Monday, July 25, 2011

Unwarranted speculation

In When Wall Street Met Main Street: The Quest for an Investors Democracy, Julia C. Ott describes the early 20th century moment when shareholding replaced stakeholding

The following review was posted recently on the Books page of the History News Network site. 

Once upon a time, Americans believed that economic success was a matter of hard work and thrift. The word "investment" was commonly understood to mean the expenditure of resources in an enterprise directly controlled by its owner. Even corporate titans like Andrew Carnegie and John Rockefeller understood their success in these terms (though not their critics). An avowed Social Darwinist like William Graham Sumner counterposed "the simple honest laborer, ready to earn his labor by productive work" with "the vicious, the idle, and the shiftless." In the popular imagination going back to the time of Alexander Hamilton, those who sought wealth through financial instruments like stocks and bonds were scarcely more than barroom gamblers. Such a view may have been simplistic, but it was certainly widespread, an article of faith in the Democratic party from the Age of Jackson to the Age of Roosevelt.

Ah, the good old days.

The story of how finance capitalism was transformed from a marginal element of modern industrial society to the inescapable imperative of contemporary life -- even after its demonstrable failure in 2007-2008 -- is the story Julia C. Ott tells in When Wall Street Met Main Street. The core of this story is a historical hinge, a crucible of about twenty years between the Progressive era and the stock market crash of 1929, when the logic of modern economic life snapped into place. It's a tale of contingent events and unexpected consequences of intended events, but it's also one of a determined elite successfully manipulating regulators and public opinion through the creation of a concept Ott dubs "an investor's democracy": the idea that replacing a nation of stakeholders with a nation of shareholders would stabilize and extend an American way of life in ways more meaningful than votes, unions, pensions, or self-governance. What's more astounding than the mere fact of this marketing strategy is the degree to which it succeeded.

One of the great ironies in the emergence of investor democracy ideology is that it was to a great extent the creation of those who presumably sought to contain and regulate capitalist excesses. The Pujo Committee of 1913 (a staple of SAT II U.S. History exams) made the first step in this direction, seeking to legitimate trading by reforming the market. Organizations like the New York Stock Exchange, which stood to benefit from such legitimacy, nevertheless parried a potential loss of prerogative by arguing that better results would be achieved through self-regulation and reporting. But it was Progressives themselves who demonstrated just what mass investment could do in the bond drives of the First World War, which used sophisticated marketing techniques (as well as less subtle ones of coercion) to finance the cost.

The federal government was strikingly good at this, and the early postwar featured even greater capital flows into the national state as well as proposals for nationalizing the rail system. But increasing impatience with Progressive policy as well as a full-bore mobilization of private interests led to a rejection of such approaches in favor of allowing capital to flow toward private enterprise. An emergent ideology of "New Proprietorship" promulgated by advocates like Thomas Nixon Carver and William Z. Ripley worked tirelessly to convince policymakers that mass investment by workers and consumers in private companies would serve as an excellent hedge against socialism as well as a modern incarnation of the family farm or small business that had previously been the core aspiration of republican ideology.

Such a version of history conveniently overlooked the fact of slavery, tenant farming, and wage labor, which always lacked such a stake in enterprises. By contrast, the boosters of New Proprietorship were very mindful that giving investors a piece of the action was hardly the same thing as control of a company, which remained firmly in the hands of corporate elites. Ott injects a gender motif into this analysis, contrasting a "feminized" vision of collective investment in instruments like pensions and social welfare with a "masculine"one of individuals empowered to amass wealth in the form of a diverse portfolio, typically in the service of a romanticized vision of retirement as a time of painless leisure. Even though women were in some cases important shareholders in AT&T -- known for decades as a blue-chip "widows and orphans" stock, a masculine, libertarian vision of trade and finance took root; hence the instinctive, dismissive description of liberalism as "the nanny state" by contemporary radio talk show hosts.

The truly astounding fact of the ideological regime that Ott limns here is how durable it has proven. The Great Depression shook it, but left the self-policing core of the NYSE intact. The primacy of the shareholder over the consumer, worker or even the manager, which first took shape early in the century, became increasingly central to the logical of modern business, achieving unquestioned supremacy in the Reagan era. Even now, when the literal and figurative bankruptcy of an investor-driven regime has saddled taxpayers with bills whose scale is only beginning to be felt, it seems almost impossible to imagine an alternative financial universe in which banks and other financial institutions are not too big to fail. As Ott notes, every major presidential candidate since Reagan has proposed some form of Social Security privatization, and even Barack Obama, who opposed the efforts of George W. Bush in this regard, nevertheless continues to insist that individuals should pursue higher risk investment strategies in order to achieve financial security.

The clarity and force of Ott's message is sustained by its medium: this is a sterling piece of scholarship. Its 225 succinct pages are buttressed by another 70 pages of notes, scaffolded into chapters that are sturdily framed with clear introductions and conclusions, as well as carefully chiseled topic sentences. The utter solidity of the volume is itself a form of force. The final irony is that it leaves you badly shaken.