JOHN PIERPOINT MORGAN ON ECONOMIC CONDITIONS

Successfully running a business in this economy is no easy task. Being an executive was so much more pleasant two years ago when growth, job creation, spending, confidence, investment, profits and productivity were booming, and the JDSs and Nortels of this world looked like they were headed for the moon. Staying focused and disciplined when the economic news is as negative as it has been is as crucial as it is challenging.

According to the eminent Yale literary critic, Harold Bloom, information is endlessly available, but where, he wonders, will wisdom be found. Bloom could have been talking about the modern executive and today’s economy. Amidst all the bad news, where is wisdom to be found? From wisdom always comes focus and discipline. If wisdom is, as Webster’s says, “Insightful understanding of what is true, right or enduring,” then executives today will find it in the words of this century’s greatest financier, John Pierpont Morgan: “Remember, my son, that any man who is a bear on the future of this country [America] will go broke.”

Morgan’s credentials for speaking on broad economic conditions and their implications for executive decision-making are impeccable. He is the Morgan of Drexel, Morgan and Company, Morgan Guaranty Trust Company, J.P. Morgan Chase and J.P. Morgan Securities Incorporated. By 1900 he controlled much of the U.S. railroad system; in 1901 he organized U.S. Steel, North America’s first billion-dollar company; he was a key player in the establishment of General Electric and International Harvester. Morgan organized the syndicate that put together the financing that resupplied U.S. gold reserves in the financial crisis of 1895, effectively saving the U.S. dollar. In the Knickerbocker Trust/Wall Street financial fiasco of 1907, the country turned to Morgan again to restore order and head off full-scale panic and failure. Prior to the Federal Reserve’s establishment in 1913, Morgan was America’s de facto central bank; the Federal Reserve was established in part to offset the staggering financial power of a single individual, J. P. Morgan. The business world will never see his like again; he was sui generis, one of a kind. Morgan was aptly called the colossus. If this has whetted your appetite for more on Morgan, have a look at Jean Strouse’s book Morgan: American Financier (Random House, New York, 1999). It is a tour de force.

The economic news has not been nice lately, and the list looks like the script for a doomsday scenario: huge stock market losses, especially in technology; the first, truly coordinated global economic slowdown in over half a century, putting somewhere between 30 and 50 per cent of world output in some semblance of recession; the lockstep trip south by the U.S., Europe and Japan is almost eerie; rising unemployment and declining job creation virtually everywhere; relentlessly bad numbers in industrial production, the lifeblood of manufacturing, in the U.S., Japan, Britain and Germany, along with a host of developing countries; a meltdown in capital spending, again virtually everywhere; serious debt problems in a number of countries and large international companies; the stubbornness of the U.S. and Japanese economies (together close to a third of world output) to respond, as history says they should, to policy-induced low interest rates, massive injections of liquidity and all-round, generally very easy monetary conditions; an energy price roller coaster; constant concern that the only bright lights in the news, consumers and housing, will abruptly flame out in a blaze of lost confidence, huge debts and plunging property values. The news has been so bad that maybe the good news is that it is hard to imagine it getting much worse. At some point, the worst always stops getting worse. Hopefully, we are getting there!

Enter John Pierpont Morgan! When Morgan says you will go broke betting against America, my reading is that he is saying not America per se but the American system, which by and large is our system in Canada. It is a system with a long history of creating sustainable prosperity and wealth. More than any other system, it has over and over led to high performance/high employment/high standard of living economies. It is a system that drives innovation, creates competitive enterprises, forces efficient resource allocation and assures effective adjustment to change. It is a system that works, albeit not without its share of trauma, dislocation, pain and confusion.

When the economic news is bad and our leaders reassure us by telling us that the fundamentals are sound, they usually stop short of explaining just what the fundamentals are and why they are sound. The fundamentals are the components of the tried-and-true system Morgan is saying is no place, over time, for a bear. As bad as the news is, and it may be bad for a while yet, smart-money executives will heed Morgan and position their enterprises accordingly. When the gloom lifts, executives who did not run their enterprises as if Morgan was right are very likely to regret it greatly. Regrets will include some combination of weak competitive position, product line deficiencies, marketplace perception problems, insufficient management talent, poor supply chain arrangements, and weak banking and investor community relations.

For Canadian executives, Morgan’s ideas are worth contemplating not only because the American system is essentially ours but also because Canada has irretrievably tied its economic wagon to the United States. Free trade and a low dollar now have U.S. exports accounting for a whopping 35 per cent and growing of Canadian GDP; our merchandise trade surplus with the U.S. (the difference between the goods we sell them and the goods they sell us) is pushing an astonishing 10 per cent of GDP.

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The fundamentals that underlie enduring economic performance are present in Canada in spades. First, democracy. In a democracy, the people select their government on a one-person, one-vote basis, and those who contest elections tacitly agree to peacefully abide by the results and allow the winner to govern. As Churchill said, “Democracy is the worst form of government except for all those other forms that have been tried from time to time.” Stability, among other things, links democracy with economic performance; persistent instability is anathema to good economic performance. Democracy assures an orderly transition from one government to the next. The people have an orderly way of getting rid of a government they do not like. Changing governments in the absence of democracy always has the potential to disintegrate into an economy-crushing chaotic madhouse. Investors only commit funds to such regimes when the financial returns are high enough to justify it, and that is usually so high as to stifle economic activity. Canada’s democracy takes a back seat to no other.

Second, the rule of law. If an economy is to function properly, people, governments and businesses need the capacity to freely contract with each other and to enforce those contracts where necessary in an orderly fashion. Without the ability to contract and enforce contracts, the risks of doing business rise enormously. After the fact, many of us may not like the contracts we enter into, but there is no doubt the rule of law is alive and well in Canada. It is also a help to our economy that all are equal under our rule of law. Justice being blind is not only good for a society; it is good economics.

Third, free markets. In a free market, consumption, production and investment decisions are made based on prices, tastes, and whatever else under the sun players in the economy deem important at the moment. The evidence is unequivocal: Free-market economies outperform bureaucratically commanded and controlled economies by a wide margin. In a free market, consumer wants dictate production, profit potential drives investment, competition keeps products, prices and costs at the cutting edge and the penalty for being stubbornly unresponsive is failure. Adam Smith’s invisible hand is tough and uncompromising, but it delivers performance. Canada is firmly in the free-market camp; but we do pay somewhat for lagging the U.S.

Fourth, private ownership. The bulk of our economy is privately owned. Ownership focuses owners’ energies on taking care of assets, growing them in a prudent way and using them efficiently and effectively. The greater the degree of public ownership, the harder it is to make an economy perform. Canada has little to worry about in this regard; but again, we lag the United States.

Fifth, trustworthy money. Money is the grease that enables people, governments and businesses to easily exchange goods, services, labour and capital. Just imagine a day in your personal or professional life when the acceptability of our money would be in question! Where money is not unconditionally trusted for commercial exchange, economic activity at best bogs down, and in time, usually breaks down. In Canada, we have such confidence in the Canadian dollar that for all practical purposes we use it without thinking about it. Part of the bedrock of our long-term economic prospects is an absolutely trustworthy money and payments system. Even if we move to a closer, more formal relationship with the U.S. dollar, there is little chance that this state of affairs will not continue.

Sixth, competitive taxes. The greater the government tax take as a percentage of GDP, the greater the likelihood that economic performance will disappoint. Economic performance depends on effort, commitment and risk-taking; these in turn depend on after-tax incentives. Canada considerably lags the U.S. on taxes and the gap is growing; we should make tax reduction a dominant national priority. Notwithstanding, the after-tax financial returns still make working and doing business in Canada far better than just worthwhile–especially by the standards of many non-U.S. countries and after adjusting for health and other government services we receive.

Seventh, commitment to sound policy. Our policy authorities, including the Bank of Canada, are absolutely committed to doing everything within their powers to head off a serious recession or worse. Also to the point, they have good, data-based economic intelligence, understand how our economy works and have an impressive array of economic artillery in their arsenal. If you think the policy authorities in a country do not understand the situation and/or do not care, then it is time to really worry. That is not remotely the case in Canada or the United States.

Eighth, sensible regulation. Government red tape frustrates economic performance. Resources devoted to compliance are not available to satisfy customers, build competitive enterprises and so on. Canadians may feel our regulatory environment is excessive, but by international standards, we are better off than most.

Ninth, respect for diversity. Societies with a strong commitment to human rights and freedoms, openness, respect and inclusion generally have the stronger economies. There is always room to do better, but on this dimension Canada is clearly a global leader.

This economy will take a while to right itself, possibly much longer than is popularly believed and certainly hoped for at the moment. The downside of our normal business cycle has been greatly exaggerated by the debt and capital spending excesses of the late 1990s as well as the serious slowdown in the U.S. History also tells us that adjustment to major new workplace and product technologies like the computer chip, optical fibre, the internet and genetic engineering is never smooth; steam engines, power looms, railroads, telegraph, electricity, telephones, steel and automobiles all drove growth to new trajectories, but not without some serious downturns along the way. On the policy side, the authorities here and in the U.S. are making the right moves, but the hard reality is that this slowdown has a lot in common with a bad cold; recovery is just going to take time.

But there will be recovery, and do not bet against exaggeration on the upside. Our system works! It has delivered economic performance in the past and it will in the future. The fundamentals are sound; wise executives will be getting their enterprises ready for recovery now. Focus and discipline beat worry and anxiety every time.

The American social historian John Dos Passos was fascinated with the wealthy and influential. For executives, his words on John Pierpont Morgan from his 1938 trilogy, U.S.A., are worth heeding:

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Indeed! Opportunities are greatest when things look worst. Controlled boldness in the executive suite will pay off.

Enterprises can make a lot of headway when the economy is bad and markets are depressed. A good time to build is when materials are cheap! How well an enterprise does in the upturn will depend on the spadework it did during the downturn. The Chinese word for crisis is wei ji. Wei means danger; ji means opportunity. There may be plenty of wei in this economy, but wise executives will focus on the ji. Morgan’s heyday may have been 100 years ago, but it is still very much worth listening to him.