Sunday, 26 April 2015 21:59

The Flaw in The Circular Flow

Written by Wallace Klinck
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In the modern world money is simply accountancy. It's issued by banks for production. Producers distribute it as effective purchasing-power as wages, salaries and dividends which are a part of industrial costs and prices. Industry must recover its costs through sales to the consumer and the money is then cancelled until reissued for a new cycle of production. Thus is created an endless cycle of money creation and destruction. Money is not a store of value and is increasingly a means of distribution rather than a means of exchange.

However, industry has many other costs including allocated charges in respect of real capital (plant, tools, etc.) which are not distributed as income in the same costing cycle. This creates a widening chasm between costs or final prices and effective consumer incomes–creating a deficiency of consumer income which becomes ever greater due to the increase of un-monetized capital charges in total prices. This “gap” becomes greater as the modernizing economy becomes more real capital intensive through greater use of non-labour factors of production.

This widening deficiency of effective purchasing power is met today by exponentially expanding bank debt issued to consumers, industry and governments. The gap between final prices and effective consumer incomes should not be made up by additional debt as a growing charge or mortgage against future production. Nor should it be filled by new money derived from an excess of real exports over imports–nor from superfluous, wasteful and destructive capital and war production.

The required expansion of purchasing-power should be created without debt and distributed from a properly constructed National Credit Account to all citizens as National (Consumer) Dividends and to retailers enabling them to sell, at point of sale, at increasingly lower prices, i.e., Compensated Retail Prices, in order to reflect the real physical efficiencies achieved by industry. The banks create this necessary credit all the time as a debt owing to themselves although they do not create the real wealth of the community which they are monetizing. Yet they will foreclose on these assets if a borrower defaults on a loan. The technical term for this process is counterfeiting and it must be stopped once and for all. Modern banking is simply a colossal counterfeiting racket–so colossal that the average citizen simply cannot believe it.

The creation of money by banks is old news. It was explained by H. D. McLeod in “The Theory and Practice of Banking”, 1883. Reginald McKenna, one-time Chancellor of the British Exchequer wrote in his “Post-War Banking Policy” (1928), “I am afraid that the ordinary citizen will not like to be told that the banks, or the Bank of England can create or destroy money.” In 1924 he had addressed a Midland Bank shareholders meeting: “The amount of money in existence varies only with the action of the banks on increasing or diminishing deposits … every bank loan and every purchase of securities creates a deposit, and every repayment of a bank loan and every sale [of securities] destroys one."

The creation of money by banks is “old hat”. What has not been properly revealed is the crime of the banks in falsely claiming ownership of the credit they create in monetizing the community’s real wealth. They have literally appropriated the community’s credit by an act of legerdemain undetected by an unsuspecting public. The whole subject was dealt with by C.H Douglas and the Social Credit movement during the 1920s on into the post-war period.

Last modified on Saturday, 10 February 2018 18:02

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  • Comment Link Oliver Sunday, 09 April 2023 14:00 posted by Oliver

    Hi Roger,

    Thanks for your question! Yes, money is only cancelled in the sense of being destroyed when a bank loan is repaid. However, when money that is handed over to a retailer in exchange for some good or service may be regarded as "cancelled" in the sense that it cannot - generally speaking - be used again as purchasing power with respect to that cycle of production. If the business uses the money received to initiate a new cycle of production, it can be issued once again as purchasing power, but only alongside a new set of costs which will make claims upon it. It is in that more limited sense that money, even if it is not used to pay down a bank loan or line of credit, may be regarded as "cancelled" with respect to the original cycle of production. I hope that helps to clarify the matter.

  • Comment Link Roger Wednesday, 05 April 2023 00:10 posted by Roger

    Hi I have a question related to this post. Orthodox economists claim that money is not cancelled out of circulation except when a bank loan is repaid but in this article it is stated that: "Industry must recover its costs through sales to the consumer and the money is then cancelled until reissued for a new cycle of production." Does this mean that businesses cancel the money as soon as they make a sale of a product? How does this happen? Why couldn't businesses just use the sales revenue to buy raw materials or pay staff and continue to make use of the money they now possess?

  • Comment Link Oliver Heydorn Thursday, 25 January 2018 23:27 posted by Oliver Heydorn

    Hello JB,

    Sorry for the delay in responding. Yes, under Social Credit, it would only make sense to trade because there was a real physical need for it. In other words, it would only make sense to trade in order to obtain goods that one could not produce at all in one's own country or could not produce easily. There would be no benefit at all to obtaining what is currently referred to as a 'favourable balance of trade'. Each country under SC would be concerned with the domestic provision of goods and services first and foremost and only with exporting insofar as corresponding imports were needed to supplement that provisioning. The general tendency would be for countries to become a lot more economically self-sufficient than they are at present. This would entail a number of social and environmental benefits.

  • Comment Link jb Thursday, 25 January 2018 23:26 posted by jb

    I wish to thank Mr Klinck for his reply above. Just one further question, please:

    In the understanding of social credit, is it correct to say that an advanced industrialised economy should have a policy of production primarily for economic self-sufficiency, instead of a policy of production primarily for export?

    Thank you

  • Comment Link Wallace Klinck Thursday, 25 January 2018 23:25 posted by Wallace Klinck

    a) My understanding is that under certain circumstances chartered banks do lend to each other for very short periods. This is to deal with temporary balance shortfalls at the clearing house and to maintain required liquidity and reserves to protect against excessive withdrawals from or, "runs" on, the banks.

    b) inflation is tempered by increased reluctance of the chartered banks to accommodate borrowers and thereby to expand the money supply. Business is forced to limit prices and profits by an insufficiency of consumer income and an increasing overhead of consumer debt which reduces creditworthiness. This in turn reduces demand for products. Inflation is rated by comparison with the previous year's Consumer Price Index so this does not reflect the same degree of cumulative price increase as occurs over many decades. Bankruptcies are also a factor in reducing inflation.

    However, the above figures do not reflect the true rate of inflation as per Social Credit conventions. Social Credit analysis indicates that imputed prices do not reflect true costs and that prices should be rapidly falling to reflect increases in the rates of production efficiency.
    In Social Credit terminology, the true cost of production is consumption measured over a given period of time. In actual fact, we are producing overall more than we consume, capital production included. Thus the real cost of production is falling and the financial price system should, but does not, reflect this reality. Briefly, the consumer is presently charged, properly, with capital depreciation but, wrongly, not credited with capital appreciation which exceeds its rate of depreciation. We prematurely recover in consumer prices allocated charges in respect of real capital at a rate which suggests that we are consuming our real capital contemporaneously whereas we know that real capital has a variable and sometimes long "shelf-life."

    We should enjoy a rapid decline in consumer prices due to the increasing Production/Consumption ratio and rapidly increasing real efficiency with displacement of human effort by modern technology, but because of faulty cost-accounting we instead see a continuous rise in prices. The real inflation rate from a Social Credit standpoint is the degree that we are denied this rapid reduction of prices by a financial system that fails to reflect reality. The price we pay is not only in rising prices but the increasing debt we must incur and unnecessary labour required to meet these prices, i.e., the amount of leisure we are denied in being on a steepening treadmill of effort in a futile effort to meet and liquidate the growing financial costs of production.

    Social Credit has a very different concept of "cost" and we do not believe that the economic system exists to provide work or "jobs". It exists to provide goods and services for society with absolute maximum efficiency. Consumption cannot be facilitated by earned incomes alone but must be assisted by additional consumer credits issued without incurring debt to all citizens alike. These additional consumption credits must be available to liquidate old production costs without creating new costs.

  • Comment Link jb Thursday, 25 January 2018 23:24 posted by jb

    A few questions for Dr Heydorn or Mr Klinck, if I may:

    a) Is it true private banks loan credit one to another? If so, what is the purpose?

    b) In most "Anglo" countries we are told that inflation is all but a thing of the past as official inflation is near zero per cent. In light of the Douglas analysis, why is inflation now so low?

    Thank you.

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