Prudent Press

9

A Review of the Social Credit Money System

D.

Many of the old and the wise-men discussed in Part 4 and Part 5 of this series, have influenced and reminded contemporary scholars about the dangers that are inherent in the private banking system.

Well-known scholars thus far have understood that the private banking system is the root cause of the perpetuating debt and unsustainable growth that many countries have been experiencing.

These problems have forced many leaders to propose solutions to the current monetary system.

This movement is known as Monetary Reform, and within the movement there are quite a few different camps. These include;

 

Fiat Debt-Free Money Reformers (FDF)

Modern Money Theorists (MMT)

Post Keynesian Reformers (PKR)

Islamic Banking Advocates (IBA)

Social Credit Reformers (SCR)

Land Reformers (LR)

Hard Money Reformers (HM)

Competing Currency Reformers (CCR)

 

This article presents the proposals and theories advocated by Social Credit Reformers. To understand this movement, it’s important to understand it’s humble beginnings.

Social Credit had been developed by a British engineer named C.H. Douglas in 1918, as a philosophy that was relevant on matters of economics, accounting, and socialogy.

 

Social Credit

During the first World War, the British government employed him to rationalize and improve aircraft production.

While working on the accounting system of this industry, he noticed that it did not pay out in wages, salaries, and dividends the total value of its production.

After the war, he studied other industries producing consumer goods, and found that the same principle applied. He formalized this study to produce what he called his A plus B “theorem”, that industry had two sets of costs, those he classified as “A” costs (wages salaries and dividends) which provided “purchasing power” for consumer goods, and “B” costs such as bank interest and depreciation charges which did not.

His formula simply rationalized that “A” can not equal “A plus B”, i.e. consumers could not afford to buy the product of their work. Although he recognized that one industry, banking, produced no goods but did put money into consumers’ hands, he still considered that there was an incipient “gap” in the economy that required a steady input of new money. Thus he believed there were other forces in the economy which tend to push prices above the level which consumers can afford to pay.

For the purposes of this article, we will examine the economic aspects of Social credit.

The economic aspect attempted to address two major issues affecting the economy. These issues include;

  1. Inflation
  2. Rising International Debt

Douglas’ work argues that both of these issues are by-products caused by the existing fractional reserve system that the bank’s use in order to loan money to governments and businesses at compounded interest.

Social creditors claim that since compound interest charges rises exponentially, governments are forced to resort to extreme measures to pay off the debt.

Many of these measures include fiscal austerity cuts to social programs, rise in general taxes, deregulation of sectors, and more which are covered in-depth in Pt 1 of this series.

Social creditors argue that when governments raise taxes, two types of problems tend to occur;

  1. Businesses increase their prices in order to retain their profit margins
  2. The cost of additional taxes weakens the general consumers purchasing power as businesses download the cost to them

Social creditor Louis Evens acknowledges these issues in his article titled The Money Myth Exploded, where he writes

In addition to the public debts, there are industrial debts, also loaded with interests. They compel the manufacturers and contractors to increase their prices beyond the cost of production, in order to reimburse the capital and the interests; otherwise they would become insolvent, bankrupt. Both public and industrial debts are paid, plus interest, by the Canadian population, to the financial system. We pay taxes for the public debts, and a surplus of price for the industrial debts. Prices are swelling while the purse is flattened by taxes.

Thus, Social Creditors advocate in reforming the current monetary system and establish propose a new system; one that does not revolve around the concept of money as debt.

 

It should be noted that social credit does not call for the introduction of a new monetary system, but rather a correction of the existing system.

The growing gap between the purchasing power of consumer wages and the cost of goods and services was outlined by Douglas in his theory referred to as the A + B Theorem.

 

A + B THEOREM


In 1920, Douglas presented the A + B theorem in his book, Credit-Power and Democracy, where he wrote,

A factory or other productive organization has, besides its economic function as a producer of goods, a financial aspect—it may be regarded on the one hand as a device for the distribution of purchasing-power to individuals through the media of wages, salaries, and dividends; and on the other hand as a manufactory of prices – financial values.

From this standpoint, its payments may be divided into two groups:

Group A: All payments made to individuals (wages, salaries, and dividends).
Group B: All payments made to other organizations (raw materials, bank charges, and other external costs).

Now 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+B. The product of any factory may be considered as something which the public ought to be able to buy, although in many cases it is an intermediate product of no use to individuals but only to a subsequent manufacture; but since A will not purchase A+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. It will be necessary at a later stage to show that this additional purchasing power is provided by loan credit (bank overdrafts) or export credit.

In essence, the theorem divides a business’ payments into two categories;

A = income, and B = payments to other organizations.

Douglas believed that the prices of goods should equal A+B in the economy.

However, Douglas noted that since income (A) is always less than the total price of goods (A+B), income would always be insufficient to buy back all of production.

He proposed that in order to buy the total production in the economy, people would have to borrow money and dive deeper into debt.

Douglas argues that social credit would prevent this from happening, by lowering the price of goods and services.

He argued that consumers should only pay for goods they consume, instead of the interest on the national or private debt which businesses factor into the cost of goods.

Additionally, Douglas argued that the money saved from paying the interest on the debt, would be used for savings (to facilitate more loans) or investments (to spur growth) in the economy.

Ultimately, Douglas’ goals were to correct the imbalance between the price of goods and the community’s purchasing power.

In order to achieve this goal, Douglas called for the implementation of a national dividend.

 

National Dividend

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In order to implement a national dividend, Douglas advocated for an  independent “national creditor” institution to be established.

This institution would be able to issue fiat credit money to be distributed to the public. Obviously, this credit money would be interest free and would not need to be paid back.

Since the dividend would be distributed directly to the people (instead of forcing industries to lower their prices and causing potential controversy), Douglas argued that the dividend represented a true rise in the public’s purchasing power.

The social credit philosophy is illustrated below.

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Social creditors praise the idea of the national dividend, arguing that it would enable people to obtain the basic necessities of life, something the current system does not take into consideration.

Louis Evens eloquently captures the significance of the dividend where he writes,

The national dividend is going to replace the national debt….A share to each and everyone, guaranteed by the dividend to each and everyone from birth till death; and this share should be sufficient to at least insure what is necessary for life.

Once the idea of a national dividend was fully supported, the next issue to address was how much credit people would receive.

Douglas stated that consumers should only pay for the goods that they consume. As such, he stated that the consumption of goods in relation to the production of goods would determine the amount dividend given to the people.

In order to illustrate the implementation of the dividend, below is a brief example.

Suppose a laptop costs $1000, and that the ratio of consumption to production is 3/4.
In other words, the public is consuming 75% of the total amount of goods produced in the economy.
Social creditors would take the cost of the laptop $1000 and multiply it by the amount of consumption in the economy, which is 75%.

Thus if an individual was to pay $1000 for a laptop, the National Credit institution would pay him or her $250 in dividends. In this way, the consumer pays only $750 for the good, but the business gets the full $1000 profit, while an extra $250 is created by the credit authority.

The concept of Social credit proved to be popular with a number of influential economists and academics, whom are addressed below.

 

The Social Credit Movement


Douglas’ social credit philosophy spawned Social Credit movements around the world, influencing public perception in quite a few countries including Canada, United Kingdom, New Zealand, and Australia.

The Canadian social credit movement largely stemmed from Alberta, where it gained popularity in the face of the Great Depression.

 

Alberta

Social credit particularly appealed to Albertan Premier, William Aberhart, who formed the Social Credit Party of Alberta in 1935.

In the 30’s, Aberhart devised a social credit program through issuing Prosperity Certificates in order to alleviate the effects of the Great Depression.

 

Each certificate was intended to circulate with a value of one dollar.

The intent of the program was to keep the certificates circulating and discourage hoarding. To achieve this, a holder had to affix to the back of a certificate a 1-cent stamp before the end of every week.

However, the hassle and expense of the stamps proved to be very unpopular with the Albertan public, and the program was ended in 1937 when the Supreme Court of Canada determined that only the federal government of Canada had the right to authorize the issuance of currency.

The movement spread from Alberta to the western provinces.  In British Columbia, the Social Credit Party enjoyed great success, and actually held the government between 1952 and 1991 although by the end, the theories of Douglas were all but forgotten.

Although the party is no longer a significant force in Albertan politics, it still has some support and has briefly experienced a revival in the mid-2000’s.

Quebec

The social credit philosophies spread from Alberta’s Social Credit Party to other Canadian provinces, most notably Quebec.

In Quebec, publicist and teacher Louis Evens came across Douglas’s work on Social Credit and went on to translate from debt to prosperity brochure, and wrote a periodic journal of Social Credit literature in French.

This journal was dubbed Cahiers du Credit Social and had been in print from 1936 – 1939.

He also wrote articles on Social Credit in Le Moniteur, a French weekly magazine on economic matters.

Evens had been a strong advocate of human rights, and believed that all humans should receive the basic necessities required for sustenance.

Thus, Evens wholeheartedly embraced the Douglas’ proposal for the national dividend, which he believed was an instrument to benefit the greater good.

Evens highlighted his support for social credit in his book titled: In This Age of Plenty, where he wrote,

The Social Credit dividend will ensure that you get your share, or at least a major portion of it. A better administration, freed from the financiers’ influence, and thus able to deal justly with these exploiters of men, will see to it that you get the rest. It is also this dividend that will recognize you as a member of the human species, in virtue of which you are entitled to a share of this world’s goods, at least the necessary share to exercise your right to live.

In addition to Evens, Douglas’ ideas also influenced individuals in other parts of the world, including the United Kingdom.

 

United Kingdom/ Great Britain

In the U.K., social credit was largely promoted by John Hargrave, when he met Douglas in 1923 after WW1.

Douglas’ philosophy was so influential that it convinced John Hargrave to establish the Green Shirt Movement for Social Credit. The Green Shirt name was derived from the advocates who wore a political uniform of green shirts.

After witnessing the initial success of the Social Credit Party of Alberta, Hargrave decided to reconstitute the Green shirts to create Britain’s own version of the Social Credit Party in 1935.

While the theory of Social credit remained quite popular in Canada and the U.K, it experienced strong criticisms due to the radical ideas it proposed (such as the national dividend).

 

Criticisms

A majority of the criticisms on social credit were directed towards the national dividend and Douglas’ A + B theorem.

These criticisms were made by a variety of notable academics and economists such as John Maynard Keynes, and Ralph Hawtrey.

Critics of the A+B theorem argue there is no difference between A and B payments.

These criticisms are based upon the Quantity theory of money, which states that the quantity of money multiplied by its velocity of circulation equals total purchasing power.

To illustrate this theory, consider the following example;

Suppose the total Money Supply in the Economy = $1 Billion
Let’s assume that this money was spent 5 times a year to purchase the goods and services in the economy.
This means that the total money spent (for the year) is equal to $5 billion. This $5 billion represents the cost of the goods and services produced in the year.

An obvious question might be; how can you purchase $5 billion worth of goods and services with only $1 billion in the money supply?

Critics argue that the velocity of money is what enables people to continue buying more goods and services.

For example;

John buys groceries for $50.
The Grocery store owner receives $50 from John.
The Grocery Store owner pays his employee Allison $50 for the day.
Allison then goes shopping at John’s Shoe Store and pays him $50 for some new shoes.
John returns to the Grocery store to buy $50 of more groceries…

Thus, critics argue, the same money can be circulated many times throughout the economy and purchase new goods and services, so there is no real difference between A and B payments.

Keynes criticized the A +B of Social Credit in his book titled: The General Theory of employment, Interest and Money, where he wrote

On the other hand, the detail of [Douglas’] diagnosis, in particular the so-called A + B theorem, includes much mere mystification. If Major Douglas had limited his B-items to the financial provisions made by entrepreneurs to which no current expenditure on replacements and renewals corresponds, he would be nearer the truth. But even in that case it is necessary to allow for the possibility of these provisions being offset by new investment in other directions as well as by increased expenditure on consumption.

Douglas rebutted the criticisms on the velocity of money in the Birmingham Debate, where he stated,

The velocity of the circulation of money in the ordinary sense of the phrase, is – if I may put it that way – a complete myth. No additional purchasing power at all is created by the velocity of the circulation of money. The rate of transfer from hand-to-hand, as you might say, of goods is increased, of course, by the rate of spending, but no more costs can be canceled by one unit of purchasing power than one unit of cost. Every time a unit of purchasing power passes through the costing system it creates a cost, and when it comes back again to the same costing system by the buying and transfer of the unit of production to the consuming system it may be cancelled, but that process is quite irrespective of what is called the velocity of money, so the categorical answer is that I do not take any account of the velocity of money in that sense.

Economist Hawtrey also criticized the policies of Social credit on the grounds that it would cause inflationary effects in the economy.

Hawtrey expressed his views in the Birmingham Debate in 1933, when he said

In fact, the proposed consumers’ credits are nonetheless inflationary because they are applied to the reduction of prices. Inflation consists in an undue expansion of purchasing power, that is to say, of income. The rise of prices is a consequence, which may be alleviated by subsidies like the bread subsidy of 1919 period but that does not rectify the underlying disequilibrium.

Thus, he argues that there is no gap between the price of goods and the people’s purchasing power, and argues that a national dividend would create inflationary in the economy by increasing the money supply.

In response to Hawtrey, Douglas replies,

My contention is that with the normal production of capital equipment which is required for its own sake, as distinct from a mere device to distribute purchasing power, the amount of purchasing power available to buy consumer goods is far inferior to the price attached to those consumer goods by the normal process of manufacture. As one might say, the industrial process provides 100 penny buns but only fifty pennies with which to buy them. The remedy is clear, and that is to sell the 100 buns for fifty pennies, that is to say one half-penny each instead of one penny, and to make up the capital charges at the point at which they are allocated by issuing to the allocator of capital charges the other 50 pennies. This is, of course, a very crude description of the process, which has been much elaborated elsewhere, but in fact that is what it comes to. To say that this is inflation, is to my mind completely to misconceive the meaning of the word “inflation.”

Currently, the Social Credit movement has seen a decline in its popularity throughout Canada.  Some of this can be attributed to the various criticisms against the philosophy that advocates have not been able to counter with.

This leads us to cover yet another monetary reform principle, one rooted in land reform.

The movement for equitable land reform is analyzed in greater detail in Pt 14 of this series.

 

Contents:

Part 1 – The Overview of Canada’s Current Financial Position

Part 2 – How the Monetary System Works

Part 3 – The History of the Bank of Canada

Part 4 – The Dangers of Usury in the Banking System

Part 5 – The Dangers of Usury in the Banking System Pt 2

Part 6 – The Loss of Canadian Sovereignty

Part 7 – The Decline of Canada’s Economic Environment

Part 8 – The Movement for Monetary Reform

Part 9 – A Review of the Fiat Money System

Part 10 – The Fundamentals of Modern Money Theory

Part 11 – Endogenous Theories on Monetary Reform

Part 12 – Principles of the Islamic Banking System

Part 14 – Henry George and the Land Reform Movement

Part 15 – A Review of the Austrian School of Economics and the Gold Standard

Part 16 – Currency Competition and Alternative Money Systems

Part 17 – The Shadow Banking System

Part 18 – Economic Recovery at the End of the Road

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