Recalling the Harsh Lessons of the Past

More than three years ago I wrote the following article on the dangers of uncontrolled competition and overconcentration in the financial markets. Having witnessed the financial crisis that unfolded shortly after this article was written, I thought I’d republish it again today as a matter of interest and, well, fact. Happy holidays to all and best wishes in 2011.

“Uncontrolled Competition and Financial Panics—Then and Now”

It is said that human nature never changes. A favorite quote of mine is Voltaire’s maxim that “history never repeats itself; man always does.” In 483 A.D., the Emperor Zeno directed Constantinople’s Praetorian Prefect that “no one may presume to exercise a monopoly of any kind.”  In more modern times, the famed British philosopher Benjamin Kidd argued in Social Evolution that laissez-faire might be appropriate in one stage of a nation’s life but not necessarily in following stages.  In the landmark 1902 case Northern Securities v. U.S., United States Attorney General Philander Knox argued, “Uncontrolled competition, like unregulated liberty, is not really free.” Today, Knox’s words ring especially true as we now know the cost of “uncontrolled competition.”

The U. S. Congress passed the Sherman Act for good reason.  By the early 1890s, unrestrained competition had created a group of financial oligopolies that threatened to undue the very fabric of our nation’s economic system.  A decade later, President Theodore Roosevelt directed his attorney general to bring suit against the three most powerful businessmen of his time—James J. Hill, J. Pierpont Morgan and E. H. Harriman—because he feared the nation’s consumers and economy were in peril from the dangerous over-concentration of financial and economic assets.

And just five years after the Roosevelt administration sued to break up the Northern Securities monopoly, the nation’s financial system collapsed and the Panic of 1907 ensued, in large part due to the overwhelming concentration of financial assets in a handful of Wall Street banks and brokerage houses run by the most powerful “money men” of their day. A generation later, our nation’s financial and economic marketplace suffered again from the dangerous overconcentration of financial assets in the hands of a few highly interconnected Wall Street financial houses. The result was The Great Depression.

How long does it take for our collective public consciousness to fade?  Few memories remain of the financial and commercial combinations that spawned the Great Depression. As the consolidation of financial system assets accelerated over the past 10 years, the “Wall Street elite” and their think tanks and allied associations put forth the same old arguments made by earlier titans of Wall Street—greater efficiency, greater value to society, easier for the consumer and greater international stature. Any person or groups expressing doubts or concerns about more and more assets in fewer and fewer hands were labeled as “backward thinkers” or “stuck in the past looking backward”—just as had been the case a century earlier. Some financial groups even said that “too big to fail” did not exist and could never happen in today’s sophisticated financial world. Similar statements preceded earlier financial panics.

In recent times, opponents of overwhelming financial concentration have warned repeatedly of the catastrophic cost of unrestrained concentration. In both 1907 and 2007, the voices of caution were ignored, and the cost of dismissing these voices was a financial panic. The financial and economic collapse struck the nation like a thunder clap and shook the very foundations of our economy and free enterprise system. Like those of times past, now a new generation of financial elites have experienced the end result of unrestrained financial asset concentration. Wall Street has witnessed the destructive power that is unleashed by the creation of massive business combinations—financial oligopolies—that hold taxpayers and consumers captive to management business decisions, no matter how misguided, greedy or destructive.

Teddy Roosevelt had the courage to act on his beliefs and worked to restore equilibrium to our nation’s economic system. It took the Panic of 1907 to put an exclamation point on his efforts—and to create the Federal Reserve System. Now, a century later, the current financial and economic crisis has again painfully revealed the true price of unrestrained financial and economic concentration—at a ruinous cost to the nation’s taxpayers and to our cherished private enterprise system.

Now it is up to us to either recall the harsh lessons of the past, or continue to relive them. Let us hope that the current administration and Congress have the same courage to restore equilibrium to our financial and economic system by unwinding these unwieldy, unmanageable and “unable to regulate” financial beasts as did Teddy Roosevelt and the Congress of his time. If we do not, future taxpayers, consumers and small businesses will be devoured by these insatiable beasts that to this day still roam on Broad and Wall Streets.