Non Credit Money

“The principle creation of money through credit
has become so immanent to understanding of money
that any other possibility is taken a priori as unreal.”

(Dr. Srećko Urgin, “Roads to Non-credit Money Creation”, 1980.)

Theoretical nature of non-credit money

The roads to non-credit money creation have not been easy. As the above quote suggests, the reasons have been more of a subjective rather than objective nature.

Of course, to overcome the deeply rooted prejudice, cogent argumentation is essential. Theoretical basis of non-credit money has to be well founded. Even then, the orthodox theory may be slow to accept it. This, however, should not discourage supporters of non-credit money.

Theoretical basis of credit money seems clear: since money is a measure of value, and value is created by producing and selling commodities, it seems inevitable that money should indeed be created in the form of credit, as that way its “backing” in human labor is ensured. Credit implies the obligation to repay the debt, and, therefore, the obligation to produce and sell something in order to be able to return the credit. Production creates value, while credits create obligation to produce. In such a state of affairs, non-credit money would seem nothing else than a forgery, because, in its pure form, non-credit money implies an emission of money without any backing in labor (production).

Money and human labor

Now that we have presented credit and non-credit money as two entirely different modes of money creation, let us analyse, briefly, what are the real capabilities of these two modes of emmision. Are they really that exclusive of each other, as they may seem? First, there is the question, on the one hand, of the extent to which the credit money today really gets repayed, and, therefore, how substantial its backing in human labor is, and, on the other hand, whether and to what extent can non-credit money be used as a measure of human labor.

Commodity money, as for example gold, has its backing in labor already at the time of creation. Therefore, it enters into circulation as a definitive means of payment (metal non-credit money) and can only incidentally return to the starting point. Money as credit, however, after a certain time, i.e. at the time of repayment, inevitably returns to the starting point. There are two basic venues for emission of credit money:

1. Loan of the central bank to the state. This credit will be repayed by collected social revenue (taxes, contributions etc.)
2. Loan of the central bank to commecial banks that then lend it to businesses. Companies return this loan by selling their products.

In either case, in order to be repayed, credit must be incorporated in product prices (as either production cost or social income added to the cost), that is, it must have a backing in commodities, or more precisely, in human labor that produces commodities.

If the performance of an actual (real) credit system were to match the theoretically expected performance (described above), an important precondition would have to be the immutability of the measure of value, i.e. the general stability of prices, i.e. the stability of value of credit money.

Since, however, money continuously devalues; it is obvious that, depending on rate of inflation and repayment terms, in real quantities, one part of real credit never gets repayed; although in nominal quantities, credit gets repayed in full.

Possession of a certain amount of money gives one the capacity to appropriate, through purchase (i.e. alienation of money), a certain amount of commoditized labor, effectively giving one power over others’ labor. Contrarily, the obligation to repay the credit forces one to sell labor (either one’s own work or that which is contained in one’s production forces and commodities), effectively forcing one to subject one’s labor to the power of money, i.e. to the obligation of repaying the credit. In principle, in the system of credit money, at the time of emission, a balance between these two processes is ensured. Credit debt and money created are nominally equal.

In real terms, however, since money is immediately effectuated, spent (while it’s worth more), while the credit is repayed later (when the money is worth less), in circumstances of inflation caused by massive credit expansion, the real debt is lower than the real quantity of money emitted, which means that one part of the real emitted money is given away as a “gift” to debtors. In other words, the emitted nominal credit can engage a greater amount of labor than the amount of labor that would later need to be engaged in order to repay that same (nominal) credit. This “surplus” engaged labor is the labor that is engaged by real non-credit (though nominally credit) money. The result is the same as if a certain amount of non-credit money were emitted in the first place.

In the second part of the front-cited article (’Ekonomska politika’, no. 1529/1981, p.25, SFRJ), Dr. Srećko Urgin correctly notes that at the time of debt remission, there in fact occurs an emission of non-credit money. The same occurs with the reprogramming of short-term loans into long-term.

Restriction of credits leads to economic crisis

As we can see, there are several spontaneous and chaotic ways of creating non-credit money. If the economy still continually lacks money, it may simply mean that more non-credit money is needed. In the modern credit economy, the inflation of credit money is a spontaneously generated mechanism for emission of non-credit money. Inability to supress inflation by restrictive credit policy without provoking severe economic crisis, leads to the conclusion that the emission of non-credit money is a necessary requirement for economic development and employment growth. If this is true, the expectation that an organized, theoretically grounded emission of non-credit money would represent the best “remedy” against the inflation of credit money – is justified.

This completes the answer to the first part of the question posed at the beginning of the previous section. In circumstances of inflation (that has become the sine qua non condition for keeping the economic mechanism in motion), in real amounts, credit is not returned in full, and therefore does not have full backing in labor at the time of its emission. Part of nominal credits, therefore, in real amounts, appears as a “gift”, that is, non-credit money.

We are now coming closer to answer the second part of the question. If the chaotically created non-credit money (as described above) can serve as a measure of human labor, the same can obviously be achieved, probably more effectively, by conscious and organized emission of non-credit money.

Let us suppose, therefore, that a certain amount of non-credit money is purposly emitted. Regardless of whom exactly is this money first allotted to, these primary porters of income from non-credit money are given power over others’ labor, i.e. ability to purchase goods and services. Thereby this primary non-credit money enters into circulation. Depending on the rate of its circulation, it will employ greater or smaller amount of labor. The total product created by that money in a given period of time, according to the well-known Marx’s formula, will be equal to the product of the quantity of that money and the average number of turnovers of that money in that period. Although at the time of creation it did not have any backing in human labor (i.e. the money is created before any labor was performed), the non-credit money played a useful social role – it engaged human labor and led to an increase of production. If the quantity of non-credit money emitted corresponds to the needs of the economy, it cannot initiate any inflationary or deflationary impulses.

With this mode of emission, there will appear one phenomenon that requires a deeper theoretical explanation. Although the orthodox theory holds that on the global (national) level, total income does not exceed total expenditures; in the system of non-credit money, the total money income will, by the quantity of primary emission of non-credit money, exceed the sum total of the money expenditures. Namely, the total money income will equal the sum of incomes from labor and incomes from emission of non-credit money. The question is where do these nominal incomes, bestowed on the porters of primary emission of non-credit money, actually come from, since they obviously do not come from labor (i.e. labor values of gross social product).

What is surplus utility?

In my previous article “What are really economic laws” (published in “Ekonomska politika”, no. 1499/1980, pp. 27, SFRJ), I set the hypothesis of the existence of a category of surplus utility, and that non-credit money should just be the monetary equivalent of that surplus. Namely, in that article a new paradigm is developed, in which money is foremostly observed in its function of legitimizing and legalizing human needs, and so it serves (as a means of purchasing) as a measure of quantity of use value (or objective utility, as a quantitative expression of use value), that people can, owing to possession of money, appropriate.

In a rational society, total income, expressing (measuring) the total realized objective utility (termed the product of civilization) should be greater than the sum of incomes that come from invested labor, that is, from labor value of social product (termed the product of culture), by an amount I defined as social surplus utility. Social surplus utility realized in a given period equals in exact nominal amount the quantity of emitted primary non-credit money in that period.

If the source of non-credit money is in surplus utility, this already hints at where the primary emission of non-credit money should be directed. Some supporters of non-credit money (for example, Dr. Milutin Ćirović and Dr. Srećko Urgin) believe it should be the sector of production. However, if one accepts the thesis about the existence of surplus utility and about non-credit money as an expression of that surplus, then it is inevitable to conclude that the primary emission of non-credit money must be allotted to the non-productive population. By spending this “unearned” income (that does not originate in labor, but rather in surplus utility, i.e. in increase of economic rationality), the beneficiaries of income from the emission of non-credit money will supply the economy with the necessary amount of cash, removing the cause of indebtedness of economy. On the other hand, since a part of the economy would be financed directly from the emission of non-credit money, a portion of taxes that have served for financing the non-productive sector would be abolished.

Thus, by allocating the emission of non-credit money in the sector of end consumers (particularly those who have been a burden to the production sector), we ensure that the production sector is both provided with non-credit money and fiscally relieved at the same time. Room for accumulation and financing of expanded self-reproduction would be significantly expanded, thereby strengthening the society’s material base. In addition, conditions would be established for faster development of public services (health, education, science, etc.) that would not burden the economy.

Productive and non-productive sphere (base and superstructure) would no longer be mutually contested, but would rather, through the mechanism of emission of non-credit money, assist each other in development.

The proposed mechanism of non-credit money emission provides the foundation for managing one extremely simplified, but absolutely effective monetary policy. If exactly the necessary quantity of non-credit money is emitted, we can be sure that no subsequent intervention would be required. In the system of credit money, on the contrary, subsequent interventions are inevitable, because the system is constantly faced with money shortage and illiquidity that are forcing the organs of monetary policy to repeatedly resort to additional credit emission (or stimulation thereof). The deflation problem, which is a characteristic of credit economy, is actually caused by shortage of non-credit money, which cannot be overcome even by endless expansion of credit money. Still, this infinite expansion serves an important function – it devalues money and thus creates conditions for spontaneous and chaotic creation of non-credit money.

Emission of non-credit money abolishes many existing balances in the social accounts (incomes and expenditures) and replaces them by lawful proportions. Traditional theory will initially have a hard time to accept the new system of social accounts. However, that system has already been spontaneously established. For example, emission of non-credit money (that is, income from the social surplus utility for the needs of non-production sphere), is today masked in budget deficit. The dogmatic policy of deficit suppression only aggravates the condition of both economy and social services.

Finally, although nominally in balance, budget can never really be in balance, as long as expenditures (i.e. emission of credit money for the needs of state) precede incomes (that repay the state’s credit) while there is a certain percentage of inflation. It is obvious that real state expenses (causing emission of money) are greater than real incomes (that withdraw money), which means that there really exists a net emission of non-credit money even though the budget in balance (nominal).

The theory of surplus utility and non-credit money asks one to look at truth in the eyes. It calls for the study of the movements of real rather than nominal quantities. Such research reveals that the new system of money emission has really been but long present, while the old one lasts only in appearances, i.e. nominal quantities. Yet everyone repeatedly vows to achieve (before some hypothetical date that always is postponed) a budget balance. Fortunately, “natural” economic laws will not allow us to. No one today can establish an actual budget balance, without putting a full stop to their own economic development. Spontaneously and chaotically, the emission of non-credit money has already taken hold and has proven its vitality.

Stojan Nenadović

stojan.nenadovic@gmail.com