Salient. Official Newspaper of the Victoria University Students' Association. Vol 41 No. 21. August 28 1978
Socred: Economic Alchemy
Socred: Economic Alchemy
The Social Credit Economic Cauldron
Social Credit is often called the 'funny money' party. In fact, SC policy covers a much wider field than finance alone; a glance at their Manifesto shows that it stretches from industrial relations to parliamentary reform, from rating to road safety. The League has decked itself out with the full paraphernalia of a serious political party.
Nevertheless, financial reform is still the foundation of Social Credit politics. It is (as it were) the 'elixir' with which they would like to work their alchemy!
But whereas the alchemists of old attempted the modest task of turning stone into gold, the modern credit chemists aspire to the much more exalted ambition of conjuring gold out of thin air!
The Scenario
This is the scenario: Credit advanced by a NZ Credit Authority would make up for a supposed inherent lack of purchasing power in the economy which, freed from the fetters of a restricted money supply, would then pour out goods in abundance and lead us to the promised land of automation and the four day week, full employment, price stability and a living wage. Just as the alchemists disdained to submit to the laws of nature, so social crediters deny the existence of objective economic laws. In the words of one pamphlet circulated by the NZSC League, 'Economic laws are usually conventional laws and therefore can be altered if required.' (R S J Rands: The Problem of Money)
Social Credit Thinking is made up of a number of economic theories and views each of which has been given different emphasis at different times. The 'A + B' Theorem characterised the early thirties while arguments about the size of the money supply in relation to GNP, and the power of the finance industry are typical of present day NZSC theorists.
These ideas have two characteristics in common. The first is that they assert that somehow or another there is a permanent shortage of purchasing power in the economy. The second is that they fail to grasp the realities of modern monopoly capitalism.
The 'A + B' Theorem
Major Douglas gave birth to social credit in the nineteen twenties, and social credit movements first spawned during the depression of the thirties. Like all major depressions under capitalism this one grew out of a crisis of over-production (intensified by a crisis of the financial system). The production of goods and services in the arena of the capitalist world market outran the available purchasing power and the result was falling profits, unemployment, the destruction of unsold goods in a vain endeavour to keep up prices, the collapse of Wall Street and the bankruptcy of many major European and American banks.
The social credit explanation of this crisis was that under capitalism there is an inherent, unavoidable 'gap' between the incomes distributed to consumers in the process of production, and the costs incurred by entrepreneurs in the same process. Depression is therefore inevitable unless this gap is made up by handouts of credit by the government (ie. a National Credit Authority) in the form of a National Dividend, tax cuts, discounts on the prices of goods sold or increased public works.
According to SC legend Douglas's discovery of the 'gap' pre-dated the depression, originating from a time during World War I when he had the job of overhauling the finances of the Harnborough Aeroplane works. (According to other versions, it happened when he was in charge of building a railroad in India!). Douglas noticed (so the story goes) that the amount paid out in salaries and wages did not go anywhere near equating with the final costs. He then went on to examine the balance sheets of over 100 industrial firms and in every firm he discovered the same 'fault'.
Payments to individuals within the firm | Salaries, wages dividends, etc. | A |
Raw materials Depreciation | + | |
Other costs | Reserves Bank Interest Taxation Rates, etc. | B |
'...every business has to recover A + B costs from the public, but distributes only A incomes. Thus there is never sufficient purchasing power distributed through industry as a whole to enable the public to meet the costs of goods produced.' ( The Problem of Money. Circulated by Waikato Regional Council of the NZSC Political League)
More than Wages
This argument is nonsense! While it is certainly possible to break down business expenditure into the categories above, it is quite wrong to say that purchasing power is only made up of payments to individuals within the firm. In fact, all the B payments represent incomes to persons other than those directly connected with the firm — raw material producing companies, transport companies, manufacturers, banks, local bodies and government — who will spend this money in their turn, buying goods or services of an equivalent amount to the B costs of the firm above. In this way, since every cost to one person is an income to someone else, production and consumption will be balanced throughout the economy.
Further to this, the 'A + B Theorem' overlooks one extremely important distinction within the economy; that is the distinction between the production of consumer goods and the production of producer goods. In a firm producing ships, machinery or factory buildings (and the like) very little of the payments to individuals within the firm will be spent on the purchase of the goods produced. Most of these payments will be spent on consumer goods. The products of the producer goods department will be bought by other firms.
On the other hand, firms producing consumer goods will produce far more that can be bought by the individuals actually working for the firm, but this excess will be purchased by workers and employers in the producer goods sector. The money earnt by selling these goods is then available for the purchase of new machinery, etc. from the producer goods sector. In this way a balance is maintained between the production of consumer goods and means of production.
At this stage of the argument, the perceptive reader will be gasping at the idiocy of the A + B Theorm, but at the same time a nagging question will have come to mind: 'It seems indeed that balance exists between production and consumption, and also between the production of sonsumer goods and the production of means of production. In that case, how can there be any economic crises under capitalism?'
Anarchy in Capitalism
The answer to this question lies in the anarchic nature of the capitalist system. While production proceeds on a social basis (ie in factories, building sites and other enterprises in which large numbers of people co-operate) the goods produced by society become the private properly of the capitalist owners who organise production according to the criteria of profitability.
There is no common social interest which allows steady, planned economic growth. Monopoly capitalistry to get maximum profits by pushing up prices and restricticting production, the government increases taxation and alters the social distribution of income, professional associations put up their charges and workers' unions attempt to win higher wages by taking industrial action against their employers. Because society under the domination of the monopoly capitalists is characterised by thousands of contending interests there is no stability in the relationship between production and consumption and between the production of different types of goods. Some goods are in short supply, while others are in excess. At times there is too much demand for the amount of goods produced (and hence inflation increases) while at other times there is a general oversupply of goods and a crisis of overproduction gets under way.
The periodic crises of overproduction that occur under capitalism result from the generally anarchic nature of the capitalist system and not from any permanent and inherent gap between purchasing power and production as is claimed by the 'A + B Theorem'. If the theorem were correct, then none of the booms that have occurred under capitalism could ever have done so!
Capitalist economies would have been in a constant state of depression. In fact if the A + B Theorem was a genuine law of capitalism, capitalism would have represented no advance on the feudal system, and we would still be trying to scratch a subsistence living out of the soil today!
The Creation of Money as Debt
According to Social Credit theory, hanks both create and destroy money. "On this point both Social Crediters and orthodox economists agree. Both agree that the repayment of a bank loan is a destruction of money ... Substantially, all money that comes into existence is a debt to the banks, and this is why Social Crediters refer to our present money system as a Debt System.
Social Crediters maintain that our money system will never be effective or just until some money, at least, comes into existence under proper circumstances, as a national credit without any corresponding national debt" (F. C. Jordan, Social Credit for New Zealand)
'... The banking system owns our money and the people, including industry, only have it on loan and pay interest on it continuously.' (W.B. Owen, Wealth or Debt)
These views contain a mixture of truth and painful misunderstanding. It is true that most (but not all) money comes into existence as debt. It is not true, however, that banks create or destroy money at will.
A Social Credit notion of money creation was in Sir Tom Skinner's mind when he declared at the 1976 Wellington stop-work rally that 'if you were the BNZ it wouldn't cost you a cracker to build that building in Willis Street. You'd only have to write a cheque.' This is nonsense. In fact banks can only create credit in a regulated proportion with their reserves They can't conjure money out of thin air in unlimited quantities. If the BNZ builds itself a building, it has to forego the interest that a similar amount of finance could bring in if they lent it out instead.
It is no more true that the repayment of a loan involves the destruction of money When a borrower repays his hank, this money remains on the books of the bank and is available for lending to a new borrower.
It is easiest to understand the error of SC theories of money by looking at the actual processes by which the supply of money is expanded or contracted.
The Process of Expanding Money
Banks hold large sums of money (deposits) which large numbers of individuals and organisations (depositors) have left with them. Experience shows that depositors generally do not try to withdraw their money all at once, so banks can lend the bulk of their deposits out to people or companies who want loans. Only a low proportion of a bank's total assets (10/20/30 per cent depending on experience or government regulation) need be kept on hand to meet the day-to-day cash requirements of depositors. This proportion is called the 'reserve asset ratio'.
Suppose (for the sake of example) that a bank gets a new deposit of $1000. and operates to a r/a ratio of 20%. It can then lend $800 of the original $1000 deposit This $800 however, after having been spent by the borrower will find its way back into the banking system (ie. the people who receive it put it in their bank accounts) So the total increase in assets of the banking system is not just the original $1000, hut $1800.
When the $800 is deposited. $640 of this can again be re-let (in accordance with the 20% r/a ratio). And so it goes on. The same money goes round and round, getting smaller at each step until finally the increase in total assets is $5000. An original deposit of $1000 has resulted in a total increase in deposits of $5000.
This effect is known as the 'credit multiplier'. This is the actual way in which the banking system creates money. Furthermore, $4000 of that $5000 came into being as debt — so Social Credit is right at least on that point.
The question now arises: 'Where did the original $1000, upon which the creation of credit was based, come from?'
There are three possible sources. First, export receipts. If export prices rise and an export boom gets under way, exporters will find themselves with increased incomes which will find their way into the banks and provide fuel for the credit multiplier. Secondly, government spending. If the government runs a deficit in its spending, and finances this by simply 'running the printing press', ie, dishing out reserve bank cheques without borrowing to cover them, then again there will be an increase in the money supply that will be multiplied by the banking system. Thirdly, adjustments to the r/a ratio. The r/a ratio in New Zealand is set by government regulation. Suppose the hanks are operating on a ratio of 30% and the government decides to reduce this to 20%. This will release funds from the reserve for lending and consequently lead to a multiplied increase in the money supply.
The money supply can also be contracted (ie, money can be destroyed) by the operation of the above processes. Suppose export receipts drop, (or import payments rise), or the government runs a surplus in its expenditures or the r/a ratio is increased. Money would then be removed from circulation, and the credit multiplier would operate in reverse — the total contraction of the money supply would be several times greater than the original amount of money removed from circulation.
While Social Credit is wrong on the question of the creation and destruction of money, they are nevertheless right that most money comes into being as a debt, upon which people and businesses are continually paying interest. This, say Social Crediters, is wrong because it puts us all in hock to exploitative financiers and furthermore provides the fuel for inflation.
Before looking at these assertions more closely, however, it is necessary to look at a further Social Credit economic theory which is particularly applicable to New Zealand. This is the question of the size of the monetary base of the economy.
The Monetary Base of the Economy
The 'monetary base' is the amount of money in circulation compared with production.
When he appeared on "Dateline" at the beginning of May. Beetham spoke at great length about the supposed contraction in the monetary base of the economy over the last twenty years.
To understand what he was talking about it is necessary to know a simple and commonly accepted equation which expresses the relationship between money supply and production:
This equation expresses the fact that there needs to be enough purchasing power in every year to buy the goods produced at their current prices. Since every dollar is used several times in the course of a year (ie. it circulates from hand to hand) there doesn't have to be one dollar of money for every dollar of goods produced, but only a certain proportion.
For example, suppose that the economy produces 10 products at an average price of $10 each. The total value of production therefore equals $100. Suppose further that the 'velocity of circulation' is 5 (ie. each dollar is used for five transactions in the course of a year), then there would have to be a money supply of $20, if all goods are to be sold.
In terms of the above equation:
M(20) × V(5) = Q(10) × p(10)
If one of these variables is altered for any reason (eg. increased production, a credit squeeze, inflation etc) then one or more of the other variables must change as well to keep both sides of the equation in balance.
The Socred Proposal
As the monetary base has contracted (so the Social Credit argument runs) the velocity of circulation has increased, largely as a result of the operations of financiers who cream off a huge profit in the process. Since the monetary base of the economy is shrinking, so money is becoming relatively scarce, interest rates are rising and the fires of inflation are being consequently stoked.
'Under modern conditions, a further reduction in the monetary base makes inflation worse. Such a policy brings financiers still higher unearned profits through interest, and also increases their power over industry and their grip on the economy.' (NZSC Pamphlet, Cause and Cure, 1977).
The solution to these problems is to expand the monetary base of the economy while decreasing the velocity of circulation of money. The operations of the finance houses will be phased out and the job of providing loan finance given wholly to the trading banks who will be allowed to make a service service charge only for their services. The elimination of financial exploitations and an increase in the money supply are the twin Social Credit keys to the elimination of inflation.
Problems in the Proposal
Do these arguments stand up to scrutiny?
Table 1 shows the relationship between money supply, GNP, and the velocity of circulation. It shows clearly that there has indeed been a decrease in the ratio of M1 to GNP accompanied by a corresponding increase in the velocity. However, the figures for GNP are expressed in 'current dollar' terms. If inflation is taken into account, the relationship of GNP to money supply takes on an entirely different aspect, (see Table 2)
M1 has only increased about half the speed as GNP (current) but it has actually increased considerably faster than the real output of goods and services in the economy. In that case, even without an increase in the velocity of circulation, money has been becoming relatively more plentiful over the last twenty years. To maintain a stable price level it would be necessary to increase the money supply slower, not faster, than is presently happening.
March | M1, $m | GNP $m | M1, as % of GNP | Velocity | Inflation Rate |
---|---|---|---|---|---|
1955 | 571 | 1860 | 30.7 | 3.26 | |
1960 | 665 | 2463 | 27.0 | 3.70 | |
1965 | 745 | 3530 | 21.1 | 4.74 | |
1970 | 764 | 4809 | 15.9 | 6.29 | |
1974 | 1298 | 8638 | 15.0 | 6.65 | 9.4 |
1975 | 1332 | 9452 | 14.1 | 7.10 | 11.8 |
1976 | 1596 | 10914 | 14.6 | 6.84 | 15.7 |
1977 | 1690 | 12786 | 13.2 | 7.57 | 16.0 |
Year | M1 (money supply) | GNP (current prices) | GNP (constant, 1965-66 prices) |
---|---|---|---|
1955 | 571 | 1860 | 2369 |
1974 | 1298 | 8636 | 4864 |
% increase | 227.3 | 464.3 | 184.3 |
It is also incorrect to assert that there is any definite relationship between the size of the money supply and the rate of inflation. Looking at the rates of inflation over recent years, it can be seen that in 1975-76 there was an increase in M 1 as a percentage of GNP coupled with a drop in the velocity of circulation, but rather than inflation decreasing (as SC theory would lead one to expect) it in fact jumped from [ unclear: 11] to 15.7%. In contrast, in 1976-77, [ unclear: the] was a substantial drop in the monet [ unclear: ary ase] and a corresponding increase in [ unclear: the locity] but inflation only marginally [ unclear: edg up.]
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In its turn, the fact that most money comes into being as debt has served is 'proof' that there is a shortage of purchasing power, while the latest theory is that the monetary base of the economy is too small and still declining.
'We therefore,' writes Rands, 'have to emphasise that the main problem is bow to inject sufficient money into the economy to enable consumption to match production Without Inflation.' (The Problem of Money)
Social Credit will increase the monetary base of the economy and at the same time make sure that the supply of money is directly related to the 'availability of produced resources.' (Cause and Cure)
These glib assertions overlook the fact that there has been enough money in circulation in the past in New Zealand to maintain full employment for a large part of the last two decades, and furthermore, that the supply of money has actually increased faster than the production of goods and services.
The Fundamental Problem
The fundamental problem with Social Credit theory is that it does not grasp the nature of monopoly capitalism. It attacks the financial system without realising that there are contradictions in the system of production which no amount of fiddling with the financial superstructure can put right. Social Crediters, wedded as they are to small scale commodity production under capitalism, attack financiers without attacking the monopoly capitalist class as a whole.
The central economic contradiction of capitalism (namely, the conflict between the accumulation of capital and the distribution of consumer goods) is intensified under the conditions of monopoly. Monopolistic corporations are no longer subject to the pressures of price-competition which characterised the early period of capitalism, and subjected individual capitalists to the law of the equalisation of the average rate of profit.
Because of their control over markets, supplies and finance, monopoly capitalists can restrict production, jack up prices and earn super-profits. With the whole of modern capitalist economies dominated by monopolies, there is a constant tendency towards stagnation. In the absense of counteracting government action a monopoly capitalist economy will soon dive into a deep and prolonged depression; that was what happened in the 1930s.
After the experience of the thirties, western governments have kept 'priming the pump', running budget deficits in order to keep demand buoyant and guarantee corporate profitability. However, when a monopolistic company encounters an increase in demand for its products it does not have to increase production in order to boost profits. Often it is simpler to merely increase prices. This is the Archilles heel of Keynesian economics. In order to avert economic crisis the 'pump' has to be primed faster and faster at the cost of accelerating inflation.
By enforcing a partial monopoly over the supply of labour, unions also contribute to the upward spiral of prices and incomes.
Beyond the occasional blank declaration that the 'price of living' must be stabilised. Social Credit has nothing to offer that grapples with the real economic and social causes of inflation. Their claim to control inflation by increasing the money supply would have exactly the opposite effect. The money supply would outpace the production of goods and services even faster, subjecting us to galloping inflation.
The Class Character of Social Credit
The main enemy in the eyes of Social Credit is the present financial system and those who directly run it. In singling out the finance capitalists for attack Social Credit reveals itself as a party of the small businessman and farmer.
In the conditions of modern monopoly capitalism the 'small man' is oppressed by finance capital: he depends on bankers and financiers for working funds, for loans to expand the business and for his mortgage. He smarts under the whip of climbing interest rates almost as much as he sweats over his rising wage bill. Cheap money is a dazzling prospect, indeed.
'Social Credit theory is not just an economic fallacy, as the professional capitalist economists would have us suppose. It is also a well-founded, though necessarily confused, cry of protest raised by the remaining independent producers against the ever growing domination of the great monopolistic capitalist groups.' (Strachey, The Nature of Capitalist Crisis)
Social Credit's agricultural policy is particularly significant in this respect. In his maiden speech in Parliament, Beetham made a strong plea for 'justice' for the farmer. The basic price paid to the 'efficient' farmer should cover all legitimate internal costs and provide for a 'reasonable' profit.
What this amounts to is the extension of 'cost-plus' pricing into the farming industry. In the past, farmers have always been price-takers due to their great numbers and the competitive nature of the market in agricultural produce. It has been impossible for farmers to adopt the monopoly capitalist cost-plus methods and they have had to accept the prevailing world market prices. The vicissitudes of this predicament have been ameliorated to a certain extent by price stabilisation schemes and subsidation.
Farmers as Mini-Monopolists
If farmers were to get the guaranteed profit promised by Beetham they could become mini-monopolists, restricting their production so as to earn the maximum profits possible. This would certainly be paradise for the petty bourgeois — farmers could be small and safe!
The trouble is, that no matter how much Beetham guarantees farmers a profitable price, he cannot control the level of world market prices. Whereas the consumer pays through the nose for the maximised profits of the industrial monopoly capitalists, in the case of Beetham's guarantee the NZ taxpayer would pick up the bill. Or if Beetham chose to run a bigger budget deficit, we would still pay for it through increased inflation.
'Justice for the farmer', in New Zealand's present economic situation is only another way of saying 'give the farmers a bigger slice of the national cake'. Readers will immediately recognise this cry for it is repeated in various ways and with varying degrees of subtlety by representatives of all 'interest groups' on behalf of their own economic constituencies.
There is no magical way in which farmers can be given bigger incomes without depriving other classes of part of theirs, given the stagnant state of the NZ economy at present. The actual amount that each class receives is determined by the daily struggles which dominate the New Zealand economic and political arena.
These struggles take place between exploiters and exploited (workers against the employers and the state), between big capitalists and small-scale business and also within the monopoly capitalist class itself.
These are the realities of modern life, realities which are partially reflected by Social Credit policies, but which are in no way comprehended by Social Credit economic theory.
David Steele