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.
|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.
|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.
|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
|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.
|"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.
|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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