The following pages are excerpts taken from the 96-page booklet "From Debt to Prosperity," written by J. Crate Larkin of Buffalo, New York, U.S.A. It is this booklet that changed the course of the life of Louis Even and made him a Social Crediter in 1934. "It was a great light on my path," Louis Even said. Read the following pages of Part I of this article and become inspired as Louis Even was. You are sure to be pleased that you took the time to read this important information. Part II will be published in our next issue of Michael.
by J. Crate Larkin
This booklet outlines briefly the economic analysis and constructive proposals known as Social Credit. These are basically the work of Major Clifford Hugh Douglas, a Scottish engineer of broad practical experience in science, business, and economics.
The proposals of Social Credit are designed to revive business, to preserve private property and the profit system, to reduce debt, to lower taxes, and to provide economic security for every American citizen.
These aims would be accomplished by the issuance of purchasing power directly to consumers in the form of credit. Three definite practical steps are required:
1. The establishment in the United States Treasury of a National Credit Account in which the nation is credited with the production of real wealth and debited with its consumption.
2. The sale of all consumers'goods at the Just Price, by means of a Retail Discount determined by the true cost of production.
3. The issuance of monthly Dividends to every American citizen.
Social Credit very properly comes under the heading of "the new economics," which approaches our present-day business problems from the practical viewpoint of a civilization equipped with every modern device of science for satisfying the needs and desires of its members. In answer to the problems of poverty and depression, Social Credit proposes a definite solution, the most sensible and least difficult way out of our financial confusion. Social Credit points the way from depression to permanent economic security, achieved through the true financial valuation of America's real wealth and the provision of adequate buying power to American citizens.
Social Credit is founded on two propositions:
First, that money must accurately reflect the true facts of our real wealth. Second, that in any civilized nation where the money-system reflects the facts and performs its function of distributing goods and services for consumption, in that nation prosperity and permanent economic security will be achieved, and poverty, paralyzing debt, and depression banished.
Yet Social Credit is neither Socialism, Fascism, nor Communism, for it involves no confiscation and would sacrifice neither the liberty nor property rights of anyone. More than anything else it means every day common sense applied to money and business.
Should the principles of Social Credit be put into operation today by the President and Congress of the United States, within six months the economic security of every American citizen would be won, and the nation could enjoy the prosperity of plenty warranted by its rich resources.
In recent years we have suffered from a world-wide depression. (Editor's note: this was written in the 1930's; but we might well suffer from similar depression very soon!) Everyone wants business recovery. Yet millions are hungry while knee-deep in wheat, lacking clothing when cotton is plowed under, homeless while houses stand vacant. Surrounded by an abundance of the things we need, we experience want in the midst of plenty. What a sad contrast!
But this sorry spectacle becomes even more vivid when we contrast producing America with consuming America. When we compare America the manufacturer with America the shopper we find that the manufacturer can produce but the shopper cannot buy. In this situation the machinery of business is stalled.
Business recovery means economic recovery. Economics is a matter of everyday business experience for it is only the business housekeeping of society. Everyone in business is familiar with economics by practical experience. We needn't fear economics as something difficult to understand for we can talk about it in simple everyday words. Instead of struggling to grasp a mass of abstract ideas it is much better to think of economics simply as everybody's business.
If we are to talk about business we had better begin by defining it so that we may know just what business is. The process of satisfying desires with goods in exchange for money is called trade or business.
Business must be carried on because its transactions actually do satisfy our desires for goods. We know that we have constant needs for goods and abundant means for producing them. So to understand the meaning of any sort of economic recovery requires first that we know what is the purpose of the economic system.
Let us picture in our imagination a vast plate glass shopwindow, reaching all the way across the continent from New York to San Francisco. Inside that window are all the goods that America makes. Outside it are millions of us, would-be shoppers, all of us with our noses flattened against the window just as we used to do when we were children.
Let's go into the shop and see what we find there. The first thing that impresses us is the amazing variety of goods that are on sale in the shop. There are millions of items offered for sale — everything that we need in order to live in comfort and convenience and satisfaction.
Suppose we ask the shopkeeper how he can maintain this supply of goods? He will show us warehouses bulging with goods. Behind the warehouses is a chain of factories and behind the factories are farms and mines, and behind those, laboratories and schools, and in the back of all these things the American people themselves with their ambition, their enthusiasm, their inventiveness and their history. With these resources the shopkeeper can guarantee to provide us with a supply of goods beyond the limits of imagination.
That supply of goods and services is America's real wealth. The ability to produce and deliver these goods and services is the only true limit of our real credit. There is no question about the abundance of our tangible real wealth.
As we look around in this workshop of wealth, we remark how few people are working in it. Everywhere we look we see labor-saving machinery that has been designed and installed purposely to eliminate human drudgery. Thanks to science, the curse of Adam has been lifted from the backs of men and transferred to the broader backs of nature's forces by means of power: steam and electrical energy. Our control over these forces can keep the shopwindow filled with goods, yet we have just begun to use our servants efficiently. The sight of all the goods they can produce in the store of plenty should make us feel very wealthy.
Now let's join the millions of shoppers outside the window. What a change we find here! Instead of the orderly scientific cooperation of the productive system and all the abundance of goods created by it, when we get outside we find a struggling mob of worried people. Everybody is fighting everybody else and most of us seem to be getting the worst of it.
All of us are shoppers and consumers of goods. We need food; clothing and shelter in order to live. We have many other desires besides that we would like to satisfy. Why have we built up this vast store of wealth and all the activities necessary to maintain its supply?
As shoppers and consumers of goods, if we ask ourselves this question the answer is obvious. We produce goods in order that we may consume them. The purpose of production is consumption. All of us know from experience that there are many goods and services that we must obtain from others who are better able to supply them than we are. Some systematic process for the production and distribution of these goods is necessary if we are to work together in an orderly and intelligent fashion. So modern business developed and its enormous capacity to produce goods and render services is now,highly specialized.
Briefly, we may define the purpose of the economic system by saying that it exists to deliver goods and services as, when, and where they are required for consumption.
With this purpose clearly in mind, and remembering that we are to contrast America the manufacturer with America the shopper, let us look at our economic system of today.
The general facts of our present difficulties are painfully familiar to all of us by personal experience. They may be classified in four main groups: Poverty, Debt, Taxation, and Depression. Of these it is hard to say which is the heaviest curse on our 20th century civilization. But it is significant that all four are found together in the greatest age of science and power over nature that man has ever known.
Thanks to science we have at last achieved the long-desired age of plenty. Inventions and technological advances have, almost unbelievably, increased our capacity to produce real Wealth in the United States, yet we cannot distribute the consumable goods that even now we produce. And at least half of this immense productive ability lies idle.
Producers wish to sell. Their salesmen offer goods to distributors, who dare not buy because they cannot sell to consumers. Shoppers are eager to buy. Many are hungry and cold and homeless. But they cannot eat or clothe themselves or find shelter, for they have no money to purchase what the producer wishes to sell them.
This is the famous paradox, "poverty in the midst of plenty" of which we have all heard — a humiliating state of suffering and misery in the richest nation on earth. The Rt. Rev. C. E. Riley, Dean of Niagara, has referred to this paradox as a "damned blasphemy." Those are strange words from a clergyman. But stranger still, it seems that all this suffering is due to a glut of goods, to the very surplus of wealth itself.
Ninety percent of the population of the United States does not manage to get enough to live in decent security. Worse than this, more than thirty million people, nearly one quarter of our` total population, are living on a mere subsistence level, with barely enough food to keep them alive, a roof over their heads, and clothing to cover their bodies.
Meanwhile business stagnates for lack of sales, and we struggle under an increasing burden of heavy taxation and debt. Today (in 2008) every person at work gives one day out of two for the payment of taxes alone.
As tax-payers we are all headed for the day of drawing our belts still tighter over an already empty stomach. For the skyrocket of climbing taxation is on the way up, and the zenith of its course will bring an explosion of national bankruptcy. Must we patiently sit by waiting for this to happen?
Every man, woman and child in this country today (October, 2008) is $33,875 in debt for Federal Government indebtedness alone and that figure is going up (the federal debt of 10.3 trillion, is increasing by $3.44 billion every day). How can it ever be repaid? How can more debt be the way out of our present indebtedness? We might as well try to stop the weather from getting cold by taking off more clothes.
We also have the surprising spectacle of an organized and government-sanctioned plan of sabotage — the deliberate destruction of agricultural wealth to restrict production to the level of current consumption. How can wealth be made available to needy consumers by destroying it? Obviously the destruction of wealth also destroys corresponding human satisfactions.
Certainly our rich natural resources, our fields and mines and factories, with all their productive ability, exist today as they did in 1929. Yet we are told now that we are in debt. From 1929 to 1935, the value of our national wealth, measured in money, has shrunk by more than 100 billion dollars — nearly one-third of its total 1929 value. The "financial experts" report that in terms of money almost one-third of our wealth has vanished into thin air.
Now, if one-third of our country had been destroyed by earthquake, fire, or flood we could understand how one-third of our wealth might have been destroyed. But there has been no such catastrophe. Nature has been kind to us. America is here as beautiful and plentiful as ever with her rich crops and her factories filled with machinery.
What has happened to this wealth that has made it lose its value? Nothing at all. The wealth itself still exists, but its value in terms of money has been destroyed. We have made the fatal mistake of confusing our wealth with money, and we have thus deprived ourselves of the wealth we need.
Outside the shopwindow of plenty we stand looking in and wishing for more money, for more buying power. Discouraged and bewildered, we yearn for the wealth of goods in the window when it is denied us simply by the limitations of our own creation, the Money System. What a tragic absurdity! And it is doubly stupid because it can be changed whenever we decide to change it.
Now we are getting close to the heart of the problem. Apparently our difficulty is concerned not with over-production but rather with under-consumption. To be able to buy goods consumers must have buying power. But there is a shortage of this necessary buying power. Under-consumption exists because we have not sufficient purchasing power to buy the total of the goods we produce.
There is ample provision for financing production but little and faulty provision for financing consumption. Producers can produce but consumers cannot consume.
And why do consumers lack buying power? The answer is to be found in the financial system itself. This constant lack exists because the money system, which was designed to accomplish the smooth flow of goods from producer to consumer, has inherent in its nature two fundamental defects so serious that the system has broken down. These disastrous defects are the root causes of depression, poverty, debt, and taxation, because they give birth to a chronic shortage of buying power. The shortage has been with us both in time of "depression" and of "prosperity."
With the coming of power, money has failed man. So long as production remained difficult, and goods were relatively scarce, our antiquated money system could operate well enough to enable business to continue. New markets were constantly being opened up to absorb the surplus of our production. But today, when we are able, through the use of power machinery, to produce on the greatest scale in history, the money system has not been adjusted to these new conditions. Science and invention have outgrown our old ideas of money.
To understand why this has happened, and to see clearly the basic cause of our chronic shortage of buying power, we must first know how the money system works in practical operation. Since its operation has resulted in failure we must discover the facts behind this failure. We have seen that the lack of buying power is responsible for under-consumption. Now let us determine what causes the chronic shortage of money.
In every discussion about the money system we find three words frequently recurring. These three words are put to a great deal of abuse. And if we are to understand clearly why the operation of the money system produces a chronic and increasing shortage of purchasing power, we must first have a definite understanding of these three words. They are all vitally related to each other. But their meaning has become confused.
The first of these words is wealth. Wealth has been defined by Webster as "large possessions, a comparative abundance of things desired, especially of worldly estate." From this definition it is apparent that wealth consists largely of goods. "All things possess the attribute of wealth if they can be used directly or indirectly for the satisfaction of human desire." The term wealth is thus a word used to express the total of goods which can satisfy human desire, as well as the means of producing such goods.
In considering our wealth as a nation we must include as a very important part the great cultural heritage that has been handed down to us by our forefathers. The rich natural resources, the farms and factories which make America wealthy, would be of little use and could never have evolved were it not for the organized scientific knowledge bequeathed to us by our ancestors. This part of our wealth is an asset belonging to the entire nation.
"The modern economic production system is not a system of individual production and exchange of production between individuals. It is more and more the synthetic assembly, in a central pool, of wealth consisting of goods and services which are preponderatingly due to the use of power, to modern scientific processes and all sorts of organizations." (C. H. Douglas, Oslo, Norway. Feb. 1935.)
The real wealth of any person, of any nation, may be measured by his or its ability to deliver wanted goods and services.
It is not always easy to measure wealth, for the value of any one article of Wealth depends directly upon the desire that people have for that article. But since we must all deal in wealth to satisfy our desires, it is essential to have some means of measuring its value in relation to our desires for the goods which compose wealth.
The necessity for dealing with wealth leads directly to the second of the words we must define in order to understand the money system. This word is credit.
"Credit is the vital air of modern commerce." The word "credit" comes from the Latin "credere" meaning to believe.
"Credit... is something founded on belief." All of us use the word "credit," and when we say a man's credit is good we mean simply that we have confidence in his ability to make good on his promise to pay. In other words credit rests upon the ability to pay or to "deliver the goods" as promised.
But it is not generally realized that there are two different and distinct kinds of credit, known respectively as real credit and financial credit. "Real credit may be defined as the rate at which goods and services can be delivered as, when, and where required. Financial credit may similarly be defined as the rate at which money can be delivered... The inclusion in both definitions of the word rate, is of course, important." (C. H. Douglas, The Monopoly of Credit p. 21.)
Thus real credit depends upon the ability to deliver goods or services. Financial credit depends upon the ability to deliver money, as required. This distinction is very important, and we must have it clearly in mind as we consider the monetary system. Let us note it well, for we shall refer to it later.
The third word we must understand clearly is money. Money is the title to life in modern society. But there is probably no other word in our language about which there is so much confusion and muddled thinking. It is no exaggeration to say that most of the wreckage in our stalled economic machinery is due to misunderstanding of the true nature and function of money. Therefore it is vital to understand money itself, even though this may require some revision of our former notions.
Money has been defined as a "medium of exchange, a means of expressing an effective demand for goods. In these days of economic hysteria this simple definition will remove much of the confusion that shrouds money in mystery.
We read and hear a great deal about "sound money." What is this "sound money" the experts talk about? Certainly it is sensible to say that a sound money system is a system that works — a system that makes effective the existing demand for goods.
We know then that goods are conveyed from producer to consumer by means of money. Money is thus the connecting link between production and consumption. It acts as a bridge between the desire for goods on the part of the consumer and their supply on the part of the producer. We might say that money is the equalizing medium between desire and goods, enabling the one to be satisfied in terms of the other. It functions as a force which, like electricity running a motor, is invisible, and we see only its effects transforming desire, which is mental, into physical goods which represent the satisfaction of that desire.
From this it should be plain that money is something numerical, not a material substance. Money is not wealth, but a symbol of wealth and a means of measuring its value. Money gives us a method for applying number values to goods.
If we stick to our personal experience, we cannot fail to realize that money is only a ticket, a ticket authorizing us to go shopping in the nation's store of wealth. Money entitles us to claim the wealth of goods in the store. A money-ticket is exactly like a railroad ticket except that a railroad ticket is only good for transportation while a money-ticket is good for anything in the store up to its stated value in prices.
"We thus arrive at a true conception of the nature of money; money is simply a social mechanism designed to facilitate orderly production and distribution. The money system is to all intents and purposes merely a system of tickets entitling the holders to goods and services. Above all, money as such is not a commodity; it has no intrinsic value apart from the function it performs, and to regard money as a commodity is proof of a radical misunderstanding of that function."
Money is not a commodity with substance, size and weight, like wheat or steel. Thinking about money as a commodity, such as gold, instead of as a measure of value, has caused much of our confusion today. For even "financial experts" agree that commodities fluctuate in value according to supply and demand, and thus no one commodity by itself is suitable as a single absolute measurement of value for all others. Prof. Frederick Soddy says, "Gold is in all respects about the worst commodity to choose as a money standard." (Money versus Men, p. 53.)
Money is so important in our lives that we may well think of it as the keystone which holds together the whole of our economic structure. The reason why money is so important that people quarrel about it, is that these money-tickets are indispensable to our shopping. Money-tickets are just as necessary to our shopping as shopping is to our lives. In civilized society our lives depend on money and the money system. For without money that works, that is "sound," we cannot touch any of the wealth that fills the shopwindows of America.
But to deserve the name "sound," money must possess two important qualifications. For one thing it must have acceptability, which means simply that everyone who uses it has confidence that it can be exchanged for wanted goods or services. And secondly since it is the medium of exchange, we should expect to find money accurately expressing the current demand for available goods.
Any sort of a sound money system, in short, must reflect the true facts of production. It must provide enough of the means of exchange to keep goods moving from producers to the shoppers who consume the goods.
There are mainly two kinds of money in use today. The first of these is currency, or tangible government money which circulates as coins; pennies, nickels, dimes, quarters, and dollar bills. The second is credit-money, or bank deposits circulating in the form of cheques.
Currency is only the pin-money of business. Credit-money (or cheques) is used in practically all large transactions, where coins or bills are not convenient. In fact, more than 90% of our business is done with cheques, or credit-money.
We know that currency is issued by the government as coins or printed bills, but many people do not know just where or how credit-money comes into existence. We use cheques because they are safe and handy, they can be written for paying an exact amount to specific individuals, and so long as they are acceptable we think no more about it.
Suppose we look into the source of this credit-money with which we do at least 90% of our buying and selling. Where is it born? We know that a cheque is an order against a bank balance. The bank balance consists of deposits credited to an account. These deposits themselves may be in the form of cheques drawn upon other accounts. No currency actually changes hands in paying for goods or services with this kind of money. Complicated transactions involving immense sums of money are handled purely by means of the bookkeeping carried on by the banks, entering credits and debits on their books. In their bookkeeping the banks credit and charge the accounts of their customers.
It is clear from this that whatever money was once intended to accomplish, by means of currency, it is a different story now that we write cheques. The cheque system today is simply a series of bookkeeping entries, and our monetary system functions mainly as the circulation of these cheques. We do almost all our business by means of bits of paper, which are evidences of Financial Credit. And this credit is itself created or destroyed in the bookkeeping process of the banks. "The cheque system is in itself a great advance upon the use of tokens in many ways. But its invention has resulted in the banks, not indeed coining money as that is quite unnecessary, but creating money without even the issue of printed notes..." (Prof. Frederick Soddy, Money versus Man, pp. 31-32.)'
C. H. Douglas stated in Oslo, in 1935, that "the method by which the banker makes money is ingenious and consists largely of bookkeeping." This kind of money is born in a bank and dies in a bank. And the bank is responsible both for its birth and its death. "The banker creates the means of payment out of nothing."
The fact that banks create and destroy money by the bookkeeping process of issuing or cancelling credits is illustrated by any ordinary bank loan. Suppose we go to the bank to borrow $1,000. The banker passes judgment on our credit rating, accepts our note, and grants the loan, crediting our account exactly as though we had deposited this sum in cash. We are now "in debt" to our friend the banker. We owe him the $1,000 we have borrowed, plus the interest he charges for its use. We can then write cheques against our new account, and these cheques are acceptable as money.
Now the banks are permitted to lend up to ten times their actual cash reserve, and in so doing the banker "creates" in the case of our loan, $1,000 (less interest) in new money.
But when the time comes to repay this sum the credit he has extended to us is destroyed. We can no longer write cheques against it. Indeed, we must pay the banker promptly or forfeit whatever security has been placed with him as collateral. If we cannot pay, our security then passes into his hands. In other words, every bank loan creates a deposit and every repayment of a bank loan destroys a deposit.
Loans are made and deposits created by crediting the borrower's account in the banker's book. And the money thus created is destroyed in the same way, by debiting the borrower's account. What has it cost the bank to lend us $1,000? Nothing but the expense incurred in its bookkeeping.
As a result of the bookkeeping process of the banks, new money is constantly being created and destroyed. And this money, said by the Encyclopedia Brittanica to be created "out of nothing," is really being manufactured out of little more than pen, paper, confidence, and a bottle of ink.
This bookkeeping process, the banking method governing the birth and death of money, is clearly described by Reginald McKenna, Chairman of the Midland Bank of London and former Chancellor of the Exchequer: "The amount of money in existence varies only with the action of the banks. Every bank loan creates a deposit..." and further, "there is only one method by which we can add to or diminish the aggregate amount of our money... The amount of money in existence varies only with the action of the banks in increasing or diminishing deposits. We know how this is effected. Every bank loan and every bank purchase of securities creates a deposit, and every repayment of a bank loan and every bank sale destroys one." (Speech at General Meeting, Midland Dann, Ltd., Jan. 25, 1924.)
When we think of our own hard-earned personal bank accounts we perhaps imagine that our deposits are used by the banks to create new credit-money. But the banks do not, as many people believe, lend such deposits. By virtue of their privilege of lending up to ten times their cash reserves, banks create financial credit which in their bookkeeping becomes a debt against the borrower.
"It is not unnatural to think of the deposits of a bank as being created by the public through the deposit of cash representing either savings or amounts which are not for the time being required to meet expenditure, but the bulk of the deposits arises out of the action of the banks themselves, for by granting loans, allowing money to be drawn on an overdraft or purchasing securities a bank creates a credit in its books which is the equivalent of a deposit." (Report of the MacMillan Committee on Finance and Industry, presented to Parliament, June 1931, Paragraph 74.)'
"Although, then, we are stressing the function of the banking system as a manufacturer of money, it is far from our object to impress the reader with any suspicion that such manufacture is criminal. Our object is to impress the reader with the importance of the fact that it is a private body, not responsible to the nation, which actually manufactures and controls the manufacture of money, and by so doing controls the nation's means of life." (Maurice Colbourne, Economic Nationalism, p. 138.)'
Money circulates. This is a fact familiar to every one. In the economic system money may well be compared to the blood of the human body. Money in business is equally as vital as the blood in our bodies. It circulates, carrying life and vitality in its flow. Money is the medium of exchange. Business cannot survive without exchange. Exchange implies activity, and this activity is the flow of money, its circulation. The flow cannot cease, for money satisfies desire only when it is exchanged for goods and services. It has no inherent value in itself. Money itself cannot be worn or eaten but it can buy clothing to wear and food to eat. When money ceases to flow, its power to satisfy desire dies, exactly as we die when our blood stops circulating. Only so long as money circulates is business alive and healthy.
We know the time blood takes to circulate through the human body. We measure its circulation by our pulse rate. And in just the same way it takes time for money to circulate through business. Time and flow taken together give us a rate of flow, and this rate of flow is the way we measure the speed of the circulation of money.
But the likeness between money and blood is still closer. For both of them circulate; that is, the course of their flow is circular. Money tends to flow in a circle through business. Its circulation begins in a bank, since it is in the bank that most of our money is born. The banker, for example, makes a loan to a producer. The producer pays his workmen, executives and shareholders, who presently appear as shoppers, consumers of goods in the retail market. The retailer then pays the wholesaler, who in turn pays the producer, who at length repays his loan to the bank. Whereupon that amount of credit is destroyed until the bank makes a new loan, when it creates more new credit. Then the circle is repeated. And business is dependent for its existence on this life-blood circulating in its economic body.
Now our study of money grows exciting, for here we come face to face with Debt. We know debt well, for it is always at our door. And it poses as our friend credit, a wolf in sheep's clothing. More than that, debt plagues us always, since every bank loan, in creating a deposit, at once puts the borrower into the clutches of debt. Banks, it is true, create "credit," which they are said to extend to borrowers. But the bank's "credit" becomes the borrower's debt. Strictly speaking, therefore, most of our business is done on debt, because the money thus created is issued as loans which must be repaid with interest.
The old Biblical tale of Noah and the Flood has its modern parallel. We are told that in Noah's day the world was submerged under great waters. But our modern flood is even greater than Noah's and just as real. For in our day we are steadily sinking under a deluge of debt. "We are not thinking of war debts, or of international debts, or of any relatives of these which may be in the limelight at any given moment, but of the system itself by which all money is debt. It is a debt to the banking system."
Struggle against this as we may, so long as money comes into being as a debt to the banking system we are its slaves. As Maurice Colbourne says, "Even our vocabulary is perverted. When a bank is said to extend you credit it is doing nothing of the kind; it is extending you debt." (Economic Nationalism, p. 147.)
It may be a disturbing thought to realize that the bulk of our money is debt-money, created by the banking system on the basis of the country's resources and its ability to deliver wanted goods. But however disturbing it may be, it is nevertheless true. Our money is a circulating evidence of debt to the banking system. This is the solid fact which we must grasp: The bulk of our money is debt-money.
How can we ever hope to get out of debt when all the money to pay off the debt is created by creating a debt? When banks create new money in the form of loans, they ask the borrowers to pay back more money than what was created. (The banks create the principal, but not the interest.) Since it is impossible to pay back money that does not exist, one must borrow again to feed the monster (the debt), and debts pile up, to the point of a world-wide bankruptcy. (Picture taken from the video "Money as debt.")
Is it any wonder that we sink in a flood of debt when every article of wealth we buy must be paid for with money which itself is debt? Debt surrounds us from birth to the grave. We cannot be rid of its grip because of the ingenious financial device called interest.
The deluge of our present debt can never be drained away because interest requires that the debtor repay more than has been loaned him. The process by which debt-money is created is cumulative — it grows. The debt cannot be liquidated because it grows faster than business can repay it. It can never be repaid, now or at any other time.
Thomas A. Edison is the author of the statement, "In all our great bond issues the interest is always greater than the principal." The total of principal and interest, which is more than the original loan, can be met only by the creation of fresh debt. Thus debt breeds more debt, and the more we struggle the deeper we sink.
But our situation, bad as it appears now, is growing worse. For example, when we try to use this borrowed money to draw wealth from the shopwindows of the nation it becomes impossible, at the same time, to use the money to draw wealth from the shopwindow and to repay the debt.
But this is not the whole story. Business depends upon the debt-money of the banking system. Every dollar loaned to business must be recovered in prices. "Now, money is never borrowed except to be spent; but, as it must subsequently be repaid, the borrowers have to spend it in producing, or inducing the production of, something that can be sold; which means that the harder the community works and the more it produces, the deeper it goes into debt to the banks." So debt mounts at the expense of our ability to buy goods.
"It must, I think, be quite obvious to anybody that, if the world as a whole is consistently getting further and further into debt, it is not, as the ordinary business man would say, paying its way — The public is paying all that it can, and buying what it can. The failure to pay more is therefore forcing the destruction of some of it and at the same time it is piling up debt." (C. H. Douglas, Oslo, Norway, February 1935.)
How fast does debt grow? Douglas continues: "In the 17th century, that is to say, in the century in which the Bank of England was founded, the world debt—and we have plenty of accurate figures with regard to these matters—increased 47 per cent. The Bank of England was founded only at the end of the 17th century.
"By the end of the 18th century the world debt had increased by 466 per cent, and by the end of the 19th century the world debt, public and private, had increased by 12,000 per cent; and, according to some very exact calculations which have been carried out by a quite irreproachable professor of industrial engineering of Columbia University, Professor Rautenstrauch, taking the year 1800 as the origin and taking one hundred years as the unit, the world debt is now increasing as the fourth tower of time; that is to say, increasing as time goes on, not as the square of time and not as the cube of time, but as the fourth power of time; and that is in spite of the numerous repudiations of debt, the writing down of debts which takes place with every bankruptcy, and other methods to write off debts and start again."
But we must not miss the one vital point which gives the key to this dilemma. The debt-money created and destroyed by banks is called "financial credit," and in this term it is the word "financial" that deserves our attention. The deluge of debt is purely financial debt since it is based upon what the banks call the "credit" they create.
Now we have already seen that there are two kinds of credit: financial credit and real credit, and herein lies our key. It was to make this point clear that we defined both financial credit and real credit before we began to examine the money system.
Later on we shall have occasion again to return to our definition of real credit.
At this point we may well pause for a moment to sum up what we have found in the money system, and see what conclusions are possible. We can list our findings as follows:
1. Money is not wealth. Money and wealth are two separate and distinct things.
2. Our modern money system has outgrown its former metallic coins, and become a system of bookkeeping.
3. More than 90% of our money is created and destroyed in the bookkeeping of the private banking system.
4. Money comes into being as a debt which is loaned to us at interest by the private banking system. The economic blood circulating in the veins of business is the blood-money of debt.
The first conclusion that stands out from all of this is that a money system built on debt and interest can function in the long run only to create more debt. And this is precisely what has happened. The facts of experience confirm our findings.
It is worth pointing out that this curious device of interest is peculiar to finance alone. It has no parallel in nature. It is one of man's inventions, and certainly not his happiest.
The second conclusion, which is perhaps not quite so easy to see, is that under this system a shortage of money is inevitable, making it increasingly difficult to buy goods.
(This shortage of purchasing power will be the topic of Part II in the next issue.)
J. Crate Larkin
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