18 October 2013

Historical Perspective: The Crisis Last Time

Each crisis has familiar facets, but also has its unique characteristics that do make things somewhat different with their own particular outcomes.

One of the great differences in this current financial crisis in the Western world, and I do mean to say 'current' since it has hardly been resolved, has been the policy actions of the governments of the world.

By forestalling a collapse of the banking system, the emerging markets have been somewhat insulated, at least for now, from the economic carnage that has occurred in the more developed nations. China, Brazil, India, and Russia are doing better than one might expect if there were a worldwide Depression. However I do think that those countries that rely on exports are clutching a viper to their breast. For the global trade regime is much more fragile than you might think, although few have yet seen it.

For the moment at least the G7, the U.S., U.K., France, Germany, Italy, Canada and Japan, have also been spared most of the pain that characterized The Great Depression. Quite a bit of this has to do with their central banks, and the eschewing of liquidationism, which these days might be compared to austerity, although it was not quite the same thing.

Where austerity has been applied, selectively forced from the outside in most cases, it has wreaked havoc with the people and the economies of those countries.    And it is giving rise to the extremism in political reactions that was quite common in the 1930's, in Italy, Germany and Japan most notably, although it was much more pervasive than other nations would care to admit.

That is not to say that things cannot go from bad but tolerable, to much worse.  We are not yet out of this financial crisis, because the reforms have not yet been made.  We are in a crisis in slow motion, if you will, and it can still go either way. 

The actions that have been taken to prop up the banking system have only delayed the reckoning that will occur when the economic fallacies and policy errors of the last thirty years that overturned many of the safeguards that fellows like Berle had helped to create, are exposed for what they are.  Then a progressive spirit of government might begin to replace the tired propaganda of deregulation and the natural goodness of the oligarchs and their phony free markets.

I do expect things to remain unsettled, and for hysteria to remain high, especially at the edges of the political spectrum.  I do not expect to see a rise of fascism in the US or Germany per se, but remain more concerned about Spain, Greece, and Portugal. 

It is fortunate perhaps that communism does not represent such a spectre for the oligarchs to incite the people against.  Although it is painfully clear that many groups are searching for a workable 'other,' even one that is largely imaginary,  that helps the unscrupulous demagogues to tap into the darkest impulses of a troubled people.

The Crisis Last Time
By Richard Parker
November 7, 2008

For writers who seek to influence public affairs, timing plays a paramount role. And few writers have had better timing than Adolf Augustus Berle.

In the summer of 1932, with America trapped in the greatest financial crisis in its history, Berle published “The Modern Corporation and Private Property,” a scholarly yet readable analysis of America’s largest companies and their managers. Berle is largely forgotten today, yet with that book he succeeded in persuading Americans to see their economic system in a new way — and helped set the stage for the most fundamental realignment of power since abolition.

The stock market had plunged vertiginously three years earlier, and by 1932 Americans were desperate to reverse the much wider collapse that had ensued — and to make sure it wouldn’t happen again. The New Republic was soon hailing “The Modern Corporation” as the book of the year, while The New York Herald Tribune pronounced it “the most important work bearing on American statecraft” since the Federalist Papers. Louis Brandeis would cite its arguments in a major Supreme Court ruling on corporate power. Running for president, Franklin Delano Roosevelt recruited Berle — a Republican Wall Street lawyer who had supported Hoover — to join his “brain trust,” and that fall entrusted him with drafting what became the most important speech of the campaign. After the election, Berle remained in New York, yet his connection to the president he audaciously addressed as “Dear Caesar” was such that Time would characterize “The Modern Corporation” as “the economic bible of the Roosevelt administration.”

At first glance, the book would hardly seem to merit such broad acclaim. But if the topic was limited, Berle’s analysis was not. He used the data compiled by his co-author, the economist Gardiner Means, to examine how markets had become concentrated in just a few hundred firms and how senior managers had wrested power from the companies’ legal owners, the shareholders. No radical, Berle was eager to preserve the corporate system, which he called “the flower of our industrial organization.” But he now believed that new controls would have to balance “a variety of claims by various groups in the community” — not just its managers or shareholders — and assign “to each a portion of the income stream on the basis of public policy rather than private cupidity.”

In 1932, as in our own moment of financial crisis, most Americans could see that something needed to be done because these new behemoths — which had turned America from a nation of farmers into the world’s largest industrial power — were on the verge of collapse, poised like Samson to pull the entire economy down with them. Berle’s genius in “The Modern Corporation” was to align his professional insights with the public’s fears, and its anger. As he starkly put it in his preface, “Between a political organization of society and an economic organization of society, which will be the dominant form?”

In Theodore Roosevelt’s and Woodrow Wilson’s era, reformers like Brandeis had argued that strict anti­monopoly and anti-collusion laws could return America to a place of small firms and farms, the beau ideal of Adam Smith’s market model. But Americans continued rushing to the cities, spurring an explosion in mass consumption, financed by a boom in cheap consumer credit and easy home loans. Then, in 1929, the markets crashed.

The crash for a time reinvigorated not only the anti-monopolists, but also union organizers, socialists, agrarian populists and crackpot utopians. It also brought forth “forward looking” chief executives like Gerald Swope of General Electric, who supported progressive corporatism — a world of government-mandated business cartels in exchange for higher wages, improved working conditions, and corporate-based workers’ compensation, pension and unemployment plans. Berle, however, was keen on none of these solutions. In his book, he explained that giant corporations were not “natural” economic institutions but recent inventions of the law, cobbled together on the remains of the medieval corporation, a quite different institution. What the Depression showed, he argued, was that modern corporations had failed not only stockholders, but the public — and would do so again, if left unregulated.

But what sort of regulation was required? On details, Berle was maddeningly but deliberately vague. What he did say clearly was that government needed to bear final responsibility for the economy by using its powers to balance supply and demand. It would also need to require corporate directors to manage the managers, not just for shareholders’ benefit but in accordance with new rules codifying the collective rights of stakeholders and the broader social responsibilities of corporations.

The impact of Berle’s ideas was no doubt enhanced by his decidedly nonradical biography. The son of a reform-minded Congregational minister and his wealthy wife, he had entered Harvard at 14 and finished Harvard Law School at 21 — at the time its youngest graduate ever. (Arrogant as well as gifted, he once showed up in Felix Frankfurter’s class the semester after completing it. Puzzled, Frankfurter asked him why he was back. “Oh,” Berle replied, “I wanted to see if you’d learned anything since last year.”) After a year at Louis Brandeis’s firm, he briefly did public-­interest legal work before marrying well and settling down to a prosperous career in Wall Street corporate law.

As clients flocked to him, however, he began questioning the very system that was making them (and him) rich. In 1923, alarmed by the venality, the chicanery and frequently the stupidity of Wall Street, he started writing articles that over the next several years would virtually invent the modern field of corporate finance law, emphasizing moderate solutions. After Columbia Law School offered him a job in 1927, he began cycling between his lucrative practice downtown and his teaching uptown.

But the Great Crash — and the subsequent revelations of market manipulation, fraud and reckless risk-taking — forced Berle to change sides. He was a Mugwump Republican, but the economic chaos of the Depression, and the threat it posed to American democracy, convinced him a new sort of regulation was now unavoidable.

In late 1931, Franklin Roosevelt, then governor of New York, called on the Columbia political scientist Raymond Moley. Roosevelt was weighing a run for president and was looking for fresh ideas. Moley quickly approached Berle and connected the two ambitious Harvard men.

A month after “The Modern Corporation” appeared, Berle drafted Roosevelt’s famous Commonwealth Club address, delivered in September 1932. Proclaiming that “the day of enlightened administration has come,” Roosevelt articulated the rationale for much of the New Deal’s financial and corporate reforms, including deposit insurance and securities regulation. He defended the coming government interventions as protecting individualism and private property against concentrated economic power. Calling for a new “economic constitutional order,” he declared it our common duty to “build toward the time when a major depression cannot occur again.”

“None of Roosevelt’s speeches,” Arthur Schlesinger Jr. later wrote, “caught up more poignantly the intellectual moods of the early Depression than this one.” It helped assure his landslide victory — and earned Berle a series of ever more important posts in the administration. America began an unprecedented 40-year expansion.

By the Reagan era, however, a new philosophy would take hold, and the public oversight of markets that Berle helped pioneer would over time be swept aside, in confident belief that markets could self-regulate and that government was the problem, not the solution.

Today, that era itself seems to be coming to end, and the question Berle posed — will democracy rule the corporations, or will the corporations rule democracy? — seems a profoundly important one worth asking again.