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Critiques of Goldman Sachs Miss Mark, Forget History

Nor was there anything to amaze the judicious in the discovery that high government officials had repeatedly accepted Morgan's largess. The trick of putting such officials under obligation is one which the big bankers have practiced from time immemorial. --The Nation, June 3, 1933
Everyone loves a villain. Lex Luthor, the Joker, Agent Smith. The bad, in its eternal war with the good, makes the world agreeably dualistic and easy to understand. Judging from the current zeitgeist, we can now add Goldman Sachs to our list of favorite villains. Take the cover story in the latest New York Magazine, which asks simply whether the investment bank is evil.

This won't do. Not because such views are too hard on Goldman and its alleged influence on politics and government, but because they're too soft in analyzing Wall Street's historically documented influence on politics and government. Because such views reduce something complex -- how high finance really operates in this country -- to the level of a comic book duel. And because blaming the financial crisis on the "bad" guys, like so many terrorists in pin stripes, obscures that the "good" guys are equally culpable.

Let's get something straight -- Wall Street was weaned on vice. In the early 1800s securities trading on New York's fledgling stock market was routinely rigged, while dubious practices such as "forward trading" were common. Land speculators and curbstone brokers abounded. Prominent financiers such as merchant William Duer, who ripped off Revolutionary War vets and triggered the Panic of 1792, were protected by the likes of Alexander Hamilton, our first Treasury Secretary.

Indeed, financiers and government officials have always worked hand in hand. When the U.S. needed to fund the War of 1812, then-Treasury Secretary Albert Gallatin enlisted investors such as fur mogul John Jacob Astor to buy bonds. Later bankers such as Nicholas Biddle openly dabbled in presidential politics, while presidents attacked bankers they viewed as political enemies, sometimes sowing more financial panic. Politicians often did the dirty work themselves, as one Sen. Kimble of New York did in trying to corner the market in shares of the Harlem Railroad. But all of this was just a warm-up.

The figure cited up top is, of course, financier J. Pierpont Morgan, founder of J. P. Morgan & Co. and Chase Manhattan Bank. The House of Morgan, as it was called, was Goldman Sachs on steroids, and its reach extended deep into the corporate and political establishments of its time. Morgan bankrolled Grover Cleveland's election as President, who had worked for a Morgan-affiliated law firm. In the 1890s, Morgan and his fellow robber barons would bail out the U.S. economy by underwriting the sale of government bonds, largely to European investors. He repeated the trick in 1907. Money needs government because government needs money.

Bankers also financed the presidential campaign of William McKinley, who returned the favor once in the White House by moving the nation's currency off the silver standard and onto gold, which consolidated their control over the capital markets. Heck, the entire Federal Reserve system was dreamed up in 1910 on Jekyll Island off the Georgia coast by a Rhode Island senator and reps from the Morgan bank, James Stillman Rockefeller's National City Bank and Kuhn, Loeb & Co., Morgan's chief rival on Wall Street.

"If America is circling the drain," Matt Taibbi wrote in a recent, and widely read, indictment of Goldman Sachs, the investment bank "has found a way to be that drain -- an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy."

It's an old (and justified) complaint, grounded in what labor historian Steve Fraser has called fear of the "eclipse of the free market by a private command economy ministered to by lugubrious men in the white shoes." Taibbi's mistake is in explaining away the activities of Goldman Sachs, or the House of Morgan, as an "unfortunate loophole," a blemish on the otherwise creamy visage of "democratic capitalism."

That's not how it works. Like it or not, the tension between finance and government is a central feature of American economic life. Money men have always conspired with politicos, blurring the line between laissez faire and crony capitalism. It doesn't make it right, of course -- just complicated. Organized greed and disorganized democracy are energetic partners, like the bulls and bears cavorting on Wall Street, and Goldman Sachs is but the latest wayward offspring of that coupling.

There are no villains. No heroes, either.

Image of J.P. Morgan courtesy of the Library of Congress.