It was the summer of 1971 and I was a youngster living in New York City riding my new Schwinn bicycle. The war in Vietnam was winding down, but that summer marked a turning point for American business. During the preceding decades, American business and the free enterprise system were under attack. 27% of American workers were union members and unions were imposing their will on corporations. Corporate income tax was just shy of 50% and the top marginal income tax rate was 70%. Then came the Powell Letter that sparked a business revolution.
Throughout the 1960’s and 1970’s, the federal government went on a regulatory binge. The final straw came in 1970 when the EPA was established and corporations were in their crosshairs. Supreme Court Lewis F. Powell, Jr. was fed up with the situation and drafted a confidential memo called “Attack of American Free Enterprise System,” which he sent to the US Chamber of Commerce on August 23, 1971. The result of that single memo changed the trajectory of American business forever and we still feel its effects today.
The memorandum was not released publicly, but circulated among business leaders and served as a wake-up call for American business. It galvanized corporate leaders who were tired of being the whipping-boy of the federal government. They were tired of being beaten by legislators who were only interested in cultivating votes for their next election.
As I read the content of the Powell Memorandum, as it is often called, I’m reminded that those who do not heed the lessons of history are doomed to repeat them. Although the memo was written over four decades ago, it reads like it was written today. I encourage you to follow the above link and read the entire memo.
The Powell Memo served its purpose very well. In 1971 before the memo was drafted, there were 175 lobbyists in Washington. Within the next ten years, there were 2,445. Moreover, 180 CEO’s from all the major corporations got together and created the “CEO Round Table,” which funneled money into political campaigns of pro-business candidates. The resulting companies became mi-optically focused on making money for shareholders and decreased emphasis on its obligation to employees and non-stockholders. The wealth magnet for businesses changed from the workers to the shareholders. Corporations that typically offered pensions to workers backed legislation to create the 401k as a way to relieve them from the responsibility of making payments to retired workers.
This act significantly contributed to the wealth gap we have today since low-income people didn’t participate in 401k savings programs while higher wage earners with more disposable income did and were rewarded by portfolio appreciation. Moreover, the campaigns of politicians who favored lowering the tax rates for corporations and for the top wage earners were financially supported by lobbying organizations.
By the 1980s, businesses had declared victory and backed off. However, as I write this we are in the midst of a Presidential election. The current Republican administration has rolled back many of the previous administration regulations. However, the prospect of a Democratic White House and Senate after the election would create a whiplash effect as their goals are to usher in unpredicted levels of new regulations as they commit to climate change initiatives. Moreover, polarizing politicians and the media continues is fanned the flames of discontent among the working class and minorities to rise up. The table is potentially getting set just like it was in 1970 before Powell wrote his now-famous memo.
Are we doomed to repeat history and how will it turn out this time?
Original published on November 2015 on SteveBizBlog and updated in October 2020.
