|Subject:||[socialcredit] In Reply to Mr. Hattersley|
|Date:||Monday, December 20, 2004 11:06:34 (-0800)|
|From:||william_b_ryan <william_b_ryan @.....com>
"Any capital formation involves immediate sacrifice
for the sake of long term gain - which is the
theoretical justification for interest, as "the price
of waiting". If I want to increase the supply of
eggs, then for a time I actually have to take eggs
off the market, so that they can be hatched out into
more hens to lay the increased supply. That is just a
fact of life."
[REPLY] I'm afraid this is Orthodox Economics 101.
It is not true that capital formation requires
"sacrifice...for long term gain." Discovery,
development and improvement does not require
"sacrifice," but discovery, development and
improvement, a point I made in my earlier post on
I would ask rhetorically if Mr. Hattersley has ever
raised chickens and harvested eggs? The rate of
production of eggs is a function of the number of
hens, and the number of hens is a function of the
demand for eggs. Most any barnyard can increase its
rate of egg production considerably without reducing
its current rate of delivery to the local market, if
demand for eggs is increasing at the local market.
It can easily meet increasing demand with increasing
deliveries. That is to say, most any barnyard has
reserve productive capacity in terms of eggs.
The objective is to equate financial or "effective"
demand with real demand. And real demand is not
limited to demand for goods and services, but extends
to the prospect for leisure.
"However, if the community, rather than the private
saver, is made to pay through scarcity and inflation
for this new supply of capital, it is improper for
the community to be charged again in prices for
something it has already paid for through inflation."
[REPLY] This is a misinterpretation of the point from
Part II, Chapter V of *Social Credit*
In the hypothetical evenly rotating economy - the
kind we would have with the social credit accounting
adjustments and assuming there is not a gigantic
asteroid that we can see in our telescopes coming
toward us - the formation of new capital does not
require "sacrifice" and "inflation," the point I made
above and in the earlier post. In the *Social
Credit* chapter noted above, Douglas was not
referring to inflation caused by capital formation,
but by the diversion of production from the consumer
market into war production, a form of taxation
presumably made justifiable by the exigencies of war.
The government could have achieved the same objective
by printing Treasury notes and spending them. By
"borrowing" them from the banks, the public was made
to pay twice, first in inflation when the notes were
spent during the war, then in "repayment" to the
bankers after the war. In this example there was
little capital formation, but utter destruction and
waste. From the purely financial perspective, all
the public has to show for their "sacrifice" was
continuing debt to the monopolists of credit.
But capital formation that is facilitated by credit
made available to the entrepreneur benefits everyone
continuously. By their choices in free markets,
consumers ratify the capital formation that brings
forth increasing productive capacity.
"We had a posting recently that suggested that in
fact new money was created not by the banks, but by
the borrowers - the bank simply validated the
creditworthiness of a borrower, and made it
universally acceptable by trading the borrower's
credit for its own."
[REPLY] Not "validated" but "endorsed." If we regard
"deposits" as "money," then of course banks create
"money" by crediting accounts.
"I think that that is a very illuminating idea - but
leads me to think that banks should not be charging
interest for the service they perform for the life of
the loan, but simply a one time service fee for
validating the borrower's credit. After that, we
could be enjoying Interest Free Credit."
[REPLY] The old name for banking was "discounting."
The banker discounts the face amount of the
borrower's note, expressed as a percentage of the
face amount, depending on creditworthiness and term.
The lower the borrower's creditworthiness, the
greater the discount. The longer the term, the
greater the discount. Banking in this respect is a
variation on the concept of insurance--the pooling of
resources and the sharing of risk.
Douglas annunciated two very important theorems among
several. The one we are most familiar with (though
poorly understand), A+B, was about accounting and not
about "money" or "economics" per se. The other –
just as poorly understood - was definitely about
credit: The rate of flow of loans equals the rate of
flow of deposits. In a broad sense, banks receive
interest on loans but pay interest on deposits.
There is no way to reconcile this theorem with "time
preference" for a quasi-commodity "medium of
The generic bank's gross "profit" is the differential
between the "interest" it receives and the "interest"
It is tantamount to a "service charge" in direct
proportion to the financial services it renders to
the community at large.
I believe Mr. Hattersley said that he receives a
pension check, as do many of us. Many of us receive
checks from mutual funds or realize capital gains, in
one form or another. In doing so, all of us (if we
are so fortunate) are direct beneficiaries of the
financial system. And we are all of us beneficiaries
of the formation of capital that the financial system
facilitates as consumers of the increasing wealth.
Relevant materials are at
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