The New Republic, March 31, 1973
SOME TIME AGO Senator Lee Metcalf of Montana invited nine of the largest industrial corporations to make known the names of their thirty principal stockholders. Five of the nine — General Motors, Standard Oil of New Jersey, IBM, Texaco and ITT — refused, citing “fiduciary responsibility” as their rationale for secrecy. Ford, Chrysler, General Electric and Mobil did release the names. In each instance, the largest stockholders were banks and the New York Stock Exchange, acting as “street names” for the real owners. Still, the data revealed that Ford’s top thirty stockholders held 35 percent of its common stock, with banks and the NYSE accounting for another 33 percent. The comparable figures for General Electric were 21 and 20 percent, for Chrysler 41 and 39 percent, and for Mobil 28 and 26 percent.
From this pattern some general conclusions can be drawn. A small number of financial institutions hold and vote large chunks of many corporations’ stock. These financial entities don’t “own” all the stock they hold; they hold it in trust for others. There is thus a separation between beneficial owners — those who get the dividends and capital gains — and titular owners. The precise configurations of beneficial and titular ownership are not discernible. We do know, though, thanks to Willard Mueller, former chief economist of the Federal Trade Commission, that the top 200 manufacturing corporations control about two-thirds of the manufacturing assets in America, and that the percentage is rising. We also know, thanks to Representative Wright Patman of Texas, that the fifty largest commercial banks hold nearly half the nation’s deposits and two-thirds of the stock held in trust. And we also know, courtesy of 1962 Federal Reserve Board figures, that although there are some thirty million individual stock owners in America, one percent of the people own 72 percent of the corporate stock.
From such statistics it is possible to discern the silhouettes of two elites and a minority. There is a small elite that manages — though not necessarily owns — the few hundred corporations that control most of the nation’s assets. This might be called the managerial elite. Then there is a second elite, overlapping to some extent with the first, that controls the financial institutions. Let’s call this the financial elite. The number of persons in these two elites could probably be accommodated in a small auditorium. Finally there is a minority — it’s too large to be called an elite — that constitutes the beneficial owners of America’s productive wealth. This minority has about two or three million members, including a handful who are far wealthier than the rest.
Neither the managerial nor the financial elite is elected by or responsible to the general public. Both are accountable to the wealth-owning minority. Both are made up largely of “men operating in the same atmosphere, absorbing the same information, moving in the same circles,” as Adolf Berle described them. Of the two, the managerial elite is more dispersed geographically and slightly more open to new arrivers. The financial elite is situated primarily in downtown New York and is more inbred.
The power relationships between the two elites are shifting. Around the turn of the century the great Wall Street financial houses helped establish and then dominated the railroad, steel, electrical equipment, electric power and other industrial trusts. During the middle part of the century it was said that corporate managers attained a high degree of autonomy. Lately power appears to be shifting back to the financial elite, at least in industries that require large infusions of outside capital.
The wealth-owning minority is a little harder to pin down. The Temporary National Economic Committee reported in 1940 that thirteen family groups — including the Rockefellers, DuPonts, Mellons, Fords, Pews, McCormicks and Dukes — owned over eight percent of the stock of the 200 largest industrial corporations, and that one family or a small number of families owned either a majority or a substantial minority of the voting stock of about eighty top corporations. Since 1940 the size of the wealth-owning minority has increased by hundreds of thousands. New families have risen to prominence, while most of the old fortunes have remained intact. A recent Wall Street Journal article noted that the Mellon family owns 30 percent of Aluminum Company of America, 40 percent of Mellon National Bank, 27 percent of Gulf Oil, and 20 percent of Carborundum, Koppers, First Boston Corp. and General Reinsurance Corp.
The number of economic control centers has declined during the past several decades. In the automobile industry, which once had dozens of control centers, there are now four— and maybe only one, since General Motors sets the course. The pervasive influence that financial institutions have in certain industries — e.g. utilities and airlines — means that the effective number of control centers may be even smaller than appears on the surface. A diminishing number of control centers means diminished competition, with the consequence that less is produced and more is charged for what is produced. Another consequence is a conspiracy of silence within the elites. If, say, the price of steel goes up, automobile manufacturers will not squawk; they will pass on the price increase to their customers, with a profit tacked on top.
Not until midway into the 19th century was such a small number of control centers possible. Before then, control of the American economy was highly decentralized because state incorporation laws limited firms to one line of business and barred them from owning property outside the state. In 1866 the New Jersey legislature — described as “the best legislature money could buy”— abandoned this tradition and permitted corporations chartered at Trenton to engage in business outside the state. Delaware and other states soon followed, and the rush to concentrated wealth and power was on.
The concentration of beneficial ownership produces somewhat different effects. Beneficial ownership determines, to a great degree, who is well-off and who is poor. Concentration of beneficial ownership skewers the way money flows after the elites have taken their cut. Thus the striking disparities between, say, Darien, Connecticut and McDowell County, West Virginia. Darien has no natural resources or factories, but it does have a sizable colony of wealth-owners. The opposite is true of Appalachia, northern New England, most rural areas and inner cities. While the federal government combats poverty by pumping billions of dollars into these depressed areas, the private economy perpetuates poverty by sucking billions of dollars out. In many instances the corporations that export wealth from impoverished areas don’t leave behind enough local taxes to provide decent schools.
HOW MIGHT CONCENTRATED ownership and control be modified? One traditional approach has been to attempt to regulate the behavior of the elites; thus a plethora of state and federal regulatory agencies, but not much in the way of benefits for the non-wealth-owning public. A more aggressive approach has been to invoke the antitrust laws. But the antitrust laws don’t address themselves to concentrated beneficial ownership. They would, if scrupulously enforced, increase the number of control centers, but that would not alter the basic distribution of wealth. Another problem is that the antitrust laws lack an organized constituency. Labor is lukewarm toward them because workers in concentrated industries indirectly share in the rake-offs of monopoly. A breakup of GM might be more attractive to auto workers if, as part of the package, they could acquire ownership of the smaller units, or a good share of it.
A good case can be made that antitrust laws actually reinforce existing patterns of ownership and control. This was Thurman Arnold’s contention a generation ago in The Folklore of Capitalism. Arnold argued that the antitrust laws, without hurting the giant corporations, taught them how to look respectable. At the same time the antitrust laws satisfied, with negligible results, a populist urge to attack bigness. “The reason why these attacks always ended with a ceremony of atonement,” Arnold wrote, “lay in the fact that there were no new organizations growing up to take over the functions of those under attack…A great cooperative movement in America might have changed the power of the industrial empire. Preaching against it, however, simply resulted in counter-preaching.”
If antitrust laws and government regulation were going to work miracles, it seems safe to say they would have done so by now. So what can be done? Arnold’s analysis suggests that concentration must be attacked, and that new economic organizations must be built that are accountable to larger numbers of people and that distribute income more equitably. Several types of organizations, not mutually exclusive, commend themselves for this job.
Publicly owned enterprises. There’s been much shying away from the notion of public ownership since the 1930s, perhaps because the economic elites have persuaded us that public ownership of any but money-losing undertakings is contrary to our “free enterprise” ethic. The objective of public ownership, however, isn’t to replace private corporations but to keep them more honest and competitive. Ideally major industries such as steel, autos and oil could consist of one publicly owned company and several that are privately owned. Pluralism of this sort would revitalize competition far more effectively than a parade of antitrust prosecutions. Thus, if the steel industry were producing at fifty percent of capacity and U.S. Steel tried to raise rather than lower its prices — as happened during the 1950s — a publicly owned steel company could undersell it.
Publicly owned enterprises at strategic spots in the economy would also shatter the conspiracy of silence within the elites. Recent experiences show how this might work. It was the Tennessee Valley Authority, tired of paying exorbitant prices for electrical machinery, that blew the whistle on the electrical price-fixing conspiracy in the 1950s. In 1971, it was again the public power companies rather than the “investor-owned” utilities that demanded a Federal Trade Commission investigation of soaring coal prices and the oil industry takeover of competing fuel resources.
It is in the energy industry, in fact, that the need for public ownership is most evident. Oil companies now own more than sixty percent of America’s natural gas reserves, 29 of the top 50 coal companies and 45 percent of known uranium reserves. Within the oil industry itself, competition is docile, thanks to joint ventures, import quotas and state pro-rationing of production. Recently the oil and gas companies pressured the Federal Power Commission to grant generous hikes in interstate gas rates, despite the FPC’s inability to verify the companies’ claims of shrinking reserves.
Public development of oil, gas, coal and geothermal resources on public lands would be beneficial in many ways. It would inject some lively competition into a cartel-type industry, enable regulatory agencies to look more critically at oil company data, and permit the timely development of energy resources in an ecologically sound manner, at prices that don’t gouge the public. Part of the earnings from public development could be plowed back into the areas from which the resources were taken, or public energy corporations themselves could be regionally based, with profits allocated according to regionally determined priorities.
The argument against public ownership, apart from its sinfulness, is that it leads to inefficient, self-aggrandizing bureaucracies that sometimes do odd things: e.g., build World Trade Centers. This is a danger. But private corporations are the most aggrandizing organizations in the world, and there are highly competent public enterprises (think of NASA) as well as incompetent private ones (Penn Central). Competition between private and public enterprises can keep the public ones trim and the private ones honest.
Cooperatively owned enterprises. Cooperatives may be organized for production, distribution or purchasing; their common trait is that they provide services and products for members, not profits for absentee shareholders. Members elect directors and often make major policy decisions on a one-man, one-vote basis. Cooperatives have a long history in America, going back to the Grange and the Farmers’ Alliance. Today the Midwest is dotted with cooperative grain elevators, gas stations and electric companies. In other parts of the country, there are cooperatively owned supermarkets, housing projects, medical clinics, credit unions and funeral societies. It is estimated that 38 million Americans are members of at least one cooperative.
Nevertheless, the cooperative movement has fallen far short of its potential. With few exceptions, cooperatives have been unable to amass the capital necessary to compete with corporations in great industrial or financial undertakings. And where cooperatives have grown large, they have generally sacrificed their member-controlled character. The Farm Bureau’s multibillion-dollar enterprises, for example, are virtually indistinguishable from profit-seeking corporations, while mutual insurance companies and savings banks long ago lost any resemblance to true cooperatives.
The federal government has, in a limited way, looked benignly upon cooperatives. There is no equivalent of the corporate income tax for cooperatives, on the theory that members’ earnings are their own; and cooperatives are largely exempt from antitrust laws. During the 1930s the Agriculture Department began making low-interest loans to rural electric and telephone cooperatives. But there has been no federal commitment to provide capital to urban cooperatives, or to promote cooperatives to a more ascendant role in the economy.
Community-owned enterprises. The aim of community-owned enterprises, like that of cooperatives, is to prevent the siphoning off of profits and control to absentee share-holders and elites. Typically, community ownership in the United States has taken the form of community development corporations, or CDCs. A CDC may be a nonprofit or a profit-making corporation. Shares are sold at nominal prices to residents of a geographic or ethnic community; directors are elected on a one man, one vote basis.
A CDC may engage in one or several businesses, and also provide political leadership to its community. The emergence of CDCs is relatively recent. One of the oldest and most successful is Progress Enterprises of Philadelphia, organized by the Reverend Leon Sullivan in 1962. It has some 6,000 shareholders, and its businesses include a shopping center, a housing project, a small electronics plant, a garment factory and several retail stores. Other CDCs include FIGHT in Rochester, the Hough Area Development Corporation in Cleveland, United Durham in Durham, North Carolina, and Operation Bootstrap in Watts. All told, there are about 35 CDCs in existence today.
Community-owned enterprises have received some financial support from the Office of Economic Opportunity, the Small Business Administration and the Department of Housing and Urban Development. Legislation that would create a U.S. community development bank, with four billion dollars in loan capital for CDCs, is stalled in Congress.
Worker-owned enterprises. Experience with worker ownership has been largely confined to countries such as Yugoslavia and Israel, but there are a few examples in the United States. A number of successful small businessmen have willed their businesses to employee trusts, and one relatively large corporation, the Chicago and Northwestern Railroad, has been sold to its employees, mainly because it was floundering. A handful of other firms (e.g., the Statesman Insurance Group) have adopted employee stock ownership plans designed by Louis Kelso.
In England, a moderate-sized plastics company, Scott Bader, Inc., is owned and controlled by its workers, and has shown rising profits for twenty years. And a study by economist Seymour Melman, comparing six industrial firms in Israel controlled by workers with six comparable firms controlled by managers, found that the former were substantially more efficient both in terms of labor productivity and return on capital investment. Worker motivation was higher, and administrative salaries and overhead lower in the worker-controlled firms.
EACH OF THE ABOVE forms of ownership has its strengths and weaknesses. Of the four, public ownership lends itself most readily to large-scale undertakings; the others work best when they stay small. None seems to possess the corporation’s ability to mobilize manpower and capital, but all have virtues that the absentee-owned corporation lacks. Together, they would add competitive vigor to our economy, connect residents of impoverished areas to the wealth around them, and afford at least some measure of popular control over economic decisions.
An economy, if it is to function smoothly, must have a hierarchy. But if a hierarchy is unavoidable, some modifying conditions ought to prevail. Those at the top ought to be as numerous and as close to the general public as possible. They ought to operate on behalf of broad constituencies, and they ought to be accountable to those constituencies.
As this series of articles in The New Republic has indicated, our economy bears scant resemblance to this ideal: it is controlled by an extremely small, largely unaccountable set of elites operating on behalf of a wealth-owning minority. To alter this pattern of ownership and control is no easy task; a full-scale federal commitment would be needed. Such a commitment would require the creation of many TVAs in many industries, the provision of large amounts of credit to cooperatives and CDCs, the conversion of corporate units into alternate ownership forms, and the nurturing of a new managerial ethos. All of this is politically unfeasible at the moment, but so are many things until enough people decide they want them.