Monetary Reform and Social Credit

The Rise of Sovereign Risk in Advanced Economies

2010-03-14T20:35:00.000-07:00

Nouriel Roubini
Mar 12, 2010 1:09PM

The Great Recession of 2008-09 was triggered by the excessive debt accumulation and leverage of private agents – households, financial institutions and even a fat tail of the corporate sector – in many advanced economies. And while there is a lot of talk about deleveraging, the reality is that private sector debt ratios have stabilized at very high levels while, as a consequence of the fiscal stimulus to get economies out of a severe recession and the socialization of part of private losses, there is now a massive re-leveraging of the public sector with deficits in excess of 10% of GDP in many advanced economies and debt to GDP ratios expected to sharply rise and in some cases double in the next few years.

Editor's comment: I.e. Privatizing profit and socializing debt

Mobile Money

2010-03-14T11:49:00.000-07:00

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

By Chris Cook from his blog

It has been a long time since I attended an event as stimulating as last week’s 13th Digital Money Forum in London where my contribution was to briefly outline a future Money 3.0 financial architecture where banks evolve from being credit middlemen to a role as managers of direct ‘Peer to Peer’ credit creation.

While predictions are difficult, particularly about the future, actual developments on the ground are proceeding at a phenomenal pace in the developing world. Speaker after speaker outlined how different countries are converging in their use of mobile phones for payments.

Where The Money Is
When asked why he robbed banks, Willie Sutton famously replied…..’because that’s where the money is’. But in the developing world, banks are typically few and far between, ATMs are even rarer, and including alternative money transmitters like Western Union even rudimentary access to cash and payment services is difficult at best. Other banking services like credit are practically non-existent other than from local money-lenders at usurious rates.

Mobile telephone companies are moving into this financial services vacuum at a phenomenal rate. All of them establish networks of air-time re-sellers, typically local shops and agents, and users make pre-payments for mobile phone use. This in itself has had interesting side effects; one major African operator was obliged by an Central Bank to cease selling high value Phone Cards, because these were routinely being used as currency, and – to add insult to injury – holding their value better than the Central Bank issued notes.

A Ghanaian mobile payment provider outlined how conventional access to cash is available in Ghana from only around 2,000 locations, for a population of 23 million: whereas his network alone (with over 50% of the mobile phone market and over 8 million subscribers) already has, through its network of re-sellers, 300,000 points of presence, accessible to 90% of the population.

Using cheap and cheerful basic mobile phones even the least educated can simply and easily make micro-payments to each other by text message or Bluetooth, and deposit and withdraw cash, via the network of agents.

While in other countries mobile ‘Telcos’ either partner with or even buy their own banks to facilitate micro-payments, this Ghanaian operator’s shrewd approach is to work with nine banks initially, all of whom were queuing up for the aggregated ‘micro’ deposits.

In Colombia, a new service provider’s business model is simply to bring a bank together with a Telco and the tens of thousands of local ‘Mom and Pop’ shops which underpin Colombia’s economy. Perhaps the best known example is Safaricom’s MPESA payment system in Kenya, which had 15 million subscribers by the end of 2009, and is now branching out into areas such as crop insurance.

Credit where it’s due
The point I was making in my presentation was that there is no reason why the shop resellers who sell airtime – and who take in cash deposits and provide access to cash as part of the mobile money service – should not dispense with cash and receive and extend interest-free (but not cost free) credit from and to customers instead.

Such credit may be created and settled within a credit clearing union architecture. All that is required for this is a mutual guarantee agreement, similar to a credit union’s ‘common bond’; a service provider (banking as a profession) to set and manage guarantee limits and defaults; and an accounting system.

Such credit clearing has been routine between tens of thousands of Swiss businesses since 1934 on the WIR credit clearing system. More recently, in Ecuador, the FactoRepo system currently under development will enable VAT-registered businesses to discount their invoices directly with the Central Bank and thereby free up working capital. Neither Swiss Francs nor Dollars, respectively, actually change hands in these systems: instead credit obligations of businesses (trade credit) is simply used in payment of other obligations within a framework of trust, the WIR’s being private, and FactoRepo’s, public. The Swiss Franc and the Dollar are used only as the pricing reference or value standard.

Fast Forward
I believe that within a remarkably short time the developing world will be using mobile payment utilities at a minute fraction of the cost of the baroque and outrageously expensive bank-centric legacy systems in the developed world. It will only be a matter of time before such systems spread virally here, too.

The enabling factor for pervasive spread in the First World will be forms of credit and currency which are based upon a new approach to investment in the use value of land/location, and of energy, both of which are almost universally acceptable in exchange.

But that is another story, and awaits the further decomposition of our terminally dysfunctional financial system of Zombie banks.

Ideas on Monetary Reform

2010-03-09T07:24:00.000-08:00

By Tom Hagan (as posted on his blog)

[Includes edits entered on February 10.]

There are two basic arguments for monetary reform:

1. The present system induces an inexorable increase in inequality - the "unfairness" argument – “Them That Has, Gets.”

2. The present system is unsustainable over the long run, doomed eventually to collapse in just the kind of credit crunch we are now experiencing - the "instability" argument.

"Unfairness" is by far the weaker of the two charges against the existing system, though more easily shown. The Gini index, for instance, reveals the dramatic ascent of the US in recent years into the stratosphere of inequality. The problem is, people tend to dismiss such irrefutable evidence with some version of "The poor will always be with us", which is to say, "Inequality is inevitable".

JFK, given the argument that some upcoming legislation was “unfair”, responded with "Life is unfair." And so it is. If inequality is inevitable, why fight it? The old Andrews Sisters song says it all: inequality is inevitable, therefore we must simply bear it with a smile. Here it is - "Them That Has, Gets":

http://www.gather.com/viewVideo.action?id=11821949021859292

Is our present system doomed?

But if the unfairness argument can be dismissed, the argument that the system is doomed is not so easily ignored. In fact, if the instability argument can be shown to be true, then even those who ostensibly benefit from the present system will be brought up short, and, if convinced, might even join the call for reform. Something like Henry Ford deciding to pay his workers a living wage, so they could afford the cars he wanted to sell. Nowadays Wall Street bankers have convinced themselves that the unpleasantness of 2008 was caused not by any inherent instability in the system, but by various errors of judgment that can now be corrected. But suppose they believed instead that the crash in 2008 portended financial doom?

A simple thought experiment can illustrate the inevitable consequences of the present system. In recent years the benefits of increased labor productivity have flowed to the top, not out to the ever-more productive labor force still employed to produce the GDP, both here and abroad.. Average wages have stagnated, manufacturing jobs have disappeared, and bankers are getting paid more than ever. Inequality has increased. Extrapolate that out, and what happens? When the last robot is installed, meaning only capital is necessary henceforth to produce goods, and labor is needed no longer, what will happen? Who will buy the goods? The owners of capital will have enough income to purchse the GDP, but the entire former labor force will be unemployed, with no money for purchasing anything. Is that even an imaginable end-state? Isn’t it obvious even to those now reaping the benefits of the present system that the current method of wealth distribution can’t last, no matter whether it’s “fair” or not?

Forget manufacturing for the moment, and just contemplate the money system itself. “Them that has, gets” sing the Andrews Sisters. Isn’t that true? Isn’t it a common dream to acquire a pile big enough to make productive work unnecessary, enabling a life of leisure, living off “unearned income” of interest, dividends and capital gains? And once the pile is that big, doesn’t it keep growing ever bigger? Until what? Until everything is owned by one person? Again, is that an imaginable end-state? Wouldn’t society collapse long before that happened? What mechanism, short of violent revolution, prevents such a result?

“Helicopter money” to the rescue?

Many observers, from Henry Ford to Henry George, have seen the flaw of unsustainability and inevitable failure in what most of us assume to be our indefinitely sustainable system for creating and allocating wealth. Recognizing that stimulating the economy by increasing our present debt-based money supply by lowering interest rates to induce more lending might not always work once interest rates were very low, Milton Friedman and Ben Bernanke both speculated that increasing the money supply to stimulate the economy (and coincidentally redistributing wealth) could always be accomplished by printing dollar bills and dropping them from helicopters – that’s why he’s “Helicopter Ben”.

Now that the Federal Reserve can’t get the economy moving by lowering interest rates, the process has been likened, not for the first time, to “pushing on a string’. Banks, even though they can borrow money at a zero interest rate, still won’t make the loans that would end the credit crunch. Instead, they continue to sit on “excess reserves”, meaning they could make loans but won’t, until they find borrowers they trust, and are sure their loans won’t be devalued by steep deflation.

All this should trigger talk about how the present money system works, and in particular discussion of whether the current credit freeze is a manifestation of exactly the kind of ultimate instability described above: a lack of purchasing power on the part of a big chunk of the population, maybe because they have hit a debt ceiling, and just can’t afford to borrow any more. That certainly seems to be what is happening. Isn’t it time to start dropping helicopter money?

Let's issue Greenbacks instead.

True, that helicopter talk was always in jest, but there is actually some truth to it. In fact, there’s a much better way to create money and spread it around without involving the banks: have the Treasury print money, US-owned Greenbacks, and spend it into the economy for needed infrastructure. Why isn’t this being discussed? Note that the money supply increases, but US debt does not. Increasing the money supply is eventually inflationary, but only after full employment is reached will prices begin to rise. Until then, printing and spending Greenbacks does exactly what we want: increases the money supply, puts people to work, and stimulates the economy without increasing US debt or causing price inflation. So why isn’t it being discussed? At the same time, it decreases inequality. Ah, maybe that’s why talking about it is beyond the pale. It doesn’t further enrich the bankers at the expense of everyone else. Or maybe they want to avoid cracking open the door to allow government, rather than the banks, to create new money.

What caused the crash?

Which leads us back to discussing the stability of our money and baking system. Is it in fact inherently unstable? There are those who hold that it is, because in any system where banks are allowed to create money by lending it out, almost the entire money supply quickly comes to consist of the loans they make. But banks lend only principal, and what they are owed back is principal plus interest. This means they are owed back more money than exists, so the system would quickly grind to a halt, unless the banks keep increasing the money out on loan, the total debt, so enough money always exists for paying back principal plus accrued interest. So the system works as long as debt can keep increasing. But nothing can increase forever in a finite world, and the time must come when creditable borrowers can no longer be found. When that happens, the banks stop lending, and the system crashes. Banks no longer make loans, whether their “reserves” are adequate or not.

Or the banks keep lending anyway, staving off the inevitable crash by making “liar loans” to borrowers who will never pay them back. They can stave off the crash still further by packaging up the liar loans into “Mortgage Backed Securities” and selling them off to unsuspecting buyers. But eventually the loans go bad, banks start failing, and the system crashes.

Is this what is happening now? If so, the “liar loans” did not CAUSE the crash, they just allowed it to be deferred for a while, perhaps thereby making the eventual crash worse. Without "liar loans", we still would have had a crash, but sooner. Importantly, this would mean that all the “cures” based on the diagnosis that “liar loans” caused the crash can’t work – they are cures for another disease altogether. The disease can't be cured until it is correctly diagnosed.

Rebuttals to criticism of Fractional Reserve Banking

I have seen a rebuttal to this theory to the effect that no, the system can be stable because the interest paid back to the banks is not re-invested by them as loans, but is spent into the economy for goods and services. But this argument falls down if any part of the interest payment is re-lent out, and obviously that is the case in real life. So the system may crash later, but eventually it will crash.

Another argument goes that if the bank is owned by the public, so its profits go back to the body politic, then it is stable no matter what use it makes of the interest it collects. This means that a publicly owned bank like the Bank of North Dakota is fundamentally stable, whereas all of its privately owned counterparts are not. This is an intriguing idea. I would love to see it explored. How does it affect the money system in total? Suppose ALL banks were owned by the public? If a public bank practicing fractional reserve banking is stable, does that destroy the argument of the American Monetary Institute that ALL fractional reserve banking is unstable, and therefore evil?

What about the arguments against the stability of the existing system raised by the advocates of social credit? Are they obviated by public ownership of the banks?

It is truly interesting how few of these questions are ever raised by academic economists. This unfortunately gives credence to the notion that economics as it is practiced is there only to provide a fig leaf for the oligarchy, to hide what is really going on: a gradual transfer of all wealth into the hands of a few bankers. Can this be true? How can academic economists, almost all of them, blithely assume the stability of our existing money and banking system, without questioning whether it is doomed to crash?

The reality of modern banking

2010-03-06T09:24:00.000-08:00

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

By Bob Beresford, whose website is here

When Fractional lending started it was pure fraud ( still is, technically )....the money changers were pretending they had more money/gold deposits than they did to make extra loans and extra profit.
They would traditionally lend out as much expanded money as possible to make more profit and gain more economic control. The 2nd US bank 1816 - 1836 had its member banks creating paper money/loans based on a capital holding of 10%gold. That was a 10 to 1 free expansion, but based on a retail bank's capital in Gold.
Someone quoted Katherine Austin Fitts as saying that pre 2008 crash they were just illegally creating derivatives in a 10 to 1 type ratio....9 not repayable ? So they'll get away with what they can - those Merchant banks holding most debt and pulling the strings - but they need/want to be able to create an economic rhythmn and have the retail banking network locked into that.... eg via Reserve Bank controls.

The basic retail Fractional system, at least since the war, has been holding back some deposits - usually 10% - as security/reserves while the other 90% got lent out. So the bank's Capital position wasn't so stringent. This - of course - means the money supply is being controlled via Quantity, while the money recycles as deposits in ever decreasing circles. So the Reserve could fix deposit ratios ( Fractionally ) and Prudential requirements, working to a plan. Canada was running a huge 25% ratio at one stage ( 1956-81 ? ), no doubt with prudent lending criteria.....and it worked okay. Controlling money via quantity is the best way.

But the big change was done to chime in with world Neo-Liberalism ( as endorsed by the IMF , eg via their Shock Therapy program ....we got the full impact in NZ, from 1984 on, following massive IMF debt ).
That change was to control money via pricing, while reducing national controls and barriers ( eg Trade barriers ), and also floating currencies.
This allows the Carry Trade, and the big Banks and Financialists, money changers, speculators, to take over, as everything gets Internationalised, manipulated and interdependent and national Govs lose economic control. And the New World Order - world government based around economic control by big banks and their favoured World corporations - is ushered in.

The shift in retail banking - as per Basel 1, 1988, was towards banks basing lending on Capital held, with various ratings - called Tiers. While the loan itself had various Risk Weightings. Notably, this frees up the money supply and will accelerate it, since Deposit ratios as such were suspended by it ( hence you could now lend All the Deposits you got - not just 90% - constrained only by your Capital ratio). This is commonly only 8% ( eg 4% Tier 1, 4% Tier 2 ) on a full risk loan, for USA banks. But Foreign Central banks are given a 0% risk rating, so big Merchant/retail banks can lend to them with even less Capital banking ( it's all set up cleverly to allow more business and control by the big banks ).

BUT...note that banks are still supposed to be lending out against their Deposits....in a perpetual balancing act, probably balancing books every night and topping up off the short term money market, other banks, the central Reserve bank on its Overnight rate etc. That's the US Fed rate, and in NZ it's the OCR ( official cash rate ) and in NZ it works a bit differently. Our Reserve sets the base market money/interest rate by offering Interest, say 2%, for the retail banks to leave their money with the Reserve. So the market rates then build above that. I think the US Fed just sets its base money rate as a wholesale charge for issuance ( currently zero ? ). The NZ Reserve will cautiously follow BIS rules and US FED initiatives ( even the dreaded Securitisation ) ...as does Australia.
The Reserve banks now expect to control money via pricing ( The NZ Reserve ignores retail bank deposit ratios ), following foreign leads - ultimately BIS and IMF.

The main point about this method is that is Wrong....that's why the money powers push it. It will put a country more into debt and dependency, while International money controls the world. And the IMF wants to act as a new world central bank, basing on its SDR's - Special Drawing Rights - which are just money created from nothing.

The big bankers have always been International, and parasitic, but have used America and its Dollar for colonisation, since 1944. They own the Federal gov ( and the NZ gov ) but under your Federal system the States have much power and there's the great chance for a State revolution in public banking. It would be a chain reaction. Once one state went, clusters would form. Oregon or Cal would tip the whole Western seaboard....and then there could also be a North West grouping around Alberta ( with its huge resources ) and Montana and North Dakota. And elsewhere ?
But act asap because they're now trying to destroy the US and its dollar to allow a new world system to be imposed. And meanwhile, I'm sure Geithner and co will try to legislate you out of existence before the State banks start. Note that Geithner and Paulson are on the board of the IMF. I predicted 18 months back that USA would be pushed close to civil war. It's being bled , currently, in the dreaded debt deflation death spiral.
Money supplies, at least at grass roots/Main st level are being contracted most places. They're prepping worldwide for public Asset Sales....which will finally hit America too. I figured the plan was for China ( and others ) to buy you up big time.

The thing about State banking is that it stabilises the money supply and gets it flowing the right ways and places ( money is like a blood supply ) - especially if you spend into Infrastructure. US states have much power and leeway, incl when working with the Federal money supply. And now, it's nearly all electronic, so money expansion is easy. Couldn't do that easily with finite Fed paper currency.

When this group first started I said we have to get all our facts straight, eg via technical people....some, happily, have come on board. And then make sure our State Bank protocols don't exceed whatever the Private banks do. Then no-one can criticise us unduly....we can say -' but BOA etc does that and the State has greater real assets than they do, in any one area '.

Note here that while US banks often play looser than the BIS standard, loans are not supposed to exceed deposits much, or for long. Happens temporarily, and other banks can and do join in the action as they lend short term to the bank making the loan ( who is without enough instant funds ), so all benefit and are part of the rhythmn. And banks must also have specific Reserve requirements of cash etc to cover normal activity. This level is set by the national Reserve Bank and all/part may even be held at the Reserve ( think US Fed does hold part of it? ). After that , they can lend all deposits until they max out their Capital ratios. Then, they can increase their Capital ( mainly done via shareholder stock ) or otherwise they can revert to the older Deposit Ratio fractional system and start holding back eg 8-10% of incoming deposits, or borrowings on the wholesale money markets, before lending out the rest.....that's what happens in New Zealand anyway.

So....main point of the State bank is to get the money supply adequate, flowing and in step with the Real Economy . It is the lifeblood that Facilitates real economic productivity....not an end in itself, since it's only paper and data on computers. Meanwhile, Wall St is strangling the Real Economy with paper and electronic tricks and Compounding Interest . They own the Feds and National Gov and so the States need to take economic control for their people.

It won't be hard to improve on what Wall St does, and we can say that various systems are workable and beneficial to some degree, from the grassroots systems, eg where work hours are traded, to a full social system like Social Credit, which is also more complex to set up and regulate.
But meanwhile, noting that it's possible to morph a system later, I believe we should push the basic system that starts easily and gets most impact on the whole economy.

That's essentially the Ben Franklin and co State system, where they controlled the money supply via Quantity, while monitoring the results. They didn't care how many pounds they actually released, as long as the economy was bouncing, and obviously it would grow. Abundance equals Good. So they loaned to farmers at 5%, no doubt at Simple Interest - Compound Interest should be illegal - and spent into Infrastructure, creating cash as necessary. Result was spectacular.

So lets follow that, noting that States now have contracted money supplies at street level. And even deflation. First question then is how to get adequate money expansion using a Federal currency ( unlike Ben Franklin's State money ) ?
For a while we thought here we could create loans purely based on Capital ratios...and States have huge capital. But even if restricted to Deposit money - eg paid in as Tax, revenue or bonds - there'll be ways around it. Ellen and I both thought of rolling loans over indefinitely till adequate revenues came in. As long as the State sets up various departments, eg State bank, development bank, Retail banks ( buying out an existing private chain ? ), Ag and Industry funding deps, Infrastructure Department, Revenue deps....one thing can be paying off another........even slowly. Eg , the parks dep can borrow money from the state bank, based on its real assets, and then use that for park improvements, hiring workers and releasing more money into the state. There would be a strong policy of keeping cash in state hands and borrowers would have to use State retail bank accounts. The State Bank would run low Simple Interest, and soon drive down private bank rates. It can systematically buy out mortgages this way, even forcibly, by legislation ( and then even use Securitisation to free up more cash ! At least these mortgages would be State owned and guarranteed ).

The system of one state sector lending to another creates much debt that is Internal only - it hurts no-one and can be rolled over. It's a solution for creating money, within existing boundaries. Since most money creation now is electronic, it's easy. It would vitally ease the Federal strangulation of the money supply. And Private banks in the state initially benefit because more money is in circulation.

The ideal solution is for States to simply Create more new money outright( as the Fed can ) and spend it into Infrastructure etc. But that illegally breaches the Fed's monetary monopoly, so we have to think of clever ways to expand the money supply, and productivity, that are less blatant.

So....worth pushing for a state bank, eg via Referendum. California is ideal there. Try raising taxes somehow at same time ? Schwarzeneger is a corrupt waste of time, but Jerry Brown may well back this, and he's running in the mid year Gov elections.

We need to have basic pamphlets or email-type short writeups, even with pictures, for different audiences, that can be bounced around. Making sure we don't get our facts wrong at all.
The current banking system is an arbitrary creation, and it does create money from nothing, but we can still rescue the economies, I'm guessing, while working within its rules.
It's been set up by the Merchant banks, to suit their plans, and relies on a money supply being expanded by constant re-lending ( which is fraud ) to create more money.
Most people don't realise that it's actually new money being created, but it's backed by deposits....same money getting deposited over and over. As all power and Interest flows to the private banking network.
So any trick a State bank uses to expand its money supply is no worse. Eventually, the fed Gov or States should just admit that money is being created and withdrawn to suit an economic situation....as Ben Franklin did.

To understand why fractional banking/re-lending is a fraud, note that the Private system treats money as having real value, the same as a material object , like gold. If you can't pay back the paper, plus Interest, then the banks want a real payment - like gold.....or your house.

But you cannot lend real objects twice ( or 9 times ) at exactly the same time. Couldn't do that with Gold, either, until banks came along. If you had a great lawnmower costing $1000, you could hire it out and get some cash...but only once at a time. But the private banking system is at any stage lending the same hunk of money - or bits of it - to many people. And without constraint by deposit ratios now, so that's to even more people. And wanting Interest - more money - paid from every bit of re-lending. Which must be unworkable, long term, sucking the money supply/blood dry. Therefore, $1000 of money cannot be worth the same as a $1000 lawnmower, which can't be in several different places at once. Since the money is in several places at once - thanks to swappable paper and electronic data - then it can't be real wealth or the equivalent.
It therefore must be just a device for exchange....which is what we thought of it originally - a claim on real wealth, that you earned or inherited.

This fraud of lending the same article/substance/money to several customers at the same time would be more obvious if only one bank existed....and much less clear when there are many banks linked by a common Reserve.

Therefore, making money out of money, via compound Interest, ultimately erodes the whole system, and the only honest way to do things is for the State and/or National gov to control the money supply, as a fluid and arbitrary thing, in the best interest of the citizens. While admitting that it is simply creating and extinguishing money as needed, to benefit the people. The money would be flowing in the right ways and as 'deep' as possible - eg via Infrastructure - to get best results. And not running loan cycles and bubbles to punish the people and benefit the private banks.

Could people please read this properly and think hard first if responding too or about it ? We need more thought and less emails to be going places.

Bob

PS - if anyone wants to sing about their income tax, they can always download free my Taxation song off my whacky music website ( bobberesford.com). It's a bit of an anthem.

Bob Beresford
bob@bobberesford.com

Unitising Residential Property

2010-02-28T08:11:00.000-08:00

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

Written by Chris Cook - September 03, 2009 9:38 AM
Page 1 of 2

Only in Scottish law is there to be found a pragmatic, “not proven” middle way between the absolutes of guilty and not guilty. Perhaps such open-minded pragmatism is the reason why the Holyrood parliament's Economy, Energy and Tourism Committee listened intently earlier this year to the unconventional financing options which the Nordic Enterprise Trust (NET) has developed in Scotland with support from Norwegian state agency Innovation Norway.

It was clear from informal discussions with members of the Edinburgh parliament that the effect of the credit crunch on Scottish housing is a far greater political hot potato than renewable energy, the subject on which we were giving evidence. The housing crisis is currently manifesting itself in several ways, including a rise in repossessions and homelessness; a shortage of development credit, particularly in the private sector but extending to the public sector; and the effect of the cessation of development on affordable housing.

We believe that there is a simple but radical partnership-based new solution – co-ownership – which we are prototyping in Scotland but could be applied throughout the UK and even internationally.

Public And Private

We all take many things for granted, and one of these things is that when say public sector we mean “owned by government” and when we say private sector we mean “owned by a limited company”. But, as the city of Glasgow has realised, there is an emerging alternative to the limited company. Enter the UK limited liability partnership (LLP), which was quietly introduced in April 2001. The LLP is the simplest and most flexible legal entity ever created; the agreement between members is totally open, to the extent that it need not even be in writing. It combines the best qualities of a limited company with the co-operative values of a partnership.

Glasgow has at least four municipal LLP organisations, which engage with private sector partners to provide services such as car parking, market premises, and buildings for the use of the local community. But these municipal LLPs leave financiers and ratepayers alike on the outside, which means that they are just as constrained by the credit crunch as any other organisation. The “land partnerships” which NET proposes are not organisations but frameworks for investment in municipal assets of all kinds, in particular for investment in sustainable and affordable housing.

Introducing Public Equity

A land partnership does not own anything, employ anyone, contract with anyone or even do anything. It is a simply a framework agreement between the various stakeholders. Land ownership remains with, or is transferred to, a public custodian, probably a local municipality.

We are not asking land owners to give their land away but to invest the value of the land/location, i.e. the right to occupy it exclusively. Whether or not it is municipalities or councils who invest the land, planning permission also has a value and municipalities and councils would invest the value of that consent. Once materials, labour and services – or money to pay for these – have been deployed, then valuable new housing is the result.

Once building has been completed, occupiers pay an affordable rental for the use of the investment made in the land/location. This “capital rental” will then be indexed to a suitable measure of inflation. It is also possible to imagine a separate payment purely for the use of the location.

Unitisation

This is the alchemy. The pool of rentals which we have created is simply divided into proportional units and investors are invited to buy these units of public equity. So units are shares...but not shares as we know them.

Investors who have seen their returns vanishing as interest rates spiral towards zero would be ready buyers of an investment such as this. Units offer a reasonable, index-linked return based on property, but with low risk since affordable rentals are by definition more likely to be paid. Units are a perfect investment for risk-averse investors such as pension funds (although not UK pension investors – for tax reasons), sovereign wealth funds, and even Islamic investors (given that no debt or interest is involved).

To all intents and purposes the proposed “rental pools” are identical to real estate investment trusts (REITs), but with the key attribute that they are redeemable against property occupation. Unlike conventional units, which typically trade at a discount (occasionally at a premium) to the market price of the underlying asset, if the market value of the units were to drop below the market value of the rental stream then property occupiers would buy and redeem them.

For occupiers there is an end to any stigma of tenancy as they literally become co-owners and have a responsibility to maintain the property in good order. If they are able to pay more than the affordable rental, they automatically buy units. Even if occupiers have no spare cash, those who either assist in the initial development of the property or subsequently maintain their property in good order will effectively receive “sweat equity” units. This is because they will be able to keep the maintenance/ depreciation allowance applied to the building (since land/location does not depreciate, although its value may change).

A borrower under a mortgage contract may be foreclosed – no matter how much equity he may have – if, for some reason such as unemployment or a credit crunch, refinancing is impossible.

In co-ownership, on the other hand, an occupier may only be evicted if he fails to pay the rental and has no more units of equity to use instead of cash.

2010-02-28T08:10:00.001-08:00

Sustainable Development

The conventional transaction-based property development model is well described as “the four Bs: Buy, Borrow, Build, and B****r Off”.

Under the existing model, developers have no interest in energy efficiency or good quality since these cost money and reduce transaction profit. In a land partnership development, the individuals or enterprises (such as housing associations) who manage development have an interest in high standards of quality and energy efficiency because this lowers the cost of occupation over time and makes the units they will receive more valuable.

The approach for contractors is firstly to invite them to invest their costs, which may be possible for businesses such as architects and engineers but not so straightforward where there are costs of materials and labour to consider. However, whether or not contractors are willing or able to invest their costs, they will be expected to receive an agreed profit margin in the form of units, and this will align their interests with those of other investors. In this way, we minimise the amount of development risk capital needed from public or private investors.

Once the developed property is complete and occupied, the manager member – again, possibly a housing association – also has an interest in doing a good job because that will increase the value of their proportional partnership equity share in the rental.

Unlocking Public Equity

Development of new housing takes time and development credit is in short supply. So we propose that some of the investment tied up in existing housing stock should be recycled and used to develop new housing. We propose to simply replace existing government, municipal and housing association borrowing with units of a new class of Scottish equity, which dramatically cuts financing costs.

Defusing The Debt Bomb

New medicines are often tested on the most desperately ill patients and we believe that our proposal could first be tested as a solution for those increasing number of Scots who are currently suffering the trauma of losing their homes to debt. So distressed properties would be transferred to a custodian, an affordable and index-linked rental would be set, and units in the resulting “pool” of affordable rentals would be sold to long-term investors, with the scheme managed by local housing associations.

For the banks, the exchange of distressed debt for units would give rise to an asset with far more resale value than any conventional security or restructured loan, which retains a debt obligation. Moreover, the fact that the rentals composing the income are affordable will mean they are more likely to be paid, and this relative certainty should justify a higher price and lower rate of return.

In this way, distressed Scottish borrowers may shake off the shackles of mortgage debt and the Scottish government's limited funding to alleviate their plight may be deployed as a revolving transitional investment in the pool while new investment is introduced by skilled Scottish financial services providers.

A New Wave Of Housing Investment

Using the co-ownership approach, international and domestic investors may refinance existing UK public and housing association debt. The massive resulting pool of development credit could then be deployed in networked sustainable development of affordable housing throughout the UK in such a way that the interests of all stakeholders are aligned.

It's not rocket science and (tongue-in-cheek) the NET even has a name for Scottish use of what is essentially a new form of partnership-based national equity: the Scottish Futures Trust.

This is an expanded version of an article published in the summer 2009 edition of Scotregen, the journal of SURF, Scotland’s independent regeneration network. Chris Cook is Principal of the Nordic Enterprise Trust. He is a well-known commentator and expert on the petroleum markets and peer-to-peer finance. He was formerly Director of Compliance and Market Supervision at the International Petroleum Exchange.

Energy Pools - Scottish Energy Institute 11 11 2009

2010-02-27T11:49:00.001-08:00

Check out this SlideShare Presentation:

Energy Pools - Scottish Energy Institute 11 11 2009

View more presentations from ChrisJCook.

Peer-to-Peer Finance: A Flight to Simplicity

2010-02-26T08:13:00.000-08:00

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

Link to article source here

By Chris Cook
February 25, 2009

Internet activist John Gilmore famously said, "The Internet interprets censorship as damage and routes around it." A key event of the Internet age was the invention of Napster, the direct online music-sharing program that helped erode the business model of the global music industry. This capability of the Internet to route around middlemen is becoming more apparent. A reader of the Financial Times in December won £10,000 for identifying peer-to-peer lending through the Internet as the "next big investment idea."

How such a directly connected financial system could work is a question that has interested me for almost a decade.

At a recent conference in Tehran on the current financial crisis, one of my fellow speakers observed that "it is not possible to solve 21st century problems with 20th century solutions." I agree. The emergent partnership-based enterprise model, however, has evolved in response to the challenges of this direct Internet connectivity.

Finance consists of three things: credit, which facilitates trade and enables the creation of productive assets; investment, which consists of financial claims over productive assets such as secured debt (e.g., mortgage loans); and equity, which is an ownership interest in a corporation, and typically exists in the form of shares.

Credit and investment may be achieved without the intermediation of banks. Since bank capital will be further depleted as the credit crunch spreads into the productive economy, peer-to-peer finance offers a solution from an entirely unexpected direction.

Direct Credit

Trade sellers have extended credit to trade buyers for thousands of years. As trade has developed nationally, regionally, and globally, one of the key enabling factors has been credit intermediation by banks. This intermediation protects sellers by taking on the credit risk of buyers and enables trade to flow by providing liquidity to sellers.

It is possible to dispense with a credit intermediary and provide such a framework of trust through the use of an agreement—a guarantee society—whereby sellers and buyers collectively provide a mutual guarantee. This mutual guarantee may then be supported by provisions made by both seller and buyer into a default fund in the hands of a neutral custodian.

A service provider could then set guarantee limits, operate the accounting system, and deal with defaults in return for a fee. The crucial advantage for banks of such a guarantee-society credit-enterprise model is that they would no longer have to put capital at risk by creating credit based upon it.

Direct Investment

When we distinguish the public sector from the private sector, we are actually distinguishing between enterprises and assets that are owned by the state and those which are owned by that specific enterprise model known as the joint stock limited liability corporation.

In recent years, media attention has focused on developments and events in the field of credit. The emergence of new generations of alternative investment vehicles—such as income trusts, real estate investment trusts, exchange traded funds, and hedge funds constituted as limited partnerships—has passed relatively unnoticed.

In particular, there has been an explosion in the United States of the use of the simple and flexible new partnership-based Limited Liability Company. In Britain and elsewhere, an even simpler form—the Limited Liability Partnership—is emerging at a phenomenal rate for purposes never intended by legislation introduced with the intention of limiting the liability of partners in professional partnerships.

Such partnership-based entities may be used as framework agreements—not organizations—which bring together investors with users of investment in a capital partnership. In this way, it is possible to create new revenue- and production-sharing mechanisms for direct investment in productive assets of all types, and particularly in real property and in energy assets through what I call "unitization."

Unitization

Let's consider how this might be used to refinance a portfolio of distressed mortgages. The properties are transferred to a neutral custodian, and an affordable rental is agreed upon. That rental is then index-linked. The resulting Rental Pool is divided into proportional units which are allocated between investors and a suitable management consortium.

For the "co-owner" occupier, this is a new form of rent-to-buy, since any amount paid in excess of rental will buy units. For the "co-owner" investor, units provide a reasonable, index-linked, secure revenue stream, ideal for risk-averse long-term investors such as pension funds. For banks, this is an optimal form of refinancing through a "Debt/Equity Swap."

Similarly, we may finance a wind turbine simply by creating units redeemable in, say, 10 kilowatt hours of energy and selling these to investors. In the United Kingdom, the sale of between 30 and 40 percent of production finances the turbine, and with a few percent of production to a manager, the balance is pure surplus.

Direct peer-to-peer investment gives rise to shares, but not as we know them. Once again, we see a role for banks as service providers, appraising investments, advising investors, and providing liquidity—all classic investment banking roles. As with direct peer-to-peer credit there is again no need for banks to risk capital by creating credit based upon it.

The enabling factor for a new generation of peer-to-peer finance is a new generation of networked partnership-based framework agreements and entities. The work of visionaries like David Johnson of New York Law School and Oliver Goodenough at the Vermont Law School in creating the new Vermont Virtual LLC is a major advance in this direction.

Outcomes

A generic clearing-union network of direct financing will enable a simple but radical new approach to global economies. It could enable systemic fiscal reform based upon taxation of privilege rather than earned income, and it also offers new solutions for financing public assets. Most exciting of all, it enables a new networked generation of global markets, and even the potential for a "New Settlement"—a Bretton Woods II—establishing a new global architecture for world trade.

Chris Cook was formerly director of the International Petroleum Exchange, and is now a strategic market consultant, commentator, and enterprise architect. He is currently developing new partnership-based enterprise models and financial products based upon their application to Internet market networks.

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Related Resources:

* What Should Bretton Woods II Look Like? (Commentary)
* Reach Out and Enrich Someone (Briefings)
* M-PESA: Mobile Money for the "Unbanked" (Policy Library)
* The Digital War on Poverty (Commentary)
* The $100 Laptop: The Next Two Billion People to Go Digital (Policy Library)
* Renewable Energy Hedges (Innovations)

The Alberta Social Credit League, Constitution and By-Laws, 1958

2010-01-18T13:57:00.000-08:00

Please click on each individual frame for a readable view.
The original photo files of a much higher quality are available
from helgenome@hotmail.com

Mother of all Carry Trades Faces an Inevitable Bust

2009-11-02T12:31:00.000-08:00

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

Posted: Sun, 01 Nov 2009 21:22:33 -0600
From the FT: By Nouriel Roubini

Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage- backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

The writer is a professor at New York University’s Stern School of Business and chairman of Roubini Global Economics

Alberta Social Credit Platform In The Early WWII Years

2009-08-26T07:41:00.000-07:00

In order to comfortably read the text in this flyer, please click on the photos below

The flyer from the early war years, reproduced below, gives a snapshot of the "Alberta Experiment" during its heyday and provides an interesting view of the issues of the day. The flyer was kindly provided by an elderly farm couple in West Central Alberta

Portrait Of A Reformer - Social Credit Founder Clifford Hugh Douglas

2009-08-15T07:46:00.001-07:00

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

The following notes are taken from Major Clifford Hugh Douglas’s book Social Credit (originally published in 1924), Douglas Centenary edition, an Institute of Economic Democracy publication, 1979.
IBSN: 0-920392-26-1
Library of Congress Catalogue Card No. 66-26837

About the author . . . .

The late Clifford Hugh Douglas, M.I.Mech.E., M.I.E.E., consulting engineer, economist, author and founder of the Social Credit movement, was born in 1879 and died in 1952. Among other posts which he had held in his earlier years were those of engineer with the Canadian General Electric Company, Peterborough, Canada, Assistant Engineer, Lachine Rapids Hydraulic Construction, Deputy Chief Electrical Engineer, Buenos Airies and Pacific Railway, Chief Engineer and Manager in India, British Westinghouse Company, Assistant Superintendent, Royal Aircraft Factory, Farnborough (England). During the First World War he was a Major in the Royal Flying Corps and later in the R.A.F. (Reserve).

After retiring from his engineering career, he and his wife ran a small yacht- building yard on Southampton Water for several years. The combination of beauty with functional efficiency in a successfully designed racing yacht had a special appeal for him. When he lived in an old water mill in Hampshire he used the waterwheel to turn a dynamo which lit and warmed the house as well as providing power for lathes and other tools. Later, when he moved to Scotland, many of his friends and followers remember helping to build his small hydroelectric powerhouse, sited on the local burn which ran through his land. Since decentralization of economic power was of the essence of his teaching, it should be put on record that he practiced what he preached.

One of his most interesting jobs, just before the 1914 war, was that of conducting preliminary experimental work and preparing plans and specifications for the electrical work on the Post Office Tube in London, with later supervision of the installation of plant in what was to be one of the earliest examples of complete automation in the history of engineering. While there were no physical difficulties about the work, he used to get orders from time to time to slow it up and pay off the men. When the War came however, he noticed that there was no longer any difficulty about getting money for anything the government wanted.

It appears that he was sent to Farnborough 1916 to sort out ‘a certain amount of muddle’ in the Aircraft Factory’s accounts, so that he had to go very carefully into the costing. This he did by introducing what were then known as ‘tabulating machines’ – an approach which anticipated the much later use of computers, and which drew his attention to the much faster rate at which the factory was generating costs as compared with the rate at which it was distributing incomes in the form of wages and salaries. Could this be true of every factory or commercial business?

Douglas then collected information from over 100 large businesses in Great Britain, and found that, in every case except in businesses headed for bankruptcy, the total costs always exceeded the sums paid out in wages, salaries and dividends. It followed that only a part of the final product could be distributed through the incomes dispersed by its production, and, moreover, a diminishing part as industrial processes lengthened and became more complex, and increased the ratio of overheads to current wages. Unless this the defect in monetary bookkeeping were corrected (which in his view was perfectly practicable), the distribution of the remainder must depend increasingly on work in progress on future products (whether wanted or not), financed by loan credit, export credits, sales below cost leading to bankruptcies and centralization of industrial power, or by consumer borrowing. The result must be predictably disastrous – in fact, the modern dilemma between mass poverty through unemployment and growing inflation, debt and monopoly, with waste of human effort and the earth’s resources to maintain ‘full employment’, requiring continuous economic ‘growth’ and economic warfare between nations leading towards military war.

This original engineer’s approach, which regarded the monetary system much as Douglas, a former railway engineer, had regarded the ticket system, as a mere book-keeping convenience for the efficient distribution of the product, was completely alien and unacceptable to the economic theorists of the day. Only one Professor of Economics (Professor Irvine of Sydney, Australia) expressed agreement with it, and he resigned his position shortly afterwards. This general condemnation by the economists was, however, along two different and contradictory lines, viz., 1. That the cost-income gap was an illusion due to Douglas’s failure to realize that the costs all represented sums paid out at a previous date as wages, salaries, etc. – ignoring the time factor which was the essence of his analysis; and, 2. that it was, on the contrary, a glimpse of the obvious, of no significance whatever, since this was the immutable way in which the monetary and economic system must work for the stimulation of new production and maintenance of the level of employment – i.e., ignoring Douglas’s radically different objective of production for the consumers’ use and not for ‘employment’ or other monetary objectives.

When the Great Depression of the 1930’s grimly confirmed Douglas’s diagnosis and gave him a worldwide reputation and following, his critics explained that he had mistaken a temporary lapse for a permanent defect in the monetary system; but subsequent events have, by now, so continuously fulfilled his predictions that this criticism is no longer credible. Despite rejection by the Economic Establishment of the day, Douglas was called upon to give evidence before the Canadian Banking Inquiry in 1923 and the Macmillan Committee in 1930, and undertook several world tours in which he addressed many gatherings, especially in Canada, Australia and New Zealand, and also at the World Engineering Congress in Tokyo in 1929. In 1935 he gave an important address before the King of Norway and the British Minister at the Oslo Merchants Club, and in the same year he was appointed Chief Reconstruction Adviser to the ‘United Farmers’ Government of the Province of Alberta, Canada, which later in the year elected the first Government to bear the title ‘Social Credit’. The Canadian Federal Government, however, frustrated all attempts to implement Douglas’s advice by disallowing the legislation, some of which was passed, and disallowed, twice; after which although the Party remained in power for over 30 years, it progressively abandoned the principles on which it was first elected. It should be placed on historical record, as a precedent, that two provincial ‘dividends’ of little more than token value, were nevertheless paid at one period to the citizens of the Province, and that, while still acting under the advice of Douglas’s representative, the Province paid its way without further borrowing, and drastically reduced the Provincial debt.

This diversion of Douglas’s ideas into the dead-end of Party politics has received far more publicity than the original and experimental approach to politics which is signposted in his later speeches and writings from 1934 onwards, notably in his five major speeches in England: The Nature of Democracy, The Tragedy of Human Effort, The Approach to Reality, The Policy of a Philosophy, and Realistic Constitutionalism. In 1934 a Social Credit Secretariat was formed under his Chairmanship, which started an Electoral Campaign involving the use of the vote for purposes desired by the electors rather than by Parliament or the Political Parties. This was followed by a highly successful Local Objectives Campaign along similar non-party lines, and a Lower Rates and Assessments Campaign which saved the British taxpayers many millions of pounds without loss of services, by reducing loan charges. The Second World War put an end to these activities on an organized national scale, and dispersed them, with the Social Credit Movement, into a decentralized force, better adapted to the present crisis of World centralization.

In the final phase of his life, roughly from 1939 to his death in 1952 Douglas consolidated his ideas in depth, contrasting very clearly the philosophy which underlies them with that which activates the Monopoly of Credit. Although the best known of them, which has already exercised considerable influence in the World, lie in the economic sphere: the concepts of real credit, the increment of association and the cultural inheritance, and the proposals of the National Dividend and the Just or Compensated price – his political ideas, though as yet little known, are if anything of greater importance. They were always worked out with a characteristic practicality, taking account of the feedback from the course of events. No one else has thrown so much light on the true nature of democracy, as distinct from the numerical product of the ballot box; on the need for decentralized control of policy and hierarchical control administration; on the freedom to choose one thing at a time, on the right to contract out, on the Voters’ Policy and the Voters’ Veto. In his last address given in London to the Constitutional Research Association in 1947, he put forward his last proposal for the rehabilitation of democracy: the Responsible Vote, in which the financial consequences of his open electoral choice would be, for a time, differentially paid for by the voter in proportion to his income – a literally revolutionary suggestion which demands an inversion of current ideas about anonymous, irresponsible, numerical voting.

Hugh Gaitskell, a former Leader of the Labour Party once sarcastically described Douglas as a ‘religious rather than a scientific reformer’. Perhaps he was more right than he knew! It may be that Douglas’s thinking on the subjects of philosophy, policy and religion, and the special meaning he gave to those words, will turn out to be his most valuable contribution to the restoring of the link between religious belief and principles which govern society. In his view, a ‘philosophy’, i.e., a conception of the universe, always expresses itself as a ‘policy' – a distinctive long-term course of action directed towards ends determined by that ‘philosophy’. ‘Religion’ (from the Latin religare, to bind back) is not just a set of beliefs such as are expressed in the Christian creeds (which constitute a ‘philosophy’) but is precisely the ‘binding back’ of these ideas to the reality of our lives, not only individually, but in the political and economic relationships of our society.

The policies of centralization and monopoly now being imposed upon the World through the closely related agencies of Finance-Capitalism and Marxist Socialism derive from a ‘philosophy’ fundamentally different from, and opposed to, that of Trinitarian Christianity, which was, however imperfectly, expressed in our Constitution, our Common Law, and the progress towards personal freedom which had been made, especially, in Britain and the Commonwealth. At the time Douglas first put forward his ideas and proposals for carrying forward this traditional policy to its next stage, its Christian basis could be taken for granted as mere ‘common sense’. Now, that can no longer be taken for granted and it has become necessary consciously to distinguish the policies at work in our society, and to relate them to the fundamental beliefs which gave rise to them. In this sense, therefore, ‘Social Credit’ is the social policy of a Christian ‘philosophy’, and before the end of his life, its founder made this explicit, rather than, as in the beginnings, implicit.

California, Take Heart!

2009-07-09T07:59:00.000-07:00

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

California Dreamin': How the State Can Beat Its Budget Woes
By Ellen Brown

As goes California," says the adage, "so goes the nation." All eyes are therefore on the Golden State as it attempts to solve its $26 billion budget deficit. The world's eighth largest economy is not going quietly into that pit of debt and devastation that has devoured Third World countries whole. The State's voters have drawn a line in the sand against further tax hikes, while Democratic leaders have drawn a line at further cuts in services or selloff of public assets. State legislators are deadlocked, caught between the rock of tax ceilings and the hard place of debt limits.

"Expect the best and accept nothing less," says another adage that typifies the attitude sometimes called "California dreaming." You create your own reality. Instead of trying to prop up an old model that has failed, you can dream up a new one. If anyone can come up with an original solution to the problem, Californians should be able to. But what? While waiting for developments, Governor Arnold Schwarzenegger has started paying the State's bills with IOUs ("I Owe You"s evidencing debt, technically called "registered warrants").

Hmm . . . Pay the bills with IOUs. Not a bad idea! That was, in fact, the original innovation that got the American colonists out of their financial straits back in the 18th century, when they lacked the silver and gold used in the Old World for conducting trade. Money, after all, was just a medium of exchange, an acknowledgment of goods and services delivered or a debt owed. The notion that the government could pay in paper receipts was first hit on by the governor of the province of Massachusetts in 1691, when he needed money to fund a local war. The use of a paper currency had been suggested in an anonymous British pamphlet in 1650, but the proposal was modeled on the receipts issued by London goldsmiths and silversmiths for the precious metals left in their vaults for safekeeping. The problem for the colonies was that they were short of silver and gold. The Massachusetts Assembly therefore proposed a different kind of paper money, a "bill of credit" representing the government's "bond" or IOU. The paper money of Massachusetts was backed only by the "full faith and credit" of the government.

Other colonies followed suit with their own issues of paper money. Some were considered government IOUs, redeemable later in "hard" currency (silver or gold). Others were issued as "legal tender" in themselves. They were "as good as gold" in trade, without bearing debt or an obligation to redeem the notes in some other form of money later. The new paper money not only made the colonies independent of the British bankers and their gold but actually allowed the colonists to finance their local government without taxing the people. Colonial assemblies discovered that provincial loan offices could generate a steady stream of revenue in the form of interest income by taking on the lending functions of banks.

The same solution was employed in other countries later. When Argentina's government workers were faced with massive layoffs, their unions persuaded six state governments to pay them instead with state bonds or IOUs in small denominations. The IOUs could then be used to pay for state services and taxes, and everyone in the local economy accepted them in trade.

There's Just One Problem . . .

Why couldn't California do the same thing? The problem with calling its IOUs "legal tender" today is that the ruse violates the U.S. Constitution. Article I, Section 10, says, "No State shall . . . coin money [or] emit bills of credit." The Cornell University Law School Annotated Constitution gives this definition:

Within the sense of the Constitution, bills of credit signify a paper medium of exchange, intended to circulate between individuals, and between the Government and individuals, for the ordinary purposes of society.
U.S. Supreme Court cases are cited from the 1830s, in which "interest bearing certificates, in denominations not exceeding ten dollars, which were issued by loan offices established by the State of Missouri and made receivable in payment of taxes or other moneys due to the State, and in payment of the fees and salaries of state officers, were held to be bills of credit whose issuance was banned by this section."

That all seems pretty clear cut, until you read a bit further. Article I, Section 10, also says that no State shall "make any Thing but gold and silver Coin a Tender in Payment of Debts." When was the last time any State paid its bills only in gold and silver coin? The States could argue that the Constitution needs to be updated.

They could make some other compelling arguments. The States agreed to give up their right to issue their own currencies because they delegated that power to Congress. Article I, Section 8, enumerates among the powers given to Congress, "To coin Money [and] regulate the Value thereof." Scholars continue to argue about the meaning of "to coin money," but the Constitution clearly gives no entity except Congress the power to create money and regulate its value, and Congress failed to properly husband that authority. It issued coins, but it allowed privately-owned banks to issue "banknotes," which soon made up the bulk of the nation's money supply. Bankers, not Congress, thus "regulated the value" of the currency, through the laws of supply and demand: the more notes they created, the smaller the value of each. In 1913, Congress went so far as to allow a privately-owned central bank called the Federal Reserve to issue its own Federal Reserve Notes and call them the exclusive national paper currency. These notes were then lent to the U.S. government, at interest.

Today, however, Federal Reserve Notes compose only about 3% of the money supply (M3). The other 97% is issued by private banks in the form of loans. "Bank credit" is created simply by entering numbers into the accounts of borrowers, as many authorities have attested. One of the most clear statements of this process came from Graham Towers, Governor of the Bank of Canada from 1935 to 1955, who acknowledged:

Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created -- brand new money.
Congress has not only reneged on its agreement to create the national money supply, but it has refused to front the funds to bail out California from its relatively modest $26 billion budget shortfall. Californians are justifiably upset, since Congress hardly batted an eye before earmarking some $700 billion in bailout money for the private banking system, and the Federal Reserve has committed trillions more for that dubious purpose. Nearly ten times the sum needed by California was allotted to bailing out AIG, a private insurance company; and half the sum needed by California went to pay off the gambling debts of AIG to Goldman Sachs, a single bank. California underwrites a substantial portion of the federal government's budget, sending a dollar in tax revenue for every 80 cents it gets back. Yet the federal government has even rejected California's request for a loan guarantee, which could have saved the State hundreds of millions of dollars in interest. The clear message is, "You're on your own."

Creative Problem Solving

The situation looks pretty dire, but it may just need some thinking outside the box. The law does not allow the States to issue "bills of credit," but it does allow them to create another form of money called "checkbook" money. All a State has to do is to form its own bank. Quoting again from the Cornell University Law School Annotated Constitution:

Bills issued by state banks are not bills of credit; it is immaterial that the State is the sole stockholder of the bank, that the officers of the bank were elected by the state legislature, or that the capital of the bank was raised by the sale of state bonds.

If private banks can create credit on their books, so can the world's eighth largest economy. Indeed, there is longstanding precedent for this approach. The State of North Dakota has owned its own bank for nearly a century. North Dakota is one of only two States (along with Montana) that are not currently facing budget shortfalls. North Dakota has beaten the Wall Street credit freeze by generating its own credit. By law, ever since 1919 the State's revenues have been deposited in its own bank, the Bank of North Dakota (BND). Using the "fractional reserve" lending scheme open to all banks, these deposits are then available to be used as the "reserves" for creating many times their face value in loans. Other banks in the State do not see the BND as a threat, because it partners with them and backstops them, serving as a sort of central bank for North Dakota. BND's loans are not insured by the Federal Deposit Insurance Corporation (FDIC) but are guaranteed by the State.

If California followed suit, it would not need to meet the FDIC's capital requirements but could designate state-owned property (parks, buildings and so forth) as its capital base. Applying the "multiplier effect" by which capital is lent and relent many times over, this base could then generate hundreds of billions of dollars in "credit." The State could deposit its revenues in the State bank and pay its payroll through it, generating an even larger deposit base for making new loans. Enough credit could be generated to allow the State not only to meet its short-term budget needs but to buy back its outstanding bonds (or debt). Bond interest and redemption costs on California's General Fund for the current year are estimated at nearly $5 billion -- about 20% of the budget shortfall. All of that money could be saved in interest, since the State would be paying interest to itself.

The State could do more than just chase the wolf from its door. It could generate enough credit to engage in the sort of economic "stimulus" being undertaken by the federal government. It could create jobs for the 11.5% of the State's population that are currently unemployed, augmenting the tax base and supplying the incomes necessary to prop up the languishing housing market. Loans for income-producing projects (transportation, energy, housing) could be repaid with the profits generated by the funded projects. And if some of the newly-issued loans were not paid back, they could simply be refinanced. The federal government has been rolling over its loans ever since 1835, the last time the federal debt was actually paid off (under Andrew Jackson).

In boom times, this approach could result in unwanted inflation. But today the economy is suffering from a serious shortage of money, because virtually all of our money comes from bank loans, and bank lending has dried up. Since neither the federal government nor the Federal Reserve has stepped in to fill the void, the States must do it themselves; and like the 18th century colonial governments, they can do it by taking on the lending functions of banks.

California's taxpayers and legislators are doing the right thing digging in their heels and drawing the line at further austerity measures. California is being watched not only by the nation but by the world. We the people did not precipitate this credit crisis; the banks did. We should not have to pay for the damage with increased taxes or decreased services or our public parks and parking meters. Like the American colonists, we can replace the old model with something better. If California legislators act quickly, they can have a State-owned bank up and running before their 45-day IOUs run out. With today's new online banking possibilities, the State would not even need to invest in a "brick and mortar" building. The whole business could be done by computer. Weary legislators trying to agree on a budget could all shake hands and go home, without budging an inch from their respective platforms. They could have it all, and so could we the people.

Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown

Debt Deflation in America‏

2009-06-30T07:16:00.000-07:00

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

From: Global Research E-Newsletter (crgeditor@yahoo.com)
Sent: June 30, 2009 4:10:35 AM
To: helgenome@hotmail.com
Debt Deflation in America
What the Jump in the U.S. Savings Rate Really Means

By Michael Hudson

URL of this article: www.globalresearch.ca/index.php?context=va&aid=14153

Global Research, June 29, 2009

Happy-face media reporting of economic news is providing the usual upbeat spin on Friday's debt-deflation statistics. The Commerce Department's National Income and Product Accounts (NIPA) for May show that U.S. “savings” are now absorbing 6.9 percent of income.

I put the word “savings” in quotation marks because this 6.9% is not what most people think of as savings. It is not money in the bank to draw out on the “rainy day” when one is laid off as unemployment rates rise. The statistic means that 6.9% of national income is being earmarked to pay down debt – the highest saving rate in 15 years, up from actually negative rates (living on borrowed credit) just a few years ago. The only way in which these savings are “money in the bank” is that they are being paid by consumers to their banks and credit card companies.

Income paid to reduce debt is not available for spending on goods and services. It therefore shrinks the economy, aggravating the depression. So why is the jump in “saving” good news?

It certainly is a good idea for consumers to get out of debt. But the media are treating this diversion of income as if it were a sign of confidence that the recession may be ending and Mr. Obama's “stimulus” plan working. The Wall Street Journal reported that Social Security recipients of one-time government payments “seem unwilling to spend right away," 1 while The New York Times wrote that “many people were putting that money away instead of spending it.”2 It is as if people can afford to save more.

The reality is that most consumers have little real choice but to pay. Unable to borrow more as banks cut back credit lines, their “choice” is either to pay their mortgage and credit card bill each month, or lose their homes and see their credit ratings slashed, pushing up penalty interest rates near 20%! To avoid this fate, families are shifting to cheaper (and less nutritious) foods, eating out less (or at fast food restaurants), and cutting back vacation spending. It therefore seems contradictory to applaud these “saving” (that is, debt-repayment) statistics as an indication that the economy may emerge from depression in the next few months. While unemployment approaches the 10% rate and new layoffs are being announced every week, isn't the Obama administration taking a big risk in telling voters that its stimulus plan is working? What will people think this winter when markets continue to shrink? How thick is Mr. Obama's Teflon?

We are living in the wreckage of the Greenspan bubble

As recently as two years ago consumers were buying so many goods on credit that the domestic savings rate was zero. (Financing the U.S. Government's budget deficit with foreign central bank recycling of the dollar's balance-of-payments deficit actually produced a negative 2% savings rate.) During these Bubble Years savings by the wealthiest 10% of the population found their counterpart in the debt that the bottom 90% were running up. In effect, the wealthy were lending their surplus revenue to an increasingly indebted economy at large.

Today, homeowners no longer can re-finance their mortgages and compensate for their wage squeeze by borrowing against rising prices for their homes. Payback time has arrived – paying back bank loans, whose volume has been augmented to include accrued interest charges and penalties. New bank lending has hit a wall as banks are limiting their activity to raking in amortization and interest on existing mortgages, credit cards and personal loans.

Many families are able to remain financially afloat by running down their savings and cutting back their spending to try and avoid bankruptcy. This diversion of income to pay creditors explains why retail sales figures, auto sales and other commercial statistics are plunging vertically downward in almost a straight line, while unemployment rates soar toward the 10% level. The ability of most people to spend at past rates has hit a wall. The same income cannot be used for two purposes. It cannot be used to pay down debt and also for spending on goods and services. Something must give. So more stores and shopping malls are becoming vacant each month. And unlike homeowners, absentee property investors have little compunction about walking away from negative equity situations – owing creditors more than the property is worth.

Over two-thirds of the U.S. population are homeowners, and real estate economists estimate that about a quarter of U.S. homes are now in a state of negative equity as market prices plunges below the mortgages attached to them. This is the condition in which Citigroup and AIG found themselves last year, along with many other Wall Street institutions. But whereas the government absorbed their losses “to get the economy moving again” (or at least to help Congress's major campaign contributors to recover), personal debtors are in no such favored position. Their designated role is to help make the banks whole by paying off the debts they have been running up in an attempt to maintain living standards that their take-home pay no longer is supporting.

Banks for their part are slashing credit-card debt limits and jacking up interest and penalty charges. (I see little chance that Congress will approve the Consumer Financial Products Agency that Mr. Obama promoted as a flashy balloon for his recent bank giveaway program. The agency is to be dreamed about, not enacted.) The problem is that default rates are rising rapidly. This has prompted many banks to strike deals with their most overstretched customers to settle outstanding balances for as little as half the face amount (much of which is accrued interest and penalties, to be sure). Banks are now competing not to gain customers but to shed them. The plan is to offer steep enough payment discounts to prompt bad risks to settle by sticking rival banks with ultimate default when they finally give up their struggle to maintain solvency. (The idea is that strapped debtors will max out on one bank's card to pay off another bank at half-price.)

The trillions of dollars that the Bush and Obama administration have given away to Wall Street would have been enough to buy a great bulk of the mortgages now in default – mortgages beyond the ability of many debtors to pay in the first place. The government could have enacted a Clean Slate for these debtors – financed by re-introducing progressive taxation, restoring the full capital gains tax to the same rate as that levied on earned income (wages and profits), and closing the tax loopholes that effectively free finance, insurance and real estate (FIRE) sector from income taxation. Instead, the government has made Wall Street virtually tax exempt, and swapped Treasury bonds for trillions of dollars of junk mortgages and bad debts. The “real” economy's growth prospects are being sacrificed in an attempt to carry its financial overhead.

Banks and credit-card companies are girding for economic shrinkage. It was in anticipation of this state of affairs, after all, that they pushed so hard from 1998 onward to make what finally became the 2005 bankruptcy laws so pro-creditor, so cruel to debtors by making personal bankruptcy an economic and legal hell.

It is to avoid this hell that families are cutting their spending so as to keep current on their debts, against all odds that they can avoid default in today's shrinking economy.

Working off debt = “saving,” but not in liquid form

People are putting more money away, but not into savings accounts. They are indeed putting it into banks, but in the form of paying down debt. To accountants looking at balance sheets, savings represent the increase in net worth. In times past this was indeed the result mainly of a buildup of liquid funds. But today's money being saved is not available for spending. It merely reduces the debt burden being carried by individuals. Unlike Citibank, AIG and other Wall Street institutions, they are not having their debts conveniently wiped off the books. The government is not nice enough to buy back their investments that had lost up to half their value in the past year. Such bailouts are for creditors and money managers, not their debtors.

The story that the media should be telling is how today's post-bubble economy has turned the concept of saving on its head. The accounting concept underlying balance sheets is that a negation of a negation is positive. Paying down debt liabilities is counted as “saving” because one owes less.

This is not what people expected a half-century ago. Economists wrote about how technology would raise productivity levels, people would be living in near utopian conditions by the time the year 2000 arrived. They expected a life of leisure and prosperity. Needless to say, this is far from materializing. The textbooks need to be rewritten – and in fact, are being rewritten.3

Keynesian economics turned inside-out

Most individuals and companies emerged from World War II in 1945 nearly debt-free, and with progressive income taxes. Economists anticipated – indeed, even feared – that rising incomes would lead to higher saving rates. The most influential view was that of John Maynard Keynes. Addressing the problems of the Great Depression in 1936, his General Theory of Employment, Interest, and Money warned that people would save relatively more as their incomes rose. Spending on consumer goods would tail off, slowing the growth of markets, and hence new investment and employment.

This view of the saving function – the propensity to save out of wages and profits –viewed saving as breaking the circular flow of payments between producers and consumers. The main cloud on the horizon, Keynesians worried, was that people would be so prosperous that they would not spend their money. The indicated policy to deter under-consumption was for economies to indulge in more leisure and more equitable income distribution.

The modern dynamics of saving – and the increasingly top-heavy indebtedness in which savings are invested – are quite different from (and worse than) what Keynes explained. Most financial savings are lent out, not plowed into tangible capital formation and industry. Most new investment in tangible capital goods and buildings comes from retained business earnings, not from savings that pass through financial intermediaries. Under these conditions, higher personal saving rates are reflected in higher indebtedness. That is why the saving rate has fallen to a zero or “wash” level. A rising proportion of savings find their counterpart more in other peoples' debts rather than being used to finance new direct investment.

Each business recovery since World War II has started with a higher debt ratio. Saving is indeed interfering with consumption, but it is not the result of rising incomes and prosperity. A rising savings rate merely reflects the degree to which the economy is working off its debt overhead. It is “saving” in the form of debt repayment in a shrinking economy. The result is financial dystopia, not the technological utopia that seemed so attainable back in 1945, just sixty-five years ago. Instead of a consumer-friendly leisure economy, we have debt peonage.

To get an idea of how oppressive the debt burden really is, I should note that the 6.9% savings rate does not even reflect the 16% of the economy that the NIPA report for interest payments to carry this debt, or the penalty fees that now yield as much as interest yields to credit-card companies – or the trillions of dollars of government bailouts to try and keep this unsustainable system afloat. How an economy can hope to compete in global markets as an industrial producer with so high a financial overhead factored into the cost of living and doing business must remain for a future article to address.

Notes

1 Kelly Evans, “Americans Save More, Amid Rising Confidence,” Wall Street Journal, June 27, 2009.

2 Jack Healy, “As Incomes Rebound, Saving Hits Highest Rate in 15 Years,” The New York Times, June 27, 2009.

3 Four years ago at a post-Keynesian “heterodox economics” conference at the University of Missouri at Kansas City (on whose faculty I have been for some years now), I outlined the shift from over-saving to debt deflation. Michael Hudson, “Saving, Asset-Price Inflation, and Debt-Induced Deflation,” in L. Randall Wray and Matthew Forstater, eds., Money, Financial Instability and Stabilization Policy (Edward Elgar, 2006):104-24.

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COMMENT: MONEY MATTERS

2009-06-21T07:16:00.000-07:00

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

Banking time bombs

Samah El-Shahat, Al Jazeera's resident economist, will be writing a regular column analysing key elements that have contributed to the global financial downturn and its impact across the world.

The trickle-down effect don't work
As a development economist, I have seen many economics theories or so called 'magic bullets' for the world's ills come and go.
No, I am not that old, but economics, like fashion, has many theories that come and go and then make a come back retro style.

The problem is some of them have been largely discredited but they still make a return becaue they serve the interests of those with influence and power. So it has always been politically convenient to dress up self interest in intimidating and opaque economics jargon.

During the 1980s and 1990s, the World Bank and the IMF believed that something called the 'trickle down effect' could save the world's poor.
In rough terms, 'trickle down' means if you give the rich tax breaks and support their industries, the wealth they create will ultimately benefit poorer people.
That is, money, just like rain, will start trickling down to us all. A theory that never worked, and African and South American countries that were made to pursue it got poorer not richer, and the poorer of those countries ended up paying a very high price

John Kenneth Galbraith, another economist, calls this the horse and sparrow theory: "If you feed the horse enough oats, some will pass through to the road for the sparrows."

So how does this apply to today's banking crisis?

Well, it is very relevant because governments across the world, but particularly the US and British administrations, are solving the financial crisis with a top-down approach.
They are hoping if they shower rich bankers with money and use taxpayers' cash to underwrite their banks then, ultimately, some money will flow down to us.
Over optimistic William Cohan, a well-known American journalist, questioned this recently in the New York Times.
"Why is so much effort being put into propping up those at the top of the economic pyramid — the money-centre banks, the insurance companies, the hedge funds and so forth — when, during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid."

But given that a lot of these banks are ZOMBIES - and by this I mean they are dead, but are walking among the living thanks to taxpayers' money.

I believe resting our economic futures on their resurrection is taking optimism a step too far. Look how much bad debt they have on their balance sheets.
Economists such as Ann Pettifor and John Kenneth Galbraith believe that the banks will use all the taxpayer money that comes their way to recapitalise themselves.
The banks will try to cover huge holes in their balance sheets due to the toxic debt they have. They should, instead, be using this money to start lending to us again - you know the real economy. This is what the banks are supposed to be doing.

Unemployment in the US is rising, fuelling fears more homes will be repossessed [AFP]

The 'trickle down' has been captured by the banks and this will continue slowing down our recovery, and I find that very frightening.

So how could this happen?

Governments are trying to find solutions to this problem that are dictated by the interests of the banking and financial sectors.

But when did the interests of the financial sector become the interest of the country?

Particularly when unemployment in America is estimated to go over ten per cent. Has anyone asked a person who is losing their home how they feel about this?

Simon Johnson, a former IMF chief economist, recently said: "Throughout the crisis, the government has taken extreme care not to upset the interests of the the financial institutions or to question the basic outlines of the system that got us here.

"In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks with no strings attached and no judicial review for his purchase decision.

"Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands, indeed that is the only way that buying toxic assets would have helped anything.

"Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved."

'Business as usual'

So I am still astonished that that governments are still hell-bent on maintaining the status quo, the business as usual approach that got us into this mess in the first place.

Has a single bank management been made to change despite being the source of the mess? Has a single bank been truly nationalised in the real sense of the word? Has any real clean audit of a bank happened? And please let's not bring up stress tests that were made to make sure everyone passes...

For every one of those questions the answer is a loud and resounding NO.

Some of the banks are now being allowed to payback some bailout money - banks such State Street and JP Morgan Chase. But they are being allowed to do so without revealing the extent of the toxic assets on their balance sheets.

"I fear these banks are walking time bombs... freed from any noose or hold the government had over them because they have paid back their bailout"

We are none the wiser than we were at the start of this crisis as to how truly 'insolvent' they are.

Yes, I hate to bring up that word but just because they are paying back some Treasury Asset Relief Program money doesn't make them healthy. Remember, they are using taxpayer money to pay the taxpayer back.

The Obama administration had a plan to get rid of these toxic assets called the Public Private Partnership Investment Partnership - the PPIP.

And even though the PPIP gave investors and Wall Street incredible inducements, and huge taxpayer subsidies to buy and sell these toxic assets, the banks did not play ball.

The plan was laid to rest last week, which is extraordinary because it was the central plank of the Obama administration's plan to rescue the banks.

I think this is disastrous. Not because I liked the PPIP, I thought it was grossly unfair and I agree with the economists Paul Krugman and Joseph Stiglitz when they said it transferred taxpayers money to the banks.

But at least the PPIP tried to deal with the toxic assets that got us into this mess in the first place.

Now I fear that these banks are walking time bombs, which are now walking away, freed from any noose or hold the government had over them because they have paid back their bailout.

And if we do not get an economic recovery soon, the toxic assets on the banks' balance sheets will detonate and bring us all down with them.

The banks are gambling on the green shoots of a miraculous economic recovery, which I think is delusional and shame on those in power for allowing them yet another chance to gamble with our economic futures.

Samah El-Shahat also presents Al Jazeera's People & Power programme.
The views expressed in this column are the author's own and do not necessarily reflect Al Jazeera editorial policy.

Source: Al Jazeera

How To Start A Local Community Bank That Does Not Charge Interest

2009-05-28T21:01:00.000-07:00

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. One way to do that is to start your own local bank. It is very simple and does not violate any laws.
A complete article on how to do this can be found on http://www.michaeljournal.org/localmoney.htm

Urgency of the American Monetary Act by Richard C. Cook

2009-05-06T16:41:00.001-07:00

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
On Thursday, April 23, 2009, Stephen Zarlenga, director of the American Monetary Institute (AMI), delivered two briefings on Capitol Hill on the American Monetary Act that AMI drafted and that may be introduced as legislation during the current congressional session. This single measure has the potential of bringing together the tens of millions of people who have realized it’s our bank-run debt-based monetary system that lies at the center of the financial rot that is destroying our republic and its values.
Attending the briefings were congressional staffers and members of the public. Zarlenga was introduced by Congressman Dennis Kucinich (D-OH), who has spoken in favor of wholesale reform of the monetary system on the floor of the U.S. House of Representatives. Kucinich is also sponsor of H.R. 7260, the “Transparency in the Creation of Wealth Act of 2008.” This act would require the Federal Reserve to resume reporting on the quantity of M3 in the economy (mega-money accessible only to large financial institutions), along with several other economic indicators it now keeps to itself, such as total credit market debt and the holding of Federal Reserve notes by foreign interests.
Stephen Zarlenga is author of The Lost Science of Money (American Monetary Institute, 2002), a monumental 736-page book that shows how money has served socially beneficial purposes throughout history only when created by governments as an instrument of law and not as the private preserve of the rich.
Hugh Downs, an unusually well-informed media personality with a strong social conscience, said of The Lost Science of Money, that it “has some stunning historical vistas of the whole concept of media of exchange.” Renowned progressive economist Dr. Michael Hudson said, “The history of money is critical to understanding the greatest problem the third millennium will face. Stephen Zarlenga's Lost Science of Money provides the needed background for seeing the basic structural issues at work.”

Since Zarlenga published The Lost Science of Money, the American Monetary Institute has grown, with chapters in Boston, New York, Chicago, Iowa, Seattle, and other locations. He conducts an annual monetary reform conference at Roosevelt University in Chicago and has a busy travel and speaking schedule. He has addressed audiences at the U.S. Treasury Department in Washington, D.C., and the British House of Lords in London.
The American Monetary Act may be viewed and downloaded from the AMI website at http://www.monetary.org/American_Monetary_Act_version_10_feb_06.htm. The main thrust of the act is to replace the bank-centered debt-based monetary system with the direct creation of money by the federal government which would spend it into circulation as was done with the Greenbacks of the latter part of the 19th century.
The money would be spent on all types of legislated government requirements but would focus on infrastructure improvements, including education and health care. The act not only would create a new monetary supply denominated in U.S. Treasury notes, but would rebuild our job base which has been outsourced to other nations by the globalist corporations and big financial interests.
The critical role of the Greenbacks in U.S. history has been distorted and downplayed by the establishment interests that control the writing of history textbooks. The Greenbacks originated during the Civil War when the government printed and spent them to meet wartime needs. Contrary to mythology, the Greenbacks were not inflationary. They continued to serve as a key part of the nation’s monetary supply into the early 20th century. As late as 1900 they formed a third of the nation’s circulating currency, with coinage, along with gold and silver certificates, forming another third, and national bank notes the remainder.
Later the value of both the Greenbacks and metallic-based currency were destroyed by the inflation caused by the introduction of Federal Reserve Notes after the approval of the Federal Reserve System by Congress in 1913. From that point on, the creation of money in the U.S. became a monopoly of the private banking system. This led to the Great Depression when the banking system crashed the economy through its deflationary policies.
The nation recovered from the Depression through the New Deal and the adoption of Keynesian economic policies during and after World War II. But now, in the early years of the 21st Century, the financial system again has collapsed through the gigantic speculative bubbles of the last 30 years. The Bush-Obama bailouts that are costing taxpayers trillions of dollars are benefiting the financial controllers but are not doing anywhere near enough for the producing economy. Even though officials are starting to forecast an economic recovery, there is every indication it will be another “jobless” recovery like the one from 2002-2005.
The American Monetary Act would put a stop to the travesties of the bank-controlled monetary system that has wrecked what was once the world’s greatest industrial democracy. In addition to reintroducing the Greenbacks, the act would eliminate fractional reserve banking by requiring banks to borrow money from the U.S. Treasury to bring their cash reserves up to the level of their lending portfolio rather than allowing them to continue to create money “out of thin air.” The banks would no longer be able to create trillions of dollars of credit, backed by nothing, which they use to fuel the speculative equities, hedge fund, and derivative markets.
The act also contains a provision for a citizens’ dividend through direct payment of cash to individuals. While it does not authorize a dividend at the level Stephen Shafarman and I have proposed in our respective books, Peaceful, Positive Revolution and We Hold These Truths: The Hope of Monetary Reform, it is a major step in the right direction. In what I have called the "Cook Plan" I advocate a dividend of $12,000 a year per capita for adults who apply with the money, once spent, being used to capitalize a new network of community savings banks.
With the 2008-2009 collapse of the financial system, the deep recession we are now suffering through, and the injustice of the government’s bank bailouts currently being administered by Secretary of the Treasury Timothy Geithner, millions of people in the U.S. and around the world have had enough of government policies that enrich the financial oligarchy and destroy the livelihood of everyone else. The world today is headed for a dark age of debt-slavery and ruinous poverty for much of the world’s population, including working people in the U.S.
The only way a catastrophe can be averted is for mankind to wake up and demand the creation of a new monetary system where money and credit are treated as a public utility. This means that money and credit should serve the needs of the producing economy while assuring a decent living and sufficient income for everyone.
To reach this goal, it is counterproductive for people simply to complain about what is happening or support half-measures like the call to embrace a gold standard. Any attempt to impose a new gold standard would play into the hands of those who control the gold; i.e., the bankers. Creating a new gold standard appears to be the objective of movements like “End-the-Fed.”
The key is not whether money is backed by gold or any other commodity but whether it serves the needs of real people, allows the trade and productivity of the nation to move, restores our job base, and supports consumer purchasing power. The American Monetary Act would meet these objectives. With the financial disasters of the last two years, millions of people realize the system is rigged against them. Jobs and savings continue to disappear while debt and the power of the banking millionaires increase. The time for Congress to act is now.

Richard C. Cook is a former federal analyst who writes on public policy issues. His book “We Hold These Truths: the Hope of Monetary Reform” is now available at www.tendrilpress.com. His website is www.richardccook.com.

“Credit as a Public Utility: The Solution to the Economic Crisis”

2009-05-03T15:42:00.001-07:00

A Video in Six Parts

Written and Produced by Richard C. Cook

©2009 by Richard C. Cook. All Rights Reserved.

Articles and videos 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

Part One of Six Parts: Credit As A Public Utility: The Solution to the Economic

2009-05-03T15:42:00.000-07:00

Part Two of Six Parts: Credit As A Public Utility: The Solution to the Economic

2009-05-03T15:40:00.000-07:00

Part Three of Six Parts: Credit As A Public Utility: The Solution to the Economi

2009-05-03T15:39:00.001-07:00

Part Four of Six Parts: Credit As A Public Utility: The Solution to the Economic

2009-05-03T15:39:00.000-07:00

Part Five of Six Parts: Credit As A Public Utility: The Solution to the Economic

2009-05-03T15:37:00.000-07:00

Part Six of Six Parts: Credit As A Public Utility: The Solution to the Economic

Study Course in Social Credit By J.M. Hattersley

2009-04-26T20:12:00.000-07:00

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.

Summary:
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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QUESTIONS:

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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FOR FURTHER READING:

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”

Sources:
(1) C.H.Douglas: “Economic Democracy” page 6

2009-04-26T20:10:00.001-07:00

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.

Summary
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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QUESTIONS:

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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FOR FURTHER READING:

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

2009-04-26T20:08:00.000-07:00

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.

Summary:
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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FOR FURTHER READING:

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.

* * * * * * * * * * *

QUESTIONS:

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?

Sources:
(1) Bank of Canada Weekly Financial Statistics.
(2) 2008 Annual Report, Canadian Western Bank.

2009-04-26T20:06:00.000-07:00

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.

Summary:
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.

* * * * * * * * * * *

QUESTIONS:
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?

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FOR FURTHER READING
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.

Sources:
(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”.

2009-04-26T20:04:00.001-07:00

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.

* * * * * * * * * * *

QUESTIONS:
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?

* * * * * * * * * * *

FOR FURTHER READING
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.

2009-04-26T20:02:00.001-07:00

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.

* * * * * * * * * * *

QUESTIONS:
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..

* * * * * * * * * * *

FOR FURTHER READING:
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.

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

2009-04-23T17:49:00.000-07:00

Lesson VII – The Views of the Reformers
At the outset of this course, we laid down certain basic principles which we felt were essential to good government and a sound economic system. These principles included a maximum of individual freedom of choice; a government policy in accord with the general will of the people while respecting the rules of morality and the position of minorities; economic security for the individual without sacrifice of personal freedom, and a monetary system that made possible the achievement of goals that were physically possible and desirable within the community.

Our study of our present day economic system has led us to believe that it is at present falling far short of these objectives. In particular there is an acute and growing lack of economic security for the average person who depends chiefly on sale of his labour for daily income. There are levels of poverty which could be easily eliminated were the financial means available to set available resources to work to bring them to an end. There is an increasing tendency for the will of the individual person to be subordinated to the direction of “big business” or “big government”, making it more and more difficult for the individual person to exercise his or her personal initiative, enterprise and freedom of choice in the daily affairs of life.

Three Areas of Fault.
In our studies so far, we have seen three major reasons why this should be the case. The workings of the economic system are set in motion, as we have seen, by the various wants of consumers, which are made “effective” by the ability and willingness of consumers to pay a certain money “price” to satisfy them. This “price” goes to compensate those who sacrifice either their labour or other resources that go into the form of wealth required by the consumer, giving those people in turn the right to set the economic machine in motion in the same manner to produce something that will satisfy their desires. Increasingly, also, because of the development and efficiency of the “tools” used in the process of manufacture, the labour purchased is only partly labour that is currently expended – a great and increasing part is labour bought and paid for by businesses at some time in the past, whose purchase was financed either (1) by bank credit, or (2) by money invested by consumers, the cost of which will either (1) be repaid to the bank and canceled, or (2) accumulated in business reserves, when the product is finally sold.

Fault Number One lies in the ownership of natural resources – that is, possession of the legal right to the exclusive use of either the surface of land, or its minerals or other resources, now and for an indefinite time into the future. If the value of these rights is not fairly distributed among citizens, there will be excessive riches for some, and excessive poverty for others.

Fault Number Two lies in the private creation of the economy's money supply. Apart for the “small change” put out by the Royal Mint, and Bank of Canada notes (which are still the “small change” of the nation's credit supply) the whole of our nation's money supply is created and loaned into existence by private institutions as they grant new credit to borrowers. These charge the public approximately ten times the amount that it costs our publicly owned Bank of Canada to create its share of the nation's money supply. A system such as this not only yields excessive profit to private interests: it also places control of our country's economic welfare in the hands of a private cartel to a very dangerous degree, and embroils consumers, businesses and governments alike in an ever increasing nexus of debt..

Fault Number Three lies in the manner in which new credit is normally introduced into our economy. The private banking system is part of the nation's “capital market”, and the new credit it creates flows by way of loan either to industry or to governments or consumers. Because the quantity created is determined both by the creditworthiness of business and consumers, and because the quantity created itself has a direct influence on business profits and prosperity, a money system such as this incorporates “positive feedback” and will swing repeatedly between over- and under- stimulation of the economy – between “booms” and “busts”. To avoid recession, it continually asks for stimulants such as trade surpluses, government deficits and spending programs, increased consumer borrowing, inventory and capital formation – even when these are not reflected in any physical demand on the part of the people the system is supposed to be serving.

These three faults have generally speaking been ignored by the “classical” economists, although the publication in 1936 of J.M. Keynes' work “the General Theory of Employment, Interest and Money”, which treats of the third, has left an important mark on orthodox economics, and may ultimately lead to the conclusions being dealt with here. There have, however, been a number of extremely capable writers outside the sacred circle of 'orthodox” economists, who have in different ways dealt with one or more of these topics. In the present lesson, it is proposed to give a brief, critical outline of the analysis and proposals of a selection of these, and in the next, make their ideas the basis for a constructive economic policy for Canada at the present time.

Henry George – the “Single Tax”:
George was an American newspaper correspondent whose classic work, “Progress and Poverty” was published in 1879. Faced with the problem of poverty being widespread, while others enjoyed extreme wealth, he accounted for this by saying that this was the consequence of private ownership of land and other natural resources, which was in turn the result of “enclosure” for private purposes of areas that once were held by the community in common.

Private property gives a regular income to the owner of the value of the natural resources of the earth placed at his disposal. He can either use these resources for his own advantage (such as using a location as a site for building his house) or for receiving an income, if he rents the site out to another person for that other person's advantage. Since some sites have much more value than others, the better sites will command a higher rental value. As George puts it:

“As wages and interest tend to a common level, all that part of the general production of wealth which exceeds what the labour and capital employed could have secured for themselves, if applied to the poorest natural agent in use, will go to landowners in the shape of rent.” 1

The amount of rent that can be charged depends very much on the quality of the resource in question. If it is far away from civilization, the rent it can command will be low or non-existent. But if its is a lot in the centre of a major city, it can be enormous. And that value comes, not from anything the owner has done, but from the presence of the community and the surrounding infrastructure it has provided. The rent a site can receive, or course, also directly affects the price at which the site can be sold, and the profits that can come from real estate development.

George therefore proposed a “single tax” on the value of sites, whether surface or mineral, which could capture this unearned rental value, created by Nature and the community, for the benefit of that community. It was not his intention that any tax be put on the owner for the value of the buildings, oilwells or other improvements that the owner had put in place at his own expense: simply the site, and the resources that Nature and the Community had provided to give it value.

As an illustration of this principle, contrast the difference between the millionaires of Texas, who have been fortunate to find oil deposits under their land and keep these for themselves, and the folks of Alaska, where oil revenues taxed by the State have been invested and distributed in a dividend of over $3,000 per year to every resident.

George's remedy was the abolition of private property in land rents, to be achieved by a tax that would confiscate from private owners the whole yearly value of the land standing in their name, though not in any way taxing man made improvements – that is “to appropriate rent by taxation”, and by this means abolish all other forms of taxation.

George's proposals were backed not only by sound reasoning, but by history. Under Old Testament law, as well as under the feudal system that had prevailed in Great Britain from the Norman Conquest to the late sixteenth century, every citizen was assured of a definite landholding in the nation, supplemented by specific rights e.g. of common pasture, in return for definite services either to the state or to his feudal lord, which were designed to uphold the fabric of society. The process by which these rights had been taken away by “enclosures” of common land by landowners was little short of legalized robbery, and an immediate cause of the growth of an impoverished, propertyless, urban population. 2

However, George did not direct his attention to financial reform, or if he did, considered it not of fundamental importance. He did not conceive of the possibility, therefore, that even were his proposals carried out, faults in the workings of the mechanism of money creation might still prevent proper and effective functioning of the economic system, unless other reforms were also carried out.

Silvio Gesell - “Stamped Money”
Silvio Gesell, a German author, first published his “Natural Economic Order” in two parts, in 1906 and 1911. An admirer of George, he nevertheless clearly saw that George's reforms would not prove adequate without additional reforms in the monetary field. Consequently, Parts III to V of his book analyze the nature and function of money and interest, and make the revolutionary proposal of “stamped money” - money issued by the state that regularly requires a tax to be paid on it in order to remain valid – in addition to land reform on the lines that George suggested.

Gesell's concern was with the acutely powerful bargaining position that the possessor of money was in, because he could, by holding back from buying, force a prospective seller into a position where he had to sell at cut rate prices. Gesell rightly understood that money had a value only because of the rights it gave, quite apart from its intrinsic value, and that State issued money was as good as gold. He appears not to have recognized that banks were not lenders of the funds of their depositors, but were actually creators of new credit money. Consequently he appears to have been under the impression that the expansion and contraction of credit by the Banking system, which is closely connected with the trade cycle, was actually caused by persons in possession of money who were alternately spending it freely, or causing business stagnation by failing to do so. His demand for a unit of money that carried with it a negative rate of interest loses much of its force, therefore, when one realizes that it was based on a misapprehension of the function of the banking system and of credit money. It is also difficult to see how “stamped money” could in fact be practically used in an economy such as our own, that makes such extensive use of transfers of credit through the banking system by cheque.

Fisher and Soddy - “100% Money”
Two writers on monetary reform, with extremely distinguished academic backgrounds, are Professor Irving Fisher (author of “100% Money”), and Frederick Soddy. Irving Fisher was Professor of Economics at Yale University, while Soddy (Author of “Wealth, Virtual Wealth and Debt”), was a Nobel Prizewinner in Chemistry, who made an independent and scholarly investigation of the origins and working of the money system, and the nature and value of money. 3

The ground covered by each of these writers was practically exclusively problem number two of our earlier analysis – the defects of the banking system. Their recommendations was a Banking system that did not have the power to create new credit money, but held, dollar for dollar, legal ender money behind every dollar of promises to pay that it has made. This could be supplemented by State issued legal tender money, in quantities required by the economy.

The chief merit of 100% money, besides its simplicity and the fact that financially it is very beneficial indeed to the public revenues, is that it can, in theory at any rate, entirely eliminate the Trade Cycle. In our previous illustrations of the Trade Cycle, we have assumed that the entrepreneur who wanted to expand his business by increasing investment in the tools of production or in stocks of materials, obtained a loan of newly created Bank credit for this purpose. This causes inflation, because it distributed additional incomes to consumers without any increase in the volume of consumer goods reaching the market at that time. Suppose, however, that such a Bank created increase in the money supply was impossible. Our entrepreneur would now have to seek his funds for expansion from the capital market – and ultimately his additional capital spending would be financed out of the money savings of consumers.

Inflation would therefore be avoided. The wages of those engaged in expanding the capital plant would give them additional power to buy, of course. However, this additional power to buy would be balanced by lessened power to buy on the part of those who had invested their money to finance this expansion. All tendency to inflation would by this means be canceled out – and to some extent also, the later tendency to deflation.

A related system of reform is known as the Hallatt Plan. This again, demands 100% State created money, and requires that such money be spent into circulation and backed by State owned permanent capital assets and be retired as these assets depreciate. The volume of money in circulation would be balanced so as on one hand not to inflate the price index, and on the other, to maintain full employment. While the actual need for “backing” of the type suggested, and the insistence on introducing money through public capital works may be disputed, this plan does give a practical approach to a money reform program. 4

All of these 100% money plans, however, cannot claim to be comprehensive cures to the whole economic problem – none really treat with the subject of rents and ownership of natural resources and Soddy alone rather briefly treats on the problem of capital accumulation in the hands of corporations, which he suggests be countered by an appropriate taxation policy.

C.H.Douglas - “Social Credit”
The outstanding – though in some ways the most difficult – economic reform writer of the twentieth century has been Clifford Hugh Douglas. Douglas was a Scottish engineer employed prior to World War I with the British Westinghouse Company in India, and during that war at the Royal Aircraft Factory at Farnborough, England, where he conducted a very extensive study of the cost and accounting processes taking place at this plant. As an engineer before the war, he had became concerned with the degree to which physically attainable and desirable engineering projects on which he was engaged were continually being frustrated by lack of money. He observed very quickly also, that in wartime those barriers were in some way mysteriously removed, and money was always available to make financially possible whatever the physical needs of war demanded. His accounting studies at Farnborough led him to understand the manner in which industrial costs tended to exceed the incomes available to liquidate them (as we saw in Lesson 6), which he formulated under the name of the “A+B Theorem” in a number of articles originally published in the “New Age” magazine, then collected into several books published between 1920 and 1924. He was also well aware of the then disputed fact that the commercial banking system was the major source of the nation's money supply, and could create and destroy financial credit at will.

Most of Douglas's approach has, of course, already been developed in this course, and will not be repeated here. However, attention is drawn to the following aspects of his writings, which make them mark a turning point in economic thought:

(1) His philosophic approach. At least from the publication of Adam Smith's “Wealth of Nations” in 1776, economists had tended to assume that the object of an economic system was primarily the production of a maximum amount of material wealth, and the maximizing of profit to those who controlled its production. To Douglas, the prime objective was economic power to choose in the hands of the individual consumer – so giving economics a chance to become divorced from the completely materialistic approach into which it had fallen, and study the process of distribution as being at least as important as that of production

(2) His analysis of the Banking system and the business cost structure: His writings anticipated the development of Keynesian “New Economics” in both of these fields, and mark a real advance in economic understanding.

(3) His support of the principle of the “Dividend” Aware of the productive power of modern machinery, and the fact that production now depended far less on the physical efforts of the worker, than on our growing knowledge of effective methods of using labour and natural resources to ever greater advantage (the common “Cultural heritage” of the community), he insisted:

“That the distribution of cash credits to individuals shall be progressively less dependent upon employment. That is to say, the dividend shall progressively replace the wage and salary, as productive capacity increases per man hour.” 5

Douglas felt that the citizens of a country could be likened to shareholders in a gigantic “holding company”, and as such were entitled to share equally in all profits over and above the actual physical cost of production. He did not develop in detail the exact manner of financing this dividend, although one other early Social Credit writer6 suggested that it should be by a tax of some sort on Industry – possibly a tax on the credit used by it, equivalent to the interest now paid by Industry to the Banks for the Bank credit that it uses. Obviously the “single tax” proposals of Henry George could be very easily tied in with the Douglas “dividend” proposal.

(4) His proposal for a “Just” or compensated price. Unlike the “100% money” reformers, Douglas did not propose to eliminate the creation of new credit by banks to finance new production. On the contrary, he wished this to be the exclusive method of financing new production, though preferably through a public authority rather than through the private banking system:

“The credits required to finance production shall be supplied, not from savings, but by new credit relating to new production, and shall be recalled only in ratio of general depreciation to general appreciation”

Instead, therefore, of achieving balance by regulating the issue of credit, Douglas proposed to vary the consumer price level, and at the same time balance the rate of flow of industrial costs with consumer incomes, by paying a discount on all retail purchases (in effect, an inverted sales tax) so as to lower the price to the consumer.

“The greater part of the surplus production is capital production, and we have to find a method of restoring his money to the producer of capital goods as soon as they are produced, while only charging the consumer for them at the rate they are used up. The justification for this, of course, is that real credit is a measure of the rate of production, so that, if total production equals (B) capital goods plus (A) consumption goods, production costs are A+B, but true consumption costs are A+B/x, where x is the average life of real assets. If we are only going to charge the consumer true costs, we have to pay the producer B-B/x, representing the value of the capital goods, to enable him to carry on business. But if, in addition, he recovered the whole of his costs eventually from the public in prices, he would have recovered his costs twice over. Therefore it is necessary to reduce the price to the public by the same amount, B-B/x, that we repaid the producer of capital goods: that is to say, retail prices must bear the same ratio to total costs that consumption bears to production. 7

The above is a very clear statement of the problem Douglas is attempting to solve, though doubt remains in this writer's mind as to whether the Just Price proposal as put forward by Douglas in fact solves it. This question of the actual economic reform proposals that should be adopted in Canada at the present time will be discussed in Lesson 8. 8

* * * * * * * * * * *

QUESTIONS:
1. List three basic areas of fault in the workings of our current economic system.
2. How far is an approach to reform made in each of these areas by
i. Henry George
ii Silvio Gesell
iii. Frederick Soddy
3. Is it possible to differentiate between the profits of business, and the unearned return that comes from ownership of land and natural resources?
4. What changes do advocates of “100% Reserve Banking” wish to see carried out in the commercial banking system?
5. Why is it claimed that 100% reserve banking can help prevent the trade cycle?
6. In what way does the philosophy of C.H.Douglas as to the purpose of an economic system, differ from that of earlier, “orthodox” economists such as Adam Smith? Do you agree with him?
7. What did Douglas mean by the “Common Cultural Heritage”? Is his idea of a “dividend” for every citizen similar to that of the “single tax” of Henry George.
8. What name did Douglas give to the device by which he intended that the flow of business costs would be matched with the flow of consumer incomes?

* * * * * * * * * * *

FOR FURTHER READING:
Henry George: “Progress and Poverty”
Silvio Gesell: “The Natural Economic Order"
Frederick Soddy: “Wealth, Virtual Wealth and Debt”
Irving Fisher: “100% Money”
H. Hallatt; “The Hallatt Plan for economic democracy.” (his critical chapter on Social Credit on page 57 is worth study, although his comments on the A+B Theorem are very superficial.)
C.H.Douglas: “Economic Democracy”
“The Monopoly of Credit”
“Social Credit”
Arian Forrest Nevin: “National Economy: The Way to Abundance”

* * * * * * * * * * *

Notes and Sources:
(1) Henry George: “Progress and Poverty” Robert Shalkenbach Foundation 1956, p.170.
(2) The history of the rise of the landowning class in Great Britain and its consequences to the rural worker who was turned into a propertyless urban factory worker, is excellently and scathingly dealt with in Part VII of Karl Marx's “Capital”. Marx, however, fails to make any distinction between normal business profit (return on the initiative, risk, and effort of the entrepreneur), and this unearned profit arising from monopolizing natural resources previously more widely distributed or shared in common. Consequently, he uses this evidence to incite hatred against both legitimate business profits, and misappropriation of the unearned return of rent on natural resources. This error is behind many of the policies – and errors – of Socialism.
(3) Soddy's analysis is generally followed in Lessons 2-5 of this course.
(4) This outline of the “Hallatt Plan” is taken from “Money, Master or Servant”, by George E. Creed. Although superficially attractive, the idea of interest free financing for public works does have the defect that it makes such works appear cheaper than they would be if market interest costs were taken into account. The public is in fact obliged by the government to work for an increase in the money supply, that is rightfully theirs already by virtue of its nature as title to part ownership of the Social Credit of the community.
(5) These paragraphs are part of the “Swanwick Principles” set out in full in C.H. Douglas, “Monopoly of Credit”, 1951 Ed. Pp 108, 117.
(6) C. Marshall Hattersley: “The Community's Credit” 1922 Ed. Pages 108, 117
(7) C.H. Douglas “the New and the Old Economics”, a reply to the criticisms of Professors Copland and Robbins, Section 5. Reprinted in “Extracts from Douglas” New Zealand Social Credit Association.
(8) A recent publication by Richard Cook, entitled “We Hold These Truths” gives a detailed proposal for a Dividend plan and control of the Banking system in the United States, foretells much of the economic disasters caused by speculation which have indeed come true, and adopts much of Douglas's philosophy and policies. A criticism is his assumption that Douglas's A+B theorem indicates that at all times and in all places, there is a deficiency of consumer purchasing power which can be made up by state issued Dividend money. In the writer's opinion, this is not necessarily always the case and his analysis at this point needs more refinement.

LESSON VIII – PRACTICAL POLICIES

2009-04-19T15:13:00.000-07:00

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.

Summary
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.

* * * * * * * * * * *

QUESTIONS:

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.

2009-04-19T14:48:00.000-07:00

Lesson IX – Foreign Trade

Once we have outlined the proposals we have made on the subject of financial reform, as we have been doing in the past two lessons, the objection that is most usually heard runs something along these lines: “Granted that the reforms that you suggest would do a great deal to improve the economic strength and welfare of our country, are they not likely to be impossible to put into effect because of the problems of foreign exchange?'

This is a legitimate question, because in fact it is precisely the problems of foreign exchange that at the present time do sharply restrict monetary policies in many countries of the world. Canadian industries in recent years, the automobile industry in particular, have for example been badly harmed by an exchange rate that has risen from around 63 cents to the U.S. Dollar, to as much as $1.05, so making our manufactures uncompetitive, at the same time as U.S. Dollars were being used to buy up interests in the Alberta oil sands.

On the other hand, the whole question of foreign exchange and international trade is not an impossible one to answer. The fundamental problems of the source of the money supply, and the effect of the flow of capital funds, apply here also. In fact, because of the scale on which foreign exchange transactions take place, it is often rather easier to understand what is going on in the international monetary field, because these things happen on a large scale and obvious way, than to spotlight some of the hidden defects of our domestic monetary arrangements.

The Reason for Trade.
The reasons for trade between nations are really not essentially different from those we gave for trade between individuals examined in Lesson II. For reasons of climate, geography, location of resources etc., certain nations have surpluses of goods of one kind, but cannot produce sufficient goods for themselves of some other kind. The simplest sort of trade, therefore, is the exchange of surplus commodities between nations for the benefit of each. Canada grows more wheat than her people can consume – Japan is short of agricultural land, but has well developed light industry, There is obvious scope here for trading the food and raw materials of Canada for the finished products of Japan, and both nations will benefit.

Trade as Barter.
From the earliest times, the merchants of the world have engaged in trade that has in essence been little different from direct barter. Many old tales tell of how merchant venturers fitted out ships with wares for export, sailed to distant lands, and came home to sell those foreign wares at a fabulous profit – the plot is the same, whether the hero is Dick Whittington or Sinbad the Sailor.

Trade such as this could be carried on without the use of any foreign money at all. Merchant A, coming from country A (which uses dollars) might spend $1,000 in fitting out a vessel to trade with country B (which used pounds sterling). He could then sail to Country B, and sells his wares for, say, one thousand pounds sterling in local money. After spending this money in restocking his ship, he might return home, sell what he bought in B for $4,000, and retire with a profit of $3,000 from his total enterprise. In essence, what has taken place is a profitable exchange of goods for goods, even though, as we saw in Lesson II, it is possible to attach a price tag even on such a barter exchange.

In this last illustration, for instance, we could summarize the transactions as follows, even though not a dollar of money of Country A left that country, and not a pound of the money of Country B left Country B.

COUNTRY A
Merchandise Exports f.o.b.1 Country A $1,000
“Invisible” exports (shipping services) $3,000
TOTAL EXPORTS $4,000 Imports of Merchandise c.i.f2 $4,000
TOTAL IMPORTS $4,000

* * * * * * * * * * *

COUNTRY B
Imports of Merchandise f.o.b. £1,000
Exports of Merchandise c.i.f £1,000

Exchange Rate (Exports A: Exports B) $4=£1

Money in International Trade:
Barter is, however, a difficult way of carrying on the process of exchange, even when, as illustrated above, it is eased by the use of local currency. Internationally, therefore, as nationally, there has been pressure to replace barter with some form of money. For various reasons though, this development of a form of international money has not progressed to such a high degree as has been the case of domestic currencies that we have already studied.

One most important reason for this is that there is no issuing authority comparable to the modern state able to issue a generally accepted international currency. Consequently there is no state created “fiat money” in international trade.3 The fundamental international money unit is therefore money of intrinsic value – generally speaking gold – supplemented by the usual techniques of Banking which, by use of paper promises, make a limited supply of gold the basis for a much greater supply of credit.

The Gold Standard.
The nearest approach the world has seen to an international currency acceptable in all parts of the world was in the heyday of the “gold standard” in the late nineteenth and early twentieth centuries. In its theoretically perfect form, a world gold standard meant that the money of every nation was valued as being worth the same amount as a particular quantity of gold. If nations bought and sold to each other, and it happened that one nation exported more than it imported, there would be a flow of gold from other nations in its direction, so increasing its national money supply. Such an increase would cause a degree of inflation and drive up its prices. Higher prices would make its exports less competitive, so encouraging other nations to export to it, bringing back a balance. By the same mechanism, an “adverse” balance of trade, with imports being greater than exports, would cause an outflow of gold, so causing deflation and a fall in prices.

This may have been fine in theory, but it was a failure in practice, because in practice the gold did not always flow the way it was expected to. The theory was that gold should flow from one nation to another in order to settle international indebtedness. In practice, speculators could import and export gold, so causing a deliberate unsettlement of international exchange, making a profit on the price fluctuations so caused. In his book “A Fraudulent Standard”4 Arthur Kitson cites a case where, some time before World War I, an American syndicate withdrew the sum of eleven million pounds in gold from the Bank of England, and shipped it to New York. Withdrawal of this amount of gold meant, of course, that a considerably larger amount of credit built upon the backing of this gold had to be canceled. The result was a fall in the United Kingdom Stock market in the price of 325 representative securities of $115.5 millions, and corresponding gains in prices in New York. The speculators, playing on two tables at once in London and New York, could not fail to make their profit.

The Gold Exchange Standard:
The economic shocks of World War I and of the 1929 Stock Market crash and the Great Depression which followed effectively put an end to the international Gold Standard. Nations simply were not prepared to let their countries stay in a condition of depression for the sake of following the rules that the Gold Standard laid down. A more flexible system developed, where international settlements could be made either in gold or in some currency exchangeable for gold on demand. The Bretton Woods agreement, setting up the International Monetary Fund, was based on this concept, with the U.S. Dollar being the most popular convertible currency used for international settlements. One result of this was to create a high demand for U.S. Dollars, so as to give them far more buying power than the currencies of most “third world” countries. A second result of this was to place an enormous strain on the U.S. Dollar itself, pegged to be redeemable in gold at a price of $35.00 per ounce. That rate in an expanding world economy simply could not be maintained, and in August 1971, the Nixon administration in the United States abandoned convertibility, since which time the price of gold in U.S. Dollars has risen twentyfold.

The U.S. Dollar continued, however, to be used as the primary settlement money in international exchanges, particularly because it was the currency in which the greatest part of the world's oil was priced. For many third world countries, loans for “development projects” carried out by U.S. Firms imposed debt obligations on such countries beyond any hopes of repayment, giving effective control of their economies to United States interests through the International Monetary Fund, and miring such countries in unnecessary poverty.5

A second consequence of the abandonment of the discipline of the Gold Standard was the replacement of employment in the United States from manufacturing industries to unproductive (in real terms) banking and financial operations. The high exchange rate of the dollar meant that a whole raft of articles, automobiles in particular, but also electronics, toys and appliances, could be imported into the U.S. much more cheaply than could be manufactured at home. Countries such as China also maintained their employment and development by buying U.S. Debt in quantity – so keeping their exchange rate low, and enabling the U.S. to use deficit financing to pay for its extremely expensive military missions abroad. Currently, this honeymoon period appears to be coming to an end, and the U.S. is paying dearly in deficits and deflation for a period in which its financial system was allowed to run wild.

A World Currency
Because of the acknowledged weaknesses of international settlement arrangements based on the gold standard or extensions of it, suggestions have been made that some supra-national authority should issue a “world currency” of fiat money, with which international settlements could be arranged. This could certainly make sure that there was a sufficient quantity of this money to finance international trade, and also correct the gross distortions in exchange rates that result from the use of a national currency, the U.S. Dollar, as the vehicle for international settlements. But there is no guarantee that such a currency would not still be used by international speculators to continue to distort the world's economies, at the expense of the less developed nations of the world.

Again, Arthur Kitson puts the point very well:6
“The effects of a universal currency would be, in the absence of tariffs, to reduce the working classes of all countries to one very low standard of living. The masses of mankind would be engaged in a life and death struggle for the possession of money and for the control of foreign markets, and the nation who could produce goods at the cheapest rate (in other words, the nation whose operatives could be induced to live at the lowest stage of existence compatible with their ability to produce goods) would become the most successful …

“Far from adopting a universal world currency, the most beneficial policy would be for each nation to have its own national paper currency – a currency that has no circulating power beyond the boundaries of the nation issuing it. Such a currency forms a natural protection for its trade and industries. It prevents the cut-throat competition which a world currency permits, and it renders international trade a system of barter – that is, an exchange of goods for goods, which is the natural and rightful form of trade.”

Two major arguments therefore can be advanced against the “world currency” approach:

•It prevents national governments administering monetary policy in the interests of the people they govern, and
•Any currency area which is so large that it is physically difficult to move goods within it at short notice, compared with the ease with which money can be transferred, will be the prey of speculators manipulating prices through rapid, long distance, movements of currency.
Protection or Free Trade?
An offshoot of the same class of thinking that promotes a world currency is the concept of “Free Trade” and lowering tariff barriers as a way of securing world prosperity. This, of course, is fallacious.

In earlier lessons, we have already contemplated the “gap” between purchasing power and prices caused by the increasing use of machinery in production. One way of seeing that there are funds to close this gap and secure full employment at home is to pass the problem on to another country by securing a “favourable balance of trade”, where exports exceed imports in value, and one's own country becomes the “workshop of the world” to which other countries are indebted, as Great Britain was in the 19th century, and China has become today. Since our own dollars are only of use to buy goods in our own country, this means that we secure our own prosperity by piling overseas debt on less developed nations – something very obvious in the disastrous state of public finances in many third world countries, where populations may be starving while “free trade” dictates that the food they grow be exported to other countries who have the funds to pay for it at higher world market prices.

An Effective System
Let us summarize what we have learned so far.

International exchange is primarily a means of barter of goods for goods between countries. As such, it can be carried out without the use of any monetary unit whatsoever.

However, if gold is used as a means of settlement of international indebtedness, it gives the advantage of fixed and certain exchange rates, and an easily worked international accounting system. Disadvantages are loss of national sovereignty, ease of speculation, and scarcity of the international monetary medium, which from time to time causes foreign exchange crises. Another disadvantage is the unrealistic levels of international exchange rates, caused by a particular demand for “hard” currencies, exchangeable into gold. These disadvantages are not wholly eliminated by the use of some kind of international “fiat” money, which also imposes considerable limitations on national sovereignty.

So let us now see if we can lay down specifications for a practical world foreign exchange system which would not have these defects:

•It should have stable exchange rates – otherwise the use of money in international exchange is impossible.
•Exchange rates should be realistic – that is, they should adequately reflect the buying power of each local currency in terms of a standardized form of wealth, e.g human labour of a particular grade of skill.
•It should not adversely affect domestic monetary policy.
•There should be no restraint of trade caused by shortage of the monetary unit.
These specifications could be comparatively easily filled by an international monetary arrangement along the following lines:

•The value of every national currency in terms of every other would initially be fixed in terms of the labour buying power of each, possibly adjusted for the quality of the labour, the wealth of that country's natural resources, and its degree of industrial development.
•Up to specified limits, the treasuries or Central Banks of each nation would be willing to accept the currencies of other nations into their reserve funds, paying out their own national money in exchange.

How it Would Work
Such a system could work with extreme simplicity. Exporter A, in country A, might see a good sales opportunity in Country B, having in mind the price level in B measured by the exchange rate between the countries. Because this exchange rate was fixed in terms of labour cost, the reason for this would have to be that he had some superior economic or industrial advantage by which he could sell more cheaply, not that he was underselling by the use of “cheap labour”.

Merchant A would be paid by the buyer of his product in Country B in the currency of Country B. This, of course, would be useless to him for spending in his own country, so he would take it to his own central bank, who would pay him the fixed rate for it, and put it into its own exchange reserves.

Merchants in country B would similarly be paid for exporting to country A, and in turn, the central bank of B would begin to accumulate reserves of “A” currency. From time to time these central banks would meet and exchange and cancel these foreign exchange reserves. In cases of trade between a number of nations, those reserves might conveniently pass through several banks in several different countries before finally coming to the cancellation point.

What would happen if one country started “living off its neighbours”, by importing more than it exported? In the central banks of other nations, more and more stocks of its currency would be held. Such nations would then have to make a decision. Either they would have to go to the country that was exporting too little, and spend the money they had on desirable imports – or it would remain useless paper in their hands. The pressure that countries now have, to export more than they import, and accumulate gold or hard currency reserves, would be counteracted by a system that gave, in exchange for a “favourable balance of trade” no more than a pile of paper currency, which gave the right to go to the debtor nation and buy its products at prices which, by the fixed exchange rate policy, would be guaranteed to be realistic in terms of its own.

How would international investment be handled under such a system? Suppose that country B was undeveloped, and that investors in country A wanted to supply it with factories, business organization and so on. The answer is very simple – and very interesting. If the investment money were spent buying equipment in country A, the overall effect would be that investors in country A were paying currency of country A to producers in their own country to provide goods and services that they would deliver to country B without immediate payment. In due course, when the new facilities were installed in B, profits would come to the country A investors, taking the form either of B currency, or goods produced in B ready for sale in the markets of A. If, however, the investment money was used for “buying up” the assets of country B – its natural resources, its real estate, its business organizations and so on – the result would be a heavy accumulation of the funds of country A in the hands of the central bank of B which, if the authorities in B are wise, they will be able to use to obtain comparable investment control of country A. What would be avoided is a situation which nowadays is the curse of the underdeveloped world: an obligation to pay back in A's currency debts which currently B can only liquidate by exporting to A food and other materials which would better be used to provide an adequate standard of living back home in country B.7

How to get there:
International agreements relating to tariffs and trade, and the sheer difficulty of reorganizing a world exchange system that is deeply established and highly profitable to financiers, mean that it is bound to take time to put a scheme such as the one suggested above into effect. However, the following first steps could easily be taken, and have in fact been already discussed by some nations at the international level.
1. International currency exchange agreements. Any two central banks of any two countries can very easily agree to exchange quantities of each other's currencies at an agreed exchange rate. This provides reserves to finance trade between them, and neatly avoids all problems between the two caused by a scarcity of gold or “hard” currency. It can be conducted on such a scale as to be beyond the powers of even the best endowed speculators to disturb.
2. A selective tariff/subsidy policy. This could be a means to bring the price level of Canadian products down to the wage level of “low wage” countries so that they do not compete unfairly with Canadian products. A special tariff, or “anti-dumping duty” is placed on all imports from the low wage country, to raise the price of these on the Canadian market to what it would have been had Canadian labour been employed. The proceeds of this tariff are used to reduce the price of Canadian exports to the country concerned, to bring such prices down to the earning level of labour in that country. In effect, what this policy effects is an altered exchange rate, expressing currencies in terms of local wage rates, rather the supply and demand for gold and hard currency. It could well be the key to opening markets for Canadian products in areas now closed to our exports because of foreign exchange difficulties.

* * * * * * * * * * *

FOR FURTHER READING:
Rev. Denis Fahey. “Money Manipulation and the Social Order” especially Chapter V “International Trade and the Gold Standard”
C. M. Hattersley “The Community's Credit” especially Chapter 9 “The International Aspect.”
Statutes of Canada: “The Bretton Woods Agreement Act”, “Currency, Mint and Exchange Fund Act”, “Bank of Canada Act”.

QUESTIONS:
1. Is there any fundamental difference in nature in the problems of exchange between nations and those of exchange between individuals?
2. What are the reasons for engaging in international trade?
3.Barter is the natural and rightful form of international trade.” Do you agree? In what ways can money be of use in such trade?
4. What are the advantages and disadvantages of the gold standard. Why has it largely been abandoned in recent years?
5. What is the difference between the “gold standard” and the “gold exchange standard”?
6. What are the arguments against establishing a single world currency?
7. Can the area covered by a single currency be too large? What disadvantages arise in such a case?
8. What different results occur when foreign investment is (I) spent within the investing country, and (ii) within the country in which the investment takes place, for the purchase of its assets and resources. Are the results the same (I) if exchange rates are fixed, or (ii) allowed to float?
9. How far can “currency exchange agreements” between central banks be of use in stabilizing international trade transactions?

Notes and Sources:
1. f.o.b “free on board”

2. c.i.f “cost, insurance, freight”

3. The proposal of Lord Keynes to create such a medium, which he called the “Bancor”, was defeated in the course of the Bretton Woods negotiations. Wikipedia has an interesting article on the proposal.

4. Cited in “The Bankers Conspiracy” by Arthur Kitson. The passage quoted is reproduced by C. Marshall Hattersley in “The Community's Credit” (1922 Edition page 59). It is also quoted by Rev. Denis Fahey in “Money Manipulation and the Social Order” 1963 Edition, page 35.

5. An alarming expose of the dishonesty of this practice is contained in the book “Confessions of an Economic Hit Man” by John Perkins (Plume, 2006)

6. Leaflet “The Dangers of Internationalism” 1932

7. A disastrous blunder in Canada's foreign exchange policy was when the Liberal government in 1950, faced with rapidly rising foreign exchange reserves coming from major U.S. Investment in Canadian oil reserves, allowed the Canadian dollar to “float” - that is, have its value in terms of the U.S. Dollar established by the forces of the market, a situation that still continues. The result has been wild swings in the value of the Canadian dollar in terms of the U.S.$, leading to alternate phases of prosperity and bankruptcy in Canadian export industries.

Lesson X – The Social Credit Movement

Major Douglas once defined Social Credit as “the policy of a philosophy”. That is to say, it is an idea that has two parts to it. In the first place, there is the philosophy – a particular outlook on humankind and its world. Secondly, there is the policy – an analysis of our present social and economic system and suggestions for its improvement, to make it reflect this fundamental outlook.

As far as his basic philosophy was concerned, Douglas never claimed that he had discovered anything new. Rather, his argument was that, since the close of the Middle Ages, Society has progressed from an economic and social system that regarded the welfare of people – all people – as its basic goal, to one that was based on the worship of an abstraction, that is money.

“The policy of this country . . . is related philosophically to the adulation of money. Money is an abstraction. Money is a thing of no value whatsoever. Money is nothing but an accounting system. Money is nothing worthy of any attention at all, but we base the whole of our actions, the whole of our policy, on the pursuit of money; and the consequence, of course, is that we become the prey of mere abstractions like the necessity of providing employment.”1

The objective of the Social Credit system he proposed was therefore to set to rights the unbalanced, materialist society that had arisen from the worship of false values:

“I will put the objective as I see it for your consideration in a very general form, and that is, we want to establish a correct relationship between the individual and the group, so that the group, and the attributes of the group, shall serve the individual, and not the individual be the slave of the group. The whole of society exists from my point of view – it may not be yours – but from my point of view, the whole of society exists for the benefit of the individual.2

Humankind was, and is, involved in a life-and-death struggle to become the master of the very economic, financial and industrial machine it has created to be its servant, and the stakes in the struggle are nothing less than man's own personality and the continuation of civilizations itself. Writing in the first edition of his book “Social Credit” in 1924 (he saw no need to change his opinions in the revised edition of this book in 1933), he summed up the situation in these words:

“The outstanding fact in regard to the existing situation in the world at the present time is that it is unstable. No person whose outlook upon life extends even so far as the boundaries of his village can fail to see that a change is not merely coming, but is in progress; and it requires only a moderately comprehensive perception of the forces which are active in every country of the world today to realize that the change which is in progress must proceed to limits to which we can set no bounds.

That is to say, the breakup of the present financial and social system is certain. Nothing will stop it. “Back to 1914” is sheer dreaming; the continuation of taxation on the present scale, together with an unsolved employment problem, is fantastic; the only point at issue in this respect is the length of time which the breakup will take, and the tribulations we have to undergo while the breakup is in progress . . .

“There is at the moment no party, group or individual possessing at once the power, the knowledge and the will which would transmute the growing social unrest and resentment (now chiefly marshaled under the crudities of Socialism and Communism) into a constructive effort for the regeneration of Society. This being so, we are merely witnesses to a succession of rearguard actions on the part of the so-called Conservative elements of Society, elements which themselves seem incapable or undesirous of genuine initiative; a process which can only result like all rearguard actions in a successive, if not successful, retreat on the part of the forces attacked . . .

A comparatively short period will probably serve to decide whether we are to master the mighty economic and social machine that we have created, or whether it is to master us; and during that period a small impetus from a body of men who know what to do and how to do it, may make the difference between yet one more retreat into the Dark Ages, or the emergence into the full light of a day of such splendour as we can at present only envisage dimly.” 3

Political History:
In its essence, we can understand Social Credit, therefore, as a philosophy which seeks to assert the mastery of the individual over the organized power of Society (represented by the powers of money and of government). This is in place of the perverted order of Society at the present time, in which money is the master, mankind the servant, and government more the servant of the monetary powers than of the electorate. Although the name “Social Credit” was only coined by Major Douglas around the year 1920, the philosophy has lasted many thousands of years – through Christ's plain statement in the Sermon on the Mount, that “You cannot serve God and Mammon”4 - to the elaborate provisions for the economic health of a nation contained in the laws of the Old Testament.5

It is worth being familiar with the provisions of Old Testament Law on economic questions, because in essence they were carried forward to form the basis of the world's economies at least up to the close of the Middle Ages. Five points in particular can be observed:

1.Elaborate provisions to secure an “inheritance” to every family that could not be permanently alienated.
2.Requirements for worker safety, prompt payment of worker's wages, and fair weights and measures in trade.
3.Interest prohibited on loans to one's fellow citizens.
4.A tax rate set as a fixed proportion of a nation's production, to maintain a Civil Service of defined size.
5.A regular “Year of Jubilee” for the repatriation of land and the forgiveness of debts, every fifty years.
Under the feudal system which formed the framework for society in the Middle Ages in Europe, each tenant held land from a feudal overlord, in return for services in maintaining the fabric of society. Trade was largely regulated by “guilds” of those in a particular trade, who enforced rules for apprenticeship, a “just price”, and quality. Usury was a punishable offence. Taxation took the form chiefly of customs duties and personal services given in exchange for the use of land.

The New World:
The discovery of the New World by Columbus in 1492, and the inflow of gold and silver from Peru and Mexico that followed in the succeeding century, had an economic impact that today is hard to conceive. Money sank to a quarter of its previous purchasing power. Customary feudal services in return for land, which had been commuted into fixed monetary payments, suddenly became more or less worthless. In England, and later Ireland and Scotland, land speculation was rife – common lands or customary tenancies were “enclosed” for sheep farming or as game preserves, agricultural workers were dispossessed, and from this time dates the emergence of a class of the “working poor” without property – Karl Marx's “proletariat” - drifting to cities without work, property or means of support – a social problem continuing to the present day.

The opening up of the Americas did mean that many of those for whom there was no place in their home country could emigrate. From the early seventeenth century onward, the developing American colonies provided land and the chance of a new career for many for whom the new financial developments (including Calvin's legitimizing of the practice of Usury) had left no place. Settlement in the New World may have been a challenge, but the American colonies were, in fact, conspicuous in their prosperity, so much so that Adam Smith, writing his “Wealth of Nations” in 1776, spends considerable time speculating why this should be so. Two basic reasons seem plain, however:

1.The ready availability of free agricultural land, to which no burden of rent was attached.
2.The “Colonial Scrip” - paper money issued by the colonies, which provided a cheap and ample money supply up to the time of the American War of Independence.
It is not always known to what a degree monetary factors were responsible for the final break of the Colonies from Great Britain and the founding of the United States. Following a visit of Benjamin Franklin to Britain in which he had incautiously explained American prosperity as flowing from the use of their own paper money, an Act was passed (1764) by the British Parliament “restraining the emission of paper bills of credit” by the American colonial governments, and by prohibiting their use as legal tender, and so their use for paying taxes to Great Britain. Franklin reports that the immediate consequence of this Act was a severe deflation in the colonies, prosperity turning overnight into unemployment and poverty. It was a refusal to pay tax on imported tea that led to the dumping of such a cargo – the famous “Boston Tea Party”, the beginning of the Revolution. That this matter of money issue was considered of major importance when the Colonies finally threw off British rule, can be seen from Article 1, Section 8, paragraph 5 of the present day United States Constitution:
“Congress shall have power to coin money, regulate the value thereof, and of foreign coin.”
So was won a notable victory in man's struggle for financial independence.

The Nineteenth Century:
The Nineteenth Century saw the expansion of the United States until it filled the whole of the Southern part of the North American continent. It also saw a powerful if sometimes concealed struggle taking place, as Banking interests sought to obtain the privilege of central banking and money creation, already enjoyed by the privately owned Bank of England, in place of the express powers granted to Congress in the constitution. In the teeth of opposition from men like Thomas Jefferson, and after once being vetoed as unconstitutional, a bill chartering the Bank of the United States was passed in 1791. In 1811, President Madison refused to renew the Bank's charter. However, following the disruption of government caused by the war of 1812 and the burning of the Capitol in Washington, pressure to have a new bank started was ultimately successful and a new national bank was chartered in 1816.

President Andrew Jackson vetoed the Act of Congress that would have re-chartered the United States Bank when its charter expired in 1832. The Bank's charter, he felt, was not compatible “with justice, with sound policy, or with the constitution of our country.” In spite of a deliberately induced financial panic, Jackson held firm, and the bank's charter expired and was not renewed.

The American Civil War, which coincided with the Presidency of Abraham Lincoln, marked the beginning of a new era in U.S. monetary history. There is some credibility to the story that this war was conceived as a means to divide the growing United States between French and English Rothschild banking interests. Circumstantial evidence in favour of this is the considerable aid given to the Southern cause by Great Britain during this war, which might have been even greater had it not been for the direct intervention of the Tsar of Russia. In addition, the demands of war exhausted Lincoln's treasury, and the North would have been in bankruptcy, had it not been that Lincoln financed the operation by issue of fiat money – State issued “Greenbacks”. This action was over the disapproval of his Secretary of the Treasury, Chase. Nevertheless it enabled the North to prosecute the war successfully without any accumulation of debt.

This issue of Greenbacks prompted immediate counter moves on the part of the Banking interests. An Act to permit circulation of Bank notes within Washington D.C. was vetoed by Lincoln. In 1863, however, a National Bank Act was passed. Not long after, Lincoln was assassinated, and the rest of the century saw no President with the strength of will to resist the growing power of the bankers over the United States monetary system. Speculation was deliberately used to cheapen the Greenback. A violent deflation was initiated when in 1873, a scarcely examined clause of the new Mint Act led to the demonetization of silver, making it no longer acceptable for coinage within the U.S.A. A further financial panic with the aim of forcing the abandonment of U.S. Treasury “silver certificates” which passed as currency, was engineered in 1893. Thousands of farmers and small businessmen were ruined. The end of this struggle to keep the United States financial system under the people's control ended with the passing of an Act to incorporate the Federal Reserve Bank under private ownership in 1913.

Alberta:
In the U.S. Presidential campaign of 1896, William Jennings Bryan had campaigned on the issue of remonetizing silver, with this stirring question “Shall humanity be crucified upon a cross of gold?” Though he narrowly failed to secure election, Bryan won wide support from those who had lost their homes in the depression, particularly in the Middle West. Many of those people around the turn of the century emigrated into the newly opened Canadian prairies, particularly the new Province of Alberta, created in 1905. Within the United Farmers of Alberta movement, they sparked a lively interest in monetary reform. So the torch of the cause of monetary freedom passed into a new country – the Province of Alberta, Canada.

Students of monetary reform in Alberta were quick to hear of the writings of Major Douglas when these first appeared following World War I. In 1921 also, the United Farmers of Alberta replaced the Liberal Party as the government of that Province. Progressive and United Farmer M.P.'s from Alberta formed a “Ginger Group” of Members of the federal Parliament interested in monetary reform, and were responsible for having Major Douglas invited as a witness before a committee of Parliament in 1923.

1935:
The catastrophic depression of the 1930's was nowhere felt so keenly as on the Canadian prairies. It was in these circumstances that a book on Social Credit, “The Meaning of Social Credit” by Maurice Colbourne reached the hands of William Aberhart, a Calgary school principal and Dean of the Prophetic Bible Institute in Calgary. He was impressed and convinced by the Social Credit argument, and began to advocate Social Credit on his regular weekly Bible radio broadcast. His message brought a ready response from all who were suffering under the depression, particularly the many members of the United Farmers, who had regularly discussed the monetary reform issue in their meetings and conventions, yet had been thwarted by the unwillingness of their own government to implement it.

At first Aberhart did not intend himself to start any new political movement, but when it became obvious that none of the established political parties were prepared to adopt a monetary reform program the Alberta Social Credit League was founded, and in the ensuing provincial election, gained 56 seats in the 63 seat Legislature. Social Credit remained in power with large majorities until it was replaced by a Conservative administration in 1972. During this time, through debtor protection legislation, through careful and honest administration, by strong emphasis on developing natural resource revenues, and by using branches of the Provincial Treasury to provide an exchange medium for a Province from which conventional banks had largely withdrawn, this Cinderella province became one of the richest and most progressive in Canada. Social Credit later (1951) became the government of the next door Province of British Columbia, and elected a single M.L.A. in Manitoba.

On the Federal scene, Social Credit members were returned to Parliament, chiefly from the Province of Alberta, from 1935 onward. Under the National Leadership of Solon Low, the total varied between ten and nineteen members of Parliament, with increasing support from British Columbia, up to 1957. In the “Diefenbaker sweep” of 1958, all Social Credit candidates were defeated. However, disillusion with Diefenbaker, and Social Credit reorganization under a new leader, Robert N. Thompson, led to 30 Social Crediters being elected in 1962, where Social Credit held a balance of power in a minority Parliament, and 24 in the following year – a new factor being that the greatest number came from the Province of Quebec under the dynamic leadership of Real Caouette, where Social Credit had already been a non-political pressure group for some time,.

From that time onward, however, Social Credit's fortunes as a political movement went into decline. World War II's financing had inflated the Canadian economy, and memories of the depression years were fading, with other political issues taking the attention of voters. The death of Real Caouette, and the unfortunate loss of the new, young and extremely popular leader, Andre Fortin in a motor accident, made it difficult to hold the party together, and Alberta's long standing Premier Manning, once personal aide to Aberhart, indicated a preference for conservatism rather than financial reform, and much Alberta political support was diverted to a new Reform party organized by his son, Preston. Similarly, much Quebec support moved to the independantist Parti Quebecois.

In Canada, it has always been a problem that matters of Banking and Finance are the responsibility of the Federal rather than Provincial governments, which puts a severe limitation on the powers of Provincial Governments claiming to be Social Credit. Nevertheless, the two Western Provinces of Canada prospered under their many years of Social Credit rule. Four main policies have been characteristic of those governments, and lay behind their economic success:

1.A policy of developing natural resources in the interests of all the people – characterized by incentives given to oil exploration in Alberta, and massive hydro power developments in B.C. Alaska's Permanent Fund, which pays an annual dividend to residents from interest on invested oil royalty income, owes its inspiration also to Alberta policies.
2.A policy of avoiding all direct debt – that is, debt that is not balanced by a revenue producing asset from which it will be repaid.
3.A policy in Alberta of providing competition to the commercial banking system, through the Government owned and guaranteed Treasury Branch system.
4.A policy of encouraging local initiative and government at the grass roots level.
The Outlook for Monetary Reform.
In addition to the position it attained in Canada, Social Credit has for many years been a force in New Zealand, in the form of the Democratic Party, and has supporters in the United States, England and Australia. Nevertheless, until recently, its success as a political movement has been disappointing. Douglas himself was rightly chary of political party politics, since the whole process of government as it is currently conducted is contrary to his ideals of personal freedom of choice, and the Social Credit political experience had been that a “single issue” party based on monetary reform only has voter appeal in times of financial collapse – something that at the present time (2009) brings it once again to the foreground. At which time, a “small impetus from a body of men who know what to do and how to do it” will be needed to prevent yet one more retreat into the Dark Ages, and lead mankind into a civilization of personal freedom and prosperity that is already physically possible for more than the favoured few, once the barriers of greed and financial manipulation have been broken down.

To which end, this Study Course is dedicated.

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FOR FURTHER READING:

Brooks Adams: “The Law of Civilization and Decay”
C. Marshall Hattersley: “The Community's Credit”, “This Age of Plenty”, “Wealth, Want and War”.
Congregational Union of Scotland - “Wealth, a Christian View”
Rev: Denis Fahey C.S.Sp. “Money Manipulation and Social Order”
Olive Cushing Dwinell “The Story of Our Money”
H.E.Nichols - “Alberta's Fight for Freedom”
Maurice Colbourne “The Meaning of Social Credit”
Gorham Munson; “Aladdin's Lamp”
Old Testament Exodus, Leviticus, Deuteronomy
John W. Hughes “C.H.Douglas – the Policy of a Philosophy”
J. Martin Hattersley “A New Way Forward”; brief to the MacDonald Commission on the Economy.

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QUESTIONS:

1. Social Credit has been defined as “The Policy of a Philosophy”. What is the difference between Social Credit Philosophy and Social Credit Policy?
2. To what causes do you attribute the prosperity of the American colonies before the War of Independence?
3. How far do you believe that each of the following factors will be necessary for effective political and financial reform in the world:
(a) Political leadership
(b) Economic pressures
(c) Public Education
(d) Disgust with lethargy, incompetence and corruption in established political parties.
4. “The only good politician is a scared politician”. What methods can money reformers take to influence the established political order?

Notes and Sources:
1. Speech “The Policy of a Philosophy” 1937, page 6.

2. Speech at Calgary, Alberta, April 1934.

3. Social Credit, 1924 Edition, page 214 sqq.

4. Matthew 6.24

5. See, for example, Leviticus Chapter 25

Postscript

We have come now to the end of this study of the principles and policies of Social Credit. In the course of it, I hope that we have come to understand that Social Credit is something more than just another political party, and something more than just another economic scheme. It is an answer – THE answer – to the most basic human problems of our times.

Our modern Capitalist system, based as it is on the profit motive and the encouragement and reward of personal initiative, has brought humankind to the dawn of an age of plenty never before known in history. At the same time the breakdown of the morally based order of the age that preceded it has allowed avaricious men, consciously or otherwise, to profit not simply as a result of the value they give to their fellow men, but by capturing for themselves the values given to all from our common association in society, whether this is expressed in terms of the value of land, labour, capital facilities, or credit.

The issue of today is the issue of Automation, and the question of how to distribute incomes to mankind with which to buy the products of the machine, when automated production needs less and less human labour, and so distributes fewer and fewer incomes, with which its products can be bought. Traditional Capitalism, whereby people make their incomes from sale or rent of their property or their labour, and most people in practice make a living by selling their labour, can give no other answer than futile schemes to secure “full employment” by “making work” in an age where work is being done away with, and such work as is required may entail many years of specialized and expensive training.

Even in countries claiming to be Capitalist across the globe today, we see the growth of Socialist programs forced on reluctant governments by the economic necessity of providing incomes and social services such a health care to citizens who otherwise could not afford them. Because they come “for free” - at a cost to the taxpayer – they are grudgingly accepted by those who make use of them, but the inefficiency of “one size fits all” programs, and the loss of personal freedom of choice, makes them a second best alternative. The experiment of state planning through Communism has now been reversed in Russia, and is under enormous strain and at great sacrifice of human freedom and welfare in China and North Korea.

Communism should not be regarded as the opposite of Capitalism. It is the logical outcome of Capitalism. It is a creed that believes correctly that the capitalist classes, by owning the means of production and distribution, have become the exploiters of the mass of the people. Yet if the working classes stage a revolution to throw off this Capitalist yoke, they also throw off the undoubted advantages in the production of wealth that Capitalism provides, and that even now workers in Capitalist countries enjoy to a far higher degree than those under Communism.

It is towards Socialism that most nations are tending in their governmental policies at the present time. These constitute, in their activities at any rate, a progressive abandonment of the monetary system altogether. Greater and greater is the proportion of income that the State takes away in taxes. More and more “free” services are provided by the State. The end of such a system is the elimination of all personal initiative and freedom of choice, except such choice as comes from being allowed to elect Parliamentary candidates on meaningless platforms, once every four years.

The economic system of the Middle Ages had the advantage of giving everyone a place in a stable order of society. Capitalism that replaced this gave the advantage that it encouraged the initiative and invention that has made possible the material riches that the world can enjoy at the present time. The policies of Social Credit are the world's next need, so that we can enjoy the economic advantages and freedom of choice given by Capitalism and the use of money, while eliminating its features of exploitation of people and of the environment, and fit all people once again into a stable, secure and prosperous framework of society, without dampening the spirit and the rewards of personal initiative.

“A small impetus from a body of men who know what to do and how to do it, may make the difference between yet one more retreat into the Dark Ages, or the emergence into the full light of a day of such splendour as we can at present only envisage dimly.” You, good reader, who have studied and understood this course, can now number yourself in this body. This is your sacred trust. A troubled and bewildered world is seeking for the knowledge you now have to set it to rights. Do not fail it.