Monday, September 3, 2012

A Short Video on Distributism, II: Another Problem and Solution

In last Thursday's posting we noted a few problems we saw in a short video on distributism. Don't get us wrong. We liked the video, especially the presenter's refusal to use the usual neo-distributist tactic of limiting one's self to vague assertions, invented history, and ad hominem attacks. The video, however, gave a contradictory definition of capitalism (pretty hard to do, frankly, given the lack of definition that characterizes the vagary people call "capitalism") and an inadequate understanding of money and credit.

Credit being (as Hilaire Belloc acknowledged) the chief means by which new capital formation is financed, this inserted a serious flaw into the presentation, and leads into the final problem with the video: a failure to distinguish between banks of deposit and banks of issue or circulation. A bank of deposit is defined as a financial institution that takes deposits and makes loans. The most common types of deposit bank are credit unions and savings and loans.

A bank of issue is defined as a financial institution that takes deposits, makes loans, and issues promissory notes. The most common types of issue banks are commercial and mercantile banks, and central banks, which were invented to function as "banks of issue for banks of issue" to ensure an adequate, elastic, stable and uniform currency.

Restricting banking to deposit banking limits the financing of economic growth to what has been withheld from consumption in the past. Using issue banking shifts financing from what has been withheld from consumption in the past, to what can be produced in the future. The rapid economic growth experienced since the 17th century is the result of the reinvention of commercial banking and the invention of central banking.

The problem is that, since most people do not have the collateral that qualifies them to use issue banking, they are forced to use deposit banking if they want to finance new capital. Given the cost of most new capital instruments these days, it is a virtual certainty that most people will not be able to make the effort, much less succeed once they do make the attempt.

Louis Kelso solved this problem with the invention of the Employee Stock Ownership Plan (ESOP). Under current law the ESOP is a way in which employees of a company can purchase the company and pay for it out of future profits.

That addresses the concentrated ownership of existing capital, but not ownership of future capital, which is where the growth — and opportunity — are. CESJ proposes "Capital Homesteading" as a means by which people without collateral can become capital owners by purchasing new equity issues with the full rights of property (including the vote and full payout of profits). This would be done using non-recourse loans secured with capital credit insurance instead of traditional forms of collateral, and paying for the shares using future profits.

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