A Place for History
History-making economist Henry Kaufman helps bring the past
to life for students
Henry Kaufman speaks to Smith School students
The Smith School’s entering Class of 2011 was born in 1990, for the most
part. The world as they know it always had credit cards, cell phones, Microsoft,
the Internet, digital cameras.
Economist and author Henry Kaufman, on the other hand, was born in 1927 in
Germany, into a society whose political climate was made even more unstable by
economic turbulence. In 1937, he immigrated to New York to escape the Nazis,
only to struggle with the misery of the Great Depression. When he grew up he
earned prestigious graduate degrees and pursued a calling as an economist. He
began a fabled career with Salomon Brothers in 1962, rose through the ranks, and
famously left them in 1988 because he disagreed with the firm’s expansionary
policies. (The company was acquired by Citicorp in the 1990s). He has worked in
the finance industry at its most-regulated and its least-regulated, and
witnessed every boom and bust since World War II. He is a living, breathing
lesson in the history of Wall Street.
Kaufman has lived through more history than most business school students
will ever read about.
And that, Kaufman says, made him aware that the past needs to be studied.
Last winter, the Smith School received a $1 million endowment from the Henry
& Elaine Kaufman Foundation to support a fellowship in business history, in
affiliation with the school’s Center for Financial Policy. University of
Maryland history professor David Sicilia was appointed the first Henry Kaufman
Fellow in Business History last summer.
The fellowship addresses what Kaufman views as a major deficiency in the way
most business schools teach. “I always thought business history should be taught
at a more prominent level in universities. You know what they say, those who
don’t know their history are doomed to repeat it,” says Kaufman. Kaufman also
supports the teaching of business history at New York University’s Stern School
of Business and Columbia University. “Not teaching economic and financial
history has contributed to the problems today in economics and finance. I push
everywhere I can to raise the relevance of history in business school
That is especially important as the world continues to struggle through the
aftershocks of the global economic meltdown. Understanding similar incidents in
the past will help students connect-the-dots between financial excesses and
their consequences. “Students who go into the field of business and finance
should have an historical perspective, a feeling for what happened in the past.
What happens in a recession? What happened in the Depression? Why did those
problems come about? Who were the heroes of those times that were later revealed
to be villains?” says Kaufman. Mike Millken was a temporary hero of the junk
bond era, Kaufman points out, but eventually wound up in jail. “Young people
ought to learn about these people—what they were trying to do, why they failed,
and what the consequences were, for themselves and for the economic system.”
For the past 50 years or so, business education has veered toward the
quantitative, equipping students with a variety of tools and techniques for
amassing and understanding data. Kaufman believes that a generous dose of
historical perspective would help young leaders understand the human motivations
behind the movement of capital. That’s because economics is such an imprecise
science. “Mathematical equations cannot fully encompass the behavior of markets
and individuals. There is no actual technique that you can put into your
analysis to tell you if things are going right or wrong,” says Kaufman. “Leaders
and supervisors and regulators need to use their judgment.”
Studying history can also help students understand the linkages between wise
regulations, good corporate behavior, and individual and societal prosperity—as
well as the consequences of ill-considered regulations and bad corporate
behavior on individual and societal turbulence. Listening to his grandfather
talk about hyperinflation in Germany made a profound impact on Kaufman’s
developing intellect. He credits these stories, his own experiences during the
Great Depression and watching financial scandals come and go, with his lifelong
advocacy for sensible, effective, rigorously-enforced regulation in the finance
Kaufman has witnessed an enormous amount of economic and financial change
during his lifetime. In 1949, when Kaufman started his career as a credit
analyst at an industrial bank in New York, the finance industry was much more
stringently regulated. So the activities of an industrial bank—financing
accounts receivable, factoring, commercial mortgage or warehousing loans—were
very different from that of a commercial bank or an investment bank.
In the 1930s, legislation prevented commercial banks from paying market rates
for deposits, dictated where they could open up branches, and set maximums on
mortgage loans. They couldn’t underwrite corporate bonds or invest in hedge fund
operations. All those limitations were gradually lifted and abandoned by the
Federal Reserve after World War II.
“In the early post-war period, a commercial bank was a commercial bank, a
savings bank was a savings bank, and an insurance company was an insurance
company,” explains Kaufman. “That all changed with the development of huge
financial conglomerates where the name on the institution doesn’t really tell
you what activities they engage in.”
After a four-year stint at the Federal Reserve Bank of New York, Kaufman was
hired as an economist by Salomon Brothers in 1962 and started the first real
fixed-income research effort on Wall Street. Kaufman built the research
organization up to 400 people and established a reputation as a very influential
voice. They also called him “Dr. Doom” for predicting higher inflation and
interest rates. Turns out he was right. So his prediction in 1982 that interest
rates would fall touched off a stock market rally that some have pinpointed as
the beginning of that decade’s bull market.
By then Salomon Brothers ruled the bond market, and Kaufman, now managing
director and a member of the executive committee, was renowned for his analysis
and his uncanny ability to read interest rate trends. But in late 1980s he
became concerned about Salomon’s risk-taking, eventually choosing to resign.
Even then he was giving warnings about derivatives and cautioning that the
industry needed better regulatory oversight.
His many years in the industry have given Kaufman a unique historical
perspective on Wall Street and a deep appreciation for the lessons you can learn
from other people’s mistakes. Helping students achieve that same sense of
perspective is one of his great passions. Today Kaufman is the president of
Henry Kaufman and Company, Inc. He is committed to higher education and has
worked for many years with the Institute of International Education,
particularly to advance academic freedom through support of its Scholar Rescue
Fund. And he plans to continue to advocate for and support the teaching of
business history to undergraduates and MBAs at business schools.
The impact of his generosity will be felt on Smith School students for many
years to come. “The Kaufman Fellowship signifies an important new direction in
the educational mission of the Smith School’s curriculum,” says Dean G. “Anand”
Anandalingam. “It ensures that our current business students are taught
critically important lessons from the history of finance and the capitalist
system, and that current policy makers understand the importance of business
history when making decisions.” Teaching students to view the present through
the perspective of hard-won wisdom from our collective financial past will help
the Smith School prepare students to meet the challenges of the future.
Dr. Kaufman’s RX for the Finance Industry
“Today the ten largest financial institutions hold more than 65% of the total
assets of the United States. It was 10% back in 1990. I would advocate that the
size of financial institutions be substantially reduced so that no one
institution is too big to fail. The Too Big to Fail doctrine harms competition,
promotes monopolistic practices and negatively affects the distribution of
credit among those who need credit in the United States and elsewhere.
“I also agree with the Paul Volcker rule: Institutions that have within their
conglomerate entity a deposit facility—savings deposits, checking
accounts—should not be allowed to do proprietary trading for their own accounts.
Those institutions really benefit from the guarantee of the federal government
through the FDIC, which provides them with a significant advantage and makes
them too big to fail. That is also harmful for the system.
“I’ve always felt that there should be a gap in the relationship between
official supervisory bodies, such as the Federal Reserve or the Controller of
the Currency, and the marketplace. As the guardians of the financial system,
they are not friends; they are parents. It should not be a buddy-buddy
Center for Financial Policy
The Henry Kaufman Fellow in Business History is a first for the Smith
School’s Center for Financial Policy: its first Academic
Fellows program, a program intended to help foster cross-disciplinary research
and thought leadership.
Kaufman first became involved with the Center for Financial Policy last fall
when he spoke to business leaders, policy makers, faculty and students at two
separate events about the financial crisis and his recent book, The
Road to Financial Reformation: Warnings, Consequences, Reforms. He
found himself interested in the center’s work and also in its proximity to
Washington, D.C., because he wanted to encourage the teaching of business
history outside of New York City. “I’m hoping this will have an influence beyond
the University of Maryland into the nation’s capital,” says Kaufman.
Teaching Business History
David Sicilia, author, associate professor of history and Henry Kaufman
Fellow of Business History, is developing the new business history course that
will be offered at the graduate level in spring 2011. An expert in business,
economic, and technology history, his research and teaching focus on the ways
that entrepreneurs and institutions marshal technology and attempt to shape
public opinion for strategic advantage. He has consulted for many years with
private and public institutions that seek to apply historical analysis to
The course will look at the historical look at the development of capitalism
to give students a broad sense of the change over time and in our culture.
Sicilia hopes to follow it with a course on financial history—bubbles, crashes,
the development of financial markets and institutions.
“Business schools think ‘we don’t have the luxury to devote time to teaching
history,’” says Sicilia. “Quantitative analysis is seen as more valuable. When
you look around at business schools in the United States, only the first-ranked
schools, the Harvards and Whartons, offer courses in history. But I’ve had some
interesting discussions with Dean Anand, who believes that if you are going to
be a leader you have to engage in big questions.”
That has become part of the Smith School’s vision, this notion that the
difference between a competent manager and a visionary leader revolves around
his or her ability to intellectually grapple with big ideas—with what is
happening in society and what their organization’s place is in that society.
And managers use history all the time, even if they don’t realize it, Sicilia
points out. Any time a manager pulls up a graph representing data of past sales,
they are using history. Sicilia hopes to equip students to do a more
sophisticated type of historical analysis, to help people avoid the pitfalls of
drawing fallacious analogies with the past.