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back in 1969, when it was only $2 a barrel, and the world today, when it is $14 a barrel.

Mr. KASCH. Oh, I think that it is impossible to get back there.

Senator ABOUREZK. Let me close this phase of questioning just by saying that the reason that the oil import quotas were placed on back in those days, before 1973, and they were approved of and requested by the domestic oil companies here, was to protect the domestic oil companies. And their reason was for protection so that they could continue to develop oil reserves in this country.

And it did not work because they refused to develop their oil reserves in this country. They refused to do anything. And that is why the import quotas were dropped. There developed, in 1973, a serious shortage of oil. And that is why the quota system was dropped entirely. Mr. KASCH. Of course, if the quota system had been more restrictive, why, it would have encouraged more development, too.

Senator ABOUREZK. How much more restrictive could you get?
Mr. KASCH. Well, you could have zero.

Senator ABOUREZK. Just abolish it altogether?

Mr. KASCH. Yes; you could.

Senator ABOUREZK. Well, it would not have done a bit of good because the east coast would have gone totally without oil, and the domestic companies probably would not have done anymore than they have done now with a 12-percent quota.

Well, anyhow, I want to thank you very much, Mr. Kasch, for your appearance here today and your testimony. And, once again, I apologize for all the delays. We do not like to do that, but it becomes necessary at times, I guess.

Mr. KASCH. Thank you.

Senator ABOUREZK. Thank you.

The last witness today is Mr. Norman G. Kurland, Washington counsel of Kelso Bangert & Co., investment bankers.

Mr. Kurland, your statement is approximately a page-and-a-half long, is that right, the statement you are going to read?

Mr. KURLAND. The statement I was going to read, sir, is a little bit longer than that.

Senator ABOUREZK. How much longer?

Mr. KURLAND. I cut down my actual statement to, oh, I figured about 20 minutes. But I could cut it down below that, if you would like. Senator ABOUREZK. I would be grateful if you could cut it down to about 10 minutes.

Mr. KURLAND. Yes, sir.

Senator ABOUREZK. So we can leave a little time for questioning because we are all going to have to jump up and run soon.

Mr. KURLAND. Yes, sir.

Senator ABOUREZK. And thank you very much. The entire statement will be printed in the record.

Mr. KURLAND. Excellent.

STATEMENT OF NORMAN G. KURLAND, WASHINGTON COUNSEL OF KELSO BANGERT & CO., INVESTMENT BANKERS

Mr. KURLAND. Mr. Chairman, my name is Norman G. Kurland. I serve as Washington counsel for Kelso Bangert & Co., an investment

banking firm, with offices in San Francisco and New York City. I also serve as executive director of the Institute for the Study of Economic Systems.

Both groups were launched by Louis Kelso, who is an original and creative thinker in the field of economics and in the field of corporate finance.

I am sorry that Mr. Kelso was unable to be with you today.

The main thrust of my presentation will be to describe how employee stock ownership financing works, and how it differs from conventional modes of financing corporate capital requirements, and also how it might be more effectively applied for promoting competition within a free enterprise-free market context.

At the outset, I should mention that I have no personal ax to grind as to whether Congress should or should not require the major oil companies to divest themselves of coal companies, uranium, or other competitive sources of energy.

However, if Congress should decide that horizontal divestiture should take place in this industry to increase marketplace competition, the key question will still remain unanswered: How will those divestitures be financed? Where will the money come from?

I think that, armed with Mr. Kelso's breakthrough concepts in economics and finance, I think we might be somewhat helpful in proposing some new alternative for cracking the finance barrier behind which monopoly hides.

My prepared statement 1 will briefly discuss the nature of the modern multinational corporation, a social tool of tremendous potential, but one that is still in an extremely primitive stage in its own evolutionary development; certainly no more advanced in fulfilling its ultimate service to mankind than was the democratic form of government over 2,000 years ago.

Closely related to this point is our perspective on the problem of monopolies in general. In my prepared statement are a few examples of concrete cases which should serve as some precedent value in how ESOP's can be used more creatively by the Department of Justice and by the Federal Trade Commission and by the Congress in promoting more effective competition.

These examples cite some new sources of credit that are still untapped for solving antitrust problems. Because of the seemingly staggering sums involved for financing expanded competition and new capital formation in our energy industries, as my written statement describes the concept of pure credit is extremely important.

Pure credit is the ultimate answer to those who claim that there is not enough savings and credit available to meet our investment needs. These hearings offer a highly suitable context for introducing Congress to the simple logic of pure credit.

And, finally, our statement proposes for your consideration some specific legislative reforms aimed at breaking the shackles of mononoly ownership simultaneous with attacking the root causes of mononolv industries.

What is an ESOP and how does it work? In a nutshell, the ESOP, the employee stock ownershin plan. is a radically new mode of invest

1 See p. 391.

ment finance. Where traditional methods of investment finance tend to concentrate the ownership of corporations into a relatively small propertied class-leaving 95 percent of all U.S. households without any ownership stake in our enterprise system of any income significance the ESOP makes the magic and logic and benefits of corporate finance accessible to those who do not own a piece of the action in today's economy; namely, the workers and management of our wealthproducing enterprises.

Nothing is taken away from present owners, other than their exclusive license, under conventional modes of finance, to monopolize access to the borrowing power of the corporation, itself.

Through the ESOP, present owners share access to the debt-carrying capacity of the corporations with the workers who are expected to keep the corporations competitive and profitable.

The purpose of finance, as Simon Kuznets has pointed out in his book, "Capital in the American Economy: Its Formation and Financing", is to enable businesses to acquire the ownership of capital instruments before the business has saved the funds to buy and pay for them.

New capital is normally expected to pay off its formation costs out of future earnings within a reasonable period of time. This is what feasibilty means in the business world. Exactly, this opportunity is made available to workers through an ESOP set up by the company for which they work.

An ESOP allows a company's employees to acquire a significant percentage of the firm's stock-up to 100 percent in many cases-without putting up any money of their own. This normally occurs when the corporation decides to expand. It can also be used in the case of divestiture and for the repurchase of outstanding stock from public stockholders.

1

In essence, the ESOP creates an in-house stock exchange. In my prepared statement is a diagram 1 describing how an ESOP works. By forming an ESOP, corporations can actually save money when they use credit to meet their capital requirements.

Congress has provided a number of special tax incentives to encourage firms to supplant conventional modes of investment finance with an ESOP as a new and more socially beneficial source of financing. For example, the ESOP is the only technique available today in the world of finance which enables a firm to borrow or receive external credit, while treating its entire debt service payments-up to a statutory maximum amounting to 25 percent of its total payroll costsas a tax-deductible expense.

Thus, uniquely, pretax corporate profits can be used to repay principal as well as interest on capital acquired for the employees through their ESOP.

For a firm with a combined Federal and State marginal corporate tax rate of 52 percent, for example, 52 cents on every dollar of capital is saved. This increase in the firm's disposable cash flow benefits all stockholders, new and old alike, making possible higher dividend payouts, expanded debt capacity and more accelerated debt repayments than under conventional debt financing.

Under last year's reforms to the private retirement system, Congress gave the ESOP special recognition and protections as an alter

1 See p. 404.

nate mode of corporate finance, but subject to IRS safeguards and scrutiny because of its additional features as a new form of employee benefit.

As an added carrot to examine and use the ESOP as a substitute for conventional modes of finance, the Tax Reduction Act of 1975 provided companies that make new investments an extra 1 percent investment tax credit beyond the 10 percent investment credit they would otherwise receive, if they adopted an ESOP.

The Trade Act of 1975 also encouraged ESOP's in its $1 billion loan guarantee program for firms locating or expanding in tradeimpacted areas. Preferential loan treatment is given to ESOPfinanced companies.

Remaining tax impediments to the expanded use of ESOP financing of U.S. new capital formation would be lifted in the Accelerated Capital Formation Act, now before the House Ways and Means Committee with various of its provisions supported by 92 House Members, including 10 on the Ways and Means Committee.

Considering the conservative nature of businessmen and bankers, ESOP financing has gained a solid foothold and is rapidly gaining recognition as a quantum leap forward in finance.

The first use of ESOP financing happened 20 years ago, involving an employee buyout of a chain of California newspapers. The next ESOP took place about 10 years later.

As the economic philosophy and financial innovations fathered by Louis Kelso gained broader popular appeal, more companies joined the ESOP bandwagon, mostly in the last 3 years. And as a result of Congress' endorsement of the ESOP concept in four major pieces of legislation, starting with the study of a proposal to convert the Northeast rail system into a 100 percent employee-owned company, several hundred corporations have adopted ESOP's and several among the top 100 corporations are in the process of implementing ESOP financing programs.

Our firm alone has pioneered over a hundred ESOPs and, as testimony to our success, we are being imitated by other investment banking firms and financial consulting companies all over the country, many of whom we have trained.

"Barron's" and other business-oriented journals have dubbed the ESOP as an idea whose time has come. Pollster Peter Hart recently discovered that, by a 66 to 25 percent margin, Americans favor the goal of having employees own most of their company's stock.

There are many possible routes to gaining ownership participation for workers. But none of the other known alternatives are tied directly to the debt-carrying capacity of the corporation itself or to the supply of corporate credit generated by banks and other private lending sources and ultimately controlled by the Federal Reserve System. The ESOP is the only alternative, as far as I know, that can build significant capital ownership into workers, which does not involve Government expropriation and wealth redistribution from present haves and which does not subject workers to any personal investment risk or reduction in pay or savings.

Conceivably, within the next several decades, every maior corporation will be financing a major portion of its capital formation requirements through its in-house employee trust.

Dr. William Comanor, in his book, "Industry Concentration and Wealth Distribution", pointed out that a necessary condition for monopoly profits is that some restriction be placed on the easy entry of new firms into an industry. What is not generally appreciated by students of monopoly, however, is that access to credit is the key to access to entry of competitors into the economic marketplace.

Access to financial credit not only determines whether competition among producers will occur in any industry. It also determines which firms may compete and, as Louis Kelso points out, whether ownership of expanded industrial capital will remain concentrated in a tiny ownership class or spread broadly among individuals who make up its ultimate consumers.

Interestingly enough, the Federal Government, under our Constitution, holds the key that will finally determine which firms and which individuals shall have access to reasonable financial credit for legitimately acquiring productive corporate assets.

Directly administered by the Federal Reserve System, Government's monopoly over the money supply and credit system is the final arbiter of what kind of credit and how much credit is available to whom.

To control the available pool of credit in our banking system is to control the existence of monopolies, both the monopoly of access of firms into marketplace competition and the more dangerous and pernicious hidden monopoly, the monopoly of individual access to the ownership of the productive tools of the enterprises themselves. The new money supply pumped into the economy annually provides nonrecourse, self-liquidating investment credit for major corporations, whose ownership and control resides mainly in the top 5 percent of Americans.

The top 1 percent, according to a recent Wharton School study, own over 50 percent of all individually owned corporate stock in the U.S.

economy.

The Federal Reserve pumps the rest of the expanding money supply into high-interest Government debt at the Federal, State, and local level or into other inflation-inducing Keynesian stimulants to artificially raise consumer power, like high-interest consumer credit, welfare, and nonproductive and synthesized jobs on public and private pavrolls.

Locked into defective Keynesian monetary policies that are driving governments at all levels to the poorhouse and artificially holding back the productivity and competitiveness of U.S. industry, the Federal Reserve Board is the central source of today's economic mess.

We will propose some new directions and new policies for the Federal Reserve Board that this committee may wish to consider as new weapons for fighting monopolies. In particular, we propose that you study the use of pure credit which is discussed in our paper. We think it offers a more high-powered alternative than present remedies for enforcing antitrust policies.

If Government is ultimately responsible for the historic origins of monopoly, Government is also the source of its cure.

The evil in today's faltering economy is not too much capitalism. It is too little capitalism. The evil is not profits. The private enterprise system and the free market economy cannot exist without the wages of capital.

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