Monday, May 4, 2015

The Lost Speech of Peter S. Grosscup, III: Bad Legal Principles

The more we find out about Judge Grosscup, the more there is to admire.  For example, Grosscup had a temporary rift with Theodore Roosevelt over some obscure points of law in the Standard Oil rebate case in 1907/1908.  Grosscup found on appeal that the enormous fine ($29 million plus), intended to bring Standard Oil to its knees, had been illegally levied.

Yes, Grosscup believed that Standard Oil should be broken up — but that it must be done legally, not by distorting, reinterpreting, or rewriting the law to do it.  Roosevelt wanted Standard Oil brought down at any cost, and didn’t speak to Grosscup for four years.  They made up in 1912 and Grosscup endorsed Roosevelt for president as the Progressive Party candidate in the four-way race between William Howard Taft (Republican), Woodrow Wilson (Democrat), Theodore Roosevelt (Progressive), and Eugene C. Debs (Socialist).  Need we remind our readers that “progressive” had a completely different meaning in 1912 than it does now?

This “long lost” speech we discovered was given shortly before Grosscup and Roosevelt had their falling out — and it puts Grosscup solidly against monopolies and trusts.  He was no friend of Rockefeller, as some accused — but he was not going to violate his principles to achieve an end.

This speech reveals that Grosscup was worried about the survival of the ordinary American, every child, woman, and man, and thus the family as a whole, which — stripped of its economic security by lack of ownership — was in deadly peril, as was the country as a whole.  That’s why we’ve linked this speech (as well as Grosscup’s articles) to the “Five for the Family” campaign.  The key is capital ownership, not more government or private sector control of ordinary people.  That is why Grosscup believed that —

Our Legislation Wrong In Principle

But though what I am saying means, perhaps, that the aim of the American public thus far, in its treatment of incorporated industry, is not directed toward the right mark, it does not mean, that in the great new industrial life that this generation of men is living, so largely an incorporated life, there is nothing that is wrong. Somewhere in that life, something is wrong; for though in the midst of material prosperity, the country is without contentment; and there must be something wrong in a prosperity that does not bring contentment — something that, in the nature of things, in some way pinches and wounds some deep-seated human instincts. Nor does it mean that the administration of President Roosevelt has been a failure. As a preparation of the public mind for the great practical thing yet to be accomplished, that administration has been a great success.

Corporations Represent Concentrated Control

What, then, is the wrong that lies at the bottom of the popular disquiet, and what is the work yet to be done? I can best answer that question, perhaps, in the statement of three facts. The first of these is: that not only is the corporation to modern industry organized, what government is to mankind politically organized, but, that as it is through effective free government alone that political power is diffused among the people, it is through the corporation alone that the ownership of the industries of the country can ever be widely diffused among the people; for outside the field of agricultural properties, property is not now held, each individual piece by some individual man; between the man who seeks to own, and the thing to be owned, there is, throughout the industrial field, the State-created intermediary called the corporation.

Diffusion of Wealth in the United States

The second fact is, that though the industrial property of the country is not widely diffused among the people, the people have the financial means to bring about such diffusion — that it is on their individual wealth, poured through the financial streams into Wall Street, that all the great corporations now chiefly rest.

Wealth of the People stored in banks, borrowed by others.
In the last annual report of the Comptroller of the Currency it is stated that there are in operation in the United States twenty-one thousand three hundred and ninety-six banks and banking institutions, with total deposits of twelve billion six hundred and twenty-eight millions seven hundred and twenty-seven thousand six hundred and sixty-five dollars. This does not include redeposits by one banking institution in another; nor does it include the large sums held by life insurance companies in trust for their policy holders. What this huge total of nearly thirteen billion dollars does represent is the individual wealth of the American public, that, uninvested in the property of the country by the depositors directly, is put in the financial institutions of the country, from which it is, of course, eventually taken out for investment, chiefly by those who borrow it for that purpose.

J.P. Morgan, founder of U.S. Steel and World's Richest Man
To some extent these deposits represent what we call the working capital of the country — the particular amounts that the merchant, the manufacturer, the railway company, and other individual depositors always keep on hand in bank, to meet their current needs; and to some extent these deposits are kept in the bank vaults as reserve. But compared with the whole, neither this reserve nor this working capital is considerable. Inquiry of one of the greatest of the railroads, whose securities at present market values are between three and four hundred million dollars, disclosed that that road carries an average bank balance of about one million, or less than one dollar for every three hundred of its market value. Inquiry of a leading merchant shows that his average bank balance is proportionately larger than this, but considerably less than one dollar in one hundred of the value of his establishment. The largest average bank balance carried, as working capital, that I have discovered, is that of the largest manufacturing corporation of the United States — the United States Steel Company — a corporation that, beginning with the raw material, turns it over again and again until the finished product is delivered to the purchaser — in that way plainly calling for the largest kind of cash capital. But even here the ratio of bank balance to the total value of the properties is only one in eighteen; so that assuming that the enterprises of the country that require distinctive working capital are of the value of fifty billion dollars — nearly one-half of the country’s entire wealth — the bank deposits representing such working capital cannot much exceed one billion of the nearly thirteen billion dollars that constitute the total of the deposits — an estimate unaffected, too, by the fact whether such working capital is first borrowed from the bank and then re-deposited, as is often the case, or is in the first instance deposited out of the depositor’s own ready means. The truth is, that the great bulk of the thirteen billion dollars — a deposit without example anywhere else in the world, is either utilized by the banks themselves, in their business of buying bonds in large quantities and selling them out at retail, or is loaned by the banks to those who are doing the actual business of the country, and carrying the corporate securities of the country. Or, stated in another way, the American people have today in bank a sum of money unemployed for investment directly by themselves, but employed by a comparatively small borrowing class, that nearly equals, at their present market prices, the value of all the railroads of the country put together — stocks, bonds and all; and that increase by what the people of the country individually hold, in the way of bonds, stocks and other corporate securities, constitutes almost the entire wealth on which the corporate business of the country actually rests. So much then for this great fact — the fact that were all the banks and saving societies to liquidate at once, paying back to the depositors at their present market prices, the corporate securities into which, through the small borrowing class, a great part of these deposits have gone, there would immediately turn up throughout every quarter of the country, and in direct possession and ownership of those of our people who have saved anything at all, in addition to the corporate bonds and stocks already held by them, so large a part of the remaining corporate securities, that it could be truthfully said that the owners of the property of America were the people of America — the property that is incorporated as well as the property that is unincorporated.

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From the Just Third Way point of view, Grosscup’s analysis embodied a flaw.  It relied on “past savings,” that is, on past reductions in consumption held in the form of money.  As Dr. Harold Glenn Moulton pointed out in his 1935 classic, The Formation of Capital, however, past savings are actually the least efficient to finance new capital formation.

Why?  Because reducing consumption cuts demand for consumer goods (obviously), and the demand for new capital goods relies on there being an increase, not a decrease, in the demand for consumer goods, or no rational person would finance new capital — if it’s not going to pay for itself out of future profits (which won’t materialize if people aren’t consuming the increased goods and services), you’d just be throwing your money away.

What’s the solution?  Finance using “future savings”: not past reductions in consumption turned into money, but future increases in production turned into money.  Our “Five for the Family” campaign wants world leaders to know that, given the right tax and monetary reforms, every family, and every child, woman, and man can become an owner of capital without taking anything from anybody else — and everybody can be better off.


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