Norman Stone - The Atlantic and Its Enemies

There was a considerable revolution, in other words, though it also had its victims. The once great firms came under competitive pressure, and they had to cut costs — ‘downsizing’, as it was unlovably called. The largest 500 companies lost 3.5 million jobs in the eighties, General Electric, for instance, falling from 400,000 to 280,000 employees. The huge conglomerates of the 1960s started to dispose of branches that were not central; and there was a tendency towards small holding companies that simply managed the incentives for almost autonomous operating companies (of these, Kohlberg Kravis Roberts — Wall Street — was a prototype). Gone — or almost — were the days when businesses were comfortable, showing off with huge buildings and endless trotting secretaries. Many companies fell sharply — nearly half of the Fortune list of 1980 was not there by 1990. The losers quite often had merged, and there was much anger against investment bankers’ willingness to finance hostile takeover bids: the short-term results, to impress shareholders, that made their offers attractive, ran the complaint, might mean immediate asset sales that would run counter to long-term investment. But manufacturing itself did not decline, and employment in it did not decline as fast as in the Fortune list. Manufacturing still accounted for almost one quarter of the GNP. What did happen was that productivity, output per man, rose, and did so substantially. It rose at 3.6 per cent per annum and the answer was that management ‘fat’ had been cut, while there was elsewhere a burst of creative energy from the Wozniaks and Gateses (plus illegal immigrants). There was, at work here, a characteristic American quality — it had been shown during the Second World War — of rationalization and risk-taking in pursuit of profit. There was a new financial idea, venture capital. Someone had to raise the initial money for patents, lawyers, etc. for a start-up company; it was a matter of guessing which one. Governments had shown that they were not good at such things, and British mistakes in this respect had been splendidly comic — a prize, stiffly contested, going to the supersonic Concorde.

A molecular biologist, Herbert Boyer, held the patent on techniques for gene splicing. Genentech was founded by two venture capitalists, Thomas Perkins and Robert A. Swanson. By 1980 the market value of the company was $300m. In 1991 Genentech sold part to Roche Holdings for $2.1bn, and an option on the remainder at a price that would have been one hundred times Genentech’s earnings of 1989. Genetic technology is exactly the industry that central planners would love to have developed, but the bureaucracy’s record was very poor, and in the USA congressional lobbying might also have affected the result. As things were, the eighties were a demonstration that venture capital could produce much better results than ‘industrial policy’ ever did.

What caused all of this? Robert Bartley reckons that it was a direct consequence of the tax cuts, both in Great Britain and in the United States, and he cites Thomas Perkins, who was chairman not only of Genentech but also of six other, smaller concerns, and who had been at the start of Compaq and Sun Microsystems, as asserting that a tax cut ‘should make it far easier to raise funds, and it will bring the entrepreneurs forward’. In 1975 there had been only $10m of new net capital, and in 1977 $39m. In 1978, following the first tax cut, the figure was $600m, and with the Reagan tax bill of 1981 over twice this. When the tax cuts appeared in reality, in 1983, the figure quadrupled. Then, in 1986 and later, as increases in the capital gains tax came (from 20 to 33 per cent), the figures fell again, to around $2bn in 1988 and 1989. Initial public offerings, where firms first went public, showed a similar pattern — under thirty per annum from 1974 to 1978, then 103 in 1979 and 953 in 1986 (falling thereafter to 186 in 1990). The public offerings amounted to $9bn in 1972 (constant dollars) but only $142m in 1974, rising to $2bn in 1980 and $24bn in 1986. By 1988 they were back to $6bn. As for England, as John Hoskyns said, a man would have had to be mad to attempt to be any sort of entrepreneur in the 1970s, and the Thatcher governments’ tax cuts did indeed bring in much greater revenue because people worked harder and more inventively. However, there is devil in the detail, not least because some of the new ventures depended in the end on government money — in California, especially, from the largesse of the Pentagon. The other large source for venture capital was foreign, of course, especially where high technology was involved, and that also was brought about by government action, because of the way in which the dollar was managed. The world could not do without it, as the universal currency, and the Americans took what in the foreign-exchange world was known as an ‘arbitrage profit’ — the old word was ‘coinage-clipping’ — on an enormous scale. Japanese and British money flowed into the United States. ‘Deregulation’ broke down some of the internal dams.

Since the great Slump of the 1930s, government regulation in the US had followed government regulation. Banks had got themselves a bad name, and thousands collapsed, the managers running away with people’s savings, in some form or another. There always had been a dislike of money-out-of-money people in the United States: Jefferson thought, for instance, that Hamilton’s proposal for a Bank of the United States was intended to restore the monarchy; Andrew Jackson was similarly ill-disposed; William Jennings Bryan famously denounced the ‘Cross of Gold’ upon which honest farmers were said to be crucified. It was easy enough in these circumstances to make a great fuss about crooked finance, and it was no doubt true that behind every fortune lies, if not a great crime, as Balzac claimed, at least a few corner-cuttings. When things went well, these passed unnoticed. When things went badly, various highly placed money-men were found out. Regulations of a fairly stringent sort were then imposed by the Roosevelt administration to make sure that banks did not do it again: ‘the money-changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truth,’ said Roosevelt. This was not really fair. The causes of the great Slump of the 1930s went far beyond the crimes or corner-cuttings of some money-men. It was the high priests themselves who had done for the alleged ancient truths — an absurd tax increase in 1932, in mid-Slump; an absurd tariff, Smoot-Hawley, which had destroyed foreign trade in 1930; a grotesque mismanagement of the money supply and the arbitrary shutting down of 6,000 banks; a pig-headed unwillingness to value gold properly and thus provide internationally valid credit; an equally pig-headed obstinacy as regards Europeans’ paying their war debts promptly and in full, while at the same time discrimination went ahead against their exports. In such a context — it destroyed parliamentary democracy almost everywhere — the crimes of some money-men amounted to small beer. However, they caused an irresistible demand for regulation. The same happened over housing. The ‘thrifts’ took money from savers and lent it to mortgagers, i.e. borrowing short and lending long, with an easy profit margin and a foreseeable income, but through a ‘Reg Q’ which limited the interest that they could charge for mortgages. The inflation of the seventies knocked the props from the system: the existing interest rate on mortgages could not be pushed upwards to match the fall in the value of the dollar, and savers clearly would not keep money in any bank if they wanted to preserve its value — they would look for higher interest elsewhere (the bonds sold by private companies or even the government), or they would switch into gold, or something that would not go away. By 1978 the amount of money in funds tripled, to almost $10bn, and reached over $40bn the following year (and in 1982 over $235bn). In 1980 the thrifts asked for help, as they lost funds, and ‘Reg Q’ was abolished. The ‘thrifts’ were allowed to invest beyond home mortgages, even offering credit cards, and there was, later, a similar relaxation in Great Britain for the equivalent, the building societies. Bricks and mortar, greatly rising in value, offered apparently solid collateral, and pyramids of credit then built up on that basis. But such deregulation happened elsewhere, and banks became free in ways that they had not been since 1932. By 1985 there was lamentation in advanced educational institutions to the effect that economics, business schools and banks were attracting far more students than ever before. A classic of this period, Michael Lewis’s Liar’s Poker (1989), reveals the world of Salomon Brothers. He had been a graduate student at the London School of Economics, despised the concentration at his native Prince-ton on two-dimensional economics, but, almost by chance, was wafted into a world in which his starting salary was twice that of his professor, and then made cruel mock of the whole greedy and stupid business of the bond market. Tom Wolfe’s Bonfire of the Vanities remains the outstanding novel of the decade and perhaps even the half -century. He too had made his observations on the trading floor of Salomon Brothers, once a rather staid and safe Wall Street house, turned into a sort of perambulatory worldwide casino.