Binary Economics – The New Paradigm

Linked with Center for Economic and Social Justice CESJ, and with Defining Economic Justice and Social Justice.

Published on CESJ, by Rodney Shakespeare, August 14-18, 2000. (Final version of paper presented at the ISSEI Conference, Bergen, Norway, Section IV, Workshop 452).

Is there a Third Way? No, not if by ‘Third Way’ is meant the vacuous rhetoric of Clinton and Blair which likes to give an impression of progressive policy while keeping the reality to the right of centre.

A few years ago, the British Labour party and the American Democrats could have been expected to be social democrats (i.e., supporting a mixed economy with relatively high levels of state spending). Today they are simply proponents of ‘free market’ capitalism. Elsewhere in Western Europe, the picture is largely the same despite some traditional socialist rhetoric coming from France, for example. Plus ca change, plus c’est la meme chose …

… A big corporation or company wishes to expand. It could go to the bank for the money but, if it were much cheaper, it might decide to ask a Constituent Trust (similar to an ESOP) to put up the cash. Acting for employees or for anyone, the trustees make a proposal to a local bank which independently evaluates the soundness of the proposed expansion. If the expansion is approved, the bank prepares to lend money to the Trust. The Trust gives the money to the corporation and, in exchange, the corporation issues new shares to the Trust which then holds the shares in the name of its constituent clients.

I mentioned cheap money. Well, the present ESOP has some financial advantages, but far from enough. In particular, binary economics proposes that cheap money should be used. Under new legislation providing for low or nil rates of interest for capital expansion linked with wide ownership purposes, the bank would go to the Federal Reserve. The Federal Reserve would issue the money at a nil or low rate of interest, and give it to the bank which would then lend it to the Trust. (See section 13 of the Federal Reserve Act in the USA.)5

In order to protect the bank and the Trust against possible losses from business failure and default by the corporation, the Trust pays a premium to buy insurance from a Capital Credit Re-insurer. The cost of the premium is added to the cost of the investment and charged to the client, as is the administrative cost of operating the Trust. The financial soundness of the privately owned Capital Credit Insurer will be guaranteed by new legislation creating a Federal Capital Credit Re-insurer (similar to the Federal Deposit Insurance Corporation – “FDIC” – which safeguards bank deposits against loss).

For the next 5 – 7 years (! the article was written in 2000), on average, the Trust will receive dividend income from the stock held in trust for the client. This income is credited towards the cost of the stock bought in the client’s name and is repaid to the local bank which provided the original loan.

The local bank, upon receiving repayment from the Trust, in turn repays the Federal Reserve. The Federal Reserve can, of course, then cancel the money or recycle it into further industrial expansion by lending it to other banks dealing with other Constituent Trusts acting on behalf of other clients.

As each share of stock is paid for in full, it is released from the Trust and full ownership accrues to the client. He/she will thereafter receive the cash income from his/her investment in the form of dividends or capital appreciation. The money is his or hers!! Although, of course, it is possible to arrange things so that the money is held on trust for the client, if that is appropriate … (full long text).

Link: The Binary Economics of Louis Kelso: A Democratic Private Property System for Growth and Justice, 34 pdf-pages.

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