A Defense of Social Credit against Dr. North's accusations

[Richard]

A Defense of Social Credit against Dr. North's accusations


North: Answering Major Douglas's crackpottery is easy. I did it in
1993 in my book, Salvation Through Inflation. He was convinced that
markets needed fiat money produced by the government in order to
clear. He argued that when businesses repay loans after production,
this destroys money. Then consumers cannot afford to buy the output.

Eastman: I am no crackpot yet I agree with the Douglas Social Credit
proposition that in an economy where all money is created by loans and
where all loans are paid back principal plus interest, that there will
be chronic deflation. There will not be enough distributed income
coming around for producing firms to cover factor costs plus repayment
of principal and interest. This money leakage to the financial sector
in excess of injections will eventually eat up the entire real
economy.

North: It did not occur to him that the banks immediately lend out the
paid off loans. That is how they stay in business.

Eastman: Unfortunately it does not occur to bankers either. The
deflation caused by payments to lenders in excess of loans results in
deflation which means a fall in demand -- a depression. Bankers do
not invest in depressions. Not only that, since the bankers and the
bond holders are very often the same group of people, there is
incentive for the bankers who are creditors to want the deflation to
occur because that makes them wealthier without having earned it.
Their system tends to deflation and the bankers like it that way
because it makes all nominal payments owed to them in the future worth
more in real terms.

North: This error is found in most under-consumption theories. There
is always a money bleed-off factor. Old money goes there to die, like
the elephant burial grounds. The consumers cannot afford to buy.


Eastman: I don't see how anyone can deny that the American people
are suffering from under-consumption. I don't see how one can look at
all of the boarded up stores and offices in this country and deny that
these businesses were hit by under-consumption that they did not
figure out when they took out their business loans. And with the
bailouts and with QE1 one and QE2 I don't see one penny of that money
going to American entrepreneurs to build American productive capacity
that will increase the real goods and services output of this
country.

After all, Mr. North, with not a penny going for domestic American
owned production to make a bigger economic pie -- where is the
economic justification for this economy doing so much borrowing. The
household sector and the government sector are crushed in debt to
international finance yet infrastructure has crumbled without being
replaced, our factories are worn out with losses not allowing
replacement. This is not because we were reckless in borrowing from
Rothschild. This is because Rothschild, through his agents since
Hamilton, has placed a blood-sucking debt-system on us that ensures
economic loss and ensures that creditors will profit from that loss.
Profit how? When farms and homes and businesses are foreclosed the
creditors take possession. The Rothschild interests own the land and
factories of this nation. That is what multinational corporations
are -- the takings from hundreds of thousands of businesses that
failed because our money is loans and all loans must be repaid
interest plus principal.

North: Every variation of this theory is nuts, with one exception:
when bank depositors withdraw currency and do not spend it, thereby
not allowing sellers to deposit the spent currency in their banks.
When there is a run on a bank in a fractional reserve system, there is
money heaven. The inverted pyramid of fiat money shrinks, just as it
expanded before. But this has nothing to do with paying off loans.

Eastman: You are saying that runs on banks are caused by depositors
withdrawing their money and holding it? Is that how you think
monetary contractions get started? In October 1929 on each of the
three "black days" the stock market crash was precipitated by margin
calls made by Wall Street financiers. Men like Baruch and Percy
Rockefeller had already shorted the market. Churchill was actually on
the floor of the exchange to see it happen. When the loan calls were
made people began to sell. This forced banks to call in loans. On
each of the three days when the ticker got three hours behind, the
galleries were cleared and the big financiers jumped in and began
buying while people, not seeing the buy signals on the ticker,
continued to sell. That is typical of how the Rothschild gang
(Morgan, Rockefeller, Goldman-Sachs etc.) contract the money supply.
And then with that initial reduction of loan-based money, there is
then the money-multiplier effect that you refer to as money withdrawn
from banks results in reduced reserves requiring more loan calls and
thus less money. After the 1929 crash money in circulation contracted
by one third. The creditor class wants to get rich by deflation
that makes dollars they are owed more valuable. They want to take
control of assets -- our homes become their rental properties, our
bankrupted businesses are allowed to disappear to give them more
monopoly concentration for their corporations. And so on.

It has always been the policy of the Rothschild interests in control
of American banking to first get the people in debt with a short
season of easy credit and then to increase the burden of that debt
halting the rate of loans and allowing deflation to take its course
toward a new depression -- almost always hurrying the process with
coordinated loan calls and reluctance to make new loans.

Perhaps you are aware of the document known as the Hazard Circular
which, in July of 1862, international lenders used to sell war bonds
to Northern investors in an effort to debt-fund the Civil War to
forestall Lincoln from issuing debt free Greenbacks. Here is a
portion of it:

"Slavery is likely to be abolished by the war power, and all chattel
slavery abolished. This I and my friends are in favor of, for slavery
is but the owning of labor and carries with it the care of the
laborers, while the European plan, led on by England, is that capital
shall control labor by controlling wages.

This can be done by controlling the money. The great debt that
capitalists will see to that is made out of the war must be used as a
means to control the volume of money. To accomplish this, the bonds
must be used as a banking basis. We are now waiting for the secretary
of the treasury to make this recommendation to Congress. It will not
do to allow the greenback, as it is called, to circulate as money any
length of time, as we cannot control that. But we can control the
bonds and through the bonds the bank issues."

But Lincoln did get the Greenback approved in 1862, but that did not
stop war financier Jay Cook from selling Congress on the present debt-
financing system we have today. Cook told Congress:

"We lay down the proposition that our national debt made permanent
and rightly managed will be a national blessing. The funded debt of
the United States is the addition of $3,000,000,000 added to the
available actual capital. To pay this debt would be to extinguish
this capital and lose this wealth."

Clearly Cook was of the Gary North school. While I would say that
Cook is mistaking debt instruments for Real Wealth -- as if a million
dollars of wealth is created between two men when one hands the other
an IOU of a million dollars. Listen to North attack the concept that
there is a distinction between finance credit and Real Credit:

North: Whenever you see the word Real capitalized, followed by a noun
-- also capitalized -- be on the alert: a crackpot theory is close at
hand.

Eastman: On the contrary. Let me quote at length a great student of
economics that Mr. North does not like, Gertrude Coogan:

“Imagine the deception and audacity of Mr. Cooke. Wealth is a
physical thing -- resources, houses, farms, etc. He tried to tell the
American people and did make some of them believe that debts of the
taxpayers (government bonds) are wealth. They are not. Mr. Cook
received $25,000 per year for repeating the lie and making it
stick. . . .

"The 'National' Banking act was enacted on February 25, 1863. It was
then and is now known to be outrageous. The act was misnamed
'National' to deceive the people. It was national only to the extent
of using the nation's money issuance powers dishonestly. It gave
national banks the power to issue the nation's currency. National
banks under that act have power to issue currency (paper money) by
simply depositing certain issues of government bonds with the United
States Treasury and obtaining currency.

Note: Today this is called open market operations or "Quantitative
Easing" only with the Federal Reserve replacing the Treasury.] e
Therefore, the privately owned national banks collect interest on
bonds deposited with the Treasury but they pay not interest for the
currency which is released to them. They keep only 5% gold
certificate reserve with the Treasury to take care of whatever
currency might be presented for payment at the Treasury. Think this
fallacious proposition through! Government bonds are taxpayers'
promises-to-pay, secured by a first lean on all physical property
within the nation and a first lean on national income, because
Congress has the power to tax. These fully secured interest-bearing
taxpayers' promises-to-pay are created by the Government and exchanged
for privately-owned banks' promises-to-pay which are unsecured by
anything real. These unsecured promises to pay are called money.
Imagine a banking system which permits taxpayers' secured promises-to-
pay to be exchanged for private individuals' unsecured promises-to-
pay."


It was reformer and newspaper editor Horace Greeley who, in 1872,
said of the National Bank Act:

"We have stricken the shackles from four million human beings and
brought all laborers to a common level, not so much by elevation of
the former slaves as by practically reducing the whole working
population, white and black, to a condition of serfdom. While
boasting of our noble deeds, we are careful to conceal the ugly fact
that by our iniquitous money system we have nationalized a system of
oppression which, though more refined, is not less cruel than the old
system of chattel slavery."

This was exactly what Otto von Bismarck said following the Civil War:

"I fear that foreign bankers with their craftiness and tortuous tricks
will entirely control the exuberant riches of America, and use it to
systematically corrupt modern civilization. They will not hesitate to
plunge the whole of Christendom into wars and chaos in order that the
earth should become their inheritance."

So not only is under-consumption due to deflation the real cause of
depressions, but the chronic problem is by design and to the benefit
of international creditors who profit by the deflationary propensities
of the system. What von Mises called the "evenly rotating economy"
under the gold system and what others call equilibrium under Say's law
- is a fiction. Economies tend to decay because principal plus
interest is greater than the amount of loans and because creditors
profit when deflation follows naturally after any credit expansion.

The von Mises 'mal-investment" theory of depressions is wrong.
Depressions are caused by deflation and deflation is caused by the
financial sector taking away more purchasing power than it
contributes.

North: Douglas offered another theory . . . the A + B
theorem. . . . He argued that there is a break in the flow of
payments. A factory pays Group A wages and dividends. It pays Group B
for raw materials, to cover bank fees, and other "external" expenses.
His theorem assumed that payments to Group B do not constitute
purchasing power for the output of the factory. The money ceases to
provide consumer demand. So, the state must intervene and create
money. This is another variation of his broken flow of funds argument.
Whenever you see any variation of the broken flow of funds argument,
you are in the presence of crackpottery. It does not matter how many
equations or graphs the author provides. He is an economic crackpot.

Eastman: Be careful, brother North, that ye do not judge as marred
what the Lord God hath made good. I am sure you know the verses from
Jeremiah 18: "Then I went down to the potter's house, and, behold,
he wrought a work on the wheels. And the vessel that he made of clay
was marred in the hand of the potter: so he made it again another
vessel, as seemed good to the potter to make it. Then the word of the
Jehovah came to me, saying, O house of Israel, cannot I do with you
as this potter? saith Jehovah. Behold, as the clay is in the
potter's hand, so are ye in mine hand, O house of Israel. At what
instant I shall speak concerning a nation, and concerning a kingdom,
to pluck up, and to pull down, and to destroy it; If that nation,
against whom I have pronounced, turn from their evil, I will repent of
the evil that I thought to do unto them."

The A + B theorem is correct. Labor produces and earns an income
called wages. The entrepreneur earns his profit (or loss). The real
resource owner gets his rent and factor payments. All those total up
to A. And the financial sector must be repaid the amount of the loan
that enabled factors to be paid before the product is sold. And all
of that is "A." But then there is also compound interest on the
loan. That is B. Who gets "B"? And more to the point, does the
person who gets "B" spend "B" on the output produced?

Now Gary North will tell you that the "B" (interest) going to the
financial sector will get back into circulation in the form of new
business loans.

Impossible!

Interest is compounded, it grows geometrically. Does investment in
America today -- if any -- profit as fast as interest compounds? Does
investment in America result in more economic pie sufficient that when
the added economic pie is sold that the new revenue will grow as
interest on debt grows? And if more loans are made being paid back
with more interest, doesn't that mean that investment will have to
grow at the expense of consumption since we know that production of
economic pie does not grow at the rate that compound interest grows?

But let's make it simple. The financial sector who are creditors are
making more wealth for themselves by fostering deflation by not
investing than they do by fostering production through investment.
They increase the value of their bonds by increasing the purchasing
power of each dollar they will be paid in the future and, on top of
that, they get ownership of all of the collateral and equity of the
loans they made that have been defaulted on by borrowers caught in the
deflation.

This Rebuttal against Mr. North was created for forums that have
limitations on the size of emails due to the fact that many forum
participants have dial up modems. If the reader is interested in
viewing the charts included in the original presentation, email Daniel
Krynicki or Richard Eastman for these charts at
pipefi...@wowway.com or oldick...@q.com .