Monday, 03 November 2014 23:28

A Summary of the Social Credit Monetary Reform

Written by M. Oliver Heydorn
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Although I disagree profoundly with Walter Russell’s ‘New-Agey’ worldview and spirituality, I think that he was on to something when he claimed that the very essence of the created universe consists in ‘rhythmic balanced interchange’. In a similar vein, I think that the type of changes envisaged by a Social Credit monetary reform (in clear contradistinction to all other monetary reform proposals) may be duly encapsulated in terms of ‘distributive self-liquidating balance’. Let us examine each of these elements in turn and in reverse order.

1) Balance – the present financial system is inherently unbalanced; Social Credit wants to make it balanced

The existing financial system does not effect an inherent or automatic balance between the rate of flow of consumer prices and the rate of flow of consumer purchasing power. Instead, because of a variety of factors (profit-making, savings, the re-investment of savings, deflationary banking policies, taxation, and the A+B factor) the rate of flow of incomes that are made available via productive processes to liquidate corresponding prices is significantly inferior to the rate of flow of consumer prices in the typical industrialized country and is steadily diminishing as machines replace human labour in production. The present system relies on a variety of palliatives in order to restore some kind of equilibrium between consumer prices and incomes, but none of these function either automatically or without engendering serious problems of their own of one type or another. By contrast, Social Credit maintains that the financial system should automatically provide for equilibrium by issuing a sufficient volume of additional purchasing power so that consumer prices and incomes can be brought into balance and kept in balance. This would contribute greatly to economic stability.

2) Self-liquidating – the present financial system is increasingly non-self-liquidating; Social Credit wants to make it self-liquidating

The main remedy employed by the existing system is to fill the gap between consumer prices and incomes by relying on governments, businesses, and/or consumers to borrow into existence the money necessary to increase the flow of consumer purchasing power. Future incomes are (directly or indirectly) mortgaged to gradually pay back the compensatory debt-money. This is inflationary as eroded incomes will lead to demands for cost of living increases, which then lead to wage-price spiralling. Furthermore, since this palliative can only provide additional liquidity if new compensatory debts are being contracted at a faster rate than old compensatory debts are being paid off, relying on loans to fill the gap results in the steady build-up of an unrepayable mountain of societal debt and this renders the financial system as a whole insolvent and increasingly so. Recurring financial crises which threaten the collapse of the entire economy are the inevitable trade-off. By contrast, Social Credit, by insisting that the automatic flow of additional purchasing power be issued free of debt, allows for that proportion of prices which cannot be met by the regular flow of consumer incomes to be cancelled out of existence once and for all, instead of having them transferred via debt as costs against the future. The Social Credit equilibrium is not only an automatic equilibrium, therefore, but a real equilibrium where debits and credits dynamically equate. The result? No inflation, no build-up of unrepayable debt, and no recurring financial crises.

3) Distributive – the present financial system relies on compensatory measures that are not maximally distributive; Social Credit wants to replace them with compensatory measures that are maximally distributive

Because of the unnecessarily strong and indeed irrational bond between employment and income under the current economic system (I say irrational because industrial production can deliver all the goods and services that we can profitably use without calling on the full capacity of the labour force), most individuals can only gain access to the purchasing power afforded by the existing system’s compensatory flow of debt-money by exchanging their labour in the service of someone else’s aims and on the latter’s terms. Balancing the circular flow under the status quo therefore requires the transfer of income, privilege, and control over policy from the common individual to an economic oligarchy. In a phrase, it requires ‘the undue centralization of economic power’. By contrast, Social Credit insists that the compensatory flow of debt-free purchasing power which it proposes as an alternative must be distributed directly (through the National Dividend) or indirectly (through the National Discount) to each individual citizen, independently as to whether he be formally employed or not. This will result in the maximum decentralization of economic power that is simultaneously compatible with a functioning economy. It will also help to eliminate economic waste or sabotage in its various forms by making it financially feasible and desirable for the economy to run as efficiently as possible where human time-energy units are concerned. Full employment as a fixed objective, together with the tremendous misdirection of economic resources with which it is closely allied, can both be jettisoned. The social and environmental benefits of such an innovation in economic life cannot be understated.

The core of the Social Credit demand vis-à-vis the financial system and hence vis-à-vis the political authorities can therefore be summarized as a three-fold demand: the type of monetary reform that we need is the type that will ensure that the financial system will be a) inherently balanced, b) self-liquidating, and c) maximally distributive. Nothing else will do, since nothing else will deliver a financial system that will operate in the full service of the common man and not, in some measure, against him.

Last modified on Saturday, 10 February 2018 18:01

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  • Comment Link Pedro Monday, 28 March 2022 19:59 posted by Pedro

    Hello Oliver

    Once again, thank you for all your patience in answering my questions.

    Hugs !!

  • Comment Link Oliver Sunday, 27 March 2022 21:16 posted by Oliver

    Hi Pedro,

    You're welcome! I think interest charged on a capital loan would rightly be considered part of capex, whereas interest charged on an operational line of credit (for day-to-day business operations) would be considered opex. As to the second matter, the Douglas Social Credit proposal of a National Dividend has a marvellous "feedback mechanism" whereby if too many people decided not to work and to live off of their dividends instead (as might happen if the dividend is really high), production will decrease and with it there will be a decrease in the size of the dividend .... thus indicating that there would be a greater need for work. The DSC dividend is never a fixed or guaranteed amount but varies depending on much compensatory debt-free credit is required to fill the recurring price-income gap.

    Um abraço,

  • Comment Link Pedro Friday, 25 March 2022 20:01 posted by Pedro

    Oliver, you managed to resolve my two doubts. Thank you very much.

    I only ask you for two answers to other questions (which are very simple): are the interest on the loan that banks charge from companies considered opex costs or capex costs?

    The other question is: do you think that, if the national dividend were to become higher than the average wage, people would still be interested in being salaried workers?

    Again, thank you very much for your help. Hugs.

  • Comment Link Oliver Monday, 21 March 2022 18:08 posted by Oliver

    Hi Pedro, no worries. The opex charges, like depreciation, can be collected or charged over a long period of time (years or decades). Thus, if a company were to borrow from a bank to cover its opex expenses it would be indebting itself potentially for a long-period of time. But these debts would still have to be paid off and ultimately paid by the consumer. It is the consumer who must put a final end to all costs. Borrowing from a bank doesn't solve the problem, because the consumer still eventually needs to be charged for the opex costs so that the bank loans can be repaid. The company might as well just charge the consumer directly for the opex rather than make their financial position worse by becoming further indebted.

    I am not sure that I understand the second question correctly. If a company already has real capital, it would not need to charge for the financial cost of the real capital necessarily, but it would still need to charge for depreciation so that the real capital can be replaced once it is worn out. Businesses have to charge enough to maintain their production facilities in order to be in a good position, so that means charging for the use of the real capital however it was required.

    I hope this is helpful!

    Best regards,

  • Comment Link Pedro Sunday, 20 March 2022 16:07 posted by Pedro

    Hello again Oliver!

    I apologize for still persisting in this doubt, but why can't company A borrow from the bank to cover opex expenses? Even if the company is short of cash at some point, will companies never borrow money to cover opex expenses?

    Regarding the answer to the second question, another question arises: if, for example, the company does not need a loan to purchase real capital for production, because it already has real capital, it would not be correct for this company to charge the cost consumer opex due to the fact that there was, in any case, a depreciation of real capital during production ?

    Thank you so much for responding to me. Hugs.

  • Comment Link Oliver Friday, 18 March 2022 22:06 posted by Oliver

    Hi Pedro,

    Sorry for the delay in responding, I've been having internet problems recently.

    To respond to your questions, a company, let's call it company A, would borrow money into existence from a bank to purchase or manufacture capital assets. Once that asset is in operation, company A would charge others, either other companies or the consumer for its use in the form of depreciation and maintenance charges. So company A would not borrow more money to meet these opex charges, but would seek to get others to pay for or cover them in the price of its goods. Now, it is true, that a second company, say, company B, could borrow debt-money from a bank to cover the costs, including the opex charges of company A in order to obtain A's semi-manufactured items which company B will then work on and either sell to company C or as finished products to consumers ... but then company B would also, in its prices, charge company C or consumers for the cost of borrowing that money to meet A's costs, including its opex costs, and would also add its own costs and opex costs to the total. So any money borrowed by a company to meet another company's opex charges only transfers costs to another buyer and never liquidates those costs once and for all in any case. The final buyer is the consumer and if he does not have enough income to meet all the costs coming forward, the problem of the gap remains regardless.

    To answer the second question, in the case of hand production where there is no real capital, no capital needs to be bought, nor is there any need to levy charges to meet depreciation and maintenance on that capital, etc., so the problem of "double costing", i.e., charging to recover the financial cost of manufacture or purchase as well as the real costs of usage/remplacement, does not arise. Any money borrowed from a bank for hand production will, if we assume raw materials are freely available or only involve other labour costs, be spent 100% on labour and labour will therefore have enough income to meet the costs of production. There would be no gap at all. The bottom line is that, on Douglas' analysis, it is the way we finance and account for real capital (machines, equipment, etc) that is the main cause of the price-income gap. The gap is therefore a feature of industrialized economies.

    I hope this is helpful! Many thanks for your questions.

    Best regards,

  • Comment Link Pedro Monday, 14 March 2022 12:33 posted by Pedro

    Hi Oliver! Great article !!!

    I was also reading another article of yours called Social Credit Solutions on the Distributist Review website. There are two paragraphs that brought me some doubts. The first would be this:

    "The problem arises because when money is borrowed into existence from the banks for production and expended on the manufacture or the purchasing of capital goods (computers, machines, equipment, buildings, etc.) both a debt and an asset bearing a cost are created, but the charges to cover both of these claims against the public (since it is the consumer who must ultimately extinguish all costs) are levied contemporaneously or at least independently of each other as capex and opex charges. Even if all of the money spent on manufacturing or purchasing real capital were converted into consumer incomes, the money issued is not sufficient to meet both claims (i.e., the debt and the cost of the asset), but only one of them.[note]Money that is used to pay down the debt before or independently of the price value of the asset is immediately destroyed and so cannot be used for further cost liquidation. Money that is being collected in view of the replacement, maintenance, and other operating costs associated with real capital obviously cannot be used to pay down a debt without forsaking its purpose."

    The question I have is: does the company never borrow from the bank an amount of money to cover opex expenses, but only an amount of money equivalent to capex expenses?

    The second paragraph I just didn't understand very well. I would like your explanation for a better understanding:

    "This is in sharp contrast to what happens when producer credit is borrowed and spent on hand production or merely on producing consumer goods or services with existing capital. In these latter cases, both a debt and a cost are created, but they are not charged as two entirely separate costs, rather they are charged sequentially. That is, once the money is collected from the consumer to meet the cost of the production, the retailer then pays back his bank loan or pays down his revolving line of credit. The same sum of money can meet both of the claims that had been made against it."

    Hugs !

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