Posted on: January 22, 2016 by M. Oliver Heydorn

Category: Social Credit Views

An Introduction to Social Credit

The following article will be published in the first edition of the Portuguese Journal "Libertária"

      In the broadest sense of the term, 'Social Credit' refers to the philosophical, economic, political, and historical ideas of the brilliant Anglo-Scottish engineer, Major Clifford Hugh Douglas (1879-1952). Not so many decades ago, the Social Credit movement was a highly active and influential force in the United Kingdom and throughout the English-speaking world (most especially in the British dominions of Australia, Canada, and New Zealand). Douglas’ renown during the inter-war period was so great that he was invited to present evidence before the Canadian Banking Enquiry in 1923, before the British Macmillan Committee in 1930, and before an Albertan legislative committee in 1934. In 1935 he was appointed Chief Reconstruction Advisor to the government of the Canadian province of Alberta, a province which went on in the same year to elect the first official Social Credit Government the world had ever seen.

     While the Social Credit 'story' is lengthy and multifaceted, this article will restrict itself to an examination of the Social Credit approach to the economic order.

     In many ways, our economy can be compared to a computer. Like a computer, its operation is dependent on two distinct elements: hardware and software. In the case of a computer, the hardware refers to all of those devices and components that form a part of the computer's physical structure and potential. In a similar way, the economy's 'hardware' consists in all of those real-world factors that can enter into the production and distribution of goods and services: land (or, more broadly, natural resources), labour, and real capital (machinery and equipment). Software, by contrast, provides the instructions which allow the hardware to function, so that it can be activated in the service of some rational purpose. The economy's software consists in its organizational structures (its institutions and legal or business conventions), chief amongst which is its financial (i.e., banking and cost accountancy) system. Just as a computer's operating system manages all of the other programmes that have been loaded onto a computer, the economy's financial system conditions all of the activities that occur within the formal, money economy.

      Now, the most important thing to understand about the modern economy's hardware is the real-world consequences of the industrial revolution. The introduction of power-driven machinery followed by the development of various information technologies has multiplied hundreds or thousands of times the quantity, and, in many cases also the quality, of what human beings would be producing without the help of such magnificent tools. It has also made many new forms of production possible. In other words, thanks to the wonders of applied science we can produce a much greater volume of worthwhile goods and services while simultaneously reducing the human labour that is required to run the productive system. This is a fact, a hard reality, and it holds the potential to revolutionize every aspect of social organization.[1]

     What does this mean in everyday, concrete terms? It means that a first-world nation is easily capable of delivering all of the goods and services that people can reasonably use with profit to themselves, i.e., that full range of goods and services which actually contribute to human well-being, while only calling on a small and ever decreasing complement of human workers.

     In other words, given the enormous productive capacity (both actual and potential) of the modern, industrialized economy, there is no physical reason for poverty, let alone destitution, for servility in its various forms (including the inane policy of full employment), or for the social, psychological, environmental, and international fallout of the chronic economic dysfunction which oppresses us. In sum, our economic hardware is of the highest quality.

     What then can explain this enormous discrepancy between what the economy of a modern, industrialized state can and should deliver, and the grossly unsatisfactory results that it actually does deliver? What is the great limiting and distorting factor?

     The Social Credit analysis reveals that the core problem with the existing economic order has nothing to do with physical scarcity or natural barriers to production, nor with defects in human nature, nor with the free market and private ownership of productive property as such, but rather with the economy's operating system, i.e., with its financial system. It is not merely that financiers and their corporate accomplices make self-centred decisions or often engage in white-collar crime; the fundamental problem with finance is structural or systemic in nature.

     Douglas' basic diagnostic claim was that if the true or correct purpose of the economy is to deliver, with the least amount of labour and resource consumption, the goods and services that people need to survive and flourish, then the reigning financial system is not properly designed to yield this result.[2]

     To continue with the computer analogy, the overriding problem with the economy is with its software. More specifically, the standard financial operating system that is found in virtually every country does not permit us to make the best possible use of our economic hardware. Instead, it limits and distorts the operation of that hardware and we all suffer in various and entirely unnecessary ways as a direct result.

     To be sure, the standard financial system has a number of problematic aspects, but the core difficulty has to do with how it undermines or subverts the economy's circular flow.

     Like many natural processes, the economy incorporates a pair of complementary cycles, the one physical and the other financial in nature:

     Households have what businesses demand, and businesses supply what households demand. People go to 'work', supplying the firms with labour (or land or capital if that is what they own) so that goods can be produced. In return for their labour (or land or capital) they receive money which they spend on the market to buy the goods and services that they have produced.[3]

     According to orthodox economic theory, this circular flow is characterized by an automatic and endogenous financial equilibrium.

     On the outstroke of the financial cycle, businesses are spending money as goods are being produced and this money is then transformed into income for workers and for the owners of land or capital. On the instroke of the financial cycle, that same consumer income is being spent on goods and services and is returned to businesses in the form of business revenue, thus enabling a new cycle of production to be initiated.

     The fundamental assumption of the orthodox conception is that the production of goods and services automatically distributes sufficient money in the form of incomes to meet the costs and hence prices of goods and services. This state of affairs is sometimes referred to as Say's law (after the 18th century French economist Jean-Baptiste Say): supply creates its own demand, or, in financial terms, the flow of prices is automatically balanced by the flow of effective demand in the form of incomes. On this view, if, in a given period economic period, a certain volume of production is going unsold, it is because people are saving their incomes instead of spending them.

     This relatively straightforward explanation of the orthodox understanding of how the economy works should make it fairly simple to understand both the Social Credit diagnosis and its corresponding remedial proposals.

     Douglas' great contribution to economics was his discovery that under modern industrialized conditions the basic assumption of economic orthodoxy is false. Say's law does not hold; i.e., the circular flow is NOT characterized by an automatic and endogenous equilibrium. Instead, the flow of consumer prices is greater than the flow of incomes that are distributed in the course of the corresponding production. There is, in other words, a chronic and inherent deficiency of consumer buying power.

     Under the existing financial system, it's as if the economy is producing every year a total output of 100 pastéis de nata (which, let us assume, are priced at one euro each in order to cover all costs), but, in the course of their production, is only distributing in the form of wages, salaries, and dividends, an insufficient sum, say 50 euros, with which the 100 tarts can be bought.

     In order to understand the whys and wherefores of the financial imbalance, one must first grasp some basic facts concerning the operation of the banking system. Contrary to a belief that is still quite commonly held, banks do not lend their depositor's money. Instead, every bank loan or bank purchase of securities creates a deposit, i.e., brand new money in the form of bank credit, while every repayment of a bank loan or the selling of a bank-held security destroys money. Indeed, the intangible numbers that banks create and issue, usually in the form of an interest-bearing debt or debt equivalent, constitute 95% or more of the money supply in the typical industrialized country. Bills and coins, which are typically created by the government, only represent the economy's 'small change'.

     However, and in contradistinction to the views of a large number of monetary reformers, the main fault in the financial system does not lie in the mere fact that the private banks create most of our money out of nothing and then proceed to charge interest on their loans, even if one were to admit that, under the existing system, these interest charges are quite often onerous, and/or excessive, and/or exploitative.

     The real problem lies much deeper than that.

     The bank creation and destruction of our money supply means that money does not circulate indefinitely in the economy from producers to consumers and back again. Instead, money is cycling in and out of existence. Money is issued to producers by banks when the former borrow on revolving lines of credit or contract long-term loans, is spent on various production costs, and is eventually returned to producers when, upon selling their goods and services to the public, they re-collect the money that had been issued to consumers in the form of wages, salaries, and dividends. The money that producers receive is then used to repay their bank loans (and is subsequently destroyed) or it is used to restore their stock of working capital (from whence it can only be re-issued against an accompanying volume of new production costs).

     The cycling of money would be no problem at all provided that the producer credit which is issued to finance each cycle of production were completely transformed into consumer income and this income were then used in toto to liquidate or cancel an equivalent flow of prices representing all production costs. If the cycle of money creation and destruction were completely in sync with the cycle of cost/price creation and price liquidation, then the flow of consumer prices and the flow of consumer incomes would be in equilibrium as the classical Say's law says they are. The system would be in balance.

     What Douglas discovered - and this is of epic importance - was that as producer credit flows outward from the banks and through the productive system it generates a greater volume in costs and hence prices than it liberates in the form of consumer incomes. The chief cause for this discrepancy has to do with the accountancy conventions that govern the costing of real capital (i.e., machines and other equipment). The standard charges that are levied by companies in the name of real capital to cover the costs of capital loan repayments, depreciation, maintenance, and obsolescence, etc., exceed the incomes that are simultaneously being distributed by those companies.

     This means that the phenomenon which, on the physical plane, is rendering people permanently unemployed (i.e., the intensifying tendency of human labour to be replaced by machines) is the same phenomenon which, on the financial plane, is chiefly responsible for the ever-increasing gap between the rate at which the prices of goods and services are generated and the rate at which income is being distributed by any modern productive process.

     The lack of consumer buying power can be aggravated by a number of other factors (such as profit-making, savings, the re-investment of savings, periodic deflationary banking policies, and taxation).

     This gap between consumer prices and incomes is the problem par excellence with the existing financial and economic orders and any monetary reform proposal which does not adequately compensate for it in line with the economy's true purpose will merely be beating around the bush, or else exacerbating the perennial economic dysfunction.

     The only option that the present system has for filling the gap is to rely on governments, businesses, and individuals to borrow additional debt-money into existence from the private banks. Government projects and works financed by an increase in public debt distribute additional incomes to government employees without increasing the flow of consumer prices in the same period of time. In a similar way, loans for increased private production (especially capital production and production for export) also raise the level of consumer income without simultaneously increasing the flow of consumer prices. Finally, consumers often borrow (via mortgages, car loans, lines of credit, credit cards, etc.) so that they can consume what would otherwise go unsold.

     Relying on additional debt-money as a palliative has a number of drawbacks, however. In the first place, debts have to be serviced. Borrowing to fill the gap thus produces inflationary charges against the incomes of future cycles of production. Indeed, this is the prime cause of the inflation which continually devalues the currency in every country. Debts deplete incomes and thus necessitate an increase in wage levels to maintain the standard of living. This will tend to drive up prices in a never-ending wage-price spiral. Furthermore, since these compensatory debts are contracted at a faster rate than they are paid off, this also leads to the accumulation of an ever-increasing burden of societal debt (public, business, and personal debts) that can never be paid off. Whenever this debt-load becomes too heavy the private banks are loath to lend any further and the economy falls into a recession or worse. Bankruptcies and foreclosures nevertheless help the economy to jettison some of its debt-load as unpayable debts are written off, thus providing some breathing space and financial room for an improvement in the economic climate.

     Beyond constant inflation, the business cycle, an ever-increasing mountain of societal debt that is, in the aggregate, unrepayable, and recurring financial crises, using the drug of 'debt-money' to deal with the gap is also heavily implicated, directly and/or indirectly, in economic inefficiency, economic waste and sabotage alongside forced economic growth (the misdirection of economic resources), heavy and often increasing taxation, increasing government regulation, wage and debt-slavery, servility, the usurpation of the unearned increment of association by the private banking system, the centralization of economic wealth, privilege, and power in fewer and fewer hands, forced migration, cultural dislocation, unnecessary stresses and strains, social conflict, environmental degradation, and international economic conflict leading to war, etc. All of these phenomena are symptoms or manifestations of the financial imbalance in the economy's circular flow.

     The Social Credit solution to the problem of the gap is to have a politically independent organ of the state, a National Credit Office, continually issue, on the basis of the relevant statistics, a sufficient volume of credit so that consumers can purchase the ‘surplus’ of goods and services that are being produced (i.e., those which cannot be bought because no income to offset their costs has been distributed in the course of their production). This credit is to be issued free of debt and in lieu of all of the conventional palliatives that are presently employed in attempting to manage the gap.

     Restoring equilibrium in each economic cycle with a suitable flow of debt-free credit would replace the exogenous, unstable, inflationary, and debt-accumulating balance - when there is a balance - between the flow of prices and consumer purchasing power in the circular flow with a balance that is endogenous, stable, anti-inflationary and cost-liquidating.

     In order to accurately reflect the physical reality, a certain volume of the compensatory credit would be used to lower retail prices in accordance with an economy's overall consumption/production ratio. The true cost of production is consumption. Hence, production should not cost, in financial terms, more than was spent on the consumption that was necessary to bring it into existence. Selling goods below cost to the consumer and making up the difference to the retailer would allow for production to be sold at its ‘Just Price’ – i.e., the price that reflects its real cost. This would involve a 'National Discount' on all consumer items.

     The remainder of the compensatory credit is to be issued in equal proportions to each citizen, whether he be employed in the formal economy or not.

     What Social Crediters refer to as 'The National Dividend' is justified morally by the fact that each citizen is rightly regarded as a shareholder in his economic association and as an heir to society’s cultural heritage. It is the cultural heritage (the inventions and discoveries of past scientists, engineers, organizers, etc.) which makes the greatest factor in modern production, the real capital, possible. And it is the real capital which, as we have seen, is primarily responsible for the price-income gap. Therefore, the most appropriate way of filling this gap would be to recognize that individuals are the beneficial owners of the real capital and deserve to receive a dividend on its operation.

     The National Dividend (which most not be confused with a conventional basic income) is justified pragmatically by the fact that the economy needs an injection of debt-free credit in order to function in a real or self-liquidating equilibrium and it needs to provide those whose labour is no longer required in the formal economy (on account of technological advances and improved production efficiency) with an income so that they can nevertheless purchase goods and services. A policy of full employment makes absolutely no sense when the efficient production of those goods and services which people can use with profit to themselves does not require, within the context of a modern, industrial economy, the full capacity of the available labour force.

     The Social Credit economic system is simply free enterprise (i.e., the private ownership of the means of production, the free market, individual initiative, and functionalist profit-making) plus an honest financial system. It is neither socialist nor capitalist, but is rather distributist in orientation: by means of the dividend every citizen would be guaranteed a minimum claim on the production made possible by the real capital. Social Credit would transform society into a gigantic profit-sharing co-operative.

     The consequences of a Social Credit monetary reform would be the establishment of absolute economic security for every citizen in place of poverty and the threat of poverty, increasing leisure in place of servility (i.e., freedom from wage-slavery, debt-slavery, and useless, witless, and/or destructive employment), the elimination of society's chronic and unrepayable debt burden and the interest charges that accompany it, the decentralization of economic wealth and power to the individual, the elimination of economic waste and sabotage, continual reductions in prices instead of inflation, much lower taxes, much less government regulation and interference, economic co-operation instead of ruthless competition, social stability, the transformation of civilization based on the unfettering of the creative impulse and the flourishing of both folk culture and high culture, environmental protection, conservation, and repair, and mutually beneficial international trade providing a sound foundation for world peace.

     Whatever is physically possible and desirable should be financially possible. All that is required is to alter the financial system so that it accurately represents the physical facts and potential of the real economy. The introduction of an honest financial system, and that is all that Social Credit proposes in the field of economics, would transform money and bankers into dutiful and uncompromising servants of the authentic common good.

 

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[1] For example, Jeremy Rifkin in his book, The End of Work, has speculated that on account of recent and continuing developments in information technologies, automation, and telecommunication it is quite possible that “... as little as 5 percent of the adult population will be needed to manage and operate the traditional industrial sphere by the year 2050. Near-workerless farms, factories, and offices will be the norm in every country.” Jeremy Rifkin, The End of Work (New York: Jeremy P. Tarcher/Penguin, 2004), xxii.

 
[2] This is not to say that the reigning financial system is merely ineffective, inefficient, and unfair. Whether by accident or deliberate intent, the system does serve an alternative purpose quite well: the centralization of wealth, privilege, and power in the hands of a plutocratic elite. The political implications of this state of affairs for conventional 'democracy' should be self-evident.


[3] Frances Hutchinson, Understanding the Financial System (Charlbury, England: Jon Carpenter Publishing, 2010), 55.

 

 

 


Comments

Posted: January 24, 2016

By: Louis Cook

Good work, Oliver.
Perhaps a few picture or diagrams may be helpful to people new to Social Credit.

Posted: January 27, 2016

By: Liam

This was really well written and to the point about the core problem with the economies of all countries as ists flawed cost accounting, it's ever-worsening trend due to accelerating automation, and the societal benefits of social credit as the only workable solution that has ever been proposed to address all aspects.

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