The ‘Small Stick’ Approach

As President Bush plans his first major response to the current scandals of capitalism, he could do worse than look for guidance from his Republican counterpart at the turn of the last century, President Theodore Roosevelt.

In 1902, Roosevelt instructed the Justice Department to prosecute the Northern Securities Co. for violating the Sherman Antitrust Act. Northern Securities was the WorldCom and Enron of the Gilded Age. Its crimes were exemplary of pervasive corporate corruption.

What was Northern Securities’ offense? It had employed an aggressive merger strategy to gain a lock on transcontinental shipping from Chicago to the Pacific Coast. Scarcely a farmer, merchant or manufacturer didn’t feel the weight of the railroad monopoly.

Then as now, all that synergistic merging required creative approaches to finance. To fuel its acquisitions, Northern Securities issued a blizzard of “watered stock” worth nothing. The dividends on those fictitious securities, however, required real cash.

The solution? Exploit the power of monopoly to charge shippers inflated prices. In the language of the day, it was a case of the “plundered people” being fleeced by the “moneyed interests.”

Roosevelt’s decision to go after Northern Securities put teeth back into a law that had been eviscerated by the Supreme Court, took on the richest and most politically influential capitalists and endeared Roosevelt to a public long-agitated over the undemocratic power the new corporations had amassed.

Indeed, the government’s success in the Northern Securities litigation was in no small part responsible for Roosevelt’s landslide victory in the 1904 presidential election. And it helped mark the beginning of the end of the Gilded Age and business’ unaccountable and unchecked reign, along with the opening of the reform period known as the Progressive Era.

With Bush’s performance in the current crisis likely to be a major factor in the 2004 presidential election, will he turn Roosevelt’s motto on its head--speak loudly and carry a small stick--or will he propose measures the Rough Rider himself would be proud of?

Unfortunately, Bush operates in an environment far less conducive to acts of political daring than Roosevelt enjoyed, despite the remarkable similarities between the two eras.

The essential difference is that, a century ago, the United States bristled with debate about the danger that concentrated wealth posed to American democracy. Muckraking journalists devoted their best efforts to exposing corporate malefactors. Many members of the Protestant clergy preached a “social gospel,” while their parishioners organized in working-class neighborhoods to improve living and working conditions.

Prominent, too, were the burgeoning socialist movements in Europe and, increasingly, in the United States. If capitalism couldn’t deliver to the common people, an attractive alternative seemed at hand.

Roosevelt was goaded into action by the pressure of the American citizens. Capitalizing on this environment, Roosevelt and, after him, President Woodrow Wilson were able to preside over the creation of landmark consumer protection, labor reform and antitrust laws. The Pure Food and Drug Act ended the routine poisoning of American consumers, and Roosevelt employed executive power to remove millions of acres of public land from the reach of private mining and agricultural interests. Under Wilson, the Clayton Act and the Federal Trade Commission laid the foundation for the government’s regulation of business through the 20th century. The Clayton Act also gave the first federal recognition to the legal right of workers to organize unions, while a series of other laws were passed to prohibit child labor, limit working hours and provide legal rights and compensation to workers injured on the job.

Today, in contrast, our politicians, Republican and Democrat alike, respond to corporate scandal by sparring over how strict to make accounting and reporting rules, whether to make individual corporate officers personally liable for malfeasance, and the reach of sanctions in matters of fraud. While such reforms are imperative, neither the voters nor international investors are likely to be comforted by such a “small stick” approach.

Real leadership in the current crisis must recognize that the most effective check on corporate abuse is the ability of citizens to act in their own defense. If this means reevaluating the deregulations that have whittled away consumer rights, reforming Cold War-era labor laws that effectively prevent workers from organizing unions, or enacting other dramatic structural changes in the balance of power between corporate and individual citizens, that’s what wielding a “big stick” is all about.

Roosevelt’s contributions to the viability of corporate capitalism are still admired 100 years later. Will history say the same of George W. Bush?