DOUGLAS CREDIT SCHEME ANALYSED

Evening Star, Issue 20980, 19 December 1931, Page 3

DOUGLAS CREDIT SCHEME ANALYSED

No. 111. (Continued.) [By Lloyd lloss.] Here is an extract from the Ottawa evidence: — Douglas: “ Prices tend to rise with the increase in the volume of credit issued, but that is not an essential of credit issue.” Question: “ That is to say, if the German mark was issued in quantities which were merely commensurate with the trade in Germany the groat inflation in prices would not occur?” Douglas: “ No. _ If the German mark were issued in such a manner that prices could not rise in proportion to the German mark—by that 1 do not necessarily mean fixation of prices—thou the prime argument against inflation would disappear.” Thus we sec that Douglas rejects the only chance of avoiding rising prices by relating the , increased purchasing power to increased commodities. Ho claims, therefore, that _ there is a method of preventing prices from rising, even if the purchasing power is increasing faster than the coinraodities. I have argued that this is impossible. Paced with a supply of goods, there is a certain amount of money. Increase the money without increasing the goods, then either your money is not used and you might as well not have it, or you pay out more tickets. As people generally prefer to use money rather than hold it until some future date, and as in most cases they are compelled to, use it to obtain necessities, then they will compete with one another for the limited goods and drive up prices. If the argument is that there is no limit to the goods, then I have shown that the Douglas analysis emphasises productivity, and that until productivity becomes available goods, there will be a limit. Moreover, no Douglas supporter has declared that to-day there is everything available to meet the demands of everyone. If there were, money would have no meaning. As there is not, an increase in money faster than of goods can have only one 1 result—of pushing up prices. HowI ever, wo will consider the Douglas method. There is in the market at any time a certain equilibrium between the goods for sale and their price. So far 1 have argued that there is a relation between goods and money, and that relation is called price. 1 have tried to show that if we create purchasing power faster than goods then prices will and must rise. Douglas writes: “ If, having broken the banking monopoly of credit, wo simply proceeded to give everyone large overdrafts, it is fairly well understood by now that all we should do would be to create a feverish ooom in production, accompanied by a spectacular rise in prices.” Those .-mould be depressing words to those who uad hoped that under the Douglas sys- ; Lem no one would deny them credits , or ask questions about their use of credit or demand security or act in the tyrannical way that banks are reported to act to-day. (Do 1 see in the future, after. the Douglas system has been set up, some now revolt against the tyranny of the Douglas banks, some new demands for more credit, much quoting of selected extracts from M'Konna and enthusiastic Douglas disciples?) However, I have argued that the apph-

cation of the just price will have the same consequences as circulating notes in the German manner, it does not matter what yon call the method, what words you clothe it in, if the money is being created faster than the goods prices will rise. Take the automobile example. *\ e buy a car, got a credit of half the amount paid out, and that credit becomes purchasing power. Purchasing power has been added to the existing supply. Wo now have a car, so we will apply this increased purchasing power to something else. Wo would expect, if many were doing the same thing, that prices would rise. This, we must note carefully, Douglas admits. _ They would, according to our analysis, go up because more purchasing power is being created than goods coming on to the market. There is competition between buyers, whoso purchasing power has been increased for the goods actually in existence. This, although there may be greater potential production, is an important admission by Douglas. Then ho continues: “ It would not go up very far before somebody would suggest that, as it has been possible to bring down the price of automobiles in that waj T , it would be possible to apply the same process to the things which had'risen in price, and the logical conclusion would be that the system would extend. (Ottawa, p. 122.) But since the process of applying the credit from one industry is to increase the price of other commodities, because you have increased more purchasing power than goods available, surely by releasing more purchasing power by giving credits on every sale, prices will and must go up. Further, if the purchasing power increased by buying cars, when applied, say, to meat sends up the price of meat, and then we turn round and reduce the price of meat by a discount, are we not where we began P Wo have obtained a credit, that credit has sent up the price of meat, then we reduce tiro meat by getting another credit, which we apply to something else, and so send up the price of that, and then reduce it again by another credit! Again, if the purchasing power applied to meat sends up the price of meat, when we get a discount from meat, and apply it to the purchase of something else, will not those go up in price? Suppose X begins with meat, and then applies his credit to cars, will not this have the result of increasing the price of cars to other people, and what is tire advantage of cutting down tho price by a discount if the use of this discount sends up the price of other things? If the discount is obtained from the purchase of one commodity and is applied to another, and sends up tho price of that other, then surely by applying it simultaneously to all articles, ypu are creating a mass_ of discounts which must send up___prices all round.

At Ottawa, Major Douglas was asked; “What is to prevent a continuous increase in prices such as we find when wo have this free printing of what is called liat money—you know, what I mean by that question?” The reply was “Yes, because the rise in prices which occurs in connection with the printing of what is referred to as fiat money takes place in accordance with the assumption that the price of an article is what it will fetch, and if there is more money in the market in relation to the same amount of goods, then it is clear that the articles will fetch more money, and that is what causes the rise in prices in connection with what is called fiat money. That takes as an axiom that you have a rise in qirices in connection with the increased supply of money; but if you apply the increased supply of money, if you like to put it that way, to the reduction of prices, that is a condition of affairs which cannot possibly take place, because the application of tho money does not take place unless you get a fall in prices.” I confess that all that seems to me quibbling with words. The only way that the increased supply of money can bo used is by applying it to goods. The increased'purchasing power is waiting to bo used. Wo have to do something with it. We take it to a shop, where, admitted by Douglas, tho goods are limited. Other people are there also. You can tell them that the money is given only on condition that prices are reduced, but nevertheless in fact the price will bo fixed by the competition of the purchasing power. We have already seen that there is no explanation of what fSics tho prices in tlm first place, and have argued that -.if yon reduce prices after they have soared owing to tho use of tho increased credits, the whole scheme seems to have left us where we were. If it were possible to reduce prices by an incantation, then this explanation by Douglas might mean something. Douglas continues: “The increase of purchasing power which is required to draw on tho unused capability of production delivery is represented by this discount, if there is no unused capacity to produce and deliver there can bo no discount. Tho justification for that discount is that unless.you have reduction of price people cannot draw upon that unused capacity to produce and deliver.” Let us recall that tho unused capacity is limited, and that tho Price Factor is fixed over a period. We have already cen that the number of discounts created early in the Douglas regime need not necessarily bear any relation to the surplus goods available at tho time. Now wo must follow in more detail tho giddy course of a discount.

We have bought a motor car for £1,000,. Wo have received u discount of £SOO, credited to our account. Tho market price of the car was £I,OOO. Wo now have the car and £SOO. The price factor is a half. The amount of purchasing power therefore to he made up on that sale in order to close the gap between consumption and productivity is £SOO. This wo have got. Now wo spend it, and receive another discount of half—viz., £250. We use this discount and buy something marked £250, and get another discount worth £125. We must be able to nse the discounts in this way, because they have been added to our banking accounts which wo can draw on in tbo usual way. So wo will buy something else with tho discount and got £62 10s back. This wo shall spend, and so on. All this shopping might ho done in tho first week: or so. Especially if wo knew anything about economics, we would want to spend our discounts before prices went up. With all this purchasing power going on in the first week or so, before tho productivity could become real goods, wo would expect a big rise in prices. Now, the first point is that although the price factor justifies tho granting back of £SOO, Arc have been able to exercise our purchasing power to obtain £937 10s, and we have not stopped yet. Wo have spent £I,OOO and got back nearly tho same amount. At least, wo have got ,pnst the allowance permitted by the price factor. This is bad enough, but remember that each of tbo credits we obtained wo have put into the hank and drawn out again as money. Douglas says that there is no reason why the currency should be affected, but as one has a right to draw out currency from a bank, then extra currency will have to be created to finance these increased transactions and this suggests inflation. Well, wo get something for our credit, of £SOO. This wo have spent. Wo have passed it. on to X, who can use it, and then pass it on to someone else. So that by the end of the day

the £SOO credit may have passed through scores of hands, buying goods and influencing prices at every pass. The fundamental reason why the Price Factor will fail is that if cannot take into account tho number of times tho credit is used. It may bo used only once in a day; it may be used a hundred times. No one can say. No one can control it. And every time it passes on it has the same effect as if you had created a new credit. (To bo continued.)