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Money and prices – The compensated discount

Written by Alain Pilote on Sunday, 01 April 2007. Posted in Economic Democracy (book)

Economic Democracy - Lesson 6

 

The distribution of new money by the national dividend is therefore a means of increasing the country’s money supply when it is necessary, and of putting this money directly into the consumers’ hands.

But to be beneficial to the consumer, this distribution of money must constitute a real increase in the consumer’s purchasing power.

Now, the purchasing power depends on two factors: the quantity of money in the buyer’s hands and the price of the products for sale.

If the price of a product decreases, the consumer’s purchasing power increases, even without an increase of money. So if I have $10.00 with which to purchase butter, if the price of butter is $2.50 a pound, I have in my hands the power to buy four pounds of butter; if the price of butter is lowered to $2.00 a pound, my purchasing power goes up, and I can buy five pounds of butter.

Moreover, if the price goes up, it unfavorably affects the consumer’s purchasing power; and in this case, even an increase of money can lose its effect. Thus, the worker who earned $200 in 1967 and who earned $400 in 1987, would lose out because the cost of living had more than doubled in those twenty years. In Canada in the year 1987 you could buy the same thing for $772 that would have been $200 in 1967.

The consequent increase in the prices of products is the reason why wage increases do not succeed in producing a durable improvement. The employers do not manufacture money, and if they have to spend more to pay their workers, they are compelled to sell their products at higher prices in order not to go bankrupt.

As for the national dividend, it is not included in prices because it is made up of new money, distributed independently of labor, by the Government.

However, with more money in the hands of the public, retailers could tend to increase the prices of their products, even if these products did not cost them more to produce.

A monetary reform which does not apply the brakes to an unjustifiable rise in prices would be an incomplete reform. It could become a catastrophe of runaway inflation.

The arbitrary setting of prices can also achieve a prejudicial effect by discouraging production. Now the reduction of production is the surest way of pushing up prices. The legislator thus achieves the contrary of what he seeks: he provokes inflation by clumsily fighting it; to escape sanctions, inflation takes place through the black market.

Social Credit puts forward a technique to automatically fight inflation: it is the proposed technique of the "adjusted price", or the compensated discount, which would be part of the way money is issued to put the total purchasing power at the level of total offered production.

The Just Price

Since products are made for the consumer, it is clear that, to meet their purpose, the products must be offered to the consumer at a price which allows the consumer to purchase them.

In other words, at all times, there must be an equilibrium between the collective prices and the collective purchasing power of all consumers.

To establish the retail price, the producers or the retailers calculate what the manufacturing of the product has cost and add the costs of handling, transportation, storing, and the necessary profits to the different intermediaries. But nothing ensures that this marked price corresponds to the consumer’s purchasing power.

The marked price must be claimed by the retailer so as not to throw anyone, from the producer to the retailer, into bankruptcy. Moreover, the price to be paid by the buyer must be such that it corresponds to the purchasing power in the consumers’ hands. Otherwise, the products remain unsold in the face of real needs.

Hence, it is necessary to have adjustment of prices.

The monetary technique of Social Credit provides this. In the Social Credit vocabulary, what we call the "Just Price" is the price which corresponds exactly to consumption.

When we say "Just Price", we do not mean at all an "honest price" or "fair price". The price marked by the retailer may be completely honest and fair, but still may not at all be the exact price.

So during the Depression the marked prices could have been honest and fair, but they were not exact; they did not correspond to consumption. When the total production of goods demanded exceeds total consumption, these prices are certainly not exact, since consumption over a given period shows conclusively the real expenses incurred for production during this same period.

The honest price is a moral matter; the exact or "just" price is a mathematical matter.

The exact price, the "Just Price" of the Social Credit system, is achieved through an arithmetical rule. So there is no question whatever of an arbitrary fixation of prices, restrictions, rewards, or chastisements — but simply arithmetic.

The Social Credit technique involves two figures that are made up by the country’s people themselves, and are not fixed arbitrarily by some men who have a mania for imposing their will on others:

  1. The figure expressing the total sum of prices. (This is set by the producers themselves.)

  2. The figure expressing the consumers’ purchasing power. (This is set by the consumers’ wishes for spending the money that they have at their disposal.)

Then, to be able to put the equal sign (=) between these two numbers, Social Credit lowers the first to the level of the second.

Let us explain first, by presenting a few unfamiliar ideas which bear far-reaching consequences.

The real cost of production

The exact price of a thing is the total sum of expenses incurred in its production. And this is true if you count in dollars, ergs, man-hours, or any other unit of measurement.

Such and such work requires four hours of time, ten ounces of sweat, a workman’s meal, and the wear of a tool. If the enumeration is complete, the exact price of this work, in other words its real cost, is four hours of time, ten ounces of sweat, a workman’s meal, and the wear of a tool — no more, no less.

As we evaluate costs in dollars in Canada and we evaluate work in dollars, it is possible to establish a relation between both in terms of dollars, always including the wear and tear and all the other elements that form expenses.

If the material expenses, work, energy, and wear and tear amount to $100, the exact price; the real cost of the product, is one-hundred dollars.

But there is the accounting price as well, that is the financial cost. During the production of an article in a factory, an account is kept of the raw material bought including processing costs, wages and salaries, capital costs, etc. All these constitute the financial cost of the production of the article.

Are the accounting and the exact price the same? Even if they accidentally are in certain cases, it is easy to prove that as a whole they certainly are not.

Take a small country that supplies, in one year, capital and consumption goods for a total production that is evaluated at 100 million dollars. If, within that time, the total expenses of the country’s inhabitants are evaluated at 80 million dollars, we can readily see that the country’s production for that year has cost exactly $80 million, since $80 million in all was consumed by the population that made the production. The financial cost of production has been evaluated at $100 million, but it actually cost only $80 million in real expenses. This is an inescapable fact: both totals are there.

The exact price of the production of $100 million has therefore been $80 million.

In other words, while $100 million in wealth was produced, $80 million in wealth was consumed. The consumption of $80 million worth of production is the real price of the $100 million worth of production.

So the real price of production is consumption.

Moreover, as we have said above, if production exists for consumption then consumption must be able to pay for production.

In the preceding example, the country deserves its production. If, by spending $80 million, it produces $100 million worth of goods and services, it must be able to get these $100 million worth of production while spending $80 million. In other words, in paying $80 million, the consumers must get the $100 million worth of production. If not, $20 million worth of production will remain for contemplation, until it turns to destruction, in front of a deprived and exasperated people.

The increase and reduction of wealth

A country becomes richer in goods when it develops its means of production: its machines, factories, means of transportation, etc. These are called capital goods.

A country is richer in products when it produces items for consumption: wheat, meat, furniture, clothing, etc. These are called consumer goods.

A country again becomes richer in products when it gets wealth from abroad. Thus Canada becomes richer in fruits when it gets bananas, oranges, and pineapples; this is called importation.

So then, a country’s goods are reduced when there is destruction or wear of the means of production: burnt factories, worn-out machines, etc. This is called depreciation.

A country’s goods are also reduced when they are consumed. Eaten food, worn-out clothing, etc., are not available any more. This is destruction through consumption.

A country’s goods are reduced again when they leave the country: for example, there will be less apples, butter, bacon, in Canada, if this country sends these products to England. This is called exportation.

Calculation of the Just Price

Now let us suppose that a year’s return gives:

Production of capital goods  3 billion 
Production of consumable goods  7 billion 
Importations 2 billion
Total acquisitions  12 billion (assets) 

Moreover:

 Depreciation of capital goods  1.8 billion
 Consumption  5.2 billion
 Exportations  2.0 billion
 Total reduction  9.0 billion (liabilities)

We conclude that: while the country became richer with $12 billion worth of production, it used, consumed, or exported, $9 billion worth of production.

The real cost of the production of $12 billion is $9 billion. If it actually cost the country $9 billion to produce $12 billion worth of goods and services, the country must be able to enjoy its $12 billion worth of production while spending only $9 billion.

With $9 billion, we must be able to pay for $12 billion. To pay 12 with 9. This requires a price adjustment: to lower the accounting price, which is 12, to the level of the real price, 9, and to do it without doing violence or harming anyone.

When faced with this adjustment, the following conclusion is logical in an economy where production exists for consumption:

Since the consumption of $9 billion worth of production, with the wear of machines included, has allowed a production worth $12 billion with improvements included, $9 billion is the real price of production. In order for the country to be able to use this production, for as long as it wants, it must be able to get it at its real price, $9 billion, which does not prevent the retailers from being compelled to claim $12 billion.

On the one hand, the country’s consumers must be able to buy 12 with 9. They must be able to draw on their country’s production by paying for it at 9/12 of the marked price.

On the other hand, the retailer must recover the full amount: 12; otherwise, he cannot meet his costs and obtain his profit, which is the salary for his services.

The compensated discount

The buyer will pay only 9/12 of the marked price if he is granted a discount of 3 on 12, or 25 percent.

A table costs $120.00; it will be sold to the buyer for $90.00. A pair of stockings costs $4.00; it will be sold to the buyer for $3.00.

Likewise, the same type of ratio is applied to the sale of all the country’s articles, because it is a national discount decreed by the National Credit Office to reach the goal for which it was instituted.

If all of the country’s consumer goods are thus paid for at 75 percent of their marked price, the country’s consumers will be able to get all of their production worth $12 billion with the $9 billion that they spend for their consumption.

If they do not like some products for sale on the market, they will not buy them and the producers will simply stop making these products, because they are not real wealth since they do not answer the needs of the consumers.

The retailers thus get from the buyers only 75 percent of their prices. They will not be able to subsist, unless they get the 25 percent that the buyer does not pay for from another source.

This other source can only be the National Credit Office, which is charged with putting money in relation to facts. On the presentation of appropriated vouchers, attesting to the sale and the national discount allowed; the retailer will get the credit-money representing the missing 25 percent from the National Credit Office.

The goal will be reached. The whole of the country’s consumers will have been able to get their country’s total production answering their needs. The retailers, and through them the producers, will have obtained the amounts which cover the costs of production and distribution.

There will be no inflation, since there is no lack of products to supply the demand. This new money is actually created only when there is a wanted and purchased product.

Besides, this issue does not enter into the price of the invoice, since it is neither wage, salary, nor investment: it comes after the product is manufactured, priced, and sold.

Another way of arriving at the same result would be to make the buyer pay the full price. The retailer would give a receipt to the buyer, attesting to the purchase amount. On presentation of this receipt at the branch of the National Credit Office, the buyer would get credit-money equal to the 25 percent of the purchase amount.

The first method is a compensated discount, a discount granted by the retailer and paid to him by the National Credit Office.

The second method is a rebate made to the buyer. The result is exactly the same.

In any case, the price paid by the consumer must be the fraction of the marked price expressed by the ratio of total consumption to total production. Otherwise, the production is only partially accessible to the consumers for whom it was made.

A dividend and a lowering of prices

There are two ways to have price-figures and money-figures correspond: prices can be lowered, or wallets fattened. Social Credit would do both, without harming anyone, and by suiting everybody. The two mechanisms put together — the lowering of prices and the dividend — would be calculated to balance the price-figures and money-figures.

Both are needed. If there is only a dividend the prices could tend to rise, even if the actual cost price of goods remains the same. And if there is only a lowering of prices, without a dividend, it would be of no use for people with no income.

The dividend formula would be infinitely better than the present social programs like welfare, unemployment insurance, etc., since the dividend would not be financed by the taxes of those who are employed, but by new money created by the National Credit Office. No one would then live at the expense of the taxpayers; the dividend would be a heritage that is due to all Canadian citizens, who are all stockholders in "Canada Limited".

Contrary to welfare this dividend would be given unconditionally, and would therefore not penalize those who want to work. Far from being an incitement to idleness, it would allow people to allocate themselves to those jobs to which they are best suited. Besides, if people stopped working, production would go down, and so would the dividend; since it is based on existing production. Without this income that is tied to employment, progress is no longer an ally of man but a curse, since by eliminating the need for human labor it makes people lose their sole source of income.

Thanks to this mechanism of a discount on prices any inflation would be impossible, since the discount actually lowers prices. Inflation means rising prices, and the best way to prevent prices from rising is to lower them! A discount on prices is exactly the opposite of a sales tax: instead of paying more for goods because of taxes, the consumers would pay less because of the discount. Who would complain about it?

Financing public works

How would public works and services be financed in a social money system such as this one? The Government does not ask: "Do we have the money to build this project?" whenever the population wants a new public project but, "Do we have the materials and the workers to make it happen?" If that is so, the National Credit Office would automatically create the new money to finance the new production.

Let us suppose the population wants a new bridge and the construction will cost $50 million. The National Credit Office therefore creates $50 million to finance the construction of this bridge, and since all new money must be withdrawn from circulation as the new production is consumed, the money created to build the bridge must be withdrawn from circulation as this bridge is consumed.

How can a bridge be "consumed"? A bridge can of course be consumed through use and depreciation. Let us suppose the engineers who built this bridge expect it to last 50 years, so then this bridge will lose one-fiftieth of its value every year; since it costs $50 million to build, it will depreciate by $1 million every year. It is therefore $1 million that will have to be withdrawn from circulation every year, for 50 years.

Will this withdrawal of money be done through taxation? "No, this is not necessary at all", said Clifford Hugh Douglas, "the Scottish engineer who conceived the Social Credit system; there is another way, and it is much simpler, to withdraw money from circulation: the method of the adjusted price (also called the compensated discount)." Douglas spoke of this in London, on January 19, 1938:

"The immense, complex, irritating and time-wasting taxation system, which keeps hundreds of people busy working, is a complete waste of time. The whole of the results that are supposed to be achieved by the system of taxation could be achieved without any bookkeeping at all; they could be achieved entirely through the price system."

How would this adjusted price work? The National Credit Office would be charged with keeping an accurate bookkeeping of the nation’s assets and liabilities, which requires only two columns: one to write down all that has been produced in the country during the given period (assets) and one for all that has been consumed (liabilities). The bridge’s $1 million annual depreciation mentioned above would be written down in the "consumption" column, and added to all the other kinds of consumption or disappearance of wealth in the country during the given period.

As we said before, Douglas also points out that the real cost of production is consumption. In the example of the bridge, the cost price is $50 million. But the real cost of the bridge is all that had to be consumed in order to build it. Whereas, on the one hand, it is impossible to know the real cost of every article produced, one can easily know, on the other hand, what the real cost of the total production of the country was during a year: it is all that has been consumed in that country throughout the given year.

Three principles

There are three fundamentals in Social Credit:

  1. Money must be issued without debt by the Government — the representative of society — according to production, and withdrawn from circulation according to consumption;

  2. A monthly dividend to every citizen;

  3. The compensated discount.

All three are necessary; if you remove one of them, the system cannot work properly.

This technique of Social Credit, that we have explained briefly, has the goal of financing the production of goods that answer the needs, and to finance the distribution of these goods for them to reach these needs. If you look at the diagram on the next page (the circuit of money), you will notice that money never piles up anywhere; it only follows the flow of goods, being issued as goods are produced and then returning to its source (the National Credit Office) as goods are consumed (sold). At any given moment, money is an exact reflection of physical realities: money appears when a new product appears, and disappears when the product disappears (is consumed).

 


 

All this opens up undreamed-of horizons and possibilities. For these possibilities to become reality, everyone must know and study the Social Credit system. And for that, all must be subscribed to the "Michael" Journal. Dear friend, here comes the part you have to play in all of this: you have understood Social Credit, so it is your duty and responsibility to make it known to others, by soliciting subscriptions around you to the "Michael" Journal. Good luck!

 

The circulation of money in a Social Credit system

The circulation of money in a Social Credit systemMoney is loaned to the producers (industry) by the National Credit Office, for the production of new goods, which brings a flow of new goods with prices (left arrow). Since wages are not sufficient to buy all of available goods and services for sale, the National Credit Office fills the gap between the flow of purchasing power and the flow of total prices by issuing a monthly dividend to every citizen. Consumers and goods meet at the market place (retailer), and when a product is purchased (consumed), the money that had originally been loaned for producing this product returns to its source, the National Credit Office. At any moment, there is always equality between the total purchasing power available in the hands of the population, and the total prices of consumable goods for sale on the market.


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About the Author

Alain Pilote

Alain Pilote

Alain Pilote has been the editor of the English edition of MICHAEL for several years. Twice a year we organize a week of study of the social doctrine of the Church and its application and Mr. Pilote is the instructor during these sessions.