Let the Rich Keep Their Wealth; We Need to Empower the Others
By Michael D. Greaney
Modern civilization is built on the assumption that the rich are with us always. Reason tells us that this existence must be for a purpose. Unfortunately, most historical movements have either been a reaction against concentrated wealth or in support of it.
Adherents of socialism assert that rich individuals or private organizations are evil because they have wealth. This allows the rich an unjust means of controlling those who do not have wealth. Socialists believe that the only solution is to vest ownership of productive wealth in the State—including control over wealth and the means of becoming an owner of wealth, which is the same as controlling ownership. Socialists believe that to question that assumption is to question the foundation of society.
On the other side of the coin, capitalism is an arrangement of society whose defenders continually assert the permanent and necessary role of the wealthy in the economy. The rich confer benefits on society just by being rich. Capitalists believe that to question that assumption is to question human nature.
How sound are these assumptions? Very sound—if we accept the basic premise that stands behind both the socialist and the capitalist positions. That assumption is that accumulated wealth—past savings—is absolutely necessary if the human race is to advance. John Maynard Keynes expressed this point nearly a century ago in “The Economic Consequences of the Peace” (1919), the book that made his reputation: “The immense accumulations of fixed capital which, to the great benefit of mankind, were built up before the war, could never have come about in a Society where wealth was divided equitably.”
The reasoning is simple. If past savings are necessary for civilization to advance, humanity needs a class of persons who cannot consume all they produce. The more wealth such individuals possess, the more quickly their unconsumed income accumulates, and the faster new capital investments can be made. This in turn creates jobs for those who do not own enough wealth to be able to save in significant amounts.
The small investor, the “rentier,” becomes a positive evil in Keynes’ system. Why? Consuming the wealth he generates, the small owner does nothing to provide the past savings Keynes believed were so necessary to form new capital, and thus jobs are not created. As Keynes declared,
“I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.”
Compare this rather chilling statement with the analysis of Karl Marx in “The Communist Manifesto”:
“In this sense, the theory of the Communists may be summed up in the single sentence: Abolition of private property.
“We Communists have been reproached with the desire of abolishing the right of personally acquiring property as the fruit of a man’s own labour, which property is alleged to be the groundwork of all personal freedom, activity and independence.
“Hard-won, self-acquired, self-earned property! Do you mean the property of the petty artisan and of the small peasant, a form of property that preceded the bourgeois form? There is no need to abolish that; the development of industry has to a great extent already destroyed it, and is still destroying it daily.”
Evidently, there are things besides the wage system on which both capitalism and socialism can agree: that private property is not something for the masses, who will only “waste” the income by using it for consumption rather than accumulating increasing amounts of useless wealth through reinvestment of the unconsumed income, that is, the past savings.
What, however, if past savings are not the only way to invest? Keynes’ house of cards (as well as that of Marx) collapses if something other than concentrated wealth can generate financing for the formation of capital. Strangely enough, we find that not only is there another way to form capital, it is feasible and has been used to finance virtually every rapid economic expansion in history.
In 1935, Dr. Harold G. Moulton realized that new capital can be formed and both inflation and deflation averted by extending bank credit exclusively for productive projects and enterprises—not for consumption or government spending. Moulton investigated and discovered that this was, in fact, in large measure how money and credit had been created in the United States during the period from about 1830 to 1933, especially after the bank reforms of 1864. The period Moulton investigated contained six distinct periods that Moulton characterized as times of great economic growth: c. 1830 to 1837, 1847 to 1857, 1868 to 1873, 1877 to 1893, 1897 to 1907, and 1922 to 1923. (Moulton characterized the period from 1926 to 1929 as one in which activity in secondary issues on Wall Street resulted in a diversion of investment capital away from production and towards speculation, and from 1930 to 1933 as a period of disinvestment.)
Moulton also briefly investigated the period from 1801 to about 1830, but the data were sparse preceding the involvement by the individual states in capital projects in the 1830s, especially canals and railroads. Nevertheless, these periods of “great expansion” made the century preceding the Crash of 1929 on the whole one of the greatest industrial, commercial, and agricultural expansions in history. He published his findings in 1935 in a small book, “The Formation of Capital.”
If such new money were to be created in ways that spread out ownership of the newly created wealth, “Say’s Law of Markets” would be restored. Say’s Law states that “production equals income,” and that “demand generates its own supply, and supply its own demand” . . . if ownership of the means of production is widespread, and the income from capital is used for consumption instead of reinvestment, as Louis Kelso, inventor of the Employee Stock Ownership Plan, or “ESOP,” pointed out in the 1950s.
In accordance with several centuries of central banking theory, the new money would be backed not by accumulated savings, but by the future income capacity of the project or enterprise being financed. Instead of past savings, the financing of new capital formation would rely on future savings, that is, income to be generated in the future by the project itself, and used to repay the debt financing. Instead of allowing the “multiplier effect” to generate unbacked money, commercial banks would have to institute and maintain a 100% reserve requirement, similar to the “Chicago Plan” developed in the 1930s.
The world’s dependence on the rich would be broken. They could use their income for consumption as originally intended, the economic “law” being that the purpose of production is consumption - not hoarding unspent (“unconsumed”) income for reinvestment to produce increasing amounts of unconsumed production.
A proposal to finance capital in this way has been developed called “capital homesteading for every citizen.” It takes as its inspiration Abraham Lincoln’s Homestead Act of 1862. The original act, while restricted to a limited type of asset, was intended to make as many Americans as possible owners of productive capital in the form of land without having to put up one cent of past savings.
“Capital homesteading” would take the process one step further, extending it to industrial and commercial assets. The land frontier was limited, but (to all intents and purposes) the commercial and industrial frontier is unlimited. As the late President Ronald Reagan declared, “What this country needs is an industrial homestead act.”
We need only add that the excess accumulations of the rich could help spread future ownership opportunities by being invested in the reserves of capital credit insurers and reinsurers. With such insurance in place to cover the risk of credit defaults on the leveraged Capital Homesteading shares in citizens’ Capital Homestead accounts, we would overcome the “collateral barrier” that puts the rich in the position where only they have access to capital credit.
That is, in fact, why the wealth gap continues to widen and the system remains unbalanced and unsustainable. The use of the savings of the rich to invest in capital credit insurance reserves, supplemented by interest premiums as part of the transaction costs for borrowings to finance capital formation in capital homestead accounts would put the power of “no interest money” created through the Federal Reserve System and commercial banks in the hands of all citizens. This would narrow the wealth gap considerably, stimulate non-inflationary growth, and allow everyone to share power and profits from sustainable growth.
Capital Homesteading can accomplish that goal—and all without harming the rich. We may not need them, but they have as much right to exist and be secure in their property as anyone else. We just want to join them.