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Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969-1974

Author(s):Ferrell, Robert H.
Reviewer(s):Chappell, Henry

Published by EH.NET (April 2011)

Robert H. Ferrell, editor, Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969-1974. Lawrence, KS: University Press of Kansas, 2010. xiv + 133 pp. $25 (hardcover), ISBN: 978-0-7006-1730-2.

Reviewed for EH.Net by Henry Chappell, Department of Economics, University of South Carolina.

Arthur Burns served as Chairman of the Federal Reserve Board (the Fed) from 1970 to 1978. Prior to serving at the Fed, he had distinguished himself in academia at Columbia University, had served as the Chairman of President Eisenhower?s Council of Economic Advisors, and had been president of both the National Bureau of Economic Research and the American Economic Association. He had also served President Nixon as an advisor prior to his years at the Fed.

As Fed Chairman, Burns inherited an incipient inflation, an inflation that accelerated under his tenure. His reign at the Fed is also known for an unhealthy mixing of politics and economics; it has been alleged that Burns? expansionary policies prior to the 1972 election were motivated by an effort to secure a Nixon win. There is little doubt that Nixon was a political schemer, but Burns? motivations have always been more difficult to assess.

As the title suggests, this book is a diary kept by Burns during the Nixon years, beginning with inauguration day in 1969 and concluding shortly before Nixon?s resignation in July 1974. The volume has been edited by Robert H. Ferrell, emeritus professor of history at Indiana University. Ferrell has left Burns? original wording intact, but has annotated the entries to provide helpful context for the reader. After Burns assumed the Fed Chairmanship, he continued to play a role as a key Nixon advisor and he observed and interacted with all of the major Nixon administration appointees. Because of his proximity to the administration, Burns? diary is able to describe the political machinations that preceded important events like the abandonment of the gold standard, the imposition of price controls, and the expansion of the money supply in advance of the 1972 election.

Ferrell tells us that Burns ?wrote this diary to hold in his mind the strengths and foibles of the leading figures of the Nixon administration, not least the president himself? (p. vii).? Burns clearly succeeded in chronicling the foibles of others; his assessments are rarely flattering. Burns says that former Treasury Secretary George Schultz was a ?woefully ignorant ideologist? (p. 66). Of William Martin, his predecessor as Fed Chairman, Burns says, ?Poor fellow, he thinks he owns the Fed and has suddenly discovered that he is so indispensable that the job must not go … to anyone else. Pathetic slob!? (p. 14).? Burns dismisses Sargent Shriver, saying, ?What a damned fool that lacquered fellow is! More stupid than I had realized.? Similarly, IMF head Pierre-Paul Schweitzer ?… is a pathetic man, always on the defensive one way or another? (p. 58).

Burns was equally harsh in his assessment of Paul Volcker, who, at that time, was serving as an undersecretary of the Treasury: ?Volcker troubled me, gave a stupid reply to President?s question why the British are interested in raising the price of gold, and I had to clarify the matter? (p. 13). He added that ?he is an indecisive man, full of flaws, and anxieties? (p. 62), and laments that ?… somehow, poor and wretched Volker — never knowing where he stood on any issue — had succeeded in instilling an irrational fear of gold in his tyrannical master [Treasury Secretary John Connally]? (p. 65). Ironically, history will portray Volcker as the heroic figure who, as Fed Chairman, finally put an end to the Great Inflation that began under Martin and accelerated under Burns.

Burns does offer at least one positive evaluation of an administration colleague, one that is comically inappropriate: ?Ted Agnew is an honest man. He has plenty of guts and good sense? (p. 76).? Agnew later resigned as Vice President and was convicted of tax evasion in connection with charges of bribery.

Given the profound inadequacies of other Nixon appointees, it was natural for Burns to seek to influence the President.? Ferrell seems to accept this as an appropriate and virtuous role for Burns. He notes that ?the solidity of his [Burns?] self-knowledge made him impervious to the mistakes of politics … when the public interest intervened he could be counted on? (p. ix).

Even if we accept Burns? good intentions, he was neither without ambition nor immune to manipulation. Like many others, Burns craved both the president?s ear and his approval. He wanted to be a part of Nixon?s administration, with influence over all economic issues, not just monetary policy. Nixon was happy to oblige him. Burns met with the ?Quadriad? (Nixon?s key economic appointees), had private meetings with Nixon and administration officials, frequently attended Cabinet meetings, and was even included in Nixon family social events.

What price did Burns pay for this elevated status? He was expected to be a team player. Burns records this expectation explicitly, quoting Nixon as saying ?while my [Burns?] status was a special one, I too will be expected to conform to publicly announced Administration policies? (p. 45).? In August 1971, Nixon announced the adoption of wage and price controls, the closing of the gold window, and the abandonment of the Bretton Woods regime of fixed exchange rates.? When Burns told Nixon that he could fully support the new program, he was rewarded with both praise and trinkets: ?That evening, Saturday, [William] Safire came to see me and told me how pleased the President was with my entire attitude and that he had said that he did not think that one could find another half dozen men like me in the entire country — that, indeed, I was a rare jewel … The next day, Sunday, the President presented everyone at the meeting with a Camp David Jacket, but he singled me and [David] Kennedy out — we were also to receive some Camp David glasses.?

Excuse me, Arthur, did you just sacrifice central bank independence for souvenir glasses?

Later, Nixon chose to ask Burns to chair the Committee on Interest and Dividends, a board with oversight over those income categories under the wage and price guidelines. It would be difficult for any Fed Chairman to raise interest rates during a period of price controls, but for a Fed Chairman to raise interest rates while simultaneously chairing a committee overseeing interest rate pricing guidelines was unthinkable. Nixon had cleverly boxed Burns in with this double appointment. Unfortunately, Burns was easy prey:? ?[Nixon] expressed gratification over my taking chairmanship of Committee on Interest and Dividends, hoped that this would not be embarrassing to Fed, [said] that my hand in this was needed, for a Stans or a Romney would not command the authority or respect required for success. I kept quiet for the most part. How could I disagree?? (p. 58-59).

As Burns was manipulated through attention and flattery, the Fed?s independence was a casualty and the political pressure for monetary ease was irresistible. Burns could not advocate resistance. Had he done so, he would have become a pariah in the administration and — for one who craved a central role — that would have been an intolerable outcome. Burns was quick to note shortcomings of others but he was unable to see how his own imperfections were so tragically exploited.

The Burns diary provides an extraordinary account. Readers will find that Ferrell?s annotations providing historical context are convenient and useful supplements. Ferrell also offers interpretive commentary that is sometimes helpful but, at other times, less so. He presents Burns as a defender of virtue, the public interest, and the gold standard, but fails to comment on the personal frailties that led Burns to sacrifice Federal Reserve independence. Ferrell?s comments on economics are sometimes confused or misleading. For example, his explanation for the crisis leading to the abandonment of gold is that ?The increasing wealth of the European nations and Japan and other factors had sent dollars out of control? (p. 49). Commentary aside, the diary itself is a treasure. It is essential reading for anyone with an interest in the history of the Nixon presidency or the political decisions that sustained the Great Inflation of the 1970s.

Henry Chappell is the Dewey H. Johnson Professor of Economics at the University of South Carolina. He is the author, with Rob Roy McGregor and Todd A. Vermilyea, of Committee Decisions on Monetary Policy: Evidence from Historical Records of the Federal Open Market Committee, MIT Press, 2005.

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (April 2011). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Better Living through Economics

Author(s):Siegfried, John J.
Reviewer(s):Vedder, Richard

Published by EH.NET (August 2010)

John J. Siegfried, editor, Better Living through Economics. Cambridge, MA: Harvard University Press, 2010. viii + 315 pp. $45 (hardcover), ISBN: 978-0-674-03618-5.

Reviewed for EH.Net by Richard Vedder, Department of Economics, Ohio University.


This volume of essays advances the proposition that economic theory and economic research can and has been harnessed to promote human welfare in many different ways, materially improving the quality of our lives and arguably our incomes. Not unusual for compilations of essays, this book contains the good, the bad, and, unfortunately, the ugly. Fortunately, ?the good? dominates, and I would say two-thirds of the volume successfully achieves its mission.

John Siegfried, Vanderbilt professor and Secretary-Treasurer of the American Economic Association, seems to be the prime mover on getting this volume published.? As Richard Caves states in a cover blurb, many of the ?essays are concise, clear and consistently written at a level within the reach of undergraduate economics students.? Good examples include Thomas Tietenberg?s excellent treatment of the evolution of emissions trading to more efficiently deal with restricting environmentally undesirable practices, Elizabeth Bailey?s nice narrative about the benefits of transportation deregulation beginning in the late 1970s, Robert Moffitt?s clear and well balanced discussion of the evolution of the Earned Income Tax Credit, Michael Boskin?s discussion of improvements in measuring inflation, Lawrence White?s analysis of changing views on anti-trust regulation over time, and the Asch, Miller and Warner?s discussion of how the military draft was ended and subsequent issues arising from that.? Each of these authors shows that basic propositions taught in any good principles of economics course can be harnessed to make the world work better and more efficiently. Generally speaking, the discipline and self-correcting properties of markets are stronger and more effective in allocating resources than rules-based command decisions made through the political process. Also, aligning incentives with socially desirable objectives pays.

Anne Krueger?s essay stands out in several respects. First, she very convincingly demonstrates that the move away from protectionist/import substitution policies in the 1950s and 1960s harnessed the spirit of enterprise and brought about enormous improvements in the standard of living for literally billions of people. And she appropriately notes that the underlying theory was not discovered by an National Science Foundation grant revealing huge insights, but essentially by the work of Adam Smith and David Ricardo a couple of centuries ago.

This gets to a problem. Economists sometimes get overwhelmed with their own self importance and claim more than they should. John Taylor writes a generally solid essay arguing that reductions in macroeconomic stability in modern times reflects in large part a move to a more intelligent understanding on the role of monetary variables in the economy. Taylor believes the evolution of new economic modeling in recent decades that combine rational expectations with some allowance for price stickiness has brought about enormous policy improvements.? Maybe, but I side with commenter Laurence H. Meyer (himself a former Federal Reserve Governor) whose views are ?the shifts in monetary policy … are due more to the rediscovery of classical monetary theory than to advances of modern macroeconomic theory. … classical monetary theorists had the story basically right? (p. 165).? The work of Milton Friedman outlined a half century ago — itself informed by still earlier work of quantity theorists and neglected practitioners like Clark Warburton — was far more important than modern-day theoretical refinements.

The less good essays stray a good deal from the stated mission of offering clear, concise explanations of using economics to deal with problems in a language an undergraduate student can understand. Alvin Roth?s paper on deferred-acceptance algorithms is filled with jargon, is exceedingly hard to follow, and deals, frankly, with a far less dramatic advancement in modern economics than improving price indices, promoting the power of comparative advantage, or the gains from transport deregulation.? Modest Roth is not — he cites nearly thirty papers he authored or coauthored in the bibliography.? The McAfee, McMillan and Wilkie piece on auctioning spectrum licenses deals with a moderately more important topic, but again gets into too many details of alternative bidding possibilities to be of interest to all but the most gung ho specialists.

Alas, I must come to the ?ugly? part of this book. This appears to be not simply a volume of essays to promote the practical dimensions of modern advances in economics, but more an effort to increase the income and prestige of economists relative to other scholars.? On page one John Siegfried assets, without a scintilla of supporting evidence, that ?the value of the improved policies documented in this volume is likely hundreds of billions of dollars.?? His agenda becomes clearer very shortly: ?Interestingly … only a few of the contributions outlined here have been financed or promoted through the private sector? (p. 3).? In other words, NSF economics grants have a huge payoff.? Charles Plott even goes further: ?the social value of the contributions of economics compares well with the contributions of basic research in any field of science.? (p. 6). ?This, of course, is a normative judgment without a scintilla of rigorous proof, measuring, for example, the rate of return on research in physics or biological sciences with that in economics or psychology (a point that even the NSF?s Daniel Newlon gently takes him to task on).

All and all, this reinforces my own feelings about our profession. For many, Physics Envy is a big cross to bear — the unwillingness to accept that economics is not considered as respectable as many of the so-called hard sciences.? This volume promotes the good economists have done, ignoring the policy disasters that economists have contributed to, for example, the stagflation of the 1970s, or, arguably, even the financial crisis of 2008 — where were economists in warning about subprime lending, excessive use of untried to financial instruments, etc? Where are we today in opposing stimulus packages that historical experience and economic theory alike say do not work?

But above all, the volume is all about rent-seeking — a plea to get more economics funding for the NSF and related agencies. It is amazing how much Adam Smith, David Ricardo, A.C. Pigou, Irving Fisher and Milton Friedman contributed to the advancement of human welfare without NSF funds. As Austen Goolsbee notes in a recent NBER working paper, more government grant funding inevitably increases economic rents because of the inherent short-term limits on the supply of good talent. If the authors had stuck to presenting the evidence without its obvious and overplayed commercial message, this would have been a far better volume.


Richard Vedder is Distinguished Professor of Economics at Ohio University. With Andrew Gillen, he has recently completed a manuscript ?Universities and Human Welfare? now under consideration at a major university press.

Copyright (c) 2010 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (August 2010). All EH.Net reviews are archived at

Subject(s):Economic Planning and Policy
History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

The Marketplace of Christianity

Author(s):Ekelund Jr., Robert B.
Hébert, Robert F. H
Tollison, Robert D.

Published by EH.NET (March 2007)

Robert B. Ekelund, Jr., Robert F. H?bert, and Robert D. Tollison, The Marketplace of Christianity. Cambridge, MA: MIT Press, 2006. x + 355 pp. $30 (cloth), ISBN: 0-262-05082-1.

Reviewed for EH.NET by J. Daniel Hammond, Department of Economics, Wake Forest University.

“I do not mean that I have observed, all through my narrative, the impartiality of the perfect historian; such detachment is hardly possible, where eternal issues are at stake.” R.A. Knox, Enthusiasm: A Chapter in the History of Religion

This book provides an economic analysis of the evolution of the existential itch-scratching industry. The analysis used is industrial organization and economic history. The period given most attention is the century after the breakout of competition that started in Germany in 1517 and spread across Europe. Also considered are the structure of the industry in the United States and the effect of the industry on economic growth. The authors use the commonplace term for the existential itch-scratching industry, Christianity. Other industries are in no meaningful sense different from Christianity ? Judaism, Islam, Buddhism, Hinduism. All provide consumers with relief from their itch, albeit in different ways. Ekelund, H?bert, and Tollison follow convention in treating Christianity as an industry separate from these others. This is sensible. Elasticities of substitution between Christianity and Islam would seem to be on the low side. The authors’ choice of Christianity rather than, say, Islam is also sensible given that much of their audience is American readers.

It is not known exactly when consumers contracted existential itch, but the malady has persisted since we became human. The Enlightenment gave us science and good government, thereby providing a degree of immunization against the itch, but so far it has not been eradicated. Indeed, the authors predict that scientific marvels such as extra-uterine reproduction, though helpful, will not provide full immunization. “Existential terror will not disappear no matter how far science takes Homo sapiens” (p. 270). It seems that the itch, like hunger but perhaps unlike procreative sex, will remain part of the Homo sapiens condition. With the itch unlikely to disappear in the foreseeable evolutionary future, so is the industry that deals with it.

The Roman Catholic Church had an enviable monopoly for centuries, so powerful that it was able to engage in first degree price discrimination. Like all monopolists, though, it struggled with technical inefficiency and potential entry. The former manifested itself in excess capital investment in beautiful cathedrals and paintings. To forestall entry it practiced usual monopolistic techniques such as limit pricing, but also tortured and killed competitors. By the end of the fifteenth century the Vatican’s pursuit of ever larger monopoly rents against the background of technological progress (the printing press) set the stage for successful entry by an entrepreneurial monk named Martin Luther. Once Luther’s firm got a foothold, all hell broke loose. Actually, it was not all hell; it was all heaven. For as every student of economics learns, when monopoly gives way to competition consumer surplus expands. There were direct gains for consumers as the price fell from the breakup of the Catholic monopoly and, in addition, the entrants lowered real production costs.

The latter welfare gains warrant explanation. What happened is that the entry of Protestant firms reduced the real cost of itch relief by doing away with ornate churches, daily masses, pilgrimages, sacraments, and middlemen confessors. This is a classic case of efficiency gains from entrepreneurial innovation, not unlike the more recent case of Wal-Mart.

In analyzing contemporary Christianity the authors use as a measure of efficiency the degree of religious belief (relief from the itch) relative to time, talent, and treasure spent in church (scratching the itch). It seems to this reader that the way this plays out is that forming and holding religious beliefs with less involvement in churches increases the efficiency of religion. Sort of like the paperless world that computer networks allow for publication of EH.NET book reviews. Religion without Churches or churches is the limit on efficiency gains in the industry. The Catholic marketing department would no doubt argue that the sacraments and other items done away with by the Protestants are part of the product, not wasteful inputs. Protestant firms disagree. The beauty of the competitive process is that in the end the consumer decides. If it should turn out that there is a God, He may also have a preference set. But investigation of that question is, as they say, beyond the scope of this project.

J. Daniel Hammond is the editor, with Claire H. Hammond, of Making Chicago Price Theory: Friedman-Stigler Correspondence, 1945-1957 (Routledge, 2006).

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):Medieval

A Free Nation Deep in Debt: The Financial Roots of Democracy

Author(s):Macdonald, James
Reviewer(s):Wright, Robert E.

Published by EH.NET (May 2006)

James Macdonald, A Free Nation Deep in Debt: The Financial Roots of Democracy. Princeton: Princeton University Press, 2006. ix + 564 pp. $20 (paperback), ISBN: 0-691-12632-1.

Reviewed for EH.NET by Robert E. Wright, Stern School of Business, New York University.

Storied trade publishing house Farrar, Straus and Giroux (FSG) published A Free Nation Deep in Debt in cloth in 2003 but did not see fit to send a copy to EH.Net for review. Princeton University Press, the publisher of the new paperback edition technically reviewed here, is taking closer aim at the scholarly market. That is likely a good call. Though ably written, this book is closer in tone, density, and substance to a scholarly tome than a bookstore blockbuster. Likely, FSG was attracted to the book’s Niall Ferguson-esque Big Thesis: Democracies eventually defeat autocracies because “countries with representative institutions are able to borrow more cheaply than those with autocratic governments” (p. 4). Bond markets also strengthen democracies internally by giving citizens some of the proverbial power of the purse and by aligning their interests with those of their governments. Heady, important stuff.

To prove his thesis, James Macdonald, a British investment banker and independent scholar, has written a wide-ranging survey of the co-evolution of representative governments and public debt markets. He starts with the Old Testament, which he uses as a primary source to explicate the transition of societies from a Lockean state of nature to autocracy. Small family groups that highly valued leisure were subsumed or slaughtered by larger and more powerfully organized autocracies that forced their subjects through taxation to create economic surpluses. Autocracies soon came to control much of the ancient world but found it impossible to control the vast expanses of Asia, the forests and fjords of Northern Europe, or the jungles of Africa. A few small city states, often strengthened by alliances with other nearby cities, also managed to hold off the imperial advance for a time.

The ancient autocracies financed wars from savings, their legendary “treasure troves,” and equity contracts that divided the spoils of war. The democratic city states, by contrast, borrowed to fund resistance to imperial encroachments. “The picture that emerges,” however, was “not of a regular system of public finance, but of a series of improvised reactions to fiscal emergencies” (p. 36). The ancient Greeks, for example, moved toward modern public credit but never explicitly connected “the principle of voluntary contribution to the public funds and the principle of distribution of surplus assets” (p. 36). The result was a dizzying array of debt instruments, some forced and some voluntary, some paying interest and others not, most short-term but some in the form of life annuities. The Greeks sometimes found it difficult to honor their obligations but the extant documentation is too sparse to say anything more definitive about their creditworthiness.

Modern public finance had to await the emergence of a different group of city states some 1,500 years later in the northern Italian peninsula. There emerged, for the first time since the fall of Carthage, a group of states run by merchants instead of soldiers. Desperate to maintain their freedom from regional despots, the representative governments of Venice, Florence, and Genoa hit upon the notion of repayable taxes, levies upon which interest would be paid if the government’s finances allowed. To evade the Church’s then stringent usury prohibition, repayment of the principal sum was left at the pleasure of the government. The Venetians circumvented that inconvenience by making the right to receive the tax repayments transferable to third parties, which quickly led to the creation of a secondary market. “They had invented the bond market” (p. 77) as Macdonald writes, but the Italian city states did not regularly pay interest on their repayable taxes, the market prices of which spiraled downward. City states in northern Europe eventually improved upon the Italian model by avoiding forced loans and repayable taxes and religiously servicing their debts. The Dutch Republic was the major innovator here.

Medieval and Early Modern European autocrats also borrowed but almost invariably eventually defaulted. Unsurprisingly, they could not borrow as much or as cheaply as the Dutch, who won their independence by wearing down the once mighty Hapsburg Empire. By the end of the 80-year struggle, a majority of Dutch households were creditors to their government. Default, rebellion, or large scale tax evasion became unthinkable because the interests of the government and the citizenry were thoroughly intertwined.

After revolutions of their own in 1688 and 1776, the British and the Americans adopted Dutch-style finance, funding their wars in large measure by selling bonds to citizen creditors rather than resorting to punitive levels of taxation, ruinous inflation, or physical coercion. The democracies thrived, while autocracies in France, Germany, Russia, and elsewhere lost wars and rebellions. By World War II, however, government wartime financial techniques, including financial repression, rationing, and payroll deduction, had become so powerful that the great patriotic bond drives of earlier wars lost much of their importance. The wartime financial system of that greatest of autocrats, Adolf Hitler, looked eerily similar to that of the United States.

If Macdonald is right — and there is more than a little truth in this book — then adherents of the English “Country” and American Jeffersonian Republican traditions exaggerated the negative aspects of national debts. Far from endangering democracies, national debts bolstered them by enabling them to defeat powerful external and internal foes. Eternal interest was as much the price of liberty as eternal vigilance.

Authors who dare proffer such a Big Thesis confront numerous tradeoffs, the most important of which is that between depth and breadth. A twenty-page bibliography is always impressive, but less so for a book that covers several millennia of finance, government, and politics. Specialists will likely be disappointed with the treatment of their areas of expertise. (I cringed at several points in his discussion of the early U.S. monetary and financial systems.) But readers should concentrate on the forest rather than the trees and judge this ambitious and important book on its panoramic vision.

Robert E. Wright teaches business, economic, and financial history at the Stern School of Business, New York University. His most recent books include The First Wall Street: Chestnut Street, Philadelphia, and the Birth of American Finance (Chicago, 2005) and Financial Founding Fathers: The Men Who Made America Rich (Chicago, 2006, with David J. Cowen). He is currently working on a book tentatively titled Financing Freedom that will describe how the entire financial system, not just the government securities market, enabled America to vanquish its most dangerous enemies at home and abroad.

Subject(s):Military and War
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Big Steel: The First Century of the United States Steel Corporation, 1901-2001

Author(s):Warren, Kenneth
Reviewer(s):Russell, Malcolm

Published by EH.Net (November 2002)

Warren, Kenneth, Big Steel: The First Century of the United States Steel

Corporation, 1901-2001. (Pittsburgh: University of Pittsburgh Press, 2001)

pp. xvii + 405.

Though by 1900 the United States ranked as the greatest steel-producing nation,

the leaders of its major firms despaired of achieving financial success to

match their industry’s stature. Output had nearly tripled since 1880, but

customers, not producers, seemed to benefit. Productivity-enhancing technology

encouraged an even faster rate of investment than sales, as did the relatively

low cost of “rounding out” existing plants. Then, during recessions, demand

plunged wildly, taking down output, prices, and profits. Initiated by Charles

M. Schwab of Carnegie Steel, who publicly addressed the advantages of combining

competitors to rationalize production, in early 1901 negotiations among J. P.

Morgan, Elbert Gary, Andrew Carnegie, and Charles M. Schwab himself created

United States Steel.

The new corporation combined three significant finishing firms (American Tin

Plate, American Steel and Wire, and National Tube) with two major integrated

companies, Carnegie Steel and Federal Steel, itself a recent merger of Illinois

firms with Minnesota mining interests. Its size was enormous: capitalized at

$1.466 billion, it included 213 manufacturing plants, one thousand miles of

railroad, and forty-one mines. In 1901, US Steel accounted for 65.7% of

national output, and almost 30% of the globe’s. During World War I, its annual

production exceeded the combined output of all German and Austro-Hungarian

firms. However, at the century’s end, the corporation fought for its very

existence, as imports and mini-mills undercut its sales in one product line

after another. Spun off by a very diversified company in 2001, US Steel

reemerged in 2002 with plants in three American locations (plus one in

Slovakia) that employed fewer than one-tenth the 168,000 workers of 1902.

Big Steel is Kenneth Warren’s attempt to narrate the chief events at US

Steel and to explain the almost continual decline in its share of the national

market. Well acquainted with the secondary literature and the industry

generally from his previous study, The American Steel Industry,

1850-1970 (University of Pittsburgh Press, 1988), Warren is an emeritus

fellow of Jesus College, Oxford. For Big Steel, he used corporate

archives and benefitted particularly from studies conducted for the

corporation. The result is a well-reasoned volume of lengthy paragraphs

overflowing with information and helpful statistics, something that judicious

editing might have transformed into a truly remarkable read.

Elbert Gary, Charles Schwab, and other founders clearly sought prosperity

through size. As Warren recognizes in the early chapters, larger size promised

many advantages. Larger units provided greater capital, labor, and managerial

productivity, and they conserved energy. Rather than producing multiple

products in one mill, the larger firm could specialize and thus reduce costs.

It could also increase the level of research, smooth the production of

specialized units, and reduce cross-hauling on the increasingly expensive

railroads. Finally, the US Steel chairman, Judge Gary, (but not his former

Carnegie executives) clearly expected market share to enable the firm to hold

prices during economic downturns. This philosophy of steady public prices,

acknowledged geographic patterns, and informal cooperation with other firms

earned the label “Judge Gary’s umbrella” for a policy that benefitted the

entire industry.

Nevertheless, Warren concludes that its great size harmed US Steel from the

start. Its management started with far too many plants, scattered irrationally

(some 100 in Pennsylvania alone). Its unwieldy managerial structure failed to

overcome the traditions and defensive attitudes inherited from some of the

merged firms. In the early years, earnings on capital and per ton of output

fell below those of the predecessor companies, particularly Carnegie.

Size also imposed a tremendous constraint on the firm’s market behavior. Not

until 1920 did the federal government abandon serious consideration of breaking

up the firm on grounds of monopoly. As a result, for its first two decades the

company carefully avoided predatory market behavior. In the process it probably

over-reacted and created an economic environment congenial to new firms, which

sought the faster-growing sectors of the industry.

Size also hampered US Steel’s geographical distribution. Because it cost only

$100-$200/ton to “round out” existing facilities (in 1950s prices), but

$300/ton to build a greenfield plant of similar size, the company’s

concentration of plants around Chicago and Pittsburgh led to further investment

in those localities. As demand shifted, the firm did acquire and expand an

integrated works in Alabama (chapter 5), but US Steel never gained prominent

market share in the West or on the East coast , even in the 1950s after it

purchased facilities in Utah from the government and built the Fairless

integrated plant near Philadelphia (chapter 15).

However, other factors besides size also contributed to lower profits and

market share. For nearly three decades, Judge Gary dominated the company with

an emphasis on financial factors. While his biographer, Ida Tarbell, credited

him for strengthening mutual interest, cooperation, and good will in American

business, Warren quotes approvingly an unidentified (and uncited) critic’s

label for the chairman, “restricted in imagination.” Gary proved unable to

retain the loyalty of experienced steel executives, and key personnel left the

firm. Chief among them was Charles M. Schwab, who soon founded a more

innovative rival, Bethlehem Steel.

Under Judge Gary, the firm moved slowly into growth areas and lagged behind its

competitors technologically. Warren focuses on these issues in chapters six,

ten, eighteen, and twenty, and he demonstrates clearly the severe failures.

Until the mid-1920s, the firm hesitated to adopt the new universal beam mill,

with its vertical and horizontal rollers, and when it did so, Schwab discovered

that it infringed on a Bethlehem patent. Decades later, it ignored the superior

technology of the oxygen converter for bulk steel production, pointing out the

waste of scrapping relatively new open hearth furnaces. Management remained

silent on the steel capacity urgently needing replacement.

Warren provides two explanations for the technological lag. First, in general,

large firms may be less responsive to technological opportunity, perhaps to any

opportunity, because bureaucracies change slowly, and advocates of change must

convince more layers of the virtue of the risk. Second, executives at US Steel

remained arrogant about the superiority of American techniques, even though by

the 1950s capacity was expanding much more rapidly abroad, giving foreign

producers more opportunity to experiment with new methods.

Readers with interests in social history will find it appalling that the

12-hour day/68 hour week existed into the 1920s, made worse by the “long turn”

of 24 hours when shifts changed from day to night. So poor were labor relations

at the firm that when conditions finally improved, the impetus came from a most

unlikely source: the President of the United States, Warren G. Harding, who

wrote to Judge Gary about abolishing the 12-hour day.

Big Steel focuses on corporate strategy rather than biography, but

Warren particularly admires the leadership of two chairmen while noting the

failure of others (especially Gary, Roger Blough, and Edgar Speer). Myron

Taylor guided the company through the Great Depression. His program of

rationalizing production replaced 30% of capacity with modern mills, and not

for another half-century would the firm experience — and benefit from — such

wrenching change. By improving labor relations, Taylor also avoided becoming a

target of the 1937 sit-down strikes.

David Roderick guided the corporation through perilous times the half-century

later. In 1979 he replaced Edgar Speer as chairman, and halted his

predecessor’s treasured dream of building a greenfield integrated plant on Lake

Erie. That alone did not save the company from the bankruptcy experienced by

many of its competitors. Roderick also halted the pattern of dribbling

investment funds in plants across the corporation, instead targeting only those

units capable of meeting the world’s most efficient standards and slashing the

rest. He took control with capacity at 35 million tons; the year following his

retirement in 1989 it amounted to only 16.4 million tons. Only three integrated

works remained, at Fairfield (Alabama), the Monongahela Valley, and Gary. Even

those areas suffered severe job losses. By 1984 greater Pittsburgh had lost

25,000 of its 30,000 jobs four years earlier. Through such surgery, though,

Roderick saved a much-reduced US Steel, to compete with surging imports and

competition from mini-mills.

In conclusion, Kenneth Warren’s business history is valuable for both its

detail and its interpretations. The supporting material – tables, maps,

appendices and bibliography – reflect fine scholarship. Nevertheless, one

senses a desire to “include it all,” and non-specialist readers may tire of

relentless details and technical jargon. A glossary of steel terms would have

been useful. Those considerations aside, Big Steel undoubtedly fills an

important place in American business history, and it will be valued by

specialists in a number of sub-disciplines.

Malcolm Russell is a generalist on the economics faculty at Andrews University.

His most recent publication is The Middle East and South Asia, 2002.

Subject(s):Business History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII