Sunday, April 26, 2009

Study Course in Social Credit By J.M. Hattersley

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

Lesson I - The Principles of Government

“SOCIAL CREDIT” means “the Credit of Society” - that is, the belief that human beings, working together in association, can gain for themselves the results they want to achieve.

Man is not a creature who can stand strongly when alone. In comparison with the rest of the animal kingdom, his body has few natural defences, either against the elements, or against his natural enemies. He cannot hunt his prey like the lion or the tiger. Physically he is a comparatively weak and late arrival in the order of living creatures.

Man, however, has become the most dominating of all living creatures on earth. This he has achieved through the power of association. Equipped with the gift of language, he is able to cooperate with his fellow men. Having discovered the secrets of reading and writing, the knowledge he has gained is not lost upon his death, he can acquire skill and learning from his fellow man who may have lived centuries before. He can add to this body of knowledge and pass a still greater heritage to those who come after him. By working with his fellow men, he has been able to secure protection for a group against common enemies. He has been able to devise and develop tools to aid him in his daily life – and borrow new skills and techniques from the inventions of others. He has been able to become a farmer instead of a nomadic hunter. He has learned to harness the forces of nature and bend them to his purpose. Every year sees new powers acquired by mankind – new abilities and new achievements to his credit. Every one of these comes from a single source. Man, by working in association with his fellow men, by building upon a heritage of culture laid down from the remotest past and still being added to today, has been able to become to a greater and greater degree the master of the Universe.

The Need for Government
Because of the great advantage that comes to men when they are able to cooperate with, and associate with their fellow men and have access to the store of knowledge and wealth accumulated in the past, societies of one sort or another have grown up in all parts of the globe.

The most fundamental and simple unit of human society is the family – a number of human beings linked by common ties of kindred. In time, the family expanded into the clan, and later still, groups of clans became associated in nations. The nation was a unit of peoples strong enough to give its members protection against their external enemies, and also secure to its members a particular territory. Each nation settled its own government, laws and customs, and protected its territory from invasion as well as it was able. At the present day, the territory of the world is divided into more than a hundred nations, and the whole of humankind is classified, with few exceptions, according to the nationality to which they belong.

As soon, however, as associations of human beings grew beyond the size of the family and clan, where natural parental authority could be expected to be adequate for the maintenance of law and order, then problems of government began. Primitive man had been so poor that his life was one of bare survival: his property was little more than his weapons, and his tent or cave. Once men were able, through the help they gave each other by working in association – through their “social credit” — to achieve for themselves an existence above bare survival, a new, important question arose. In what manner was this new wealth to be divided? What rights should each citizen have to the benefits that the community gave to all in common? What powers should the Government have over the person and property of individual citizens? The determination of these questions — and many different answers have been given to them in different lands and at different periods of history – form the most fundamental challenges of government. The allocation of rights of person and property among individuals, and the preserving of these rights against foreign invaders, have been from the earliest times, and still are, the most basic duties of government. By looking back, however, on the way in which organized government has come about, it is possible to obtain a guiding principle. The individual comes before the State – in time, and therefore in law. The State is the creation of people, and groups of people, who have banded together for mutual defence and mutual advantage, and it has no other purpose for its existence except to promote the benefit of those individual people who belong to it:

“Systems were made for men, and not men for systems, and the interest of man, which is self development, is above all systems, whether theological, political or economic.”(1)

It is perfectly true, of course, that by agreeing to live together in a society with his fellow men, a man agrees automatically to allow his neighbour certain rights and freedoms, which he in his turn expects to receive from the other members of the society to which he belongs. Society cannot continue in being unless this is the case, and it is, of course, the justification for Criminal Law. But basically it is turning the order of society upside down to say that the rights that the individual has come from the State. The reverse is true. The powers and the rights of Government come from the individuals who have set it up. It is not the individual who has only such rights as the State, by some “Bill of Rights” or other document, chooses to allow him. It is the State which only has such rights over the lives of its citizens as the people collectively have allowed it. As the great constitutional documents of our Common Law system – Magna Carta, the Bill of Rights, the Act of Settlement, incorporated into Canadian Law by our Constitution Act – go to show, the right of the individual to control his government is one for which ordinary people have been forced to fight – and have fought – from generation to generation. It is following this tradition, that Social Credit has established as its most fundamental principle, that
I. “The individual is the most important factor in organized Society. His opportunity to choose and refuse, where it does not infringe upon the same freedom in others, must be protected by the laws of the land, and safeguarded by the administration of justice.”

The Duties of Government
It is very important indeed that this basic principle of Government – that it must recognize the fundamental freedoms of the individual – take its rightful place in the world today. In times past – indeed up to as little as fifty years or a century ago – there were still unclaimed and undeveloped lands in the world to which those who found the policies of their governments intolerable could flee. Canada, in fact, was one of those countries, and can number among her population many people and many ethnic groups – United Empire Loyalists, Ukrainians and other refugees from persecution in Russia or Eastern European countries, Doukhabors, and so on – who came to her shores for the sake of freedom from a government that would not recognize their wishes at home. There is very little space left in the world today, for those who are persecuted or cannot agree with the policies of the government of the territory in which they live, to establish what for many hundreds of years has been possible – a new nation, in a new area, under a new form of government. Governments today, in fact, are in a position to blackmail their citizens. No matter how they defy the citizen's rights: no matter how far their policies may be away from the true interests of those that they govern, it is increasingly difficult for the average citizen to escape from their powers – and this is true whether the means used to keep the citizen in his place is an Iron or a Bamboo curtain, or progressively stricter immigration laws between nations, and the growing scarcity of “free land” in the Western Hemisphere where immigrants may settle to homestead undisturbed and in peace.

It is quite true that the processes of democracy do allow citizens to elect their representatives to Parliament, and that laws are not passed, except upon a majority vote of these representatives. This, however, is not the whole solution to the question. Each individual citizen is in fact in a minority – a minority of one. Even assembled into groups of thinking people, he may still find himself so outnumbered as to have no voice in his own government. “Party Government”, unless restrained in some way, in fact means that the strongest political machine controls the government, and so can put itself in a position where it can plunder the property of minorities, through unfair tax laws or otherwise, in order to improve its standing with the majority interests that have backed it. Democracy of this type, in fact, can be nothing else than a license to the strongest to plunder the weakest – the very negation of the principles that led to the establishment of government in the first place. For democratic government to fulfill its true function it must, in carrying out the will of the majority, also respect the eternal laws of right and wrong, and the position of minorities. The second basic principle of good government – the second principle of Social Credit – therefore combines with the Left or Liberal view, that the will of the people to do what they want to do must prevail, a Right, or Conservative, view that this action must be controlled within the limits of what is morally right and physically possible:

II. The major function of democratic government in organized society is to give the people the results they want in the management of their public affairs, as far as these are physically possible and morally right.

Good Administration
Having set down these two basic principles of government, we must move to examine how these apply to the actual administration of Society.

There are three basic directions in which a profit comes to society as a whole, from the working of human beings in cooperation. In an unjust society, this profit is likely to be monopolized by those who control political power, for the welfare of the strong and the detriment of the weak. In a just society – one that is governing in accordance with the will of the people, natural justice and fundamental concepts of right and wrong, this profit is one that is shared fairly among the people as a whole.

The first profit is that which comes to labour – to the workers – because their efforts being greater results than would be the case were they living on their own outside of organized society. This profit is abused when one person becomes so much the master of the services of another that he can use them entirely to his own advantage. This is a condition of slavery. An abuse to a lesser degree may exist when, for instance, through corrupt union practices, workers are forced to pay an unjustified tribute to a third party before they are permitted to engage in employment.

The second profit is that which comes to those who hold rights over land and over the natural resources of the country. When first a group of people takes possession of some territory, it is held by all in common – no one has rights to any particular piece. Quickly, however, the need for a private place for each person to live and for private ownership of land for farming, makes it clear that it is better that these common rights be to some extent at least broken up. Instead of each person having a partial right to occupy all the land, each person is given a total right to occupy a part of the land, make exclusive use of it and work its natural resources. If each citizen has an equally valuable piece of land allotted to him, obviously he is not the loser. On the other hand – and this almost invariably tends to happen in time – if a small class of landholders gain monopoly rights to the greatest part of the land, and the remainder of the population can only live upon it upon satisfying their terms, a great injustice is done. In a just society, those who enjoy a privilege given them by the State, of exclusive control of land or other natural resources, and by so doing, exclude others from enjoyment of the rights that they possess, should make fair payment to the State for the privilege. This payment, in turn, should be applied for the advantage of those who have lost their rights of common use of the land, because of the monopoly granted to the landholder.

The third profit is that which comes to the issuer of money tokens used by Society, as a result of the fact that the members of this society are willing to use them in the process of exchange. Even though these tokens may be no more than scraps of paper, or debased metal, they may be exchanged for goods and services of real worth, so that the issuer of the money token makes a handsome profit. In a properly ordered society, all money tokens are issued by or on behalf of the State, and the profit from so doing comes to the general treasury. In many countries today, however, issue of new money has become a private affair, yielding an unfair profit out of a public resource – the public credit – to those who have obtained this power of issue. The way in which this has occurred, the results this has caused, and what is necessary to put the matter right, will be a major subject of study in future chapters. Suffice it to say at the present time, that the abuse of the power to create the nation's money supply is behind some of the most acute economic problems of the nations of the world at the present day.

We have in this chapter examined briefly the basic relationship that exists between the individual and the group, and the basic justification for government, and guidelines which good government should follow. We have also examined three areas – that of labour, of land and natural resources, and of the public credit – where it is the duty of a good administration to make sure that an advantage that belongs to Society as a whole is not captured for private profit by groups who obtain for themselves, under unjust laws, a privileged monopoly position.

Those who obtain a position of private advantage at the public expense are in the position of parasites on the body politic. The more healthy and thriving a society is, the greater the chance for such parasites to take hold. The more power that such parasites obtain for themselves, the weaker grows the society upon which they prey, until the point of absolute collapse is reached. The challenge is therefore squarely laid before all who believe that there is something worthwhile saving in our Canadian society – to understand what is wrong and what is necessary to put it right, and boldly to work for sound administration of their government, in their own interest, and that of their children and their fellow citizens.

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1. What are the chief sources of man's increasing power over Nature?
2. Are Governments necessary? Why?
3. What would you consider to be the most basic duties of government?
4. Do you believe that the rights of Government come from the individual, or that the rights of the individual come from the Government? Why?
5. What are the first two basic principles of Social Credit?
6. To what extent, and for what reasons, should democratic governments respect the wishes of minorities?
7. The Social Credit government of Alberta introduced a policy of leasing the right to work the Province's mineral resources to the highest bidder. Is this policy in the public interest? How does it compare with the handling of natural resources in other provinces and countries? Who gains? Who loses?
8. Suggest three ways by which a profit comes to society as a result of people working together. Try and think of instances in your own experience, where private interests have been able to profit by taking to themselves profit that belongs to Society as a whole. In each case, who gained and who lost?

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E.C. Manning: “The Social Credit Yardstick” (Alberta Social Credit League)
J.S. Mill: “On Liberty”
George, Henry: “Progress and Poverty (Books V – VII in particular)
Adams, Brooks: “The Law of Civilization and Decay”
C.H. Douglas: “Economic Democracy”

(1) C.H.Douglas: “Economic Democracy” page 6
Lesson II – The Nature of Wealth

Everyone is interested in acquiring wealth. That is, he is interested in acquiring, not “wealth” merely in the narrow sense of material possessions in which the word is most generally used today, but those things which contribute to that person's “weal” or well being.

Viewed in this light, what goes to make up “wealth” will vary slightly with each different human being. Everyone, of course, needs a certain level of food, clothing and shelter in order to keep alive – but even in those cases, individual tastes will vary. A peasant in China or India can keep alive on rice, whereas in the Western nations, the basic food will be bread. The Inuit finds tents and igloos satisfactory for a nomadic life as a hunter in the Arctic – a modern suburban apartment would be useless for that lifestyle. The overalls that a manual worker needs are entirely different in material and purpose from the business suit of the company director. When we come to individual tastes in matters not so basic to survival, the variety of human tastes and requirements becomes even more bewildering. One person prefers going by car, another by train or bus. One person likes gardening, another to attend a sporting event. One person seeks education, another prefers entertainment. Not only are the forms of “wealth” endless, the particular circumstances a person is in can make a great difference as to how far any object actually contributes to the “wealth” of any person.

To a person who has no chairs in his house to sit on, the first chair he acquires is worth a great deal. Providing he has space for them, so too, to a lesser degree, are probably the next four or five. Somewhere around a dozen, perhaps, he begins to feel he has enough. By two dozen, perhaps, he begins to refuse to take more even if they were given him, unless he knew of some place where he could get rid of them in exchange for something he did want. By the time his total reached four dozen, probably he would be thinking even of paying someone to take a few of those chairs away!

Wealth, Value and Price
It is important, therefore, to understand that there is a difference between Wealth and Value. Wealth in effect consists of anything in the universe that may at any time be useful to any human being. The air we breathe is a form of wealth – we need it for our well being. If somebody came up to us with a box full of air, however, and asked us if we wanted it and if we would pay something for it, almost certainly we would turn them down. Because we have enough of it, and can get more every time we breathe, this extra supply is of no use to us – it has no value for us. It certainly would be of value to us, and we would be ready to pay almost any price for it, if for some reason we were cut off from our normal sources of air supply – trapped underground in a mine, perhaps – and that air stood between us and suffocation.

“Value”, therefore, is a personal matter. The degree to which we desire to possess a particular form of wealth is its value for us. Because our needs and desires change from day to day, and from hour to hour sometimes, so does the value we place on any particular form of wealth. Before lunch, a good meal will have considerable value for us. After we have eaten, the value of another meal in our opinion will be almost nil. A key factor, in fact, in our deciding what the value of any object or service to us actually is, will be in weighing up how strongly we desire it, and how easy it will be for us to obtain it in some other way.

Just as we measure distances in inches, yards, miles or kilometers, so we have units in which value is measured: in Canada these units are Dollars and Cents.

We can look around us at the hundreds of objects and services that do not belong to us, yet which we would like to have, and we can form an estimate in our own minds of the value to us of owning each of them, and this estimate is the “price” we would be prepared to pay for it. Similarly, we can in our own minds form an estimate of the value to us of owning property that is already ours – our home, our furniture, our clothes, our labour, and so on, and attach a price to each. Other people are likely to form their own, different, values, of the things that we and they own, and price them differently. Suppose, now, that I price a morning of my labour at $40.00, and a chair at $50.00. B, however, who has more chairs than he wants for his own use (he manufactures them), prices a chair at $25.00 and a morning of my labour at $50.00. If I go and work for a morning for B, and so give him a morning's labour, and B in exchange gives me a chair, I will feel very content. In my own mind, I will have made a profit of value of $10.00. B, too, will be content. In his mind, he will have made a profit of $25.00. Let us note two things about this transaction. First of all, that although dollars were used to measure value, no money was involved at all. It was a simple exchange of goods and services – pure barter. Secondly that, as is normal in any exchange, both sides make a profit. I made a profit of $10.00 (I obtained a chair for $10.00 less than I was prepared to pay). B made a profit of $25.00 (he had the use of labour worth $50.00 to him, at an expense of a chair worth to him only $25.00).

There is no black magic about the fact that both sides in an exchange deal make a profit on it. It is the direct result of people living in society and helping each other through mutual specialization and cooperation. Both sides gain, because their desires are more nearly satisfied. They have parted with wealth that was superfluous to them, and in its place they have obtained a form of wealth that they wanted to have. They have exercised their freedom of choice, and each has gained through the power of association, the “social credit” of Society.

The Source of Wealth
We have now seen something of the nature of wealth: how its value is established, and comes to be embodied in a price. A further question remains to be answered – Where does wealth come from, and how can the amount of it be increased?

The answer is that it comes from three sources. In the first place, a great amount of our wealth is available to us without any effort on our part at all. The air we breathe, the rain and water in the rivers, the sunshine, the fruits that grow on trees, and suchlike, come to us as a gift of Nature without effort on our part – though they remain wealth for all that. A second class of sources lies in what we can call mankind's “cultural inheritance” - the accumulated wisdom and know-how that has accumulated ever since the dawn of civilization, from language and writing, to all our modern knowledge of physics, chemistry and engineering, let alone cultural objects such as dance and music, poetry, literature and drama, rules for games and sports – the list goes on and on. A third and more useful class of objects comes into being when these or other resources are together worked upon by mankind, to increase their usefulness. The farmer tills the ground, plants the seed, and in due course reaps a harvest – this provides him with far more food, and far better food, than he would have had if he had left the ground to produce food unaided. His desires are better satisfied – his wealth is greater. In the same way, minerals are extracted, processed and manufactured into useful tools; trees are cut down for fuel, housing or furniture. Wealth of this type is not simply a resource as found in nature: it is a resource of this type that has been worked upon also by human skill and effort. Whether such wealth is of value to mankind, of course, depends very much indeed on how much the product serves to satisfy a person's desires, compared with how much effort and sacrifice must be made in order to bring it into being.

“Capital” and “Consumer” Goods
We can take our analysis of wealth even a stage further. There is a class of wealth which is immediately useful to us in satisfying our desires. In this class come such things as food and clothing, the home we live in, the transportation we enjoy, our newspapers, TV's, entertainment, and so on. This class of wealth satisfies us by being used up, or “consumed” for our enjoyment. Goods and services of this kind are known as “consumer goods”, and the people who use them are known as “Consumers”.

By contrast, there is a class of wealth that people acquire, not because they want to consume or make use of it personally for their own enjoyment, but because they wish to make a profit through resale or exchange with a person who ultimately wishes to consume it. This type of wealth goes by the name of “Capital”. It consists of all of the assets of business undertakings. It consists of the raw materials they acquire to be manufactured into goods. It consists of the land that the business owns, and its plant and machinery which in due course it is planned to use up and wear out in adding value to the raw materials that it processes. It includes the goodwill of the business as a going concern, and the inventory of all the goods that the undertaking has finally produced, but has not yet disposed of through sale.

Generally speaking, capital goods are of no great value in satisfying our present desires. One cannot go visiting on a bulldozer, or make one's home in a warehouse or office. However, such capital goods are of the very greatest value in providing consumers with the goods and services that do satisfy their wants. Capital goods are, in fact, the “tools” by which the consumer goods we wish to consume are actually turned out. By inventing more and more ingenious “tools” of this type, people are able to enjoy greater and greater wealth, with less and less effort on their part, and less and labour required in the long run for each unit of consumer goods produced. There is only one catch.

The catch is this. If we are to take time and effort to make tools – to make “capital” goods, there will be a short time when we will be not richer but poorer than before. We will have turned some of our time and energy away from direct production of consumer goods, and used it instead on producing tools that give immediate satisfaction to no one. After a little while, of course, those “tools” enable us to obtain more consumer goods with less effort than ever before. Before they do, however, someone is forced to make a sacrifice. The first cave man who stayed at home, putting together a bow and arrow so as to be a more efficient hunter, perhaps had to go without lunch while those who went hunting with their spears were able to eat. But with this new and more efficient weapon in his hand when completed, he could feel himself well content. His investment – the fact that he had diverted his time and resources away from acquiring food for immediate consumption in favour of making himself a better weapon for hunting - in the long run made him richer than before.

The Modern Situation
When we consider the ways in which wealth reaches us, we have come a long way from the primitive cave man. We have, in fact, probably come further in this direction in the past two hundred years – since the “Industrial Revolution – than in all recorded history before. We have harnessed the forces of nature – steam, fossil fuels, electricity, the atom – to give us power. We have developed new wonders in the fields of science and chemistry. The time has come when we can say that the problem of the production of wealth has been solved. Viewed as a simple problem, of the number of people living in our country today, the skills and resources that they have, and their factories and machinery, balanced against the needs of these same people for enough food, clothing and shelter to keep them reasonably alive, we can say that it is now possible not simply to keep all our citizens alive, but to do so in a fair degree of comfort. This should mean that our citizens should be enjoying wealth – that is, the means to satisfy their needs and desires – as never before.

Strangely enough, however, this is not the case at all. In Canada, for instance, over the past thirty years, not less than six per cent of the working population, and at times up to twice that proportion have been unable to find a job. They were in a position of having something of value to them which they were willing to part with – their labour. However, they could not find anyone for whom their labour would be valuable enough that they could sell it to get the products they needed in return. These same unemployed people went in need of the wealth they needed for comfortable living. They also had wealth of another kind, their labour, that they were quite ready to part with, but they could find nobody interested in making use of it. There had been a breakdown - a breakdown in the process of exchange. Our later chapters will examine the cause of this, and its cure, more closely.

At this point, however, many people will rush in with what seems at first to be an easy solution. “Let us conscript the nation's wealth” they suggest. “Let us take from the rich and give to the poor, and all will be well.”

Wait a minute. Will this really solve the problem? The problem, as we saw above, is not of anyone being too rich. It is one of exchange – of a person who has something he wants to exchange not being able to do so: of unemployed workers being unable to sell their labour – but also, of underemployed businesses unable to get rid of their products, even though the unemployed need them and could make use of them. This is obviously is the case, because if they could get rid of their surplus products, they would then find it worth while to take on more workers, even giving training to those who needed it in a new line of work if demand were brisk enough to make this worth while.

Add to this another point. Something is valuable to people, because they can use it to satisfy their own particular wants and needs. Unless people can keep their own powers of free choice, they will not get the greatest possible satisfaction. For this reason, Social Credit has laid it down as its third basic principle, that

III. “Economic security alone is not enough. We must have Freedom with Security.

Anything in the Universe which may be useful to a human being is a form of Wealth.

Wealth acquires Value as soon as any person wishes to possess it.

The amount of Value that a person sets on any piece of Wealth can be measured as a Price which is expressed in monetary units – in Canada, these units are Canadian Dollars and Cents.

Since the same objects have different values to different people, it follows that Exchange between people can bring Profit to both: that is, value received over and above value parted with.

Wealth comes from a nation's inheritance of culture and natural resources, but is greatly increased by human labour and skill. In the long run, it is increased even more in relation to the sacrifices people must make to obtain it, through the use of Capital – that is, goods acquired for resale, and tools to be used up in the process of production, preparing them for final consumption.

In the modern world there is no need for poverty or any lack of a sufficient basic amount of wealth to satisfy human needs. Poverty arises, however, when those who have something valuable that they are prepared to part with, often their labour, are unable to exchange it for the goods and services they require. It arises, in fact from a breakdown in the process of Exchange, not from a breakdown in the process of Production.

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1. What is Wealth? Does it have the same value for every person?
2. What factors affect the value of any article to a person?
3. What are the units in which value is measures?
4. How is it that the process of exchange can increase a person's wealth?
5. How does Profit arise? Can both parties to an exchange profit from it?
6. How is wealth produced? Is human labour essential to its production?
7. What is Capital? What is the difference between “capital” and “consumer” goods?
8. Is wealth in any way connected to personal freedom? How?
9. What is the third basic principle of Social Credit?
10. Has the problem of production of wealth been solved? How? Why then do we have poverty?

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Soddy, Professor Frederick, “Wealth, Virtual Wealth and Debt”
Hattersley, C. Marshall, “Wealth, Want and War”, particularly Chapter 1.
Lesson III – Money

Let us first quickly review what we have learned in earlier lessons. We have seen how the whole of Society has come into being for the advantage of the individuals who compose it, because in Society, it becomes easier for each individual person to obtain the shelter and protection and other things necessary for existence.

We have seen how humans satisfy their needs by acquiring and making use of (or “consuming”) wealth – that is, natural resources which they or some other persons may have made more suitable for their purposes by working on them with hand and brain, and often with tools of some kind.

We have seen how people are able to place a value on the different items they want, and express this value in terms of a “price”, measured in units such as dollars and cents, according to the strength of their desires.

We have seen how wealth is most efficiently brought into being with the least sacrifice of human or natural resources when it is specialized – that is, when a single person or group of persons produces a quantity of articles all of the same type, greater than it can make use of for its own consumption.

We have also seen, however, that the most satisfactory form of consumption comes when each person has a small quantity only of a large variety of objects, because after a certain minimum quantity of any form of wealth, additional quantities are of less and less value to the consumer.

From all of the above facts, one most significant deduction can be made. This is, that for individuals to be able to best satisfy their own desires, and so best obtain the satisfaction of their wants, which was their original reason for taking part in Society, there must be within that Society an efficient means for the exchange of goods and services, from those who have too much of one variety, to those who have too much of another.

The Development of a Money System:
All primitive societies have felt this lack of a means of exchange, and an amazing number of expedients have been developed for the purpose of making this process of exchange more easy. Primarily, all of these revolve around the use in the process of exchange of an intermediate token, to which is assigned an arbitrary value, and which, no matter what may be its external appearance, is in fact a form of money.

In most primitive societies, exchange begins on the basis of barter – that is, a simple exchange of commodities or services. Barter, however, can be a frustrating and inefficient affair. Suppose, for instance, that you are a farmer heading to market on market day, with some chickens you wish to part with, worth in your reckoning $10.00 apiece, and you wish to bring home some vegetables to the same value. On meeting the man who has vegetables, chances are that he is not interested in chickens at all, although he might take a chicken from you for vegetables that are worth only $5.00 in your estimation. By sheer luck, you might find that the fishmonger has some fish that you think worth $12.00, which he will part with for in exchange for a chicken, and the seller of vegetables would take this in exchange for vegetables that he thinks are worth $12.00, but you would only think worth $10.00, and in this way, your mission will be successful. On the other hand, you might not be so lucky, and would be faced with taking a loss on your chicken, or going home with no exchange carried out at all.

To get over this situation, two alternative solutions could have been arrived at. In the first case, you might have sold your chicken, not by exchanging it for fish or vegetables, but for the greatest possible amount of some other commodity readily exchangeable on the market. Any commodity would do: in early Canadian days, beaver skins were used, at other times, wheat, but very often, because of their long lasting qualities and the easy way they could be divided, it would be the precious metals, silver or gold. Having obtained the biggest quantity of, say, silver coins that you could find offered you in exchange for your chicken – say $12.00 - you would then be in a position to approach the vegetable seller, and in exchange for the vegetables you wanted, you would part with silver to the value of $10.00, leaving you with $2.00 in silver, which you could either spend on something else you wanted, or save for the next market day.

As an alternative to this, you might do without silver or any intermediate commodity at all. You might go to the vegetable seller at the beginning of the day, and explain at the start of the proceedings that you had a chicken you wanted to get rid of in exchange for vegetables. Although he did not personally want the chicken, he would deliver the vegetables to you and take from you a promise in writing to hand over a chicken on demand. During the day, as he went to buy the things he needed, he would pay for them with your promise to deliver the chicken. This might pass through several hands, until it came into the hands of a person who was actually looking for a chicken, who would present your note to you, and so pick up your chicken. In this way, the exchange would be carried out to everyone's satisfaction.

These two alternative solutions are in fact prototypes of the two fundamentally different types of money that have been used throughout the world during history. The first is the “intrinsic value” type of money. In this, the intermediate object which passes from hand to hand is something of actual worth, and which has an actual market value. That makes it readily acceptable, and very efficient therefore in carrying out the business of exchange, so obtaining the best possible price for the seller, and the greatest value for the buyer. The drawback to this system, and it is a serious one, is that a shortage of gold or silver, or other valuable and acceptable intermediate product, may itself prevent exchange taking place. Even, however, if this is not the case, it is a characteristic of this system that a certain amount of actual wealth, wealth that could be at the service of human beings, is tied up in a manner that prevents it from being put to practical use. Thousands of ounces of gold, for instance, are at the present time deposited in the vaults of various banks, instead of adorning the nation's public buildings, or being used for jewelry, as was the case in more ancient times.

The second type of money is “token” money. Its great advantage, of course, is cheapness. No precious metals or other wealth is required – only such materials as are needed to record a promise to pay in permanent and transferable form. For this reason also there need never be any shortage of it – it can be provided in as abundant a supply as is needed to carry out the exchange needs of Society. It may, however, be less effective and more unreliable. For one thing, it is not based on the value of the token itself, it is based on my credit – belief in my promise to hand over something of value (in the previous illustration, the chicken ) on demand. Those who do not know me, may not trust me. Those who do trust me, may find themselves deceived – by the time the note is presented, I may have eaten all my chickens, or perhaps there never was a chicken when I made the note up in the first place. Finally, of course, no matter what I promise to give in exchange for my note, it is not likely to be as generally acceptable as something of built in real wealth, such as a gold or silver coin.

Modern Types of Money
The development of modern money has almost exclusively taken the form of different attempts to combine the virtues of these two basically different systems. There has been an attempt to produce a monetary unit that combined at the same time the efficiency, general acceptability and complete reliability of “intrinsic value” money, and the cheapness and ease in producing a sufficient quantity for the purposes of trade that is the characteristic of “token” money. This development has taken place under two different authorities. The smaller part of the development has been in the money tokens issued by the State, or other public authority. The larger part has been in the money tokens issued by private concerns – the goldsmiths of ancient times, and the commercial banks and credit unions of the present day.

As far as the State is concerned, the development has been a straightforward one, from the State's original prerogative of inspecting and approving the precious metals, stamping them so that they might be generally acceptable for trade, into the production of a recognized system of coinage. Before long, kings in need of funds found it unnecessary to maintain the full value of gold or silver in the coinage for the coins to retain their value and usefulness in commerce. The coinage was “debased” - that is, the face value of the coin was increased above the value that those coins would fetch as precious metal, if they were melted down and the metal sold on the market. Canada's coins are debased coins of this type at the present time – only the cent costs as much to produce as its face value, the $2.00 toonie costs only sixteen cents. A further step has been the printing of paper notes by, or under the authority of the government. These notes are money, because the law of the land makes them “legal tender” - that is a lawful means of settling debts of any description within the country.

Through both of these means – coins and notes – the State is able to provide a cheap and sufficient supply of money at a very low cost. Failures in such state money systems, however, have occurred. These have chiefly taken place when, for political or other reasons, the State has deliberately caused an excessive quantity of money to be put into circulation, as was the case with the notorious German inflation of the late 1920's, or that in Russia following the Russian revolution, or more recently, in Zimbabwe. That this need not be the case, however, is shown by the six hundred year history of the Bank of Venice (the “Giro”), or the spectacularly successful German currency reform of 1948 (in which a whole new currency was printed and distributed to citizens) and the history of the successful use of paper money in the American Colonies and in Canada (where signed playing cards were once used) over a period of one hundred and fifty years prior to the War of Independence.

The development in the private enterprise field has been rather different. Lacking the authority of the state to make a simple declaration of law that the notes it printed were legal tender for settlement of debts, and therefore money, private enterprise resorted to a system whereby its notes or other promises to pay (such as customers' deposits – their “money in the bank”) were only backed by gold or state money sufficient to meet normal demands from the public to exchange them into gold or legal tender, leaving a large amount of them backed by nothing at all except public confidence in the bank. Goldsmiths – ancestors of our modern commercial bankers – were the first to do this. Because it was their trade to look after stocks of gold for customers, and because the receipts they gave for the gold deposited with them started to pass from hand to hand as money (as in our earlier illustration of token money, concerning the chickens), and because in fact they were never called upon to exchange all these receipts for gold at one time, they found they could quite safely issue more receipts, or “promises to pay money on demand”, than the stock of gold they actually had in their keeping, and lend these out with precisely the same effect as if they were lending gold. Modern banking is an extension of this principle. Under current regulations, for every dollar that they promise to pay their customers, which in the customers' eyes, is “money in the bank”, they could, if all their customers asked to withdraw their money in legal tender all at once, only provide approximately six cents per depositor. Canada's banks, for instance, at the end of the year 2008, held notes, coins and deposits at the Bank of Canada in a total amount of $4,607 millions. This supported credit they had granted in various forms in a total of $624,488 millions (1).

In actual fact, this system of Banking can work smoothly and well most of the time, even though it looks perilously unstable on the surface. In any time of stress, however, it quickly shows its fundamental instability. Great Britain at the outset of World War I, for instance, was forced to suspend bank payments in gold sovereigns after a three day run on her banks. The gold sovereign was replaced by hastily printed Treasury notes, declared by the State to be legal tender. Banks themselves have found that in times of business depression, the choice has sometimes been between business failure and amalgamation - with the result that the commercial banking system in most countries has become more and more highly centralized. However, certain hidden defects in the operation of the system, certain long range effects that the system has in the workings of Society, require careful examination, and will be discussed in more detail in later chapters. Although generally sound in administration and convenient in operation, the banking system itself rests on such unstable foundations that its operations are a peril to any nation that relies on it for a sound and stable system of money.

Money and Debt
One difference exists between money created by the Banking system and money created from any other source that has extremely important consequences. This is, that the process of creating new money through the Banking system, in contrast to any other way of creating money, involves the creation of debt.

When the Mint stamps out a new coin, new money comes into existence, and no person is obliged to borrow anything for this to happen. If the Mint strikes, say, a thousand $2.00 coins costing sixteen cents apiece, the actual cost of the coins will be $160.00. Eighty of the new coins will pay for the manufacture of the whole thousand, and the remaining 920, with a face value of $1,840, are sheer profit, which can go into public revenue and lower taxes. When the Bank of Canada issues new Bank Notes, the process is a little more complicated, but the effect is the same. The new notes are used to pay for interest bearing Government Bonds – but since the interest paid swells the profits of the Bank, and the Government, which owns the Bank of Canada, puts the profits into general revenue, the whole difference between the face value of new bank of Canada notes, and the cost of issuing and administering them, is outright profit to the Canadian government – again, a saving to the pockets of the Canadian taxpayer.

When Banks create new money, however, they lend it out at interest. As in the case of all new money which is not backed 100% by “intrinsic value”, a profit goes to the issuer, of the difference between the face value of the money, and the actual cost of producing it, which does include, of course, the cost of any interest paid to depositors on their credits at the bank. This time, though, the profit from money creation does not go into the public treasury, but into the hands of private shareholders. The Canadian Western Bank, for instance, in its 2008 Annual Report, shows a shareholders' contributed capital of $221.9 millions, and a net income after taxes for the year of just over $102 millions, a 46% after tax return on capital. Not bad! (2)

All of this shows the vast scale of private exploitation of a public asset, in this case, the public credit. That is, the amount of value that the people of Canada are prepared at any time to surrender in exchange for money tokens that do not have in themselves more than a very nominal value. They do this because these tokens make exchange easy and exchange is a very profitable thing. But also, it brings about an entirely new situation. A bank's books would not balance unless at the same time that new money, or Bank Credit, was created, a debt from the person to whom this credit is lent was recorded on its books as one of the assets of the Bank. This debt is not, as in the case of the Bank of Canada, a matter of accounting of no real significance. It is a loan, secured by a pledge of real assets by the borrower, that can be foreclosed on in case of default, and otherwise will in due course be repaid by the borrower, with interest until that repayment takes place.

Over ninety per cent of the money circulating in Canada is money created by these loans of the commercial banking system. That money has been issued against a mortgage of their public and private assets to the tune of over six hundred billion dollars. It is a sober fact that this whole debt of $624 billion dollars, averaging approximately $19,000.00 per head, and costing approximately $250 per family per month, would have no reason to exist, and could disappear entirely, under a state issued money system.

It is essential to be able to exchange wealth between people, if people are to be able to share the advantages of association which first made them take part in Society.

In primitive times, exchange was by barter, but two systems of money have since developed, which make exchange of wealth more efficient. Both operate by allowing wealth to be disposed of in exchange for an intermediary token of a certain nominal value, known as “money”, and the money token is later exchanged for a different form of wealth. In the first case, the money token has “intrinsic” value: in the second, it is accepted because of a promise made by the issuer (his “credit”).

Modern money systems have developed by using “credit” money, which has the convenience added to it of intrinsic value money either (1) Because the tokens are state issued, and are declared by law to be legal tender for the settlement of debts, or (2) because the tokens are issued by private authorities (banks and credit unions), and in practice, these keep a sufficient reserve of legal tender money or precious metals, to make the credit money exchangeable for legal tender money any time this is required. Both types of system are capable of abuse and failure, however a State system, provided that it is responsibly operated, has proved effective over long periods of time.

The chief disadvantages of the commercial banking (credit) system are (1) that a bank is never completely proof against failure, and (2) that money so created can never be issued into circulation, but only lent. As a result, a heavy burden of indebtedness to the private banking system is the inevitable result of use of bank created credit money.

Because money can, in fact, be created at little cost, and can be spent into circulation by the State in accordance with the needs and opportunities of the community for the exchange of wealth, Social Credit has adopted as its fourth and final principle:

IV Whatever is physically possible and desirable and morally right, can and should be made financially possible.

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Articles on Banking and Money in any standard encyclopedia.
Nevin, Arian – National Economy
Sayers, R.S. - Modern Banking
Dwinell, Olive – The Story of our Money
Munson, Gorham - “Aladdin's Lamp”
Canada Year Book – Chapter on Currency and Banking.

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1. Is an effective way of exchanging different forms of wealth between its members an essential feature of Society? If so, why?
2. What are the disadvantages of a system of barter?
3. Name two basic types of primitive money. How does each operate in a typical transaction?
4. Why is it useful for money to have intrinsic value? Are there any disadvantages to this?
5. What substances having intrinsic value have been used at different periods of history?
6. What is the basis for the acceptability of “token” money issued by any person?
7. What types of money are Government issued in Canada at the present time. Do they have (1) Intrinsic or (2) Token value?
8. What other types of money are in use in Canada at the present time. Who issues them?
9. Give examples where State issued money systems have (a) failed, and (b) succeeded in the past. Is money issued by the state either evil or doomed to failure?
10. What defects are attached to the issue of money by commercial banks?

(1) Bank of Canada Weekly Financial Statistics.
(2) 2008 Annual Report, Canadian Western Bank.
Lesson IV – The Price System

How Money Works:
We have seen how it is through a process of cooperation that individual people are able to satisfy their needs in a society. Natural resources are taken and worked upon by different people, with different abilities and skills and tools to work with, and are passed from hand to hand in a process of exchange, until they reach the person for whom the whole process exists, and who is finally to make use of the product – the Consumer.

Sometimes, the functions of production and exchange are separated when the workings of the Capitalist organization of society are considered, and the idea is created that only those who actually labour in producing a physical product are carrying out a useful function. This actually is not true. “Production” - that is, supplying a desired form of wealth to a person willing to consume it, is simply not complete until the wealth itself is transferred over to the consumer, and in this process, those who extract the raw materials, those who ship them, those who process them, those who assemble them,who wholesale them, who retail them, who create the consumer demand for them through advertising, who deliver the product to the consumer's doorstep, are all adding value to the product, all for the sake of one person, and one person only – the Consumer who is going to make use of them. The most magnificent capital projects – dams, hydro developments, great factories, warehouses, stores and so on – would have no purpose, and would have to be abandoned, unless somewhere at the end of the line, there was the Consumer, ready, willing and able to pay for the wealth, no matter what its final form, the he makes use of.

This process of production, as we have seen, requires repeated exchange of the ownership of half finished products, from the hands of those who process them in one manner, to the hands of those who process it in another, each person in the chain seeking first of all to cover his expenditures on the raw materials processed, including the cost of the labour he employs, and in addition, to gain as large as possible return to himself for his initiative and effort in furthering the product one stage nearer to final satisfaction for the consumer. A steady stream of goods and services, in fact, is continually becoming ready for sale – being placed “on the market” - some of which will be bought for final consumption, but a great part of which will be bought by other business enterprises for further processing before being sold to the ultimate buyer.

There is, therefore, at any given moment, a very definite amount in any society which, although owned by definite persons, they are actively seeking to exchange for money on the market. Or, to put the same situation in another way, there will be a definite number of owners of wealth who are anxiously seeking to part with it, in exchange for what is, within certain limits, a perfectly definite sum of money. These persons are not simply big industrialists or merchants. The most important element among them is the enormous number of wage earners in the country, willingly, week by week, month by month, year in and year out, contributing the wealth of their labour and the skills of their education into the process of production for the sake of receiving, at the end of every week, two weeks, or whatever the customary pay period is, an agreed amount of money for the work they have performed. The total amount of what all these people are prepared to sacrifice, for the purpose of holding money, consists of what can be called the “national credit”, or what one writer has called the “Virtual Wealth” of the nation. It is the sum total of all the wealth that the people of a country are prepared at any time to part with, so that instead of having wealth in one form today, they can have a choice of wealth in a number of different forms in the future.

In an earlier lesson, we saw how one form of primitive money system turned part of this national credit - this willingness to part with wealth for money – into money by issuing a private promise to deliver goods, which could be passed to others as money. In a modern money system, the coin or dollar bills issued by the State, or the dollar credits advanced by a bank, are in fact a generalized form of promise, issued on behalf of all who wish to exchange wealth for money, to receive ownership of a proportion of that wealth.

A unit of money, no matter where it comes from, is in fact, a certificate of title that can be passed from hand to hand to a proportion of the total of the virtual wealth, or national credit, of the community. The proportion of the total national credit that each unit of money will buy will tend always to be that proportion of the national credit that the unit of money bears to the total money supply of the nation. Should the national credit be constant, in fact, and the quantity of money units in circulation be doubled, this very fact would tend automatically to cut the value of each money unit in half – a process technically known as “Inflation”.

How Much Money?
The question of “how much money should there be in circulation?” is always likely to be a vexing one, especially in a world that has seen, in many countries, either whole economies come to a standstill and prices collapse below cost of production for lack of sufficient money, or the value of their monetary units collapse completely, when the money supply increased faster than the availability of consumer goods on the market.

In earlier lessons, we have seen firstly that even without any money being in circulation at all, there is a perfectly definite measure that people can make in their minds as to the value of the things around them, at which they are willing either to buy or to sell them.

We have also seen that each unit of money in circulation, whether state issued, bank issued, or even an undetected counterfeit, is a certificate of title to a fractional part of the public credit.

We have also seen that the determining factor in the whole economic process, without which all would come to a halt, is the known willingness of potential consumers to pay a certain money price for the various forms of wealth that they wish to buy.

Suppose, now, that money is taken out of circulation. Maybe consumers cut back on their spending, and start paying off their debts. This actually happened, for instance, when bank loans were recalled during the Great Depression of the 1930's. What will be the result? One of two things. Either the value of every dollar will increase and the price of goods will therefore fall, or the value of the dollar will tend to stay constant, and the amount of the national Credit will shrink. Businesses will be unwilling or unable to offer goods for sale below cost at lower prices, and will cut back output to keep prices from falling.

In actual fact, both events occur. There is a tendency for prices to fall – but prices cannot fall too far, because businesses cannot afford to sell below cost without going into bankruptcy. Businessmen who have invested in plant and stock on the assumption that they will be able to sell at a particular price, including a fair profit for themselves, cannot without going bankrupt afford to sell much below the expected price. What happens instead is that the whole economy goes into low gear, factories run below capacity, workers are laid off, unemployment mounts – in short, there is far less exchange of wealth, and so far less production, than would have been the case had the money supply been greater. In physical terms, Society and its members become much poorer than they need to be.

Increasing the money supply, on the other hand, will first of all permit more and more exchange to take place – production will increase. A limit will be reached, however, where it is not possible to carry on more exchange. Prices begin to rise as the value of the monetary unit falls.

The Happy Mean
Is there, then, a happy mean for a nation's money supply? Yes. This comes when the supply of money is ample enough to carry out all the exchange of goods and services that the people wish to effect by putting their goods and services on the market, yet is not so great that goods and services begin to become scarce in terms of money available at the accepted price level, so that prices start to rise. This level, though it may seem hard to determine, in actual fact is not as difficult to achieve as may be supposed. For one thing, our general level of prices is a fairly stable factor, and profiteering and excessive profits need not be expected, unless there is either a monopoly situation, or obvious scarcities of goods, to make them command a “black market” price. For another, the index of unemployment shows fairly clearly whether or not there is an excessive, or else an insufficient, demand for labour, one of the most universal, but perishable, forms of wealth. It can always be expected that there will be a certain amount of “frictional” unemployment, as people move from job to job, or take time to acquire new skills. We can also expect that as a country becomes richer, more people may choose to retire earlier from the labour force. The index of the people who are “involuntarily unemployed” - that is, qualified for work but yet without employment, shows clearly whether the money supply is sufficient to finance the process of exchange or not.

Also, the framework of Society, and the way in which people receive and spend their incomes, does not change suddenly from day to day. There is in fact a very steady relationship indeed between a nation's Gross National Product in any year, and the money supply. Between 1926 and 1983, for instance, the lowest ratio, in 1966, was 33%, or a four month period of circulation. The highest was the year 1946, resulting from the pressures of wartime inflation, at 58.2% (7 months). In more recent years, ratios of M2 money supply to Gross Domestic Product were a high of 58.14% in 1993, (7 months)(1) but for the years 1988, 1998 and 2003 were all between 50 and 51% (6 months)(2) For a very long period of time, therefore, the ratio of money supply to Gross Domestic Product for the previous year (that is, the total price of goods and services produced in that year) varied to indicate a circulation period between a minimum of four months and a maximum of seven, in spite of extremes of boom and depression. The most usual period in recent years has been around six months.

This simply means that in our present state of society, the average dollar takes a certain fairly fixed time to be received as income by a consumer, spend on the products of industry, and pass through industry until once again it is a payment to a consumer, as wage, salary or dividend income. In the short term, therefore, if we know in physical terms the goods and services that can be turned out by Canadians in any year, there is no great difficulty in calculating very closely indeed the amount of money the country needs to have in circulation in order to have those goods and services produced.

Money, Competition and Prices:
Earlier we saw that the value, and so the price to any individual for any particular form of wealth, was something that varied from person to person, and even at different times. Generally speaking, however, it is true that only a few people will want an article at a high price, and the lower the price is brought, the more people will be ready to buy the article.

Suppose, therefor, that if an article were priced at $1,000.00, ten people would buy it. If it were priced at $100.00, one hundred people would buy it. If it were priced at $10.00. five thousand people would buy it. Suppose also that for ten units, the cost of manufacture is $100.00 per unit. For 100 units, it is $15 per unit, and for 1,000 units, it is $7.50 per unit. We have an interesting study in the arithmetic of business costs. In our imaginary situation: Ten articles cost $1000.00 to make, sell for $10,000.00, yielding profit of $9,000.00 One Hundred articles cost $1,500.00 to make, sell for $10,000.00. yielding profit of $8.500.00 Five Thousand articles cost $39,500.00 to make, sell for $50,000.00, yielding profit of $10.500. It makes surprisingly little difference, therefore, to our producer from the point of view of profit, whether he makes very few articles and sells them at a high price, or a large number, and sells them cheaply. From the point of view of the Consumer, however, it makes all the difference in the world. Mass production means that the price of the article is reduced by 99%, so that 4,990 additional people can enjoy the article in question, in comparison with the restricted output, high cost approach.

How can producers be persuaded to give the public the best value for money, and adopt this high output, low price approach? The classic answer to this is by competition between producers. In our example above, suppose that all the articles were more or less identical. Producer A was trying to sell his at $1,000.00 each. Producer B was pricing his at $100.00, and Producer C at $10.00. A and B would have little chance of selling in competition with C at their much higher prices. In order to obtain a market, they would be forced to lower their prices to something close to C's prices if they want any of their articles to be sold. All the same, it is worth noting that (1) it is this competition between producers that tends to drive the “small man” who cannot easily switch his output and cost structure from producing small quantities at high prices, to large quantities at low prices, out of business; (2) in our example, the market at $10 was only for 5,000 units. If A, B and C are to share equally, they will have only 1,667 units apiece. Their costs per unit may therefore well be higher than if there was only one producer in the field, so that to keep themselves from bankruptcy, the actual price charged to consumers by all three firms may be higher than if only one firm occupied the field.

Limited Supply:
The example we have taken above assumes that it is comparatively easy to produce additional articles as needed. It is typical of modern mass production – say of automobiles, appliances, printed materials and so on – that whether one article or a million be produced, there are fairly definite “setting up” costs, including those of research and design, plant, machinery and so on, that are completely fixed. In addition, there are “run on” costs, chiefly for raw materials, power and labour. These are required, once the plant has been set up, to produce each individual article. The greater the number of articles among which this setting up cost can be shared, the nearer the price of the finished product comes to being no greater than that of the raw materials and labour involved. History probably shows no better example of this than the case of the development of the mass market Model-T Ford car, and also the problems of the U.S. automobile industry in more recent years, as the influence of Japanese and South Korean competition has made it necessary to produce cars of better quality needing less frequent replacement, while matching the substantially lower production costs of foreign industries.

Some products, though, are by their nature in fixed supply. There may only be a certain number of rare stamps or rare paintings, for instance: a certain quantity of a precious metal, or a certain number of shares in a certain company. In such cases, when further production is difficult or impossible, prices are not set by competition between producers, but by competition between consumers. This is the case when production is controlled to gain maximum profit by cartels or monopolies (including some professional associations). The products are allocated proportionately to the total of money that consumers as a whole are prepared to pay for them, and price will have no relation to original cost. That is the key, for instance, to the operation of the Stock Exchange. The volume of shares listed on the exchange is, in the short period, fairly inflexible. Therefore the more persons investing on the exchange, the higher share prices will go, without any reference, for instance, to the earning power of the shares themselves. The small investor is attracted by the prospect of capital gains from rising share prices to put his own money into the investment market – and by so doing, makes prices rise still higher. As soon, though, as any substantial number of people start liquidating their holdings, the reverse process takes place. Prices fall. Paper values are lost, and there is a “crash”, such as that on Wall Street in 1929, or again in 2008, which heralded the onset of the Great Depression.

The Rate of Interest:
Before going on in the next lesson to examine the economic system “in motion”, there is one more factor entering into the costs of production that is of key importance. That is, the rate of interest.

We have seen that people willingly hold money for short periods of time, because it is convenient for them to do without wealth they possess in one form now (such as their labour), in order to have a choice of wealth in a different form in the future. To have to do without wealth for any great length of time, however, is a definite inconvenience, progressively more so the longer the deprivation continues. Yet we have also seen that modern mass production demands the use of “tools” - capital of one sort and another – which Industry must purchase and pay for before any production can take place. If Industry is to acquire this capital, which is a form of wealth, this can happen in two ways. Either people holding funds part with them by lending money or buying shares in a venture – often the case when pension funds invest their retirement savings - or the money is created and lent by a Bank, in which case the whole national money supply is expanded, and, since new production is not yet on the market, the value of the dollar is diluted by inflation, and the general public pays for the investment through loss in the value of the dollars that they hold. The price that the Banks, or other holders of wealth charge for placing money at the service of Industry is known as the Rate of Interest, and is generally expressed as a percentage of the capital sum advanced, payable annually. Sometimes, of course, parting with this wealth means taking the risk of it never being seen again if the business fails, or consumer credit is not repaid, and in such cases, the interest rate charged is made higher by an estimate of the risk involved.

Something that should be noted, however, with regard to this matter of interest, is that the Banker advancing money at interests expects to be paid the sum contracted for, even though the project for which it is advanced may be a failure. If the farmer's crop fails, the Bank will still expect to be repaid in full, the farmer's only defence being to go into bankruptcy. Since money is sterile, and does not breed more money, philosophers such as Aristotle, and religious authorities from Moses to Mohammed and the Pope , have denounced the charging of interest on money without assuming the risk of the project for which it was advanced. Muslim Banking, which avoids the charging of interest, still pays attention to this prohibition. Calvin was the religious leader who overrode Old Testament prohibitions (Ezekiel 18, Psalm 15) to make usury acceptable in the modern Capitalist era. Shakespeare illustrates the concern over the subject in his time in his drama of “The Merchant of Venice”. It is this ability to create money backed by the full liability of the borrower to pay back his debt with interest that has made it possible for the Banking system to progressively replace state issued money with money of its own creation.

The key factor, setting in motion our whole economic system, is the existence of consumers desiring certain forms of wealth, and willing to pay a certain price for them. These same consumers also have labour, skills, or other property to sell, again valuing these at a certain price. These products, and these skills, labour or other wealth which people are continually willing to “put on the market” in exchange for money, have a definite value, and form the “National Credit”. A nation's money supply is in fact a supply of certificates of title to shares in this “National Credit”, though private individuals are generally unable to create such certificates for themselves, even though they are the ones whose skills, labour and property are what in fact give value to the monetary unit, now partly issued by Governments, but mostly as debt through the banking system

In practice, each dollar of the nation's money supply circulates in a fairly constant average period of between four and seven months to convey real wealth in the form of labour or other services from Consumers to Industry (the Business Sector), and real wealth in the form of products or other services from Industry back again to Consumers. If the money supply is increased excessively, beyond the people's willingness or ability to put additional goods and services on the market for exchange, the buying power of each unit of money will tend to decrease. Conversely, if the money supply shrinks, or fails to expand in accordance with ability to expand production, prices to the producer will fall, and the “National Credit” will decrease as workers and machinery become unemployed.

Prices of goods on the market, in the absence of competition, tend to become what will give the greatest return to the producer – this may involve small output, high price, and comparatively little value to the Consumer. Competition between producers tends to lower prices and extend markets, even though in theory it may be slightly less efficient than monopoly production. If supply is restricted, however, (as in the drug trade, when there is vigorous enforcement) competition between consumers has no other effect but to increase price, regardless of cost of production. Interest is the price of “doing without wealth” for a period of time, and generally speaking, the rate of interest reflects the price people expect to receive for doing without wealth now, for the sake of supplying finance to pay for the tools that will bring greater wealth in the future. When advanced as Consumer Credit, e.g. for automobile loans or house mortgages, it represents the cost of providing Consumers with value now, that they will pay for at some future time. There are practical and moral considerations involved when money is advanced to business purposes without assuming any part of the risk of business failure.

* * * * * * * * * * *

1. Define the word Consumer. What is the difference between “Production” and “Consumption”?
2. Is there any purpose to Production without Consumption?
3. What is the “National Credit”. Why does it exist?
4. If the National Credit increases, is the price level likely to rise or fall? Why?
5. What is the effect of too small a supply of money in the hands of Consumers?
6. How best could we determine the ideal quantity of money for the Canadian economy at any time?
7. What is the effect of competition between producers? Between Consumers? How far are these effects either good or bad?
8. What is the general effect of mass production techniques on small business? Why?
9. What is the rate of interest, and how is it justified? Why are different rates of interest charged for short and long term borrowing?
10. Are there practical or ethical problems attached to the charging of interest or loans of money?

* * * * * * * * * * *

V.C.Vickers: “Economic Tribulation”
J.K.Galbraith: “The Great Crash, 1929”
Irving Fisher: “100% Money”
Alec Cairncross: “Introduction to Economics” parts II and III.
Standard economics textbooks on the subject of supply, demand and price.

(1) J.M.Hattersley Brief to the MacDonald Royal Commission, Part 3.
(2) Statistics Canada, Canadian Economic Observer Historical Statistical Supplement 2008.
(3)Benedict XIV: Encyclical “Vix Pervenit”.
Lesson V – How Our Economy Works

The Basic Pattern:
Like any other piece of complicated machinery, at first sight our economic system appears like a great jumble of interacting forces, and it is difficult to see what is cause and what is effect: what it is that sets things moving, and what are the things that are being moved.

By now, however, we have been able to clear some of the ground, and isolate some of the basic parts of the economic mechanism.

If we compare our economic system to a piece of machinery, such as an automobile, we can see that its basic drive comes from the wants of Consumers – in the case of the automobile, the driver's need for an efficient, speedy and safe means of transportation. The governing mechanism which limits how far those wants will be satisfied, is the willingness of Consumers to work to satisfy those wants. That includes the price they are willing to pay for the car and the gasoline, insurance and other supplies needed to make it operational. That will dictate the quality of the vehicle, and the size of its engine in particular. Just like our economy, the engine makes use of natural resources, in this case, gasoline, to provide energy. The driving wheels transmit that energy to the road, to move the car forward. Between the two comes the transmission, which takes the energy provided by the engine, and converts it through gears to put it in a useful form to move those wheels. If Production is the engine, and Consumption is the movement, then it is the Money System is the Transmission that stands between the two and is essential to make movement possible.

In a primitive society, the system of production is not well developed, and so is inefficient. Effective tools and skills are not easily available. Exchange is difficult, therefore production is not specialized, and as a result, consumer wants have to be very acute indeed before production can be assigned to satisfying them. Driven by the need to satisfy simple needs such as food to stay alive, long hours are worked, and heavy labour performed, for a low standard of living.

Developing the economic machine so that production is possible with less and less human effort is like the process of eliminating friction. On the one hand, less urgent demands of consumers can be satisfied: people can enjoy luxuries as well as necessities. On the other hand, because these wants are less urgent, people are less willing to work long hours for little reward. If the difference between working an eight hour day and a sixteen hour day is the difference between life and death, as it may well be in a primitive country, or one where working people on minimum wage are forced to work overtime to cover expenses such as taxes, rents and debt charges, most people will be willing to work the sixteen hour day. But if the difference is only that of having a second car or a bigger house to live in, many will prefer to work fewer hours, and take additional time for vacations and to enjoy their possessions. So over time the working week has steadily shortened, while people have enjoyed a rising standard of living. This is a direct result of greater and greater efficiency in the process of production – its ability to satisfy a particular degree of human want with a smaller and smaller quantity of human energy.

The “A Plus B” Phenomenon
When Capital development of new projects takes place, we can therefore see that a problem arises in balancing the flow of money to Consumers who want to buy, with the actual flow of Consumer goods for sale.

If there were no money creation by banks for the purpose of financing capital development, the problem would be less acute. People who wanted to finance new projects would have to dip into their pockets or those of their friends, perhaps borrowing from the funds of those saving for retirement and similar sources. This would take off the market money demand for a certain quantity of consumer goods, replacing this by demand for materials and labour needed in putting together the new project.

However, it is rare for new businesses to go ahead without the help of new credit created by the Banking system against their indebtedness. In fact, the financing of new investments or the takeover of existing companies can be carried out with very little investment by the borrower of his own money. Sometimes he borrows “on margin” - that is, investing in purchase of a company, real estate, shares on the stock exchange, the commodities or foreign exchange markets by obtaining an enormous loan secured by a small amount of cash and the value of the asset acquired by the bank financing, on the understanding that if the market falls, the assets will be sold and the loan paid back out of the proceeds. The speculator's hope is that his acquisition will drive up the price of the asset through his increased money demand, giving him the chance to “flip” the asset to another buyer at a higher price, repay the Bank with interest, and still receive an enormous return on the small amount of money he has laid out. It does happen, though, that the market may fall rather than rise, in which case, he loses everything. Speculation of this kind by an unauthorized employee of long established Baring's Bank, who in 1995 gambled on a rise in the Japanese stock market when it actually fell, led to the bankruptcy and complete collapse of that bank, which now no longer exists. In the same way, many who had expected capital gains on the housing or stock markets in the year 2008, were desolated to find their investments lost value, as credit became less and less easy to obtain, and foreclosures of houses and halving of the value of pension funds became a social disaster.

Let us examine more closely what happens when investment takes place, either through direct bank borrowing, or private investment where the investor has borrowed to finance the shares he buys. The money supply is increased, but the supply of Consumer goods does not just stay the same – it is reduced by the increased demand for labour and materials needed to assemble the project. If this involves, say, an oil sands plant costing ten billion dollars, and taking ten years to assemble before it goes into production, we indeed gain “full employment”, with a shortage of labour causing rising costs including wages, as has been seen in Alberta – but the cost of this has not been borne by the investors, but by the public at large. The value of their dollars has been reduced as the buying power of the dollar has been taken away by the increase in the money supply. Until the work is completed, the community is actually poorer in terms of the real wealth it can enjoy.

The time comes when such a plant is completed and goes into production. If five thousand people were employed in construction while the plant is being built, then likely only five hundred will be needed to run it when the installation is complete. So 4,500 workers are laid off, and will no longer be receiving wages from this source. Assuming a twenty year term for paying off the bank loan and writing down the value of the plant, we can see a yearly cash flow statement for the plant once it has been completed that looks something like the following:

“A” costs:
500 employees at $80,000.00 = $40,000,000.00
Materials, royalties, taxes. $40,000,000.00
Interest on Bank Loan and/or dividends to shareholders $500,000,000.00
TOTAL: $580,000,000.00
“B” costs
Repayment of Bank advance $500,000,000.00
Total costs incurred to be charged into prices $1,080,000,000.00
LESS: Total of cash paid out to Consumers $ 580,000,000.00
DEFICIENCY $ 500,000,000.00

The sums taken from the public through inflation now are paid back to the bank and canceled, and deflation sets in, prices fall, unemployment mounts and just when more product than ever before becomes available, the money that would have made it possible for people to buy it disappears. Recession and Depression replace the previous boom. What looked like a promising venture now is the cause of surplus production that cannot be sold. So our plant may well be mothballed or go into bankruptcy. What should have been a source of more wealth to the community now becomes a wasted asset.

It is worth noting that, even in cases where Bank financing is no longer used, and if all the cost of the plant has been assembled through actual money savings, the fact that when the plant is complete, there will be more product on the market for consumers to buy. That means that there will be a need for the public to have additional dollars to spend if this new product is to be sold without a change in the price level. To quote a phrase of Major Douglas, there will be a need for “New Credit for New Production” to be placed in the hands of the consuming public.

The Trade Cycle:
One cannot look at the whole of industry, of course, as a single and simple business concern. At any moment, among the thousands of enterprises in any country, some will be in the process of organization and capital expansion, where the tendency is to pay more out in incomes than is balanced by goods reaching the market. Others will be in that later stage, when they are seeking to recoup these previous expenses, by obtaining a cash flow from their sales greater than the payments they make for labour and raw materials. What would be, if there were only one giant business concern in the country, a gigantic expansion and depression, is evened out through adding together the actions of a large number of concerns in the business sector, and summing them up in economic “trends” that differ at different times, known generally as the “upswing” and “downswing” of the Trade (or Business) Cycle.

Generally, “trade cycles” are of two basic patterns. The first and less serious is the “two year cycle”, associated with ebbs and flows in the building up and liquidation of stocks of commodities by business. If firms in general become overstocked, they may cut production for a short while, causing a rise in unemployment, until these inventories shrink to a more normal figure. Production then resumes, and employment picks up once again.

The second is the “long term” or “cyclical” depression. In theory, it comes around about every twenty years, but in fact, it cannot be predicted with such regularity. Others have counted such depressions as occurring every eleven years, and blamed them on the natural cycle of sunspot activity. However, the causes can likely be found much nearer earth. A dozen such depressions were recorded in the United States during the nineteenth century, and another four before the Great Depression of the 1930's. Public Works, rearmament and war financing kept recession away for several years thereafter, but recessions could be observed once again in 1981, 1991, and a most serious one commencing in the year 2008.

These recessions are part of a regular process. The cycle is started by some event which causes a marked increase in the money supply – it may be a war, some other program involving extensive Government borrowing, a gold rush, or even some consumer installment buying boom. This leads to an increase in “effective” consumer demand – that is, demand matched with the dollars to pay for what is demanded. This in turn makes capital development appear profitable, and the fact that resources are therefore turned to capital purposes drives consumer goods prices higher. But a time comes when the growth in the money supply that triggered the boom can no longer be continued (the war is over, the gold runs out, the government or the consumer are too deeply in debt to go further: business is over extended and has no need to increase capacity, or banks may be at the limit of their lending resources) and business conditions get worse. If Bank failures occur, or in some other way the money supply is suddenly reduced, the depression may turn into a Crash. Otherwise, it may simply become a slow drift into stagnation, only to be ended by some new event that increases consumer buying power, and so touches off a “boom” once again. In the mean time, everyone lives at a far lower standard of living that could physically be possible.

SUMMARY: The basic driving force of an economic system is the desire of consumers for the things that will satisfy their wants. This desire, when accompanied by money of an acceptable kind, constitutes the “effective demand” for wealth in differing forms.

This effective (money) demand in its turn sets consumers to work in all of the different ways that Society requires to satisfy its needs and wants. The money that consumers receive for the services they so render again gives them an effective demand in the form of money with which they can satisfy their own wants.

The use of tools (capital) to make production more efficient leads to more satisfaction for less work. In an age of automation, such “tools” are so complex and perfect, that much of the labour required to make any article goes into making the “tool”, and comparatively little into the item by item production of the product – think of the automation that produces in quantity the modern automobile. As a consequence, production of useful goods and services generally takes place long after most of the physical labour required has been performed, and the wages paid out for doing this have already been paid out and spent.

When the finance spent on creating the capital tools has originated in newly created Bank credit, the consequence is a “trade cycle” in which consumers receive incomes and spend them, before new wealth comes on the market, leading to a time of inflationary boom. The boom period tends to be followed by a period of deflation, unemployment, and cutthroat price competition, as bank credit is repaid and canceled, and the money supply ceases to expand. Even when new production is financed from savings rather than bank credit, the fact that the new plant is able to place more physical production on the market will still tend to drive down prices, unless some new event occurs that makes consumer purchasing power available in order to buy the increased production. In general, a vast increase in Consumer and Government debt since the 1930's has made it possible to expand the economy (at the price of continuous inflation of prices) and avoid recession. However, current economic signs are that the limits of Consumer and Government borrowing have now been reached.

* * * * * * * * * * *

1. What is the basic force which sets the whole economic system in motion?
2. State three factors which have the effect of placing a limit on the degree to which consumers are able to satisfy their wants.
3. What is the result of increased efficiency in the process of production? Are unemployment, or shorter working hours, a sign of greater or less efficiency?
4. A hydro-electric project takes five years to assemble at a cost of $100 millions, and has a projected life of 30 years. Its costs of operation once in service will be $1 million per year, plus loan repayment blended payments of principal and interest at 6% per annum of $7.2 millions. Describe the effect on the economy (1) during the construction phase, and (2) after electricity generation commences, (a) if funds come from Bank loans, and (b) from private investment. Assume that money paid to the lender for interest will pass back to the public in wages and dividends, but that repayment of principal to a bank will be cancelled.
5. Why is it that a war can cause economic prosperity?
6. The year 2008 saw remarkable and world wide financial turmoil, with the collapse of several financial institutions, and mass layoffs in many industries. Give as many reasons as you can for this phenomenon taking place.
7. How far is full employment a necessity for economic prosperity?

* * * * * * * * * * *

C.H.Douglas: “Social Credit” (Revised 1933 edition), Part II, pages 78 sqq.
J.M.Keynes: “General Theory of Employment, Interest and Money”
Statistics Canada: “National Accounts: Income and Expenditure” 1926-1956 and continuation volumes.
John W. Hughes: “Major Douglas – The Policy of a Philosophy” Chapter 5.
Lesson VI – Some “Orthodox” Solutions
As we saw in the last lesson, one of the major economic problems of the present day, and one that is likely to become more and more acute as our “tools” become more and more efficient through automation, is to achieve a balance between the rate at which consumers receive incomes to spend on the goods and services that Industry provides for them, and the actual rate of flow of goods and services onto the market for sale to those same consumers.

Before the Depression of the 1930's, the idea that there might be any kind of imbalance of this kind in the economic system was reserved for economic “heretics”, particularly, of course, the Social Credit followers of Major C. H. Douglas. The onset of the Great Depression, however, showed all too clearly that there was no automatic balance in an economy between ability to produce and ability to consume. The plain evidence of “poverty amid (potential) plenty” of those days forced a decided shift in economic thinking which in fact accepted for its own many ideas earlier put forward by Douglas. This was particularly evident in the writings of Maynard Keynes, whose “General Theory of Employment, Interest and Money” superseded some of the same writer's own earlier ideas on the subject, and paved the way for a “new” economics in orthodox circles that has all but superseded the “classical” economics of the nineteenth and early twentieth centuries.

The “orthodox” economics of today, therefore, is different from the orthodox economics of the days when Social Credit was first propounded. Indeed, most economists of today would agree with many of the criticisms Douglas made of the orthodoxy of the 1920's when first he wrote. Today's followers of Keynes, however, generally consider that the solutions he advanced for the economic problems of the depression – chiefly consisting of low interest rates from the Central Bank and allowing budget deficits as part of a deliberate policy to stimulate the economy – are sufficient to bring about a satisfactory resolution to an economy in recession. It is the purpose of this lesson to analyze the defects in our economic machinery caused by our present system of a bank created money supply in more detail, show how the Keynesian proposals do to some extent act as a palliative, but also show the limitations of those policies, and how alternative policies such as those advocated by Social Credit provide a better solution.

The Layout of the Economic System
In the last lesson, we saw how the creation and withdrawal of bank created credit at first caused a tendency to inflation, which would be followed by a tendency to deflation. That is, at one time, consumers would be receiving incomes faster than goods and services at normal market prices were coming onto the market for sale, and later, goods and services would reach the market faster than incomes were being distributed, and therefore could only be sold, if sold at all, below cost and at a loss.

We will now need to study, not simply the quantity of bank credit that is created, but also the manner in which it is introduced into the economic system, as this has a direct effect on the two most obvious effects of an economy stabilized by “Keynesian” policies – the constant inflation of prices, and the persistent growth of Government and Consumer debt, and the cost of paying interest on it.

When we study an economic system, we are really studying only two things. We study people's wants, and we study the means they use to satisfy those wants.

In a very primitive economy, people look after the satisfaction of their own individual wants – they use their own hands, or those of their family or clan, to produce the food they put in their mouths. In an advanced economy such as our own, people generally work for a “business”, which uses their work and other factors (such as machinery and natural resources) to make goods and services which are placed on the “market”. Those goods and services are then purchased and made use of by consumers, using the money they have been paid for the contributions they have earlier made to the productions of the business community.

Some of the goods and services that business produces, of course, are not for immediate consumption – they are tools or infrastructure to be used up only over a period of time, to aid in making other goods for consumption. Conversely, some of the goods and services coming on the market reflect not simply the cost of the wealth used up immediately in making them available, but also the cost of the capital accumulated in the past, now made use of in bringing this wealth to a marketable state.

We can state that in any period of time, the prices of consumer goods being sold on the market equal “A” plus “B”, where “A” represents those costs, such as wages, sales taxes, profits and so on, charged into the prices of goods, and circulating within a very short period of time back to consumers (Government being regarded as a Consumer, which, of course, it is), and “B” represents those costs, such as for the use and depreciation of capital, which are not balanced by immediate payments to consumers, but are used for the repayment of debt, or possibly “ploughed back” through the capital market to pay for the creation of new stocks of fixed capital.

Suppose, just as an example, that at a particular time there is no need for any capital expansion in an economy. Suppose, say, that we are at the end of a capital investment “boom”, and our business capacity is sufficient for our needs for some time to come. What will happen?

All that part of consumer prices which consists of “A” costs will continue to circulate to business and be paid out by business again in various forms of consumer income, so that consumers receive income at least at this rate. But all that part of consumer prices that consist of “B” costs will be channeled back into the capital market, and, in the absence of opportunities for new investment (which we have assumed) will almost inevitably be used for the repayment of bank indebtedness. And since, as we have seen, it is primarily the borrowing of credit from the banking system by business that causes the creation of the major part of our money supply, this situation will cause a sudden and violent shrinkage in the total supply of money – reflected very quickly in a collapse of prices in the Stock Market and elsewhere. If this creates a panic among consumers, so that they refrain from investing and repay their own borrowings, this will tend to make the situation even worse. C. H. Douglas describes the situation as follows:(1)

“The rate of flow of purchasing power to individuals is represented by A, but since all payments go into prices, the rate of flow of prices cannot be less than A plus B. Since A will not purchase A plus B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing power which is not comprised in the description grouped under A.

“The above proposition is perhaps most simply grasped by recognizing that the B payments may be considered in the light of the repayment of a bank loan by all the concerns to whom they are made, with the result involved in the relationship previously discussed between bank deposits and bank loans. When real capital (i.e. tools, etc.) is financed from savings, that condition is complicated by (b) . . .

“(b) since money is normally distributable only through the agency of wages, salaries and dividends, it being assumed that the interest on Government loans is provided by taxation, the whole of these wages, salaries and dividends must have appeared in the cost and consequently in the price of the articles produced. It does not appear to need any elaborate demonstration to see that any saving of these wages, salaries and dividends means that a proportion of the goods in the prices of which they appear as costs, must remain unsold within the credit area in which they are produced.”

Mitigating Factors
Sometimes it is assumed, wrongly, that the economic problem described above means that automatically, and in all times and places, consumers do not have sufficient purchasing power to pay for the consumer goods that are at that time for sale. This is not the conclusion that Douglas reached, and it certainly is not borne out by experience. Rather, the conclusion to be reached is that, unless there is some compensating flow of purchasing power to consumers to balance the “B” costs that are continually being included in prices, then flowing back to the capital market and so to the banks for cancellation, a situation of deflation and economic collapse will be reached.

This compensating flow is made, under current arrangements, in a number of ways. The following are the most important:

Accumulation of business inventories. The more business accumulates stocks of unsold goods, and finances their production by borrowing on the capital market, the more consumers will be receiving incomes not balanced by increases in the prices of the goods sold to them. A decrease in inventories, of course, has a reverse, deflationary effect.

New fixed capital formation by business. Creation of new capital assets – houses, machinery, office buildings, etc. financed by business borrowing - means that funds are again channeled by means of wages, etc. to consumers without any immediate increase in the monies at that time to be recovered in prices from consumers.

A surplus of exports. If exports exceed imports in price, the result is a trade “surplus”, financed by funds flowing from the capital market to purchase the debt of the foreign nation, and thence to pay for the goods sold by the exporter. Again, this means that funds from the capital market flow to business, and from there to consumers in additional wages, without any comparable increase in the goods and services placed for sale on the domestic consumer market.

Personal Debt. If the public at large, instead of placing funds for investment on the capital market, so reducing their power to buy consumer goods, borrows instead, and so receives funds from the capital market, (e.g. by buying automobiles “on time”, buying houses with large mortgages against them, and other forms of credit purchase) then consumer purchasing power will again be increased without any immediate increase in the costs that business will have to recover in the price of what it sells.

Government deficit finance. Government borrowing on the capital market, when such monies are spent into circulation either in direct purchases, or indirectly by payments in pensions and so on, has this same inflationary effect. It is this attempt of governments to prevent deflation by spending beyond their own incomes and borrowing the difference that lies at the root of deliberate deficit financing by government in time of depression for the purpose of getting the economy moving once again.

Unnecessary Capital Development. An excessive pressure to develop megaprojects to support the people's style of living is encouraged, not for the purpose of the actual need, but to keep people at work so that they will receive incomes. A serious consequence of this is strain on the world's ecology, where reasonable limits on development projects are resisted because of the unemployment that will result if they are discontinued.

War. If the struggle for markets, or the need to cure unemployment at home, gets too oppressive, then War becomes a solution. In times of war, ordinary financial rules are suspended, enormous debts are run up to pay for soldiers' salaries and war material, price controls are often imposed to prevent inflation, and a stagnant economy is transformed to one of incredible productivity – for destruction. The enemy is not expected to pay for the bombs and bullets delivered to him, and without that financial limit, the only limit on production is a physical one. The tragedy is that the wealth that is being used up in hostilities could so much more usefully have been made available for international aid and to relieve poverty both at home and abroad.

The Resulting Situation
Let us summarize these influences at work in our economic system. The fundamental problem, arising directly from the use of bank credit in business financing, is that there is no built in balance between the rate at which consumer goods and services become available for sale, and the rate at which consumers receive incomes to buy them. A business's cash flow will almost always be different from that same business's profit and loss statement. The system therefore swings in cycles from inflation to deflation.

Inflation can be attributed to two basic causes. One is the familiar one of “too much money chasing too few goods”, which accompanies wartime financing, or times of rapid capital development and/or consumer debt financing, the result of increased lending of Bank created money. The second, is the fact that businesses cannot sell below their costs of production without heading towards bankruptcy. Consequently, in a period of tight money, when sales become difficult and prices would otherwise be driven down, businesses will frequently attempt to cover their costs by reducing output and increasing their prices – something pointed out in an earlier lesson (2). This involves a very harmful situation of both inflation and economic stagnation – sometimes known as Stagflation, familiar to us in particular from the history of the early 1980's.

The most basic tendency is a tendency to deflation. By this is not meant that there is always a shortage of money relative to the supply of consumer goods. It means that unless the economy is being continuously stimulated by one of a number of devices – export surpluses, new capital development, government or personal borrowing or the like – it is on the brink of having a large part of its money supply canceled, and a situation arising where incomes are not enough to pay the necessary prices of goods offered for sale, with consequent poverty and distress in the midst of potential plenty. No wonder there is such an underlying tone of nervousness in the statements of all who are responsible for forming or commenting on the nation's monetary policy. No one can ever be sure, as things are at present, how long “good times will last”.

Let us assume, though, that conventional monetary policy is working as well as it can under our present monetary system. Will that be good enough? What can we expect?

Firstly, we can expect a system where the ownership of business is not in the hands of ordinary people, but a large part of business assets are balanced by borrowing of business from banks, not from private investors. To this degree the average citizen is prevented from receiving the dividend income he should be relying on more and more in this age of developing automation, and the problem of personal poverty in an age of abundance is made that much the worse.

Secondly, we can expect governments and peoples to become progressively more in debt. To buy the wealth he has produced, the wage earner is obliged to borrow – if he does not, demand for his product falls, and he will find himself out of a job without a wage income at all. Both taxes and personal living costs increase as a result of the burden of interest that this progressively greater debt involves. In the end we may find a people who, apart from a privileged few who are on the “inside track” (and incidentally therefore have a great deal of political influence to prevent change), have no property or possessions they can call their own, and a government at the mercy of its, and the people's creditors.

Thirdly, we can expect a people in a chronic state of unnecessary anxiety about their own economic future. From the material point of view, there is not the least doubt that Canada is rich enough to support all of her population in the foreseeable future in a very fair degree of comfort. But from the point of view of finance, it is more than likely that some time in the foreseeable future such a financial collapse will come about that many able bodied Canadians will lose their jobs and because of this go short of the necessities of life.

Fourthly, we can expect Waste in our economic system, as political expediency brings pressure on governments to instigate or guarantee “make work” projects for the purpose of distributing incomes through employment – these works usually being of a capital nature, of course, to satisfy some imagined demand in the future and not to provide consumer goods, because of the difficulty of finding consumers with money to buy such products by cash payments through free choice on the market.

Fifthly, we can expect chronic slow inflation of prices in our economic system, if the effect of these stimulants distributes incomes faster than consumer goods reach the market for people to buy. This in addition to the constant addition to business costs, and therefore prices, caused by taxation to cover an ever increasing National Debt.

Sixthly, we can expect tension in international trade, as every nation seeks to improve its own economy at home, by protectionism and trying to export more abroad than it imports from abroad – a mathematical impossibility.

Seventhly, a “race to the bottom” in the quality of consumer goods on the market, aimed more and more at a public that is under financial pressure to buy in the cheapest possible market – even if it means buying products produced in intolerable conditions in third world countries, which are displacing employment at home.

Eighthly, a loss of personal freedom, as competition for sales drives wages down, leads to layoffs and unemployment, so making the poor poorer, sometimes having to work two jobs (if they can find them) in order to earn a living income. Investment money may be cheap and easy to come by – but because business conditions are so bad, nobody wants to borrow it. In fact, if prices are falling rapidly even a low rate of interest makes the cost of borrowing prohibitively expensive.

So in coming lessons, we will be examining some of the ideas that have been put forward by reformers in the past, to eliminate these defects.

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1. Is there any difference between the rate at which consumers receive incomes, and the rate at which business is seeking to recover costs through sale of goods on the consumer market?
2. If so, what are the effects of this:
(a) Where the flow of consumer incomes in greater than the rate of flow of business costs?
(b) Where the reverse is the case, and costs exceed incomes?
3. If the production of new capital goods were suddenly to come to a standstill, what economic effect would you expect?
4. Name some of the most important causes at work causing inflation in an economy, and explain their effects.
5. Name some of the most important causes at work causing deflation in an economy, and explain their effects.
6. Define “Stagflation” and outline its causes.
7. List some of the principal solutions to these problems made use of in our present day financial system, and the problems attached to each..

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R.N.Thompson “Canadians, It's Time you Knew”; “Commonsense for Canadians”.
J.M.Keynes: “General Theory of Employment, Interest and Money, Chapters 22 (Notes on the Trade Cycle) and 23 (Notes on Mercantilism).
J.M.Hattersley “A New Way Forward” Brief to the Royal Commission on Canada's Economic prospects.

(1) Monopoly of Credit, 1951 edition, page 141
(2) Study Course in Social Credit - Lesson IV.