How Should We Clean Up the Mess on Wall Street?
The high flyers of corporate America have had their wings clipped before with effective regulation. However, history shows that"muckraking," revealing scandals and even mobilizing public opinion through mass media, has never been enough in itself to achieve regulatory reforms.
In the early 20th century, magazines aimed at a new white collar middle-class audience unearthed corporate scandals and reported spectacular examples of business arrogance. Yet, anti-Trust legislation languished in Congress for years, as Republican Senate leader Nelson Aldrich, John D. Rockefeller's son-in-law, blocked legislation to lower tariffs, and created legislation to increase the power of large investment banks. Only a division in the Republican party: a three way race for the presidency in 1912 with Progressive party candidate Theodore Roosevelt running second and the election of Democrat Woodrow Wilson with a solid congressional majority broke the stalemate and led to the establishment of the Federal Trade Commission and the Federal Reserve Board.
Of course, the powers of the new regulatory commissions were limited and the courts remained in the hands of conservatives solicitous of the rights of Big Business and protectors of the principle of Freedom of Contract. In the 1920s, with an almost religious intensity represented by Calvin Coolidge's pious proclamation,"the business of America is business. He who builds a factory builds a temple, he who works there, worships there," conservative Republicans staffed regulatory agencies with militant opponents of regulation and made the trickle-down theory of detaxation, deregulation, and privatization preached by Secretary of the Treasury Andrew Mellon into national policy. The idea, as Coolidge's predecessor, Warren Harding said, was to get government out of business and make government work like a business, an idea which carried the day until the Great Crash, but then flew or jumped out the window with a number of prominent brokers, bankers and big business executives. In the economic carnage which followed, the Dow Jones average dropped by 92% from its peak, unemployment reached somewhere between 25% and 38% of the work force at its peak (the lower figure comes from the Hoover administration) and salaries and wages dropped far more than prices, leading to a steep decline in purchasing power and living standards for the great majority of people who were able to hold unto their jobs.
The result of course was the New Deal, which provided an answer to Herbert Hoover's robotic refrain that the"economy is fundamentally sound," a phrase recently revived by George W. Bush, as everything crashed around him.
Perhaps now is the time for the kind of radical changes the New Deal instituted when it established the Securities and Exchange Commission (SEC) in 1934. The Securities Exchange Act compelled publically traded firms to provide listings of their assets and liabilities. It also outlawed various practices used to manipulate stock prices for speculative purposes.
The legislation of the 1930s, including the Banking Act of 1933, which established the Federal Deposit Insurance Commission and subsequent banking legislation that divorced investment and commercial banking, protected the savings of millions of small depositors and barred the sort of stock market speculation by banks that caused thousands of banks to collapse in the early 1930s. The measures passed only after tens of millions of people voted for political leadership committed to changing an economic system that had led to mass unemployment and a huge decline in living standards.
As a result, FDR rallied the people, denouncing the leaders of industry and finance who resisted regulation and reform as"Economic Royalists." He supported the growth of trade unions to balance employers power, established old age pensions, unemployment insurance, and other social protections for the people.
Those regulatory reforms were successful, even though the new regulatory agencies were often staffed with appointees who were much more sympathetic to business interests than the original New Dealers. Although it took World War II to really revive the economy, real wages rose sharply from the 1940s to the 1970s and unemployment didn't reach ten percent until the first years of the Reagan administration.
The present crisis stems from the successful weakening of the New Deal reforms in recent decades. Roosevelt had, in an attempt to save capitalism from itself, demonized corporate arrogance and business greed. Fifty years later, President Ronald Reagan directed the deregulation of energy, public utilities, banking, and finance while demonizing welfare recipients. He sharply reduced federal funding for a wide variety of social welfare and education programs. Reagan revived Andrew Mellon's long discredited"trickle down theory of the 1920s and even used social-religious conservatism, in campaigns against abortion rights and for"family values," in much the same way that 1920s conservatives had used religious fundamentalism, prohibition, even attempts to bar women from wearing short skirts in public to divide people along urban-rural and ethnic religious lines while the economy stagnated and inequality grew spectactularly.
First of all, Reagan, in the name of"supply-side economics," aggressively deregulated industry, sharply reduced environmental regulation, and staffed regulatory agencies with men and women who held the views of Secretary of the Interior James Watt, who famously said,"there are two kinds of people in this country, liberals and Americans." Reagan also reduced discretionary social spending in the first years of his administration by one hundred billion dollars.
The result was the worst recession since the 1930s with unemployment reaching a peak of 11% in 1982. The administration then used massive military spending,"military Keynesianism" as historian Richard Hofstadter had called it earlier in the 1950s, to spend its way out of the recession it created, and floated along on a politics of make-believe, busting unions, destroying public housing, bailing out a scandal-ridden savings and loan system that its policies created, and maintaining its popularity as deficits tripled, poverty and crime grew, and voter participation dropped to the point that the top 20% of income earners, who in general did benefit from a rising stock market and the detaxation policies of Reagan, often constituted a majority of the electorate in off-year congressional elections and state and local elections. David Stockman, Reagan's Budget Director and an important architect of his early policies, summed it up subsequently when he said the economy had become an"utter, mind-numbing disaster."
But, even with the crash of 1987, the money didn't stop flowing as it had in 1929. The New Deal social policies and regulatory reforms that Reagan did so much to weaken, as Paul Volcker was to note sarcastically, saved the stock market debacle from turning into a major depression. Thanks to the"entitlements" (social security, minimum wages, unemployment insurance) Reagan condemned, the FDIC system and the Federal Reserve, he avoided the fate of Herbert Hoover.
In effect, Reagan transformed generations of criticism against the abuses of"big business," which had produced regulatory reforms, into a generation of criticism against"big government." The administration of George H. W. Bush continued these policies, even though runaway deficits compelled it to raise taxes. The Clinton administration did little to reregulate business and joined with Republicans to eliminate much of the New Deal's federal welfare program, Aid to Families with Dependent Children (AFDC), in 1996. Before the present embarrassment from corporate corruption and bankruptcies, the current Bush administration was intent on returning to hard-line Reaganism.
The current scandals, the billions extorted from California for electricity, and the Enron and WorldCom stock and accounting swindles, are the result of deregulation. They are evidence that deregulation is part of the problem, not part of the solution to maintaining a healthy and stable economy.
A national energy policy, based on regional versions of the Tennessee Valley Authority (TVA),which produced public power on a regional basis in cooperation with local communities, would have prevented the energy speculation that produced such a disaster for California. FDR and the National Resources Planning Board, a New Deal agency, saw such a policy as a long-range goal in the 1930s. Strengthening the Federal Trade Commission and the Securities and Exchange Commission to outlaw the shady mergers and self-serving accounting practices that has turned the stock market into a great engine of speculation would make CEOs return to policies fostering productive long-term growth to provide dividends for shareholders rather than raising short-term stock prices at all costs.
If we are really at war, or involved in an open-ended"war against terrorism", as the Bush administration regularly reminds us, reviving FDR's World War II proposal for an income cap on high executives, brokers, and bankers would deter business leaders from acting like Robber Barons and creating more Enrons, just as team salary caps in professional sports have tried to keep greedy owners from destroying competition and inflating costs to everyone. Finally, seriously considering public ownership of industries undermined by corporate corruption would serve as a powerful deterrent to those board room operators who will try to circumvent any system of regulation.
The U.S. has never fought a war with tax cuts for the rich and corporations and a call for weak, decentralized national government. Given his overall policies, President Bush's indignant recent statements against the corporate scandals remind me of Louis, the police chief played by Claude Rains in the movie"Casablanca," announcing that he is shocked, shocked that gambling exists on the premises of Rick's Café while he instructs underlings to gather up his winnings before he temporarily closes down the place.
Turning a blind eye to corporate profiteers is destabilizing the economy. In the present situation, serious change means radical change in government's relationship to business.
This piece was distributed for non-exclusive use by the History News Service, an informal syndicate of professional historians who seek to improve the public's understanding of current events by setting these events in their historical contexts. The article may be republished as long as both the author and the History News Service are clearly credited.