GENERAL ARTICLES

MANAGED CREDIT

Says this writer: “We have reached the stage where conscions and deliberate management of national credit is essential to future progress”

G. G. McGEER January 1 1933
GENERAL ARTICLES

MANAGED CREDIT

Says this writer: “We have reached the stage where conscions and deliberate management of national credit is essential to future progress”

G. G. McGEER January 1 1933

MANAGED CREDIT

Says this writer: “We have reached the stage where conscions and deliberate management of national credit is essential to future progress”

G. G. McGEER

BANKING based upon the practice of holding and investing the money funds of others is as old as commerce.

Banking based upon the use of credits resting upon the reserves of money wealth actually held by the banker, dates back possibly for 500 years. Banking based upon the creation, issue, circulation and manipulation of credits created by bookkeeping entries, resting upon the wealth of credit borrowers or assets purchased with bank credit such as Government bonds, dates from 1844. This last system came to maturity during the war and post-war perkxis.

Banking based upon the recognition and management of national credit as capital and purchasing power, is the next step.

The banker of today is something much more than a mere custodian and investor of his own and other people’s money. He now assumes the following responsibilities which are essentially the prerogatives of the national governing authority:

(1) The issue and circulation of the purchasing power medium of exchange in general use.

(2) The management of the domestic and international trade of the nation.

These wide powers are now inherent in the normal functioning of the monetary system.

What the world needs, what every nation, including Canada, needs is an honest management of the monetary system that will make credit sound in the realm of capital. No such result will ever come from a monetary system that permits a private profit-seeking monopoly to:

(1) Issue, circulate, use and profit by the management of the purchasing power of the people.

(2) Manage both domestic and international trade, and arbitrarily fix the rate of commercial progress and the standard of living.

(3) Issue credit, and exchange it for both interest and real wealth.

(4) Levy a ruinous charge for the privilege of issuing the credit purchasing power, in an âge when credit has taken the place of money of intrinsic value.

(5) Maintain two monetary standards.

When the banker loans or purchases securities and

other assets, he uses a credit standard not based on gold

When he collects, he uses a money standard that is based on gold.

In short, when the banker lends or buys he goes off gold, using bank credit which he is free to issue without any gold reserve whatever. When he calls his loans, the borrower must convert his assets into money based on gold. Nothing in the way of a monetary system could be more inequitable. It provides a sure and certain method by which an organized minority can, with safety and certainty, plunder the wealth producers, the taxpayers and the Government of the State.

Mismanagement of Credit

rT'IIE POLICY we are pursuing in delegating the issue and management of credit, the real medium of exchange, to the banker, violates the fundamental law of democracy, which is: That which constitutes a part of the public domain belongs, as a matter of inalienable right, to all the people.

The right to issue money is a prerogative of the Government of the State. The profits that flow from that right belong to the people. When credit is used as a substitute for money, the issue of credit purchasing power should likewise be the sovereign prerogative of Government.

We have revelled in the folly of paying interest for borrowed credit which is issued by a private monopoly as a concession and privilege from National Government. We have sown whirlwinds of interest-bearing bonds, mortgages, notes and overdrafts. We are now reaping tornadoes of taxes, bankruptcies, foreclosures, moratoriums, debt repudiations and riots.

We have but to look about us to see the enormous duplication of both institutions and officials who are now living off the management and manipulation of the medium of exchange of the day. In every city and in every country, the obvious overlapping of banking organizations presents a tragedy of waste and duplication.

It is not only the dividends the banks pay to shareholders that are chargeable to the people. There are other things far more important than dividends. These are the items that must be taken into account:

(1) The gross cost of operating the private money system.

(2) The profit that should go to the nation on the issue of credit and money.

(3) The loss to wage-earners, industry, taxpayers and the nation, caused by the practice of borrowing bank credit at interest repayable in gold, and denying the use of the nation's credit as capital.

(4) Losses arising from lack of purchasing power in circulation.

A management of credit must lx* established in its place that will effectively circulate credit at less cost to Government, business and |x*ople; a management that will increase the volume of purchasing power and give a greater measure of that stability which makes progress jx>ssible. The means of providing the essential volume of purchasing ixtwer must be perfected, and the cost of supplying it must be vastly reduced.

We have reached the stage where an era of conscious and deliberate management of national credit and trade must succeed the era of undirected evolution which has permitted bankers’ profits and the wages of credit to ascend to the point where the wages of men and the profits of industry have been destroyed. We are at the parting of the ways, and the old order must give way to the new. We now find that we must set up the means of maintaining order in the world of trade and commerce, for the same reason that we have found it necessary to control railway operations and regulate the movement of traffic in our city streets and the transmission of messages and music through the air. Our future depends upon whether we are prepared to assume with courage and with fortitude the wider and more difficult responsibilities of Government that are now definitely established. Of all those responsibilities, the management of credit is by far the most important.

The Real Basis of Wealth

A FUNDAMENTAL error in the present political economy is to be found in the fact that it accepts a management of the monetary system whose major objective is the accumulation of interest and money profit. That must be changed if the natural course of ordered evolution is not to be denied. The real objective of the monetary system must be national progress, based upon economic stability designed to sustain an ever rising standard of living for the people in every walk of life. The distribution of wages and business income must be recognized as more important than the distribution of taxpayers’ wealth in interest and principal paid on account of creditsmanufactured in bankers’ books.

No matter how far you pursue the involved expressions

of the modem economist and the monetary doctrinaire, you will inevitably find yourself arriving at these two conclusions:

(1) When wage-distributing enterprise maintains the masses in gainful employment, whether it be in time of war or peace, prosperity exists.

(2) When wage-distributing activity ceases and the masses become unemployed, no matter how much money or credit exists, prosperity ceases, prices fall, incomes decline, taxes increase and starvation and revolution threaten. In a sentence, when the masses are unemployed bad times appear.

Some day statesmen and economists will recognize the fact that the consumers’ earning power must govern his buying power, and that men cannot live without wages. When that day comes, the per capita volume of purchasing power in circulation will not remain a matter of guesswork.

A nation like Canada, possessed of thirty billion dollars of real wealth and many times that much available for future development, does not have to borrow bank credit either from a foreign or a domestic banker. Her real purchasing power lies in the natural resources she possesses, and is backed not with gold but with the intelligence of her people. Canada can pnxluce and maintain all the national bank credit her people need to maintain Canada as a going concern as long as civilization lasts. 'Hie wealth of Canada does not depend upon the amount of gold she can store in a vault, but in the intelligent use of her unbounded store of real wealth that is already developed and now awaits development.

The creation, issue and use of national credit as purchasing power is a proved possibility today, because bankers have created, issued and used bank credit to finance the business of banking in the same way that national credit should and can finance the nation. National credit should be the nation’s buying power in exactly the same way that bank credit is the banker’s buying power today. A credit deposit in a national bank that can be transferred by cheque does not need a backing of gold any more than does a credit deposit in a private banking system.

The existing private banking system has proved that fact, and to argue to the contrary is to deny the facts that are now definitely established by banking practice.

In (he face of these facts, nothing condemns the existing banking system more than that our bankers have allowed us foolishly to borrow bank credits abroad that are repayable in gold something we have not, and cannot get, in anything like the quantity required. Like the Jews at the time of the Exodus, we are in bondage to a foreign people, bound for all eternity with liabilities of gold.

We have lost the complete indejxmdence that should be our most priceless heritage.

We can thank our banking system for our position in that regard. We must find some practical way of meeting our existing debts, and of avoiding a recurrence of any similar liability in the future.

A British View

TN THE MAIN, the general conclusions I am offering to that end are supported by the report of the Macmillan Committee filed with the British Government in 1931. Of that report, despite its length and the am fusion of compromise and contradiction it contains. Sir Josiah Stamp has rightly declared:

“The report is easily the best up-to-date textbook on the financial system. There is more here of intelligible exposition than can be found elsewhere.”

As I read the report, it marks in an epochal way the beginning of economic planning for the British Empire. In the following selected passages, its authors have accurately definal the means of establishing a sound monetary system and the most pertinent remedies that are available and within the realm of practical jx*litics for the alleviation and cure of our existing economic ills:

1. “The monetary system must be a managed system. The major objectives of a sound monetary policy—the avoidance of the credit cycle and stability cannot be attained except by individuals placed in a position of unchallengeable independence.” (Section 280.)

Bankers, permitted to profit out of the management of credit, cannot satisfy these requirements. The existing tanker management is condemned out of hand by this

finding. The Committee recognizes that the truth, “You cannot serve God and Mammon,” applies with equal force to bankers and the people. In short, the bankers cannot serve themselves and the nation at the same time. In placing the management of the monetary system in the hands of men of “unchallengeable independence,” is to be found the cure for the fundamental defect in our system. If we cure it, the remaining problems will be much more readily and effectively solved.

The report thus lays down the fundamental necessity of a sound monetary system, but that is not all that is necessary, as the following additional conclusions of the Committee indicate.

2. “The best hope of a remedy (for the existing depression) lies in a monetary policy designed to increase the volume of purchasing power, to decrease interest rates, and to stimulate the spirit of enterprise and the volume of investment.” (Section 118 and Addendum I, Section 2.)

3. "It is not necessary that the volume of note issue

(or the creation and issue of national bank credit— author's addition) should continue to be regulated, as it is now, by reference to the amount of gold held in reserve. Gold should be held primarily to settle international balances and not to support domestic note issues. There need be no obstacle to the creation of a much increased volume of purchasing power, without any increase in the supply of gold.” (Section 148.)

4. "In the modem world, gold plays, in the main, only an indirect rôle in the determination of the level of prices, because the circulating medium consists overwhelmingly of paper money and bank deposits.” (Section 45.)

5. "If Governments pursue an inflationary policy— i.e., meet expenditures, not out of revenue but by the issue of paper currency (or the creation of credit in a national banking system-author's addition)—forces are set in motion increasing profits and wages, and additional spending arises. An expansion of credit and currency has a «implicated effect upon the price level.

“There is nothing inherently impractical in the exercise of the Government's power to deliberately control the price level. We should be ready to attempt the task and to gain experience by practice.” (Sections 24.210.3

6. “The vicious circle is complete. The decline of new enterprise has reacted adversely on profits and prices, and the low level of prices stands in the way of new enterprise. It is for this reason that some of us think that, in the domestic field, it may be necessary to invoke governmental enterprise to break the vicious circle.” (Section 316.)

7. “A study of history would, we believe, confirm the opinion that it is in the changes in the level of prices, and in the consequential alteration in the position of debtors and creditors, entrepreneurs and workers, peasants and the tax gatherer, that the main secret of social trouble is to be found.” (Section 204.)

The remedy here proposed provides that, under tht management of men of “unchallengeable independence,' national credit may be successfully issued and circulated and that it is the only means of financing the wage-dis tributing public enterprise now necessary to give relief tc unemployment, to raise the level of prices, and to break tht vicious circle that is now closing and tightening its strangling grip on all trade and commerce.

A National Banking System

SIMPLE as the positive and sound conclusions of the Macmillan Committee may be, they cannot be worked out in a country like Canada unless the national, provincial and municipal governments are prepared to co-operate in setting up and maintaining the economic machinery necessary to put the programme suggested into action.

Here, as I see them, are the essential features of the organization necessary to achieve Canadian progress and prosperity, despite the conflicting cross currents that are now disrupting all international relations and which have enshrouded the future in the gloom of doubt and misgiving:

The establishment of a national banking system, consisting of a national central bank and a provincial sub-central bank located in each province or in each unit of provinces consistent with economy and sound business management.

Possibly a sub-central bank for Nova Scotia, New Brunswick and Prince Edward Island, one for Quebec, one for Ontario, one for Manitoba and Saskatchewan, and one for Alberta and British Columbia, would serve adequately all provincial constitutional requirements.

The primary object and dominating responsibility of the banking system would be :

(a) To finance with national credit, free of interest charges, the maintenance and advancement of national, provincial and municipal governmental enterprise, and all public and social services.

(b) To provide the capital essential to the maintenance of progressive national and provincial trade development, and the elimination of unemployment.

This means that we would eliminate the borrowing of both foreign and domestic bank credit for the purpose of maintaining Government and advancing the production of wealth. We would eliminate the existing disastrous cost that the circulation of capital now involves. We would provide all capital needed in advancing public service and private enterprise recognized as essential to social and national progress, and to sustain the circulation of the purchasing power essential to industrial and commercial progress and prosperity.

We would be able to put in circulation enough credit to permit us to enjoy the fruits of our own energy and intelligence, appropriately applied to useful effort. Instead of adjusting the value of our real wealth and our capacity to produce and use wealth to our limited capacity to pay interest for bank credit, the circulation of credit purchasing power would be adjusted to the actual wealth of the people willingly at work in useful service to each otner and to the nation.

Does that mean that all taxes and interest would be done away with? No. Taxes would be necessary to regulate and control the circulation of the consumers’ purchasing power stream, and to prevent the circulation of credit from either clogging in the hands of the shrewd and avaricious or becoming excessive, but no taxes would be necessary other than for the purpose of regulating the circulation of credit purchasing power. Taxes on excess profits, including effective probate and succession duties, excise and licenses, and a general sales tax, provide ample means of keeping the circulation of credit within the limits of reason and practical business requirements.

Continued on page 36

Continued from page 24

The use of national credit does not mean the abolition of interest, either as an inducement to thrift or as a fair compensation for the use of accumulated capital. Interest paid to those whose savings have been invested in the service of others may not be harmful, providing it is confined to actual and real surplus savings. But that is a very different thing from the practice of the private banking monopoly, which is privik‘ged to issue credit and to treat that fiction of money as interest-earning gold. No civilization can avoid ruin and the disaster of bankruptcy under such an impossible system. Other than accumulated savings, no advance of interest-earning credit should ever be made by other than the national banking institution, whose power to pay interest on savings and fix the rate of interest

to be paid should be inviolate. By this means, the evil may be taken out of both taxation and usury.

Powers of National Bank Outlined

HPHE TOWER of such a banking system would include;

(a) The exclusive monopoly of note and credit issue.

(b) The right to buy and sell securities; the right to buy and sell gold and silver.

(c) The right to set a limit to the expenditure by national, provincial and municipal governments, with the exception of those expenditures essential to the maintenance of peace and order, viz., the maintenance of national

defense, the militia and the police organizations, the control of which shall remain vested in the elected representatives of the people; and the right to check the manner of all expenditures made in respect of any public enterprise.

(d) The right to advance for the purpose of national, provincial and municipal government enterprises, the use of currency and credit without interest, to the end that Government may sustain the institutions and practices essential to the good government, the employment and the cultural development of the Canadian people in every walk of life, and to pay interest on accumulated savings for such or any other purpose.

(e) The right to fix, control and

regulate all capital issues in the form of interest-bearing securities, and to declare the rate of interest that may be offered.

(f) The power to levy regulatory taxation designed to prevent the accumulation of immense fortunes, to aid in the control and regulation of production and trade, to prevent the accumulation of unnecessary credits in the possession of the consuming public.

(g) The right to regulate and control the entire gold reserves of the nation, international credit and foreign expenditures.

(h) The right to consolidate, control and regulate the liquidation of all existing public debts.

(i) Die power to collect all taxes.

(j) The right to do all things necessary to perfect and sustain a sound monetary system.

Such a banking system would be able to keep in circulation the volume of credit purchasing power necessary to eliminate unemployment and to give life and vitality to the wealth producing power of the age. National credit would be used not to accumulate money profit and interest, but to maintain a rising standard of living in every department of the social order. Advancing human intelligence and the improved and broadened power to both create and use real wealth, would provide ample security for the credit so used.

Other measures of control designed to perfect and maintain the co-ordination of the operation of the various factors such as prices, production and international trade, so that production, prices and purchasing power may be kept in equilibrium, are of course equally necessary. Control of these factors follows as a corollary of a controlled monetary system.

Backed by Wealth of Nation

THE SECURITY for the monetary wealth of the people, evidenced by credits in a national banking system in exactly the same way that they are now evidenced in the credits of the private banking corporations, would be supported by the going-concern value of the entire wealth of the nation. That is the only security that exists today. That security would be protected by a national management of national credit from losing its value by a failure of the circulation of purchasing power. Such a thing could not happen in the absence of deliberate maladministration. The danger of issuing too little purchasing power, just as great as the danger of issuing too much, would be eliminated. The danger of bankrupting every one with interest-bearing debt issued on a basis of non-gold standard of credit and collected on a basis of gold standard money, would become another pagan relic of the past.

The primary objective of this managed monetary system should be to equate the volume of purchasing power in active circulation to the wealth-producing activity of the nation, so as to permit the rise in the standard of living that wealth-producing activity and intelligent use makes possible. We now know with definite certainty that the circulation of an adequate volume of purchasing power cannot be maintained upon the theories of banker management, which have depended upon the pyramiding of interest-bearing debts, the deliberate change in the rate of interest, and the deliberate expansion and contraction of credit. A more adequate mctluxl of control through regulatory taxation must and would be supplied. With establishment of such control, the evils of both inflation and deflation and the credit cycle would cease to be a characteristic of social progress.

The purchasing-power medium of exchange would not be changed. Token money such as bronze, nickel and silver coins, and bank-note currency issued by the national bank, would circulate just as freely as it does today. In the main, cheques transferring bank credit as they do today would be used to consummate most of the business transactions of the nation.

How would such a system work? Well, in so far as the public’s use of the medium of exchange is concerned, it would work in exactly the same way that the banking system of today operates. Loans to business would lx made in much the same way that they are today, under the supervision of the same men who now serve the public as officials of the private money system. I would expect such officials to be supplied with much more accurate information as to the course of future events than they have possessed in the past.

The old idea of “loaning people money when they did not need it and taking it

away from them when they haven't got it.” j would be changed into a sounder practice of advising people not to borrow at interest unless no other way could be found to promote enterprises that were certain to succeed. Let us look now at how the cost of government could be taken care of without other than regulatory taxes.

“The Sane and Reasonable Course”

TET US assume that our cities, counties.

provinces and National Government are being financed by a national banking system. The amount of credit to lx expended would be budgeted for the coming year. The payrolls of Governmental authority, expenditures for supplies and materials, would be paid by cheque. The cheques would be issued on the national bank. They amid be used in exactly the same way they are used today. They could be converted into gold, legal tender rash, token money or foreign exchange, or deposited. There is no difference in a national monetary system and a private monetary system in that regard.

Then where is the difference? It is wholly in the use of credit as capital. Instead of people borrowing private credit and agreeing to repay it in gold at interest, the management of national capital would eliminate that expense to the taxpayers of the community. Bankruptcy of Government and confiscation of the taxpayers’ wealth by interest charges would be eliminated and become an utter impossibility.

Where would the national credits, against which the Government’s cheques would be issued, come from? They would come from the identical source that the credits in the banks of the private money system, against which the cheques of the Government are now issued, come from. They would be created by bookkeeping entries in the books of the national banking system by the officials of the people’s bank. They would be promises to the owners of the credits created that would be payable on demand in legal tender cash, convertible into gold. The wealth of the nation would be behind that promise, just as the vast majority j think the wealth of the nation is behind the | promise of the private banker of today. But | it would be the promise of a Government no longer bent on bankruptcy by borrowing its own credit and agreeing to repay it in gold with interest.

Would the Government be able to meet all its obligations so created in gold? Yes, it would be able to meet all the proper and reasonable needs of creditors of the bank in just the same way that private bankers are able to meet their money and gold obligations to creditors today.

All the gold that the nation ix>ssesses would always he available to support national bank credit and national buying power in foreign markets. Gold, as tlx vice-president of the National City Bank, New York, has truly said, is only needed to settle adverse international balances, and Canada can produce all the gold she needs for that purpose.

Upon the three broad grounds of facility to the people, security for the monetary wealth of the nation and skill of management, the private banking system has | nothing that is not available in greater j degree to a national institution. But more j than that—a national banking system would j eliminate the disastrous cost of financing j public enterprise by borrowing bank credit. The greatest of all Governmental extravagances. namely the cost of financing the cost of government, would lx eliminated.

In the nationalization of our banking system lies the course to sane and reasonable • administration of all public affairs.

Editor’s Note: This is the third and concluding article of Mr. McGcer’s series on money and credit. It trill be followed in an early issue by a further discussion of (he subject by A. F. IT. Plumptre. of the. Department of Economics, University of Toronto. Mr. Plumptre teilt take an opposing view to that advanced by Mr. McGeer.