"THE JUST PRICE"

Otago Daily Times, Issue 22053, 8 September 1933, Page 5

"THE JUST PRICE"

TO THE EDITOR. SrR, —Mr Sivertsen has inquired where the mathematical defects in the present financial and costing system are. There are a good many of the defects though several overlap to 6ome extent. At the outset it must be explained that the financial and costing system is being dealt with a& it operates to-day. For the sake of clearness each point has been numbered. 1. It is obvious that in a profit system there must be a constant creation of new money, otherwise eventually a few persons would come into the possession of all themoney. Neglecting that part of money which is called legal tender, functions as cash, is directly controlled by Parliament as to design and amount, and is a very small fraction of all money available or used, all money is a creation of the banking system. There are several ways in which it may create money, and the most obvious one is by granting loans. When bank A grants a loan> to a client the client pays the loan to other persons who are in all .probability clients of other banks—bank' B, bank C, etc. In- ; short, the, granting of a loan by bank A increases Its total deposits, and the total deposits of bank B. bank C, as soon as the. client commences to operate upon the loan account. Major Douglas expresses this fact in the symbols dL/dt = dD/dt. A' simple way of showing it is:-—Assets must equal liabilities; that is, loans + cash in hand = deposits + capital of bank. But a fixed ratio must be kept between cash in hand and liabilities to supply cash if demanded, hence any increase or decrease.in loans or cash in hand must be balanced by an equal increase or decrease in deposits or capital. As capital does not change,.and cash is constant, an increase or decrease in loans is balanced by an increase or decrease in deposits. Space prevents any extended discussion of the effects of the simple arithmetical fact that deposits are created by loans, but two defects which follow should be specially noted. (a) If Mr Sivertsen posseses sixpence jt is because someone else somewhere owes a bank'sixpence. (b) The amount of money in existence as'calculated by the banking system bears no necessary relationship to the amount of money industry as a whole from its operations would calculate as being'in existence; in fact, the two calculations are fundamentally opposed to one another.

2. Mr Sivertsen will see the next defect by tracing the use of a loan by industry. He will agree, I am sure, that loans are made principally for purposes of fresh production; and that from the producers' hands loans function as purchasing power in the form of wages, salaries, and dividends. He will also agree that loans have to be repaid, and that producers must recover from the public in prices all the costs incurred. Superficially, it does appear that, since all money emanates from the banking system, is spent somewhere in _wages, etc., and recovered from the public in prices, the amount of purchasing power available should equal the prices charged for goods, with the possible exception of profit, charges. Profit charges, however, average out at under 3 per cent., and as there is a continuous flow of money creation that possible discrepancy should not cause anything more than a small time lag. Mathematicians, especially engineer ones, are anything but superficial, and regard the facts from a different angle to that of ordinary people. In order to discover whether there is sufficient purchasing power to cover prices, the production system is regarded as performing two actions —(a) continuously generating costs or prices, (b) simultaneously and continuously generating purchasing power as wages, salaries, or dividends. These amounts are each divided by time so fhat a rate or a velocity is obtained. Suppose any firm's two actions were represented by two straight lines on squared paper, each square to the right representing, say, one second, and each square directly upwards representing a pricevalue of, say, a shilling. It is obvious that if wages, etc., are to balance costs the two lines would have to be equal at any moment of time selected. ; But when the sosting 6ystem of any firm is analysed its costs are found to be in two divisions: A, consisting of wages, etc., paid out;- B, of payments to other firms. , The cost line on the squared paper would, however, equal A -|- B, whilst the wages, etc., line would only be A units long, hence any firms, consequently all, are generating costs at a greater rate than they are generating purchasing power. An actual example was given by the manufacturers at the recent exhibition. Approximately the A line was 1(5.000,000 long and the A -f- B line f 10.000.000 long. Although industry generates prices at a greater rate than it generates purchasing power, not all the goods to which prices are attached are intended to be sold direct to the general public; in fact, coods may be divided roughly into three categories: (a) Capital, goods—i.e., heavy machinery, buildings, etc. (Al + 131); (b) Intermediate goods—i.e., poods in process of manufacture or forming some component of final goods (A2 -f B-); (c) Ultimate goods—i.e., those winch the general public buy to consume (A 3 4B 3). (In future, for brevity salts, they will be written C goods, etc.) Of these, the A payments for C and I or goods will be available to be expended on U goods (A 3 + B 3). The question arises whether Al -1- A2 + A 3 = (A 3 + B 3), the price of TJ goods. In practice they do not. But if it is assumed that they do, or micrht do. then you are committed to the proposition that it is desirable or essential to build, say, railways or post offices as a means to providing a considerable proportion of the community with the purchasing power necessary for them

to have.to buy food, clothing, and shelter, all of which are produced in ample amounts for all. The reason why Al + A2 + A 3 does not in practice equal (A 3 + B 3) lies in the method of accounting costs into price. The method proceeds on the rules that (a) all costs go into price, (b) all costs must be recovered from the consumer. Therefore, in the case of a U commodity of series production, there will be the, following allocations of costs forming (A 3 + B3):—(a) A charge against past expenditure ori any capital goods bought, say, machinery. (b) A charge covering the whole of any payments made in respect of I goods bought, which charge of the I producer to the U, producer will include a charge similar to (a)—that is, a charge against past'expenditure of the I producer for any-capital goods he has bought. From that fact there arises the proposition that where any payments in money occur twice or more in series production then the ultimate price of the product is increased by that amount multiplied by the number of times of its appearance without any equivalent increase of purchasing power. (c) lhe ordinary A and B charges of the U producer other than the B charges described in (a) and (b). • Mr Sivertsen will remember. that _ M charges are payments to other organisation's, and see that the B charges of a TJ producer have been split into their components. Using the symbols the price of an U product is:—(a fraction ot Al -f- Bl in respect of capital charges) + (A2 4- B2 which itself includes a'fraction of an Al + Bl charge) + (A 3 + B 3). Against these .are A payments to the: extent of Al + A2 + A 3, which have been distributed during the course of the generation of the price above. It these A. payments are to be equal to the price ' above, then two things must be true: (a) Al + A2 must be at least equal to the (the fraction of Al.+ 131) + (A2 + B2); that is, Al must equal the fraction + 82. . (b) Al must equal the fraction + B2 at any moment ot time. In default-of an actual example it is not possible to give a quantitative proof of (a)* but in regard to (b) both Al and A2 were distributed before either (A2 4- B2) price, or (A 3 +B3) price were generated, consequently _ unless, Al and A2 were wholly saved, which is a reductio ad absurdum proposition, they were not available at the time when the goods priced at (A 3 + B 3) .were waiting to be bought by consumers with an equivalent amount of purchasing power. _ 3 A third defect occurs in saving either as hoarding or as reinvestment, in the first case jt is obvious that it, out or purchasing power distributed, some is not spent, an equivalent amount of goods will not be consumed. In the second case, if say, £lO is saved by abstention from buying and reinvested in new production, then £lO worth of goods is unconsumed until the reinvested £lO has again been paid out as wages, etc.; but in the meantime the reinvested HO has created a second price-value of £lO attached to the goods of the.new production for which there is no equivalent purchasing power. This is really a second example of payments occurring twice or more in series production, etc. ... , , j„i„„« 4 Sales of securities by banks .destroy money in existence. Whilst there is nothing illegal or immoral in such bank actions, there is nothing in. the banking system to ensure that it is done onlj when purchasing power is in excess ot prices of ultimate goods for sale. 5 Collection of interest means money collected from purchasing power in the hands of the public. 6. Taxation causes a deficiency of purchasing power in several ways of which the most important are:—(a) Jiy the amount of Government loans, or at least the interest upon them being collected out of wages, salaries, etc., when the wanes salaries, etc., have already been chafged into prices. (b) By the ordinary operation of a geometrical progression; that is, if taxation per head averages, sav, 23 per cent., then every tune a sum of monev changes hands from expenditure in one set of hands to_ income in the other, the amount taken in taxation may be found by multiplying the sum 'of " money by J. Provided the original sum passed through a sufficient set of hands ultimately that which constituted the starting point of the sum would possess all the purchasing power.— I am, etc., C. H. Chapman. Dunedin, September 4. [We have allowed a fair amount of latitude to the supporters of the Douglas credit scheme, but we cannot undertake to publish any other letters of either the length or the unintelligibihty of the above.—Ed. O.D.T.]