The Citizens Land Bank:
A Just Third Way for Financing Urban Development
By Norman G. Kurland
Presentation before Canada-United States Brownfield Summit (CUBS) Panel
“Funding Right-Sizing Cities”
October 7, 2010, Buffalo, New York
Bucky Fuller, one of my intellectual heroes, said, “We are called to be architects of the future, not its victims . . . . [Our challenge is to] make the world work for one hundred percent of humanity in the shortest possible time with spontaneous cooperation and without ecological damage or the disadvantage of anyone.” So, welcome, fellow architects of the future.
As a practical matter, as was suggested by my fellow panelists, each of you should pursue financing for your projects, as well as for the project I will propose today, through all conventional sources — public sector, foundation, and existing private sector sources.
But in today’s troubled world of mounting budget deficits and shrinking private-sector bank loans, how many of you think that these sources will be sufficient for funding all of the city right-sizing, brownfield redevelopment and new community development projects you think should be implemented? Please raise your hands.
My major purpose in coming before you today is to encourage you to think outside-the-box, beyond the short-term, and in ways that would empower every American with a personal stake in a market-based version of grassroots economic democracy. I want you to consider how we could reinforce in economic terms what our Voting Rights Act of 1965 did in lifting racial barriers to universal participation in today’s political democracy. I want you to think long-term and optimistically about the impact your most creative initiatives could have over the next 100 years for people living in your community, assuming there was enough money to fund your projects.
My hope is to convince enough of you mayors and professionals in this audience to be willing to explore a non-conventional but politically timely approach that would tap into an existing but overlooked source — a “hidden reservoir” — for financing your boldest vision of the future. We call this new approach “Capital Homesteading.” It would create communities where new investment and new private-sector jobs would be created, and where every man, woman and child —no matter how poor — could become a capital owner of growth capital. In this new way, have-nots could become haves without depending on or taking anything away from current haves. As will be explained, this approach would employ 100% leveraged bank financing, which is available today under Federal law for worker-owners.
If I (we) succeed today, members of this body will decide to form a task force for Capital Homesteading, who would in turn select other mayors and professionals with experience in Capital Homesteading financing. Together, the task force would study, develop strategies and mobilize a critical mass of “people power” that may be needed to gain access to this hidden reservoir of money. The source of new money for urban development that I will describe to you today is not subject to budget deficits. It is not dependent on local, State or Federal taxpayer support.
The source of this new money and how to tap into it starts with the preamble of the original Federal Reserve Act of 1913, which reads:
“An Act to provide for the establishment of Federal reserve banks, to establish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”
The key to monetizing private-sector growth so that it provides ownership-expanding financing not for the few, but for every member of your community, is in the opening sentence of the second paragraph, Section 13, of this original act. This reads:
“Upon endorsement of any of its member banks, with a waiver of demand, notice and protest by such bank, any Federal reserve bank may discount notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Federal Reserve Board to have the right to determine or define the character of the paper thus eligible for discount, within the meaning of the Act.”
Before I explain what this paragraph means for financing your community’s short-term and longterm development projects, and the specifics of how you architects of the future can access the “hidden reservoir,” let’s first consider a new, people-centered version of economic growth.
Some of you may have read the recent remarks of the UK’s former prime minister Tony Blair in the September 25th issue of the Wall Street Journal. Blair called for a “Third Way,” a strategy in which government should be for empowerment of all citizens, not for entitlements. He suggested that government policies should encourage strong growth and create wealth. He suggested that the tax system should encourage hard work, and enable enterprises to be competitive in global markets. I agree with him to that extent.
But, with all due respect, America needs not just a “Third Way.” We need a Just Third Way.
We need governments at all levels, but especially at the federal level, to empower all citizens economically and lift all artificial tax, monetary and financing barriers to rapid market disciplined growth that pulls all the unemployed and underemployed into new private-sector jobs. We need government to ensure as a fundamental right of citizenship more equitable access by every man, woman, and child to ownership of wealth-producing growth capital. Such growth capital would include all development land, infrastructure, new technologies, new rentable space, and even intangible assets like participatory management and quality control systems.
As John Dondanville mentioned, I was an architect of the laws making 100% leveraged employee stock ownership plans legislatively available. Considering the many local economies in the Great Lakes region that have suffered a loss in their manufacturing base, I am reminded of the testimony of Walter Reuther in 1967 before the Joint Economic Committee, a year before his untimely death. Walter called for such an ownership-expanding, bottom-line-oriented approach to save American jobs from being outsourced to other countries with workers who are willing or forced to work for a fraction of wages negotiated by unions in America.
Under the Just Third Way, as proposed under what we call the “Capital Homestead Act,” we could lift those artificial tax, monetary, and financial barriers to universal access to participation in capital ownership. This is the big picture. We hope this act can be passed by 2012, the 150th anniversary of Abraham Lincoln’s Homestead Act of 1862. This would make it possible for every citizen to become an owner of growth capital. As with the leveraged S-Corp ESOP today, a few key reforms in Federal tax laws and Federal Reserve policies, low-cost capital credit and more just tax laws would enable people who are today propertyless and who cannot afford to reduce their consumption incomes to acquire ownership shares in viable projects, such as those you would like to see financed. Future profits could be used to repay the capital credit. Private-sector loan default insurance would cover the risk of default.
Such leveraged financing of professionally designed and well-managed projects would pay for the capital costs from the full stream of future profits generated by the assets themselves. Financial experts call this “leveraged financing of ‘self-liquidating’ assets.” In other words, unlike non-productive uses of credit, the financing of sound capital projects is not dependent on past savings, but is best done on credit advanced to produce “future” savings.
One example of one hundred percent leveraged financing is Mid South Building Supply, Inc., headquartered in Springfield, Virginia, and a client of our investment banking and consulting business since 1985. We arranged for the first one hundred percent bank-financed leveraged buyout by all the workers with a $7.3 million loan extended by Equitable Bank of Baltimore. No worker put up one cent. No worker had to reduce his or her take-home pay or consumption income to become an owner. No worker was personally at risk in the event the loan failed. The loan was repaid entirely with pre-tax corporate profits. Today the company, 25 years later, is almost ten times its original size. Six workers have become millionaires. The average worker who has been with the company at least five years has approximately $100 thousand in his or her tax-sheltered ESOP account.
Given the success of the Mid South model, how could leveraged financing work for the benefit of every citizen in your community? We developed a model for a Just Third Way approach to urban redevelopment for the City of East St. Louis, Illinois. That city, right across the Mississippi River, right across from the famed Gateway Arch in St. Louis, was once a thriving industrial center. It is now one of America’s poorest cities, a virtual wasteland of brownfields. We were invited by the late State Representative Wyvetter Younge to develop a plan for financing a new city which in the 1970s she and the internationally famed choreographer Katherine Dunham and R. Buckminster Fuller conceived and called “Old Man River City.”
In the mid-1990s, Representative Younge discovered our “Just Third Way.” We worked with her to develop what she called a for-profit “Citizens Land Cooperative- CLC.” Because of her passionate commitment to the empowerment of all citizens and her leadership in the Illinois Legislature, she was able to persuade the Illinois House of Representatives to pass a bill we drafted by 114-0 to establish a demonstration Citizens Land Cooperative for East St. Louis and ten neighboring communities. The features needed for such a demonstration are explained in the pamphlet distributed to each of you. We now call this advanced empowerment and financing tool a “Citizens Land Bank.”
Our East St. Louis plan was to launch the model initially with conventional funding sources from the public and private sectors. What made our financing strategy unusual (besides its strategy for making every man, woman and child an equal shareholder of this for-profit, professionally managed land planning and development enterprise), is that local political leaders would be mobilized to lift barriers for local banks to discount the CLC’s loan paper under the second paragraph of Section 13 of the Federal Reserve Act of 1913. Under this provision, the St. Louis Federal Reserve and each of the eleven other Federal Reserve Banks has the power, as I pointed out earlier, to issue “out of thin air” new asset-backed, interest-free money for financing the Old Man River City project and similar redevelopment projects in East St. Louis and its neighboring “demonstration communities.”
Eleven mayors agreed to serve on the interim board of what became known as the “Metro East Citizens Land Cooperative” prior to a precinct-by-precinct election to a community assembly that would designate elected community representatives to serve on the CLC’s board of directors. Unfortunately, Representative Younge died. Without such a visionary, true “servant leader” filling her shoes, the plan is now gathering dust, waiting for a new servant leader with the courage and selfless commitment to the principle of doing “what’s right.”
I’m distributing to you a paper we developed with Rep. Younge, entitled “Linking People to Land and Technology Through Ownership” [see attached]. These charts and explanations describe briefly the seven stages for organizing, financing and implementing a for-profit Citizens Land Bank in your communities, plus a one-page “system overview” that explains the role of the Federal Reserve for financing citizen-owned city redevelopment:
My mission today has been as a “seed dropper.” I hope that in this audience will be one or more bold servant leaders like Wyvetter Younge and the late Senator Russell Long of Louisiana, once one of Washington’s most powerful leaders. Senator Long became our champion on Capitol Hill for ESOP financing, following a four-hour dinner that ESOP inventor Louis Kelso and I had with him on November 27, 1973. Senator Long became so fired up by the common-sense justice of our proposal that he picked up the check. How’s that for effective lobbying?
Besides my few words on the Federal Reserve System and Citizens Land Banks, I suggest each of you examine other “Just Third Way seeds” (like the Homeowners Equity Corporation and other Capital Homesteading reforms) as described in papers at two important websites. The first is the “virtual library” of our non-profit arm, the Center for Economic and Social Justice (CESJ), http://www.cesj.org. The second is our social entrepreneurial investment banking and consulting.The second is our social entrepreneurial investment banking and consulting business, Equity Expansion International, Inc. (EEI), http://www.eei-consultants.com.
Again I would like to express my sincerest appreciation to John Dondanville and Bob Colangelo of the National Brownfield Association for honoring me with the opportunity to speak before other architects of the future.
Now that these “seeds of thought” have been planted, I hope that members of this audience will organize a task force to study the Capital Homestead Act and the proposed model for Citizens Land Banking. I now look forward to answering any questions you might have.
