In October of 1930 Louis Kelso saw the collapse of Caldwell and the Company, the largest financial holding company in the South of the United States that triggered the cascade that forced hundreds of commercial banks to discontinue operations. About one third of these organisations were reopened but majority were liquidated. In December fourth-largest bank in New York City, Bank of United States, suspended its operations. Kelso observed financial panic inducing depositors to withdraw funds from every bank.

The banking crisis that erupted in 1931 was followed by collapse of real estate market in Chicago. The banking crisis has disrupted the process of credit creation, increasing the prices that firms paid for working capital and preventing some firms from acquiring credit at any price. The result of Great Depression was chronic unemployment and social destruction.

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The economy after the Great Depression relied more on productive capital than on human labour

The economy that emerged after the Great Depression relied less on human labour than on productive capital – technology, land and resources. The recovery of economic growth to pre-recession levels took more than 24 months but labor market was completely changed. The estimates of Non-Accelerating Inflation Rates of Unemployment (NAIRU) shows dramatic increase in early 1930s to over 20 percent, followed by steep fall beginning roughly in the middle of that decade. The shift down stops no further than half of pre-recession levels in the end of decade to reach up to 15 percent.

Traditional economic analysis perceives combinations of “shocks” and “institutions” as a primary reason for change in unemployment. “Institutions” are “the constellation of labour market structures, rules, and customs that determine how flexibly the labour market responds to demand or supply shocks.”

It is believed that certain institutions together with its combinations can magnify the impacts of shocks and cause their effects to persist.

Observing the Great Depression and its aftermath Kelso returned to the first principles of classical economics – supply and demand, private property in labour and capital. It was clear for him that implementation of new technology in manufacturing and services cuts costs by liquidation of workplaces. Technology changed the nature of production from labour-intensive to capital-intensive. Human worker had to compete with “the capital worker”. Working meant to work increasingly through and with capital.

The shield against crisis like a Great Depression must be a system of common participation in the economy that main driver is capital. The universal ownership of capital is necessity. Every man, woman and child must earn income from capital ownership to subsidise the shrinking wage and make possible reform of overburdened welfare states.

The wide-spread capital ownership system prevents coerced income redistribution and it will lead to creation of economy resistant against shocks.

Louis Kelso was convinced that free market logic requires that every producer must be consumer. The income generated by the free market must be spent to buy that market’s current output. Otherwise we make depression inevitable and supply does not create its own demand.

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Every man, woman and child must earn income from capital ownership to subsidise the shrinking wage and make possible reform of overburdened welfare states.

The universal capital ownership addresses problems of fast privatisation of people’s assets for the benefit of few firms. In fact, the assets must be privatised for the good of the people in accordance with principles of free market.

This unique understanding of economic growth that is generated by the labor and capital performance and depends on universal capital ownership is called Kelso paradigm. American economist, staunch loyal advocate of Kelso solution, Norman Kurland and his team based their unique and complex economic program of Capital Homesteading on this new economic paradigm.