You have been thinking for some time of buying a vacuum cleaner so that the lady of the house might more easily keep the floors clean. Now, you see in the paper, that the local department store is advertising a Powermatic Lewyt at a reduced price: $62.50. You decide to take advantage of the offer.
If you have a bank account you send, along with your order, your cheque for $62.50, drawing on your bank in favor of the department store. The store's accountant deposits your cheque in his employer's bank. The store's banker adds $62.50 to the store's account and then sends the cheque to your bank. Your banker debits your account to the amount of $62.50 and then makes the necessary settlement with the other bank through the agency of the banks' clearing house.
The result: you get your vacuum cleaner just as surely as if you had gone down to the store with $62.50 in your pocket in paper or silver and paid for the cleaner over the counter. Your back account has decreased by $62.50. The store's bank account has increased by $62.50. But not one piece of money has moved either with you or at the store. This is accounting and it is a business which everyone understands and takes for granted.
But what is not so widely known is that the banks use this method of accounting not only to transfer existing credits, but to create new credits which will be used as methods of paying just as easily as those already existing.
Mr. Smith is in the retail business; let us say he's a general merchant. He buys from wholesalers all the various goods he offers to the consumers.
Now obviously Mr. Smith doesn't wait until he gets an order for 5 pounds of sugar or for two pair of shoes before ordering them from the wholesaler or the warehouse of the manufacturer. He must keep sugar and shoes in his store — in stock, as we say. And he must keep stocks of many other items on hand in the store so that he may be able to satisfy the demands of his customers as they present them.
No article is ever paid for before it is sold. Mr. Smith, then, has not paid for all the stocks which are on his shelves or in the rear of his store.
Yet each time that he receives a shipment from the wholesaler he gets a bill. And each time the wholesaler gets quantities of goods from the manufacturer or producer he likewise gets a bill from the manufacturer or producer. And the manufacturer or producer must pay, his employees, pay for the raw materials, pay for the daily running expenses such a light, heat, electrical power, etc., etc.
Neither the wholesaler, nor the manufacturer or producer, nor the employees and all the others engaged in production can wait until Mr. Smith has sold his goods in order to have the money which they need to keep operating.
However, Mr. Smith has made an arrangement with his local bank. The banker has agreed to extend to Mr. Smith a "line of credit". That is to say, the bank will allow Mr. Smith to make out cheques on his account up to a certain amount, even if his account is exhausted before this amount has been reached.
For example, if Mr. Smith has no longer any money in his account and has a bill of $800.00 to pay to his wholesaler, he is going to act as if he had a fine fat account and make out a cheque for $800.00 in favor of his wholesaler. The wholesaler can deposit this cheque at his own bank. When the cheque returns to Mr. Smith's bank the banker cannot decrease Mr. Smith's account by an amount which is not in it; all the same he will honor Smith's cheque with the other bank and will charge Smith's account with it.
In this way Smith can continue to pay with cheques for which he has no funds. It is understood however that once he has sold his merchandise he must deposit this money at his bank. His banker will then decrease his debit or his debt by that amount. So somewhat after the fashion of a game, he uses cheques to make his payments and then makes deposits in order to reimburse the bank, always providing, of course that his net debit does not go over $15,000.
The acceptance by the bank of these cheques without funds, passed in by Smith, constitutes a veritable creation of the means of paying. This is money being written into existence by the banker; it is script money based on the value of the merchandise not yet sold but resting on the merchant's shelves.
It is a procedure in common practice today, a procedure without which business and commerce could not continue. How could the sum total of retail merchants distribute their merchandise to the public when the money with which to pay for this merchandise has not yet come into the hands of the public?
The merchant's profits, the legitimate recompense for his services, are included in the selling price of the goods and have not as yet been distributed since the merchant has not yet even been paid. Likewise for the sales tax; it is included in the price, but not in the pocketbook of the public. And the same holds true for all the other taxes which have infiltrated into the price during the course of production. The general expenses of the merchant cannot be paid and hence cannot reach the wallets of the public before the merchant's goods have'been sold.
So there is a certain amount of reason behind this procedure. The one great drawback of the system is that it places the merchant, and through him, the entire community, at the mercy of whatever decisions the banking system may decide to make. Those engaged in business — wholesalers, retailers, the suppliers of raw materials, the personnel who work in industry — have had to suffer more than once because of this situation.
Tomorrow, for example, Mr. Smith is going to be advised by his banker that from now on he must limit his overdrafts to $7,500 instead of $15,000. If he asks his banker, why, Smith will be told that this is an order received from the central office and that all lines of credit have been cut by one half.
The result: Mr. Smith will have to let some of his employees go, demand immediate payment from each of his customers, cut down on his orders from wholesalers; the wholesaler in turn reduces his orders with the manufacturer. The manufacturer then cuts back production and reduces his staff. These latter, unemployed, now buy less from the retailer. And thus the situation along the whole circle is aggravated; it is in fact a vicious circle.
We will call such a situation a recession, or a crisis. And since people are better informed today than they were 25 years ago we will add, "It is a restriction of credit." The authors of this restriction of credit will attempt to justify it by saying, "It is necessary to combat inflation; the people have too much money; they are buying too many goods."
But who, in fact, finds that the people are buying too many products? The retailer? The industrialists? The wholesalers or the unemployed workers?
Script money which is created by the banker's pen is every bit as good as gold or silver or bank bills. It is created by a very simple accounting procedure and it is extremely easy to keep it in proper relationship with the flow of goods and services which are necessary for our needs. Unfortunately just the opposite happens. The amount of money to be put in circulation is left to the whim and dictates of the bankers who ordinarily make it depend upon the bank's interest rates and not upon the needs of the public and the productive capacity of the country.
Mr. Smith's cheques without funds, which are honored by the banks, are essentially loans made on demand in the measure that they are needed without any specific terms, but of short duration, since Mr. Smith's deposits in the bank are made whensoever he sells his products.
There are other loans generally greater in amount which the banks make to industries or to public corporations. Such loans also involve the creation of credit by means of the banker's pen.
When Mackenzie King declared war in September 1939, his government like other, had known a dearth of money for some ten years. During the crisis of that ten years, savings accounts had not increased. And yet the war was to cost billions.
But the day after the declaration of war the drought of money came to an end. A first loan of 80 millions of dollars to the government was followed by other as often as, and to whatever amount, was needed. The banks created all the money that was necessary not only to begin but to carry on when taxes and the sale of bonds to individuals no longer brought in sufficient funds.
We ended the war with billions of dollars more in circulation than when we began. These new billions did not come from the manufacture of munitions or from cultivating the earth. They didn't come out of the gold mines. These billions came from the pen and ink of bankers as figures set down on the credit side of the government's account.
It is true that payments made in cheque, especially when it is question of simple employees' salaries, brings these to the bank wickets to have their cheques changed into money which will make it easier to buy the products they currently need. But in fifteen days, or even less, all this money will have taken the road back to the banks, either through the savings of the worker or by the deposits made by the merchant and the proprietor who have been paid by their customers or their tenants. And this same money will suffice to meet the demands of other cheques. The bankers know very well that one dollar of real money is sufficient to support ten dollars in cheque money. And it is a fact that the bank laws permit the bankers to loan from 8 to 12½ times as much money as they have in their vaults or on deposit at the Bank of Canada. The bankers do not lend the money of their depositors; they lend credit which they create and on which they exact interest from the borrowers' although it is the borrowers who, by their production, give real value to this money.
So it is quite evident that our modern money system is essentially a system of accounting, It is one of the marvels of modern progress that more than 90 percent of the money in circulation can thus come into existence through the simple operation of setting down figures in a ledger. The evil is that such a convenient mechanism should be so badly adjusted to realities and that the system should have come to regulate our economic life rather than serving it faithfully as it should. We must retain what progress has given us, but we must correct the errors therein. And that is precisely what the application of the monetary propositions of Social Credit would do.