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by Robert Jawitz
While some centralization in business happened in the US in
the late 19th century and early 20th century (the "robber
barons"), most happened in the late 1920's. This was entirely due to the market
speculation and the introduction of margin purchases of stock that caused the
hyper-inflation of the stock market in 1928 and 1929. According to John Kenneth
Galbraith, in his classic "The Great Crash- 1929", the market spurred
consolidations (mergers) because of easy sale of securities to finance them. In
those last years of the 1920's, the US witnessed the creation of US Steel,
International Harvester, International Nickel, and American Tobacco, just to
name a few. According to Prof. Galbraith, "The primary motivation in all but
the rarest cases was to reduce, eliminate or regularize competition" These
mergers went beyond industrials and included electric, gas, water, bus and milk
companies and then to food retailing, variety stores, department stores and
motion picture companies. Thus, the primary impetus for centralization of
commerce in America
was monopoly.
To expand the base of participation in the stock market, the
investment trust was born. An investment trust was a device where the unsophisticated
investor can employ professional investors in the selection of their stocks and
can, with one purchase of stock (those of the investment trust), have the
benefits of a diversified portfolio. As an example of how this worked, Goldman
Sachs & Co. (an investment banking and brokerage house) created an
investment trust called the Goldman Sachs Trading Corporation in December of
1928. The initial stock offering was $100/share. It sold the first day at
$104/share. On February 2nd, it sold at $136.50/share. On February 7th,
it sold at $232.50: easy money. On July 26th, they started another
one, the Shenandoah Corp. The stock was issued at $17.50/share. It opened that
day at $30/share and closed that day at $36/share: easy money.
This huge increase in the demand for stocks and bonds
created a need for supply. Here's where the centralization of commerce began.
Some companies saw the opportunity to quickly raise large amounts of cash,
usually at many times the prudent market capitalization, and use this money to
purchase their competitors. The knowledge of how to do this made the purchasers
smug. They felt justified because the local and small companies were "naïve or
incompetent". The truth is they were either too small to go public or they
didn't want to participate in this speculation fever that was raging across the
country. Don't forget, speculation is a form of gambling and money-changing was
considered a sin. In any case, these large centralized regional and national
companies were born out of a desire to monopolize, anathema to a healthy
capitalist society.
The first day of a long market slide, was October 24, 1929. The Industrial Average started before that Thursday at 448. A big slide happened on October 29, 1929 (Black Tuesday) and by November 13, 1929 it was 224, half its value. On July 8th 1930, it was 58. The Goldman Sachs Trading Corporation's stock which sold at $232.50 on February 7th, 1928, was trading at $1.75 in May of 1932. Those people who used margins to buy their stocks, when the stock went below its appraised value, got "margin calls". When they couldn’t meet them they lost their bank accounts, their homes, their farms.
Now we are in the midst of another economic crisis. FDR
coined the term "depression" because he thought it was less scary than "crash"
or "collapse". Whether or not we are in a depression remains to be seen. But,
already, we are seeing these large conglomerates getting into trouble. General
Motors was created by William Durant in 1908 out of the stock market crash and
financial crisis of 1907 (under the same circumstances that other large
companies were created in 1929). Now General Motors, with the other two auto
makers, are facing bankruptcy. These mega-companies represent an industry that
supports 1 out of every 10 wage-earners in America. What would happen if this
crisis mimics the other one? After the "crash", the US unemployment rate went from 3.2%
in 1929 to 24.9% in 1933 (when FDR took office). According to the Bureau of
Labor Statistics, unemployment in 2007 was 4.6% compared to the 3.2% of 1929.
In October, 2008, the unemployment rate was 6.5% one point less than in 1930
when the unemployment rate was 7.5%. What would happen if these conglomerates,
these merged companies, these centralized corporations were no longer able to
service their debt and were to go bankrupt. People say that won't happen
because Obama won't let it happen. Hoover
tried to save the 1929 collapse and engineered huge bailouts (through
"organized support"). But it failed. Hoover
announced big cuts in taxes (2/3 to ½), but it was insignificant. FDR did his
best with his New Deal but unemployment was still 17.9% in 1939. Galbraith
said, "The singular feature of the great crash of 1929 was that the worst
continued to worsen".
We have a very complicated economy and the collapse of these
large companies would have ramifications throughout it. GM, as an example, may
be large, but it supports a myriad of small businesses such as sales showrooms,
repair shops, parts suppliers, advertizing agencies, transport companies, etc.
No one should wish this collapse to happen and our leaders should do all they
can, (as they are), to prevent not only large companies such as GM from
collapsing but to also support liquidity in the banking system so as to keep
all companies afloat. But our government will be constrained by capacity. Somewhere
in the scenario of acquiring more national debt to prevent these collapses
there is a limit and if we can't prevent this collapse within the limit, the
collapse will happen anyway.
Furthermore, we have other demands on our society. Fuel
costs, while moderated lately, are destined to rise and stress our economy and
the households within it. We have terrible environmental consequences if we
don't change our habits of energy waste and energy sources, from fossil fuels
to renewable fuels. As we discussed in our companion articles, "The 21st
Century Challenge", "Where Do We Go From Here" and "The Post Industrial
Culture", we need to advance beyond the oil and coal based industrial
revolution.
So what can we do when these
large companies shrink or fold? What can we do if the collapse happens? What
will happen if our unemployment rate doubles or triples as it did after 1933
and remained high until the 2nd world war. Certainly we don't want a
war to get us out of a depression.
So let's try to formulate a scenario
that can plan for our economic recovery as well as address the energy and
environmental urgencies. Let's call it "The New Decentralization".
In the past, when large numbers
of skilled and technically proficient people were laid off from big companies,
they started their own companies. These small companies found themselves more
productive than the original companies (not saddled with debt and labor
commitments) and were able to compete with them. The mega-farms that have been
created because corporations could buy the smaller ones (because of securities
financing), if they fail, can be worked back into smaller farms. A typical 3-5 acre organic farm operated by a
single family earns approximately $34,000/acre now (far and above the average
per acre yield of a large mega-farm).
Small business (if we define it
under 500 employees) is already the major part of the economy. According to the
US Census Bureau, in 2004, the latest year statistics were available, of the
5,885,784 firms in the country, 5,868,737 were of firms less than 499 employees
(99.7%). Of the 135,400,699 people
employed, 19,523,741 were self employed (14.4%), 59,399,486 were employees in
firms under 499 employees (43.9%) and 56,477,472
were employees in firms over 500 (41.7%). In other words, only 17,047 firms
(only .3% of the total) employ 41.7% of the workforce. It is this .3% of the
businesses, these big regional, national and international conglomerates, that
run the risk of collapsing our economy. Looking at the inverse, it is the potential
of small business to absorb the anticipated unemployment caused by the collapse
of the big firms and help save the economy. As Nydia Velázquez, Chairwoman of
the House Committee on Small Business said. "We must continue to take actions
to assist small firms, as they will ultimately be the drivers of the economic
recovery." Small business development will be the cornerstone of the new
decentralization.
It is appropriate that it happens this way in the 21st
century. The demise of the oil culture, be it from supply, because of national
security or the environment, will require us to drive less and transport goods
shorter distances. We will need to decentralize commerce. The need to develop
alternative sources of energy, like wind, solar, small hydro, geothermal and
wave energy, will require us to change the grid from being supported by
centralized generation plants to what is now called distributed generation
(DG). We, therefore, need to decentralize the grid.
All economists are now looking to the "green economy" to
save us from the effects of our dismal balance of trade and the loss of our
industrial base. The collapse of the big conglomerates will add to the ravages
to our oil-based economy. The green economy can be made up of hundreds of
thousands of small businesses that build, install and maintain solar panels, develop
the small hydro plants, the geothermal plants, the wind turbines, do recycling,
insulate our buildings, make the changes required to our electrical and fuel
systems, grow, make, market and deliver biofuels, install the rail for our new
transit systems, and, of course, grow the food when the large farms collapse.
But it still may not be enough. An additional 10% (from the existing 4.5% in
2004) to the unemployment rate in the US, would throw an additional 13,500,000
people out of work. In Germany,
there were 38,300,000 people employed in 2004. Their green revolution,
essentially developing wind, solar and small hydro companies, created 200,000
new jobs. That represents only ½% of its employment base. The US, with its employment base of
135,400,699, could expect a growth of jobs potential, using the German
experience as a gage, of about 675,000 jobs from those three endeavors. A much
greater job potential can be seen in the agricultural sector. In 2004, only 1%
of the US
labor force was involved in farming. That is down from 28% in 1920. An
additional 5% of the labor force going back into farming, for both food and
fuel, could add 6,770,000 jobs back to earning incomes. The key change, however,
in a Post Industrial Culture is the return to a single wage earner per family.
In 2004, of the 113,146,000 households, 77,010,000 were families. Of those,
58,109,000 were married with a median income of $63,813/yr. Of those 70.5% had
a spouse in the labor force for 1 or more weeks per year and 23.2% had a spouse
working all 52 weeks. If half of those two wage earner families had their
spouse stay home (23.2/2=11.6%), an additional 6,740,000 jobs need not be
created. Those three actions alone, the development of alternative energy jobs,
a modest return to small farms and a cultural change of the equivalent of one
wage earner per family could absorb the loss of over 14,185,000 jobs. The key
item in allowing the equivalent of one wage earner to stay home is the cost of
the home. Our inflated housing market created the need for two wage earners to
support the mortgage. The regulators allowed 40-50% of income to support a
mortgage, when previously it was only 25%. If the government could assist in
lowering the housing obligations of these families, then there is the
possibility we can survive the collapse.
Government can play other roles in this transformation. It
can stop subsidizing the oil and coal companies and, instead, encourage,
educate and provide low interest loans to support small business. It can change
the farm subsidy programs to favor small farms. It can support The Main Street
Economic Recovery Act. It can support the SBA (Small Business Administration).
It can support SBIR (Small Business Innovation Research), the STTR (Small
Business Technology Transfer), and the TALF (Term Asset-backed Security Loan
Facility). It can support alternative energy and conservation of resources by
providing subsidies and loan supports until they can be market feasible. It can
support the master planning for the decentralization of the suburbs and our new
transportation network. It can support the transformation of our grid.
With this new emphasis, there is the possibility we can
avoid "the worst continuing to worsen". Of course, there will be pain. All
change encounters pain. But, with a plan and a direction, we can have hope. This
hope can be called the new decentralization.
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