The cost of living — The “just price”

When we say that “living is dear”, we merely wish to say that the cost of goods and services is high. And when we talk about the rising cost of living, we say that prices are rising again.

But when we hear the word “inflation”, the normal reaction is to think, not about prices, but about the mass of money. And heads are nodded, and the remark is passed around that there is too much money in circulation, even though practically everyone is complaining about not having enough of it. Nevertheless, the fact remains that, in this case again, it is high prices which cause the discontent. It is prices which are inflated rather than the pocketbooks of the citizenry.

We can say, then, that “the high cost of living” and “inflation” both apply, in reality, to prices. More specifically, they apply to the level of prices in relation to the purchasing power.

Prices, purchasing power, money — and we must add, “taxes” — are terms tied in with the financial aspect of our economic system, and it is precisely in the financial aspect of the economy that we run head on into continual difficulties.

The “production” phase of our economy, that part which places goods and services at the service of our needs, functions very well when it is not hindered by finance. The “distribution” phase, in its physical aspect (transportation, advertizing, sales) operates very satisfactorily, but not so in its financial aspect. When goods and services do not arrive where the needs are, it is not the fault of the physical side of distribution; the fault lies in the fact that there is not sufficient purchasing power where the needs exist.

The important question of prices

The lack of purchasing power is not only a matter of a lack of money. It is determined also by prices. If you need 5 pounds of butter for your family, a ten-dollar bill will get you your 5 pounds when the cost of butter is $2.00 a pound. But if the cost of butter goes up to $2.50 a pound, your ten dollars will constitute for you a lack of purchasing power. You can now buy only 4 pounds of butter.

Major Douglas, the founder of the Social Credit school, stated that any monetary reform which failed to take into account the mechanism of pricing was doomed to failure. He was right! And one of the basic and essential points of the Social Credit system of financial proposals is precisely the scientific adjustment of prices.

The existing financial system contains no provision for the adjustment of prices to be brought to the level of purchasing power. There is also a very obvious contradiction between the operation of production and the application of prices.

With the marvels of modern-day production, goods are pouring forth from the production system in an ever-increasing flood which needs ever fewer human hands to maintain it. It would seem only logical, then, that the prices of these goods should decrease. The easier it becomes to produce this mass of goods, the lower the prices should be.

This would constitute a genuine conformity with the realities of our economic situation. But such is not the case. Why? For the simple reason that the financial system is in no way in conformity with the realities of production. It is finance which is the culprit.

The evil of inflation in the system

When we talk about the financial system, we are evidently talking about money — or, what is the same thing, financial credit. For financial credit, which is the book or figure money of the bankers, acts exactly in the same way, and with the same effects, as paper money or the most-precious metal money.

The evil in the existing financial system begins at the very birth of money. Every new dollar that sees the light of day carries within itself the germ of inflation. Not because it increases the amount of money in circulation by one dollar. The increase in the amount of money in existence is quite justifiable when there is an increase in production. But the germ of inflation is born of the manner in which this dollar comes into existence. It takes its birth from the pen of the banker who lends it to a borrower, who in turn engages himself to bring back this dollar, plus extra money in the form of an interest charge. The money goes out as a dollar debt. But it is more than a dollar repayment which must be returned to the banker.

The borrower who gets $100,000 cannot put more than $100,000 into circulation. Through the materials which he buys and the salaries he pays, he can distribute in purchasing power no more than this $100,000. But since he must repay more than the $100,000, he must put the entire amount to be repaid in his prices. The sum total of the prices demanded must be greater than the sum total of the purchasing power which he distributes. The sum total of the prices will include the $100,000, plus the interest he must return. But the purchasing power he distributes is only $100,000.

Note well that it is not the profit which the borrower will make which is the cause of this unbalance. His profit, which we suppose to be reasonable, is his salary, his purchasing power — part of the $100,000. But once the money is on the way back to the source from which it came as a repayment, it ceases to be purchasing power. And since the repayment must be greater than the loan, it is this which causes the upset in the balance between the totality of prices and the totality of the purchasing power being distributed.

Since practically all the money for industry and commerce first comes into existence in the form of loans to be repaid (or as overdrafts which are simply another form of loans), this monstrous increase in prices, which results from this financial cancer, takes place all along the line. It is this system of debt money which is the primary cause of the inflation of prices.

In principle, the bankers are deflationists. The rarer something is, the more valuable it becomes. It is in the interest of the bankers that money should be scarce and hard to get. Thus they are able to demand a higher price for their money (greater rates of interest) from those who must borrow from them. As far as money is concerned, the bankers are deflationaries. But the method whereby they put new money into circulation is inflationary with regard to prices.

This is one of the numerous contradictions in the system, and it is a cause of the friction in economics and of the cycles of inflation and deflation. It causes inflation when, in order to keep the country from going completely under, the banking system opens the flood gates of credit a little wider, and it permits the issuance of credit at a greater rate than the return of repayments. It causes deflation when, in order to restore value to its money by making it more scarce, the banking system closes, or almost closes, the gates of credit. When credit is so restricted, the banking system still demands the repayment of previous loans at the same rate as originally exacted so that the prices do not come down, even at times when credit is tight and hard or impossible to get.

It is not difficult to see, then, how over a period of a few generations, or even less, the level of prices will go up, even though progress has brought production to a point where prices should go down. This factor is often expressed in the terms "money losing its value". It loses its value because of a system which would give it more than its true value when it is created. This same system exacts that individuals save their money as a condition for future purchasing power, even though this same system, by its processes, causes the dollar to lose its value with the passage of years. This is not the only contradiction in a system which, basically and in very simple terms, is a system which lies and steals, which refuses to keep in step with realities and to put itself at the service of productive possibilities and human needs.

Increase in salaries – increase in prices

There is no question but that prices must suffer from inflationary elements coming from some  source other than the one mentioned above — elements primarily designed to offset the effects of the first. Take, for example, the increasing of salaries and wages.

As we have shown above, in order to meet the exactions of the system of debt money, industry is obliged to recover, through prices, more money than it distributes in purchasing power. Facing such a deficit in purchasing power, salaried employees, who are also consumers in search of purchasing power, demand increases in salaries. The employer finally gives in and grants such increases. He must, if he wishes to keep the help he needs. But he is then obliged to add this increase, or these increases, to the prices of his products. For that is the only way he can grant such increases.

This increase in salaries, followed by rising prices in one sector of the economy, makes itself felt in other sectors of the economy. So the employees in these other branches of industry and commerce are obliged in turn to also demand increases in salaries. This demand is followed by increases in prices there. So it is that the advantages obtained in the first successful demand for increases are found to be but very short lived, and soon another round of increases in salaries are on the agenda. So it is also that contracts between employers and employees are short-term contracts.

In order to improve purchasing power without at the same time causing a rise in prices, it is necessary to issue supplementary purchasing power which does not pass through industry nor commerce. This would mean money which is not tied to employment of any sort, but which is based uniquely upon the capacity of the country to produce to meet the demands of this new money. This is what Social Credit proposes when it recommends the periodic dividend for all plus the discount on prices, which is compensated for to the merchant by the same organism which would be charged with issuing the dividend. This dividend source cannot be the originator of debt money since the issuance of this debt money requires a repayment which must be included in prices.

The masters of the existing money system, the bankers, certainly will not welcome the acceptance of the Social Credit proposals. Their acceptance would put an end to the domination of credit by the banking monopoly.

But those who suffer from this perpetual financial evil, those who earn salaries, their unions, employers, business men, and the various forms of government must eventually turn to the only definite solution to a problem which, in the final analysis, is nothing more than a problem in accounting. And the problem consists of this: that monetary accounting which creates modern money and controls the flow of credit — a function which by its nature is a social function — has become an instrument of domination, of overlordship of our economic life, lying in the hands of institutions which work only for private interests.

Those earning salaries are not the only ones calling for more dollars because of the inflation which is an inevitable result of the evils of this system of debt money. Governments are doing the same. They must have more tax money because each dollar of tax money pays for fewer services, for less material needed for their projects in the measure that money is needed in the measure that the rising cost of living makes more demands upon the government in matters of social security.

This financial evil reaches into every sphere of society. It is only aggravated by such palliatives as increased salaries and pensions, which have only a temporary effect. And the aggravation shows on the thermometer of prices. It shows elsewhere too: in families where the revenue of the family has been reduced from a salary to unemployment insurance benefits or to public charity grants which are made necessary because production has come to a halt, despite the urgent needs for its products and services.

Social Credit would correct all of this by making of finance the exact reflection and the faithful servant of realities. Not only by making financially possible all that is physically possible for filling the public and private needs of the population. Not only by distributing to each and every citizen a periodic dividend which will insure for each at least the necessities of life. But also by a scientific and constant adjustment of prices in relation to purchasing power.

Divergence due to the speed factor

We have not, in this article, given a complete list of all the factors contributing to the rise in prices. We must take note not only of the volume of money distributed as purchasing power in relation to the volume of money reclaimed as prices. We must also take note — and this is very important — of the rhythm, of the rate of speed of one in relation to the speed of the other. (Douglas was an engineer, and did not forget anything in his calculations.) Even if the two amounts of money were the same — the money spent by industry and the money reclaimed by prices — there would still be a divergence between them. Prices appear at the same pace as goods are produced, right from the very beginning to the moment when the goods appear on the merchants shelf. But the money which reaches the public during the course of production, and which remains in the public's hands when the product is put forth for sale, does not follow the same pattern or rhythm at all.

Without going into all the details of the processes mentioned above, this very simple fact is evident: each week, in every industry, the sum total of the prices coming in for products which are in the course of completion or completed is greater than the sum total of the sum of money distributed to individuals in the form of salaries or dividends or any other form of remuneration. So, the total sum of money established as prices during the week is greater than the total sum of purchasing power distributed during the week. And the same is true for every succeeding week.

It might be objected that public works, or the production of armaments, or other forms of production of such a nature distribute money without putting products on the market. It is true that they do not put products on the market, but their prices appear in taxes. And taxes deplete just so much more the amount of purchasing power available for buying goods which are put on the market. As for the loans for the above-mentioned works, they are nothing more than differed increases in taxation, and we pay in taxes today for the borrowings of yesterday.

The exploitation of demand

Another cause of rising prices can be attributed to what is commonly called the “law of supply and demand” — to what has also been aptly called “merchandizing”.

Douglas has written that prices, under our existing system, are generally situated between the minimum and the maximum. The minimum is that prices below which the producer or the merchant cannot sell his products for long without finally finding himself in a position where he will not be able to sell anything (bankruptcy). The maximum price is the highest possible price that can be squeezed by any means out of the purchaser. This latter form of price pertains to the Semitic rather than the Christian ideal of the way in which business should be conducted.

 Social Credit would correct this defect by means of the mechanism for the scientific adjustment of prices.

The “just price”

 The Christians of the Middle Ages spent a good deal of time in the consideration of this question of the “just price” by which they understood an equitable price — always difficult to establish concretely. Well, Douglas also settled this problem by making the distinction between the accounting price and the adjusted price.

The accounting price is the price as established today, while the cost price includes the reasonable profit of the producer, of those sharing in the enterprise, of those engaged in distribution (their salaries), and also the charges which are added on as the cost of public services.

The seller must get this accounting price for the goods if he is to satisfy his obligations and remain in business. But for the purchaser, the consumer, this is not the just price. Major Douglas defined it in this fashion: “The real cost of production is the financial cost of consumption.”

In other words, we should not have to pay any price over and above the price of what is consumed in the course of production. That which is consumed, used, depreciated, or destroyed, in whole or in part during a given period, represents the true cost of that which has been produced during this period.

Since it is impossible, period after period, to consume more than is produced, period after period, it follows then: that to be just, to be conformed to reality, the price to be paid for production should be below the accounting price established for this production. And this should be arranged without any detriment to the normal accounting of the cost price.