The Consent of the Governed--Add Your Own Two Cents Worth
Wriston, Walter B.
2007
If you have not been too preoccupied with your own affairs to notice it, you may be aware that we in the financial intermediary business have been living through some interesting times. Like you, we have been encountering frequent, unpredictable and uncontrollable increases in the price of our basic raw material--in our case, money. Although oil comes from some places other than OPEC, dollars are manufactured only by the Federal Reserve Bank. While the supply is controlled in Washington, at the same time we are obliged to operate under legal price ceilings that limit what we can charge for our product. Recently the government also decided to tell us where and when and to whom we can sell it. What all this means is that Americans now find their individual liberties reduced in a manner never contemplated by the Founding Fathers. In return for their lost freedom Americans got a less-efficient, less-productive economy. | |
If you think that sounds exactly like the oil business, you are right. But we in the banking community have still other problems. If oil companies were subject to the same laws and regulations that govern us--like the McFadden Act--there would be no pipelines, no national oil companies, and no chains of filling stations in the United States. We in the banking industry, moreover, are surrounded by competitors like money market mutual funds which are not so regulated because they did not exist when Mr. McFadden--not to mention his associates Mr. Glass and Mr. Steagall--were devising their various banking laws. As a result, the money market mutual funds, by giving the consumer what he or she wants, have lately been attracting funds at the rate of $8 billion a month--a sum which it took Citibank 100 years to accumulate. | |
So the next time you hear your Chairman complaining about his problems, tell him to cheer up. It could be worse. He might be trying to run a bank holding company, instead. | |
But you did not come here today to attend a recital of bankers' problems. I mention them only because they exemplify certain trends affecting our whole society today--including the oil industry. What we see in almost every field of endeavor nowadays--from steel companies or automobile companies to retail stores--is a geometric rate of increase in the proliferation of laws, rules and regulations, on the one hand, and on the other hand, an ever-widening gap between what we are instructed to do by those rules, and what is humanly possible. | |
This is not an entirely new phenomenon in our country. One of the most audacious acts in history was for a small group of colonist to declare their independence from the greatest military power in the world because that power had forced them into a similar situation. | |
Unlike some revolutions, ours articulated a rationale that has stood the test of time and forms the basis for a free society. The Declaration of Independence asserted that the power of government derives from the "consent of the governed." This concept, which is fundamental to a free society, depends upon a citizen being able to find out what his government is doing. Otherwise consent is clearly impossible. Today, a good case could be made that no one knows, or can know, what our government is doing. Thus, the legitimacy of its acts can no longer be supported by the "consent of the governed." This same kind of proliferation of laws and regulations was one of the complaints against George III enumerated in the Declaration of Independence. It specified that he "erected a multitude of new offices, and sent hither swarms of officers to harass our people, and eat out their substance." Today, our language may not be as eloquent as Jefferson's, but the thought is the same. | |
It has been said that if history never repeats itself, it at least offers parallels. Looking at our present legal/regulatory situation, one is reminded that ancient Rome started with laws consisting of Twelve Tables that were committed to memory by school children, but which then grew to some 3,000 brass plates deposited in the Capitol and read by nobody. It cannot be said that this process caused the decline and fall of the Roman Empire, but it certainly did nothing to prevent it. Between the end and the beginning, Roman society evolved into one where, in Gibbon's words:
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Considering the size of the legal and accounting staffs necessary to operate even a modest business in modern America, and comparing the short length of our Constitution with the pages of the Federal Register, it seems fair to say that what it took the Romans 13 centuries to do, we may have accomplished in two. | |
Most of this has been achieved--if that's the right word--within the past 80 years. One of the reasons usually advanced for this regulatory avalanche is that life has become more complicated. We cannot expect to live in 1980 according to rules that worked in . No doubt the Romans were told something very similar in the year 529, when the Emperor Justinian decided that the laws had gotten entirely out of hand and ought to be re-codified. But however the Romans accounted for their predicament, they presumably did not blame the invention of automobiles, airplanes, telephones or intercontinental ballistic missiles. | |
Nor is it likely that they attributed the need for regulation to the operations of J. Pierpont Morgan, Commodore Vanderbilt, or John D. Rockefeller. Perhaps, in the year 529, the Emperor Justinian had a sinners' list of his own. If so, I'm sure it served the same purpose that such a list is useful for today: invoking the evils of the past, real or imaginary, to gain acceptance for new laws and expanding authority for the lawmaker. | |
The old Romans were jealous of their freedom and they were famous lawmakers. They believed, in Edward Gibbon's words, that: This was supposed to protect them from capricious judges or arbitrary Caesars. What they failed to anticipate, and we have no excuse for not anticipating, was that when the laws became so numerous that even the lawyers could not keep up with them, their government could become as arbitrary as it liked, simply by deciding which laws to enforce and which to ignore. This process continued until, according to Mr. Gibbon, their government finally: In short, government authority no longer rested on the consent of the governed. | |
That we are perilously close to that point in late 20th century America seems almost self-evident. And while technology is not responsible for this, it provides some new refinements. There are now, for instance, some four billion records on individuals stored in the data systems of some 97 federal agencies. A push of the button can produce a complete picture of the financial, medical, political, and personal life of almost any one of us. Since it is impossible to process simultaneously the records of 230 million Americans, who gets singled-out for special attention comes to depend more and more on the whim of the button-pusher. That is not government by law; it is government by men. And what is true for individuals, of course, is also true for corporations, associations, or any other organization. | |
There are encouraging signs that the American people are becoming aware of the danger. Public opinion polls disclose an increasing concern about regulatory excesses. People are beginning to object, in increasing numbers, to a way of life described in the current issue of as one where:
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In the banking business, the Congress has passed more than 300 amendments to the Federal Reserve Act and laws regulating banks, some of which help make the Federal Reserve the most profitable corporation in the world. The Fed made more than nine-and-one-half billion dollars last year. This record profit was attained by assessing a special tax on the handful of banks who are members of the Federal Reserve System, while the vast majority of banks paid not one dime. | |
It is little wonder that public opinion polls reflect the public's increasing impatience with excessive regulation. You all know that the Department of Energy operates on a budget larger than that of the State of New York and has yet to help find a barrel of oil or produce a kilowatt of electricity. The new Department of Energy has, however, been extremely useful in stimulating the public's awakening, not only through its efforts in creating last year's lines in front of the filling stations, but also by such contributions as sending the operators of those stations a monthly form. It was accompanied by four pages of complex, small-print instructions, part of which read:
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All of this may be making it harder to get your gas tank filled in the service stations, but it ought to make them great training centers for future petroleum industry finance officers. We may eventually see every gas pump manned by an MBA. | |
Just as the political allocation of gasoline created long lines and regional shortages, so the political allocation of credit under the Credit Control Act of 1969 is now devastating the financial markets. We were told solemnly not to make loans to aid speculation, but instead see that the farmer and small businessman receive plenty of credit. Lending money to a farmer to buy seed, hoping that the Lord will favor him with sunshine and rain in the right proportions, that the EPA will not ban the only pesticide that will save his crop, and if all goes well that a beneficent Congress and President will come through with a good support price for his crop-- that's a true speculative loan. Anyone who ever used a pitch fork knows this. | |
We are told it is beneficial to loan money to buy a car, but it is bad to take our family to dinner and pay for it with a Master Card. Apparently the freedom of Americans to manage their own financial affairs is something that must be curtailed. You and I are not capable of managing our own money and must have the guidance of a beneficent government. If this attempt to assume political control of financial markets was not so tragic and so destructive of individual freedom, it would be ludicrous. Money is fungible and the lesson of history is that if the state wants to control one form of credit, it must control all forms. Additionally, we have so designed our laws and regulations that all of you now routinely deal with foreign banks whose governments believe their institutions should be bolstered, not hamstrung. | |
We in the business community also may have contributed something toward awakening the public to these phenomena: certainly we do our share of complaining. But it might be a healthy exercise to ask ourselves whether we are not, at least on some occasions, also part of the problem. Are we not a little too eager, for example, to adopt accounting principles that fit perfectly into the Washington definition of "clarification" as the process of filling in the background with so many facts that the foreground sinks out of sight. | |
When I started in the banking business thirty years ago, I was a credit investigator. My job was to walk down Wall Street, find the appropriate officer in another bank and ask him, "Is this company's credit good?" He said "yes" or he said "no" in a rather stylized way that was easily understood. Today, as you well know, a company issues a 10-K of fifty or sixty pages that is incomprehensible to almost anyone but a Certified Public Accountant. And even he might hesitate to venture a flat "yes" or "no" without first consulting his attorney. | |
It is true, of course, that what goes into the 10-Ks is put there because the government, in its wisdom, has concluded that statistical data is synonymous with information. But how many of us can say with a clear conscience that we acquiesced in this trend because we were helpless to do otherwise? Is there even a faint possibility that some of us should be numbered among those private practitioners Gibbon mentions--those who increase the darkness tenfold because they find the mysterious science to be a profitable trade? | |
It may be that we have simply spent so much time filling out government forms that we have become unconsciously infected by the government's way of looking at things. Sometimes we no longer wait to be asked. A case in point might be the controversy that has swirled around the Financial Accounting Standards Board Statement 8 since its inception in 1976. This can be fairly described as an exercise that was entirely self-propelled. Virtually no one outside a relatively small group of accounting theorists ever demanded the sweeping changes it required, and which are now being reconsidered after producing precisely the confusion that many of us predicted. | |
There was never any demand for obscuring the basic long-term trends of a business by the over-recording of short-term swings in the international currency markets. Rational accounting procedures ought to improve information and yield better decisions. Accounting conventions should not drive business decisions, but rather should reflect them in a meaningful manner. There are some who would argue that FASB-8 accomplished the opposite. | |
The history of FASB-8 is too well-known to all of you to require much elaboration from me. But there is one additional aspect I would like to mention because it has something important to tell us about the kind of world into which we seem to be regulating ourselves. | |
As many of you know, the Research Foundation of Financial Executives Institute did a study of the effects of FASB-8 on corporate management practices, and on the stock market's assessment of the firms affected by the rule. There was no evidence that the market reacted negatively, no doubt because Wall Street has long since learned to cut its way through even the most dense thicket of "clarification." The authors of the study concluded, however, that some managers care about what their financial statements seem to be saying, as well as what they actually mean, and that the accounting numbers can affect their business judgment. They will take actions in the foreign currency area that they know will increase both costs and risks in order to preserve the results they want in their numbers. In other words, there is a willingness to sustain real losses in order to prevent paper losses. | |
We have all been conditioned to this kind of thinking, of course, by decades of tax law. We are used to living in a world where the ideal candidate for a merger or acquisition is one floating in red ink with a good tax carryover. The government writes tax laws that encourage a businessman to make a take-over bid rather than build new facilities, and then puts the Justice Department to work probing for antitrust problems. We put ceilings on the interest banks can pay you for your savings, tax what little you do earn, but make the interest on installment buying tax-deductible, and then listen to government spokesmen denounce our borrowing habits and urge us to be more thrifty. All we have done as citizens is to respond intelligently to the rewards and penalties assessed by the law. The President of the United States goes on television to warn us against dependence on foreign oil, while the government operates an entitlement program that subsidizes the importation of foreign oil and removes most of the incentive for refiners to search for new domestic sources. | |
There is a word for this kind of thinking, and for the unreal, convoluted sort of world such thinking creates. The word is "byzantine," and it commemorates the great city of Byzantium where the Emperor Justinian created his great legal masterpiece fourteen hundred years ago. | |
We seem to be intent on continuing down that same ancient road--but do we really have to? We are not, after all, standing in the path of a natural phenomenon like Mount St. Helens. The events propelling us are all man-made and it just might be possible to influence their course. Perhaps more of our efforts ought to be directed toward our fellow citizens to do what the Romans failed to do but our Founding Fathers did; that is, to learn the lessons of their own history. It was not Edward Gibbon, but the authors of the Federalist Papers who warned us:
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If all of these things were merely an annoyance, or the price of progress, we could go on with the usual good-natured grousing. But I believe we Americans face a clear and present danger that is too serious for bureaucratic games. What Franklin Roosevelt called the "Great Arsenal of Democracy" is now only an aging physical plant that is no longer the envy of the world. Decades of government disincentives to save have taken their toll and produced the lowest savings rate in the free world at the very time our capital needs are the greatest. Even though we all know that if we continue on our present path, the lights will eventually go out, and yet we have no national energy policy worthy of the name. We have the technology, the skills, and the money to solve our energy problem, but apparently have not yet summoned the political will to make the trade-offs necessary to prevent the lights from going out. Our defense establishment is no longer clearly second to none, and the world questions our will to use what we have. Many perceive that we have assisted the demise of friends abroad and failed to make our enemies pay any price for their hostile actions. We can ask ourselves if the incredible profusion of laws and regulations, each one by itself made for a good purpose, has now been woven into such a confining network that our country, like Gulliver, is unable to move to assure its own future. | |
What to do? Take a leaf from the book of our forefathers and stand up and be counted. They pledged their lives, their fortunes, and their sacred honor--in short, everything they had--to found this country. Our society is now infinitely more complex, infinitely more dangerous and inextricably bound up with the rest of the world. Nevertheless, with the military balance moving against us, with a rapidly aging industrial plant, with the heavy hand of regulation effectively closing every avenue to free up American innovation, capital formation, energy and skills, the time is growing late. | |
Yet the pendulum does swing, and there are signs that it may be doing so today. There is always something each of us can do to help the process, and every bit helps. In London, the famous Big Ben used to have a tray on its pendulum where one placed stacks of old English pennies to regulate the clock. The more pennies you placed there, the heavier the weight, and the faster the pendulum swung. If there is anyone among us who thinks he may have a few cents to add, I can only suggest that now is a very good time to do it. | |