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					Bill,

As Michael Lane has pointed out, there are many important common themes in Louis
Kelso's binary economics and Major Douglas' social credit economics. While their
precise language and their means for achieving their goals might differ, Douglas and
Kelso would probably both agree with changes in national economic policy that would:
1) recognize the increased productiveness of the instruments of technology as a basis
for national income maintenance policies, 2) discourage redistributive taxation and any
form of concentrated power, 3) support the monetization of private sector economic
growth, 4) provide access to credit as a fundamental right of citizens, 5) favor full
production over full employment policies, 6) favor market-based determinations of
wages and prices, 7) protect private property rights, and 8) focus on overcoming
artificial scarcity (poverty) and planning for shared abundance. Reasonable people can engage in
fruitful debates over differences between Kelso and Douglas in their respective systems logic and
means of implementing their shared objectives. Such positive interactions might possibly lead to a
combining of their "people power" networks to challenge the defenders of the hopelessly flawed
economic policies coming from the left, the right and the muddled middle of Washington
thinktanks and academia generally. Given the many strengths that would result from an
alliance between binary economists and social creditors, I hope that my responses below
will lead to a mutually respectful and continuing dialogue with you and Vic Bridger, initially separate
from mine with Michael Lane.

Below I will intersperse my responses to your reactions to some quoted excerpts of
mine in a recent exchange with Michael Lane, who, like yourself, is committed to the
teachings of Major Douglas. Many of my responses flow from my paper, "A New
Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth
Without Inflation," which is confirmed for publication in The Journal of Socio-Economics
and can be downloaded by clicking on
http://www.cesj.org/binaryeconomics/price-money.html
But I want to acknowledge that most of the responses below were prepared, with my
inputs and editing touches, by my colleague, Michael D. Greaney, a CPA and MBA
who serves as volunteer director of research for our Center for Economic and Social
Justice. However, I accept total responsibility for this e-mail posting.

"William B. Ryan" wrote:

 Norman,

 In response to your dialog with Michael [Lane].

 1. First, a note to Michael [Lane]:

 "Labor displacements" was the subject heading of a message
 from someone else that I replied to. It is not mine. My
 preferred term is "labor displacement" as a general concept.
 Douglas' term was "labour replacement." The following is
 excerpted from The Monopoly of Credit:

 "The factor which is probably at the root of the problem...has
 during the past few years been a matter of acrimonious
 controversy. On its physical or realistic side, it is intimately
 connected with the replacement of human labour by machine
 labour."

 NK: Why is this point significant? As far as I can see, there is no difference that makes any
 difference between “labor replacement” and “labor displacement.” "Productive capital," "tools of
production," "procreative capital," or what Backminster Fuller called "energy slaves" would have
also been appropriate for describing the substitution of human work with productive technology.
I’m not sure Douglas would have made an issue of the language in this instance.


2. You make a number of gross misstatements of fact which
no doubt derive from an unfamiliarity with the subject.

Kurland: "...there would be no point in placing limits on profits
as Douglas proposed."

Douglas never proposed that there should be limits on profits.
The Dividend itself, a broadly encompassing concept, is to be
funded with new credit and not diverted or confiscated profits
or taxation. This does not necessarily require action by the
government. In principle, it could be accomplished by the
banking system on its own initiative through its own facilities.
Nor does it necessarily require "money." It could be
accomplished by the mechanism of a generalized accounting
adjustment in augmentation to effective demand.


The Social Credit Movement, from its inception to its wane,
was always staunchly pro-individual enterprise and against
centralized power in any form. This extensive excerpt is from
Economic Democracy, published as a book in 1919 after an
earlier serialization in Orage's journal, at the very beginning of
Douglas' public career:

"We are thus led to inquire into environment with a view to
the identification, if possible, of conditions to which can be
charged the development of servility on the one hand, and the
discouragement of possibly more desirable characteristics on
the other, and in this inquiry it is necessary to avoid the real
danger of mistaking effects for causes; and, further, to beware
of seeing only one phenomenon when we are really confronted
with several.

"For instance, that from the misuse of the power of capital
many of the more glaring defects of society proceed is certain,
but in claiming that in itself the private administration of
industry is the whole source of these evils, the Socialist is
almost certainly claiming too much, confounding the symptom
with the disease, and taking no account of certain essential
facts. It is most important to differentiate in this matter,
between private enterprise utilizing capital, and the abuse of
it.

"The private administration of capital has had a credit as well
as a debit side to its account; without private enterprise
backed by capital, scientific progress, and the possibilities of
material betterment based on it, would never have achieved
the rapid development of the past hundred years; and still
more important at this time, only the control of capital, which
on the one hand has degraded propaganda into one of the
Black Arts, has, on the other, made possible such crusades
against an ill-informed or misled public opinion as, for
instance, the anti-slavery campaign of the early nineteenth
century, or the parallel activities of the anti-sweating league
at the present day. The very agitation carried on against
capitalism itself would be impossible without the freedom of
action given by the private control of considerable funds.

"The capitalistic system in the form in which we know it has
served its purpose, and may be replaced with advantage; but
in any social system proposed, the first necessity is to provide
some bulwark against a despotism which might exceed that of
the Trust, bad as the latter has become. In our anxiety to
make a world safe for democracy it is a real urgency that we
do not tip out the baby with the bath water, and, by discarding
too soon what is clearly an agency which can be made to
operate both ways, make democracy even more unsafe for
the individual that it is at present.

"The danger which at the moment threatens individual liberty
far more than any extension of individual enterprise is the
Servile State; the erection of an irresistible and impersonal
organization through which the ambition of able men,
animated consciously or unconsciously by the lust of
domination, may operate to the enslavement of their fellows.
Under such a system the ordinary citizen might, and probably
would, be far worse off than under private enterprise freed
from the domination of finance and regulated in the light of
modern thought...

"In attacking capitalism, collective Socialism has largely failed
to recognize that the real enemy is the will-to-power, the
positive complement to servility, of which Prussianism, with its
theories of the supreme state and the unimportance of the
individual (both of which are the absolute negation of private
enterprise), is only the fine flower; and that nationalization of
all the means of livelihood, without the provision of much
more effective safeguards than have so far been publicly
evolved, leaves the individual without any appeal from its only
possible employer and substitutes a worse, because more
powerful, tyranny for that which it would destroy.

"...It is notorious that the State Socialists of Germany,
commonly known as the Majority Party, were of the greatest
possible assistance to Junkerdom in carrying out its plans for a
Prussian world hegemony; while in England the bureaucrat
and the Fabian have, on the whole, not failed to understand
each other; and the explanation is simply that both, either
consciously or unconsciously, assume that there is no
psychological problem involved in the control of industry just
as the Syndicalist is, with more justification, apt to stress the
psychological to the exclusion of the technical aspect.

"Because the control of capital has given power, the effect of
the operation of the will-to-power has been to accumulate
capital in a few groups, possibly composed of large numbers of
shareholders, but frequently directed by one man; and this
process is quite clearly a stage in the transition from
decentralized to centralized power. This centralization of the
power of capital and credit is going on before our eyes, both
directly in the form of money trusts and bank amalgamations,
and indirectly in the confederation of the producing industries
representing the capital power of machinery. It has its
counterpart in every sphere of activity: the coalescing of small
businesses into larger, of shops into huge stores, of villages
into towns, of nations into leagues, and in very case is
commended to the reason by the plea of economic necessity
and efficiency. But behind this lies always the will-to-power,
which operates equally through politics, finance or industry,
and always towards centralization.

"If this point of view be admitted, it seems perfectly clear that
to the individual it will make very little difference what name
is given to centralization. Nationalization without
decentralized control of policy will quite effectively install the
trust magnate of the next generation in the chair of the
bureaucrat, with the added advantage to him, that he will
have no shareholders' meeting."

NK: This whole argument is a non sequitur, that is, it does not follow from the point being made,
which is that Norm Kurland made “gross misstatements of fact” stemming from his
“unfamiliarity with the subject.” The quote is irrelevant. Major Douglas specifically stated that
capital (the non-human factors of production, in which Kelso includes natural resources and
technology, the “means of exploiting” natural resources) should be owned in common, i.e., by the
collective. The entrepreneur (the “improver of process”) was only due a certain pro rata return.
Everything above that level constituted the “national dividend” and was owned by everybody
equally:

Douglas: “(1) Natural resources are common property, and the means for their exploitation
should also be common property. . . . (3) The payment to be made to the improver of process,
including direction, is to be based on the rate of decrease of human time-energy units resulting
from the improvement, and is to take the form of an extension of facilities for further
improvement in the same or other processes.” (Douglas, “Economic Democracy” pp. 110 –
111.)

NK: This is an explicit limitation on the return to the owner of capital. Douglas limited
profit-taking to what would recompense the entrepreneur for his time and effort, measured in
their value in “time-energy units,” along with whatever was needed to form new capital. This is
a variation on Ricardo’s “labor theory of value,” which Marx congealed into a dogma. A mere
shareholder who did not contribute labor or “human time-energy units” to the productive process
would receive only enough to replace his original investment. This is also, by the way, identical
to Marx’s proposal that the capitalist was due back only the original cost of the capital. Any
residual would belong to the collective as the “National Dividend.”

NK: The National Dividend would be monetized and distributed by having the government issue
non-repayable credits in equal amounts to every citizen. Douglas declared that the money supply
available for consumption purposes could only consist of loaned money that had not yet been paid
back to the banks from which it had issued:

Douglas: “The impossibility of a balanced budget within a closed system of credit must be from
the foregoing sufficiently obvious. Without going into details which still further complicate the
situation, such a proposition means that the only surplus purchasing power at the disposal of the
individuals comprising the nation would be the excess of bank loans over bank repayments, i.e.
debt.” (Douglas, “The Monopoly of Credit” p. 58).

NK: The only solution to this perceived lack of purchasing power would be to make loans (social
credit) to the citizens that did not have to be repaid. These would be considered increments of
the National Dividend, payable as dividends on shares held individually, representing a portion of
the National Debt. As the National Dividend belongs to everyone, the people would, in essence,
be loaning money to themselves. It would thus be foolish to repay the loans as you would only be
paying them back to yourself. The loans, necessarily in the form of new money, would be spent
to clear consumption goods and services at market prices, not to perform the self-defeating act
of repaying the social credit loans:

Douglas: “The provision of a National Dividend is merely to place in the hands of each one of the
population, in the form of dividend-paying shares, a share of what is now known as the National
Debt, without, however, confiscating that which is already in private hands, since the National
Credit, is, in fact immensely greater than that portion of the National Debt which now provides
incomes to individuals.

Douglas: “The practical effect of a National Dividend would be, firstly, to provide a secure
source of income to individuals which, though it might be desirable to augment it by work, when
obtainable, would, nevertheless, provide all the necessary purchasing power to maintain
self-respect and health. By providing a steady demand upon our producing system, it would go a
long way towards stabilizing business conditions, and would assure producers of a constant home
market for their goods.” (Douglas, “The Monopoly of Credit” p. 102).

 NK: If declaring that only a specific return on capital is legitimate and everything else belongs to
the collective is NOT a limitation on profits, then nothing can be construed as a limitation on
profits. It follows then that there can be no argument, because there is no agreement on the
meaning of the concept “limitation” or “profit.” The issue here, as in the comment above, is
purely semantic.

NK: Similarly, Bill, let's examine these statements of yours: “Nor does it [the National Dividend]
necessarily require ‘money.’ It could be accomplished by the mechanism of a generalized
accounting adjustment in augmentation to effective demand” is an exercise in obfuscatory
semantics. While I consider Douglas’ definition of money somewhat limited (and thereby
misleading), his definition was explicit enough to include as “money” any such “mechanism of a
generalized accounting adjustment in augmentation to effective demand.”

NK: To argue that “augmentation to effective demand” in any form does NOT constitute
“money” as understood by Douglas is to confuse his clear intent:

Douglas: “Money is essentially an order system. It has been defined by Professor Walker as
'any medium no matter of what it is made or why people want it, no one will refuse in exchange
for his goods.' That is to say, a given denomination of money may at any time be exchanged for
any article bearing a price figure corresponding to this denomination of money, and it is a simple
extension of this proposition to say that the power of creating money is a guarantee of the power
of acquiring goods or services to a total proportion of the whole stock of goods and services
equal to the percentage of existing money which can be created.” (Douglas, “The Monopoly of
Credit” pp. 17 – 18.)

NK: The real issue, however, is not whether Douglas stated he supported private property. By
his own words, as you quoted him above, that is a given. This is a declaration he made many
times and which, apparently, he believed. The real issue is whether Douglas’ understanding of
property and the program he developed do, in fact, respect and protect private property the way
he claimed. This, and I'm sure all binary economists would agree, would not appear to be the
case. The issue is also not whether Major Douglas opposed centralized power in any form. He
did, repeatedly. The issue is whether his program’s effect on property rights would inevitably
increase the centralized power of government. While Douglas denied that social credit was
socialism,

Douglas: “It seems difficult to make it clear that the proposal for a National Dividend, which
would enable the products of our industrial system to be bought by our own population, has
nothing to do with Socialism, as that is commonly understood. The main idea of Socialism
appears to be the nationalization of productive undertakings and their administration by
Government departments. Whatever merits such a proposal may have, or may not have, it does
not touch the difficulty we have been considering.” (Douglas, “The Monopoly of Credit” p. 101.)

the effect is the same. The passage quoted directly above is followed immediately by the
statement that “The provision of a National Dividend is merely to place in the hands of each one
of the population, in the form of dividend-paying shares, a share of what is now known as the
National Debt” (see above). Douglas also previously stated that common ownership applied to
both natural resources and the means of exploiting them. It becomes impossible to reconcile the
claim that social credit is NOT socialism given Karl Marx’s definition of communism, the most
extreme form of socialism, in “The Communist Manifesto”: “In this sense, the theory of the
Communists may be summed up in the single sentence: Abolition of private property.” This is
made clearer when Marx elaborates on this statement, declaring that personal property is not his
object, but property in the means of production — that which Douglas had declared belonged to
the collective. Such a program (as well as Douglas’ stated aim in “Economic Democracy” of
“changing human personality”[!] by overcoming the “will-to-power”) requires, as the communists
discovered, increasing government control and domination. Instead of “withering away,” the
state becomes ever stronger. (There is also a question as to the degree of oversight required by
a central authority to keep entrepreneurs from ratcheting up their salaries to replace profits
diverted to the National Dividend, just as they do today to avoid the double taxation on corporate
dividends.)

NK: Before I studied the law, I must confess that I did not understand the nature of "property."
After meeting Kelso and reading his superb critique of Karl Marx's Das Kapital, I deepened my
understanding of property and its political significance for broadly diffusing economic power.
(Click on KARL MARX: The Almost Capitalist By Louis O. Kelso. or
http://www.cesj.org/thirdway/almostcapitalist.htm)

NK: Despite his obvious brilliance, Major Douglas, like Marx and many intellectuals, failed to
fully appreciate the nature and political significance of property. Stated simply, property is not a
thing. It is a set of relationships. It is the rights, powers and privileges that a person has to and
over a thing, in relation to everyone else in the world. These rights include one that Douglas
correctly considered all-important. That is the right of access to the means of acquiring and
possessing property. Unfortunately, his concern for this universal and absolute right "to" property
appears to have caused him to overlook the equally important rights "of" property. Above all, the
rights of property mean the right of full enjoyment of “the fruits of ownership.” Primary among
“the fruits of ownership” is the full stream of income generated by that which is owned. If you
own an apple tree, you have the right to do with as you please all the apples grown on that tree,
as long as your “doing” respects the rights of others and the common good.

NK: It is important to note in this respect that “the common good” does not include title to the
fruits of ownership that derive from private property, but organized society may place limitations
how those fruits are used. That is, care must be taken that others’ rights are not violated, but
their rights do not give others the right to use the fruits of ownership that belong to you, at least
not without your consent. Organized society can prevent you from hurling green apples at the
heads of passers-by, or to punish you if you do such a thing. But government does not have the
right to steal apples from trees belonging to private individuals that adjoin a public thoroughfare.

NK: Whether you own yourself, land, an apple tree or some other form of capital, the rights of
property demand that you receive the fruits thereof, without infringement, or society is unjust to
that extent. You own the wages generated by your labor, the crops from your land, the apples
from your tree, and the revenues-less-costs resulting from the sale of products generated by your
machinery — in their entirety. The functional definition of slavery, a perversion and
dehumanization of property rights, is that the fruits of labor belong to someone else.
Consequently, no one else, especially the state, has any legitimate claim on your property.
(There are certain exceptions, especially in cases of dire necessity, but these are exceptions, not
the rule, and we are here discussing a mandatory rule, not allowed expedients.)

NK: Some, such as Thomas Hobbes and Robert Filmer, have protested that individuals only have
private property against other private individuals, not against the state. By Hobbesian logic,
taxation is an exercise of property in the goods of the subjects by the sovereign who is the
ultimate owner of everything. Locke (and Sidney, Bellarmine, Aquinas, et al.) disagreed with this
assessment. Taxes are a grant from the people to their duly appointed rulers for the purpose of
meeting the expenses of government, and cannot be levied legitimately without the consent
(implicit or explicit) of the governed.

NK: Back to Major Douglas. His social credit program requires that some central authority
determine the amount of production above what is “due” to producers for their legitimate efforts,
“monetize” that amount as a payment on the “National Dividend,” and distribute it to every
citizen in the form of “new credit.” (Remember that in “The Monopoly of Credit” Douglas
declared money and credit identical.) This “National Dividend” would rapidly become virtually
the sole source of income for the majority of people:

Douglas: “That the distribution of cash credits to individuals shall be progressively less dependent
upon employment. That is to say, that the dividend shall progressively displace the wage and
salary, as productive capacity increases per man-hour.” (Douglas, “The Monopoly of Credit” p.
151.)

NK: While social credit proponents claim to be uncomfortable with centralized power, giving
such power over individual incomes is a recipe for virtually unlimited power in the hands of the
central authority that makes the determination as to the appropriate rate of return on invested
capital, which in turn determines the amount of the “National Dividend.” This is true whether
they decide to peg it to the cost of capital or some other measure. The fact remains that the
decision is essentially arbitrary and, if enforced even by the indirect means of the National
Dividend, tyrannical. It forces a subjective “what should be” on to an objective “what is,” the
“what is” already having been determined by the functioning of the market.

NK: However a National Dividend is accomplished, whether direct or indirect (i.e., through
direct taxation of what some called "surplus profits" or "unearned profits" and subsequent
redistribution, or through monetization and issuance of new currency or credit in ways that result
in inflation, a form of indirect taxation), the effect is the same. Debilitating inroads have been
made on the institution of private property. To claim that the amount of the National Dividend
belongs to the collective is to destroy private property.

NK: Douglas equated the “National Dividend” with what he called the “cultural heritage” and
what Mortimer Adler called the “goods of civilization.” I call them "social goods." Kelso and
Adler considered the “goods of civilization” as equally accessible to every educated person and
available to be incorporated in all forms of productive capital. Just as the air we breathe or laws
or ideas are not subject to the laws of property, the same goes for the “cultural heritage.”
(Money, credit and the political ballot are also "social goods" that should be equally accessible
under the same conditions to all. Like other parts of the "cultural heritage," money, credit, laws,
and ideas are not property, but they are vital to enable individuals to acquire property and be free
of dependency on others. I think that Kelso and Adler were on sounder ground.

NK: Based on Douglas' erroneous view of property rights in the "cultural heritage", the social
credit position argues that what was generated by my property does not belong to me, but to
everyone to the degree that it exceeds what is “due” me under that particular arrangement of
society. While I may retain legal title, I retain rights to nothing above an amount determined by
the central authority, which by that act alone is exercising property in my goods, and thus
assumes effective (though not legal) title to my goods. As Henry George pointed out in
“Progress and Poverty,” the state doesn’t need to take legal title to land and natural resources if
it can take the income — the outcome is exactly the same:

Henry George: “I do not propose either to purchase or to confiscate private property in land.
The first would be unjust; the second, needless. Let the individuals who now hold it still retain, if
they want to, possession of what they are pleased to call THEIR land. Let them continue to call
it THEIR land. Let them buy and sell, and bequeath and devise it. We may safely leave them
the shell, if we take the kernel. IT IS NOT NECESSARY TO CONFISCATE LAND; IT IS
ONLY NECESSARY TO CONFISCATE RENT….

Henry George: “What I, therefore, propose, as the simple yet sovereign remedy, which will raise
wages, increase the earnings of capital, extirpate pauperism, abolish poverty, give remunerative
employment to whoever wishes it, afford free scope to human powers, lessen crime, elevate
morals, and taste, and intelligence, purify government and carry civilization to yet nobler heights,
is — TO APPROPRIATE RENT BY TAXATION.

Henry George: “In this way the State may become the universal landlord without calling herself
so, and without assuming a single new function. In form, the ownership of land would remain
just as now. No owner of land need be dispossessed, and no restriction need be placed upon the
amount of land any one could hold. For, rent being taken by the State in taxes, land, no matter in
whose name it stood, or in what parcels it was held, would be really common property, and every
member of the community would participate in the advantages of its ownership.” (Henry George,
“Progress and Poverty” pp. 405 – 406.)

NK: The social credit program further erodes private property by not taxing profits directly, but
does so indirectly. That is, the amount of the National Dividend is determined for the nation as a
whole (“collectivized”), and general claims issued to the population in the form of new money
(cash credits issued as dividends on the national debt and not repayable). Adding new money
without linking it to the formation of wealth-producing assets or newly-produced goods is the
classic definition of inflation. Social credit adds new money in the form of “dividend cash
credits” (or, if you prefer, “a generalized accounting adjustment in augmentation to effective
demand”) linked to the consumer goods resulting from current production, not , as Kelso
proposed, to the amount of new capital needed to meet future consumer demand.

NK: Were the money supply to remain unadjusted as productive output increased, prices would
fall in obedience to the laws of supply and demand. In monetary terms, each individual’s
holdings of currency and financial assets would be worth more, he would have an increase in
purchasing power — each unit of currency would purchase more goods and services. Were the
central authority to monetize the amount of the National Dividend and distribute the new money
to the citizens, the purchasing power represented by the new money would be shifted from
existing financial assets in the proportion that the new money bears to the old. (Money is
“fungible,” and you cannot have a sound economy anyway with different values assigned to
currency depending on when or how it was issued; it’s been tried.) Everyone who had holdings
of financial assets would have been subject to a hidden tax that removed the increased
purchasing power that would otherwise have resulted from a lowering of the price level.

NK: It was the declared intention of Major Douglas to abolish the income tax. The hidden tax of
such an inflationary procedure would allow a social credit economy to carry out Douglas' plan.
There would still be a tax, of course. It would, however, not be as obvious as the income tax. It
would be the hidden tax of inflation levied on the property of holders of financial assets, i.e.,
assets that are measured in terms of current units of currency and are consequently not “inflation
proof.”
NK: Producers would remain with their wealth intact. Productive assets (“capital” in binary
economic terms) are automatically “inflation proof.” This is because the prices for output can be
increased to match increases in the price level (and thus the cost of production) — assuming, of
course, that foreign producers don’t nip in and take advantage of being able to produce and take
away domestic markets with the added advantage of their more stable currency. Douglas
assumed that this would not happen under social credit because such warlike aggression would
be eliminated by each country producing only for its own use. (Now that would be a great way
to balkanize the global economy, close down the World Trade Organization and stop the
globalization process in its tracks!! Protectionists of the world unite!!) (See Douglas, “The
Monopoly of Credit” pp. 95 – 105, ‘The Causes of War.’) Owners of capital would receive
higher prices for their goods and services. There would be a double incentive. Not only would
there be greater profits in terms of more units of currency which caused the inflation, with the
abolition of the income tax, producers would be immeasurably better off because their profits
would not be taxed. This would increase their profits in real terms as well as in current currency
unit terms.

NK: Because social credit results in what is in effect a property tax on financial assets, the
hidden tax burden of inflation that replaced the income tax would fall on anyone foolish enough to
have saved money. Those with nothing or whose wealth was in some form of equity would be
the beneficiaries. The former would benefit by receipt of their dividend checks, the latter by
being relieved of the burden of direct income taxation. It would not be too long before people
realized that the only ways to come out ahead would be to be born rich with significant holdings
of productive assets, or to divest yourself of financial assets and labor income, i.e., spend your
savings and quit work. To do otherwise would be counter-productive. You would otherwise be
in the position of earning money for somebody else to spend. As noted above, Douglas realized
this and counted it a positive good that people would no longer “work” for their income, but
derive it entirely from the National Dividend.

NK: Any tax is automatically a disincentive to productive activity. The disincentive of inflation
falls on people 1) whose wealth is in the form of financial assets, 2) whose income is fixed, or 3)
whose income is dependent on something that is not directly responsible for the bulk of
production. As a disincentive, inflation causes, respectively, 1) drops in savings rates and the
accumulation of financial assets (spend it fast before it loses more value), 2) poverty among
those with fixed incomes (the aged in the United States share with single mothers and their
families the most rapid growth of poverty), and 3) lowering of the employment rate as people
discover they cannot live on labor income, the bulk of which in today’s society is redistributed
capital income, and producers hesitate to keep or add workers who they think represent a drag
on the productive process.. As inflation increases, people tend not to want to work for wages
because the wage rate tends to lag behind the inflation rate. With the social credit plan, virtually
any incentive to work for increasingly inflated currency units would be removed, particularly in
that the hidden tax of inflation would be constant, and be taking an increasing proportion of labor
income through the loss of purchasing power.

NK: Social credit would force most people into increasing income dependency on the state via
the National Dividend, and the most logical activity will be doing nothing of economic value. Bad
as the wage system is, absent a program of expanded capital ownership, it is the only legitimate
means aside from charity whereby most people can gain income tied to productive inputs. Social
credit essentially divides up the financial savings of the economy and redistributes it among
everyone.

NK: Purchasing power will flow into new productive power ("capital breeding capital") as the
wealthiest producers receive property income and use it not for consumption, but for investment
in new capital. Shrinking consumption incomes to invest in new capital reduces consumer
demand in the economy. Social credit then increases the price level at the same time as the
increased money supply made available via the National Dividend bids up prices. Productive
capacity will vastly increase, to the point of immense over-capacity, as producers invest income
that cannot be used for consumption purposes. The increase of this investment pool will be
driven in part by the greater profits available made through the social creditors’ abolition of the
confiscatory income tax, profits that under the Keynesian system are in part taxed away to
redistribute.

NK: Ordinarily prices would decrease under over-production as goods failed to clear at market
prices. The paradox inherent in Keynesian economics and reflected in social credit, however,
means that the price level will increase due to the increase in the money supply via payment of
the National Dividend. This will be exacerbated by the decrease in the value of the currency as
the “backing” is removed when the consumer goods purchased with the National Dividend are
consumed. While the “backing” is removed, the new money (or “cash credit”) remains
circulating asset-disconnected within the economy. Prices will then increase even more rapidly,
making it impossible to print enough money to purchase the production at the higher prices.

NK: This is the classic scenario of “hyperinflation.” Hyperinflation differs from “ordinary”
inflation in that ordinary inflation consists of adding to the money supply without increasing
productive ability at the same time. This drives up prices, more or less in ratio to the amount of
new money added to the system. The rise in the price level is limited by the amount of new
money printed.

NK: Hyperinflation, however, results when backing is removed from a currency, prices rise in
consequence of an increasingly valueless currency, and the currency-issuing authority attempts
to “catch up” to the rising price level by supplying more and more currency to clear production at
market prices. Since the price level in a situation where a currency has effectively no value is
infinite for all intents and purposes, the price level rises FASTER than money can possibly be
created. To put it another way, regular inflation fuels the rise in the price level by causing
increasing units of currency to “chase” goods and services that are decreasing, are not
increasing, or are not increasing as rapidly as the money supply.

NK: Hyperinflation fuels the rise in the price level by removing the value of the currency by
taking away its backing. This breaks the link between the amount of money in circulation and
the amount of goods and services on the market. The money no longer represents purchasing
power. Sellers gradually realize that no matter how high they price their goods, the amount of
currency they take in is worthless. The prices of goods and services will begin to skyrocket.
The money-issuing authority, if it lacks the power to replace the currency with something that
has value, attempts to keep up with the price level by creating more and more money, but that is
irrelevant. How much money is in circulation becomes a non-issue because whether you have
one unit or a 100 trillion, they are worth the same: nothing. In pure hyperinflation, where the
currency has no value whatsoever, it wouldn’t matter how much currency you had, you couldn’t
buy anything — the price would be infinite. You can determine a price level by dividing the total
goods and services by the money supply, but if the money supply isn’t worth anything, you’re
dividing by zero.

NK: Such hyperinflation was observed in Germany in 1923 – 24, where the Reichsmark hit 14
trillion to the dollar on the black market before Schacht forced through his reforms to restore
backing to the currency. Prior to that, the Allies had removed virtually everything of value from
the country as war reparations and the Reichsmark, formerly backed by gold, had nothing to
back it. The quasi-government had no power to tax (and there was nothing to tax anyway), and
could not make good on the value stated on the face of the currency, regardless of the amount.
The only brake on the hyperinflation was caused by the fact that people never completely lost
trust in their currency, or they would simply have stopped using it. Admittedly, this happened in
many cases in Germany with a complete change to a barter economy and the issuance of
“Notgeld” denominated in terms of commodities instead of Reichsmarken and Reichspfennigen.

NK: The only way for a social credit program to avoid hyperinflation is to tax producers in the
amount of the National Dividend directly. That is, openly admit that the National Dividend
constitutes a serious inroad on the institution of private property, and take advantage of it by
confiscating directly from the producers everything above the presumed legitimate return on
capital in the form of income tax. This can then be redistributed as a National Dividend to the
citizens without fear of inflation. Income that would ordinarily be turned into new capital would
instead be used to pay the National Dividend tax. The disincentive to produce would be shifted
back to the owner of capital and away from people on fixed incomes, those with financial assets,
and workers dependent on wage income.

3. Kurland: "Depreciation generates additional cash flow that
could be used to generate additional purchasing power..."

Depreciation, in double-entry accounting, is charged against
sales. It contributes neither to "cash flow" or "purchasing
power" but subtracts from profit. See my comments below.

NK: Not to keep saying it, but depreciation is a non-cash expense. It therefore, in that sense,
“contributes” to cash flow and purchasing power by having an expense item recorded which
does NOT use cash, thereby freeing up the cash which otherwise would have been so used for
other purposes, such as working capital. Depreciation does “improve” the cash flow picture to
that extent because virtually every business in the developed world uses ACCRUAL
accounting. Depreciation permits the “transformation” of a long-term asset (capital) into a liquid
asset (cash) via expensing a pro-rata portion of the capital over time WITHOUT paying out the
cash at that time. It’s the same as if you were purchasing the asset with cash as you used it, but
you’ve already laid out the cash — now you’re purchasing it, but without having to put out the
cash. Over the long term, depreciation does not generate cash, but in the short term, on a period
by period basis, it does.

4. Kurland: "Say's Law is a mathematical identity. It is
double-entry bookkeeping carried to the level of a national
market-based economy..."

It is nothing of the kind. It has nothing whatever to do with
double-entry accounting. Indeed, its reducio ad absurdum is
Douglas' A + B theorem.

Except for these brief comments I'll not dwell too much on it
here. We are preparing a forthcoming discussion on the
subject that will go into great detail.

I refer you to the diagram attached, which you may have seen
before.

Consumer income "A" is depicted in the diagram by the curve
at T2. It is the flow of purchasing power being placed into the
hands of final consumers through salaries, wages and
dividends. But the costs of production in their totality (curve
T1 in the diagram) are "A + B" since payments are being
made into account balances held by firms as well as
consumers. "A + B" is always greater than "A" at every point
in time, assuming the condition of growth.

This dilemma is resolved in double-entry accounting by
delaying the expensing of costs through time so that costs
incurred today are charged against sales in the future which
are prospectively greater than sales today. The delay is
accomplished through various techniques such as
depreciation.* The expectation of the entrepreneurs is that
sales will exceed expense allowing them to make a profit.
That is their incentive to invest and criterion of efficiency.

There exists, however, no mechanism in double-entry
accounting to accommodate the parametric shift of an
increasing ratio of "B" to "A" flowing from labor
displacement--increasing capitalization or "round-about-ness"
in production. Consumer income, in terms of purchasing
power, therefore is falling in comparison to the costs of
production. Since the costs of production are being charged
against sales (the curve at T3) into final consumption in their
totality, and since sales must comparatively fall if income is
comparatively falling, the rate of entrepreneurial profit must
commensurately fall--in perpetual discouragement to
production.**

What manifests is the increase in the variety of goods and
services continuously made available through the
implementation of science, technology and entrepreneurial
initiative.

But production for the masses is demand constrained.***

"Poverty" remains endemic amidst "Plenty."



NK: Bill, you contend that <<There exists, however, no mechanism in double-entry
accounting to accommodate the parametric shift of an increasing ratio of "B"
to "A" flowing from labor displacement--increasing capitalization or
"round-about-ness" in production.>> Again, for reasons explained above, cash freed up
by accounting for depreciation can be used to close this gap.

NK: I have difficulty in your conclusions regarding Say's Law as refined by Kelso's binary
economics. You do not seem to take into consideration the fact that Say’s Law constitutes an
equation. As such it is analogous to the basic “accounting equation” (“assets – liabilities =
owner’s equity,” which is stated on an income statement as “sales – costs = profits”). This is
where Kelso derived his comparison. In context, this is perfectly legitimate. Under Say’s Law,
purchasing power is assumed only to the extent of production — not beyond or in addition to
production. If production increases, so does purchasing power. If production decreases, so does
the ability to purchase that production. This is consistent with the principles of double-entry
bookkeeping.

NK: Social credit, however, violates the basic principles of accounting by adding to the system on
one “side” without adding anything on the other. That is, the amount of existing production above
a certain amount is declared to be a National Dividend, and new money created and inserted into
the system in that amount.

NK: Yes, social credit does clear that production, but leaves “excess” money in the system after
its job has been done. Say’s Law posits a “steady state,” where the money supply is constant.
Kelso refines this by providing that, through the use of the central bank, the money supply is
pegged directly to the creation or liquidation and financing of new self-liquidating and
ownership-expanding capital and production. New capital should be financed with what Kelso
called "pure credit" and repaid with future dividends thereby creating "future savings" by people
who have little or no assets today. Kelso's binary system would automatically provide sufficient
demand to clear production and then retire the money IF all income generated is used either to
retire the capital formation debt (and thus remove it from circulation, “liquidating” the capital) or
for consumer purchases (liquidating the production) — from whence it passes as dividends to the
new capital owner who uses it to liquidate his share of newly formed capital through repayment
of his capital acquisition debt.

NK: Social credit upsets the steady state of Say’s Law and violates the principles of double-entry
bookkeeping by adding to one side while subtracting from the other side. Of course Douglas
rejected Say’s Law — it CANNOT work in his system. The accounting equation underpinning
double-entry bookkeeping and supporting Say’s Law demands that you either add to both sides,
or subtract from both sides. Mixing the two results in permanent disequilibrium, as Keynes noted
and, in fact, on which he based his system. You cannot solve the inherent flaw in Keynesian
economics by exaggerating it. You can only do so by countering it and equalizing the situation as
Say’s Law demands, and which Kelso figured out how to do.

-------------------

*Which is accounting bias against labor. If, for example, an
entrepreneur can increase productivity, say by ten percent at
the same cost, by either of two methods: 1. By improving
worker training; or 2. By purchasing a machine--he is inclined
to purchase the machine. It is more "profitable" for him to
purchase the machine since he is permitted to delay its
expensing through depreciation.

NK: The presumed accounting bias against labor is a “non-issue.” If an entrepreneur can
increase productivity ten percent either by purchasing a machine or hiring additional workers,
both at the same cost, he is indifferent as to which he chooses. The decision is affected by other
factors. Assuming everything is exactly equal, e.g., he can hire one worker for one year for
$10K, or purchase one machine that will work for one year for $10K, there is no accounting bias
one way or another.

NK: If he hires one worker for $10K/year for ten years, or purchases a machine for $100K with
a useful life of ten years and straight-line depreciation of $10K/year, there is still no accounting
bias one way or another. The CFO will advise the one making the decision that, as far as the
numbers go, “Accounting” is completely indifferent. “Personnel” however might point out that
machines don’t get sick, don’t demand pay increases and don’t go on strike. Any “bias” is not in
accounting, but in industrial and human relations. Human beings tend to make poor slaves.
Machines make excellent slaves.

NK: Depreciation does not influence the decision unless, through accelerated depreciation (which
is more advantageous when taking into consideration the present value of money and the
prospects of inflation), the expense of purchasing a machine can be loaded up front, that is,
expensed closer to the actual time of purchase. “Front loaded” depreciation would thus make it
more advantageous to purchase the machine rather than hire a human worker because it would
NOT be spreading out the expense as much as possible. It’s more profitable to recognize an
expense as fast as possible. That is why the IRS has regulations prohibiting the practice as much
as possible. It’s not easy to expense large purchases of capital that soon for tax purposes.
Accelerated depreciation allows permanent deferment of income taxes as the capital is replaced
while still theoretically productive, but which has been fully depreciated — expensed — closer to
the time of acquisition. That is why you sometimes find companies disposing of perfectly good
assets, often at what is technically a loss. The tax savings make it profitable to buy new capital
and depreciate it as fast as possible.

NK: It costs money to delay recognition of an expense. If there is a choice between hiring ten
workers to do a job that will take one year at $100K or purchasing a machine for $100K that will
take one year to do the same job but be expensed over ten years, the bias is in favor of the
workers — not the machine. Profits are greater the faster you can expense an item because of
the time value of money.

**Which is why investment in the aggregate is not
"self-liquidating."

***Precluding the realization of productive potential.

Bill


Best regards,

Norm

				
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