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The flow and cancellation of money

on Saturday, 01 October 2005. Posted in Social Credit

Mr. Henry Raynel, of New Zealand, has been acquainted with the Social Credit philosophy for over 50 years, and upon our request, came to our Congress in Rougemont this year to give lectures on Social Credit. Part I was published in our previous issue; here is part 2. (The third and final part will be published in our next issue.)

by Henry Raynel

Earlier (see Michael's previous issue), we discussed the ownership of society's money supply and the importance of enacting legislation to confer the right of creation, ownership, and management to the nation, to the Government, and to the people of our nation. Our address and discussion illustrated the tremendous benefit that would result for every individual in society.

Today I want to discuss and delve a little more about enacting legislation for society to establish, own, and manage its own money supply. I want to briefly comment about just one aspect only: on savings for investment. And I would also like to briefly comment about society paying its debts to bankers.

Our first priority right now is to progress our discussion beyond money creation to talk about money flow and money cancellation, and how it relates to industry and commerce. Society's money supply is created and cancelled continuously as it flows through each cycle of production and consumption of all goods and services. I have endeavoured to illustrate this in an elementary picture form which I will show you at the end of the lecture.

My experience in teaching Social Credit has proved to me that the flow-and-cancellation subject is a stumbling block for many of our conscientious supporters. My mother teaching me the Christian philosophy, combined with my father's support for a typical farmers natural feelings for freedom and private enterprise, has given me the lifetime natural philosophy that helps me study and accept the natural reality of Social Credit.

Most people in the Social Credit Movement find it difficult to understand and accept that money cancels automatically when it is paid into commercial business bank accounts. Working with my own business has helped me understand flow and cancellation, Lack of understanding of flow and cancellation is one of the reasons why many Social Crediters have not got the confidence to advocate and campaign for society to actually own, create, and manage its money supply. And this understanding gives one confidence and enthusiasm to become a crusader,

Our army of crusaders are dependent on the understanding of the leaders of our economic reform Movement. Because us leaders have a good understanding of Douglas and Louis Even, because we have a honest conviction that there is an alternative economic system based on freedom with financial security, the grassroots "will of the people", the people's army will be inspired and will follow us.

C.H. Douglas and his staunch disciples claim there is only one thing worse than a private banking money monopoly, and that is to marry the bankers' money creation with politicians and Government, and thereby create a complete Government dictatorship of both finance and politics. History of the performance of socialist governments has proved Douglas to be correct.

Right now, our nation's orthodox money supply continuously flows as it is created for production, and cancels through distribution. Or to put it more simply, this is what is meant by creation flow and cancellation.

The present commercial banks operate the present system of money creation and cancellation that is very simple and, fortunately, very efficient. There would be no need for a Government operating the new economics of Social Credit to change this aspect of how money functions. The change we must demand is that the ownership and flow of society's money from the beginning of the money pipeline be society owned and independently managed. It would not be as now with bankers owning and managing society's total money supply flow as unrepayable permanent interest-bearing debt compounding exponentially. The people's money supply must be managed independently by a people's monetary authority.

Let us talk quite precisely about creation flow and cancellation of society's money. Commercial bankers lend to businesses, as an example, and bankers also lend to our bakers to bake today's bread. And when the consumers have bought the bread in the days ahead, the shops return the money to the commercial bankers, and it is cancelled if there is still a demand for more bread in the days ahead, the process will be repeated.

In this way, private-enterprise businesses fluctuate production and distribution according to consumer demand. Money flows: it is created for production, and it is cancelled when production is consumed. The old saying is: money is made round to go round, and its meaning is still basically true.

Now what is meant by "a cycle of production and consumption"? This involves a series of stages of production and the time needed to convert nature's raw materials — nature's free raw materials — by the application of energy into finished goods and services from where they are purchased by consumers. The cycle may take one year, one month, or less. This free portion of energy, which is all energy, except human energy, is our cultural inheritance.

C.H. Douglas once wrote: "Economic production is simply the conversion of one thing into another, and is primarily a matter of energy. It seems highly probable that both energy and production are only limited by our knowledge of how to apply them."

Statements by banking authorities

There are a large number of eminent banking authorities that could be quoted, but for professional proof of this, I will limit myself to only one.

The Rt. Hon. Reginald McKenna, one-time British Chancellor of the Exchequer and Chairman of the Midland Bank, addressed a meeting of shareholders of the bank on January 25, 1924, and said (as recorded in his book Post-War Banking):

"I am afraid the ordinary citizen will not like to be told that the banks can, and do, create and destroy money. The amount of finance in existence varies only with the action of the banks in increasing or decreasing deposits and bank purchases. We know how this is affected. Every loan, overdraft, or bank purchase creates a deposit, and every repayment of a loan, overdraft, or bank sale destroys a deposit."

This distinguished authority is acknowledgement and proof of my above statements that banks create and cancel the flow of money as it daily flows into banks, reducing loans, and if needed for the next cycle of production, it is created and flows to finance the next cycle of production.

Hopefully I have made the point perfectly clear which I am trying to emphasize.

All sections of our community's business people, all industry and commerce, obtain their financial requirements, directly or indirectly, from the commercial banks. There is no other creating and cancelling authority. Even legal tender is brought into circulation by the trading banks that purchase it with their own bank cheques.

Only a small number of registered banks carry out this creating and cancelling function with their cheque-clearing facility. All our commercial business companies, and even savings and lending institutions and financial companies, must process all their cheques and other financial transactions through the commercial banks cheque-clearing house. It is an efficient system.

I now wish to further advance my previous lecture about ownership of money and the constitutional establishment of a society's independent monetary authority. The following extract states the development beautifully. The gentlemen would probably rather that I use a different word, like excellently. I am quoting an extract from one of a series of reliable Social Credit booklets which was coauthored by the Social Credit secretariat chairman Donald Neale and his successor, secretariat chairman Alan Armstrong, an economist with an honours degree. Their publication is called Sustainable Prosperity — Challenge and Change. I am quoting from booklet 3 entitled Money, page 16, and published in 1994 by The Social Credit Secretariat of Edinburgh, Scotland, which speaks about the reform of the money-supply system.

"The power to create money must be withdrawn from the commercial banking system. The creation of the community's money supply, debt-free, must revert to a Government authority — a National Credit Authority — charged with the duty of maintaining a strict relationship between the volume of money supply and the volume of real-wealth production, allowing for imports and exports and for capital depreciation and appreciation, thereby ensuring that there is always 'effective demand' sufficient to clear the markets in each productive period. All the statistics necessary to do this are already available within the Central Statistical Office.

"This Authority would need to be so constituted as to be accountable to Parliament, but to be insulated from any form of political manipulation. In this respect, it would be similar to the Weights and Measures Office which is responsible for maintaining and enforcing observance of correct weights and measures in all trading, while being free from political pressure to tamper with those standards for political advantage.

"Critics who may object that money created under Government control would inevitably prove inflationary must be able to say why that must be so, when it would be created by precisely the same means and from the same source — the national credit — as the banks, and yet there is no allegation that bank-created money is inevitably inflationary.

"As Clifford H. Dougias insisted, 'Money is only a mechanism by means of which we deal with things. It has no properties except those we choose to give it. A phrase such as "There is no money in the country with which to do such and so" means absolutely nothing unless we are also saying that "the goods and services required to do this thing do not exist and cannot be produced; therefore it is useless to create the money equivalent of them." For instance, it is simply childish to say that a country has no money for social betterment or for any other purpose when it has the skill, the men, and the materials to create that betterment.""

This key to reform the money system would open the way to further measurers designed:

(1) to eliminate all possibility of inflation through the introduction of a scientific or just price, and

(2) to eliminate the chronic deficiency of aggregate purchasing power with aggregate prices through the introduction of a national dividend.

The national dividend

Now I will speak about the national dividend quoting from booklet 2 of the same source:

"The national dividend would be provided from part of the new money created on a Government account, and would be distributed as purchasing power to each member of the community as a right. It would be unrelated to earnings, and would be sufficient to ensure a 'certain standard of respect, health, and decency which is the first desideratum.'

"The national dividend would break the age-old link between employment and income, a necessary reform when, through technological progress, employment can no longer be regarded as the sole claim to income."

As soon as understanding becomes clear, then it becomes logical that society's total money supply can, and should be distributed in two flows: one portion of the flow to the Government Treasury to finance all Government spending, free of debt, and the second portion of the flow as loans, free of interest, to bankers for them to finance industry and commerce with low-cost loan finance. This shows clearly in the diagram that is attached. (See opposite diagram.) Government borrowing would cease, and the national debt, along with taxation, could be progressively eliminated in a reasonably short time.

We who understand our faulty private banking money system, our pre-the age of machines, the business-pricing system, and the reason for the inadequacy of our society's individuals-incomes system, we who understand have a responsibility to build, in a democratic way, a grass-roots "will of the people" army to pressure and force MP's to work in Parliament for honest natural policies that voters want, and to insist on the enactment of legislation appropriately. We must insist that MP's represent policies wanted by voters, and not policies foisted on us by banker economists, travelling salesmen, working and paid by bankers.

The key that will bring success is that the pressure from voters must be greater than the pressure from economists. It is as simple as that! History has proved that the will of the people can be the greatest power on earth. The shamed democracy we have is precious, and we must use it!


There is a false argument prevailing that consumers must save to finance industry and commerce. It is a deceitful whitewash of the worst type. The serious permanent shortage of total consumer income illustrates the falseness of the often-repeated statement that the main source of money to finance industry and commerce comes from people's savings.

This false propaganda perpetuates the lie that the main source of general investment finance is provided from people's savings. Yet every dollar saved from immediate use to buy today's goods and services available in shops and offices causes those goods to remain unsold. Only by somebody somewhere else in society borrowing extra bank-debt dollars can it be made possible for the goods represented by the saved dollars to be sold. The savings propaganda not only helps to shroud the fact that the banks own and create all of society's debt money, but also it very effectively portrays the false belief that there is no alternative, and that we must pay taxation robbery out of our wages, salaries, and dividends.

The international financial oligarchy's well-educated, well-paid, economic managers are continuously travelling advising the nations of the world the policies that suit the International Bankers present evil economic system.

Debts cannot be paid back

Now I will make a brief comment on the impossibility of paying back society's debt to the banking owners. All money, every dollar that is circulating in society, is a borrowed dollar from the commercial banking system. Bankers create all of society's money as a debt — there is no other money in existence. It is therefore absolutely illogical and completely unrealistic for economists, university lecturers, politicians, and senior highly-positioned bankers to tell society that it must, or even can, pay back its debt. It is an absolute impossibility because of the very simple fact that all money is debt. If we could imagine all of our commercial bank loans to be repaid, there would be no money in society, and the economy, as it functions today, would collapse. What a sobering fact to think about. So why then do economists and highly-positioned bankers carefully nurse their secret?

We are responsible to let the cat out of the bag!

At present, in each country money comes from your banks, and it goes out in two flows. One flow is the debt building up in your Parliament, your Government, and the second flow flows out through industry and commerce. The both flows join together, the industry of Government flow and the general industry and commerce flow, and so they are going through the industry and commerce of State and private enterprise, flowing through goods and services of all descriptions. The goods and services are purchased by consumers, and the money in their pockets is spent, and the money is logically returned to the bank daily as the commercial people bank their takings.

Unfortunately, at the point of consumption of each cycle of production, the total amount that is paid out as wages, salaries, and profits or dividends is not available for the consumers to spend in the shops. A substantial amount of it is taken in taxation, and goes up in this flow to finance Government industry and commerce, or Government spending; the police, the armed forces, and all Government responsibilities. So the flow that we have as consumers to spend on the things we need is substantially less than what it should be for that one reason alone.

The functioning of banking is completely legal and legitimate; they have every right to function as they are doing their responsible work. The Government has delegated the right to create money to bankers. So they are just carrying out the job that legislature requires them to do. We may not be happy with some of the results, but they have every right to do it. And, fortunately, we have somebody doing it. What kind of society would we have if there was no management in control! If it is not what we like, then it is up to us to protest against what we think is wrong, and have it changed. And this is what Social Credit is proposing.

On this graph entitled "Money is created and cancelled at it flows" (see diagram above) is shown the modernized supply-cycle flow under a Social Credit way. Society's total money supply flows through as the lecture stated. Now we have the situation where, with the wisdom of the people putting pressure on their members of Parliament, the members of Parliament get such pressure that was just a little bit more than the traditional economists.

All the statistics that are needed for society's monetary authority to manage the quantity of money are all available. So now we have a situation where society's management group can send the money into society. It will flow into a similar situation of what is happening now. As far as the citizens of society are concerned, the change is so simple and so efficient with the bankers just carrying on their important function, which they are doing now, that most people in society would not even know what has happened. So there would be no upheaval at all.

We have a position now where society's monetary authority is allocating money required to function State spending in one flow which, of course, is naturally free of cost. Now who owns the money supply? Society owns the money supply. So there is no need for taxes when you own the money supply.

One flow would go to the Government, and one flow would go to the bank to finance industry and commerce. So out the flow goes to supply industry and commerce. They all have what they require; there is no question of the banks being short of money. A full amount will be available according to the mathematical statistics that are done, so the bankers will have full access to all they will need; it will go through industry and commerce, it will join up with this flow here, and the total together will enable society to pay the total costs of industry and commerce for all goods and services, and poverty will at last be abolished!

It is important to appreciate this. It is not a miss-and-hit thing. The whole thing has been done with statistics that flow in month after month, continuously, and the quantity of goods and services, proven to be there by statistics, is matched by the people's money supply, owned by the people. If there are 1,000 units of prices there, there are 1,000 units of money available. 

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