Social Credit and the A + B Theorem

Mr. Victor J. Bridger is a long-standing Social Crediter of Australia, who came to our Congress in Rougemont in September, 2004. In the September/October 2004 issue of his publication, The Australian Social Crediter, Mr. Bridger wrote the following article:  "Social Credit and the A + B Theorem"

The A + B Theorem is not the totality of Social Credit. Many critics believe that if they can disprove the Theorem then Social Credit is totally wrong. Apart from the fact they cannot prove it wrong, it is only one part of the Social Credit concept. It is simply a means whereby C.H. Douglas's analysis of the existing financial accounting system demonstrates the flaw in the system and explains how the financial current continues with this inherent flaw. It continues through the increasing necessity for bank lending with the obvious result of increased debt.

The A + B Theorem

Major Douglas'statement of his theorem is as follows:

"A factory or other productive organisation has, besides its economic function as a producer of goods, a financial aspect - it may be regarded on the one hand as a device for the distribution of purchasing power to individuals, through the media of wages, salaries and dividends; and on the other hand as a manufactory of prices financial values. From this standpoint its payments may be divided into two groups:

Group A. — All payments made to individuals (wages, salaries, and dividends).

Group B. — All payments made to other organisations (raw materials, plant, repayment of bank loans, and other non-personal costs).

Now the rate of flow of purchasing power to individuals is represented by A, but since all payments go into prices, the rate of flow of prices cannot be less than A + B. Since A will not purchase A + B a proportion of the product at least equivalent to B must be distributed by a form of purchasing power, which is not comprised in the description grouped under A."

"The above proposition," he says, "is perhaps most simply grasped by recognizing that the B payments may be considered in the light of a repayment of a bank loan by all the concerns to whom they are made, with the result involved in the relationship previously discussed between bank deposits and bank loans." (The relationship referred to is the cancellation or "destroying" of a bank deposit upon the repayment of a bank loan, and so the passing out of existence of so much money.)

Two important things should be noted in this statement.

1. The expression "rate of flow," which signifies a dynamic or continuous state. This idea can best be grasped by imagining the industrial system as a huge tank from which issues two streams. One representing the flow of A costs or payments; the other the flow of B costs or payments. The two streams flow concurrently and together represent the rate at which prices or costs are generated by the industrial system, while the "A" stream alone represents the rate at which purchasing power is distributed. And in these circumstances this relation between costs and purchasing power must obtain over any period of time, or at any point of time considered.

2. Major Douglas does not say that the total goods produced are not sold, but that a portion at least equal to "B" must be sold by a form of purchasing power other than that comprised in "A." He has stated:

"The wages, salaries and dividends distributed during a given period do not, and cannot, buy the production of that period; that production can only be bought, i.e., distributed, under present conditions, by a draft, and an increasing draft, on the purchasing power distributed in respect of future production, and this latter is mainly and increasingly derived from financial credit created by the banks."

One argument to this proposition is, that the B payments "ultimately" become purchasing power, and consequently the apparent deficiency is made up. We shall presently consider what is meant by the term "ultimately" and, if our interpretation be correct, what the statement implies.

Repayment of bank loans

Practically the whole of industry is carried on by bank credit, which means that as each concern receives payment for its product (which payment constitutes the B payment of the next industry in the chain or process), it must of necessity use that money to repay its bank loan contracted in the production of the goods, and thereupon the money is "destroyed." How, then, can it possibly function as purchasing power? It is true that the B payments of any industry may have represented income or purchasing power at some time in the past, but the money had to be spent by the recipients in order to live and, therefore, would be used in the repayment of the loan incurred in the production of the goods which it purchased. Hence, with the exception of the negligible portion which may be saved, that money can in no sense be regarded as purchasing power "now."

This answer in itself should be sufficient to prove the fallacy of the claim that B payments are also effective purchasing power, for it will be obvious not only that they represent "A" payments of the past or expended purchasing power, and therefore cannot represent "income" again in that production; but also that they are in fact simply payments passing between industries on their way back to the banking system for cancellation, and at no stage appear "outside" of industry as income and purchasing power. If we imagine this flow of B payments to go on every day, week and year, flowing constantly and concurrently with the flow of A payments, the one flow of money, however, going backward to the banking system for cancellation, while the other flow goes forward to consumers as purchasing power, it seems indisputable that the A payments as the flow of purchasing power can never equal the two flows of costs represented by A + B.

Do B's Become A's?

Now what is meant by the term "ultimately"? Does it mean that the sum of money received by the producer of raw materials or machines in payment for his goods is available entirely for expenditure on his personal needs as a consumer? In that event we should have to suppose that such producers contracted no loans, paid no wages or salaries, drew no incomes themselves, and made no purchases at all - in short, that they lived on air - until the goods were marketed and payment received, which may be months, and in some cases years.

Actually the producer or manufacturer pay wages and salaries and draws an income himself as wages of management, at the time of production, and to allege that he and his

employees will again receive a similar sum on the sale of the produce — excepting that accruing as "profit" — is to claim that producers are paid twice over for their work! The usual practice is for a producer or manufacturer to borrow from a bank or expend his own capital to carry out production, and the money he receives from the sale of his product is used to repay his loan or restore his capital. If instead he were to use the proceeds of sales for personal expenditure it would mean, therefore, that he did not repay his bank loan, or that he was living on his capital, and in either case he would very soon cease to function as a producer. It is apparent, then, that if the "B payments" money is to emerge again from the productive system, as the result of a loan from the banking system, it will do so in respect of NEW production and will register a new cost.

From this analysis it would seem that the most generous and the only intelligible meaning to be placed on the use of the term "ultimately" in relation to B payments, is that they will reappear in further production but, on the next occasion, as A payments, and will then function as purchasing power.

Clearly, if the B payments, in any period, do not become purchasing power until "ultimately," that is, at sometime later, then they cannot be regarded as purchasing power NOW, that is, within any period under review, and when the goods are made in which the B payments appear as costs; and that is the claim Major Douglas makes.

Even if it be assumed that what is suggested (that B payments become A payments) does occur, it is no solution of the problem of the disparity between total costs and purchasing power; because the next period, like the previous one, must also have ITS B costs to be accounted into price, which fact again makes prices greater than the A payments distributed as purchasing power. (...)

The idea of the B payments "ultimately" making up the deficiency in purchasing power is entirely groundless. It is proof, too, of the truth of Major Douglas'contention that production can be bought only by a "draft, and an increasing draft on the purchasing power distributed in respect of future production. The simple argument that Bs become As amounts to saying, what everyone knows to be true, that if we go on working we shall get some money to buy some goods; but what everyone wants to know, and what should be demonstrated if it is to disprove the A + B Theorem is, that we already have enough money to buy the goods already produced. In a world overstocked with goods and equipment, it is surely beside the point to say that the solution lies in producing more goods so that the people may be provided with enough money to buy what already exists in abundance. (...)

"The Time Factor"

In criticizing the A+B Theorem the detractors, disregard entirely the time factor in production, and make the assumption that because money was paid out at some time in production, weeks or months before, it must be available NOW as purchasing power – an obviously untenable position. People generally spend their income as they get it, in order to live; and therefore to assume that money received by individual engaged in production, say, six months ago, is now in their hands as purchasing power is the height of absurdity. The mill will never grind with the water that has passed.

In the words of Major Douglas: "Cost is the accumulation of past spendings over an indefinite period, whereas cash price requires a purchasing power effective at the moment of purchase."

Vic Bridger