An Open Letter to George Melloan

This is getting to be quite a habit with us.  Writing open letters to George Melloan of the Wall Street Journal and points east, west, south, and north, that is.  In other words, we don't quite know how to go about getting in touch with Mr. Melloan, so we've been doing the internet equivalent of going around the web with a bullhorn.  (We also sent something c/o the Wall Street Journal.)  Anyway, here's our latest.

Dear Mr. Melloan:

As a result of reading your articles, "Obama's Perplexing Populism" (WSJ, 11/04/11, A19) and "A Free-Trade Plan to Save Japan" (WSJ, 11.07/11), may I offer some input? Much of the ineffectiveness, even damage caused by the efforts to save the U.S. and various economies around the globe is, in my opinion, due to a reliance on outmoded monetary and fiscal policies that serve only to strip ordinary people of economic power and concentrate that power in private and public sector elites. What can be regarded as the four "pillars" of an economically just society are undermined by this concentration of power:

• A limited economic role for the State,

• Free and open markets as the best means of determining just wages, just prices, and just profits,

• Restoration of the rights of private property, especially in corporate equity, and

• Widespread direct ownership of capital, individually or in free association with others.

This last, widespread direct ownership of capital, is the "fatal omission" from every economy on earth, and the reason why the other three are emasculated. Power, as Daniel Webster reminded us in the Massachusetts Constitutional Convention of 1820, naturally and necessarily follows property. Webster did not refer to consumer goods, even a primary dwelling, but landed, industrial, and commercial capital that produces marketable goods and services.

The necessity of as many people as possible owning capital in addition to their labor has been recognized from the earliest times, but has increased in urgency as technology advances and displaces labor from the production process at an accelerating rate. In 1848 William T. Thornton published A Plea for Peasant Proprietors, a proposal to end the Great Famine in Ireland. The plan was based on making land available at a reasonable cost to the Irish to enable them to shift to other sources of food. Abraham Lincoln's 1862 Homestead Act helped America recover from the Civil War and the shift from cotton to wheat. In 1891, Pope Leo XIII declared, "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." In the early 20th century Peter S. Grosscup, one of Theodore Roosevelt's "trust busters," advocated "people-ization" of America's corporations by spreading out ownership.

The list could go on endlessly, but what was needed was a viable means of financing capital acquisition by people who had no accumulated savings and could not afford to cut consumption in order to save. In the late 1950s and early 1960s, Louis O. Kelso and Mortimer Adler, building on the work of Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, developed a financially feasible plan whereby workers could become owners of the corporations that employed them. Their two books, The Capitalist Manifesto (1958) and The New Capitalists (1961), detailed their proposal that became the Employee Stock Ownership Plan (ESOP), which was embodied in U.S. law after 1973 when the late Senator Russell Long of Louisiana championed the initial enabling legislation.

The main question, of course, was how, without raising taxes or redistributing existing wealth, through inflation or otherwise, could someone without existing savings or the capacity to reduce consumption acquire and possess capital? The answer was given in the subtitle of Kelso and Adler's second book, "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

The "problem" here is obvious. Keynesian, Monetarist/Chicago and Austrian economics are all based solidly on the assumption that the only way to finance new capital formation is to cut consumption, accumulate money savings, then invest. Moulton completely disproved this assumption in 1935 in The Formation of Capital, presented as an alternative to the Keynesian New Deal. Moulton explained how, by discounting and rediscounting "bills of exchange" drawn on the present value of existing and future marketable goods and services, commercial banks and the central bank (the Federal Reserve) can create an elastic, asset-backed currency to replace the government debt-backed currency that has stifled growth and concentrated wealth in the hands of a few. The potential of "pure credit," that is, credit that is not dependent on existing accumulations of savings, is bounded only by what can be produced in the future, not by what has been withheld from consumption in the past.

Kelso and Adler added two critical improvements to Moulton's work. One, replace traditional collateral with capital credit insurance and reinsurance, using the risk premium charged on all loans as the premium on an insurance policy. Two, make certain that all new capital financed using pure credit is owned by people who previously owned little or no capital, and who will use the income first to repay the capital acquisition loan and then to meet consumption needs instead of reinvestment.

In order to restore the global economy in the shortest possible time, it is essential that the United States implement a program of expanded capital ownership at the earliest possible date. We at the Center for Economic and Social Justice (CESJ) have developed a proposal to do just that. Following up on Ronald Reagan's call in 1974 for an "Industrial Homestead Act," we propose a "Capital Homestead Act" to duplicate and even improve on the economic power and rapid growth potential unleashed by Lincoln's land-based Homestead Act.

I believe that some time ago you corresponded with Dr. Norman Kurland, president of CESJ, on this topic. In view of your writings on the current world situation, Dr. Kurland is most interested in reopening the discussion with you. I can help in setting up a good time for a telephone conversation at your earliest convenience.

Thank you. We look forward to hearing from you.

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