Where do we find this enemy? Everyone today is complaining of inflation, and with good reason. Governments, citizens, producers and consumers, all are in accord on this one fact, that inflation is the major ailment of our existing economy. It chokes off the flow of goods on the domestic market; it places exporters at a disadvantage with regards to competitors who can offer their products at a reduced price; it reduces the amount of goods a family can buy because of ever-mounting prices, it is a cause of unemployment because of products which will not sell.
So it is obvious that some sort of a fight must be put up against inflation. Very good! But then where do we find the enemy and how do we recognize him?
The word inflation means a swelling up, a puffing out. So it shouldn't be hard to recognize since by its definition it is a swelling, a distension.
Just where is this swelling, this distension? In the pocket book or in prices?
I hardly think we shall find anyone complaining about having too much money in his pocket or in his account at the bank. But get anyone to talk about prices and you will soon find out just where this swelling, this distension is occuring. The unions especially have based their case for demanding increased wages mainly on the inflation of prices. So most everyone has a pretty fair idea of where this inflation is taking place.
Let's have that established once and for all: our worst economic enemy, inflation, is in prices and not in our pocketbooks.
But now we find a very strange situation has arisen. All the great savants, all the big names in the spheres of economics and politics are unanimous in declaring that the one way in which to banish inflation is to deflate our pocketbooks! Our poor wallets which are already pitifully thin must be diminished even more, while prices which are swelling and swelling at an increasing speed aren't even brought into the picture.
The banks, joining in this grand concert — in fact, they are conducting it — practice the restriction of credit, giving as their reason for doing so, that they are combatting inflation. Restriction of credit exercised against the production side of our economy has for its effect to diminish production; but it has no effect on prices. Quite the contrary, in fact, it is when products are scarce that prices tend to increase.
Restriction of credit is always accompanied by an increase in the rates of interest charged to those who would borrow, or who succeed in obtaining loans. Now, obviously, an increase in interest rates certainly isn't going to help prices take a downward trend. Again, the contrary is true; producers must of necessity, include in their prices all their financial charges, and this will include the increased rate of interest which they are obliged to pay. Higher interest rates make for higher prices.
The high-browed savants sitting in their ivory towers in the universities or on the councils of the financiers recommend the increase of taxes as a means of fighting inflation. In fact, at this very time, the question of increasing taxes towards this end is being seriously studied in government circles at Ottawa. And what will an increase in taxation achieve? The taxes paid by producers are included in the prices they charge the consumer. Increase taxes and you are bound to increase prices. Again this is only too painfully clear to anyone who is not befuddled by all the technical jargon which these savants employ in order to mask the true effect that their plans and schemes will have. As for the taxes which are paid by the consuming public, these simply reduce still more the contents of the consumer's purse. They have no effect on the prices, where the real inflation exists.
Now, since inflation is to be found in prices, it is prices which must be treated. There the remedy must be applied and not elsewhere.
Does this mean that prices must be fixed by government decree? By no means. Prices pertain to producers, to the middlemen, to the merchants.
So much for that. Now, what about getting prices down? How can this be done without hurting, financially those who have a right to regain what they have spent in costs, along with a just and legitimate profit?
Major Douglas, the Scotsman who founded the Social Credit school, studied this question, deeply and came up with a very concrete and logical proposition. Douglas, a very hard-headed and down-to-earth engineer, studied the question from every angle, looking at the problem, as it were, from the viewpoint of an engineer, disregarding the flummery of all the old and usless formulas which scholastic economists love to hold up to the public. That was 41 years ago. Had his proposal been adopted at that time we should not today be floundering about in seemingly incurable, and growing inflation; nor for that matter, would we be afflicted with a great deal of other economic nonsense whose only effect is to cause misery to incalculable multitudes.
What is this proposal of Social Credit? It consists of establishing two prices:
1) the accounting price;
2) the discounted and compensated price.
The purchaser pays only the second.
The introduction of a double price would not be something new. Everyone at one time or another has seen this price ticket; "Regular price $80.00; special price for this sale — $64.00.". The regular price of $80.00 is the accounting price. The special sale price of $64.00 is the discounted price. So the discount is here $16.00, or 20% of the accounting price.
Well, the method proposed by Social Credit also makes use of the double price, but this practice is carried to refinement and perfection in that the discount will be general; that it will be applied to all products, that, the percentage will be the same for all, and that the merchant will be compensated for the discount. In other words, the seller gets the accounting price while the buyer pays only the discounted price.
This general discount — which is usually callced by Crediters, "the national discount" — would vary according to the state of the nation's economic health, but it would apply, without distinction, to every retail house or organization.
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? And - how can this be done without causing inflation?
Let us state right off, that the setting of a discount rate for the country, and the compensation of the retailer will be the function of şome monetary organization established by the government, but free of government intervention in the exercise of its functions, it would determine the rate of discount mathematically, according to the statistics compiled on production and consumption; in other words, without any interference from politicians or private interests. It would operate, in principle, somewhat after the fashion of our courts, where judges, appointed by the government, render judgements according to laws which they have not legislated, according to the proofs established by facts, of which they are not authors.
This monetary organization could very easily be the Bank of Canada adapted to this end, or the chartered banks acting as the agents of society.
Upon the presentation of sales slips showing the discount granted the customers, the organization would grant to the merchant the total amount of the discount. This is just the reverse of the sales tax, where the merchant takes the money from the customer and gives it to the government.
These credits granted to merchants would be based upon the same foundation as are the credits created and loaned to borrowers by the banks, namely, the capacity of the country to produces, which capacity is national wealth and not something owned by the banks. It is a base without which all the money in the world would be worth exactly nothing; but it is itself of value to no one as long as there is no financial credit to make it available to society. And the best proof of this is that restriction of credit decreases production.
Now, 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 far from 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?
You cannot have inflation and deflation at one and the same time in the same medium.
Credits which are issued to deflate prices cannot at the same time inflate them.
It is a common error to call every increase of the amount of money in circulation, inflation. You can have inflation when the issuing of credits or money brings with it an increase in prices. This happens when the issuance of credit is in the form of interest-laden loans by the chartered banks; the interest is the factor causing inflation. But an issuance of a credit which is made upon condition that prices be lowered is not a factor involving inflation, but deflation.
Another objection: Is the wholesaler not likely to increase his accounting price since he is sure of getting it back thanks to the discount, which of course, will be greater?
In the first place, competition will continue to play its role in the matter of price as well as of quality. The buyer isn't going there where the prices are higher. And if there is no sale of goods, there is no discount and no compensation.
Secondly, an increase in purchasing power, which in this fashion reaches the consumer without having passed through production, does not in any way affect the price which must go back to the manufacturer or producer. Why should the price go up? The difficulty in understanding this resides precisely in the fact that today, all money entering into circulation must pass through industry, hence must appear in the price, the accounting price.
Thirdly; If, in spite of competition, there should arise abuses in certain places, there is nothing to prevent the inserting of protective clauses in the procedure. This compensation is instituted to favor society, the merchant as well as the buyer. Society, therefore can demand that the beneficiaries of the compensated discount should retrict themselves to a reasonable profit in establishing the accounting price. The sanction could be the loss of the privilege of the discount, which would have the effect of branding those guilty, in the eyes of the buying public.