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Tuesday, July 24, 2007

The Social Credit Monetary System

The Social Credit Monetary System is a sound basis for a monetary system. It completely eliminates the need for a bank, or even a centralized issuing authority.

Suppose that A manufactures and sells shirts for $20 each, and B manufactures and sells shoes for $60 a pair. In a pure barter system, A could trade with B, three shirts for one pair of shoes.

In the current economic system, A and B would never perform a direct barter exchange. With a 50% taxation rate, for example, A would need to sell 6 shirts to get enough money to buy one pair of shoes. A sells 6 shirts for $20, pays $60 in taxes and has $60 left. B needs to sell 2 pairs of shoes to get enough money to buy 3 shirts. The government has stolen half of A's and B's work. Wouldn't it be nice if A and B could barter directly with each other and not report their transaction to red market agents? It's none of the government's business what A and B decide to do in private. Besides, it would be very difficult to enforce unless red market workers spy on everyone all the time. The Social Credit Monetary System has no centralized issuing authority. This makes confiscation via taxation or inflation difficult.

In this post, I ignore the confiscatory effect of taxes. Taxes could be collected under a Social Credit system, by giving credits to the government. This would allow for 100% transparency in how tax money was spent. Even better, under a Social Credit system there might be no involuntary taxes at all. People would only pay for services used.

Instead of quoting prices in dollars, A and B could have quoted prices in silver. For example, A could sell shirts for 1 ounce of silver each. B could sell shoes for 3 ounces of silver a pair. They could quote prices in gold. They could quote prices based on the time spent laboring. For example, it takes A 1 hour to make a shirt and B 3 hours to make a pair of shoes. However, there's a defect in quoting prices based on time spent laboring. Perhaps making shoes is harder than making shirts. Perhaps B is a more efficient worker than A. Perhaps shoes have more expensive raw materials than shirts.

The important thing is that A and B agreed that a pair of shoes is worth 3 times as much as a shirt. The same ratio of 3:1 applies no matter what they agree to use as money.

An alternate monetary system should not use Federal Reserve Notes or any fiat money as its basis. That defeats the entire purpose of an alternate money system. People could still trade for Federal Reserve Notes if they want to. People still need Federal Reserve Notes to pay taxes and purchase pink market services, even if they work under a Social Credit Monetary System sometimes.

People could use anything they wished as money, provided they agree on a method to convert from one to the other. For example, if two people agree that 1 ounce of gold is worth the same as 20 ounces of silver, then they can trade if one person has gold instead of silver. People can convert from silver to fiat money at the current market price.

If I was starting a Social Credit Monetary System, I would organize it so that people could use anything they wanted as money. I'd prefer to do all my personal transactions in silver or gold.

Below, assume all prices are in ounces of silver, but any unit of stable value works. Quoting prices in dollars doesn't work, because the issuing authority for dollars inflates. Using gold or silver makes sense, because they have stable real value and can't be forged. The mining rate of gold or silver is slow enough to not affect things much.

In the Social Credit Monetary System, everyone starts with a balance of zero. There is no central bank or issuing authority. Continuing our above example, A sells shirts for 1 each and B sells shoes for 3 a pair. If A buys a pair of shoes from B for 3, now A has a balance of -3 and B has a balance of +3. If C buys 3 shirts from A, now A has a balance of 0 (he owes B 3 and has a credit of +3 from C), B has a balance of +3, and C has a balance of -3. Suppose that B and C trust each other. Then, B can allow A to exchange his debt for for C's. A's balance is now zero, B has a balance of +3 (owed by C), and C has a balance of -3 (owed to B instead of A).

If B and C did not trust each other, then B would be unwilling to let A swap C's debt for his own. A would have to carry a debt of 3 to B and a credit of 3 from C. If B demanded payment of physical silver, than A would have to call his debt from C. If C defaulted, then A would have to come up with silver via some other means.

Suppose that D has a balance of -1000. D wants to buy a shirt from A for 1. A will look at D's balance of -1000, and may refuse the transaction. He might demand immediate payment in physical silver. On the other hand, B might come to A and say "D is a good guy. He'll pay off his debt eventually." In that case, A would accept a debt of 1 from D, but A would hold B accountable if D defaulted.

There is no centralized issuing authority. When C says he has a balance of -3, he should also cite who has a debt to C and who has a credit to C. This allows others to check C's trustworthiness.

Very little physical silver needs to be delivered. It works as long as most people keep a balance near zero, and the parties mutually trust one another. Further, suppose that B was a very skilled shoemaker. He might have a large net positive balance of payments. In that case, instead of demanding physical silver, he might be content to have A, C, and D owe him potential future favors. Unlike a bank, who would extort via the Compound Interest Paradox, B would extend credit to his friends for future favors. If the unit of value is stable, such as an ounce of silver, then B does not even need to charge interest. In fact, B might be better off leaving some of his wealth with A, C, and D. If B has physical silver, red market bandits could seize his silver. (An IRS seizure is an example of red market theft.) Red market agents can't steal the favors owed by A, C, and D! (However, red market agents could kill or imprison all four of them.)

Notice that in the Social Credit Monetary System, you can't just keep track of the total balance. You also have to keep track of who owes what to whom. Debts can only be exchanged when the parties mutually trust one another. If someone has an imbalance of payments, they can always deliver physical silver or other goods to correct the imbalance. There is no centralized issuing authority. A's debt is backed by A and only by A. If A dies with outstanding debts and insufficient assets, then his creditors are stuck.

This system has no centralized issuing authority. There is no possibility of the Compound Interest Paradox sucking away the wealth of society. People can still make loans at interest, if they want to. In the above example, A could offer to D "I'll sell you a shirt for 1.05, but you don't have to pay me for a year."

The Social Credit Monetary System has a much sounder basis than the traditional financial system. There is no need for a centralized issuing authority. There isn't even a need for people to trade physical silver or gold, if everyone keeps a balance of payments. Everyone keeps track of their own transactions. It is potentially cumbersome and different that what people are used to. However, computers could easily process the transactions. It could be implemented in a way that is easy for the average person to understand.


TZ said...

Good conversation starter!, but I think that if there is to be any common currency within the system, then a "centralized issuing authority" is an essential thing.

Pure barter has serious limitations which currency has liberated us from - for instance, How do we trade Houses for future wages?

So, under controlled conditions I think that money is a great tool.
However, as we can see in the current orthodox financial system, it is open to exploitation.

A Social Credit system would prevent this exploitation if administered correctly, but that would take a "centralized issuing authority" to do it.
NOT to create policy, but only to administer the system - that is, to ensure that the amount of currency in the system was equal to the value of goods and services available in that economic community.

FSK said...

That is one of the false ideas that everyone has been taught. A centralized issuing authority is not needed to insure integrity of money. Multiple competing vendors is superior. For all services currently provided by the red market, multiple competing vendors is a superior model.

The only possibility of a centralized authority would be a credit rating agency. The credit rating agency would keep track of who is trustworthy and who is untrustworthy. Multiple competing vendors is superior to a centralized authority with a monopoly. A credit rating agency could make sure its records are encrypted and distributed, minimizing the risk of an IRS raid.

Historically, any centralized money issuing authority cannot resist the temptation to cheat.

Also remember that people working under a Social Credit system will be doing so voluntarily. There is no way to force them to use the centralized issuing authority.

You are forgetting an important point. The red market has not been defeated yet. Anyone attempting to run a centralized Social Credit authority would be painting a giant bullseye on themselves. I would not trust a centralized Social Credit authority with my records, because the IRS would seize them and come after me. I might trust an authority with a list of who I considered trustworthy and who I considered untrustworthy. Such a list is still dangerous, if seized by the IRS.

Of course, many people participating in a Social Credit system may not use their real names. Anonymity is important, because of the red market threat.

That is the failure of systems such as e-gold. From time to time, the IRS seizes the assets of the e-gold vendors, making them unreliable.

Any centralized issuing authority would be, in the eyes of the IRS, a barter exchange. A centralized authority would be required to issue 1099 forms to the participants. A centralized authority would be required to report all transactions to the IRS. However, if the Social Credit system is implemented by people acting independently, there is no reporting requirement. If there is no centralized authority, if the IRS seizes one person's records, it does not place all other users in jeopardy.

Trading a house for future wages can be implemented under a Social Credit system. If the price of a house is 30,000 ounces of silver, you would give the seller a credit of 30,000 and the buyer a debit of 30,000. The buyer would be expected to pay off the debt at a rate of 1,000 per year or other specified rate. The seller could charge interest, if desired. With non-fiat money, interest charges should be small; the free market interest rate would probably be 1-2%. If the buyer dies before paying off his debt, then the seller gets first claim to the house, if nobody else is willing to assume responsibility for repaying the debt.

With non-fiat money, housing prices should be stable. The seller would be risking much less in the event of a default.

However, selling a house under the Social Credit system is probably not feasible until the red market falls. With the Federal Reserve subsidizing interest rates, it makes sense for a home buyer to borrow from the Federal Reserve. If you anticipate a hyperinflationary crash of the dollar, a fixed-rate mortgage looks very attractive.

TZ said...

I'm surprised you haven't had more interest from bloggers.
Keep up the good work!

FSK said...

For some bizarre reason, Google has my blog in "Supplementary Results". That means I'm getting practically zero new readers via search.

According to Google Analytics, I have 180 Absolute Unique Visitors. It looks like I have 20-30 readers who keep coming back regularly.

My most popular post, by far, has been "The Voting Scam".

I've mentioned my blog on a few websites. Some people have been forwarding the links to others.

TZ said...

Your post regarding the vote is great!
I sometime feel quite alone in my observation that our democracy is a sham - More totalitarian that anybody seems to recognise.

Regarding this post though...
I observe a couple of things which seem to me to make your analogy somewhat oversimplified (yet with much merit - I am not your enemy):)

1) Who determines what an ounce of silver is worth?
2) who determines how much silver is required in the community to effect sufficient trade)
3) The system only works as far as the level of trust goes. Unfortunately this is sometimes subjective and judgemental, and we all have a right to a living - whether we engage in barter or not.
Even this distributive system is not immune to exploitation since A B and C may gang up on D, and so must be supported by at least a Jurisprudential body of authority.

The main issue with the centralized issuing authority, I agree, is with the issue of trust vs. monopoly, power, exploitation, etc.

On this point, we have predominantly seen both POLICY and ADMINISTRATION being exercised from the same hierarchical structure (such as government, or the IMF). This is a form of Totalitarianism.
But at the same time we can see that WE THE PEOPLE can vote for products and services with our dollars (ie. we buy mainly brown shoes, and shortly we will find more brown shoes being produced for us than black shoes - which have less demand).

If we could separate POLICY (like the demand vote above) from ADMINISTRATION, then the "centralized issuing authority" becomes merely an accounting function to regulate the FINANCIAL system so that it always reflects accurately the actual wealth available to the community in goods and services.

Production exists only for consumption, (not full employment - which is merely an enforced way to distribute the wealth of the country) and yet as C.H.Douglas pointed out as far back as the Great Depression, "The cost of production is always running ahead of the purchasing power of the community" since our only purchasing power is in the wages and salaries FROM that same production, and which is only a part of the total cost.
We can never liquidate all of our own production. So we produce more and more, exporting surplus so that the extra money can be used to make up some of the shortfall in our purchasing power.

The balance of the purchasing power of the community must come from a source which is NOT related to wages, and is distributed freely to all - WHETHER OR NOT they are actively involved in production (including pensions NOT from the taxes of the working)!

The gap between the price of production and the purchasing power of that same community - that GAP is currently filled by a host of economic policies which are inflationary, and cause trade wars between countries.

I believe Social Credit as proposed and developed by C.H. Douglas addresses your concerns for financial justice without disposing of the great benefits that money has provided over the years. I like your proposals but I think we must be careful not to throw away the baby with the bathwater.

Have you read C.H. Douglas?
Louis Even?
Bryan Monahan?

With Respect...

FSK said...

I'm going to answer these questions in a separate post. A full answer is too detailed for this comment box.

Ineffabelle said...

The SCMS could also operate by a series of circulating IOUs, with various trust agencies competing with different ratings systems. Redemption would be in either other IOUs or partial redemption of the services and goods promised by that IOU. You could write an IOU for silver if you wanted to, or gold, or shoes or shirts.
As far as any issuing authority goes, any problems of interchangeability could be solved by competing clearing houses, which might operate alongside the "trust" agencies, only they would literally exchange people's IOUs at a rate determined by their preferred trust ratings.

Anonymous said...

Your post seems to be describing (quite accurately) a Local Exchange Trading System (LETS) as initially described by Michael Linton in 1982 (often referred to as a mutual credit system with promotion of goods offered by participants) instead of what is generally referred to as Social Credit, as proposed by CH Douglas early in this century.

Key elements of the Social Credit system, as it is generally known, are:
- price controls
- government issuance of currency (vs. bank issue)
- government money makes up difference between cost of production and money in circulation

All of which require a central authority for implementation. The whole point behind social credit in a typical proposal for implementation is distribution of a basic income to ensure that purchasing power is available broadly. You'll find a lot about it by looking at Guaranteed Basic Income on the web.

While I do appreciate your posts, it would help to use the commonly-accepted terminology.

Hakuna Matata said...

Great invention of the bicycle?
There is a bank with international currency for 75 years!

No, it is not in Nigeria or Bangladesh..

The existence of such financial institution is another reason why Swiss is the only nation that said to Nazis in 1940 to bugger off and they did't dare to challenge.

Matt said...

Check out BillMonk. It's a free Internet service that tracks what they've dubbed "social money" -- balances between friends -- essentially equivalent to your social monetary credits. They use dollar signs, but theoretically you could do your accounting in any units you wished. BillMonk has a function they call "debt shuffling," which is exactly what you've described. And you can make accounting entries in BillMonk via text message, so it's immediately accessible in a casual setting. It's been around for a while, it works, the web site is nice and functional, and it's just what you've described (except that it's not decentralized). I'd definitely suggest you read their FAQ.

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