Spencer Heath Archive

Item 1889

Pencil notes, Elkridge, Maryland

July 9, 1957

 

 

/NATIONAL INCOME AND

THE SPIRAL OF INFLATION/

 

          The national income of a population is the numerical expression of what they have done for and received from one another during any period. It thus depends on there being a general system of exchange and the employment therein of a system of accountancy by means of which all things — services and goods — that are offered in the market for exchange are rated as to their exchangeableness one with another by reference to a common unit of value-in-exchange.

     The exchange system, in and of itself, is an agency of peace. It employs no element of compulsion or stealth, for by such it is only deranged or destroyed. It is, in effect, a system of balanced energy exchanges, mutual and reciprocal. It is thereby social — the antithesis of political.

     The energy that flows is called services. It is distinguished from all other human energies by its being the subject-matter of contract, of a psychological accord, the meeting of minds. Contract and the performance of contract is all that goes on [continues on?]; all else is alien at best or at worst destroys. Contracts are performed either directly by the exercise of personal powers or by the transfer of ownership and title and thereby of the use of property that is subject-matter of the contract. Property, where there is an exchange system, may be rightly defined as whatever is so accepted as belonging to a particular person (or persons) that he only can make and perform contracts of sale or lease with respect to it.

     In the absence of a general market system of exchange, there is no general rating of services and goods as to their relative value in exchange. All exchanges of services or goods must be in kind; each is the value of the other and no numerical values are determined or assigned. But in a general system of exchange, the free market determines exchange values in terms of the value units adopted and employed. In such a system all transactions are divided in two parts. The party of the first part delivers services and/or goods or property, and the second party to the exchange transfers numerical tokens or bank credits according to the market value of what he has received. These tokens or credits are the market values of services and/or goods that the party of the second part has sold to others, the equivalent of which he receives in his present purchase transaction. The present party of the first part now accepts these tokens or credits as convenient means for drawing by purchase from the general market such services and goods as are the exchange equivalents of those he has sold.

     Thus every exchange, when completed, involves both a sale and a purchase, the interim tokens or credits serving as measures to determine the equivalence between what is given and what is received in exchange.

     Now the national income cannot be stated in any but numerical terms. It therefore takes no account at all of production — of services and goods, property and its use — except such as have been the subject-matter of contract and exchange. Transactions other than market transactions cannot appear in the account.

     If all services and goods were sold only once and thereafter only consumed, then the total money turnover for the period would represent all and only such portion of production that had been subject to sale. In a highly productive exchange economy, however, almost everything is sold not directly to consumers but to purchasers who purchase for re-sale. Such purchasers are not the original performers of the services or producers of the goods that they buy. Their services consist in so increasing the usefulness to others and thereby the exchangeableness of the services and goods that they buy that they can re-sell them at a profit, which is the measure of their contribution. Such services and goods are called capital because they are in the course of exchange and are administered for the use and benefit finally of those who do not sell them again.

     However, services and goods in the course of exchange are not the only category of capital. It is necessary that a portion of what is purchased be employed as fixed capital, not itself moving in the channels of exchange but being used as necessary means and instrument in the transformation of services and goods and in facilitation of their further distribution by exchange. These are commonly called the “tools” and instruments of production because of their relation to and effect upon the capital that is in course of exchange.

     A national income consists only of those services and goods that pass through or operate as instruments in the channels of exchange and thus have numerically rated values. Services and goods not in course of or facilitating exchange are called consumers’ services and goods. Those that are in course of or facilitating exchange are called capital goods.

     Those who sell their personal services only and buy but do not re-sell do not administer any services (of others) and property as capital. Their recompense is net, without deduction of any costs of doing business. Those who own and administer a business receive, if successful, a gross income that is divided four ways.

     The national income is the total of payments in exchange value units for the services and goods that are paid for according to their exchange ratings of the common markets. It is made up of the entire income of those who supply none but their personal services plus the net income to those who provide capital services and goods. This net income is the excess of gross income above the cost of private capital, for which interest is paid, the cost of public services for which ground rent is paid, and the cost of private services for which wages, salaries and other measured stipends are paid. This excess of gross income over costs is the earned recompense for administrative services that is called profit. Normally, all net income, in money, tokens or credits is, soon or late, expended for services and goods equivalent in exchange value to those sold and for which the tokens or credits were received as purchasing instruments for completing the exchange.

     In practice, however, whenever there is a coercive public authority, a large portion of the net incomes of the inhabitants — the national income — is directed by force or stealth for political uses. This spending of a great part of the national income by political persons who have made no contributions to the general market makes it impossible for those who do contribute to receive equivalent services and goods in return.

     Whatever of national income in the form of tokens or credits the public authority leaves in the hands of its creators is employed in two ways. One part is consumed. The portion not consumed is saved and reinvested in business either directly or by deposits in banks or other lending or investing institutions. This provides a fund that is drawn upon by short-term bank loans and by long-term bond issues to maintain and increase the quantity of services coming under productive administration and thus increasing the national income. These funds naturally flow into those businesses whose administration has been most reliably profitable and those who give most promise of becoming so, all to the advantage of the national income.

     The making of profits is what creates the desire to borrow capital for increasing them and the desire of lenders to make loans. Taxation is a charge against profits and thereby a deterrent to the borrowing and investment of savings as new capital. But the device of government counterfeiting the tokens or credits earned in the market, and that of employing false purchasing instruments drawn against fictitious bank deposits called loans, are far more injurious in their effects. These false and stealthy devices for drawing services and goods out of the general market without making any corresponding contribution thereto cause rising prices by increasing the market demand for services and goods and by depleting the supply. This alone would be evil enough, but rising prices cause abnormal increase of profits in terms of money and credits beyond any increase in terms of services and goods. This apparent increase of profit is due largely or even entirely to increases in the money value of inventories instead of the performance of any administrative or other productive services upon capital services or goods between their time of purchase and time of sale. Such seeming profits are in general an irresistible stimulus to borrowers to increase their borrowings and the consequent increase in the interest rate is a similar inducement upon lenders to lend.

     Thus in the counterfeiting of purchasing power begins an inflationary spiral in which the “profits” are more and more from speculation instead of production and which gets completely out of hand when the actual income from the productive administration of capital disappears or is lost sight of in a welter of speculative gains. At some point in the process, some operators will extend their borrowings and other extravagancies beyond the possibility of their “profits” servicing their loans. The default and bankruptcy of these weakens the position of their creditors to the point where some of these must fail and so the whole house of cards (credit cards) crashes down. Inflation is followed by deflation, the mountain of debt is either repudiated or underwritten and the deadly cycle again slowly resumed.

     There is little likelihood of this fatal rhythm being broken until such time as the owners of a community learn how to organize themselves so as to provide a proprietary administration of the community capital and services for profit in lieu of profitless and wasteful political administration of its public affairs. Under such administration, the national income in its entirety will be distributed by the process of the market only to those who have contributed and in proportion to their several contributions thereto. The system of free enterprise can then come fully into its own.