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In a speech to Congress (his first State of the Union address after assuming the presidency three months earlier), Theodore Roosevelt spoke on the “[delicate] mechanism of modern business” and the role it plays in shaping the nation’s economy. Although Roosevelt achieved a notable reputation for “trust-busting,” it wasn’t necessarily his intent to destroy large corporations; as he said, “The captains of industry who have . . . built up our commerce . . . have on the whole done great good to our people.” But Roosevelt understood the evils of overcapitalization, and he was firm in his conviction that businesses that exercised a higher level of influence within the economy—and therefore had a greater ability to cause harm—needed to be regulated: 

“[C]ombination and concentration should be, not prohibited, but supervised and within reasonable limits controlled. . . .  It is no limitation upon property rights or freedom of contract to require that when men receive from government the privilege of doing business under corporate form, which frees them from individual responsibility, and enables them to call into their enterprises the capital of the public, they shall do so upon absolutely truthful representations as to the value of the property in which the capital is to be invested. Corporations engaged in interstate commerce should be regulated if they are found to exercise a license working to the public injury. It should be as much the aim of those who seek for social betterment to rid the business world of crimes of cunning as to rid the entire body politic of crimes of violence. Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with these institutions.”

The question of how to regulate large corporations is once again before the nation’s leaders, and although the circumstances are relatively similar (as Frank Rich of the NYT put it, large financial institutions like Goldman Sachs may not constitute trusts or monopolies, but are as much the new “octopus” of this century as Standard Oil was in Roosevelt’s day), the approach has drastically changed. Corporations are no longer viewed as too large to exist but rather too large to fail, and extensive deregulation of the financial sector in the name of laissez-faire capitalism has enabled high-risk behavior that is further encouraged by the implicit guarantee that the government will step in with rescue dollars should things become dicey. The government makes this guarantee because it recognizes, as Roosevelt stated, that “[d]isaster to great business enterprises can never have its effects limited to the men at the top.” But such policy begs the question of whether the government is obligated to rescue these corporations, or whether Roosevelt was right in believing that businesses that are too big to fail are too big to exist.

Both Congress and the White House are currently working on plans to regulate large financial institutions in the hopes of avoiding future economic crises. These plans focus largely on demanding adequate capitalization and greater disclosure from corporations whose failure would jeopardize the economy. Regulations that require banks to keep more money in reserve and prohibit overextension of available capital are certainly needed, as is better oversight. Roosevelt in particular felt that disclosure of a company’s operations was key: “Artificial bodies, such as corporations and joint stock or other associations, depending upon any statutory law for their existence or privileges, should be subject to proper governmental supervision, and full and accurate information as to their operations should be made public regularly at reasonable intervals.”

But these solutions don’t address or question the existence of corporations that pose a potential threat to the economy simply by virtue of their size. Lawmakers have stopped short of considering breaking up large corporations before failure becomes imminent, a solution that a century ago was seen as necessary to prevent public injury. Companies that consider themselves “too big to fail” are more likely to engage in risky behavior, while unlikely to discontinue doling out multi-million dollar bonuses to corporate executives—something they would not be able to do if they did not expect the government to intervene.

At the very minimum, when you demand free-market capitalism unfettered by government interference and then bring your company to the brink of bankruptcy by engaging in high-risk behaviors made possible by the deregulation of your industry, there shouldn’t be a government bailout waiting for you. Either way, it would be good to revisit the ideas of the “trust-busting era” and rethink our “too big to fail” way of thinking.

This entry was posted on Thursday, October 29th, 2009 at 6:39 pm and is filed under Current Events. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.