Last week we noted what makes the rich different is not more money (although that certainly doesn’t hurt . . .) but access to money creation. Access to money and credit determines who can acquire and possess capital, which is what makes people rich, not mere money.
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| Aristotle: Political Philosopher |
Generations of political philosophers and moralists agreed in general how people are to become more fully human and reform society. Historically, most authorities have concurred that widespread capital ownership is essential if people are to have the personal power they need to carry out acts of virtue and so become more fully human. Social justice adds the necessity of personal power to be able to organize in free association with others to effect necessary changes in institutions and the common good as a whole.
Unfortunately, not being experts in money, credit, banking, and finance, the best political philosophers and moralists could do was to recommend workers be paid more. This would presumably enable workers to save and finally purchase capital to supplement and in some cases replace wage income, and gain control over their own lives.
It is true workers can exercise the required thrift and accumulate enough savings to purchase capital. It is, however, not probable on the individual level, nor realistic for an entire economy.
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| Dr. Harold Glenn Moulton |
At the individual level, raising wages without a commensurate expansion of production increases the cost of production, and thus raises prices to the consumer. Since the consumer is in most cases the wage earner himself and his dependents, any wage increase is usually cancelled out by the increase in prices. It is actually worse in most cases. Factors in addition to wage increases cause a rise in the price level, especially when governments back the currency with their own debt to monetize deficits. Real income declines.
At the level of an entire economy, financing capital formation (i.e., acquiring capital) by reducing consumption and accumulating savings creates an “economic dilemma.” As explained by Dr. Harold Glenn Moulton (1883-1965), president of the Brookings Institution in Washington, DC from 1928 to 1952, “The dilemma may be summarily stated as follows: In order to accumulate money savings, we must decrease our expenditures for consumption; but in order to expand capital goods profitably, we must increase our expenditures for consumption.” (Harold G. Moulton, The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 28.)
That is (as Moulton went on), if people reduce their consumption to save to finance capital acquisition, there will not be enough consumer demand to justify investing in new capital. Thus, as Moulton noted,
If a larger percentage of the national income is saved, we have abundance of funds with which to create new capital; but such capital is not profitable. If, on the other hand, a larger percentage is diverted to consumption channels it is profitable to construct new plant and equipment; but there are inadequate funds for the purpose. (Ibid., 35.)
Fortunately, Moulton then went on to explain how relying on savings generated by reducing consumption in the past is not the way that new capital has typically been financed, especially during periods of rapid economic growth. Instead, the bulk of new capital formation at such times has been financed by expanding commercial bank credit backed by increasing production in the future.
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| Benjamin M. Anderson |
Commercial banking and the entire science of finance, in fact, are based on knowing the distinction between the different types of savings and their proper uses to back the different types of money. Put another way, “The first principle of commercial banking is to know ‘the difference between a bill of exchange and a mortgage’.” (Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946. Indianapolis, Indiana: Liberty Fund, Inc., 1980, 233.) “Past savings” generated by reducing consumption is best used for consumption. “Future savings” generated by increasing production is best used for financing new capital to increase production. Finally, backing the money supply with government debt — “no savings” — is best used for nothing at all.
Moulton thereby demonstrated that new capital can be financed without reducing consumption or increasing wages when there is no commensurate increase in labor productiveness. He did not, however, make what in Catholic social teaching or the Just Third Way seems the obvious correlation, that here also was a just and feasible means to finance widespread capital ownership without redistribution. Moulton (or, perhaps more fairly, his associates at the Brookings Institution) assumed as a matter of course that widespread capital ownership means redistribution of existing capital assets, not participation in the financing and thus ownership of new capital assets. (Harold G. Moulton, Income and Economic Progress. Washington, DC: The Brookings Institution, 1935, 76.)
Louis Orth Kelso
It was not until Louis Orth Kelso (1913-1991) and Mortimer Adler published The Capitalist Manifesto (1958) (New York: Random House, 1958) and The New Capitalists (New York: Random House, 1961) that a viable and personalist means of bringing about widespread capital ownership became known to the general public. The subtitle of the second volume is significant: “A Proposal to Free Economic Growth from the Slavery of Savings.”
Kelso — Adler gave him full credit for the idea (Kelso and Adler, The Capitalist Manifesto, op. cit., ix.) — did not mean that capital can be formed without the use of savings. As noted above, Moulton pointed out that savings can be generated either by reducing consumption (past savings) or by increasing production (future savings). What Kelso meant was, instead of people working to accumulate savings, future savings (meaning future profits used to pay off a capital loan) could work for people to accumulate capital.
Considered as a breakthrough in applying moral philosophy (which is what primarily interested Adler) Kelso’s achievement was to explain how techniques of modern corporate finance could be used to provide money and credit to make every person an owner of capital without redistribution or harming private property in any way. Expansion of commercial bank credit backed up by a central bank and collateralized with capital credit insurance could be used to provide full access to capital ownership by every member of society.
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