Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems

Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems

by Thomas Ferguson


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"To discover who rules, follow the gold." This is the argument of Golden Rule, a provocative, pungent history of modern American politics. Although the role big money plays in defining political outcomes has long been obvious to ordinary Americans, most pundits and scholars have virtually dismissed this assumption. Even in light of skyrocketing campaign costs, the belief that major financial interests primarily determine who parties nominate and where they stand on the issues—that, in effect, Democrats and Republicans are merely the left and right wings of the "Property Party"—has been ignored by most political scientists. Offering evidence ranging from the nineteenth century to the 1994 mid-term elections, Golden Rule shows that voters are "right on the money."

Thomas Ferguson breaks completely with traditional voter centered accounts of party politics. In its place he outlines an "investment approach," in which powerful investors, not unorganized voters, dominate campaigns and elections. Because businesses "invest" in political parties and their candidates, changes in industrial structures—between large firms and sectors—can alter the agenda of party politics and the shape of public policy.

Golden Rule presents revised versions of widely read essays in which Ferguson advanced and tested his theory, including his seminal study of the role played by capital intensive multinationals and international financiers in the New Deal. The chapter "Studies in Money Driven Politics" brings this aspect of American politics into better focus, along with other studies of Federal Reserve policy making and campaign finance in the 1936 election. Ferguson analyzes how a changing world economy and other social developments broke up the New Deal system in our own time, through careful studies of the 1988 and 1992 elections. The essay on 1992 contains an extended analysis of the emergence of the Clinton coalition and Ross Perot's dramatic independent insurgency. A postscript on the 1994 elections demonstrates the controlling impact of money on several key campaigns.

This controversial work by a theorist of money and politics in the U.S. relates to issues in campaign finance reform, PACs, policymaking, public financing, and how today's elections work.

Product Details

ISBN-13: 9780226243177
Publisher: University of Chicago Press
Publication date: 06/28/1995
Series: American Politics and Political Economy Series
Edition description: 1
Pages: 440
Sales rank: 730,131
Product dimensions: 6.00(w) x 9.00(h) x 1.20(d)

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Golden Rule

The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems

By Thomas Ferguson

The University of Chicago Press

Copyright © 1995 The University of Chicago
All rights reserved.
ISBN: 978-0-226-24317-7


Party Realignment and American Industrial Structure: The Investment Theory of Political Parties in Historical Perspective


IN MID-SEPTEMBER 1912 a gentleman representing Woodrow Wilson, the Democratic nominee for president of the United States, came calling on Mr. Frank A. Vanderlip. At that time Vanderlip was one of the most prominent businessmen in America. Quoted frequently in the press and recognized as a leading Progressive, he served on the boards of 12 major corporations, including E. H. Harriman's Union Pacific Railroad, the mammoth U.S. Realty and Improvement Co., and four sizable banks. He was also a trustee of New York University and the Stevens Institute, a member of the executive committee of the New York Chamber of Commerce, and active in the National Civic Federation. Most important, however, he was president of the National City Bank of New York, after J. P. Morgan & Co. probably the most important bank in America.

Nothing in the record suggests that the banker felt any embarrassment at receiving the envoy of a party associated in American folklore (and much subsequent academic writing) with straitened Southern and Western farmers. It is easy to understand why: the visitor was Henry Morgenthau Sr., himself a director a dozen corporations (including the big, multinationally oriented Underwood Typewriter Co.) and a major figure in Manhattan real estate.

As was his custom with anything important, Vanderlip later wrote a detailed account of the encounter to James Stillman. Along with William Rockefeller (younger brother of the even more famous and wealthier John D.), Stillman had been prominently associated with the bank for many years. He was probably its largest stockholder. Now retired in France, he superintended the bank by remote control. Almost every other day brought a long letter from Vanderlip, describing his activities and decisions. After reading the letters, Stillman would write back his comments and instructions, dispatching them once in a while by secret courier or sometimes sending them in code. Because the months prior to the 1912 election had been filled with acrimonious controversies that importantly affected National City, especially the discussions of what eventually became the Federal Reserve Act, Vanderlip could be sure of Stillman's attention as he related how

I had a two-hour session with [Charles D.] Hilles, the chairman of the Republican Campaign Committee, and one of equal length with Morgenthau, who is Chairman of Wilson's finance committee, and who is, with [William G.] McAdoo, practically directing the campaign. Hilles is not hopeful. I think the most [William Howard] Taft really hopes for is to get a larger vote than [Theodore] Roosevelt, although he believes that sentiment is swinging back to him some, and there is some evidence of that.... I had a very thorough going over of the administration with Hilles and I must say the result did not improve my views any of its efficiency. There never has been any clear understanding in the White House in regard to the National City Company [National City's newly organized and controversial securities affiliate], and the whole disposition was to avoid trouble and to pass the question along. My conversation with Morgenthau left me more pessimistic about the political outlook than I have been at all. I am afraid not a great deal that is good is likely to come out of a Wilson administration. At least, I am afraid that a good deal that is foolish and ill considered may come out of it. I think Wilson is really pretty well imbued with the "Money Trust" idea, and I fear he lacks the sincerity that I believed at one time he had. Morgenthau told me positively that it would not be his plan to have any extra session of Congress and that he proposed to take up banking legislation before the tariff; that he favors a central bank and one of the arguments he proposed to use is that the people are now under all the evil conditions of an unrestrained central bank, through the operations of the "Money Trust"; that there is a "Money Trust" that is practically a central bank, without any legislative control, and that they might much better replace it with a real central bank that will do them some good and will be controlled. I can see how just such stuff as this would appeal to Wilson's mind, but I am disgusted with his thinking and using such clap trap. He has told Morgenthau that the Aldrich Bill [which many major American banks sponsored] never can be passed, because it bears the Aldrich name. They have got to get up another bill which he supposes will have to be about 60% the Aldrich Bill to start with and probably will be 80% before they got it passed, but it must have another name.

This is about as scientific an attitude toward the banking question as you would expect from Tim Murphy. Morgenthau tells me that [New York attorney Samuel] Untermeyer is preparing for a thoroughgoing campaign to begin after election—I believe the date is November 20th—and has got a lot of men working on it now. His whole ambition is to, in some way, get a white-wash for his character. He has offered a hundred thousand dollars (all of this is quite confidential, of course) if he can be assured of a foreign mission. Indeed, he would give any amount for an important one, and has even the audacity to think that he might possibly be appointed to England. Wilson will make no promises whatever and they have accepted only $10,000 as yet and probably will accept no more. He would also like to be Attorney General. Morgenthau says that, of course, is quite impossible, although he could imagine that he might be sent to some post of about the grade of Italy.

As a primary source for the study of modern American politics, this letter is uncommonly rich. Even on casual reading it brims with exciting implications for a wide range of issues now extensively debated by social scientists and historians—the impact of financial innovation on American political development, for example; or the relationship between congressional investigations (like that Untermeyer had just directed into banking practices on behalf of the so-called Pujo Committee) and the evolution of the national political agenda; or the role of professionalization in U.S. diplomacy of the period; or the significance of class and, perhaps, ethnic factors in elite politics. With more deliberate attention to the letter's historical context and stylistic idiosyncrasies still more would be revealed. A reading that was sensitive to the political choices other leading businessmen made during the same election, for instance, could certainly throw rare light on several first-order mysteries of the great American organism of that epoch, notably the delicate balance of rivalry and cooperation that characterized the "Money Trust" before World War I, and the precise ways in which the preferences of its members, allies, and opponents translated into party politics and public policy.

But perhaps the most important reflections suggested by this correspondence concern this essay's central theme: the primary and constitutive role large investors play in American politics. For much about this missive's tone and contents—the famous banker's condescension toward the White House (where "the whole disposition was to avoid trouble and to pass the question along," while—as Stillman and Vanderlip were both well aware—securing National City's vital interests); the Olympian assurance which acts as though nothing could be more natural than that top operatives of both major parties should drop by for intimate campaign discussions; or the matter-of-fact disdain with which Vanderlip relates to Stillman that the "Archangel Woodrow" (as H. L. Mencken called him) doesn't really believe what he is saying about what was probably the campaign's prime issue—bank reform—and that he has no plans to appoint Untermeyer, the archenemy of the big banks, to high diplomatic post—almost irresistibly raises a series of subversive doubts about the basic conceptual framework that most recent studies of American politics rely on to understand the workings of the political system over time and as a whole.

As summed up in the "critical realignment theory" elaborated by a succession of scholars since the late 1950s, this view understands political change primarily—though of course not exclusively—in terms of changing patterns of mass voting behavior. Most American elections, it considers, are contests within comparatively stable and coherent "party systems." While any number of short-term forces may momentarily alter the balance of power within a particular party system, and cumulative, long-run secular changes may also be at work, the identity of individual party systems rests on durable voting coalitions within the electorate. So long as these voting blocs (which in different party systems may be defined variously along ethnic, class, religious, racial, sexual, or a plurality of other lines) persist, only marginal changes are likely when administrations turn over. Characteristic patterns of voter turnout, party competition, political symbols, public policies, and other institutional expressions of the distribution of power survive from election to election.

"Normal politics," of course, is not the only kind of politics that occurs in the United States. The "critical realignments" of critical realignment theory refer to a handful of exceptional elections—those associated with the New Deal and the Great Depression of the 1930s, the Populist insurrection of the 1890s, the Civil War, and the Jacksonian era are most frequently mentioned, though other dates have also been proposed—in which extraordinary political pressures find expression. Associated with the rise of new political issues, intense social stress, sharp factional infighting within existing parties, and the rise of strong party movements, these "critical" or "realigning" elections sweep away the old party system. Triggering a burst of new legislation and setting off or facilitating other institutional changes that may take years to complete, such elections establish the framework of a new pattern of politics that characterizes the next party system.

With few exceptions, the higher stakes involved in realigning elections do not sway realignment theorists from their emphasis on popular control of public policy. The sweeping changes in the political system that occur are again ascribed to voter sentiment. By raising the salience of political issues, most analysts suggest, critical elections facilitate a large-scale conversion of new voters from one party to another, or a mass mobilization of new voters into the political system. Either way, the partisan division of the electorate alters decisively.

An illuminating and sophisticated variation on classic liberal electoral themes, critical realignment theory continues to be widely held by both social scientists and historians. It has also inspired increasing numbers of journalists, consultants, and political activists professionally concerned with interpreting political events. But in recent years skeptical appraisals of the theory have proliferated and many of its claims have come in for heavy criticism (Lichtman, 1976, 1980, 1982; Kousser, 1980; Benson, Silbey, and Field, 1978; Ferguson, 1986).

The pivotal arguments raised against conventional versions of critical realignment theory undermine precisely the aspect of the theory that the Vanderlip-Stillman exchange challenges so vividly: the inspired confidence in what might be termed "voter sovereignty." As several studies have argued in detail, evidence is mounting that the durable voter coalitions which are supposed to underlie party systems never existed, and that so-called critical realignments are not only very difficult to define, but simply have not witnessed major, lasting shifts in voter sentiment. In the words of one sophisticated quantitative study of American voting patterns by three scholars very sympathetic to the realignment perspective (Clubb, Flanigan, and Zingale, 1980, p. 119),

[E]lectoral change during the historical periods usually identified as realignments was not in every case either as sharp or as pervasive, nor was lasting change as narrowly confined to a few periods, as the literature suggests. Although these periods were marked by both deviating and realigning electoral change, which shifted the balance of partisan strength within the electorate toward one or the other of the parties, these shifts did not involve the massive reshuffling of the electorate that some formulations of the realignment perspective describe. Moreover, indications of substantial continuity of the alignment of electoral forces across virtually the whole sweep of American electoral history can be observed.... [E]lectoral patterns do not, by themselves, clearly and unequivocally point to the occurrence of partisan realignment.

To this evidence of massive public policy change without correspondingly sweeping electoral realignment, and other difficulties, adherents of critical realignment theory respond variously. The common denominator in virtually all their replies, however, is a determination to shore up the theory by making it even more complicated, "more multidimensional." The hope is to supplement the already complex electoral analysis with more and more variables—conducting more detailed studies, for example, of the president and the electorate, Congress and the electorate, the president, Congress, and the electorate, etc.

But it is doubtful that such moves will do more than postpone the inevitable. As an earlier paper argued (Ferguson, 1986), adding baroque variations to already complex themes is likely only to generate rococo variations on the same themes—and provide very little additional illumination. Nor are these efforts likely to constitute an effective reply to the direct evidence emerging from both quantitative and case studies indicating that the relationship between public policy change and party platforms, electoral margins, and voting behavior is weak and unstable.

It is time, therefore, to recognize that the chief reason why no social scientists have succeeded in specifying unambiguous electoral criteria to identify "partisan realignment" may well be that there are no such criteria to be found. And it is high time, accordingly, to begin developing a different approach—a fresh account of political systems in which business elites, not voters, play the leading part; an account that treats mass party structures and voting behavior as dependent variables, explicable in terms of rules for ballot access, issues, and institutional change, in a context of class conflict and change within the business community.

The present paper represents an attempt to revise conventional accounts of American party systems and critical realignments along precisely these lines. Parties, the paper argues, are not what critical realignment theory (and most American election analyses) treat them as, viz., as Anthony Downs defined them in his celebrated formalization of the liberal (electoral) model of parties and voters, the political analogues of "entrepreneurs in a profit-seeking economy" who "act to maximize votes" (Downs, 1957a, pp. 295 and 300). Instead, the fundamental market for political parties usually is not voters. As a number of recent analysts have documented (Burnham, 1974, 1981; Popkin et al., 1976; Ginsberg, 1982), most of these possess desperately limited resources and—especially in the United States—exiguous information and interest in politics. The real market for political parties is defined by major investors, who generally have good and clear reasons for investing to control the state. In a two-party system like that of the United States, accordingly, incidents like those recounted in Vanderlip's letter to Stillman are far more typical of U.S. parties than the usual median voter fantasy. Blocs of major investors define the core of political parties and are responsible for most of the signals the party sends to the electorate.

During realignments, I shall argue, basic changes take place in the core investment blocs which constitute parties. More specifically, realignments occur when cumulative long-run changes in industrial structures (commonly interacting with a variety of short-run factors, notably steep economic downturns) polarize the business community, thus bringing together a new and powerful bloc of investors with durable interests. As this process begins, party competition heats up and at least some differences between the parties emerge more clearly.

Since the business community typically polarizes only during a general crisis, it is scarcely surprising that in such cases voters also begin to shake, rattle, and roll. Only if the electorate's degree of effective organization significantly increases, however, does it receive more than crumbs. Otherwise all that occurs is a change of personnel and policy that, because it may reflect nothing more than a vote of no confidence in the current regime, bears no necessary relation to any set of voting patterns or consistent electoral interests. Assuming that the system crisis eventually eases (possibly, but not necessarily, because of any public policy innovation), the fresh "hegemonic bloc" that has come to power enjoys excellent prospects as long as it can hold itself together. Benefiting from incumbency advantage and the chance to implement its program, the new bloc's major problem is to manage the tensions among its various parts, while of course making certain that large groups of voters do not become highly mobilized against it—either by making positive appeals to some (which need not be the same from election to election) or by minimizing voter turnout, or both.


Excerpted from Golden Rule by Thomas Ferguson. Copyright © 1995 The University of Chicago. Excerpted by permission of The University of Chicago Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents

Introduction. Politics, Social Science, and the Golden Rule: Reading the
Handwriting on the Wall
1: Party Realignment and American Industrial Structure: The Investment
Theory of Political Parties in Historical Perspective
2: From 'Normalcy' to New Deal: Industrial Structure, Party Competition,
and American Public Policy in the Great Depression
3: Monetary Policy, Loan Liquidation, and Industrial Conflict: The Federal
Reserve and the Open Market Operations of 1932
Thomas Ferguson, Gerald Epstein.
4: Industrial Structure and Party Competition in the New Deal: A
Quantitative Assessment
5: By Invitation Only: Party Competition and Industrial Structure in the
1988 Election
6: 'Real Change'? 'Organized Capitalism,' Fiscal Policy, and the 1992
Conclusion. Money and Destiny in Advanced Capitalism: Paying the Piper,
Calling the Tune
Appendix: Deduced and Abandoned: Rational Expectations, the Investment
Theory of Political Parties, and the Myth of the Median Voter

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