Analysis of Richard Cook’s Monetary Reforms Part I

Analysis of Richard Cook’s Monetary Reforms as Presented in We Hold These Truths
Part I

Thomas Allen

This paper is Part I of my analysis of Richard C. Cook’s monetary reforms as presented in his book We Hold These Truths: The Hope of Monetary Reform (Tendril Press, 2008–2009). His words and my paraphrases or summaries of his words, I have italicized. My commentary is in roman letters. I have provided references to pages in his book and have enclosed them in parentheses.

Mr. Cook covers many different things in his book. I am limiting my analysis mostly to his monetary reform. As his book contains much repetition, this analysis also contains some repetition. Moreover as various related points of his proposal are scattered throughout his book, this analysis is somewhat scattered.

Mr. Cook is a statist who advocates giving a strong central government absolute control of the country’s money and credit. He seems convinced that America’s financial and economic problems result from too little governmental intervention instead of too much. He also seems to believe that giving those who really control the U.S. government, i.e., the monopolistic cartels, absolute monopolistic control of money and credit will break the tyranny of their monopolistic control (p. xv). Moreover, he is a preacher of envy, who promises the people something for nothing if they would just adopt his scheme.

Mr. Cook believes that the solution to the country’s problems lies in “central control of monetary resources” (p. 9). The financial and economic crisis that the United States face is caused by and is the result of “central control of monetary resources.” Since 1913, the United States have had “central control of monetary resources.”

Mr. Cook contends that the primary problem with the U.S. “financial system is that the creation of new purchasing power through credit—loans, mortgages, credit cards, etc.—is controlled by private financial institutions. The system functions principally for their profit” (p. 13). The implication is that if the government controlled the creation of purchasing power, the country would have no financial or economic problems of concern. If this were true, then the Soviet Union would have been an economic paradise compared to the United States instead of an economic disaster. Its government had absolute control of the creation of new purchasing power and enforced it with an extensive police state.

Like all fiat monetary reformers, Mr. Cook believes that the U.S. Constitution gives Congress “authority over our monetary system” (p. 13). It does not. The U.S. Constitution gives Congress only severely limited monetary authorities. It authorizes Congress to define the monetary unit. At the time of its adoption, people understood this authority to be defining the dollar as the weight of silver in the Spanish milled dollar. This is what the Constitution means by “regulate the value thereof.” It could coin money, i.e., gold and silver. The Constitution gives Congress no authority to print any kind of paper money. It gives Congress no authority to create or issue credit except that it does authorize Congress to use the government’s credit to borrow. The Constitution leaves the creation of money and credit directly in the hands of the people acting in their individual capacities.

Mr. Cook calls for “greater economic democracy” (p. 14). “Greater economic democracy” is euphuism for socialism, fascism, or another form of statism. To achieve this goal, he promotes Social Credit as the replacement for the current “finance capitalism.” Social Credit provides “democratic capitalism” without a collective solution (p. 14). As we shall see, Social Credit is a form of collectivism.

He claims, “The main problem with the U.S. economy today has to do with earnings and prices. People simply do not earn anywhere near enough to buy what the economy produces” (p. 17). He may be correct, but this is questionable. As we will see, his solution is wrong and will fail to achieve this goal.

Using 2006 data, Mr. Cook compares the gross domestic product (GDP) to the total national income. He concludes that the national income or purchasing power is not enough to consume all the gross domestic product. It only accounts for about 75 percent of what is needed to consume the gross domestic product (p. 18). The remainder must come from borrowing, new debt. This borrowing enriches financial institutions as they receive the interest (pp.19-24).

Correctly, Mr. Cook does not believe that more regulation and restrictions in lending will solve the problem. He also rules out keeping interest rates artificially low (although he proposes to do this with his Social Credit system) and cutting the costs of production, which usually means cutting labor costs. Part of his recommendation is higher taxation of upper-income brackets and corporations. However, these increases in taxation will not close the gap between GDP and purchasing power, national income (pp. 24-25). Taxation of income and corporations does nothing to close Mr. Cook’s perceived gap. It merely transfers income from one category to another. If this taxation does anything, it will widen the gap as taxation of income often leads to a decline in income. Likewise, the taxation of corporations does nothing to narrow the gap. Corporations will pay the tax from their income or collect it from the income of their customers via higher prices.

Mr. Cook describes C.H. Douglas’s Social Credit proposal (pp. 26ff). According to Mr. Douglas, the cause of financial crises is the “gap between the value of manufactured goods and the purchasing power distributed through wages, salaries, and dividends” (p. 26). This deficiency results from “business profits not distributed as dividends (retained earnings); individual savings, i.e., ‘mere abstention from buying’; ‘investment of savings in new works, which create a new cost without fresh purchasing power’; accounting factors, where costs previously incurred are carried over into current prices; and ‘deflation’, i.e., ‘sale of securities by banks and recall of loans’” (p. 26). Mr. Douglas seems to have as little use for savings as does the typical Keynesian. As the industrial revolution has been built on “retained earnings,” “individual savings,” and “investment of savings in new works,” Mr. Douglas must want to return society to a preindustrial revolution era.

To Mr. Douglas’ list, Mr. Cook adds “insurance, . . . maintenance of unused plant capacity, . . . employer retirement contributions, and the cumulative sum of retained earnings and other cost factors when businesses buy from each other” (p. 26). Like Mr. Douglas and apparently all Social Credit adherents, Mr. Cook has little use for savings and investments. He opposes companies assisting their employees with retirement, or at least he considers it detrimental to the economy. Much of the money that ends up in insurance, retirement plans, and retained earnings is used for industrial development and technological advancement. Only that portion that ends up in government bonds is truly wasted. Also, Mr. Cook believes that letting factories and machines decay is better for the economy than maintaining them for future use.

Mr. Cook firmly believes that market forces do not decide the price of a product. He seems to believe that company executives dictate prices. They “force consumers to pay for the costs of capital depreciation, [but] they do not give them credit for appreciation of the value of the business that will appear through future capital gains” (p. 26). A company may propose a price, but it cannot fix the price unless the government stands ready to enforce that price. The marginal buyer determines the price.

To Mr. Douglas, the solution to the problem is credit (p. 27). He identifies two forms of credit: “real credit” and “financial credit.” Real credit is “the total ability of a nation to produce goods and services through increasingly efficient use of science and technology. Another way to define ‘real credit’ is to view it as ‘productive potential’” (p. 28). Loans by banks are financial credit (p. 28). Are savings accounts, certificates of deposits, and checking accounts, which are loans to banks, “real credit” or “financial credit?” Whichever they are, neither Mr. Douglas nor Mr. Cook seems to have much use for the first two.

Mr. Cook claims that in the United States, banks have a monopoly on credit (p. 28). That is not exactly true. Anyone who lends is creating credit. If someone lends a coworker money for lunch, he has created credit. Banks have a monopoly (or more correctly a cartel as more than one is included) in creating credit that also functions as a circulating medium of exchange. If Mr. Cook’s definition of credit as the productive capacity of the country is used (p. 58), it is definitely not true—at least not yet. Some private concerns still operate independently of bank credit.

Moreover, bank lending is not as one-sided as often presented. When a bank lends a customer electronic checkbook money, it is lending its credit. On the other side of the loan, the customer is lending an equivalent amount of credit to the bank when he accepts the bank’s promise to pay. The bank promises to pay in federal reserve notes the checkbook money lent to the customer when returned for redemption. Thus, the bank and its customer are mutually indebted to each other. Both owe each other the money represented by the loan. Fractional reserve banking is “the manufacture of currency out of mutual indebtedness.”[1]

Not only is the bank lending its credit to the borrower, but the borrower is also leading his credit to the bank. One may ask, “Why doesn’t the borrower print and spend his own notes and eliminate the bank?” If the law did not prevent him, he could. Whether anyone would accept these notes is doubtful.

Mr. Cook’s National Dividend program (v.i.) obviates this voluntary aspect of lending. He wants to force every legal resident to lend his credit to the government. He does this by forcing the government’s credit on each individual.

Mr. Cook writes, “Critics may ask why, if Douglas's analysis is correct, is it not generally recognized and accepted? The answer is that it IS recognized and accepted, but only by the monetary reformers on the one hand and the financiers on the other. But the financiers, who own the mass media, are not telling the rest of us, because it’s what makes them so rich and powerful” (p. 29). A large segment of monetary reformers rejects Mr. Douglas’ and Mr. Cook’s solution of Social Credit. They believe that the problem is fiat money and not who creates and issues it or how it is created and issued. Markets are vastly superior to any committee or individual in deciding how much money and credit to create and issue and when and where. On the other hand, Mr. Douglas and Mr. Cook believe that the problem is not fiat money. It is who creates and issues it and how. A committee or individual can do a better job of creating and issuing money and credit than the markets. That is a part, the committee, is greater than the whole, the markets, i.e., the sum of every individual on the planet.

Both Mr. Douglas and Mr. Cook are correct in that the current system is highly flawed. The flaws arise from governmental intervention and granting special privileges to certain groups. Most monetary reformers agree with Mr. Douglas and Mr. Cook that the special privileges granted to banks need to be removed. However, Mr. Douglas and Mr. Cook want the government to have the power to grant special privileges. They favor strong governmental intervention. Their program depends on it.

Mr. Douglas claims that his system is neither Marxism nor socialism. “Marxism, like finance capitalism [his term for the current system], assumes an economy of scarcity” (p. 29).

Mr. Douglas believes that as machines do more work, “workers’ wages would fade away as a source of societal purchasing power” (p. 30). “. . . abundance could be distributed to those who needed and deserved it only if society took back its rightful prerogative of credit creation from the banks and made that credit available without hindrance to individuals” (p. 30). History has shown that automation has lead to an explosion in jobs and often higher-paying jobs. In this respect, Mr. Douglas errs. Automation frees labor to undertake more productive tasks.

The key part of Mr. Douglas’ plan is the National Dividend. It is a “cash stipend paid to all citizens” (p. 30). Do illegal aliens receive a payment? Mr. Cook does exclude illegal aliens (p. 33). Therefore, are people required to prove their citizenship? Does this require a national identification card or chip?

For the National Dividend program to work, the government has to outlaw anonymity for all citizens. (Only illegal aliens have the right to anonymity. Once again illegal aliens have more rights than citizens.) It must know about their existence and presumably location, so it can force its loans on them. Everyone has to participate in the program whether he wants to or not so that a sufficient quantity of money is injected into the economy and everyone receives a minimum income.

Moreover, the government would have to prevent the saving or investing of any money or credit paid through the National Dividend program. More than that, it would have to prevent using the National Dividend stipend from being used to allow the saving or investing of funds that would not have been saved or invested without the National Dividend. Saving and investing cannot be allowed to be increased. If they do increase, part of the purpose of the National Dividend, which is to overcome the negative aspect of saving and investing, has been defeated.

“Because the dividend would be an expression of the sum total of the producing potential expressed as the ‘real credit’ of the nation, it would be distributed as a book entry on a government ledger, not as a budget expenditure paid for by tax revenues. And the right to the dividend would not be tied to whether or not a person had a job” (p. 30). In other words, the U.S. government would directly create money out of nothing instead of creating money out of nothing through the Federal Reserve as it currently does.

Mr. Cook does acknowledge that the government may be creating money out of nothing as banks do now. However, “the difference is that bank loans must be repaid, while payments under a National Dividend system would not” (p. 31). Thus, money created under the National Dividend program is nonrepayable. At least under the current dysfunctional system, money is eventually withdrawn from the economy once its work is done. Under Mr. Cook’s scheme, it is not. Once the money is injected into the economy, it remains there forever. Thus, the purchasing power of money will continuously be driven down.

Alternatively, the National Dividend could be distributed “through price rebates paid to consumers as partial compensate for purchases” (p. 30). Mr. Douglas’ plan, which Mr. Cook endorses, does create many new jobs through the bureaucracy needed to implement it. His system may not be pure socialism, but it is a redistribute-the-wealth program.

The National Dividend of Social Credit fills the gap between national income and GDP. It provides the “purchasing power to the residents of the nation as their rightful benefit from creating, operating, and maintaining our wondrous economy. It’s society as a whole which created our economy, and we are the ones who should benefit from it” (pp. 30-31). Apparently, Mr. Cook believes that individual effort had little to do with creating our economy. Mr. Cook’s collectivism shows itself in this statement. At least Mr. Cook sees what Mr. Douglas denies, and, that is, Social Credit is a form of collectivism.

Before comparing national income to GDP, governmental expenditures should be subtracted from GDP because governmental expenditures are a negative on the economy and do not contribute any goods to the economy. (Some of it may be necessary, but it still is a negative.) Governmental expenditures account for about 20 percent of GDP. Removing governmental expenditures reduces Mr. Cook’s gap significantly. If the gap between GDP and national income is as important as Mr. Cook and the adherents of Social Credit believe, they need to focus on reducing governmental expenditures instead of creating more money out of nothing to make everyone dependent on the government.

Removing governmental expenditures leaves a gap of about $1 trillion. If the $1 trillion in savings and investments that Mr. Cook arbitrarily removes from the national income are added back, the gap vanishes.

I have just illustrated a major flaw with Social Credit and the concomitant National Dividend. Calculating the National Dividend is completely arbitrary and is based on arbitrarily selected numbers. What should be included in calculating GDP and national income? The choice is arbitrary. I would exclude governmental expenditures and include savings. Mr. Cook would do the opposite. By removing savings from national income, Mr. Cook admits that the selection of numbers to include or exclude is an arbitrary choice.

Once someone decides what to include, the data need to be collected. (Mr. Cook is vague about whom this someone is although it probably would be done under to auspices of some governmental bureaucracy.) Collection of data requires more bureaucrats, more intrusion, and more cost on businesses and individuals, and therefore, more drag on the economy, less productivity, and higher prices.

Moreover, the data collected are historical and not contemporaneous. Should not the National Dividend reflect the present instead of the past? If the objective is to close the gap between production and income, should not the gap be covered when it occurs instead of 18 to 24 months later? That is if done annually. If done monthly, the lag is six to 12 months.

An annual approach would require several months after the end of the year to collect, compile, and report data. Several more months are needed for the bureaucrats to review and compile data. Another month or two is needed to populate accounts. A monthly approach would require about the same amount of time to collect, report, compile, and review data and populate accounts.

Furthermore, accurate information requires more than just companies and institutions reporting. It requires each individual to report detailed information about his activities—must not miss any individual sales, off-the-record payments, or hoarding of cash. The reporting requirements for Mr. Cook’s program to function properly are at least as invasive as income taxes.

A system is available that does inject money into the economy simultaneously with the supply of new goods being offered for sale equal to the cost of these goods. It is the real bills doctrine (commercial money principle). For the real bills doctrine to function, the gold coin standard (the true gold standard) is necessary. We can never again have the gold standard because it greatly restricts the ability of those who really control the government to control the people. So people like Mr. Cook pursue schemes that will give those who control the government more control over the people.

“A Social Credit system would be implemented through simple bookkeeping. The funding of the National Dividend would be drawn from a National Credit Account that would include all factors which give rise to production costs and create new capital assets” (p. 31).

“The National Credit Account could also be used for price subsidies” (p. 31). So, the U.S. government is going to distort the markets by rigging prices. Depending on how the subsidies are applied, they will lead to shortages or surpluses.

What happens when shortages occur? Does the government intervene to solve the problem caused by the first intervention? That is the usual approach. How will shortages make workers better off?

On the other hand, what happens if surpluses occur? Artificial surpluses make production higher than it would be otherwise. The economy is producing more than is being consumed. According to Social Credit, it means that people do not have enough money to buy the governmentally created surpluses. This distortion causes the government to issue even more National Dividend.

Mr. Cook argues that National Dividend money is not “free money” (p. 31). It is free money to the recipient. He exerts no effort to earn it. He risks nothing to get it. Because he exists, he receives it. Parents expend resources on their children, not because the children work for it, but because they exist; they belong to the parents. Likewise, Social Credit reduces people to wards of the government. The government pays them because they belong to the government.

Mr. Cook emphasizes “that Social Credit is not a socialist system. Rather it is ‘democratic capitalism,’ in contrast to the ‘financial capitalism . . .” (pp. 31-32). I guess it depends on how one defines “socialism.” Whether or not it is socialism, it is a form of collectivism and statism. It leads straight to a despotic government.

“Under a Social Credit system, banks would continue to function in limited ways, but they would not have the privilege of funding the entire shortfall in purchasing power of the nation” (p. 32). The National Dividend would fund the shortfall (pp. 32-33).

Like all fiat monetary reformers, Mr. Cook claims that his scheme is not inflationary. It merely brings “the total monetary supply of the nation only up to the level of the GDP. It would not result in ‘more dollars chasing the same amount of goods,’ . . .” (p. 33). Contrary to Mr. Cook’s claim, his scheme is highly inflationary. Inflation occurs when new money entering the markets exceeds the value of new goods entering the markets. The value of new goods entering the markets accounts for only a part of the GDP. For example, governmental expenditures, which are a significant part of the GDP, are not goods, either new or old, which is why they should be subtracted from the GDP. Furthermore, under Mr. Cook’s scheme, once new money enters the economy, it is never removed. Thus, each year, ever more dollars are available to chase the same quantity of goods.

Like many people, Mr. Cook errs in identifying rising costs and prices as inflation (p. 34). He also errs when he claims that bank interest is inflationary (p. 34). None of these is inflation. Rising costs and prices result from inflation, which is an increase in the money supply above the value of new goods entering the markets. Furthermore, interest only indirectly causes inflation. If the Federal Reserve keeps interest rates below the natural market rate, people may borrow more. Their increased borrowing can lead to banks creating more credit money than the markets require. Then the result is inflationary, and prices usually rise. Therefore, contrary to Mr. Cook’s assertion, interest is not inflationary because it adds to the cost of business. The cost of producing a product does not fix its price; the marginal consumer does. Moreover, the marginal consumer ultimately fixes the costs of production.

Mr. Cook is correct when he states, “Management of a modern producing economy the way the Federal Reserve does by raising and lowering interest rates is a travesty” (p. 35). However, contrary to Mr. Cook’s assertion (p. 36), low-interest rates, i.e., interest rates below the market rates, typically lead to more inflation than high-interest rates, i.e., interest rates above the market rate. As noted above, people borrow more when rates are artificially low, which results in more credit money being created. Conversely, they borrow less when rates are artificially high, and thus, less credit money is created. This is why the Federal Reserve pushed interest rates down when it wants more inflation and pushes them up when it wants less inflation.

Endnote

1. Hartley Withers, The Meaning of Money (Cheaper ed.; New York, N.Y.: E.P. Dutton and Co., 1921), p. 28.

Copyright © 2010 by Thomas Coley Allen.

Part 2

More articles on money.