DOUGLAS CREDIT

New Zealand Herald, Volume LXX, Issue 21596, 14 September 1933, Page 11

DOUGLAS CREDIT

THE ECONOMIC ASPECT. "VIOLENTLY INFLATIONARY" ADDRESS TO BUSINESS MEN VIEWS OF PROFESSOR BELSHAW The economic aspect of the Douglas credit proposals formed the subject of an address given by Dr. H. Belshaw, professor of economics at Auckland University College, at a luncheon gathering of the Auckland Creditmen's Club held in the Milne-and Choyce Reception Hall yesterday. Mr. T. U. Wells presided over'a large attendance.

Professor Belshaw said the basis of the Douglas proposals was the A plus B theorem. Major Douglas argued that the payments of industry fell into two classes, A payments being payments to individuals, such as wages, salaries and dividends, and B payments being payments to other establishments, such as raw materials, bank charges and other internal costs. The A payments, he contended, were the only purchasing power distributed, and, since they were obviously less than A plus B, purchasing power was not sufficient to buy at their cost all the goods which industry produced. Hence there was a permanent tendency toward a deficiency in purchasing power.

The A and B Payments The theory was that additional purchasing power must be provided to make up for the B payments. But it would be found that in industry B payments were really A payments, if not at one time then at some previous stage. Carrying the analysis back, it would be seen that all payments were made to individuals, and were therefore A payments, so that all payments represented purchasing power. Every cost of industry was a source of income to someone, and could be, and usually was, spent.

Major Douglas admitted this, but Baid the purchasing power in respect of B payments was distributed in a previous period. This also was true, .but it was irrelevant, provided they regarded production as a continuous, regular flow, for all processes were going on simultaneously and an amount equal to all costs, at the final stage, was being distributed as purchasing power.. Professor B6lshaw quoted an example to illustrate this contention.

Interest and Loans Major Douglas, he said, argued that payment of interest and Repayment of loans to banks led to a deficiency of purchasing power. But these payments were distributed as purchasing power, as interest to depositors and shareholders, and as wages and salaries to the staffs. Repayment of bank loans only reduced purchasing power if it took place before goods were sold and if the money were not re-lent. The normal process was for loans to be repaid after goods were sold and for credit to be re-lent for a further period. The A plus B plan was not offered as a new phenomenon. It had been operating for- a very long time. Hence, if it were true to theory, the economic system would have collapsed long ago. Major Douglas offered a number of ingenious but totally unconvincing reasons why it had not worked according to theory. Professor Belshaw said he had worked out estimates of B payments in New Zealand for the years prior to the crisis and these had been checked by the Government Statistician. The total was £60,000,000 a year or more. About one half of the capital expenditure would represent B payments—and these, according td Major Douglas, would not expand purchasing power—so the capital expenditure would need to fbe £120,000,000 to meet the alleged deficiency of B payments. " An Impossible Amount " Making all allowances and calling the amount £60,000,000, and taking the record national income of £150,000,000 in 1928-29, two-fifths of this income would be provided by capital works. The public capital expenditure was • about £10,000,000, which would leave £50,000,000 to be spent on private capital This would bo about 70 per cent of the value of all fafctories, including land, and more than five times the amount spent on buildings, clearly an impossible amount. The inescapable conclusion was that the A plus B theorem had not worked because it was not true, but Major Douglas' proposals were based on the assumption that it was true. His proposal simply was that the alleged deficiency due to B payments should be met by additional free purchasing power to the amount of the B payments. Bank deposits in New Zealand in 1929 were £58,000,000 and advances £49,000,000. B payments totalled about £60,000,000, which, according to the Douglas plan, would be the amount required to be distributed. This would be doubling purchasing power. Flight from the Currency Major Douglas said price fixation was unworkable and prices would be allowed to move freely. The price of goods would be what they would fetch, less Hhe discount. The effect of this, since it had been shown that all B payments were, in fact, distributed purchasing power, would be an enormous increase in purchasing power in excess of goods and a sharp rise in Very quickly the whole of the discount would be absorbed by the rise in prices. Retailers, in competition for the goods of manufacturers, would offer more, and the latter would offer more to the producers of raw materials. Financial costs, therefore, would rise and B payments would increase. These would require more credits to meet them and there would follow a further unavoidable rise in prices. If the process were persisted in there would' be a flight from the currency as in Germany and Austria. It would be impossible to hold exchanges and they would rise rapidly after a short interval. Briefly, the results would be rapid inflation and internal economic and social disorder

The argument was used that if prices rose credit would be restricted again, but there cquld be no question, but that prices would rise, hence the; Douglas proposals could never in fact be given full effect. In essence /they were unavoidably and violently inflationary. It would be no consolation to be told, as soon as they began to exert, their influence on prices, that the proposals would no longer be permitted to apply, neither, if they were permitted to apply, would it be any consolation to be told that their supporters were enthusiastic idealists who meant well.