Louis D. Brandeis, a Supreme Court Justice and prominent member of the Progressive Movement, at the height of the Great Depression was asked whether that was the worst of times. He answered: "[T]he worst happened before 1929." If we use our current travails as an opportunity to give roots to moral capitalism, we might truly say that the worst is behind us.
What is moral capitalism? Moral capitalism is a financial system that operates with the deepest respect for the moral law. The root of the moral law in economics is the same as the root of the moral law in all other aspects of life: the principal rule is, do not steal. Rather than going through the sad and divisive litany of what constitutes stealing or who does the stealing in today’s society, let us spend our energies on how to prevent stealing in the future.
To obtain moral capitalism we need to enforce three rules: Give access to national credit to those who qualify for a loan; issue such loans at cost; expand the ownership base of the national economy when you issue such loans.
National credit is what the Federal Reserve System uses when it creates new money by making a loan to an applicant. An applicant under the proposed system can be an individual entrepreneur, a corporation, a cooperative, or a governmental unit with taxing power. To avoid swamping the Fed under such requests, loan applications should be chandelled through the existing monetary institutions: banks and other financial institutions would apply for loans at the discount window of the Fed. In this way, neither the Fed nor any political entity would influence the allocation of credit; it would be the market to make decisions as to apply or not to apply for a loan. And the essential precondition for the issuance of any such loans must, of course, be the ability to repay the loan. National credit is not a stream that comes from nowhere and goes into the pockets of a few chosen people. National credit is a pool of resources; a pool of common resources. Since such a pool is not made of inexhaustible resources but of necessarily limited resources, the pool must be replenished by the repayment of the loan. This way no inflation is created.
No inflation and no undue political influence is allowed in the proposed system also because, to qualify, these loans have to be issued exclusively for the creation of new real wealth, for the creation of new productive systems, new tools, new gadgets, new consumer goods. No such loans should ever be issued to buy financial instruments, goods to be hoarded, and consumer goods.
By not allowing access to national credit to purchase financial instruments, goods to be hoarded, and consumer goods, a repetition of the worst that has occurred during the past decades would be eliminated. The essential economic reason why such loans do not qualify under the proposed system is that the purchase of none of these financial or real goods assures the lender of the repayment of the loan. As old economists such as Adam Smith or Keynes would say, these are nonproductive loans; these are speculative loans. (For Smith, see pp. 300-340, especially pp. 339-340 from the Modern Library (Cannan) edition of the Wealth of Nations, and for Keynes see pp. 339-340 and pp. 351-353 of the General Theory). Application for these loans should be directed to private banks and loan sharks, not to such a vital institution as the administration of national credit. The Fed cannot take the risk of non-repayment of resources that are entrusted to its stewardship.
The moral reason for not allowing such loans under the proposed system is immediately realized: while capital credit liberates us, consumer credit enslaves us. Consumer credit destroys such virtues that are essential to citizenship as prudence and temperance. The moral reason does reinforce the economic reason and forms an indissoluble unit with the political reason: if we want a stable and just society, we cannot foster consumerism. Consumerism, based on envy, engenders social instability. Social instability cannot be fostered by public institutions. Let private banks deal with those base forces—while regulating them to prevent usurious interest rates and wild expansion of the money supply through modulated reserve requirements; let public institutions truck only in the realm of the higher values.
Capital loans should be issued at cost. To gain independence from the political realm, the Fed has been selling our national inheritance, our national credit, for a mess of pottage. The Fed has been making a profit on the loans that it has issued in the past. Well, the Fed has to realize that, by using a resource whose value is created by all the citizens of a nation, it cannot operate as a private institution. Its operations have to be transparent and have to be conducted for the benefit of all citizens. Not to make a profit on such loans, to make these loans at cost is performing the only public service to which it is entitled by its responsibilities. (We believe in the free market; and yet, we tolerate the Fed to set the most important price in the system: the interest rate, the price of money.)
And just because the value of money is created by all the citizens of a nation, the administration of the national credit can be exercised only for the benefit of everyone. But not everyone is an entrepreneur. That is true. The solution is this: qualifying loans are loans that are issued to individual entrepreneurs or to cooperatives, and to corporations that establish a Stock Ownership Plan (ESOP) for the benefit of all their employees.
It is only if employees become stockholders that they can be held accountable for all the operations of the corporation. That is our only hope to ever establish transparent accounting systems, ecological safe processes, and operations that are safe for humans. A socially responsible corporation is a dream of ideologues; what we need is a morally responsible corporation—a corporation whose every stockholder and every employee/owner is a morally responsible person.
What does this mean for the immediate future? It means that we were not able to solve issues of moral hazard in the past and we will not be able to solve them in the future. By avoiding the moral questions, we are laying the foundation for future failure. And future failures are going to be increasingly more painful. Under the proposed system, failed corporations, no matter how big, should be allowed to fail. If there is any value left in them, all employees, generally knowing the facts, will get together, form an ESOP, and purchase those assets. Being new—or renewed wealth—these loans would qualify to apply for a loan to be issued with national credit. That is the way to create the base for moral capitalism.
(c) 2011. Carmine Gorga, PhD, is president of The Somist Institute and author of numerous publications, including The Economic Process (2010).
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