Social Credit Views

Monday, 13 February 2017 19:25

What's Wrong with the Financial System? A Social Credit Perspective

Written by M. Oliver Heydorn
Rate this item
(0 votes)

At the very heart of the modern economy we find this thing called ‘finance’. Finance is to the economy what an operating system is to a computer. For it is the financial system which allows an economy’s ‘hardware’ (i.e., its raw materials, labour, machinery, etc.) to be actualized in the service of specific ‘software applications’ (i.e., production programmes). As far as the formal economy is concerned, it is true to say that finance is the essential interface and animating principle.

But the financial system, i.e., the banking and cost accountancy system, is also a purely human artefact composed of institutions, laws, and conventions. This means that it can function more or less adequately. If it is properly designed, it will serve the common good in an effective, efficient, and fair manner. If it is not properly designed, it will tend, instead, to serve the vested interests of those who own and operate the financial system, thus transforming financiers (both national and international) into an economic and political oligarchy.

Social Credit holds that the conventional financial system is not properly designed and that, in consequence, it has become impossible for any economic association operating under its rules to fulfill its true purpose (i.e., the delivery of those goods and services that people can use with profit to themselves with the least amount of labour and resource consumption) to the extent that such a fulfillment is physically possible. In other words, because there is a ‘bug’ in the economy’s operating system, the economy’s hardware is artificially constrained and its activity is misdirected. Chronic dysfunction in the form of poverty, servility, the recurring cycle of boom and bust, constant inflation, heavy taxation, economic waste and sabotage, forced economic growth, ever-increasing indebtedness, and the centralization of wealth, privilege, and power in fewer and fewer hands is the inevitable result.

In general, a financial system may be described as a system of double-entry bookkeeping involving both money values and money. It is a system of numerical representation that is meant to measure our physical economic assets on the one hand and the calls that we make on those assets on the other.

The basic design fault with the conventional system is this: it is not an honest system. That is, it is not designed to provide an accurate representation of our physical wealth, both potential and actual. Instead, it systematically underestimates our wealth, always making it appear, in financial terms, that we are poorer than we actually are in physical terms.[1]

Perhaps it is easiest to grasp the general nature of the problem in the case of potential production. In the big wide world there are many goods and services that are never produced even though there is a) a great need for them on the part of various individuals on the one hand, and b) more than sufficient raw material, labour, and machinery, etc., to bring these goods and services into being on the other. The required items are not produced because sufficient producer credit to set the economy’s hardware in motion is not forthcoming. But how can there be a lack of money? Money is simply a matter of accountancy numbers. In principle, we should be able to create as much or as little of it as we need. If the financial system were properly designed, society’s real credit, i.e., its physical potential to deliver needed goods and services, would be automatically and isomorphically represented by an adequate flow of financial credit for production. Finance would dutifully respond to the legitimate demands of the real economy, rather than acting as the great limiting factor. Ironically, sufficient producer credit is often made available for wasteful, redundant, or destructive production, such as low-quality, throw-away appliances, competing brands whose only noticeable difference lies in the packaging, and armaments for export. Thus we see that the existing rules of the financial game interfere with the catalytic function of the financial system in two ways: by artificially limiting the volume of desired production and by simultaneously inducing the production of many other things that would not be sanctioned by the truly independent and autonomous citizen in his rôle as worker and consumer.

When it comes to actual production, a parallel problem can be observed. In addition to its catalytic function in facilitating new production, the financial system also serves a distributive function with respect to already existing production. On one side of the equation, the financial system registers the costs that are incurred and hence the price-values that are built up as producer credit is spent to obtain raw materials and to transform them, through the intelligent application of energy, into a more useful form. On the other side, it also registers, under the heading of consumer purchasing power, the money that is distributed to consumers as a reward for their various inputs in the production process in the form of wages, salaries, rents, and dividends, etc.

Douglas revealed that in the case of the financial system’s distributive function, our existing financial ‘software’ is faulty because any production involving the use of real capital will build up costs and hence prices at a faster rate than it distributes income to consumers.2 That is, for every 100 units of cost that the financial system registers in the course of the production of some good or service, it only registers the equivalent of a smaller proportion of that 100 units, let’s say 50 units, in the form of incomes that were simultaneously distributed through the same productive process.3 There is a structural imbalance where prices and incomes are concerned. Finance lags behind the physical reality and artificially limits our access to it.

Now, this situation is not right. Why? Well, in the first place, it’s irrational. What’s the point of producing some specified inventory of goods if the act of production does not distribute enough money to consumers so that those goods can be bought in their entirety and all of their corresponding costs of production liquidated? What cannot be consumed is waste and the production of waste is purposeless.

One may object that the existing system has various ways of compensating for this lack of purchasing power, through the continual granting of more and more loans involving the creation of additional debt-money that is then issued to consumers, governments, and firms, and through export credit. Fine, but this brings us to the consideration of a second and more fundamental problem with the conventional financial software.

The physical cost of producing something is paid for as production proceeds and is paid for in full upon completion of the good or the delivery of the service in question. Otherwise, the good or service would not exist. If the financial system were an honest system, i.e., if it were properly designed so as to mirror or reflect reality, there would be no need to borrow-into-being additional debt-money to be repaid out of future earnings in order to consume in full what has already been produced. Every unit of price-value (as measured in dollars or any other currency) attached to any consumer good or service would be automatically matched by an equivalent unit in consumer purchasing power. Prices and incomes would be in an automatic balance or equilibrium.

Unfortunately, the financial system that we have in place is not a truthful indicator of our existing wealth. The picture it paints does not correspond isomorphically to the physical reality. For it allows a certain proportion of industrial production to go unrepresented by consumer purchasing power. While it rightly recognizes production costs as liabilities, it does not recognize that the corresponding production is also an asset that could and should be automatically represented by sufficient money in the hands of consumers. If the good or service exists, it has been paid for in physical terms, and so the money needed to represent it should also exist without having to borrow it as a cost against future cycles of production. There is no physical need to earn via future work what you have already paid for physically in the past; there should be no financial need either.

Besides being dishonest, this state of affairs is also unfair. If you conceive of the community as a single agent, the structural imbalance between prices and incomes can rightly be seen as a violation of commutative justice. The community surrenders all that is necessary in physical terms to bring the goods or services into being, but, in exchange, it only receives sufficient purchasing power to consume a certain limited portion of that production and not the production in its entirety. This is equivalent to doing 10 dollars worth of work and only being paid 6 dollars, let us say, in exchange for that work. The exchange is unequal; i.e., the community receives less than what it gave.[4]

In sum, the existing financial system is so highly dysfunctional because it is structurally dishonest. It does not embody the principles of honest or accurate book-keeping when attempting to carry out either its catalytic function or its distributive function.[5] By failing to conform its figures to the objective truth of the physical economic reality, the financial system becomes the limiting factor to which the real economy and the real people it is meant to serve are routinely subordinated. This subordination is an inversion of the due relation which should obtain between the financial system and the real economy. Instead of the economic dog wagging its financial tail, as, when, and where required, the financial tail wags the economic dog.

For those who profess belief in the Christian revelation, it should be of no small consequence that any financial system which incarnates such a perverted relationship between real things and figures is rightly described not simply as non-Christian, but as anti-Christian. If there is a ‘this-worldy’ or mundane source to our chronic economic, political, and social discontent it lies here, in the systematic subordination of society’s real credit to its financial credit, of reality to mere abstractions. Nothing has been more corrosive where both Christianity and Christendom is concerned than the conventional financial system.


[1] By maintaining money in a state of artificial scarcity, the existing financial conventions ensure that money will be regarded as a commodity rather than as a useful tool. Like any other commodity, artificial scarcity enhances the benefits for those few who do monopolize the creation and selling of money as debt.

[2] The proper explanation for this state of affairs will be the subject of a forthcoming article.

[3]The proportions here make no claim to accuracy and have merely been chosen to illustrate the general principle.

[4] It is for this reason that the concern which socialists and classical distributists show for the question of equity in income distribution is regarded as being of secondary importance by the Social Crediter. To reference the example employed in the text, increasing the proportion of the six dollars that is received by labour at the expense of capital and/or management via redistributive taxation or by making the worker an owner in his business does nothing to increase the aggregate volume of consumer purchasing power which has been released. You do not make an insufficiency sufficient by re-allocating its distribution.

[5] Please note that this diagnosis is completely independent of questions of profit and interest. From a Social Credit perspective, economic rent-taking, whether in the regular corporate world or in the financial world, in the form of usury, is an excrescence on an intrinsically flawed representational system and not the source of the problem.

Leave a comment

Make sure you enter all the required information, indicated by an asterisk (*). HTML code is not allowed.


  • Comment Link  Oliver Heydorn Sunday, 18 February 2018 19:29 posted by Oliver Heydorn

    Hi JB,

    Thanks for your message and my apologies for not having responded yet to a previous comment that you had submitted. I'll try to find it and get back to you on that too.

    To answer this question, economic reality, as used by Social Crediters in the context indicated, would refer to the physical potential of the economy to produce goods and services with the least amount of resource consumption and labour, on the one hand, as well as to the physical goods and services that are available for purchase at any given time, on the other. The financial system should accurately represent symbolically, i.e., numerically, these physical dimensions of the economy.

  • Comment Link JB Sunday, 18 February 2018 19:29 posted by JB

    When social crediters use the phrase "economic reality" (eg. the financial system does not reflect economic reality), what do they mean by this?

    Many thanks


  • Comment Link Arindam Sunday, 18 February 2018 19:28 posted by Arindam

    In relation to the fundamental flaw with the financial system which has been carefully identified and addressed by Dr. Heydorn in this article, it is interesting to note that the Bank of International Settlements postulated two theories in its 2015-2016 annual report - secular stagnation and financial bubbles, as explanations for the current malaise.

    I think we could argue that these two are actually interrelated: secular stagnation is inevitable since costs rise faster than incomes: financial bubbles are the result of attempting to overcome such stagnation with increased borrowing. In which case, by tackling the first, (through a National Dividend, perhaps along with a Just Price mechanism) we can prevent the second.

Latest Articles

  • Financial Credit as a Merit Good
    The debt­-finance system, by generating a chronic insufficiency of purchasing power, thereby requiring increased borrowing (in lieu of large trade surpluses) if economic activity is not to grind to a halt, causes the State ­ with its great, almost unlimited capacity to borrow, thanks to its power to tax (i.e. creditors are eager to lend to it in the knowledge that it will always have a means to pay them back), to expand its role in the economy. Thus, as society finds its purchasing power increasingly insufficient to satisfy its requirements, the State steps in, with its role becoming larger and larger as it fills the growing gap. Caught unawares by these developments, which they were utterly incapable of anticipating, economists scrambled to come up with theories explaining ­ and indeed, justifying ­ such extensive government intervention.
    Wednesday, 29 August 2018 14:16
  • Visualizing the Gap
    The central contention of the Social Credit critique of contemporary economic management (or rather mismanagement) is the existence of a gap between prices and incomes in the operation of any modern economy - i.e. an economy based on debt-finance and multi-stage, mechanized production. This underlying deficiency of purchasing power, makes it impossible to liquidate the costs of production without resorting to increased debt and/or a large trade surplus - since prices cannot fall below costs without putting the continued operation of an enterprise in peril, (unless it can rely on direct or indirect government support). Furthermore, the critique contends that this gap is bound to grow as the economy becomes more sophisticated - i.e. as production involves more and more stages, and use of machinery increases - entailing spiralling debt and increasing trade tensions if the necessary financial remedies are not applied.
    Tuesday, 28 August 2018 13:37
  • Social Credit and Democracy: The Problem - Part Two
    In this second article, I will continue to examine some of the structural problems with conventional democratic political systems that Douglas had identified in the course of his writings, especially in the writings of his latter years. Beyond the particular defects in the voting system which were discussed in the previous month’s article, there are also problems with the party system and with how the voting and party systems interact with each other. Since there is quite a bit of information to cover, I beg the reader’s indulgence if the following is reminiscent of a lawyer’s seriatim brief.
    Monday, 20 August 2018 17:27