Wall Street Was America’s First Foe in World War II
Breaking up monopolies was the first step in fighting Hitler.
As World War II approached, the lesson of World War I, for Americans, was a frightening one. Despite two and a half years of warning, the United States had entered the First World War unprepared. By 1918, the U.S. field army numbered 5 million men but still relied on British and French allies for artillery and other equipment.
The United States had started late, and it tried to “bait” its manufacturers into expanding plants with lucrative contracts. U.S. soldiers had to use British and French weapons. The United States of the late 1930s was now in the same situation. On the eve of Germany’s invasion of Poland in 1939, 85 percent of U.S. factory machinery dated from the 1920s or earlier. Some predated the Civil War.
After the invasion of Poland, Americans didn’t necessarily want to intervene in Europe, but preparedness and support for military spending began to increase. U.S. President Franklin D. Roosevelt asked for larger Army and Navy budgets. But to build that larger Army and Navy, massive supplies of steel, aluminum, copper, and every other material would be necessary. The control of monopolists, who wanted to restrict supplies of these metals, would have to be broken.
What Roosevelt called in 1932 the “unofficial … economic Government of the United States” had to be dismantled, and replaced with democratic means of wielding power. The system that monopolists such as J. Pierpont Morgan and Andrew Mellon had put together did not just wield power over government; it was a government in and of itself. This government of the monopolists had two separate layers of power. There were individual monopolies. Mellon’s aluminum giant Alcoa, for instance, was not only an aluminum producer, but the regulator of the aluminum trade itself. It controlled pricing, output, wages, and the buying of key inputs, such as electric power.
As Morgan, and then Mellon, took a set of businesses and turned them into monopolies, power passed from the engineers, workers, and communities who created, invented, and produced, to financiers, salesmen, and lawyers who controlled, restrained, and manipulated. The second layer was how these monopolies related to one another. An individual monopoly controlled just a single branch of trade. It became a political system when its power, the power of one boss, was combined with other monopolies, the power of many bosses. And this system—of big-business bosses monopolizing the key channels of trade and commerce—still lived on Wall Street.
Wall Street was where financiers moved resources around, through lending or borrowing money, and combined or split up companies. The task for the White House and the populists in Congress was to take this private government apart and construct a democratic one. That meant breaking up the industrial monopolies that ruled specific industries and replacing the rule of banks with competitive regulated markets, with protections for workers and producers. It meant recapturing the ability to print money and control the economy. It meant breaking apart and replacing Wall Street with public channels of financing, so that corporations were free from financial masters. This did not mean undermining business, but liberating it from monopoly and financial power.
The lawyer Robert Jackson would again lead the way. Jackson had been a favorite of Roosevelt since he had put Mellon on trial for tax evasion. He had done stints at the Securities and Exchange Commission, the Department of Justice, and the Bureau of Internal Revenue, and defended New Deal programs to a hostile Supreme Court. He was Roosevelt’s legal ace. As he had shown with his high-stakes Mellon trial, Jackson loved litigating, he was good at it, and he could take on some of the tougher and more complex cases.
In 1937, Roosevelt assigned Jackson the task of reviving a moribund corner of the government, the Department of Justice’s Antitrust Division, which the corporatist planners of the New Deal had effectively shut down for years. With limited resources, Jackson decided to focus only on the “most flagrant cases” of monopolization in the country, and the one in which the “greatest public interest is involved.” On April 23, 1937, the government filed suit, seeking dissolution of the Aluminum Company of America (Alcoa).
The government lost the initial rounds of the Alcoa case. But the arrival of the war itself would give a new impetus to the struggle.
In the summer of 1939, Philippe Levelle, an official from a French aluminum company, visited an American business executive, Richard Reynolds, in Virginia. Reynolds was president of Reynolds Metals, which bought aluminum from Alcoa and fabricated it into aluminum foil. Reynolds had heard that the Germans were buying large amounts of bauxite from France. He wondered if this was being used for armaments. Levelle wasn’t worried and said that the Germans were short of brass and were using aluminum for window frames and doorknobs.
Germany had become the largest aluminum producer in the world by 1938. Within a few months, as Reynolds put it, “French bauxite was being returned to France in the shape of German planes.” When the war started, Germany seemed unstoppable. Poland’s army collapsed immediately in 1939. In April 1940, Germany conquered Denmark and Norway, and in early May, Hitler’s forces invaded France. Americans had expected a long stalemate similar to the First World War, and the ample time that would afford the United States to ramp up if necessary. France had a powerful military and was considered one of the most important major military powers in the world. But faced with Germany’s awesome new weapons, wielded through blitzkreig tactics, France surrendered within six weeks. England stood alone. The Germans began bombing Britain from the air.
Even so, the defense buildup in the United States was agonizingly slow. When France surrendered, the Army Air Corps had 2,755 planes, and most of these were old or used for training purposes. Hitler was receiving more material from French factories he had taken over than Britain was receiving from the United States. “Prime Minister Churchill said of the Royal Air Force that never in history did so many so much to so few,” wrote investigative journalist I. F. Stone. “It might be said of us,” wrote Stone, about American monopolies, “that never did a people do so little with so much.”
Churchill was talking about the Battle of Britain, where a few Royal Air Force pilots saved England from the German air force’s constant bombing barrages over London. Stone was comparing this courage to Alcoa, and its habit of withholding desperately needed aluminum production—for planes and other war-related industrial parts—to preserve the price of the metal. To Stone, American financial masters were colluding with the fascist powers. And there was proof in the cartel deals that Standard Oil of New Jersey and Alcoa, among others, had made with German chemical and metal companies.
In May of 1940, Roosevelt sought to direct America’s industrial might in building every kind of weapon imaginable, as well as inventing new ones, and churning out the foodstuffs, metals, medicines, and raw materials necessary to equip a 10-million-person army. He publicly said that the nation would need to build 50,000 planes a year, which was equivalent to the total number the military had bought between 1909 and 1940. To build much of this, especially an air force, it would need aluminum. Shortly after Roosevelt called for 50,000 planes a year, Reynolds went to see Arthur Davis of Alcoa.
To Reynolds, Davis seemed as complacent about the United States’ aluminum supply as Levelle had been about French needs. Germany would soon be able to make much more aluminum than the United States, noted Reynolds. Perhaps Davis should ask the government to finance the buildup of capacity to match the Nazis’ capacity to make a billion pounds of the metal a year. Davis, who felt it a burden to accept funds from the government, said Reynolds was “unnecessarily alarmed.” There would be no shortage.
Davis’s prediction proved laughable. In November 1940, the Northrop Aircraft Company cut hours by 20 percent due to a metal shortage. By May 1941, work on bombers by one of the more promising American aerospace companies, Boeing, had ceased because of inadequate aluminum supplies.
Congress reacted angrily. Sen. Joseph O’Mahoney attacked Alcoa for delaying the manufacture of warplanes by “keeping supplies down in order to keep prices up,” while adding that the chemical, iron and steel, metal, electric, and shipping cartels had “all played their part in the growth of Hitler’s power.” Whether the ongoing antitrust suit was decided for or against Alcoa, he said, “it is clear that the manufacture of American airplanes needed to fill our own and British orders has been seriously delayed because parts manufacturers have been unable to get a sufficient amount of aluminum to fill their orders.”
In August 1940, after a conversation with and encouragement from Sen. Lister Hill of Alabama, Reynolds decided to enter the aluminum manufacturing business himself and compete with Alcoa, if the government would lend him the money to do so. Fortunately for Reynolds, a low-key antimonopolist in government named Clifford Durr had realized that the U.S. government would have to become the major banker in the war. Durr was a corporate lawyer from a wealthy family in Montgomery, Alabama; he moved to Washington in the early 1930s on the recommendation of his brother-in-law, Hugo Black. Durr took a job rescuing banks and railroads at the Reconstruction Finance Corporation, the bailout fund created by former President Herbert Hoover that Roosevelt repurposed to finance various parts of the New Deal. In the 1930s, Durr became concerned over the Nazi threat to liberal values. “Our immediate problem,” he believed, “was one of productive capacity for military supplies—particularly airplanes.”
The United States didn’t have much of an air force. Roosevelt’s goal of 50,000 planes a year was 100 times what the industry had produced in the late 1930s. The United States hit that target by 1942 and doubled it by 1944. Durr saw that the government would have to finance an armaments buildup and lobbied Congress to charter a large public bank to lend money to build factories. It was controversial. One congressman asserted that a bill to let the Reconstruction Finance Corporation deploy private capital “would grant such broad powers to the executive branch of the Government as to make it possible to establish a Fascist state in the United States.” Arthur Krock of the New York Times said the bill was “totalitarian” and “an alarming measure.”
The head of the Investment Bankers Association condemned financing for private capital as ‘a short cut to national socialism.’ Yet Durr succeeded in getting Congress to charter what would be called the Defense Plant Corporation and to begin the rapid buildup of the U.S. armaments industry. Over the course of the war, the Defense Plant Corporation financed the construction of roughly one-third of the new facilities needed to fight the Axis powers, with the Army and Navy supplying much of the rest. It would be a war financed by government bankers, not private financiers. Because of the power this financing brought, antimonopolists ensured that the government owned the plants it financed and hired businesses leaders and engineers to run them.
Meanwhile, the antitrust suit against Alcoa was still going on. In January 1942, Alcoa’s lawyers attacked antitrust chief Thurman Arnold for destroying the morale of the key men in production. In March, at a House Military Affairs Subcommittee hearing, Thurman Arnold took his revenge. He told congressmen that there was Nazi influence over U.S. industry, but that he had the situation in hand. “We had an industry dominated by cartels before the war,” he said, cartels that worked with Nazi companies. “Indictments must go out to make that sort of thing hazardous.”
Arnold was an excellent lawyer, but an even better press hound. He noted that none of these companies lacked patriotism; it just so happened that their behavior helped the Nazis. “It is obvious that this kind of practice on an extended scale throughout industry has been one of the causes why we are short of basic materials,” he said.
Men were dying and prices were going up. But don’t worry, the companies meant well. Sen. Harry Truman, a Brandeis disciple, used the word “treason” to hit the Rockefeller concern, the dominant energy monopoly. Standard Oil of New Jersey couldn’t jump fast enough. Professing innocence about a deal with Nazi dye maker I.G. Farben to withhold production of synthetic rubber, Standard Oil paid a fine and released its patents for all to use. Across the economy, U.S. firms rushed to break the cartel agreements they had with German firms.
Eventually, the military blocked the Antitrust Division from prosecuting more suits; they could bring suits, but had to suspend them until the war was over. So the division started attacking international cartel arrangements. The Department of Justice went after optical goods (Bausch & Lomb’s tie-up with the German Zeiss corporation), tungsten carbide (General Electric and Krupp), electric lamps (General Electric and AEG in Germany), glass electric lightbulbs (Corning Glass and Phillips), potash and nitrogen (DuPont and Allied Chemical), chemicals and pharmaceuticals (Sterling and I.G. Farben, Schering Corporation and the Schering Corporation of Berlin), dyestuffs and photographic supplies (General Aniline and I.G. Farben), synthetic rubber, toluol (used to make the explosive TNT), and magnesium (Alcoa, Dow Chemical, and I.G. Farben).
In March 1945, Alcoa lost its antitrust suit on appeal in federal court, and it was forced to license its patents on a royalty-free basis to competitors. Alcoa was so important, and had had so many investigations for so long, that four Supreme Court justices—now including Justice Robert Jackson—had recused themselves. Congress created a special lower court to hear the case. Judge Learned Hand wrote the decision, setting aside Judge Francis Caffey’s previous dismissal of the case, and held that Alcoa’s monopoly power itself, and not any intent to misuse its power in anticompetitive ways, was the crux of the matter. In doing so, the Alcoa decision settled an important debate in antitrust law. Being an industrial monopoly was now illegal.
Alcoa was never split apart. By the time of the decision, the government had created competition through financing and military purchases that resulted in the emergence of Reynolds and Kaiser as aluminum powers. Roosevelt had instructed his administration to use its ownership of plants to ensure that Alcoa wouldn’t dominate the industry after the war. And Alcoa was forced to share its patents, its industrial know-how, and supplies of bauxite with these new competitors, thus preventing the company from reconcentrating power in the industry. The government restructured the market by selling off competitive aluminum plants. In the disposal of the government plants to industry, Surplus Property Administrator Stuart Symington worked with O’Mahoney and the Department of Justice Antitrust Division to combat Alcoa’s attempt to recapture its “benevolent monopoly.” Instead, aluminum plant ownership was dispersed, leading to a more competitive market structure.
This occurred in industries far beyond aluminum. By the end of the war, the government “held title to 90 percent or more of the synthetic rubber, aircraft, and magnesium industries, owned 55 percent of the nation’s aluminum capacity and the bulk of the nation’s machine tools, and had significant ownership in a variety of other industries.” In restructuring production, the government restructured the economy.
This article is excerpted from Matt Stoller’s Goliath: The 100-Year War Between Monopoly Power and Democracy.
Matt Stoller is a Fellow at the Open Markets Institute. He is writing a book on monopoly power in the 20th century for Simon and Schuster.