In biology, engineering, computers and in many other fields besides, we become familiar with the concept of a feedback loop. A feedback loop occurs whenever the output of a specific dynamic process becomes the input for future operations or cycles of that same process. This allows the overall system in question to regulate itself in one direction or another by monitoring its own output. That self-regulation can occur in one of two directions: the original output signal can be ramped up or amplified, as is the case with the hormones inducing childbirth in an ever-increasing cascade of intensity, or the original output signal can be diminished or neutralized as is the case when the body sweats in order to bring its temperature back down to a normal level (homeostasis). When the output signal is amplified, we are dealing with a ‘positive’ feedback loop, when it is diminished or neutralized, we are dealing with a ‘negative’ feedback loop.
If we examine the financial system in terms of one of its chief products, i.e., debt, we can easily come to understand the essence of the Social Credit analysis and remedial proposals. In sum, the problem with the existing financial system from a Douglas Social Credit point of view is that it functions after the pattern of a positive feedback loop, amplifying debt, whereas it should, in the interests of stability, functionality, and therefore human satisfaction, function after the pattern of a negative feedback loop, dynamically liquidating excess or surplus debt in the chain of production with debt-free credits. The Social Credit remedial proposals were designed to change the financial dynamic from a positive feedback loop to a negative feedback loop.[1]
The problem, its effects, and the correct solution can be adumbrated as follows:
1. The financial system we live under at present is a debt-money system, meaning that all money is created and/or injected into the economy alongside an accompanying debt or debt-equivalent.[2] In essence, every dollar that is created and injected by an issuer has to be repaid to that issuer at some future point in time. No money is injected without the expectation that it will return in one form or another to the issuer. There is no ‘free gift’ of money to the economy. B., this is a human convention, not an inherent feature of the universe, and so, it can be changed or adapted to suit whatever policy objective we wish.
2. When we then apply this type of debt-money system to a production system that is costed on the basis of the current accountancy conventions what we find is this: the rate at which costs are generated – and these costs might plausibly be conceived as debts owing to the production system and directly or indirectly to the banking system which creates and injects the money supply in the first place – exceeds the rate at which incomes are simultaneously being issued to consumers via their wages, salaries, and dividends that have been obtained through the same production process. This means that the price system is inherently unbalanced, with there always being an insufficient flow of consumer income distributed via production to liquidate once and for all the costs/prices of that production.
The fact of the imbalance is important to producers and to the economy as a whole because only the consumer can liquidate or put a final end to all production costs. Only the consumer has the power to obliterate a historical production cost forever, instead of passing it on as a cost from one party to another, which is what businesses and other productive agencies do whenever they spend money. When consumers are not properly enfranchised with real consumer purchasing power, i.e., income, producers are not able to sell all their production or meet all their costs. The result is loss and eventually bankruptcy.
The situation is likewise important to the consumer because unless he is properly and sufficiently enfranchised with purchasing power or income, he cannot obtain in full the goods and services which his labour, natural resources, and/or cultural inheritance (in the form of technology and its associated know-how) make so amply available. Any consumer production that cannot be distributed on account of the missing income would be wasted … and there is not much point in producing something that won’t or can’t be consumed.
3. This mismatch in rates between the flows of costs/prices and incomes occurs because some of the money that is used as production credits to initiate or carry on production make a full monetary circuit and go back to their point of origin (whether a bank or a business revenue account) without ever being transformed into consumer income. This is because businesses and indeed any modern productive organization have many other costs besides labour costs and many of these costs either do not distribute consumer income at all in being paid or only do so later on at a lower and slower rate than the rate at which they need to be collected. Money is created and destroyed or issued and received in a way that adds to the final costs of the production which must be met by the consumer, but which does not distribute any income to the consumer in the same period of time.
4. Since all money is created and introduced as a debt or a debt equivalent (i.e., it has to be repaid to its issuer), the only way of making up for the underlying lack of consumer buying power in the form of income under the current financial system is to borrow more money into existence as consumer loans, or to borrow more money to initiate more production, especially capital production, government production, and production for export (as these provide the greatest time lags between when the capital is produced and the much needed additional incomes are distributed on the one hand, and when the associated debts will have to be paid on the other).
5. But relying on the ‘debt-only’ system to fill the gap actually creates a positive feedback loop, where attempting to liquidate production costs by creating and injecting more and more debt-money leads to an overall build-up of more and more debt, which increases exponentially, until the stability of the system is shaken and a financial crisis occurs … this is the only way of allowing for a re-set, so that the system can be taken back to a previous stage and allowed to amplify again until the crisis point recurs. As the saying goes, you cannot successfully borrow yourself out of debt … you only create a deeper and deeper debt hole over time. Eventually, the debt burdens become so great that they cannot be adequately serviced and neither lenders nor borrowers are then inclined to continue with the money creation and/or lending process. Therefore, periodic financial crises and economic recessions are inherent consequences of our debt-finance system.
6. Running the financial system on a positive feedback loop has many other negative consequences besides exponentially increasing and unrepayable debt and its associated periodic financial crises.
For example, it is also heavily implicated as the main cause of inflation in the form of cost-push inflation. As the debt burden increases, servicing charges increase. As servicing charges increase, the buying power of consumer incomes is diminished (directly or indirectly). As the buying power of consumer incomes is diminished, consumers require and hence demand increased wages/salaries to ‘maintain the standard of level’ or the level of consumption to which they were accustomed in the previous economic period. As wages and salaries go up, costs/prices will eventually go up as businesses will need to borrow or otherwise acquire more money to pay the higher wage and salary bills. The time lag between the wage increases and the corresponding price increases offers the consumer a bit of relief, but the end result is the steady devaluing of each unit of currency as each unit buys less and less of what it did before. As this phenomenon has repeated itself over time, we can easily understand why it is that each major unit of currency only purchases a small percentage of what it could purchase say 100 years ago.
Other negative phenomena heavily implicated by a positive feedback loop where debt is concerned include: i) the paradox of poverty in the midst of plenty, or the fact that poverty continues to plague the world even though there is no physical shortage, in real or at least in potential terms, to answer to basic needs; ii) the paradox of servility in place of freedom, or the fact that people have to work harder and longer under precarious conditions than what the physical facts of economic life actually require; iii) economic instability, or the fact that sometimes not enough money is borrowed to fill the gap, resulting in economic stagnation, recessions or worse, while, at other times, too much money is borrowed to fill the gap leading to irrational exuberance and an overheating market; iv) unnecessary conflict, or the fact that consumers, workers, and producers must fight amongst themselves and against each other over a scarce flow of consumer buying power; v) forced economic growth and economic inefficiency, waste, and sabotage or the fact that the economy must grow, whether there is a genuine need for additional consumer or capital goods and services or not, because it distributes much needed additional income to consumers (The result is a tremendous waste of time, effort, and resources); and vi) social problems, mass migration, and the environment or the facts that: there is not a single societal issue, such as abortion, drug addiction, or delinquency, that does not have a financial component and could not be alleviated or prevented by a liberation from artificial financial stringency. In a similar vein, lack of production in developing countries and the need for constant growth in developed countries act as the north and south poles of a magnet drawing ever-greater floods of migrants from the third world to the first, with all the cultural dislocation and conflict which that provokes. Finally, the impetus to constant growth also leads to excessive resource consumption, to the destruction of non-renewable resources and of habitats and ecosystems, while the artificial lack of consumer incomes makes it all the more difficult for consumers to afford and hence for companies to control pollution and to offer more environmentally friendly products.
7. What Douglas proposed with his Social Credit overhaul of the financial system was to re-engineer the system after the pattern of a negative feedback loop. Whenever costs and hence prices in the process of production exceed, as they do, the incomes simultaneously being distributed to consumers, the financial system would fill the gap by having an organ of the state, the National Credit Authority, create and issue free of debt sufficient income directly to consumers (in the form of a National Dividend) or to retailers on behalf of consumers (in the form of the Compensated Price Discount) so that the excess costs could be liquidated with money specifically earmarked to them or for them and that would have, therefore, no other debt-claim in connection with it. This would, by dynamically and in real-time ensuring the liquidation of all production debts, dramatically lower the debt-load at any given moment in the economy, preventing debts from piling up exponentially, and returning the financial system to a position of balance, of homeostasis. The background debt-load would be kept relatively low and only increase in direct proportion as the economy increased in size. Naturally, to avoid demand inflation, this injection of a reverse flow of debt-free credit would take place in lieu of all of the other methods currently relied on to fill the gap; i.e., both consumer loans and excess production loans involving the creation of new debt-money (whether for domestic use or export) would have to be eliminated.[3]
Once the financial system and hence the economy have been put on an operating system that seeks to maintain homeostasis, we can legitimately expect that all of the other ‘symptoms’ associated with the destabilizing positive feedback loop for debt (and that were mentioned in the last section) will be eliminated or at least greatly attenuated. The economy will become more stable as it more effectively and efficiently serves or fulfills its true purpose: the delivery of goods and services, as, when, and where required, with the least amount of labour and resource consumption. With finance out of the way as an artificially constraining or restraining factor the only inherent limit to the economy’s functioning would be the interplay between what can be done with the available economic resources (machines, software, know-how, labour, and natural resources) and the desire of consumers for meaningful goods and services to sustain and enrich their lives.
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[1] I am not the first Social Credit author to draw a parallel between biological homeostasis and the Social Credit proposals. As Arindam Basu has pointed out recently in private communication, the following interesting comment was made by Gorham Munson in his book Aladdin’s Lamp: The Wealth of the American People:
“There was a monetary cause for the social numbness, and a distinguished scientist, Walter B. Cannon, in his book, 'The Wisdom of the Body', puts us on the track of it. How often it happens that there is more economic wisdom in a side-glance by a scientist at economics than there is in the prolonged stare of the professional economist at phenomena that are not obeying the theory he studied for his doctorate!”
“Marvelling at the remarkable stability of the human body, which he traces to the preservation of the uniformity of the fluid matrix (blood and lymph), Professor Cannon inquires if there are not general principles of stabilization and speculates on the usefulness of examining economic organization in the light of the body's organization. Pursuing his thought, he decides that money, specifically including credit in that term, is an integral part of the fluid matrix of society. Furthermore, he says, ‘the strategic control would appear to reside in the devices for distributing goods, in commerce and the flow of money rather than in manufacturing and production.’ Professor Cannon's digression into general principles of stabilization is extremely suggestive: it suggests that just as even a small degree of lapsing of the homeostasis of the fluid matrix in our bodies brings on coma or convulsion, so a certain degree of lapsing of social homeostasis will bring about a comatose or a convulsive society in danger of death. Indeed, if we say that the first principle of social homeostasis is the maintenance at unity of the ratio of production to consumption in the societal fluid matrix, we have an explanation both of the decline of hope among democrats and of the disposition to tantrums of the fascists which marked the pre-Second World War years - since in those years there was no maintenance at unity of the ratio of production to consumption. The end has been a global convulsion.” Gorham, Munson. Aladdin's Lamp: The Wealth of the American People (New York: Creative Age Press, 1945), 188-189.
[2] With the expression ‘debt-equivalent’, I am referring to monies that are, strictly speaking, created without debt, but which must eventually be repaid to the issuer by the receiver after they have been injected into the economy. To take one example, bills and coins may be created free of debt by the central government authority, but as they are typically injected into the economy by being purchased by banks at face value and those banks then charge the consuming public to recover the equivalent of those expenditures, bills and coins cannot be considered as a free gift to the economy and may therefore be regarded as a ‘debt-equivalent’, something that has to be repaid to the issuer.
[3] Arindam Basu has commented on this last sentence as follows: “Strictly speaking, I'd argue the other methods would automatically be eliminated, as the increased flow of debt-free credit would reduce the need for individuals, firms and governments to borrow, since they would see their incomes, revenues and tax receipts rise. However, to be on the safe side, the use of statutory liquidity requirements (i.e. the amount of reserves commercial banks must have as a proportion of total lending - effectively a limitation on commercial lending by banks) can be used to restrict the supply of debt money, if required.” Private communication with Arindam Basu 03/04/2020.
