RE: Two views

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helge nome

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Feb 6, 2014, 11:46:05 PM2/6/14

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Guys,
I can only admire Douglas for having created an ongoing debate for well on 80 years now!
If anything, that's what the A+B Theorem has achieved.

Helge

Date: Thu, 6 Feb 2014 18:15:13 -0800
Subject: Re: Two views
From: olrichar...@gmail.com
To: social...@googlegroups.com

Hi Dick: I'll respond to you in red.

Hi, Jim. I respond to your red in green.

DE1: "If the "B" payments are disbursed to other organizations then the purchasing power shortfall problem is not with the firm but with the other organizations. That is what I am saying too. I say the interest payments go to the financial sector and that there is where they are kept from returning to the flow as either consumption or investment spending."(Dick)

JS: B payments are not income to anyone. B payments are monies on their way to the bank. Money is either flowing from the bank to the consumer as income in the form of wages, salaries and dividends, or it is reclaimed in the form of prices and taxes and flowing back to th bank. Workers are paid prior to the good or service they produce being purchased and the company receiving revenues for said good or service. These revenues go towards paying back previously incurred debts or replacing working capital. Only a very small percentage of revenues are distributed as income in the form of dividends.

DE2:

1. Yes, to qualify as genuine Douglas B these production costs must not be paid to anyone.

2. There is no "on the way" in finance - at all times money is in one account or another. Transfer is instantaneous with no twilight zone.

3. If the money is transferred to a bank it must either be a fee to the bank or interest payments or savings put in deposit. There are no other choices.

4. The deposits stay in the bank. When salaries, wages, dividends are "paid" by a business deposits are transferred from the businesses account to the employee's account or the stockholder's account. When taxes are paid money is transferred from the tax payer's account to the IRS's account somewhere.

5. When you say money "is reclaimed in the form of prices ... and flowing back to the bank" I have no idea what you are talking about. Money is spent. When a checkbook or debit card is used for spending a deposit is transferred from payers account to receiver's account. Again there is no twilight zone. A deposit is always in one account or another. Deposits are only destroyed when principal paid and a loan retired or when customers take cash. In the latter case the deposit amount becomes a currency amount. Only repayment of principal goes back to thin air -- stops being money.

6. Yes workers are paid for work they do. Yes, the work is done and often paid for before the product worked on is sold and revenue from the sale received by the business.

7. Yes, revenues pay bills and interest on loans.

8. You are wrong on your last point. The way Douglas defines "dividends" the term includes both profit and interest.

Profit = Total revenue minus Total Cost

Profit = Total revenue minus total wages - total salaries - total rent - total utilities - total non-labor factor costs

Total Dividends = Total revenue minus total wages - total salaries - total rent - total utilities - total non-labor factor costs

Total profit and total interest = Total revenue - total wages - total salaries - total rent - total utilities - total non-labor factor costs

No money is lost. A firm my retain its earnings, but the money still exists and the firm has an opportunity cost for not putting it in the bank, even overnight, to collect interest on those funds. All money set aside for replacement of new equipment through internal financing is also "put to work" while it waits -- invested -- either buying government bonds or placed in a more liquid overnight funds account.

Depreciation has nothing to do with this. The book keeping for new assets paid for with loans does not influence real money flows.

Douglas simply did not tell his readers and audiences the truth. The chronic shortage of purchasing power comes from banks which in interest but do not return the money to circulation, because they neither consume it nor lend it to entrepreneurs who will spend it on producer's goods. They hold it for reasons I have given. Creditors gain from deflation. Taking interest from the economy and not putting the money back into the economy causes the deflation which prospers creditors. They buy up assets cheaply following defaults and foreclosures and distress sales. They get the collateral when the lender fails keep up scheduled payments.

It's that simple.

____________________________________________________________

DE1: "They are income. Interest is income to the lender. The question is not "Why are the B payments not income?", but rather why do the persons receiving the interest not spend the proceeds. Why do they the not return the income received to the flow of money within the loop of households, government and business from which it came?"

JS: Interest is not "income" to the lender. Interest is revenues to the lender. Revenues and income are two different things. This is the common mistake of many economists who are confused as to basic accounting. Income can only be distributed from revenues after all expenses have been paid, otherwise, it leaves a trail of debt, or working capital is reduced. Most companies operate on a revolving line of credit. Income, in the form of wages and salaries, is distributed to workers prior to the good or service they produce being sold. Worker do not wait for the product they produce to be sold before they receive income: this may take several months. Companies borrow the money for operating costs and pay their workers prior to receiving revenue, and then when the product the workers produced is sold, pay back that portion of the debt.

DE2:

1. Read Jane Austin's Pride and Prejudice. Mr. Darcey gets 32,000 pounds a year. Mr. Darcy owns bonds, likely they are counsels -- paying interest perpetually with no principal every being repaid. That is Mr. Darcey's income. It is the goal of the rich to set things up with bond holdings so that they and their posterity can simply live on the interest of their bond holdings. Interest is income.

2. Interest is revenues to the lender, but salary is revenue to the employee yet salary is still income.

3. Basic accounting has nothing to do with economics. There is no cause and effect in accounting. There is merely keeping track of assets, liabilities -- what account is credited and which debited. No predictions can come from accounting. But I will say this for it, it exists so that there can be no such thing as "B" - money that disappears from circulation and no one knows where it went. If you want to know what big piece of money went into a black hole -- then the books will show you -- the books of the business show that interest was paid to the bank and the books of the bank show that the interest collected was not invested (banks like to lend thin-air created money and keep the interest it earns because the interest does not have to return to thin air.) The owners of the bank (through hoding companies or whatever devices) get that wealth and as often as not move it offshore -- where for all intents and purposes it is gone from the American economy.

4. You say "income can only be distributed from revenues after all expenses have been paid." This is wrong. The firms expenses being paid is the same as the suppliers receiving their incomes.

5. Revolving line of credit changes nothing. It is still loans requiring the future payments of interest.

6. Yes bank lending exists to advance money to breach the gap between wages now and sale of product later -- just as consumer buying now will hire people later. It is a wonderful cycle -- but it does not account for the chronic drain of money from the domestic economy -- the "over saving" (financial sector "constipation", saver hoarding) and concomitant "underconsumption." The problem is loans from the financial sector being less than the obligation to pay the financial sector principal plus interest. That is what Douglas SHOULD HAVE honestly told people that "B" is all about -- sometimes he did -- naming "bank charges" -- but he did not want to go up against the City so directly -- he was after all a very intelligent and prudent man -- and so he fumbled around talking about the money vanishing through defects in our system of "accountancy."

In the bible you must not give the talking snake and the sun standing still the same credence you give "Love they enemy" and "do unto others...," and "seek ye first the kingdom" and even, perhaps, "do not cast your pearls before swine" - I aways follow this last one -- I only correspond with honest, intelligent and well-informed men of good will -- and I know you do to.

In the same way do not give the Douglas twilight-zone depreciation B the same weight you give to his many salutary concepts -- such as the social credit dividend, the freeing of mankind from the "full employment" and "jobs" objectives and the great benefit of unemployment in an age of machines to name only a few.

____________________________________________________________

DE1: "Let's think about this. Rent is an overhead charge for a business location, you pay it regardless of how much or how little product is produced. He pays overhead when he pays his electric bill and phone bill. A business license is an expense charged to overhead. A retailer pays a big overhead for a shop located on say Park Avenue in New York City. He pays overhead for the counter and display cases in the shop, supposing he rents them or is paying for them in installments. Let us say he is paying for them in installments. In this case -- no pun intended -- we see what Douglas is driving at. The counters were built and the workmen who built all of their parts (glass, varnish, hinges, cut and sanded lumber etc.) and those who assembled those components have were paid in the past. But, my friends, paid with what? Where did the enterprisers get the money to build those parts so they could be sold to the cabinet maker and where did the cabinet maker get the money to pay people to assemble those parts and finish them, put them in crates and deliver them to the shop on Park Avenue? Why he borrowed the money of course! And on what terms? Well, to get money to produce their components of the cabint each supplier had to sign a contract obligating him to make a steam of future payments, payments of principal and payments of interest. The loan paid the cabinet makers so they could pay principal and interest on the loans that they took out to pay their own suppliers and workers. So we see a chain of events leading back where loans are taken out which pay businessmen so they can pay loans which they took out to pay other businessmen who took out loans to pay other business men and so forth. A flow of loans. A flow of payments to principal and interest. In each case the principal being paid equals the amount that was purchased from suppliers and the interest is paid on top of that amount. It is hoped by each businessman in the chain that the loan amount he borrowed will enable him to produce and sell products the proceeds of which will enable him to pay both that principal plust the agreed-upon interest plus enough profit -- called normal profit -- to have paid his work and entrepreneurial skill at least as much as he could have gotten chucking that job and earning best alternative income doing something else."

JS: Dick, all companies in the supply chain mark up the price of the good or service they sell over and above cost, not just the banks in the form of interest. All companies in the supply chain transform the good or service they purchase which adds additional costs and thus increases the price. Further, all companies in the supply chain need to mark up the price to earn a profit. This is no different than banks who are a business at the beginning of the supply chain in that they are the ones who supply money. They have real costs to provide this service, and they need to earn a profit. Interest is the price of the loan, and is charged by banks to recover their costs and return a profit.

The problem is that monies are paid out in any supply chain far in advance of the good or service making its way to the consumer, and this money is used to buy consumer goods at or near the time the money is distributed to workers in the form of wages and salaries. As a consequence, this money no longer exists as purchasing power when the good, or service, and its associated cost finally makes its way to the consumer.

DE2:

1. Yes. Price is not just set on the basis of supply conditions, demand plays a big part. When demand falls sellers know they must charge less for the products to make the best of a bad situation and when demand exceeds expectation they charge more earning a great profit. But as some entrpreneurs hit it right, others hit it wrong and lose. There must always be firms that enjoy profit and firms that suffer losses and going under. The sovereign consumer differentially reinforces entrepreneurs, that is enterprisers, for their effort. Competition is like natural selection -- only more so. I am for the market system and consumer sovereigny -- I am not for capitalism -- with capitalisms banking system as we know it today -- I am for populist with the money system and banking system I have described.

2. What you are saying above about "the problem" being "that monies are paid out in any supply chain far in advance of the good or service making its way to the consumer" is the very problem that banks solve. They provide the advance so that entrepreneurs can hire before the entrepreneur is paid. There is nothing wrong with that system. What is wrong is the fact that our money is not permanent and that there is not enough of it. We should not be paying tribute to the financial elites for the privilege of them letting us have money with which to conduct transactions -- even to conduct transactions where "advances" are not necessary to bridge the temporal gap between wage paying and product selling. First provide the money and then and only then let there be banks offering advances to those who need them. The present system, the work of corporporation lawyers and political economists hired by bankers since the founding of the Bank of England -- is really a system of tribute paying to dominant elite who reign as conquerors -- which is what the creation of the Bank of England made them. But I digress. Banks are good, but the must be populist banks, not capitalist banks.

____________________________________________________________

DE1: "Douglas was fuzzy on all that and would and likely would not have admitted to it -- but I can see and I hope you can see that this is the core truth he was skirting. "

JS: Douglas was not fuzzy on the subject of interest at all. Here is a direct quote from him in regards to the subject:

"The rapturous iconoclasm of certain groups of monetary reformers', to whom Usury", the sparring-partner of the bankers "inflation" is the Scarlet Woman of Babylon, has had the inevitable effect of encouraging the financial authorities to abolish, for practical purposes, the interest paid on undrawn current balances, and deposit accounts. We do not say they would not have done it anyway - the one thoroughly sound feature of the banking system was its dividends to shareholders and its interest payments to depositors which I jointly with the insignificant mint issues, provided almost the only fresh unattached purchasing-power. It is obviously lost time to beg of our amateur currency experts to consider whether they really mean what they ask, which is, the replacement of unattached purchasing-power by loans. But they must not complain if we, and others with us, regard them as propagandists for totalitarianism." The Social Creditor, Oct. 27, 1945.

DE2:

1. Interest if she mut be personified as a women needs to be treated as one's own daughter. Keep her from falling into prostitution for City of London and Wall Street pimps. Let her be always in the comnpany of honest bankers wedded to their community, seeking the prosper the town and prosper the ambitious enterpriser with better ideas of how to provide good quality at the best price for which he can earn a profit making him richer so that he can do more good in a bigger and better way.

2. This is an interesting idea, that of disallowing the earning of "savers interest" on money holdings held to long without deployment in some investment or in consumption. The thinking is close to that of Gessell who would have given us money that expires after a certain day -- in order to force people to leave the liquidity trap and start spending. I too am against such an idea -- but not for the reason Douglas here gives -- his reason being that the interest payments to depositors before the law had been the only source of "fresh unattached purchasing power and that the law is totaliarian. I would oppose such a plan for two reasons.

a. because interest rates are already near zero and non-spending of dollars in the American economic does not end -- and why does non-spending not end? Because real interest rates are high in a deflation even when nominal rates are near zero.

b. because if the banks don't have to pay "saver depositors" interest on their deposits the banker has less cost for not forcing their lending officers to find people to lend to.

But this question has nothing to do about where B should be viewed as net interest drain or as money leaked into the twilight zone of accountancy.

________________________________________________________

DE1: "I can make out no sense in this whatsoever. There is either one payment or two payments. If I pay five dollars to one fellow to build something that I am going to sell to you and then pay another fellow five dollars to finish the job then I have paid $10 dollars and I hope I can get that much from you when I sell you the thing. But that says nothing about how much money exists in the economy or in my wallet our yours or theirs or the sum of of all our money.

If Douglas is trying to say above that an increase of velocity of money circulation does not increase purchasing power he has made a mistake." (Dick)

JS: Douglas is saying that the increase in the "velocity of circulation" of money does not increase it's purchasing power. The Fisher equation is a "myth". One dollar is only capable of defraying one dollar in cost, because in order for that dollar to reach the consumer again, it has to do so in the form of wages, salaries and dividends, and as such, it creates another cost. Everytime money passes through the productive system, it creates a cost.

DE2:

1. Yes I know he says it is a myth. It is easy to say it.

2. In the smallest country in the world in a typical week -- Jane the laundress pays one clamshell to Bob the Fisherman for one fish and Bob uses it to pay Sam the berry picker for a basket of berries and Sam pays the clam to Jane who washes his trousers abd Jane takes her clam this time to Sam for berries and Sam this time takes the clam to Bob for fish and Bob uses the clam to pay Jane for his cleaning and so on. One day they all get together and talk about how each of them could produce and sell more of their products (laundering, fish, berries) if only there was demand. But there is only one shell. (The country is landlocked and surrounded by high mountains with no lakes.) Then Jane remembers what her late husband, Tarzan, who was an monetarist, said about the velocity of money. Tarzan said that doubling the speed at which money circulates is as good as doubling the quantity of money for ending an underconsumption economic depression. "It's worth a try, said Sam." And so instead of being slow about doing their transacting -- the dealings which usually took all week were now completed by Wednesday, leaving Jane with the clam. All Jane would have to do would be to go to Sam again and buy another fish. And same could then buy more berries and so on. The island would double production with a corresponding increase in the standard of living.

Now what's wrong with that?

____________________________________________________________

JS: An explanation of the fallacy of this equation can be found here:

http://social-credit.blogspot.ca/2010/03/alberta-post-war-reconstruction.html

DE2:

1. Notice that his denial of the role of velocity of money in the determination of purchasing power is based on one thing, viz., the fact that all of the money is loans. Read it youself:

Yes the doubling of speed of the dollars does not relieve of the fact that the dollars now doing twice the work must still be paid back to the bank at interest.

In Douglas's example he has a $10 bill circulating in one day -- starting with someone buy buys 2 pairs of shoes the seller of which then buys some shirts from someone who then bys "provisions" from someone who then buys "gas and oil".

Douglas remarks:

"The contention is that the $10 bill provided purchasing
power to the extent of $40 during the day by virtue of its "velocity of
circulation" in enabling $40 worth of goods to be purchased by consumers.
On the face of it this would appear to be the case, but on examination
it will be found to be a complete fallacy ... Because all money issued

creates a debt of the corresponding amount at its source of issue, for all

practical purposes merchants B., C., D., and E. can be assumed to be

operating on credit loans from their banks with some "savings" invested

in their stock.

"...The proceeds of every sale they make can be divided into three
parts: (1) repayment of a bank loan before a new line of credit can
be obtained to replace stock, (2) payment of operating costs and
(3) net profit- i.e. personal income for services. Suppose that in
each case B.,C., D., and E. work on a 15% net profit. From each
purchase amounting to $10 they would be obliged to set aside - say,
$8.50 repayment of their bank loans for replacement of stock and overhead
costs, and only $1.50 as personal income.This is likewise true of C. and D.

Therefore, by spending the $10 both of them created a liability against their

future purchasing power.

1. Douglas is wrong. Does it really matter what I write next. Whatever I say your against it, after I say Douglas is wrong. Anyway, Douglas is wrong. Yes the first guy who got a loan of $10 from the bank is in debt. But the debt does not follow the sawbuck as it is spent over and over. The debt is created separately and attaches to the borrower not to the money floated. The $10 bill can be spent once in that day or five times or ten times or twenty times -- and it does work. People benefit. Imagine that all of the work done by the bill after it leaves the possession of the initial borrower of it is to buy services that peopel perform for each other -- house cleaning, gardening, delivering packages to neighbors, mowing lawns, taking dance lessons. Does an increase of velocity add to purchasing power -- you bet it does! It matters whether in a day only house cleaning and gardening got done versus the faster moving ten-dollar bill making possible the mowed lawn and dance lessons as well.

2. All of this debt encumbrance that Douglas brings to the question has nothing to do with whether or not velocity of circulation can increases purchases. The debt situation is merely a complication that works simultaneously and interferes with the pure acceleration result. You can't prove a functional relationship or the lack of one unless you hold other things constant and very just the variable under question. To add debt obligations complicates the matter. You want to talk about the gas-temperature-pressure law of Kelvin and someone comes along and says Kelvin's law is a fallacy and then proceeds to talk about a chamber where the walls are contracted -- but then adds an electric air conditioner pumping cold air into the room -- and then says "See, the greater pressure of the squeezed container did not raise the room temperature."

3. One thing that Douglas's argument does bring to the fore is the need society has for permanent money, money that enters the economy without the simultaneous birth of a debt requireing an equal amount of money and then yet more money (principal and interest) later be withdrawn. We need permanent thin-air money.

4. In the American populist social credit system that I propose -- the only monetary policy variable is the size of the social credit dividend. The answer to that is political. But since there is only one egg in the basket it will be easy for the people to keep their eye on it and to develop a good understanding of the effects of increases or decreases in the dividend -- noting that with permanent money the size of the dividend need not be very large. I like what Hobson said about too much and too little money:

Hobson: IN a modern economic system the productive powers of capital and labour are applied to making (1) consumption goods, (2) replacement goods, (3) new capital goods, in a right ratio. This ratio will be continually changing with changes in consumers’ tastes and demands, with technological improvements, etc., but at any given time there will be a true equilibrium, a right proportion of productive energy directed along these three channels. That ratio will be governed by an intelligent anticipation of the use of the money incomes continuously distributed to the owners of the factors of production, as wages, interest, profits, rents, salaries. These incomes are grouped in selling prices for the three classes of product, and are sufficient to buy all products. These “payments” are the gross income of the community. After deducting the income spent on replacement (commonly furnished out of reserves), the net income is spent on consumption goods, or is saved and invested in the purchase of new capital goods. The net real income thus consists of new consumption goods and new capital goods: the net money income of the costs of making such goods. Consumption goods are produced in such kinds and quantities as it is expected will be bought without undue delay when offered in the market. New capital goods are similarly produced in such kinds and quantities as it is expected will be bought without delay by the savings of investors. [1] Orders for such goods will in many cases express this expectation and direct their production. The purchasing power for both consumption and capital goods will be vested in the current income, i.e. the costs distributed in payments for the use of the factors of production. In a rightly balanced economic system there should be no lack of effective demand for either class of production and no undue delay in its application. If all the productive work done within a year, or other short period, were available for purchase by the income distributed in respect of it (its costs), the process would be simplicity itself, money income being continuously translated into the real income it represents.

From his article Underconsumption which can be read here: http://www.marxists.org/archive/hobson/1933/11/underconsum.htm Ignore the Marxist website -- the like Hobson because Lenin stole Hobson's analysis of Imperialism.

JS: The conclusion of which is reproduced below:

"The so-called "velocity of circulation" did not increase purchasing power at all.
The fallacy in the theory lies in the incorrect assumption that money "circulates",wheras actually it is issued against production, and withdrawn as purchasing power as the goods are bought for consumption."

DE2:

Is Douglas so above reproach that you need only present his conclusions without a defense of his reasoning?

DE1: "No. There is nothing new here. Douglas says there is A going to wages and profit and B going to "raw materials, bank charges and other." The raw materials is wrong. Raw materials come from land and labor and tools. If you buy the mineral rights the money goes to government which spends it or uses it to pay interest on government debt. If rent the rights you pay the one who owns them and he is free to take the money and consume, invest or hoard it. Raw materials does not withdraw money from circulation. However insofar as Douglas means by "bank charges" the payment of interest and principal for money previously received to that extent he is not in dispute with me or my "straw." Whenever Douglas says "bank charges" you know exactly what he means. Whenver he accounts for B in any other way -- "overhead," "depreciation", "raw materials" and so forth everyone gets confused and wonders what he means -- including the "true believers" who nevertheless not their heads and affirm that here is the profoundest of truths and it is too bad that the rest of the world can't see it.

A + Interest equals what firms must pay to produce product. When the banks to not recirculate the interest they take then only A is left in consumer hands to buy the product. Firms have to fail. The more firms make profit the more other firms have to fail -- because there is not enough money for all firms even to break even given the the money that can buy their product."

JS: This statement demonstrates your misunderstanding of the A+B theorem. ALL payments to other organizations are "B" costs. B payments are monies on their way back to the bank. They do not reach the consumer whatsoever. Businesses operate on a revolving line of credit. Money is flowing out from the bank in the form of wages, salaries and dividends, and flowing back to the bank when that money is recovered in the form of prices or taxes.

DE2: I won't say what your statement demonstrates -- but I will point out that the only money that goes to banks and is swallowed up are 1) interest payments; 2) fines for NSF checks; 3) principal payments. The savers deposits are not swallowed up by the banks and the banks must pay interest on them. But the interest the banks and all lending institutions collect is the big one -- the only candidate for B that makes sense, the only one big enough, the only one clearly in evidence (for those who will take off their worshipful Douglas blinders and actually look.)

Everyone is the same. When things get oppostional and degenrate into whose wrong and whose right , who wins and who loses -- then no one will budge. And so a civilization falls with great misery and material loss for all.

_____________________________________________________

DE1: "Some are working on pie that will be available for purchase in the period it was produced and some are working on bakeries and pie pans that will not be ready until much later. There is no swindle here. The swindle is in having an economy in which 100 percent of the money in circulation (currency and "checkable" deposits) is loaned money that must be paid back."

JS: From the Wikipedia article on Social Credit:

Critics of the theorem, such as J.M. Pullen, Hawtrey and J.M Keynes argue there is no difference between A and B payments. Other critics, such as Gary North, argue that social credit policies are inflationary. "The A + B theorem has met with almost universal rejection from academic economists on the grounds that, although B payments may be made initially to “other organizations,” they will not necessarily be lost to the flow of available purchasing power. A and B payments overlap through time. Even if the B payments are received and spent before the finished product is available for purchase, current purchasing power will be boosted by B payments received in the current production of goods that will be available for purchase in the future."^[26]
A.W. Joseph replied to this specific criticism in a paper given to the Birmingham Actuarial Society, "Banking and Industry":

Let A1+B1 be the costs in a period to time of articles produced by factories making consumable goods divided up into A1 costs which refer to money paid to individuals by means of salaries, wages, dividends, etc., and B1 costs which refer to money paid to other institutions. Let A2, B2 be the corresponding costs of factories producing capital equipment. The money distributed to individuals is A1+A2 and the cost of the final consumable goods is A1+B1. If money in the hands of the public is to be equal to the costs of consumable articles produced then A1+A2 = A1+B1 and therefore A2=B1. Now modern science has brought us to the stage where machines are more and more taking the place of human labour in producing goods, i.e. A1 is becoming less important relatively to B1 and A2 less important relatively to B2.

In symbols if B1/A1 = k1 and B2/A2 = k2 both k1 and k2 are increasing.

Since A2=B1 this means that (A2+B2)/(A1+B1)= (1+k2)*A2/(1+1/k1)*B1 = (1+k2)/(1+1/k1) which is increasing.

Thus in order that the economic system should keep working it is essential that capital goods should be produced in ever increasing quantity relatively to consumable goods. As soon as the ratio of capital goods to consumable goods slackens, costs exceed money distributed, i.e. the consumer is unable to purchase the consumable goods coming on the market."

And in a reply to Dr. Hobson, Douglas restated his central thesis: "To reiterate categorically, the theorem criticised by Mr. Hobson: 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." ^[27]
DE2: I have written many powerful refutations of North -- but he never responds -- says I'm not worth responding to because I have not written a book. (People don't care what you think or whether you make sense or not -- as long as you are published. Write a book with the name social credit -- and you become a folk hero to social creditors from southern Australia to northern Canada. Never heard of Pullen. But Hawtrey I will defend. Hawtrey did not disparage the idea of a shortage of purchasing power stemming from monetary causes -- he is in fact right up there with Fisher as the best economist on debt-deflation depressions. Read the debate and you will find that Hawtrey rejected, not an inadequacy of purchasing power in consumer hands, but the wrong headed notion that the gap comes from accountants distributing large capital outlays over many periods in the books.
Douglas deserves credit for the notion of the social credit dividend to individuals -- and the defense of it morally and practically. He also deserves great credit for pointing out that there is a "B". The disovery that there is a "B" that does not participate in future expenditure is a great disovery -- like someone discovering the moon on an always cloudy planet -- except that Douglas is wrong in asserting that the moon is made of green cheese. The great pioneer does not have to get everything right. Newton believed in witchcraft -- but still we honor him for the things he was the first to get right.

On Thu, Feb 6, 2014 at 8:17 AM, Jim Schroeder <jimsch...@gmail.com> wrote:

Hi Dick: I'll respond to you in red.

"If the "B" payments are disbursed to other organizations then the purchasing power shortfall problem is not with the firm but with the other organizations. That is what I am saying to. I say the interest payments go to the financial sector and that there is where they are kept from returning to the flow as either consumption or investment spending."(Dick)

B payments are not income to anyone. B payments are monies on their way to the bank. Money is either flowing from the bank to the consumer as income in the form of wages, salaries and dividends, or it is reclaimed in the form of prices and taxes and flowing back to th bank. Workers are paid prior to the good or service they produce being purchased and the company receiving revenues for said good or service. These revenues go towards paying back previously incurred debts or replacing working capital. Only a very small percentage of revenues are distributed as income in the form of dividends.

"They are income. Interest is income to the lender. The question is not "Why are the B payments not income?", but rather why do the persons receiving the interest not spend the proceeds. Why do they the not return the income received to the flow of money within the loop of households, government and business from which it came?"

Interest is not "income" to the lender. Interest is revenues to the lender. Revenues and income are two different things. This is the common mistake of many economists who are confused as to basic accounting. Income can only be distributed from revenues after all expenses have been paid, otherwise, it leaves a trail of debt, or working capital is reduced. Most companies operate on a revolving line of credit. Income, in the form of wages and salaries, is distributed to workers prior to the good or service they produce being sold. Worker do not wait for the product they produce to be sold before they receive income: this may take several months. Companies borrow the money for operating costs and pay their workers prior to receiving revenue, and then when the product the workers produced is sold, pay back that portion of the debt.

"Let's think about this. Rent is an overhead charge for a business location, you pay it regardless of how much or how little product is produced. He pays overhead when he pays his electric bill and phone bill. A business license is an expense charged to overhead. A retailer pays a big overhead for a shop located on say Park Avenue in New York City. He pays overhead for the counter and display cases in the shop, supposing he rents them or is paying for them in installments. Let us say he is paying for them in installments. In this case -- no pun intended -- we see what Douglas is driving at. The counters were built and the workmen who built all of their parts (glass, varnish, hinges, cut and sanded lumber etc.) and those who assembled those components have were paid in the past. But, my friends, paid with what? Where did the enterprisers get the money to build those parts so they could be sold to the cabinet maker and where did the cabinet maker get the money to pay people to assemble those parts and finish them, put them in crates and deliver them to the shop on Park Avenue? Why he borrowed the money of course! And on what terms? Well, to get money to produce their components of the cabint each supplier had to sign a contract obligating him to make a steam of future payments, payments of principal and payments of interest. The loan paid the cabinet makers so they could pay principal and interest on the loans that they took out to pay their own suppliers and workers. So we see a chain of events leading back where loans are taken out which pay businessmen so they can pay loans which they took out to pay other businessmen who took out loans to pay other business men and so forth. A flow of loans. A flow of payments to principal and interest. In each case the principal being paid equals the amount that was purchased from suppliers and the interest is paid on top of that amount. It is hoped by each businessman in the chain that the loan amount he borrowed will enable him to produce and sell products the proceeds of which will enable him to pay both that principal plust the agreed-upon interest plus enough profit -- called normal profit -- to have paid his work and entrepreneurial skill at least as much as he could have gotten chucking that job and earning best alternative income doing something else."

Dick, all companies in the supply chain mark up the price of the good or service they sell over and above cost, not just the banks in the form of interest. All companies in the supply chain transform the good or service they purchase which adds additional costs and thus increases the price. Further, all companies in the supply chain need to mark up the price to earn a profit. This is no different than banks who are a business at the beginning of the supply chain in that they are the ones who supply money. They have real costs to provide this service, and they need to earn a profit. Interest is the price of the loan, and is charged by banks to recover their costs and return a profit.

The problem is that monies are paid out in any supply chain far in advance of the good or service making its way to the consumer, and this money is used to buy consumer goods at or near the time the money is distributed to workers in the form of wages and salaries. As a consequence, this money no longer exists as purchasing power when the good, or service, and its associated cost finally makes its way to the consumer.

"Douglas was fuzzy on all that and would and likely would not have admitted to it -- but I can see and I hope you can see that this is the core truth he was skirting.  "

Douglas was not fuzzy on the subject of interest at all. Here is a direct quote from him in regards to the subject:

"The rapturous iconoclasm of certain groups of monetary reformers', to whom Usury", the sparring-partner of the bankers "inflation" is the Scarlet Woman of Babylon, has had the inevitable effect of encouraging the financial authorities to abolish, for practical purposes, the interest paid on undrawn current balances, and deposit accounts. We do not say they would not have done it anyway - the one thoroughly sound feature of the banking system was its dividends to shareholders and its interest payments to depositors which I jointly with the insignificant mint issues, provided almost the only fresh unattached purchasing-power. It is obviously lost time to beg of our amateur currency experts to consider whether they really mean what they ask, which is, the replacement of unattached purchasing-power by loans. But they must not complain if we, and others with us, regard them as propagandists for totalitarianism. " The Social Creditor, Oct. 27, 1945.

"I can make out no sense in this whatsoever. There is either one payment or two payments. If I pay five dollars to one fellow to build something that I am going to sell to you and then pay another fellow five dollars to finish the job then I have paid $10 dollars and I hope I can get that much from you when I sell you the thing. But that says nothing about how much money exists in the economy or in my wallet our yours or theirs or the sum of of all our money.

If Douglas is trying to say above that an increase of velocity of money circulation does not increase purchasing power he has made a mistake." (Dick)

Douglas is saying that the increase in the "velocity of circulation" of money does not increase it's purchasing power. The Fisher equation is a "myth". One dollar is only capable of defraying one dollar in cost, because in order for that dollar to reach the consumer again, it has to do so in the form of wages, salaries and dividends, and as such, it creates another cost. Everytime money passes through the productive system, it creates a cost.

An explanation of the fallacy of this equation can be found here:

http://social-credit.blogspot.ca/2010/03/alberta-post-war-reconstruction.html

The conclusion of which is reproduced below:

"The so-called "velocity of circulation" did not increase purchasing power at all.
The fallacy in the theory lies in the incorrect assumption that money "circulates",wheras actually it is issued against production, and withdrawn as purchasing power as the goods are bought for consumption."

"No. There is nothing new here. Douglas says there is A going to wages and profit and B going to "raw materials, bank charges and other." The raw materials is wrong. Raw materials come from land and labor and tools. If you buy the mineral rights the money goes to government which spends it or uses it to pay interest on government debt. If rent the rights you pay the one who owns them and he is free to take the money and consume, invest or hoard it. Raw materials does not withdraw money from circulation. However insofar as Douglas means by "bank charges" the payment of interest and principal for money previously received to that extent he is not in dispute with me or my "straw." Whenever Douglas says "bank charges" you know exactly what he means. Whenver he accounts for B in any other way -- "overhead," "depreciation", "raw materials" and so forth everyone gets confused and wonders what he means -- including the "true believers" who nevertheless not their heads and affirm that here is the profoundest of truths and it is too bad that the rest of the world can't see it.

A + Interest equals what firms must pay to produce product. When the banks to not recirculate the interest they take then only A is left in consumer hands to buy the product. Firms have to fail. The more firms make profit the more other firms have to fail -- because there is not enough money for all firms even to break even given the the money that can buy their product."

This statement demonstrates your misunderstanding of the A+B theorem. ALL payments to other organizations are "B" costs. B payments are monies on their way back to the bank. They do not reach the consumer whatsoever. Businesses operate on a revolving line of credit. Money is flowing out from the bank in the form of wages, salaries and dividends, and flowing back to the bank when that money is recovered in the form of prices or taxes.

"Some are working on pie that will be available for purchase in the period it was produced and some are working on bakeries and pie pans that will not be ready until much later. There is no swindle here. The swindle is in having an economy in which 100 percent of the money in circulation (currency and "checkable" deposits) is loaned money that must be paid back."

From the Wikipedia article on Social Credit:

Critics of the theorem, such as J.M. Pullen, Hawtrey and J.M Keynes argue there is no difference between A and B payments. Other critics, such as Gary North, argue that social credit policies are inflationary. "The A + B theorem has met with almost universal rejection from academic economists on the grounds that, although B payments may be made initially to “other organizations,” they will not necessarily be lost to the flow of available purchasing power. A and B payments overlap through time. Even if the B payments are received and spent before the finished product is available for purchase, current purchasing power will be boosted by B payments received in the current production of goods that will be available for purchase in the future."^[26]
A.W. Joseph replied to this specific criticism in a paper given to the Birmingham Actuarial Society, "Banking and Industry":
Let A1+B1 be the costs in a period to time of articles produced by factories making consumable goods divided up into A1 costs which refer to money paid to individuals by means of salaries, wages, dividends, etc., and B1 costs which refer to money paid to other institutions. Let A2, B2 be the corresponding costs of factories producing capital equipment. The money distributed to individuals is A1+A2 and the cost of the final consumable goods is A1+B1. If money in the hands of the public is to be equal to the costs of consumable articles produced then A1+A2 = A1+B1 and therefore A2=B1. Now modern science has brought us to the stage where machines are more and more taking the place of human labour in producing goods, i.e. A1 is becoming less important relatively to B1 and A2 less important relatively to B2.

In symbols if B1/A1 = k1 and B2/A2 = k2 both k1 and k2 are increasing.
Since A2=B1 this means that (A2+B2)/(A1+B1)= (1+k2)*A2/(1+1/k1)*B1 = (1+k2)/(1+1/k1) which is increasing.

Thus in order that the economic system should keep working it is essential that capital goods should be produced in ever increasing quantity relatively to consumable goods. As soon as the ratio of capital goods to consumable goods slackens, costs exceed money distributed, i.e. the consumer is unable to purchase the consumable goods coming on the market."

And in a reply to Dr. Hobson, Douglas restated his central thesis: "To reiterate categorically, the theorem criticised by Mr. Hobson: 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." ^[27]

Take care.

On Wed, Feb 5, 2014 at 11:53 PM, oldickeastman . <olrichar...@gmail.com> wrote:

Be ashamed to die until you have won some victory for humanity. -

- Horace Mann 1796-1889

I would be true for there are those who trust me. I would be pure for there are those who care. I would be strong for there is much to suffer. And I would be brave for there is much to dare.

-- Howard Arnold Walter 1883 - 1918

Two views

Jim Schroeder:

Hi Dick. Your explanation of "B" in Douglas's A+B theorem is "off the mark", so the entirety of your argument becomes a strawman.

Dick Eastman:

If I only had a brain.

_______________________________________________________

Jim Schroeder:

B" payments in the A+B theorem are all payments to other organizations.

Dick Eastman:

If the "B" payments are disbursed to other organizations then the purchasing power shortfall problem is not with the firm but with the other organizations. That is what I am saying to. I say the interest payments go to the financial sector and that there is where they are kept from returning to the flow as either consumption or investment spending.

_______________________________________________________

Jim Schroeder:

The question becomes, why are B payments not income? All companies pay their workers prior to the product being sold and revenues being received for the sale of the product that the worker produced. This is generally done through a revolving line of credit.

Dick Eastman:

They are income.  Interest is income to the lender. The question is not "Why are the B payments not income?", but rather why do the persons receiving the interest not spend the proceeds. Why do they the not return the income received to the flow of money within the loop of households, government and business from which it came?

_______________________________________________________

Jim Schroeder:

Douglas stated quite explicitly in "The New and the Old Economics":

"I think that a little consideration will make it clear that in this sense an overhead charge is any charge in respect of which the actual distributed purchasing power does not still exist, and that practically this means any charge created at a further distance in the past than the period of cyclic rate of circulation of money. There is no fundamental difference between tools and intermediate products, and the latter may therefore be included.[22]

Dick Eastman:

Let's think about this.      Rent is an overhead charge for a business location, you pay it regardless of how much or how little product is produced.    He pays overhead when he pays his electric bill and phone bill.       A business license is an expense charged to overhead.   A retailer pays a big overhead for a shop located on say Park Avenue in New York City.  He pays overhead for the counter and display cases in the shop, supposing he rents them or is paying for them in installments. Let us say he is paying for them in installments. In this case -- no pun intended -- we see what Douglas is driving at. The counters were built and the workmen who built all of their parts (glass, varnish, hinges, cut and sanded lumber etc.) and those who assembled those components have were paid in the past.   But, my friends, paid with what? Where did the enterprisers get the money to build those parts so they could be sold to the cabinet maker and where did the cabinet maker get the money to pay people to assemble those parts and finish them, put them in crates and deliver them to the shop on Park Avenue? Why he borrowed the money of course! And on what terms? Well, to get money to produce their components of the cabint each supplier had to sign a contract obligating him to make a steam of future payments, payments of principal and payments of interest. The loan paid the cabinet makers so they could pay principal and interest on the loans that they took out to pay their own suppliers and workers. So we see a chain of events leading back where loans are taken out which pay businessmen so they can pay loans which they took out to pay other businessmen who took out loans to pay other business men and so forth. A flow of loans. A flow of payments to principal and interest. In each case the principal being paid equals the amount that was purchased from suppliers and the interest is paid on top of that amount. It is hoped by each businessman in the chain that the loan amount he borrowed will enable him to produce and sell products the proceeds of which will enable him to pay both that principal plust the agreed-upon interest plus enough profit -- called normal profit -- to have paid his work and entrepreneurial skill at least as much as he could have gotten chucking that job and earning best alternative income doing something else.

Stateing this plainly: The overhead that matters is interest on loans. No just on loans to pay fixed costs (overhead), as douglas suggests, but all loans for whatever output level the business owner chooses.   (And remember, what matters is fixed cost per unit sold -- the more units sold the lower the fixed cost per unit. Douglas was wrong to abstract out fixed costs from variable costs -- that is to separate overhead (plant, equipment, showroom etc.) from labor and input materials costs.

An amount equal to principal always gets spent -- returned to the river -- or rather the loan adds amount X to the river and the payment of principal takes that amount out again. But the interest takes where it did not first provide and sometimes the interest once paid to the lender does not get returned to the river.     That drain is the source of the problem -- that you call "B" and "the (Douglas, rather than Keynesian) "gap."

Overhead charges are to pay overhead expenses called in economics fixed cost payments.

_______________________________________________________

Jim Schroeder:

Douglas estimated the "cyclic rate of circulation of money to be three weeks. This estimate was derived by taking the number of clearings through the banks and dividing by the amount of deposits. As Douglas stated in his testimony before the Alberta Agricultural Commission:

"Now we know there are an increasing number of charges which originated from a period much anterior to three weeks, and included in those charges, as a matter of fact, are most of the charges made in, respect of purchases from one organization to another, but all such charges as capital charges (for instance, on a railway which was constructed a year, two years, three years, five or ten years ago, where charges are still extant), cannot be liquidated by a stream of purchasing power which does not increase in volume and which has a period of three weeks. The consequence is, you have a piling up of debt, you have in many cases a diminution of purchasing power being equivalent to the price of the goods for sale.[23]

Dick Eastman:

"Cyclic rate of circulation" is total deposit dollars transfered per total dollars deposited. This is the same as Irving Fisher's velocity of the circulation of dollar deposits, the V' in his equation MV + M'V' = PQ   -- but do you see what Douglas is saying here??? He is saying people are paying their old bills in the present period along with their current buying. What is this but households paying current expenses plus long term debt. What is this but businesses paying current operating expenses -- fixed and variable -- plus long term debt. What is this but government paying its mandated expenses on public goods and transfer payments plus long term debt. Can't you see that Douglas is arguing my point for me here!!!!   Do you really think that my straw catches fire and is burned up when Douglas says there is not enough money in circulation to pay off debt? But I have gone further than Douglas does here. I assert, with many of you I am sure, that since all of our money is loan and that all of it has to be paid back to the financial sector in ful (loan equals principal) plus compound interest -- and that that is impossible and being impossible forces default, foreclosures, bankruptcies and the seizing of collateral by the lenders -- the assets of the people -- to make up for the interest that debtors cannot scrape up because it does not exist. Douglas was fuzzy on all that and would and likely would not have admitted to it -- but I can see and I hope you can see that this is the core truth he was skirting.

_______________________________________________________

Jim Schroeder:

There are two cycles that are going on simultaneously, and in order for there to be "equilibrium" they must be in sync.

Dick Eastman:

There is no equilibrium here. There are no cylces here. The economy Douglas lived in and talked about and the economy we are living in is a system where the domestic economy is in dynamic deterioration, a decay path and net interest drain (resulting from inflows of loans being less than contract-law-required outflows of principal plus interest). Furthermore there are banks and big financial players with money to expand reserves or decrease reserve, to lend or to call in loans, to tighten money in the lower loop or to ease credit etc. Where there are human controllers who can can control key central bank levers and variables under the control of big money holders who can lend or not, invest or not, force loan calls or not -- then there is no such thing as equilibrium. To talk of cycles and equilibrium in this economy is to believe in prediction based on the distribution of tea leaves at the bottom of your teacup after the tea is drunk.

_______________________________________________________

Jim Schroeder:

The lower limit of price is the cost of production, but the upper limit is subject to the laws of supply and demand.

Dick Eastman:

Often in these days inventories are sold at a loss because liquidity is needed to make the next interest payment and revenues from sales at a cost-covering price are not sufficient. Sometimes doing this can buy time until things turn around, but often that never happens.   Everything depends on return.  Sometime the best a firm can do is sell at a price that is below variable cost -- operating at a loss, but still able to pay fixed costs and stay in operation. But when the best a firm can do is sell at a price x quantity that not only doesn't cover variable costs but also does not cover fixed costs (the mortgage on the store, the payments to the bank on the machines etc) then it is time to shut down. Supply conditions and demand determine all of it all the way.

_______________________________________________________

Jim Schroeder:

An example would be illustrative here.

Take for instance the construction of an oil refinery. Assume for simplicity that the only costs are labour costs. The construction company pays the workers a certain amount of money to construct the refinery. Since labour is the only cost, the company enters the refinery on its books and depreciates it for lets say 20 years. If the cost was $1,000,000, then this means that the cost would be distributed to the consumer at $50,000/annum for 20 years.

Income = $1,000,000 and costs = $1,000,000 so where's the discrepancy?

The problem is that those workers are not going to wait 20 years to spend all their income. Most, if not all of it, will be spent in the first year. What happens to it? Well it gets spent on consumer goods in the first year, which in turn increases the effective demand for those goods. Retailers, operating on conditions of supply and demand, increase the price of those goods and services thus absorbing the entire $1,000,000 in the first year. Now the company that built the refinery is charging $50,000 per annum for the next 19 years, but the income necessary to defray those costs no longer exists.

Where did the income go? Well, if all of the money the retailers took in was distributed back to shareholders as dividends, then it would reappear as income, and again, there would be no problem. But that's not what happens. Retailers see this rise in revenues and realize that they can invest that money back into their business in order to seek even more profits at some future point in time. However, by doing this, they are creating new costs without any additional purchasing power being distributed.

Dick Eastman:

The example is very nice. Let's use it.   A million dollars was paid to laborers who mined the steel, grew the trees and cut the lumber, made the windows from sand, made the molds and poured the steel for each part, mined the chemicals, travelled the world for the needed minerals, refined them, purified them, did the electronic etc and made this wonderful refinery.    Got it. And for this they were paid twenty years ago, $1,000,000 dollars. (Labor was cheap back then.) I've got that too. And twenty years ago those workers took their earnings and spent them  -- on refined things presumably.

Next you say that the laborers will spend all of that money in the first year.   That too is reasonable. They spend it on consumer goods. What else would they spend it on?

Then you say that the $1,000,000 increases demand for the goods they purchase -- of course -- there $1,000,000 is their demand since you say they spend it all.

Now you say , "Retailers, operating on conditions of supply and demand, increase the price of those goods and services thus absorbing the entire $1,000,000 in the first year."  but what is this but another way of stating that the laborers spend their money. They spent their money, period.  Talking about "supply and demand" and "absorbing" adds nothing to the fact -- the workers spent their money.

Now here is where you make your fatal mistake. When the refinery was built for $1,000,000 you say that the book keeper " depreciates it for lets say 20 years. If the cost was $1,000,000, then this means that the cost would be distributed to the consumer at $50,000/annum for 20 years."   (unquote) And further down you say "Now the company that built the refinery is charging $50,000 per annum for the next 19 years, but the income necessary to defray those costs no longer exists."    I am sorry, but that is all wrong.   The company paid for a refinery. You never said how. Let me say it. It was paid for as most refineries are paid for, with bank financing.  Bonds were floated obligating the borrower -- the refinery entretreneurs -- to pay a given face value. The bonds were sold for less than face value, the differnece between the bond price and the face price establishing the interest rate on the loan. The float is sold. The bank is paid its fee. The firm must pay the face value -- or it can make arrangements with the bank to pay the face value when it comes due in exchange for the refinery entrepreneurs making regular payments to the bank. NOTICE THAT THIS IS ALL INTEREST PAYMENTS.    Now let us go back from the world of finance to the humble book keeper and standard accounting practices. Accountants and all those who look to the books for an accounting of the health of the firm find it wise to distribute a big payment "in the books" over several months or years -- in the case of the refinery purchas over twenty years. Why is this done? Simply so that the fist year, which might have been a good operating year, will not be overburdened with a gigantic cost -- compared to revenue -- making the year look very bad simply because the machine was purchased in that year.  The macine is entered as an asset worth so much. But the payment is spread over twenty years. So a reserve account is created by which each year the value of the machine goes down by one twentieth from its original price value while  the payment for the machine is made each year for the twelve years. Each year asset value of the machine declines (as book keepers provide for wear and tear) by one twentieth and each year one twentieth of the price of the machine is distributed. The machine is paid for when its accounting asset value also reaches zero.  (The actual machine may still be going stong or it may have been junked years before this happens.) What happens in the books with depreciation does not matter one iota!!! What matters in the world of national purchasing power, deflaiton and inflation is the loan that paid for the machine and the drain of funds from the economy as the refinery enterprisers pay principal plus interest   -- as they pay the face value greater than the bond price they obtained 20 years before.

Depreciation in the accounting system of the firm means nothing. All that matters is the loan as inflow and the principal and interest as drain.

The workers spent their money at whatever price -- and the retailers who sold to them paid their bank for the funds with which they paid their suppliers. That is how the system works. In the end what matters is what I Mr. Dick Straw Man says that matters -- interest drain.   THE REFINER ENTERPRISERS GOT A LOAN TO PAY THE WORKERS THE $1,000,000 and so did the economy. BUT THEN THEY HAD TO PAY BACK THE $1,000,000 PLUS COMPOUND INTEREST AND TO THE EXTENT THAT THEY COULD RAISE AND FORK OVER THAT MUCH MONEY SO DID THE ECONOMY.

By the way -- the life ascribed to the machine has nothing to do with the term of the loan. The machine can be depreciated over twenty years but the loan may extend only 5 years or all of thirty years. What matters for national money supply and purchasing power is the loan servicing not the depreciation period.

_______________________________________________________

Jim Schroeder:

Or as Douglas wrote in "The Monopoly of Credit":

"Where any payment in money appears twice or
more in series production, then the ultimate price of the product is increased by the amount
of that payment multiplied by the number of times of its appearance, without any equivalent
increase of purchasing power.

Dick Eastman:

I can make out no sense in this whatsoever.   There is either one payment or two payments. If I pay five dollars to one fellow to build something that I am going to sell to you and then pay another fellow five dollars to finish the job then I have paid $10 dollars and I hope I can get that much from you when I sell you the thing. But that says nothing about how much money exists in the economy or in my wallet our yours or theirs or the sum of of all our money.

If Douglas is trying to say above that an increase of velocity of money circulation does not increase purchasing power he has made a mistake.

Look again at Fisher's equation   MV + M'V = PQ

There are so many dollars of currency in peoples hands and they change hands so many times in a say a month. There are so many dollar denominated deposits in all of our checking accounts at any moment and these deposit dollars are transferred at a certain rate per month. The currency spent at a certain rate and the deposit dollars transferred at a certain rate equal as a necessary identity the sum of the price of every item that was sold during that month. More simply the total dollars spent equals the sum of all receipts for things sold. If the velocity of both currency circulation and of transfer are doubled then it is possible for the quantity sold to double or the price to double or the price and the quantity to go each go up by percentages that total 200%.

You know the parlor game Monopoly. If everyone on this list meets at my house and we play twice as fast as usual we can play two whole games in the time it usually takes to play one -- using the same amount of money in the game in each game.

You have laughed at Austrian Schoolers again and again for their wrong-headed adherence to the ideas of Ludwig von Mises about gold or intrinsic value or that inflation causes depressions. You have looked with pity and sadness on Ellen Brown telling us we must back the trillion dollar coin and Obama's depositing it with the Fed. Or Antony Migchels telling you that banks lending money at interest must be outlawed -- a reformer who would throw the baby out with the dirty bathwater.

Don't put C H Douglas on a par with Jesus.   And don't hate the messenger who points out the mistakes he has made. Do you think I like descecrating your idols. Do you think I enjoy being the dangerous heretic and the anti-social ultra-negative one who brings rain to everyone's parade.

I do not reject Douglas -- I stand on his shoulders -- and Kitson's shoulders, and Soddy's and Feder's and Hawtrey's and Hobson's    -- while at the same time I topple the false prophets at their clay feet.

_______________________________________________________

Jim Schroeder:

With this fundamental proposition in mind we are in a position to take a more generalised
view of the defect in the price system which is concerned with the double circuit of money in
industry, and which has become known as the A plus B theorem. The statement of this is as
follows:

In any manufacturing undertaking the payments made may be divided into two
groups: Group A: Payments made to individuals as wages, salaries, and dividends; Group
B: Payments made to other organisations for raw materials, bank charges, and other external
costs. The rate of distribution of purchasing power to individuals is represented by A, but
since all payments go into prices, the rate of generation of prices cannot be less than A plus
B. Since A will not purchase A plus 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."

Dick Eastman:

Having rejected the "milk," dare I go on to consider the "meat"?

No. There is nothing new here. Douglas says there is A going to wages and profit and B going to "raw materials, bank charges and other." The raw materials is wrong. Raw materials come from land and labor and tools. If you buy the mineral rights the money goes to government which spends it or uses it to pay interest on government debt. If rent the rights you pay the one who owns them and he is free to take the money and consume, invest or hoard it.   Raw materials does not withdraw money from circulation. However insofar as Douglas means by "bank charges" the payment of interest and principal for money previously received to that extent he is not in dispute with me or my "straw." Whenever Douglas says "bank charges" you know exactly what he means. Whenver he accounts for B in any other way -- "overhead," "depreciation", "raw materials" and so forth everyone gets confused and wonders what he means -- including the "true believers" who nevertheless not their heads and affirm that here is the profoundest of truths and it is too bad that the rest of the world can't see it.

A  + Interest equals what firms must pay to produce product. When the banks to not recirculate the interest they take then only A is left in consumer hands to buy the product. Firms have to fail. The more firms make profit the more other firms have to fail -- because there is not enough money for all firms even to break even given the the money that can buy their product.

_______________________________________________________

Jim Schroeder: and further:

":If the wage earners
in process "1" use their current month's, i.e. May's, wages to buy their share of one
current month's production of consumable goods, they are using money distributed in respect
of production which will not appear as consumable goods till October. They are in fact
involuntarily reinvesting their money in industry, with the result previously explained."

Dick Eastman:  Their buying is voluntary -- unless the husbands are being forced by their wives to buy baby food with their paycheck when they would rather buy whisky.

And what is this about them buying "their share?" They buy what they can on the market at the prices offered.

Most people these days are working paycheck to paycheck supporting themselves "hand to mouth" Others are not. Most, in the service economy, give the benefit of their labor right away. Others, those working on Boeing Jets and so forth are not going to see a finished product until months later perhaps.   BUT THIS IS COMPLETELY IRRELEVANT TO THE QUESTION AT HAND. It is the provision of money that enables them to work and earn a paycheck. Some are working on pie that will be available for purchase in the period it was produced and some are working on bakeries and pie pans that will not be ready until much later. There is no swindle here.   The swindle is in having an economy in which 100 percent of the money in circulation (currency and "checkable" deposits) is loaned money that must be paid back.

Douglas did not see it clearly and so he did not spell out the clear solution.

We need thin-air permanent money that is created independently of the banking system which lends at interest. Banking and money creation must be separated. All new money must be introduced by the consumer so that consumer demand will become the guiding sector of the economy -- the consumer's demand being the souce of the signals that move the profit-seeking entrepreneur to action in organizing production.

If you think that this economy will be fixed by filling in the gap with a dividend and a rebate plan for retailers without getting rid of loan-created money and a private control of central banking -- then consider that you just might be more of rote and drill Douglas man than it is good to be.

Here is a test: Can you name two mistakes of Douglas that you have identified and own as true mistakes?

I see mistakes in all of the great beacons I follow -- and I despise myself for the millions of mistakes I have made and for the mistakes I continue to make in almost everything I write. But in there is an honest heart asking you to think that what I say may sometimes be right even if it is contrary to what the major has taught.

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Jim Schroeder: This is the precise explanantion of "B" payments, and why they are not regarded as income in Douglas' A+B thereom, which demonstrates why prices increase faster than incomes.

As to the "interest drain" theory, or what is also known as the "debt virus theory", this theory neglects to take into account that reciprocal spending by banks is an increase in the money supply. When a bank loans money, this is not the only activity which the bank engages in which increases the money supply. Payment for interest on deposits, purchases of assets, and payment for expenses also increase the money supply which can then be used to pay the interest on loans.

Some will argue that the reciprocal spending by banks is always less than the interest rates charged on loans, and this is true. This is because banks have A and B costs as well, and this is just another example of the validity of the A+B theorem.

Dick Eastman:  What do you mean "also known as the 'debt virus theory.' You have been reading that noodlehead Migchels.   You give my ideas this stupid name. Whoever gave that term to you was blowing smoke -- and doesn't know what he is talking about. I ask you to name the source of this term and provide the URL.

And do you yourself know what you are talking about when you say that I have neglected to take account for "reciprocal spending by banks" increasing the money supply?   Banks don't spend. They lend. And when banks increase the money supply it is through the fractional reserve banking system that multiplies deposits many times for every outside dollar injected into the banking system. What do you think I am talking about when I speak of the need to end money creation by banks?

I was feeling sorry for being uncharitably frank with a good hearted and courageous man seeking only good for mankind  -- now this iconoclastic scarecrow  is thinking you deserve every bit of what I have dished out.

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Cheers.

Glooms.

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Jim Schroeder

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