Tuesday, February 2, 2010

A Long Introduction to Social Credit

The recent earthquake in Haiti has got my blood boiling more than ever over the exploitative and unethical nature of the current world financial system.

One of the great advantages of this system to its proprietors is its complex nature, making it easy to pull the wool over the eyes of common Americans who grab onto soundbites and simplistic explanations and, besides, are kept complacent on the spoils of that very exploitation.

Some trads are quite aware of this exploitation inherent in capitalism, and are aware that the Social Teachings of the Church condemn it. This is one place where I think the movement is quite strong. However, there are still many "Conservative" voices within both traditionalist and neoconservative Catholicism who are big pushers of neo-liberal "economic orthodoxy" and the vicious efficiency of the so-called "free market" (I'm thinking specifically of those involved with the so-called "Acton Institute").

There are many problems, specifically, with the current world economic/financial system, including (as I hope to discuss in another post) the neo-colonial enforced economic dependency of the Global South upon the North, and the uneven international "specialization of function" of First, Second, and Third World countries in an unequal exchange promoted under the name "free trade" by the IMF and World Bank, and by a United States more than willing to participate in wars of economic structural adjustment trumped up as "liberating" (when really, all they do is make the new State tributary to the US).

However, the issue that really gets to the heart of the current economic structures of exploitation, both internationally and domestically...is Usury. Moneylending at interest without sharing any of the risk. Our entire monetary system, as it is currently constructed is based on debt and debt-slavery...debt to parasitic financiers who don't actually do anything productive, and do not even have what the purport to "lend".

The problem of credit is complex, of course, but I think the Pilgrims of St. Michael (also known as the "White Berets") who publish the Michael Journal do a very good job of explaining it (and an attractive solution) in light of Catholic Social Teaching, in 10 Simple Lessons (and only the first 6 are needed to understand the system in itself, the rest are just historical and religious information):


It's relatively quick and fascinating reading, but I think they belabor the point with a lot of repetition, so I'll do my best to summarize here.

I'll start with a quote that helps us to reconsider our whole paradigm of economics and money:
...it often happens, in the running of public affairs, that one mistakes the means for the end, and one is all amazed when chaos results. For example, according to you, what is the end of economics:

A. To create jobs?

B. To reach a favourable balance of trade?

C. To distribute money to people?

D. To produce the goods that people need?

The correct answer is D. Yet, for practically all politicians, the end of economics is to create jobs: yet, jobs are just a means to produce goods, which are the end; today, thanks to the heritage of progress, goods can be produced with less and less human labour, which leaves people more free time to do other activities, like taking care of their families, or accomplish other social duties. Besides, what would be the point of continuing to produce something when human needs for this production are satisfied? This would be a useless waste of resources. And what about all those who cannot be employed in the production system: the handicapped, old people, children, housewives — should they starve to death? Not every human being is a producer, but all are consumers.

Since I learned of Social Credit, that has been of the things that has angered me the most about all the proposals for "stimulus" in the current recession; all the politicians seem to be concerned with "unemployment" and the need to "create jobs". This stems from the Anglo-Protestant "work ethic"...a Calvinist invention. In reality...the goal of the economy is to produce the goods people need and want and let the goods reach those people.

If technology enables everything to be produced with less and less human work...why this obsession with making everyone "earn a living" if their labor is superfluous? This abstraction of finance from production, while at the same time bootstrapping distribution to participation in that same production...is one of the huge problems with our whole current economic paradigm.

I'm told we're in a recession...but has our production capacity actually gone down? Did factories and machines get destroyed? Did the fields all get eaten by locusts or scorched by drought?? Did a big chunk of the labor force die of some awful plague??? No. The production capacity, objectively, remained the same. The only thing that collapsed was the nebulous "finance"...

The fact is that we have reached the Age of Abundance. Scarcity of actual wealth, that is to say goods and services, is no longer really a problem in the world. That is what makes me so mad about all this conservative talk of balanced budgets and condemning the giving of "bad loans" to all these "untrustworthy deadbeats" foreclosing on their houses because they "didn't live within their means". Well, what exactly are our "means" if not the ability to produce? And the ridiculous thing about all these foreclosed houses that were allegedly "beyond our means"...is that they exist! The houses got built!!! So they obviously WERE within our means. We had the labor and the raw materials for them, and the demand for them. Ah, you say, but they were paid for with "loans". With mortgages. But what do these loans represent? Do they mean that production capacity was diverted into houses that lenders could have put towards...what? Needed food and clothing? I don't think that's what happened, as we have enough of those still.

What is at issue is only distribution. Money is merely the tool of distribution, it is not a good in itself. The real trick of the current system, however, is how money is created. When we speak of money creation, most people imagine those videos of the Mint they show kids in school, big sheets of greenbacks rolling off big presses.

In reality, paper currency like this is a tiny fraction of the money that exists. Most money is created as numbers in a ledger or in a computer, as credit. And it is created by private banks. Conservatives will often get angry at the idea of all these people defaulting on loans and going into bankruptcy, because they imagine that banks are lending from deposits. Their deposits, it is implied.

In reality, nothing is further from the truth. Banks create the money they loan...out of thin air. Or, rather, out of the promise to repay. Out of the debt itself. The person making the loan implies that they are going to do something productive and eventually, thus, be able to pay back the loan. This credit, this promise to procure the money in the future, is the source of the money in the present, not previous deposits. This is how the money supply increases. When the principal is returned, that money is simply retired, disappears as simply as it appears.

However, there is an issue. Banks expect more than just the principal in return. Banks expect interest. This is the Usury consistently condemned by the Church until the late 19th-century when hierarchs got suddenly quiet on the issue. Part of this is because of an ingenious slight-of-hand that the bankers have pulled. They argued persuasively that lending at interest could be justified as the cost of the risk that the loan won't be repaid, or as opportunity cost in a world of potentially productive investments. And, buying this argument, theologians generally got silent about usury or reduced it simply to "interest above fair market value" or something sufficiently disingenuous like that.

Now, in itself, these arguments are correct. If you invest in a venture with your own real capital, and so share the risk...you have a right to a dividend as your share of the profits. However, banks giving loans are not in fact in this situation. First, they do not invest their own capital, they simply are authorized (by State sanction and enforcement) to loan the money into existence out of nothing. As such, they take no real risk, as they lose nothing if the loan is not returned. And yet they expect interest on top of it.

Now, there is a connection between deposits and loans inasmuch as governments may place a "fractional reserve" requirement on banks. Banks are required to have a certain ratio of reserve deposits to loans they make, partly just to keep a cap on lending and partially just to be sure that they are covered, cash-wise, if people decide to withdraw their money as cash so there is no run on the bank. But, even reserve requirements have gone down and down. A previously required ratio of one deposit dollar for every 9 created as debt...has decreased to practically no reserve requirement at all.

But, anyway, the problem is that the private banking system creates money as debt. Our entire money supply represents money that has literally been "loaned into existence". And all of it must be paid back eventually in a constant cycle. The problem is that, while the loan creates the principal...it doesn't create the interest. That has to come from somewhere else, and the only other place it can come from is more loans. Or from other people defaulting somewhere along the line. The cycle is endless and almost inevitably leads to more and more foreclosures. Either through what they buy with the interest payments, or through repossession and foreclosures...the bankers gain control of goods simply because they have the State's monopoly on force behind them to enforce the payment of a "debt" that, to them, involved no more effort than declaring money into existence. It's downright stealing.

If this is all too complicated for you to visualize, Paul Grignon has made a great video explaining it all with visuals and handy concrete examples called Money as Debt:


Many people who see this video assume that the problem is fiat money in itself, the idea of money as simply a means of exchange, and rashly decide that what we need is to return to a Gold Standard or other commodity-based monetary system. But that is not Mr. Grignon's point at all (at the end, he hints at a Social Credit type solution). It is arbitrary to peg the money supply to some commodity. The important thing is to keep it in proportion to the total wealth, not any particular arbitrary individual commodity.

So. Private bankers loan new money into existence, but expect more than the principal in return. And yet, the money supply indeed must increase each year. Because we have more and more real wealth that needs to be represented by money.

Contrary to the cyclical "boom-and-bust" view misleadingly portrayed to the public by "orthodox" economics...in reality, our wealth is constantly increasing. Just think: each year, new buildings, new roads, new innovations, new things...are built. And they don't all disappear. Some things, like food and clothing, run out quickly, of course. But many goods last for many years. Sure, there is constant depreciation of old things. But most depreciate more slowly than new things appear. All those "foreclosed" houses...still exist! They're here for over a hundred years now, perhaps. Our total real wealth is getting greater and greater, because each year more new things are added to the accumulated "stuff" of humanity than are destroyed! Especially in the area of infrastructure and, of course, technological innovation; that new knowledge and production capacity doesn't start from square-one again each year. Each year we become one year richer in time to labor and energy from the sun (gifts of God which no one has a right to sell) which we convert into goods.

If value wasn't increasing people wouldn't bother with business. The whole point of industry is to take raw materials and labor costing $9 to produce something worth, in the market, $12. This is good. This "surplus value" was a problem for Marx. A word on Marx and I: separated from his radical political and philosophical views, I think "Marxian" [as opposed to "Marxist"] economics can be quite perceptive. His analysis of the problems was actually extremely sharp...just not his proposed solutions. And yet this surplus value is actually, in itself, a good thing; it is the source of many problems in economics, but it is not, in itself, a problem. It is actually very good.

This surplus value is created by human effort out of the time and resources God gives us new each year, and the "gap" between the cost it takes to make something, the wages paid to workers (and to the producers of raw materials)...are less than the "profit" earned when the price is determined by supply-and-demand on the market. This is common sense; you (hopefully) produce a good for less than you sell it. But then how is this shortage of purchasing power to be filled? If the system is only paying everyone the cost of production (wages, prices of raw materials, etc)...how is society supposed to pay for the prices demanded on the market? There is a chronic shortage. If a country in a given year spends $9 billion on production, but makes goods worth $12 billion...this is good! It means value-added. But if only $9 billion have been paid out in the production process as wages and to producers of raw material...where is the extra S3 billion supposed to come from to meet the prices?? At the very least, there will be a "lag" as money is spent and re-spent.

Currently, the answer is credit. The people of this country will "borrow" the $3 billion gap on credit cards and such. Except they will promise to pay back more than $3 billion the next year. They will have to borrow this extra (the interest) using next year's production. The lenders will come to control more and more of the production. And the people in unpayable debt will be accused of "living beyond their means" when really the goods produced that they were paying for clearly were within their means, by the very fact that the goods were, in fact, produced!!! What else are "our means" except that which we can, in fact, physically produce?!?

Social Credit, in a nutshell, proposes that instead of letting private banks create our money supply (and demand more than they create in return as usury)...the government should just fill that purchasing-power "gap" each year with new money, declared into existence on the basis of the existence of the goods themselves, and distribute this money to the people equally through a monthly dividend to each citizen and as a refund on prices (to prevent any possible inflation).

The idea of the government simply "printing more money" conjures up images of 100-trillion dollar notes in Zimbabwe and walls papered with deutschemarks in Weimer Germany. In reality, hyperinflation (inflation in general, actually) is caused by debts. The problem in hyperinflation situations isn't the government creating free money...but rather creating money to pay off debts in the same escalating cycle that (at a slower pace) is the cause of even our regular inflation.

Social credit would have no inflation, because there would be no usurious debts, and the National Credit Office would only authorize the creation each year of as much money as needed to fill the gap in purchasing power. To keep the money supply in the same proportion to total GDP. And even if they did print too much or too little, assumably prices would simply adjust accordingly, since the dividends are being distributed to everyone equally, and without Usury eating away at people's wealth, taking a share they did nothing to deserve...what is physically possible would simply be made financially possible. Why should we not produce to the maximum of our capacity? Why should we let finance limit production and/or distribution?! That is confusing the means and the ends!

I've encountered some trads who are big trade-unionists, but Social Credit believes their methods are ultimately self-defeating as explained in the following funny cartoon:
Since wages simply factor into costs...higher wages or a minimum wage connected to employment (ie, participation in production) won't solve the problem. Neither will simple redistribution of wealth by the government through tax-funded programs. The whole problem is that a new source of income, an increase in the money supply, is needed for the population to fill the purchasing power gap that isn't connected with production. Currently this is filled with debt-based credit. And when consumers are unwilling to take anymore loans, the government steps in and takes on the debt and distributes it as government jobs or stimulus checks, etc. Unfortunately, this just adds one more step, as paying the interest on the national debt becomes an increasing chunk of the budget paid for by taxes (which, by the way, might not even exist under Social Credit, as the government might just keep a portion of the new money for it's costs instead of taxing).

Those who have been inculcated with the Anglo-Protestant work ethic would be horrified at the idea of simply giving people money each year, but the Pilgrims of St Michael explain:

— A social dividend to all? But a dividend presupposes a productive-invested capital!

Precisely! It is because all members of society are co-capitalists of a real and immensely productive capital.

We said above, and we could never repeat it enough, that financial credit is, at birth, the property of all of society. It is so because it is based on real credit, on the country’s production capacity. This production capacity is made up partially of work, and the competence of those who also take part in production. But it is mainly made up of other elements which are the property of all.

There are, first of all, natural resources, which are not the production of any man; they are a gift from God, a free gift that must be at the service of all. There are also all the inventions made, developed, and transmitted from one generation to the next. It is the biggest production factor today. No man can claim to be the only owner of progress, which is the fruit of many generations.

No doubt that one needs men of our present times to make use of this progress — and they are entitled to a reward: they get it in remuneration: wages, salaries, etc. But a capitalist who does not personally take part in the industry where he invested his capital is entitled to a share of the result just the same, because of his capital.

The largest real capital of modern production is, in fact, the sum total of the progressive inventions, i.e. discoveries, which today give us more goods with less work. And since all human beings are, on an equal basis, coheirs of this immense capital that is always increasing, all are entitled to a share in the fruits of production.

The employee is entitled to this dividend and to his wage or salary. The unemployed person has no wage or salary, but is entitled to this dividend, which we call social, because it is the income from a social capital.

Giving people money will conjure up for some the simplistic commonplace about Soviet Russia, "If everyone is guaranteed an income, no one will have an incentive to work," but the whole point of the Social Credit dividend is that it is based on the production of the country that year. If a bunch of people stopped working and that caused the production of the country to go down, then the Dividend would decrease proportionately, and that would drive some people back into the labor force to supplement their dividend with a salary...and so a new equilibrium would be reached.

Unfortunately, the current protestant-work-ethic inspired system that ties income to "employment"...makes technology the enemy of the worker instead of his friend:

In 1850, manufacturing as we know it today was barely started, with man doing 20% of the work, animals 50%, and machines accounting for only 30%. By 1900, man was doing only 15%, animals 30%, and machines 55%. By 1950, man was doing only 6%, and machines the rest — 94%. (The animals have been freed!)

And we have seen nothing yet, since we are only entering the computer age, which allows places like the Nissan Zama plant in Japan to produce 1,300 cars a day with the help of only 67 humans — that is more than 13 cars a day per man. There are even some factories that are entirely automated, without any human employee, like the Fiat motor factory in Italy, which is under the control of some twenty robots who do all the work.

In 1964, a report was presented to the President of the United States, signed by 32 signatories, including Mr. Gunnar Myrdal, Swedish-born economist, and Dr. Linus Pauling, winner of the Nobel Prize, entitled "Social Chaos in Automation". This report said in brief that "the U.S., and eventually the rest of the world, would soon be involved in a ‘revolution’ which promised unlimited output… by systems of machines which will require little co-operation from human beings. Consequently, action must be taken to ensure incomes for all men, whether or not they engage in what is commonly reckoned as work."

In his book The End of Work, U.S. author Jeremy Rifkin quotes a recent Swiss study which said that "in thirty years from now, less than 2% of the present workforce will be enough to produce the totality of the goods that people need." Three out of every four workers — from retail clerks to surgeons — will eventually be replaced by computer-guided machines.

If the rule that limits the distribution of income to those who are employed is not changed, society is heading for chaos. It would be plain ludicrous to tax 2% of workers to support 98% of unemployed people. We definitely need a source of income that is not tied to employment. The case is clearly made for the Social Credit dividend.

And yet a neo-luddite attitude persists because workers see robots as "taking their jobs" in a world where jobs are the only source of income. As a greater and greater percentage of production is done by machines, however, a greater and greater percentage of income should come from a source other than "employment". We are fast approaching the age when 99% of production will be done by machines, and rather than being afraid of the "unemployment" that will result, we should rejoice that man will have time for leisure, finally, and will claim his share of those goods simply with an equal divided given to all citizens by the government, their labor being now unnecessary, but their inheritance to the progress of humanity and the natural resources given by God still remaining due to their dignity as human beings, not as simply means to some capitalist or financier's greedy end.

Debt is used to keep everyone working menial and probably unnecessary jobs to distract them while the fat cats get rich. It is used to keep the Third World underdeveloped and so the source of raw materials and cheap labor (and easy markets). It is used to manipulate governments and the media. As Pius XI said in his Social Encyclical Quadragesimo Anno: "Those who control money and credit have become the masters of our lives...no one dare breathes against their will."


Mark of the Vineyard said...

I would hope though that the consumerist mentality that is prevalent in the US and Europe (but to a greater extent in the US) wasn't spreading to other parts of the world, yet sadly it seems to be. "Supply creates its own demand", and this is true. From the contact I've had with the people from the PALOP's, the exposure to american pop-culture, be it via their own immigrants be it via mass-media, has created demands for things which are truly superfluous to their lives...

A Sinner said...

Yes, it is very sad. But when you have mentality that what we need is to "create jobs" to distribute money (because an income has been tied inseparably to "employment")...then you will encourage the fomentation of false demand in the form of stupid consumerist crap...in order to justify new production to "employ" people who really don't need to be employed anymore thanks to technology.

Ben said...

Fascinating read, the White Beret stuff, thanks for pointing it out.

I teach CCE in a pretty suburban parish, I can see this consumerist get-a-job mentality effecting every aspect of the way these kids think... heck, not just the kids, everyone.

FrGregACCA said...

I am still exploring distributivism and especially, still looking at social credit. In the meantime, it is essential that the labor movement be strengthened, expanded, and re-democratized, at least in the United States.