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Friday, 05 August 2022 00:40

Inflation? Maybe it’s Time We Tried Compensated Price Discounts

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      As a follow-up to my last article, “Lettuce Determine the True Nature of Inflation”,  it’s time to consider how the ‘disease’ of inflation should be treated. The first step, of course, is to diagnose the cause of the inflation correctly. Is it demand-pull inflation, i.e., ‘too much money chasing too few goods’, or is it cost-push inflation, i.e., increased production and related costs due to supply-side interruptions, shortages, and shocks which are driving up prices?

     All over the world, central banks have been raising the cash rate (i.e., the interest rates that the central bank charges commercial banks for borrowing currency or electronic bank reserves) under the assumption that the steady increases in prices and the cost of living are being caused by there being an excess of consumer purchasing power that is available in relation to goods and services. The economy, according to this narrative, is ‘over-heating’ and so the conventional response has been to increase the costs of credit … the theory being that this will decrease the demand for credit, i.e., borrowing will decrease, and the flow of consumer purchasing power will be suitably moderated. With a diminished flow of consumer purchasing power coming on to the market, there will no longer be ‘too much money chasing too few goods’ and the inflation rate will decline … so runs the theory.

     However, as I explained in my previous article, it is more than questionable how much of the current inflation is actually due to a demand-pull dynamic. If there really is ‘too much money (consumer purchasing power) chasing too few goods’, then why is the current inflation making it more and more difficult for people to make ends meet? Why are there demands for wage increases? These are indications that the problem is not one of ‘too much money chasing too few goods’, but of supply-based cost and price increases which exceed, more and more, the capacity of consumers, with the purchasing power currently available to them, to meet those increases. 

     Now, if, in response to what is perceived as demand-pull inflation, the central banks, followed by the commercial banks, increase the interest rates and hence the cost of borrowing, this will further increase the costs of doing business. These costs will be passed on to the consumer and the consumer will likewise be hit by increased interest rates on mortgages, credit card debt, and any new borrowing he may undertake. The gap between prices and purchasing power will grow as a consequence and this, in turn, will only intensify the call for wage and salary increases to meet the rising cost of living. Of course, all wage and salary increases also increase the cost of doing business and these added costs will eventually filter through the economy as corresponding price increases. The great danger here is that we will end up in a wage-price spiral, where we are forever increasing wages in the vain hope of catching up with prices and are thereby, however inadvertently, continually pushing prices up even further. The end result is runaway inflation. Far from solving the problem, the increase in interest rates, which, we are told, was intended to resolve the inflation problem, could have set off a domino effect in the other direction, intensifying the very problem it was meant to fix. 

     If the inflation we are witnessing is cost-push, instead of demand-pull, or insofar as it is cost-push, there is another way of dealing with the problem which governments and their central banks should seriously consider: compensated price discounts. Instead of increasing wages across the board (which will only further increase prices), the same amount of money required for the wage increases could be spent on reducing prices through a universally applied discount (a kind of reverse sales tax). Retailers would be compensated to the extent of the discount (enabling them to meet their costs in full), while consumers would see the purchasing power of their current wages, savings, etc., correspondingly increased. The cost-push inflation would be neutralized and everyone would benefit.

     To take a concrete example, let’s say that a discount of 10% across the board is deemed necessary to rein in the inflation, the increase in the cost of living, which affects everyone. Every retailer would then discount his goods or services by that 10% figure. 3 kg of Bananas in the supermarket costing 10 dollars, let’s say, would be sold to the consumer for 9 dollars. The government would reimburse the retailer the amount of the discount, which, in this example, would be 1 dollar. With the EFTPOS system, this rebate could be issued to the retailer electronically and in real time. Allow me to emphasise as well that this type of price regulation has nothing to do with price controls. Businesses are completely free to increase or decrease retail prices in order to cover all of their costs and to make a remunerative profit. It is only after the price has been set by the business that the price discount comes into play as a fixed percentage of that set price.

     Apart from any question of theory, compensated price discounts were actually employed successfully in Australia during the 2nd World War (from 1943-1946) to deal with the inflation associated with war time conditions. Australia’s experiences with compensated price discounts are registered in the official annual Year Book No. 37 (1946-1947), pages 458 to 464. So the message here is that compensated price discounts can work because they have worked in the past and kept inflation at bay.

     ‘But where is the money to come from?’ will be the inevitable objection. It would appear that when the Curtin government introduced compensated price discounts the financing of them was accomplished wholly within the context of orthodox finance. By the time of the 2nd World War, the Commonwealth Bank had long given up its operations as a genuinely public bank operating on unorthodox (but highly successful) principles.[1] In other words, the money needed to carry out the programme came from taxpayer revenue, or else from increases in government borrowings from various sources at market rates of interest. It is unlikely, however, that the prospect of tax increases or further increases in the national debt will be well received by the public at large (especially since it is alleged that the profligate spending such debt increases made possible during the coronavirus ‘pandemic’ was responsible, in part, for the inflation that we are now seeing). Increasing taxes, will, of course, increase prices and would therefore be equivalent to giving with one hand and taking back with the other; it would be self-defeating. Increasing the national debt will merely shift the problem on to future generations who will have to pay the borrowed money back, plus interest via taxation.

     This is where Douglas Social Credit enters the picture. What if there is, in the normal operation of the economy, a gap between the rate at which costs and prices are generated via productive processes and the incomes that are simultaneously being distributed to consumers? We normally fill or compensate that gap viaincreased borrowings from the banking system (which creates the money it lends ex nihilo, via the aid of double-entry accounting). But there is no reason why the Reserve Bank, for example, couldn’t just create the money needed to balance the flow of incomes and issue it to retailers as a rebate in exchange for the desired discount or lowering of prices. Instead of accounting this newly created money as the corresponding liability of a loan or security (such as a treasury bill), the money could be accounted as the corresponding liability to the assets of really existing consumer goods and services that have been financially assessed in terms of remunerative prices (i.e., prices sufficient to cover the costs of their production and to allow the retailer a suitable profit). These surplus assets (for which no corresponding consumer income had been issued in the course of production) would be revealed in a National Profit and Loss Account (which is something that would also need to be introduced into the system of national accounting by the Reserve Bank).

     When the newly created money is received by retailers, they will use it to pay down their revolving lines of credit (debts) with their banks (both the credit and the debt will then cancel each other out of existence) or else they will use that money to restore their stock of working capital and it will only ever be re-issued alongside a new set of costs and prices. There is perhaps one further change that might need to be made in order to ensure a seamless, harmonious transition to the new system: the creation of money by commercial banks for the facilitation of consumer production would have to be curtailed and eventually eliminated altogether. This will be far more effective in preventing demand-pull inflation, especially any such inflation which could be rendered even more likely or possible given the introduction of debt-free credit to fund the compensated discounts, than attempting to control the spigot of credit via interest rate increases.



[1] For example, the original Commonwealth Bank financed Australia’s activities during the First World War at 5/7 of 1% interest, which was basically financing the war effort at the cost of administration. The intercontinental railway was also financed debt-free via the profits of the Commonwealth Bank. This track record of Australia’s first public bank gives some small indication as to what an unorthodox approach to banking can do for the community.

Last modified on Monday, 15 August 2022 19:51


  • Comment Link Pedro Saturday, 17 September 2022 13:13 posted by Pedro

    Thank you Oliver!

    Appreciate your attention. You helped a lot.

    Hugs !

  • Comment Link Oliver Thursday, 15 September 2022 01:38 posted by Oliver

    Hi Pedro,

    There was an article that I recall reading many years ago about the Japanese use of Douglas' ideas in order to improve their export markets. It was, I believe, something put out by the Pilgrims of Saint Michael. Unfortunately, I cannot find a version of it on-line (the version I read was in print) on their website or elsewhere.

    However, on page 6 of this New Zealand newspaper, I did see a reference to "Social Credit in Japan" that will be of interest to you:

    Best regards,

  • Comment Link Pedro Monday, 12 September 2022 20:48 posted by Pedro

    Hi Oliver!

    Thanks for your response. Do you know where I can find more information about the relationship of the Japanese government at that time with the ideas of social credit?

    Again, thank you for your comment.

  • Comment Link Oliver Sunday, 11 September 2022 19:54 posted by Oliver

    Hi Pedro,

    Thanks for your comments and question! Before I talk about Japan, I wanted to point out that the private banking system would remain under Douglas Social Credit. The difference would be that these banks would have to function under the National Credit Authority and in accordance with a DSC National Monetary Policy. So the description provided from that website you quoted is not quite correct.

    Japan apparently adopted some aspects of the Douglas analysis before the 2nd World War, but inverted it to further their own success within the context of international trade. That is, they used the compensated price discount idea to make their exports cheaper than they otherwise would have been ... thus allowing them to out-compete their rivals in the arena of international trade. This was a perversion of what Douglas intended, which was mutually beneficial and balanced trade (no 'favourable' trade balances).

  • Comment Link Pedro Sunday, 04 September 2022 09:33 posted by Pedro

    "compensated price discounts were actually employed successfully in Australia during the 2nd World War (from 1943-1946) to deal with the inflation associated with war time conditions. Australia’s experiences with compensated price discounts are registered in the official annual Year Book No. 37 (1946-1947), pages 458 to 464."

    There is an article that talks about Japan also having adopted some of CH Douglas' ideas:

    "Douglas’s economic theory advocated the transfer of the money creation process from private banks, which create money out of nothing as an interest-bearing debt, to the state. This government created money he termed social credit. He also favored the payment of a basic income or national dividend to each citizen (Japan’s postal banking system acted in this way)."

    My question: did Japan actually implement CH Douglas social credit?