One of the most common misunderstandings where Social Credit is concerned is the notion that the Social Credit diagnosis can be adequately summarized along the following lines: "The problem with the existing financial system is that the banks create money out of nothing in the form of bank credit and then proceed to charge interest on the money that they loan out. Unfortunately, they do not create the money to pay the interest and this leads to a continual build-up of unrepayable debts, etc., etc." This popularized interpretation of Social Credit is erroneous.
It is absolutely vital for people to understand that, in contradistinction to those monetary reformers who would focus all of our attention on the private creation of money and on the question of usury (however defined), the Social Credit diagnosis points in another and much deeper direction. While it is true that banks do indeed create the bulk of the money supply ex nihilo and in the form of interest-bearing debt, and while it is true that these practices can be problematic (largely on account of the de facto monopoly on money creation which the private banks, for all intents and purposes, currently possess), the financial system's most fundamental flaw has nothing to do with the private creation of the money supply nor with the charging of interest as such.
The core problem according to Douglas' analysis is that the financial system is inherently or structurally unbalanced; it generates prices at a faster rate than it distributes income. This difference in rates between total prices and total incomes typically manifests itself as a gap between consumer prices and consumer incomes, a gap that must be bridged in one way or another if the economy is to attain to a state of financial equilibrium and continue in operation.
The gap in question is not exclusively or even primarily caused by the charging of interest on bank credit. Indeed, if you were to restore the creation and issuance of all money to the state and forbid the charging of interest, the gap between consumer prices and incomes would still remain just so long as the standard conventions governing the financing of production and industrial cost accountancy were in place. While the charging of interest can exacerbate the gap between consumer prices and consumer incomes (insofar as bank profits may be held in reserve, re-invested, or used to pay down debts, or insofar as the money needed to pay the interest factor in bank profits cannot be easily or quickly redirected from other expense claims, etc.), the chief cause behind the gap has to do with real capital. The acquisition of real capital under existing financial conventions results in the building up of costs in the productive process for which no or an insufficient volume of consumer purchasing power has been distributed. By the time these capital costs come forward to be liquidated by the consumer in the prices of consumer goods and services, he does not have sufficient income derived from their production to be able to pay for them.
Furthermore, while it is likewise true that under the existing system the charging of interest can be a) onerous (insofar as having to pay interest may divert so much of one's income that day-to-day living becomes burdensome and one's legitimate needs cannot be adequately or easily met), b) exploitative (insofar as being forced or heavily pressured to borrow money under asymmetrical terms would not even exist if the economy and hence individuals automatically enjoyed adequate levels of consumer purchasing power), and c) excessive (insofar as one may be required to pay large, even incredibly large sums in interest that may exceed the amounts originally borrowed should one be unable to pay off one's debts relatively quickly), it is also true that the restoration of an automatic and self-liquidating balance to the financial system along the lines that Social Credit proposes would do much towards eliminating these objectionable, i.e., usurious, aspects of the practice even if the charging of interest were to continue in a Social Credit economy. Distributing the compensatory flow of debt-free money to the consumer (via the National Dividend and the National Discount) would help to do away with the undue centralization of economic wealth and power that are associated with the present monopoly of credit by putting an end to this monopoly. In other words, in a balanced financial system, the charging of interest would cease to be the kind of issue that it is today. Since it would cease to be the same kind of issue and since it is not the underlying problem in any case, the focus of monetary reformers should be on restoring a due balance to the circular flow and not on eliminating usury.
At the end of the day, private banks (which would continue to operate as the community's financial book-keepers and as regulators of private production under Social Credit) must be able to cover their legitimate costs and to make a profit in exchange for successfully promoting the real interests of the community by financing desirable (i.e., remunerable) production. They must therefore be entitled to levy fees in one form or another for their services.
Addendum: As noted by Wally Klinck in his comment to this article (see below), the fundamental crime of the present banking system does not consist in the charging of interest on monies created out of nothing as such, but rather in the fact that the recurring gap between consumer prices and consumer incomes (which would not exist if the financial system were an honest system, i.e., if it accurately reflected reality) allows the banks to lay an illegitimate claim to the beneficial ownership of real capital.
As we have seen, the gap is mainly due to the existence of real capital. Under current conventions we rely (in large measure) on the private banks to fill that gap by issuing additional loans to governments, businesses, and consumers. The increase in liquidity that the economy requires means that these compensatory loans will tend to be paid back more slowly than they are contracted, thus leading to an unrepayble and increasing mountain of debt upon which a tribute of steadily compounding interest must be paid. The tacit or implicit claim which the banks regularly make to the ownership of the credit that they create (by demanding that it be paid back) is, in this particular case, transformed into a kind of long-term, secure, and wholly illegitimate investment. To summarize: the debt-system has allowed the banks to indirectly appropriate the real capital for their own benefit since they are, given their monopoly on credit creation, the only ones who can compensate for the gap. In truth, the beneficial ownership of real capital (as opposed to the administrative ownership) actually rests with the aggregate of individuals who compose society since communal factors of production such as natural resources, the unearned increment of association, and the cultural heritage, are what have made the real capital possible. For this reason, Social Credit proposes that the additional bank debt that is presently used to fill the gap should be replaced with debt-free money that would be issued to the true beneficial owners of the real capital: the common citizens.
Addendum #2: On the principle that the financial system should reflect the physical reality of the economy as accurately possible, it would be eminently fitting if the fees that banks would charge under Social Credit on production loans (in order to meet their costs and to make a reasonable profit) would be referred to as 'service charges'. This would make it clear that the banks are being paid for their services and not for the money which they lend, as if that money had a value in and of itself. Money is not to be treated as an artificially scarce commodity under Social Credit, but rather as a mere numerical instrument, a ticket.