This is history. Will it repeat itself?
Carlos and James - thanks for this and a very special thanks to Lawrence Kudlow, a really smart man.
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exchange2000.com
exchange2000.com
Rockefeller and Gates -- The Real Parallel
By LAWRENCE KUDLOW
c.1998 Bloomberg News
NEW YORK -- History often repeats itself, so journalists have delighted in discussing the similarities between Bill Gates and John D. Rockefeller. Separated by a hundred years, both were said to be the wealthiest men of their day. Both ran companies that dominated their
respective industries of oil and computer software. Both were subjected to personal attacks by politicians. And both were confronted with highly publicized antitrust lawsuits from the U.S. Department of Justice.
However, today's pundits have yet to examine the economic and stock market consequences of the legal actions against Standard Oil between 1906, when the Federal government filed suit in Missouri to dissolve the company under the Sherman Anti-Trust Act, and 1911, when the Supreme court finally upheld the earlier decision to dismantle Standard Oil, or afterwards.
Courtesy of ''Titan'', Ron Chernow's excellent new biography of Rockefeller, we know that by the summer of 1907 the monopoly restraint of trade and price-fixing charges filed against Standard Oil has spawned seven Federal and six state lawsuits (Texas, Minnesota, Missouri, Tennessee, Ohio and Mississippi). Judge Kenesaw Mountain Landis (later commissioner of major league baseball) delivered a bombshell verdict in early August: he fined the company an unheard of $29.24 million ($457 million in 1996 dollars), the largest corporate penalty ever levied up to that time.
Standard's stock fell sharply, from 500 to 421, a 16 percent decline during the week following the decision. Even more, the Standard & Poor's stock index fell 38 percent from September, 1906 to November, 1907 (from 10.0 to 6.2). After temporarily rebounding to the old high in early 1908, the S&P stock index went into a prolonged tailspin and didn't recover the 1907-08 high ground until 1924, 16 years later, even though the share prices of the newly broken up Standard companies fared quite well.
The stock market collapse of 1907 helped bring on a severe economic downturn then called a ''panic,'' as real gross national product declined by 8.2 percent in 1908. The Federal Reserve wasn't created until 1913, so when the market sell-off engendered a severe liquidity squeeze that caused several bank failures, it nearly drove the nation off the gold standard. Ironically, while J.P. Morgan usually gets credit for pooling sufficient funds to keep the stock market open, prevent even more bank failures and preserve the credit standing of the U.S. Government, it was Rockefeller who actually contributed the lion's share of the emergency loan pool.
Nevertheless, the administration of Theodore Roosevelt kept the heat on Standard Oil. Railing against big business, T.R. excoriated the ''malefactors of great wealth.'' He told his attorney general that the Standard Oil people were ''the biggest criminals in the country.'' Roosevelt's successor, William Howard Taft, was initially supported by Rockefeller and many other business leaders who hoped to secure a more moderate anti-trust policy. Taft, however, initiated 65 antitrust actions, even more than the 44 brought by Roosevelt. American business
was under siege. In addition to Standard Oil, trust-busting suits were brought against American Sugar, American Tobacco, American Can and other big industrial firms.
It could be argued that Standard Oil was literally fueling America's great post-Civil War economic take-off. Until the advent of our current information-age of technological innovation, most economic historians agree that the last quarter of the nineteenth century marked the country's greatest period of rapid technological advance. From the mid 1870's to 1907, real GNP growth averaged 5.1 per cent per year, while the overall level of prices fell about 1 percent annually. Entrepreneurship boosted output of more products, more efficiently and profitably, reaching more consumers at lower prices. It was from his study of this transformational period that Joseph Schumpeter coined the phrase ''gales of creative destruction.''
Yet two Republican presidents completely changed the environment by repeatedly bashing and then over-regulating business, allegedly in defense of consumers. Yet consumers benefited mightily from expanded production, reduced prices, and rapid economic growth. As for industry dominance, Mr. Chernow reports in his book on Rockefeller and Standard Oil that ''by the time of the Supreme Court's 1911 decision, evolutionary changes in the marketplace had already eroded the trust's dominance.'' Overseas, Standard was competing with Royal Dutch Shell in Asia and the Anglo-Persian Oil Company (British Petroleum's predecessor) in the Middle East.
At home, new oil finds in Texas, Oklahoma, California, Kansas and Illinois created a strong competitive challenge to Standard Oil from Associated Oil & Gas, Texaco, the Gulf Company and others. ''While the trust had pumped 32 per cent of American crude oil in 1899, its share had slumped to 14 per cent by 1911,'' Chernow writes. In refining, Standard's original business, its market share fell from 86 percent to 64 percent in the years before the firm was broken up.
The anti-business trust-busting of the Roosevelt and Taft administrations carried over into the tenure of Woodrow Wilson, who added to this anti-growth burden with a progressive income tax in 1913. Tax rates were initially low, but they were raised substantially during the World War I period. Economic growth stagnated at only 2 per cent annually between 1907 and 1914, and after the temporary effects of wartime stimulus, the U.S. economy fell into recession between 1918 and 1921. Not until the pro-business administrations of Warren Harding and Calvin Coolidge, during which Treasury Secretary Andrew Mellon slashed income tax rates, did the U.S. growth rate rebound to 5 percent. Even that recovery was brief, completely smothered by the huge tariff and tax increases imposed first by Herbert Hoover and then Franklin Roosevelt during the depressionary 1930's.
The spirit of risk-taking, and business confidence in general, are fragile things. But they are vital to growth. History teaches us that government efforts to manage competition and regulate innovation can, through the age-old law of ''unintended consequences,'' have substantially adverse affects on the wealth-creating process. The protracted stock market slump, and the long-term growth slowdown following early century trust-busting, should serve as an important warning to Justice Department officials who are now prosecuting Bill
Gates and Microsoft.
The two principal engines of growth in the 1990's have been the zero-inflation strategy of Fed Chairman Alan Greenspan and the wave of information-age technological advances from the hardware and software industries. With spillover effects reverberating through every nook and cranny of the reconstructed economy, the growth, productivity, investment and job-creating abilities of the U.S. economy have outperformed all expectations. So has the stock market.
Innovative products and lower prices have benefited consumers enormously. Dominant firms like Microsoft can only remain so if they are truly competitive. But if government regulators turn Microsoft into a public utility, with huge penalty fines and a myriad of industrial policy regulations, then innovation will be stifled and the economic growth engine will sputter. During the late 1970's Jimmy Carter's hyperactive Federal Trade Commission waged war on American oil companies, as well as then-dominant firms such as AT&T and DuPont. Instead of helping consumers, the whole economy suffered.
Already, the Clinton Administration has declared war on tobacco companies. Now it is turning its guns on Microsoft. The Washington rumor mill has it that Intel is next in line. Perhaps they will make another run at health-care insurers and private hospital companies.
Who knows?
What we do know is that free market competition is a far more efficient regulatory device than government's clumsy hand. It was true for Standard Oil, and it remains true for Microsoft. It is doubtful that government is really capable of driving a stake into the hi-tech
advance that is fueling today's economic growth. Knowledge and information will always be beneficially applied somewhere. Government can't stop it. Yet governments have a way of ignoring history. So they may be doomed to repeat it.
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(Lawrence Kudlow was chief economist at the Office of Management & Budget during
President Ronald Reagan's first term. He's now chief economist at American Skandia Life
Assurance Corp. The opinions expressed are his own and don't represent the judgment of
Bloomberg LP or Bloomberg News.)
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(The Bloomberg web site is at bloomberg.com ) |
