Of all the great deceptions that come to surround a gathering stock-market boom -- from blather about the obsolescence of the business cycle to editorial claptrap about the United States turning into a republic of shareholders -- one of the most pernicious has been the failure to recognize the character of the money culture it creates.
The pages of American history tell different stories about enormous wealth. Sometimes it has coexisted reasonably well with democracy, as in the days of Andrew Jackson or during the two decades after World War II. But the reverse has been true of the record concentrations of wealth that have grown up around the three most important financial boom periods: the post-Civil War Gilded Age, the Roaring Twenties and the just-concluded bull market of the 1980s and '90s.
In a nutshell, these unusual wealth surges have bred unusual corruption. The moral degradation, in fact, has been multiple -- financial corruption, political corruption, and philosophic or ideological corruption. Each has reinforced the others. When money is king, politicians get bought on a truly grand scale and philosophy bows to avarice. The genesis is much the same each time. All three booms have involved at least one decade -- sometimes several -- of hot new technology, surging stock markets, innovative finance and the sense that the United States has transcended old limitations and rules. Money has fed on itself, creating a cult of railroad barons, automobile kings, hotshot CEOs and financial masters of the universe. As the boom swells, so does the culture's preoccupation with money -- and the competitive urge to ever more willingly cut corners. Human nature just can't resist. The ethical low usually becomes clear after the bull-market peak.
To get a fix on the corruption, it's necessary to begin with a portrait of the unusual wealth-creation dynamics involved. Each of these three periods saw a particularly lucrative convergence of economic forces. First, powerful new technology -- railroads, steel and oil in the Gilded Age; automobiles, radio, motion pictures, aviation and household appliances in the 1920s; and personal computers, telecommunications, biotechnology, networking and the Internet in the 1980s and '90s -- energized the economy and captured the national imagination.
The second factor was financial innovation -- new dimensions of banking, ballooning stock-market volume, innovations from ticker tapes and investment trusts to computer programs and derivatives. There was also a cockiness each time about the United States having achieved a new level of sophisticated financial regulation -- represented in the 1990s by the magic of Alan Greenspan -- that would ensure against any calamity.
In all three periods, elements of the technology mania combined with new financial and speculative opportunities to create speculative excesses in bonds, stocks or both. And each time a speculative bubble burst -- in 1893, 1929 and 2000 -- the weakness in stocks and bonds spread into the real economy. But the wealth created was still notable, even after some or much of it was lost in the downturn.
The Gilded Age after the Civil War -- it was 1873 when Mark Twain coined the term -- lifted the American economy to not only new heights of success and industrialization, but also of economic polarization, and it introduced the nation to new lows of corruption. When the Civil War broke out in 1861, the largest fortune in the country was in the $15 million range, but by 1876, Commodore Vanderbilt had $100 million, and by the turn of the century both John D. Rockefeller (oil) and Andrew Carnegie (steel) were worth $300 million to $400 million. There had been maybe 300 U.S. millionaires in 1860, but by 1900 there were 4,000 to 5,000. And because there was little change in the value of a dollar between 1860 and 1900, the gains were real and not the product of inflation.
The financial corruption was lethal. Stocks and bonds were manipulated and watered down to such an extent that, after the Panic of 1893, thousands of banks and companies controlling one-third of the nation's railroad system were among the tens of thousands that failed. As for the political corruption of the Gilded Age, the U.S. Senate, then chosen by state legislatures rather than elected by the people, is even more emblematic than the Tweed Ring, Whiskey Ring or Indian Ring. Millionaires frequently bought themselves Senate seats, and when one honest but naive member proposed legislation to unseat senators who had done so, Sen. Weldon B. Heyburn (R-Idaho) replied, in all seriousness, "We might lose a quorum here, waiting for the courts to act." Meanwhile, the philosophic corruption of the era produced a cult of markets and laissez faire, social Darwinism and survival of the fittest.
The 1920s made their greatest mark in financial corruption: Ponzi and his scheme, banks that peddled junk bonds and stocks, Samuel Insull and his pyramided utility holding companies, and New York Stock Exchange President Richard Whitney, who finally went to jail in 1938. The political side was highlighted by the Teapot Dome scandal and corrupt big-city machines owned by bootleggers and gangsters. The Dow Jones industrial average climbed 500 percent between 1921 and 1929, and the number of millionaires roughly quintupled to between 30,000 and 35,000 before collapsing in 1929 along with stock prices and the Indian summer of laissez faire.
Which brings us to the 1980s and 1990s and the corruption during those boom-crazed, wealth-fetishizing decades -- behavior that was not just a matter of a few bad apples. As financial historians and economists such as Charles Kindleberger have pointed out, financial and political corruption seem to be an inevitable consequence of the psychologies and politics unleashed as a long bull market feeds a culture of money and greed.
The wealth and feeding pattern of the 1980s and '90s can be described in one word: unprecedented. The percentage increase in the Dow Jones industrial average between 1982 and 1999 was greater than the increase between 1921 and 1929, and the buildup in the largest American fortunes can be seen in the annual list of the Forbes 400 richest Americans. In 1982, looking at the richest 30 individuals and families, No. 30 had $500 million and No. 1, the du Pont family, had $8.6 billion; by 1999, after a 1,200 percent rise in the Dow, No. 30 had a fortune of $7 billion and No. 1, Bill Gates of Microsoft, had $85 billion.
Another set of numbers make clear just how rapacious America's top corporate echelon was. At its most intense, this was the mentality that gave us Enron, WorldCom and the like. In 1981 the 10 highest-compensated executives in the United States had an average annual compensation of $3.45 million; in 1988 the average compensation for this group had climbed to $19.3 million; in 2000 it had soared to $154 million.
Very little of this incredible gain at the top of the U.S. wealth-and-income structure trickled down. The top 1 percent of Americans did not do nearly as well as the top one-tenth of 1 percent, but their fortunes soared in comparison with the middle class. In the autumn of 2001, when the Senate was Democratic and the House Republican, the Congressional Budget Office published data showing changes in household after-tax income adjusted for inflation. (See chart at left.)
From the 1980s on, the enormous economic opportunities and benefits being concentrated at the top (and spreading down into the upper quintile) through tax cuts; bank, currency and savings-and-loan bailouts; deregulation; mergers; leveraged buyouts; and a bull market in stocks had the predictable effects. Financial corruption ballooned, exemplified by the looting of savings-and-loan associations, the proliferation of insider-trading scandals and the criminal machinations of junk-bond king Michael Milken. On the philosophic front, conservative think tanks promoted laissez faire and theorized about markets replacing politics. With so much at stake in policy making and regulation, the rich stepped up their political involvement, and more and more money poured into congressional elections.
After a pause at the beginning of the 1990s, the boom, the technology mania and the stock-market bubble continued to expand until they burst in 2000. After the crash, a mass of financial corruption and dirty laundry spilled out of the closet, tainting Enron, Citicorp, Merrill Lynch, Bell South and dozens of others. The warping of ideas and thinking had in many ways resurrected the Gilded Age taste for survival of the fittest (this time globally), glorification of the rich and deification of markets.
But my purpose here is to emphasize how the concentration and momentum of wealth spilled over, just as they had before, from economic self-interest and buccaneering into the corruption of politics. Money flowed into elections and into the many pockets of well-tailored politicians. If the corruption was not as obvious as in the buying of the U.S. Senate circa 1900, it was even greater in overall scale. Consider these highlights (or lowlights):
The presidential "money primary." In the 1999-2000 election cycle, big donors in both parties were able for the first time to flood the system with enough money to anoint chosen candidates -- Republican George W. Bush, Democrat Al Gore -- scare off most rivals and avoid a drawn-out primary contest on either side.
The buying of the national parties. Soft-dollar contributions rose from very little in the early 1980s to some $495 million in the 1999-2000 cycle, more or less enabling wealthy individuals, corporations and interests to rent the loyalties of both parties.
The rising cost of open seats. Since the 1979-1980 election cycle, the cost of running for open House and Senate seats has roughly quintupled, ensuring that a candidate must either have money of his or her own or accept the conditions and fealty that come with large-scale fundraising.
The selling of representatives and senators. Over the years, politicians have tailored more and more pockets into which money can be stuffed, including campaign war chests, leadership political action committees, personal foundations, allied think tanks and high-paying jobs for spouses, to say nothing of future job opportunities for themselves.
The ascendancy of the top 1 percent. Not surprisingly, the dominance of money in politics has cemented the dominance of those who have it to give. In the 1999-2000 cycle, the 15,000 top campaign donors (of $10,000 and more) gave more than 40 percent of the total contributions greater than $1,000. Similarly, about 40 percent of the donors giving at least $200 were in the top 1 percent of Americans by income. This goes a long way toward explaining why Congress has voted for top-bracket income-tax cuts and for eliminating the federal inheritance or estate tax, which applies only to the top 1.6 percent of estates.
The purchase of key economic policies. Since the mid-1990s, the ability of rich individuals and free-spending industries to buy victory on critical issues has been particularly evident in three congressional decisions: the 1995 legislation to shield accounting firms from liability for inaccurate corporate reporting (and the subsequent defeat of efforts to curb accounting industry conflicts of interest); the 1996 Telecommunications Act; and the 1999 legislation repealing the Glass-Steagall Act, a law that for 65 years had prohibited banks from being in the insurance or securities business. Money won each time. The accounting industry flooded Congress with money and marshaled allies to threaten the Securities and Exchange Commission's budget. Sen. John McCain (R-Ariz.), chairman of the Senate Committee on Commerce, called the Telecommunications Act, in which broadcasters got $70 billion worth of free spectrum, "one of the greatest rip-offs since Teapot Dome." In 1999 the finance, insurance and real-estate sector was able to repeal Glass-Steagall in part because it was spending more on lobbying (more than $200 million in 1998) than any other economic sector. It had also become the biggest campaign giver in national politics, up from $109 million in 1991- 1992 to a walloping $297 million in 1999-2000.
Alas, the changes won by the accounting, telecommunications and banking industries -- all of them promoting either something for nothing, lowered standards of responsibility or corner-cutting -- only exacerbated the collapse of ethics and responsible behavior. Not surprisingly, each of these industries would be front and center in the excesses and abuses that came to light in 2002 and 2003.
The bottom line, to use that phrase beloved by businessmen, is simply this: As the top 1 percent of Americans made so much money with the help of the political favoritisms of the 1980s and 1990s, they plowed even more money back into politics to secure and extend that favoritism -- and they are still reaping the benefits. Meanwhile, of course, corrupted thinking is pushing the argument that giving a check to a candidate amounts to protected political speech under the First Amendment of the U.S. Constitution. It is amazing -- literally amazing -- how few opponents of these developments understand their larger historical context and symbolism.
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