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Douglas's Three Proposals

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

What are Douglas’ three proposals?

Clifford Hugh DouglasClifford Hugh Douglas

Douglas set forth his three proposals at Swanwick, in 1924, before the MacMillan Committee in May 1930 and in a lecture given at Caxton Hall, London, in October 1930. He also published them in some of his writings, including in “The Monopoly of Credit”.

The first of these proposals refers to the financing of consumption by an adjustment between purchasing power and prices:

“The cash credits of the population of any country shall at any moment be collectively equal to the collective cash prices for consumable goods for sale in that country, and such cash credits shall be cancelled on the purchase of goods for consumption.”

Douglas did not change the wording of this proposal: it remained as written in 1924 and in 1930. In this proposal, the Means of Payment, that is the cash money or scrip money found in the consumer’s hands, are called Cash Credits. The term Credits is used to denote the financing of production.

The difference between the two types of credit is that the money in the consumer’s hands is theirs. It is purchasing power for the purchase of products of their own choosing. However, the Credits issued to producers are advances that the producer must pay back when his products are sold.

We have translated “Cash Credits” to “Means of Payment” rather than to “purchasing power” because purchasing power does not depend only on the amount of money in the consumer’s hands but also on retail prices. With ten dollars in Means of Payment, one can obtain ten pairs of socks if the socks sell for one dollar a pair. However, if the socks sell for two dollars a pair, one will only be able to purchase five pairs with the same ten dollars. It is understood that purchasing power decreases as prices rise even if the money available is the same.

These Cash Credits could also be called “consumer money”. The individual with consumer money can obtain consumable goods. It is a different matter with Credits used for production since these will be used by the borrower to produce goods that he must sell in order to return this Credit to its source.

What is the goal of the first proposal set forth by Douglas?

The goal of this proposal is to achieve what can be called perfect purchasing power by establishing an equilibrium between the prices to be paid by buyers and the money in buyers’ hands.

Social Credit makes a distinction between the “cost price” and the “cash price” to be paid by the buyer. The buyer would not have to pay the entire cost price, but only the price that corresponds to the Means of Payment, i.e. the Cash Credits in the population’s hands.

The cost price must always be recovered if the producer wishes to remain in business. But the price to be paid must be adjusted to the Means of Payment in the consumer’s hands if we want production to reach its goal which is the consumption of goods.

How can this twofold condition be met?

Through a “Price Adjustment” mechanism. An adjustment does not fix prices. Establishing cost prices is a matter for producers. They are the ones who know how much the production has cost them.

The proposed Price Adjustment would consist of a coefficient applied to all retail prices. This coefficient would be calculated on a regular basis according to the ratio of total consumption to total production for a specified period.

For example, during the period that is now ending, if the country’s total production was $40 billion, and total consumption was $30 billion, it can be determined that, whatever the value of the total cost prices, the $40 billion production has cost the country $30 billion. Therefore, $30 billion is the real cost of the total $40 billion production. And if the producers must recover $40 billion, the consumers must pay only $30 billion. The producers must receive the remaining $10 billion through another means and not through the buyers. A Price Adjustment is the monetary mechanism that would remedy this situation.

In this case, a coefficient of 3/4 would be applied to all retail prices. The cost prices would be multiplied by this coefficient and the buyer would therefore pay only 75 percent of the cost price.

In other words, a general discount of 25 percent would be applied on all retail prices for the length of the new term. At the end of each term the general discount rate would be determined by calculating the ratio of consumption to production. This brings us as close as possible to a perfect purchasing power.

This operation is sometimes called a compensated price or a “Compensated Discount” because the money the retailer does not receive from the buyer, because of the discount, he will later receive from the national Credit Office. This compensation allows the retailer to recover all of his costs. No one loses. Producers, retailers and consumers profit because products reach who they are meant to reach more efficiently.

Why do you say that this would lead to the perfect purchasing power?

Because it sets at one to one the ratio between the Means of Payment and prices. In the example given above this ratio was 3/4. We could only afford to pay 3/4 of the production. After the Price Adjustment the ratio becomes one to one. The entire production can now be afforded. This allows production to reach its goal since products are made for consumption.

This is perfect, since it is fair that the population pay only the “just price” which is the true cost of its production. It is Douglas who gave ‘just price’ a definition sought after by generations of sociologists. He formulated it in the following way: “The true cost of production is consumption.” This fact is entirely ignored in Economics’ textbooks.

Methods for the adjustment of prices may vary but they must seek to attain this perfection and do so with a minimum of operations. In comparison, this would be much simpler than calculating the return owed to each member of a consumer co-op, and better results would follow.

And what is Douglas’ second proposal?

Douglas’ second proposal relates to the financing of production. It was expressed as follows at Swanwick, and before the MacMillan Committee:

“The credits required to finance production shall be supplied not from savings, but be new credits relating to new production.”

At Caxton Hall, in October 1930, Douglas modified the end of his statement to:

“new credits relating to production.”

He no longer says “new production”, but only “production”, since both expressions mean the same. As products are being made it will be new production that will maintain the level of goods flowing to consumers.

Some people have wrongly interpreted this proposal as though it applied only to an increase in the volume of production. This is certainly not the case when viewed in the context of all three proposals. Douglas adds:

“And these credits shall be recalled only in ratio of general depreciation to general appreciation”.

Present financial system became instrument of enslavement

Why finance production with new credits and not with savings? Because savings come from money that was distributed in relation to a production made in the past. This money was included in the costs of the former production. If this money is not used to buy the earlier production the gap between the Means of Payment and prices will grow.

It can be argued that the savings used to finance new production, through investments or other means, will be returned into circulation as purchasing power. This is true, but only as an expense made by the producer and thus it creates a new price. The same amount of money cannot be used to simultaneously pay the price that corresponds to a former production and the price that corresponds to a new production.

The money saved above is returned to consumers and it creates a new price without cancelling the previous one.

This does not mean that one who saves is wrong in investing his money for the expansion of production. One is perfectly free to do what he pleases with his money. But the subtraction to overall purchasing power made by savings must be compensated in one way or another by an equivalent amount of money placed into the consumer’s hands. This can be accomplished through the social Dividend or through an increase in the Compensated Discount. Once this is done the effect on purchasing power will be the same as if the production had been financed directly with new Credits. These newly created Credits would replace the savings that were diverted from purchasing power.

The present system does not make this adjustment. It insists that financing be achieved through savings without heeding the resulting deficit in purchasing power. This is one reason for the gap found between the consumer’s Means of Payment and the prices of goods.

And what is Douglas’ third proposal?

The third proposal introduces a new component to purchasing power. This is the distribution of a Dividend to everyone whether employed in production or not. It is therefore a component of purchasing power that leaves no one without Means of Payment.

It is recognized that everyone has a right to a share of production as co-capitalists and co-heirs of what is the largest factor in modern production. This factor is the benefit resulting from progress that was acquired, increased and shared from one generation to the next and as co-owners of God’s given natural resources.

The Dividend is also a means to maintain the flow of purchasing power relative to the flow of production since production will increasingly require fewer workers. This would be the solution to today’s biggest headache which leaves economists with their arms raised to the sky and which leaves governments dumbfounded before the failures of full employment policies. Today, the pursuit of full employment is pure nonsense. Progress inevitably results in employee lay offs. In Douglas’ words:

“The distribution of cash to individuals shall be progressively less dependent upon employment. That is to say that the dividend shall progressively displace wages and salaries.”

This would occur over time as productivity increases per man-hour as Douglas explained elsewhere. This is perfectly in keeping with reality since it takes into account the part played by work and the part played by progress in the course of production.

Progress, a collective good, becomes an increasingly important factor of production while human labour becomes decreasingly important. This reality must be reflected in the distribution of incomes, through a Dividend to everyone on the one hand and through a reward for employment on the other.

We will return to this question later when the periodic Dividend to each citizen will be discussed.

Does this mean the complete overthrow of the methods used for financing production and of the methods used for the distribution of the claims to production?

Above all, it is a change in the way we view the role of the economic system, returning it to its legitimate goal. This goal would then be supported by appropriate means. The time has come to return the “goals and means” to their correct positions. The time has come for monetary reform.

This seems to imply that money, or Financial Credit, can appear at the snap of a finger to finance production and consumption!

Certainly. The monetary system is essentially an accounting system. Are the accountants short of figures to count, add, subtract, multiply, divide or to calculate percentages?

Besides, facts show that money is only a matter of figures. Those who control credit can make figures appear or disappear according to their whim. All they need is a book and a pen.

In a lecture he gave at Westminster on March 7, 1936, Douglas told his Social Credit audience:

“We, Social Crediters, say that the monetary system at present does not reflect facts. The opposition says it does. Well, I put it to your common-sense, how was it that a world which was apparently almost feverishly prosperous in 1929 — or alleged to be so, judged by orthodox standards — and certainly capable of producing tremendous quantities of goods and services and distributing a considerable proportion of them, could be so impoverished by 1930, and so changed fundamentally that conditions were reversed and the world was wretchedly poor? Is it reasonable to suppose that between a single date in October, 1929, and a few months later, the world would change from a rich one to a poor one? Of course it is not.”

Douglas made this comment three and one half years before World War II broke out. Once war was declared everyone could ask himself a question of the same nature but in reverse: how is it that after lacking money for ten years they found overnight all the money that was needed for a war that lasted six years and which cost billions?

A single answer applies to both questions. The monetary system is only a matter of accounting and all it requires are figures that bear a legal seal.

If money is lacking to answer basic needs when production can readily be made, and if there is no shortage of money when producers are enlisted for war, it is because the present monetary system imposes arbitrary limitations instead of reflecting facts.

 

Douglas’ Three Proposals

  1. The cash credits of the population of any country shall at any moment be collectively equal to the collective cash prices for consumable goods for sale in that country, and such cash credits shall be cancelled on the purchase of goods for consumption.

  2. The credits required to finance production shall be supplied not from savings, but be new credits relating to new production, and shall be recalled only in ratio of general depreciation to general appreciation.

  3. The distribution of cash to individuals shall be progressively less dependent upon employment. That is to say that the dividend shall progressively displace the wage and salary, as productive capacity increases per man-hour.

 

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