
01:12:00.040 --> 01:12:02.360
The real income kept going up.

793
01:12:02.360 --> 01:12:10.360
The salary would stay the same per age of the person, and then, you know, the prices, of course, the living kept going down, real wages went up.

794
01:12:10.360 --> 01:12:20.360
Great. Okay. Marvelous period of living. Of course, there was no air conditioning then, and we can't remember everything.

795
01:12:20.360 --> 01:12:28.360
Steel ingots and castings and other... steel, of course, comes in, really starts with the Civil War period.

796
01:12:28.360 --> 01:12:43.040
So, around there, steel ingots and castings produced, in 1867, 20,000 long tons, I don't

797
01:12:43.040 --> 01:12:46.880
know if some of these things are measured in short terms, tons and tons in long, I don't

798
01:12:46.880 --> 01:12:51.680
know exactly why, but anyway, it doesn't make any difference.

799
01:12:51.680 --> 01:13:18.680
1899, it was 10.6 million, so that's about 500 fold increase of steel ingots. There is an index of physical production, a very difficult physical manufacturing production, very tricky and you can't really do it very well, but it actually went up by about six fold in this period.

800
01:13:18.680 --> 01:13:25.680
With steel ingots again, most of it, one of the things that reflects this is a change

801
01:13:27.040 --> 01:13:34.040
in technology of steel. In 1867, most of the steel was crucible steel, which is apparently

802
01:13:34.040 --> 01:13:45.040
Most of the steel was crucible steel which is apparently high quality but you can't make

803
01:13:45.040 --> 01:13:55.160
much of it, crucible which was about 17,000 tons, a little bit of Bessemer, but Bessemer

804
01:13:55.160 --> 01:14:05.040
Bessemer just coming in then, starts in Europe, it's 2.7. Bessemer, I think it's a product,

805
01:14:05.040 --> 01:14:10.080
don't ask me in any detail, Bessemer is probably a force hot air and a force oxygen at high

806
01:14:10.080 --> 01:14:24.600
temperatures, which makes it more malleable. And so, 1899, Husserl goes up to 101.2 thousand,

807
01:14:24.600 --> 01:14:31.400
for 7.6 million, this is all thousand, this is 1.6 million, and coming up fast on the

808
01:14:31.400 --> 01:14:40.400
outside is open hearth steel which comes in which starts about 1870 and is zero in 1867,

809
01:14:40.400 --> 01:14:48.600
open hearth is even hotter, injections or whatever, and then it's 3.0 million and passes

810
01:14:48.600 --> 01:14:55.000
Bessemer by about 1905 or something like that, open Hawaii comes with the key steel, remains

811
01:14:55.000 --> 01:15:04.000
the key steel thing until the 1930s or something, what was it, Oxygen Converter, what's the

812
01:15:04.000 --> 01:15:11.240
name of that, Oxygen Conversion or something, that again starts, yeah something like Oxygen

813
01:15:11.240 --> 01:15:12.240
Conversion or something.

814
01:15:12.240 --> 01:15:16.200
We'll see later the US Steel which was supposed to be a monopoly, the design of the monopoly

815
01:15:16.200 --> 01:15:20.240
and Steel was the last company to introduce any of these things, the last corporation in

816
01:15:20.240 --> 01:15:30.960
the world in steel to introduce this current process, they've always been a flop-a-roo.

817
01:15:30.960 --> 01:15:35.600
So Bessemer that they ruled the roost until about 1906 when open hearth essentially takes

818
01:15:35.600 --> 01:15:43.200
over, 1908, and then rolled iron and steel comes in, something again new, which didn't

819
01:15:43.200 --> 01:16:12.200
It didn't exist in 1867, rolled iron and steel, contrasted casting and ingots, so zero in 1867, and by 1885 it's 3.1 million tons, and by 1899 it's about 10.3 million, it's coming out very fast, it's an addition to all the other stuff, it's rolled iron and steel.

820
01:16:12.200 --> 01:16:18.200
So, enormous, enormous increase in iron, obvious iron and steel production.

821
01:16:18.200 --> 01:16:19.200
Where were you using it?

822
01:16:19.200 --> 01:16:21.200
Where were we using it? All over the place.

823
01:16:21.200 --> 01:16:22.200
Railways?

824
01:16:22.200 --> 01:16:27.200
Railways, rail lines, steel rails, and manufacturing, all sorts of other things.

825
01:16:27.200 --> 01:16:33.200
It's just a basic thing, an element for machine tool machines in general, all sorts of stuff.

826
01:16:33.200 --> 01:16:35.200
We were talking about it before.

827
01:16:35.200 --> 01:16:36.200
Huh?

828
01:16:36.200 --> 01:16:38.200
We were talking about it before.

829
01:16:38.200 --> 01:16:41.720
Well, no, this is just an indication of what was going on, as I'm showing a tremendous

830
01:16:41.720 --> 01:16:42.720
increase in production.

831
01:16:42.720 --> 01:16:47.560
I mean, just taking different industries, this is an example, an illustration of what's

832
01:16:47.560 --> 01:16:48.560
going on.

833
01:16:48.560 --> 01:16:53.040
Tremendous flowering of production all over the place, manufacturing, size of, the factory

834
01:16:53.040 --> 01:16:55.360
comes in, I'll mention this in a minute.

835
01:16:55.360 --> 01:17:01.800
Factories really come in in this period, didn't really exist before much, except in arms manufacturing.

836
01:17:01.800 --> 01:17:06.560
So I mean, the whole thing, just an explosion of, and they all fit together.

837
01:17:06.560 --> 01:17:25.560
The most produced steel rails go up about six-fold. In 1867, there were 4,500 tons. In 1899, there were 2.3 million tons.

838
01:17:25.560 --> 01:17:32.560
This is a period, by the way, when there wasn't much railway increase in railway mileage by this time.

839
01:17:32.560 --> 01:17:43.560
There's gold, I think, outpouring of rails, so this is, let's see, this is about four hundred and fifteen thousand. It goes up by about six-fold.

840
01:17:47.560 --> 01:17:53.560
Structural iron and steel goes in a lot, goes in by about ten-fold. Bricks go up by about three-fold.

841
01:17:53.560 --> 01:18:08.560
cotton textiles increased by fivefold, coal increased by 14 times, crude oil of course increased by 19 times, we'll get to crude oil in a minute, it's a big new industry, an oil industry, it's virtually brand new

842
01:18:08.560 --> 01:18:35.560
Kuhler oil increases from 1867, it really begins in 1859, the first oil well dug in Titusville, Pennsylvania, 1867, 3.3 million barrels, a big increase of question zero, 1899 is 57.1 million barrels, a 19-fold increase.

843
01:18:35.560 --> 01:18:47.480
The, again, most of these processes, Bessemer begins in England, the open horse process

844
01:18:47.480 --> 01:18:51.280
begins in Germany, Siemens-Martin process, essentially the United States, however, is

845
01:18:51.280 --> 01:18:58.120
the most, greatest increase in these things, the Industrial Revolution really takes off.

846
01:18:58.120 --> 01:19:02.520
Iron begins to tap, the Minnesota iron mines are going to come into production, and the

847
01:19:02.520 --> 01:19:08.400
The Sabe Iron Range in the Great Lake Minnesota area comes into production, coal starts in

848
01:19:08.400 --> 01:19:13.160
Pennsylvania and spreads to Illinois, West Virginia, and Kentucky, and crude oil, as we'll

849
01:19:13.160 --> 01:19:22.160
see, begins in Pennsylvania, continues there and spreads to Ohio and Indiana, so also before

850
01:19:22.160 --> 01:19:27.480
the Civil War, most of the power in industry was water power, let's say you got the power,

851
01:19:27.480 --> 01:19:31.240
and of course in water power, water power wasn't that bad, but you had to situate near

852
01:19:31.240 --> 01:19:35.060
and the Federal Reserve with some kind of waterfall, those kinds of limited locations.

853
01:19:35.060 --> 01:19:41.900
For example, you go up in New England, you see lots of these circular things, what do

854
01:19:41.900 --> 01:19:42.900
they call these things?

855
01:19:42.900 --> 01:19:47.200
Turbine or whatever, the water goes over it and produces power.

856
01:19:47.200 --> 01:19:49.960
Steam comes in after the Civil War and takes over.

857
01:19:49.960 --> 01:19:53.600
And one of the great things about steam is you don't have to worry about being near a

858
01:19:53.600 --> 01:19:54.600
waterfall.

859
01:19:54.600 --> 01:19:55.600
It could be anyplace.

860
01:19:55.600 --> 01:20:00.500
So you can locate near markets, you can locate near a fuel supply, you're not stuck with

861
01:20:00.500 --> 01:20:08.500
New England, of course, has a lot of streams of waterfalls, but other places are very difficult to find one.

862
01:20:08.500 --> 01:20:14.500
Steam turbine comes in, et cetera, et cetera. Factory comes in, as I mentioned a little bit.

863
01:20:14.500 --> 01:20:26.500
Before the Civil War, basically, there were no factories. What happens is you have a capitalist who buys, invests, saves up and invests in material, raw material, say cotton textile,

864
01:20:26.500 --> 01:20:32.060
and he finds weavers, knitters and weavers and he hires them using a piecework basis

865
01:20:32.060 --> 01:20:37.060
to produce this stuff and he sells it down the line.

866
01:20:37.060 --> 01:20:40.100
The weavers and men have to have their own equipment, have your own loom in the basement

867
01:20:40.100 --> 01:20:43.020
or whatever the basement is, the ground floor.

868
01:20:43.020 --> 01:20:47.860
And so this obviously limits production, you have a very, it's called a putting out system

869
01:20:47.860 --> 01:20:51.460
or a domestic system.

870
01:20:51.460 --> 01:20:59.420
and where the merchant essentially saves up and invests in this thing and then the workers

871
01:20:59.420 --> 01:21:00.420
own their equipment.

872
01:21:00.420 --> 01:21:03.020
There was no quote alienation unquote of workers in that capital.

873
01:21:03.020 --> 01:21:04.020
They had to own their equipment.

874
01:21:04.020 --> 01:21:05.020
That's a big problem.

875
01:21:05.020 --> 01:21:08.020
In other words, if you're a weaver, you have to own your loom, which means you have to

876
01:21:08.020 --> 01:21:12.500
have a lot of money to buy the loom or build it or whatever you're going to get it putting

877
01:21:12.500 --> 01:21:16.020
out systems.

878
01:21:16.020 --> 01:21:23.500
So after the Civil War, a factory comes in, we bring the workers together into one spot

879
01:21:23.500 --> 01:21:28.420
and you have a continuous flow of some sort of equipment, you have the machines together,

880
01:21:28.420 --> 01:21:32.020
the capitalist owns the machines, the worker doesn't have to invest in the machine, this

881
01:21:32.020 --> 01:21:37.820
is a big benefit to the worker, it means anybody can get a job, you don't have to own a loom,

882
01:21:37.820 --> 01:21:42.660
or whatever else, you don't have to own iron forging equipment or whatever happens to them.

883
01:21:42.660 --> 01:21:49.460
So, the factory has been defined, I guess it's a pretty good definition, as a place

884
01:21:49.460 --> 01:21:54.420
where, quote, raw material can be converted into finished goods by consecutive harmonious

885
01:21:54.420 --> 01:22:01.060
processes carried along by a central power, some kind of power source.

886
01:22:01.060 --> 01:22:06.380
So that was the growth of the factory system, and meant, of course, an enormous increase

887
01:22:06.380 --> 01:22:11.900
in productivity, and how many goods could be produced coming out of the factory, and

888
01:22:11.900 --> 01:22:14.820
A whole bunch of people, each one with a loom.

889
01:22:14.820 --> 01:22:16.940
Of course, it meant you had a supervisor or employees,

890
01:22:16.940 --> 01:22:19.620
you have buildings where everybody gets together,

891
01:22:19.620 --> 01:22:23.060
you have machines located now in the same spot.

892
01:22:23.060 --> 01:22:25.940
You have much larger aggregations of capital equipment

893
01:22:25.940 --> 01:22:27.900
than you could have before that.

894
01:22:27.900 --> 01:22:29.700
It means, I'd say, the worker doesn't have to save up

895
01:22:29.700 --> 01:22:30.820
the money to buy his own loom,

896
01:22:30.820 --> 01:22:33.500
he can then have a central location system.

897
01:22:34.500 --> 01:22:35.780
By the way, one interesting thing is that

898
01:22:35.780 --> 01:22:38.980
anti-capitalist types left us and so forth,

899
01:22:38.980 --> 01:22:40.620
and then belly-aching about the factory system

900
01:22:40.620 --> 01:22:44.780
from about 150 years, that this alienates the people from their labor, they don't,

901
01:22:44.780 --> 01:22:50.060
in good old days you used to work at home like on the farm, work at home, family works

902
01:22:50.060 --> 01:22:54.900
at home and now you're, the father or husband of something is yanked away from his, a love

903
01:22:54.900 --> 01:22:59.420
of heart, and has to go to the work place and works in the factory and is alienated

904
01:22:59.420 --> 01:23:00.420
and so forth and so on.

905
01:23:00.420 --> 01:23:04.580
And now we have a situation, now a very high tech, and more and more of a situation where

906
01:23:04.580 --> 01:23:09.620
people can work at home as you know, with computers and so forth, and so now they're

907
01:23:09.620 --> 01:23:19.620
They're belly-aching again, the leftists, the anti-capitalists, but now they don't talk about alienation, they want to stop belly-aching, it's a terrible thing, they can be exploited when they're at home.

908
01:23:19.620 --> 01:23:25.620
This happened with the beloved knitting-cap ladies of Vermont, I think they were, a few years ago.

909
01:23:25.620 --> 01:23:35.620
Apparently in Vermont, I forget if it was Vermont or New Hampshire, anyway, a whole bunch of ladies who sit at home and knit ski caps and sweaters and stuff like that, I think ski caps.

910
01:23:35.620 --> 01:23:44.620
And they were happily, you know, knitting away. It was great shape. They were making money they couldn't have made before. They could work at home. They didn't have to have babysitters and that sort of stuff.

911
01:23:44.620 --> 01:23:57.620
However, it violated the Department of Labor regulations. You can't have homework. Homework is illegal for most occupations. This was put in by labor unions in the 30s.

912
01:23:57.620 --> 01:24:05.620
Somebody who's working at home is not going to join a union, obviously, it's very rare for a home-work person to join some damn union.

913
01:24:05.620 --> 01:24:13.620
So the unions have a law passed to outlaw homework, and when the Department of Labor a few years ago found out, I think it was the Carter administration,

914
01:24:13.620 --> 01:24:19.620
found out that these people were illegal, they cracked down, they said you can't do any ski-capping anymore.

915
01:24:19.620 --> 01:24:25.620
There's a lot of complaints, but pictures of these lovable middle-aged ladies now deprived of their homework.

916
01:24:25.620 --> 01:24:31.620
and they were getting, and the unions were claiming they were being exploited, they were getting below the minimum wage, it turned out they weren't getting below the minimum wage

917
01:24:31.620 --> 01:24:37.620
they were exploited under evil conditions, of course they didn't think their homes were evil working conditions, their homes were in pretty good shape

918
01:24:37.620 --> 01:24:47.620
so in general, the agitation, the result was the Reagan administration came in, what they did was they passed a law saying, I think they say that

919
01:24:47.620 --> 01:24:53.220
C-cap knitting was outerwear, C-cap knitting or something was legal, and nothing else.

920
01:24:53.220 --> 01:24:57.460
Sweaters were still illegal, knitting sweaters at home, everything else was illegal, just

921
01:24:57.460 --> 01:25:02.540
C-caps and some other things, some other subcategories now legal.

922
01:25:02.540 --> 01:25:07.540
I hope it's not legal, I think they'd probably blow that through after Titanic's struggle.

923
01:25:07.540 --> 01:25:12.420
So anyway, they don't talk anymore about alienation, how great it is to work at home, now they're

924
01:25:12.420 --> 01:25:13.420
complaining.

925
01:25:13.420 --> 01:25:17.020
As a matter of fact, now you have a situation like computer types in Little Island are working

926
01:25:17.020 --> 01:25:22.300
in Home, and people are beginning to complain because they have visitors, they have traffic

927
01:25:22.300 --> 01:25:24.340
blocking the roads and stuff like that.

928
01:25:24.340 --> 01:25:28.260
There's a constant struggle, they violate zoning laws, we're not supposed to do anything

929
01:25:28.260 --> 01:25:29.260
at home.

930
01:25:29.260 --> 01:25:34.940
And yeah, the whole big nonsense that involves us shrinks often stay at home, and they try

931
01:25:34.940 --> 01:25:35.940
to outlaw that.

932
01:25:35.940 --> 01:25:37.820
The whole, yeah, it goes on and on.

933
01:25:37.820 --> 01:25:44.060
So anyway, somehow homework, even though allegedly beloved by status, leftist types, and it didn't

934
01:25:44.060 --> 01:25:49.060
And it exists much, now that it can exist, and does much more than I was belaying about that, too.

935
01:25:56.060 --> 01:26:01.060
Okay, corporations come in first, let's say, for railroads, and next for manufacturing, but much later.

936
01:26:01.060 --> 01:26:07.060
For example, Standard Oil was a partnership until quite late, and so was almost all the other companies.

937
01:26:07.060 --> 01:26:20.060
Corporations, the advantage of corporate, the corporation, the corporate form, over partnerships, okay, is several obvious advantages.

938
01:26:20.060 --> 01:26:25.060
First of all, the corporate form is permanent. In other words, you have a bunch of people, they all, yeah.

939
01:26:25.060 --> 01:26:35.060
Deflation? Well, yeah, only in the sense that there was no worry about inflation, no worry about the dollar.

940
01:26:35.060 --> 01:27:04.940
of Dollar, with deflation, yeah, that's right, yeah, oh yeah, yeah, your real income

941
01:27:04.940 --> 01:27:12.980
Well, I don't think deflation creates the situation.

942
01:27:12.980 --> 01:27:15.860
Just that deflation permits productivity to the lower price.

943
01:27:15.860 --> 01:27:16.860
In other words, works the other way around.

944
01:27:16.860 --> 01:27:18.840
An increase in productivity, saving investment.

945
01:27:18.840 --> 01:27:21.500
And this increases the supply of goods.

946
01:27:21.500 --> 01:27:24.660
In other words, high curve shift to the right.

947
01:27:24.660 --> 01:27:25.660
Prices go down.

948
01:27:25.660 --> 01:27:29.500
This increases everybody's real income in terms of purchasing power, so they can invest

949
01:27:29.500 --> 01:27:30.500
more and spend more.

950
01:27:30.500 --> 01:27:31.500
Yeah, sure.

951
01:27:31.500 --> 01:27:36.740
Well, okay, I wouldn't say deflation in the sense of just, in other words, the causal

952
01:27:36.740 --> 01:27:41.900
force factor is you have an increase in, you don't have much monetary inflation, so you

953
01:27:41.900 --> 01:27:46.740
permit the price to fall, this increases everybody's real income, yeah, that's that, yeah.

954
01:27:46.740 --> 01:27:47.740
Right.

955
01:27:47.740 --> 01:27:51.700
There was nothing that somehow, it's good to have deflation per se, it's good when it's

956
01:27:51.700 --> 01:27:56.980
caused by increasing productivity and allows everybody to have increased real income, right.

957
01:27:56.980 --> 01:28:01.380
Because naturally, when you have inflation, a lot of people have decreased real income

958
01:28:01.380 --> 01:28:06.780
because their wages don't catch up with prices, but they don't have that problem here because

959
01:28:06.780 --> 01:28:07.780
prices don't really go up.

960
01:28:07.780 --> 01:28:14.900
Okay, let's take a 10-minute break or so, and then we'll be in cooperation for a lot

961
01:28:14.900 --> 01:28:15.900
to make.

962
01:28:15.900 --> 01:28:18.780
I'm able to acquire large amounts of capital.

963
01:28:18.780 --> 01:28:26.060
First place, I mean, I just sort of, it's not the rank order, it's different advantages.

964
01:28:26.060 --> 01:28:31.940
One is permanent, in other words, if you have a partnership, you and your brother-in-law

965
01:28:31.940 --> 01:28:36.020
and your friends or whatever, when one partner dies, it's a big headache, you usually have

966
01:28:36.020 --> 01:28:39.740
to reorganize the partnership and redistribute the assets, stuff like that.

967
01:28:39.740 --> 01:28:45.060
Corporation is permanent, if one stockholder dies, nobody cares, and the entity itself

968
01:28:45.060 --> 01:28:48.220
just continues on with other stockholders.

969
01:28:48.220 --> 01:28:51.900
Second of all, and this is part of the whole picture, you can transfer your stock, in other

970
01:28:51.900 --> 01:29:00.580
In other words, transferability of ownership In other words, if you have a corporation

971
01:29:00.580 --> 01:29:06.300
with a million shareholders, let's say you have a ten million dollar corporation with

972
01:29:06.300 --> 01:29:17.300
ten million dollars in assets, and you have a million shareholders, that means you own

973
01:29:17.300 --> 01:29:23.980
If you own one share, you essentially own one-tenth of the, excuse me, one share means you're

974
01:29:23.980 --> 01:29:32.980
owning one-tenth, yeah, right, what's the, one-one million, one-ten million, one-ten million,

975
01:29:32.980 --> 01:29:33.980
right?

976
01:29:33.980 --> 01:29:34.980
One million.

977
01:29:34.980 --> 01:29:35.980
One million.

978
01:29:35.980 --> 01:29:36.980
One million.

979
01:29:36.980 --> 01:29:37.980
Sorry, okay.

980
01:29:37.980 --> 01:29:41.820
You own one-one million of the corporation.

981
01:29:41.820 --> 01:29:45.940
So, if you own a whole million shares, you own the whole

982
01:29:45.940 --> 01:29:50.140
ball of wax. Each share is worth ten dollars.

983
01:29:50.140 --> 01:29:55.020
A share would be ten dollars, and

984
01:29:55.020 --> 01:29:58.260
if you own one share, you own one millionth of a corporation.

985
01:29:58.260 --> 01:30:03.660
The thing is, you can sell your share. In other words, if you're a partner, there are four partners in this firm,

986
01:30:03.660 --> 01:30:06.940
you can't sell your share. I mean, you're sort of stuck, you have to

987
01:30:06.940 --> 01:30:11.420
ask your partner to buy you out, but sometimes they don't want to buy you out, and then you're stuck.

988
01:30:11.420 --> 01:30:16.540
So, if you have transferability, very important, you're liquid, in other words, you can sell

989
01:30:16.540 --> 01:30:17.540
out tomorrow.

990
01:30:17.540 --> 01:30:21.140
I want to buy ten shares of IBM, I want to sell it to the market and do it, like that.

991
01:30:21.140 --> 01:30:25.340
I don't have to wait, negotiate with somebody, etc., etc.

992
01:30:25.340 --> 01:30:28.580
So this means if you know that you can transfer ownership whenever you want, you're much more

993
01:30:28.580 --> 01:30:32.620
likely to invest in the corporation, obviously, because it's a real sort of lifetime commitment

994
01:30:32.620 --> 01:30:36.340
to be a partner in some firm.

995
01:30:36.340 --> 01:30:42.140
And three, the stockholder is only liable for the assets that's in the corporation,

996
01:30:42.140 --> 01:30:48.580
in other words, limited liabilities, it's cool.

997
01:30:48.580 --> 01:30:56.580
So in the case of, if you own, in other words, $10 worth of General Motors, whatever it is,

998
01:30:56.580 --> 01:30:58.860
if the General Motors goes bankrupt, you lose your $10.

999
01:30:58.860 --> 01:31:02.100
Let's say you lose the whole thing, you usually don't because they can resell it and whatever,

1000
01:31:02.100 --> 01:31:09.100
But anyway, let's assume the whole corporation disappears, it just goes bluey. All you lose is 10 bucks.

1001
01:31:09.100 --> 01:31:13.100
In other words, the maximum you can lose is 10 million dollars of the total assets.

1002
01:31:13.100 --> 01:31:18.100
But if you're a personal liability, if you're a partnership, you can lose all your personal assets.

1003
01:31:18.100 --> 01:31:27.100
In other words, if you owe a partnership, you owe a million dollars and you liquidate, you go bankrupt, you can only raise 100,000.

1004
01:31:27.100 --> 01:31:30.100
You're liable for the other 900,000, you can have to sell your house and whatever.

1005
01:31:30.100 --> 01:31:34.700
I mean, usually bankruptcy law is limited, but the point is, your personal assets are

1006
01:31:34.700 --> 01:31:35.700
involved.

1007
01:31:35.700 --> 01:31:38.740
Your personal assets are never at risk in a corporation.

1008
01:31:38.740 --> 01:31:44.660
Now you can say, isn't this, there are many arguments about this, many libertarians, free

1009
01:31:44.660 --> 01:31:49.340
market types argue that corporations are immoral because the government limits the liability.

1010
01:31:49.340 --> 01:31:53.860
In other words, this is an artificial limiting, it's a subsidy of the corporation.

1011
01:31:53.860 --> 01:31:54.860
That was the argument.

1012
01:31:54.860 --> 01:31:59.220
I don't think the argument is correct because the thing is, when you're in a corporation,

1013
01:31:59.220 --> 01:32:03.180
You put your creditors on notice. In other words, essentially, if you want to lend money

1014
01:32:03.180 --> 01:32:08.740
to General Motors or IBM or if you're a worker and you're waiting for money, if you buy a

1015
01:32:08.740 --> 01:32:12.820
bond or whatever the loan happens to be, you know that the corporation's software is a

1016
01:32:12.820 --> 01:32:18.220
limited liability and you take that risk. So it isn't as if the government suddenly

1017
01:32:18.220 --> 01:32:23.740
interferes and says, no, no, the person can't attach the personal assets of whoever owns

1018
01:32:23.740 --> 01:32:27.300
the corporation. You know that at the beginning, you take that chance. So I do not consider

1019
01:32:27.300 --> 01:32:35.500
The only subsidy that comes in here is when a corporation commits a tort, in other words,

1020
01:32:35.500 --> 01:32:41.500
a tort is when a corporation somehow injures some person or whatever, a third party injury,

1021
01:32:41.500 --> 01:32:43.940
in other words, when the person doesn't contract for it.

1022
01:32:43.940 --> 01:32:48.660
I don't know what the, you know, corporation, the truck of a corporation kills somebody,

1023
01:32:48.660 --> 01:32:52.980
whatever, or pollution or something, or a nuclear accident.

1024
01:32:52.980 --> 01:32:57.940
These things, of course, are tort and therefore you can't contract a limited liability.

1025
01:32:57.940 --> 01:33:00.060
The corporation has a limited liability for tort.

1026
01:33:00.060 --> 01:33:04.460
That is a subsidy because it's not part of a contract when a creditor agrees to it because

1027
01:33:04.460 --> 01:33:11.060
if you're a third party, a victim of a corporation one way or the other, you haven't agreed to

1028
01:33:11.060 --> 01:33:13.060
any limitation of liability.

1029
01:33:13.060 --> 01:33:16.940
Outside of that, and this doesn't happen very often, a corporation is perfectly legitimate

1030
01:33:16.940 --> 01:33:20.180
from the point of view of the free market or a libertarian legal structure.

1031
01:33:20.180 --> 01:33:25.820
At any rate, the existence of the corporation means that you're going to acquire a vast

1032
01:33:25.820 --> 01:33:26.820
amount of capital.

1033
01:33:26.820 --> 01:33:29.860
Somebody's willing to invest because they know they can sell their shares at any time

1034
01:33:29.860 --> 01:33:30.860
and so forth and so on.

1035
01:33:30.860 --> 01:33:40.060
It's a tremendous advantage to the company, to the investor, and enable an enormous amount

1036
01:33:40.060 --> 01:33:44.180
of growth in the enforcement of manufacturing and in railroad corporations.

1037
01:33:44.180 --> 01:33:50.980
The other thing that comes in after the Civil War, almost from nothing, is the whole concept

1038
01:33:50.980 --> 01:33:51.980
of insurance.

1039
01:33:51.980 --> 01:33:55.900
Insurance really begins after the Civil War period, more or less, and it keeps growing

1040
01:33:55.900 --> 01:33:56.900
until this day.

1041
01:33:56.900 --> 01:34:01.140
Life insurance, accident insurance, a whole bunch of stuff.

1042
01:34:01.140 --> 01:34:02.140
Assets keep growing.

1043
01:34:02.140 --> 01:34:06.500
Now, the thing about insurance companies, for example, to give you an idea of a tremendous

1044
01:34:06.500 --> 01:34:13.500
This increase, in 1860, the total assets of life insurance companies, which has been a

1045
01:34:15.060 --> 01:34:22.060
major pileup of insurance, we'll see, total assets of 24 million dollars of all life insurance

1046
01:34:23.500 --> 01:34:30.500
in the United States. By 1897, total assets were 1.35 billion and it's been growing almost

1047
01:34:30.500 --> 01:34:39.460
And it's been growing almost at this rate since then, an enormous increase in capital.

1048
01:34:39.460 --> 01:34:43.180
And they invested in railroads and stuff like that, and the thing is that life insurance

1049
01:34:43.180 --> 01:34:49.860
is a very peculiar industry, much more peculiar than accident insurance or fire insurance.

1050
01:34:49.860 --> 01:34:54.140
Principles of insurance are, I'd say with fire accidents, essentially you're pooling

1051
01:34:54.140 --> 01:35:00.340
risks, let's say there are a thousand buildings in some town and you're worried about fire

1052
01:35:00.340 --> 01:35:03.820
So you pool your risk, and statistically, if you have a large number like that, you

1053
01:35:03.820 --> 01:35:08.260
can pretty well predict that one billion will burn down in a year, or two billion, whatever

1054
01:35:08.260 --> 01:35:09.260
that may be.

1055
01:35:09.260 --> 01:35:13.960
So everybody pools their risk, they all contribute a certain amount of premiums, and then when

1056
01:35:13.960 --> 01:35:19.580
one billion burns down, they pay off the guy who suffers this loss, and they're going to

1057
01:35:19.580 --> 01:35:26.540
calculate it fairly neatly, precisely, on an actuarial basis, so that if you know that

1058
01:35:26.540 --> 01:35:31.980
1 billion turned out and the billion worth say under $1000. You pool these billings,

1059
01:35:31.980 --> 01:35:36.140
you get together and you charge the premiums which more or less fit this competitively.

1060
01:35:37.420 --> 01:35:41.580
You wind up, you pay the guy off and that's it. There's no amassment of capital, assets don't

1061
01:35:41.580 --> 01:35:45.980
matter, there's no big capital investment, it's just you're pooling risk and you pay off the guys,

1062
01:35:45.980 --> 01:35:51.900
the losers. So this kind of insurance, fire insurance, action insurance doesn't pile up

1063
01:35:51.900 --> 01:35:57.620
about capital, it's no great advantage to any group of financial interests to control

1064
01:35:57.620 --> 01:36:02.940
it, because who cares, in a sense, in a pure sense, the assets disappear at the end of

1065
01:36:02.940 --> 01:36:07.260
the year, you know, you pile up 100,000, each guy can, let's say there's 10 people, each

1066
01:36:07.260 --> 01:36:11.420
one contributes a certain amount of money, or let's say a thousand, a hundred people,

1067
01:36:11.420 --> 01:36:15.180
each contributes a thousand dollars a year premium, they collect a hundred thousand dollars,

1068
01:36:15.180 --> 01:36:17.980
they pay off one dollar a year, a hundred thousand, they don't have any assets at all,

1069
01:36:17.980 --> 01:36:20.700
except you know, a little bit of salary or something.

1070
01:36:20.700 --> 01:36:26.700
So, there's no reason for insurance companies to become big financial plums, so to speak.

1071
01:36:26.700 --> 01:36:31.900
And of course with insurance, by the way, another thing about insurance, the thing which

1072
01:36:31.900 --> 01:36:36.820
screws up insurance is when the loser, how should we put this, the loser creates his

1073
01:36:36.820 --> 01:36:37.820
own loss.

1074
01:36:37.820 --> 01:36:46.420
In other words, you have to assume these are acts of God or nature.

1075
01:36:46.420 --> 01:36:51.100
In New York, for example, there's an old tradition of burning down, if you're losing money on

1076
01:36:51.100 --> 01:36:54.100
a store, let's say you burn down the store and collect the fire insurance.

1077
01:36:54.100 --> 01:36:56.180
You're not supposed to do that.

1078
01:36:56.180 --> 01:36:59.220
It's obviously illegal because you're defrauding the insurance company.

1079
01:36:59.220 --> 01:37:02.980
You're not supposed to be paying for somebody who consciously burns down something.

1080
01:37:02.980 --> 01:37:07.100
You're only paying for an accidental fire, obviously.

1081
01:37:07.100 --> 01:37:13.780
So setting your own fire for your so-called loss is obviously a no-no.

1082
01:37:13.780 --> 01:37:16.660
In life insurance, the whole life insurance system is different from all the rest of it.

1083
01:37:16.660 --> 01:37:21.620
Life insurance is a very peculiar industry because in life insurance, with so-called

1084
01:37:21.620 --> 01:37:23.460
term insurance, it's more or less like this.

1085
01:37:23.460 --> 01:37:27.980
In other words, you can tell more or less how many people will die in each age group

1086
01:37:27.980 --> 01:37:32.580
in the United States every year, and then people pool their resources, they can set

1087
01:37:32.580 --> 01:37:35.420
premiums in such a way they pay off the people.

1088
01:37:35.420 --> 01:37:38.820
With term insurance, you don't build up a large amount of capital, but the way life

1089
01:37:38.820 --> 01:37:43.340
insurance has functioned mostly in the United States is so-called whole life insurance,

1090
01:37:43.340 --> 01:37:48.860
where you pile up enormous amount, you charge much more than the competitive rate, you pile

1091
01:37:48.860 --> 01:37:51.700
up an enormous amount of capital which sits there until somebody dies.

1092
01:37:51.700 --> 01:37:59.580
As a result of this, you're essentially paying double, in other words, you're amassing, it

1093
01:37:59.580 --> 01:38:05.580
becomes sort of a capital investment industry where the policyholder doesn't really benefit.

1094
01:38:05.580 --> 01:38:09.620
In other words, he still pays a high premium and the insurance company has an enormous amount

1095
01:38:09.620 --> 01:38:14.700
and the amount of capital which they can use to lower their, increase their profits, so

1096
01:38:14.700 --> 01:38:16.900
their amount of capital amassed.

1097
01:38:16.900 --> 01:38:20.900
The reason why this is allowed to take place is because as you see with the progressive

1098
01:38:20.900 --> 01:38:24.060
period, in addition to everything else, they cartelize the insurance industry and outlaw

1099
01:38:24.060 --> 01:38:29.540
the so-called racketeering insurance, in other words, insurance where they charge a low rate.

1100
01:38:29.540 --> 01:38:32.940
You have to have licenses that are very heavily regulated in the industry for each state.

1101
01:38:32.940 --> 01:38:37.620
As a result, you have the whole thing become the quasi-racket where they have a monopolized

1102
01:38:37.620 --> 01:38:42.260
are cartelized industry, which then when they charge a very high premium, now whole life

1103
01:38:42.260 --> 01:38:46.620
has become more or less discredited, they're getting away from that, because people obviously

1104
01:38:46.620 --> 01:38:47.620
lose a lot of money.

1105
01:38:47.620 --> 01:38:53.820
If you start at the age of 21 or something, keep pouring in premiums and try to, you wind

1106
01:38:53.820 --> 01:38:56.580
up by about 40 or something, you're really paying the insurance companies.

1107
01:38:56.580 --> 01:39:00.820
In other words, what you should really do if you have a whole life policy is keep churning

1108
01:39:00.820 --> 01:39:05.340
it over, cash the policy in, get your cash surrender value and then get another policy

1109
01:39:05.340 --> 01:39:06.340
somewhere else.

1110
01:39:06.340 --> 01:39:09.620
Insurance companies hate that because that destroys the whole racket.

1111
01:39:09.620 --> 01:39:20.620
As a result, the insurance salesmen are always told not to encourage people to do it as a matter of fact try to prevent them from doing it, you don't want to churn it over, that's unethical competition, they would say.

1112
01:39:20.620 --> 01:39:29.260
It's okay to have a new policy, but not to get your new policy by getting a person to cash in the other policy. Once they do that, they realize the whole thing is a racket.

1113
01:39:29.260 --> 01:39:33.700
At any rate, it results in an enormous piling up of resources and assets.

1114
01:39:33.700 --> 01:39:38.700
Plus the fact that insurance companies are mostly non-profit, they're mutually owned.

1115
01:39:40.700 --> 01:39:41.700
Most of them.

1116
01:39:42.700 --> 01:39:45.700
Which means that the trustees don't really own the assets.

1117
01:39:46.700 --> 01:39:52.700
Here they have, they pile up an enormous amount of assets, they don't make any profits on them, as long as they don't go bankrupt.

1118
01:39:52.700 --> 01:39:55.700
It's like colleges, as long as they don't go bankrupt they can take on forever.

1119
01:39:55.700 --> 01:40:01.700
But there's no incentive to maximize your profits because there's no stockholders, there's no partners even, just trustees.

1120
01:40:01.700 --> 01:40:07.140
The trustees, members of the board who have a sort of altruistic function of keeping this

1121
01:40:07.140 --> 01:40:08.140
thing going.

1122
01:40:08.140 --> 01:40:12.580
But so in other words, you have an enormous amount of capital piled up in life insurance

1123
01:40:12.580 --> 01:40:15.100
and it's a plum for financial groups to take hold of it.

1124
01:40:15.100 --> 01:40:19.740
And the way the trustees are self-appointed, in other words, nobody chooses them, they're

1125
01:40:19.740 --> 01:40:21.420
those stockholders.

1126
01:40:21.420 --> 01:40:25.620
And so in the mutually owned companies, they have things like the depositor, quote, an

1127
01:40:25.620 --> 01:40:26.620
owner unquote.

1128
01:40:26.620 --> 01:40:30.340
And so technically, the depositor could vote for the ship, for the board of directors.

1129
01:40:30.340 --> 01:40:35.340
The unhanned deposits can never vote. In other words, in a fine print it says you can't vote.

1130
01:40:35.340 --> 01:40:39.340
So what happens is that there are 8 trustees or 12 trustees, they keep reappointing vacancies,

1131
01:40:39.340 --> 01:40:44.340
they're self-reflectuating oligarchies. So what happens is, by the late 19th century,

1132
01:40:44.340 --> 01:40:48.340
these were taken over by various financial groups, the Morgans, the Rockefellers,

1133
01:40:48.340 --> 01:40:53.340
they all had their own insurance company, and then they could take the assets and vote them to control their company they want to control.

1134
01:40:53.340 --> 01:40:59.340
That was the best of the Standard Oil, the Morgan company, and to vote with the way the Morgan people of the Rockefeller people

1135
01:40:59.340 --> 01:41:04.420
They become allies, they don't actually lose a lot of money and go bankrupt, they don't

1136
01:41:04.420 --> 01:41:05.420
care about making profits.

1137
01:41:05.420 --> 01:41:10.060
So they become, in other words, voting allies of the Morgans, Rockefellers, Vanderbilt,

1138
01:41:10.060 --> 01:41:14.380
whoever, you know, whatever the financial group is.

1139
01:41:14.380 --> 01:41:20.180
So this is by the late 19th century, by the 1890s or so, this becomes an important consideration.

1140
01:41:20.180 --> 01:41:23.900
So New York, for example, Metropolitan, I forget now which it is, one of them, two of

1141
01:41:23.900 --> 01:41:28.060
them are Rockefellers, two of them are Morgans, something like that.

1142
01:41:28.060 --> 01:41:32.420
Now, investment banking I've already talked about, investment banking oddly enough has

1143
01:41:32.420 --> 01:41:35.060
never been a corporation, it's always been a partnership.

1144
01:41:35.060 --> 01:41:39.740
Morgan, Kuhn, Lowell, all these companies, right now, as of this moment, they're becoming

1145
01:41:39.740 --> 01:41:40.740
corporations.

1146
01:41:40.740 --> 01:41:46.580
But until, from the beginning of investment banking until the present, they've been partnerships.

1147
01:41:46.580 --> 01:41:49.180
One of the reasons for that is because they maintain secrecy.

1148
01:41:49.180 --> 01:41:53.180
In other words, if you're in partnership, you don't have to have, you know, make public

1149
01:41:53.180 --> 01:41:57.500
accounting, you don't have to fulfill requirements, nobody really knows what's going on.

1150
01:41:57.500 --> 01:42:01.460
They could have secret deals without being in the public eye.

1151
01:42:01.460 --> 01:42:07.260
They could just increase the number of partners, but in the case of the Morgans, as we'll see

1152
01:42:07.260 --> 01:42:12.740
in particular, they had political partners, in other words, two or three guys were assigned

1153
01:42:12.740 --> 01:42:15.340
the task, almost did no investment banking.

1154
01:42:15.340 --> 01:42:18.900
Their job was to put mergers together in the lobby and government, get government regulations

1155
01:42:18.900 --> 01:42:20.140
they want, stuff like that.

1156
01:42:20.140 --> 01:42:27.140
They became sort of political partners rather than strict investment bankers in the United

1157
01:42:27.140 --> 01:42:39.780
in a narrow sense, so by the, as we'll see, by the 1890s, as we begin to have corporations

1158
01:42:39.780 --> 01:42:44.420
in manufacturing, and the Morgan's get into that, the Morgan's begin to promote the idea

1159
01:42:44.420 --> 01:42:50.340
of mergers, either cartels or mergers, cartels didn't work very well with railroads, so instead

1160
01:42:50.340 --> 01:42:54.980
of cartels, they got another gimmick, namely, why don't we have a situation where all the

1161
01:42:54.980 --> 01:42:59.260
companies, if there are eight companies in one industry, why don't they all pool their

1162
01:42:59.260 --> 01:43:01.940
resources and become one company and then they'll have a monopoly, then they can raise

1163
01:43:01.940 --> 01:43:02.940
the price.

1164
01:43:02.940 --> 01:43:03.940
That was the idea.

1165
01:43:03.940 --> 01:43:04.940
The so-called great merger movement.

1166
01:43:04.940 --> 01:43:13.300
We'll go into some details on this probably next time, maybe Tuesday, the next Tuesday.

1167
01:43:13.300 --> 01:43:16.980
So the idea of the merger was, it would act like a cartel except you wouldn't have to

1168
01:43:16.980 --> 01:43:22.860
worry about internal competition and cheating because they just merge into one corporation,

1169
01:43:22.860 --> 01:43:28.860
one holding company, one trust as it was called, it was called a trust and they used a trust

1170
01:43:28.860 --> 01:43:34.900
instrument, they have a trusteeship instrument, so the idea is this, okay, we'll take the

1171
01:43:34.900 --> 01:43:38.060
steel, all the steel companies, let's say there are 80 steel companies all competing

1172
01:43:38.060 --> 01:43:42.340
very vigorously, why don't they all merge into one steel company, US Steel, which is

1173
01:43:42.340 --> 01:43:49.140
the origin of US Steel by 1901, and we'll have, and then you see they can take all these,

1174
01:43:49.140 --> 01:43:53.540
They can leverage everything and then they can take supply and they can cut the production

1175
01:43:53.540 --> 01:43:54.540
and raise price.

1176
01:43:54.540 --> 01:43:55.540
That's the whole point.

1177
01:43:55.540 --> 01:44:00.380
They can dump some of the plants which are inefficient or whatever, dump that and then

1178
01:44:00.380 --> 01:44:03.900
we'll cut production and raise price and achieve their monopoly profits that they've been longing

1179
01:44:03.900 --> 01:44:04.900
for.

1180
01:44:04.900 --> 01:44:10.660
So that's the, that was the, and they did this by the way in late 1890s with two merger

1181
01:44:10.660 --> 01:44:11.660
ways.

1182
01:44:11.660 --> 01:44:19.060
One of the early 90s, a major one, a few years 1898 to 1901, where literally several

1183
01:44:19.060 --> 01:44:24.460
100 industries all have these monopoly mergers, a whole raft of them. I'll go into some examples

1184
01:44:24.460 --> 01:44:30.980
a little bit later. Sugar refining, oil, steel, agricultural machinery, the whole bit. And

1185
01:44:30.980 --> 01:44:33.820
the interesting thing is that every one of these cases virtually, the whole thing is

1186
01:44:33.820 --> 01:44:38.580
a flop-a-roo. They're usually put through by the Morgans. U.S. Steel was a Morgan merger.

1187
01:44:38.580 --> 01:44:42.380
General Electric, the idea of General Electric was to have one merger monopoly company that

1188
01:44:42.380 --> 01:44:48.900
was also a Morgan. AT&T was Morgan, of course. They achieved a monopoly through government

1189
01:44:48.900 --> 01:44:55.580
Regulation through Patents and Federal Communications Commission later.

1190
01:44:55.580 --> 01:45:00.700
All these things are reflections of an attempt, usually led by Morgan and others, to have

1191
01:45:00.700 --> 01:45:03.860
a monopoly and then they can cut production and raise fights.

1192
01:45:03.860 --> 01:45:04.860
It's flopped every time.

1193
01:45:04.860 --> 01:45:06.900
The reason it's flopped was, first of all, monopolies are inefficient.

1194
01:45:06.900 --> 01:45:11.140
We'll get to this a little later because the National Biscuit Company was originally a

1195
01:45:11.140 --> 01:45:15.340
monopoly attempt to have a monopoly, monopolize all biscuits and cookies in the country, packaged

1196
01:45:15.340 --> 01:45:16.340
cookies.

1197
01:45:16.340 --> 01:45:22.340
Roll a flop-a-roo, because new companies will come in, even though they didn't cheat, even though they merged,

1198
01:45:22.340 --> 01:45:26.340
they raise their profits and immediately, hey, this is a monopoly company, got high profits, let's zip in there,

1199
01:45:26.340 --> 01:45:30.340
a new plant, a better plant, all of a sudden they have new guys, new cookies,

1200
01:45:30.340 --> 01:45:36.340
new sugar refining, new oil, new whatever, and then they're stuck, then the whole

1201
01:45:36.340 --> 01:45:41.340
cartel or merger is broken, the company loses a percentage of share all the time,

1202
01:45:41.340 --> 01:45:44.340
and then they're stuck with two or three new permanent companies with good competitors

1203
01:45:44.340 --> 01:45:49.220
have modern equipment, much more modern because they're new. They come and zip brand new

1204
01:45:49.220 --> 01:45:54.020
equipment and they're stuck from then on. All these, US Steel, for example, is a classic

1205
01:45:54.020 --> 01:45:58.100
case of a company which was a total flop of rules from the very beginning. It started

1206
01:45:58.100 --> 01:46:03.060
with, they tried to get 100% of the market. They only achieved about 80% or something

1207
01:46:03.060 --> 01:46:09.340
at the peak. They kept losing shares all the time. They kept losing money, having suffering

1208
01:46:09.340 --> 01:46:14.820
losses, and from that day, from 1901 until the present, you're still in a crummy company,

1209
01:46:14.820 --> 01:46:19.420
they've been constantly losing their share of the market, always behind the new technology,

1210
01:46:19.420 --> 01:46:26.500
the last people to put in the oxygen and whatever process, and always stumbling through life,

1211
01:46:26.500 --> 01:46:31.940
and because they were constructed as a monopoly and not as an efficient free market competitive

1212
01:46:31.940 --> 01:46:32.940
kind of company.

1213
01:46:32.940 --> 01:46:38.940
And the same thing happened to all the others, as we'll see, and what they had to do to really

1214
01:46:38.940 --> 01:46:50.420
So even though they didn't have any internal cheating, the external pressure was enormous

1215
01:46:50.420 --> 01:46:56.020
to come in and nip in with new plants, new steel plants, new oil refineries and all the

1216
01:46:56.020 --> 01:46:57.020
rest of it.

1217
01:46:57.020 --> 01:47:01.020
But this is, I'm just giving you a sort of an indication of the future.

1218
01:47:01.020 --> 01:47:02.020
Yeah?

1219
01:47:02.020 --> 01:47:11.020
Oh, that would be a tough thing to do, but they'd merge and each one, they'd all pool

1220
01:47:11.020 --> 01:47:15.140
their shares into one giant company, it's a standard oil deal, it's a U.S. deal, they

1221
01:47:15.140 --> 01:47:19.300
have like 80 companies, 20 companies, whatever it is, they take their shares and they pool

1222
01:47:19.300 --> 01:47:24.340
them, they all become pro-rata shareholders in a new company, with one big company. Of

1223
01:47:24.340 --> 01:47:29.060
course, there are a lot of headaches to do it, but they usually agree like you're ahead

1224
01:47:29.060 --> 01:47:33.860
of One Company and your merger becomes president of the division of that company, something

1225
01:47:33.860 --> 01:47:34.860
like that.

1226
01:47:34.860 --> 01:47:39.460
They do that now, in a sense, you merge with publishers, let's say, merge all the time,

1227
01:47:39.460 --> 01:47:44.380
and the old publisher becomes, is brought out, he still remains president for the life of

1228
01:47:44.380 --> 01:47:46.980
his division, you know, until he retires, stuff like that.

1229
01:47:46.980 --> 01:47:49.780
So they do things like that, they have agreements to do that.

1230
01:47:49.780 --> 01:47:56.780
Well, yeah, they've done, I mean, Carnegie, for example, built, as we'll see later, we

1231
01:47:56.780 --> 01:48:12.780
Carnegie built up a giant Carnegie Steel Corporation, he was a very good entrepreneur, a great steel man, but then he gets a little old, he figures out he's ready to retire, he sells out to Morgan, he becomes part of U.S. Steel, he gets a huge amount of money and he retires and becomes an older statesman.

1232
01:48:12.780 --> 01:48:21.780
So that's the way it's done, you get to the point where you figure out, I've had it, I'm going to go to Europe or something, and you become part of the great Morgan Empire.

1233
01:48:21.780 --> 01:48:34.780
So, the key thing is it didn't work, it was a flop-a-roo, because of this fantastic amount of new competition coming in, and we'll see how the same thing with standard oil.

1234
01:48:34.780 --> 01:48:45.780
With standard oil, by the way, I'll just repeat this in detail later, what happens with standard oil, Rockefeller never attempted to get a monopoly in crude oil or distribution or anything like that, he could never do it.

1235
01:48:45.780 --> 01:48:51.780
You try for monopoly oil refining, because refining is the most highly capitalized part

1236
01:48:51.780 --> 01:48:52.780
of the industry.

1237
01:48:52.780 --> 01:48:57.180
And he got at one point, he did it by buying them out, by having mergers, like what's your

1238
01:48:57.180 --> 01:49:00.380
price when you buy oil refinery.

1239
01:49:00.380 --> 01:49:07.780
He got to the point where he got about, peaked about 90% of oil refinery in the United States.

1240
01:49:07.780 --> 01:49:12.380
And then what began to happen was that people began to say, I'll do this in more detail

1241
01:49:12.380 --> 01:49:15.700
later, we'll run a little bit later, but what happened is this.

1242
01:49:15.700 --> 01:49:19.180
People would know in the industry, hey, this guy Rockefeller is willing to buy every refinery

1243
01:49:19.180 --> 01:49:21.300
built and then put, you know, not use it.

1244
01:49:21.300 --> 01:49:25.860
He became sort of a sucker, in other words, people ran into the business of building refineries

1245
01:49:25.860 --> 01:49:27.340
so that Rockefeller had to buy it.

1246
01:49:27.340 --> 01:49:31.340
They didn't expect to use it, hell, there's this jerk over there that's going to buy my

1247
01:49:31.340 --> 01:49:34.940
refinery, and so they started using, also, building fake refineries, like it looks like

1248
01:49:34.940 --> 01:49:39.380
a refinery, except there's nothing in those old equipment, you know, a Potemkin refinery,

1249
01:49:39.380 --> 01:49:40.380
if you want to call it that.

1250
01:49:40.380 --> 01:49:45.380
This is a takeover of the so-called Potemkin village in Tsarist Russia.

1251
01:49:45.380 --> 01:49:50.380
They have a big shot visitor to show that the peasants are happy and smiling.

1252
01:49:50.380 --> 01:49:53.380
They have a fake village consisting mostly of Tsarist police agents.

1253
01:49:53.380 --> 01:49:56.380
Here's a village of happy peasants, and they show the people too.

1254
01:49:56.380 --> 01:49:59.380
And six hours later, when they go on, the village disappears.

1255
01:49:59.380 --> 01:50:02.380
Of course, the communists did something similar later on.

1256
01:50:02.380 --> 01:50:04.380
Anyway, it's called the Potemkin village.

1257
01:50:04.380 --> 01:50:09.380
It has essentially a Potemkin refinery. It looks like a refinery, but there's no stuff in it.

1258
01:50:09.380 --> 01:50:12.420
So finally Rockefeller at one point says, I'm sick of this, I'm losing money, I'm buying

1259
01:50:12.420 --> 01:50:15.860
these damn refineries, I have nothing to do with them, and he put, I'm sick of saying

1260
01:50:15.860 --> 01:50:19.940
blackmail these people, I'm stopping the whole thing, he stopped trying to keep the monopolies

1261
01:50:19.940 --> 01:50:20.940
refining.

1262
01:50:20.940 --> 01:50:24.660
What then happened to him later on, by the way, I'm really skipping a lot, but what happened

1263
01:50:24.660 --> 01:50:29.620
to him, he was concentrated as we'll see in western Pennsylvania, that was his oil wells

1264
01:50:29.620 --> 01:50:34.500
and his refinery was in Cleveland, so he had pipelines and transportation stuff, railroads

1265
01:50:34.500 --> 01:50:39.260
to get the oil, his whole life was built on Pennsylvania crude oil.

1266
01:50:39.260 --> 01:50:44.820
and they started around 1900 or so, they started oil discoveries, food oil discoveries in Texas

1267
01:50:44.820 --> 01:50:45.820
and Oklahoma.

1268
01:50:45.820 --> 01:50:46.820
Rockefeller didn't believe it.

1269
01:50:46.820 --> 01:50:50.780
The standard oil people were asked to flash in the pan, their whole life was geared toward

1270
01:50:50.780 --> 01:50:51.780
Pennsylvania.

1271
01:50:51.780 --> 01:50:58.060
As a result, new firms, new young, tiny firms popped up like Texaco and Gulf to exploit

1272
01:50:58.060 --> 01:51:01.380
the Texas oil fields and Rockefeller, the standard oil was way behind on that.

1273
01:51:01.380 --> 01:51:05.420
This is what happens when monopoly companies begin to lose out, they're going to get less

1274
01:51:05.420 --> 01:51:10.940
and they lose out on a competitive framework.

1275
01:51:10.940 --> 01:51:16.500
Same thing happened, by the way, to skip totally to the current post-World War II period, in

1276
01:51:16.500 --> 01:51:19.860
the photography industry, same thing happened in Eastman Kodak, Eastman Kodak used to have

1277
01:51:19.860 --> 01:51:24.700
a monopoly of American, at least American photography, of course, worldwide.

1278
01:51:24.700 --> 01:51:30.980
And so, in two cases, with two of the most dramatic improvements in photography in World

1279
01:51:30.980 --> 01:51:35.040
War II, namely Polaroid and Xerox.

1280
01:51:35.040 --> 01:51:41.040
In both cases, Dr. Land, the inventor of the Polaroid Instance Hammer, and whoever the

1281
01:51:41.040 --> 01:51:45.200
guy was invented Xerox, I forget his name, in each case they went to Eastman Kodak and

1282
01:51:45.200 --> 01:51:49.080
said, here's the process, and offered to sell it to them, you know, in each case the guy's

1283
01:51:49.080 --> 01:51:53.480
the expert, they said it won't work, it won't work, it's too expensive, blah, blah, blah.

1284
01:51:53.480 --> 01:51:57.400
They rejected it, they finally had to go to some bank or friends and get capital and just

1285
01:51:57.400 --> 01:51:58.400
build their own company.

1286
01:51:58.400 --> 01:52:04.920
Of course, I wish I had been in on the beginning, first ten shares of Xerox or Polaroid, so

1287
01:52:04.920 --> 01:52:10.800
So in both cases, these monopoly firms, or quote monopoly firms, unquote, were too set

1288
01:52:10.800 --> 01:52:17.860
in their way, too bureaucratic, just missed out on the top innovations in photography.

1289
01:52:17.860 --> 01:52:20.000
So that's what happens.

1290
01:52:20.000 --> 01:52:31.000
At any rate, another big thing that comes in the late 19th century, of course, is electricity.

1291
01:52:31.000 --> 01:52:38.000
fantastic new thing in power. And we'll see, by the way, how Stanley Welles got caught

1292
01:52:38.640 --> 01:52:43.880
short and sent something like that. The great guy there, we've got one guy, heroic figure

1293
01:52:43.880 --> 01:52:49.320
there, the first is Thomas Edison, great inventor and all that, the electric bulb and everything

1294
01:52:49.320 --> 01:52:53.240
else connected with it. The interesting thing about Edison was, and also Westinghouse, the

1295
01:52:53.240 --> 01:53:00.240
other great, I should say also Nikola Tesla. In both the case of, in both the case of the

1296
01:53:01.000 --> 01:53:03.600
Thomas Edison, George Westinghouse

1297
01:53:03.600 --> 01:53:07.320
neither of them went to college, neither of them were scientifically trained

1298
01:53:07.320 --> 01:53:11.600
it's not true that they were anti-science, they had scientists working for them

1299
01:53:11.600 --> 01:53:16.120
but they were creative geniuses, no question about that

1300
01:53:16.120 --> 01:53:20.240
the interesting thing about Edison in particular, he was very cost oriented

1301
01:53:20.240 --> 01:53:25.760
his whole schtick was, how do we get cheap electricity, cheap electric light for the masses, cheap electric power

1302
01:53:25.760 --> 01:53:28.280
the other inventors who were competing with him

1303
01:53:28.280 --> 01:53:30.800
on the electric bulb, electric light front

1304
01:53:30.800 --> 01:53:35.040
were too entranced with the technology, they wanted elegant technologies and they were like

1305
01:53:35.040 --> 01:53:39.240
people like Maxim and other very good inventors, but they lost out on their competitive rights

1306
01:53:39.240 --> 01:53:42.600
so they were interested in getting an example of a light bulb question, they wanted a perfect

1307
01:53:42.600 --> 01:53:50.720
bulb that would last a long time, a high resistance or low resistance, I forget which is, they

1308
01:53:50.720 --> 01:53:54.680
wanted a low resistance bulb that would last twenty years, unfortunately it cost an enormous

1309
01:53:54.680 --> 01:53:58.440
amount of money, it cost like a thousand dollars a bulb, that was the sort of thing they were

1310
01:53:58.440 --> 01:54:05.440
working on, Edison immediately saw that in order to have a cheap, you have a filament

1311
01:54:06.080 --> 01:54:10.920
of high resistance, you want to have a cheap bulb, and he starts working on that, even

1312
01:54:10.920 --> 01:54:14.720
though technologically it wasn't as elegant, a bulb which would blow out in a year or six

1313
01:54:14.720 --> 01:54:21.040
months, it would be much cheaper, and he starts in on that and he gets a high resistance wire,

1314
01:54:21.040 --> 01:54:23.960
copper wire, etc., which is very cheap, and then he gets it cheaper yet, he starts looking

1315
01:54:23.960 --> 01:54:31.480
And he gets enormous reductions in the cost so he can get a mass product, a cheaper product.

1316
01:54:31.480 --> 01:54:35.040
And he gets the same thing with the dynamo, and he goes to the power station and the whole

1317
01:54:35.040 --> 01:54:38.840
business and each step of the way he looks at where can we cut the cost.

1318
01:54:38.840 --> 01:54:42.720
So instead of having electricity as sort of a toy for very rich people, which is essentially

1319
01:54:42.720 --> 01:54:47.640
what it was beginning, the multi-millionaire could have one light bulb, but if you go to

1320
01:54:47.640 --> 01:54:51.040
the mass productions you get a lot of profits, and so that's the way he went at it, it was

1321
01:54:51.040 --> 01:54:55.480
He was a purely economically oriented inventor.

1322
01:54:55.480 --> 01:54:57.960
And then he starts with an example.

1323
01:54:57.960 --> 01:55:01.640
In 1883, Edison has a light bulb.

1324
01:55:01.640 --> 01:55:04.280
He has a three-wire system.

1325
01:55:04.280 --> 01:55:06.440
He couldn't figure out the cost of copper

1326
01:55:06.440 --> 01:55:10.080
was still very high, and the cost of each bulb was $25.

1327
01:55:10.080 --> 01:55:11.400
It was not going to work.

1328
01:55:11.400 --> 01:55:14.560
And he's looking around for some way, and he's meant to have a three-wire system, which cuts

1329
01:55:14.560 --> 01:55:16.000
in the filament,

1330
01:55:16.000 --> 01:55:18.320
which cuts the cost

1331
01:55:18.320 --> 01:55:21.760
of copper per lamp for $25.00 to a buck and a half.

1332
01:55:21.760 --> 01:55:22.600
That's the way he was doing it.

1333
01:55:22.600 --> 01:55:24.800
It was a dramatic, enormous reduction in cost

1334
01:55:24.800 --> 01:55:27.000
so he could have a mass production system.

1335
01:55:27.000 --> 01:55:30.240
And after he works out the transmission work

1336
01:55:30.240 --> 01:55:31.760
and the dynamo and everything else,

1337
01:55:31.760 --> 01:55:34.080
and finally he says, we gotta charge for this baby,

1338
01:55:34.080 --> 01:55:35.640
you're not gonna have free electricity.

1339
01:55:35.640 --> 01:55:38.160
And he events the meter system, the whole idea of metering

1340
01:55:38.160 --> 01:55:40.120
and hooks it up with the rest of it.

1341
01:55:40.120 --> 01:55:45.120
So, the metering per kilowatt hour used, et cetera, et cetera.

1342
01:55:45.120 --> 01:56:01.120
So while his competitors like Maxim and Swann were looking for an elegant, technologically elegant, very durable bulb of low resistance, he immediately says, no, we aren't cheap bulbs, we need a high resistance filament that starts reducing the copper cost.

1343
01:56:01.120 --> 01:56:07.120
Still, these guys, I mean, people like Edison wasn't right about everything.

1344
01:56:07.120 --> 01:56:13.120
He had tremendous genius type ideas, take 10 of them, 8 of which would be great, 2 of which were totally off the wall

1345
01:56:13.120 --> 01:56:16.120
This is the way inventors apparently operate

1346
01:56:16.120 --> 01:56:21.120
So, for example, when he was working out his electric system, he had a direct current

1347
01:56:21.120 --> 01:56:26.120
And George Westinghouse, another brilliant young, untrained, unscientific inventor, comes to him and says,

1348
01:56:26.120 --> 01:56:29.120
No, he's with the idea of alternating current

1349
01:56:29.120 --> 01:56:34.120
With direct current, you're limited in like a 10 block area, alternating current you can go forever, practically

1350
01:56:34.120 --> 01:56:41.120
So Edison says, no, it won't work, and Westinghouse has to go and get capital somewhere and start

1351
01:56:42.200 --> 01:56:47.400
the Westinghouse Electric Corporation based on alternating current, again with a much

1352
01:56:47.400 --> 01:56:54.400
lower cost system. Westinghouse also had his own peculiar ideas. By the way, Edison insisted

1353
01:56:55.560 --> 01:57:00.320
on running everything himself, every detail of every area, and with him it worked, it

1354
01:57:00.320 --> 01:57:13.320
It doesn't work with everybody. Westinghouse, for example, tried to find an atmospheric engine, in other words, he wanted to get power out of the atmosphere, and he insisted it could work, and they said it couldn't work, and in fact it didn't work.

1355
01:57:13.320 --> 01:57:20.320
Although they tell me my engineering colleagues say they're now beginning to talk about that again. I don't know if they've actually done it. I'm glad they haven't done it.

1356
01:57:20.320 --> 01:57:26.320
Obviously, if they ever do that, it's an unlimited source of cheap power.

1357
01:57:26.320 --> 01:57:31.520
So to say these guys were right most of the time and very wrong other times, that's the

1358
01:57:31.520 --> 01:57:36.880
way the thing works, you can't win them all.

1359
01:57:36.880 --> 01:57:41.760
So with the electric light, with Edison and Westinghouse and all that coming in, as you

1360
01:57:41.760 --> 01:57:48.180
will see with oil, again with standard oil, kerosene was a big oil product and kerosene

1361
01:57:48.180 --> 01:57:59.020
And so, by 1890-1900, kerosene lamps were replaced by electric lamps, and once again,

1362
01:57:59.020 --> 01:58:03.020
Rockefeller didn't quite cotton of this, he kept insisting that kerosene stole the

1363
01:58:03.020 --> 01:58:05.140
waves of the future when it was dying out.

1364
01:58:05.140 --> 01:58:08.820
He didn't realize that gasoline was going to be a key, as automobiles, roads come in

1365
01:58:08.820 --> 01:58:11.260
and automobiles and engines come in and trucks, et cetera.

1366
01:58:11.260 --> 01:58:15.660
So again, standard oil, starting with a virtual monopoly of refining, begins to lose out to

1367
01:58:15.660 --> 01:58:20.220
to other firms, newer ones like Texaco and Golf, et cetera, said, no, no, we think gasoline

1368
01:58:20.220 --> 01:58:25.500
is more important, I've got to catch the, you know, the new trends.

1369
01:58:25.500 --> 01:58:34.500
So the, okay, so with the corporations coming in, stock exchange of course comes in, the

1370
01:58:34.500 --> 01:58:40.180
New York Stock Exchange began around 1819, it was just a few stocks, really government

1371
01:58:40.180 --> 01:58:45.660
and the bonds and a couple of banks and companies, and then railroads come in, and by the late,

1372
01:58:45.660 --> 01:58:50.460
by the 1870s, 1880s, stock exchange becomes a big thing, and it goes indoors.

1373
01:58:50.460 --> 01:58:54.540
By the way, the American stock exchange used to be called the New York Curb Exchange until

1374
01:58:54.540 --> 01:58:55.540
about the 1960s.

1375
01:58:55.540 --> 01:58:58.540
The reason it's called the Curb Exchange, people used to sell stuff on the curb.

1376
01:58:58.540 --> 01:59:03.020
They'd stand there on the street and they'd trade, and so eventually go indoors when,

1377
01:59:03.020 --> 01:59:09.660
you know, it gets too big and the weather becomes unpleasant.

1378
01:59:09.660 --> 01:59:15.060
So we begin to have the, Edison sets up the Edison Electric Light Company, Westinghouse

1379
01:59:15.060 --> 01:59:19.580
sets up the Westinghouse Corporation, which of course is still around. Edison was not impoverished.

1380
01:59:19.580 --> 01:59:23.500
It's good to see somebody with a great inventor that did not die impoverished. He died, of

1381
01:59:23.500 --> 01:59:28.460
course, a millionaire. And Edison Electric Company then falls into the Morgan ambit and

1382
01:59:28.460 --> 01:59:33.140
by, I think, forms General Electric by the late 90s, on the exact date somewhere. This

1383
01:59:33.140 --> 01:59:36.100
was an attempt to have a monopoly which never worked because we always had Westinghouse

1384
01:59:36.100 --> 01:59:48.220
So he refused to go along with it. So Westinghouse stood outside, refused to go into the Morgan

1385
01:59:48.220 --> 01:59:56.860
Ambit and slugged it out. And he got funds from his own friends himself, as we'll see

1386
01:59:56.860 --> 02:00:00.900
later the next time. Rockefeller essentially got funds from himself, his partner, his father,

1387
02:00:00.900 --> 02:00:13.700
Okay, we now get to oil and I'll spend the next time talking in depth about the oil industry.

1388
02:00:13.700 --> 02:00:19.420
Oil starts, interestingly enough, petroleum starts, petroleum is, you think about, usually

1389
02:00:19.420 --> 02:00:22.700
it's charged with capitalist development, industrial development, waste, use a lot of

1390
02:00:22.700 --> 02:00:23.700
resources.

1391
02:00:23.700 --> 02:00:27.500
You have a lot of natural resources and the industry comes in, the natural resources disappear.

1392
02:00:27.500 --> 02:00:31.900
In the case of petroleum, petroleum was not a natural resource until the industry came along.

1393
02:00:31.900 --> 02:00:36.060
Petroleum is just a pain in the neck, it was a big waste product, just black ooze,

1394
02:00:36.060 --> 02:00:39.900
considered, you know, blah, because there's nothing to do with it, nobody knew what to do with it,

1395
02:00:39.900 --> 02:00:45.580
nothing to be done with petroleum. What happened was, before the Civil War, the major

1396
02:00:46.620 --> 02:00:51.580
lighting source was whale oil, whale oil lamps. You've probably seen it in old movies,

1397
02:00:51.580 --> 02:00:56.940
18th century movies, of sailing ships in a whale lamp. A whale was a common resource, okay, so

1398
02:00:57.500 --> 02:01:02.540
Well, unfortunately, as you can say, it was whale communism in the sense that if you kill

1399
02:01:02.540 --> 02:01:04.060
a whale, you own it.

1400
02:01:04.060 --> 02:01:08.260
If the whale's swimming around on the ocean, nobody owns their unowned property.

1401
02:01:08.260 --> 02:01:13.020
You can't own a school of whales, you still can't own a school of fish.

1402
02:01:13.020 --> 02:01:15.420
As a result, the incentive was to kill as many whales as possible.

1403
02:01:15.420 --> 02:01:17.700
If you didn't kill a whale, your competitor would kill a whale.

1404
02:01:17.700 --> 02:01:22.260
There's no incentive to conserve the whale population because there's no private property

1405
02:01:22.260 --> 02:01:26.660
in the whale school or whale's bed, and what do we call these guys?

1406
02:01:26.660 --> 02:01:30.520
So it's usually a different word for collective group of fish.

1407
02:01:30.520 --> 02:01:33.200
As a result of fish communism or whale communism

1408
02:01:33.200 --> 02:01:37.400
and the resource, they have an overuse of whales.

1409
02:01:37.400 --> 02:01:40.560
And they begin to have a big whale shortage,

1410
02:01:40.560 --> 02:01:42.600
a big whale scarcity.

1411
02:01:42.600 --> 02:01:47.600
So, since there was a free market in whale energy,

1412
02:01:47.800 --> 02:01:49.800
so to speak, what happened then is that

1413
02:01:49.800 --> 02:01:51.880
as the supply of whales began to go down,

1414
02:01:51.880 --> 02:01:53.960
the price of whale oil went up.

1415
02:01:53.960 --> 02:01:56.160
As the price of whale oil went up

1416
02:01:56.160 --> 02:02:00.400
and they got more and more expensive. People began to look around for alternative energy sources.

1417
02:02:00.400 --> 02:02:04.260
They didn't have an international energy commission to try to plan this.

1418
02:02:04.260 --> 02:02:11.060
It's purely free market sort of setup. They saw the oil prices were going down and we gotta do something about it. Why don't we do about lamps?

1419
02:02:11.060 --> 02:02:17.520
They started then looking at a technology and maybe an alternative source of lighting and they came up with petroleum, the kerosene lamp.

1420
02:02:17.520 --> 02:02:20.060
And they started using petroleum this...

1421
02:02:20.060 --> 02:02:25.280
originally they started with petroleum which was sort of hanging around the surface of whatever, I don't know where it is, lakes and all of it.

1422
02:02:25.280 --> 02:02:29.200
and, obviously, it's not much of it. In the old days, nobody was using any. They had surface

1423
02:02:29.200 --> 02:02:33.080
petroleum, they started using that, and they thought of the technology now, hey, this looks

1424
02:02:33.080 --> 02:02:36.760
good, you can use kerosene lamps that are even better than oil, and they smell less

1425
02:02:36.760 --> 02:02:40.880
badly and all that sort of stuff, and it's cheaper. And as a result of that, they began

1426
02:02:40.880 --> 02:02:46.800
a drill for oil. The first oil well was Titusville, Pennsylvania, Western Pennsylvania, and by

1427
02:02:46.800 --> 02:02:53.560
God, they found lots of oil. As I said, Western Pennsylvania becomes the big oil area, and

1428
02:02:53.560 --> 02:03:02.660
And this remains that way until after 1900. And so, and then you begin to get refineries,

1429
02:03:02.660 --> 02:03:05.560
the first big refineries were in Cleveland, they weren't very big at first, they were

1430
02:03:05.560 --> 02:03:11.080
sort of small refineries and using, starting with commercial equipment or whatever. And

1431
02:03:11.080 --> 02:03:15.920
John D. Rockefeller, by the way, took the same so-called period type as Hill and Dool,

1432
02:03:15.920 --> 02:03:22.440
and was going to be really short, he was thin, 5'2 or something, 5 foot, started off in fairly

1433
02:03:22.440 --> 02:03:26.680
Stanley impoverished his father with sort of a quack patent medicine salesman.

1434
02:03:26.680 --> 02:03:31.360
He went around, one of these guys, like in the movies, he said, buy this bottle and cure

1435
02:03:31.360 --> 02:03:35.880
your hepatic, sciatica and cancer or whatever.

1436
02:03:35.880 --> 02:03:42.280
And so he was born, by the way, again in western New York, therefore of course he's a Republican.

1437
02:03:42.280 --> 02:03:46.440
If you're not a Calvinist or a Catholic, there are very few Catholics in New York,

1438
02:03:46.440 --> 02:03:48.240
you're of course a Republican.

1439
02:03:48.240 --> 02:03:53.360
and move, family moved to Cleveland, I think it's family moved to Cleveland, it's in high

1440
02:03:53.360 --> 02:03:59.040
school and as with Morgan you'll find out the key Republican figures and key people

1441
02:03:59.040 --> 02:04:02.440
figures in the oil industry turn out to be guys who knew Rockefeller in high school or

1442
02:04:02.440 --> 02:04:03.440
in grade school.

1443
02:04:03.440 --> 02:04:05.640
If you knew Rockefeller in high school or in grammar school you were in.

1444
02:04:05.640 --> 02:04:08.160
Okay we'll resume that on Thursday.