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home of ... Douglas Social Credit
SOCIAL CREDIT AND NATIONAL ACCOUNTING
by Victor J. Bridger
Copied with permission for circulation
AN INTRODUCTION TO
Social Credit and National Accounting
The ideas and information given in this publication are for the purposes of a guide only. Many suggestions are made but none of them is definitive. There may be many changes that can be made to improve or even simplify the recording of a National Balance Sheet and accompanying accounts.
The basis for the institution of a proper set of National Accounts is the philosophy of Social Credit. This philosophy is available in other available literature. It is suffice to say that Social Credit is the Policy of a Philosophy and that the Policy, which includes adjustment to the financial accounting is a means whereby all citizens of a nation, are provided with the opportunity to share in the wealth of their nation.
This includes not only the benefits that may accrue from the availability of natural resources but also from productive resources that provide for those basic things such as food, clothing and shelter.
It is hoped that this publication may light a spark and open up discussion on the subject and
perhaps light a candle for others to see the benefits that may be gained.
“It is better to light a candle than to curse in the darkness.”
We may well ask, “What is the importance of a National Balance Sheet?” and “Why is it considered such a necessity by Social Credit advocates?” The answer to these and other questions in the following explanation are considered and we leave the reader to judge for him or herself.
Every business entity is required by legislation to keep a proper set of books of account. That is one reason. Equally important is the fact that by keeping an accurate record of all the business activities engaged in by the business the proprietors and or the shareholders can ascertain whether or not the business is viable, i.e., making a profit or loss and not heading for the Bankruptcy court.
A normal business Balance Sheet is in reality a statement of the Assets and Liabilities, which show the financial position of the business at the date specified. Also a normal Balance sheet contains information that breaks up the Assets into Current Assets, Fixed Assets and Intangible Assets.
Current Assets usually are those assets that can be realised or turned over quickly or in a short period of time, in the sense that they are either cash in hand or can be converted into cash in that short period of time. In the main these may consist of cash in hand, i.e., in the bank, debtors, other types of paper that can be converted such as financial documents like bills of exchange, short term deposits, stocks on hand of goods or raw materials, manufactured work in progress.
Fixed Assets consist of property land, buildings, plant and machinery, motor vehicles and can be regarded as those items that are necessary for the business to produce its trading income. Intangible Assets are those that have no material existence. They have no real value in themselves and include such things as goodwill, patents, trademarks, and licence rights.
On the other side of the Balance Sheet are classified what is known as Liabilities. These, like the assets, are classified according to whether they are, Current, Deferred, or Capital, or Retained Earnings (undistributed profit).
Current Liabilities contain all those items that must be met within a short period of time. These would nominally include payments to creditors for purchases and other expenses incurred in running the business such as telephone, electricity, and payments for tax, the bank overdraft, and bills payable.
Deferred Liabilities include those liabilities that do not have to be paid in the immediate future. Items classified under this heading are mortgages, debentures, and long-term loans.
Capital is the money originally contributed by the proprietors or shareholders in establishing the business. This changes according to whether or not the business is profitable. If profits are made and they are not distributed to the proprietors (in a private business) or shareholders in a public company they become retained profits and may be added to the Capital, or just shown as Retained Earnings. If the business is not profitable the Capital Account can be a negative figure because losses are transferred to the Capital Account also. Alternatively the Capital Account will remain as per the paid up Capital figure and the Losses shown separately.
This preliminary and brief introduction to a Balance Sheet is sufficient explanation for our purposes. To obtain an accurate view of the financial position of the business it is vital that any interested person must be able to read and understand the time worn areas to investigate.
These are (a) Liabilities to creditors that indicate whether or not the business can meet its obligations and pay its way. (b) Working Capital that is simply the difference between Current Assets and current Liabilities.
Construction of a Balance Sheet
There are two ways by which a balance sheet may be adjusted or compiled. The first is by a direct debit to an asset item and a corresponding credit to an asset item. For instance a purchase of plant and equipment would have a debit to plant and equipment and a credit to the bank account item. Other adjustments can be made at the end of a balance period but these need not concern us here.
The other way is by the transferring the result of the Profit and Loss after all Trading and Overhead Expenses have been completed. All of these particular accounts are cleared at the end of the financial year period and the result is transferred to the Balance Sheet to Retained Earnings or Accumulated Losses depending upon the result being a profit or loss.
It is necessary to understand this brief and incomplete explanation only for the purpose of recognizing how a Balance Sheet may be affected by the accounting system adopted.
On the other hand, as many companies have found to their regret or at least to that of the shareholders, appreciation of assets can be also very significant. A company that has property in the form of land and/or buildings and has not adjusted these values in their accounts may find, and have found, that their share value is underestimated and therefore are a target for a takeover. The result has been that they are taken over and then the company is closed down and the property assets are sold off for a value much higher than that shown on their balance sheet.
We can summarise at this point and say that a Balance Sheet is a summary of ledger balances at the end of a financial period and should be a true and accurate position of the worth of the entity at that point. It is affected by adjustments within the balance sheet items themselves or by the results of the trading within the specified period.
A Realistic Approach to a Balance Sheet
The first thing requiring understanding is that all recording in accounts and thus reflected on the Balance Sheet is done by the use of symbols. In Australia it is the $, in the U.S. it is the $, even though these $s are not the same thing. In the U.K. it is the £, in Japan it is the ¥ and for different nations different symbols with differing values to all others.
In studying a Balance Sheet from this perspective it call be readily seen that the Balance Sheet is comprised of tangible and intangible things. Remembering that a Balance Sheet is the result of double entry bookkeeping system it is necessary that the Assets and Liabilities be in balance.
If we apply this principle to all existing balance sheets throughout the world it is obvious that all debits must equal all credits. Taking this one step further, which is significant for the purposes of explaining a National Balance Sheet, if all money balances, i.e., debtors and creditors including loans, mortgages and any other claim to money, such as Bills of Exchange, etc., were settled, the only things that would remain on Balance Sheets would be tangible items. These would include things such as property, buildings, furniture and fittings, plant and equipment, motor vehicles, and stock of finished goods or work in progress, i.e., semi-manufactured goods or raw materials, classified as stock in hand or inventory.
All of these items are classified as Assets on the Balance Sheet but there would be no Liabilities. If one wished to show a Creditor it would have to be God, or Nature, or Shareholder’s Equity. In this case it is preferable to show Shareholder Equity representing a liability to the people of the nation.
A realistic appraisal of a Balance Sheet must recognise that the Balance Sheet provides information which is historic in the sense that it records a position at a point in time after events have occurred and that all activity has been recorded by the use of symbols. These symbols, e.g., the $ make the task of recording much easier than using other methods that would be required under a barter system.
It is not, and should not be regarded as a commodity with a price value.
Introduction to a National Balance Sheet
Under current government financial accounting there are two aspects. First, all government expenditures and receipts are subject to appropriation through the Budget, which is set by the government each year. Second, the activity within the economy is recorded, not in accordance with current accounting principles but based on economic principles that do not reflect the correct financial situation. The figures that are compiled are recorded in a National Income and Expenditure Statement that by definition as set down by economists must be in balance. Briefly this is based on an assumption that in any given financial period the money paid out in disbursements to people, i.e., the national income is equal to the national expenditure in the same period and therefore is equal to and provides a figure valued at factor cost that is referred to as the national output. This national output is regarded as the creation of wealth by the nation’s industry.
We need not concern ourselves with the fallacies contained in the simplistic approach in the above except to point out that if there is any use at all for the compilation of such figures it would be for the purpose of obtaining information on trends that may occur. These trends may offer assistance in obtaining statistical information on changes that may be occurring within the economy.
information does not reflect the true state of the economy.
A number of fundamental basics for the compilation of a National Balance Sheet would include:
It should be understood that all production is the result of conversion of natural resources into another form and this conversion of matter from its natural state into another is attained by the use of energy. Energy can be from a natural source such as solar energy in the form of coal, oil, the sun, wind and water. It can also be from mechanical, electric or human energy. Mechanical and electrical energy are originally based on the use of natural resources converted by the use of human energy.
This brings us to the point in normal double entry bookkeeping. Opening balances on the Balance Sheet should be determined according to items listed. On the operational side there should be a National Credit Account, which can reflect the changes in a period similar to any normal commercial operation. The National Credit Account would be divided into two categories, one relating to Consumption Goods and the other to Capital Goods. There should also be a National Resources Account, which reflects the changes that occur including the extent to which the Natural Resources may be added to, drawn upon and depreciated.
The results at the end of an accounting period would reflect the equity of all individuals as shareholders in the nation. It would show the ability of the nation as a going concern as in any business to produce both Capital and Consumer goods as, when and where required.
On the Balance Sheet there would be a transfer of balances to the respective asset balances with the net result being credited to the liability equity balance. This action is no different to the situation when a new business is commenced. The Bank Account is debited with a deposit of money received from shareholders and is shown as an Asset, whilst the corresponding entry has been credited to the Capital Account recognising the shareholders as the holders of the equity as a Liability by providing the business with the necessary funds.
From a Social Credit perspective the Law of Cost means that the Cost of Production is Consumption. The real physical cost in a nation, of all its production is the total consumption that occurs in the nation for a given period. With the reality that the physical Cost of Production is Consumption, this fundamental Law of cost means that all production is paid for in full on consumption. This Law of Cost is consistent with the fact that there is no debt in nature.
This physical fact should be reflected in the accounts in a National Credit Account, which would be in two segments, a Consumption Goods and Services Account and a Capital Goods Account. In a National Accounting system that produces a National Balance Sheet and has a National Credit Account and a National Resources Account, these are not Accounts to be regarded in the same manner as accounts in a business. They would the result of a compilation of figures, which purport to reflect “flows” or changes in the economy.
For purposes of illustration we may start with a very simple example of what has been stated to this point.
Produced Physical Assets
General Ledger Accounts
National Credit Account
The above illustration is a simple attempt to highlight the differences between a business Balance Sheet and one compiled for a nation. A few explanations on items included will be clarified but it is necessary to indicate that this idea is not new.
On September 19th, 1939, the Governor informed the House that the Resolution as stated above was transmitted as Message No. 9 to His Excellency the Governor-General.
Quite obviously this would have no effect on the Commonwealth as having originated in a States House but it does show that the idea of utilising the National Credit for the benefit of all its citizens is not new. There have been other attempts to design a National Balance Sheet both in Australia and the United Kingdom but these have been based upon establishing criteria for explaining economic decisions by government and the results that have occurred from those decisions. Since 1989 the Australian Bureau of Statistics has been experimenting with developing a National Balance Sheet that contained statistics recommended in the 1968 version of the United Nations System of National Accounts. In 1977, the United Nations published a proposal for countries to prepare national and sector balance sheets.
The suggestions offered here differ markedly from those other proposals because they are based on a philosophical base that encompasses the belief that “The essential mechanism of genuine democracy is decentralised control of the real credit of the community.”
Observations on a National Balance Sheet
What should be recorded on a National Balance Sheet are the real physical non-financial assets that represent the real credit of the nation. Some of the items that would appear under this heading would include:
All natural resources. Land, water, forests, sub-soil assets such as mineral, gas, and oil deposits.
Government buildings residential and non-residential, roads, bridges, all government infrastructures that assist in the production process, all plant and machinery (This would include all military and defence equipment).
Assets – Work in Progress
For the purpose of recording correctly expenditure on the creation of new assets such as a bridge, road, railway, etc., there should be an appropriate accounting procedure to reflect the real situation.
Money made available in the course of construction should be recorded as a loan to the Department undertaking the project in the same manner as a progress payment. The loan should be reflected in the accounts in the same manner as any loan made through the banking system.
A credit would be established in favour of the Department or authority undertaking the
project and a debit against the Assets – Work in Progress account in the National Credit
The accounting for the financial transactions could be done through the Reserve Bank.
There can be no question as to where the money for the project can come from. It could be conducted in the same manner as the construction of the Commonwealth Railway from Port Augusta to Perth, which simply involved a transfer of money from one Department to another. Under the suggestions contained in this National Balance Sheet the money would be new money created according to the results of the year’s accounting.
National Credit Account
National Credit Account
Births and Deaths
Emigration and Immigration
It will be observed that there is no provision for financial assets or liabilities such as Loans, Borrowings, Shares, Treasury Certificates, Investments either domestic or overseas or any other type of financial paper. Also there is no provision for foreign exchange holdings or liabilities. The National Balance Sheet is a statement or a summary of balances of accounts at the end of a particular period and reflects the position within the domestic economy. The only financial record that should appear is the financial figure of the $ that represents the value of legal tender to balance the net values of assets and liabilities on the balance sheet. Obviously the values of the assets and liabilities would be expressed in terms of Australian currency.
Under the operation of a correct set of National Accounts there would be no need for such things as Capital Inflow, attracting overseas investment, or borrowing from other countries. Gold would be treated as a commodity only and its value would be determined by commercial market operations on its commercial properties usefulness.
The National Debt as it applies to the Commonwealth Government would not appear on the National Balance Sheet. Normally it would be expected that the National Debt represents the value of all public assets.
Many other proposals for the construction of a National Balance Sheet include items that relate to the private sector. Some of these include things such as Trade Debtors, insurance policies, pension funds, bank deposits, Treasury bills, commercial bills, hire purchase figures, installment credit, house mortgages and many other types of financial assets and liabilities. These have no place in a Balance Sheet based upon real physical entities.
In constructing a National Balance Sheet as proposed here it is recognised that many questions will arise as to what should or should not be included.
NATIONAL CREDIT AUTHORITY
The Government should institute a separate statutory organisation named the National Credit Authority. Its responsibility and function would be to compile the National Balance Sheet based on information supplied by other authorities such as the Reserve bank, the Bureaus of Statistics and the Taxation office.
THE FINANCIAL AUTHORITY
A National Credit Authority would not determine policy but be responsible for producing a proper and correct set of accounts on which policy could be based. A Balance Sheet produced by the Authority would form the basis for financial policy on which the government of the day would determine its financial policy.
The Commonwealth of Australia Constitution Act (Chapter 1. Part V. Section 51) gives full power to the Federal and States Government to control the source and creation of currency, coinage and the issue of paper money as legal tender. A vital constitutional aspect to be observed is – that in respect of the whole question of money, the Commonwealth has no exclusive power, but power in conjunction with the states. It has powers with respect to all banks except State Banks.
A National Balance Sheet would differ from an ordinary balance sheet in two ways. Firstly, no money would appear as an asset and secondly the assets and liabilities would not balance, because the resources, accumulated capital and wealth of the community would far exceed the total of all liabilities. This difference is the accumulated resources of society, and the embodiment of the Real Credit, which give value to all credit by whomsoever created and issued.
At present, this Real Credit cannot be used by the Community who are its rightful beneficiaries because it is not monetised. As soon as we have a balance sheet however, it will be seen that this surplus of assets over liabilities can be monetised and distributed to the community in whatever way deemed desirable so that consumption may keep pace with production, and so enable a continuous expansion of production.
For the first time Australia would become a Co-operative Commonwealth which would distribute a dividend to all its citizens instead of resembling a tin mine which, instead of distributing dividends, makes calls on its shareholders or a government resorting to taxation.
THE NATIONAL CREDIT AUTHORITY – GOVERNMENT AUTHORITIES AND BANKS
The equity that has been established at the end of a financial period could allow for certain occurrences. Part of the equity could be distributed as a National Dividend and part to apply the Compensated Price mechanism whereby retailers are rebated for discounts applied to the sale of their goods. The amount to be distributed for the National Dividend and the Compensated price would be determined on the formula relating Consumption to Production in the period under review. Retailers would be encouraged to register to receive the rebate and fulfill certain conditions.
Another portion of the equity that could be utilised at the commencement of the introduction of a National Balance sheet would be to make available to Local authorities loans without interest but possibly with a small service charge repayable over a period of ten (10) years for specific purposes. These loans could be used to gradually eliminate their interest paying debt and/or for the purpose of new capital works only. They would not be available for current operations.
Another portion could be available for lending to the banking system. Banks would become financial intermediaries as they are currently claimed to be, but in reality they are not. Banks would operate no differently as they currently do except they will be obliged to restrict their lending to the funds that are available through Capital, Reserves, and Borrowings. Any extra funds required may be borrowed from the Reserve Bank which funds would be eventually recorded against the equity on the National Balance Sheet. As Banks make repayments the reverse would apply.
Another use to which a portion may be allocated is for a major Government project such as the Snowy River Scheme. If the Reserve Bank or Development Bank provides a loan, such as existed with the extinct Commonwealth Development Bank it is simply a loan by the people to themselves and we may safely assume that the loan will be interest-free and no costs will be included for that purpose. The construction being undertaken will distribute wages and salaries and other costs which will be cancelled out on completion when the total cost which has been drawn against the National Credit Account will be treated as an asset with appropriate depreciation and appreciation
A system of national accounting is necessary if the community is to have available sufficient money to provide an effective demand for the goods and services, which farms and factories can produce, at prices, which will allow producers to function profitably.
Other advantages would follow. Our present system of taxation would diminish and the financing of for example, Social Services could be paid for out of increased equity without the need for taxation for that purpose. People would be able to receive the benefits of their association past and present as a result of the Cultural Inheritance and Increment of Association as well as technological advancements.
The greatest blessing, however, would be that the present Debt System, in which the community can develop industrially, socially and culturally, only by getting deeper and deeper into debt, would be transformed into a Credit System in which the resources of Australia could be monetised and used for the benefit of all citizens. Under such a Credit System, the individual would be established in his personal sovereignty and freedom, and co-operation would replace compulsion as a means of securing participation in enterprises and projects. It does not necessarily mean that there would be no debt—just that there would be no debt incurred as a result of a deficiency in purchasing power.
Several aspects of national accounting have not been treated because of lack of space, but anyone who has grasped the principles enunciated above, will be able to apply them to any aspect of the subject.
Correction of Accounting System
There would be few informed people who would seriously question the fact that there are and have been for some considerable time, serious defects in the financial system.
This fact can be evidenced through the unpurchasable surplus production (quite separate from the notion of built in obsolescence),
Increasing speculative ventures in the financial markets around the world in buying and selling currencies contribute nothing by way of adding to the productive process for the benefit of the people in general. Whilst all economic production is measured in terms of finance, science is reducing the energy requirement in the productive process. This is accompanied by a system that continues to maintain the importance of a scarcity of finance, which is, or should be, simply a claim upon the articles that are produced and potentially could be produced in abundance.
Economic democracy as a reflection of economic security can never be achieved until the defect in the financial system, which virtually controls the economic system, is rectified. The observation of the facts when presented in terms that can be readily tested can elicit only one answer to the question – who is benefiting? Take one example of the way in which unemployment is regarded. Now, we are talking about unemployment and not money or anything else. In a physical sense, whether it is human, mechanical, electrical, solar energy, the word “employ” means “to use something, or a person, to be occupied, or to use one’s power”. In other words it requires the use of energy, in some form. Economic production is simply the application of energy to available raw materials. If a means is attained whereby energy can be saved there is a physical saving and that in turn should be regarded as an asset, yet in conventional terms being unemployed is regarded as a liability.
. . . economic production is simply a conversion of one thing into another, and is primarily a matter of energy. It seems highly probable that both energy and production are only limited by our knowledge of how to apply them. (C. H. Douglas, Social Credit Principles.)
This could be expanded to an article in itself, but any accountant would recognise that an industry that saved energy, no matter what form, would save money because money is the measure used to calculate the cost of the use of energy. The reduction of human energy employed in an undertaken must be translated into increased profits (all other things being equal) and this is reflected in an increase in the financial position on the Balance Sheet. The Balance Sheet would then reflect this as an increase in Assets or a reduction in Liabilities depending upon whether the undertaking operated on a credit bank balance or an overdraft.
The answer to the question of why people do not have economic democracy lies in the acceptance or rejection of an outdated philosophy, against the physical facts contained in a pursued policy. On the one hand we are offered an increase in an asset for the benefit of people in society, and on the other a denial of the benefits that should ensue to the people in their association. The very policy that results from the defect in the financial system that affects the distribution of the results of observable phenomena in the form of associations, by denying those benefits, is a matter of control.
THE PHYSICAL BASIS OF SOCIAL CREDIT
To commence the explanation on the physical basis of Social Credit it is interesting to recall some of the incidents involving C. H. Douglas who can be regarded as the founder of the ideas that are encompassed in what is known as Social Credit.
Originally it was referred to as Douglas Credit by many but he quickly rejected that designation because he acknowledged that he was not the originator of the Credit of Society. That Credit in the form of all the natural resources was provided for Man. Whether one wishes to acknowledge that everything that existed before Man is attributable to God or simply natural phenomena is not in question. The fact is, all the physical resources necessary for the life of Man existed independent of Man.
Before he entered into a study of the problems which confronted people in obtaining the benefits of their work and working together he had noticed certain things operating in the economy which did not appear to make sense to him.
In an address to members of the Canadian Club at Ottawa early in 1923, when in Canada by invitation to lay his views before the Canadian Parliamentary Committee on banking and commerce, Douglas gave an outline as to how his ideas began to formulate.
The story began, he said, when he was in India about fifteen years previously (1908), in charge of the Westinghouse interests in the East. He was surveying for the Indian Government a large district which revealed a good deal of water-power. In Calcutta and Simla he asked what was going to be done about this; to which came the reply, “Well we haven’t any money.” At that time manufacturers in Great Britain were hard put to get orders and prices were very low indeed. Major Douglas said he accepted the statement made, and, he supposed, pigeonholed the fact and circumstances in his mind.
On being sent during the war to the Royal Aircraft Establishment at Farnborough to assist in its operation, he decided that it would be necessary to go very carefully into the costing process. His friend Sir Guy Calthrop suggested that he should make use of tabulating machines, and so after a time Major Douglas began to concentrate very carefully on them. One day he noticed with regard to the figures on the cards emerging from those machines that wages and salaries at the weekend did not represent the price value of the goods produced in the same period. “You might say that anybody would know that, and I suppose they would,” said Major Douglas. But to him it followed that if that were true, it was true every week and in every factory at the same time. Therefore the wage and salary purchasing power each week was insufficient to purchase the goods according to the price each week.
This is a matter which eighty years later in 2005 still eludes those economists and others who argue that Douglas only looked at the results of one factory and ignored the whole economy. It appears that the reasoning is that if a problem is made bigger it will disappear.
On completion of his work at Farnborough, and confronted with industrial disputes, he found that the best way out of the difficulties with those who were fighting for more wages was to give it to them. “It settled everything,” said Major Douglas amid laughter. Then he went to Richborough, one of the new concrete cities built during the war and was immensely impressed by the fact that in spite of the withdrawal of something like seven millions of the best producers to the armed services, plus millions more engaged in the production of immense quantities of materials to be destroyed, leaving behind only the old and the very young, they were able to raise such wonderful new concrete cities, and yet everybody in the country was living at least at as high a standard as before the war. These facts also became pigeon-holed in his mind. Then his attention was attracted to a persistent propaganda that was being conducted to the effect that “we must produce more.” And he began to think what would happen when the whole of this intensive production was diverted in peace time. The persistent propaganda gained in volume, to be supplemented by a new cry that they were a poor, poor nation, and only hard work would save them from destruction.
The first article written by C. H. Douglas was The Delusion of Super-Production. In this article he stated:
The starting point to understanding Social Credit is the acceptance and understanding of the physical realities with which we are confronted. We have natural resources provided without the intervention of Man and we have the use of energy by Man to convert those resources for the benefit of Man.
In his book Introduction to Social Credit in the section Physics Dr. Bryan W. Monahan, one time Chairman of The Social Credit Secretariat, wrote:
(When that true profit is used to make more tools it is regarded as an investment in new capital equipment.)
C. H. Douglas in his book Economic Democracy drew attention to the fact that the fundamental currency in which in the last analysis an individual can liquidate his or her debts is potential effort over a definite period of time. In other words the real of the world’s currency is effort into time which he referred to as time-energy units. Without any other form of energy it is human energy in a certain period of time in which an individual can obtain the necessaries of life.
By liquidating “his or her debts” is a reference to the fact that he or she is drawing against the Credit – the Natural Resources provided by God or Nature. In the same manner it is by working (using energy) that Man can pay his debts in society.
Another way to regard this is to imagine a Balance Sheet where all money transactions were cancelled out by payments of all debts to creditors. All that would remain would be physical assets. Who would be shown as the creditor – God?
We know that Man has been able to utilise his energy to the extent that there is a surplus with which he has been able to put the surplus energy to increasing benefits. The construction of tools for instance which allows not only the procurement of basic necessities in less time with less expenditure of human energy, but renders possible processes hitherto impossible.
We have now reached a position of understanding the physical basic realities. All natural resources are made available to Man to utilise for his own benefit. The physical use of human energy can convert these natural resources to other things which are of increasing benefit. The knowledge of how to do things, make tools and increase the use of human energy provides a physical profit which can be utilised to further increase benefits. Those benefits include the ability to make more tools or to spend some time in leisure.
Another factor which enters into the equation is the discovery that by associating with one or more other persons it was possible to further increase benefits because it was found that two or more persons working together could achieve something which one person on his own could not achieve. Thus a further physical profit could be gained which we refer to as the Increment of Association. The knowledge of how to do things, make tools, etc., both of which, the knowledge and tools, are passed on to future generations we refer to as the Cultural Inheritance.
Dr. Bryan W. Monahan explains in his Introduction to Social Credit the real physical aspects of production:
We have “only to think of the changes wrought by the use of the spade in the practice of horticulture.” What is also important of course is not only the spade but a “knowledge of spade practice” and the “habits of plants,”
Further factors that enormously extend the effectiveness of individual effort are:
(1) The association of individuals to achieve a common objective.
(2) The introduction of solar and nuclear energy in place of human and animal energy as the basis of work done.
(3) The arrangement of automaticity in mechanical and electrical operations.
In examining the first factor it will be noted that the first result of association is that a given job may be accomplished more quickly and more easily. But not only may two men lift a heavy weight more easily and more quickly than one man but two men may lift a weight that neither alone could lift.
Society, from the aspect which concerns this paper “is a complex of observable phenomena and phenomena are observed results in nature, and all phenomena (all observed results in nature) appear to arise from some mode of association”. Every association has a result, and this is its increment of association. We can divide associations into different classes, Material, Mass and Energy asso- ciations for instance. The cultural heritage which increases the power of human beings in association to do things is the conservation of means of doing things.
The second factor which incalculably extends the power of human beings to produce desired results is solar energy, which includes energy stored in the form of wood, coal, oil and water power derived from the changes in the distribution of water due to the sun’s direct heat.
Thus an important ratio
Machine time-energy units which over time could be .......20.... 50.... 100.... 400
ranging from at least fifty units to in some cases many hundreds and increasing daily. Add to this atomic power and the still more spectacular possibilities of thermo nuclear and the magnitude of the picture may perhaps be glimpsed. The need for expenditure of human energy expenditure is becoming increasingly reduced with the development of automated process.
Hence, the third factor which the individual now has in his power to increase benefits is the use of automation. Increased technology, computerisation, and the division of labour which further multiply the use of energy all add up to what Douglas referred to as a catalyst.
In fact the requirement for human energy is becoming negligible and with automation could for the most part be dispensed with entirely. Its importance lies in quite another direction. The term “catalyst” is used in chemistry to denote a substance, the presence of which either enables a chemical reaction to take place, or to take place much more readily. The rate of production depends on the rate of transformation of energy. A man may control the speed of a giant machine by the mere energy at his finger tips. The multiplying factor of automaticity via amazing new electronic devices is even greater still. Certain functions of human thinking can be performed with incredible speed by these electronic devices which the late Robert Theobald, an English economist, referred to as cybernation, i.e., the use of computers together with electronic robots such as used in motor vehicle manufacturing. In rocket research most complex and vital mathematical calculations that would take more than a year for an individual to complete can be done in minutes by computers.
In Major Douglas’ unsurpassed description,
This is simply recognition of the fact that human energy is reducing in comparison to other energy used in the productive process.
This process is of the nature of acceleration and involves the ever greater rate of production with which to make things; the leverage of real capital. But there is a limit to the amount of capital goods that can be utilized usefully, and barring unlimited export into outer space we are approaching this limit ever more rapidly. It must be emphasised that our capacity to produce capital goods – things with which to make things – is far greater than actual capital goods in existence.
Dr. Tudor Jones in his course of lectures, the Elements of Social Credit, refers to derived associations, i.e., associations which add to or lead from one to another. It is of extreme importance that the physical associations with which we are dealing are those that lead to positive results. An association of people working together to produce a result they do not want is not even to be considered. However an association of people working together to produce a result they do want includes all of those factors that have been explained such as the Increment of Association, the Cultural Inheritance and the use of energy in all its forms.
Quoting Dr. Jones at length:
These three words, CAPACITY, ENERGY & POWER should be marked indelibly in the mind because whether or not there is a small amount of energy such as human energy or a great amount of energy utilising machines and all capital equipment (tools), the limitations are those as described by Douglas. That limitation is the knowledge which gives the POWER to apply them.
This brings us to a characteristic which is overlooked and not even considered in the productive process. It is best described in the words of Dr. Jones:
To put the matter in a simpler form if we refer to bread as the staff of life and that Man exists on bread alone it is easier to understand. If a farmer sows his seed, grows wheat, harvests the wheat, grinds the wheat into flour, and makes bread from that flour it provides him with the energy to go out and plant the seeds, etc., to make more flour the next day. The bread that he eats today that gives him the energy to go out and repeat the process tomorrow is not the energy that allowed him to sow his seed etc. in the previous period, yesterday. It is simply a recognition that all of the conditions that existed from the beginning on this earth provided Man with the necessaries for life. His work is simply a further addition to the energy.
If the only access to food, clothing and shelter is through money and the only access to money is through employment, then unemployment means starvation. This sequence is not logic. It is what the Russian psychologist Pavlov called ‘conditioning’. It applies to animals just as effectively as to Man, the place of employment being taken, for example, by jumping through a hoop.
The sequence ‘unemployment means starvation’ is a convention just as the sequence of a ringing bell means salivation in a dog is a convention. The depression was terminated by the employment associated with preparation for war. Preparation for war means the construction or conversion of factories, the manufacture of armaments and arms, the stock-piling of materials, and the employment of a proportion of the population in doing these things. Of itself, clearly it contributes nothing to the standard of living. But it does distribute money, allowing access to whatever standard of living is available through the efforts of those not diverted to the production of munitions.
When a maniac in charge of the world’s most powerful military organisation is threatening to make war, production of munitions to meet the threat is a necessity. But insofar as war, under modern conditions, involving the mass slaughter of non-combatants, is an incarnation of evil, employment in the production of the means of this slaughter is degrading employment. But it still distributes incomes, virtually the only access to the means of life.
The production and distribution of pornography also distributes incomes; so does the production of essentially useless gadgets. Employment of any kind, useful, neutral, useless or vicious, is paid for in the same way, by means of money. What enhances the standard and quality of life is remunerated indifferently with what degrades life and despoils the earth. We pay, of course, for this indifference. Wasted effort dilutes the value of useful effort; this is the reality underlying the financial phenomenon of inflation.
In order to see clearly how the institutions of society can be made to minister to the true welfare of man spiritually, materially, individually and socially, we will need to take a careful look at some important discoveries and enunciations contained in Social Credit.
The first of these is that the “cost of production is consumption”. This is a real, natural, and fundamental law of economics; being expressed more fully in the statement that the Real cost of production is measured by the consumption incurred in that production. If we refer back to the analogy of the farmer and his bread, this can easily be seen. The cost of producing today’s loaf of bread was the bread produced yesterday and consumed today. Put another way, we can say that the true cost of a given programme of production is the consumption of all production over an equivalent period of time. Cost is only the natural penalty or condition paid by human beings in reaping the result of the increment of association, one aspect of which is the fruitfulness of the earth. The ratio of food consumed to food produced is always a fraction less than one. This applies to all consumption items. The difference between that fraction and one represents true profit in the most fundamental sense.
Therefore: .... Food Consumed..... may be equal to ...1.... 1
It is difficult for some people to understand the meaning of the statement that cost is the natural penalty paid by human beings but this should be related to what was said earlier. The fundamental currency in which in the last analysis an individual can liquidate his or her debts is potential effort over a definite period of time. The cost in real physical terms represents a penalty; a penalty in the form of potential effort over time. People must expend some energy in a certain period of time to obtain something.
A distinction is drawn between penalties exacted by man-made law and natural law to obtain a useful notion of ‘cost’.
To discover whether or not a penalty of any description is naturally attached to goods and services is not to discover the nature of the penalties or the names and addresses of the natural payees. Natural penalties are not, in fact, payments made to anybody. They are the natural conditions in which a desired result may be secured.
Let us take, then, any desired result and see as far as we can, what are the natural conditions in which it may be secured? Broadly, they are the establishment of the appropriate associations.
Take the case of a loaf of bread. Loaves of bread are consumable goods, resulting, under modern industrial conditions, from a long and complicated train of associations, e.g., the cultural heritage (knowledge of effective methods of irrigation, breeding of desirable strains of wheat, the discovery of the aerating properties of yeast, natural mechanical principles embodied in the construction of machinery for mixing and transportation, fire- making, the modes of rendering heat energy available, the art of brick making, traditional knowledge of the behaviour of artificially implanted grain, and so on.) No natural observable penalty is exacted in regard to any of these associations or their increments, unless it is the penalty of having to do work to establish the associations anew in order to profit by them. Energy is the capacity for this work.
We may say, then, that the penalty exacted for using the cultural heritage (which, we see, is a large item in the production of a loaf of bread) is the work done by men in establishing the appropriate associations. Let us say, for it is the traditional symbol, that bread itself is the source of the energy providing the capacity to do this work. In other words, the cost, or penalty, exacted naturally, here is consumption by living men engaged in establishing the appropriate
Thus we may say that in regard to physical realities:
THE TRUE COST OF A GIVEN PROGRAMME OF PRODUCTION IS THE CONSUMPTION OF ALL PRODUCTION OVER AN EQUIVALENT PERIOD OF TIME. As everybody knows, a standard method is in use of evaluating cost in terms of money. Before we try to discover the correctness or otherwise of the use which is made of this method, let us try to see what is involved. It is always better to take very simple cases whenever the objective is to discover fundamental principles. The modern industrial system is complicated, and it is fatally easy to lose track of the events occurring within it and of their real meanings.
In this case, the cost of production of all the cocoanuts of the island would be all the cocoanuts of the island, or the cost of a cocoanut would be a cocoanut. But suppose the islanders to be capable and willing to produce more cocoanuts than sufficed for their needs, let us say twice as many, then the production would be twice the consumption, and the penalty exacted for making two cocoanuts available would be one cocoanut. It is never possible for the mean consumption rate to be greater than the mean production rate in any period without there being a source of goods not revealed in the production figures – that is to say without extending the period considered to cover an excess of production of goods which could be stored.
Now this is a very remarkable result, which must surprise some of us, who have so prominently in our minds notions of equity that we recoil from the plain fact that it is possible for the true cost of a volume of goods to be a fraction of the goods. We are in the habit of thinking that since one cocoanut is as good as another, more or less, no exchange is equitable that is not on the basis of cocoanut for cocoanut. Yet it is evident that in certain circumstances, namely a higher mean rate of production than of consumption, the true cost of production is a fraction of itself.
Now, we do not need to know much about money to see that if the islanders are “rewarded” (quite unnecessarily in this case) for their production of, let us say, a hundred cocoanuts with a hundred little pieces of paper, upon each of which is written a letter “M,” the “cost” in “M’s” of one hundred cocoanuts is one hundred “M’s.”
Major Douglas has defined this production capacity (energy) as the ability to deliver goods and
services, as, when, and where required, and is called by him the real credit of the community. This
most important factor modifies the fundamental law previously stated, namely, that the “cost of
production is consumption,” and the important ratio ..........consumption.........affected by it.
Two interesting revelations emerge from the foregoing considerations. Firstly neither individuals nor the community of individuals can go into “debt” for true cost. If cost is consumption, it is discharged on consumption. Cost is properly measured as a ratio, in which production potential, the denominator, is increasing much more rapidly than actual consumption, the numerator; therefore real costs are falling.
The physical reality is that in the fraction Consumption to Production. Consumption is always less than Production. It is a physical impossibility to consume more than has been produced. Surplus production may be saved and consumed later but in totality it is not possible to consume more than has been produced.
We have seen that human energy is reducing in relation to other forms of energy in the productive process. This means that production must be increasing at a greater rate than consumption. Now if the cost of production is consumption it follows that real cost is being reduced with respect to production. In other words goods for consumption should be less costly because human energy is being used less and less.
However, the introduction of money in whatever form and attached to a unit of production conceals the physical reality. It is like a magician’s slight of hand trick or some kind of black magic that hides the truth from people.
If the real physical cost is being reduced this should be reflected in a money system which should reproduce the same conditions with a money price.
Dr. Tudor Jones in his Elements of Social Credit explains this very simply:
All this means that the physical reality in the productive process reveals that the cost of production which is consumption covers the production of everything, i.e., consumable goods (Consumption) goods that are consumed and capital goods (tools and equipment) to be used in future production.
We have reached a point where we can summarise.
Man exists in an environment which provides him with a credit in the availability of all of the natural resources. Man is indebted to God or Nature for the provision of that credit. Man can only liquidate his debt in the usage of those resources by utilising his time and energy. Over and above the provisions of necessaries to exist Man can produce more than he needs to consume. The surplus production is in reality a profit which can be used either for leisure or for the production of tools (capital equipment) to further increase consumer goods or capital goods.
However, within the system in which we live, costs and prices are based on rules of accounting in which money values are attached to the units of production and thus consumption. The reality is that, as shown in the case of cocoanuts, no accounting is allowed in the real production process for the increment of association or the use of capital equipment. There should be an accounting process that equates costs of production with the consumption that occurs in the same period of time.
One of the problems facing those who attempt to unravel the truth is the use of language and the common acceptance of words and expressions. It is absolutely vital to clear the mind and have no preconceived ideas. Dr. Tudor Jones in his Elements of Social Credit explains:
The price of anything is denoted by the number of monetary units paid or to be paid. In all cases, the price either asked or accepted is a sum of money. There is no relation to the real physical cost. The price of anything is built up by the addition of financial costs of production and is calculated in terms of money.
In particular money does not measure “value”, use value, moral value, aesthetic value or any other form of value. C. H. Douglas in his book Social Credit explains:
We have reached a point where we can see the diversion from reality to the unreal. The reality is the physical and the unreal is money. Why is money classed as unreal? Because it has no intrinsic value; it has no use other than that which we as people wish to give it. It is or should be like a mirror reflecting reality because without reality there is no need for money.
C. H. Douglas drew attention to the fact that if it can be any medium it can be anything and that the only physical limit to the amount of money should be physical resources (Man, Machines and Natural Resources).
Value is subjective and immeasurable although an absolute. If an article or each unit that makes up an article has, for no matter what reasons placed against it, a money value of say one dollar, then money simply measures the fact that two articles or units will be two dollars and three unit three dollars, etc. It is in this sense that money is a ‘rate measurer’ of the rate of production in fact, not a measure of value. The fact that one article has a money quantity of one dollar placed against it has nothing to do with the nature of money itself. Neither can money measure relative value except theoretically for one instant in one case.
Production wealth and consumption can only be properly measured in rates. Also the economic system is not static but dynamic and here we approach the heart of the whole matter.
If we attempt to look at the matter from a static point of view we are sure to make the mistake which formed the point of the story regarding the committee of “scientists” who it is said, were asked to report upon the nature of the hum in a humming top. Their report was that the whole subject was nonsense, as they had taken the top carefully to pieces and were able to report that there was absolutely no sign of the existence of any hum.
If we grasp this idea we shall not find it difficult to accept the statement that the wealth of a country, and therefore the basis of its financial credit, is not so much in the things that it actually possesses as in the rate at which it can produce them.
We are now getting to a very interesting stage, because it is only a step further to say that if we issue money at a rate corresponding to the rate of production we should not take it back at the same rate (which is what we do at the present time when we charge all financial costs into prices) but we should only take it back at the rate of consumption, which results in the startling conclusion that we ought to charge less than the price for articles sold, even if the rate of consumption as compared with the rate of production remains constant. But we know that it does not remain constant.
Every improvement of process, machines, and the application of power to industry increases the rate of production without necessarily increasing the rate of consumption, so that not only ought we to have the prices of goods below the price which is the cost to the consumer, but we ought to have them decreasing in relation to cost/price. So that the rate at which we can issue additional credit (money) is easily seen to be dependent upon the rate of increase of productive capacity, while the rate at which we take back existing credit and the new credit should be dependent upon the rate of consumption. It is vital to be clear about the fact that there is a real natural and indissoluble connection between production and consumption.
If the rate of production is increasing against the rate of consumption it means that consumption
must be a fraction of production and thus the fraction:
We know that the fraction of Consumption to Production must be less than one. Whatever that fraction may be, 1/4, 1/40, 1/400, it cannot be established until after the end of a period. This can only be done by an accounting process that is instituted under a correct set of accounts in a proper realistic manner and based on physical reality. C. H. Douglas referred to real credit as the rate or dynamic capacity at which a community can deliver goods and services as demanded. In his book Social Credit he wrote:
When, therefore, we say that:
True price (in £) = cost of ultimate products consumed (£) + depreciation of real capital in £
......................... = cost (in £) x Credit created (in £) + cost of total production (£)
We have now reached a position where the reality of physical cost can be linked to financial cost. Now the physical cost as we have seen is a penalty in terms of the use of energy but the financial cost of anything which is an accumulation of figures is more than just the financial cost in the process of production. The final cost financially to the consumer is the price that has to be paid at the point of sale.
It must be emphasised that these two features of the present system operating in every part of the world are absolutely inherent in it; underlying every other aspect and administrative detail of the world’s economic and financial system as at present constituted. If the substance of this paper so far presented has been grasped, it will be clearly seen that the current financial accounting system not only violates the true law of cost as enunciated by Major Douglas in the statement that the true cost of production is the consumption incurred in that production, but also that here is the origin of the financial perversion of the true law of supply and demand if we may call it such.
In his booklet, The New and the Old Economics, published as a reply to Professors Robbins and Copland, Major Douglas puts the matter most succinctly as follows:
There is yet another fundamental aspect to all this. Apart from other factors making for real progress, the rate of production is practically proportionate to the energy applied to it; the energy output of machines not the input, applied directly to the production. If one unit of human labour with the aid of mechanical power and machinery produces ten times as much production as the same unit working without such aids then either output will increase ten times or only one-tenth of the amount of labour will be required for the same original output. As production per man increases, either requirements must increase, or the number of men required in production must decrease. When overall production increases beyond individual requirements as the ratio
...................................................................Machine time energy units
rises towards near saturation level when very few men would receive wages and salaries to purchase the product, then price per unit production would have to fall so that the smaller amount and area of wage distribution would purchase the total product, some of which would otherwise remain unsold.
The true physical situation makes progress towards this status inexorable unless catastrophe supervenes. We are far from it at present. In place of genuine leisure we have full employment, hydrogen bombs and the race into outer space. The conquest of outer space is not in itself to be deprecated. The question is one of priority. The nature of the cultural heritage and its operation in- creasingly through co-operative machine production is making producer and consumer increasingly interdependent. The natural born inhabitant of a country is becoming inherently less a wage earner and (but not in present practice) more of the nature of a shareholder in his country. With rare insight Major Douglas describes it thus:
At present, this Real Credit cannot be used by the Community who are its rightful beneficiaries because it is not monetised. As soon as we have a National Balance Sheet however, it will be seen that this surplus of assets over liabilities can be monetised and distributed to the community in whatever way deemed desirable so that consumption may keep pace with production, and so enable a continuous expansion of production.
The prevalent assumption that human work (employment) is the foundation of purchasing power has more implications than can possibly be dealt with here. It is the root assumption of a world philosophy which may yet bring civilization to its death grapple. It consists in the domination by a financial system over all effective individual dissent and is inextricably linked to a policy of full employment where employment (the expenditure of human energy which is a diminishing factor in production) is absolutely necessary to receive an income to receive the benefits which are increasingly being supplied by other forms of energy.
The means whereby the accounting methods would be corrected to reflect the physical facts are contained in the establishment of a National Balance Sheet. This is a matter for financial discussion together with the physical basis of Social Credit. It should be sufficient to say that a National Balance Sheet properly constructed would be the link, between the physical reality and the monetary symbol reflecting the reality, to the distribution of benefits accruing to individuals from the physical basis of Social Credit.
One of the main difficulties that is experienced by new readers to the subject of Social Credit is in divorcing their thinking in monetary terms and accepting physical reality.
It is only when the importance of physical reality is realised that an understanding can be achieved.
To substitute physical facts for symbols which in fact do not reflect those physical facts, which they should, means reversing the thinking which is associated with the use of those symbols.
It is not the symbols such as the $ or ! or £ which mean anything but the real things which they should correctly represent.
The information contained herein and the quotations have been extracted from Social
Credit publications and essays or addresses by C. H. Douglas.
C. H. Douglas * * *
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