We have a tradition of watching It's a Wonderful Life during the holidays. This year it inspired a reflection on economics.
Do you know the name Philip Van Doren Stern? He was an early 20th century Civil War historian who wrote over 40 books. But it was a book of fiction that has surely touched your life in someway. It was 10 years after the Great Depression when Stern wrote a 4,000 word short story, The Greatest Gift. The tale was the conjuring of a haunting dream he had endured years earlier and combined with the real life story of A.P. Giannini, the founder of Bank of America.
On the surface, The Greatest Gift is a story of a troubled, ambitious young businessman and father. But it's really about two different economic expressions of capitalism, two siblings from the common parents of free market commerce. They are still with us today. They don't talk much or even text. But during the holidays they crash into one another, inevitably, like two stars pulled into each other's orbit.
Stern could not get any publishers interested in his story. Frustrated but vigilant, he decided to self-publish it and made 200 copies for friends and family in December 1943. As luck would have it, it ended up at RKO Pictures who purchased the movie rights. Frank Capra's production company bought the screenplay and the world got It's a Wonderful Life. And the world got Potter Economics and Bailey Economics.
Henry Potter (not Harry Potter...different story) is the shrewd, hard-hearted wealthy banker whose self-interest is overshadowed only by his impatience. In the film, Potter (pictured right) tries endlessly to widen his power by taking over the only other bank in Bedford Falls, Bailey Bros Building and Loan, owned by the more magnanimous Peter Bailey.
In an early exchange, Henry Potter provides a glimpse of the mindset driving Potter Economics.
Potter : Have you put any real pressure on these people of yours to pay those mortgages?
Bailey : Times are bad, Mr. Potter. A lot of these people are out of work.
Potter : Well, then, foreclose.
Bailey : I can't do that. These families have children.
Potter : They're not my children.
Bailey : But they're somebody's children, Mr. Potter.
Potter : Are you running a business or a charity ward? Not with my money!
Later in the film, Peter Bailey tragically dies and his son George Bailey, famously played by Jimmy Stewart, takes over the business--however reluctantly. In a firey repartee with George, Potter would reveal more of his view of the world:
Mr. Potter : Peter Bailey was not a businessman. That's what killed him. Oh, I don't mean any disrespect to him, God rest his soul. He was a man of high ideals. So called. But ideals without common sense can ruin this town.
Now, you take this loan here to Ernie Bishop. You know, that fellow that sits around all day on his brains in his taxi, you know....A discontented, lazy rabble instead of a thrifty working class. And all because a few starry-eyed dreamers like Peter Bailey stir them up and fill their heads with a lot of impossible ideas!
Potter Economics exhibits a distrust of the working class, a distrust even of the higher ideals of humanity. Greed alone is deified; satisfaction through accumulation. Decades before Stern penned his short story, President Theodore Roosevelt was presiding over the dawn of the industrial revolution. He saw this rampant expression of capitalism widening the gap between the haves and have not. He saw Potter Economics in all its glory and violence, such as in the famous coal strike in Pennsylvania. Roosevelt would observe:
"It is a bad thing for a nation to raise and to admire a false standard of success; and there can be no falser standard than that set by the deification of material well-being in and for itself." (my emphasis)
Roosevelt the "trust buster" threw his impressive energy, rhetorical and political strength, against a country pulled inexorably towards Potter Economics. The durge of this form of capitalism has plagued it since the beginning. Adam Smith himself warned against it in The Wealth of Nations:
"What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable." (my emphasis)
Today, Potter Economics can masquerade as the highest and purest expression of capitalism. Shark Tank's Peter O'Leary is lauded when bragging about the need to be "merciless" and willing to "fire your own mother" if that is what it takes to succeed. And consider the case of $35 billion private equity firm Cerberus Capital Management. According to The Washington Post (12.26.18), Cerberus is the largest single family homeowner in Memphis with 1,800 properties and its "aggressive tactics" to recover rent are right from the Henry Potter playbook: threats, citations, harassment, and evictions.
"They don't care," says Memphis Public Works Director Robert Knecht of Cerberus. "They are just here to lease their properties without consequence." (my emphasis)
Without consequence. That is a disturbing phrase; perhaps the slogan of Potter Economics. Of course, consequences do result. Benefits are privatized (by absentee landlords) and costs are socialized (by the town of Memphis). Other maxims could include...
Distrust then take advantage of the working poor.
Seek short term gain at any cost (as long as it's legal and/or you don't get caught).
Shout down any dissent as being "starry eyed dreaming" whether it comes from your conscience, your constituents or your colleagues.
Yoke your happiness to the ascendence of power and possessions.
Comfort over character and status over everything else
George Bailey is the ambitious young man eager to see the world, who becomes the reluctant owner/manager of Bailey Bros Savings & Loan after his father passes away. Seeing Potter's desire to take over his dad's Savings & Loan and thus consolidate his power, George assumes his dad's vacated role. In contrast to Potter, he took an interest in his customers and took the time to educate them. Bailey (pictured above) was satisfied with lower but still sound returns, and thought of the whole system not just his own benefit.
After his father passes away and Potter attempts to take over the Savings & Loan, Bailey stands up to him and in so doing explains the perspective of Bailey Economics:
Just remember this, Mr. Potter, that this rabble you're talking about, they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath? Anyway, my father didn't think so. People were human beings to him, but to you, a warped, frustrated old man, they're cattle. Well, in my book he died a much richer man than you'll ever be.
After defending and uplifting the working class, George gives us another lesson in Bailey Economics when he turns to all the business men in the room: "Doesn't this make them better citizens? Better customers?"
3 Keys to George Bailey's Capitalism for the Common Good
Invest in Your Customers
Potter Economics sees customers investing in him. That is only partially true. You too must invest in your customers. Take sincere interest in them. Spend time with them. Don't let your understanding to be mediated by data, reports, and analytics alone. One scene sees customers flooding the Bailey Building and Loan and asking to withdraw their money. George Bailey explains to his customers how the Savings & Loan works, that your money isn't sitting in the bank but is reinvested in the community. The scene is similar to FDRs famous "Fireside Chats" to a nation rocked by the Great Depression. FDR stayed close to America, explained how banking works, what exactly was being done, the results and what was being planned. Where Potter Economics keeps people in the dark, Bailey Economics gives them the opportunity to see the light.
Seek Sound but Fair Returns
You remember the old adage: don't kill the goose that lays the golden eggs. If you take too much, you kill the goose. If you squeeze too much from suppliers, from labor, from the community, from fields, forests, soil, or the atmosphere, you cut into the branch on which the whole thing rests. Benjamin Graham in his classic The Intelligent Investor reminds us:"You must aspire to 'adequate,' not extraordinary, performance." Graham preached a self-control and market wisdom necessary for Bailey Economics.
The Parts are a Sum of the Whole
Bailey Economics recognizes that the whole community of Bedford Falls is pulled by the combined force of its financial, social, cultural and spiritual resources. As John Muir said, "When we try to pick out anything by itself, we find it hitched to everything else in the Universe." This is a good encapsulation of the "systems view" of Bailey Economics. The world of Henry Potter is a fantasy world made up of self-interested economic Rationalists involved in a zero-sum game. In contrast, George Bailey's community is made up of a real world of human beings and families with a shared future. Working poor with a loan buys a house, builds equity and become customers who pay back loans and shop in local stores, pay taxes for the school and local police. It's all connected.
In conclusion...beware the money itch
Let's wrap up with Mr. A.P. Giannini, the founder of Bank of America, Philip Van Doren Stern's inspiration for the character of George Bailey in The Greatest Gift.
Giannini worked at a Savings & Loan in North Beach, California. He grew frustrated with loans that propped up the wealthy at the exclusion of the working poor, the hard-working immigrants like those he had gotten to know working in the produce business.
In 1904, he founded the Bank of Italy for the "little fellows", the working class, and it thrived , weathering the fierceness of the Great Depression and becoming the Bank of America in 1930.
Despite creating a multi-billion dollar bank, Giannini kept little of the wealth to himself. The board gave him a $1.5 million bonus one year which he gave to the University of California.
Giannini felt wealth would make him lose touch with the working class. "Money itch is a bad thing," he was fond of saying. "I never had that trouble." But he had an itch for meaning, for purpose, for doing something important with his life. He used business and finance to help tens of thousands of people.
Business schools often teach that the purpose of business is to make money. That is inaccurate. The purpose of business, such as the Bailey Bros Buildings and Loan, is to serve people and help create well-being in the community. If the purpose of business is to make money then the purpose of my car is gasoline. And the purpose of my son is to eat BLT sandwiches. That's ridiculous. We confuse purpose with the power needed to reach that purpose. Money, gasoline and food are all sources of power, of energy...but energy to do what? Where will the car go? What will my son do? Those are questions of purpose.
Why does business exist? This is really the core difference between Potter and Bailey Economics. If you believe it is to make money, you get one kind of economics. If you believe it is to serve people and communities, you get another.
Bailey Economics Businesses
Local banks and credit unions often live out the values of Bailey Economics. Here are some specific examples of other interesting companies doing it the George Bailey way:
GivLocal - credit card processing service that donates money to local causes
CNote - a savings account alternative that invests in underserved communities
Community Capital Management - a majority employee-owned asset management firm that specializes in market-rate impact/ESG investing in fixed income, equities, and liquid alternative strategies.