An effective strategy against inflation

People complain about inflation. Governments want solutions yet their measures are ineffective and inflation persists.

What exactly is inflation? Older dictionaries explain that "inflation is a disproportionate issue of paper money". This understanding would require that we print less money and reduce its circulation through taxation and other means.

Financial credit increasingly replaced paper money in commercial transactions and economists next stated that inflation was caused by too many bank loans and too much financial credit in circulation. Credit restriction was recommended as a remedy and an increase in interest charges was advised to discourage borrowing.

If the remedy were taking money out of circulation, acting as if there was too much of it would take us to one of two directions: increasing taxes or increasing prices. Increasing prices would aggravate the original complaint. Increasing taxes, especially when levied against producers, would be folded into higher prices charged to consumers which only worsens the original problem.

A more recent analysis described inflation as 'too much money chasing too few goods'. However, no one can seriously argue that inflation in the developed world is due to not enough goods and too much purchasing power.

Why do we denounce inflation? It is because inflation increases the cost of living. The ordinary person will disagree that he has too much money in his wallet. He may bluntly say: "No, sir, inflation is not in my wallet, it is in prices. I can live with an inflated wallet but inflated prices are a problem."

The inflation everyone complains about is price inflation, not money supply inflation. Thinking that treating wallets instead of treating prices will solve inflation is incorrect.

The compensated reduction of prices

Since inflation is found in prices, it is prices which need a remedy. Does this mean that prices should be fixed by government decree? Not at all. Prices are the domain of producers, middlemen and merchants, not governments.

How can reducing prices be done without financially punishing producers who have a right to be compensated for their costs which must also include a legitimate profit?

Major C. H. Douglas, the Scotsman who founded Social Credit, developed a solution. An engineer, he studied the issue from every angle without regard to useless formulae advanced by mainstream economists. It was more than a century ago that he solved the problem of inflation. Had his proposal been adopted we would not be floundering without an apparent solution to inflation. Nor, for that matter, would we be afflicted with a great deal of other economic nonsense whose only effect is to cause misery.

What is his proposal? It consists of establishing two prices: the accounting price and the discounted "compensated price". The purchaser pays the second price while the merchant/producer receives the accounting price.

A system of two prices is not something new. Everyone is familiar with sales, such as when the regular price of an item is $80.00 but the sale price is $64.00. We can look at the regular price of $80.00 as the accounting price. The sale price of $64.00 is the discounted price. In this case, the discount is $16.00, or 20% of the accounting price.

The method proposed by Social Credit, also known as Economic Democracy, makes use of the double price system. The practice is refined in that the discount would be applied to all goods. The percentage discount would be the same for all consumers and the merchant would be compensated for the total discounted amount. In other words, the seller gets the accounting price while the buyer pays only the discounted price.

This general discount — which we call the compensated discount or the national discount — would vary according to the state of the nation's economic health.

The question now arises: by whom and how is the seller to be compensated for the discount if he is to realize the accounting price? Also, how can this be done without causing inflation?

A monetary branch of government

The compensation to the merchant would be the function of an independent monetary branch of government which would determine the discount mathematically, according to the figures compiled regarding production and consumption. The branch of government would be independent of the political system and private interests, much like are the courts, where judges are appointed by the government and render judgements according to laws which they have not legislated and according to evidence established by facts of which they are not authors.

In Canada, the monetary branch could be the Bank of Canada or the chartered banks.

Upon presentation of sales receipts demonstrating the total discount favouring customers, the monetary branch would give the total amount discounted to the merchant. This can be seen as the reverse of the sales tax, where a merchant takes money from a customer and forwards it to the government.

Credits granted to merchants would be based on the same foundation as are the credits created and loaned to borrowers by the banks, namely, the capacity of the country to produce. The capacity to produce represents the wealth of a nation. It is not a capacity owned by bankers but by a nation and its population.

Capacity is without value if there is no financial credit to make it available to society. The best proof of this fact is that restrictions result in a decrease in production. The potential financial credit which is made realizable (but not yet realized) by the productive capacity of the country represents the difference between the total productive capacity of the country and the total capacity to pay possessed by the population.

The compensations proposed for the discounted price are not large enough to cover all this difference since they are measured not according to the total productive capacity of the country but only according to production already realised and offered to the consumer. But what about inflation? Will not all these credits, freely distributed, tend to aggravate rather than subdue inflation?

It is a common error to describe every increase of the money supply as inflationary. Inflation can occur when issuing money results in an increase in prices. This happens when credit is issued in the form of interest-bearing loans; the interest is the factor that is inflationary. However, issuing credit with the provision that prices will be lowered is deflationary, not the opposite.

An economy cannot have both inflation and deflation at the same time. Credits which are issued to deflate prices cannot at the same time inflate them.

Another objection to this scheme is that the wholesaler could increase his accounting price since he is certain of gain, thanks to the discount. However, competition will continue to play its role in the matter of price as it does with quality. The buyer will have a choice where to spend his money, and pricing will be a consideration. If the consumer does not purchase from a particular producer, there will be no compensated discount for the customer, and so, no compensation to the producer or merchant.

Secondly, an increase in purchasing power to the consumer will not pass through the production system to impact prices. The difficulty in understanding this resides precisely in the fact that today all money entering into circulation must pass through industry and hence must appear in the accounting price.

Thirdly; If, in spite of competition, there should arise abuses in certain places, there is nothing to prevent the national monetary branch from developing regulations to address the problem. Since the system's design favours both the merchant and the buyer, there could be limits placed on what constitutes a reasonable profit when establishing the accounting price. A possible sanction could be the loss of the privilege of the discount, which would have the effect of branding those firms guilty in the eyes of the buying public.