The Shortage of Buying Power Arising from Prices

on Wednesday, 28 December 2016. Posted in From Debt to Prosperity (book)

From debt to prosperity - Chapter VI

So far we have dealt mainly with money. “Practically all pur­chasing power comes into existence in the form of credit, and though it may be transmuted into cash in its passage through the hands either of poor men who have no banking account, or of rich men who require pocket-money, it resumes the form of credit to be extinguished.”1

We have seen that the first fundamental defect in our money sys­tem is an artificial scarcity of money resulting from the monopoly over its supply and its creation as debt. The second defect is more subtle and, if possible, even more disastrous than the first, for it concerns the direct relation of money to goods. Its pinch is felt in every purse, from beggar’s to millionaire’s, since it involves the prices we must pay for the goods we need to live.

It is generally agreed that our trouble is not over-production but under-consumption, which results from a chronic shortage of buying-power. We must note carefully the word “chronic” for at any given moment the amount of money in our pockets is bound, under the pres­ent money system, to be insufficient to buy the total output of in­dustry.

Why is this so? Let us recall again our picture of the shopwindow through which we looked at America’s great store of wealth. On our visit to the store we were impressed with the million different items offered for sale, and the part which Science plays in producing them.

As we look at the goods in this shop, we cannot help noticing the fact that every article on sale carries a price tag. Where do these prices come from? They are manufactured, just as goods are manufac­tured. We find in the shop two simultaneous processes of manufacture going on together. The first of these processes is a stream of real visible goods, articles of wealth we need and desire. The second is an almost in­visible stream of figures in the form of prices. And these two streams — goods and prices — flow together side by side, uniting in the shop-window as goods for sale, with prices attached. Bearing this picture in mind let us see how prices become attached to goods.

Buying Power and Prices

Every factory is more than just a producer of goods. The goods it manufactures must sell at a price. And the price at which they sell must cover all the costs involved in their production. From the view­point of money, therefore, every factory produces not only goods but also prices. So that for every article of goods produced a price is pro­duced also.

Now how do we, as shoppers and consumers, get the money to equal the prices of the goods we wish to buy? In the workshop of wealth we found two streams flowing together, the first one a stream of real goods and the second, a parallel stream of prices attached to these goods. Now to complete the picture we have to add a third and last stream of money-tickets.

The stream of real goods and the stream of prices both flow out of the productive system. So also do all the money-tickets with which to buy goods come from the productive system. They come to us, the shopping public, as salaries, wages, dividends and profits. And the total of all of these payments to us is what we call the “buying power of the Nation.”

That personal income, derived from the productive system in re­turn for services rendered, is the only shopping fund that the nation as a shopper possesses. It is all the money that the nation as shoppers has received to buy the price-values that the nation as producers has created.

So our incomes depend on business. Naturally we receive more money when the nation is busy producing and less when business slows down. But the most important thing that interests us is to compare, over any period, the number of money-tickets trickling out of industry to the shopping-nation with the price-values created in the shop over the same period. If the money received by Shopping-America were al­ways exactly equal to the price-values created by Producing-America, then we could purchase all the goods we can produce. We might per­haps dispute about the distribution of the tickets but we would certainly have enough of them to buy our total production.

But we don’t find this. Experience proves that it isn’t true. What we find in fact is that the buying power of the Nation, flowing from the productive system as wages and salaries and dividends, is much LESS than the price-values created in the same period. The two streams, buying-power and prices, do not move together, either in volume or in rate of flow. The stream of prices moving to the shopwindow flows much FASTER than the stream of shopping tickets to the shopping public. And the result is that our buying power lags chronically behind the price-values of the goods in the shop.

Now, the only title to go shopping, and that means to live, is the money payments distributed as buying power to shoppers. But the money distributed amongst all of us at any time is only enough to equal about TWO-THIRDS the price values in the shop.

That is a matter of fact and not a matter of theory. It can be proved by simple arithmetic. And it is confirmed by experience. We can see it in any business operating statement. Beginning in 1920, it was Major C. H. Douglas who originally pointed out the gap between buying power and prices. He discovered the constant lagging of buying power behind prices. He has revealed to us why we are poor in the midst of plenty. He has shown us the gap separating us from the wealth of goods we can produce.

In that gap between Buying Power and Prices lies the root cause of depression, of poverty and human suffering, of strikes and riots, of bankruptcy and business failures. On one side of the gap is plenty of goods. On the other side is a chronic shortage of money.

No wonder then that there are always more goods than there are buyers! No wonder we fight each other for these precious money-tickets! No wonder everyone has to look for employment in the shop in order to live. Those who can’t work in the shop have to be supported by the rest of us through relief programs and charity. And so long as the gap separates buying power and prices, permanent business recovery is hopeless.

An Everyday Example

For example, we can easily understand this chronic shortage from an illustration showing how modern business operates. Let us consider a radio factory which has been in business for the past five years. The owner of the factory finds that his competitors are installing new labor-saving machinery, which reduces their costs below his own figures. He must have these new machines in his plant in order to continue business, He calls on his banker and asks for a loan of $10,000 to buy the necessary machines. The banker, who considers the plan a sound one, grants the loan, incidentally creating the $10,000, which our radio producer now owes him. The latter hopefully buys his ma­chinery and installs it. He finds that the new machinery will replace ten men, who are no longer needed. So he lays them off. Their place is taken by the new machinery, which costs him only its depreciation and power charges. He saves the pay of these ten men, who lose their jobs and their wages. Here is a real loss of buying power, arising out of the replacement of men by machines.

How Prices are Made

The process of price building extends all the way from raw ma­terials to the shop window, but we can look at a cross-section of it right here in the radio factory. The first thing we see is that every cost, including profit, which enters into the production of a radio must be charged into the retail price paid by the consumer. Otherwise the fac­tory cannot keep operating. All costs must be recovered in prices. That is a fundamental business principle. If the radio manufacturer fails to recover all his costs he will soon be out of business.

In his operating statement which records all his costs and pay­ments, there are two different and distinct kinds of costs. Therefore we will divide his total costs into two groups, calling the first group “S” or Shopper’s costs and the second “B” or Business Costs.

“S”costs will be all payments that the factory makes direct to individuals, such as wages, salaries, bonuses, dividends, and profits.

“B” costs will be all payments made to other organizations, for such things as raw materials, machinery, light, heat and power, in­surance, taxes, bank charges, advertising expense, and all the other ex­ternal costs that appear in a business operating statement.

Now all the “S” costs are payments directly into the hands of in­dividual consumers, who can use them for shopping. These “S” costs therefore represent .actual and immediate buying power. For the persons who receive them as salaries and wages, they are shopping tickets that can be used immediately to buy wanted goods.

But the “B” costs are payments to other businesses which in turn distribute them. It is of course true that eventually most of the “B” costs will some time reach the hands of individual consumers, but in the radio factory which is the particular cross-section we are observing at the moment, only the “S” payments actually reach individuals who can use them for shopping.

However, all the “S” costs and all the “B” costs must be charged into the total selling price of the radios if the manufacturer is to recover his total costs, plus a reasonable profit. Consequently, the total selling price of the radios he produces must include all the “S” costs as well as all the “B” costs. Therefore his selling price must be “S” plus “B”.

How the Shortage Arises

Now we have an interesting picture. The only immediate buying power so far distributed in the production of the radios is “S”, and obviously “S” alone is less than “S” plus “B,” which is necessarily the price. Therefore “S”, representing salaries and wages which are money payments to individual consumers, can never buy “S” plus “B” which is the price of the finished radios. As A. R. Orage writes, “It is a fact of present financial practice that industry cannot distribute enough money to consumers by wages, salaries, etc., to enable them to buy and enjoy the goods it produces.”2

Now when we, the shopping nation, want to buy a radio we must pay in its price all the costs involved in producing it. We pay no only for the radio but also for part of the costs of the machinery and other overhead charges of the radio factory. In fact we buy not only the radio alone, but also a part of the factory that produced it. In the price we must pay all of the costs involved in its production but we have only the money represented by the “S” costs to spend. That is all we receive for shopping.

So the situation under our present price system comes down to just this: there is a chronic shortage of shopper’s buying power generated in the flow of business. The figures of research indicate that over a given period of time, out of the total costs of industry, the money available as purchasing power amounts to only TWO-THIRDS of the value of the total output.3 This shortage of buying power is inherent in the process of price building.

What makes this gap between buying power and prices? “Now while the fact of the gap is the important thing, the explanation of the gap offered by Major Douglas appears to me to be convincing. He says that much of the money put into the productive system as bank loans never, in fact, gets out as income during the same period in which it is put in. It is used simply to transfer capital goods from one factory to another, and thus while it adds to the price-stream, it does not add to the income of us shoppers.”4

From the shopper’s point of view, retail prices come to us loaded with all the costs of production and distribution. They include repay­ment of bank loans, interest, depreciation charges on plant and equip­ment, and all other costs of production. All these costs must be paid for in the retail price we pay to buy the goods. But against them we have available as buying power only the thin trickle of shopping tickets that reaches us as salaries, wages, dividends and profits. So the more we borrow from the banking system to produce wealth, the wider grows the gap between buying power and prices. And meanwhile debt piles up to new high peaks.5

The Time-lag

But if this gap has always existed, why have we not felt it sooner? Why have the effects of the chronic lag of buying power become so apparent only recently?

The very word sooner points out the answer to this question. It is largely a matter of time. The word “chronic” comes from the Greek word meaning “time.” The flow of money in exchange for goods and services takes time. We have been looking only at one cross-section of this flow in the radio factory. But the flow is as continuous as time itself. It never stops. And as soon as we look beyond this cross-section, and take in a longer period of time we shall see the same thing repeated over and over again.

At every point, just as we saw in the radio factory, the “S” costs are LESS than the total “S” plus “B” prices, so that over any given period of time the total prices (S plus B) must always be greater than the total shopper’s buying power (S). The payments of money to individual consumers who use the money for shopping are always lagging behind the prices of the goods that shoppers want to buy. And the longer the time the greater the lag.

If we go back to the radio factory to the maker of its machines, ­we find the same situation that we saw in the radio factory itself. And if we go still further back to the foundry that made the parts of the machines and even to the mining of iron ore, it is again the same story. All along the line the amounts of money distributed by industry as buying power are less than the price of the finished product. At the root of this lies the factor of time. The lagging of buying power behind prices is a time-lag. Time and money taken together give us a “rate of flow of money.” The rate of flow of money payments to shoppers always lags behind the rate of flow of the price of goods.

All Along the Line

At any given moment there is a shortage of the buying power necessary to equal prices. And this shortage is cumulative, it keeps growing larger. The flow of costs into price starts with the prime producer and builds up to the retail selling price which shoppers must pay for the goods they consume. These goods tend to flow through business in a straight line from the raw material producer to the consumer. It takes time to move goods from one step to the next. At every step along the line all the costs involved in this step, plus a reasonable profit, are added into the price of the goods. As shoppers we must pay the total of all these costs. But we have only the “S” payments to spend and therefore when the goods come on the market we can never pay “S” plus “B”, the price of the goods we need. Even if no profits are added, we are always short of buying power.6

The importance of this lagging of consumer buying power behind the flow of prices is especially noticeable when we consider the time it takes to produce and distribute any article of merchandise. For ex­ample, we may assume that a period of eight weeks is required to as­semble a radio from raw materials and to complete its construction in the factory of a producer. A week later the producer sells the radio to a wholesaler. Finally after another week, the radio is sold to a retailer who is now ready to deliver it to a shopper. At every step along this ten-week line of production and distribution, salaries and wages (S costs) are paid to consumers. The wages paid during the first week are spent for food, clothing and shelter during the second week, wages paid during the second week are spent during the third week and so on to the end of the ten weeks when the radio reaches the retailer. At every point along the line the wage payments (S) are spent soon after they are received. Yet at every step the costs (S plus B) progressively pile up and when the radio reaches the retailer most of the salaries and wages out of which it must be bought have already been spent. As shopper’s buying power they are no longer available. They have gone back into the bank accounts of business again where they are again divided into “S” and “B” costs. So buying power continues to lag be­hind prices.7

The Vicious Circle

Now let us remember how money circulates through business, be­ginning in a bank with a loan and ending with the repayment of the loan to the bank. The radio producer in our example has borrowed $10,000 to install his new machines. This $10,000 must be paid back to the bank plus accumulated interest. The producer must recover this money by including in the price of his radios not only repayments on the loan but also interest. So the public has to pay more than the pro­ducer has borrowed!

Now when the producer repays his loan, that $ 10,000 goes out of existence. It has disappeared although it is still charged in prices against the shopping public. That amount of money has been destroyed and the shopping public is left without a corresponding buying power. There is no way of putting into circulation again the money represented by the loan except by another loan from the bank for further production. When this occurs, the whole vicious circle is once more started. Even if bank loans are renewed instead of repaid, the money payments reaching the pocketbooks of shoppers keep lagging behind the price value of goods.8

Thus we go round and round the circle of money and over and over the path of production. But our incomes never catch up with the prices of th goods we need and desire. We are like squirrels in a cage — we can make the cage go round but we can’t get anywhere.9

Savings and Investment

Our plight is still more serious when we remember that all of salaries and wages cannot be used to purchase goods. Some salaries and wages must be held as savings against emergencies and inevitable old age.

Money used for investment cannot be used for consumption. Investment diverts it back into further production thus creating a new set of costs with lessened buying power to equal them. So investment results in widening the gap between buying power and prices.

Whatever savings we can scrape together reduce our present buying of goods for consumption. As for hoarding, hoarded dollars are idle money, simply withdrawn from circulation.

The Gap is Growing

As we have seen, the more automatic machinery replaces men, the wider becomes the gap between buying power and prices because salaries and wages are thus reduced, leaving other cost items proportionately increased. When we stop to realize that the gap is constantly widening as efficient machine-power rapidly replaces inefficient man-labor in doing the work of the world, it becomes evident that we are reaching the senseless absurdity of a maximum production and a mini­mum of consumption. Yet we wonder at the paradox of poverty in the midst of plenty!

What Keeps Business Going?

“If you ask, quite naturally, how in that case the goods are ever sold at all, the answer is that there are more ways of killing a cat than choking it with butter. The gap can be artificially bridged even if it is not actually closed.”10

Here we find the final answer to our question — “Why haven’t we felt the gap sooner? If this chronic shortage of buying power was always present why did its effects only become so apparent in 1929?”

To begin with, we must first recognize a fact necessary to supply the background for our understanding. Briefly, it is “that in the modern economic system the industrial side is subservient to the finan­cial or money side.”11

A number of artificial stimulants have enabled our ailing finan­cial system to conceal its weakness. “For instance, goods can be willfully destroyed. Or they can be practically given away under the compulsion of bankruptcy. Or they can be disposed of in return for acknowledge­ment of debt, that is to say, by mortgaging our future income of money-tickets.”12 But we shall have to content ourselves with listing the chief drugs that have postponed the breakdown of finance for ade­quate comment on them would require a volume in itself.

New Bank Loans to Finance Production

The extension of so-called “credit” from the banking system fur­nishes the main motive power in keeping money flowing through busi­ness. Without the extension and renewal of loans, the lag in buying power would soon become directly noticeable. Naturally, as we have seen, new production distributes fresh buying power to consumers. But it also creates additional goods beyond the reach of this purchasing power. Eventually we get a glut of goods and insufficient buying power in the hands of shoppers to claim them for consumption. “These loans are like a drug; the more we take the more we have to take, until in a short time we pass completely into their power.”13

Over-Expansion in Capital Goods Industries

Industry is engaged in the production of two kinds of goods: consumer’s goods and capital or non-consumable goods.

During and after the war vast sums of money borrowed from the banks were poured into the capital goods industries, engaged in producing non-consumable goods (machinery, etc.). This production greatly increased our productive capacity. While these industries were producing rapidly an apparent prosperity boomed. But the resulting expansion of plant and equipment (the cost of which must be recovered in prices) only widened the gap between buying power and prices. Now with idle factories, restricted production and shrunken incomes, we are paying the piper.

Sabotage and Restriction of Production

We have already referred to the stupidity of sabotage and deliberate restriction of production. Yet in our own country these are going on every day, both in industry and agriculture. Most obviously we see them in agriculture, where food-stuffs, cotton and other products desperately needed by millions are destroyed on a vast scale. In industry, machines stand idle or are scrapped. And all this in an effort to cut production to fit a dwindling buying power. How long can we go on destroying our real wealth instead of using it?

Business Failures, Liquidations and Bankruptcies

Business men have swallowed a strong dose of these bitter medicines in the past five years. Liquidations and mark-downs on merchandise are ruinous to business. Nevertheless, by lowering prices they give a temporary increase in the buying power of the shopping public. But the gap continues between buying power and prices because the benefits to buying power thus gained are counterbalanced by unemployment, the failures of banks and similar losses caused by bankruptcy.

The Export Market

In the past, exports absorbed much of the domestic production which American buying power was unable to purchase. Exports are largely financed by foreign loans, once easily arranged but now in­creasingly difficult. Our own shortage of buying power requires that exports increase as machines increase our productive capacity. But the possibility of exports diminishes as mounting tariff barriers, unpaid international debt, and competition between nations prevent us from dumping our surplus abroad.

Worst of all, competition for survival in the export market breeds economic conflict which is the forerunner of military war it­self.14 “Peace? Why ... is there any man here or any woman . . . any child — who does not know that the seed of war in the modern world is industrial and commercial rivalry? The war was a commercial and industrial war. It was not a political war.”15

One More War?

When war comes, the necessity of national preservation sets aside the old rules of finance. Production has the right of way. Salaries and wages are thus distributed, but for producing munitions that are to be blown up and other goods to be consumed by the fighting forces — for goods, in short, which never appear in the shopwindow to be sold to the shopping public. The nation pays the bill, and the buying power of consumers, enriched by these new wages and salaries, is enabled to ab­sorb a greater proportion of the goods that are for sale. Temporary prosperity reigns.16

But then, when the war is over, the inevitable debt to the interna­tional banking system that financed it must be paid. The outlet for goods is once more restricted, productive capacity is greater than ever, and depression ensues.

The horrid memory of the war is still fresh in our minds. The price of death and destruction is too high to pay for wartime prosperity. We are told that the next war will be many times more destructive than the last. Can any sane man look forward without a shudder to the blotting out of civilization?

How Debt Develops Depressions

Looking over this list of futile palliatives it is easy to see that every item in it, except perhaps sabotage, is tainted with the disease of debt. Altogether they are a hopeless lot of remedies to combat the spread of this disease. Slowly and surely the poison of debt-money infects the blood of business until the breakdown is reached and financial collapse follows the ravages of the debt-disease, as it did in 1929. To save them­selves the banks are forced to sell securities and recall loans, thus can­celling credits and destroying the very money they have created. Falling prices, business paralysis and unemployment follow. The se­quence is familiar to all of us in business. Surely “such attempts to cope with the strains and stresses of a modern economy by a money system which has been proved unable to sustain them is repugnant to both science and common sense.”17

To sum it up, business goes on despite the shortage of buying power because it must go on. We need its goods and services in order to live. But the economic system is burdened with debt, chronically crippled by the lag of buying power behind prices. It hobbles pain­fully along delivering only a fraction of its potential goods and serv­ices. We pay the price of its progress in poverty and suffering. Adequate buying power would prevent our paying this price. But we keep on paying the price of poverty because the money system as it operates in prices is not self-liquidating. And the burden of debt grows heavier year by year.

 


 

1) R. G. Hawtrey, Currency and Credit.

2) Economic Nationalism, by A. R. Orage, Fortune, Nov. 1933.

3) See M. Colbourne, Unemployment or War, pp. 174-176.

4) A. R. Orage, Social Credit Broadcast, London, Nov. 1934.

5) “All the credit that the community gets and converts into money and spends or saves is manufactured by the banks out of nothing. It is lent to manufacturers, dealers, and others who require it for their business, and is circulated by them throughout the community. Some of it goes direct into the pockets of consumers, as wages, salaries, or dividends ; and, in being spent, it transfers goods from the ultimate vendor or retailer to the consumer — that is its function. This we will call “consumer credit,” and the costs it creates “consumer costs” — that is, costs representing purchasing power in the consumer’s hands, costs he can pay.”

“The rest of the credit issued is used to transfer goods, not from retailer to con­sumer, but from one business firm to another. This we will call “business credit,” and the costs it creates “business costs.”

“The distinction is purely one of function, and is made for elucidation purposes. So far as the business world is concerned it is not perceived to exist. If it was, the economic problem would probably have been solved long ago. Any bank credit will per­form either function.”
“Business credits, as defined, are nobody’s income — that is the importance of the distinction made above — so business costs are costs the consumer has no money to meet and cannot therefore pay.”

“Business credits are mere replacement credits, replacing earlier issues of con­sumer credit which have been spent and extinguished; for what is a consumer-cost at one stage of the productive process becomes a business-cost at all subsequent stages.”

H. M. M., An Outline of Social Credit, pp. 20-21.

6) In addition to this fact we must remember also that profits and dividends distributed are themselves BUYING POWER because they are payments to individuals who can use them to buy goods.

7) “If all the costs of production were traced back to their original source, it would be found that they consist of payments made to somebody or other for services ren­dered, real or imaginary; so, at a first glance, it might seem obvious that, no matter what the cost of production may be, there is always bound to be sufficient money in the community’s hands to buy the whole product. That is far from being the case.’’

“What is overlooked is that the various items appearing in costs today represent payments made over a long period of time. Some were made last week, some last month, some last year, some many years ago; but to be effective as purchasing power now — as they would have to be in order to buy today’s products — every penny of those payments would have to be saved. We know, however, that most of the money was spent as it was received — had to be spent by the recipients in order to live — and no longer exists as pur­chasing power ; for, as we shall see later, money, or purchasing power, is extinguished in buying goods for final use or consumption.”

H. M M. An Outline of Social Credit, p. 12.

8) What actually happens is that the money or credit received by consumers in connection with cycles of production not yet completed — that is, not yet materialized in final (consumers’) commodities — is taken from them via the prices charged for goods belonging to cycles which are completed.

H. M. M. An Outline of Social Credit, p.23

9) THE DIFFICULTY IS THUS TWOFOLD. It centers in the fact that BUYING POWER is not in the right hands at the right time, that is, in the hands of shoppers when they need it to buy wanted goods.

10) A. R. Orage, Social Credit Broadcast, London, Nov. 1934,

11) C. M. Hattersley, This Age of Plenty, p. 34.

12) A. R. Orage, Social Credit Broadcast, London, Nov. 1934.

13) Maurice Colbourne, Economic Nationalism, p. 169.

14) “As things are, one nation can only expand its foreign market at the expense of other nations ; and, as an expanding market is a matter of life and death for all of them, the end of the scramble is, clearly, war.”

“War, in our day, whatever it may have been due to in times past, is an outcome of the efforts of industrial nations to avert excessive unemployment; since that endangers their existence.”

H. M. M. An Outline of Social Credit, p. 15.

15) Woodrow Wilson, Sept. 1919.

16) “War cures unemployment by providing millions of men with jobs in the army and navy ; and the rest of the nation is kept busy supplying them with munitions. Credit may be difficult to get in peace time; but in time of war it flows like water, ensuring plenty of money to spend. Plenty of money to spend means a ready sale of goods, and rising prices; and what is not sold for peaceful consumption is blown into the air or otherwise destroyed. Production is at a maximum; but the market never becomes overstocked.”

H. M. M., An Outline of Social Credit, p. 16.

17) A. R. Orage, Fortune, November 1933.