While doing business in the Soviet Union in the 1930s, Fred Koch witnessed the brutality of Joseph Stalin’s regime. He returned to the United States a free-market evangelist. “[My father] was constantly speaking to us children about what was wrong with government,” David Koch told author Brian Doherty in Radicals for Capitalism, a history of the libertarian movement. “It’s something I grew up with—a fundamental point of view that big government was bad.”
When his father died in 1967, Charles Koch inherited a large fortune and became CEO of the family business. Today Koch Industries—which produces everything from fertilizer to Dixie cups—is the nation’s second-largest private company, generating nearly $100 billion in revenue in 2011.
In 1962, Charles Koch began reading about Austrian economics, a staunchly free-market philosophy often embraced by libertarians. “I spent the next two years almost like a hermit, surrounded by books,” he told the Wall Street Journal in 1997. He attended lectures at the Freedom School, a Colorado Springs institution led by prominent libertarian scholars. As Koch Industries expanded, he emerged as the libertarian movement’s leading patron. The network of libertarian groups he bankrolled became known as the Kochtopus.
Charles Koch and Ed Crane met when Koch hosted a Roger MacBride campaign fundraiser at his Wichita home. Crane was impressed by Koch’s commitment to libertarian principles. “He was more hard-core than I was,” Crane says.
As the campaign wrapped up—with MacBride receiving 0.2 percent of the popular vote—Crane looked forward to moving back to California and resuming his career in finance. But Koch approached him with a question: “What would it take to keep you in the movement?”
During his time in Washington, Crane had been impressed by the think-tank establishment, especially the conservative American Enterprise Institute and the liberal Brookings Institution, both of which he saw as able to influence policy in meaningful ways.
“It would be nice to have a libertarian think tank,” Crane told Koch. “But you don’t want me to run it, because I am going back to California.”
Koch offered to build a libertarian think tank in California if Crane would run it. Crane agreed.
To create the new think tank, Koch changed the name of a Kansas nonprofit he had formed in 1974—the Charles Koch Foundation—to the Cato Institute. The name referred to Cato’s Letters, a collection of essays on political liberty that influenced the American Revolution.
In a highly unusual step, Koch structured Cato as a stock organization. Cato’s shareholders were empowered to appoint a board of directors, which would oversee the institute’s management. Kansas is among the few states that permit nonprofits to issue stock.
“Scuttlebutt around the Kochtopus offices in the late ’70s and early ’80s was that Charles had put it in place to protect his own interests: If he was funding this organization, he didn’t want it saying or doing things he deplored—things that would embarrass him,” Jeff Riggenbach, who joined Cato in 1978, said via e-mail. “He wanted to retain the ability to pull the plug.”
Cato’s five original shareholders were Koch, Crane, MacBride, libertarian economist Murray Rothbard, and George Pearson, a former employee of Koch’s. Koch “liked the idea of being in control of things even though he is not recognized as being in control,” says David Gordon, who worked at Cato in 1979 and 1980. “He picked the people as stockholders because he thought they would do what he wanted.”
Crane didn’t realize how peculiar this corporate structure was. He signed the shareholder agreement and paid $12 for a dozen shares of Cato stock.
Cato christened its San Francisco headquarters in 1977. Its mission was to insert libertarian ideas into the national discourse through academic research, a daily radio program, and a monthly magazine, Inquiry.
Crane was just 32 when he became Cato’s CEO. His management style was criticized by some as tyrannical, and he became known in libertarian circles as Boss Crane. His allies were called the Crane Machine.
Early employees, however, say Koch was Cato’s real monarch. He and Crane spoke nearly every day by phone. “Ed Crane would always call Wichita and run everything by Charles,” Gordon says. “It was quite clear that Koch was in charge.” Koch traveled to San Francisco every couple of months to meet with Crane and the staff. “Whatever Charles said went,” says Ronald Hamowy, an early Cato employee.
But in communicating with Cato employees, Koch could be frustratingly passive-aggressive. When Riggenbach suggested recruiting ’60s activist Abbie Hoffman for Cato’s radio program, Koch seemed surprised but didn’t say what he thought. “Ed had to tell me later how much Charles really hated the idea,” Riggenbach says. “He had to explain to me further why I should have understood Charles’s brief comments as a strict order to scotch any such plan.”
While other libertarians believed it would take generations for their ideas to trigger broad reform, Koch was less patient, Riggenbach says: “He expected to see results from his investment in the popularization of ideas, and he expected to see them within his lifetime.”
Crane and Koch became close friends. They traveled to the Soviet Union together in 1981, taking a train from Finland to St. Petersburg. They visited China in 1983, lodging at the same state guesthouse where President Nixon had stayed in 1972. Their political views were nearly identical. Says Charles Murray, an AEI scholar who has known Crane and Koch since the 1980s: “I don’t think you could get a piece of paper between them.”
Crane took a leave of absence from Cato to run the 1980 presidential campaign of Libertarian candidate Ed Clark. By selecting Charles Koch’s brother David as the vice-presidential candidate, the campaign was able to gain access to David Koch’s personal wealth without violating campaign-finance laws. In the end, Clark received more than 1 percent of the popular vote—to this day the best-ever showing for a Libertarian presidential candidate.
Meanwhile, Crane and Charles Koch struggled to keep Cato’s staff united; internal feuds were common during Cato’s early years. Shortly after the 1980 election, Cato shareholder Murray Rothbard blasted the Clark campaign—which Crane had managed—for watering down libertarian tax ideals in the hope of attracting voters. “They sold their souls—ours, unfortunately, along with it—for a mess of pottage,” Rothbard wrote in a libertarian journal.
Rothbard was fired from Cato. He claimed that his shares of Cato stock, which were held in Charles Koch’s Wichita office, were canceled. Rothbard accused Crane and Koch of breaking the law and violating libertarian principles. “This movement is too big for any set of power-hungry villains to control,” Rothbard wrote.
(Rothbard is rumored to have written some of the racist passages in Ron Paul’s newsletter that drew national attention during this year’s Republican presidential primary. He died in 1995.)