Posts Tagged ‘Great Depression’

How Today’s Crisis Changes Our View of the Past: Plus Two New 5-Star Amazon Reviews

May 1, 2009

One of the things that I did not anticipate about the response to Creative Capital is the degree to which it has been resonating in a downturn. Timing, like in most endeavors, is a pretty crucial factor in book publishing. And I remember thinking before Creative Capital came out in the spring of 2008 that I was glad the U.S. economy still seemed to be doing well.

But then the economy began to lose steam over the summer. The housing market continued to deteriorate. And before you know it, it was September and Lehman Brothers had gone bankrupt and Merrill Lynch sold itself in a fire sale. The U.S. had plunged into a deep and scary recession.

Suddenly, America, a nation of future-oriented amnesiacs, became obsessed with history, and, in particular, with the history of economic crisis. The surprising thing, for me, was that the financial panic changed the way I thought and talked about the book, and the way people viewed it as well.

Virtually overnight, my chapters on the Great Depression, and World War II, and my chronicling of multiple recessions and their inter-relationship with the nation’s entrepreneurial economy in the post-war period took on a new significance. True, one of the key arguments I make in the book was that the venture capital industry itself was born in response to the Great Depression. And that Silicon Valley was created in the midst of the nasty recession of the mid-1970s.

But the more I thought about today’s troubled times, the more I came to see that the history of innovation and economic downturns were in some ways inextricably linked. I came to see that some of the most successful companies were hatched or developed during a downturn. I developed a somewhat contrarian perspective based on my study of the past. And those insights continues to shape my work as a journalist today.

All this is a way of saying I am gratified that readers of the book agree with me that the story of Georges Doriot and the instrumental role he played in building our nation’s entrepreneurial economy still has lessons to offer us in today’s turbulent times. On that note, please check out these two reviews from my Amazon page. Both reviewers gave Creative Capital five stars. One is written by Robert Ackerman, a successful venture capitalist who is managing director and co-founder of Allegis Capital. Their reviews must be having a positive impact. Amazon says there are only three copies of my book left in stock!

The Man of Great Vision!, April 30, 2009
By maryann davenport “Maryann D.” (Southern California) – See all my reviews
Spencer Ante’s biography of Georges Doriot left me cheering my head off! He would look at the mistakes of today’s politicians and bank leaders and tell them exactly what they had done wrong and why and it would not be double talk. This is a great read about a true genius of business who came here from France and tried to teach how to be effective capitalists instead of idiot pretenders. It’s too bad we didn’t learn when we could have. We wouldn’t be in this mess now.
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A Must Read – If you care about Innovation and Growth, April 29, 2009
By R. Ackerman “Entrepreneur” (San Francisco) – See all my reviews

In his book Creative Capital – Spencer Ante not only captures the amazing story of a French immigrant (Georges Doriot) and his profound contributions to the United States in business education, government service and launch of the systemic US venture capital industry, he also distills the essence of entrepreneurism and its pivotal role in innovation and the growth of the US technology industry. By embracing creative ideas and pro-actively managing the risk inherent in bringing new technologies to market, Doriot demonstrated that economic growth and wealth creation are at the heart of the venture capital model and two sides of the same coin.

At a time when the US economy is looking for direction and the keys to its future growth and sustainably, Ante’s book is a must read for every politician, business leader and investor who is genuinely looking for the levers through which we can grow and extend our competitive advantage in a global economy. After reading Creative Capital, the question that comes to mind is “how can we proactively encourage more of the innovation that Doriot helped bring to life”.

Ante’s style delivers a great story in an easily readable format punctuated with data and facts that draw clear comparisons to the economic challenges we face to day.


Part 8: Slouching Through the Great Depression

December 4, 2008

Chapter Five
“Slouching Through the Depression”

Read Part 1, Read Part 2, Read Part 3, Read Part 4, Read Part 5, Read Part 6, Read Part 7

Over the course of his long career, Doriot participated in many committees. And he usually despised them. “A committee is an invitation to do nothing,” was one of his famous maxims. But perhaps no committee was as important as the New Products Committee. It wasn’t so much the work of the Committee that mattered, though they did undertake a series of important studies. More so it was the fact that it assembled the brain trust of individuals who would eventually pioneer the venture capital industry.

On November 8, 1940, the New Products Committee convened its first annual meeting to discuss the results of its research. One subcommittee concluded that although capital existed for new ventures, there was a need for an “organization and technique to appraise opportunities for specific enterprises.” Doriot’s subcommittee concurred that “the great need is for qualified technical analysis of situations, in order that venture capital investors may proceed with a reasonable degree of assurance.”

The outcome of the Committee was the creation of the New England Industrial Foundation. The Foundation’s goal was not to invest in new enterprises but to create a sort of industrial research organization to “appraise opportunities for scientific enterprises in the New England area.” After spotting those opportunities, the Foundation hoped existing New England businesses would then invest in and nurture them.

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Around the same time, Doriot joined forces with another group of elite New Englanders working on the same problem: Enterprise Associates. Led by William Coolidge, an American physicist who in 1916 invented the prototype of modern X-ray technology, Enterprise Associates took a more direct approach than the Foundation, raising $300,000 from twenty stockholders to finance the final stages of promising research projects.

William D. Coolidge
[William D. Coolidge examining his hot cathode, high vacuum X-ray tube, 1913.]

Doriot joined the board of Enterprise, along with his Business School assistant William H. McLean, and a few others. Throughout 1938 and early 1939, the stockholders and officers of Enterprise met with various entrepreneurs, looking for ideas to finance. On May 7, 1940, they held a dinner where they learned about a young chemical company called National Research. They liked the idea and backed the firm.

Then history threw a wrench in their plans. On May 10, Germany invaded Luxembourg, Belgium, the Netherlands, and France, ending the so-called Phony War. Right after Germany unleashed its blitzkrieg on the rest of Europe, most of the people who attended the Enterprise dinner called up William Coolidge and told him they wished to withdraw from their participation in the financing of National Research. Coolidge refused to withdraw. Since he had made a commitment, he would follow through with it. Doriot, feeling bad, loaned them an assistant to help, and later joined National Research’s board.

But it made little difference. The United States was facing a far graver risk—global fascism—and she needed to devote all of her energies and resources to fighting this dangerous and growing scourge. Enterprise Associates and pretty much everything else unrelated to the war were put on the back burner.

Still, the experience of Enterprise Associates taught the venture industry’s pioneers an important lesson. “[The Enterprise] experience made Merrill Griswold and Karl Compton realize that it might not be a good idea to have a company with only enough money to find and study projects, then ‘to pass the hat’ for capital to start the new company,” explained Doriot. A company should have its own capital, they concluded. That way, it would be insulated from events outside of its control.

For the time being, though, the war had snuffed out the formation of the nation’s venture capital industry just as it was getting off the ground. Six years later, Compton, Doriot, and other members of the New England brain trust would revive their plans to create a regional venture movement. But first, they all had a war to fight.

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Part 7: Slouching Through the Great Depression

December 2, 2008

Chapter Five
“Slouching Through the Depression”

Read Part 1, Read Part 2, Read Part 3, Read Part 4, Read Part 5, Read Part 6

In 1938 and 1939, various groups of New England industrialists and financiers became obsessed with fixing the nation’s risk-less economy. One of the most prominent organizations was the New England Council, a group of politicians, businessmen, and educators, which formed in 1925 to “improve economic conditions for New England.”

Within this group, there was a growing awareness that New England’s universities and industrial research labs were a valuable asset distinguishing the region from the rest of the nation. The most impressive asset in the region was MIT.

Karl Compton
[MIT President Karl Compton]

In 1930, Karl Compton, then the head of the physics department of Princeton University, accepted an invitation to become the president of MIT. Under Compton, MIT redefined the relationship between science and society. When Compton took office during the Great Depression, science was attacked as a source of social ills.

Over the next twenty-four years, Compton worked tirelessly to strengthen basic scientific research at MIT and to promote the importance of science to a skeptical and hostile public. Compton advocated a broad education for scientists, one that responded to the needs of the time.

In 1934, Compton proposed an ambitious program he called “Put Science to Work.” The campaign called for the public financing of “scientific and engineering research looking toward better public works for the future.” Instead of blaming labor-saving technology for society’s ills, Compton proposed the bold idea that science gave birth to great new industries.

“New industries are like babies: they need shelter and nourishment, which they take in the form of patent protection, financing, and the chance of reasonable profits,” wrote Comptom in a long essay promoting his campaign. “But, before all, they need need to be born, and their parents are science and invention.”

The egalitarian ethos of the New Deal stymied Compton’s campaign to finance research at elite universities like MIT. So Compton turned his attention to the regional level. In 1939, responding to a suggestion by Compton, the New England Council formed a committee to examine how new products might help reverse the terminal decline of the region’s textile and garment industries.

The New Products Committee brought together eight of the most progressive minds in America, including Compton, Doriot, Ralph Flanders, a mechanical engineer who rose to become head of Vermont’s Jones & Lamson Machine Company, and Merrill Griswold, president of Massachusetts Investors Trust. Doriot was charged with heading up one of several subcommittees; his was called “Development Procedures and Venture Capital.”

Was this his new impossible mission?

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Part 6: Slouching Through the Great Depression

December 1, 2008

Chapter Five
“Slouching Through the Depression”

Depression-era tax policies had the unintended consequence of creating a “risk-less economy.”

Read Part 1, Read Part 2, Read Part 3, Read Part 4, Read Part 5

In his 1933 inauguration speech, Franklin Delano Roosevelt famously told the nation, “Let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

Thanks to Roosevelt’s bold and firm leadership, the United States was no longer in fear of dissolving into revolution or anarchy. But although unemployment declined and the economy advanced steadily throughout Roosevelt’s first two terms, the New Deal failed to completely pull the United States out of the depression.

The median joblessness rate during the New Deal was 17.2 percent, and until the United States entered the war, it never fell below 14 percent. The country was still in the grip of fear, but it was of a different sort. It was a profound fear to take economic risks.

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The fact is, the crash of 1929 inflicted deep scars on the psyche of the nation—scars that would not heal until after the war. If Americans were afraid to deposit money in a bank, they were surely in no mood to invest in securities or any other venture that wasn’t as solid as Manhattan bedrock.

Despite all the positives of the New Deal, and there were many, Depression-era tax policies had the unintended consequence of creating a “risk-less economy.” A string of tax hikes and new taxes extinguished the nation’s sparks of innovation.

On top of the Revenue Act of 1932—one of the largest tax increases in American history, which doubled the estate tax, increased corporate taxes by almost 15 percent, and raised taxes on the highest incomes from 25 percent to 63 percent—the Revenue Act of 1935 raised new taxes on higher income levels, corporations, and estates. The Revenue Act of 1937 taxed short-term capital gains as ordinary income. And in 1936, Roosevelt added a higher top rate of 79 percent on individual income greater than $5 million—a rate that was increased again in 1939.

By 1937, the undistributed profits surtax severely restricted the ability of small companies to build up their capital out of earnings, and the large surtax on individual incomes discouraged rich people from investing in new companies.

Great Depression

At the 1936 Investment Bankers Association (IBA) conference, MIT president Karl T. Compton warned that the new surtax illustrated “how government regulation has been directed almost entirely at the curbing of exploitation and has generally ignored and sometimes even penalized attempts toward technical progress.”

The result was that more and more funds flowed into super-conservative investment trusts, and to insurance companies and pension funds. By the 1938 IBA convention, the financial community began to express deep concern about the nation’s atrophied capital markets.

“If investors throughout the land, large and small, refrain from purchasing unseasoned securities of a young industry and refuse to take a business man’s risk, where will new industries obtain needed capital, and would not such a development slow down the economic progress of the country?” asked Dr. Marcus Nadler, a New York University finance professor.

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Part 5: Slouching Through the Great Depression

November 28, 2008

Chapter Five
“Slouching Through the Depression”

Read Part 1, Read Part 2, Read Part 3, Read Part 4

The brawl between Doriot and Curley was part of larger battle brewing between the democratic New Dealers and the republican business establishment. Most of the business community initially supported Roosevelt’s New Deal but after the government passed the Glass-Steagall Act of 1933, prohibiting commercial banks from owning brokerages, and then created the Securities and Exchange Commission in 1934, Roosevelt began to lose Wall Street. It didn’t hurt him politically, though. The country wanted drastic action and Roosevelt gave it to them in spades.

Indeed, while most parties lose support in the first midterm elections, the Congressional elections of 1934 gave President Roosevelt large majorities in both houses, sparking a second wave of New Deal legislation. These measures included the Works Progress Administration, which set up a national relief agency that employed two million family heads; the National Labor Relations Act, which established the federal rights of workers to organize unions, to engage in collective bargaining, and to take part in strikes; and, most importantly, the Social Security Act, which created an economic safety net for the elderly, the poor, and the sick.


Contrary to Doriot’s inane predictions, the New Deal helped revive the morale of the nation as well as the economy. After unemployment peaked in 1933 at 24.9 percent, it fell for three consecutive years until it bottomed out in 1937 at 14.3 percent. Although still a high level of unemployment, Roosevelt’s policies clearly brought significant relief to a nation desperate for the chance to earn an honest day’s work.

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Doriot also began to benefit personally during these years as dozens of companies sought his guidance. On October 25, 1934, the Kansas City Southern Railway Company hired Doriot to become a director, his first board-level position since his days with Willy Wiseman at New York Foreign and Development Corporation. In December, railway car maker Budd Manufacturing also hired Doriot as a director, and he soon after was elected to the company’s executive committee. In March of 1935, Doriot was made vice president of Budd Manufacturing, and in September, Budd subsidiary Budd Wheel offered him yet another director position. Lastly, in October, the Massachusetts Investors Trust, one of New England’s largest investment managers, hired him as a consultant.

At the end of 1935, the head of Budd Manufacturing cabled Doriot, asking him to sail immediately for Europe. Budd had big plans for Europe and wanted Doriot’s help. But the offer came at a bad time. At Dean Donham’s request, Doriot had taken over the required first-year class in industrial management that year, although the Dean had asked him to teach it as a version of his Manufacturing class. With a staggering 450 students, it was the biggest class of his career, and Doriot knew Dean Donham would not release him for an extended period.

[The first diesel-powered train in America built of stainless steel by E. G. Budd Manufacturing Company. On May 26, 1934, the Burlington Pioneer Zephyr made its record breaking trip from Denver to Chicago, a distance of 1000 miles, in approximately 13 hours at an average speed of 77 mph.]

Even though Doriot was unable to accept the offer from Budd Manufacturing, it didn’t stop him from agreeing to other outside assignments. In 1936, Doriot became a consultant to Ladenburg, Thalmann & Company, a New York–based investment bank. In 1937, Thornley & Jones, Incorporated elected Doriot to its board. Then in 1938 and early 1939, Doriot became director of more than ten other companies, including the utility, Standard Power & Light Corporation, and manufacturing concerns such as McKeesport Tin Plate.

Dean Donham allowed faculty to perform outside consulting as long as it did not interfere with the main work of the School. It was his best way of keeping low-paid professors on staff. Doriot’s astonishing amount of outside work pushed the limits of the School’s rules. But Doriot was one of the most popular professors, and he was tenured to boot. Since Doriot was a workaholic with no family responsibilities to divert his energies, he managed for the most part to pull off the balancing act.

Moreover, Doriot continued to develop innovative teaching methods that pleased Dean Donham. In 1937, Doriot adapted the approach of his Business Policy and Industrial Management courses to a new second-year course called simply “Manufacturing.” Unlike his Manufacturing Industries course he taught as an assistant professor, the purpose of this new course was to “train the students in the thorough analysis of and in the administrative control of a manufacturing company.” Emphasis was placed on “the study of new products, new ideas, new developments and new questions of research,” all under Professor Doriot’s “imaginative and stimulating guidance.”

For the next forty years, Professor Doriot would use this course as his intellectual sandbox, training more than six thousand students in the arts of self-improvement and creative management.

Eventually though, Doriot did make a few concessions. There were just too many balls to juggle. Between 1936 and 1938, he resigned from six, or about a quarter, of his outside positions, including those at N. W. Ayer & Son, Budd Manufacturing, Ladenburg, Thalmann, and Thornley & Jones.

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Part 4: Slouching Through the Great Depression

November 26, 2008

Chapter Five
“Slouching Through the Depression”

Read Part 1, Read Part 2, Read Part 3

Doriot ended 1933 by firing another salvo—this time at his homeland. Like many immigrants, Doriot maintained a love-hate relationship with his home country. But Doriot’s feelings were more extreme than those of most immigrants.

“Doriot in many ways was the most schizophrenic Frenchman I’ve ever met,” says colleague and friend James F. Morgan. “He would go back and forth for this admiration for French wine and cuisine and the French language. But the French capacity to make very simple things complicated drove him nuts.”

And now, for the first time, Doriot publicly expressed his disgust with France. Throughout the year, Doriot had been contributing a quarterly column for a French magazine called La Revue des Vivants, the Review of the Living Ones. In his December column, Doriot attacked the French government when it refused to pay a $20 million interest payment on her wartime debt to America.

Calling his country a “frivolous nation,” Doriot was outraged that France would not pay this relatively small sum to a country who had come to its aid when it needed it most. “Without exaggeration,” he thundered, “one can safely say that during the last four or five years France has done everything she could to have America become disgusted with her.”

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In the beginning of 1934, Edna met a gentleman who owned a very nice duplex apartment for rent on the top two floors of 101 Chestnut Street in Boston. Although Edna declined at first, explaining that it was too expensive, the gentleman clearly wanted them to take the apartment, lowering the rent so that it was more affordable. The Doriots soon moved in, and Edna picked up a few new items to furnish their new home.

The couple liked the apartment but the new home did not brighten Georges’s spirits very much. For much of that year, Doriot was in a “rather disinterested mood,” as he described it. “I have been in Boston trying to act as a nice teacher not burdened with any new ideas,” Doriot confided in Strauss. “There has been no excitement up here, and I am looking for excitement.” However, as the mid-term elections of 1934 heated up later that year, Doriot’s life became entangled in an unusually public affair, giving him more excitement than he bargained for.

New Deal

In a speech he gave in Philadelphia on October 18, Doriot denounced the very basis of the New Deal. “The New Deal will go down in history as one thing that has done more harm to the morals of the nation,” said Doriot. “The idea that all men are born equal and that it is a desirable thing for everybody to be interested in government is wrong and fantastic, and sooner or later we must come to the conclusion that those who pay the taxes have more right to govern than those who don’t.”

These few sentences are probably the dumbest that Doriot ever uttered, and democratic politicians running for office picked up the remarks like they were a gift from the political gods. In a rare lapse of judgment, Doriot had crossed the line from iconoclastic to idiotic. In a speech in Boston on November 2 before a throng of supporters, James M. Curley, a three-term mayor of Boston who was running for governor of Massachusetts, used Doriot’s remarks on the New Deal to criticize Harvard University.

Looking over his throng of supporters, Curley quoted Doriot’s comments on the New Deal and then launched his attack.

“This is a most unusual statement for a supposedly educated man and coming from the assistant dean of Harvard University Graduate School does not reflect credibility upon this famous institution of learning. The dean overlooks the fact that the New Deal has been the most potent contributing factor for a higher moral order in America that has taken place in the past 10 generations, in that it has taken children out of industry, permitting them to develop mentally and physically until such time as they are able in some measure to begin life’s battle. . . If a knowledge of hygiene and a respect for lawfully constituted authority which is the cornerstone of our form of government is to be classified as immoral then Professor Doriot is guilty of the most stupid statement that a supposedly intellectual man can make.”

Curley won the election, as did many other Democrats. And Doriot learned his lesson. Never again would he attack such a prominent political figure as FDR in such a public way. Instead of lashing out, Doriot would apply his influence and charm behind the scenes.

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Part 3: Slouching Through the Great Depression

November 25, 2008

Chapter Five
“Slouching Through the Depression”

Read Part 1, Read Part 2

“Bankers, and not the government, should determine what industries are worth saving.”

In the 1931–1932 school year, outside interests continued to draw Doriot’s attention away from Harvard. In particular, Doriot was closely monitoring the progress of his Parisian business school, which was off to a strong start. The French Department of Education had awarded the school a first-class rating, applications were up, and almost all of the first-year students “were booked for important positions, sometimes as vice presidents of corporations.”

On January 12, 1932, Doriot was invited by Major General Fox Connor to give a lecture to a large audience of regular Army, National Guard, and Reserve officers at Harvard’s Baker Memorial Library. After several years of lectures, Doriot had established quite a reputation in the military.

“There is one thing about Professor Doriot that has impressed me a great deal,” said one Colonel in his remarks introducing Doriot. “He is different from other professors in that he is intensely human and I think the affection that has been shown to him by the Harvard graduates, not only when he is here but when they are talking to me about him, is really very touching and he should be very proud of it.”

On this January day, Doriot’s subject was “Industrial Mobilization in a Major Emergency.” Although Doriot envisioned various ways of promoting peace, this lecture and others he gave over the next few years suggested Doriot believed war was always on the horizon. “We must formulate and perfect our preparedness plans in peace-time for war-time needs,” urged Doriot. “In peace-time an order for supplies is delayed in delivery or fails of execution but no one suffers seriously or dies as a result. In war-time the delay in delivery of supplies for only a week may cause the loss of countless lives.”

Doriot ended the speech by calling for the creation of a “chief of natural resources as well as a chief of manufacturing” to help manage the coordination of wartime production needs. But, as with so many other visionary speeches he had delivered over the years, Doriot’s warning and calls for action fell on deaf ears and empty government coffers.

At the end of 1931, some of the country’s leading companies began to court Doriot, including N. W. Ayer, the first advertising agency in the United States., In November, the firm offered Doriot a job. Founded in Philadelphia in 1869, N. W. Ayer coined some of the industry’s most enduring jingles, including Morton Salt’s “When it rains it pours.”

Doriot expressed hesitation about the offer to Lewis Strauss. “This does not mean I have decided to go with them,” wrote Doriot, “but I have realized that they were in very close touch with many companies that might require good banking connections, and after all, since I am still free and ‘my soul has not been sold’! it is normal that you should be the good banking connection.” In early 1932, after careful consideration, Doriot declined to take the job, but he did accept his first consulting job.

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For Doriot, the rest of 1932 did not bring much excitement. The real action was in Washington. All eyes were on the nation’s capital as it was consumed with the presidential election of 1932, pitting the incumbent Herbert Hoover against the urbane democratic governor from New York, Franklin Delano Roosevelt. It was landmark election that realigned the political landscape of America, ushering in a new era of activist government. And Doriot was eager to be involved.

After becoming a full professor at Harvard, Doriot began to take a greater interest in the nation’s public life. In his speeches before the military, and in various articles he wrote or committees that he joined, we see a man becoming increasingly interested in using his power to shape public policy. One theme emerged as a leitmotif: like many businessmen of the day, Doriot was a critic of big federal government. “American businessmen are now handicapped as a consequence of the stupid regulation which now exists,” said Doriot to one reporter in 1932.


Doriot was particularly opposed to the government provision of direct economic relief to the unemployed. In January of 1933, Doriot weighed in on the issue in a four-page article he co-wrote for New Outlook called “The Motorist Afoot.” The story focused on the emergence of two Depression-era taxes: sales and gasoline. Mississippi was the first state to adopt a sales tax, and a dozen other states were contemplating similar measures “as a way out of the general depression and the distressed conditions of state finances.”

The tax on gasoline was the next step, to help Mississippi and other states refill their coffers. Doriot favored the sales tax but in his essay he criticized legislatures that adopted gas taxes to build and maintain roads, and then diverted the funds for direct unemployment relief. “The fallacy of taking revenue that is now providing worthwhile employment of public benefit and giving it to those who are unemployed is so obviously and utterly absurd that one marvels howl egislators—supposedly representatives of the thinking citizens—can contemplate such measures and even carry them into effect.”

In March, Doriot wrote Lewis Strauss and asked him to open a bank account for him. What seems like an unusual request today was actually a shrewd maneuver. In the early 1930s, the banking industry was in the throes of a crisis. With hundreds of banks declaring insolvency, Doriot tapped Strauss for his knowledge of this troubled industry.

“Would you be willing to open an account for me in a bank which you think has a fair chance of remaining in existence for a period of months?” asked Doriot. “If the bank you pick should close two minutes after the account is opened, I shall not feel badly but shall merely come to the conclusion that it could not be helped.” The amount that Doriot deposited in the account showed the meagerness of his savings. It was only $3,500, less than a year of salary.

In June, at the height of the Depression, Doriot stepped up his attack on big government by slamming one of the key legislative proposals of the New Deal—the National Industrial Recovery Act. Passed on June 16, 1933, the law created the National Recovery Administration (NRA), an executive agency with the power to create “codes of fair competition”—codes which were intended to reduce destructive competition and to help workers by setting minimum wages and maximum weekly hours.

The NRA, symbolized by the blue eagle, included a rash of regulations that imposed pricing and production standards for all sorts of goods and services. But the codes allowed cartels to be established in many industries. And as NRA-associated firms increased their prices, sales fell, employment fell, and the recovery stalled.

Most economic historians today consider the NRA to be a resounding failure but many respectable business groups praised its passage, including the U.S. Chamber of Commerce and leading labor organizations. Not Doriot. The professor believed in the collective wisdom of the market, not government bureaucrats.

In a story published in the Boston Transcript titled “A Dissenting Voice on the Recovery Act,” reporter W. P. Black devoted the whole piece to airing the Doriot’s views, who declared the act as nothing more than a bluff, a measure designed “to scare the manufacturers and make them behave.”

To carry out its provisions, Doriot said the United States would have to go “all the way to Bolshevism, which none but an insignificant minority wants in America.” Doriot criticized many aspects of the act but the worst feature for him was that it gave the government the power to lend money to struggling businesses. “Bankers, and not the government, should determine what industries are worth saving,” argued Doriot.

This time, Doriot hit the nail on the head. The professor correctly saw that the newly elected Roosevelt—and the government—had overstepped their bounds. But Doriot did not have to wait long to be vindicated. The law was so poorly conceived that on May 27, 1935, the Supreme Court overturned the NRA in a unanimous decision, ruling that it infringed upon states’ authority and gave powers to the executive branch in violation of the Constitution.

The NRA quickly stopped operations. Doriot’s campaign against the agency marked the first of many battles he would wage against the federal government, and what he felt were its misguided intrusions into the free market economy.

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Part 2: Slouching Through the Great Depression

November 24, 2008

Chapter Five
“Slouching Through the Depression”

Read Part 1

In January 1931, after the Doriots returned to Cambridge from their unorthodox honeymoon, Georges needed to find a new place to live with his wife. They soon found an apartment in Cambridge. The first Sunday after they moved in, a throng of friends and colleagues called on them.

Doriot, the self-described “most unsociable bachelor,” never led much of a social life, allowing most of his evenings to be consumed by work. This history made his colleagues and their wives even more curious about Doriot after he got married. Friends and coworkers continued to drop by their apartment to see the quirky professor and the woman who had agreed to marry him.

So, after a few weeks, having realized that “all my evenings would be wasted and I could not do any work,” the Doriots cancelled their lease and escaped to the Hotel Bellevue in Boston, where they stayed while Edna looked for a new apartment less central to the Cambridge social scene.

Even though Doriot was a professor, he and Edna led a spartan lifestyle. In the early 1930s, Doriot made about $4,000 or $5,000 a year, a comfortable middle-class income. But that security was compromised by the obligation he felt to regularly send money home to help take care of his parents and sister.

Still, the Doriots had it better than most Americans. In 1931, when the Great Depression kicked in, the U.S. unemployment rate surged to 16.1 percent, tripling from 3.1 percent in 1929. By 1930, breadlines broke out as desperate people lined up for free food doled out by states and cities.

Hoovervilles—those shantytowns comprised of hundreds of shotgun shacks cobbled together with cardboard boxes, egg crates, or corrugated tin—began sprouting across the American landscape. If Georges had strolled by Central Park’s Great Lawn on a visit to New York, he would have gaped at a vast squatter’s village with thousands of “utterly spiritless” people, in the words of writer Joseph Mitchell.

At least Georges and Edna had a job, a roof over their heads, and money to pay for food and clothes. But they still pinched every penny. At the Hotel Bellevue, Georges and Edna studied the breakfast menu very carefully to see whether they could find a breakfast that would feed the both of them. Porridge, they learned, was the best choice. As for beverages, they concluded that tea was preferable to coffee. Coffee would usually yield one cup of drink, but a teapot provided enough water for two cups.

Luck, that mercurial commodity, was in short supply during those bleak times. One day, Edna splurged and bought a bigger heater for their living room, but when Georges placed the heater on top of a glass table, the glass broke.

A short while later, Edna found an attractive apartment at 5 Arlington Street in Boston. It was a second floor unit with a balcony overlooking a garden and three high-ceilinged rooms. Most importantly, it was finally a place they both liked. “At the time there were few automobiles running on Arlington Street and we were not annoyed by their noise or smell,” said Doriot.


Late in 1931, Doriot became transfixed with the idea of globalization, or as he called it, the “international mind.” He viewed the increasing interdependency of the world as a means of maintaining peace. In a series of articles and speeches, Doriot developed these ideas, and his remarks received significant coverage by the press.

In one essay picked up by various U.S. newspapers, Doriot boldly called for the internationalization of all transportation systems in Europe—air, railroads, and steamships—as the most effective way to promote peace in that war-ravaged continent. By merging these transportation lines into a unified system owned by a group of international investors, Doriot argued that it would create a more efficient transportation network and, more importantly, “make national secrecy impossible and tend strongly to minimize national jealousies.” World peace could not be produced through political negotiations, he felt, but through industrial cooperation and coordination.

In November of 1931, Doriot expanded upon these ideas in an address he gave to the Two Hundred Fifty Associates of the Harvard Business School, a group of well-heeled donors. The address, titled “French and German Crisis,” offered a comparative analysis of the strengths and weaknesses of the French and German economies.

Doriot praised Germany as “clever, very clever,” arguing that the nation’s reindustrialization was “undoubtedly one of the outstanding feats of the century” and that “others should adapt themselves to it rather than try to duplicate or compete.” France, on the other hand, was following the “habit…of not talking very much about their troubles.”

In order to keep France and Germany from waging war against one another, Doriot proposed the formation of an international bank that would be given the power to “control and investigate all international loans.” By this means, loans intended to finance military purposes would be greatly hindered, thus preventing the suspicion that leads to a secret run-up to war, as had happened during the Great War.

Some of Doriot’s high-minded ideas would eventually become realities, but once again he was too far ahead of his time. In just a few years, European nationalism would reemerge with a vengeance, making a mockery of his pleas for cooperation.

Forget the First 100 Days; It’s the 90-Day Interregnum That Matters

November 23, 2008

In the agonizing four-month interval between the November 1932 election and the inauguration of President elect Franklin Roosevelt in March 1933, the American banking system shut down completely.

New York Times columnist Paul Krugman wrote a great column about this issue, in which he wrote that “the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now.”

Outgoing President Herbert Hoover repeatedly beseeched FDR to do something, anything, to calm the public. FDR demurred over and over again. Fear and panic filled the void.

[FDR on inauguration day: from the Life archive on Google.]

Back in 1933, Americans across the country, realizing that Washington was stuck in a state of deadening paralysis, “scurried to their banks, queued up with bags and satchels, and carted away their deposits in currency or gold,” wrote historian David M. Kennedy in his Pulitzer Prize winning book, Freedom From Fear. To stem the panic, states declared banking holidays. By inauguration day, government decrees had shut down every bank in 32 states.

Today, I don’t think the banking system is as bad off as it was in 1933, though it does appear to be weakening. But we do face a whole new raft of risks.

One, we are still facing a liquidity crisis. Without a federal stimulus packages or some sign that the government is willing to pump up the economy, credit markets could remain paralyzed and banks could remain unwilling to lend.

Two, we are still facing a crisis of confidence. Deflationary powers could strengthen and wipe out even more jobs. Without strong government action over the next 90 days, the stock market is likely to continue to drop, zapping wealth and making consumers less likely to spend, forcing more companies into restructuring or bankruptcy.

Three, we are facing a car crisis. Washington needs to apply its power to force a restructuring of the automobile industry–and avoid a chaotic flameout could send unemployment into near–Depression era levels.

The question is whether or not Detroit–a crucial industry and national security asset–needs to be put through bankruptcy in order to do so. The emerging consensus seems to be, yes, a pre-packaged and orderly bankruptcy would be the best course of action, and I tend to agree with that. Congress did the right thing by denying Detroit a bail-out. Now, it needs to help revamp Detroit and create an industry that is truly competitive. But acting now is crucial. This week, two of the three CEOs of U.S. car companies basically admitted they are teetering on the edge of bankruptcy.

Against this darkening outlook, it comes as a welcome relief to see Barack Obama accelerating his transition plans and proposing a more aggressive stimulus package. It shows that he is not following one lesson of FDR: stiffing the American public for political gain. Hardly anyone remembers that FDR put politics over the American people before he took over office but his lack of action caused a lot of pain for a lot of people.

As Kennedy writes, one of FDR’s advisors once said that FDR “either did not realize how serious the situation was or . . . preferred to have conditions deteriorate and gain for himself the entire credit for the rescue operation.”

Let’s hope the Republicans work with Obama and the Democrats to craft a package that can be signed into law the day he takes over from the Bush Administration. (Or maybe Congress could pass some smaller mini-stimulus package ahead of a big bold Obama package.)

Obama campaigned on the premise that he would put the people before politics. That solving America’s problems was more important than scoring ideological or political points. This is his first big test and chance to prove that he was not blowing smoke.

Part 1: Slouching Through the Great Depression

November 21, 2008

It’s experimentation time at the Creative Capital blog! With the U.S. economy facing its worst economic crisis since the Great Depression, my thoughts have returned to the chapter I wrote on my book about that dark period in our nation’s history, “Slouching Through the Depression.”

There are many lessons to be learned from this time. And now that we’ve all suddenly become students of history, I want to share some of the ones I’ve learned. So, with the blessing of my publisher Harvard Business Press, over the next week or so I am going to serialize Chapter 5 and publish it on this blog.

My hope is that the experiment sparks a conversation about that period and gets us thinking about how we can avoid slipping into a deeper economic funk and lead the country back onto a path of prosperity.

As we pick up the story, Georges Doriot, is a 30-year-old native of France who transformed himself over the course of the last 10 years in America from a young immigrant into a distinguished professor at Harvard Business School.

Chapter Five
“Slouching Through the Depression”

When Doriot returned to Harvard in the fall of 1931, he could look back on the past decade and smile with pride. In the relatively brief span of ten years, the young immigrant had conquered a new country.

Not only had he found a profession that brought him satisfaction and security, he had earned a reputation as one of the leading lights of the most important business school in the country; he had spearheaded the creation of a successful new business school in Paris; and he had found the love of his life and convinced her to marry him. And yet there was still a fire that burned in Doriot, a passion that kept him searching for his next mission impossible.

Doriot aboard the Ile de France, 1931
[Above: Doriot, the doctor of “sick businesses,” aboard the Ile de France in 1931.]

Perhaps that is why the 1930s—a time of diminished expectations for the entire nation—were probably the most frustrating period of Doriot’s life. He was always at his best when tackling an impossible job, but during the Great Depression, despite several attempts, Doriot never found a grandiose task to throw himself into as he had done so many times during the previous decade.

At times, a similar mood of discontent permeated the home of the Doriots. The 1930s would have been the ideal time for Georges and Edna to start their own family. But the Doriots never did have a child.

No doubt, Doriot’s lack of children profoundly shaped his character. Over the next forty years, he compensated for this absence by nurturing countless students and younger colleagues as if they were his own offspring. “He often said the only advantage of not having children is you choose them,” says Claude Janssen, who studied under Doriot in the 1950s. “He chose three: Arnaud de Vitry, Robert McCabe and myself. We were really his three sons.”

Nevertheless, the 1930s were hardly a lost decade. In retrospect, for the Doriots and the rest of the nation, it was a time for hunkering down, for planting seeds that could be harvested in the future. Indeed, the years of the Great Depression hold the answer to another great mystery of Doriot’s life: How did a man with hardly any experience running a business come to be such a world-class businessman?

The answer is that during those years, dozens of companies hired the professor to help guide them through the worst disaster that had ever hit the American economy. In that dark decade, Doriot gained a lifetime of experience as an officer, director, and consultant.

Between 1932 and 1941, when he was called up to join the military, Doriot served on the boards of twenty companies, while taking on executive-level positions in ten other firms. It was an astonishing volume of outside work that would never be allowed in today’s age of vigilant corporate governance.

In addition, in 1940 Doriot was elected to take over the presidency of the struggling McKeesport Tin Plate Corporation, where he promptly put the company on firmer footing by negotiating the sale of its tin plate division to steelmaker Jones & Laughlin. Tending to all these companies, Doriot was like a circus artist juggling a dozen balls while walking a tightrope. Would he pull off the balancing act or would he lose his balance and come crashing back to earth? (more…)