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Thought for the Month:
A CONSTITUTIONAL MONEY SYSTEM
Extracts From Mr. W. R. Browning's Seminar Paper
A bank loan is of worth only if the community has already produced wealth and services, which it can buy. Therefore the only natural limit to the creation of credit is the ability of the community to honour that credit. From this angle, the whole resources and wealth of the community may be considered as assets against which all money and credit are a liability. Whatever is physically possible is financially possible. From every angle, the community is therefore the ultimate owner and creditor of all credit created by the banks.
This moral relationship should be legally expressed.
Just as the borrower is in debt to the bank, so the bank should be indebted
to the public and this relationship should find expression in a system
of National Bookkeeping.
Such a bookkeeping system would free the banks from all suspicion that they were counterfeiting the credit of the nation and would establish the responsibility of the Central Bank to the government on a more satisfactory basis. But these things would not of themselves enable the government and the people to judge whether credit were being created at a desirable rate. That would be possible only if the rate of credit recall were based on a natural law, and the application of this law would necessitate the compilation of the data of production and consumption, which would also permit the compilation of a Balance Sheet of the Nation.
THE LAW OF COST
From the physical angle, the cost of making or producing anything is the amount of wealth, raw materials and energy used up and consumed in its production, including the food, clothing and shelter of those producing it. The natural law is therefore that the cost of production is consumption. The cost of all production over a unit of time is the total consumption over that unit of time. This law may be expressed financially in the following way; the price of production should bear to its total cost the same relation that consumption bears to production. This is somewhat similar to the principle that if society produces five units of wealth and capital, only three of which are available for consumption (the other two being capital production such as factories) only three-fifths of the money paid away in production should be charged for the three units of consumption, the remaining two-thirds remaining available to buy the output of the machinery at the rate at which depreciation charges are included in the prices of future consumption.
At present, when the lowest level of prices is
the cost of production, while the highest is the maximum that can be
taken from the public, there is never sufficient money to liquidate
the depreciation charges of capital production when they are included
in prices. The principle of the rate of credit recall is illustrated
in a water system in which one ticket is issued for every gallon of
water entering the reservoir and one ticket collected for every gallon
consumed or evaporated. There will always be sufficient tickets to buy
all the water no matter how large the reservoir. But if some tickets
were collected where the water enters the reservoir, all the water could
not be bought. The reservoir would continually expand but the people
would never be able to buy it all. A similar premature collection of
tickets occurs when credit is recalled before the goods it has helped
produce are available for consumption, when prices vary with the amount
of money on the market, and when money is saved and invested.
There is an inherent incompatibility between the real objectives of industry and the accepted theory of Full Employment. The ideal factory is one in which machinery has completely displaced manpower-the machine secreting unemployment as the body secretes sweat. The accepted ideal of both capitalists and workers is maximum employment. Both have a financial interest in finding or making work. Both are ultimately interested in preventing the machine from completely displacing human labour, because, for the worker this would mean the loss of money with which to buy the necessities of life, and for the capitalist the drying up of profits if the great bulk of the people are without wages to buy the output of industry. This incompatibility of objective is the result of the retention of pre-industrial modes of thought regarding industry and finance.
An electronic, scientific industrial age is irreconcilable with an unscientific, pre-industrial financial system operating on the moral principle that a man shall not eat unless he works. Unless the electronic age is deliberately impeded, industry will very quickly replace human effort with machinery and it will be possible for the community to enjoy a degree of leisure undreamed of in the past.
These facts have to be borne in mind when applying
the natural law of prices. Simply to reduce prices to their scientific
level would be of little avail to the man without money. Whether the
price of food was high or low would be of only theoretical interest
to the man without an income. The problem must be faced from a community
angle rather than a financial-industrial one.
The natural law of cost can be applied to present-day
society only if it be based on the principle that all members of society
are entitled to participate in the benefits resulting from the Cultural
Inheritance and the Increment of Association, and that these benefits,
like the profits of a company, can be distributed only if they are monetised.
While the natural law of prices indicates the level at which goods should
be sold it does not involve us in any one way of applying this principle.
Let us consider the fundamentals of the problem. Workers are disemployed
because machines are substituted for their labour. An unscientific rate
of credit recall prevents the community from buying goods at their financial
cost of production, because money equal to depreciation has already
returned to the banks.
Industry can remain financial only so long as producers and the government are increasingly constructing new capital works or armaments, and when the nation and the individuals are getting deeper and deeper into debt. All producers can make profits only when there is an increase in the national debt because under our bookkeeping system profits made by one are balanced by losses made by another. Therefore, the products of farms and industry, which cannot be sold at home, must be exported abroad, or rot. This forced competition for foreign markets is the primary cause of war between the industrial nations.
These evils can be cured only by recreating the prematurely recalled credit and distributing it to the public directly, or indirectly by subsidising producers to sell their goods at prices from which the overhead charges have been removed, these charges being rebated by the government.
For two major reasons, the subsidising of prices
should be employed to only a minor degree. By making the subsidy and
the issue of credit conditional on a prior reduction of price, the government
could remove any inflationary danger from the issue of credit, but if
this method were employed exclusively only those who were employed would
benefit from the system, and it would leave the problems resulting from
The workers and capitalists would receive a National Dividend in addition to their wages and industrial dividends, while the public would receive just a National Dividend.
We shall not go into the national bookkeeping by which a Balance Sheet may be devised and a dividend granted, but simply point out that the freedom and sovereignty of the individual can be maintained only by a National Dividend, and that only such a financial system, based on natural law and operating in a society in which organisation, power and social relations are based on natural law, can rightly be considered constitutional.