The Douglas Scheme pt.1 (1933)

From the May 1933 issue of the Socialist Standard

Bursting the bubble

An interesting development since the war has been the rise of the “Social Credit” movement led by Major Douglas. Its interest for Socialists arises partly from the fact that it stands in the way of Socialist propaganda and prevents many workers (particularly the younger ones) from going to the trouble of studying Socialism, and partly from the peculiar features of the movement, features interesting in themselves. Here we have a political movement which almost completely ignores many of the ordinary methods of political parties. Instead of trying to capture Parliamentary seats and build up a party machine of its own, it relies on permeating the members of other parties. Its basis is not a long programme of immediate aims tacked on to a vague philosophy, as is usual with capitalist political parties, but a straightforward demand for an apparently simple, but fundamental, change in the monetary system. It does not change with every change in the political and industrial situation, but maintains a high degree of consistency. It is based on an economic theory which almost every economist and practising banker describes as absurd, yet it holds its own and goes on gathering adherents. It has produced a considerable body of books and periodical literature, and is hotly debated in trade union branches and many political organisations. It has so far reached recognition that Major Douglas was invited to give evidence before the Committee on Finance and Industry (MacMillan Committee). In studying the Douglas movement it is, therefore, necessary not only to decide whether the economist, Mr. D. H. Robertson, is correct when he says that ” the arguments of Major Douglas …. are founded on a fallacy so crude that, until one has looked into them for oneself, it is almost impossible to believe that they can really have been put forward,” but also to explain how it happens that a theory so open to question has been able to win support.

One aspect of the second question can be dealt with right away, without going deeply into the theory at all. In essence, Major Douglas says that all the evils of trade depression, unemployment and poverty are caused by a “kink” in the monetary system, which results in a permanent shortage of purchasing power. He says that production of goods of all kinds could be easily and almost immediately increased to an enormous extent if it were not for the fact that this “kink” prevents the mass of the population from being able to buy the goods. By a simple correction of the defect in the monetary system, poverty could at once be abolished. That is the hope Major Douglas holds out. It is its simplicity and all-embracingness which makes it so attractive.

In times of economic disturbance and political unrest all those people who find their old mental landmarks shifting or overthrown, and who cannot themselves cut a path through the tangle, are desperately anxious to discover new guides, who will lead them to safety. Major Douglas’s scheme has everything to recommend it from this point of view. The Liberal Party has ceased to be effective since the war. The Labour Party has been a failure in office and its old propaganda for nationalisation has had to be discarded without anything so simple and superficially attractive to take its place. Unemployment has been heavy and persistent and no Government has frankly faced the issue. The prewar days of two big political parties, with more or less clearly defined policies, have gone, and we now have a situation in which the old lines of cleavage have largely disappeared. It is hard nowadays to tell what programme exactly the various parties stand for.

The economists are in as complete a muddle as the politicians. They produce their theories and explanations for the bewilderment of students, and the ordinary man in the street, who knows nothing of nice points of theory, sees only that the economists are hopelessly disagreed among themselves even about the elements of their subject; that their explanations and forecasts time and time again have been shown to be false; and that their attempts to advise and guide the politicians have had no obvious effect on the solution of the world’s great problems.

Into this situation comes Major Douglas with a staggeringly simple proposition. Solve the problem of trade depression and poverty by distributing purchasing power free. Usher in the age of plenty !

The proposal is attractive to the worker who is unemployed; to the small manufacturer or shopkeeper who believes that but for the alleged dominance of the banks over industry he could hold his own in competition with the combines; and to the struggling professional man who sees that his supposed superior knowledge and training give no guarantee of a steady and comfortable livelihood. One merit the theory has in the eyes of its adherents is that it saves them from the necessity of making themselves familiar with the theories of the recognised economists. If, as Douglas says, all the economists (including Marx) have failed to notice the defect alleged to exist, and if this defect is of vital importance then why waste time studying economic textbooks ?

With all these advantages it is not surprising that the theory of Major Douglas has made considerable headway and is known not only in England, but in the Dominions and U.S.A., where energetic groups carry on propaganda on its behalf.

A brief reference has already been made to the nature of the theory. Before going into details and analysing it a digression must be made in order to explain the position the banks and the money system occupy in the capitalist world. Without some such background all discussion of the Douglas proposition will be useless.

The Economic Basis

The first point to notice is that beneath all the processes of buying and selling, banking and commercial operations, lies the private ownership and control of the physical means of life. This is so obvious that it ought not to need mentioning, but it is often overlooked in discussions about currency and finance. Human beings need food, clothing and shelter, recreation and amusements. These things are provided by the application of human labour to the land, raw materials, and the instruments of production and distribution, but the individuals whose labour-power produces the wealth do not own it. All the land and raw materials and all the products are privately owned by individual capitalists or companies. The typical features of capitalist production are, then, the existence on the one hand of a large number of workers who get their living by selling their mental and physical energies for a wage or a salary, and, on the other hand, a relatively small number of capitalist investors who get their living by owning property and employing workers to use that property for the production of wealth. With their wages and salaries the workers can buy part of the wealth produced, and the balance remains in the possession of the capitalists. The workers consume the greater part of their share immediately, by eating food, by wearing out their clothes, and so on, while the capitalists, through the abundance of their wealth, are able to “save” a considerable part of it; that is to say, they take it not in the form of articles for personal consumption, but in the form of factories, machinery, etc., and all the various forms of additions to the existing stock of “means of production and distribution.”

If we ignore for the moment the whole of the elaborate machinery of buying and selling, banking, etc., and look only at the main underlying physical features of capitalism, what we see is millions of workers producing and distributing the articles needed to sustain life, and working under the control of the capitalists who own the land, factories, railways, etc. The articles produced can be divided into three classes: (1) Articles needed for the subsistence of the workers (mainly necessities); (2) Articles for the subsistence of the propertied class, both necessities and luxuries; and (3) Articles needed for the repair and extension of existing means of production and distribution (factories, railways, etc.) and the erection of new kinds of means of production and distribution as new needs arise and are satisfied.

But, in fact, the above picture is over-simplified because capitalists and workers are not two closely organised world classes acting as two single units, but are composed of millions of separate individuals and groups acting on their own. If they were two single units, each represented by a responsible authority, we could imagine them planning production and distribution so that only so much of each kind of wealth is produced as is needed, and so that the responsible authority for each class divides the articles among its members as required. Actually the process is carried out with the assistance of the money system. Each capitalist firm produces goods of one or a few kinds (say, boots) and sells them for money. The money is used to pay for the costs of manufacture, raw materials, wages, profits, etc., and the individuals who receive the money spend it to buy goods of various kinds. The final effect arrived at by this money process is at bottom the exchange of commodities. Each individual who owns commodities goes into the market and effects an exchange, giving one kind of goods and receiving another kind or kinds. The worker goes into the market with labour power to sell. He receives wages and uses them to buy bread, clothes, etc.

The advantage of the money system over the direct exchange of goods—barter—is that simple barter is faced with the difficulty that the individual who brings boots to the market may not want to receive the articles brought into the market by the man who wants the boots. Money, on the other hand, is the “universal equivalent.” He who has money can, if he has sufficient of it, buy any of the thousands of kinds of articles offered for sale. Consequently, the use of money as a medium of exchange is a great advance on systems of barter. But it must not be forgotten that the various substances which have been used as money (in modern times silver or gold) have been able to occupy that position only because they were like every other article in the all-important characteristic that they possessed value, while in addition gold and silver have qualities of durability and scarcity which make them most suitable for use as money. (The use of banknotes to represent certain quantities of gold or silver and to circulate in place of coins does not raise any issue which needs to be gone into at this stage.)

The values of articles are not accidental or fixed by the free choice of the owners of them. Value is a relationship between the various articles depending upon the amount of labour required in their production. Leaving aside various complicating features we can say that a certain weight of gold has the same value as a certain weight of wheat, or a certain number of razor blades, because the labour required to produce each of these three quantities is the same.

We see, then, that the payment of a sum of money by one person to another is, in effect, a way of transferring command over goods from one person to another.

The Banking System

The origin of the banking system was the practice of depositing money for safe keeping with the goldsmiths and paying them for this service. The goldsmiths subsequently adopted the practice of paying interest to the depositor, and they re-lent the money at a higher rate of interest to a borrower. This was only an indirect way of the depositor himself lending his money at interest to the borrower. Whether the goldsmith acted as intermediary or whether the lending was done directly the general effect was the same, i.e., the owner of the money (representing a command over goods) was lending it to a borrower, who would thus, for a specified time, have at his disposal the means of buying goods. It was not an act of ” creating ” goods or values, but only of lending them, the banks being intermediaries between lenders and borrowers.

Fundamentally, the same process underlies the modern banking and credit system. People who deposit cash and cheques in the banks are, in effect, placing at the disposal of the banks a command over goods, expressed as a certain sum of money. The banks pay to the depositor a fluctuating rate of interest on most of the deposits, and place the deposits at the disposal of other persons and companies who wish to borrow. Again, it is, in effect, a process of transferring the command over goods from the saving section to the borrowing section. As the banks need security for their loans to industry the borrower in fact (or in effect) pledges his factory, his stock-in-trade, etc. The bank is just like a pawnbroker, except that the bank largely works on borrowed money. The banks are intermediaries between one set of property owners and another set. The borrowers pay interest to the banks, who pay a smaller or no interest to the lenders. The whole of the interest comes ultimately out of the productive process. The capitalist who borrows from the banks and sets production in motion is able to do so and to meet all his expenses and pay profit to shareholders and interest to the banks, because the values produced by his employees are greater than the values consumed in the process (including the values consumed in the maintenance of the workers, their wages). The base of the pyramid of capitalist industry is the workers (including, of course, the so-called brain workers) who produce values which cover all the costs of production, and cover wages and then still leave a surplus to be divided among the landowning capitalist, the industrial-capitalist, and the money-lending capitalist in the form of rent, profit and interest.

That is a brief outline of the underlying framework of capitalist production, but Major Douglas and others who think like him cannot see this framework. All they can see is a confusing series of effects and appearances, confusing only because the underlying causes are not understood.

In a further article, the origin and nature of the Douglas theory will be explained.

Edgar Hardcastle

(To be continued)