Presidency: How TR Fought Corporate Crime

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Mr. Rauchway is associate professor of history at the University of California, Davis.

George W. Bush vowed last week to restore confidence in American capitalism by putting more federal police on the Wall Street beat and jailing"dishonest individuals." American journalists, encouraged by White House attitudes, have already likened Mr Bush's plan to Theodore Roosevelt's centre-right crusade against business corruption, which also began by targeting a few infamous wrongdoers.

But Roosevelt quickly discovered that playing cops-and-robbers with white- collar crooks did little to limit corporate crime. He began to campaign for substantial systemic reform based on a fundamental vision of government's legitimate role in regulating the economy. If Mr Bush wants to fill the Republican Roosevelt's outsize shoes he must prepare himself to take his next step: towards increased government regulation.

Put in office when an anarchist terrorist murdered his predecessor in September, 1901, Roosevelt devoted his first official message as president to two themes: the worldwide"war on anarchism" his administration was supposed to co-ordinate with European powers, and the domestic campaign he proposed to wage against corporate corruption.

Americans of Roosevelt's era complained of widespread corporate accounting fraud, and particularly of stock-watering. By issuing shares at a par value greater than the price paid by investors, companies routinely overstated capital investment. The practice was so common that economic historians now assume it of all balance sheets in certain industries, such as railways. In this way, company executives rendered a reliable impression of enterprises that in reality were riddled with risk.

In response, Roosevelt reminded his constituents that"there are real and grave evils" on Wall Street, and he called for open accounting, believing that publicity itself would prevent bad behaviour.

To listen to Mr Bush today, one would think little has changed in a century. On Tuesday, he too called for increased police powers against crimes of cunning, asking for a new"financial crimes SWAT team" - super-fit accountants in Kevlar, apparently - to deter executive malfeasance. Like Roosevelt, he emphasised the"foundation of integrity" that must underlie corporate capitalism if it is to attract public investment. Like Roosevelt, he too touted improved publicity, promoting the idea that"greater transparency will expose bad companies and, just as importantly, protect the reputation of good ones".

Also like Roosevelt, he will find that increased police power and greater publicity will not prevent future corporate implosions. The problem with the market today is not, despite Mr Bush's declaration, with"a few wrongdoers" who have"failed our system". The problem, as in 1901, is that the system encourages many ordinary people to behave dishonestly. So long as the rules of the game prize short-term share price gain over long-term earnings stability, the temptation to cheat by manipulating the market will remain too strong.

Initially, Roosevelt hoped to let business regulate itself under a regime of increased publicity - and Mr Bush wishes now to do the same. He used his speech on Tuesday to promote the House of Representatives' bill, backed by the accounting firms (which would leave regulation in the industry's own hands), instead of the Senate bill, which would increase government oversight. Like Roosevelt, he will soon - possibly before this November's Congressional elections - feel pressure to adopt the stricter position.

Over time, growing inequality of wealth and continued corporate corruption pushed Roosevelt to denounce the entire class of capitalists -"malefactors of great wealth", as he came to call them. Congressional elections swept reformist politicians of both parties into office, so he backed more systemic changes - laws that led to the Federal Reserve Board and other regulatory agencies. He helped to create the commonplace notion that constant government oversight made the free market more stable and profitable.

In the 1920s that commonplace belief died, attacked by the Supreme Court and eroded by public delight in a rising stock market. Only catastrophe in 1929 and the election of Roosevelt's cousin, Franklin, in 1932 could resurrect it. The new President Roosevelt denounced"the generation of self-seekers" who in a boom decade dismantled the earlier Roosevelt's regulations because they no longer shared his vision of government safeguarding public interest."When there is no vision, the people perish," Roosevelt admonished.

The Presidents Roosevelt provide a parable for the Presidents Bush, the first of whom famously lacked"the vision thing". If Mr Bush wishes today to succeed where his father failed, he must truly follow their lead. He cannot just borrow Rooseveltian rhetoric, but must back stricter regulation because he believes it is right.

This article was first published by the Financial Times and is reprinted with permission of the author.

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