Social Credit and monetary reforms

The Western Socialist
August and September 1934

When Mr. Neville Chamberlain, the British Chancellor of the Exchequer, was honored with the dedication of a public building in Birmingham, England, some time ago, the gold key with which he was presented failed to unlock the door after three or four efforts. On closer examination it was found that some dried paint formed the obstruction, and upon its removal the lock worked perfectly. Money reformers blame the golden key for not unlocking the door to economic prosperity, but if they examined the lock carefully they would find that the profit system is the obstacle that must be removed.

Major Douglas, advocate of social credit, who is receiving wide publicity tells us that Karl Marx is out of date in that his economic theories dealt with a period of scarcity. This is not so. The economics of Marx are based upon a developing capitalist system, and the advance made by the use of machinery in commodity production serves only to add to the correctness of the basic principles he laid down eighty years ago. Marx was always clear in presenting the material of his theories, but the only thing that is definite about the scheme of the gallant major is its indefiniteness. As a sample of the uncertainty of the advocates of social credit Mr. David W. Ryder, the author of a series of ten articles that have appeared in the newspapers of a dozen American and Canadian cities states that –

“ . . . definitions are always a bit difficult . . . Consequently, I shall not undertake to give a set definition of Social Credit” (Ottawa Citizen, Dec. 19, 1933).

Reviewing one of Douglas’ books in the December, 1933, issue of the Catholic magazine Commonwealth, a Mr. Ryan tells us he consulted several supporters of Douglas, and especially Mr. Johnson, Labor M. P., in the Irish parliament, on social credit. Ryan asked Johnson if he knew what Douglas was driving at and Johnson replied that “sometimes he thought he knew, but other times he was not sure”. Continuing, Mr. Ryan stated that after ten years’ study he found himself in the position held by Johnson in 1922. He was consoled, however, when he discovered that Prof. Gaitshill (in G. D. H. Cole’s book What People Want to Know About Money) also found Douglas very “ambiguous”.

Let us begin our analysis of social credit by first setting down a few economic facts.

1. All wealth is produced by the application of human labor to natural resources.
2. Money was not introduced to distribute goods (as money reformers claim); it developed out of the exchange of values.
3. The law of money is that no more should be in circulation than is naturally required to act in exchanging the mass of commodities.

If a substitute money (e. g., paper) is used and is divorced from the above law or principle, it will proportionately lose value and buy less. This was proved by the after-the-war inflation in Germany, when millions of marks were required to buy a bushel of potatoes.

Why does social credit appeal to the average person? Because it is easier to believe than to think. The extravagant promise of National Dividends and for nothing makes the mob responsive to palliatives of the money reformer. The Douglas Schemers also state many obvious truths, but the analysis they make of same is defective. For instance, the writer of the Ottawa Citizen articles states that we have:

1. Want amidst plenty.
2. A deficiency of purchasing power.
3. Nine-tenths of business done with check money.
4. A Central Bank necessary.

In Canada, Prime Minister Bennett has already decided that No. 4 is essential to the smoother working of capitalism and the bank is being organized. Major Douglas and his followers base their main argument for social credit upon Nos. 2 and 3 and I will treat with these later. Mr. Ryder then demonstrates how ignorant of elementary economics credit “theorists” really are by stating that gold is not wealth, and refers to money as financial wealth. He then says that the quantity of money in circulation at present is “virtually the same as when production was carried on by hand”. This is ridiculous. From 1860 to 1873 alone the amount of gold in the world tripled. From the beginning of the nineteenth century to 1912 world production of the glittering metal increased to the extent of 60 times per annum. From 1914 to 1919 thirty countries (excluding Russia) increased paper currency from $7,250,000,000 to 50,000,000,000 or over 60 per cent, and gold production during that time totalled $200,000,000. Currency in circulation in the U.S.A. amounted to 1,129,000,000 more in 1932 than in 1931.

Like the C.C.F., Douglasites kick about the power banks have to “create” money, and in the same breath tells us bankers want to reduce the volume of money “in order to enhance the value of what is left”, because

“ . . . the value of money depends upon the amount of money in the country and the amount of goods people want to buy” (Ottawa Citizen, Dec. 20, 1933).

Why should bankers want to create money if by reducing its volume they can make it more valuable?

Mr. Ryder then jumps into the farm situation and tells us that “the amount the farmer eats while growing the corn is the true cost of the new crop”. In other words, if there are three farmers living beside each other – a Scotsman, an Englishman and an Irishman – the true costs of their crops would be the cost of porridge, roast beef and potatoes.

In the December 23 issue of the Citizen Mr. Ryder states that exponents of social credit are agreed that

“A small group of financiers . . . can create booms when it pays them to do so, and cause depressions when these better suit their purpose.”

Such a statement is, on the face of it, so absurd that comment is unnecessary. Mr. Ryder had previously contradicted this viewpoint in Article 4 by telling us that the

“major causes of booms and depressions and the process of the gradual impoverishment is through the producers (capitalists) having to take back in prices more than they pay out in wages, salaries and dividends” (Dec. 20, 1933).

Social credit advocates always talk in terms of price but fail to recognize value. To them there is no such thing as value; a thing is worth what it will fetch. According to this the producer (or capitalist) makes profits by selling goods, but in that case he would give it all away again when he spends, as a consumer, the proceeds of his sale. To make a profit by selling things over their value presupposes a society wherein exists a class that only sells and another class that only consumes. But producers are also consumers, and when a seller has made a transaction he becomes a buyer; credit reformers forget this fact. Profit us mot made by the members of society taking in one another’s washing. I will develop the real cause of economic crises later.

In the same article Mr. Ryder goes on to say:

“The more goods that are sold the greater is the amount the producer takes back through prices he has not distributed in wages, salaries and dividends; this greatly depletes the savings of the consumers, until after, say, ten or twelve years their savings are all gone and the depression begins again”.

Readers should note in the above two quotations:

(1) That savings are depleted at the beginning of a depression. This is not true, and the statement cannot be substantiated by facts.

(2) That the capitalist takes back more in prices than he pays out in wages, dividends, etc. It is true the capitalist gets more than he pays out, because the workers get only a small portion of the wealth they produce, but it is in the productive process that the capitalist gets this, by exploiting wage-labor on the job, not in the prices he gets in the sale of commodities. Dividends are paid out of the surplus value taken from the workers.

(3) That the consumers had savings for ten or twelve years. It is not clear what is meant by consumers, because both capitalists and workers consume wealth, but certainly the savings of the capitalists are not depleted at the start of a depression. On the other hand the workers have little to save whether a boom or a depression is on. The wages they receive for the labor they expend hovers around value at all times, and that value or wage is based upon what it costs to live. Again, as far as the working class is concerned times are still bad, yet many banks are reporting increases in savings.

The writer of the articles seems to assume that production is carried on to satisfy human needs. This assumption, like many made by Douglas and his followers, has no basis in fact. They overlook that capitalism is a class society and that the prime motive in production is profit. They mix a number of truths with assumptions and call it the “new economics”. A cynical critic once said: “If you want to make a doctrine indestructible, make it completely incomprehensible. No one can then prove you wrong”.

The first thing Douglas “theorists” must learn is “What is capitalism”. Two definitions from capitalist sources worthy of note are the following, the first from page 56 of Prof. Fisher’s book, Booms and Depressions. He says:

“What we call the capitalist system might better be called the system of Private Profits”.

On page 3 of the same book the writer says:

“A depression is a condition in which business becomes unprofitable . . . It might be called the Private Profit Disease”.

An editorial under the caption “Whither Are We Drifting?” in the Montreal Financial Times of Nov. 3, 1933, gives another definition. It says:

“The success of the capitalist system is based upon the ability of individuals and of business in their control to conduct their affairs on a sound economic basis. (Note it is not a social basis.) Balancing incomes with expenditures to secure profits as a result of initiative and application, and retrench when such profits are curbed by prevailing conditions”.

Social Credit reformers should ponder over these statements.

According to Douglas, a surplus of commodities accumulates because of a deficiency in purchasing power or, in other words, a surplus exists because there is not enough money. I will therefore, in my next article, deal with the Douglas theorem of a deficiency of purchasing power which is better known as his A + B theorem.

The Douglas A + B Theorem

The Douglas A + B Theorem is based upon two premises: (1) A deficiency of purchasing power. (2) Cancellation of bank loans destroys money with the result that there is not enough left to purchase the new goods produced.

No one should be able to state the A + B theorem better than Major Douglas himself, and we therefore present to our readers the case he put before the English Banking Commission.

“A factory or other productive organization has besides its economic function as a producer of goods, a financial object. 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. On the other hand as a manufactory of prices, financial values and from this standpoint may be divided into two groups. Group A. All payments made to individuals in wages, salaries and dividends. Group B. All payments made to other organizations, raw material, bank charges, and other external costs. Now the rate of flow to individuals is represented by A and since all payments go into prices it cannot but be less than A + B. Since A cannot purchase A + B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing power which is not compromised in the description under A.” (MacMillan Report, Vol 1, page 298).

In a previous article I pointed out that the conceptions of Douglas and his followers are cloudy and involved, and the above statement adds further proof of this. In unravelling it I will endeavor to show the A + B to be one of the greatest economic fallacies ever propagated. Douglas errs even in his groupings for in the first place dividends (which are not paid until goods are sold) are placed in Group A, and when challenged why this is so his supporters remind their adversaries of the time element, yet this same time element applies equally to payments for raw material and depreciation of machinery, which he places in Group B. Again, bank charges are in Group B, yet these charges become income at the start because the bank discounts the loan when issued and the charges become income to employees or dividends to shareholders.

Douglas says that wages, salaries and dividends is all the purchasing power paid out in production and this he calls “the just price”. He also states that wages, salaries and dividends plus raw materials, bank charges, taxes, depreciation and other external costs are the total price, and that this cannot be purchased because of a deficiency in the incomes pad out. If we work this out we find that instead of an A + B theorem it really amounts to A equals product B. Let me illustrate:

Farmer grows wheat. ………………………………........... = $100
Miller buys wheat $100 + $100 to make flour.…………….= $200
Baker buys flour $200 + $100 to make bread..…………….= $300

The Farmer has received $100 income; the Miller $100 and the Baker $100 and the value of the total products equals $300. The total income therefore equals the value of the total product. Douglas forgets that the A payment to the Farmer was the B payment to the Miller, and the Miller and Farmer A payments were B payments for the Baker.

Douglas is just as stupid when he states that bank loans cancelled, take away purchasing power. He says that if a man borrows $10 for productive purposes in due course the loan is paid leaving $10 new goods on the market unable to be sold because the money has been destroyed by the bank cancellation. This is an absurdity which arises from the conception of bank checks as money. It should be obvious that the $10 loan gave power to use check machinery to the borrower, and equally obvious that the $10 spent productively must have bought its equivalent before the loan could be repaid. Let me illustrate with a chart to show that although (as Douglas claims) 9/10 of transactions are made with bank money, it is used for the facility of production and the Major is totally wrong when he says that “cancellation of bank loans reduces the power to purchase the new goods produced”.

The Depositor deposits $100 with the bank The Farmer borrows $100 and makes $100. Product equals $200. The Miller borrows $200 and makes $100. Product equals $300. The Farmer cancels loan of $100 when paid by Miller. The Baker borrows $300 and makes $100. Product equals $400. The Miller cancels his $200 loan when paid Baker.

At the end of the transaction the value of the product amounts to $400, which equals the total incomes and the original deposit. When the Baker has sold the total product he cancels his $300 loan and the depositor’s $100 may then be used to call upon further production. Douglas would view the above in this manner: The total financial transactions were $200 + $300 + $400 + $900. Bank loans were $100 + $200 + $300 + $600. When these loans were cancelled there is only $300 to purchase his cock-eyed financial cost of $900.

Should the question of interest – say 5% interest on the bank loans crop up, the explanation is simple. While bank charges, as I already pointed out, are made at the start, the completed transactions would appear as follows:

Farmer’s loan of $100 – $95 income and $5 bank interest. ..………………..$100.
Miller’s loan of $200 – $90 income and $10 bank interest. …………………$100.
Baker’s loan of $300 – $85 income and $15 bank interest.………………….$100.
The Depositor’s wealth in new form.………………………………...............$100.

If we remember that the product of industry and the purchasing power are the same thing viewed from different sides; that they balance one another, or in other words that every cost to the producer is someone else’s income, the fallacy of the A + B theorem becomes apparent.

In the production of commodities there is distributed in the form of wages, salaries, rent, interest, profit, etc., sufficient purchasing power to buy back all the mass of commodities that appear on the open market. That is to say the price of all the articles for sale is equal to the total of all costs and charges, but the people who receive this purchasing power do not spend it all. They save against old age, sickness, holidays, the education of their children or to use for further investment.

Prices recovered by the sale of goods are simply the sum total of all that is paid out of income (including corporate incomes, wages, salaries, bank charges, taxes, raw material costs, etc.) in the course of production. This also includes the purchasing power created by bank credits, for this is used to pay out incomes – wages, raw material costs, etc, – in advance of the sale of the goods in the process of production, and these advances are thereafter cancelled out of the prices realized by the sale of the goods in question.

To the extent of the inability to reinvest profitably and the accumulation of savings, there is a corresponding decrease in purchasing power. When these two operations get out of balance, when there is no longer a profitable outlet for the reinvestment of idle surplus and a consequent slowing up takes place in the transfer of purchasing power, real trouble develops. Commodities exceed demand, a fall in prices occurs and economic dislocation sets in. The stage is reached where the investment of new capital cannot keep pace with the increased powers to produce wealth.

General capitalist prosperity depends upon an equilibrium of supply and demand; production and consumption; savings and investments, maintenance of this balance is vital to the stability of the present system. The trouble today is not a deficiency of purchasing power, but is due to the fact that an idle capitalist class owns and controls the means for producing wealth and therefore own the wealth that is produced. The low bargaining power of the workers on the job causes the large percentage of income to go to the non-producing capitalists, whose profits are periodically added to capital funds, with the result that the wealth of each nation concentrates more and more into fewer hands. Social Credit offers no solution to this situation.

Peter T. Leckie