Fraud and Corruption: The DNA of Business

Many of us watched the financial meltdown that happened in 2008 and continues its repercussions to the present idiotic debate on deficits and debt (as though it were all the public workers and poor people of the country who had massively looted the public treasury, rather than Halliburton and Goldman Sachs!) with various reactions from amusement, horror, schadenfreude, to excited anticipation. The future stretching ahead of us bodes ill, though, and while we should work towards a revolt that challenges/rejects the austerity agenda, until such a rebellion starts, life is going to keep getting harder for more and more people. Unemployment is soaring (which would be fine if it didn’t mean an abject lack of resources as a result) and the frontal assault by the ultra-rich on the social safety net is going strong. Tepid Democratic defenses that involve pre-emptively agreeing to entirely wrong-headed frames of reference only accelerate social disintegration.

I have been reading a lot lately, finally finding time to finish a few books that have been beckoning me. I read David McNally’s brilliant “Global Slump: The Economics and Politics of Crisis and Resistance”, a book that I can’t recommend highly enough. I also managed to plow through all 517 pages of “Railroaded: The Transcontinentals and the Making of Modern America” by Richard White, also a fantastic history that I highly recommend. Taken together they reinforce each other across time and space. Both look at periods of about a quarter century in which capitalism radically reorganized economies and enclosed vast geographies and human cultures into new market relations simultaneously—one in the latter part of the 19th century, the other about a century later.

Railroaded covers the rise of the railroads from what I’d like to say is a “Processed World” perspective. That is to say, rather than the triumphalist, Darwinist narrative of the rise of the corporation as a victory of efficiency and intelligence, and the railroads as the most compelling example of the corporate form in the 19th century, Richard White looks at the venality, stupidity, and corruption that were the deep foundation of the expansion of railroads across North America (including Mexico and Canada, which as he shows, was driven by the same logic and even many of the same men and investment syndicates). Rather than presenting the Union Pacific or Southern Pacific as these all-powerful organizations that earned the nickname “Octopus” (in SP’s case) these were inefficient, badly built, poorly maintained, largely unnecessary, and extremely destructive industrial companies. White unmasks the internal workings of these railroad corporations in all their glorious ineptitude, showing how the owners were back-biting, small-minded men (including especially Leland Stanford, the namesake of White’s university employer!) who knew nothing about railroads, and probably even less about managing businesses, but in many cases (Collis Huntington, Jay Gould, William Villard) were extremely good at buying and bullying the politicians they needed to get the public monies their grand schemes required.

The railroads were laughably unprofitable for the thousands of British and German and New England investors who were fleeced again and again by the slick salesmen of western railroads, who pointed to the federal guarantees and long-term bonds they issued as proof of their solvency. But the owners of railroads made their fortunes by building elaborate interlocking corporate structures, full of holding companies, junk bonds, insecure securities, and the whole panoply of chimerical financial instruments we’ve come to know so well in the last decade of derivatives, collateralized debt swaps, etc. When their business empires began to totter, they’d run to their bought-and-paid-for senators and congressman in Washington D.C. to get new appropriations, rollovers of old debts, new authorizations for long-term bonds guaranteed by the U.S. government, and for a time, they’d continue the shell game that made them personally rich while bankrupting dozens of railroads by the early 1890s. As White puts it, “Railroads caromed across the continent, creating systems that in toto made no rational sense but that could yield vast personal fortunes through construction, speculation, and financial manipulation.”

One of the more interesting tidbits I gleaned from his well-documented and thoughtful work has to do with the argument he makes that the railroads were fundamentally unnecessary at the time they were built. He grants that regional railroads were useful, and that in California for example, the primary function of bringing manufactured goods to the rural areas served by the railroad, and the agricultural surpluses grown there back to San Francisco for processing and export, was a real market and generated real profits. But the railroads that crossed the far west had no real purpose, and couldn’t compete with the more efficient and less expensive steamship service that connected San Francisco with the East by way of the Panamanian Isthmus. Here is an extended excerpt describing how the railroads had to buy off the Pacific Mail Steamship Company to keep it from driving them out of business:

By the late 1880s little had changed. Charles Francis Adams [president of the Union Pacific Railroad] testified before the Pacific Railway Commission that the Pacific Mail Steamship Company “could reduce the rate… until it would make the business worthless to us, and yet make something itself” on traffic to the East Coast. This was an amazing statement, one worth lingering over, for it meant that the railroads really were not necessary for much of the freight traffic between the East and the Far West. If the Pacific Mail wished to do so, it could dominate the traffic. The question then becomes why it did not do so?

 

The first part of the answer is that the Pacific Mail was a lazy and corrupt corporation. It had, as its name indicated, a federal subsidy to carry the mail. It carried coffee and fruit from Central America to San Francisco and sent rice, lumber, flour, and goods from San Francisco wholesalers in return. It also carried manufactured goods from New York and sent wine, lead, rags, and perhaps rice back. It did not carry wheat. That went by sailing ship. The second part of the answer is that the Union Pacific and the Central Pacific, recognizing their vulnerability to rate cutting by the Pacific Mail, offered to pay what amounted to a subsidy for the company to raise its rates. The Pacific Mail consented. It could make more money by doing less.

 

The subsidy that the railroads paid Pacific Mail remained in operation for most of the period from 1870 into the 1890s; it took the form of an agreement to buy space in its steamers at above-market prices first by the Central Pacific and the Union Pacific and later, by the Transcontinental Association. The railroads acted as a freight agent, either reselling this space at the prevailing transcontinental railroad rates to shippers, leaving it empty, or, as the Southern Pacific did, shipping the equipment it needed to build in Mexico by sea rather than by rail. In return the Pacific Mail charged rates identical to those of the railroads, did not add new ships, and refused to solicit traffic to compete with the railroads.

The notion that transcontinental railroads made life better for Americans is boosterish pap, unjustified by any rational cost-benefit analysis, and especially if one takes into account factors that don’t often enter ledger sheets. They wasted incredible amounts of money, had to be completely rebuilt not long after their original construction, took huge amounts of resources to maintain, and left a swath of environmental and social devastation wherever they went.

Transcontinental railroads were a Gilded Age extravagance that rent holes in the political, social, and environmental fabric of the nation, creating railroads as mismanaged and corrupt as they were long, but this argument does not meet the central contention of their defenders: life for American was better because of them… Lloyd Mercer… has calculated that both the first transcontinentals—the UP and CP—and the last of the 19th-century roads, the Great Northern… would have made adequate returns on their investments over a twenty-year time frame without a subsidy… His is the classic social benefits calculator with only plus signs and no minus signs. It has no subtracting of the possible social costs of land grants, the endless disputes over taxes and loss of local revenues from taxes, and much more. There is no consideration of environmental costs or losses to Indians. Indian economies might bleed profusely, but they are treated as so many economic blood donors: their losses are counted as benefits to non-Indians.

 

In assessing the social utility of the railroads, I want to include social costs harder for economists to measure. I want to be conscious of the price—not necessarily calculated in losses that markets measure—and to consider who benefited and who lost. The issue facing the transcontinental railroads was a simple one. Having built ahead of demand, they had to create traffic in places where there was precious little to sell. Given their high fixed costs, the railroads could not simply wait for profitable traffic to appear. Hauling something, even at a loss, was better than hauling nothing. In attempting to cut economic losses, the railroads helped create both what might be called dumb growth and environmental catastrophes. Bison became the first victims of dumb growth.

But there would be many more victims of dumb growth, going well beyond the story of western railroads, right up to the present. As we contemplate the rising tides, spreading droughts and floods, deforestation and factory farming, food surpluses and widespread famine, dumb growth is the underlying logic that keeps modern society, lemming-like, rushing towards the abyss. Suburbia alone, spreading across the best farm lands of North America and inspiring people around the world to seek an unachievable lifestyle, is maybe the biggest example of dumb growth. Nevertheless, the high priests of our society still solemnly invoke “growth” as the all-purpose solution for all human ills. The holy grail of politicians and economists is the strange combination of inputs and mysterious measurements that create the illusion of “growth” as a demonstration of social health. Meanwhile, things keep getting worse, especially when we’re “growing!” But during the past three years, the economic collapse and public bailout of private capital has been at the center of our unfolding global history.

Dave McNally’s Global Slump is a thorough, critical analysis of the neoliberal capitalist counterattack and global economic restructuring that overcame the crisis of the 1970s, and its ending in the Asian crisis of 1997. Part of his snappy book’s mission is to debunk the platitudes repeated ad nauseum by liberals, blaming evil bankers or the failure of regulation for the current crisis. His critique is rooted in a solid Marxism in which crisis starts with a fall in profitability. That in turn leads to a shrinking of investment as the possibility for profits dries up. Once there is a shortage of investment capital due to prior overproduction and excessive investment and the fall in profits, speculative pyramids that depended on free-flowing money suddenly face the abyss and soon collapse. But to understand how this happens (and it’s fascinating how similar the process was in the collapses centered on railroads in the 1870s and 1890s), he carefully reconstructs the steps that brought U.S. capitalism from its last crisis in the early 1970s to the new century’s drama.

He goes back to the delinking of the dollar from gold by Nixon in 1971 as the key moment that opened the process of financialization that has gone through several booms and busts since then. Unlike many Marxist analysts, he doesn’t agree that the current crisis is just the most recent phase of an ongoing long crisis that started in the profit crash of the early 1970s. He does think there was a “great boom” from 1948-1971, but then it ended. He argues that the neoliberal restructuring started under Carter in the late 1970s when he appointed Paul Volcker to head the Fed and engineer a sharp economic contraction. This restructuring was fully embraced and extended by Reagan in the U.S., Thatcher in the UK (both centrally concerned with breaking unions, disciplining labor, and shrinking relative wages), and throughout much of the rest of the world by the IMF’s structural adjustment programs. This economic reorganization re-established the basis for profitability, mostly by pushing down wages while reining in inflation and solidifying the unique role of the U.S. dollar as the international currency.

So from 1982-1997 there was a real period of capitalist growth and profitability, but since 1997 there has been a crash in business investment because there’s been a collapse of profits in production, more or less corresponding to a classic crisis in Marxist terms. The system has pushed itself onward with the speculative booms in internet stocks, real estate, and other assets, but the wild expansion of credit and future claims on profits have finally come unraveled. Interestingly, McNally shows how typical economic growth rates from the 19th century to the present were much closer to the sluggish pace we’ve seen in the industrialized world since 1973, and that the rapid growth and prosperity of the 1948-71 period were the anomaly. “In short, during the neoliberal expansion, the periodicity of the business cycle returned to something approximating its ‘classic’ form, with recessions every seven to ten years, rather than every three to four.”

He has three main theses about the 25-year neoliberal period:

Thesis one: Following the recessions of 1974-75 and 1980-82 and the launch of an offensive by the ruling classes in the North against unions and peoples of the Global South, severe capitalist restructuring generated a new wave of capitalist growth, albeit a much more uneven and volatile one than occurred during the Great Boom.

 

Thesis two: The upward trend in profit rates from the early 1980s underpinned a wave of capitalist expansion that began to falter in 1997 with the crisis in East Asia.

 

Thesis three: Alongside and interacting with these changes, a wholesale reorganization of capitalist finance occurred, stimulated by a metamorphosis in forms of world money. The end of the Great Boom was punctuated by a collapse of the gold-dollar standard, the emergence of floating exchange rates, heightened financial volatility and uncertainty, and a proliferation of new financial instruments designed to hedge risk in a context of unstable monetary relations. These risk-hedging instruments opened up enormous new fields for financial services and profits, while also creating an inordinately larger sphere for speculation.

McNally ends his book with a chapter called “Toward a Great Resistance?” and you have to give him credit for putting a question mark on that rather than treating it as a typical leftist exhortation (not that he isn’t partial to a bit of that too, in the chapter itself). I like a lot of his thinking (I had the pleasure of meeting him and hearing him present his argument at a Retort gathering in Berkeley earlier this year).

“In most of the Global North, of course, we are in the early stages of rebuilding infrastructures of dissent, not usually of leading mass struggles…” After detailing a bit of the dynamic within some recent upheavals (like the student movement in California, or the much larger mass strikes in Greece) he identifies the need for a sustained, long-term effort towards a new kind of revolutionary politics, consisting of

“workers’ centers, solidarity coalitions, radical community groups, alternative media, union organizing drives, campaigns against racism and in support of non-status people, the creation of artistic and cultural co-ops, and much more. It will mean building the democratic spaces and practices that develop organizers who are in the struggle for the long haul. All of this is essential to overcoming the damage of the neoliberal period—the dispossession of memory, social fragmentation, and the destruction of solidarities, the political and cultural effects of a long period without sustained mass oppositional politics. Here a rich dialectic will come into play in which a New Left learns from the rich resources of struggle from the past without mimicry—by understanding that real mass movements for revolutionary change are strengthened by remembering the compelling legacies of those who struggled before us while not being confined by their horizons and experiences. While honoring past struggles, revolutionary movements also write a new poetry for the future. And that poetry—joined to the hard-nosed work of organizing—can only develop from the soil of real social struggle, not the concoctions of small groups.” (p. 178-79)

I think McNally gets at some vital aspects of the path ahead here. He also falls back on some ideas that border the tired clichés of the 20th century Left. Lately I’m a bit leery of many calls I’ve heard to engage in “organizing” without much more specificity than that. I know we’re living through a period of extreme atomization and part of the antidote to that is to find ways to engage in public, social, assertive (and hopefully intrinsically enjoyable) politics. That only happens by organizing people to come together in public and make themselves heard.

But the issues that I consider at the top of an agenda that *might* begin to address our predicament don’t usually enter the discourse. What work do we do? Why? Why shouldn’t we have democratic control over our shared labor, over the dispensation of the products of our efforts? How would such a profound democracy work, let alone how might it emerge in the first place in a world based on buying and selling human time? Going further, how would a democratic science look? How would technologies be evaluated democratically, chosen or rejected based on reason and informed debate? How in a world of Faux News and CNN (See Nothing News) could a genuinely democratic culture emerge, one that had a foundation of shared values and a shared language for understanding the problems we’re facing and how they might be addressed?

The 21st century presents us with its own set of problems. They’re not the same ones that faced radicals in past generations, not the relatively recent New Left of 40 years ago, and not the older Left dating back to earlier in the 20th century and even earlier, in the 19th century. Richard White does more in Railroaded than just detail the cronyism and mind-numbing corruption of the Gilded Era. He also traces the radical movements that emerged to combat the newly powerful corporations, the “antimonopoly” forces, the organized farmers, and of course, the organized working class, first in the form of the Knights of Labor, and later, the highly charged story of the American Railway Union and its firebrand leader, Eugene Debs. Debs is often remembered as a socialist candidate for President who garnered more than a million votes in 1920 while he sat in a jail cell convicted of “espionage” for speaking out against World War I. But during his early days he led the American Railway Union when the federal government sent out troops to break the strike in 1894. During that time he was fully a part of the radical labor movement of the time, in other words, a patriarchical racist! Here’s some of what Richard White wrote:

Since for Debs “the government will rest upon the intelligence and virtue of the people,” a republican economy had, above all, to produce republican citizens. He embraced a nation where a worker “owns himself, is a man, a citizen, and independent.” This was quintessential nineteenth-century liberalism: society as a collection of autonomous individuals, each with a moral right to control his own labor. His whole career was an attempt to reconcile liberal ideals of a society constructed through freely negotiated contracts with the world of large corporations and dependent workers…

During the huge 1894 railway strike,

“[Debs] invoked the language of manhood and proposed tapping antimonopoly sentiment all along the line. If the workers stood up and were men, they would ‘not want for the support of courageous, manly men.’ … The American Railway Union (ARU) resonated with the antimonopoly language of improvement, manhood, equity, honor, and citizenship. It marked all these qualities as the attributes of white men. It did not accept African American members.”

This haunted them quite starkly in this epic strike, since it was in Montana, then a key center of strike activity outside California, that federal troops came in and quickly broke the strike. Which troops came in? The black Tenth Cavalry and their white officers!

Self-defeating dynamics rooted in historic racism and sexism still haunt social organizing as we go forward. But the work ahead goes well beyond these historic blights. We’ll have to raise our efforts to face the epic challenges of our times, and go well beyond the old barriers that have sunk working-class liberation movements in times past.