A Probusiness Orientation and Scandals in Washington

A Probusiness Orientation and Scandals in Washington

The federal government intervened on behalf of business throughout the nineteenth century, especially in matters of promoting infrastructure and development. At the same time, the federal government sought to regulate business to prevent monopoly and exploitation of consumers. Many observers argued that the government’s track record in this regard was mixed at best. Following the wartime partnership between government and industry, and the anti-Socialist hysteria of the Red Scare, the Republican administration of Warren HardingThe twenty-ninth president of the United States, Harding was a conservative publisher from Ohio whose administration is best known for a series of scandals involving several of his cabinet members. adopted an unapologetically probusiness orientation. Most government officials agreed with Harding’s Vice President Calvin Coolidge, who reputedly declared that “the business of America was business.” The attempted trust-busting of the Progressive Era gave way to toleration of oligarchy—a term that in this context refers to control of an entire industry by a handful of large corporations.

Progressives continued to compile statistics showing how US Steel, Standard Oil, General Electric, and other firms dominated their respective industries and used their positions to control workers and prices. For many Americans, the prosperity of the era seemed out of place with such an indictment of corporate America. Unemployment was at historical lows, wages were at historic highs, and it seemed that scarcity was becoming a problem of the past as Wall Street and Main Street appeared to be prospering together. Equally important, Wall Street was losing its pejorative image as investment firms hired traveling brokers that peddled investments door to door and coast to coast. For the first time, significant numbers of middle-class Americans were purchasing stocks. As a result, statistics about the wild profits of these corporations were just as likely to stimulate investment as indignation.

Figure 6.1

In reference to the Teapot Dome Scandal, the US Capitol is presented as a boiling teapot. The leasing of Wyoming oil reserves had a tremendous impact on the development of the mountainous West, while the revelation of cash bribes greatly reduced the public’s trust in the federal government.

The new probusiness climate facilitated the rise of trade associations and professional organizations that represented the interests of particular industries and professions. In the past, corporate executives traveled directly to Washington to advocate their interests. By the 1920s, some of these new organizations established offices near the nation’s capital and were able to employ specialists who dedicated themselves to advocacy among lawmakers on the behalf of their clients. Some Americans complained that the power and influence of these lobbyists constituted a nefarious “fourth branch” of government. Others argued that lobbyists circumvented the concept of democracy and introduced new opportunities for corruption. After all, they argued, these advocacy groups provided funding for congressional campaigns that appeared to many as bribes. In some cases, cash was distributed directly to the lawmakers themselves.

Several dishonest legislators were exposed in the early 1920s, and some of the biggest scandals were tied to the Harding administration itself. The first scandal was the discovery that the head of the Veterans Bureau was accepting kickbacks from government contractors and even looting medical supplies that were supposed to be used for injured veterans. Harding’s attorney general was later indicted for fraud regarding “irregularities” with the disposition of German assets that had been seized during World War I. He was also accused of receiving kickbacks from bootleggers.

The biggest scandal of the 1920s involved Secretary of the Interior Albert Fall who was believed to have accepted $400,000 in bribes. In exchange, Fall permitted private oil companies to drill on public land in Wyoming. These oil reserves, such as the massive Teapot Dome reserve, were supposed to be left undeveloped as an emergency resource for the military so that the United States would never be dependent on foreign oil during war. The incident was soon labeled the Teapot Dome ScandalErupted when news that Secretary of the Interior Albert Fall had arranged to lease the US Navy’s Oil Reserves at Teapot Dome, Wyoming, to a private oil company. Fall had received hundreds of thousands of dollars in bribes to permit drilling on publicly owned lands containing oil that had been reserved for use by the navy., a phrase that became synonymous with government corruption throughout the next generation. The public was even more enraged when Albert Fall was only ordered to pay a $100,000 fine and serve one year in jail.

Harding was not directly connected to any of these scandals and remained a popular president prior to his sudden death in August 1923. Calvin Coolidge replaced Harding as president and continued the probusiness policies favored by Harding and the Republican Party. Both of these presidents typified the profile of what many Americans expected of their presidents: a dignified leader and a model citizen. Later revelations would demonstrate that despite their images as devout Christians and family men, neither was above the temptations that ensnared many other men of wealth and power. More damaging, at least to the reputation of the late President Harding, was the revelation that he likely knew many of the details about the scandals within his administration but had failed to prevent them. Though he knew them to be incompetent or unethical, Harding delegated authority to several cabinet officials because they supported his administration and/or were personal friends from his days in Ohio politics. Known as the “Ohio Gang,” even though many of the members of Harding’s cabal were not from the Buckeye State, these Republican leaders became infamous for corruption. Many also were known to be gamblers and had numerous extramarital affairs that conflicted with their public image and espoused Christian living.

Despite the revelations of corruption, most of the legislation that was favorable to business interests during the early 1920s also promoted economic growth that provided some benefits to the nation’s overall welfare. For example, the automotive and oil industries lobbied Congress to approve the Federal Highway Act of 1921. This law provided matching grants for states to build highways and bridges. Although the interstate system would not be developed until after World War II, this program required recipients to coordinate their efforts with neighboring states to create a nationwide grid of roads.

Figure 6.2

Andrew Mellon placing a wreath at the foot of a statue honoring Alexander Hamilton. Mellon was an influential Secretary of the Treasury who supported many of the conservative views of Hamilton, a Founding Father and the first Secretary of the Treasury. Mellon was also a wealthy philanthropist who donated millions to the University of Pittsburgh, his alma mater.

Secretary of the Treasury Andrew Mellon was staunchly conservative and supported the era’s deep tax cuts for the wealthy. He also resurrected one of the Progressive goals by creating the General Accounting Office, which audited the government’s budgets and expense reports. Mellon advocated low taxes for corporations and the wealthy—a condition he believed was a prerequisite for economic expansion. Harding also appointed four conservative and probusiness appointees to the Supreme Court. Bolstered by the inclusion of these conservatives, the Supreme Court repealed federal child labor laws and upheld numerous injunctions ordering unions to halt strikes and return to work.

The Republican-controlled Congress and White House of the 1920s approved three policies that favored business interests, wealthy individuals, and some members of the middle class. Fearful that a European recovery would result in US businesses once again being forced to compete with foreign goods, Congress raised tariffs. These taxes helped to protect US businesses by making foreign goods more expensive, but the law also kept consumer prices artificially high. Second, Congress enacted a series of laws that reduced the tax rate for the wealthiest Americans from over 70 percent to just over 20 percent. Congress also raised the exemption level, which meant that a larger number of middle and upper-middle-class families were no longer required to pay any federal tax. Congress also reduced estate taxes that were assessed on large fortunes passed down to the next generation. Lastly, Congress approved reductions in government spending that resulted in balanced budgets but also led to reduced enforcement of the already-lax regulations on businesses and financiers.

Wealthy individuals and corporations benefitted from each of these decisions, at least in the short run. The tariffs led to increased profits for manufacturers, while the tax reductions permitted entrepreneurs to finance new businesses. Because some of these profits were reinvested in ways that led to job creation, a portion of the economic benefits of lower taxes for businesses and the wealthy likely benefitted the rest of the nation. It would later be apparent, however, that the majority of Americans were not earning enough money to sustain the economic rally of the 1920s, which had been built largely on consumer spending.

The tariffs made it difficult for European nations to repay their debts, and Congress was forced to permit a series of extensions on loans that would eventually default. Progressives argued that the tax reductions Andrew Mellon recommended led to concentrated wealth in the hands of the few. These individuals would later claim that the stock market crash was the result of the wealthy using their revenues to speculate in real estate and the stock market rather than invest in new businesses. By this perspective, lowering the tax rates for the wealthy might reduce stability rather than spur productive investment and job creation.