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monetary reform

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For a Better Understanding of Social Credit

Written by Alain Pilote on Sunday, 01 January 1995. Posted in In This Age of Plenty (book)

In this age of plenty - Chapter 42

No inflation with Social Credit

It is not unusual to hear some people, especially so-called “learned” people, say that money issued by the Government, as proposed by the Social Credit system, would bring about runaway inflation. And when they say this, they think they said it all, whereas they know nothing about Social Credit, nothing about the circuit of money in a Social Credit system, nothing about the compensated discount, and nothing about the dividend.

You “learned” people, please think about it for one moment: which method will increase prices – 100 dollars issued without interest by the Government, or 100 dollars borrowed at interest from private banks? Even a 10-year-old kid would find the right answer immediately: it is the interest that makes prices inflate. A 10-year-old kid would also tell you that it is absurd for the Government to borrow money at interest, when it could issue it itself, without interest.

Well, it seems that for people covered with diplomas, the answer is not so obvious. Why? Because they have a false notion of the problem, preconceived ideas.

It reminds us of the guy who had met Gérard Mercier, the present Director of the “Michael” Movement, and said to him: “Your Social Credit theory doesn’t make any sense! Come on, the Government cannot just print a wholesale quantity of paper money like that. It will bring about runaway inflation!” Mr. Mercier replied: “You are quite right.”

The guy, surprised, added: “What? You, Mr. Mercier, are against Social Credit?” – “Not at all; I will explain it to you. There are two kinds of Social Credit: the real Social Credit and the false one. The one you have just explained to me is the false one; the one spread by the Financiers. I totally agree with you that the kind of Social Credit you have just explained to me doesn’t hold water, but what you explained has nothing to do with real Social Credit. I am going to explain real Social Credit to you, the kind of Social Credit you obviously never heard of.”

And Mr. Mercier explained to him the Social Credit technique, with Louis Even’s two brochures, What Do We Mean By Real Social Credit? and A Sound and Effective Financial System. The following article aims at giving a good idea of what real Social Credit is.

Accurate bookkeeping

First, let us define the words “social credit”: instead of having money created by the banks at interest – a banking credit, one would have money created without interest by society – a social credit. The Social Credit system aims at nothing but to have money be the exact financial expression of economic realities. So there is no question whatsoever in Social Credit of issuing or printing money anyhow, without limits and in an irresponsible way (as the Financiers would like the population to think). Here is what is actually proposed by the Social Crediters:

The Government would appoint a commission of accountants, an independent organism called the “National Credit Office”, that would be charged with setting up an accurate bookkeeping as regards our currency: money would be issued as new goods are made, and be withdrawn from circulation as these goods are consumed. Thus there would be a constant balance between the capacity to produce and the capacity to pay, between prices and purchasing power.

The dividend

Moreover, because wages are not sufficient to purchase all of existing production (wages being just one part of the production cost of any item), the National Credit Office would give every citizen a monthly dividend, a sum of money to fill the gap in the purchasing power (and make it equal to the collective prices for consumable goods for sale), and to ensure each and all a share in the goods of the nation. This dividend would be based on the two biggest factors to modern production: the inheritance of natural resources, and the inventions of past generations, which are both free gifts from God, therefore belonging to all. Those who would be employed in production would still receive a salary, but everyone, employed as well as unemployed, would receive his or her dividend.

The dividend formula would be infinitely better than the present social programs like welfare, unemployment insurance, etc., since the dividend would not be financed by the taxes of those who are employed, but by new money created by the National Credit Office. No one would therefore live at the expense of the taxpayers; the dividend would be a heritage that is due to all Canadian citizens, who are all stockholders in “Canada Limited”.

And contrary to welfare, this dividend would be given unconditionally, without means tests, and would therefore not penalize those who want to work. Far from being an incitement to idleness, it would allow people to allocate themselves to those jobs to which they are best suited. Besides, if people stopped working, production would go down, and so would the dividend, since it is based on existing production. Without this income not tied to employment, progress is no longer an ally of man, but a curse, since, by eliminating the need for human labour, it makes people lose their sole source of income.

To tie income to work is to distort means and ends. If all the necessities of life can be provided without everyone having to work, it is sheer stupidity to create useless work in order to keep everyone employed (and not to mention all the waste in resources and human energy it represents!). As John Farina, a professor in the faculty of social work at the Wilfrid Laurier University in Waterloo, Ont., put it, in 1982:

“Man invented machines so man would not have to work, and we've succeeded to the point of one and a half million unemployed. To me that is sheer, raging idiocy.”

Financing public works

How would public works and services be financed in such a social money system? Whenever the population wants a new public project, the Government would not ask: “Have we the money to build this project?” but “Have we the materials and the workers to realize it?” If it is so, the National Credit Office would automatically create the new money to finance the new production.

Let us suppose the population wants a new bridge, of which the construction will cost $50 million. The National Credit Office therefore creates $50 million to finance the construction of this bridge. And since all new money must be withdrawn from circulation as the new production is consumed, the money created to build the bridge must be withdrawn from circulation as this bridge is consumed.

How can a bridge be “consumed”? Through wear and depreciation. Let us suppose the engineers who built this bridge expect it to last 50 years. This bridge will therefore lose one-fiftieth of its value every year; since it costs $50 million to build, it will depreciate by $1 million every year. It is therefore $1 million that will have to be withdrawn from circulation every year, for 50 years.

Will this withdrawal of money be done through taxation? No, this is not necessary at all, said Clifford Hugh Douglas, the Scottish engineer who conceived the Social Credit system; there is another way, that is much simpler, to withdraw money from circulation: the method of the adjusted price (also called the compensated discount). Douglas said in London, on January 19, 1938:

“The immense, complex, irritating and time-wasting taxation system, which keeps hundreds of people busy working, is a complete waste of time. The whole of the results that are supposed to be achieved by the system of taxation could be achieved without any bookkeeping at all; they could be achieved entirely through the price system.”

The adjusted price

How would this adjusted price work? The National Credit Office would be charged with keeping an accurate bookkeeping of the nation's assets and liabilities, which requires only two columns: one to write down all that has been produced in the country during the given period (assets), and one for all that has been consumed (liabilities). The bridge's $1 million annual depreciation mentioned above would be written down in the “consumption” column, and added to all the other kinds of consumption or disappearance of wealth in the country during the given period.

Douglas also points out that the real cost of production is consumption. In the example of the bridge, the cost price is $50 million. But the real cost of the bridge is all that had to be consumed in order to build it. Whereas, on the one hand, it is impossible to know the real cost of every article produced, one can easily know, on the other hand, what the real cost of the total production of the country was during a year: it is all that has been consumed in that country throughout the given year.

For example, if Canada's national accounts show that, in a year, the total production of consumer goods for sale was $500 billion, and that, in the same year, total consumption was $400 billion, this means that Canada was able to produce $500 billion worth of goods and services while consuming only $400 billion worth of goods and services. What the bookkeeping price shows at $500 billion actually cost $400 billion to produce.

The real cost of the production that is priced at $500 billion is therefore $400 billion. The population must therefore be able to reap the fruit of its labour — the $500-billion production — by paying only $400 billion for it. Besides, we have seen before that money must be withdrawn from circulation as goods are consumed: if $400 billion worth of goods and services are consumed in the country during a year, it is $400 billion that must be withdrawn from circulation, no more, no less.

A discount on prices

How can Canadians get $500 billion worth of goods and services while paying only $400 billion? That is quite simple. The retail price of all goods and services only has to be reduced by 1/5 — a 20% discount. The National Credit Office would therefore decree a 20% discount on all retail prices during the following term. For example, if an article was priced at $500, I would pay only $400 for it.

But if the retailer wants to stay in business, he must recover $500 for the sale of that product, for this price of $500 includes all the costs of the retailer, including his profit. This is why Douglas speaks about a “compensated discount”: in the example mentioned above, the retailer would be compensated by the National Credit Office which would pay him the $100 that was discounted.

For each one of his sales, the retailer would only have to present his sales voucher to the National Credit Office, which would reimburse him the discount granted to the consumer. Thus, nobody would be penalized: the consumers would obtain the goods which, otherwise, would have remained unsold, and the retailers would recover their costs.

Inflation would be impossible

Thanks to this mechanism of a discount on prices, any inflation would be impossible, since the discount actually lowers prices. Inflation means rising prices, and the best way to prevent prices from rising is to lower them! Moreover, a discount on prices is exactly the opposite of a sales tax: instead of paying more for goods because of taxes, the consumers would pay less because of the discount. Who would complain about it?

One now clearly sees that those who claim that Social Credit will cause inflation talk through their hats, for they ignore the existence of the compensated discount. Of course, if there was only question in Social Credit of printing money, and nothing else, the fear of inflation would be rightly justified. But Social Credit does have this technique to prevent any danger of inflation.

There are three fundamentals in Social Credit: 1. Money must be issued without debt by the Government — the representative of society — according to production, and withdrawn from circulation according to consumption; 2. A monthly dividend to every citizen; 3. The compensated discount. All three are necessary; if you remove one of them, the system cannot work properly.

All of this technique of Social Credit, as explained above briefly, aims at nothing but to finance the production of goods that answer needs, and to finance the distribution of these goods for them to reach these needs. If you look at the diagram below (the circuit of money), you will notice that money never piles up anywhere; it only follows the flow of goods, being issued as goods are produced, and returning to its source (the National Credit Office) as goods are consumed (sold). At any moment, money is an exact reflection of physical realities: money appears when a new product appears, and disappears when the product disappears (is consumed).

Taxes and Social Credit

What would become of today’s taxes in a Social Credit system? All taxation would be reduced drastically, and in time could be entirely abolished. The guideline would be to have people pay only for what they consume. The consumption of public goods (like bridges) would be paid for by the adjustment of prices, as it was explained above. However, it would be unfair to have all of the citizens of the nation pay for services that are offered only to certain cities, like the water supply, sewerage, etc. It is those who receive these services who would have to pay their municipalities for them.

However, public administration would no longer drag public debts, that are mathematically unrepayable, and that are serviced every year by a large slice of the tax revenues (for the Canadian Government, servicing the public debt costs over one-third of all taxes). We would neither have to pay for all the social programs (welfare, unemployment insurance, etc.), which would be advantageously replaced by the unconditional monthly dividend to every citizen.

 

The circulation of money In a Social Credit system

The circulation of moneyMoney is loaned to the producers (industry) by the National Credit Office, for the production of new goods, which brings a flow of new goods with prices (left arrow). Since wages are not sufficient to buy all of available goods and services for sale, the National Credit Office fills the gap between the flow of purchasing power and the flow of total prices by issuing a monthly dividend to every citizen. Consumers and goods meet at the market place (retailer), and when a product is purchased (consumed), the money that had originally been loaned for producing this good returns to its source, the National Credit Office. At any moment, there is always an equality between the total purchasing power available in the hands of the population, and the total prices of consumable goods for sale on the market.


 

All this opens up undreamt-of horizons and possibilities. For these possibilities to come true, all must know and study the Social Credit system. And for that, all must be subscribed to the “Michael” Journal. Dear friend who reads this article, here comes the part you have to play in all of this: you have understood Social Credit, so it is your duty and responsibility to make it known to others, by soliciting around you subscriptions to the “Michael” Journal. Good luck!


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About the Author

Alain Pilote

Alain Pilote

Alain Pilote has been the editor of the English edition of MICHAEL for several years. Twice a year we organize a week of study of the social doctrine of the Church and its application and Mr. Pilote is the instructor during these sessions.