“It will be essential for all of us to live and work in lower temperatures,” Nixon said during a televised speech. “Incidentally, my doctor tells me that in a temperature of sixty-six to sixty-eight degrees, you’re really more healthy than when it’s seventy-five to seventy-eight, if that’s any comfort.”
It might seem odd that a conservative Republican president would impose price controls and energy rationing, but Nixon’s actions reflected the settled beliefs of American political life in the early 1970s. There was a broad consensus in America that could be called “the New Deal Consensus,” tracing back to the 1930s, when Franklin Roosevelt created a new regulatory regime. The New Deal reshaped everything in America’s business world. It replaced unfettered markets with price controls in some cases. It gave unions very strong protections that helped workers organize. And, maybe most important, the New Deal convinced Americans that the federal government should play a large and interventionist role in the economy. It was loathsome to acolytes of Hayek and von Mises.
FDR’s actions were a response to decades of economic stagnation, when the government largely refrained from regulating markets and large corporations; an era that was defined by the laissez-faire, or hands-off, approach to regulation. During that time, the economy was dominated by a new breed of large corporations whose operations crossed state lines and transcended the control of state-based regulators. The federal government, the only entity powerful enough to constrain the companies, declined to do so on the theory that it would harm economic growth. The government was also constrained by a conservative US Supreme Court, which struck down regulatory efforts after a seminal decision known as the Lochner ruling. In 1905, the court ruled against New York state regulators who tried to penalize a bakery owner named Joseph Lochner. The state wanted Lochner’s employees to work no more than ten hours a day. He argued that the regulation violated the Fourteenth Amendment of the US Constitution, which was passed to protect the rights of newly freed slaves. Lochner said that the Fourteenth Amendment also protected his right, and his employees’ right, to enter into whatever kind of labor contract they wanted to. The Lochner ruling hobbled lawmakers and ushered in an era of business-friendly legal decisions. During the Lochner era, the court would strike down minimum-wage laws, federal child labor laws, banking and insurance regulations, and transportation laws. The Lochner era was a time of great prosperity in America, but the prosperity wasn’t widely shared. There was a tremendous concentration of economic power. A handful of robber barons, like John D. Rockefeller and Cornelius Vanderbilt, amassed huge fortunes, while the people who worked to produce those fortunes—the farmers, weavers, oil rig workers, and others—lived in poverty.
When FDR was elected in 1932, in the depths of the Great Depression, the hands-off era came to an end. Roosevelt, and the Democratic-controlled Congress that worked closely with him, created large-scale assistance and work programs to help employees who’d lost their jobs. They created regulatory agencies to oversee the stock market and prohibited banks from speculating with depositors’ money. They established Social Security, or “old age insurance,” the precursor of Medicare. They passed the Wagner Act, which empowered labor unions, passed a minimum-wage law, and established the forty-hour workweek. The role of activist government was cemented in American life and would only deepen over the next thirty years.
Even Republicans like Richard Nixon were compelled to intervene. Nixon signed bills to create the Environmental Protection Agency, founded in 1970, and the Occupational Safety and Health Administration, or OSHA, founded in 1971. He signed the Clean Air Act and the Clean Water Act into law, two pieces of sweeping legislation that would regulate huge portions of the US economy.
Government intervention affected the oil industry as much or more than any other. A complex web of price caps and regulations were put on Koch Industries, and they seemed to confirm every belief that Charles Koch had adopted from Hayek. A new task force in Washington, called the Cost of Living Council, tried to set the price of oil and control markets from a central office. The result was a byzantine mess that hindered companies like Koch Industries and did little to solve the underlying crisis. The Cost of Living Council created an intricate pricing system that split the oil supply into three classes: “old” oil, “new” oil, and “stripper” oil.I The old oil was oil already in production when the price caps hit, and most of it was controlled by oil majors like Exxon. New oil was any oil drilled after the price caps were put into place.
The council put a hard cap on old oil of $5.25 per barrel but let the price of new oil float in an open market, where supply and demand played a role. Predictably, new oil was generally a lot more expensive. This put a major squeeze on independent oil refineries like Koch Industries, which bought oil on the open market rather than drilling it themselves. Big companies like Exxon drilled their own oil and refused to sell it because of the price cap, suffocating markets.
To solve that problem, the Federal Energy Administration passed a law that effectively banned the oil majors from holding on to their old crude. The FEA ordered the sale of fifty-six million barrels of oil. And this was all just one program, meant to control oil prices. Other complex schemes controlled natural gas prices and the pipeline industry.
This incensed Charles Koch. He called the Republican Party “bankrupt” for its unwillingness to challenge the New Deal philosophy and its inability to dismantle its political structures. Koch wrote a fund-raising letter for the tiny Libertarian Party in 1975, saying that Republican efforts to regulate markets caused him to have “abandoned them in disgust.” Republicans were “no better allies in the fight for free enterprise than the Democratic Party,” Koch wrote.
With the Republicans on the sidelines, Charles Koch set out to dismantle the system himself. For years, he had been dabbling in political philosophy. He owned a small bookstore in Wichita that sold conservative literature. He attended and gave money to the Freedom School in Colorado Springs, which taught courses in Austrian economic philosophy. In the 1970s, Charles Koch took his efforts a step further. He unveiled a plan in 1974 that didn’t become widely known for decades, after he had been executing it with remarkable discipline from the CEO’s suite at Koch Industries.
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In April of 1974, Charles Koch gave a speech at a gathering in Dallas held by a conservative think tank that he’d cofounded, called the Institute for Humane Studies. When Charles Koch addressed the group, his tone was belligerent, even caustic.
“Anticapitalist feelings in the United States are probably more virulent today than ever before,” he began. While many CEOs were grumbling about the burden of regulations, Charles Koch chastised his fellow business leaders as being insufficiently loyal to the principles of capitalism. It was a mistake to even characterize America’s economy as capitalistic, he said. Koch chastised the business community for having been seduced by the thinking behind the New Deal.
“To date, business has attempted to defend itself by taking a conciliatory attitude rather than exposing the fallacies in the anti-capitalist arguments. For example, when the oil industry and others are criticized for having ‘excess’ profits, businessmen should argue that in a free market there is no such thing as excess profit—that without high profits there would be no signal to invest more capital in order to increase production to meet the consumer demand that created the profits,” he said.