The basis for financial credit

The following text of Wally Klinck, of Alberta, was sent to a lady in response to the question “What is the basis for financial credit?”, and summarizes very well the Social Credit financial proposals:

There are two forms of credit, viz., “real credit” (the ability to deliver goods and services when and where required) and “financial credit” (the ability to deliver money when and where required). An equation should exist between real and financial credit. Anything physically possible, if desired, should be made financially possible. The basis of financial credit should be, therefore, the potential of a society to deliver goods and services. The purpose of an economy is not to create employment but to deliver goods and services with maximum efficiency and minimal physical input, human and otherwise. That is, the purpose of production is consumption — and not to create work. Money should be issued as required for production, and cancelled at the rate of physical consumption.

Under modern conditions, the increased deployment of capital for production lessens the relative need for human input. This creates two major problems: 1) So long as incomes are dependent only upon employment, the unemployed have no access to consumer goods except via welfare transfer payments, and 2) the capital factor in prices actually results in the rate of flow of financial costs and prices progressively exceeding the rate of flow of effective consumer incomes in any given production cycle.

This “gap” between minimum prices and incomes is "bridged" by continuous expansion of bank loans which accumulates, exponentially, as unrepayable debt. This expansion of debt does not, however, liquidate the financial costs of production but passes them on as a charge against future production cycles, resulting in a cost-induced escalation, i.e., inflation of prices. This directly conflicts with economic reality: the physical cost of production is actually met as production takes place, and the financial costs of production should be met simultaneously, at the same rate. That is, money should be issued at the rate of production, and cancelled at the rate of consumption. The true cost of production is the rate of consumption divided by the rate of production over time, typically always and increasingly less than a value of one.

We might say, briefly, that the central problem of the modern economy is a problem of defective industrial financial cost accountancy. That is, that the consumer is charged (properly) in consumer prices with capital depreciation — but not rightly credited (as would be required in a realistic economic system) with capital appreciation, which latter normally far outstrips the rate of capital depreciation.

With increased use of physical capital and improved efficiency of production, we should experience, continuously, a falling price-level and an increased purchasing power with increasing leisure.

These realistic objectives require: 1) A departure from pseudo-moral misconceptions about the right to consumption being tied to income earned in the production process. Any such relationship is logically untenable where non-labor factors of production are replacing labour. This is confirmed when scientific mathematical analysis clearly demonstrates a progressive tendency for the distribution of financial incomes to lag increasingly behind the generation of financial costs. 2) The injection of compensatory non-cost creating-consumption credits into the economy from outside the existing industrial financial price-system in order to balance total prices with total financial incomes. These new consumption credits, issued without debt, would liquidate old “excess” industrial financial prices and costs — and be cancelled as purchasing power when used to repay former business loans from the banks (or, alternatively, be replaced to working capital where they would only be reissued as purchasing power through new production which would create a whole new set of financial costs and prices).

The Social Credit proposals include the issue of National (Consumer) Dividends to all citizens as a matter of right to beneficial ownership in the national capital by way of inheritance, and the institution of a Compensated Price whereby a portion of the required consumption credits would be paid to retailers in order to effect a lower price level. The variable but normally increasing amounts of Dividends and Price Compensation would be independently determined statistically at suitable intervals.