The Social Credit Type Fallacy used by ‘Debt Free Money’ Advocates

Randall Wray is on fine form criticising a ‘Debt Free Money’ advocate who claims

When a commercial bank makes a loan, the principal is created, but not the interest. 

He replies

Money is always and everywhere else an IOU. As my prof, Hyman Minsky, always said, discipline the analysis with balance sheets. Show me the balance sheets in which government creates and spends money that is not its liability, vs the balance sheets in which government borrows its own currency from banks…

But he doesn”t really answer the objection re banks not crearting the money for interest.  I note that the supposed ‘Gap’in demand re interest is exactly the same as promulgated by Major Douglas and Social Credit theorists for years.

It is a fallacy.

The fallacy is due to

  1. their being no rational reason for taking out a loan for business purposes  unless the investment yields a profit.  The entrepreneur calculates this before seeking a loan.  This however opens up the potential that the economy cannot grow because interest swallows up profits.  This is also a fallacy because:
  2. The proportion of profits retained is respent circulating throughout the economy until – in a process of geometrical contraction – the limnit is reached on it being paid as interest
  3.  The intermediate goods bought by an entrepreneur are subject to value added and profit by suppliers
  4. Bank profits are either returned to shareholders to be spent or retained as bank capital to expand the ability of the bank to loan further.

In all four ways the money recirculates to enable payment of interest and supplying the additional demand to pay for the new product, the loan and the interest on it..


One thought on “The Social Credit Type Fallacy used by ‘Debt Free Money’ Advocates

  1. In the first place Douglas never claimed that interest was the problem with the economy, so you’re off to a bad start with that erroneous conclusion. Secondly you show a complete unconsciousness of the costing/pricing system that is necessarily practiced by every enterprise and whose cost accounting conventions are the flaw that hold the entire economy down. This is typical of theorists, the vast majority of which have never been businessmen with a “hands on” enough approach to be aware of its importance. Thirdly ADDITIONAL FLOWS of costs over and above the costs of finance like depreciation make the the economy inherently cost inflationary, and depreciation allowances for business are not eliminations or forgiveness of such costs and so are merely “stays of execution” of such; and if a business does not charge such costs continuously in their prices they are actually zombies unless they are wildly successful and/or conglomerating in a usually fruitless attempt to avoid bankruptcy. This is also why 80-90% of business start ups fail within a few years. Fourthly, even if one doesn’t care to be an accurate accountant and does not believe the above, the enormously disruptive effects of innovation and artificial intelligence are going to erode aggregate demand so badly in the next 10-15 years that the policies of Social Credit/Wisdomics/Gracenomics….are the only rational course for people who no longer want to be dominated by Finance, and so are the only ethical course anyway.

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