for the Social Credit
How to Finance Production
— But, where will we get the money, the financial credit, these “legalized figures”, to be used by a financial system that is in keeping with Douglas's propositions?
The credits required to finance production and distribution would be drawn at its source, from the country's financial credit which is based on the country's tremendous real credit.
No major changes need to be made to the existing structures. Private enterprises would remain privately owned. Banks could remain private enterprises as they now are. It is through them that financial credit would be chanelled for its issuance and return to its source.
Banks now possess the whole mechanism, all of the equipment needed, a well-established network of branches, and a well-trained and competent personnel to carry out this service efficiently. Banks could continue to be rewarded for their services. They could continue to be responsible for the loans granted for production and be responsible for the accounting operations related to consumer credit (the dividend and compensated discount), and receive proper remuneration for doing so. But the credit they would thus be handling, would remain the property of society, and their different operations would have to take into account the objective set by a financial system that meets the goal and the principles explained above.
Different methods can be devised to implement Douglas's propositions. But the best methods are undoubtedly those that would do it efficiently while making the least amount of changes to the existing institutions.
— You say that the chartered banks could be responsible for the loans granted for production. Do you mean that producers would continue to deal with the banks to finance their expenses while waiting for their products to be sold?
Of course. We need such a service, and the banks are very well organized to offer it.
Usually, production undergoes several transformations before a finished good is arrived at. The first producer involved in the process may be in need of an advance of money, of financial credit, and when he passes his semi-finished good onto a second producer, he will want to be paid immediately to cover his costs and to pay back the banker. Neither the first producer nor his banker can wait for the goods to reach their final stage of transformation, perhaps several months or even several years later. Neither can they wait for the finished good to be sold by the dealer and paid for by the consumer, before getting their money.
Let us say that three firms are successively involved in the process: firms A, B and C. Here is how we can conceive the financial operations:
Producer A needs a loan to mobilize the raw material, to pay the transportation fees, to pay his employees, his utilities bill, his power equipment and other overhead charges. He goes to a commercial bank and obtains these credits.
When A sells his semi-finished product to B, he will include in his price all that he spent, including the amount he borrowed, which he must return to the bank. To this, he will add his profit, which is his salary. B may be in need of a loan to pay all of this to A and perhaps to cover his own operating costs: transportation, salaries, overhead charges, etc. He too will go to the bank, he will obtain the credit he needs, and will pay A.
With the money obtained from B, A will be able to reimburse the bank
When B passes his semi-finished good to C, he will also include all of his expenses in the price, including his own loan from the bank. And C will also be able to go to the bank to pay what he owes to B and to cover his own operating costs.
Once paid by C, producer B will settle with his bank.
The same thing will happen when C passes his finished goods to the wholesaler. The wholesaler will be able to do what the producers have done: get a loan from the bank with which to pay C.
The bank, with its accountants and equipment, is well organized to handle these operations that allow them to keep count of the loans issued and those repaid. Even if the producers do not deal with the same bank, the different banks settle their debit and credit balances on a daily basis.
Douglas's propositions can be implemented easily using this method of financing whereby loans are granted at the different stages of production, all the while using the present banking mechanism.
— Would the banks create these credits, as they do today?
No, as explained before, these credits represent part of the country's productive capacity which is the result of various activities, of natural resources, of applied science, of the existence of an organized society, etc. These financial credits only draw their value from the real credit, from the country's productive capacity. The financial credit is the numbered expression of the real credit, of a wealth that is social by nature. At its roots, financial credit, being a social credit, can only be the property of society.
To place this credit into circulation, to entrust people with it who will use it to mobilize the country's productive capacity, and to return this credit to its source after it has run its course, we can use the existing channels, the banking mechanism, without having to nationalize the banks.
There is therefore no need for a Central Bank to establish a new network of branches, nor does the Central Bank need to make its own credit inquiries of the borrowers, nor does it need to involve itself directly with the recalling of credit after it has been used. All of this can be left to the chartered banks, or to commercial banks, since they are very competent in this kind of work.
But this financial credit remains a social instrument and it can only originate in an organism devoted solely to the service of the community: in a National or a Provincial Credit Office, or a Central Bank (itself nationalized) that would fulfill the function of creating financial credit.
— But then, where would the commercial banks take the financial credit they would lend to producers?
They would get it, upon request and without cost, from its very source, say the Central Bank. Without cost, that is to say, with only one obligation: that of returning the same amount to the source after its journey in circulation.
The Central Bank would keep count of what is issued and what is refunded. The loans would be debited from the commercial bank's account, and money that is returned would be credited.
There is nothing new in these accounting practices between a central bank and the commercial banks. In Canada, each commercial bank has already an account with the Bank of Canada in which debit and credit entries are made every day.
— But would the chartered banks continue to charge fees from the borrowers for the loans they would grant them?
Of course. The banks must be able to meet their expenses, pay their employees their salaries, cover their overhead charges, and make legitimate profits – like any private enterprise.
The banks must also foresee cases where, in spite of the precautionary measures they normally take, it may become impossible for some borrowers to pay back their loan. A borrower's bankruptcy would not discharge the lending bank of its obligation towards the Central Bank. It would be held responsible to return to its source, the credit of society it has obtained from it.
Social Credit does not wish for people to be irresponsible, not in the least. Quite the opposite, the commercial banks would be held responsible for the credits they obtained from the Central Bank. The borrower – an individual or a company – would be held responsible to the commercial bank which does the lending. The latter would no doubt require guarantees, particularly from new clients, or from enterprises when they entail a greater risk.
The fees that the banks charge for their loans could still be called interests. However, the time factor, the period between the loan and its repayment, ought to be of less importance. Whether the loan stretches over a few months or a few years, it does not affect the banker's financial position, since it is society's credit that is in circulation, not his own. At the very most, a longer period would lead to a greater number of bookkeeping entries being made to the borrower's account.
— But do these fees, these interest charges, mean that the borrower must pay back more credit than was released. Would the same apply to all the other borrowers. Will this not create a mathematical impossibility like the one we denounce today?
Not under a Social Credit financial system that equates purchasing power to prices through the periodic dividend and the compensated price mechanisms. Interest charges and all other financial costs are included in the prices. They can therefore be recovered through the means of payment that will have been placed in the public's hands.
— Are these additional costs compatible with Douglas's proposition that “All new production be financed by new credits”? It would seem that if one must pay a 5 percent charge on the financing of production, that is to say 5 percent on top of the credits lent to the producer, that the new production will not be entirely financed by new credits.
During the different stages of production, financing can be done with the producer's personal funds, or partly with loans, or even totally with loans (except for the interest). But this will be settled at the time production is delivered in the form of a finished product. For only then does it become a new production; at the moment the finished product goes from the wholesaler or last producer to the retailer, an operation will be carried out that fulfills Douglas's proposition. It is then that new credits (interest-free credits) can be issued to cover all the expenses that had to be made for this new production.
— How will this be accomplished?
Once again, several methods may be used to achieve this. Mr. W. B. Brockie, a New Zealand Social Crediter, suggests that it should be done when the goods are received by the retailer. He would be granted an interest-free loan that covers the total cost price of the finished goods. In our view, this method seems to reach a double objective: First, to finance production by new credits; and second, to later allow the credit to return to its source at the rate the goods are consumed.
Production presents itself as a continuous flow, where production reaches different stages, from raw material to finished product. Production becomes a finished good at the point of delivery to the retailer who will undertake its distribution to the consumers.
What is this point of delivery? It occurs at the wholesaler, or at the last producer, if this is where the retailer takes possession of the finished good.
This finished good bears a price, the price charged to the retailer. This is the cost price of production. But to obtain the total cost price, we must add the distribution costs, that is to say, the expenses of the retailer. And it is this final cost price that will have to be covered by the new issue of interest-free credits.
The retailer must therefore add to the wholesaler's bill the transportation costs, his employees' wages and salaries, the unavoidable losses and his overhead charges. Through experience, he knows the weekly or monthly amount of these costs; he also knows the average amount of goods he can manage to sell, on a weekly or monthly basis. Therefore, he knows what percentage to add to the wholesaler's bill to get the final cost price of the goods that will be passed on to the buyers.
— Could you give a hypothetical example to help us understand this important point better?
Let us suppose that the retailer knows, through experience, that the handling and service charges to sell his goods cost him on average an amount equal to 10 percent of the price he pays the wholesaler.
Then, let us suppose that this retailer gets a load of supplies for which he is billed $4,000. He will reach the conclusion that he needs $4,400 to cover his total costs: the wholesaler's price, plus handling costs, but excluding all profits. The $4,400 is arrived at by adding $4,000 + 10 percent of $4,000, i.e. $4,000 + $400 = $4,400.
The final cost price of this new production thus totals $4,400. It is therefore $4,400 of new interest-free credits that are needed to pay off the complete cost related to this new production.
To achieve this, we can use, while perfecting it, a method of financing rather widely used among retailers: bank overdrafts. Today, most retailers actually pay off their bills to the wholesalers with “overdraft” cheques. That is to say, through an agreement made between the retailer and his banker, the bank honours these cheques, even when the retailer's account at the bank does not have sufficient funds. It is like a loan made on request, in proportion to the retailer's needs, up to a certain limit which constitutes his “line of credit”. It is very handy, since it allows the wholesaler to be paid without delay so that he may meet his own obligations.
In the bank's ledger, these overdraft loans are debited against the retailer's account. As he sells his products, he must return the fruit of his sales to the bank to replenish his account as best he can, to the banker's satisfaction, without ever letting his account fall below the line of credit agreed upon. In fact, this is a series of loans and repayments, by mutual agreement. And under the present financial system, the banker charges fees to the retailer for this service. These fees are interest charges calculated on the amount and the length of the deficits.
Well, under the proposed system for the financing of new production by new credits, the retailer would pay off all his bills relative to this production with loans obtained from the banker, without any interest charges. This is something which should easily please all retailers.
In the above example, the retailer would get from his bank an interest-free loan for $4,400. The chartered bank would draw all the amounts required to this end, also free of interest charges, from the Central Bank, the source of credit. (Let us not forget that we are dealing with a social financial system that adapts itself to reality, issuing credits at the rate goods are produced and withdrawing them at the rate goods are consumed.)
— But why this difference between the producer's case, who must pay interest on his loans, and the retailer's case, who would get interest-free loans?
For more than one reason. First, the situation is different: In the producer's case, the loan is made for a production that is yet to come, whereas in the retailer's case, the loan is granted for a production that has truly been made. (Let us add that the producer did not suffer from having to pay interest, since he included these interest charges in his price, and the loans at the following stages of production included the credits needed to cover these charges.)
And if the loan to the retailer should draw interest, this interest would add to the retail price an element not covered by this loan. Then the new production would no longer be financed entirely by new credits, as Douglas's proposition requires, for a financial system to reflect reality accurately.
Then again, if interest was charged on the final retail price, this interest would become the property of the commercial bank when the loan is paid back by the retailer. Therefore, there would be a part of the credit that did not go back to the source when the good is consumed, and the system would not reflect reality accurately: “Cash credits,” (the means of payment) says Douglas, “shall be cancelled on the purchase of goods for consumption.”
Our retailer therefore gets a $4,400 loan. And when he sells his goods, he will have to bring back to his bank only this amount of $4,400, without any additional charges.
When the goods are bought, the money the buyer gives to the retailer stops being “cash credit”, consumer money, and simply becomes financial credit. This credit, upon being handed over to the banker by the retailer, will begin its journey back to its source, through the same channel used for its issuance.
— You said earlier that this amount of $4,400 included all the production and handling costs, from the raw material up to the delivery of the product to the consumer, but not the retailer's profit. Will the retailer now sell his goods for more than $4,400 by adding his profit to it?
No. For the method proposed here to achieve its goal, the retailer's profit must not be included in the price to be paid by the buyer. If his profit was to be included in the retail price, this portion of the retail price would belong to him and would not be returned to the source of credit to cancel out the cash credits (means of payment). This would cause the same defect we mentioned above.
In the above example, if the retailer was to sell his goods with a 10-percent profit margin, it would raise the retail price to $4,840; this would exceed the new credit issued to finance this new production by $440; it would distort Douglas's proposition which requires that all new production be financed by new credits. Nor would it be suitable to have this profit included in the other costs covered by the amount lent by the banker to the retailer. Increasing this loan to $4,840 and telling the retailer to bring back only $4,400 while keeping the remaining $400 for his profit, would amount to paying the retailer for a work that he has not yet performed.
The retailer's profit must come from a source other than the buyer's wallet, and must come to him only after he has carried out his sale.
Therefore, the retail price will not include the retailer's profit. This will prevent price increases that are due to the tendency too many retailers have of raising their profit margin when business is good. Under a Social Credit financial system, business would always be good, since the purely financial problem would be eliminated. To take advantage of this situation by charging exaggerated profits would lead to the inflation of prices, whereas the proper flowing of a production that is freed of all obstacles, should make prices fall.
— Do you mean to say that, under a Social Credit system, the retailer would no longer make a profit, or that his profit would be limited?
Not at all. But the retailer's profit must not depend upon a price increase. His profit would depend rather upon the volume of his sales. With a moderate profit margin, determined in advance according to the kind of goods, the more items he sells, the larger his profit. In a non-monopolistic but competitive economy, it is the retailers who give their customers the best service who would make the most profits, without exceeding the profit margin per article. Therefore, it is the percentage – not the volume – of profit that must be regulated, agreed upon for each line of business.
Society has the right to demand this of its retailers: In the first place, it provides them, at no cost, the loans they need to pay off their bills, and secondly, it maintains at all times, total purchasing power equal to total prices, in front of the goods offered.
Since it is society that provides retailers with the credit needed to maintain their stock, society is therefore the owner of these goods so to speak. The retailers thus become the agents in charge of selling them. It is only fair that society should reward the retailers for selling the products, but without allowing them to exploit the buyers.
Therefore, it is society that will provide the retailer's profit, not as a loan that must be paid back, but as cash credits that will become the retailer's own property.
The retailer, while remaining the real owner of his private business and managing it freely, is at the same time, an agent of the community for the distribution of goods. In the exact same way, the producer keeps his private enterprise, but is at the same time, an agent of the community to mobilize its real credit, that is, the country's productive capacity. In the same way the banker remains the owner of his bank, but is at the same time an agent of the community for the channelling, the issuance and the withdrawal of the financial credit based on the country's real credit.
Social Credit is a strong defender of private property. But every private enterprise also has a social function to fulfill, a function it would automatically fulfill through the simple workings of a Social Credit system faithful to the propositions that were put forth by Douglas.
— But when and how will the retailer draw this profit from society?
Once again, through the chartered bank that will in turn draw this credit from its social source, the Central Bank or the National Credit Office.
The retailer has two accounts at his bank: his overdraft account, in which the bank keeps a record of the loans made to the retailer and the repayment of these loans. The other, his personal account, where the retailer can deposit his savings, on which he can issue cheques for his personal affairs, from which he can withdraw cash, etc., like any other individual.
As he sells his goods, the retailer returns the money to the bank where it is entered in his commercial account as a repayment of credit. At the same time, the banker enters, in the retailer's personal account, the profit to which he is entitled for the sales he made, according to the percentage agreed upon for his kind of business. For this entry, made in the name of society, the banker issues a cheque drawn upon the national credit, that is to say, on the Central Bank.
For example, if the agreed profit margin is established at 10 percent, with each $100 that the retailer brings as repayment, the banker credits the first account with $100, a credit which thus enters upon its way back towards its source, and the banker enters $10 to the credit of the retailer's personal account.
For all the accounting services performed and not paid by the customers (interest-free loans, profits to the retailers, periodic dividends to all), the banker is reimbursed by the Central Bank according to established norms.
— Isn't all of this extremely complicated?
Not at all. Many sentences are needed to explain it, but it would soon work like a routine, as briskly as the banking operations we now witness in all local banks.
It is infinitely less complicated than the accounting used by consumer cooperatives, where the accountant must keep track of each of the members' purchases, to distribute to each one a rebate in direct proportion to his purchases.
Furthermore, this system would be sound, it would reflect economic facts with precision. It would finance production and consumption efficiently. It would serve our economic life to our satisfaction, and with much less bureaucracy, fewer inquiries, fewer financial operations, than what is required today by government institutions, in trying to alleviate the deficiencies in purchasing power from which the whole economy suffers. The system would also do away with the heavy tax burden required today in endeavouring to put bread on the table of the totally destitute (when the government finally acknowledges their state of poverty, after lengthy and humiliating inquiries).
— Would this not be too different from the financing methods we are accustomed to?
Different by its results, yes; but in all points similar to the present mechanism. See for yourself:
The same banking establishments; the same bankers; the same debit and credit entries in bank accounts; the same payment system by cheques; the same formalities for loans to the producers; the same responsibilities on the part of the lenders and borrowers; the same overdraft payment facilities for retailers, minus the servitude brought on by interests.
Add to this, global purchasing power kept at the same level as the global production being offered, with a suitable share guaranteed to each one; thus a better distribution and sharing of the fruits of production; a protection against unjustified price increases; and the money dictatorship abolished. And on and on.
Then, consider the final situation, in relation to the $4,400 worth of production taken as an example:
It was possible to carry out that production without any financial limitations. Credit came according to the needs, from one stage of the production process to the next; all participants were duly paid, including the bankers who received interest for their services in keeping with the loans. The complete final payment which covered all costs, financial costs as well as production costs, could be made as soon as the goods were finished, by the interest-free loan to the retailer who took possession of this production. The production could then be sold without adding any charges to the cost price.
The financial machinery uses the same mechanisms, but it was properly lubricated instead of sand being allowed into its gearbox – and this makes a world of difference in its operation.
— Would these credit releases not cause an accumulation of money, with all the evils of inflation?
Follow the credit's trajectory outlined in these pages. Credit does not pile up. It follows the movement of wealth. It comes into circulation at the rate goods are produced, and takes the return route towards its source at the rate goods are consumed.
These credits make up what could be called an operating capital which, belonging to society, is placed at the service of the economy so that it may answer the needs of the population in accordance with the physical means that now exist. This working capital can be increased as needs increase, being limited by the reaching of full productive capacity only.
As for the social aspect of the sharing in the fruits of production, the Social Credit economy guarantees this by introducing into purchasing power, a universal periodic dividend, which will be discussed later in this study.
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