— If I have understood properly, under a Social Credit financial system, the banking system could continue to operate exactly as it does today, lending money at interest to the producers of consumer goods and to public-works contractors?

Exactly as it does today, as a mechanism, but not in spirit. It is the credit of society, a “social credit”, that the banker would lend. Therefore, he would no more lend credit created by him, but credit that he would get from the Central Bank, the custodian of the credit of society. Instead of being a creator of financial credit based on a thing which belongs to society, the chartered bank would only serve as a channel for this credit.

This may look insignificant, of little or no consequence in practice, seeing that, in either case, the borrower can get the same loans, with the same terms. But, on the contrary, this makes an enormous difference.

As Douglas pointed out before a committee of Alberta's Legislative Assembly in 1934, if credit is at birth the property of financial institutions, these institutions get, for nothing, a mortgage security on all wealth produced and financed by this credit. Whereas if all this credit is, at its source, the property of society, it is the whole population which gets this mortgage security for nothing; then it is the population as a whole which provides the loan, and this confers on all the citizens the right to a dividend, to a share of the wealth produced and financed by this "social" credit.

— Would this financial credit still be, like today, a temporary money, created with the loan, and disappearing (cancelled) with the repayment?

No. The loan would not create the credit: this credit was already there, kept by the Central Bank, waiting to be used. Similarly, the repayment of a loan would not cancel the financial credit, but would put it into the return channel towards the Central Bank where it came from.

Here again, this may not seem to make much difference, since the present chartered banks can always create a new amount to make other loans. But the proposed method is more in conformity with reality. The financial credit must be the reflection, the expression in figures, of the country's production capacity which alone gives it value. And the country's production capacity does not disappear when a borrower, after having used it, pays back the borrowed financial credit. Why, then, would this financial credit, which represents this production capacity, be cancelled, even temporarily?

— Would the financial credit issued by the Central Bank, and put into circulation through commercial banks, have to return to its source at a predetermined time, just as it is today with loan terms?

No. The credit that is used for financing production would come out of its source at the rate of production – private or public production; and it would return to its source only at the rate of consumption, or depreciation – private or public consumption.

It would not be in conformity with the facts to demand this return to take place faster than consumption does, like it is done today, especially for public goods. Violence is done to reality when consumption, depreciation is paid at a rate faster than consumption actually takes place. Reality is contradicted when twice the price of a waterworks, a bridge, a school building, is removed from circulation through taxes, in order to pay back loans; when twice the price of a public good is removed from circulation even before this public good is completely depreciated, before it is “consumed” once! (And really, how can we consume it twice?)

— Does this mean that there is no relation today between the activity of money and the activity of real wealth?

This is precisely one of the great defects of the present system, and this, for several reasons. Not only because one forces the repayment of production money faster than consumption takes place. But also because there is no equality ratio between the prices of offered goods and the means of payment in the consumer's hands.

The price is made up as the good is manufactured, and this price is attached to the finished good, which is sold in the market. Whereas the money distributed in the production process takes 1,000 roads, is spent at 1,000 points in time without timing, with the appearance of the finished good and its final price.

There is also money included in the retail price, but which is not distributed, because it is reserved for the replacement of machines later on. There is, as well, the savings of private individuals, which are no more part of the real purchasing power, although they are included in prices, etc.

So much so that, if there is no price adjustment (as Social Credit proposes), the inevitable gap between purchasing power and prices remains, and production does not reach its goal.

Another point: the amount of existing purchasing power forgets many consumers. As it is mainly distributed as a reward to producers, those who are not hired in production have little or no purchasing power.

For all these reasons, it is therefore necessary to see to the financing, not only of production, but also of consumption. This necessity increases, as progress increases production without hiring more people.

— From what source must the means of payment be taken to finance what lacks to consumption?

From the same source as for the financing of production. From the Central Bank, which in this case, can also be done through the channel of the commercial banks.

— Therefore, this would again be money that the commercial banks would lend at interest to the consumers?

Oh no! One must make a distinction between the money that finances production, and the money that buys production, even if both come from the same source.

Douglas makes this distinction when he talks about “credits” and “cash credits”. “Credits” is the money advanced to production, and which must be repaid to the lending bank. “Cash credits” is what we can call “consumer money”, that the consumer uses as he pleases. The difference between these two kinds of money lies in their function, and not in their nature. Both are actually financial credit issued from the same source. Moreover, production money changes into consumer money, when it is paid out by the producer in wages, salaries, industrial dividends.

Today, virtually all consumer money has first been production money, since it is the production activities that distribute almost all purchasing power.

Under a Social Credit system, additional consumer money would come directly from the source without going through industry, in two ways:

A) As a compensation to the seller, for the general discount granted to the buyers, in accordance with the price adjustment;

B) As social dividends to all, which we will talk about (in the next issue of “Michael”).

This addition of purchasing power would allow consumers to pay for certain amounts which are included in prices, but which are not yet or no more in the consumers' hands when goods are put on sale.

It would be far more satisfying than to have to be in debt to some financial institutions. This indebtedness, which becomes more and more widespread under the present system, is a strange way to allow the population to get the abundant production of its country. It is to make a few financiers benefit, and the population suffer, from a system incapable of establishing an equilibrium between prices and purchasing power.

The circulation of financial credit
In a Social Credit system

Money 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.