Julia Ott is an assistant professor of history at the New School. A former RSF Visiting Scholar, Ott is also the author of When Wall Street Met Main Street: The Quest for an Investor's Democracy (Harvard University Press, 2011), which chronicles the initial phase of mass investment at the turn of the 20th century and the issues surrounding it.
Q: Your book starts at the turn of the 20th century, when less than 1 percent of Americans owned stocks or bonds (compared to 50 percent of households in 2007). What was prevailing sentiment about financial securities and markets in that era?
A: No question about it – the prevailing sentiment was negative.
Since the nation’s founding, Americans for the most part had viewed financial securities, the individuals who traded bonds and stocks, and the private associations (like the New York Stock Exchange) that administered securities exchanges as antithetical to their most cherished economic ideals, political values, and savings practices. Popular economic thought held that economic value derived from diligent labor and steadfast thrift—qualities utterly absent in the scuffle of the stock exchanges’ trading floors. American political culture identified ownership and control of real property as the foundation of a citizen’s virtue and independence, of his investment in the nation. Bonds, stocks, and the malefactors who traded them seemed to imperil this ideal of proprietary democracy. The lure of speculative riches subverted the work ethic; it diverted capital from productive pursuits.
At the start of the twentieth century, financial securities and markets played a very limited role in the way in which most Americans saved money and most firms acquired funds. Most people considered the stock and bond markets to be insiders’ games, rigged against investors of modest means who lacked access to adequate information about the corporations whose securities they might purchase. And because New York City banks (which held the reserves of other banks across the nation) loaned money to securities brokers (these brokers’ loans paid a high rate of interested and could be called in at any time), stock market declines produced terrible consequences for the financial system.
Take the Panic of 1907 as one example. In October, an unsuccessful attempt to corner the market in the stock of the United Copper Company ended in the failure of participating brokerages. Frightened depositors clamored to recover their savings from banks associated with the scheme. The resulting collapse of the third-largest trust company in New York City wreaked havoc. Faith in financial institutions evaporated; even depositors at sound banks and trusts lined up to withdraw their money. Depositors’ demands forced regional banks to call in their reserves from the New York City banks. These, in turn, demanded the repayment of loans made to brokers, who sold stock to pay those banks. The stock market plummeted and credit markets froze, driving all kinds of borrowers into bankruptcy. With no central bank to step in, it fell to J. P. Morgan to stem the crisis. Americans weren’t particularly thrilled to discover just how much financial stability depended upon one man.
Q: As corporations grew and the agrarian sector faded in importance, there was a shift in thinking and two competing models emerged, which you call "investor democracy" and "shareholder democracy." What were the differences between these two camps and who were the respective people pushing them?
A: Progressive writers and reformers first dreamed of an investor democracy – a society in which individuals would hold a ‘stake’ in the nation and in the economic system as an investor in stocks or bonds – prior to World War I. The shareholder democracy ideal evolved out of investor democracy in the 1920s.
While all investor democrats promoted a mass investment society, this cohort of theorists, policymakers and corporate and financial leaders disagreed on a range of issues. They disputed which securities were most appropriate for the public -- government or corporate issues? stocks or bonds? They fiercely debated what role the state should play in directing or regulating financial capital, in promoting universal investment, and in protecting the interests of citizen-investors.
In the 1920s, leading corporations, financial firms, and the New York Stock Exchange promoted the idea of shareholder democracy – universal ownership of corporate stock -- as part of a larger effort to shape public opinion. After Armistice, they faced calls for increased regulation of corporations and the financial system, high levels of unionization, even proposals for government ownership of railroads and utilities. As corporations, banks, and brokerages launched new initiatives to increase share-ownership, their publicity and marketing pitted mass investment against regulation, the welfare state, and labor unions. Universal acquisition of corporate stock via unregulated securities markets could accomplish key social goals—individual security and opportunity, macroeconomic prosperity and stability—in the most efficient and democratic manner, they pledged.
In short, not all those who sought to transform the United States into an investors’ democracy agreed that universal ownership of corporate stock via unregulated securities markets was the right way to go about accomplishing that mission. In fact, many who embraced the mass investment ideal believed that federal oversight of corporate securities issuance, financial disclosure, corporate governance and of securities exchange practices would be required before securities investment could become a suitable practice for the average American.
Q: The First World War changed the way Americans interacted with the financial markets; in fact, you write that government bond campaigns "advanced new models of citizenship" and drove the idea of an "investor-centered economy." How so?
A: In the four Liberty Loan and the Victory Loan campaigns of World War I, an estimated 20 million subscribers (82.0% of households) pledged to buy a federal war bond. These drives raised $21.4 billion. The second program of the Treasury Department’s War Loan Organization, War Savings, collected roughly $1 billion through the sale of savings certificates and stamps to some 34 million men, women, and children (32.2% of the population).
When Congress declared war on Germany and its allies in 1917, Americans did not stand solidly behind this decision. After all, Wilson’s victorious 1916 reelection campaign had featured the slogan, “He Kept Us Out of War.” Neither could Wilson claim that the millions denied the right to vote—women, African Americans, children, and the newly immigrated—had endorsed the war. Outright resistance ran deep. Pacifists in the Progressive, women’s, and socialist movements decried that humble American youth were dying to protect plutocrats’ financial interests. Millions of Irish and German Americans opposed alliance with the British.
The Wilson Administration chose to fund the war in large part through small-denomination federal bonds because it viewed mass investment as means of cultivating support for an unpopular war, unifying a heterogeneous population, and inhibiting inflation and radicalism. The architects of the War Loans believed that investment would transform every inhabitant into a citizen-investor. Each would possess a ‘stake’ in the war and in the nation, even if he or she lacked the vote. The War Loan drives imagined investment as an act that both made and manifested citizenship. Publicity and pageantry identified the practice of investment with the process of democracy.
Many objected to American involvement in the Great War. Still others rejected the mass-marketing of small-denomination federal debt as improper war finance policy. Domestic criticism compelled the Treasury to defend the merit of investment as a set of attitudes and practices that would yield a better future for individuals and for the nation as a whole. Federal securities were promoted as tools of individual economic freedom and national economic stability. The investor-centered theory of political economy embedded in War Loan rhetoric and imagery figured citizen-investors as holding the reins of the nation’s economy. The War Loan campaigns encouraged Americans to anticipate that widespread ownership of federal debt would not only win the war, but also transform their economic system and their state.
Q: You identify two main characters in the post-war era who pushed the idea of shareholder democracy - David F. Houston, a former U.S. Treasury official, and Thomas Nixon Carver, a Harvard economics professor. Talk a little about Houston's time at AT&T and how it related to Carver's theory of a "New Proprietorship."
A: When Warren G. Harding became President in 1921, David F. Houston stepped down as Secretary of the Treasury Department, where he had overseen the U.S. Government Savings program (which sold small denomination federal securities until 1924). He took up a new post as Chairman of Bell Telephone Securities Company, AT&T’s stock-distribution subsidiary. In this new role, Houston promoted corporate stock ownership—rather than the federal government’s sale of its debt—as the proper mechanism for transforming every worker into a capitalist and democratizing the American economy.
Houston drew inspiration from the writings of Thomas Nixon Carver, a Harvard economist who served as one of the chief theorists of the War Loan drives. After Armistice, as the nation descended into Red Scare hysteria, labor strife, racial violence, and xenophobia, Carver began to entertain the notion that shares of corporate stock might convey a political-economic stake in American capitalism more effectively than federal bonds, stamps, or certificates. In the 1920s, corporate stockowners moved to the fore of Carver’s investor-centered theory of political economy, which his adherents dubbed the “New Proprietorship.”
The New Proprietorship influenced a wide variety of opinion makers in the 1920s, but none were as prominent or influential as David F. Houston. Under his guidance, AT&T became the first of a large number of corporations that dispensed their shares directly to the public through employee-ownership and customer-ownership plans.
As they put the New Proprietorship into practice, Houston and the corporate executives he inspired bent Thomas Nixon Carver’s ideas toward conservative goals. Corporations sought after mass share-ownership to buttress their assertions that privately administered corporate capitalism best served the public interest. Employee share-ownership plans aimed to repel unionization and federal intrusions into labor relations. Customer ownership plans sought to stave off antitrust suits, to sidestep unfavorable regulatory action, and to refute proposals for government ownership of utilities.
Q: You offer some pointed critiques of the arguments Houston and Carver deploy, noting that the "employee- and customer-ownership 'movements' of the 1920s" did not actually lead to more involvement of shareholders in the operation of companies. What actually happened?
A: In reality, these ‘movements’ helped consolidate executives’ control over the modern corporation – something we continue to grapple with today as we debate issues like executive pay and wonder why shareholders approve enormous compensation packages (seemingly without regard to performance) while workers wages languish.
The diffusion of corporate stock in the 1920s increased the number of Americans entitled to corporate income without providing them with any means to influence corporate policy in any meaningful way. This separation of ownership from control—lamented most famously by Gardiner Means and Adolph Berle in The Modern Corporation and Private Property (1932)—was not an unintended by-product of the increase in corporate stock ownership. Rather, many corporate executives intentionally resolved to distribute their shares to as many investors as possible—in blocks as small as possible—in order to solidify their authority. Widely diffused share-ownership insured that corporate executives would not encounter any challenges from owners of large blocks of shares.
General Motors serves as a case in point. GM added employee share-ownership in 1919. In 1923, it launched a massive public relations campaign to promote GM stock to current and prospective customers. As General Motors’ shareholder base took off, CEO Alfred P. Sloan and CFO John J. Raskob established Managers’ Security Company (MSC) to incentivize top executives. General Motors lent MSC $28 million to purchase GM stock. MSC shares were then distributed to executive management. No matter how numerous GM shareholders became (176,693 in 1928), key executives secured full authority by voting the GM stock held by MSG as a single block.
Q: You identify a concerted campaign by the New York Stock Exchange to promote a laissez-faire approach to financial markets, a campaign that was largely successful (and whose rhetoric continues to be heard today). Why do you think the model favored by Progressives like Louis Brandeis lost out? How did the laissez-faire argument connect with American concerns about the state of democracy in the age of corporations?
A: That’s a very good question.
I think the notion of a mass investment society resonated with a generation that struggled to reconcile modern social and economic realities with their long-standing political beliefs about the importance of property-ownership. Still, this generation remained as skeptical of enlarged government as they were of large corporations. So in the 1920s, as the economy boomed but inequality increased, I think Americans were attracted to the proposition that corporations could redistribute their wealth and dissipate their power by ‘democratizing’ ownership, without any recourse to government action or intervention.
Still, Jazz Age stock distributors’ promises would haunt them. These shareholder democrats had allowed that every American could and should invest in stocks. Their analogies linking market and nation, corporation and polity, trade and vote, shareholder and citizen had implied—often quite unintentionally—that the state might owe the investing public some consideration. Ironically, then, the shareholder democracy ideal – which sought to repel regulation -- offered an opening for the modern regulatory state. New Deal financial reforms and agencies, especially the Securities and Exchange Commission, aimed to ensure that outsiders enjoyed equal, timely access to truthful corporate data and received equal treatment from their brokers.