The following is a collaborative effort between Wally Klinck and myself.
Introduction
The term Social Credit, as a formal name, originated from the writings of the British engineer and originator of the Social Credit movement, Clifford Hugh Douglas (1879-1952), who wrote a book by that name in 1924. Douglas, a civil engineer who had pursued his higher education at Cambridge University, had published previously, most notably in the British intellectual journal The New Age whose editor, Alfred Orage, became converted to Douglas’s ideas and, subsequently devoted The New Age and latterly The New English Weekly, after a ten year sojourn in the United States, to promulgation of those ideas until his death on the eve of his BBC speech on Social Credit, November 5, 1934, in the “Poverty in Plenty” Series. Douglas’s first book Economic Democracy was published in 1920, shortly after his article “The Delusion of Super-Production” appeared in 1918 in the English Review. Among Douglas’s other early works were The Control and Distribution of Production, Credit-Power and Democracy and Warning Democracy and The Monopoly of Credit. Of considerable interest is the Evidence that he presented to the Canadian House of Commons Select Committee on Banking and Commerce in 1923, to the British Parliamentary Macmillan Committee on Finance and Industry in 1930, which included exchanges with economist J. M. Keynes, and to the Agricultural Committee of the Alberta Legislature in 1934 during the term of the United Farmers of Alberta Government in that Canadian Province.
Douglas’s prolific writings spawned a worldwide movement, most prominent in the British Commonwealth but with beachheads in Europe and activities in the United States where Orage, during his sojourn there, promoted Douglas’s ideas. In the United States, the New Democracy group was headed by the American author Gorham Munson who contributed a major book on Social Credit titled Aladdin’s Lamp: The Wealth of the American People (New York: Creative Age Press, 1945.). While Canada and New Zealand had electoral successes with “Social Credit” political parties, the movement in England and Australia was primarily devoted to pressuring existing parties to implement Social Credit: this function was performed especially by Douglas’s Social Credit Secretariat in England and the Commonwealth Leagues of Rights especially in Australia. Douglas continued writing and contributing to the Secretariat’s journals, initially Social Credit and shortly thereafter The Social Crediter (which continues to be published by the Secretariat) for the remainder of his lifetime, concentrating more on political and philosophical issues in his later years.
Political History
In the early years of the movement in the UK there was strong pressure from trade unionists for the Labour Party to consider adopting ‘social credit’ ideals and policies. The Labour leadership proved hostile, however, essentially because its doctrines of Fabian socialism, with its hierarchical view of state-socialism, economic growth and full employment, were incompatible with such ideas as National Dividends and an end to wage/salary slavery. Certain British Labour economists expended considerable effort in an effort to discredit Social Credit. One of the leading Fabians is said to have declared that they didn’t care whether Douglas was technically correct or not—they simply did not like his policy!
In 1935 the first “Social Credit” government was elected in Alberta, Canada under the leadership of William Aberhart. “Bible Bill”, as he was also known, was a high school mathematics teacher and radio evangelist who was given a book on Social Credit, titled The Meaning of Social Credit, written by the English author and actor Maurice Colborne, and decided Douglas’s theories were exactly what Alberta needed to escape the depression. Douglas, having counseled the previous United Farmers of Alberta Provincial Government was sought as an advisor to Aberhart, but withdrew shortly after due to disagreements, or misunderstandings, in policy and strategy. Under the pressures of dealing with the extreme conditions of the Great Depression and being unable to understand Douglas’s advice Aberhart sought the assistance of a representative of orthodox finance to put the Provinces finances in order. The difficult and strained correspondece between Aberhart and Douglas was published by Douglas in his book The Alberta Experiment (London: Eyre and Spottiswoode, 1937).
The Premier wanted to balance the provincial budget, and Douglas stated that the concept of a balanced budget was completely inconsistent with the use of Social Credit, because of the arithmetic impossibility, under the existing rules of financial cost accountancy, of balancing all budgets within an economy simultaneously. (“The Fallacy of a Balanced Budget,” The New English Weekly, July 28, 1932, pp. 346-7) In a letter to Aberhart, Douglas stated, "This seems to be a suitable occasion on which to emphasise the proposition that a Balanced Budget is quite inconsistent with the use of Social Credit [i.e., Real Credit—the ability to deliver goods and services “as, when and where required”] in the modern world, and is simply a statement in accounting figures that the progress of the country is stationary, i.e., that it consumes exactly what it produces, including capital assets. The result of the acceptance of this proposition is that all capital appreciation becomes quite automatically the property of those who create an issue of money [i.e., the banking system] and the necessary unbalancing of the Budget is covered by Debts."
Two other expert Social Credit technical advisors, L. Denis Byrne and George F. Powell, were sent from the United Kingdom by Douglas, but all attempts to pass Social Credit legislation were ruled ultra vires by the Supreme Court of Canada and Privy Council in London. In desperation, William Aberhart attempted to implement the monetary theories of Silvio Gesell by issuing a form of scrip known as "prosperity certificates", which depreciated in value the longer they were held. Douglas, however, was not impressed by Gesell's theories and openly criticized them. "Gesell's theory was that the trouble with the world was that people saved money so that what you had to do was to make them spend it faster. Disappearing money is the heaviest form of continuous taxation ever devised. The theory behind this idea of Gesell's was that what is required is to stimulate trade - that you have to get people frantically buying goods - a perfectly sound idea so long as the objective of life is merely trading." (" The Approach To Reality")
The Alberta Social Credit Party, under Ernest Manning who succeeded Aberhart after his untimely death, slowly departed from its roots and became popularly identified as a right wing populist movement. Meanwhile, Douglas published in the Secretariat’s journal “An Act for the Better Management of the Credit of Alberta” (The Social Crediter, February 8, 1947). Subsequently, in the same journal, he wrote a critical analysis of what went wrong with Social Credit in Alberta (“Social Credit in Alberta”, August 28/September 4-11, 1948) in which he said, “The Manning administration is no more a Social Credit administration than the British government is Labor”. Social Credit also formed governments in British Columbia, Canada, but again the party had little in common with Douglas and his theories. Social Credit Parties also enjoyed some national electoral successes in Canada, with support from Western Canada and more notably from Quebec. Social Credit parties also had some electoral successes in New Zealand.
Political Theory
Douglas opposed the formation of Social Credit Parties, because he felt that a group of elected amateurs should never direct a group of competent experts in technical matters. ( “The Approach to Reality,” Address at Westminster, March 7, 1936.) The goal of politicians should be to pressure the experts to get the policy results desired by the populace, but the experts are ultimately responsible for achieving those results. “The proper function of Parliament, I may perhaps be allowed to repeat, is to force all activities of a public nature to be carried on so that the individuals who comprise the public may derive the maximum benefit from them. Once the idea is grasped, the criminal absurdity of the party system becomes evident.” ("The Tragedy of Human Effort,” Address at Central Hall, Liverpool, October 30, 1936.) Therefore, Social Credit supported by effective public demand could be implemented by any political party, and once implemented, achieving a realistic integration of means and ends, party politics would cease to exist. Douglas defined democracy as the “will of the people”, not rule by the majority. It is the right of the individual to choose freely one thing at a time, and to contract out of unsatisfactory associations. Traditional ballot-box democracy is incompatible with Social Credit, and Douglas advocated what he called the “responsible vote”, where anonymity in the voting process no longer existed. "The individual voter must be made individually responsible, not collectively taxable, for his vote." ("Realistic Consitutionalism")
The establishment of the supremacy of common law is essential to ensuring the rights of individuals are protected from an all powerful parliament. Douglas believed that the constitution was an organism, not an organization. He also believed that the effectiveness of the British government was structurally determined by its application of the Christian concept known as Trinitarianism. "In some form or other, sovereignty in the British Isles for the last two thousand years has been Trinitarian. Whether we look on this Trinitarianism under the names of King, Lords and Commons or as Policy, Sanctions and Administration, the Trinity-in-Unity has existed, and our national success has been greatest when the balance (never perfect) has been approached. ("Realistic Constitutionalism")
Economic Theory
Douglas disagreed with classical economists such as Adam Smith and David Ricardo who divided the factors of production into land, labour and capital. He also disagreed with Marx who claimed that labour created all wealth. Douglas believed the “cultural inheritance of society” was the primary factor in production. Our cultural inheritance is defined as the knowledge, technique and processes that have been handed down to us incrementally from the origins of civilization. Consequently, we do not have to keep “reinventing the wheel”. “We are merely the administrators of that cultural inheritance, and to that extent the cultural inheritance is the property of all of us, without exception.” (“The Monopolistic Idea,” Address at the Melbourne Town Hall, Australia, January 22, 1934.)
Douglas also criticized classical economics because it was based upon a barter economy; whereas, the modern economy is a monetary one. To the orthodox economist, money is a medium of exchange. This may have once been the case when the majority of wealth was produced by individuals who exchanged it with each other, but in the modern economy, where production is split up into multiple processes, wealth is produced by people working in association with each other. For instance, any automobile worker does not produce any wealth by himself ; the wealth that is produced (i.e., the automobile) is only produced in conjunction with other auto workers, the producers of roads, gasoline, insurance etc. Therefore, wealth is a pool upon which people can draw, and the efficiency gained by individuals co-operating in the productive process in known as the “unearned increment of association”—historic accumulations of which constitute what Douglas called the Cultural Heritage. The means of drawing upon this pool are the tickets distributed by the banking system.
Money originally came from the productive system, when cattle owners punched leather discs which represented a head of cattle. These discs could then be exchanged for corn, and the corn producers could then exchange the disc for a head of cattle at a later date. The word “pecuniary” comes from the Latin “pecus,” meaning cattle. Today, the productive system and the distributive/monetary system are two separate entities. Douglas was one of the first to understand that loans create deposits, and he gave a short mathematical proof of this in his book Social Credit. Bank credit comprises the vast majority of money, and is created every time a bank makes a loan. Douglas was also one of the first to understand the creditary nature of money. The word credit derives from the Latin “credere”, meaning to believe. “The essential quality of money, therefore, is that a man shall believe that he can get what he wants by the aid of it.” (C.H. Douglas, “Engineering, Money and Prices,” Paper read at the Institution of Mechanical Engineers, April 22, 1927, reprinted in Warning Democracy, 1935, p. 15)
Money should not be regarded as a commodity but rather as a ticket, a means of distribution of production (“The Use of Money,” Address in St. James’ Theatre, Christchurch, New Zealand, February 13, 1934, p. 11, 13.) “There are two sides to this question of a ticket representing something that we can call, if we like, a value. There is the ticket itself--the money which forms the thing we call ‘effective demand’—and there is something we call a price opposite to it.” (“The Use of Money,” op cit., p. 15) Money is effective demand, and the means of reclaiming that money are prices and taxes. As real capital replaces labour in the process of modernization money should become increasingly an instrument of distribution.
Douglas also claimed the problem of production, or scarcity, had long been solved. The new problem was one of distribution. Douglas criticized the banking system on two counts: 1) for being a form of government which has been centralizing its power for centuries, and 2) for claiming ownership to the money they create. The latter he claimed was equivalent to claiming ownership of the nation. (“Dictatorship by Taxation,” An Address delivered in the Ulster Hall, Belfast, November 24, 1936.) Money, Douglas claimed, was merely an abstract representation of the real credit of the community, which is the ability of the community to deliver goods and services, when, and where they are required.
The first article to appear in the New Age, edited by A.R. Orage, titled “A Mechanical View of Economics” appeared in January, 1919. In this article, we get a glimpse of Douglas’s concerns in regards to the methods by which economic activity is measured when he says, “It is not the purpose of this short article to depreciate the services of accountants; in fact, under the existing conditions probably no body of men has done more to crystallize the data on which we carry on the business of the world; but the utter confusion of thought which has undoubtedly arisen from the calm assumption of the book-keeper and the accountant that he and he alone was in a position to assign positive or negative values to the quantities represented by his figures is one of the outstanding curiosities of the industrial system; and the attempt to mold the activities of a great empire on such a basis is surely the final condemnation of an out-worn method."
Just over a year later, in his book Credit-Power and Democracy (1920), we see Douglas's critique of accounting methodology as it pertains to income and prices in his famous “A+B theorem”. This was not a theory but a theorem. Quoting from the fourth, Australian Edition of 1933:
"A factory or other productive organization has, besides its economic function as a producer of goods, a financial aspect—it may be regarded on the one hand as a device for the distribution of purchasing-power to individuals through the media of wages, salaries, and dividends; and on the other hand as a manufactory of prices—financial values. From this standpoint its payments may be divided into two groups:
Group A - All payments made to individuals (wages, salaries, and dividends).
Group B - All payments made to other organizations (raw materials, bank charges, and other external costs).
Now the rate of flow of purchasing-power to individuals is represented by A, but since all payments go into prices, the rate of flow of prices cannot be less than A+B. The product of any factory may be considered as something which the public ought to be able to buy, although in many cases it is an intermediate product of no use to individuals but only to a subsequent manufacture; but since A will not purchase A+B; a proportion of the product at least equivalent to B must be distributed by a form of purchasing-power which is not comprised in the description grouped under A. It will be necessary at a later stage to show that this additional purchasing power is provided by loan credit (bank overdrafts) or export credit.”. (C.H. Douglas, Credit-Power and Democracy, Aust. Edition, 1933, pp. 22-23)
The theorem itself demonstrates that total prices rise faster than total incomes when regarded as a flow. Douglas proposed to eliminate this problem by giving “debt-free” credits to consumers in the form of a price rebate and a dividend, called formally a Compensated Price and a National (or Consumer) Dividend. A National Credit Office would be charged with the task of calculating the size of the rebate and dividend by determining a national balance sheet, and keeping track of aggregate production and consumption statistics. The price rebate is based upon the observation that the real cost of production is the mean rate of consumption over the mean rate of production for an equivalent period of time. The physical cost of producing something is the materials and capital that were consumed in its production, plus that amount of Labor consumed during its production. This total consumption represents the physical cost of production. Since less inputs are consumed to produce a unit of output as technology advances, and total production increases relative to total consumption over time, the real cost of production is falling over time; hence, prices should be falling with the progression of time.
The price rebate (Compensated Price) is designed to realize this fact. The Dividend is based upon the fact that Labor is being displaced in the productive process due to increases in productivity. Since Labor is being replaced in the productive process, people should be free to consume while enjoying an increasing amount of leisure as machines displace them. The Dividend would give people this freedom. Further, Labor displacement in the productive process implies that overhead charges {B}Bare increasing in relation to income (A), because “B is the financial representation of the lever of capital” (C.H. Douglas Credit Power and Democracy, Aust. Edition, 1933, p. 25). This means that any attempt to stabilize or increase income is met with rising prices. If A is constant or increasing, and B is increasing due to technological advances, then A+B (prices) must also be increasing. From this perspective, inflation and unemployment are trade offs (re the Phillips Curve), unless prices are reduced from debt- free monies that do not derive from the productive system.
The cause of these “B” payments, or overhead charges, is described by Douglas in his pamphlet entitled, "The New and The Old Economics" when he says, “I think that a little consideration will make it clear that in this sense an overhead charge is any charge in respect of which the actual distributed purchasing power does not still exist, and that practically this means any charge created at a further distance in the past than the period of cyclic rate of circulation of money. There is no fundamental difference between tools and intermediate products, and the latter may therefore be included.” The cyclic rate of circulation of money measures the amount of time that it takes for a loan to go through the productive system and to come back to the bank. This can be calculated by determining the amount of clearings through the bank in a year divided by the average amount of deposits held at the banks (which varies very little). This number will give you the amount of times money must turnover in order to produce these clearing house figures. Douglas estimated the cyclic rate of circulation of money to be approximately three weeks. As Douglas said in his testimony before the Alberta Agricultural Committee of the Alberta Legislature in 1934, “Now we know there are an increasing number of charges which originated from a period much anterior to three weeks, and included in those charges, as a matter of fact, are most of the charges made in, respect of purchases from one organization to another, but all such charges as capital charges (for instance, on a railway which was constructed a year, two years, three years, five or ten years ago, where charges are still extant), cannot be liquidated by a stream of purchasing power which does not increase in volume and which has a period of three weeks. The consequence is, you have a piling up of debt, you have in many cases a diminution of purchasing power being equivalent to the price of the goods for sale.” (p. 90)
We see the major consequence of the problem that Douglas identified is exponentially increasing debt. Other less noticeable consequences are that society is either forced to engage in production that the consumer does not want, or production he cannot purchase. The latter represents a “favorable balance of trade”, meaning a country exports more than it imports. The former represents excessive capital production and/or military buildup. The problem with pursuing a favorable balance of trade is that not every country can pursue this objective at the same time, since it is necessary for a country to import more than it exports if another exports more than it imports. The long-term consequence of this policy is a trade war, ultimately resulting in real war. Hence, the Social Credit admonition, as expressed by the Social Credit Party of Great Britain and Northern Ireland, led by John Hargrave, that “He who calls for Full-Employment calls for War!” Excessive capital production is only a temporary fix because the cost of the capital ultimately shows up in the cost of consumer goods, or taxes, which only goes to further exacerbate the gap between income and prices at a later date. Military buildup necessitates either it’s use, or stockpiling of weapons leading to inventory accumulation.
Philosophy
Douglas warned against viewing Social Credit solely as a scheme of monetary reform. He described Social Credit as a policy of a philosophy. He coined this philosophy “practical Christianity.” Douglas believed there was a Canon which ran through the universe, and Jesus Christ was the Incarnation of this Canon. However, he also felt that Christianity remained ineffective so long as it remained transcendental. Religion, which derives from the Latin word relegare, meaning to “bind back”, was supposed to be a binding back to reality. Christianity was only effective to the extent that it was rooted in existence. Although Douglas defined Social Credit as a philosophy with Christian roots, he did not envision a Christian theocracy. Social Credit society recognizes the fact that the relationship between man and God is unique. Therefore, it is essential to allow man the greatest possible freedom in order to pursue this relationship. If people are given the economic security and leisure achievable in the context of a Social Credit dispensation, most would end their service to mammon and use their free time pursuing spiritual, intellectual, or cultural goals leading to self-development. Douglas did not believe that religion should be thrust upon anyone through force of law or external compulsion. He emphasized that all policy derives from its respective philosophy and that “. . . Society is primarily metaphysical, and must have regard to the organic relationships of its prototype.”
Douglas said that Social Crediters wants to build a new civilization based upon absolute economic security for the individual—where “. . . they shall sit every man [individual] under his [her] vine and under his [her] fig tree; and none shall make them afraid.” (Micah iv, 4 quoted on the cover of the Douglas Quarterly Review, The Fig Tree, New Series. 1954-55.) In keeping with this goal, Douglas was opposed to all forms of taxation on real property. This set Social Credit at variance from the land-taxing recommendations of the Henry George School.
Douglas opposed what he termed “the pyramid of power.” Totalitarianism reflects this pyramid and is the antithesis of Social Credit. It turns the government into an end instead of a means, and the individual into a means instead of an end—Demon est deus inversus—“the devil is God upside down.” Social Credit is designed to give the individual the maximum freedom allowable given the need for association in economic, political and social matters. Liberty in politics is dependent on the metaphysical concept of free will, for what use is the purpose of liberty if man is not free to choose? Social Credit rejects dialectical materialistic philosophy. Douglas divided philosophy into two schools of thought that he labeled the "classical school" and the "modern school", which are broadly represented by philosophies of Aristotle and Bacon respectively. Douglas was critical of both schools of thought, but believed that "the truth lies in appreciation of the fact that neither conception is useful without the other". (C.H. Douglas: Social Credit. ISBN 0-087968-107-1, p. 6) Social Credit philosophy is best summed by Douglas when he said, “Systems were made for men, and not men for systems, and the interest of man which is self-development, is above all systems, whether theological, political or economic.” (Economic Democracy, Fourth Revised and. Enlarged Edition, 1934, p 18.)
Critics to A+B and Rebuttal
Critics to the theorem argue there is no difference between A and B payments, and Social Credit policies are inflationary. These criticisms are based upon the quantity theory of money, which states that the quantity of money multiplied by its velocity of circulation equals total purchasing power. Following is a brief explanation of the quantity theory of money:
"MV=PQ:
where
M=quantity of money in the hands of the public
P=average level of prices
Q=quantity of output (that is real national product or real national income).
Thus, PQ = national product, measured in nominal (dollar) terms
And V = income velocity of money, that is, the average number of times that the money stock (M) is spent to buy final output during a year. Specifically, V is defined as being equal to PQ/M
Suppose that the money stock is $20 billion. Assume that, in the course of a year, the average dollar bill and the average chequing deposit are spent twelve times to purchase final goods and services. In other words, V is 12. Then, total spending for final output is $20 billion times 12, or $240 billion. In turn, this total spending (MV) equals the total quantity of goods and services (Q) times the average price (P) at which they were sold.
But how can the same dollar be used over and over to purchase final goods? Very simply. When you purchase groceries at the store, the $50 you pay does not disappear. Rather, it goes into the cash register of the store. From there, it is used to pay the farmer for fresh vegetables, the canning factory for canned goods, or the clerk's wages. The farmer or the clerk or the employee of the canning factory will in turn use the money to purchase goods. Once more, the same money is used for final purchases. The same dollar bill can circulate round and round." (Blomqvist, Wonnacott and Wonnacott, "Economics First Canadian Edition" ISBN: 0-07-54815-X: p. 247-248)
It was written in a committee report to the Alberta government in regards to the quantity theory of money: “The fallacy in the theory lies in the incorrect assumption that money "circulates", whereas it is issued against production, and withdrawn as purchasing power as the goods are bought for consumption. “ (“The Alberta Post-War Reconstruction Committee Report of the Subcommittee on Finance") Because all money is created as a debt that needs to be repaid, money does not circulate, but instead operates in an accounting cycle. If a retailer receives money from a customer for its product, the total sum of this money is neither profit, nor income. A retailer has debts to repay, or it must replace working capital. These sums are subtracted from revenues when determining profits. Neither is the profit entirely income; taxes must be paid, and a portion may be re-invested back into the business. Therefore, of the money received from the customer, the retailer may find that only a very small percentage is actually distributed as income that can then be spent on goods or services, the rest is either used to repay debts, replace working capital, or re-invested back into the firm. The fallacy is that the same dollar bill can "circulate round and round"; in reality, money is created as a debt that needs to be repaid. Every loan creates a deposit, and every repayment of a loan destroys a deposit. Therefore; money does not "circulate round and round" but is created and destroyed through the creation of loans and their repayment.
Other critics argue that if the gap between income and prices exists as Douglas claimed, the economy would have collapsed in short order. They also argue that there are periods of time in which purchasing power is in excess of the price of consumer goods for sale.
Douglas replied to these criticisms in his testimony before the Alberta Agricultural Committee when he said, "What people who say that forget is that we were piling up debt at that time at the rate of ten millions sterling a day and if it can be shown, and it can be shown, that we are increasing debt continuously by normal operation of the banking system and the financial system at the present time, then that is proof that we are not distributing purchasing power sufficient to buy the goods for sale at that time; otherwise we should not be increasing debt, and that is the situation." (p. 90)
Incomes are paid out to workers during a multi-stage program of production, and according to the convention of accepted orthodox rules of accountancy, said incomes, are part of the financial cost and price of the final product when it is ready for use at the point of retail sale. For the product to be purchased with incomes earned in respect of its manufacture, all of these incomes would have to be saved until the product’s completion. In the real world earned incomes are largely, and necessarily, spent on past production to meet the present needs of living, and will not be available to purchase goods completed in the future –goods which must include the sum of incomes paid out during their period of manufacture in their price . Because the cyclic rate of circulation of money takes less time than the cancellation of the costs that the money created, orthodox economics can only allow access to the final products of industry by the mechanism of increasing consumer debt that constitutes a mortgage against future incomes. This does not liquidate the financial cost of production inasmuch as it merely passes charges of one accountancy period on as mounting charges against future periods. In other words, supply does not create enough demand to liquidate all the costs of production: Social Credit denies the validity of "Says Law" in economics.
Literary Figures in Social Credit
As lack of finance has been a constant impediment to the development of the arts and literature, the concept of economic democracy through Social Credit had immediate appeal in literary circles. Names associated with Social Credit include Charlie Chaplin, William Carlos Williams, Ezra Pound, T.S. Eliot, Herbert Read, Aldous Huxley, Storm Jameson, Eimar O’Duffy, Sybil Thorndyke, Bonamy DobrÈe and the American publisher James Laughlin . In 1933 Eimar O’Duffy published Asses in Clover, a science fiction fantasy exploration of social credit themes. His social credit economics book Life and Money: Being a Critical Examination of the Principles and Practice of Orthodox Economics with A Practical Scheme to End the Muddle it has made of our Civilisation, was endorsed by Douglas.
Summary
In Social Credit terminology, the words “Economic Democracy” do not mean worker control of industry. They mean conditions of consumer sovereignty wherein the consumer establishes the policy of production through exercise of his money-vote, fully provided with adequate purchasing power. The policy of production is so to be removed from the banking institutions, the government and industry. Social Credit envisages an “aristocracy of producers, serving and accredited by a democracy of consumers.” (C. H. Douglas) The true purpose of production is consumption and production must serve the genuine, freely expressed interests of consumers. Each citizen is to have a beneficial, not direct, inheritance in the communal capital—conferred by complete and dynamic access to the fruits of industry assured by the National Dividend and Compensated Price.Social Credit is distributive and its policy is to disperse power to individuals. “The only safe place for power is in many hands.”
Tuesday, April 29, 2008
Sunday, October 7, 2007
Douglas's A+B Theorem
Douglas’s A+B theorem is probably the most simple, yet most controversial, of all of Douglas's ideas. Oftentimes, too much emphasis has been placed on this theory amongst Social Crediters themselves, but the theory itself is essential for understanding Douglas’ monetary policies. The theorem is a truism; however, the controversy lies in the nature of the “B payments” which Douglas identified. The theorem is stated by Douglas as follows:
“In any manufacturing undertaking the payments made may be divided into two groups: Group A: Payments made to individuals as wages, salaries, and dividends; Group B: Payments made to other organizations for raw materials, bank charges and other external costs. The rate of distribution of purchasing power to individuals is represented by A, but since all payments go into prices, the rate of generation of prices cannot be less than A plus B. Since A will not purchase A plus B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing power which is not comprised in the description grouped under A.” (C.H. Douglas, “The Monopoly of Credit”)
Douglas was an engineer, and a cost accountant.. As a scientist, he started with an observation, and formed a hypothesis. This is different than many orthodox economists who form a hypothesis, and then try to make the facts fit their theory. Douglas’ A+B theory is a simple statement of fact, and the accounts of any business will verify this fact. The confusion amongst orthodox economists lies in the nature of the B payments, and what causes them.
The critics of the theory generally fall into two categories by arguing: 1) B payments are really income, so there is no differentiation between A and B payments or 2) B payments are either past, or future, income. Let’s address both these criticisms individually.
The first criticism, which states that B payments are income, implicitly assumes the quantity theory of money. According to this theory, all money received by firms is income and can be used to purchase other goods and services. The theorem states that the quantity of transactions, multiplied by the quantity of money, equals total purchasing power. On the surface, this theory seems to make sense, but upon further investigation, it is not a reflection of reality. In reality, firms have costs that must be repaid. These costs can ultimately be traced back to bank debt because all money originates as debt. If a company receives $10 for its product, and assuming accumulated costs of $8.50 to acquire and sell this product, then only $1.50 is actually profit to the company, and potential income. The $8.50 must be used to cancel debts, or replace working capital. All of the $10 received by the company is not income. The fallacy was pointed out in "The Alberta Post-War Reconstruction Committee Report".
“The fallacy in the theory lies in the incorrect assumption that money "circulates", whereas it is issued against production, and withdrawn as purchasing power as the goods are bought for consumption. “ ( “The Alberta Post-War Reconstruction Committee Report of the Subcommittee on Finance")
The truth is that money does not “circulate” but instead operates in an accounting cycle, and B payments are monies on their way back to the bank, thus completing the cycle. Therefore, B payments do not exist as income to anyone. Income, by contrast, is flowing from the bank, and reaches individuals through the media of wages, salaries, and dividends. The argument that B payments are income is a complete fallacy based on the erroneous assumption that the circulation of money increases its purchasing power.
The second criticism, which has more credibility, will be seen to be a complete fallacy when the concept of time is introduced. Although not all B payments represent previous, or future, income (something we will touch on later), it is true that a proportion of the B payments are represented by past and future incomes. However; income and prices must be regarded as flows, and as Douglas stated:
“The mill will never grind with water that has passed, and unless it can be shown, as it certainly cannot be shown, that all these sums distributed in respect of the production of intermediate products are actually saved up, not in the form of securities, but in the form of actual purchasing power, we are obliged to assume what I believe to be true, that the rate of flow of purchasing power derived from the normal and theoretical operation of the existing price system is always less than that of the generation of prices within the same period of time.” (C.H. Douglas, “The Monopoly of Credit”)
It is obvious that future incomes cannot be used as present incomes (excluding momentarily credit from an extraneous source, which is a mortgage on future incomes). These future incomes are profits (interest on loans representing bank profit), which become future incomes via dividends paid to individuals. The fact that profits partially cause the gap between income and prices forms the supposed justification for the socialist argument against profits. However, nobody will do something unless it in some sense of the word profits him. Also, profits only represent a portion of the gap between income and prices. Douglas did not seek to eliminate profits, instead he wanted to compensate for the gap between income and prices which profits helped create.
"The essential point to notice, however, is not the profit, but that he cannot and will not produce unless his expenses on the average are not more than covered. These expenses may be of various descriptions, but they can all be resolved ultimately into labour charges of some sort (a fact which incidentally is responsible for the fallacy that labour, by which is meant the labour of the present population of the world, produces all wealth). Consider what this means. All past labour, represented by money charges, goes into cost and so into price. But a great part of the product of his labour -that part which represents consumption and depreciation - has become useless, and disappeared." (C.H. Douglas, "The Control and Distribution of Production")
Past income used for consumption represents a substantial portion of the gap between income and prices. The belief that incomes disbursed in the past for capital production are all saved up in order to defray the costs associated with those incomes as they make their way into the cost of future consumer goods is a complete fallacy. People tend to spend their income on consumer goods in a relatively expeditious fashion. This money is collected from the consumers by businesses through the agency of prices. The upper limit of prices being governed by the laws of supply and demand, or what the item will fetch. This income, recollected by businesses, forms a part of their profit, assuming they can sell their product above cost. These profits can be distributed as income in the form of dividends, but is most often re-invested back into the company, and therefore, do not exist as income to anyone.
“Consider the nature of these B payments. They are repayments collected from the public of purchasing power in respect of production not yet delivered to the public. If the wage earners in process ‘I’ use their current month’s, i.e. May’s, wages to buy their share of one current month’s production of consumable goods, they are using money distributed in respect of production which will not appear as consumable goods till October. They are in fact involuntarily reinvesting their money in industry, with the results previously explained” (C.H. Douglas, “The Monopoly of Credit”)
Therefore, it can be seen that the criticisms of the A+B theorem are based on the fallacy known as the quantity theory of money, or they fail to take into account the effect of time on income and prices (i.e. they are static). Incomes and prices are flows, and any analysis into their nature must account for the dimension of time. Since prices include all payments made to individuals as income (A), as well as all overhead charges (B), we must understand what causes these overhead charges in order to understand why prices rise faster than incomes when regarded as a flow.
"It is now necessary to see to what extent this conception of overhead charges can be extended, and I think that a little consideration will make it clear that in this sense an overhead charge is any charge in respect of which the actual distributed purchasing power does not still exist, and that practically this means any charge created at a further distance in the past than the period of cyclic rate of circulation of money. There is no fundamental difference between tools and intermediate products, and the latter may therefore be included." (C.H. Douglas, "The New and The Old Economics")
The cyclic rate of purchasing power of money can be calculated by calculating the average amount of deposits held by depositors in banks relative to the amount of clearings through the banks, minus the amount of "Butcher-Baker" transactions. Douglas referred to any transaction that broke a chain of repayments as a "Butcher-Baker" transaction. When a butcher receives money for his product from his customer, he must repay debts owed to the slaughterhouse for the meat, who in turn must pay debts owed to the farmer, who pays debts to the banker (all money originating from the bank as a debt). If the butcher buys bread from the baker with the money he has received from his customer, then he has broken the chain of debt to the slaughterhouse, farmer, and ultimately the banker; and therefore, these transactions leave a trail of debt, and must be deducted when calculating the cyclic rate of purchasing power, because the monetary cycle has not been completed. Douglas calculated the average cyclic rate of purchasing power to be approximately two and a half weeks in Britain ("The Old and the New Economics”). Therefore; any cost anterior to three weeks, must form a part of the gap between income and prices. Douglas spoke of this fact when questioned before the Alberta Agricultural Commission.
"Well, that question of course is outside what I was speaking of this morning, but I have no objection whatever to answering it shortly. The best way of understanding what the speaker has referred to as the "A plus B" theory is to look at the matter in this way: The purchasing power of the general community is practically 98 per cent, I think, taken over all products, bank money. The actual deposits in banks under what are sometimes called "normal times" (I don't know what normal times are, but they are frequently referred to so we will assume that there are normal times) the deposits remained fairly constant. For instance, in Great Britain since the war they have reached around between 16 and 18 hundred millions of pounds. Now there is quite obviously a circulation of those deposits through the agency of costs. They are distributed for wages and so forth and they come back to the same source through the agency of price. That is the way the existing financial system works.
Now all business in the world at the present time is carried on on the theory of the balanced budget, including governmental business. Therefore, you must have a right, or period of cycle through which this money which starts from the banks goes out through cost and comes back again to the banks through the agency of price; there must be a time that that cycle takes. Now we have as a matter of fact means of calculating that time, and in Great Britain the average is somewhere in the neighbourhood of around about three weeks. Now, so long as a charge is incurred and liquidated inside that period of three weeks it can be liquidated by that cycle of the flow of purchasing power, starting from the banks, going out through costs and coming back again through prices. So long as the whole transaction of costs and prices is involved in a period of about three weeks, there is no difficulty involved in the prices and the costs being equal, but any item of cost which is outside that period of three weeks we will say cannot be liquidated by that stream of credit which is constantly in circulation at a period rate, we will say of three weeks.
Now we know there are an increasing number of charges which originated from a period much anterior to three weeks, and included in those charges, as a matter of fact, are most of the charges made in, respect of purchases from one organization to another, but all such charges as capital charges (for instance, on a railway which was constructed a year, two years, three years, five or ten years ago, where charges are still extant), cannot be liquidated by a stream of purchasing power which does not increase in volume and which has a period of three weeks. The consequence is, you have a piling up of debt, you have in many cases a diminution of purchasing power being equivalent to the price of the goods for sale. It is frequently said, "Your theory must be absurd because we know that there are periods in which purchasing power is in excess of the price of the goods for sale, for instance at the end of a war." What people who say that forget is that we were piling up debt at that time at the rate of ten millions sterling a day and if it can be shown, and it can be shown, that we are increasing debt continuously by normal operation of the banking system and the financial system at the present time, then that is proof that we are not distributing purchasing power sufficient to buy the goods for sale at that time; otherwise we should not be increasing debt, and that is the situation." (C.H. Douglas, "Douglas System of Social Credit", evidence taken by the Agricultural Committee of the Alberta Legislature 1934)
If money disbursed for production makes its way to the bank before its cost can be extinguished in the price of the consumer goods it creates, then there is a corresponding gap between income and prices. If income is reinvested back into the productive system, then each time it is re-invested, it creates a new cost without creating new purchasing power (we have already seen that money does not circulate, but cycles, so money is only capable of cancelling one cost). The income I receive in terms of wages or salaries has been debited to the cost of some good or service. If I invest my income, then I expect to receive my investment back, with a rate of return. The only way the company I invested in can give me my money back with a rate of return is by charging the consumer through prices. Therefore; my income has created two costs: 1) the cost associated with the good or service that I helped provide, and 2) the cost associated with the investment that must be returned to me. However, my income can only cancel one of those costs. There is now a new cost created, without the creation of new purchasing power.
"But we also find that apart from this question of the distribution of purchasing power there is not enough purchasing power distributed to buy the goods which are for sale if the production of these goods has been financed by ordinary methods. There are many contributory causes to this situation, but it is probable that the main cause is due to the reappearance in prices of the same sum of money several times, a state of affairs which is rendered possible by the splitting up of production into a large number of processes." (C.H. Douglas, "Money and the Price System")
The reappearance in prices of the same sum of money several times creates a gap between purchasing power and prices. The re-investment of savings causes the reappearance in prices of the same sum of money, and the more production is split up into a large number of processes, the greater the probability that income disbursed in capital production will be reinvested. Douglas listed five causes of the gap between prices and purchasing power in "The New and The Old Economics":
"Categorically, there are at least the following five causes of a deficiency of purchasing power as compared with collective prices of goods for sale: -
1. Money profits collected from the public (interest is profit on an intangible)
2. Savings, i.e., mere abstentation from buying
3. Investment of savings in new works, which create a new cost without fresh purchasing power
4. Difference in circuit velocity between cost liquidation and price creation which results in charges being carried over into prices from a previous cost accountancy cycle. Practically all plant charges are of this nature, and all payments for material brought in frm a previous wage cycle are of the same nature.
5. Deflation, i.e. sale of securities by banks and recall of loans" (C.H. Douglas, "The New and The Old Economics")
We have already discussed at length reasons 1, 3, and 4. Reasons 2 and 5 are pretty much self-explanatory, both being a reduction in A, and not the creation of B costs. Add to all this the fact that overhead charges are growing in relation to income (i.e. B is increasing relative to A), due to the fact that capital is replacing the need for labour in the productive process, and it is apparent that the gap between income and prices is ever increasing, and this problem is ever worsening.
"At the moment the point to be borne in mind is that B is the financial representation of the lever of capital, and is constantly increasing in comparison with A. So that, in order to keep A and the goods purchase with A at a constant value, A+B must expand with every improvement of process..." (C.H. Douglas, "Credit-Power and Democracy")
What does this mean? If A+B must expand with every improvement of process in order to keep A, and the goods purchased with A ,at a constant value, and if A+B represent prices, then prices must expand with every improvement in process. This is why certain periods of time, when people have enough income to purchase most goods coming onto the market, are met with rising prices (i.e. inflation). Inflation is generally not caused by too much income chasing too few goods, but is caused by the ever increasing expansion of overhead costs via advancing technological processes. This means that inflation is inherent in our economic system, unless credit from an extraneous source is used to decrease, or stabilize, prices.
"Now any attempt, by current financial methods, to reduce prices (or even to stabilize them, as the phrase goes) is a mathematical absurdity unless the cost of this stabilization, or lowering of prices, is met from some extraneous source. Or to put the matter another way, the margin of profit which makes it possible for a producer to go on producing, disappears unless the financial cost, and consequently the price of production, is allowed to rise steadily in relation to direct labour cost." (C.H. Douglas, "Social Credit")
“In any manufacturing undertaking the payments made may be divided into two groups: Group A: Payments made to individuals as wages, salaries, and dividends; Group B: Payments made to other organizations for raw materials, bank charges and other external costs. The rate of distribution of purchasing power to individuals is represented by A, but since all payments go into prices, the rate of generation of prices cannot be less than A plus B. Since A will not purchase A plus B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing power which is not comprised in the description grouped under A.” (C.H. Douglas, “The Monopoly of Credit”)
Douglas was an engineer, and a cost accountant.. As a scientist, he started with an observation, and formed a hypothesis. This is different than many orthodox economists who form a hypothesis, and then try to make the facts fit their theory. Douglas’ A+B theory is a simple statement of fact, and the accounts of any business will verify this fact. The confusion amongst orthodox economists lies in the nature of the B payments, and what causes them.
The critics of the theory generally fall into two categories by arguing: 1) B payments are really income, so there is no differentiation between A and B payments or 2) B payments are either past, or future, income. Let’s address both these criticisms individually.
The first criticism, which states that B payments are income, implicitly assumes the quantity theory of money. According to this theory, all money received by firms is income and can be used to purchase other goods and services. The theorem states that the quantity of transactions, multiplied by the quantity of money, equals total purchasing power. On the surface, this theory seems to make sense, but upon further investigation, it is not a reflection of reality. In reality, firms have costs that must be repaid. These costs can ultimately be traced back to bank debt because all money originates as debt. If a company receives $10 for its product, and assuming accumulated costs of $8.50 to acquire and sell this product, then only $1.50 is actually profit to the company, and potential income. The $8.50 must be used to cancel debts, or replace working capital. All of the $10 received by the company is not income. The fallacy was pointed out in "The Alberta Post-War Reconstruction Committee Report".
“The fallacy in the theory lies in the incorrect assumption that money "circulates", whereas it is issued against production, and withdrawn as purchasing power as the goods are bought for consumption. “ ( “The Alberta Post-War Reconstruction Committee Report of the Subcommittee on Finance")
The truth is that money does not “circulate” but instead operates in an accounting cycle, and B payments are monies on their way back to the bank, thus completing the cycle. Therefore, B payments do not exist as income to anyone. Income, by contrast, is flowing from the bank, and reaches individuals through the media of wages, salaries, and dividends. The argument that B payments are income is a complete fallacy based on the erroneous assumption that the circulation of money increases its purchasing power.
The second criticism, which has more credibility, will be seen to be a complete fallacy when the concept of time is introduced. Although not all B payments represent previous, or future, income (something we will touch on later), it is true that a proportion of the B payments are represented by past and future incomes. However; income and prices must be regarded as flows, and as Douglas stated:
“The mill will never grind with water that has passed, and unless it can be shown, as it certainly cannot be shown, that all these sums distributed in respect of the production of intermediate products are actually saved up, not in the form of securities, but in the form of actual purchasing power, we are obliged to assume what I believe to be true, that the rate of flow of purchasing power derived from the normal and theoretical operation of the existing price system is always less than that of the generation of prices within the same period of time.” (C.H. Douglas, “The Monopoly of Credit”)
It is obvious that future incomes cannot be used as present incomes (excluding momentarily credit from an extraneous source, which is a mortgage on future incomes). These future incomes are profits (interest on loans representing bank profit), which become future incomes via dividends paid to individuals. The fact that profits partially cause the gap between income and prices forms the supposed justification for the socialist argument against profits. However, nobody will do something unless it in some sense of the word profits him. Also, profits only represent a portion of the gap between income and prices. Douglas did not seek to eliminate profits, instead he wanted to compensate for the gap between income and prices which profits helped create.
"The essential point to notice, however, is not the profit, but that he cannot and will not produce unless his expenses on the average are not more than covered. These expenses may be of various descriptions, but they can all be resolved ultimately into labour charges of some sort (a fact which incidentally is responsible for the fallacy that labour, by which is meant the labour of the present population of the world, produces all wealth). Consider what this means. All past labour, represented by money charges, goes into cost and so into price. But a great part of the product of his labour -that part which represents consumption and depreciation - has become useless, and disappeared." (C.H. Douglas, "The Control and Distribution of Production")
Past income used for consumption represents a substantial portion of the gap between income and prices. The belief that incomes disbursed in the past for capital production are all saved up in order to defray the costs associated with those incomes as they make their way into the cost of future consumer goods is a complete fallacy. People tend to spend their income on consumer goods in a relatively expeditious fashion. This money is collected from the consumers by businesses through the agency of prices. The upper limit of prices being governed by the laws of supply and demand, or what the item will fetch. This income, recollected by businesses, forms a part of their profit, assuming they can sell their product above cost. These profits can be distributed as income in the form of dividends, but is most often re-invested back into the company, and therefore, do not exist as income to anyone.
“Consider the nature of these B payments. They are repayments collected from the public of purchasing power in respect of production not yet delivered to the public. If the wage earners in process ‘I’ use their current month’s, i.e. May’s, wages to buy their share of one current month’s production of consumable goods, they are using money distributed in respect of production which will not appear as consumable goods till October. They are in fact involuntarily reinvesting their money in industry, with the results previously explained” (C.H. Douglas, “The Monopoly of Credit”)
Therefore, it can be seen that the criticisms of the A+B theorem are based on the fallacy known as the quantity theory of money, or they fail to take into account the effect of time on income and prices (i.e. they are static). Incomes and prices are flows, and any analysis into their nature must account for the dimension of time. Since prices include all payments made to individuals as income (A), as well as all overhead charges (B), we must understand what causes these overhead charges in order to understand why prices rise faster than incomes when regarded as a flow.
"It is now necessary to see to what extent this conception of overhead charges can be extended, and I think that a little consideration will make it clear that in this sense an overhead charge is any charge in respect of which the actual distributed purchasing power does not still exist, and that practically this means any charge created at a further distance in the past than the period of cyclic rate of circulation of money. There is no fundamental difference between tools and intermediate products, and the latter may therefore be included." (C.H. Douglas, "The New and The Old Economics")
The cyclic rate of purchasing power of money can be calculated by calculating the average amount of deposits held by depositors in banks relative to the amount of clearings through the banks, minus the amount of "Butcher-Baker" transactions. Douglas referred to any transaction that broke a chain of repayments as a "Butcher-Baker" transaction. When a butcher receives money for his product from his customer, he must repay debts owed to the slaughterhouse for the meat, who in turn must pay debts owed to the farmer, who pays debts to the banker (all money originating from the bank as a debt). If the butcher buys bread from the baker with the money he has received from his customer, then he has broken the chain of debt to the slaughterhouse, farmer, and ultimately the banker; and therefore, these transactions leave a trail of debt, and must be deducted when calculating the cyclic rate of purchasing power, because the monetary cycle has not been completed. Douglas calculated the average cyclic rate of purchasing power to be approximately two and a half weeks in Britain ("The Old and the New Economics”). Therefore; any cost anterior to three weeks, must form a part of the gap between income and prices. Douglas spoke of this fact when questioned before the Alberta Agricultural Commission.
"Well, that question of course is outside what I was speaking of this morning, but I have no objection whatever to answering it shortly. The best way of understanding what the speaker has referred to as the "A plus B" theory is to look at the matter in this way: The purchasing power of the general community is practically 98 per cent, I think, taken over all products, bank money. The actual deposits in banks under what are sometimes called "normal times" (I don't know what normal times are, but they are frequently referred to so we will assume that there are normal times) the deposits remained fairly constant. For instance, in Great Britain since the war they have reached around between 16 and 18 hundred millions of pounds. Now there is quite obviously a circulation of those deposits through the agency of costs. They are distributed for wages and so forth and they come back to the same source through the agency of price. That is the way the existing financial system works.
Now all business in the world at the present time is carried on on the theory of the balanced budget, including governmental business. Therefore, you must have a right, or period of cycle through which this money which starts from the banks goes out through cost and comes back again to the banks through the agency of price; there must be a time that that cycle takes. Now we have as a matter of fact means of calculating that time, and in Great Britain the average is somewhere in the neighbourhood of around about three weeks. Now, so long as a charge is incurred and liquidated inside that period of three weeks it can be liquidated by that cycle of the flow of purchasing power, starting from the banks, going out through costs and coming back again through prices. So long as the whole transaction of costs and prices is involved in a period of about three weeks, there is no difficulty involved in the prices and the costs being equal, but any item of cost which is outside that period of three weeks we will say cannot be liquidated by that stream of credit which is constantly in circulation at a period rate, we will say of three weeks.
Now we know there are an increasing number of charges which originated from a period much anterior to three weeks, and included in those charges, as a matter of fact, are most of the charges made in, respect of purchases from one organization to another, but all such charges as capital charges (for instance, on a railway which was constructed a year, two years, three years, five or ten years ago, where charges are still extant), cannot be liquidated by a stream of purchasing power which does not increase in volume and which has a period of three weeks. The consequence is, you have a piling up of debt, you have in many cases a diminution of purchasing power being equivalent to the price of the goods for sale. It is frequently said, "Your theory must be absurd because we know that there are periods in which purchasing power is in excess of the price of the goods for sale, for instance at the end of a war." What people who say that forget is that we were piling up debt at that time at the rate of ten millions sterling a day and if it can be shown, and it can be shown, that we are increasing debt continuously by normal operation of the banking system and the financial system at the present time, then that is proof that we are not distributing purchasing power sufficient to buy the goods for sale at that time; otherwise we should not be increasing debt, and that is the situation." (C.H. Douglas, "Douglas System of Social Credit", evidence taken by the Agricultural Committee of the Alberta Legislature 1934)
If money disbursed for production makes its way to the bank before its cost can be extinguished in the price of the consumer goods it creates, then there is a corresponding gap between income and prices. If income is reinvested back into the productive system, then each time it is re-invested, it creates a new cost without creating new purchasing power (we have already seen that money does not circulate, but cycles, so money is only capable of cancelling one cost). The income I receive in terms of wages or salaries has been debited to the cost of some good or service. If I invest my income, then I expect to receive my investment back, with a rate of return. The only way the company I invested in can give me my money back with a rate of return is by charging the consumer through prices. Therefore; my income has created two costs: 1) the cost associated with the good or service that I helped provide, and 2) the cost associated with the investment that must be returned to me. However, my income can only cancel one of those costs. There is now a new cost created, without the creation of new purchasing power.
"But we also find that apart from this question of the distribution of purchasing power there is not enough purchasing power distributed to buy the goods which are for sale if the production of these goods has been financed by ordinary methods. There are many contributory causes to this situation, but it is probable that the main cause is due to the reappearance in prices of the same sum of money several times, a state of affairs which is rendered possible by the splitting up of production into a large number of processes." (C.H. Douglas, "Money and the Price System")
The reappearance in prices of the same sum of money several times creates a gap between purchasing power and prices. The re-investment of savings causes the reappearance in prices of the same sum of money, and the more production is split up into a large number of processes, the greater the probability that income disbursed in capital production will be reinvested. Douglas listed five causes of the gap between prices and purchasing power in "The New and The Old Economics":
"Categorically, there are at least the following five causes of a deficiency of purchasing power as compared with collective prices of goods for sale: -
1. Money profits collected from the public (interest is profit on an intangible)
2. Savings, i.e., mere abstentation from buying
3. Investment of savings in new works, which create a new cost without fresh purchasing power
4. Difference in circuit velocity between cost liquidation and price creation which results in charges being carried over into prices from a previous cost accountancy cycle. Practically all plant charges are of this nature, and all payments for material brought in frm a previous wage cycle are of the same nature.
5. Deflation, i.e. sale of securities by banks and recall of loans" (C.H. Douglas, "The New and The Old Economics")
We have already discussed at length reasons 1, 3, and 4. Reasons 2 and 5 are pretty much self-explanatory, both being a reduction in A, and not the creation of B costs. Add to all this the fact that overhead charges are growing in relation to income (i.e. B is increasing relative to A), due to the fact that capital is replacing the need for labour in the productive process, and it is apparent that the gap between income and prices is ever increasing, and this problem is ever worsening.
"At the moment the point to be borne in mind is that B is the financial representation of the lever of capital, and is constantly increasing in comparison with A. So that, in order to keep A and the goods purchase with A at a constant value, A+B must expand with every improvement of process..." (C.H. Douglas, "Credit-Power and Democracy")
What does this mean? If A+B must expand with every improvement of process in order to keep A, and the goods purchased with A ,at a constant value, and if A+B represent prices, then prices must expand with every improvement in process. This is why certain periods of time, when people have enough income to purchase most goods coming onto the market, are met with rising prices (i.e. inflation). Inflation is generally not caused by too much income chasing too few goods, but is caused by the ever increasing expansion of overhead costs via advancing technological processes. This means that inflation is inherent in our economic system, unless credit from an extraneous source is used to decrease, or stabilize, prices.
"Now any attempt, by current financial methods, to reduce prices (or even to stabilize them, as the phrase goes) is a mathematical absurdity unless the cost of this stabilization, or lowering of prices, is met from some extraneous source. Or to put the matter another way, the margin of profit which makes it possible for a producer to go on producing, disappears unless the financial cost, and consequently the price of production, is allowed to rise steadily in relation to direct labour cost." (C.H. Douglas, "Social Credit")
Subscribe to:
Posts (Atom)