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SALVATION THROUGH INFLATION

Other Books by Gary North

Manx’s Religion of Revolution (1968, 1989)

An Introduction to Christian Economics (1 973)

Puritan Economic Expm”ments (1974, 1988)

Unconditional Surrender (1981, 1988)

Sucessful Investing in an Age of Envy (1981)

The Dominion Covenant: Genesis (1982, 1987)

Government by Emergency (1983)

Backward, ChnMan Soldiers? (1984)

75 Bible Questions XMr Instructors Pray ItNJ Won’t Ask (1984) Coined Freedom (1984)

Moses and Phuraoh (1985)

The Sinai Stmte~ (1986)

Conspiracy: A Biblical View (1986)

Honest Money (1986)

Fighting Chance (1986), with Arthur Robinson

UnhoZy Spirits (1986)

Dominion and Common Grace (1987)

hdwrit the Earth (1987)

Liberating Planet Earth (1987)

Healer of the Nations (1987)

The Pirate Econom~ (1987)

Is the World Running Down? (1988)

When jwstice 1s Aborted (1989)

Political Polytheism (1989)

The Hoax of Higher Critici.$m (1990)

The Judeo-Chtitian Tradition (1990)

lbols of Dominion: The Case Laws of Exodus (1990)

Victim’s Rights (1990)

Westminster’s Confession (1991)

Christian Reconstmction (1991), with Gary DeMar

The Cease Theorem (1992)

Political~ Incorrect (1993)

Rapture Faer: Why D@ensationali.sm Is Paraijwd (1993)

SALVATION THROUGH INFLATION

The Economics of Social Credit

Gary North

Institute for Christian Economics

copyright, Gary North, 1993

Library of Congress Cataloging-in-Publication DataNorth Gary

Salvation through inflation : the economics of social credit/Gary North

Institute for Christian Economics

I? O BOX 8000Tyler, TX 76711

This book is dedicated to

Don Bell

whose journalistic integrity ismatched only by his doggedpersistence - a model for all

of us professional scribblers

TABLE OF CONTENTS

Foreword ix

Preface xxi

Introduction 1

l Testing the Prophets 17

2 The Origins ofSocialCredit .31

3 Scarcity and Wealth 41

4 Social Credit’s Blueprint 55

5 Who Represents the Consumers? , 81

6 Who Should Control Distribution? 106

7 Falling Prices and Capitalist Profits 119

8 AFaIse Prescription 141

9 Dividends Under Capitalism 165

10 Social Credit Means State Monopoly Credit 185

11 Sanctions: From Economics to Politics 209

Conclusion 226

AppendixA MajorDouglas’A+ BTheorem 241

Appendix B: My Challenge to Social Credit Leaders 264

Appendm C: A Bibliography ofFiat Money Reforms 27’7 Appendix D: A Bibliography ofFree Market MonetaryTheory 285

Scripture Index 288

Index 290

About the Author 301

There are men who are commonly stigmatized as moneta~

cranks The monetary crank suggests a method for making

everybody prosperous by monetary measures His plans are.illusory However, they are the consistent application of a mon-etary ideology entirely approved by contemporary public opin-ion and espoused by the policies of almost all governments.The objections raised against these ideological errors by theeconomists are not taken into account by the governments,political parties, and the press

It is generally believed by those unfamiliar with economictheory that credit expansion and an increase in the quantity ofmoney in circulation are efficacious means for lowering the rate

of interest permanently below the height it would attain on anonmanipulated capital and loan market This theory is utterlyillusory But it guides the monetary and credit policy of almostevery contemporary government Now, on the basis of thisvicious ideology, no valid objection can be raised against theplans advanced by Pierre Joseph Proudhon, Ernest Solvay,Clifford Hugh Douglas and a host of other would-be reformers.They are only more consistent than other people are Theywant to reduce the rate of interest to zero and thus to abolishaltogether the scarcity of “capital.” He who wants to refutethem must attack the theories underlying the monetary andcredit policies of the great nations

Ludwig von Mises*

* Mises, Human Action: A Treatise on Economics (New Haven,

Connec-ticut: Yale University Press, 1949), p 186

de-If you hold a Ph.D in economics, you are not likely to havebeen deceived by the version of inflationism that I do my best

to refute in this book Major Douglas’ version of inflationism islong forgotten within the economics profession Even in itsheyday in the 1930’s, it was considered terribly unfashionable

by economists Far be it from me to suggest that you are fashionable While you probably hold some version of inflation-ism, unless you are an Austrian School economist, you willprobably find this book a curiosity You need to read my book

un-on the Cease theorem more than you need to read this un-one.l

My targeted reader for this book is a sincere Christian, ably a layman, who has stumbled into some branch of the Social

prob-1 Gary North, The Cease Theorem: A Study in Ejiftemology (Tyler, Texax Institmtefor Christian Economics, 1992)

x SALVATION THROUGH INFIATION

Credit-movement and has been persuaded (though not byreading the complete works of Major Douglas) that Social Cred-

it economics is Christian He has been woefully deceived about,this I see my task as that of instructor in biblical economictruth What the Bible teaches about economics in general andmonetary policy specifically is utterly opposed to Social Crediteconomics I intend to prove this to him This maybe you

I receive no money from the sale of this book I wrote it fi-ee

of charge as a service Why? As we ask in the United States:

“What’s the catch?” There is no catch I was trained to be ateacher Teachers teach Once they begin a career teaching, it

is difficult for them to stop But unlike most teachers, I teach infi-ont of a computer screen, not in front of a classroom

I have devoted my adult life to studying the Bible I havealso devoted much of my career to studying economics Havinglearned some things, I feel compelled to teach them to others.The things I have learned are simple, such as the old rule,

“You rarely get something for nothing,”2 and its corollary,

“you sometimes get nothing for something.” As a businessman,

I have learned that the solutions to personal poverty are hardwork, long hours, personal thrift, honesty, and a commitment

to serve others by selling them what they want at a price theycan tiord Prayer is also a gooda idea These are also the solu-tions to world poverty I have learned, above all, that there are

no shortcuts to lasting wealth This principle applies to societies

as well as to individuals

2 The exception is salvation, a fkee gift of God “For by grace are ye savedthrough fkhh; and that not of yourselves it is the gifi of God: Not of works, lest anyman should boast” (Ephesians 2:8-9) But salvation ceases to be free once it is freelyreceived “For we are his workmanship, created in Christ Jesus unto good works,which God bath before ordained that we should walk in them” (Ephesians 2:10).Grace is a form of debt We receive more from God than we can ever pay for, but weare nevertheless required by God to pay what we can in order to verifj the reatity ofour Eah.h “But wilt thou know, O vain man, that faith without works is dead?” (James2:20) “Ye see then how that by works a man is justified, and not by filth only”(James 2:24)

Foreword xiThe trouble is, while people say they believe these simpleprinciples, they find it difficult to act on them when confrontedwith deception They are easily sidetracked They are easily de-ceived They seek out wealth formulas that supposedly havebeen hidden to others Thk book is about one such formula.

I agree with the words of Jesus: “Take heed lest any mandeceive you.” It is very easy for people to be deceived by falseeconomic ideas Most people know a little bit about economics,but they think they know far more than they really do There-fore, they are easily deceived A charlatan would have a difficulttime making a living by deceiving the average person aboutnuclear physics because the average person knows that heknows almost nothing about nuclear physics He is unlikely tobecome a crusader for a new, revolutionary view of nuclearphysics He is not going to read a monthly newsletter on the

“new” nuclear physics He is unlikely to send large portions ofhis income to support a new nuclear physics movement But hemay do all these things and more if the promoter comes in thename of a revolutionary new view of economics, especiallymoney The average man believes he understands money

An Antidote to Economic Deception

This is a book about a deception: a social reform programknown as Social Credit It began with one man’s self-deception:Clifford Hugh Douglas (1879-1952) It moved rapidly to amore comprehensive form of deception It continues to deceive,though on a scale much smaller than in 1935 Today, the de-tails of Social Credit economics no longer interest anyone out-side of one of the tiny, struggling national organizations thatstill call themselves “Social Credit.” Meanwhile, the whole worldhas adopted some version of salvation through inflation Faith

in@t money remains a universal faith What was regarded by most

Western economists and politicians in 1918 or 1927 as a bizarreconclusion - the need for continual injections of fiat money in

xii SALVATION THROUGH INFLATION

order to keep a national economy productive - is today theuniversal orthodoxy

With the transformation of monetary heresy into orthodoxy,the “ministry” one of the chief prophets of the older heresy hasbeen forgotten Academic historians and economists prefer topay retroactive homage to John Maynard Keynes rather thanMajor Douglas Keynes, for all his bizarre personal behavior,was a scholar; Douglas was not Keynes served as a high gov-ernment official; Douglas did not Keynes’ General ?%eo~ wasincoherent in a scholarly fashion; Douglas’ little books wereincoherent in an amateurish fashion Style counts for a greatdeal in academia and in fashionable intellectual circles Keyneshad style; Douglas did not

Yet Major Douglas’ call for salvation through inflation cruited tens of thousands of people, 1918-1936, when Keynes’monetary ideas were anything but stable Beginning late inWorld War I, it was C H Douglas, not J M Keynes, who her-alded the West’s new age of fiat money and price inflation

re-The Curse of Self-DeceptionSelf-deception is the most difficult form of deception toovercome, both for the deceived and his opponents The de-ceiver is convinced that he is telling the truth This makes himconfident His aura of confidence impresses others People arealso impressed with his great sincerity and his utter devotion tohis ideas or his cause This is why the deception of Social Creditspread rapidly, first to literary figures: editors, poets, and socialcritics; then to clerics, evangelists, and youth leaders Fromthere it spread to the tens of thousands of these people’s disci-ples Alberta, the Canadian province, overwhelmingly voted in

a Social Credit government in 1935 Eventually, the appeal ofthis deception faded when most people lost interest in pursuingwhat increasingly looked like a lost cause But the cause stillsimmers in Canada, Australia, New Zealand, and South Africa

Foreword X111 .The problem is, those who remain impressed with this de-ception are very often well-meaning Christians Those whoprofess faith in the divinity of Jesus Christ, the divine-humanincarnation in history of the Second Person of the Trinity findthemselves on the fi-inges of Western society Protestant funda-mentalists, who seem to make up the bulk of Social Credit’sChristian supporters, have been consigned to the cultural outerdarkness of poorly typeset newsletters, AM radio broadcasts,and tiny Bible colleges They are not taken seriously by thosewho publicly shape the modern world.

In self-defense, these culturally isolated Christians have tried

to build psychological and cultural walls around themselves andtheir families They live in the equivalent of cultural ghettos, orperhaps more accurately, broken-down cultural castles Occa-sionally they lower the drawbridge to bring in some harriedpilgrim, but then they immediately raise it The problem is, inorder to march out to attack the enemy outside, they mustlower the drawbridge for considerable periods of time Thisoffers the enemy an opportunity to invade, and most Christiansare so paralyzed by an intellectual inferiority complex that theyrefuse even to consider an offensive campaign outside the cas-tle Meanwhile, television, government schools, and the newsmedia break through the flimsy castle walls on a daily basis, butstill Christians comfort themselves that they have not beentotally corrupted by the world around them Small comfort!Today, Christians communicate mainly with each other.More accurately, many tiny pockets of believers within thislarger conglomeration of cultural rejects today communicateonly within their isolated regional subdivisions of the ChurchInternational They do not take seriously those from outsidethe local camp of the faithful who dare to criticize their beliefs,whether the critics are Christians or humanists Their veryisolation from Establishment culture comforts them It alsomakes them vulnerable to charlatans and deviants who pro-claim some bizarre “new thing” in the name of Christ

xiv SALVATION THROUGH INFL4TION

The Lure of the BizarreThis is why Christians often revel in ideas that members ofthe Establishment’s humanist culture regard as utterly bizarre.Their willingness to embrace the culturally and intellectuallybizarre becomes their point of vulnerability There are manybizarre fringe groups within the humanist camp Leaders insidethe Christian camp can and do import very strange ideas fromthese humanist fringes, ideas that have nothing to do with theBible but which can be wrapped in the swaddling clothes ofconservative religion In this form, these imports can and havedeceived many One such import is Social Credit

Because the importers are Christians, the typical discipledoes not expect them to be familiar with the details of academ-

ic, scientific, and intellectual matters Here is the problem:because the Christian importers are intellectually unable torecognize the nature of the deception when they see it, theypass along its errors to their followers in the name of their ownanti-Establishment commitment They do not perceive that thy

have been deceived by humanists, occultists, and charlatans from outside the camp They say: “Weren’t the originators also persecuted by

the Establishment? Didn’t they also suffer for their beliefs?Well, then, let Christians also warmly receive these new ideas!”Result: Christians rarely recognize that these ideas are veryoften ancient errors that had once been the common coin ofthe realm within the humanist camp, but which fell out of favorwhen they were found to be incorrect and, more to the point,totally unworkable

A growing minority of Christians have grown weary of theirstatus as political observers and victims They have becomerestless They want to make a difference in history But theyhave no experience in “worldly” matters They are aware of nobiblical working models, no Bible-based blueprints for socialtransformation But they are no longer content to serve asdoormats, paying taxes to finance their spiritual enemies’ end-less State-funded projects So, they begin to listen to those who

Foreword xv

promise solutions, especially quick-fix, one-shot, “turn-key”solutions - solutions they hope will patch things up temporarilyuntil Jesus returns in glory to take them bodily to heaven.Different Christian subdivisions embrace diflerent reformprojects What is significant is that all of these proposed reformshave been imported from the humanist camp Academic neo-evangelical Christians tend to become enthusiastic promoters ofliberal humanist fads that fell out of favor a decade or twoearlier Fundamentalist Christians, in contrast, tend to be skep-tical about social reform in general, so they are Iess likely toadopt these decade-old reform schemes This does not make afundamentalist immune to discarded humanist fads It makeshim vulnerable to much older discards - discards so ancientthat even the humanists have forgotten about them Unawarethat these ideas were exposed as erroneous or even fraudulenttwo or more generations earlier, a fundamentalist may embracethese ideas as the wave of the future, to the extent that hebelieves that this dispensation has a future A good example ofthis sort of long-forgotten discard is Social Credit

Social Credit and “Real Bills”

The Social Credit movement began in 1917 The tal idea of Social Credit is that capitalism suffers from a majorflaw: it does not create sufficient bank credit to allow consumers

fundamen-to buy the entire output of industry The origin of this ideagoes back to the long-forgotten “real bills” doctrines of the earlynineteenth century This was an arcane debate between twogroups of English economists: the Banking School (“real bills”advocates) and the Currency School (anti-inflation) What is not

understood is that Social Credit is a logical extension of the case for

real-bills banking, but without private banks Under Social Credit,

the State would take over the bankers’ economic fimction:creating credit and deciding which businesses should receive it.The terminology of “real bills” commercial banking waspopularized by Adam Smith in 1’776, who referred to a “real

xvi SALVATION THROUGH INFLATION

bill of exchange drawn by a real creditor upon a reaI debtor,and which, as soon as it becomes due, is reaUy paid by thedebtor; “s The process works as follows: a bank offers credit.(issues a bank note or writes a check) to a businessman who isowed money in the future The bank discounts the promisedfuture payment today, and the businessman must pay the facevalue of this “real bill” to the bank when the debtor pays thebusinessman The discount constitutes the rate of interest

“Elatic” Counterfeit Currency

Banking School economists called for a so-called “elasticcurrency,” one which can expand or contract according to “theneeds of business.” They regarded short-term bank credit as anappropriate response to the demand by business for capital

They did not perceive that short-term money creation by a fractional

reserve banking system ha unwanted repercussions, such as the

cre-ation of a boom-bust economic cycle They also did not perceivethat “the needs of business” cannot be separated fi-om “theprice of loans,” meaning the interest rate

Fractional reserve banking creates credit (money) out ofnothing The law allows the banking system to lend out moremoney than the banks have taken in from depositors: fi-actionalreserves Thus, in the short run, banks can lower the short-term interest rate by increasing the supply of Ioanable finds:

monetag injation Businesses then take adva&age of this

short-term subsidy by borrowing more money than they would haveborrowed otherwise So, the so-called “needs of business” risewhen interest rates are forced down by fiat money (calledfid~”-a~ money) created by the banking system As these “needs”rise, banks create more money to satisfy these “needs.”

The process of borrowing and money creation becomes reinforcing until the increase in the money supply begins to

self-3 Adam Smith, Weatih of Nations, edited by Edwin Cannan (New York ModernLibrary, [1776] 1937), p 288

Forewoni xviiraise prices Then interest rates will rise, “the needs of business”will slow down or even shrink, and a recession begins Deposi-tors may even begin withdrawing their deposits and demanding.cash: a “banking panic.” The money supply then shrinks.The reduced interest rate condition is a temporary phenomenon

created by the expansion of bank credit Rates will rise later on, then

fall because of the recession A bank run will shrink the moneysupply In the short run, however, the creation of bank creditdoes increase the supply of money This “elastic credh.” systemhas long been basic to the modern economy and most econo-mists, including Adam Smith, have accepted the legitimacy ofthis system The “real bills” doctrine plus the legalization offi-actional reserve banking constitute a license for banks tocounterfeit money The result is the boom-bust business cycle.4

Sociul Credit

Defenders of Social Credit today, not one of whom is atrained economist, have never heard of the real-bills doctrine.Neither had Social Credit’s founder, Major Douglas For thatmatter, only specialists in the history of banking theory haveheard of it So, those enthusiasts who announce Social Credit asboth a breakthrough economic theory and a practical monetaryreform program operate fi-om a profound ignorance of thehistory of the erroneous idea which they so enthusiastically

proclaim: fiat credit money, i.e., legalized counte@eiting.

Following the logic of the real-bills doctrine, they proclaimthe need for continual new injections of fiat money by the State

in order to avoid economic slumps They also call for the placement of the fi-actional reserve banking system by the State.They become apologists for long-term monetary inflation, butalways in the name of stable prices and economic growth Theyask “merely” for the general public to get in on the issue of

re-4 Ludwig von Mises, Human Action: A Treatise on Ecmwmics (New Haven, necticut Yale University Press, 1949), ch 20