Goldman Sachs--Then and Now

Daniel Johnson quotes interesting information about Goldman Sachs taken from Galbraith's book, Age of Uncertainty. Both writers suggest that there are still things to be learned about Depressions and Big Recessions: 1. banks like Goldman Sachs should be accountable to the society that it sucessfully rips off every so often; and 2. the Fed has more to learn about the management of society's money.

Galbraith on Goldman Sachs and the Fed
By Daniel Johnson - Salem-News.com

(CALGARY, Alberta) - I am just rereading John Kenneth Galbraith’s 1977 book, Age of Uncertainty which came out of a BBC series of the same name. While there was much of interest a second time around, a couple of items jumped out at me. The first was the role that Goldman Sachs played in the run up to the 1930s Depression; not unlike it’s role in the current Great Recession. Galbraith wrote:

Goldman Sachs

“Most exciting of all were the holding companies and the investment trusts. Both were companies formed to invest in other companies. And the companies in which they invested, invested in yet other companies that, in turn, invested in yet others. The layers could be five or ten deep. Along the way bonds and preferred stock were sold. The resulting interest payments and preferred dividends took some of the earnings of the ultimate operating company; the remaining earnings came cascading back to the common stock still held by the promoters. Or this happened as long as the dividends of the ultimate companies were good and rising. When these fell, the bond interest and preferred stock soaked up all the revenues and more. Nothing was left to go upstream; the stock in the investment trusts and holding companies then went, often in a week, from wonderful to worthless. It was an eventuality that almost no one had foreseen.

“The metaphor for all these promotions was Goldman Sachs. There had been nothing like it since the South Sea Bubble…

“The golden age of Goldman Sachs was the nearly eleven months beginning December 4, 1928. On that day the Goldman Sachs Trading Corporation was formed. This was an investment trust with the function only of investing in other companies; $100 million of stock was issued, of which 90 percent was sold to the public. [More than $1.3 billion in 2011 dollars. Multiply all figures by 13 for an approximate 2011 dollar amount] This was put in other stock selected in accordance with the superior insights of Goldman Sachs. In February, the Trading Corporation was merged with the Financial and Industrial Securities Corporation, another investment trust. Assets were now $235 million. In July the combined enterprises launched the Shenandoah Corporation. Preferred and common stocks to a total of $102.3 million were authorized, again for investment in other stock. The public share was oversubscribed sevenfold so yet more was issued. In August Shenandoah, in turn launched the Blue Ridge Corporation—for $142 million. A few days later, back at the [Goldman Sachs] Trading Corporation $71.4 million more in securities was issued to buy another investment trust as well as a West Coast bank.

“Shenandoah, which had been issued at $17.50 and had risen to $36.00 eventually went down to fifty cents. This was quite a loss. The Trading Corporation did worse. In February 1929, aided by some purchase of itself, it had reached $222.50. Two years later it could be had for a dollar or two. ‘He took my fortune,’ said one saddened commentator of his broker, ‘and ran it into a shoestring.’ A principle in this vast expropriation—a director of both Shenandoah and Blue Ridge—was John Foster Dulles. A more introspective man might have wondered. Dulles emerged with his faith in the capitalist system unshaken.” (Pp. 208f of first edition)

Conservatives support, as a position of principle, the unfettered operation of business. As Nobel economist Milton Friedman, patron of modern conservatism put it:

"Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible."

The operation of Goldman Sachs, however, demonstrates beyond a doubt that business, as a public trust, must be accountable to the larger community.

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