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The Financing of Public Works

Written by Louis Even on Friday, 27 May 2016. Posted in A Sound and Efficient Financial System

What was just explained shows how Douglas's financial propositions could be applied to the production and distribution of consumer goods, the goods that individuals and families buy on the market. Could this method be applied also to the production and the payment of public works?

Definitely! In that case, consumption is best called depreciation: the gradual consumption by wear and tear that accompanies the aging of public works. They are consumed by everyone, represented by government or by a local public body, as in the case of schools, waterworks, municipal buildings, roads, sidewalks, sewer systems. Once carried out, these public works are undoubtedly a new production. Therefore, this production must also be financed by new credits.

— In the case of consumer goods, you got the producers to finance themselves through the existing financial system, without excluding interest-bearing bank loans; then, you had these costs covered by interest-free social credits when the finished goods went from the wholesaler to the retailer who serves the consumers. Would it be the same for public works, and when would the financial costs of this new production be covered by interest-free credits?

Usually – and the method should be extended – governments and other public administrations entrust contractors with the execution of these works. Most of the time, the lowest bidder is chosen, after having his competence and liability assessed.

The contractor would finance himself in the same manner that the producers of consumer goods do, either with funds already at his disposal, or with loans he could obtain from a bank by promising to repay the capital and interests.

As for the new credits to finance these public works, the public administration that commandeered these would get the interest-free credits to pay the contractor at the moment the public body takes possession of the completed works.

From the time of delivery, the population, which is the consumer in this case, would pay for their consumption, i.e for their wear and tear, their depreciation, at the rate at which it takes place.

— Would you explain this by an example?

We have seen, at the beginning of this study, that a country's real credit resides in that country's production capacity. It is a social credit and all of the country's financial credit, being based on its real credit, is also a social credit.

Therefore, as we have said, all new financial credit must come from a Monetary Office (which can be a Central Bank) operating on behalf of society. But this credit can just as well be channelled towards production by the system of banks that now exists, and be returned to its source through the same channel, after having been used in production and consumption.

We have also said that the Monetary Office could be the Bank of Canada, on a national scale, or a Provincial Credit Office, on a provincial scale, should a provincial government take such an initiative due to the Federal Government's refusal to take action.

For the sake of clarity, let us suppose that Social Credit is established in all of Canada.

When plans for public works are submitted to the people's representatives – in Ottawa, if they are of federal jurisdiction, in a provincial legislature if they are within this province's jurisdiction, in a municipality if it falls within its jurisdiction – the people's representatives need not wonder whether these projects are financially possible, but only whether they answer real needs and whether they are physically feasible. Physically feasible, in other words, is the country's production capacity capable of carrying out these works while continuing to supply the goods required to answer private needs. Otherwise said: Will this new public production prevent a more urgent production from being made.

The decision to proceed or to postpone the projects that were submitted will be taken accordingly, with financial considerations set aside. Finance will carry out its role: to serve without deciding. Balanced budgets would no longer be a consideration; our only priority would be to determine in what order we want works to be carried out, works that are wanted and feasible.

For instance, let us consider the building of a bridge. The construction is decided upon because it answers a real need and because there is no reason to fear that activities directed toward this construction may prevent stores from being supplied with consumer goods.

In a Social Credit system, the financing of the bridge is not a problem. But the Government will nevertheless ask that tenders be submitted; if finance truly reflects realities, a lower price should mean less materials, less energy, less time – therefore, a smaller portion subtracted from the country's real wealth.

Let us say that contractor John Smith gets the contract, after bidding $5,000,000. This price is meant to cover all of his expenses and a legitimate profit. He has already figured how much he needs to borrow to pay for the materials, for his employees and for the interests. The enterprise belongs to him, not the Government. His only guarantee is that once the bridge is completed, he will receive $5,000,000 from the Government upon its delivery if its inspection shows that the bridge was built according to the norms agreed upon.

Whether Mr. Smith is compelled to borrow $2,000,000, or $3,000,000, or even the total amount of $5,000,000, is his own business. If he deals with a bank, they will settle the matter between themselves. The Government has no part in this.

As was the case with private production, if Smith borrows from a bank, the lending bank is quite justified in requiring that he pay an interest to cover its own operating costs and the risks normally incurred by lending institutions.

Once the bridge is completed, it is of course John Smith's property, but it is of no particular use to him. Therefore, he will hasten to deliver it to the Government. After the usual inspection and acceptance, the Government will pay him the price agreed upon, $5,000,000.

This price includes all costs: the cost of materials and labour, the profit John Smith included in his price when he prepared his bid, and the financial costs that he had anticipated.

If financial costs are also added, interest charged on his loan, doesn't this mean that this new production will not be paid with new interest-free money?

Yes it will, in the same way the retailer was, when dealing with consumer goods. The Government will obtain, interest free, the global amount of new financial credit with which to pay this new production that was recently finished.

— How and where will it get this money from?

It will get it from the source of the social financial credit, that is, from the Central Bank, either directly, or through a commercial bank used as a channel to this end. And in the latter case, the commercial bank gets it upon request and it may take the form of a simple cheque.

Is the Government now indebted for $5,000,000 directly towards the Central Bank or indirectly through a commercial bank?

Not at all. There is no getting into debt. The bridge is wealth created by the country's population, not only by the work of those who contributed directly to it, but by the work of all those who supplied the things that allowed the bridge to be built: food and goods of all kinds. Of course, the employees who worked on the bridge did pay for these things, but the latter were produced by the population; and if certain goods were imported, it was in exchange for exported domestic goods.

The population must not be put into debt for its own production, no more than the baker is required to pay for the bread he has made. If the Canadian bridge had been built by Mexico or by China, then it could be recorded as a Canadian debt owed to Mexico or to China. In a sound financial system, in keeping with reality, a public debt, a national debt can only exist if owed to a foreign country, when we have received from that country, more real things (labour, materials, etc.) than the real things we have given that country.

— But, in the case of consumer goods, you had the retailer pay back to the Central Bank, with no interest, the amount he had obtained to take possession of the finished goods; he had to return to the Bank the credit he had obtained as he sold his goods, over time.

That is correct. He drew this money from the consumers who bought the goods. He had them pay for the consumption of the goods, not for their production which was financed by new interest-free credit, the Bank had provided to the retailer.

— And in the case of public production, in the case of the bridge, will the interest-free credit obtained from the source, from the Bank, also be returned to the source? And if so, by whom and how?

The same as with consumer goods. The population does not have to pay for the production of the bridge, which is, as we have just explained, its own production; but it will pay for its consumption, that is to say, the wear and tear, the depreciation, at the rate this consumption takes place. This is also in keeping with Douglas's principle:

New production must be financed by new credits, and the withdrawal of credit must be made in proportion to consumption, therefore, as the wealth which had thus been created and financed, disappears.

Let us return to the baker's bread: the baker does not have to pay for its production, but those who eat it must pay for its consumption. In the case of the bridge, it is the public which “consumes” it: therefore, it is the public, the population who will pay for it, not as its producer, but as its consumer.

— How will the population pay for the bridge?

Let us say that the bridge is expected to last at least 50 years. From this we can say that an average depreciation of $100,000 a year will take place. So it is $100,000 a year the public will be required to return to the Central Bank to make finance the true reflection of economic realities.

At the end of fifty years, whether the bridge is totally “consumed” (worn out) or not, payments will no longer have to be made. Nothing can be consumed twice, nor be made to be paid twice – no more than the consumer should be required to pay the baker twice for his bread. It is only an absurd and plundering financial system, such as the system we now have, that can make the population pay twice for its waterworks, its schools, its bridges, its roads or even for the wars it has fought... and won!

— Is it through taxes that the Government will withdraw from the public the yearly amounts to be paid for the wear of the bridge?

It will withdraw them by means of a levy that can vary; not necessarily by the present method of taxation which is cumbersome, clumsy, expensive, and often unfair. It could be done by way of the price-adjustment mechanism, the annual $100,000 being added to the amount of “total consumption”. The wear of the bridge would affect all consumer prices since it involves the whole community.

— And if, by accident or by sabotage, the bridge should fall down at the end of ten years?

This would raise, at once, by the amount of the value that was lost, the country's total consumption for the current period and the matter would be settled by the price-adjustment mechanism – an adjustment of all prices. Since prices, under a Social Credit system, are adjusted by taking cost prices and by multiplying them by the ratio of consumption to production, it is clear that the greater the total consumption, relative to total production, the smaller the compensated discount will be.

The consumer will then pay more for everything he buys, and more money will be returned to its source. This is in keeping with the principle that finance must be the exact reflection of reality.

 

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