ALOR - Science of the Social Credit Measured in Terms of Human Satisfaction

THE A + B THEOREM

by
Victor Bridger

There is little doubt that there is a mental block by some who argue against the A+B Theorem.

Firstly, the A+B Theorem is not the totality of Social Credit. Many critics believe that if they can disprove the Theorem then Social Credit is totally wrong. Apart from the fact they cannot prove it wrong it is only one part of the Social Credit concept. It is simply a means whereby C.H. Douglas’s analysis of the existing financial accounting system demonstrates the flaw in the system and explains how the current financial system continues with this inherent flaw. It continues through the increasing necessity for bank lending with the obvious result of increased debt. It is a Theorem and not a theory.

The A + B Theorem

Major Douglas’s statement of his theorem is as follows:
“A factory or other productive organisation has, besides its economic function as a producer of goods, a financial aspect – it may be regarded on the one hand as a device for the distribution of purchasing power to individuals, through the media of wages, salaries and dividends; and on the other hand as a manufactory of prices financial values. From this standpoint its payments may be divided into two groups:

Group A.--All payments made to individuals (wages, salaries, and dividends).

Group B.--All payments made to other organisations (raw materials, plant, repayment of bank loans, and other non-personal costs).

Now the rate of flow of purchasing power to individuals is represented by A, but since all payments go into prices, the rate of flow of prices cannot be less than A + B. Since A will not purchase A + B a proportion of the product at least equivalent to B must be distributed by a form of purchasing power, which is not comprised in the description grouped under A.”

“The above proposition,” he says, “is perhaps most simply grasped by recognising that the B payments may be considered in the light of a repayment of a bank loan by all the concerns to whom they are made, with the result involved in the relationship previously discussed between bank deposits and bank loans.” (The relationship referred to is the cancellation or “destroying” of a bank deposit upon the repayment of a bank loan, and so the passing out of existence of so much money.)

Two important things should be noted in this statement.

1. The expression “rate of flow,” which signifies a dynamic or continuous state. This idea can best be grasped by imagining the industrial system as a huge tank from which issues two streams. One representing the flow of A costs or payments; the other the flow of B costs or payments. The two streams flow concurrently and together represent the rate at which prices or costs are generated by the industrial system, while the “A” stream alone represents the rate at which purchasing power is distributed. And in these circumstances this relation between costs and purchasing power must obtain over any period of time, or at any point of time considered.

2. Major Douglas does not say that the total goods produced are not sold, but that a portion at least equal to “B” must be sold by a form of purchasing power other than that comprised in “A.” He has stated:

“The wages, salaries and dividends distributed during a given period do not, and cannot, buy the production of that period; that production can only be bought, i.e., distributed, under present conditions, by a draft, and an increasing draft, on the purchasing power distributed in respect of future production, and this latter is mainly and increasingly derived from financial credit created by the banks.”

The argument criticizing this proposition is, that the B payments “ultimately” become purchasing power, and consequently the apparent deficiency is made up. We shall presently consider what is meant by the term “ultimately” and, if our interpretation be correct, what the statement implies.

A comment by an economist in recent times illustrates how little understanding exists in how the real world operates.

“Group B payments will themselves be divided between Group A and Group B payments at the recipients, and those Group B payments will also be divided between Group A and Group B payments ... and so on. And if there is a residual of Group B payments that were resolved into Group A payments in a previous period, that can be offset against the Group A payments made this period where the products paid for will show up in final output in the following period.”

This statement illustrates the lack of understanding on the question of Cost and the fact that if it applies to one producer only it must ipso facto apply to all producers so that the aggregate of Prices must always exceed aggregate incomes in the same period of production.

Now the first thing to understand is that Group A payments are payments for wages, salaries and dividends and that Group B payments are payments made to other organizations or book allocated costs for which no payment is made.

B payments are received by other organizations in return for costs they have already incurred. For example company number one pays company number 2, 3, 4, and 5 etc., for insurance, rent, telephone, interest, cost of either intermediate goods or raw materials.

Companies 2, 3, 4, and 5 etc. have already paid out wages, salaries and dividends which have formed part of their cost which has been charged to company number one. The total payments make up the total cost for which wages have been paid i.e. “B” payments Companies 2, 3 , 4, and 5 cannot and do not pay out the receipts of reimbursements as wages salaries and dividends. A simple simplistic example will show how ridiculous is the economist’s claim that B payments become A payments and therefore there is sufficient purchasing power to meet final prices.

Let us put the procedure in a different order. Company X commences with sufficient capital (with no overdraft) to meet all expenses in a round of production. Company X commences with no debt or payments to other organizations. (If it did have payments to other organizations before commencing it would not alter the argument but would extend it and support the A+B Theorem.) Company X cuts down the trees or mines the minerals with labour only and thus pays out wages and salaries, i.e., $200. These form part of the initial costs of production. However, it incurs costs for insurance, fuel, telephone, stationery, postage, capital equipment etc., of $300. Let us assume for simplicity that all these payments are made to one Company Y.

Company Y receives payments equivalent to its costs incurred for wages and salaries paid out in the same period, i.e., $300. At this point of time all B costs incurred are equal to the wages and salaries expended by Company Y.

Company X has total costs of $500 and Company Y has costs of $300 which have been recovered. The total costs incurred in the period are $500 and wages and salaries equal $200 plus $300, i.e., $500.

This is a completely static situation in which there is no provision for growth, the money position remains the same.

However Company X has made a provision for depreciation on the capital equipment which it purchased and added this to its costs. In addition it adds a figure for profit. The depreciation and profit amount to $50.

Company Y has charged Company X only its costs and has made no provision for depreciation or profit. Suppose that the $300 charged to Company X included a similar amount for depreciation and profit.

The situation would change with Prices established by Company X as being costs plus depreciation plus profit, which equals $550.

Company Y has no B payments (an impossibility but assumed for simplicity) and it has costs of $300 made up of wages and salaries paid out, i.e., $250 and $50 for depreciation and profit. It has established a price of $300

Total wages paid out by both companies is $200 (Company X) and $250 (Company Y), equalling a total of $450. The total of price to be met is $550 (Company X). Company Y has recovered its costs and profit.

The situation is aggravated further with the incurrence of labour displacement as plant and equipment are employed in their place. As a result wages and salaries (A payments) are reduced and B payments are increased. Not only are the costs of the operation of capital equipment entered into price but also the added depreciation. With the increasing ratio of B to A payments with respect to costs and price, it is beyond dispute that income (A) will fall as a component part in the costs of production. It is not too difficult to understand that the payment for capital equipment did not originate from peoples’ savings, commonly regarded as investment.

As previously explained with the introduction of new and more capital equipment peoples’ income is reduced through labour displacement. It originates from bank lending which has to be repaid to the banks. It may be argued that the money could have come from retained earnings but this can only produce the situation of a further deficiency in purchasing power. The money contained in retained earnings has arisen from profits which have been obtained by recovering costs in prices and for which there must be some unsold goods remaining in the market. By investing in a further round of production the money from retained earnings will form part of a new set of costs. That money can either buy unsold goods or be used to produce goods, produced by the use of the money saved for which there will be a new set of costs and prices but it cannot do both.

In reality most companies operate on an overdraft and therefore incur interest charges, which can only be met out of price and adds to the deficiency. There are other items that could be included but the mathematics above cannot be discounted. Nor can it be disputed that a time element is involved in any production operation, particularly between the incurring of an original cost and the final price to be met. In addition there is the real situation that not all accounts are paid in the same production period and sometimes not at all. Other factors that can affect the position are the operations of the banking system, for example, if a bank reduced an overdraft or called in the overdraft prematurely. This is the real world.

Much is made of the effect of interest in the scheme of things but interest is a B payment and like all other B payments, all things being equal, will find their way back into the money flow.

In the real world, it is the action of the banks by continuing their lending and in recent times the introduction of Credit Cards which creates the situation of people meeting a price established in the past with incomes they have to earn in the future. People are mortgaging their future because of a faulty financial accounting system. This is the real world and a fact beyond dispute evidenced by the enormous increase in consumer debt.

To answer the comments quoted by the economist, it is definitely not correct to state that “Group B payments will themselves be divided between Group A and Group B payments at the recipients, and those Group B payments will also be divided between Group A and Group B payments ... and so on.”

This is not only an unfounded assumption but demonstrates a lack of knowledge of the operation of any commercial undertaking. Group “B” payments to the recipient (y) represent recovery of costs already incurred for which money has already been paid including wages and salaries and which forms part of the costs of (X). B payments received by (Y) can only be recovered from (X) after a price has been met. This means that the wages and salaries paid by (Y) included in the cost to (X) are recovered in prices by (X)

B Payments are payments made by one business to another or allocation of book costs, which are not paid to anyone. Disregarding the latter book costs, B payments received may provide support for the recipient to continue business either because the bank account has been credited and this has increased the balance in the black – or an overdraft is reduced. The action taken by the recipient of B Payments does not mean that receipts are immediately utilised to pay wages and salaries. The payment of wages and salaries by the recipient is distinctly a separate and different operation and any business which operated on the basis of using its receipts as income is headed for bankruptcy.

It is obvious that there is a difference in language and the use of terms by economists. One thing is certain. Receipts in any business do not represent Income.

The balance of the quote “And if there is a residual of Group B payments that were resolved into Group A payments in a previous period where the products paid for will show up in final output in the following period.”, is not only supposition and double-speak but is based on the original premise which as has been shown is false and therefore not worthy of comment.

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SOCIAL CREDIT AND THE A + B THEOREM

Repayment of Bank Loans

Practically the whole of industry is carried on by bank credit, which means that as each concern receives payment for its product (which payment constitutes the B payment of the next industry in the chain or process), it must of necessity use that money to repay its bank loan contracted in the production of the goods, and thereupon the money is “destroyed.” How, then, can it possibly function as purchasing power? It is true that the B payments of any industry may have represented income for some or purchasing power at some time in the past, but the money had to be spent by the recipients in order to live and, therefore, would be used in the repayment of the loan incurred in the production of the goods which it purchased. Hence, with the exception of the negligible portion, which may be saved, that money can in no sense be regarded as purchasing power “now.”

This answer in itself should be sufficient to prove the fallacy of the claim that B payments are also effective purchasing power, for it will be obvious not only that they represent “A” payments of the past or expended purchasing power, and therefore cannot represent “income” unless a loan is renewed or an overdraft is used again in that production; but also that they are in fact simply payments passing between industries on their way back to the banking system for cancellation, and at no stage appear “outside” of industry as income and purchasing power. If we imagine this flow of B payments to go on every day, week and year, flowing constantly and concurrently with the flow of A payments, the one flow of money, however, going backward to the banking system for cancellation, while the other flow goes forward to consumers as purchasing power, It seems indisputable that the A payments as the flow of purchasing power can never equal the two flows of costs represented by A + B.

Do B’s Become A’s?

Now what is meant by the term “ultimately?” Does it mean that the sum of money received by the producer of raw materials or machines in payment for his goods is available entirely for expenditure on his personal needs as a consumer? In that event we should have to suppose that such producers contracted no loans, paid no wages or salaries, drew no incomes themselves, and made no purchases at all–in short, that they lived on air–until the goods were marketed and payment received, which may be months, and in some cases years.

Actually the producer or manufacturer pays wages and salaries and draws an income himself as wages of management, at the time of production, and to allege that he and his employees will again receive a similar sum on the sale of the produce– excepting that accruing as “profit”– is to claim that producers are paid twice over for their work! The usual practice is for a producer or manufacturer to borrow from a bank or expend his own capital to carry out production, and the money he receives from the sale of his product is used to repay his loan or restore his capital. If instead he were to use the proceeds of sales for personal expenditure it would mean, therefore, that he did not repay his bank loan, or that he was living on his capital, and in either case he would very soon cease to function as a producer. It is apparent, then, that if the “B payments” money is to emerge again from the productive system, as the result of a loan from the banking system, it will do so in respect of NEW production and will register a new cost.

From this analysis it would seem that the most generous and the only intelligible meaning to be placed on the use of the term “ultimately” in relation to B payments, is that they will reappear in further production but, on the next occasion, as A payments, and will then function as purchasing power.

Clearly, if the B payments, in any period, do not become purchasing power until “ultimately,”that is, at sometime later, then they cannot be regarded as purchasing power NOW, that is, within any period under review, and when the goods are made in which the B payments appear as costs; and that is the claim Major Douglas makes.

Even if it be assumed that what is suggested (that B payments become A payments) does occur, this is no solution of the problem of the disparity between total costs and purchasing power, because the next period, like the previous one, must also have ITS B costs to be accounted into price, which fact again makes prices greater than the A payments distributed as purchasing power. Let us examine the implications of the suggestion that Bs become As.

Let us imagine that each day represents a period or cycle in industrial operations. On Monday, then, industry pays out, say, $10 as its A payments to individuals, and $10 as B payments to other organisations. The cost of the product, therefore, is $20; and in the terms of the A + B Theorem, the only purchasing power distributed is $10. We doubt that this can be denied, for it cannot be disputed that money used to make B payments cannot, at one and the same time, be used to pay wages and salaries. But the claim is that the B payments will “ultimately” appear as A payments and make up the deficiency. Let us see. Now clearly “ultimately” cannot be Monday. As already suggested it is a physical impossibility, since money cannot be in two places at once. Therefore, we must assume that Tuesday–the next period–is the “ultimately” referred to, and that then these “B” payments will appear as “A” payments and purchasing power.

Now on Tuesday as with Monday, there must of necessity be B payments or charges connected with production, for it will be granted that men are paid wages and salaries only for working on machines in making up raw materials, and that they generally work in buildings–all of which mean costs in production. Consequently, we can justifiably set down similar token figures for this period, and assume that B payments are $10 and the A payments $10, a total of $20, which is the cost of the product. On Monday we saw there was a deficiency of $10 in purchasing power, and we will now assume that the A payments of Tuesday are used to purchase Monday's production and make good that deficiency. Thus industry for that day will recover its costs. But what will then be the position in relation to Tuesday's production? The A payments of that day were used to make up the deficiency in respect of Monday’s production, and therefore there must be a “carry over” of $20 worth of goods – $10 more than was the case with Monday’s production. On Wednesday, as with the other periods, industry distributes A payments to individuals amounting to $10, and again has B payments of $10, and again total costs are $20. No profit is included which goes to make up the price which has to be met by consumers.

But the purchasing power distributed in this period is sufficient to buy only half of Tuesday’s “carry over” costing $20, and therefore if it is to be sold that can be done only by waiting – until the next period – Thursday – and using ITS A payments for the purpose. If we imagine this to be done it is clear, as a result, that in disposing of Tuesday's production we have rendered the whole of Wednesday’s and Thursday’s production unsaleable, or, in other words, there would be $40 worth of goods on the market without money to buy them, unless, of course, more money is created by the banks and advanced for a further and greater extent of production. In addition to all this is the reality of “Time” in the process. “B” payment represent costs incurred by (Y) BEFORE being charged to and paid by (X).. That part of those “B” costs which are for wages and salaries have been paid by (Y) prior to (X) including them in costs.. (Y) also has “B” costs and so on. “B” payments cannot possibly become “A” payments “ultimately”.

This illustration makes plain that the idea of the B payments “ultimately” making up the deficiency in purchasing power is entirely groundless. It is proof, too, of the truth of Major Douglas’s contention that production can be bought only by a draft, and an increasing draft on the purchasing power distributed in respect of future production. The simple argument that Bs become As amounts to saying, what everyone knows to be true, that if we go on working we shall get some money to buy some goods; but what everyone wants to know, and what should be demonstrated if it is to disprove the A + B Theorem is, that we already have enough money to buy the goods already produced. In a world overstocked with goods and equipment, it is surely beside the point to say that the solution lies in producing more goods so that the people may be provided with enough money to buy what already exists in abundance.

On The Question of Banking

It is important to note the part played in the economy and in covering up, intentionally or not, by the banking system. The A+B Theorem as stated by C.H. Douglas, is supported by overwhelming empirical evidence of the truths contained in it. Douglas pointed out that the deficiency in purchasing power under the current financial system of accounting could be overcome by further bank lending. This is evidenced by the enormous growth in debt, particularly consumer debt.

In the days of old when banks for one reason or another restricted their lending it became known as a “credit squeeze”. In much the same manner if the banks reduced or limited their lending fro consumption, or the people decided not to use credit cards the system would grind to a halt. If that ever did happen it would completely vindicate the A+B Theorem.

Douglas was correct in stating that the banks wrongfully claimed ownership of the money they lend. If banks only lent from their own funds either Capital or borrowed funds they would have the right to claim ownership. In this case they would have the same rights on foreclosure as any other lending institution who do not have the ability to create credit (money).

I agree that Douglas opposed nationalisation of the banks. The problem is not the administration but the policy. If banks were nationalised it would certainly increase the Monopoly of Credit but in a centralised administration. This is one reason for not allowing governments the privilege of creating credit (money) because it gives the power to a political party that is currently in power. If banks can only lend that which they have and cannot create credit they would be entitled to exercise any foreclosure rights that may exist under their contracts with their clients.

I do not like the term “on-lending”. It conceives of the idea that banks are agents for the Central Bank or whatever body that does have the right to create new credit and this is not correct. If banks want to lend they can use their own money. If they need more money they can (a) increase their Capital; (b) issue bonds and sell these and on which they would have to pay interest; ( c) borrow direct from local or overseas investors; (d) borrow from the Central Bank or Authority. In the latter case it may be that the bank would get a favourable interest rate if lending for New Production to their clients. However the matter of New Credits for New production is a subject on its own and this is detailed in other literature. The whole idea of New Credits for New production is that the money should not be from a source that has been saved from a previous period of production.

Banks, when making loans should act prudently. If they are sensible in their business like any other business they would know best (or should know) if their loans are responsible. Recentevents have shown this has not always been the case and I believe it wrong for governments to bail out banks that have indulged in reckless worthless investments. If any other business operated in the manner that many banks have they would go bankrupt.

The manner and quantity of New Credits to provide for new production, the National dividend and the Compensated Price discount would depend entirely on the results of a proper and correct National Accounting system.

Social Credit would be for a decentralised Policy and Centralised Administration. Dr. Monahan explains this fully in his Introduction to Social Credit. A Producer recovers his costs by establishing a Price, which becomes a cost to the next in line who in turn establishes a Price and so on until it reaches the retailer. The Consumer pays a “Price” which includes all costs previously incurred plus the profit of the retailer. Thus the Producer etc. all recover their costs. All “Prices” are banked and if the receiver of the “Price operates either from a loan or overdraft it means that the money supply has contracted until such time as new loans are extended or overdraft is used to spend into circulation.

In so far as Capital expansion is concerned there is always confusion. Capital can be in the form of money, which is obtained from the general public in the issuance of shares. Capital in the form of Plant & Equipment should be called just that not capital. Capital is a Liability to shareholders. Plant & Equipment is an Asset.

A final word on Centralisation and Decentralisation. In the proper conduct of any enterprise it is administration that must be centralised. Decentralisation of Policy with regard to Social Credit with respect to economic and financial affairs it is the very acts of consumers applying an effective demand that constitutes that Policy. If the consumer has sufficient purchasing power his purchases determine what is bought and therefore sold by the retailer. This allows the retailer to order more supplies of the product and therefore expresses a demand on the producer for more of the same product and so on back up the track. It is the consumer who is determining what is made and how much by applying effective demand. We wish to increase that purchasing power by means of the National Dividend and the Compensated Price discount. At the moment the lack of purchasing power and the need to borrow to purchase consumer goods puts the financier in control of policy. The question on how much is the gap and how much money would be required to equalize prices with consumer purchasing power can only determined after the end of a period. A proper set of National Accounts would reflect the correct facts. This would remove guesswork as with Governments’ decisions back in the 1940/50s to allow banks to only increase the money supply by an arbitrary figure of 11%. This was the same as the arbitrary value of gold was determined each morning at breakfast by President Roosevelt. We have come a long way from then but we are still in backwoods on the question of banking.

If I have a bucket filled with water, unless I bought a bucket or any receptacle with specific measurements all I know is that I have a bucket full of water. If someone asked me what the temperature of the water is I could put my hand in the water and say cold meaning that it is not hot. If they wished to know exactly what the temperature was I would need a thermometer. The same applies with the application of Social Credit. Too many questions are asked about techniques. All we want is the principle applied and leave the technical details to experts. There seems to be some thought that with Social Credit so many things will change and that is not the case. Life will still go on.

Without going into too much detail I make the following comments. The banking system was different in Douglas' day. I am not aware of how things operated in other countries such as England or Canada but I do know about Australia. Banks in Australia at one time issued their own currency notes until that was changed by legislation. At the establishment of the Commonwealth Bank it was the ONLY bank that could offer home loans. Private banks were restricted to lending to business only.
The Commonwealth Bank, which was eventually undermined by the private banks through the political system, was also the Central Bank up until 1952 when the Reserve Bank was established. At that time private banks were still restricted to lending to business only but gradually they obtained the power to lend for home mortgages and private loans. Consumer Credit, Leasing of Vehicles and Hire Purchase to Consumers followed which is where we are to day in Douglas' day all of these things did not exist in the same manner and certainly not to the extent of today. A reading of the Story of the Commonwealth Bank from its inception to its demise provides a good indication of how the world of power of the banks exist.

Probably Douglas' comment about banks on the pound for pound basis was predicated on the basis that banks did lend deposits although keeping certain reserves. This is one reason why a run on the banks without the backing of a central bank caused failures. It is difficult to compare then with now but whether Douglas was only concerned with the Monopoly of Credit issued by banks or not it is a fact that other financial institutions only lend from that which they have. For instance, Insurance Companies, Merchant Banks, Credit Unions and many others. Prior to the 1950s consumers could only purchase from wages, which were small, or use the lay-by system i.e. pay for the article over a period of time and when paid for they could collect. The other avenue was to borrow from moneylenders and even this was restricted to small amounts. Sometimes a moneylender would issue a voucher, which could be used at a particular store,

Banks are closest to their customers and in a better position to evaluate a business and its chance of success than a centralised bank. Today we have in Australia a great debate going on about the Mining Industry. The Federal Government wants to impose a Super-tax on profits, which exceed profits at a certain level. Mr Rudd's argument is that apart from the fact that most of the major companies are either owned or controlled foreigners that the people of Australia should be getting a better return for the use of the resources, which belong to the people. I tend to agree. The money that has been invested by these large companies, although they may have used some reserves, is in the main provided by banks finance. Another way would have been to have all investment in New Production emanate from a National Bank and made available to private banks for distribution to either local or overseas investors. Royalties that are paid on mining leases are a pittance and do not reflect the benefits that should accrue to the people. The results from a national set of accounts would reveal the amount, which may or may not be available for distribution to consumers by way of a National dividend and Compensated Price discount to make up the deficiency in purchasing power

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