Drew Field
Direct Public Offerings


Books by Louis O. Kelso


Lou Kelso hired me for my first job with a law firm.  After our work lives separated, we had occasional luncheon conversations for the rest of his life.  Lou wrote five books over 30 years, demonstrated his programs with clients of his law firm and investment bank, lobbied new legislation and delivered hundreds of interviews, speeches and essays.  He died in 1991 at age 78.


Lou self-published his first book, The Distributive Dynamics of Capitalism, in 1956.  A friend and client of Lou’s, Mortimer Adler, had authored several published books.  With the two of them as co-authors, The Capitalist Manifesto was published by Random House in 1958.  They followed this in 1961 with The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings, Random House.   


In 1967, Lou and Patricia Hetter co-authored Two-Factor Theory: The Economics of Reality:  How to Turn Eighty Million Workers into Capitalists on Borrowed Money and Other Proposals, Random House.  Lou’s final book, co-authored with Patricia Hetter Kelso and published by Ballinger in 1986, is Democracy and Economic Power:  Extending the ESOP Revolution


Articles by Lou, books by others on his ideas and information about Lou can be seen at www.kelsoinstitute.org/bibliography.html.   Extensive biographical anecdotes about Lou’s life and work are in Stuart Speiser’s book, A Piece of the Action.  Rutgers University has established a fellowship for "studying the topic of broadened ownership of capital in a democratic society in the Unites States," described at http://www.smlr.rutgers.edu/KelsoFellowships.pdf.


Lou’s books use theory and history to justify a movement toward broader ownership of capital.  Then he describes his own ways of doing that. These commentaries on Lou’s books are directed primarily to his programs.


* * *


The Capitalist Manifesto was written during the Cold War, when capitalism and communism were competing economic systems.  In part one, Lou shows where he thinks Karl Marx made his big mistake and says:


            The path the capitalist revolution will take faces in exactly the

            opposite direction from that taken by the communist revolution. 

            It seeks to diffuse the private ownership of capital instead of

            abolishing it entirely.  It seeks to make all men capitalists instead 

            of preventing anyone from being a capitalist by making the State

the only capitalist.


Part two of the book is Lou’s program for the “capitalist revolution.”   It would help households become owners of corporate shares.  They would pay for the shares through bank loans.  Dividends on the shares would first repay the loans.  After that, the dividends would be a major source of household income.


Each element of the program calls for new legislation.  One major government program would make credit easily available for households to invest in businesses.  A “Capital Diffusion Insurance Corporation” would be federally chartered, to insure against some of the risks, such as the failure of a business to sell all of a securities offering and the catastrophe to a borrower from multiple business failures.  This insurance is intended to lower the bank’s interest rate so that the borrower’s loan payments would be less than the expected dividends on the shares.


To provide cash for loan repayment and household income, corporations would be required to pay out their entire net income in dividends.  (Younger businesses could retain earnings for growth and reserves against risks.) 


* * *


The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings, further explains how new investments would be financed by loans, rather than only from savings.  The problem this would solve is presented as: 


The conventional methods of financing new capital formation involve a systematic concentration of the ownership of productive capital.  [The challenge is to find a method] which would simultaneously promote the growth of new capital formation and increase the number of households owning viable capital estates.


This second book describes the method as a “financed-capitalist program.”  The loans proposed for individuals to buy securities would be non-recourse.  That is, like most home mortgage loans, the lender could foreclose on the securities purchased but the borrower would not have to pay any remaining balance.  That risk would be insured by the Capital Diffusion Insurance Corporation (CDIC).  The insurance would not protect against the failure of any one business.  Rather, the borrower/investor would be required to have a diversified portfolio and the risk insured would be that the value of the entire portfolio sank below the amount of the loan.


The insurance underwriting policies of the CDIC would determine which businesses could have their securities purchased in the financed-capitalist program.  These policies would include an anti-monopoly limitation, the promotion of technological improvement, inflation control, preventing concentration of share ownership and encouraging equity financing over debt. 


There would also be CDIC policies for deciding which households could participate in the financed-capitalist program.  For instance, they should not be ones who would use their freedom from working for a living “to fall into idleness, lasciviousness, perpetual play, or other mischief.”  Nor should they be people who would “continue feverishly to produce and accumulate . . . more wealth.”


Eligible households would need the “economic knowledge” to manage their investments, “or at least the aptitude and willingness to acquire such knowledge.”  They should have the “educational background” to “provide some basis for hope that the freedom from personal toil which can be achieved through capital acquisition would be constructively used to contribute to the work of civilization.”   


* * *


Two-Factor Theory: The Economics of Reality:  How to Turn Eighty Million Workers into Capitalists on Borrowed Money and Other Proposals looks at concentration of  wealth as the result of a one-factor economic theory: that labor is the only contributor to production.  In the U.S., this has led to a policy of full employment and higher wages.  To take care of those who are too old or unable to work, the policy takes taxes paid by the workers to be redistributed under Social Security, unemployment insurance and other entitlement programs.


The two-factor theory would use “universal capitalism” to provide income to households, beyond what they earned from their labor.  The objective is not only to alleviate poverty and free people from living paycheck-to-paycheck.  It would also build a “second economy.”  The explanation is that:


1.  The very few households who now own nearly all of the

productive capital are receiving far more income than they use to

buy goods and services. 

2.  That additional income gets reinvested, rather than spent on


3.  If the income from capital were paid to far more households,

more of it would be spent in ways that supported increased


4.  This would increase the economic growth rate and the total income to be distributed as a return on capital.

5.  The far greater business income, paid to many more households, would eventually replace the need for income redistribution programs.


The book proposes a “Second Income Plan Trust” which would purchase the employer’s newly issued shares and hold them in trust for the employees.  A corporation could also have a “financed-capitalist program,” for selling newly issued shares to nonemployee households.  Loans to fund the purchase would be made by banks, based upon insurance by the Capital Diffusion Insurance Corporation.  (This later book has the CDIC insuring “against failure of the new plant, etc.” financed by the newly issued shares “to pay off their purchase costs within a prescribed financing period.”)


Tax laws would be amended, so that corporations could deduct the amount of dividends paid to reduce CDIC-insured loans.


* * *


Democracy and Economic Power:  Extending the ESOP Revolution.  This final book explains the first ESOP Lou created, in 1956, and how that experience can carry over to:


MUSOP (Mutual Stock Ownership Plan, a trust owning several

small businesses for the benefit of all their employees.)  The costs

of creating and administering an ESOP are usually far too great for

a smaller corporate business.  The MUSOP would allow multiple

businesses to share the costs.


CSOP (Consumer Stock Ownership Plan, a trust owning a business for the benefit of its customers.)  Lou says that, after he created the first and only CSOP, for Valley Nitrogen Producers in 1963, its competitors lobbied Congress to prevent the creation of any more.


GSOP (General Stock Ownership Plan, for ownership of a business by all the citizens within a related geographic area.)  Lou worked to have Congress pass the General Stock Ownership Corporation law of 1978.  The Alaska state constitution had been amended in 1977 to have 25% of all the state’s mineral rents and royalties placed in a permanent fund.  Unlike the trust form of his other plans; the Alaska GSOP was to be a corporation which issued one share for each of its citizens.  After a five-year escrow, the shares would be owned directly by the individuals.   (A 1972 effort for a similar fund in Puerto Rico had lost out in political battles.)  Instead of adopting the GSOP plan, Alaska chose to use a trust, managed by trustees appointed, reappointed and removable by its governor  (www.apfc.org/fundlaw/ConstAndLaw.cfm.  That trust is one of the examples used for Peter Barnes' proposal in his 2006 book, Capitalism 3.0: A Guide to Reclaiming the Commons.)


ICOP (Individual Capital Ownership Plan, a trust through which individuals could borrow money to buy securities issued by small businesses.)  The securities would be rated and the loans to purchase them would be insured to cover failure by the businesses.


COMCOP (Commercial Capital Ownership Plan, a trust to hold commercial real estate for the benefit of individual investors.)


PUBCOP (Public Capital Ownership Plan would provide insured loans to buy securities in corporations which owned privatized public facilities, like streets, schools, prisons, airports and transit systems.)


RECOP (Residential Capital Ownership Plan, which would combine insurance on home mortgage loans, to lower the interest rate, with tax deductions.  The combination would reduce the amount necessary for loan payments.)


All of these purchases would be funded entirely by loans.  Repayment of the loans, except for home mortgage loans, would come from interest and dividends on the securities purchased.  There would be insurance against the risk that this would not be enough to make the loan payments.  The commercial insurance would be reinsured by the Capital Diffusion Reinsurance Corporation, to be established by the federal government.  When the loans had been paid, by interest and dividend income from the purchased business, the individuals would get the right to vote their shares and receive the income directly. 


The balance of this final book explains some of the theories behind Lou’s programs and describes a changed role for labor unions in converting their members to capital owners.


* * *


Comments on the Kelso programs.  Lou and I agreed about the need to broaden the ownership of capital and increase the number of individuals who could receive investment income, as a supplement to work earnings.  We had three differences about how that could be done:


1.  Lou’s programs placed an intermediary between the individual owners and the business.  Direct offerings create a direct relationship between owners and management.


2.  Lou’s programs require extensive government legislation and oversight.  Direct offerings use the existing legal framework, without any special treatment.


3.  Lou’s programs used Wall Street investment bankers, including Kelso & Co., in packaging and distribution.   We have prepared electronic toolkits for use by the business itself in designing and completing direct offerings.


Lou believed passionately that each of these three elements was necessary.  He told me that the intermediary was needed because the new owners did not have the experience or training to manage direct investments.  He said this was a temporary measure and could gradually be eliminated as more people became capable of capital management.  In our direct public offerings, over 90% of the investors have never owned shares directly in a business before.  Nor do they have an account with a securities broker.  Nevertheless, our interviews show that they read the offering documents and perform the same kind of “risk/reward analysis” as securities analysts and investment managers. 


Government intervention was necessary, Lou argued, because vast borrowings were required for workers to invest in businesses.  The financial institutions would not extend that credit without government guarantees, tax benefits or other incentives.  As to our direct offerings, one of Lou’s followers referred to them as a “Marie Antoinette” response.  (When told the French people could not afford bread, their queen reportedly said:  “Let them eat cake.”)  The point of the comment being that households don’t have money to invest, unless they can get loans that are repaid from the investments’ income.   However, we have seen that “workers” will choose to allocate money to owning shares in a business, rather than spend it on something else.  The money is there, if it can be diverted from consumption.  Government-supported borrowings are not necessary. (Ironically, Paul Samuelson, Nobel Laureate in Economics, referred to Lou’s programs on television’s “60 Minutes” as:  “It really has a Marie Antoinette-ish ring to it.  ‘Let them own capital!’”)


Lou’s programs are complex and require professional intermediaries and their advisors.  The ESOP and all the other “_SOPs” involve creating trusts and intricate financing negotiations and documentation.  There is clearly a role for investment bankers and their lawyers.  Direct offerings rely on simple structures that have been used for centuries.  We maintain electronic toolkits for direct offerings and have demonstrated that they can be done without these financial engineers and sales forces.


These differences do not detract from the benefits that I and many others have gotten from Lou’s writings and examples of his theories in action.