Posted on: April 17, 2016 by M. Oliver Heydorn

Category: Social Credit Views

Social Credit: An Introduction for Distributists

     

 

 

 

 

 

 

 

 

 

 

 

      This article was originally posted on-line by The Distributist Review on April 11, 2016: http://distributistreview.com/social-credit-introduction-distributists/. (Two very minor changes have been incorporated into this version).

     As every distributist knows, there are three basic economic systems. The first upholds private ownership of the means of production but concentrates it in the hands of the few, thus leaving the greater portion of the population with no choice but to sell the only thing that they own, their labour, in exchange for the means of subsistence. This is the capitalist system. The second system rejects private ownership of productive property in favour of collective ownership, whether this collective ownership be entrusted to the State or to a series of smaller community bodies. This attitude towards capital is the central tenet of socialism. The third and final alternative maintains the institution of private ownership, but insists that this ownership must be generally apportioned so that as many people as possible may enjoy their own share in the productive property of the nation. This is the model which has come to be known as ‘distributism’. Every economic system (whether extant or merely possible) is a variation on one of these themes or a partial combination of some of their key aspects and tendencies.

     What many distributists may not know is that contemporaneous with the efforts of Belloc and Chesterton to provide a theoretical elaboration for the general economic orientation that had flourished under Medieval Christendom, and to explore ways by means of which the wisdom of that system might be restored under modern conditions, there arose, also in England, a small but influential movement for the regeneration of society. This movement operated on parallel lines. In common with distributism, Social Credit was based on what turned out to be Christian principles.[1]

     Spearheaded by the Anglo-Scottish engineer, Major Clifford Hugh Douglas (1879-1952), the Social Credit movement sought to bring the institutions and conventions that regulate social life into alignment with what Douglas referred to as ‘the Canon’, i.e., the natural laws that govern reality. The goal was proper or healthy functioning and this required that the inner ‘logic’ of the universe be discovered and that it be obeyed through the application of appropriate mechanisms.

     In the domain of economics, this meant that the rules of the economic game and the institutions necessary for giving them effect should be determined not by what is most beneficial to the powerful few, nor by what enhances the status or aims of any collective, but by the common good of individuals. That ‘common good’ consisted in the fulfillment of the true purpose of economic association: the delivery of those goods and services that people can use with profit to themselves with the least amount of human labour and resource consumption.

     It was in the course of his work as an engineer that Douglas discovered, through a series of serendipitous events, that the main obstacle in the path of the economy’s common good is finance or the money system. In a variety of presentations made before the Canadian Banking Enquiry in 1923, the British MacMillan Committee on Finance and Industry in 1930, the New Zealand Monetary Committee in 1934, and a legislative committee of the province of Alberta in 1934, as well as in a torrent of books, articles, commentaries, debates, and speeches beginning in 1917 and continuing up until the early 1950’s, Douglas explained both what is wrong with the existing banking and cost accountancy systems and what could and should be done by way of rectification.[2] His proposed solution is an acknowledgment that the widespread and equitable distribution of private productive property is a necessity if the economy is to serve the common good. In terms of the threefold division of economic systems, Social Credit falls squarely in the distributist camp.

     But if Social Credit and distributism, or what I will refer to as ‘classical’ distributism, are at one in calling for the return of the Proprietary State, that third option beyond capitalism and socialism, where do they diverge?[3]

     The essential differences between the two models would appear to be three in number; these involve: 1) the nature of the ownership that is to be distributed, 2) the methods for distributing that ownership, and 3) the socio-economic implications of actually achieving a wider and more equitable distribution of ownership over the means of production.

Direct Ownership vs. Beneficial Ownership

     Whereas classical distributism seeks to enfranchise families, and when such family-ownership is not practical, employees as direct owners of the property they use to produce goods and services, Social Credit does not aim at distributing ownership among the many in the form of family farms, workshops, trades, small businesses, ESOPs, or co-operatives, etc.[4] Instead, the ownership which Social Credit wishes to accord to each individual citizen is a beneficial (rather than direct) ownership in the real capital, i.e., in the machines, equipment, and tools, of an industrialized society. The type of contribution which the general capital makes to production (rather than the capital itself) is rightly regarded as common or communal property.[5]

     Natural resources, the unearned increments of association (both human and mechanical), and the cultural heritage of society (the discoveries of past scientists, engineers, inventors, organizers, and adventurers, etc.) are what make the economy’s real capital possible. It just so happens that these factors of production are also free gifts of God, nature, and preceding generations. For these reasons, each individual can legitimately claim, in common with his fellows, that he is or should be the chief beneficiary of the use of real capital. In truth, each of us is a shareholder in his economic association and is therefore entitled in strict justice to a proportionate share in the abundant production that power-driven machinery can deliver.

The Regulatory State vs. Monetary Reform

     Both Social Credit and classical distributism recognize that there is a role for the public authorities in achieving the Proprietary State. Whereas classical distributism countenances such methods as anti-monopoly legislation, differential taxation, guilds, co-operatives, and even the redistribution of ownership when appropriate (as was the case in Taiwan’s Land-to-the-Tiller programme), Social Credit seeks to achieve the same general goal of widespread productive property ownership via monetary reform. That is, the distribution of a beneficial ownership in the communal capital to everyone would not require expropriating the direct owners of factories or other productive organizations, nor would it involve confiscating and redistributing, or otherwise altering the allocation of, corporate shares, nor would it necessitate redistributive or punitive taxation or state regulation of market activities in the form of guilds or similar institutions and conventions.

     In order to grasp how the Proprietary State can be realized via monetary reform, it is necessary to understand the Social Credit analysis of the existing financial system.

     Bank credit, i.e., enumerated abstractions, forms the bulk of the money supply (over 95%) in any modern country. Currency, or notes and coins, is the economy’s small change. Every bank loan or bank purchase creates money in the form of credit and every repayment to a bank or redemption of a bank purchase destroys credit. Credit is being continually created and destroyed; i.e., it cycles in and out of existence rather than circulating indefinitely as the quantity theory of money would have it. Most production is financed on the basis of bank loans or overdraft facilities. For this reason, prices are not infinitely flexible; there is a lower limit which must be recovered by producers from consumers if businesses are to avoid bankruptcy. Now, Social Credit claims that this producer credit, while it builds up costs and hence prices in the course of production, also releases a lesser volume in the form of consumer incomes (i.e., purchasing power in the form of wages, salaries, and dividends) with which the corresponding prices can be liquidated. There is, in other words, a structural imbalance in the price system or a price-income gap. Say's law does not hold.

     This gap can be exacerbated by profit-making (including profits derived from interest), savings, the re-investment of savings, periodic deflationary policies on the part of the banks, and taxation, but it is fundamentally due to the accounting conventions that govern the financing and costing of real capital.[6] To put it briefly, while every labour expenditure in the course of production registers as both a cost and as an injection of income into consumer pockets, and profit, while figuring as a ‘cost’, can be redistributed in the form of a dividend, capital expenditures (including allocated costs at the retail stage) are not distributable as current income. In some cases, such as the payment of capital loans (Capex in the narrower sense), the capital expenditure is not distributable as consumer income at all (money used to pay down a loan is destroyed), while in other cases, such as depreciation and maintenance charges, the expenditure, while being distributed as income at a later point in time, will be dispersed in a lesser volume than it was collected (because the capital costs of other companies also figure in the expenditure of Opex funds). If we let ‘A’ represent the flow of consumer incomes and ‘B’ represent the flow of capital costs, we could say that, over the economy considered as a whole, businesses are demanding ‘A+B’ from consumers in the form of prices, but are only concurrently distributing sufficient income to meet the A component of cost in the form of incomes.[7]

     The existing financial system has two basic options for compensating for the inherent lack of consumer buying power. It can rely on businesses to sell at a loss (thus lowering prices) or it can attempt to increase the flow of A payments while keeping the flow of prices (A+B) stable. While both methods are relied on in practice, the latter has distinct advantages over the former. Unless government subsidies are involved, businesses can only sell at a loss for a fixed period of time before bankruptcy looms large. Thus, we generally attempt to ensure equilibrium by continually growing the economy at the required rate and by inducing as many consumers as possible to supplement their purchasing power via the expedient of consumer debt. In both cases new, additional money is created as debt by the banking system. Credit lent to governments for public works and other activities (such as warfare) can provide jobs and hence incomes without, in the same period of time, expanding the cost burden on the taxpayer. In a similar way, credit lent to business for expansion, especially expansion involving capital production and production for export, can distribute additional wages, salaries, and profits, without adding simultaneously to the flow of prices. Naturally all such production, whether public or private, will have to be paid for eventually, but by that time we can hope to muddle along by doing more of the same: additional economic growth and a further increase in consumer indebtedness.

     Since the price-income gap is due, in the main, to the way in which the existing financial system incorrectly represents the costs of real capital (i.e., as price-values without accompanying consumer income), and since the beneficial ownership of real capital is rightly accorded to the individual citizens, Social Credit proposes to deal with the problem of the gap by altering the financial system so that it will henceforth provide an accurate or isomorphic representation of the physical economic facts.

     In lieu of all conventional palliatives, the Social Credit commonwealth would monetize that proportion of consumer prices that is unrepresented by consumer income via the creation of ‘debt-free’ credit and distribute it to the beneficial owners of the communal capital. Prices and Incomes would be in an automatic balance and the financial system would become self-liquidating instead of relying on an ever-growing burden of outstanding debt to meet current prices. The direct payment would take the form of a National Dividend and be granted as a secure income to every citizen whether he be employed in the formal economy or not.[8] The indirect payment, known as the National Discount, would effectively remove Capex charges from prices by allowing retailers to sell their goods and services at a price that reflects the real costs of production (which would be a percentage of the financial costs as normally computed). The discount would thus result in lower prices to consumers while providing retailers with a rebate so that their accounting costs could still be met in full.[9]

     By making the monetary system correspond to the physical economic facts, Social Credit would transform the whole of society into a gigantic profit-sharing co-operative.

Do ut Des vs. Sharing of the Free Gift

     Finally, Social Credit and classical distributism differ because the type of proprietary society that each would achieve, and the manner in which each would seek to achieve it, embody two radically different visions of the socio-economic order when it comes to the relationship between wealth and work. In the distributist system, all wealth must be earned through work (if we assume that all forms of economic rent will have been eliminated). Everyone, or at least every family man or prospective family man, must work on his own capital (whether held individually or in common with others) to provide a livelihood for himself and for those depending on him. This is sometimes referred to in Social Credit literature as a do ut des economic system or the denial of the free gift as an economic reality. Social Credit agrees that economic rent should be terminated, but it does not follow that all wealth without work is necessarily bad, nor that an economic free gift is a metaphysical impossibility.

     The phenomenon which is chiefly responsible for the increasing price-income gap is the same phenomenon which is responsible for the increasing tendency towards technological unemployment: the displacement of labour by real capital. By providing, on an equitable basis, a certain measure of access to wealth without work, the dividend (in conjunction with the compensated price mechanism) would do away on the financial plane with the necessity of full employment, just as technological advances have done away with any such necessity on the physical plane.[10]

     Social Crediters view Douglas’ proposals as a manifestation on the economic and material plane of the Christian doctrine of unearned grace as necessary (but not sufficient) for salvation. The economy needs the free gift in order to function properly and the people also need it in order that they may have the time and the means to take proper care of the many other pressing matters that lie beyond the sordid struggle for mere economic survival … including, most notably, their spiritual lives.

 

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1. Whereas the distributist economy, having developed organically under the influence of the Church in the Middle Ages, was explicitly grounded on Christian principles, the Social Credit economic model was based on a careful observation and analysis of reality. It only became evident later on that the principles thereby revealed were identical with some of the key principles of the Christian Weltanschauung.

2. Considering the enormous quantity, but also the high level of quality, of the writing which Douglas and his closest collaborators have left to posterity on a vast variety of subjects, it is astonishing that Social Credit, as a body of thought, remains relatively unknown to this day. Even where it is known it is often fundamentally misunderstood.

3. In his book, An Essay on the Restoration of Property, Hilaire Belloc described the ‘Proprietary State’ as “the state of society such as our ancestors enjoyed, in which property is well distributed…” Cf. Hilaire Belloc, An Essay on the Restoration of Property, 2nd edition. (Norfolk, Virginia: IHS Press, 2009), 13.

4. This is not to say that Social Credit is opposed to these forms of productive property ownership. Indeed, insofar as decentralized and/or co-operative production of this kind serves a legitimate purpose in meeting economic ends, the introduction of Social Credit will provide a very favourable financial environment for their organic expansion and development.

5. ‘Common’ and ‘communal’ are used here in the distributist rather than in the socialist sense, i.e., as property upon which each individual can lay a claim for his own private share, rather than as something that is ‘owned’ collectively by a group.

6. Contrary to a common misunderstanding, ‘Social Credit’ is not about an ‘interest-free’ money system. Usury, in the sense of ‘unearned profit’ or economic rent-taking on loans, is certainly a feature of the existing banking system, but it is more a consequence than a cause of the price-income gap. Eliminate the gap along Social Credit lines and you automatically eliminate much of the potential for usury.

7. This is not Douglas’ famous A+B theorem, but a generalized adaptation of it that seeks to isolate the core cause of the gap. It uses the same symbols (i.e., ‘A’ and ‘B’), but in a slightly different way. My ‘B’ does not involve any and all ‘payments to other organizations’ because it is restricted to capital costs. Douglas’ ‘B’ includes payments which represent past A expenses in the course of production.

8. The Social Credit dividend or ‘National Dividend’ must not be confused, therefore, with any conventional proposal for a ‘basic income’ that is financed via redistributive taxation and/or an increase in public indebtedness.

9. While it would be beyond the scope of this article to consider in any great detail, varied phenomena such as the recurring cycle of boom and bust, inflation (both cost-push and demand pull), oppressive levels of taxation, economic inefficiency, waste, and sabotage, the increasing centralization of economic wealth, privilege, and power in fewer and fewer hands, the ever-increasing mountain of societal debt that is, in the aggregate, unrepayable, social conflict, forced migration, cultural dislocation, environmental degradation, and international economic conflict leading to war, are all heavily implicated as direct or indirect consequences of the imbalance in the price system. Resolving the imbalance along Social Credit lines is therefore likely to reduce, if not eliminate, these other sources and manifestations of economic and social dysfunction, in addition to restoring widespread property ownership as the defining mark of the economic order.

10. This is yet another way in which Social Credit seeks to make the financial system reflect or correspond to the physical economic reality.

 

 


Comments

Posted: May 11, 2016

By: Flavio

I'd like to know what's your thinking on inflation as described by the austrian economist Frank Shostak. I've read your book "Social Credit Economics" but I still have some doubts on certain points concerning the concept of inflation. I have a lot of questions on the theoretical fundamentals that you base the social credit economic policy on. I'd like to link you to a few of the aforementioned author's articles, precisely on the subject of inflation. I certainly wish if you could provide, within your commentary response, some observations on how creation of money would not discourage on the long run the entrepreneurial incentive to produce. Obviously, from my viewpoint, money that hasn't been supported by previous production would be some type of surreptitious taxation, or wouldn't it be?
https://mises.org/library/inflation-does-not-produce-economic-growth
https://mises.org/library/inflation-here-and-it-going-get-worse
(I encourage you to read in depth the many articles on inflation that this author has made; his writings are an excellent source into the Austrian thinking)

I'll await your kind observations on the matter.
Thank you! Best regards

Posted: May 14, 2016

By: Oliver

Thank you, Flavio, for your comment, and thanks also for reading SCE. I've have taken a look at the articles to which you have linked.

Perhaps the most important thing to understand is that Social Credit proposes that, in lieu of all of the compensatory debt (government, corporate, and consumer loans) that we currently rely on in order to increase consumer buying power so that more of what we produce can be consumed, a sufficient flow of debt-free credit should created and issued in the form of the dividend and the discount. In other words, Social Credit does not advocate the issuance of superfluous money in an irrational or exuberant manner, but rather a monetization of previous production for which insufficient income has been distributed in the course of its manufacture. It is only on the basis of this 'surplus' of existing production that the creation and issuance of the additional money can be justified. Things like mortgages, car loans, student loans, lines of credit, credit cards, excess government debt and excess corporate debt would all be eliminated under Social Cedit; they would not be necessary. Whereas the existing reliance on compensatory debt is inherently inflationary; i.e., we merely transfer costs against future cycles of production (thus inducing cost-push inflation as wages must be constantly increased to maintain the standard of living that is steadily eroded by debt-servicing payments), Social Credit would allow for all costs to be met or liquidated in full without acquiring debt-claims against future periods.

Beyond that, it is important to understand that money is not some fixed stuff that circulates indefinitely in the economy. Money in the form of bank credit (95% of the money supply) is created when banks make loans or purchases and is destroyed when these loans are repaid and purchases are redeemed. Thus, prices are not infinitely flexible. There is a lower limit which business must recover from consumers so that their loans can be paid back and they can avoid bankruptcy. Shostak appears to be working on the assumption that the quantity theory of money is correct, when, in fact, it only applies to the upper limit of prices. What Douglas claimed was that, because of current financial conventions (banking and cost accountancy conventions) no solvent business is distributing sufficient income to consumers (in the form of wages, salaries, and dividends) to offset the price-values (the lower limits of cost) that their products are simultaneously generating. The two sides: cost-price and consumer income are not in an automatic balance as they should be and would be if the financial system accurately represented the physical economic realities. Since a certain proportion of production is unrepresented by consumer income, Douglas' solution is to create additional money (debt-free) so that these products can be represented by money in consumer pockets and purchased. Presumably, Shostak believes that every act of production releases sufficient consumer income to buy that production in full and thus that any additional money creation must be inflationary in the form of demand-pull inflation. Social Credit denies Say's law and hence it does not follow that the creation of additional money must increase prices. If the right volume is issued debt-free, SC holds that prices and consumer purchasing power can be brought into equilibrium without the necessity of contracting any additional debt.

As far as entrepreneurship is concerned, if there are genuine needs on the part of consumers and the ability on the part of the community to satisfy these needs, then Social Credit would make it financially much easier for new businesses designed to deliver the required production to be established and to prosper. The incentive for the entrepreneur would not be merely additional income, but the satisfaction of augmenting the general standard of living. As it stands, how much new production is actually waste, i.e., production that merely takes advantage of the consumer via manipulative advertising or market control? In other words, we must not lose sight of the fact that, under the current system, not all entrepreneurial innovations actually serve some authentic human need in the most efficient manner possible. This excessive or misdirected production exists precisely because there is a lack of consumer buying power and people must fight for survival any way they can since they are subject to artificial financial pressures.

Posted: May 17, 2016

By: Flavio

Thank you for your response! I'm also studying this economic phenomenons and trying to comprehend them better by doing a comparative analysis on numerous economic standpoints that exist within the academic spectrum. I will analyze your arguments later and yes it is likely that I may be basing my assumptions on the intellectual groundwork of Austrian liberals without being sufficiently objective as I should be while studying various different economic theories.

Very informative website and hopefully I will be reading the subsequent articles you post on the blog. Thanks!

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