If you want to baffle and outrage both socialists and capitalists — kin under the skin more than either group realizes — tell them that it is possible to have expanded capital ownership without either redefining ownership or redistributing what belongs to others. Socialists will bellow that you cannot have widespread ownership without changing the meaning of ownership, while capitalists will shriek that the only way others can own anything is to take it from them.
As a result — as we saw in the previous posting on this subject — things will only continue to deteriorate, as the capitalists limit full participation in economic life to an élite, and the socialists work to abolish economic life as anything consistent or even coherent.
With his background as a corporate finance lawyer, Kelso changed all that. What he did, in hindsight, seems incredibly obvious. First, in common with the popes, he recognized that private property is essential to a just and well-ordered society. Kelso was quite clear that he did not mean ownership restricted to an elite few in the private sector or as an expedient permitted by the State or community that could be revoked at any time. Instead, his conclusion agreed with that of the early nineteenth century English “Radical” politician, William Cobbett, whom Chesterton regarded as “the Apostle of Distributism” —
 |
| William Cobbett |
Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave. (William Cobbett, A History of the Protestant Reformation in England and Ireland (1827), § 456.)
In The Capitalist Manifesto, Kelso and Adler agreed with Aristotle’s conclusion that a free person who owned nothing but his labor was — in effect — a “masterless slave.” As such, although nominally an equal citizen and participant in the pólis, he had less status than an actual slave who was respected as his owner’s possession.
 |
| Louis O. Kelso |
Kelso therefore addressed the problem of how to make it possible for everyone to own capital, and thereby have not merely nominal participation in society, but actual and potentially full participation in the common good. First, he made it clear that he did not refer to existing capital already owned by others. Kelso referred primarily to the new, additional capital that, since it does not yet exist, is not yet owned by anyone. Ownership of new capital depends on who finances it, and in what way it is financed.
Expecting the average wage worker to cut consumption and accumulate sufficient savings out of what was increasingly an inadequate income is clearly unrealistic. Kelso therefore proposed that everyone be empowered to use financing techniques that the big corporations and the rich had been using for centuries.
Specifically, instead of saving by reducing consumption in the past or increasing wages in the present, it is possible — indeed, preferable — to save by increasing production in the future. An individual or business enterprise can start from a position of having no savings. By purchasing capital on credit, however, and promising to pay for the capital out of profits generated by the capital in the future, anyone can finance capital acquisition. That is, anyone who is “creditworthy,” i.e., his word is good and the capital he finances in this way is expected to be profitable.
The difficulty in financing by means of such “future savings” is that not everyone is either creditworthy or known throughout the community as such. Commercial and central banking, however, solved that problem centuries ago, but before Kelso came along, as a rule only the rich and exceptional individuals were able to take advantage of classic banking techniques.
Contrary to popular belief, commercial and central banks do not simply create money out of nothing — or at least are not supposed to. (Monetizing government debt is, in effect, creating money out of nothing, but that is how the politicians misuse a system designed and intended to provide financing for the private sector, not government.) When used as intended, commercial banks (also called “mercantile banks”) only create money when a borrower brings a project to them for financing.
If a borrower is creditworthy and the project is expected to generate a profit within a reasonable period, the bank temporarily “buys” the project by issuing a promissory note. The bank then creates new money backed by the promissory note — which is backed by the borrower’s creditworthiness — and the borrower uses the money to finance the project.
 |
| Henry Thornton |
If there is a central bank, the commercial bank can “sell” the project to the central bank. In that case, instead of the commercial bank creating money, the central bank creates money, hands it over to the commercial bank, and the commercial bank hands it over to the borrower. The borrower owes the commercial bank, and the commercial bank owes the central bank.
When the project makes a profit, the borrower repays the commercial bank plus a fee for the service — thereby buying back the project — and the bank cancels the money. If the commercial bank sells the loan to the central bank, then the borrower’s loan payment passes through the commercial bank and goes to the central bank, which then sells back the project and cancels the money. (Like an electrical circuit, this chain of transactions can be as long as necessary or desired, with one bank selling the loan to another, if the chain is not broken. See Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802).) In this way, there is always enough money to finance new capital to increase production in the future without having to cut consumption in the past.
There was, however, another problem. Paradoxically, the reason only the rich as a rule can use future savings is they have a virtual monopoly on past savings. That is, they have collateral the bank can seize if the capital project fails and the borrower defaults on the loan.
As Kelso reasoned, banks demand collateral for loans as a form of insurance and charge a premium for making loans with a higher risk of default. Why not take that risk premium by means of which banks self-insure, and use it as the premium for an insurance policy that will then serve as collateral?
In this way, anyone can be creditworthy, because the risk shifts from the borrower to the project itself. It would no longer matter if someone was the wrong sex, age, race, religion, or anything else. Everything except the financial feasibility of the project would become a matter of complete indifference to the bank, and everyone, at least potentially, could become a capital owner.
#30#
