Yesterday we posted the portion of Judge Grosscup’s 1907
speech highlighting the fact that, under then-current methods of corporate
finance (which still obtain today), most people had no means to obtain
ownership of the large corporations, combinations, and trusts. In today’s portion, Grosscup makes it clear
that it is not the size of the enterprise that matters, but the distribution or
size of the individual ownership stake.
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| Wesley Newcomb Hohfeld |
Just as important, however, is the other point Grosscup
makes, something that many people today, even strong advocates of expanded
capital ownership, neglect: the meaning of ownership, that is, property itself. This is the sort of vagueness that Wesley Newcomb Hohfeld (1879-1918) tried to correct in Fundamental Legal Conceptions (1919).
We cannot stress strongly enough that “property” is not the
thing owned, even though in common usage the term is often used that way. We cannot, however, be vague or general when
talking about rights — or who has them and what they mean. That’s the way to massive confusion.
In essence, property is two things. One is the natural right every single child,
woman, and man has to be an owner. This
is access, that is, the “generic
right of dominion,” the individual aspect of property. It is called “generic” because the right to
be an owner is a defining characteristic of what it means to be an individual
member of the genus “human.” If you
don’t have the right to be an owner, you are not human. Conversely, if you are human, you have the
right to be an owner — by definition. To
change the definition of “human” to exclude the right to be an owner is to
violate the first principle of reason.
You can’t “re-edit the dictionary,” as John Maynard Keynes put it in his
Treatise on Money (1930), even with
the best of intentions or for the most pressing reasons in the world.
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| Inadequate housing for families can be a problem. |
The generic right of dominion is, incidentally, one of the
reasons why we are promoting the
“Five for the Family” campaign. One
of the goals of the campaign is to bring the Just Third Way to the attention of
world leaders with vision, especially Pope Francis, so that they become aware
that the way things are is not the way things have to be.
Property is another thing as well: the bundle of socially
determined rights that define how an owner may exercise his or her rights. This is use,
the “universal destination of all goods,” the social aspect of property. In general, no one may use what is owned to
harm him- or herself, other individuals, groups, institutions, or the common
good as a whole; “use” is necessarily limited by the demands of the common good
balanced against the wants and needs of the owner — with the proviso that use
must never be defined in such a way as to take away or nullify the underlying
generic right of dominion: the natural right to be an owner.
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| Judge Peter S. Grosscup |
Keeping this understanding of property in mind, Grosscup
addressed the need to reform the corporation not merely to make it possible for
ordinary people to own (access, the generic right of dominion), but to ensure
that ownership means something (use, the universal destination of all goods). His example, that of companies that pay
dividends out of their capitalization or incur debt to pay dividends in order
to increase the value per share, is not one that has too much direct relevance
today.
Instead, what we have (especially since Dodge v. Ford Motor Company in 1919) is companies withholding
dividends, and investors turned into speculators purchasing shares not for the
dividend income, but for resale later at a higher price. This fuels additional speculation, and the
actual profitability of a company becomes in a sense irrelevant if something
can be done to drive up the value per share.
Where the problem in Grosscup’s day was “false capitalization,” the
problem today is “pump and dump” (go long) or “shop and drop” (go short)
especially when hedge funds allow speculators to gain from both rises and falls
in share values; market volatility becomes something to be desired and
encouraged, rather than feared and avoided, as the increasingly wide swings in
the stock market suggest.
But here’s Grosscup’s take —
National Commission on Corporation Reform Needed
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| Karl Liebknecht (1871-1919), German socialist agitator. |
The detailed form that the work of corporate reconstruction
should take would be best performed, perhaps, by a national commission, and
such a commission would have for precedent the work done by Germany thirty
years ago — a corporate reform that has almost disarmed German Socialism,
except as an agitation, against the unjust land laws of that country. I shall
not go into details now, but will confine myself to those fundamental
principles that in their nature must be at the foundation of the new corporate
structure.
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| "Put your nickel in the slot and take out a charter." |
In this country the corporation is a creature of the
executive department of the several states, and issues out of such department
almost as a matter of course. Neither the object for which the corporation is
formed, nor the amount of its capitalization, nor the character of the
securities issued commands any preliminary attention other than such as is
merely perfunctory. Put your nickel in the slot and take out a charter, is the
invitation that the States extend; and in line before the slot machine, entitled,
too, to an equal place in the line, are the corporate projects conceived to
defraud, as well as those that have an honest purpose. Neither is detained by
so much as an inquiry. For indifference such as that I would substitute at the
very threshold of the corporation’s application for existence an honest,
careful inquiry by some tribunal of government — a tribunal that will act only
after it has heard; a hearing in which the public is represented by a District
Attorney on whom is thus devolved the duty not merely of pursuing the horse
after it is stolen, but of seeing to it that the door is locked before the horse
is stolen. And what honest project, I ask, can object to such an inquiry?
Origin of False Capitalization
The corporation as at present organized by the states has
license to issue all the securities it chooses, and all the kinds of securities
it chooses — securities whose place in the corporate geologic stratification no
ordinary mind can locate; and out of this have come the many instances of
capitalizations that serve no purpose other than to exploit with one hand the
consuming public, while baiting with the other that portion of the public that,
with hard-earned savings, is looking for some opportunity to help itself along
in the race of life. No honest project needs license like that. Let the initial
securities issued be related in a fair business way to the actual values put
in.
Incorporated enterprise, just as private enterprise, should
be given room to grow. A dollar turned into two, ten, twenty, if turned
honestly, wrongs no one. Go forth, increase and multiply, is a command without
which economic progress would not be. But in all this there is no need that the
corporation should initially capitalize a projected success that, if it exists
at all, exists only in the future. Let the securities issued on account of
success be issued only when success is established; and let them be fairly
related, as the enterprise grows, to the increased value of the actual earning
power developed. And I can see no reason why in any honest enterprise the
question whether additional securities shall be issued should not be made the
subject of judicial inquiry.
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| A "Traction Company" |
But the restriction of capitalization to figures that are
fair will accomplish little if the declaring and paying of unearned dividends
be left to those who are in control of the corporations; for it is not on the
par value of securities, but upon the size and regularity of dividend payments,
that the public makes up its judgment as to values; and it is not on mere
capitalization that the schemer in corporate securities counts, but upon his
ability to make the public believe that the capitalization has an earning
power. Take the well-known case of some of the Chicago traction companies.
Without dividends the securities issued would have remained near zero, and
that, too, irrespective of how small the issue was; but with high dividends,
paid year after year until they were no longer questioned, the securities rose
in the stock markets to par, to double par, and beyond that, irrespective of
how large the issue was. It was not the capitalization, but the high dividends
regularly paid for a long period that did the trick; not real dividends in any
honest application of that word to earnings, but trick dividends — dividends
that stripped the enterprise of its power to keep up with its public duty; that
let the enterprise gradually but surely run down, and that borrowed millions
for dividends on the top of the depletion. Indeed, the whole transaction was a
moral crime — a crime that robbed honest men and women of the accumulations of
a lifetime— a crime that is not fully expiated, either, by arraigning before
the bar of public opinion the men who got away with the plunder. I arraign as
accessory before the fact the people of the great state who, scrupulously
honest in their individual dealings, issued to the projectors of this crime the
ready-made corporate weapon without which the crime could not have been
committed.
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