U.S. not always averse to nationalization, despite its free-market image

NEW YORK — If the U.S. government moves ahead with a plan to take ownership stakes in American banks, as seems likely, it would be an exceptional step - but not an unprecedented one.

The United States has a culture that celebrates laissez-faire capitalism as the economic ideal, but the practice is sometimes different. Over the past century, the U.S. government has nationalized railways, coal mines and steel mills, and it has even taken a controlling interest in banks when that was deemed to be in the national interest.

The corporate wards of the state typically have been returned to private hands after short, sometimes fleeting, stretches under government stewardship.

Finance experts say that having Washington take stakes in U.S. banks now - like government interventions in the past - would be a promising step in addressing an economic emergency. The plan being weighed by the Treasury Department, they say, could supply banks with sorely needed capital and help restore confidence in financial markets. Across Europe, governments rolled out similar initiatives Monday.

In other countries, the government bank-investment programs are routinely called nationalization programs. But that is not likely in America, where nationalization is a word to avoid, given the cultural aversion to anything that hints of socialism.

"Putting this plan on the table makes a lot of sense, but you can't call it nationalization here," said Simon Johnson, an economist at the Massachusetts Institute of Technology's Sloan School of Management. "In France, it is fine, but not in the United States."

In times of war and national emergency, Washington has not hesitated. In 1917, the government seized the railroads to make sure goods, armaments and troops moved smoothly in the interests of national defense during World War I. Bondholders and stockholders were compensated, and railroads were returned to private ownership in 1920, after the war ended.

During World War II, Washington seized dozens of companies including railroads, coal mines and, briefly, the Montgomery Ward department store chain. In 1952, President Harry Truman seized 88 steel mills across the country, asserting that unyielding owners were determined to provoke an industry-wide strike that would cripple the Korean War effort. That forced nationalization did not last long, since the Supreme Court ruled the action an unconstitutional abuse of presidential power.

In banking, the U.S. government stepped in to take an 80 percent stake in the Continental Illinois National Bank and Trust in 1984. Continental Illinois failed in part because of bad oil-patch loans in Oklahoma and Texas. As one of the country's top 10 banks, Continental Illinois was deemed "too big to fail" by regulators, who feared wider turmoil in the financial markets. Continental was sold to Bank of America in 1994.

Yet the nearest precedent for the plan the Treasury is weighing, finance experts say, is the investments made by the Reconstruction Finance Corporation in the 1930s. The agency, established in 1932, not only made loans to distressed banks but also bought stock in 6,000 banks, at a total cost of about $3 billion, said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University.

A similar effort these days, in proportion to the current economy, would be $400 to $500 billion, Sylla said.

When the economy eventually stabilized, the government sold the stock to private investors or the banks themselves.

That program was a good one, experts say, but the U.S. government moved too slowly to deal with the financial crisis, which precipitated and lengthened the Great Depression. The lesson of history, it seems, is for Washington to move quickly in times of economic crisis to revive the patient.

"The goal is to get the engine of capitalism going as productively as possible," said Nancy Koehn, a historian at the Harvard Business School. "Ideology is a luxury good in times of crisis."

The government plan to buy stakes in banks would be the latest step in Washington's efforts to ease the credit crisis. The government has already spent or authorized $800 billion to keep the investment bank Bear Stearns and the troubled insurer American International Group from collapsing and for the economic rescue package to buy soured mortgage-backed securities from banks and Wall Street companies. The Federal Reserve has cut interest rates and pumped money into the banking system to get the normal business of lending going again.

Nothing has turned the tide yet.

After World War II, several European countries nationalized basic industries like coal, steel and even autos, which typically remained in government hands until the 1980s, when most Western economies began paring back the state role in the economy.

Europe today remains far more comfortable with government's having a strong hand in business. So when Sweden, for example, faced a financial meltdown in the early 1990s, the nationalization of swaths of the banking industry was welcomed.

The Swedish government quickly bought stakes in banks, much as the Treasury is considering, and sold most of them off later, a model of swift, forceful intervention in a credit crisis, financial experts say.

"The obvious danger with anything that really starts to look like the government taking ownership or control of a significant piece of an industry is, Where do you stop?" said Robert Bruner, a finance expert at the Darden School of Business at the University of Virginia. "The auto industry is in dire straits, and the airline industry is in trouble, for example."

"But the spillover effects from the crisis in the financial system are so great, pulling down the rest of the economy in a way that no other industry can, so that the potential cost of not doing something like this is immense," Bruner said.