PUBLIC BOOKS: Jonathan Levy on the New Histories of Capitalism
22 November 2011
READ THIS ARTICLE ON THE PUBLIC BOOKS SITE HERE.
The official Public Books preview is scheduled to go live December 5. Meanwhile, we’re proud to share with you the inaugural nonfiction review, in which Jonathan Levy asks why finance came to dominate the US economy and discusses three new books that stress the interlocked histories of government and Wall Street.
The Rise of Finance
Debtor Nation: The History of America in Red Ink
by Louis Hyman
Princeton University Press, 2011
Capitalizing on Crisis: The Political Origins of the Rise of Finance
by Greta R. Krippner
Harvard University Press, 2011
When Wall Street Met Main Street: The Quest for an Investor’s Democracy
by Julia C. Ott
Harvard University Press, 2011
In a February 2011 interview, the United States Treasury secretary insisted that the future of the American economy depends upon the continued growth of its financial sector. “I don’t have any enthusiasm,” said Timothy Geithner, for “trying to shrink the relative importance of the financial system in our economy as a test of reform, because we have to think about the fact that we operate in the broader world.” Geithner pointed to the ongoing “financial deepening” of emerging “middle-income” countries, probably meaning countries such as Brazil, India, and China.* As they continue to develop, new financial institutions—banks, insurance companies, brokerage firms—will deposit the new savings of a rising global middle class, channeling it into new economic enterprise. The Treasury secretary hopes it will be American financial institutions that, say, take deposits from Brazilian savers, cycling it back out as capital, for a fee, to Brazilian industrialists. Financial services, in other words, is where Geithner believes America’s competitive advantage resides.
Global financial services, however, have played a more troublesome role than Geither lets on. In the past decade, American financial institutions did not channel accumulated wealth into productive enterprise, so much as they helped to inflate an American housing bubble, enabling the 2007–8 financial crisis. Instead of opening factories in Brazil, let alone Michigan, Wall Street opened casinos in Manhattan—bankrolled, in part, by new Chinese savers. Geithner, however, is confident that in the future this kind of clearly unproductive, if not anti-social financial activity will be prevented by proper “regulation.” Whether that prediction proves right or wrong remains to be seen. The secretary’s remarks were refreshingly candid, acknowledging just how central finance has become to the American economy. Policymakers like Timothy Geithner have no discernible industrial policy to reverse this trend.
How did we end up here? Given the stakes of the question, one might expect that professional historians have a handle on the question, but they do not. In the past few decades, American economic history has been a relatively neglected field. Off-of-the-shelf historical narratives of American capitalism do exist, but they largely focus on transformations in work, the organization of production, or the rise of consumerism. Either way, they tend to culminate in the post-WWII era, in the American economy of General Motors, rather than Goldman Sachs.
Happily, today American economic history is now experiencing a reinvigoration, with momentum gathering under the banner “the new history of capitalism.” Given the present moment, the history of finance is likely to be at its cutting edge. Three new books by first-time authors unearth the historical origins of what many scholars are now calling “financialization.” Doing so, they take dead aim at the Treasury secretary’s recent comments. As for the rise of finance, in varied and surprising ways, each argues that the path was cleared by none other than the state itself, through political actors like Geithner.
One reason why, up till now, financial services have played a largely ancillary role in American economic history is that financial services, up till quite recently, have played an ancillary role in an industrial economy—an industrial economy geared towards the production of things, not services. Finance, in other words, is supposed to service productive economic activity, by extending business loans, or providing consumer credit.
Beginning in the 1970s, the American economy shifted away from a financial system that serviced production and consumption, to one organized around financial activity qua financial activity. Interestingly enough, it was nonfinancial US corporations that led the way, themselves increasingly relying upon financial engineering for profit making. That is Greta R. Krippner’s striking finding in Capitalizing on Crisis. American consumers might remember the slogan that General Electric brings “good things to life.” But nowadays General Electric is, basically, a financial conglomerate.
To prove her claim, Krippner, an economic sociologist by training, marshals a data set spanning 1950 to 2001. She weighs profits, leaving aside other economic measures like employment, or the mix of industrial / financial goods and services within the larger national economy. In the 1950s, for instance, the percentage of total profits wrung from financial activity in the US economy was as low as 10 percent. During the following decades, firms’ financial profits (across financial and nonfinancial sectors) increased by a factor somewhere between three and five. Much of this involved what one would expect, the rise of, say, Bank of America or Goldman Sachs. But again, Krippner also discovers that nonfinancial firms began to take in profits via financial activity, at a rate nearly five times as great as before. Notably, much of this came via interest accrual, rather than through capital gains. By the early 2000s, financial profits had pushed up to 40 percent of total corporate profits—whereabouts, after plunging to negative territory in 2009, the number still rests today. In Krippner’s figures, the early 1980s almost always appears to have been the inflection point.
Could there be counter explanations for the numbers? Consider again the global context, and Timothy Geithner’s lack of enthusiasm for shrinking the American financial sector. Could not US firms, rather than engaging in finance qua finance, be servicing the productive activities of non-US firms, which elude her accounting? I wonder if Krippner could be simply measuring globalization, and the consequent deindustrialization of the US, coupled with the industrialization of the rest of the world? She anticipates this criticism, noting that despite US firms’ offshoring of manufacturing, their foreign operations have actually relied even more heavily on financial activities.
So if it’s US firms under study, then Capitalizing on Crisis definitively illustrates that a “financialization” of the US economy has occurred. Why is another question.
While the economy financialized in the 1970s and 1980s, historians squared off on a different canvas, assaying the rise of an industrial economy at the turn of the twentieth century. Two competing paradigms emerged. Labor historians studied the proletarianization of the American labor force. Business historians, led by Alfred Chandler at the Harvard Business School, focused on organizational change in the conduct of business, and the rise, not of wage labor, but of a class of new corporate managers.
Neither labor historians nor business historians focused much on finance. Labor historians cared more about work cultures than balance sheets. Alfred Chandler’s middle name was DuPont, and he was a distant relation of the du Ponts, credited by Chandler with large contributions to the “supremacy” of managerial capitalism by the 1920s. Regardless, an admirer of his once told me that Chandler admitted (this was in the early 1980s) that he had too much downplayed in his work the role of finance capitalists like J. P. Morgan in the corporate consolidation of twentieth-century industry—adding the warning that if the country ever put the financiers in charge, disaster would follow. Chandler, who passed away in May 2007, must be rolling in his grave.
In the end, Chandler found a wider audience among business school professors and organizational sociologists than historians. Meanwhile, many of those same historians, even many labor historians, made the cultural turn, often dispensing with the study of the economy altogether. Within history departments, by the turn of the twenty-first century, American economic history languished.
Enter the new histories of capitalism. Julia Ott’s When Wall Street Met Main Street adds a financial endpoint to American history’s familiar story, in which the agricultural economy of the nineteenth century gave way to the corporate, industrial economy of the twentieth. To her, the significance of the 1910s and 1920s lies not in the “Fall of the House of Labor,” or even the rise of Chandler’s managerial capitalism, but rather in the mounting financial quest for an “investor’s democracy.”
Following labor historians, When Wall Street Met Main Street reimagines the turn-of-the-twentieth-century crisis of the “producer’s republic.” Producerism was a nineteenth-century political ideology, which linked politics and economics, arguing that full citizenship in the American republic demanded manly economic independence. Citizenship could only be rooted in the possession of productive (i.e. non-financial) property. Labor historians have long argued that the rise of industrial wage labor in the late nineteenth century sounded the death knell for the “producer’s republic.”
Ott agrees that a corporate industrial society threatened the traditional republican ideal of “proprietary democracy.” As mainly independent proprietorship gave way to corporate consolidation in the Great Merger Movement of 1895–1904—during which time some 1,800 firms disappeared into 157 corporate behemoths—the new corporate political economy stood in dire need of political and ideological legitimation. A new shareholder political ideology, which promised that American citizens—now primarily wage laborers—could nevertheless still own a propertied stake in the American economy, through the ownership of corporate securities, offered a much-needed ideological tonic.
Modern mass investment in organized securities markets began during World War I. Here, the twentieth-century leviathan, just getting its bearings in the United States, enters the picture. American entry into the war required a massive expansion of federal state capacity. The state told its citizens that it was their patriotic duty to purchase federal securities in order to fund the war effort. Suddenly, owning a financial security—rather than productive property—grounded democratic citizenship. Ott’s account is superb, full of subtle insights and surprising interactions between state actors in desperate need of finance, financiers in desperate need of political legitimacy, and a wide range of private citizens and civil society actors—women’s groups, even labor unions—caught in between. “Ironically,” Ott writes, “the ability… to enlarge the shareholding class in the 1920s depended upon the federal government’s successes in mass-marketing its debt and in reshaping popular attitudes toward securities investment during World War I.”
Now, something like this had happened before, during the American Civil War, which too was bankrolled by popular investors (for this reason alone I am somewhat skeptical of Ott’s general claim that mass financial investment did not exist before World War I). After the Civil War, the US government paid off its debts, which were recycled by popular investors into widely diffused and decentralized financial markets, if not deposited in local savings banks, or stuffed back under mattresses. What was different after World War I was both the new corporate political economy and a centralizing institution, the New York Stock Exchange (NYSE), newly thirsting for a mass investment market. Pro-corporate ideologues and the NYSE seized the moment, turning “swords into shares.” They did so by mobilizing the language and imagery of producerism. Harvard University professor Thomas Nixon Carter’s “New Proprietorship,” accomplished by popular ownership of corporate securities, was the most emblematic, and seemingly influential, theory. By the time of the 1920s boom, the NYSE was calling itself “The People’s Market,” and shareholder ideology had achieved lasting form. Finance, it turned out, had produced something—a “People’s Market” to replace a “Producer’s Republic.”
By 1929, Ott claims, “an ideology of shareholder democracy… reigned supreme,” a conclusion perhaps too strongly stated. Chandler’s managers, at least, had an equally rightful claim to supremacy. But on the whole the book takes great care to illustrate a profound ideological shift. Aided by World War I, the new industrial economy pulled the rug out from under nineteenth-century producerism’s anxiety with owning financial securities. Certainly, the early twentieth-century shareholder ideology that Ott has discovered resonates powerfully with today’s financial sloganeering. When Wall Street Met Main Street is not concerned with tracing the actual historical mechanism that recycled a 1920s ideology into the contemporary world. But it is this ideology, Ott concludes, which “underlay the free-wheeling securitization that torpedoed the economy in 2008.”
If that is the case, then Ott has identified the first moment in a distinct historical pattern in twentieth-century American political economy. Ironically, she writes, the expansion of state capacity in World War I led to a surge forward for financial markets. The subject, then, is the unintended consequences of state action. Louis Hyman’s Debtor Nation argues in the same spirit as it traces the roots of the contemporary financial practice of “securitization” to transformations in consumer debt.
The history of consumer debt crosses paths with shareholder ideology in the 1920s. The Fordist political economy that came together in that decade demanded new structures of credit in order to finance the purchase of the new consumer durables, like Ford’s Model T. This would be an instance of “financial” activities, according to Krippner’s distinction, which Hyman shares, that might actually foster “productive” activities, like the actual manufacturing of new cars, with the mass industrial employment and widely-shared postwar economic abundance that followed in its wake.
Like the crisis of the “producer’s republic,” the shift from nineteenth-century producerism to twentieth-century consumerism is another warhorse historical narrative of American capitalism. Yet, looking at consumer debt, Hyman chooses instead to carry the history of financial institutions forward to a moment where Ott’s account cannot go. How did finance transform from ancillary economic service to financial activity qua financial activity? That, indeed, is the central problem of the past thirty to forty years of American economic history, crying out for explanation. Hyman would point to the securitization of consumer debt, or how twentieth-century consumer debt, that is, became “legal, sellable, and profitable.”
Modern consumer debt is a post–World War II phenomenon. Installment loans and many other new types of personal consumer loans first arose in the 1920s. But “revolving credit”—that noose around so many credit card–holders necks—emerged only after World War II, financing the “Consumer’s Republic.” Setting aside Hyman’s prehistory (there was much more securitization of debt in the nineteenth century than he admits), what most distinguishes Hyman’s account is the sharp-eyed, oftentimes brilliant analysis of the interactions between finance capitalists and Washington policymakers in the making of the twentieth-century financial infrastructure of consumer debt. It was the “visible hands” of policymakers, as much as the “invisible hand” of financial markets, that created these new structures. And once again, we are presented with a story of the unintended consequences of state action. Ott speaks of the “irony” of the World War I bond market, while Hyman speaks of policies that time and again led “entrepreneurial innovation” into “unexpected directions.”
This pattern recurs relentlessly in Debtor Nation, and to great effect. One illustrative episode occurred during the New Deal, in Hyman’s brief treatment of the 1934 National Housing Act, which created the Federal Housing Administration (FHA). To lure private capital back into a bottomed-out residential real estate market, and to create much-needed jobs in the construction industry, the FHA amortized and secured 5 percent interest, ten-year residential mortgages. In turn, the FHA created an insurance program for lenders, to pay back the principal on defaulting loans. The FHA would inspect and assure the quality of the loans. In the process, it standardized mortgage loans, rendering notoriously singular housing assets commensurable and enabling them to be securitized into bonds for public sale. The FHA did that, creating the National Mortgage Association, and a secondary market for the resale of home mortgages. But it was the state, not private actors, who first did the standardizing, and for reasons of its own. “The federal government organized the FHA,” Hyman concludes, “but private capital paid for it and profited from it.”
This does not mean that Hyman lacks appreciation for the agency of powerful finance capitalists. He seemingly relishes the opportunity to emphasize that the powerful have more power than the powerless, a point he thinks many social and cultural historians have forgotten. But the true focus is on how twentieth-century public authorities—with or without intending it—created the context in which the private accumulation and circulation of capital might profitably occur. For much of that century, capital profited from manufacturing, often of consumer durables—including the sale of prefabricated homes, with General Electric appliances parked inside, Ford automobiles parked outside. This was made possible by new forms of consumer debt. But then during the 1970s, with the manufacturing sector in crisis, the financial proliferation of consumer debt became a profitable end in-and-of-itself.
Hyman presents an original and what might well be an influential framework for thinking about twentieth-century American political economy. To read the newspapers, financiers lash out at government regulators, while, every once in a while, politicians return the favor. The tradition goes back at least as far as J. P. Morgan waving his cane at meddlesome Progressive reformers, while Theodore Roosevelt vented against the “malefactors of great wealth.” However, given the fact of the twentieth-century leviathan’s existence, and capitalists’ need to make profits, the antagonism between market and state, regulators and the regulated, can obscure as much as it reveals. In the twentieth-century United States, there has been a fundamental imbrication of state action and private profit making. The American state has the power—even through inaction—to create the conditions of capital formation. Historians of twentieth-century American capitalism, Hyman wants to say, should devote more attention to this imbrication, rather than getting embroiled themselves in the ideological debates that have hovered, and still hover, above the nitty-gritty conduct of business.
In sum, in both When Wall Street Met Main Street and Debtor Nation are glimpses of what the outlines of the “new history of capitalism” are likely to be. Both are works of political economy. Further, the term “history of capitalism” is appropriate, given that both authors target capitalists, and the structural accumulation and circulation of capital—rather than workers, consumers, or corporate managers, let alone the abstract power of market forces.
This is Krippner’s tack in Capitalizing On Crisis, as well. She picks up Hyman’s thread during the general crisis of the 1970s, with a succinct account of its many components—from stagflation, to flagging manufacturing productivity and profitability, to a fiscal crisis, to a crisis with respect to the very “legitimacy” of state action, given the inability of Liberals and Conservatives, facing an angry street, to find common ground concerning the nation’s economic ills. In the end, the political impasse tempted elites, across the political spectrum, to simply pass the buck to “market discipline.” It was one thing for the state to say that it would remove its hand from the marketplace. It was quite another, given just how heavy that hand had become in the postwar period, to actually do it. In the very act of attempting to leave the field to “market discipline,” the state pushed American capitalism in a new, financial direction.
As US policymakers, under the mantra of liberating “market forces,” began to allow finance capital to flow more freely, first across domestic markets, then across national borders, abundant capital threatened inflationary pressures. And so Federal Reserve Chairman Paul Volcker imposed a new regime of high-interest rates—the monetarist “Volker Shock” of 1979–1982—to break the back of inflation, all the while still intending to unleash what Reagan called “the magic of the market.” The Volcker Shock, according to Krippner, in what should by now be a familiar refrain, had “unintended consequences.” It was the proximate cause of financialization.
The account hinges on a deceptively simple point. The cheap-money, high-interest-rate environment of the early 1980s led firms, even nonfinancial ones—even those led by Chandler’s vaunted class of managers—to scurry to short-term financial activity for profit making. Rather than investing in productive capacity, firms sought ways to make profits via interest rate accrual. High US interest rates, given that the dollar was the world’s reserve currency, also attracted enormous inflows of finance capital from around the world seeking high yield, liquid financial assets. Japan was the trailblazer of this strategy in the 1980s, especially after its economy slid into real-estate-bubble-induced deflation. But after the Asian financial crisis of 1998, fearful of global finance capital’s fickleness, China took it to new heights. US firms “capitalized on crisis,” and—prodded on in this way by policymakers—financialized the entire American economy.
It is an elegant, compelling argument. The timing and sequence of events count for a lot, because it was a low-interest-rate environment, subsequently fostered by Federal Reserve Chairman Alan Greenspan in the late 1990s and throughout the 2000s, which was crucial for continued financialization. Inducing a switch from interest accrual to capital gains strategies, Greenspan made it possible for late-1990s US corporations to buy back vast blocks of their own shares, hoping to watch them skyrocket, while lining the pockets of nefarious corporate executives like Bernie Ebbers and Ken Lay. Then, after that bubble burst, in the 2000s, aided by cheap money, there developed a new Wall Street carrying trade—with short-term, cheap money financing putatively risk-free mortgage-backed securities. Yet, first the high-rate interest rates of the early 1980s—leading US firms to avoid long-term fixed capital investment, while rerouting global capital flows into the US—set these corporate financial strategies into place. Only then would a low-interest-rate environment help fuel them.
When it did, and global savings glutted American capital markets, the securitization of residential mortgages, newly intensified by Wall Street computer algorithms, went wild. Meanwhile, even if the 1990s stock market bubble was blown more by corporate buy-backs than popular day trading, shareholder ideology in fact waxed more than waned after the NASDAQ tanked—except now, in the “ownership society” of George W. Bush, many Americans began to treat houses like hot-potato Enron stocks. Wall Street begged them to do it, if it did not fraudulently trick them into doing it. In the 2000s, it is no exaggeration to say that the US economy engaged in the greatest bout of financial activity qua financial activity known to history.
Krippner’s chilling conclusion is that the rise of finance has not, indeed cannot, solve the crisis of the 1970s. All it could do was paper it over. The rough economic seas the US is now experiencing are the same ones it thought it rode out, if not already by Morning in America, then certainly by the time of the New Economy, as it basked in the glow of Soviet collapse.
Recently, the 2010 census has confirmed that the 2000s—at least by every single statistical measurement one could imagine—was a lost decade economically for the large majority of Americans, even before the panic of 2007–8 and its aftermath. What has financialization produced besides a powerful political ideology? Thus far, in the United States, besides more billionaires and millionaires, not very much.
And so US economic problems must now be stared directly in the face. The 2010s are still the 1970s. If these three books teach us anything, it is that the state—whether it likes it or not, or even knows it or not—will continue to set, if not steer, the course. For all of Hyman’s, Krippner’s, and Ott’s sophistication, Timothy Geithner’s plainspoken words hardly cry out for a sophisticated analysis. We know where this ship is still headed—unless other hands can reach for the wheel. Zuccotti Park is but one block from the Treasury secretary’s former perch at the Federal Reserve Bank of New York.
Jonathan Levy is an assistant professor of history at Princeton University. His first book, Freaks of Fortune: The Emerging World of Capitalism and Risk in America, is forthcoming from Harvard University Press in 2012.
* “The Escape Artist,” The New Republic, February 10, 2011.