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How to finance production
The
credits required to finance production and distribution would be drawn
from this source: the country's financial credit, based upon the
country's immense real credit. This
would not require any upheaval within the established structures.
Private enterprises would remain private enterprises. Even the banks
could remain private enterprises. It is through them that financial
credit would be channelled for its issue and be returned to the source. The
banks actually possess all the mechanisms, all the required
installations, with a well-established network of branches, and a
well-trained and competent personnel, to carry out this service
marvellously. They could continue to find in these functions the reward
due for their services. They could continue to be responsible for the
loans to production, and also responsible for the accounting operations
relative to consumer credit (the dividend and the compensated discount),
and get a fair remuneration for them. But the credit they would thus
handle would remain the ownership of society, and their operations would
have to take into account the objective of, a financial system
respecting the end and the principles expounded above. We
can conceive different methods for the implementation of the
propositions expressed by Douglas. But the best methods, certainly, are
those which would do it effectively while making the least possible
change within the existing institutions. —
You say that the chartered banks could be responsible for the loans to
production. Do you mean that producers would continue to go to the banks
to finance their expenses while waiting to sell their goods? Of
course. We need such a service, and the banks are very well organized to
see to it. Usually,
production passes through several successive changes before reaching the
condition of a finished good. The first producer in the chain can be in
need of an advance of money, of financial credit; and when he passes his
semi-finished good to a second producer, he will want to be paid
straightaway, to recover his expenses and pay back the banker. Neither
the first producer nor his banker can wait for the good to have reached
the end of the chain, perhaps in several months, or even years. And they
can much less wait for the finished good to be sold and paid for by the
consumer, before getting their money. Let
us say that the production process goes through three successive firms:
A, B, C. Here is how we can conceive the financing operations: Producer
A needs a loan to mobilize raw material, transportation. pay his
employees, the heat and lights, his motorized forces, his overhead. He
goes to the commercial bank and gets this loan. When
A sells his semi-finished good to B, he will include in his price all
that he spent, including the borrowed money that he must pay back to the
bank. He will add his profit to it (which is a salary for him). B can be
in need of a loan to pay all of this to A, and perhaps also for his own
operating costs: transportation, wages and salaries, overhead, etc. He
also goes to the bank, gets the loan, and pays A. With
the money obtained from B, A will be able to pay back 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 the bill from B and for his own
operating costs. Once
paid by C, the B producer will settle up with his bank. The
same thing when C passes his finished good to the wholesaler. The
wholesaler will be able to do like the producers have done successively:
get from the bank the necessary loan to pay C. The
bank, with its accountants and installation, is marvellously well
organized to see to these operations, to follow up the state of the
loans and repayments. Even if the producers do not all deal with the
same bank, one borrowing, for example, from the Bank of Montreal, the
other from the Royal Bank, this does not create a problem: the banks are
set up to settle their debit and credit balances among themselves, every
twenty-four hours. The
implementation of Douglas's propositions can very well put up with this
method of financing, by loans to the various levels of production, while
using the present banking mechanism. —
Would the banks create these credits, as they do today? No.
We have explained it: these credits represent a production capacity of
the country, resulting from various activities, the natural resources,
applied science, the existence of an organized society, etc. These
financial credits are worth something only because of the real credit,
because of the country's production capacity. The financial credit is
the figured expression of the real credit, of a good which is social by
nature. At its source, the financial credit, being a social credit, can
only be the ownership of society. To
put this credit into circulation, to confide it to people who will use
it to mobilize the country's production capacity, and to bring back this
credit to its source after having carried out its work, one can very
well use the existing channel, the banking mechanism, without in any way
nationalizing the banks. There
is therefore no need for a Central Bank to establish a new network of
branches, nor to make a credit-check on the ones requesting for credit,
nor to directly take care of recalling credit after its use. All this
can be left in the hands of the chartered banks, or the commercial
banks, which are very competent in this line of business. But
this financial credit remains a social instrument and must have its
source only in an organism solely devoted to the service of the
community: in a National (or Provincial) Credit Office, or a Central
Bank (being nationalized) fulfilling this function. —
But then, where would the commercial banks take the financial credit to
lend to production? They
would get it, upon request and without cost, from the source itself,
that is, the Central Bank. Without cost, that is to say, with only the
obligation of bringing back the same amount to the source, after its
journey in circulation. The
Central Bank would keep count of what is taken out and what is coming
in, debiting what is taken out in the account of the commercial bank,
and crediting what is coming in. There
is nothing new in these accounting relations between a central bank and
the commercial banks. In Canada, each commercial bank already has 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 to the borrowers
for the loans they would make to them? Certainly.
The banks must be able to meet their expenses, pay their employees'
salaries, cover their overhead, and make legitimate profits – like any
private enterprise. The
banks must also foresee cases where, in spite of the precautionary
measures they are good at taking, it becomes impossible for certain
borrowers to pay back. A borrower's bankruptcy would not discharge the
lending bank's obligation towards the Central Bank. It would be held
responsible to pay back, to its source, the credit of society it would
have obtained. Social
Credit's aim is in no way to make irresponsible people. On the contrary.
The commercial bank would be held responsible for the advanced loans
obtained from the Central Bank. The borrower – an individual or a
company – would be held responsible towards the lending commercial
bank. This latter would certainly require guarantees, particularly from
new clients, or for loans to enterprises that are risky. The
fees required by the banker for his loans could still be called
interest. However, it seems to us that the time factor, the period
between the loan and its repayment, ought to be of less importance.
Whether it is a six-month, or one-, two-, or three-year loan, it does
not affect the banker's financial position, since it is the credit of
society, and not his own, which is; in circulation. At the very most, a
longer period could consist of a greater amount of bookkeeping entries
to be made in the borrower's account. —
But these fees, these interest charges, mean the borrower is obliged to
pay back more credit than what was released. Similarly for all other
borrowers. Will it not create a mathematical impossibility, like the one
we denounce today? Not
under a Social Credit financial system, because the system, by the
periodical dividend to all and the adjusted- and compensated-price
mechanism, balances the purchasing power with the prices, Now, all
financial costs, including interest charges, are included in the prices.
Therefore, all of this is recoverable, thanks to the means of payment
thus secured in the public's hands. —
Are these additional costs compatible with Douglas's propositions:
“All new production must be financed by new credits”? It would seem
that if one must pay, for example, a 5-percent charge on the financing
of production, that is to say, 5 percent on top of the credits passed to
the producer, the new production is not entirely financed by new
credits. During
the course of the various levels of production, finance can come from
the producer's personal funds, or partially from loans, or even totally
from loans (except the interest). But all this will be settled when
production is delivered in the form of a finished good. Because it is
really then that it is a new production. And it is then, when the
finished good goes from the wholesaler or the last producer to the
retailer, that an operation, special to the Social Credit system, can
fulfill the proposition expounded by Douglas. It is then that new
credits (interest-free credits) can be issued to cover all the expenses
which had to be incurred for this new production. —
How will this be accomplished? Once
again, there may be several methods to achieve it. Mr. W. B. Brockie, a
New Zealand Social Crediter, suggests that it should be done when the
goods are received by the retailer: by an interest-free loan, made to
the retailer, to cover the total cost price of the finished goods. This
method seems to us very appropriate to reach a double objective: 1. To
finance effectively the new production by new credits; 2. Afterwards, to
allow the return of credit to its source as the goods are consumed. The
production process is a continuous flow, made up of various levels, from
raw material to the finished good. Production becomes a finished good at
the place it is ready to be delivered to the retailer, who will
undertake its distribution to the consumers. What
is this place? It is the wholesaler's, or the last producer's, if the
retailer takes the finished good there. This finished good has a price,
the price charged to the retailer. It is the cost price of production.
But to get the final cost price, one must add the distribution costs to
it, that is to say, the expenses of the retailer. And it is all of this,
the final cost price, which 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 damage, the
overhead he anticipates. 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 can
pre-evaluate fairly close the percentage to add to the wholesaler's bill
to get the final cost price of the goods when they are 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 his
handling and service costs to sell his goods cost him, on an average, an
amount equal to 10 percent of the price he must pay for them to the
wholesaler. Then,
let us suppose that this retailer gets a load of supplies for which he'
is billed $4,000. He will conclude that, to meet his total costs (the
wholesaler's price, plus handling costs, but excluding all profits), the
supplies finally cost him $4,000 + 10 percent of $4,000, that is to say
$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 relative to this new production. To
achieve this, we can use, while perfecting it, a method of financing
rather widely used among retailers: 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 “credit line”. It is very handy, since,
for his part, the wholesaler wishes to be paid without delay to meet his
own obligations. In
the bank's ledger, these loans are debited against the retailer's
account. As he sells his products, he will have to bring the fruit of
his sales to the bank to keep his account afloat as much as possible, to
the banker's satisfaction, without ever let ting his account fall below
the credit line agreed upon. In fact, it is therefore 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
$4,400 loan. The chartered bank would draw all the amounts required to
this end, also without interest charges, from the Central Bank, the
source of credit. (Let us not forget that we are talking about a social
financial system, which adapts to reality, issuing credits as goods are
produced, and withdrawing them as 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 which is not yet
realized, whereas in the retailer's case, the loan is made on a
production well and truly finished. (Let us add that the producer did
not r suffer from the obligation of paying interest, since he included
these interest charges in his price, and that the loans to the following
levels of production defrayed them.) Then,
if the loan to the retailer was to demand interest, this interest would
add to the retail price an element not covered by this loan. Then the
new production would not be financed entirely by new credits, as
Douglas's proposition requires for a financial system to reflect reality
exactly. Then
again, if interest was charged on the final retail price, this interest
would become the ownership of the commercial bank when the loan is paid
back by the retailer. Therefore, there would be a part of the credit
which would not go back to the source when the good is consumed, and the
system would not reflect reality exactly: “The means of payment (cash
credits),” 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. At
the time of the sales, the money that the buyer gives to the retailer
stops being “cash credit”, consumer money, and simply becomes
financial credit which, handed over to the banker by the retailer, will
begin its complete return towards its source, through the same channel
used for its issue. —
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 as
the cancellation of cash credits (means of payment). This would produce
the defect that we pointed out above. In
the above case, for example, if the retailer was to sell his goods with
a 10-percent profit margin, it would push up the retail price to $4,840;
this would exceed by $440 the new credit issued to finance this new
production; it would distort Douglas's proposition which requires that
all new production be financed by new credits. It would not be suitable
either to have this profit included in the other costs covered by the
amount lent by the banker to the retailer, by raising this loan to
$4,840 and telling the retailer to bring back only $4,400, keeping the
remaining $400 for his profit: it would be to pay the retailer for a
work that he did not yet perform. The
retailer's profit must come from a source other than the buyer's wallet,
and come only after he has carried out his sale. Therefore,
the retail price will not include the retailer's profit. This will
prevent the price increase due to the tendency that too many retailers
have, that of raising their profit margin when business is good. Now,
under a Social Credit financial system, business would always be good,
since the purely financial problem would not exist any more; to take
advantage of it to allow oneself exaggerated profits would lead to an
inflation of prices, whereas the smooth selling of production should
make prices fall. —
Do you mean that, under a Social Credit financial system, the retailer
would no more make a profit, or that a ceiling would be put on his
profit? 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
moderated profit margin, determined in advance according to the trade,
the more items he would sell, the bigger his profit l would be. In a
non-monopolistic but competitive economy, it is the retailers, who give
the best services to their customers, who would make the most profits,
without exceeding the profit margin per article for all that. Therefore,
it is the percentage – not the volume – of profit that must be
regulated, agreed for each line of business. Society
has the right to demand this of the retailers, seeing that, in the first
place, it provides, without cost, the necessary loan to pay off their
bills, and seeing that, secondly, it maintains at all times, in front of
the goods offered, a total purchasing power that equals total prices. As
a result of society providing the retailer with the necessary credit to
pay for the goods that he takes into stock, society is the owner of
these goods, the retailer being no more, so to speak, but the agent
charged to sell them. It is just for society to reward the retailer for
this selling, but without allowing him to exploit the buyers. Therefore,
it is society which will provide the retailer's profit, no more in loans
that he must pay back but in cash credits, means of payment which will
be the retailer's personal ownership. The
retailer, while completely keeping his private business and managing it
without hindrances, is all the same, in a way, an agent of the community
for the distribution of goods. Exactly like the producer who, while
fully retaining his private enterprise, is, in a way, an agent of the
community for the use of the real credit, the country's production
capacity. Exactly, again, like the banker who, while fully retaining the
private ownership of his banking enterprise, is, in a way, the agent of
the community for the channelling, the issue and 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 has, all the same, a social function to fulfill, a function
which it would automatically fulfill through the simple working of a
Social Credit financial system faithful to the propositions expounded by
Douglas. —
But when and how will the retailer draw this profit from society? Still
through the chartered bank which draws this credit from the 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, against which he can get cash, etc., like any other
person. As
the retailer sells his goods, he brings what he takes in to the bank,
which records it as a credit repayment into the first account mentioned.
At the same time, the banker records into the other account, into the
retailer's personal account, the profit to which he is entitled for the
sales he made, according to the percentage agreed for his kind of
business. For this entry, made in the name of society, the banker issues
a cheque on 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 records $10 to the credit of the
retailer's personal account. For
all the accounting services performed without being paid by the
customers (interest-free loans, profits to the retailers, periodical
dividends to all), the banker records $10 to the Central Bank according
to agreed standards. —
Is this not all extremely complicated? Not
at all. It takes many sentences to explain it, but it would work like a
routine operation, as briskly as the banking operations which one
witnesses every day in all bank branches. It
is infinitely less complicated, for example, than the accounting
procedures of the consumer cooperatives, where the accountant must keep
track of each collaborator's purchases, to distribute to each one a
rebate proportionate to his personal purchases. Then
this system would be sound, reflecting economic facts exactly, financing
production and consumption effectively. It would thus serve economic
life with satisfaction, and with much less bureaucracy, inquiries,
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 onto the table of the totally destitute (when the government
finally acknowledges their poverty situation, often after lengthy and
always humiliating inquiries). —
Would this not be too different from the financing methods which we are
accustomed to? Different
in result, yes; but almost, in all, 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, less the constraint of
interest. In
addition to this: a global purchasing power maintained in keeping with
the global production offered, with a suitable share guaranteed to each
one; thus a better distribution of the fruits of production; a
protection against unjustified price increases; and the money
dictatorship suppressed. And that's not all. Then,
consider the final situation, relatively to the $4,400 portion of
production taken as an example: It
was possible to carry out that production without any financial
hindrance. Credit came according to the needs, from one level to the
next in the production process; all participants were duly paid,
including the bankers, by getting interest for their services in keeping
with the loans. The complete, final payment, covering 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 this production. The production could be sold without adding any
charges to the cost price. The
financial organization has kept all the same cogwheels, but duly oiled,
instead of allowing sand into the bearings and gears – and this makes
all the difference in the world in its operation. —
Would not these credit releases cause an accumulation of money, with all
the evils of inflation? Follow
the credit route in the simplified outline presented in these pages.
Credit does not pile up, it follows the movement of wealth, coming into
circulation as goods are produced, and taking the return route towards
its source as goods are consumed. These
credits form like a working capital, belonging to society, put at the
service of the economy to answer the population's needs according to the
physical possibilities to see to them; a working capital which can be
increased when these needs increase and when the production
availabilities allow it. As
to the social character of the sharing-out of the goods made, the Social
Credit economy guarantees it by the introduction, into the purchasing
power, of the periodical dividend to all, which we will talk about
further on in this study. Louis Even
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