20th Century Capitalism and Regulation in the United States

Regardless of your opinion of how much regulation
or how much intervention the government should have in markets, in capitalism generally, I think it’s interesting to take a look at the various cycles that have happened in the United States, both from an economic point of view and also from a regulatory point of view. If we start in the late 1800s, in the late 1800s so
we’ve had the Civil War, we’ve had Reconstruction. You actually have a crisis, kind of a depression after the Civil War, but then after that depression, at the end of the 1800s, the United States comes roaring back. It becomes a major industrialized nation. And part of that industrializing process, you have some gentlemen who become very, very, very wealthy. You have Cornelius Vanderbilt. His wealth was in the rail
and in the steamboats. John D. Rockefeller known by some people as the wealthiest man in history. That may or may not be the case, but he was definitely the wealthiest man in American history. If you inflation-adjust
so some accounts will say he had 1.5 billion dollars. You might say, “Wait, I know of people “who have more than 1.5 billion dollars.” If you inflation-adjust
the amount of money that John D. Rockefeller had at the turn of the century it comes out to 400 billion to 600 billion dollars. This is a lot more than
anyone that we know of in present times. You have Andrew Carnegie
in the steel business. His net worth, if you look at
it in a present value basis, is approximately 300 billion. You have people like JP Morgan. Although is net worth
also huge, huge amount, but where his power was really …. Since he was in control of the
financial world at that time, his financial power was tremendous. Maybe more than the type of power
that these gentleman could wield. The amount of power that
him and his associates controlled through their various holdings, some have said amounted
to the amount of wealth in all of the United States
West of the Mississippi. These are hugely powerful,
hugely wealthy men. The type of power and wealth that we actually have not seen since. You can decide what you
think of these people. On some level all of these people, I’m sure they were good entrepreneurs. I’m sure they were hard working, I’m sure they innovated in their own way but they were also known for back then that this might be why it would have given fuel to someone like Marx who would look at people
like this and say, “Look, these people have so much power. “Labor has no power compared to them. “Some of the employees in some of these “companies, it’s hard to
really say that they are “independent human beings. “They’re almost like slave labor. “They live on the campus.
They have no rights. “People are dying while they’re working “for some of these organizations.” So you can decide where you will, but the reality is that these people were hugely, hugely, hugely
wealthy, hugely powerful. Now you fast forward to the early 1900s and you start having a
little bit of a backlash against these … I
guess the system in which these type of people can thrive. You have Teddy Roosevelt
comes to power in 1901. One of the things … He’s
famous for many things, but one of the things
he’s famous for is being a trust buster. When he talks about trust, a trust is really just
a large corporation. The idea is, is that, “Look Standard Oil, “you have essentially taken control of the “refining and the oil industry in America. “You have become a monopolist. “You need to be broken up.” This is anti-competitive. Remember, capitalism for the
capitalist sake, for capitalism sake is maybe not that good of an idea. What we want is competition. What we want is innovation. What we want is incentives. If you control everything
and no one can compete that’s not helping anyone. So Teddy Roosevelt, it didn’t
happen during his administration but he kind of started
the trust busting process, and in the next administration, in Taft’s administration, you actually have Standard
Oil being broken up. Just to get an idea of
how big Standard Oil was, if you take Exxon Mobil, Chevron, Conoco, and pretty much every
other major US oil company, put them together. I’m not saying it’s the
equivalent of Standard Oil. That’s actually what standard oil was. When Standard Oil was broken up
during Taft’s administration, it was actually broken up into
all of these corporations. You can look into it more. You could imagine how much power
someone like that would hold. So the pendulum swung in one
extreme at the end of the 1800s. Roosevelt comes in, once
again Republican President, Very strong President. But he said, “Look, enough is enough. “This is too much. “This is not in the best
interest of the American people. “We need competition.” Then you fast forward even more. In the 20s you have this huge boom. Things are looking well. Whenever there is a boom,
people look the other way. People think, “Oh we don’t
need much regulation. “We don’t need much
government intervention.” But then booms, many times,
almost always lead to busts. Then you have the Great Crash of 29, leads into the Great Depression. People are unhappy with Herbert Hoover. FDR comes into power in kind of the heart of the Great Depression. He stays President until World War 2. In his attempts to take the country
out of the Great Depression, he has this New Deal set of programs. Some of the New Deal
programs were essentially to make use of all the
labor and industrial capacity that was going unused
during the Great Depression. It was kind of this Keynesian Philosophy that if no one else is going to supply the demand to use all of these factories and use all of these
people, the government will. There were these huge
public works projects but there was also
regulation getting involved here to kind of stop
some of the things that were perceived caused
the boom and the bust. You have the Glass Steagall Act, which is most famous for
separating investment banking from depository institutions. Essentially saying the
same people who are taking your deposits can’t on the other side take your deposits and gamble with
them in the stock market. This is when Social Security passed, once again providing a safety net, going slightly in the Socialist direction. Saying, “Hey look, we can’t have,
if we’re a civilized, rich country, “we can’t have people going
hungry in the streets. “We can’t have older people who have done “their work, who have
contributed to society, “now all of the sudden
that we’re in the middle “of a depression, we can’t
have them starving to death. “Or not having them at
least having a basic “level of existence.” You have Social Security. Safety net is coming into play. You have Fannie Mae being created, which the Fannie Mae narrative plays all the way into 2008 and
continues to be a part of the story with the
American housing situation. What this is, is an
organization that essentially can buy mortgages. Buying mortgages is it’s essentially lending
money to people for mortgages. The reason why the government did this, is the government … This
is a separate organization that implicitly had the
backing of the government, which says that Fannie
Mae can borrow from people but if for whatever
reason one day Fannie Mae can’t pay back its loans, the
government will back it up. It will make good on those loans. What that allowed Fannie
Mae to do is to borrow money at very low interest rates, essentially close to the
rate that the US government could borrow at and then loan that money at very low interest rates to
people who want to buy houses. So essentially subsidized home ownership. I should say not home ownership. Subsidized home borrowing. I want to make that
clear because if everyone now has more borrowing
power to buy a home, then most likely that will just increase the price of houses. So it’s really not
subsidizing home borrowing but that’s a whole other topic. Once again the government
is getting involved. Here they’re trying to do a
little bit of engineering. Once again this goes against
letting the market do its thing. This is a distortion in the market. It’s a distortion because once again it’s anti-competitive. If someone else wanted
to do what Fannie Mae did but didn’t have the
backing of the government it wouldn’t be able to
compete because it wouldn’t be able to borrow money as cheaply. You keep fast forwarding. You get to Lyndon
Johnson’s Administration. Obviously there were
other people in between. You get to Lyndon Johnson’s administration and you have the Great Society. The Great Society, amongst other things, food stamps, war on
poverty, Medicare, Medicaid, so once again saying, “Hey society needs “to have some base level
of support for people.” I’m not going to take
sides one way or the other but the pendulum was definitely swinging in the direction of
more social safety nets and more attempts to make kind of a level playing field and you can debate whether they were successful or not. The other thing, and this is completely unrelated
to what this conversation is about but whenever someone learns about Teddy Roosevelt and Franklin Roosevelt in the same video it begs the question, “Were they related in some way?” It does turn out they were fifth cousins. Even more interesting, Eleanor Roosevelt, who was Franklin Roosevelt’s wife, was Teddy Roosevelt’s niece. There actually was a
pretty close relationship between all of these Roosevelt’s. Another interesting thing, I just found this on the Internet, Teddy Roosevelt was
also the first President to ride in the open in an automobile. It’s funny to see the
secret service agents over here riding bicycles to keep up. Anyway, complete tangent. So you had, just to review where we are. End of 1800s you have what some people have called, if they want to
be insulting of these people, the robber barrons. They have concentrated
a huge amount of wealth. Then the pendulum starts swinging back with Teddy Roosevelt, Franklin
Roosevelt and then Lyndon Johnson. Then you fast forward even through the 70s you still have kind of a fairly heavy regulation of many industries in the US. Jimmy Carter, who was
considered quite liberal, you have to give him, if
you are anti-regulation, give him some credit. He actually deregulated
the airline industry and frankly that’s why it’s
hard … that’s why airline tickets are actually fairly inexpensive if you look at them on an
inflation-adjusted basis. Then the pendulum swings
back again into less government, less regulation
under Ronald Reagan. This is Ronald Reagan here. He is kind of most known
amongst other things, I mean, some people think that he brought communism to the brink but he also was big on less government. From the story of the 1900s until then was kind of more and more regulation, more safety nets, more government, and then Ronald Reagan comes with less government and lower taxes, although he spent a ton on the military, and the military is government. What’s interesting is in
this period during the 80s you start having an economic boom. You could debate whether
it’s due to Ronald Reagan, or maybe it was due to things that were completely out of his control. Maybe it was due to
automation and information technology starts becoming big and he has nothing to do with
that but regardless to say, you do start having an
economic boom in the 80s. Then the 90s it starts to
accelerate under Bill Clinton. The interesting thing that
you see is when things are good the temptation
for government to regulate goes down and under Bill Clinton, who is a democratic, considered liberal, you have Welfare Reform, which does undo a lot of … I guess it takes a more
conservative take on welfare. It makes it harder to have welfare
for longer periods of time. You also have the repeal
of Glass Steagall, so the repeal of Glass Steagall. So even though Bill Clinton
was considered liberal, maybe he would blame
these things on having a republican congress,
who forced him into it, or whatever else. The reality is it did happen
under his administration. The government stepping
out of welfare a little bit and allowing to or kind of
a deregulation of banks. Allowing for investment banking and commercial banking to
start getting comingled again. Then you keep forwarding through the Bush Administration once George W. Bush, I could put his dad in here in between. Actually he was forced to raise taxes so I can’t really include him in the conversation of less government, and he would claim he
was forced to do that because of democrats. All the way through all
of these presidencies, while things were kind
of on this upward march, you had this constant
stream of deregulation and all the way until you get to 2008. You have a major, major financial crisis. Who knows, now sitting in 2011, where that pendulum will swing back, but there is a sense that maybe all of this went too far
and probably the worst signs of this is this
whole idea that emerged during the 2008 crisis of Too Big To Fail. Which is kind of the worst
of Capitalism and Socialism. It’s kind of like corporate welfare. It’s like, not only are you
not giving benefit to those who want to innovate or do well, you have these huge entities that control so much wealth, that control
so much of the economy, and they get there by taking huge amounts of risks and as soon
as they do incompetent stupid things that put all of us at risk, the government comes in to bail them out because essentially they are
holding the economy hostage. If the government does
not bail these characters out they might take the
entire economy with them. My sense is that they tried to scare the government a little
bit more to have the government believe that
so they do get bailed. Regardless to say, it does
leave kind of a moment in time where society, or at
least American society, really the world, has to question how much
regulation is appropriate? How much control over the financial system should private institutions
be allowed to have? Fannie Mae is an interesting one. Because once again it’s
a government sponsored institution that was pseudo-private. It was kind of the worst of both worlds. Once again it’s still being propped up by the government and
it’s a major distortion. It’s a major distortion
market but to some degree the government is afraid of
letting it completely falter now because it would probably tank the economy to some degree. Anyway, hopefully you
found that interesting. I just wanted to give you some perspective on the swinging of the pendulum between government regulation and
more kind of capitalism without regulation that we’ve
seen in the United States over roughly the last 100 or so years.

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