The Social Credit position as outlined by Douglas is that the gap between prices and incomes is caused primarily by the ways in which real capital (factories, machines, equipment, etc.) are financed and the ways in which their costs are then accounted for under current financial (i.e., banking and cost accountancy) conventions. This means that even if you were to eliminate the charging of interest, a significant gap between prices and incomes would remain. N.B. Douglas never denied that profits derived from interest (like any other type of profit-making) can intensify or exacerbate the gap.

There are many processes which are responsible for the “accountancy problem” related to real capital. Here is just one concrete example. A company borrows 1,000,000 (and let’s make it interest-free) from a bank (which creates the credit out of nothing) and uses it to erect a factory (including machines). Let’s further assume, for the sake of simplicity, that all of that money is used to pay workers and so the whole of the one million is transformed into wages and salaries. The company then issues shares in an “Initial Public Offering”. The workers buy those shares, which are collectively worth 1 million, with the 1 million they were paid. The company then uses the money to pay off its capital loan. The money and the debt cancel each other out of existence (every repayment of a loan destroys a deposit). At this point, however, the company will try to recover the price-value of the factory (one million) in the form of depreciation charges over the life of the industrial assets in question – these are some of the company’s overheads or operating costs. This will allow the factory to be replaced. But, no money has been issued with which these charges might be met. All of the money created and issued in the name or in virtue of the factory during its construction period has been prematurely cancelled, i.e., it is not available to offset the costs associated with the consumption of the factory. There is therefore an imbalance between what the company is trying to recover in costs and the income available to meet those costs. Notice that this particular imbalance has nothing to do with the charging of interest since we’ve assumed interest-free credit at the beginning of the thought experiment.

If the financial system were properly designed, i.e., if it were constructed in such a way that it adequately reflected reality, it would automatically re-create sufficient money free of any debt in order to allow for the depreciation charges to be met as the company is consuming its real capital. It would distribute this directly to consumers as income because only consumers can liquidate final costs. This is what SC proposes to do via the dividend. The present financial system does not automatically register the real capital by representing it in terms of purchasing power because it is not designed to accurately represent the physical economic reality. Right now, we rely on increases in consumer debt (credit cards, mortgages, lines of credit, overdrafts, installment plans, etc.) to compensate for the lack of purchasing power, or on increases in government debt (to distribute incomes to government workers on government projects, esp. public works, while not simultaneously adding to the costs of goods that consumers must pay for, on an excess of exports over imports, or on business expansion (esp. in relation to capital goods). If the compensatory debt money cannot be raised, the company will have to take a hit in its prices and risk bankruptcy. This is all wasted effort from the point of view of the true purpose of economic association: the delivery of desired goods and services, as, when, and where required with the least amount of trouble to everyone. As an added bonus, fill the gap the Social Credit way and all of the interest that is charged on the compensatory debt would be completely eliminated as by-product.