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Saturday, 13 January 2024 15:56

Douglas Social Credit ... By Way Of Metaphor

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For whatever reason, Douglas Social Credit seems to exhibit an unusually high informational “barrier to entry” and yet it is vital that as many people as possible would come to understand it as quickly as possible because the financial analysis and remedial proposals of Major C.H. Douglas (1879-1952) are the solution to 90% or more of our financial, economic, political, cultural, environmental, and international problems. In what follows, I will focus on the monetary dimensions of Douglas Social Credit, though the reader should be aware that DSC constitutes a much broader body of thought which incorporates a social philosophy, a political theory, and also a theory of history. Since the easiest way to grasp something new and therefore unknown is to approach it by means of the known, this article relies heavily on metaphors to communicate the truth of Douglas’ vision.

 

THE PRIMACY OF NATURAL LAW IN SUCCESSFUL HUMAN ACTION

     Let us begin by contemplating the quasi-miraculous phenomenon of air travel. In order for a plane to fly effectively, efficiently, and safely, transporting passengers from one location to another, it is necessary for the plane to have been designed and constructed in keeping with the principles of aerodynamics. These principles are the manifestation of the natural law in the domain of air travel. It’s of no use to say: “we don’t care what the principles of aerodynamics are, we are going to design the plane as we see fit or as we think the law of aerodynamics ought to be.” Disregarding the objective principles that govern reality in favour of one’s own preferred principles is a recipe for failure – any plane constructed on this basis will, at the very least, not fly, and may even result in all manner of carnage and destruction in the interim should a foolhardy attempt be undertaken to initiate a flight under such conditions. The observation of this fact enables us to draw a general inference: functionality, in whatever sphere of activity, is dependent on the conformity of our action with reality, on observance of the natural law – in a word – on truth.

     In the same way, the financial system – by which we mean the banking, cost accountancy, and taxation systems – must be designed in keeping with natural law if it is to be successful in fulfilling its particular true purpose: the facilitation, to the greatest extent possible and desirable, of the production and consumption of goods and services that answer to human needs, with the least amount of labour and resource consumption.

     When it comes to the financial system, the relevant natural law principle is grounded in the nature of effective measurement tools. Any such tool is only useful to us insofar as it provides us with accurate information about the real, mind-independent or objective world. A thermometer, for example, only qualifies as a good tool if it does what it is supposed to do, i.e., if it provides us with accurate information regarding the temperature of whatever it is that we are measuring. A thermometer that consistently overestimates or underestimates the objective temperature, or worse, arbitrarily alternates from overestimating to underestimating and vice versa, is not worth purchasing, holding on to, or even manufacturing when there are more accurate instruments available.

     In the same way, an effective financial system will be one that provides us with accurate information concerning the real or physical economy. The financial system is or is meant to be ‘the tool’ with which we ‘measure’ and represent the real economy, therefore the picture it paints in the abstract world of numbers should map on isomorphically to the real world. Indeed, this is the basic contention of Douglas Social Credit:the financial system should be so structured and should so function as if it were nothing other than an accurate mirror in which all the relevant facts of the physical economy are duly reflected.

 

 LIONS AND MIRRORS: AN ANALOGY

     In order to make the due relationship clear in the mind of the reader, let us consider the following image of a lion standing in front of a mirror:

 

 

  

     The image of the lion that appears in the mirror maps on perfectly (apart from the phenomenon of lateral inversion) to the real lion which is standing in front of the mirror and to his various body parts that are exposed to the mirror. The mirror itself may therefore be described as an accurate mirror, a non-distorting mirror.

      The financial system could be designed in such a way that it functions as if it were an accurate, non-distorting mirror, which truthfully reflects the physical economic reality. Whatever exists in the physical realm that is of economic significance could be fully represented in the virtual world of finance. As the physical economic facts change, the quantitative representation of those facts within the financial system would also change accordingly. Notice that in this conception of the due relationship between finance and the real world, the real world is in the driver’s seat; i.e., the mirror of finance is designed to merely follow whatever is happening in the physical realm. The real world is the determining factor and the financial system is the determined factor and thus the financial system is completely subordinate to the real economy.

     According to the natural law and to Douglas Social Credit (which, as a body of thought, is merely insisting that the natural law should be observed in the arena of finance and economics), the financial system should be designed so as to provide this kind of accurate representation of the real, physical economy. That is, it should be a system that embodies truth, that is structurally honest, and that operates, in consequence, as dutiful servant of the real economy. The instant this kind of arrangement is in place, the financial system will be able to fulfill its true purpose in an effective, efficient, and fair manner. Once again, we see that functionality in the realm of finance and hence economics is dependent on conformity with truth. It falls, above all, to the public authority which is responsible for the common good, i.e., to the government, to ensure that the financial system is regulated appropriately, i.e., in line with reality and the natural law.

     Analogies often fall short, however, of a perfect comparison because, by their very nature, they combine similarities with differences when approaching the targeted object via the analogue. That kind of imperfection is observable in the case of the previous analogy that was made with the thermometer. You see, the financial system is not just a way of representing the real, or physical economy, in the way that the thermometer is meant to measure and represent the real temperature, it is also provides the essential mechanism and tools, i.e., the system of money and prices, by means of which economic actors are able to initiate change in the real, or physical economy, either on the level of production or consumption. In other words, unlike the thermometer, the financial system is not just a set of representative symbols, but a set of tools that can effect what they signify. There is a sacramental or interactive dimension to the financial symbols that is not present in the case of the thermometer. It is important to keep this in mind as we discuss how a structurally truthful financial system would operate.

 

 THE IMPLICATIONS OF THE ANALOGY IN CONCRETE TERMS

     So what would this mirroring of an honest, optimally functional financial system look like in concrete terms?

     On the level of production, there is a reality that we can identify within the physical economy as “the useful productive capacity”. Whenever we have, on the one hand, a legitimate need or desire on the part of the consuming public for some good or service, say a need for housing, or healthcare, or transport facilities, etc., and, on the other hand, the physical productive capacity to fulfill those needs or desires in terms of raw materials, labour, technology, etc., our society possesses what Douglas referred to as the ‘real credit’ or as ‘useful productive capacity’, i.e., the ability to deliver goods and services as, when, and where required. Now, if the financial system were to accurately reflect the reality of this useful productive capacity, it would be structured in such a way that financial credit could be issued to catalyze this production as, when, and where required, i.e., on demand. In other words, what is physically possible and desirable should be automatically financially possible. There should be no artificial financial limit with respect to the full actualization of the useful productive capacity. Once again, the real economy, in this case its useful productive capacity, should be in the driver’s seat, and the financial system should just function as an administrative tool that makes what is possible real through the mechanism of money.

     On the level of consumption, there is, in any given economic period, a flow of real wealth coming forth from productive processes. This flow of consumer goods and services can be measured by the financial system in terms of remunerative prices, i.e., the prices that will cover all costs of production plus a reasonable profit-margin. Now, if the financial system were to accurately reflect this flow of real wealth in terms of money and not just prices, it would also ensure that there is, in every economic period, sufficient consumer income being automatically distributed to consumers to offset those remunerative prices, in order to effect in full the transfer of goods and services to consumers and to meet all the costs of production. What has been paid in physical terms (and every completed consumer good or service has been paid for in full in physical terms, i.e., various things like raw material, labour, and technology have been consumed in the process of production, otherwise the consumer good/service would not exist) should also be capable of being paid for in full in financial terms by consumers once and for all (without incurring further debt, because debt only postpones payment).

 

 THE FAILURES OF THE EXISTING FINANCIAL SYSTEM

     Unfortunately, our existing financial system fails to accurately mirror the physical economic reality both on the level of production and consumption. Instead, because of the way in which it is designed and the way in which it functions, the financial system systemically underestimates the real, physical economy. The system makes it appear that we are poorer than we actually are, both in terms of our productive capacity, but also in terms of our ability to freely consume the wealth that we do produce.

     In order to clarify further the nature of the problem with the current financial system, let us return to the analogy of the lion standing in front of the mirror, but with an important modification: the mirror is no longer an accurate mirror but a distorting mirror. Instead of the image in the mirror mapping on perfectly to the real lion, the mirror makes the lion appear as if he were as small and as weak as a common house cat. It’s as if the mirror in question were modelled after a fun house mirror that one might find in an amusement park.

 

 

 

     In the same way, the ‘mirror’ of finance under the existing financial system is a structurally dishonest mirror that artificially limits and distorts our conception of the real, physical economy. Because we have to interact with the real economy (insofar as it has been monetized) through this artificially limiting and distorting lens, the financial system becomes the determining factor, and what it allows us to do in the real economy becomes the determined factor. Thus, the real economy becomes subordinated to the financial system. The financial system (and those who own and control it) then occupy the driver’s seat as what was meant to function as a mere neutral tool (money and the money system) can be leveraged by those owners to impose self-serving policies on the economic associations. They can, in various ways, compensate for some of the artificial limitation and distortion, but will only do so under terms that promote the advancement of their own wealth, power, and privilege. The opportunity cost of having a structurally dishonest financial system that serves oligarchic interests is that it will simultaneously fail to serve the common good in an optimal manner.

     So how does our existing dishonest and dysfunctional financial system malfunction in concrete terms so as to produce these baleful outcomes?

     On the level of production, we often encounter many situations in which real credit is indeed present, i.e., there is a legitimate need co-existing with the physical means to meet that need and yet the useful production does not come into being for one very important reason: there is a lack of money. In other words, needs go unmet, while useful productive capacity goes unused because the existing financial system is not designed to ensure that sufficient producer credit to catalyze the real credit can be created and issued as, when, and where required. Even in well-developed, first-world nations, there are sick people, or elderly people, or disabled people who are in need of adequate medical care who cannot access the care they need to the degree they need it … not because the physical resources don’t exist in the nation but because the money does not exist with which those resources could be marshalled and harnessed for productive purposes. The system thus fails to mirror the useful productive capacity.

     Why does this failure occur? The lack of adequate producer credit is a feature of the existing system because under the rubrics of any appropriately designed financial system producer credit should only be advanced when consumers can afford to pay for the costs of the resulting production, whether that production be public (in which case consumers pay in taxes) or private (in which case consumers pay in prices). To finance something that cannot be paid for by the intended target market is to put one’s self on the path to bankruptcy. Somehow the costs must be recovered so that the producer loans can be repaid in full and on a timely basis. But if there is real demand for certain forms of production that are never actualized, why can’t the intended consumers pay for it? Why is real demand not adequately represented by effective demand? This has to do with the second manner in which the existing financial system fails to adequately represent reality and it occurs on the level of consumption. In other words, the lack of sufficient producer credit is directly caused by the lack of sufficient consumer credit which is endemic to the system.

     As we have already seen, there is, in any given economic period, a flow of real wealth issuing forth from productive processes. This flow of consumer goods and services can be measured by the financial system in terms of remunerative prices, i.e., the prices that will cover all costs of production plus a reasonable profit-margin. Unfortunately, the existing financial system does not accurately reflect this flow of real wealth but systematically under-estimates it. How? By only automatically representing a certain portion of this flow of real wealth with the corresponding  incomes that are distributed to consumers. Let’s say that 100 million dollars in remunerative prices have been generated in consumer goods and services in a particular nation over the course of a year. Given those assumptions for the sake of illustration, it may be that only a proportion of that value has been distributed to consumers over the same period of time, say 60 million, in wages, salaries, dividends, and other forms of profit. If the financial system were an honest system and 100 millions’ worth of consumer goods and services were coming on to the market, then 100 millions would appear in consumer pockets as income to offset what they are being asked to pay by the system. Instead, there is an in-built structural imbalance between the two sides of the equation. There is a chronic, underlying deficiency of consumer incomes relative to the prices that are being built up by the same productive processes.

     This deficiency of consumer incomes has various causes, and can be exacerbated by consumer savings, but it is, in the main, due to a phenomenon that C.H. Douglas described using his A+B theorem.[1] This theorem demonstrates that  as producer credit flows through productive systems under the existing financial system, the rate at which costs and prices are being built up in the production system necessarily exceed the rate at which consumer incomes are simultaneously being distributed. Beyond that, the re-investment of savings, profit-making and retained profits, and periodic deflationary banking policies also contribute to the structural or in-built deficiency of consumer incomes relative to prices.

 

 CONVENTIONAL METHODS OF DEALING WITH THE FAILURE OF FINANCE

     Naturally, the existing financial system has various palliatives that it can rely on in order to compensate for this chronic, underlying deficiency of consumer incomes. In the main, however, it depends on some economic agent, whether governments, businesses, or consumers, to borrow additional money into existence (as the counterpart to a loan) from the banking system.  

     Whenever governments or businesses spend money on additional production that the consumer will not buy or will not pay for in the same period of time, consumer incomes can be augmented without increasing the flow of consumer prices. If the production is exported without corresponding imports (a ‘favourable’ balance of trade) so much the better. In the same way, loans to consumers can help to bolster the existing flow of consumer purchasing power.  (N.B. every bank loan creates money ex nihilo in the form of bank credit and every repayment of a bank loan destroys bank credit. The vast majority of the money supply exists in the form of bank credit and most of the bank credit is issued in the form of a repayable debt).

     There are serious consequences, however, that follow on from the use of additional debt-money to fill the price-income gap. This should come as no surprise given what we have previously discussed, because injecting debt-money to buoy up consumer buying power violates the principle that what has been paid for in physical terms should be payable in full in financial terms without incurring any additional costs or debts (assuming that the financial system should be an honest system and function as an accurate, non-distorting mirror). In other words, the debt palliatives fail to reflect the physical economic reality. Instead they are built on a lie, i.e., the automatic and erroneous representation of 100 million dollars’ worth in goods and services with only 60 millions in consumer income as the counterpart. The long-train of deleterious consequences include: the business cycle, constant inflation (mostly cost-push, but also demand-pull), the misdirection of economic resources, economic inefficiency, economic waste and sabotage alongside forced economic growth, an ever-increasing mountain of societal debt that is, in the aggregate, unrepayable, recurring financial crises, heavy and often increasing taxation, wage and debt-slavery, servility, forced migration, cultural dislocation, unnecessary stresses and strains, social conflict, environmental degradation, and international economic conflict leading to war, etc.

     Why is all of this dysfunction, which is consequent to the use of a structurally dishonest financial system, tolerated? If a thermometer is not giving us accurate information, we throw it out. Why do we persist with a financial system which, because of its inaccuracy, artificially limits and distorts our economic activities and everything else which relies on those activities? As has been explained earlier, It’s because the underlying chronic deficiency of consumer income provides the pretext which the banking system (which has a monopoly on credit creation) can use as leverage to impose its own self-serving policies on all other economic agents (who are dependent on the additional credit that only the banking system can provide). In exchange for filling the gap, conditions regarding policy can be imposed and also very favourable charges can be levied for this service. In other words, the structurally dishonest and dysfunctional financial system is tolerated, and is indeed a requirement, in order for the proprietors of the banking system to usurp the unearned increment of association and to enjoy the centralization of economic wealth, privilege, and power in their own hands.

 

THE DOUGLAS SOCIAL CREDIT SOLUTION

     In lieu of these debt palliatives to deal with the chronic underlying deficiency of consumer incomes relative to prices, Douglas Social Credit insists that the financial system should accurately reflect the physical economic reality automatically. This would require that the price-income gap be measured by a National Credit Office and that sufficient consumer credits be created and issued free of debt to, or on behalf of, consumers. This would bring the flow of incomes into alignment with the flow of remunerative prices attached to consumer goods and services, enable these goods and services to be purchased in full, and also cover all of the costs incurred by productive organisations without incurring any additional debt. The direct payment to consumers would be issued in the form of a National Dividend, a periodic payment issued to each citizen independently of his employment status. This would reflect the reality that citizens are rightly regarded as shareholders in their economies (due to their share in the natural resources, the unearned increment of association, and the cultural heritage of society) and that as technology develops and displaces labour, fewer and fewer people are actually needed by the productive system. This decrease in the need to work on a physical level to provide us with the goods and services we need to survive and flourish should be reflected on a financial level with increasing opportunities for paid leisure. The dividend thus fulfills a variety of ends where a structurally honest financial system is concerned.

     The other infusion of compensatory consumer credits would be issued in the form of a National Discount in keeping with the consumption/production ratio. Since the true or real cost of production is consumption, the financial system, when designed as a structurally honest financial system, should also reflect this reality. By measuring the value of what is consumed in manufacturing a certain volume of production and then by multiplying this ratio by the standard financial price we arrive at the due discount price that reflects the true costs of production. Retailers would lower their prices by this ratio (thus indirectly increasing consumer purchasing power) and would be reimbursed by the National Credit Office to the extent of the discount with debt-free credits (thus enabling them to meet their costs).

     So while the bad news is that the current financial system does not function as an accurate mirror would do, merely registering on the financial plane what is going on in the physical economy, the good news is that the Douglas Social Credit remedial proposals ingeniously take advantage of the flaws in the existing system to, by means of a compensatory flow of debt-free consumer credits (the dividend and the discount) and in lieu of all existing palliatives, transform the financial system into the accurate mirror that it could and should be. Once respect for truth and natural law is restored in the design and operation of the financial system, full functionality and the increased satisfaction of all members of an economic association will be in reach.

 

 

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[1] Money is being created and destroyed all the time through the banking system. As it is being created and destroyed costs and prices are being generated in the production system and liquidated by the consumer. If all of the costs that have been generated were liquidated by the consumer by the same volume of money as it runs through the cycle of being created and destroyed, there would be no issue. The problem is that while costs and prices are being generated, only a portion of them are being liquidated  by the consumer. In other words, the two cycles of money creation and destruction and price creation and destruction (i.e., liquidation by the consumer) are not in sync. As a result, some portion of production cannot be liquidated by the flow of money that produced it. It is represented by unprovided-for costs that will be charged into future cycles of production.

 

Last modified on Wednesday, 14 February 2024 17:32

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2 comments

  • Comment Link Oliver Sunday, 21 January 2024 13:21 posted by Oliver

    Thank you, Arindam, for your comment! Yes, headings are probably good idea. I'll give it some reflection. That quote from Henry Ford is priceless. Thanks for sharing the find!

  • Comment Link Arindam Friday, 19 January 2024 00:43 posted by Arindam

    A most thorough elaboration of Episode 3, though I think a few headers/sub-titles would help the reader.

    Episode #3: Money and the Economy

    https://youtu.be/YvYbiY6at4w

    Incidentally, it's interesting to note that Henry Ford had an inkling about this issue a century ago:

    'But money should always be money. A foot is always twelve inches, but when is a dollar a dollar? If ton weights changed in the coal yard, and peck measures changed in the grocery, and yard sticks were to-day 42 inches and to-morrow 33 inches (by some occult process called “exchange") the people would mighty soon remedy that. When a dollar is not always a dollar, when the 100-cent dollar becomes the 65-cent dollar, and then the 50-cent dollar, and then the 47-cent dollar, as the good old American gold and silver dollars did, what is the use of yelling about “cheap money,” “depreciated money”? A dollar that stays 100 cents is as necessary as a pound that stays 16 ounces and a yard that stays 36 inches.'

    He went on to state:

    'If the present faulty system is more profitable to a financier than a more perfect system would be, and if that financier values his few remaining years of personal profits more highly than he would value the honour of making a contribution to the life of the world by helping to erect a better system, then there is no way of preventing a clash of interests. But it is fair to say to the selfish financial interests that, if their fight is waged to perpetuate a system just because it profits them, then their fight is already lost. Why should finance fear? The world will still be here. Men will do business with one another. There will be
    money and there will be need of masters of the mechanism of money. Nothing is going to depart but the knots and tangles. There will be some readjustments, of course. Banks will no longer be the masters of industry. They will be the servants of industry. Business will control money instead of money controlling business. The ruinous interest system will be greatly modified. Banking will not be a risk, but a service. Banks will begin to do much more for the people than they do now, and instead of being the most expensive businesses in the world to manage, and the most highly profitable in the matter of dividends, they will become less costly, and the profits of their operation will go to the community which they serve.'

    Henry Ford, My Life and Work, chapter 12 'Money: Master or Servant'.

    With a century's hindsight, it's evident that the great American industrialist underestimated the extent the financiers were willing to go to preserve their dysfunctional system. Keeping the general public in the dark about the nature of money, credit and the actual capabilities of the real economy is central to their ploy - hence the challenge of shining light into this deepest abyss.

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