The Circulation of Financial Credit

Written by Louis Even on Friday, 27 May 2016. Posted in A Sound and Efficient Financial System

— If I have understood correctly, 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 the same spirit. It is the credit of society, a “social credit”, that the banker would lend. Therefore, he would no longer lend credit that he created, but credit that he would obtain from the Central Bank, the custodian of the credit of society. Instead of creating financial credit based on something that belongs to society, the chartered banks would only serve as a channel for this credit.

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

As Douglas pointed out before a committee of the Alberta 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 continue to be, as it is today, a transient money, created as a loan and which disappears (is cancelled) when the loan is repaid?

No. The loan would not create this credit: this credit already existed. It was in the custody of the Central Bank, waiting to be used. Likewise, the repayment of a loan would not cancel the financial credit, but would put it on the path of its return to the Central Bank, from whence it came.

Here again, this may not seem to make much difference, since today's chartered banks can also create new money to make new loans. But the proposed method is more in keeping with reality. The financial credit must be the reflection, the numbered expression 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 set it in motion, pays back the financial credit he borrowed. Why, then, should the financial credit which represents this production capacity, be cancelled, even temporarily?

— Should the financial credit issued by the Central Bank, and put into circulation through commercial banks, have to be returned to its source at a predetermined date, just as it does under today's loan conditions?

No. The credit that is used to finance production would leave its source according to the rate of production – whether private or public; and it would return to its source in accordance with the rate of consumption, or depreciation – whether private or public.

It would not be in keeping with facts to demand that this return take place faster than consumption, as is the case today, especially for public works. We distort reality when we insist that consumption or depreciation be paid at a faster rate than it actually takes place. We contradict reality when we remove credit from circulation, through taxation, and pay back inflated loans that are twice the price, be it of an aqueduct, a bridge, or a school building; by paying twice the amount due, even before the public work is completely depreciated, that is, before it is “consumed” once! (Besides, how can we consume it twice?)

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

This is precisely one of the great defects of the present system, and this, for several reasons. Not only because we require that production credits be returned faster than consumption takes place. But also because there is a gap between the cost prices of products and the means of payment in the consumers' hands.

The sales price is evaluated while the product is being manufactured, and the final price is attached to the finished good as it reaches the marketplace. Whereas the money distributed during the production process follows many different paths and is spent at many different points in time, without consideration being given to the time at which the finished product and its final price appear.

There are also costs included in the retail price, for which no money was distributed, since it is set aside for the later replacement of machinery. There are also the savings of individuals which are no longer part of the purchasing power, although they are included in prices, etc.

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

One more point: The amount of purchasing power now available, leaves out many consumers. Since it is distributed mainly as a reward to producers, those who are not hired for wages in the production have little or no purchasing power.

For all of these reasons, we need to take into account the financing, not only of production, but also of consumption. This need grows as progress increases production without hiring more people.

— Where must the means of payment come from to finance what is now lacking for consumption?

From the same source as for the financing of production, that is from the Central Bank; this too, can be carried out through commercial banks.

— Would this be money lent at interest, by the commercial banks, 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” are the money advances for the production that must be repaid to the lending bank. “Cash credits” is what we might 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. In fact, both are financial credit issued from the same source. Moreover, money for production changes into consumer money when it is paid out by the producer as wages, salaries and industrial dividends.

Today, virtually all consumer money was once money for production, since it is the activities of production 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 mentioned above;

B) as a social dividend to all, the topic of the next section.

This increase in purchasing power would allow consumers to meet certain costs that are included into prices but that are, not yet or no longer, in the consumers' hands when the goods are put up for sale.

It would be far more satisfying than having to indebt ourselves to some financial institution. This indebtedness, which is becoming more and more widespread under the present system, is a strange way to give the people access to the abundant production of their country. This only allows some financiers to benefit, and the population to suffer, from a system that is incapable of establishing an equilibrium between prices and purchasing power.



The Circulation of Financial Credit

In a Social Credit system


By Alain Pilote


The circulation of financial credit

Money is loaned to the producers (industry) by the National Credit Office for the production of new goods. The left arrow shows the flow of goods with their prices attached. The right arrow shows the salaries that are distributed to the workers. The horizontal arrow shows a monthly dividend being issued to each citizen.

Consumers and goods meet at the retailer’s where a final adjustment is made to prices using a compensated discount: The sum of cash credits must be equal to the sum of prices to be paid by the consumers.

Once a product is purchased (consumed), the money that was used to buy it, is returned to the National Credit Office.


Source: Economic Democracy by Alain Pilote


Previous chapter -

Next chapter -


About the Author