Mr. Summers, let me refer you to Chapter 13: the whiteness of the whale

In the election of 1910, Democrats took control of the House of Representatives. The economy still hadn’t recovered from the bust of 1907. The original impetus for the progressive legislation that had received support and scorn in equal measure from Teddy Roosevelt – America’s most bipolar president – had not died out, which is why President Taft couldn’t block the amendment to the Constitution instituting a federal income tax. Unfortunately, the move to force corporations to incorporate federally, instead of in the states, failed.

There was, back in those days, a burning issue that has flamed out so much since that the very word brings an eery blank to the mind: overcapitalization. The reason this figured so heavily as a scare word among the progressives is that the era from the turn of the century to the establishment of the Interstate Commerce Commission, in 1914 – which is generally taken to bookend the progressive moment – saw the instantiation of what Lawrence Mitchell, in The Speculation Economy, claims is the founding moment of modern American capitalism: the subjugation of industry to finance. This was a moment that expressed itself on several fronts – for instance, the Courts finally cleared up the confusion about how property law applied to corporations – creating a new form of property, defined by John Commons this way: [the old common law definition] … is Property, the other is Business. The one is property in the sense of Things owned, the other is property in the sense of exchange-value of things. One is physical objects, the other is marketable assets.” [quoted by Sklar, page 50]

One of the results of this legal change, or rather, one of the reasons it came about, was that the notion of a corporation as a body issuing stock was changing. And that change brought up the charge of overcapitalization – that a corporation, instead of finding its raison d’etre in using its assets to produce a good or service on which it made a profit, was now an entity wrapped up entirely in the market for its stocks.

In 1911, a bill was voted through the House of Representatives and narrowly turned down in the Senate that would have smashed this legal structure. S. 232 built on legislative ideas already crafted during Roosevelt’s term (remember, Roosevelt was in the wings in 1911, and would run in 1912, thus ruining Taft’s chance at a second term). S. 232 would not only have required federal incorporation of all interstate businesses. Here’s Mitchell’s description of it:

“It would have replaced traditional state corporate finance law by preventing companies from issuing “new stock” for more than the cash value of their assets, addressing both traditional antitrust concerns and newer worries about the stability of the stock market by preventing overcapitalization. But it would have done much more.

S. 232 was designed to restore industry to its primary role in American business, subjugating finance to its service. It would have directed the proceeds of securities issues to industrial progress by preventing corporations from issuing stock except “for the purpose of enlarging or extending the business of such corporation or for improvements or betterments”, and only with the permission of the Secretary of Commerce and Labor. Corporations would only be permitted to issue stock to finance revenue-generating industrial activities rather than finance the ambitions of sellers and promoters. … S. 232 would have restored the industrial business model to American corporate capitalism and prevented the spread of the finance combination from continuing it dominance of American industry.” (137) In Sklar’s account of the Roosevelt era draft, ‘whenever the amount of outstanding stock should exceed the value of assets, the secretary would require the corporation to call in all staock and issue new stock in lieu thereof in an amount not exceeding the value of assets, and each stockholder would be required to surrender the old stock and receive the new issue in an amount proportionate to the old holdings.”

This may well be the most radical legislation every considered by Congress. Think of it – the stock market as we know it today simply wouldn’t exist. Instead of being a legal fiction, the stock holders would literally own the company, and their profits would be limited to the profits of the company. The price to earnings index would level out so that the stock price would only hover marginally above earnings.

Needless to say, America did not go down this path. In fact, this path of needles seems to have been so traumatic an adventure that it has been thoroughly forgotten. We accept the equities market as it is as an expression of American capitalism. It is really an expression of changes in the physiology of American capitalism that came about during this era – almost overnight, in Mitchell’s view.

The last couple of weeks have both deepened the desperate prospects for the economy and shortened the dimension of changes we are supposed to envision for that economy. Obama’s bright old things – the Geithner/Summers/Romer crewe – have every intellectual investment in how things used to be. Like, two years ago. Why not? They feel themselves to be at the very least master carpenters in the building of the Great Moderation. LI’s stand is that the system – the mangle of inequality – is collapsing, and our vision is that this collapse will be mortal – but this might just be the optimist in us, Jonah’s kindly side, looking forward to Ninevah’s conversion. We think that crewe would certainly resist the radical remedies of 1911. Roosevelt would now be considered somewhat left of Chomsky. However, we have to have broader vistas in order to think about what is happening here. This is one of the reasons that LI considers the strongest charge against Summers to be that he doesn’t read literary novels. He should be questioned on this. The whole board of Economic Advisors should stock up on the great novels – we’d suggest, among others, Moby Dick and J.R. It is the lack of imagination of the self-aggrandizer set that actually produced this mess. At the bottom of the deaths of so much over the last eight years – the death of Iraqis, the death of American money, etc. – is a mortal lack of poetry.

LI, doing our part, will end with another notice from Ludwig Hohl.

“The alteration of the object to be tested through the person, the appearance of the tester, is also very important in the investigation of human situations. One goes to visit the unhappy, the said, the lonely: the visit effects a change. The deepsea divers appears 900 meters below the surface of the sea with a lamp of a terrible intensity, in order to surprise life. But those that were there, flee the light, while those who weren’t there, come near to it. (In spite of all of which, here outer eyes have seen what is hardly given to inner eyes to see, dreams and fantasies).”


northanger said…
the names remain the same :: "The servants must under no circumstances learn who we are," cautioned Senator Aldrich. "What can we do to fool them?" asked another member of the group. The problem was discussed. "I have it," cried one. "Let's all call each other by our first names. Don't ever let us mention our last names." It was so agreed… Nelson had told Harry, Frank, Paul, and Piatt that he was to keep them on Jekyl Island, cut off from the rest of the world, until they had evolved and compiled a scientific currency system for the United States, a system that would embody all that was best in Europe, yet so modelled that it could serve a country measuring thousands against European countries measuring only hundreds of miles… Later Benjamin Strong, Jr., was called into frequent consultation and he joined the "First-Name Club" as "Ben."
P said…
"the subjugation of industry to finance"

So the bondholders chuckle nervously while the UAW gets mugged. After all, you can't touch a bond indenture, but a retirement plan, well, fuck those guys while you can - "crisis gives you leverage to make changes you ordinarily couldn't make."

And yet, as Schumer pointed out this morning, no word from the dealers, no word from the bondholders on what concessions they will make.