Banks are chartered to create our money supply by issuing loans both for production and consumption. These are the original source of our money supply and all money issued is repayable and cancelled upon repayment. Any money that is saved is not available for consumption. Company reserves only become incomes when issued for new production which creates a whole new and additional set of costs and prices. Meanwhile they have not cancelled previous costs. That is why Douglas said that all new production must be financed by new credits. The so-called “velocity of circulation” does not create new or additional purchasing power as has been alleged and taught. A dollar is only a dollar and cannot perform the function of, e.g., ten or twenty dollars. Money can re-circulate but in doing so it does not create new purchasing-power but simply adds to costs with each new circulation for production purposes.
The reason that banks are having difficulty in issuing credit is that the economy is starved of effective consumer demand, without which sales slump, making business disinclined to borrow in the face of uncertain or reduced sales. Consumers are loaded with debt which discourages additional borrowing and makes them less well qualified as secured borrowers. That is why the attempt to create more liquidity by providing more reserves for bank lending (“quantitive easing”) for production is failing to stimulate the economy as intended. The price-system is already non-self-liquidating and adding to the debt load only worsens the situation. Outstanding monies are outstanding un-liquidated debts. Here in Canada If only our Federal debt alone were paid off this would cancel virtually the entire money supply. We have a costive financial price-system. Business accumulation of reserves is accomplished by a premature cancellation of credit via prices. One way of describing this is to note that the consumer is rightly charged with capital depreciation but quite improperly not credited with capital appreciation which is much greater than depreciation. The true cost of production is consumption and we should realistically have a rapidly falling price-level and/or an increase in available purchasing-power.