B005HFI0X2 EBOK (41 page)

FROM FINANCE CAPITALISM TO MANAGERIAL CAPITALISM

The Glass-Steagall Act and the creation of the Securities and Exchange Commission (SEC) brought an end to the era of American finance capitalism symbolized by J. P. Morgan. Investment bankers were separated from commercial bankers and forbidden to be on the boards of directors of corporations.

The dominance of productive industry over finance during this period is shown by the reduced dependence of corporations on Wall Street. According to a congressional report in 1962, following World War II, industry was financed primarily from within. Borrowing from banks and issuing securities accounted for only a quarter of capital: “As compared with the 1920s, corporate financing in recent years featured a higher reliance on internally generated funds, a modest rise in the importance of long-term borrowing, and a sharp reduction in stock flotations.”
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The post-1945 boom, by allowing many firms to finance themselves to a greater degree from retained earnings, reduced the influence of the financial sector over corporate America even more.

Freedom from autocratic founders and financiers provided the managers of big companies with stability of tenure. In 1952, three-quarters of eight hundred senior executives in three hundred industrial, railroad, and utility companies had been with the same corporations for more than twenty years.
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There was no market for executives, of the kind that developed at the end of the twentieth century. In the concentrated sectors, lifetime employment was the norm for managers and employees alike. Promotion was typically from within the company. Because executive salaries were restrained, the perquisites of office—the key to the executive bathroom or the corner office—were the goals of competition. On retirement, managers and many if not all employees of large companies could look forward to a defined-benefit pension plan.

Many of the executives who worked their way up to the top of companies began as engineers. In the early 1900s, Thorstein Veblen had called for a “soviet of engineers.” James Burnham, Leon Trotsky’s deputy in the United States and later a founder of the conservative movement, argued that in all industrial societies a “managerial elite” was displacing capitalists. In 1932, in
The Modern Corporation and Private Property
, Adolf Berle and Gardiner Means had called for managers to become a “neutral technocracy.” In his 1964 book
The American Economic Republic
, Berle argued that most economic power was now exercised by corporate managers, the managers of pensions and mutual funds, government officials, and scientific experts.
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In his 1966 Reith Lectures for the BBC, which became his book
The New Industrial State
, John Kenneth Galbraith made a similar argument that a “technostructure” of managerial firms had replaced the market with private planning in the concentrated, capital-intensive sectors of the economy.
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“WHAT WAS GOOD FOR OUR COUNTRY WAS GOOD FOR GENERAL MOTORS”

When President Eisenhower nominated Charles Erwin “Engine Charlie” Wilson, the president of GM, to be secretary of defense in 1953, Wilson was asked at a Senate confirmation hearing about conflicts of interest. Wilson replied: “I cannot conceive of one because for years I thought what was good for our country was good for General Motors, and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country.”
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In the popular press and history books, Wilson was often accused of having said something different: “What is good for General Motors is good for America.” But in his actual statement he put the good of the country first.

Wilson was Veblen’s engineer and Burnham’s manager rolled into one. An electrical engineer by training, he worked for Westinghouse and then General Motors, where he became president in January 1941. Wilson’s career symbolizes the collaboration of the military and the private sector in promoting technological innovation in the twentieth century. During World War I, Wilson helped Westinghouse develop radio generators and electric motors for the US military. During World War II, as head of General Motors, he directed the company’s war production.

Wilson was typical of the “organization men” who dominated the American economy during the Golden Age of high growth and widely shared prosperity from 1945 to 1973. What has come to be known as the “stakeholder” conception of the corporation was widely shared during the Golden Age. In 1951, the chairman of Standard Oil of New Jersey explained: “The job of management is to maintain an equitable and working balance among the claims of the various directly affected interest groups . . . stockholders, employees, customers, and the public at large. Business managers are gaining professional status partly because they see in their work the basic responsibilities that other professional men have long recognized in theirs.”
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Thomas Murphy of GM explained: “The UAW may have introduced the sit-down strike to America, but in its relationship with GM management it has also helped introduce . . . mutually beneficial cooperation. . . . What comes to my mind is the progress we have made, by working together, in such directions as providing greater safety and health protection, in decreasing alcoholism and drug addiction, in improving the quality of life.”
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Founded in 1942, the Committee for Economic Development (CED) was a spin-off of the Business Advisory Council of the Department of Commerce. Dominated by representatives of large and medium-size firms, the CED carried on a version of the associationalist tradition, in opposition to the hard-edged antistatism of the National Association of Manufacturers and its small-business constituency. William Benton, the founder and vice president, explained: “The historic attitude of business has been to use government if it could, and abuse it if it couldn’t. Philosophically, business was committed to the doctrine that, ‘that government is best which governs least.’ ” The CED attitude was that “government has a positive and permanent role in achieving the common objectives of high employment and production and high and rising standards of living for people in all walks of life. . . . This is our present answer to the European brands of socialism. Long may it thrive.”
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The role of government in the era of American stakeholder capitalism was not limited to serving as an umpire enforcing neutral rules of competition and transparency in a free market. The government was part of a tripartite system that also included management and labor, which, if less formal than the aborted NIRA system of the 1930s, was similar in spirit. Unofficial and fragmented as it was, interest-group pluralism was the successor to NIRA corporatism and the equivalent of more formal tripartite government-business-labor bargaining systems in other Western democracies. What Galbraith later called “countervailing power” was described by the journalist John Chamberlain as the essence of the “broker state” created by the New Deal: “The labor union, the consumers’ or producers’ co-operative, the ‘institute,’ the syndicate—these are the important things in a democracy. If their power is evenly spread, if there are economic checks and balances to parallel the political checks and balances, then society will be democratic. For democracy is what results when you have a state of tension in society that permits no one group to dare to bid for total power.”
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THE TREATY OF DETROIT

Following World War II, the uneasy peace between government and business was joined by a shaky rapprochement between business and organized labor. During the New Deal era, organized labor reached a degree of influence that it did not possess before or afterward. After the Supreme Court struck down the NIRA, some of the prolabor provisions that it contained were included in the National Labor Relations Act, signed in June 1935 by Roosevelt, and the 1938 Fair Labor Standards Act. The Taft-Hartley Act of 1947 shifted the balance of power back toward management, while leaving the structure of labor relations created during the Roosevelt years intact.

In 1950, Walter Reuther’s United Auto Workers (UAW) signed a five-year agreement with the Big Three automobile makers of Detroit—Ford, GM, and Chrysler. The UAW agreed to forgo strike activity in return for inflation-adjusted salaries, health and retirement packages, and other benefits. The five-year contract that GM signed with the UAW in 1950 that provided generous benefits to auto workers became known as “the Treaty of Detroit.” Ford and Chrysler signed identical agreements and many lesser companies followed their lead.

Even in the absence of the sector-wide bargaining that the NIRA-code authorities had sought to promote, contracts in the concentrated industrial sector served as informal models for wage-and-benefit policies in other industries until the 1970s. The percentage of Americans who belonged to labor unions, only 2.7 percent in 1900, had risen to 12.1 percent in 1920, only to fall to 7.4 percent in 1930. By the mid-1950s, roughly one in three American workers belonged to a union.

Because US economic growth slowed in the late twentieth century, pensions, health insurance, and other company-based benefits imposed crippling costs on America’s automakers and other companies. For this reason, it is often argued that unions crippled US manufacturing industries. But the corporations, not the unions, preferred employer-based benefits systems. They spurned UAW leader Walter Reuther’s proposal that the car companies “go down to Washington to fight with us” for universal federal health care and retirement benefits. In the 1950s and 1960s, the Big Three and other corporations were confident that they could always pass on the cost of benefits to consumers. In addition, they preferred to increase benefits rather than wages. For example, in 1961, GM was able to raise wages by only 2.5 percent by increasing pension obligations in the future by 12 percent.
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BANKING AS A PUBLIC UTILITY

The revolutionary changes in the economy and society that occurred during and after World War II were accompanied by a degree of stability in the financial sector without precedent in American history. In the mature New Deal order between the 1940s and the 1970s, finance went from being the master of American industry to being its servant. The Glass-Steagall Act and other New Deal–era reforms made commercial banking a boring, safe sector dominated by small banks serving local and state businesses. A scaled-down investment-banking sector played an essential but limited role in raising capital for large corporations.

Investment banks were partnerships, not the corporations with limited liability that they became at the end of the century (before they metamorphosed into “bank holding companies” in order to be rescued by the Federal Reserve following the crash of 2008). Before the 1970s, the SEC required investment banks to be partnerships, so that the prospect of personal liability for firm losses would encourage the partners to be risk averse and prudent.

Between World War II and the 1980s, American banking was safe and dull. Commercial banks took deposits and made loans. Commercial banks were also the main source of credit to most companies except for the largest, which could raise money in the bond market. Savings and loans (S&Ls) facilitated mortgage lending.

Another reform intended to steer finance away from speculation into productive investment was Regulation Q, passed as part of the Glass-Steagall Act of 1933 and reaffirmed by the Banking Act of 1935. Regulation Q banned the provision of interest payments on checking accounts at commercial banks. It also allowed the Federal Reserve to set interest-rate ceilings on savings accounts and time deposits such as certificates of deposit. Like the other elements of the New Deal system, the regulation sought to limit competition among banks for customers that might drive banks into risky practices. Another goal of Regulation Q was to encourage community banks to lend to productive local businesses and enterprises, rather than hold large balances with big metropolitan banks that might use the money for unproductive speculation.
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Ruinous competition among banks was also checked by the 1927 McFadden Act, which preceded the New Deal and imposed restraints on interstate and intrastate branch banking. Banks were stable, protected public utilities, not dynamic firms in a competitive marketplace. Banking had become a boring business, symbolized by the “3–6–3” rule that summed up the banker’s job: “Borrow at 3 percent, lend at 6 percent, golf at 3 p.m.”

In addition to regulating finance, the federal government acted as a banker in its own right. Although the Reconstruction Finance Corporation was effectively abolished in 1953, its offspring continued to provide the country with public-investment banks for particular purposes. The Farm Credit System; the Federal Home Loan Banks, Fannie Mae and FHA; the Export-Import Bank; and other public-development banks helped to provide inexpensive credit on fair terms to farmers, small businesses, and the new home-owning majority.

DEMOGRAPHIC CHANGE

The 1920 census was the first in which urban Americans outnumbered rural Americans. By 1950, two-thirds of native-born white Americans lived in urban areas, whereas two-thirds had lived in rural areas in 1900.
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In 1950, 88.7 percent of whites worked in nonfarm occupations, compared to only 11.3 percent on farms. The white workforce was divided between blue-collar manual jobs (46.2 percent) and white-collar jobs, including sales and clerical jobs along with managerial and professional jobs (45 percent).

Only 8.8 percent of whites worked as domestic servants or in other menial services. Blacks, however, were heavily represented in those services (17.1 percent), farms (18.8 percent), and manual labor (52.1 percent), and were underrepresented in white collar jobs (11.9 percent).
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Jobs remained highly segregated by gender, with women largely limited to the occupations of secretary, teacher, and nurse. Clerical jobs accounted for three-tenths of the nonfarm jobs for women in 1950.
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