Hi Neil,
I was interested in the comments in your recent podcast Monologue # 31 – Trump is Back where you said, “anyone who genuinely has the solution to the money problem, getting our species out from under trillions, actually quadrillions, of dollars and pounds and Euros and Yuans of debt, well that would certainly attract my attention.”
I would like to acquaint you with the work of an Anglo-Scottish engineer Clifford Hugh Douglas (1879 -1952). Douglas began writing about economic matters in 1917 and continued until his death. His first article appeared in the English Review and was called The Delusion of Super-Production. In it he wrote “we are living under a system of accountancy which renders the delivery of the nation’s goods and services to itself a technical impossibility.” It is this detail which lies at the base of our economic dysfunction and is the answer to the debt riddle.
Allow me to explain…
Our Setup
The real economy can be divided into two parts:
- Production. Where goods and services are made.
- Consumption. Where goods and services are offered for sale.
Production is basically a process of conversion. That is, it takes raw materials and converts them into some good or service of use to consumers. In addition to the raw materials this process of conversion requires inputs of labour and other forms of energy which we call ‘work’. Each time a product is worked on our accounting system attaches a monetary value (cost) to it. Costs in the production system build up as products move through the process.
When a product is fully converted into something which a consumer might be interested in buying it is offered for sale. All of the monetary values (costs) which were attached to the item in the production system are brought forward into the price. The lower limit of price is cost of production. It is only at the point of sale that all of the costs of production transferred with the product during the production process, are finally paid and cancelled. The money used to buy consumer goods we can call consumer purchasing power.
The consumer, of course, is not just a consumer. Men and women work in the production system and this is where they get the money which allows them to buy things on the market. The cost of labour is, of course, also a cost of production brought forward into prices.
The Problem
The assumption of conventional economics is that the production system provides enough purchasing power to consumers to buy the goods and services on the market. This assumption is incorrect.
The problem is that the consumer is not provided with a sufficient flow of purchasing power to cover costs accumulating in the production system. This is because the money that is paid to people (wages, salaries and profits) comprises only a fraction of the final price.
This is obvious enough, though seldom discussed. Take for instance the costs of a firm that produces cars: mined raw materials, factory and machinery costs, transport, warehousing, bank and government charges and a thousand other things I can’t imagine. Labour is just one of these costs, and in the age of automation a diminishing one. It is unavoidable that labour costs and profits be but a fraction of total costs, so how is the car to be sold if the consumer is not provided with sufficient purchasing power to buy it?
This, in fact, is the primary cause of inflation defined as an increase the money supply accompanied by an increase in prices. It is erroneously thought that investment in capital goods (factories, machinery etc.) that are not sold to the public increase the supply of purchasing power in the community. This may be true initially but as the capital makes available consumer items for sale the costs of capital expenditure are brought forward and included in the price of final products. Consumers don’t own tractors but they pay for them in every loaf of bread.
This is replicated across all industrial economies. As the burden of production is increasingly shifted to machines a diminishing portion of costs is provided for consumption. The only means of avoiding economic disaster is to increase the volume of consumer purchasing power by some means outside the production system.
The Financial System
The financial system can be thought of as a software program which has as its purpose the direction and organisation of the real economy. Both production and consumption systems are measured and managed in terms of money.
I think you understand that notes and coins make up only a tiny proportion of the total money supply. Most of it is bank credit. Very little is understood about the nature of bank credit and the consequences of its use.
As the name suggests bank credit is the product of banks. Banks assess the credibility (credit ability) of ‘loan’ applicants (government, business and citizens) and create the money supply against contracts to repay principal and interest. When debts are repaid money is, to use the terminology of the Bank of England, “destroyed.”
Industrial economies short of consumer purchasing power seek to make it up by bringing more debt-money into existence. In other words, as the real economy grows the shortage of consumer purchasing power generates a demand for increasing the volume of debt-money. That’s why we see the fortunes of the community fluctuate with the lending policies of big finance. Debt fills the gap short-term and all is hale and hearty, but its only ever a prelude to the contraction.
The other problem is that debt itself is a cost which, true of all costs, can only be paid by the consumer and only with more debt money. It’s a death spiral with finance as the pilot poised to eject. The whole thing is rigged to ensure the financial industry obtains an ever increasing mortgage over the activities and assets of the rest of society.
The Solution
Douglas proposed that the only solution was “to give the consumer purchasing power which does not appear in prices.” The idea being that debt-free credit would be issued enough to bridge the gap between prices and incomes.
This is entirely appropriate since that portion of production that can’t be distributed for want of purchasing power arises from what Douglas described as the cultural inheritance of which the whole community is the rightful beneficiary:
The greatest factor in the creation of real wealth is the cultural inheritance of civilization – scientific knowledge, tools, processes, organisation and so forth. … This cultural inheritance is beyond dispute the birthright of the community and not of any section of it.
Douglas’ proposals were rejected by the powers-that-be because it encroached on the banking industry’s “Monopoly of Credit”, the title of a book he published in the 1920s. Douglas came to believe that this financial disequilibrium I have described was the centerpiece of a plan to centralise control in an international hierarchy with the money power at its apex; the “Last Fortress” of superstition.
The Social Credit Movement achieved significant traction in the period from the depression to the beginning of the Second War. Douglas spoke to parliaments and monarchs and gave evidence before the McMillan Committee on Finance and Industry. The Social Credit movement that came out of Douglas’ revelations has since been assigned to the Orwellian memory hole. As a history buff you might be interested in the archive on our website. A few of us continue to keep his message alive in the hope that people will come to appreciate its importance in heading off “the development of world dominion” by the expansion of individual freedom into the domain of economics.
With respect to our subject the immediate lesson of history is that the financial powers will issue the debt required to keep the system staggering on. The power of money is an undeniable reality. The challenge is how can we spread this power to provide for the satisfaction of the individual.
I’ll leave you with this quote that describes the ultimate goal of Douglas and his Social Credit:
Kind Regards
William Waite
Northern Rivers, NSW
waitewill@hotmail.com
Websites:
www.thepeoplescredit.com.au
www.socred.org