Ask someone this question: what is purchasing power? Nine times out of ten — if not ten — he will answer: "It's the money you have in your pocket".
Certainly the money in your pocket is for something, but there is more than paper and silver money involved in purchasing power. If purchasing power were identified solely with what money we had in our pockets, the monthly family allowance $6.00 or $8.00 according to the age of the child) would give the mother in 1960 the same purchasing power the same amount brought in 1945. Now any mother will tell you that this just simply isn't the case.
Purchasing power means the ability to buy or purchase. $6.00 might have bought 74 quarts of milk in 1945. $6.00 will only buy you 26 quarts of the same kind of milk in 1960. So purchasing power is not to be confused with the amount of paper or silver money you may have.
Purchasing power might better be equivalated with the amount of groceries you can bring back with you from the store rather than with the amount of money you carry with you to the store.
Furthermore, the woman who goes out shopping considers not only the money she has in her purse but the prices written down on the tags attached to the goods. She estimates the differences between the two to see if she is able or capable of buying. In other words, her purchasing power is determined by the relationship between the amount of money she has and the prices of the goods.
It very often happens that the lady must buy other goods than those which she wanted. What she wanted was there on the shelf waiting to be bought. But one glance at the price tags and a peek into her purse convinced her that she would have to do with another product or a substitute at a lower price. Obviously, in this case she had no choice, and inasmuch as she brings home a certain percentage of goods which are of the nature of being imposed upon her, to that extent it can be said that her purchasing power is limited; she lacks certain purchasing power.
Any valid definition of purchasing power must take this element into consideration. And this is precisely what Douglas, the great founder of Social Credit, a man always exact in his statements, was able to do. In his first book on this subject (Economic Democracy; page 61) he wrote:
"Purchasing power is the quantity of goods, of the desired description, which one can buy with the money available."
It was Major Douglas himself who emphasised the words: of the desired description. He was well aware that where there is no power to choose we cannot speak of true purchasing "power".
Douglas went on to say: "Purchasing power is clearly a function of price".
If, in effect, you cut the price in two, the same amount of money will purchase twice as much. If you double the price then the same amount of money will only buy half as much, as in the case of family allowances.
The higher prices go the lower the value of money drops. The two are in opposition. The price, then, is the important thing to consider. It must be carefully watched and not only in time of inflation (high cost of living) for the price is always opposed to purchasing power and money; this opposition must be constantly watched, carefully regulated, constantly held in check so that it will not get out of hand.
Any so-called monetary reform which does not take into account the matter of price is bound to be a fiasco. A social regulator of price is as essential as the social control of credit. The monetary propositions set forth by Douglas takes this into account. In fact, it is by exposing this constant divergence between the computation of the prices and the distribution of purchasing power that Douglas begins his criticism of the existing financial system.
Here is how Douglas presents the discord inherent in the accounting of prices. This is not a word for word copy of the master's exposé, but rather the reasoning and deductions of Douglas set down in a manner easy to understand for the reader, while adhering faithfully to the thoughts of the founder of Social Credit.
Every industrial establishment, every organization which produces, carries on three operations at once. It produces goods, which is its economic function. The two other procedures have a financial character; the organization establishes prices and it distributes purchasing power.
The manufacture of the product and the establishing of its price go along together right down the line, from the introduction of the raw material right down to the delivery of the finished product.
The distribution of purchasing power, of money to individuals, is in the form of salaries to employees, commissions to agents, salaries to executives and dividends to shareholders.
But the price of the product includes other elements besides the money thus distributed to individuals. It includes payments for material or intermediate products taxes, bank charges, charges for depreciation, reserves set aside for developments and other contingent items. All such payments, inasmuch as they do not go to individuals, cannot be considered as purchasing power for the consumer.
For purposes of distinction, Douglas denotes that group of payments made to individuals, as A, and the group of payments made for other purposes as, B.
Note well the matter of time: "during the course of production". In expressing a proposition which takes into account, at one and the same time, quantity and time, we make use of the word, "rate", or the word "speed". A sum of money which brings me in $5 in a year has not the same rate as a sum of money bringing me in $5 in six months. A river which pours forth a million cubic feet of water in one day has not the same speed as a river which pours forth the same amount in one hour. The results are certainly not the same.
Douglas, being an engineer, considered quantity relative to time and made use of the term "rate" in setting forth his theorem which is known as, the A + B theorem:
The rate of distribution of purchasing power to individuals is represented by A. But, since all payments must enter into the price, the rate of the establishment of prices cannot be less than A + B.
It is evident that A cannot buy A + B. In order that all production can be bought by consumers it is necessary that a proportion of this production, equivalent at least to B, be distributed through another form of purchasing power not included in the group A.
This last sentence simply states that there must be another form of purchasing power besides that of salaries or dividends to shareholders, commissions to agents if the population is effectively to make demand upon the products of its industry.
The conclusion of Douglas is born out by facts. Without having gone into the matter of A or B or A + B, everyone knows very well that the purchasing power of the people is not sufficient to buy up all the products placed before it. Consumer goods are accumulating to the point where they are causing unemployment or at least a cut-back in production by producers, and the perpetuating of public debts at every level, proving beyond all doubt that the purchasing power distributed by industry and producers of all sorts is quite incapable of liquidating the price tags placed on production of all sorts.
Nevertheless, orthodox economists recoil before this assertion of Douglas. For them, according to their text books and all they have ever been taught, production automatically finances consumption. In other words, production always distributes to the consumer all the money that goes into the price. Stuart Chase, for example, one of our orthodox economists, says that the act of producing always liberates enough money to buy the product, and thus the economic balance is kept.
These economists are excessively obstinate in the face of facts. They talk to us of economic balance when the greatest economic problem of every producing country is to find some means of keeping its products flowing!
The most renowned economist of our times, the Englishman, Keynes, summed up the orthodox theory in a statement which in fact does little more than beg the question:
"Let X be the cost of production for all producers. Then, X will also be equal to the public revenues."
This statement has the effect of seeming to demonstrate something, by affirming it without in anyway proving it.
In a attempt to overthrow Douglas' theorem, the duly licensed economist says that, sooner or later, B payments will become A payments; that what it paid today for intermediate products and materials, finishes by reaching those individuals engaged in producing these products and materials; that the reserves set aside for interest charges, for depreciation will some day be employed in replacing equipment, repairing the factory, and that as a result, all these payments will sooner or later reach the individuals engaged in these various works; and so forth and so on.
It is precisely the sooner or later which makes all the difference and which causes the upset in the balance. Precisely because it is sooner or later, it is not now at the present moment, that there is this disparity between the price and the purchasing power meant to distribute it.
A similar line of reasoning might go like this: "All men who are born die, sooner or later. Thus deaths liquidate births. So the population of the world neither increases nor decreases. It is in balance!"
The price itself is neither sooner or later. It's right here in the present, going right along with the products produced. But not so with the purchasing power. It does not go along with the price — rarely in quantity and never in matter of time.
If the system has not heretofore fallen apart, it is because the B part of the price which finds no counterpart in the issuance of purchasing power to the consumer, at the time of the issuance of production, is made up, at least in part, by money coming from another source: loans, instalment buying, export credits, etc. — not to speak of bankruptcy which liquidates whatever an inadequate purchasing power cannot liquidate.
All of this patching up corrects nothing. It only puts off the day of reckoning in trying to buy up todays production with the money spent on expansion and which will appear on the price of tomorrow's production although the actual money will not be there to pay for it; or by mortgaging by time payments the purchasing power of tomorrow to buy the production of today. Or, again, another favorite bit of jinks — making the people produce goods they'll never be able to acquire in order that they may buy up the products which they are allowed.
The complete solution, the perfect solution, the solution which is anti-inflationary, would be the application of a price regulator, already proposed by Douglas; an adjustment and compensation of the price, at the time and the place where the consumer buys the product. We have spoken of this before and we shall come back to it again.