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Except that, with fewer MLB clubs, there was more talent available to be spread around.
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The talent pool was also SUBSTANTIALLY smaller at the time due to the lack of Black (and most latino/all asian) players and the smaller population. Although at the same time Football and Basketball weren't taking players so you could at least argue your case I suppose.
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Plus ALL clubs spent lots of money on amateur players. That's why the draft was implemented in the first place—all clubs were furiously attempting to outbid each other for amateur players.
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Not ALL clubs spent more on amateur players. A few of the worse-run/lame-duck clubs (Phillies, Athletics, Browns, Braves, etc.) couldn't afford top talent for more then a few years at a time if at all. The Yankees had a pretty steady revenue in stark comparison thanks to being dominant at the right time (when they built their new colossal stadium).
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Since this was too much like actual free-market competition for MLB, the draft was instituted.
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Correct on this part. The MLB knew players would cost crap-loads more on the open-market then if they were drafted.