Supermoney

THERE is a certain amount of mileage, politicians discover periodically, in griping about our tax system. It is discovered that last year three hundred people had incomes of $200,000 and paid no taxes, and let’s get the bastids. Or the Atlantic Richfield Company, a major oil producer, paid no taxes on $454 million. Jean Paul Getty has an income of $300,000 a day and pays no taxes. And so on. Then there is some thrashing around, and some pulling at the drawstrings of the loopholes. You have only to turn to the classifieds in The Wall Street Journal and read the bold letters TAX SHELTER to realize that a large group of our citizens minimize their taxes. Sheltering income does not produce Supercurrency—Supercurrency being a term I made up to describe the real money of the country. Supercurrency is capitalized income, not sheltered income, and in a moment this chapter will explain it. Instinctively people know that they are not going to get rich working for a salary; part of the reason they drift toward the securities markets is that they know that is where the Supercurrency lives. But since much of the publicity is about reducing taxes on income, let us get that out of the way first.

People send the congressmen to the U.S. Congress, and Congress writes the tax laws. When the Congress wants to encourage something, it writes a favorable tax law. Cynics and Mr. Dooley could say that Congress responds to lobbies because it wants to encourage its own reelection. Congress wants to encourage the search for energy, so it writes the oil laws the way it does. As a social objective, Congress wants everybody to own his own home, so it triple-subsidizes personal housing, which incidentally makes a house one of the best investments you can make. (Do not write and say that you made your investment and then they raised the taxes and then the roof fell down and then the freeway came through.) Congress subsidizes personal housing by creating agencies to provide mortgages, by making the interest on those mortgages and the taxes on the property deductible, and by deferring the taxes when the house is sold if another one is bought within a year.

If I were making up a list of readings for a sociology course about American life, I would put The United States Master Tax Guide at the top of the list. That marvelous book will show you that Congress values things; the people may be born, get married and die, but the things live on. For a work to be of superior worth in the eyes of the Master Tax Guide, it must be a thing. If you write a poem, whatever you sell it for will always be income, taxed at the highest earned rate. That is because you created the poem. The tax law very specifically (and anti-intellectually) says that creations, particularly copyrightable ones, are always income. If you sell me your poem for $10, it then becomes a property, a thing; when I resell it for $1,000, I pay a capital-gains rate, because exchanges of things are more socially desirable than the creation of them. The anomaly develops because the privileges granted to one group can be bought by another, at a premium.

If, for example, you write a poem or sing a song or discover a cure for the common cold in your basement lab, and you are successful, your wise tax counselor might tell you to quick, go drill an oil well. But if you drill a successful oil well, no one is going to tell you to quick, go write a poem or sing a song. If one man sits alone in a room with some paper and an idea, and the ideas become words on paper, and then actors act them or singers sing them—straight income, call the driller. If one man sits in a room with some paper and an idea, and the ideas become diagrams, and the diagrams are machined into metal—you have made a thing; you can capitalize it, borrow on it, build a company with pensions, stock options, floating yachts, a little private jet, and a capital gain at the end.

The dentist who has a good year and adds up his potential tax bill may decide to drill oil, not teeth, or to go into real estate or to try some other venture. Wall Street is gearing up more and more to the selling of these packages; it can make more on them than from the commissions on stocks. The tax shelter will take the income tax from dentistry, run it through an approved thing, and produce an eventual capital gain taxed at rates lower than the dentist’s earned income rate, though if the dentist would calculate the discounted present value of the deferral, he would see that unless he is very lucky, the fees he pays to the brokers and lawyers and accountants and drillers and ranchers will probably make up the difference in the rates.

I have done this myself sometimes just to defer income from one year to another and have more time to think about it, because part of my family is in the cattle business. To defer income, you call my brother-in-law Bill and buy a lot of feed. All the feed is deductible. Then you borrow on the feed to buy the steers—the interest is deductible—and while the steers chomp away at the feed, getting fatter, you cross January 1 and into another year, when the sold steers return as income. There is, of course, a problem in addition to the income returning: the grain is real and the steers are real and they do not always get fat on schedule, and the prices at which they are sold go up and down.

If there were turkey vultures circling high in the Arizona sky, Bill would say, “Must be some of yours over there,” and if the vet was heading for a particular pen with a foot-long needle, I knew whose steers those were. One year—obviously a long time ago—I watched steer prices go from 19¢ a pound to 27¢ a pound, and I thought we were in fat city, but the profit for the year came in at $57.32. “Some of yours died,” Bill said. I do have to say that Bill is very fair and dispenses justice with a tempered hand. The next year prices went down, and my loss was only $57.32, for which I was grateful. “The other fella’s died,” Bill said. “See, it all evens out.”

Everybody knows that for rich people, taxpaying is a game of hare and hounds, the revenuers against high-priced accountants, in which you never have to settle for 100 percent of the assessment anyway. But rich people are not those who have deferred their taxes, though rich people may do that because they have smart lawyers. Your income is still your income even if the taxes are a bit lower. The real money comes from Supercurrency. The most pure forms of Supercurrency are the great companies with broad markets selling at high multiples of earnings. Granddad and Uncle Harry had a partnership. They took the money home. Uncle Harry turned it into a company, and it was then worth whatever a private buyer might pay for it. But Uncle Harry sold it to Eli Lilly or IBM or Xerox or Coca-Cola, and now Uncle Harry’s side of the family is rich and peels off the Supercurrency—shares of IBM or Coca-Cola—whenever it wants a new boat.

There are some profound social implications here, because it is not lost on the smaller proprietors of American business that the way to cash in is to turn the family business into Supercurrency, whether by selling to the public or to IBM, or hopefully first to one and then to the other. For in addition to those impulses to concentration that come from economies of scale and the aggregation of capital, there are the impulses of the owners to cash in their business for a superior currency. Further, the multiplier on the Supercurrency increases the distance between wage earners and capital owners.

The tax reforms we hear about concern the various subsidies of some taxpayers by other taxpayers. In a recent study, The Brookings Institution said that these subsidies, or benefits, or loopholes, come to $77 billion annually, so presumably the elimination of the privileges for the subsidized taxpayers would drop the rates for all the others.

But Supercurrency is beyond tax reform; it is, as any currency is, the fiber of the society. Only on the periphery, where there are stock options and other devices to let the latecomers in, is there some talk of how to get in. To reform Supercurrency would be to change the whole notion of wealth in America, to change trusts and multiple trusts, and estates and inheritance laws, and the nature of the corporate animal itself. So Supercurrency will be around for a while.

It used to be, in the imperfectly developed securities markets of days of yore, that if the company had some assets, you could sell stock to the public. The common stock then had some claim on these assets, after the bonds and the preferred. But that style has changed and the love of assets has been left far behind; it now is the income stream—and the market’s readiness to capitalize it—that matters. Uncle Harry’s company will “go public,” and in fact, its goal is not just to take care of Uncle Harry and Aunt Edna and that worthless hippie Cousin Eugene, but to make it to the public marketplace; the company will merge, borrow and doll itself up to that end objective. If the company is marginal, there are years when it may have to wait, but the commissions are fat on underwriting original issues and generally there is always a hungry underwriter.

Let us make up a capricious example. There are two Park Avenue doctors swabbing children’s throats. They are doing a land-office business. Together they make $100,000 a year. (They could make even more, but taxes are high, they like to ski, and they do not like children.) With their $100,000, they pay taxes and grocery bills, and maybe put something in the savings bank.

They form Pediatricians, Inc., meet the hungry underwriter, and sell the stock to the public at thirty times earnings. Their after-tax net is $50,000, so their stock is worth $1,500,000. Now when they want to pay grocery bills, they peel off some of the $1,500,000, as much as the market can stand. They have moved into the Supercurrency class. If their auditors had made a statement of their net worth before, it would have consisted of stethoscopes, fluoroscopes and a jar of lollipops. Now their net worth is $1,500,000—partly in cash, which they sold to the public, and the rest in their stock. Their old net worth—the sum of stethoscopes, fluoroscopes and lollipops—came, let us say, to $10,000. Their new net worth is $1,500,000. The difference of $1,490,000 is new money to the economy, just as if the Fed had printed it, and should be included in all the calculations of the money supply.

You have to have a good market to sell Pediatricians, Inc., but perhaps the example is not so capricious. Advertising agencies consisting of three hot talents, two typewriters, four crayons, a telephone and a line on some zippy accounts have made it into the Supercurrency class, thereby turning the $60,000 made by the participants into a multiple thereof.

In 1972 we had a good example of Supercurrency. The Levitz brothers—Ralph, Gary, Leon and Phillip—of Pottstown, Pennsylvania, were furniture retailers whose company netted $60,000 or so a year. Then the company noticed that sales were terrific when they ran the year-end clearance sale from the warehouse: furniture right in the carton, cash on the barrelhead, 20 percent off. The idea was very successful, they added more warehouses, and the company went public—in fact, superpublic. At one point, it was selling for seventeen times its book value, one hundred times its earnings, and Ralph, Gary, Leon and Phillip had banked $33 million of public money for their stock, and they still held $300 million worth. (History will tell, of course, whether selling furniture from warehouses is really worth 100 times earnings, but the $33 million is safely in the bank.)

I have an ambivalent attitude toward this. On the one hand, there is no question that hungry underwriters have sold lots of junk to the public. Should they be policed in some way? We get then to the other hand. In almost no other country do small enterprises have such easy access to capital, and easy access to the public markets is part of this, a great national asset. Caveat emptor: the odds are better than at the track. Small enterprises provide ferment, keep the Establishment on its toes, and sometimes even grow into great enterprises.

Does Mrs. Rudkin bake good bread at her home in Fair-field, Connecticut? She does indeed. But after her business expands into a bakery called Pepperidge Farm, the Rudkins want to trade it in for the real money. (Supercurrency brings more than cash almost every time), so they trade the bakery for $28 million of Campbell’s Soup, very good Supercurrency. With the broad stock exchange listing of Campbell’s Soup, they can peel off some, turn it into cash, diversify, and start behaving like rich people. In fact, you can go through the Supercurrency-history exercise right in the kitchen: you can see the food families’ trading right up there on the label, because usually the family name was well enough known that the Supercurrency company kept its own identity to a quiet little line somewhere. Is there some Hellmann’s mayonnaise? Obviously there once were some Hellmanns in the mayonnaise business: that is not a name an ad agency would think up. The Supercurrency ultimately turned up as CPS, formerly Corn Products, via Best Foods. Dannon is not a family name, but Isaac Carasso, a Spanish businessman, named his product after his son Daniel—hence Danone, later Anglicized to Dannon. At some point Dannon was traded in for Beatrice Foods, billion-dollar dairy Supercurrency. Is there some Breakstone cottage cheese? The Supercurrency is Kraft.

Finally, all of the following were good businesses on their own, and they all have something in common: Avis Rent a Car, Cannon Electric, Federal Electric, Sheraton Hotels, Howard W. Sams (a publisher), Continental Baking, Grinnell Corporation (pipes and pipe fittings), Hartford Fire Insurance Company (a major insurer), Rayonier, Pennsylvania Glass Sand, Southern Wood Preserving Company, and Levitt and Sons, the famous builders of Levittowns. What do all of these thriving enterprises have in common? Their owners all traded up for the same Supercurrency, ITT, formerly International Telephone and Telegraph, which has been the prime example of how a Supercurrency company uses its premium currency to buy what it stalks.

The capricious examples have a lot of “good will” in the Supercurrency (for “good will” some skeptics sometimes read “air”), but all capitalized earnings count as Supercurrency, especially the legitimate and broadly traded ones. The people in the big house on the hill have Supercurrency because Granddad bought the Tabulator company that turned into IBM, and IBM is regal Supercurrency.

Make no mistake about it, this is real money. The psychiatrists and social scientists have other definitions, but economists start with a basic definition: money is M₁, all the coins and currency in circulation outside the banks, plus demand deposits (i.e., checking accounts) in the banks. To this, most economists add M₂, which includes savings accounts and time deposits in banks. This can be spent almost as easily as M₁. Everyone does not cash in his savings account on the same day, but all you have to do is transfer your savings account to your checking account to get M₂ to M₁, and that’s pretty easy. Some economists add short-term government bills to this, since they are also practically cash.

To this I suggest we add M₃, Supercurrency. Supercurrency is the before-and-after of a stock going public, in at book and out at market. That act of going public creates additional currency, just as switching a savings account to a checking account moves M₂ to M₁. To get M₃ to M₁, you buy at book, sell at market, peel off some stock, move it to your checking account and presto! M₁, you are rich.

A while ago, there was a debate among economists on what really moved the economy, and the monetarists said, being monetarists, that it was the money supply which was most important. But in calculating the money supply, few economists paid much attention to Supercurrency, yet there it was. (All I wanted for my own efforts was a little footnote, just to the left of Say’s Law and the Hicks-Hansen Synthesis, called Smith’s Increment. A former member of the Council of Economic Advisers asked, “Are you willing to do some serious work on this?” That shut me up. I knew that meant writing up Supercurrency in Boolean algebra in Kyklos, or maybe Econometrica, presenting a paper full of Σs and Δs and little numbers lying on their sides, writing “The Social Implications of Supercurrency” for The Public Interest or maybe even the New York Review, and finally souping it all up for The New York Times Magazine. Unfortunately, even with my new electronic calculator I am lousy at multiple regressions, stochastic series and such. It might be more respectable to write up Supercurrency in algebra, but I have to do it in English. So, in English.

Everything in Smith’s Increment is Supercurrency, but only that Supercurrency which has just changed from stethoscopes and lollipops to a multiple of net counts as Smith’s Increment. At some point, all Supercurrency went through that process, but we count it only the first time it happens.

So we have a somewhat skewed income pattern in the society. There are people below or outside the level of M₁. They have problems earning any money at all, because they are badly educated or not motivated or they can’t get to where they have to go. They have no money to speak of, whether currency, coins, or checking accounts, and many of them are on welfare. Then we have the vast majority of people, earners of M₁. They go to work; their employers pay them; they spend the money at the grocery store, mail checks to the druggist, pay their taxes, stash a little into M₂, and struggle on. And finally we have the Supercurrency holders, the serene owners of the M₃.

The poor innocents among us do not realize the impact of a superior currency around. They still think the green stuff in their wallets is money. We can all huff and puff and work overtime, but there is no way we can catch up, because there is nothing to capitalize our earnings. And Supercurrency compounds beautifully, given a bit of time. The Rockefellers may be smart, but the gap between our smartness and theirs is not equal to the difference between our currency and theirs, by several light-years.

A friend of mine bought himself a twenty-eight-acre palazzo in Greenwich and fixed it up handsomely before the bear market. He said he could always get a million for it. I asked him who would have a million to spend on a house in spare times, and he said, “There will always be somebody whose company has gone public and gotten listed who can peel off some of the stuff and spread it around. There will be more of those guys than there will be houses with twenty-eight acres in Greenwich.”

Corporations sell stock to retire debt, to build new plants or what have you. That is not Supercurrency because on the books of the company the money received turns into the new plant. But when the Selling Stockholders dispense of their equity, they move into the Supercurrency class, at capital-gains rates.

There are other ways of compounding wealth, usually involving borrowing on the asset—the real property or the oil in the ground—and buying some more. But the most easily accessible form is Supercurrency, obtained as close to the source as possible. That is your number, M₃, and if riches gleam in your eye, at least you know where they are.

While there are other forms of wealth, Supercurrency is the superior currency of the country, because if they make a profit, even the oil deals and the real estate deals and the farm deals and the equipment-leasing deals will be brought to market and sold at a multiple of their earnings so that their participants can get the real stuff, traded paper.

Obviously, the laws and mechanisms of the country are built around the protection not just of currency but also of Supercurrency. It would not be the same society—whichever way you like it—without the structure and mechanisms that support the currencies, both Super and regular. Yet a very short time ago, the structure and mechanism went through some perilous times.

It is not easy to have a story about something that did not quite happen, and it is particularly not easy to have that story revolve around abstractions, concepts that may be unfamiliar, and statistics. To avoid footnotes, the statistics have been chucked into the back of the book. Most of the numbers are from the Board of Governors of the Federal Reserve, or the Federal Reserve Banks of New York and St. Louis, whose help is hereby acknowledged, or from equally public sources. It is more important for a general reader to get the feel of what happened than to walk through the mechanics, so if it gets a bit abstract, just keep going.

The first of the two moments when the structure swayed perilously is the weekend the United States almost ran out of money. That is more metaphoric than precise, but it does serve to introduce the first of the great near misses. Most investors turn only to the stock-market page, but the stock market does not exist all by itself. There are also bond markets, commercial-paper markets, commodity markets, a banking system and so on. None of these is self-contained: money does flow and the markets are interdependent. Any disaster or near disaster brings a search for villains, who fleeced the lambs, and so on. In the Crunch, the villains were very widely dispersed; in fact, the crisis point came from a rather broad sweep of history.