FROM DEBT TO PROSPERITY

The booklet that made Louis Even
understand Social Credit

Part IV: The Just Price

 In Part III of this series taken from J. Crate Larkin’s booklet, "From Debt to Prosperity," we saw that the money of our nation should be issued to reflect the realities of production and consumption, according to a "national credit account" (or national balance sheet), to make sure that consumers have enough purchasing power to buy the production that is offered to them on the market.

"The Just Price is the pivot of a sound economic system, balancing the outward and inward flow of credit with the production and consumption of goods; and it cannot be determined by the haggling of the market, the present method of determining prices. It is a matter for scientific calculation, based on recorded statistics; but quite a simple calculation for all that."

As soon as the National Credit Account makes our Real Credit available for use, the second step necessary for permanent business recovery is to establish a scientific pricing system designed to apply this credit where it is most needed. This pricing system must operate specifically to close the gap between the Nation’s present insufficient trickle of shopping-tickets and the price value of the goods in the shop.

Business survival demands that all costs must be recovered in prices. We know that to buy goods, shoppers must present their shopping-tickets or establish credit in the store of wealth. It is here that the total cost of production and distribution is collected from the shopping public. The logical way then to increase buying power and at the same time to lower prices is to bring new money into existence as a DISCOUNT on the retail prices of goods and services.

By this discount on retail prices Social Credit proposes to lower prices and add to the buying power. The Just Price is simply the regular retail price minus this Discount. The discount would apply on all goods sold to shoppers at retail for consumption. The retailer is the point of contact between business and the consumer, the last link in the chain of distribution connecting production with consumption. Accordingly, the retail price must include all the costs of production and distribution and whatever profits are made. The total of all these costs and profits is the Retail Price. Hence it is here, at this final point, that the balance between production and consumption must center.

The adoption of the Just Price would raise the purchasing power of every shopper by establishing a continuous retail discount on all retail purchases. "The object of Price regulation (at the Just Price) is to put an end forever to the alternating recurrence of inflation, when credit is said to be plentiful, and deflation, when credit is said to be scarce. By means of the Just Price, industry will be able to receive a proportion of its costs of production from the National Credit Account, so that it will no longer depend wholly on the inadequate purchasing power which it now distributes to consumers."

To balance the money payments which consumers receive from business with the total retail price of the goods offered for sale, the Retail Discount would be extended to all shoppers and consumers of goods.

Perhaps this may sound complicated in practice so let us apply it to our everyday experience and illustrate its operation. For example, suppose we have for a long time been wanting to buy a new tire for the family Ford. But we have postponed our purchase for lack of cash. The retail price of the tire is $10. The retail discount rate at the time is 25 per cent. Now applying a discount of 25 per cent to the retail price of $10 would give us a Just Price of $7.50. With the extra buying power which the discount gives us, we can go to the tire dealer and buy our $10 tire for $7.50.

At first thought, the idea of buying a $10 tire at less than cost may seem surprising. It is certainly a bargain for us. But it works to the tire dealer’s advantage too. Let us follow the handling of this translation to see how it works. The sales clerk who sold us the tire records the sale, showing on his usual sales slip the retail price and also the amount of discount that has been allowed us. The retailer then follows his usual practice of depositing his receipts in his bank. But he includes together with them a discount voucher showing all his transactions and the total discount allowed on all of them. The bank then credits the retailer’s bank account with the total retail value of all his transactions, thus giving him the total retail price, recovering all his costs, and enabling him to balance his books.

The bank in turn reports to the U. S. Treasury the total amount of the discount it has disbursed. The discount is charged against the debit side of the National Credit Account as consumption. The bank is repaid with Treasury Credit Certificates, thus balancing its books.

What is the net result of this bookkeeping process? The retailer’s books balance, the bank’s books balance, and the National Credit Account, by this simple procedure, raises the buying power of all of us, balancing consumption with production. The whole process is in fact less complicated than many business methods already in common use. That its results would add to our buying power hardly needs to be pointed out.

Where does the money come from to finance this increase in buying power? It is created by a bookkeeping process exactly as it is now created by bookkeeping. But it is derived directly from the Real Credit figures shown in the National Credit Account, instead of from the debt figures of the private banking system.

We have seen that in the National Credit Account, the shopping nation is credited with the production of Wealth and charged for consumption. The production of Real Wealth must necessarily always run ahead of consumption. The Retail Discount is determined by the difference between the actual production of Wealth and its consumption. So the credit to finance the discount thus comes from monetizing the surplus of production over consumption as shown in the National Credit Account. The creation of this credit grows out of the excess of Real Credit production over Real Credit consumption:

The Just Price is based on Real Cost – that is, on the principle that the true cost of any article is the total of all that is consumed in producing it. If we make a table, for instance, a certain amount of wood is consumed, a tree has been cut down somewhere in the forest; there has also been a certain amount of depreciation in the saws, logging tools, freight cars, machinery in the mill and factory, and so on down to the truck that finally delivers the table to our home. At the same time other products such as food and clothing, have been consumed by those engaged in cutting down the tree, sawing it into lumber and making the table. At the end of the whole process the tree, the food, and all the rest, have been partly or wholly used up; the table is left. Now what has it cost us? Obviously the total of the things consumed in making it.

In the same way, if we look at our total production of goods for any given period of time, we can say that its real cost has been our total consumption over that same period of time. And if production has exceeded consumption, then in terms of Real Wealth we show a net profit on our work. Our Real Credit has increased.

The Just Price, or retail price less the Discount, is based on this fact that the real cost of Production is Consumption. (The real cost of production is consumption. If we momentarily disregard the financial aspect of industry and concern ourselves with goods only, it becomes clear that the actual physical cost of things produced is the material used up and machinery worn out in the making.) But we know that all the many fixed charges on capital investment, interest, repayment of loans and other financial costs must enter into the total retail price of every article. A moment’s thought will show us that the Real Cost of any finished article will always be less than its Financial Cost. Social Credit proposes that by means of the Just Price consumers should pay the Real Cost, or what is consumed in real wealth, and that the balance of the total retail price should be represented by the Discount. The function of the discount is to overcome for consumers the difference between Real Cost and Financial Cost, to bridge the gap between buying power and prices.

As we saw in the radio factory, industry produces not only goods, but also prices. And we found that the shoppers who bought a radio paid in the price not only for the radio alone but also for a share of the factory that produced it.

Just so, all goods produced under the present method of price-building, must sell at a price that includes not only the direct cost of each article but the cost of the means of production as well. All the financial costs involved must be recovered as well as the real cost.

When we consumers buy a sack of flour, we also have to pay part of the cost of the railroad that transported the wheat and the mill that ground it into flour. To be sure we eat only the flour, we have no appetite for railroads and mills. But after we have eaten the flour in our daily bread, the railroad and the mill which we have helped to pay for, still remain. And in them still remains the capacity to deliver more flour.

When we buy goods, we buy what we want to consume. Yet under the present price system, we pay not only for what we consume but also for factories, workshops and machinery, which we cannot consume. And after we have consumed the goods we buy, the factories and machinery are still in existence, ready to produce more goods.

The purpose of the Just Price, based on Real Cost, is thus to enable us to pay as we go for what we actually do consume. Social Credit rightly regards the means of production as useful assets. It is false accounting to regard new money created by a bank for the production of wealth, as a debt against the shopping nation to be recovered in prices. Honest bookkeeping would credit the nation, on the strength of whose resources the money was created, with the value of the resulting new capital assets. Our capital plant and equipment for production is a part of our Real Wealth. When we pay for the means of production we are buying what we cannot and do not consume. Social Credit insists that in the Just Price we pay for what we do consume. The other costs involved in retail prices are met with the Retail Discount.

So we see that the word "Just Price" are not merely a phrase. We are simply applying the actual facts of production and consumption to the prices we pay for goods and services. The Just Price is a logical as well as a convenient way to conform the business practice of accounting to the facts of our ever-lagging buying power.

When we consider the many complex discounts which play so large a part in every business today, it is evident that a uniform discount on the retail price of all goods sold for consumption would be easy to record and control. The Just Price involves no changes in our present efficient business structure, no futile attempts at price-fixing, no Government interference with business.

Another important feature of the Just Price is that it would put the control of how credit is used into the hands of consumers themselves, since the discount applies only on sales actually made.

The credit put to work in the discount as increased buying power is only issued when goods are sold so that the relationship of goods and money remains exact and constant. Thus Social Credit prevents the inevitable inflation and collapse which follow the expansion of money under the present bank-debt system. Nor would any speculation be possible in the use of this credit, for it would come into business against specific goods at the moment of sale.

Since the Retail Discount would reduce the price of all consumers goods it would make an actual addition to the buying power of every dollar of our income. For example, at a 25% discount $4000 worth of goods could be bought with a $3000 a year income. The discount would provide extra buying power which we could use in any way we wish. The Retail Discount thus adds to shoppers income and reduces the prices of the goods in the shop, effectively closing the gap that now breeds poverty, depression and war.

Yet the operation of the Just Price would destroy neither profits nor competition. On the contrary, by causing a greater turnover of goods it would provide a healthy stimulation for business, in which competition would be for an adequate purchasing power instead of a deficient one, as at present.

In considering the many advantages of the Just Price we must remember that the amount of Retail Discount at any particular time would be determined by the existing facts of production (which includes new plant and imports) and consumption (including depreciation and exports). These facts are shown in the National Credit Account. The Just Price is then determined by an accurate mathematical ratio between the total production of wealth and the total consumption of wealth.

If you refer to the example of National Credit Account given in the last issue, the Retail Discount would be calculated as follows:

Net Real Credit Balance (25) divided by the Total Additions to Real Wealth (100) equals 25%.

The current quarterly rate of Retail Discount would then be 25%.

National Dividends are also paid out of the National Credit Account. As explained later (in the next issue of "Michael") the total of National Dividends paid would be added to consumption since the Dividend would be used for consumption.

Social Credit proposes to put the Just Price into effect thus adding to our buying power and reducing prices. It is suggested that we would start with a very conservative discount of 15 per cent on all retail purchases for consumption. This initial discount rate, however, would not be permanent but in the future would vary periodically in accordance with the facts of production and consumption. For example, after a three months period of operation at a discount of 15%, during the next three months period the discount might be fixed at 20%. In the following period actual 1929 production figures might be used to calculate the discount. Thus business would pick up gradually and surely. We would then have accurate reliable data to determine the discount just as the insurance companies base their rates on actuarial statistics. The rate of discount would then be revised quarterly, as the National Credit Account records changes in the relationship of production and consumption.

From a business viewpoint the Just Price coincides exactly with current business practices. The procedure for recording and accounting of the discount is familiar to every accountant. Under the present NRA codes every business would simply agree not to make more than a specified rate of profit on turnover. This would prevent profiteering and together with price competition, would effectively limit any tendency to raise prices. Any retailer who tried to take undue advantage of the increased purchasing power would forfeit his right to dispense the discount, which would leave him at the mercy of his competitors. Cheating would not pay.

In practical operation the Just Price would furnish immediate relief from the present depression, by starting the wheels of industry turning to supply the new goods called forth by this increase in shopper’s buying power. And by applying the whole amount of the discount against retail purchases for consumption, we should soon consume the "unsaleable surplus" that exists today. No longer would we destroy cotton, pigs, and other useful wealth that we had sweated to produce, nor let our factories stand idle while their products were needed. (In fact, “The industrial system has never functioned at more than 25 per cent of its productive capacity, having been hampered by the defective purchasing-power of a debt-burdened and over charged body of consumers. — Guy. W. Mallon, Bankers vs Consumers, p. 20.)

This immediate relief would be still further stimulated by a psychological factor. As consumers we should hasten to take advantage promptly of the discount, for in advance of its quarterly revision we should not know how much increased business might cause it to diminish in the next quarter.

To visualize the effects of the Just Price we need only ask ourselves "What would I do with a 20% increase in my income?" Certainly we would put the money to use immediately to buy goods. And that buying would start America’s workshop of wealth to producing and delivering more goods. As shoppers we could buy all the wanted goods in the shopwindow. Business would begin to move forward and grow again. The economic system could fulfill its function of supplying the nation’s shoppers with wanted goods and services for consumption. The Just Price provides the sound business basis for permanent recovery.

The natural tendency of any civilized nation possessing the advantages of machine-power production is to grow constantly richer and richer as new Real Wealth is produced. "Now it is manifest that in any modern community appreciation far exceeds depreciation. Ultimate commodities cannot for any length of time be consumed faster than they are made, and capital appreciation (new factories, new machinery and the development of mines, etc.) continually outstrips simultaneous capital depreciation. Even – one might almost say – especially – during the late war, productive capacity was enormously increased, while ultimate commodities were replaced as fast as they were consumed or destroyed.’’

But because our false bookkeeping requires that we monetize our wealth as debt to the banks, this flaw in the money system makes us poorer and poorer instead of increasingly wealthy. The consequences of such stupidity are filled with human suffering. The adoption of the Just Price would end it at once by making prices reflect the facts of our production and consumption of Real Wealth.

We can only liquidate the crushing burden of debt that now paralyzes industrial activity by making payments against it out of the profits resulting from increased business. Years of prosperity are required to accomplish this, but the Just Price provides the most practical means for its achievement.

Much as the Just Price would accomplish to end depression and debt, obviously its advantages could not be enjoyed by those who have no money at all to spend. What then of the unemployed? The pick-up in business would unquestionably provide employment for many of them, but what of the rest? Social Credit meets this problem of unemployment with the National Dividend.

In the next issue: the National Dividend.