The Citizen’s Share The Roots of Employee Stock Ownership in American History.

The Citizen’s ShareThe Roots of Employee Stock

Ownership in American History

Joseph Blasi, J. Robert Beyster Professor ofEmployee Ownership Rutgers UniversitySchool of Management and Labor Relations

Speech to The ESOP Association Conference November 7, 2013

The American War of Independence

1st President George Washington

The Cod Fishery Had Shares• The fourth largest export industry • Expected to be a major source of revenue for the new

U.S. Government • Played a key national security function by training

sailors for the new navy• Shares were common for over a century in the industry• To weaken the rebellious colonies the British worked

hard to destroy the entire industry during the war• President Washington asked Secretary of State Thomas

Jefferson to head a committee to bring the industry back

Early Research on Shares

”The Captain and the Crew drew one half, and agreed among themselves in what Proportion to divide the fare. Sometimes the Owners hire the men by the month and give them Common Seaman’s wages…they were generally found the most attentive when their Dependence was on Share of what they caught.”

-Joseph Anthony, the leading shipper in Philadelphia,Letter to Assistant Secretary of the Treasury Tench Coxewho was assisting Secretary of State Jefferson

The First Legislation on Shares

• Washington signs a law on the cod fishery on Feb 16, 1792 on Thomas Jefferson’s recommendation

• It is very similar to Federal ESOP legislationgiving tax incentives to ships that use shares

• Tax credits went 5/8ths to the crew but the condition was broad-based profit shares for all

The American Vision Was Shares• Every citizen should have enough property in

land to be independent and have liberty – “ever pleased with laboring on their own farms”

-George Washington, 1789

• “It (America) will not be less advantageous to the lowest class of people because of the equal distribution of property.”

-George Washington, 1789

2nd President John Adams

Adams on Shares• “the balance of power in society accompanies the balance

of property in land”

• “the only possible way of preserving…equal liberty…is to make the acquisition of land easy to every member of society”

• In Massachusetts, they granted public land liberally • Favored policies to broaden ownership

• His classic statement: “the property of every man has a share in government”

3rd President Thomas Jefferson

TJ Developed Policies

• His draft of the Virginia Constitution called for a grant of 50 acres to every citizen

• As Washington’s Secretary of State, he led the Cod Fishery Committee

• He wrote the first report of the nation favoring liberal distribution of public lands for GW in order to create a property-owning republic

Jefferson on Shares

• “not too soon to provide by every possible means that as few as possible shall be without a little portion of land”

• “legislators cannot invent too many devices for subdividing property”

• His Belief About Owners: “they are tied to their country and wed to its liberties”

4th President James Madison

Madison on Shares

• “the owners of the country form the safest basis of free government”

• “withhold unnecessary opportunities to increase the inequality of property”

• “without violating the rights of property reduce extreme wealth toward…mediocrity”

• Madison’s back of the envelope prediction: there is not enough land for the growing population

First Secretary of the TreasuryAlexander Hamilton

Hamilton on Shares

• Favored the role of a financial elite BUT also held:

• “the desire of being an independent proprietor in land is founded on such strong principles in the human breast”

• Actually implemented the cod share laws

• Thought “the equality and moderation of individual property” would promote growth

Radical Measures to Promote Shares

• The Founders opposed what we could consider communism and socialism and state ownership and the redistribution of wealth

.• They were not for anything goes – outlawed primogeniture.

• Northwest Ordinance of 1787 – Ohio, Indiana, Michigan, Wisconsin, 1/3 of Minnesota with servitude abolished in this territory

• Louisiana Purchase – almost a million acres (but some plantations moved in and sullied the idea of “the empire of liberty”)

• Until 1862, liberal policies of low cost land, liberal credit, and installment payments, very similar to today’s Leveraged ESOP

• Citizens continually favored foregoing revenue to create shares for broad ownership.

The Northwest TerritoryServitude was abolished here!

The Louisiana Purchase – an “empire of liberty” but some errors

Citizen Support for Shares

• “Shares of land” was the most popular public policy other than free postage for citizens

• Land shares were central to the foundation of the Republican Party – the Free Soil Party

• For homesteads: the largest nationally coordinated petition drive in American history – in newspapers

• Eventually became a cornerstone of both the Democratic Party and the Republican Party Platforms

President Abraham Lincoln

Lincoln on Shares

• ”a higher and more enduring interest…than in the amount of direct revenue”

• “I am in favor of cutting up the wild lands so that every poor man may have a home.”

• The Homestead Act of 1862-grants of 160 acres based on sweat equity-liberal pricing, later installments, expanded size-10% of the US, 1.6 million farms,20% of public land

Republican Speaker of the House of Representatives Galusha Grow (R-PA)

When Land Runs Out?????

• This created a lot of worry in the Founders’ generation

• Adams and Madison feared the manipulation of the population by the rich and political parties

• Grow said that the future of the homestead idea was in shares in corporations

• Corporate leaders developed shares for a century.

• Message to the Tea Party: small government + low taxes + broad-based property acquisition = Founders

Lessons Learned• The Founders believed that shares were the solution to economic

inequality.

• Their LARGEST public policies, were, on shares & were radical

• They were willing to use tax incentives and forego tax revenue because they held shares = small government

• The reason is that they believed a democratic republic could not exist without broad-based property ownership – a national security issue.

• Their policies were very similar, for example, to Louis Kelso’s Employee Stock Ownership Plan: acquisition of capital with a variety of mechanisms namely grants not based on wages, acquisition through installments, support of the tax system

Credit, Installments, Low Interest

What Is A Strong Policy for Shares? • NO: Corporate welfare of IRC 162(m) has used $5 to 15 billion per year

to promote concentrated employee ownership in only 5-10,000 stock market companies and costing 5-10 times annual ESOP tax incentives

• YES: The U.S. needs a far-reaching expansion of employee ownership tax incentives, for stock market and private companies.

• In comprehensive tax reform, shares must be a condition for the $1 trillion in corporate tax incentives that corporations typically receive over several years, with a broadened tax base as a result of more citizens who have shares in corporations, a lower corporate tax, and lower capital gains taxes.

THE END