Public Credit

a free public utility

All wealth is created by bringing human and natural resources together. If the necessary resources are available, and there is a demand for new wealth to be created, a lack of money should never be allowed to stand in the way of achieving the possible. Accepting the idea that a shortage of money is beneficial to society is just as foolish as believing that the world is flat.

Each time new wealth is created, new money to represent and distribute that wealth must also be created. Ideally, the total amount of money in existence should match the total amount of existing wealth as closely as possible. Money that is created to represent wealth should remain in circulation until consumption extinguishes the wealth that it represents. Money is simply a claim ticket on wealth, that enables workers who produce wealth to defer their consumption of an equal amount of wealth until a later date.

In a monetary system based on labour, money is merely a receipt for productive work already performed. Workers themselves create all of the money needed for production and trade, simply by showing up for work. Employers don't need a reserve of their own money to pay their employees. The money for wages is created automatically, solely by the act of working. Employers simply confirm the labour contributions of their employees and tell the banks which accounts receive the newly created credits. No one else's money is ever involved.

A labour-based credit system would simply credit (record) the hours of work contributed to make new wealth possible, and reduce the outstanding credits as wealth was consumed. Private capital investment would no longer be required to initiate new projects. Instead, public credit (or public capital investment) would be provided interest-free to enable production, trade and government expenditures. Business and government could borrow production credits to initiate new projects, but credits to fuel consumer consumption would not be issued. Business-to-business "purchases" of external goods and services would simply transfer production credits, previously created for the seller, to the buyer's line of credit. Workers would use the wage credits transferred to them to purchase the production. The sales revenues of retailers would reduce their account balances at the credit bank. Once all of the wealth from a production cycle was fully consumed, all of the outstanding credit (that originally made the production possible) would have already been extinguished from the system. To ensure that the provision of credit would always remain fair and completely transparent, an online credit records service would be established as a public institution. Our existing network of retail banks would then simply plug into it.

In a labour-based credit system employers don't need a reserve of their own money to pay for production inputs from other businesses either. All goods & services that move from one business to another are simply transferred, without any money changing hands. Of course, the value of the transfers are recorded as an accounting entry in the records of both businesses, but no "cash on hand" is required or exchanged during the transactions.

Credit no longer involves borrowing other people's money. Credit no longer fabricates new money out of thin air. Credit is not a debt that must be repaid. Credit is simply an accounting method that is used to record transactions. Credit is simply a ledger of receipts. The total amount of new money that workers create by working goes into the ledger. The labour value of any goods and services that move from one business to another as production inputs goes into the ledger. The total amount that workers consume (purchase) also goes into the ledger.

All new money is created as a record of socially productive labour already contributed to society by workers. Businesses simply submit transaction receipts to their local bank. Businesses submit labour receipts on behalf of their employees for the time they spent working. Businesses submit transfer receipts for any production inputs they send or receive from other businesses. When workers exchange their labour receipts (credits) for merchandise, their labour receipts are destroyed and the purchase price is subtracted from the seller's outstanding credit balance. Money does not recirculate. When businesses transfer production inputs to another business, the transfer price is simply subtracted from the shipper's outstanding credit balance and added to the receiver's outstanding credit balance. No money is required at all.

All businesses keep an internal ledger of their own transactions. Banks keep a shared public ledger system. Banks no longer have the power to create new money or credit. Neither does the government. Only individuals themselves, by choosing to work, can create new money.

Asset Depreciation

With a labour-based credit system there is absolutely no reason for individuals or businesses to pay for major assets that they use any faster than they actually depreciate and wear out. Under our current debt-based monetary system, the cost of long-term financing prevents this from occurring. If a house was built to last 100 years and you financed it's entire value for 100 years at 6% interest, you would end up paying 6 times its original value, or 500% of its value in interest alone. The same holds true for major business assets like factories, malls and equipment. Businesses simply can't afford to pay off their debts at the true depreciation rate of their assets. They need to charge their customers more for the products they produce, to generate profits, to pay down their loans quickly. Without interest charges, the true depreciation cost of a $600,000 house, built to last 100 years, would only be $500 a month. Similar savings by business and government would lower consumer prices and any need for taxes significantly.

If people decided to save a portion of their income, inventories of existing wealth would grow but the employers who originally accessed the credit would not be penalized or pressured in any way for the return of the credit. Until their inventories are consumed, there is no reason to eliminate the credit that was created to make consumption possible. Consumption itself pays back the credits, and without the burden of interest, there would be no loan defaults. If an employer's inventory levels grew beyond his sales level, he would not be able to access any new credit until his inventory levels were reduced. Declining inventories would trigger new production. Inventories destroyed by age or accident would be treated as consumption and any outstanding production credits would be depreciated accordingly. No one would suffer a personal loss or injury when public investment capital was depreciated, so insurance would no longer be required. All credit would be tied directly to existing wealth. No one would profit or lose from the provision or use of credit.

Here's a simple example to illustrate how a new business would get started.

Joe decides to open a restaurant. He registers his business and gets a new business number (just like today). He establishes a new business account at his local bank. His account balance is zero. He orders his production inputs from his suppliers (the cooking equipment, tables & chairs, food ingredients, etc.). They ship his order and issue a transfer receipt to both Joe and his bank. Joe's credit balance at the bank now matches the cost of his order. Joe hires his employees and begins his operations. All of Joe's own labour hours, and those of his employees, are added to his credit balance at the bank. As Joe's customers pay for their meals (with the money their own labour created), their labour receipts at the bank are destroyed and Joe's outstanding credit balance at the bank is reduced accordingly. All of Joe's ongoing external costs (hydro, fuel, etc.) are added to his credit balance and subtracted from his suppliers credit balances. Business to business transfers are nothing more than an accounting entry.

Obviously, if Joe's sales fall far short of his expenses for an extended period of time, Joe's outstanding credit balance at the bank would grow to an unreasonable level. At that point Joe should be asked to come up with a plan to turn things around. If demand for his services continued to falter, then a limit on Joe's credit should be set. If Joe then reached that limit, it would be probably be in the best interest of the community if Joe chose a different line of work. None of Joe's own money would be lost if he closed the restaurant. No one else's money would be lost either. All of Joe's surplus restaurant equipment and remaining production inputs could be recycled into a new venture. Transfer receipts would lower Joe's outstanding credit balance at the bank, and any remaining credit balance would simply be erased (treated as consumption and depreciated to zero). Only accounting records would be affected. No one else's purchasing power would be lost. A small surplus of money would remain in the hands of Joe's employees, but this amount would be insignificant compared to the amount of totally worthless, unbacked credit in existence today.

Public Capital & Private Usership

The concept of public capital investment is a unique synthesis of public and private ownership. An entrepreneur uses public credit to acquire the physical assets he needs to engage his talent & creativity. His use of those assets is privately controlled by him. No one has the right to prevent him from using his buildings or equipment or to take any of his property away from him. As his assets age and wear out, their real value depreciates, so he must include that cost in his prices and repay the public credit that he used to get started, but only at the real rate of his asset depreciation.

This depreciation cost is added to his prices and is paid for by the public. The credit is both created and returned publicly. The enjoyment and use of the assets, however, is always privately controlled. If the producer continues his private use of the assets until they are completely worn out, they will have no value and the credit which enabled them to be created will have been fully returned. If however, the entrepreneur no longer wishes to use the assets himself, and the assets still have value, he can transfer the assets to another user along with the original credit balance that remains outstanding. He cannot add a private profit (or subjective value) to the transfer price of the assets for they were publicly funded and the public credit still outstanding constitutes a lien that defines their value and restricts their transfer price. They can only be transferred at their true depreciated value. Any request to transfer public assets at a higher or lower value will be denied.

This system prevents the accumulation of private wealth at the public's expense, but continues to provide the full enjoyment rights of private ownership. Not only does it eliminate the usury of interest on our entire physical asset base, it also avoids the ridiculous cost inflation caused by using amortization periods that are much shorter than the useful life of an asset. One of the most exciting features of this concept is that higher quality assets, designed to last longer and NOT wear out, become less expensive to own than inferior quality, disposable assets. When consumers purchase major assets such as homes, cars, etc., a portion of the public credit amount originally issued to the producer is simply transferred to the consumer. No new financing is required. Consumers then become obligated to repay the transferred portion of the original public credit, but only at the real rate of the asset's depreciation. Due to their longer durability, higher quality assets actually become more affordable than inferior products.

Public capital investment is needed to control the absurdity of the public being charged for the accumulation of private wealth. Consumers should expect to pay their fair share of the real depreciation cost of the capital assets that were used to make the products they purchase. As long as those costs do not include interest and are based on an amortization rate which truly reflects the real rate of depreciation for the production assets used to produce the products, then all is good. It is only when the current owners of capital use profit to try to pay for their capital costs faster than the real rate of asset depreciation that problems arise. In a labour-based credit system the initial amount of public credit needed to launch a new enterprise is always equal to ONLY the labour cost of the capital assets, raw material & component inputs, energy, etc. Setting prices equal to labour costs only, prevents a gap between wages and prices from ever arising and ensures that purchasing power is always equal to productive capacity. If automation and robotics reduce the need for human labour then prices will be reduced by an equal amount. Shorter working hours for everyone will follow reduced prices and eventually the need to work at all may disappear completely.

With a labour-based credit system no one ever has to borrow or rent "other people's money" to unlock and develop their own human potential. Each individual can choose for themselves how they contribute their own passion, talent and creativity to the collective garden of life. Credit is a free public utility, that is equally accessible to all.