The Social Credit Fallacy

Until the present economic downturn the main Monetary Reform group were the followers of Major Douglas who founded the Social Credit movement between the two world wars.

Douglasclaimed that there was a chronic shortage of purchasing power because the income generated in production was not enough to cover the prices of all the goods produced. The maincause of this gap, he alleged, was the banking system which, according to him, had come to have a monopoly in the destruction and creation of money but refused to create enough. He proposed to cover the gap by the government issuing “debt-free money” which will allow taxes to be cut, prices to be reduced and every citizen to be paid a social dividend.Since his assumed lack of purchasing power did not in fact exist, if his scheme had have been implemented it would have led to raging inflation.

Today’s Monetary Reformers start from the opposite assumption to Douglas and claim that the banks’use of their supposed money-creating power has led them to create too much purchasing power compared to production, leading to inflation and financial bubbles that eventually go bust. Their solution, however, is the same: the government should take away the banks’supposed power to create extra purchasing power and vest money creation exclusively in the hands of some government body.

Old and new Monetary Reformers are both agreed that, if this reform is made, then the capitalist system will function smoothly with crisis-free growth and full employment (they tend to be supporters of so-called free market capitalism). But it won’t, since recurring crises with increased unemployment are built-in to the capitalist economy of production for profit and cannot be eliminated by banking and monetary reform.

More on the Social Credit fallacy can be found in these articles in the archive section of the Socialist Party’s website here:

The Douglas Scheme, May, June, July 1933

Are They the Only Cranks?, January 1967

Major Douglas Rides Again, September 2003

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