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Douglas's Three Propositions

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

— What are Douglas's three propositions?

Clifford Hugh DouglasClifford Hugh Douglas

Douglas publicly set forth these three propositions on three occasions: at Swanwick, in 1924; before the MacMillan Committee, in May 1930; and in a lecture given at Caxton Hall, London, in October 1930. And he published them in some of his writings, among them, The Monopoly of Credit.

The first of these propositions relates to the financing of consumption, by an adjustment between the 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 or depreciated only on the purchase or depreciation of goods for consumption.

Douglas did not change anything to the wording of this proposition: It was the same in 1930 as in 1924. In this proposition, the means of payment, that is to say the cash money or script money found in the consumers’ hands, are called “cash credits”. While the single word "credits" is used when he speaks about the financing of production.

The difference between the two types of credit, resides in the fact that the money in the consumers’ hands is theirs: it is purchasing power to be used as they please in obtaining products of their own choosing. While the credits issued to producers are advances that the producer must pay back when his products have been sold.

We have translated "cash credits" by “means of purchase” rather than by “purchasing power” because purchasing power does not depend only on the amount of money in the consumer's hands but also on the prices in front of this money. With ten dollars in means of purchase, you can obtain 10 pair of socks if the socks sell for one dollar a pair; but if the socks sell for two dollars a pair, you will only be able to get five pair of socks with the same amount of ten dollars. It is well known that purchasing power decreases as prices rise, even if the money in hand is the same.

These "cash credits" could also be called “consumer money”. The individual who has these in hand can effectively use them to obtain consumable goods. It is a different matter with credits used for production since these have to be used by the borrower to produce goods that he will need to sell so as to be able to return this credit to its source.

— What is the goal of this first proposition set forth by Douglas?

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

Social Credit makes a distinction between the cost price and the price to be paid by the buyer (cash price). The buyer would not have to pay the entire cost price, but only this price brought to the level that corresponds to the means of payment, i.e. the cash credits in the population's hands.

The cost price must always be recovered by the producer if he wishes to remain in business. But the price to be paid must be adjusted to the level of the means of payment in the consumers' hands, if we want production to reach its end, which is the consumption of goods.

— How can this twofold condition be met?

Through a price-adjustment mechanism. An adjustment, and not a fixing of prices: Establishing cost prices is a matter for producers. They are the ones who know how much the production hast cost them.

The proposed adjustment would consist of a coefficient that would be applied to all retail prices. This coefficient would be calculated on a regular basis (every three or six months, for example), according to the ratio of total consumption to total production for the period ending.

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 ascertained that, whatever the cost prices may have been, 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 only pay $30 billion. The producers must be provided with the $10 billion that is missing through another channel, but not through the buyers. The monetary mechanism would see to this.

In this case, a coefficient of 3/4 will be applied to all retail prices: The cost prices will be multiplied by this coefficient, by 3/4 or 0.75. The buyer will therefore pay only 75 percent of the cost price.

In other words, a general discount of 25 percent (the opposite of a sales tax) will be decreed on all retail prices for the length of the new term. At the end of each term, the general discount rate is thus calculated by taking into account the statistics of consumption in relation to the statistics of production of the period ending. This brings us as near as possible to the 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 out. Everyone profits by the products flowing more readily towards their corresponding needs.

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

Because it sets at 1:1 the ratio between the means of payment and the 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 1/1. We can now afford to pay for the whole production. This allows production to reach its end: Products are made to be consumed.

Perfect, since it is fair that the population be made to pay only the "just price", the true cost of its production. It is Douglas who gave the words “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 truth is totally ignored by Economic textbooks.

Modalities for the adjustment of prices may vary, but they must seek to attain this perfection and do so with a minimum of operations. By comparison, this would be a lot simpler than figuring the return owed to each member of a consumer coop. And it would give way better results.

— And what is Douglas's second proposition?

Douglas's second proposition relates to the financing of production. It was expressed as follows, by its author, 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 are synonymous: As production is being made, it is new production that will maintain the flow of production to be drawn upon by consumers.

Some people have wrongly interpreted this proposition as though applying only to an increase in the volume of production, which is certainly not the case when viewed in the context of all three propositions.

Douglas adds:

And these credits shall be recalled only in ratio of general depreciation to general appreciation, general enrichment.

Why finance production in this way, with new credits and not with savings? Because savings come from money that has been distributed in relation to a production that has been made in the past. And this money has been included into the production costs of this former production. If this money is not used to buy that 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. It is true, but as an expense made by the producer, thus creating a new price. The same amount of money cannot be used to pay simultaneously the price that corresponds to a former production and the price that corresponds to a new production.

Each time money saved is thus returned to the consumers, it creates a new price, without having cancelled a former price that was left without its corresponding purchasing power at the time this money became savings.

Let us clarify this point by using an example:

Take a worker who earns $500 a week. From this amount, he draws $50 to buy shares in an enterprise which is building a new factory.

The $500 in wages have surely been included in the cost of the goods made by this worker. But in front of this price, $500, there remains only $450 of purchasing power.

The building of the factory will convert the $50 back into purchasing power through the wages distributed to the construction workers. But the goods that will come out of the new factory will have to include this $50 in their prices. The $50, which has once again become purchasing power, cannot buy the $50 price of the former and the $50 price of the new production simultaneously.

This does not mean that the one who saves is wrong in investing his money for the expansion of production. He is perfectly free to do what he pleases with the money he owns. But the subtraction to the overall purchasing power made by savings, must be compensated in one way or the other by an equivalent amount of money to be placed into the consumers' hands (through the social dividend or through an increase in the compensated discount). Once this is done, the effect on the purchasing power will be the same as if the production had been financed directly with new credits, since these newly created credits would replace the savings that were diverted from the purchasing power.

The present system does not make this adjustment. It insists that financing be done through savings, without paying any attention to the deficit in purchasing power. This is not the only cause, but one of the causes, for the gap found between the consumers' means of payment and the prices of goods.

— And what of Douglas's third financial proposition?

The third proposition introduces a new component to purchasing power: the distribution of a dividend to all, whether employed or not in production. It is therefore a component of purchasing power that leaves no one without some means of payment.

It is recognized that everyone has a right to a share of production, as co-capitalists, as coheirs of the largest factor in modern production, that is, the progress acquired, increased and transmitted from one generation to the next and as co-owners of God's given natural resources.

It is also a means to maintain the flow of purchasing power relative to the flow of production, since production will increasingly do without the need for 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 non-success of their full-employment policy. The pursuit of full employment is pure nonsense, hard to explain on the part of intelligent beings, when progress applies itself inexorably at laying off employees, at freeing production from the need of workers.

In Douglas's own 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.

Progressively, as productivity increases per man-hour, as Douglas said elsewhere. This is perfectly in keeping with reality since it takes into account the part that is played by work, and the part played by progress in the course of production.

Progress — a collective good — becomes more and more important as a factor of production, and human labour becomes less and less 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?

It is above all, and much more simply, a change in philosophy, in the conception of the role of the economic and financial systems, leading them back to their own end, an end that would be supported by appropriate means. The time has come to return the ends and the means to their proper places. The time has come for perversion to give way to monetary reform.

—But this seems to imply that money, or financial credit, can come at the snap of a finger, at once, to finance production and consumption!

Certainly. The monetary system is essentially an accounting system. Are the accountants short of figures to count, to add, subtract, multiply, divide, to make rules of three and to express percentages?

Besides, facts show that money is only a matter of figures. Figures that the monopolists of the system can cause to appear or disappear according to their whim. All they need is a book, a pen and a few drops of ink.

In a lecture he gave at Westminster on March 7, 1936, C.H. Douglas told his audience — a 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 a half years before World War II broke out. Once war was declared, everyone could ask himself a question of the same nature as Douglas's, but in reverse:

— How is it that after lacking money for ten year, all of a sudden 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. Therefore, if, in front of an enormous productive capacity, money is lacking for the satisfaction of normal human needs, and if money becomes plentiful when the producers and the means of production are commandeered for battlefields and for war production, it is because the present monetary system imposes arbitrary decisions instead of reflecting the facts that result from actions carried out by free entrepreneurs and by free consumers.

Douglas's three propositions

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.

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.

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.

 

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