Business as Usual

The problem today isn't shoddy corporate ethics -- capitalism was built on corruption. The problem is America's bias against government regulation.

There was once a lanky, bespectacled accountant who doted on his daughters, was fond of puns, and, by the mid-1940s, had become very uncomfortable with his job. The accountant was a spontaneous man with an infectious laugh, and evenings after dinner he would lead his four children, wife, and parents-in-law in boisterous discussions of local and world affairs. But later at night, while alone with his wife, he would describe his growing uneasiness with instructions he was receiving from his boss at a local food-processing concern.

The accountant's wife, now 93, recalls that her husband believed he was being asked to keep the company's books in an unethical way, though she doesn't remember precise details. "I really didn't feel good about it, that's for sure," she recalls half a century later. As time went on and the accountant continued to complain, she advised him to resign, and he did.

"There was something dad didn't want to do," the accountant's youngest daughter also recalls.

"He definitely quit on ethical grounds," adds the accountant's eldest son.

The food plant's owner, a plain-spoken grade-school dropout, found another bookkeeper. The plant owner invested in incipient food-freezing technology and became one of the nation's biggest suppliers to a just-beginning fast-food restaurant industry. During the next 60 years this entrepreneur came to dominate America's fertilizer market, founded a worldwide mining operation, became one of America's top landowners, and made billions of dollars in the microelectronics industry. By century's end he was one of America's richest men; his name graced streets and university buildings.

This tale about my long-dead grandfather and his now-billionaire former boss drifted back to mind one evening last week as I sat in a financial-accounting night class listening to our professor expound on what he described as a crisis of values in American business. In the old days the propagators of business frauds were humiliated for generations hence, he said; now they're players. Financial professionals once valued their craft, he opined; now they peddle flimflam.

As one might imagine, I found the idea that shoddy ethics had only recently infected the top of the corporate food chain to be preposterous. But it's a notion that's impossible to ignore. This "crisis of morals" explanation for America's current corporate malaise has become the official line of Wall Street, the Bush administration's Securities and Exchange Commission, and the Justice Department. In newspaper articles and on talk shows, officials offer the palliative that a lapse in scruples by some recent bad apples has spoiled an ordinarily ethical American business environment.

But America is not suffering a crisis of business morals, if the word "crisis" is to be taken at its dictionary meaning of a "disordered function" or "radical change in status."

Rather, America is suffering a crisis of understanding, 20 years in the making, about how our market economy has historically functioned. This country was built through the enterprise of liars, dissemblers, thieves, and frauds; America has progressed only to the extent to which government regulators have channeled their efforts in positive directions.

But after a couple of decades of post-Reagan conservative agitation against government regulation, environmental and employee protections, and lawsuits against abusive business, the idea that the most successful business leaders also possess sound ethics, and effectively regulate themselves, has evolved into a sort of national cultural myth.


America's economic coming-of-age story isn't an uplifting Horatio Alger tale about survival of the purest. The real history of American commerce and industry is filled with tales much more like my grandfather's.

A boy in the 1850s who followed the advice of Alger's fellow Unitarian and contemporary, Horace Greeley -- "Go west, young man, go west" -- would have found an economy shaped by unscrupulous logger barons, railroad barons, and placer mining barons. He'd have seen buffalo massacred on the Great Plains, Indians massacred at Fort Jones, and dissident workers massacred in Washington state.

Had he survived and returned a half-century later, he would have seen the Sherman Anti-Trust Act employed to dismantle J.P. Morgan's coal-and-rail monopoly, the Northern Securities Co. That action launched dozens of large turn-of-the century trust-busting cases by the federal government. Not much later, the guiding documents of our financial system -- the 1933 Truth in Securities Act, and the Securities Exchange Act -- passed, after the charlatan financiers who prospered during the 1920s stock market boom sundered America's economy. The Glass-Steagall Act of 1933 likewise passed after congressional hearings showed brokers and bankers, the presumed leaders of American enterprise, were guilty of grotesque abuse of the public's trust.

But another half-century later, history took an odd turn. Ronald Reagan announced, "Government is not the solution to our problem; government is the problem," and the practical view of America that had formed over the years about the relationship between markets and regulation dissolved into 1850s Calvinist myth. Like a magical-thinking mental patient, America forgot its past of corporate transgression followed by regulatory renewal, and imagined itself a nation built on outstanding moral character and laissez-faire institutions.


To bolster his case about America's recent financial malaise, our accounting professor last week passed out photocopies of a Wall Street Journalarticle about the sorry lot of our Securities and Exchange Commission. Annual exchange trading volume increased sixfold between 1993 and 2001, while the SEC's enforcement staff increased by only 15 percent. Though annual trading volume on the New York Stock Exchange has neared a trillion shares a year, as of last month the SEC had prosecuted only 122 financial reporting cases nationwide, 10 percent more than last year. The SEC has long known of conflicts of interest involving Wall Street analysts and done nothing. The agency has idly watched manipulative behavior in initial public offerings of stock. Congress has repeatedly ignored requests by the SEC director for more funding. And both sides of the isle have been in thrall to Reagan's anti-regulatory legacy; the last Democratic president signed a bill repealing the Glass-Steagall Act, after all. It has been decades, meanwhile, since the Justice Department has been terribly excited about pursuing antitrust actions. The department's last act of real antitrust enforcement, the 1984 breakup of AT&T, has since been undermined by the telephone giant's mega-merging, predatory-monopoly-behaving Baby Bell offspring. And the Federal Communications Commission has nodded in approval.

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