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The A plus B Theorem, Saving, and the

Repetition of Payments Increasing Prices.

For the convenience of readers who have not Professor Copland's paper, or the book in which this theorem is contained.

It is reprinted herewith:-"A factory or other productive organization 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, bank charges and other external costs).

"Now, the rate of flow of purchasing power to individualsis represented by A, but since all payments go into prices, the rate of. flow 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." (And my criticism of A+B is what Douglas thinks comprises B, not that B does not exist. I argue that the only factor that causes B is interest on debt created money, or what Douglas calls usury. I will elaborate further below.)

It is fortunate that the criticism of Professor Copland is practically contemporaneous with a criticism of the same theorem by Professor Robbins, as it is possible to use either of them to confute the other. It is, however, obvious that, at any rate, Professor Copland has not understood, what seems to me to be, its fairly simple language, and what are the consequences which might be expected as a result of its truth.

The A plus B theorem, then, may be said to be first, an assertion that, under certain circumstances, almost universal in modern industry, which will subsequently be specified, purchasing power cannot be equal to prices, if purchasing power and prices are both considered as a flow, which is the commonly accepted and correct method of regarding the matter. The second aspect of the theorem is that it puts forward an explanation as to the mechanism through which this disparity is produced. Obviously, the correct method of approaching the subject, although not that commonly employed by professional economists, is first ofall to ascertain if the situation does, in fact, confirm the theorem. Now, fortunately, or unfortunately, it is not necessary to seek very far for this confirmation. I do not suppose that Professor Copland, or any responsible student of the economic situation would deny that it is concerned with a problem of glut, still less would he contend that it was a problem of scarcity. It is admitted that we can produce all we want, but cannot buy or sell to the extent of our productive capacity. (Agreed!)Without going over the well-known ground covered by the literature of sabotage, such as the burning of wheat as fuel because it cannot be sold or to keep up the price, the destruction of millions of bags of coffee, the shooting of calves an the Argentine plains, the restriction of rubber tapping, and merely emphasising that this glut of actual consumable products does not take into account the immense unused productivity represented by half-idle factories, large bodies of unemployed, decreasing cultivation of farm lands, and unused processes far increasing the productivity of agriculture, to name only a few of these aspects of the matter, it is quite certain that the introduction of mechanical power into the economic service of man has at least multiplied his productive capacity by the ratio of his muscular energy to the power at his disposal, that is to say, at least fifty times. It is highly probable that the multiplying factor is considerably greater than this. An association of American engineers and technologists at Columbia University remarks:

"The advent of technology makes all findings based an human labour irrelevant, because the rate of energy conversion of the modern machine is many thousand times that of man.

The total capacity of U.S. industrial equipment is one billion horsepower which does the work of ten billion men or five ,times the earth's total population." Both from observation, therefore, and by scientific deduction, we are justified in regarding it as beyond all reasonable doubt that, from the realistic or physical point of view, the world actually is rich and could be much richer in real goods and services, and that economic want is an anachronism.(Again, agreed so far) On the other hand, we may regard Governments as being spokesmen of the financial system, since it is by the sanction of Governments that the existing system is maintained. It is claimed by these governmental spokesmen that we are living in a period of great stringency, that financial economy is necessary, both of the voluntary or saving description and of the involuntary description, which may be for the present purpose described as taxation. Obviously, these two pictures cannot be at one and the same time true. We cannot be rich and poor, in an economic sense, simultaneously. That is to say, the financial system does not reflect the facts of the physical, economic, and production system. (Absolutely) Since fact and logic both demonstrate that we are rich, while the financial system says that we are poor, it seems beyond dispute that it is purchasing power which is lacking, and not goods, or, in other words, that the collective prices of the goods for sale are in excess of the purchasing power available to buy them. (With all this I absolutely agree with Douglas, I just disagree with the factors that cause this except one.) Professor Copland seems to have some inkling of this in his first paragraph, in which he remarks that: "With many others, Major Douglas finds a disparity between consumers' spending power and production." (sic). I am not specially concerned with any claims to priority, and am, therefore, quite content to agree that I have an increasing body of acquiescence on this point, although I do not gather that Professor Copland admits it.

Turning to the specific criticism of the theorem, Professor Copland begins by remarking as follows: "Taking the first part of this argument, it is assumed that the so-called B payments are not distributed to consumers. This I believe to be the fundamental fallacy of the Douglas Credit Analysis." (And so do I with the exception of interest or debt retired).

I think I am justified in retorting to the second sentence just quoted that I think the first sentence is conclusive evidence that Professor Copland does not understand the Douglas Credit Analysis. The B payments to which he refers are specifically stated in the enunciation of it, to be payments made from one producing organisation to another, and are,beyond dispute, the completion of a cycle of cost accountancy. (Yes they are)

I trust Professor Copland will not consider me unduly elementary if I explain that a cost is created either by the application of paid labour to production or by the allocation of book costs in respect of previously-incurred expense, or by both together. Payments to labour distribute purchasing power to consumers, who supply the labour as workers, and create costs which go into prices of the goods that they produce. The allocation of book costs does not distribute purchasing power,(This is where I absolutely disagree with Douglas, and will elaborate on why below.) but is the presentation of a claim an purchasing power already distributed, and is met, if it is met,by the inclusion of the sum claimed, in: price. B payments area settlement of the combined claim produced in this way at every separated stage of production. (This is true, but when a book cost, or overhead is paid to an outside manufacturer, that money used to pay him does not disappear. It still exists in that manufacturer's bank account, and that money can still be used as purchasing power to clear the product that the second manufacturer is producing. This seems to me to be a major - no pun intended - point of confusion on behalf of Douglas. I will elaborate further below.)

Fortunately, Professor Copland, while ignoring the diagram on page 31 of The Monopoly of Credit, the book from which he is at the moment quoting, includes a diagram of his own, which confirms my belief. It will be noticed that in this diagram time is non-existent, (And this has been my criticism of the accounting proof offered by the banks and a member of the Social Credit group that states that the loans (debt) and credits (money) are in balance, and interest has no affect on this balance because it's bank equity. But as I've always stated, by the TIME that bank equity has been spent back in the system, more interest has accrued, because interest is a function of time)and apparently, to Professor Copland, is of no importance. (Apparently, to some people who use accounting proofs it's of no importance either) That I am not misrepresenting him is, I think, proved by his remark, on page 16 of his pamphlet, that it is "not relevant to the point at issue" that "spending power distributed two years ago is not available for consumption today. The several stages of production are in progress at the same time."

Let us suppose that production is divided into five processes, all of them in progress at the same time. Each of these five processes pays its workmen weekly, and each pays £ lO in wages. Each one of the factories carrying out the five processes allocates 100 per cent onto its direct labour in the form of book charges, which is a very moderate average overhead charge. For the moment we will leave out payments for materials. The total amount of wages distributed in the week is £50. It seems to me to be merely perverse, to deny that the price values or claims on the public created in that week are £ 100 while the purchasing power distributed is only £50. (Actually, the purchasing power distributed that week is $100 because the money that went to "overhead" went to another manufacturer, and is in his bank account which is still purchasing power to be used.)When factory No. 4 sells its weekly output to factory No. 5, it sells it for £80, and factory No. 5, if it can sell at all, sells for £ 100. If Professor Copland cannot show me a week in which, in the normal operation of the cost system, this process is not going on, the only question at issue is whether the £50 of overhead charges still exist in the form of purchasing power. It is not merely relevant; it is the major portion of the problem.(It absolutely is the major problem I have with Douglas' A+B as presented) I might remark that if he can show me a factory which does not allocate book charges, I will show him a factory which is heading straight for bankruptcy.

In order to decide this question, we have to examine the nature of the overhead charges, how they were created, and what financial processes have been associated with them.(Yep) To make the matter as simple as possible, I shall, for the moment, assume that overhead charges are nothing but charges for the use of buildings and plant, and at a later stage explain how this definition can be extended.

Before, then, each of the factories in the above illustration could commence operation, it had to be built and equipped with machinery. There are two methods by which this operation could have been financed. The first is that it could have been financed out of savings, the method commonly suggested by orthodox financial authorities as that by which capital expenditure is financed. It is very questionable whether much modern finance is done this way.(Absolutely)Assuming this course to be pursued, the money to buy the plant must have appeared in the cost of some previous product, and therefore its mere saving causes a deficiency of purchasing power to that extent.(That is true, but the labour used to build the new factory, which was being used to produce consumer goods, is now making the economy produce less consumer goods, because it's building a capital good, so purchasing power should come out of the system to reflect this decrease in the production of consumer goods) If it is now applied to pay the wages, etc., necessary to produce the new buildings and plant, quite obviously these new buildings and plant are produced without the creation or distribution of any fresh purchasing power.

In other words, the money creates a second price value, but does not produce any fresh money. (Fresh money is not needed to cancel costs if it is circulated more than once, and I think Douglas is confused in this matter) This is the simplest, but by no means the only, example of a sum of money appearing more than once in series or chain production, and producinga cost on each occasion without creating fresh purchasing power.

From the ordinary point of view, the people who put up the money are legitimately entitled not only to a profit on this money, but also to get it back again in full, since in their case the money may be assumed to represent past effort, so that the factories in question must make a charge on each article turned out which will provide the money to meet these claims. (Absolutely, and I have always stated that I agree that it's fair to charge interest on pre-existing money saved or invested)The only objection to this perfectly fair assumption is that, in the aggregate, the public have not got the money.

The second method, and probably the method by which most modern financing is done, under cover of a smoke screen provided by comparatively small subscriptions from the public, is that some financial institution actually creates the money, taking debentures on the new factories as security. Ethically, there is every difference between money created by a stroke of the pen and money acquired as the result of years of effort, but I am not at the moment concerned with ethics. (Absolutely, and that is why when people learn that bank loans are just created money, they are appalled, but I agree with Douglas in that I'm not concerned with the ethical implications of this at the moment.) At first sight it is a better method, considered as an isolated operation. When the new factories come into existence, new money is distributed to the men who built the factories. But there are two practical objections, leaving aside any question of ethics. The new money or credit is claimed by the financial institution as its property, and therefore when it is lent creates a debt against the public.(Not true, the debt is also a credit. The "property" of the money belongs to both the bank and the loanee. This is double entry bookeeping, as the loan is entered as a debt (iou) and a credit (deposit)). At the same time, being distributed in advance of consumable goods, it tends towards true inflation. (I concur, and is the problem with debt created investment as opposed to real savings). The debt differs in nature from the debt created by private finance in exactly the same way that a debt to foreigners differs from an internal debt-its repayment actually takes money out of the country. If a rise of prices has occurred, it is repaid twice over, once in increased prices and again on redemption. Secondly, there is no provision in this method of financing for the money required to pay the interest on the debentures, which, in fact, can only be paid, if it is paid, by the issue of fresh money to pay it, which, under existing circumstances, comes from the same source, that is to say, the financial system. (Douglas is right at the precipice here. He has found his inbalancing factor, and the factor which forces us to produce more debt, but watch as he steps away from this revelation)From this point of view, it is the difference between usury and profit-a difference clearly drawn in the Middle Ages. (And a difference I've pointed out on many occasion, so from now on when I speak of interest, I'm going to use the word usury which Douglas coins here to maintain clarity, because there is a difference between interest charged on pre-existing money, and interest charged on debt created money.)There is an additional factor, perhaps more important than any of these, and that is that, either by directly calling in the debentures or by selling the debentures to the public and calling in public overdrafts, financial institutions can, and most unquestionably do, recall the money equivalent to the plant value at a greater rate than this plant depreciates. (Yes, and this is mostly caused by the charging of interest, instead of repaying the loan over the active life of the asset as it depreciates, the loanee pays back that amout + interest.)

It is therefore, I think, incontestable that, either wholly or in part, the purchasing power to pay overhead charges on a scale which is legitimate from the plant owner's point of view does not exist, except in times of wholly excessive capital production or quite abnormal exportation. (Yes, but the only "overhead" charge which can't be paid back without access to more loans is interest based on usury.)It is now necessary to see to what extent this conception of overhead charges can be extended, and 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, (Yes, but it appears that Douglas thinks that when a cost is cancelled, the money, or credit, that cancelled that cost ceases to exist, or is cancelled itself. This is not true, and that credit exists to cancel more costs as it is circulated, until such a time as it is used to pay back a debt.) and that practically this means any charge created at a further distance in the past than the period of the cyclic rate of the circulation of money. There is no fundamental difference between tools and intermediate products, and the latter may therefore be included. Admittedly, at this point we get into a certain difficulty, both to ascertain the average rate of circulation of money, and the antiquity of the various charges made, but the disparity is so great that, qualitatively, there is no difficulty in proving the point.

In Great Britain, for instance, the deposits in the Joint Stock Banks are roughly £2,000,000,000. In rough figures the annual clearings of the clearing banks amount to £40,000,000,000. It seems obvious that £2,000,000,000 of deposits must circulate twenty times in a year to produce these clearing-house figures, and that therefore the average rate of circulation is a little over two and a half weeks. (Douglas seems to acknowledge the circulation, or velocity of money, here)At this point it may be desirable to deal with the common error that the circulation of money increases its purchasing power, an error which seems implicit on page 19 of Professor Copland's pamphlet, where he remarks: "A given unit of money will circulate many times in a unit of time. It will make many payments, because it has what economists call velocity of circulation." I think that what Professor Copland means by this is that, if I pay £ 1 to the butcher for meat and the butcher pays the £ 1 to the baker for bread which the baker has supplied to the butcher, then two debts are liquidated. This is a complete and major fallacy. The butcher incurred costs, perhaps from a farmer in respect of cattle supplied, who in his turn possibly borrowed the £1 from a bank. In any case, if the butcher uses my £ 1 to pay the baker, he has broken the chain of repayment from me to the farmer and ultimately to the banker, and the costs which were created when the farmer sold his cattle to the butcher are not liquidated. (But the baker could buy meat from the butcher, who then has $1 to pay the farmer, who then can use the one dollar to cancel the debt. The credit doesn't disappear because it's given to the baker, the baker can then use the dollar to buy meat in exchange for the bread which he sold to the butcher, and then the butcher can use this same dollar to cancel other costs. Like I stated previously, I can clear the market of $1,000,000 dollars in costs with one dollar so long as I circulate it $1,000,000 times. Now if the cost of the meat the butcher supplies, is exacly equal to the cost of the cattle which the farmer supplies to the butcher (i.e. one dollar), and when receiving the dollar spends it on bread, instead of spending it on clearing his debt to the farmer, THEN THE BUTCHER SHOULD GO IN DEBT. He has just spent money on something for which he has made no profit. So the butcher should go in debt, to pay back the farmer, who in turn pays off his debt to the bank. So now the farmer is out of debt, and the butcher is in debt. $1 of debt was created to cancel a $1 of debt, and the aggregate debt did not change. It only change as to who has the debt)The clearing-house figures just quoted contain a large number of. "butcher-baker" transactions, and these must be deducted in estimating circulation rates. The vital fact is, of course, that one unit of money can circulate an indefinite number of times through the costing system, in each case creating a fresh cost or, if it be preferred, a fresh debt charge, but not fresh purchasing power. It is, perhaps, unnecessary to contend that the average antiquity of the debt charges against the population is more than two and a half weeks. It is certainly a considerable number of years, but it would be difficult to say exactly what it is.

Categorically, there are at least the following five causes of a deficiency of purchasing power as compared with collective prices of goods for sale:-

1. Money profits collected from the public (interest is profit on an intangible). (Interest is what drives profit, because it is the rate of return of capital - i.e. the opportunity cost of capital. It is more than just profit on an intangible, it is profit that is guaranteed to grow continuously over time, it guarantees that the rate of growth of debt is greater than the rate of growth of credits to cancel that debt, and that forces more debt into the system, and causes an inbalance in prices.)

2. Savings, i.e., mere abstentation from buying.

3. Investment of savings in new works, which create a new cost without fresh purchasing power.

4. Difference of circuit velocity between cost liquidation and price creation which results in charges being carried over into prices from a previous cost accountancy cycle. Practically all plant charges are of this nature, and all payments for material brought in from a previous wage cycle are of the same nature.

S. Deflation, i.e., sale of securities by banks and recall of loans.

There are other causes of, at the moment, less importance.

Excluding taxation, which is a separate although allied subject, all distributed purchasing power is recovered from the public through the agency of prices. This is just as true in connection with the recall of trade loans as in any other form of expense. It seems obvious, therefore, that, with the exception of savings, the whole of the above causes of the difference between purchasing power and prices can be found in B payments, which are money ultimately on its way back to the bank, (Yes, money back to the bank creates less credit in the system as money is cancelled, but either new capital projects are created to create more consumer goods, and hence, the money supply remains constant or growing, or less and less capital investments are made, and the amount of consumer goods produced slows with depreciation, and therefore, less and less money is needed to clear the market. In either event, there is no inbalance. The inbalance comes from the fact that the debt can never be paid off, and access to more loans is made necessary because of usury.)and none of them, with the exception of savings, are found in A payments, and if we subtract the A payments distributed in a given week, minus savings from the total prices claimed in a given week, we shall get B payments as a measure of the net debt claims against the public for the week in question.

As bearing upon this, the Association of American

Engineers at Columbia University, previously referred to, remarks that "the total debt claim against the physical equipment of all American industry has risen to the fantastic figure of 218,000,000,000 dollars-a debt claim on posterity." They correctly remark that a temporary revival to "prosperity levels" is possible by increasing the debt claim through a policy of inflation, but that a downward oscillation will result from this that is likely to end in the utter collapse of the price system under which industry has operated.

The foregoing is sufficient answer to the quotation from Mr. J. Keynes, which begins: "Let X be equal to the cost of production of all producers. Then X will also be equal to the incomes of the public." This is the well-known logical fallacy known as the petitio princil, which consists in assuming the truth of the fact which you have set out to prove and then proving the assumption from the logical conclusion.

The cost of production is not equal to the incomes of the public, and therefore the rest of the argument merely indicates what would happen if it were equal.(This is true, but the only thing that causes this inbalance is the cost of interest on debt created money).

Professor Copland then goes on to argue that the whole system of production would have broken down had my analysis been correct, and mentions the interesting fact that A payments in Australian industry are about one-fourth of the total value of the output of goods in factories. It is well understood how it has been possible for industry to carry on up to the present time under the faulty financial system we have examined, and the two more important causes are: firstly, the excess of exports over imports, resulting in taking goods out of the country and receiving purchasing power in return for them, thus at one and the same time decreasing the amount of goods in the country and increasing the amount of purchasing power in respect of the remaining goods; and secondly, by a progressively excessive production of capital goods, the A payments of which become available to buy the consumable goods, the method to which reference is made by the American authorities quoted previously. Both of these latter processes have now become, in practice, impossible to any considerable extent, and the present crisis is the result.

Take care,

Jim

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