Book review: The Douglas Credit Scheme Exposed


From the days of Marx and Engels, Socialists have pointed out that the improvements in the instruments of production added to the continual increase in the applications of science and discoveries to industry, were resulting in the means of production out-running the effective demand for and consumption of products. The periodical crises of the nineteenth century that resulted from these facts brought forward various “remedies,” many of a financial character. One of the best known of these was “Bimetalism,” or the double standard, which we were told would ensure “stability,” in spite of the fact that countries that had adopted the scheme were just as unstable, if not more so, than those with a single standard. But the great favourite idea was the one of supplying “cheap ” credit to the small producer or capitalist who was being beaten in competition by the large capitalist. As this “credit ” could not—for obvious reasons — be obtained through the usual financial channels, the municipality or the State was called upon to supply it.

The Great War brought about an immense acceleration in the improvements of instruments of production and the applications of science to industry, and a great increase in combinations among capitalists reaching in many cases to the Trust stage. While the huge destruction of products by the war continued accompanied by the withdrawal of millions of men from industry, these means of production were kept occupied. When the war ended a twofold increase in the old problem faced the master class. First, the great demand for products for war having ended, large numbers of workers were thrown out of employment and plants were standing idle. Second, the demobilisation of the huge armies threw another immense number of men upon the streets. At first the cry went up for “mass production ” of peace commodities, a cry backed up by the Labour leaders, and war factories were converted as speedily as possible to this end. The result was, of course, easy to foretell. After a short feverish “boom” in production of goods for which there was no effective demand, a fearful slump followed with larger numbers than ever thrown out of employment.

Of course, numerous remedies, old and new, were put forward to deal with this enormous problem, and among them our old friends the money and credit cranks turned up again. Some advocated the abolition of the gold standard. Others the inflation of the currency. And, of course, the question of “cheap” credit cropped up once more. The great point common to all these schemes was that they promised to preserve capitalism while offering enormous benefits to the workers. As the facts mentioned above show this is a contradiction in terms. While capitalism lasts the tendency is for further improvements in the means of production and extended application of science to industry. Not only so, but these improvements and applications proceed far faster than the growth in markets, with the result that the markets are filled up in a shorter time than before and unemployment spreads faster and farther as a consequence. There is no escape from this position, nor any solution of the problem while the private ownership of materials and instruments of production remains. At present the capitalist class is “staving off” the worst effects of the enormous unemployment by extending Unemployment Insurance, inaccurately termed “the dole.”

The work now under consideration is one of these attempts to save capitalism from catastrophe by means of “credit” manipulation. This statement may surprise those members of the I.L.P., etc., who have been mystified by its confused exposition into supposing that its object was to provide a scheme to benefit or even to emancipate the workers. In fairness to the author it must be stated that he makes no such claim himself, for while he says capitalism is breaking down, he proposes the scheme to save society from crashing into chaos. The workers are to remain workers and the capitalists are to continue to be capitalists.

Major Douglas takes about 150 pages to expound his scheme, and Mr. A. R. Orage of the “New Age” kindly adds another 60 pages of commentary to “explain its general meaning.” There was certainly great need for this, but it is doubtful if the object has been accomplished. The author exhibits little knowledge of economics and hardly more of industry. His various and confusing uses of the word “credit” makes it difficult for the non-technical reader to follow his argument, while the student of economics is merely irritated at the mis-statements and misunderstandings of capitalism shown in the exposition. Thus on page 6 we are told that the fundamental policy of a capitalistic manufacturing enterprise—

“is to pay its way as a means to the end of maintaining and increasing its financial credit with the banks.”

The most elementary student of economics knows that under capitalism the “fundamental policy” of a concern is to produce profits for the capitalists, and its “financial credit” is only one of the factors in that policy. The first sub-heading to chapter I is entitled “The Fallacy of Marxianism.” Yet there is not one word of Marx nor a single statement of Marxianism in the whole chapter. According to pages 22 and 26 Major Douglas imagines that all increases of capitalisation consist of bankers’ overdrafts, and it actually is made a part of his scheme. This absurd notion leads to the further fallacy that the banker not only decides what shall be produced, but also the prices at which the articles shall be sold (pp. 32 and 46.). “Credit” is used at one time to mean instruments of production, while later on it is defined as “the correct estimate of the capacity of a community with its plant, culture and labour, to deliver goods and services” (p. 101). Financial credit it the issue of money as overdrafts, etc. Mr. Orage explains on page 192 that “consumable goods plus capital goods and imports make up between them the sum of the real credit produced,” but on page 197 he defines real credit as given on page 101. Further confusion is shown in dealing with capital. On pages 28-29, we read that ” capital represents potential production of ultimate commodities,” while on page 34 it is described as “tools, factories, intermediate products.” In the same paragraph it is asserted that the prices of ultimate products turned out in a limited time includes the total cost of tools, factories, etc., although the latter may continue to give service for years after. The fact is, of course, that the average life of a machine, tool or factory is taken and its cost split up among the number of articles produced during that life, and therefore the “prices of ultimate products ” for any period less than this life will not contain the whole of the capital cost. While it is admitted on page 42 that the “individual entrepreneur” has been superseded by the limited liability company, both Major Douglas and Mr. Orage retain and repeat the superstition that the capitalist “administers” industry.

Numerous other fallacies are scattered throughout the book but we must pass them over to examine the scheme proposed.

Major Douglas avoids numerous difficulties and questions by laying it down that everything economic is “credit.” Raw materials, instruments of production, and finished products are all “credit.” This credit is the creation equally of consumers and producers because without the consumer the goods produced would be useless. Consumers and producers appear in their joint characters as “members of the public.” The first point to be grasped clearly is that the capacity of our means of production is far greater than our actual production. The total capacity to produce, or “the correct estimate of ability to produce and deliver goods as and when and where required ” (p. 189) is called our “real” or “national” credit. When giving an illustration, however, some further confusion is introduced by sometimes limiting “real” credit to means of production. Whatever definition may be taken, the object of the scheme is to distribute the margin between the amount of consumable goods produced and the amount of real credit, among the consumers. It is estimated that the present production of real credit is four times greater than the production of consumable goods. The scheme proposes to distribute this difference or margin by regulating the price of consumable commodities in this ratio. That is to say, that consumable goods would be sold at one-fourth the total cost of production, thus distributing to the consumer his share of the national credit at the moment of purchase. For the purpose of illustration the coal industry is taken and the scheme worked out in some detail on that product. Coal besides being a consumable good is also used as a means of production, but, as here, it increases the “capacity to deliver goods and services out of all proportion to the ‘cost’ of raising it” (p. 119) the manufacturer is already in possession of his margin, or rather more than his margin, and he is to pay over this excess in the form of an increased price—”an agreed percentage”—above the cost of production. The question of coal for export would be decided by our need of coal and the conditions of the world market. We thus have “domestic” coal sold at a quarter its cost of production, “commercial” coal sold at “an agreed percentage” above the cost of production, and “export” coal at a price determined by the world market. It is assumed as probable that the total of above prices will not equal the total cost of production. Then what is to become of the poor coalmine owner? Quite simple. The margin between the total prices and the total costs of production—including interest, dividends, etc.—will be made good to the coalowner by the Government in Treasury notes issued against the National Credit. The larger the amount of National Credit the lower will be the price of domestic coal, and the lower the cost of producing coal, the lower will be the prices of goods into the production of which coal enters. This is where the coal miner is considered. As he is a consumer of numerous articles of the latter kind, it will be to his benefit to produce coal as cheaply as possible so as to lower the prices of the articles he requires. Further, as these articles will be consumable goods their price will be regulated by the ratio between their cost of production and real credit, as in the case of domestic coal. Hence another inducement to the miner to increase real credit, so far as coal forms a part of it by working hard and cheap.

Such is the proposal, and its application to all branches of industry producing consumable goods will, presumably, follow the same line. What would happen in the industries that only produce “intermediate products” as machines, engines, ships, railways, factories, etc. we are left to guess.

The next point is how the scheme is to be brought into operation. The object to be attained is that “the public acquire control of credit-issue and price-making.” On page 86 we are told “There is no hope whatever in the hustings.” Yet the second clause of the scheme, calls in the Government to enforce the scheme upon industry. And clauses 1—2 and 6 of Part 2 call in the Government to carry out important details.

A producers’ bank is to be established in each industry. The Government shall recognise this bank as an integral part’ of the industry and representing its credit. It shall ensure its affiliation with the clearing house.

The shareholders of the bank shall be all the persons engaged in the industry, who shall have one vote each at a meeting. The bank as such shall pay no dividend.

The directors (of the industry) shall pay all wages and salaries to the producers’ bank in bulk and the bank shall allocate to each employee’s account his wage or salary.

Once the bank is in operation all subsequent expenditure on capital account shall be financed jointly by the colliery owners and the producers’ bank in the ratio which total dividends bear to salaries and wages. The benefits of such financing done by the producers’ bank shall accrue to the depositors.

The capital already invested in the mining properties and plant shall be entitled to a fixed return of, say, 6 per cent., and, together with all fresh capital, shall continue to carry with it all the ordinary privileges of capital administration other than price-fixing.

The Government shall reimburse to the colliery owners the difference between their total costs incurred and their total price received, by means of Treasury notes, such notes being debited, as now, to the National Credit Account.

In the case of a reduction in the costs of working, one-half such reduction shall be dealt with in the National Credit Account, one-quarter shall be credited to the colliery owners, and one-quarter to the producers’ bank.

Other clauses deal with the questions of prices, accounts, etc., that need not detain us here.

The first point that sticks out from the scheme, like a column on a plain, is that the capitalist and capitalism are to remain. Public control of credit issue and price-making is to result merely in the capitalist being guaranteed his dividends from the National Credit. “But prices will be lower for all consumers,” we will be told, “and therefore the workers will benefit as consumers.” The remark is fallacious, for while every producer is a consumer, every consumer is not a producer. Those consumers who live, without producing, on profits—whether in the form of interest or dividends—will, first, have their profits guaranteed to them, and second, their purchasing power enormously increased by the fall in prices. But the worker remains a wage-slave and his wages will be determined by his cost of living, modified by the pressure he may be able to exert through his Trade Union. Mr. Orage claims that under the scheme “the exclusively proletarian Trade Union ceases to be necessary.” On the contrary they will be required more than ever for an employer whose dividends are guaranteed is in a far stronger position than one who has to use his dividends in a fight with the workers.

Thus the workers will be called upon to work harder and produce more in order to cheapen consumable goods for the capitalists, while the workers’ own position will be worse relatively, and even absolutely. Major Douglas says quite definitely that if the demand for the product falls off “the industry would produce the same amount of real purchasing power for distribution among its members through the agency of dividends with less work, wages and salaries” (page 124, italics ours). In other words the exploitation of the workers would increase under the conditions mentioned.

It may be objected to this that under the scheme every worker in the industry would be a shareholder in the bank, and could draw “dividends” on his portion of the shares the bank holds for credit advanced for capital expansion. Or, as Major Douglas puts it:

“So that as improvements in process displaced men from industry the purchasing power they had helped to create would be available in the form of dividends.” (P. 125.)

Under the illustration given in the book the ratio of wages and salaries to dividends is estimated as 9 to 1; so that it £100,000 were required for an extension of the industry, £90,000 would be advanced by the producers’ bank and £10,000 by the owners of the industry. But this clause is sheer farce. It may astonish the ignorant Major Douglas and his followers to know that many industries extend their business out of revenue without any fresh capitalisation at all. The big banks have been doing it for years. Even where capitalisation takes place later on, it is usually done to hide large profits. The owners of an industry under this scheme need not ask for a single £1 note from the producers’ bank, but could carry out their extensions as “expenses of business” and the amount would be guaranteed by the Government. Even if it suited the owners’ interests to call upon the producers’ bank, the amount called need never be large enough to balance the owners’ shares, while to argue that the few shillings—at most—that would be the share of each of the hundreds of thousands of workers in the industry, would maintain a man out of work, is absurd.

It is thus easy to see that the scheme was drawn up with the object of preserving the economic position of the small capitalist and dividend drawer from the result of what Major Douglas thinks is an impending collapse. The workers are to be deceived into fancying they are capitalists or sharing in the control of industry by a few shares collectively owned through a bank, just as many are misled by the “profit-sharing” schemes in operation in so many industries to-day. But the scheme will fail to find general acceptance because the large capitalists and financiers are not interested in it, nor even in Major Douglas’ cry of “chaos coming,” while the smaller capitalists do not possess the power to put it into operation.

The portion of the book written by Major Douglas is written in the bombastically ignorant and offensively arrogant style of a youth from a so-called Public School. Mr. Orage, as an older and more experienced propagandist, is far more careful as he sees the necessity of converting or hoodwinking the workers into accepting the scheme before it can be tried.

But its fallacies seem too glaring even for his hopes.

The book is priced at 7s. 6d. The publishers should have made it £7 6s. to prevent any worker who might have made a bit of overtime one week from wasting money upon its purchase.


(Socialist Standard, December 1924)