Sunday, April 19, 2009


We have ranged far and wide over the workings of our economic and monetary system, and noted both its good points and its bad ones. We have noted, in particular, three areas of defect so serious that if action is not taken, our present system will end – as Marxist economists also expect it will – in complete collapse.

An Initial Question:
One question requires to be answered at the outset. Can our present economic system, based as it is on the use of money for the exchange of goods and services, be saved at all? Or has the time come when the money system has been shown to work so badly that it must be abandoned, in favour of some government organized scheme for the direction of production and the flow of goods to consumers – which is the policy of Socialism, and incidentally, the direction in which governments are heading in many parts of the world with distressing speed, as they devise schemes to provide for various social needs such as medical and hospital care, that the average person cannot afford under present arrangements without help from governments or insurers.

Our answer to this question must be an emphatic “No!” As we have studied the nature and operation of the system of exchange by money, one cannot but marvel at the inbuilt efficiency of the system to achieve precise satisfaction of the wishes of the individual citizen at the very least expenditure of human effort and use of natural resources. No system of State “planning” can be expected to come within miles of this degree of personal satisfaction of individual preferences, which we have already made one of our basic principles to achieve. The world's experience of “planned economies” has yet to produce one that gives personal satisfaction comparable to that provided under private enterprise through the medium of money. What we have found to be wrong is not the institution of money, but the manner in which this institution is administered. We have found reason to criticize the way in which money, the medium of exchange, is created, the way in which it flows as income to those who have control of the world's natural resources, and the way in which it is accounted for in connection with the flow of business costs.

The proposals in this lesson must not be regarded as invariable decrees of the one and only method by which our economic problems can be solved, not should they be regarded as in any way laying down a specified party political policy. All that they claim to be are practical proposals that, if implemented, would cure three basic defects in the Canadian economy, and in doing so, greatly increase the wealth and rate of development of this country, vastly improve the financial position and resources of the average citizen, and provide a basic level of economic security to all, without regimentation by the State. In the spirit of the founder of Social Credit, Major C. H. Douglas (not always recognized by his followers);
“We have put forward a number of tentative proposals, none of which, and any rate so far as I have myself any responsibility, is claimed to be final, rigid, or unchangeable. They are merely suggestion based upon an analysis of the point of view I have put to you tonight”..1

The Creation of the Money Supply:
The first proposal being advanced is that the issue of money tokens against the Social Credit of the nation be placed exclusively under public authority. Our federal government, on behalf of the people as a whole, must take this responsibility. In Canada, the most appropriate body to do so is the publicly owned Bank of Canada.

This does not mean that Chartered Banks have to be abolished or taken over by the State. The only new limit on their operations would be that every promise to pay money that they made on current account (promises to pay money on demand) would have to be backed by the actual possession of a sufficient quality of legal tender issued by the Bank of Canada to carry this out – in fact, a 100% legal tender reserve, in the same way that lawyers are expected, on pain of disbarment, to administer their trust accounts. In contrast, Investment Accounts, need not be so backed, but money left there by depositors could only be withdrawn after notice equal to the period for which the investment has been made. As compensation, interest could be paid on such investment.

To provide this 100% legal tender backing required for current accounts, means that the Bank of Canada would need to create and lend roughly $400 billion (as of 2008) of new currency to be held to the credit of the commercial banks in its books. This could either be loaned to the banks, at a rate of, say, 1% per annum, or used to buy Government debt from them, and in either case, could be expected to provide an income to the Federal Treasury of a minimum of $4 billion per year.

Increases in the national money supply would be the sole responsibility of the Bank of Canada, who would issue it against non interest bearing government debt. The amount would be calculated by first assessing a reasonable target for increase in Canada's Gross Domestic Product in a coming period of time, say a year. The money supply would then be increased in proportion to this expected increase. As we have seen in Lesson VI, it seems possible for the money supply to be increased in a moderate amount every year without this causing an increase in prices: the increase in the money supply is balanced by the increased need for persons in all parts of society to hold increasing money balances to match an increasing productive capacity, increased earnings levels, and the like. The allowable amount that would not cause an increase in prices would seem to be equivalent roughly to an increase in the money supply around 3%, year by year.2 Under present conditions in Canada, it would not be unreasonable to expect an annual revenue of at least $25 billions, debt and tax free, from this source.3

Such a payment could be used directly to eliminate Government budget deficits, to reduce levels of taxation, and to increase the level of financial help for Municipalities, and pensions and other allowances paid to deserving people by the Federal Government. Remember that currently, something like one third of Federal Government taxation goes to pay interest on the National Debt.

The Process of Introduction of New Money.
In order to introduce new money without causing a trade cycle and without inflation and debt, two alternative methods of proceeding are suggested:
The Just Price. This is one of the original “Three Demands” of Social Credit, originally put forward by Major Douglas. As we saw earlier in Lessons V and VI, under our present Banking system, introduction of new credit used to finance capital expansion tends to cause both inflation and deflation at different points in the trade cycle. Inflation initially if the credit and money supply is expanded beyond quite a limited amount, and deflation at a later time when repayment of this credit causes a contraction in the money supply.

The “Just Price” or “Compensated Price Discount” is a proposal to counteract this tendency. Its purpose is to pay back to the public the costs that have already been incurred in building up the capital plant used in manufacture, which are now being charged into consumer prices without any balancing incomes being given to the public with which to pay them. Under such a system, Private Banks might continue to issue and recall credit, as at present, for the purpose of financing production. Compensation would be made for the inflationary or deflationary effects by an adjustment made as a discount on retail prices – for which, in Canada at any rate, the existing Goods and Services Tax mechanism could easily be adapted. In a time of depression, retail prices would be lowered by a subsidy of newly created credit paid to the seller at the retail level. This would enable goods to be moved from crowded store shelves, and would bring down the price level within the reach of people willing, but previously unable, to buy, so preventing stagnation of the economy. On the other hand, if for any reason consumers were receiving incomes faster than consumer goods were coming on the market for sale, this “compensated price” could operate as a sales tax, mopping up the excessive consumer purchasing power, so preventing excessive profit taking by the business and financial sector, and a vicious spiral of price increases.

(2) The National Dividend. A further way of putting funds into the hands of the consuming public, which has already been outlined to some degree in Section I above, is that of a National Dividend. Under such a system, at least some part of the new credit that the Bank of Canada could create and distribute would be determined by a statistical body, either our existing Statistics Canada or a specially set up National Credit Office, and would be introduced into the economy as an outright payment (not a loan) to consumers (not the business sector). This could either go directly to consumers by way of outright payment, as happens in Alaska at the present time, or paid to Government to be distributed for Government purposes for the benefit of the public in such way as Parliament may direct.

Such a system would ensure an adequate basic income to all, would eliminate economic instability and much of the risks of doing business, enable the economy to produce at optimum efficiency, and place industry far more under the control of private investors rather than banks and hedge funds which have led to many of the troubles of the present time. It would also make unnecessary many of the bureaucratic welfare schemes that have grown up over the years designed to cure, on a piecemeal basis and paid from taxes, some of the worst features of poverty caused by the current debt-based financial system. Two Royal Commissions in Canada have already recommended a program of this type, and the fact that something similar is now available to residents of Alaska in the United States, without any adverse consequences, shows that the time for such a program in Canada is long overdue.

(3) Natural Resources.
To regain control of the natural resources of the nation, and assure that the profit from them is equitably made available to all citizens, is one of the most difficult, but yet the most important tasks, of economic reform.

To illustrate its importance, imagine an island to rich in material resources of food and other products, that there was no reason for anybody to work at all for anyone on it.

Under our modern system, where natural resources have fallen into comparatively few hands, this would be a complete disaster. If there lived on the island a class of those who, like the modern city dweller in Canada, own practically nothing in the way of land or productive resources, and live by selling their labour, then no need to work means no employment. No employment means – starvation in the midst of plenty!

Automation and cybernation are bringing mankind rapidly into the state of the citizens of our imaginary island. So efficient and labour saving does machinery become, that the cost of a mass produced article approaches more and more closely to the cost of the raw materials that go into it plus the depreciation charge for the use of the machine that manufactures it. Less and less labour is required at the time of production. Therefore, as automation more and more reduces the burden of work that people need carry out in order to survive, this question of the ownership of land and natural resources becomes a number one problem. A person who has nothing to fall back on other than his earnings from labour faces a future of starvation in the midst of plenty, as less and less of his work is required, and available jobs progressively require more and more training and skill. Our very existence will therefore depend more and more on our ability to obtain income from sources other than work.

That source will have to be from ownership of resources of all kinds, And in order to see that all citizens have at least a minimum share of this inheritance, some method of redistribution of wealth that gives back to the community the value of what it has conferred on the private owner must be used, while at the same time not discouraging the owner by taxation from making improvements to the property under his control.

For this purpose, George's remedy of a tax on site values, but not on improvements, appears ideal. Since, under the Canadian constitution, property rights are the responsibilities of Provinces, this means that these, and the collection of royalties on mineral production, should form an income stream that Provinces should redistribute to their citizens, in the form of income payments, services, or both.

The defects in our economic system do not arise from the fact that it makes use of money, but from the fact that in certain important ways, the mechanism of money is abused. If suitable policies are put into effect, the mechanism of money will prove itself to be the most efficient and equitable way of bringing to all people the means of satisfying their own individual needs and preferences.

If the State, through the Bank of Canada, were to assume responsibility for creating all of our nation's money supply, federal government revenues would be increased automatically by some $65 billions per year, and current expenditure on National Debt charges of $33.3 billions could also be substantially reduced over a period of time. This could cover a much increased part of Government program expenditures (running in the 2007/8 year at $199.5 billion)4 with a substantial decrease in taxation. In addition, the price inflation that currently is steadily taking value from the people's savings, and is the direct result of our present system of credit creation by the chartered banks, would be eliminated. So would the possibility of bank failure caused by a “run on the bank”, and our current experiences of recession, debt and “poverty in plenty”.

Alternatively, if it were felt that the present banking system should retain its present power to create credit, the mechanism of the Compensated Price could be used to balance monetary demand for goods with the supply available. It would ensure that prices were lowered within reach of all in times of recession, and profiteering and excessive capital expansion would not take place in times of “boom”.

A fair distribution of the yearly value of the nation's natural resources, including its land surface rights, could be achieved by implementing a tax on site values, whose proceeds could be distributed as a “dividend” to all citizens, so giving them a guaranteed basic income that came quite apart from any wages received from the sale of labour, thus fairly distributing to all the increased value created by the community now coming as windfall profits to speculators in real estate development.

This concept of the Dividend is the answer to the problem of employment and incomes in the age of Automation. One interesting consequence of tis use will be that, because a proportion of a person's income is already assured, people will be able to afford to go to work at a lower wage rate than before. This makes practical many fields of employment, particularly including personal service and child care, now becoming extinct at today's wage levels. It will also encourage many people wishing to engage, for instances, in the arts or study and self improvement, to launch out, backed by their dividend income which, even if not sufficient to provide complete support, makes the challenge of financing themselves a great deal more easy. Similarly, such an income would encourage older folks to retire at an earlier age, creating more openings in the labour market.

* * * * * * * * * * *


1.Should money be abolished? Give reasons for your answer.
2. Are the proposals (a) of C.H.Douglas (b) contained in this lesson, to be regarded as final solutions to the economic problem? If not, what is their value?
3 What changes are suggested in the operation of
(a) Chartered Bank current accounts, and
(b)Chartered Bank Savings (or Investment) accounts,
in order to bring the Banking system on to a 100% reserve basis?
4.In an economy where, in a given period, $100 is spent on the the production, purchase and consumption of consumer goods, $50 is spent on the production of Capital goods, and Capital goods to the value of $30 are written off:
(i) What is the total cost of production of all capital and consumer goods?
(ii) What is the cost of the goods consumed?
(iii) What is the difference between the two figures?
(iv) If this difference is financed by newly created Bank credit, who actually pays for it, and how?
5. Why is equitable ownership of a country's resources of land and minerals increasingly important with the development of automation?
6. List some of the benefits that would come to the average citizen from the reforms suggested in this lesson.

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