One of the first attempts by Louis Even to explain the Douglas Social Credit analysis and remedial proposals was written in the mid 1930’s and is known as “L’Île des Naufragés” or “Island of the Shipwrecked”. It is, in essence, a fable that is intended to explain in an easy to understand format the basics of the Social Credit message to the newcomer. The Pilgrims of Saint Michael, a Catholic organisation that Louis Even had established and which has been promoting Douglas Social Credit for many decades now, continues to employ this story to this day in their promotional materials under the names of “The Money Myth Exploded” and/or “Salvation Island”: https://www.michaeljournal.org/articles/social-credit/item/the-money-myth-exploded.
It was indeed through the efforts of the Pilgrims that I first became properly aware of Douglas Social Credit in the early 2000’s and “The Money Myth Exploded” was one of the first documents which I had read. For their zeal and dedication, I am eternally grateful, but my further in-depth studies of the Social Credit doctrine accomplished in the intervening years have now obliged me to provide the following caveats. Whatever its merits, and there are many, a too literal or out of context reading of “The Money Myth Exploded” can lead the reader to some erroneous and seriously misleading conclusions. It is therefore necessary to explain what these are in some detail so that any such deviations can be scrupulously avoided.
What the Story Gets Right:
Before proceeding to the critique, however, it will be instructive to emphasize the key points which the fable gets right.
- Yes, the private banks do create the bulk of the money supply in the form of bank credit and inject it into the economy whenever the make a loan or other purchase.
- And yes, it is the real wealth of the community (which is owned by the citizens) which allow the banks to create this money. That is, the real wealth of the community (and not gold, as was alleged during the days of the gold standard) is the ultimate asset which backs or gives value to the money that the banks create. Without these goods and services, or the raw capacity to produce them, all of the gold, or any other conceivable forms of money present in the universe, are of no value whatsoever.
- To further complicate matters, it is also true that the banks do make an implicit claim that the money that they create is their money (even though the real wealth over and against which they create this money is not theirs) because they expect the money they create to be paid back or otherwise returned to them.
- It is indeed obviously true that the banks do charge interest on these loans and various service fees for this and their other services, that these fees can be, and often are, exorbitant, and that failure to pay debt and interest can lead to the confiscation of the collateral that was put up as a guarantee for the loan.
- It is likewise true that all loans cannot be paid back in the aggregate, but not for the reason that is cited (i.e., the charging of interest) … more on this later.
- It is correct that real wealth consists in goods and services that answer to human needs: food, clothing, shelter, etc. Real wealth is not gold or paper money, or any kind of money at all. Money is, or should be, just a token, a representation of real wealth.
- It is true that if there is insufficient money to catalyze production, a country’s economy will be paralyzed to the extent that money is lacking, as was notably the case during the Great Depression.
- In general, it is incontrovertibly correct to assert that the money system that is set up in any nation should serve the inhabitants of that nation on an equitable basis and not the interests of an oligarchic plutocracy at the expense of the common good. It is also the case the while Douglas Social Credit would embody the ideal of the former arrangement, the current financial system reigning the world over is an exemplification of the latter category. There is a need for a new National Monetary Policy that would put the interests of the general community first and not those of bankers.
- The political implications of the fable are also incontestable: whoever controls the money system must control the economy, the nation, the world, etc. Given the way our civilization is currently structured, i.e., its dependence on a fundamentally dishonest and dysfunctional (but wealth & power-centralizing) financial system, the Money Power must be the Supreme Authority. We run our economies, in the first place, to serve the overriding interests of financiers and under the conditions they deem appropriate (for themselves). To maintain that control, control of information, of the media, is vital. This political control of information is used to keep people in ignorance, to discredit legitimate criticism, to prevent it from arriving in the first place, and to distract people’s attention from the real issues. One particularly effective method of achieving this latter aim is to use propaganda, i.e., publicity, to divide the population into two or more warring camps on the basis of some false dichotomy: “Liberals vs. ‘Conservatives’” in Canada or “Republicans vs Democrats” in the USA is a prime example … ditto ‘capitalism’ vs. ‘socialism’, ‘libertarianism’ vs. ‘authoritarianism’ and so forth. Each faction has its own newspapers, TV channels, internet influencers, and so on. This also prevents the people from ever uniting around the real issues and exerting effective, intelligent pressure on the existing authorities to resolve problems in favour of the common interest. The possession and control of money affords all the sanctions necessary to take control of the media and to (mis)direct the factions vying ostensibly for power in the conventional political landscape.
- It is true that, because of the problems with the existing monetary system, taxes are high and this creates conflict between those who pay the most compared with those who paid less and whose incomes or other benefits are subsidized by the richer. In the same manner, people under the pressure of high taxation look for ways to compensate for their losses by raising prices, exploiting workers, etc. The effect of this on the general morale of a nation is to lower it substantially, with people blaming others, their poor work ethic, or alleged lack of virtue, etc., for the problems that the money system is, in fact, causing. The system tends to bring out the worst in human nature and this has a tendency to ruin the harmony and progress that would otherwise characterize community life.
- Under the debt-money only paradigm, it is also the case that the richer a country becomes in material terms, i.e., the more it develops its productive capacity and seeks to make use of it, the more indebted it tends to become. The real reasons for this are not so clear in the story, but this will be discussed later. For now let it be stressed that this is a curious state of affairs. It is as if a nation is punished under the existing system in debt terms for its success in terms of real economic development. The total societal debts, including the national debt, are indeed unpayable in the aggregate under the existing system and the grand totals tend to increase exponentially over time.
- Finally, money is, or should be, just a form of accountancy that represents a) the real capacity to produce goods and services and b) the flow of real wealth in the form of goods and services. Douglas Social Credit merely insists that this system of accountancy should be so structured and should so function that it would provide an accurate reflection of these realities. In other words, it should be an honest system of accounting. If production increases, the volume of money available in the form of consumer income should also increase accordingly.
What The Story Gets Wrong:
Whatever its merits, and there are many, there are four fundamental flaws which characterize the “Salvation Island” story if any attempt is made to apply the story to the economy as a whole. There is a sort of fallacy of composition at play. What may have been true of the Island under the terms or conditions stipulated by the story is not an accurate description of what is actually occurring in any established conventional economy.
Firstly, contrary to what the fable might suggest, the charging of interest is not the main cause of the price-income gap in the economy and, in fact, it does not contribute to the gap in the way that the story suggests. Rather, whatever contribution interest does make to the gap is indistinguishable from the contributions that are made by any profit-making enterprise.
Allow me to explain … in section 9 of the story we read the following: “ ‘Can the population of the island taken as a whole’ he mused, ‘meet its obligations? Oliver issued a total of $1000. He’s asking $1080 in return. But even if we were to bring him every dollar bill on the island, we would still be $80 short’ ”.[1] This may be a valid concern within the context of the story, if we assume that Oliver never spends any of the interest he receives, in an attempt, I suppose to bankrupt someone and seize their property. But this debt-virus hypothesis is not an accurate representation of how things work in the real world. In the real world, banks spend money into existence (which they create) every time they pay their own operating expenses. This money finds its way into the community via the wages and salaries of bank employees and contractors. This consumer income can thereby help to offset the interest charges and other fees that banks levy on loans and their other services. Beyond that, a certain proportion of the profit which banks make is also returned to the community via the distribution of dividends or employee bonuses, etc. We are not now dealing with the equity of this arrangement in terms of income distribution or whether, to what extent, or under which conditions, bank profits are ethically legitimate. We are simply emphasizing the fact that the bank is distributing money to offset some significant proportion of its costs and so the gap that is caused by interest is really only that proportion that is undistributed profit.
Secondly, the main cause behind the price-income gap, as per the Douglas analysis, is entirely ignored by the story. The gap exists in the first place due to the presence of real capital in the production process and the charges that are levied in its name under existing cost accountancy conventions. The creation of money as debt is, apart from any question of interest, only a problem because the cycle of debt-creation and its re-imbursement is out of sync (it occurs in a shorter period of time) as compared with the cycle of price-generation and the subsequent price-liquidation. For every 100 dollars, let us say, that is being created by a bank, lent to a productive agency, and then returned to the bank via other companies or individuals in payment to cover various production costs, only a proportion, say 60 dollars is being distributed in the form of wages, salaries, and dividends. It is the presence of these capital charges (for depreciation, maintenance, capital loan repayments) which generate costs and prices without, simultaneously, in the same period of time, distributing consumer incomes with which those costs and prices could be met. It is the costing of real capital, in other words, which delinks the two accountancy cycles by generating the gap in the rate of price generation vs. income distribution.
The basic flaw in the current financial system is therefore technical in nature. It is this technical problem which makes the debt-only paradigm an inappropriate ‘software’ programme for running the economy. The system creates debts that are in excess of existing consumer credits to liquidate that debt, but the only solution it can offer is to fill that gap with more debt-money borrowed into existence from itself. But this does not liquidate any costs once and for all; it merely transfers them. It replaces one debt with another. Naturally it is impossible to borrow yourself out of debt. The unrepayable mountain of ever-increasing debt thus emerges as a result of the attempt to fill the price-income gap with debt-money and not from the charging of interest as the story suggests.
Thirdly, while the accounting system introduced in section 17 may be entirely appropriate for a small community of people who are trading their production with one another, it is not an accurate model of how a Douglas Social Credit system would work on the level of the society as a whole. Most production in the modern economy is not individual production but group production involving multiple stages and entities, suppliers, etc. Thus, we need a money system that will allow all of us, including those who do not work, the ability to draw on the central pool of wealth and to arrange for the transfer of raw materials, intermediate products from one firm to another. Furthermore, because we are dealing with large units and not individuals who know each other, it is entirely appropriate that the discipline of debt be employed in the case of money that is advanced for production. This will help to ensure that money and resources are not wasted on things consumers do not wish to purchase. The use of debt-money for production (and production only) is also one of the key ingredients that generates the price-income gap and thus allows for us to fill it with debt-free consumer credits in the form of the dividend and the discount. Eliminate the use of debt entirely and you eliminate part of the gap. Eliminate part of the gap and we cannot create as much money in the form of a National Dividend or National Discounts to fill the gap.
Contrary to what the accounting model presented in section 17 suggests, the money supply in a Douglas Social Credit system is, generally speaking, not permanent but temporary. Money is created and advanced for production. Some of it is transformed into consumer incomes, and some of it into business revenue. When spent in conjunction with the newly created debt-free dividends and discounts, the consumer income is destroyed in the repayment of producer loans at the retail stage. The business revenue is destroyed directly or indirectly (through investments) in the repayment of capital loans or lines of credit or is used to restore working capital. Thus the Douglas Social Credit monetary system is debt-free only in an analogous sense. Debt is still employed for the purposes of production, but all production debts can be fully liquidated with an adequate flow of consumer purchasing power, thus debts are dynamically liquidated without requiring the contracting of additional debt to fill the price-income gap (a is the case at present).
Now, perhaps the potentially most scandalizing correction has to do with a statement made in section 16 “A Priceless Bit of Information”, where we read: “Never at any time should interest be paid on new money”. To my knowledge, Douglas never actually stipulated that interest would not be levied on production loans in a Douglas Social Credit system. Certainly, as there would be no more need for compensatory public, business, or consumer debts involving the creation of new money to fill the price-income gap, no compound interest could ever be levied on those debts. This would reduce the interest burden considerably. However, banks would still have to charge clients fees in one form or another in order to cover their costs and, if they serve the public well under a new National Monetary Policy, to make a reasonable profit. There is no reason, apart from aesthetics or friendly public relations perhaps, that these fees could not take the form of simple interest (compound interest is admittedly problematic).
-------------
[1] One of the most unfortunate aspects of “The Money Myth Exploded”, however – at least from the point of view of the present author – is that the name of the exploitative banker is Oliver. I am happy to report that his name was not “Olivier” in the original French version, but was “Martin” instead.
