The first objection that must be expected when proposing any new issue of credit is that rampant inflation is likely to be the result. This knee-jerk reaction is evidence of the banking industry’s success in a perpetual effort to mislead the public about financial matters.
The fact of the matter is that banks don’t like to issue credit under conditions and beyond limits not set by themselves. The reason for this is simple. The banking industry is a monopoly and, as any monopolist will tell you, keeping your product in short supply is the means to increasing its value. Quigley writes on the interests of creditors:
A creditor, such as a bank, which has lent money – equivalent to a certain quantity of goods and services - on one price level, gets back the same amount of money - but a smaller quantity of goods and services – when repayment comes at a higher price level, because the money repaid is then less valuable. This is why bankers, as creditors in money terms, have been obsessed with maintaining the value of money, although the reason they have traditionally given for this obsession – that ‘sound money’ maintains ‘business confidence’ – has been propagandist rather than accurate.1
The present order has failed to deal with inflation. We are expected to accept this problem as a part of life and a valid excuse for dictatorship through the manipulation of financial instruments like interest rates. The aim here is to show that the cause of inflation is inherent in conventional financing technique and explain how the implementation of Social Credit would operate to control it.
The Social Credit proposals of a National Dividend and Compensated Price mechanism would issue money equivalent to price values like a theatre issues tickets up to the limit of available seats. The important elements of this relationship are the consumers’ demand for the entertainment and the availability of seats. It would be considered very strange by both the vendor and the potential viewer if a shortage of tickets were to come between the entertainment and the would-be entertained. You will immediately acknowledge that at the cinema the ticket issuing system has no influence in itself over the consumer’s demand or the availability of seats. A monetary system that operates along these lines reduces the influence of the means of exchange to nothing more than a convenience that assists in arranging the exchange of goods and services. Douglas compares the two systems by way of an analogy:
We say, and it is only now that it is faintly contested, that he who pays the piper calls the tune. The idea that it is the hearer who is primarily concerned in the tune, the piper in the instrument, and the payment a mere convenience as between the two parties, is so novel to large numbers of unthinking persons, that it is only natural to expect violent opposition to the world-wide efforts being made to reconstitute society on these very principles.2
The modification of finance so as to reduce its influence on the economy toward neutrality is the purpose of Social Credit economics. Since the method of doing this involves an intelligent expansion of credit to people (giving people money) and people’s chief concern with any plan of this kind is runaway inflation, Social Crediters are beholden to explain how they would deal with such a problem.
Please imagine that one Saturday morning a truck dumped a load of cash in Brisbane’s Queen Street Mall. You could expect the happy event of economic stimulation in the immediate area. If this became a regular thing, in addition to undignified demonstrations of the love of money, you would soon detect an increase in prices in the surrounding retail outlets. This increase would eventually neutralise the benefit of the purchasing power distributed by the truck of cash. Worse, the rising prices would have diluted the value of all money for people who shopped in stores where prices had risen. This scenario makes it easy to define and identify the damage done by inflation. Inflation is an increase in the money supply accompanied by an increase in prices. Douglas wrote, ‘Inflation is not an increase in purchasing power, it is an increase in the number or amount of money tokens, whether paper or otherwise, accompanied by an increase in price, so that both the money-to-spend side is, in figures, raised and the price side is also, in figures, raised.’3
Any suggestion to give people money is met with something like, ‘you can’t just print money,’ often coupled with some vague reference to post war Germany and cash in wheelbarrows. The very suggestion that any properly conceived expansion of credit would take the form of printed bills belies the general ignorance about the typical method of money creation. More than 95% of money in cycle is issued in the form of loan credit taken on by government, business and private people by entering into debt contracts with commercial banks. A commercial bank is a business that lends money to make a profit. A loan creates a deposit without reducing anyone else’s deposit. The figures the bank enters into the borrowers account will be accepted everywhere as payment for goods and services so can be called money. Money borrowed in this way is new money and will cycle through the economy until it is repaid and the credit destroyed.
This being true we come to a major cause of inflation. Any issue of credit needs to be repaid and so must find its equivalent (plus interest) in the form of prices somewhere. If we define inflation as an increase in the money supply accompanied by an increase in prices we discover a worm inherent in our method of money creation. Heydorn writes, ‘Debt-money, however, has to be repaid and so the greater the amount of it which has been contracted, the greater are the costs which will eventually have to be met.’4 So we can conclude that the method of money creation is a major contributing factor to uncontrollable inflation. Question: Would we control inflation if we created money in a different way?
This is not the whole cause of inflation but it is an important one. What has been described above is a systemic defect. It belongs to the category of inflation described as cost- push inflation. The lower level of price is set by the cost of production (this is obviously true regardless of general misconceptions about so-called laws of supply and demand) and any cost must be recovered in price. An increase in cost of any kind creates upward pressure on prices which must be recovered from the consumer at any end-product’s point of sale. Increase in labour costs, power costs, rent, bank charges, taxation, capital expenditure and the other myriad charges must be factored into retail prices if businesses are to survive.
The other type of inflation is demand- pull. In the present system the upper limit of price is set by what the consumer will pay. It follows, therefore, that if you increase the amount of money units in the hands of the consumer he will be prepared to pay more and so the retailer, perceiving this willingness, charges more. It is unfair to say this tendency is driven entirely by greed. Business these days is risky business. It is not difficult to see that operating from a position of indebtedness most business is conducted under a sword of Damocles that can only be held up by paying off as much debt as possible or shoring up reserves in anticipation of ‘hard times’ which, in present conditions, come along at regular intervals. Upon consideration of these factors it is easy to see why prices should increase upon the public receiving a regular truck load of cash.
The Social Credit analysis explains that there exists a shortage of purchasing power in the hands of consumers and the solution to much of the economic tension that exists is to make up this shortage by an addition to purchasing power that does not appear in the prices of products. One will realise at this point that rising prices destroys purchasing power. So the attention of any solution must be turned to the reduction of prices:
Now a rise in purchasing power accompanied by a fall in prices is not inflation – it is an increased purchasing power, which is quite a different thing, and if you do apply credit as we call it – the source from which purchasing power is drawn – to a reduction of prices you cannot produce inflation.4
The Social Credit proposal to deal with this problem of rising prices is simple. Willing retailers would register with a department that we might call the National Credit Authority (NCA). At the time of registration the retailer would present a figure of average prices (costs + profit) they have been charging and would be happy to continue receiving in exchange for their goods. For example, 10% above cost. They would then agree to discount the price of products on their shelves by, lets say, 25% below the presented figure. Upon sale of an item the retailer would take evidence of the sale to his bank who would reimburse him the whole 25% discounted price. The 25% would be debt-free credit issued by the NCA outside the conventional debt-money system. With modern methods of fund transfer a system like this would be easy enough to administer.
An example might make it clearer. It costs the owner of a lawnmower shop $300 to sell a lawnmower. This is inclusive of all costs; rent, bank charges, the mower from the factory, salesmen etc. Under present conditions he prices a mower at $330 to the public. Under the compensated price system the owner of the store would agree with the NCA to discount his mower to the public by 25%, that is to $248. Upon sale of a mower the owner of the shop would take proof of sale to the bank who would credit his account with the $82 drawn from NCA funds.
A suggested variation would be for the retailer to charge the consumer the full $330 and the consumer take proof of purchase to the bank who reimburses the consumer’s account the 25% or $82 from the NCA.
The general public (we are all consumers of goods and services) would be the beneficiary with lower and stable prices. Price increases would be brought under control and a mechanism for the issue of credit (not debt) instituted. The retailer, the distributive stage of the economy, would be happy to fix prices so that he could enjoy the benefits of a market with increased buying power not being eroded by inflation and it is likely sales volume would increase at the lower price so he would do better anyway. This benefit of increased purchasing power would feed back into the productive system providing greater stability to meet costs and carry on demanded production. Retailers discovered defrauding the scheme or raising prices beyond that which was agreed would be removed from the register and cease to receive the compensated price advantage. The actual amount of credit required would be subject to periodic assessment and adjustment in line with the realities of the economy.
This arrangement would achieve three sorely needed objectives. Stabilise prices, increase purchasing power through credit injection and progressively empower the consumer to decide what is produced by giving him sufficient money to buy the goods and services he desires. The stimulus for production under a scheme like this would increasingly arise directly from the decisions of consumers about what they want. Presently the decisions about what people buy is based on consideration of what is cheapest and the effectiveness of psychological manipulation called advertising, and these factors dictate down the supply chain the quality and type of goods for sale.
The basis for the Social Credit solution is to make the financial system reflect facts. So you might well ask what is the realistic basis for the issue of this new credit? The reality is that the real cost of production is consumption over the same period. For example, if I require the energy of a loaf of bread and 200g of butter to make 5 loaves of bread and 1kg of butter then the real cost of 5 loaves and a 1kg of butter is one loaf and 200g of butter or one fifth of what is produced. Generally speaking the real cost of a society’s production programme over a given period of time can be measured by the mean consumption rate over that same period of time.4 This realisation has far reaching implications one of which is that by the time any product becomes available for consumption the real cost of its manufacture has already been paid. The financial price of the product should be a function of the real cost (materials, labour, energy etc) and, because the real cost is falling, owing to the widespread use of machinery and automation, so to should financial costs be falling.
An arrangement that recognises this reality passes on the advantages of industrial progress to the community of consumers, who are the right recipients of these advantages. The present system that creates money through the contracting of debt insists that consumers cover the exorbitant costs of finance which, as we have seen, inflate prices. These costs are booked against the energies of the community to orientate the purpose of economies as providers of employment to service debt rather than the provision and distribution of authentically demanded goods and services. The measure described above would serve to decrease the influence of money and recalibrate finance as an instrument that serves rather than an institution that directs.
Quigley, C. (1966). Tragedy and Hope. A History of the World in Our Time. The MacMillan Company, New York, p. 47.
Douglas, C.H. (1979). The Monopoly of Credit. Bloomfield Books, Suffolk, England.
- Douglas, C.H. (1993). The Use of Money: Address Delivered By Major Douglas, St. James Theatre, Christchurch, New Zealand, Feb. 13, 1934.
- Heydorn, O. (2014). Social Credit Economics. CreateSpace Independent Publishing Platform, Ancaster, Ontario, Canada.