Major Douglas in Alberta (1935)

From the August 1935 issue of the Socialist Standard

An interesting situation has arisen in Alberta with the acceptance by Major Douglas of post as adviser to the Government. The Government in the province is in the hands of the Party known as the United Farmers of Alberta, whose hold on the electorate has been seriously undermined by the rapid growth of a local Social Credit League run by a Mr. Aberhart. Fearful of being defeated at the next elections the Government, in the words of the Canadian correspondent of the Economist, “hit upon the idea of importing Major Douglas himself, the parent of Social Credit, to confound Mr. Aberhart” (Economist, June 29th).

Major Douglas and Mr. Aberhart have said some harsh things about each other, and each claims that his particular scheme is the genuine article, so that it seems highly probable that the move of the Alberta Government will succeed in splitting the Social Credit vote. Major Douglas is not giving his aid for nothing. He is to have a “generous fee.” According to the Vanguard (Toronto, June 1st, 1935) he gets a retaining fee of 5,000 dollars and a further payment of 2,000 dollars for every visit to Alberta.

He has recommended the formation of a coalition Government which shall seek a mandate for the following four “fundamental objectives” (Economist, June 29th).

A drastic reduction of taxation, particularly upon property.

A maintenance dividend as of right, probably small at first, and graded so as to be at the maximum after middle age.

Measures designed to produce a low price level within the Province with adequate remuneration to the producer and trader.

Development of internal resources based upon “physical capacity rather than upon financial considerations.”

It will be noticed that these objectives might be accepted easily by any Liberal-Labour Party anywhere. Where they are definite they are in line with capitalism. Where they are vague they are good vote-catching devices.

What is important about the Alberta episode is that it exposes the real nature of the Douglasite gospel. Major Douglas and his followers are most emphatic that their scheme is not inflation of the currency, but that, in fact, is precisely what it is. The whole Douglas theory is based on an ancient myth about a supposed deficiency of purchasing power. There is no such deficiency, and consequently the issue of Social Credit in the form of the payment of an allowance to all citizens, since it is not to be provided by increased taxation, could only be done by inflating the currency and thus causing the price level to rise. Major Douglas is most anxious to deny this because experiences of inflation in France, Germany and elsewhere have shown how useless that is except for the problems of certain sections of the capitalist class. Now we find him acting as adviser to the United Farmers of Alberta, one of the planks of whose programme, adopted at a conference two or three years ago (see Canadian Annual Review, 1933), is inflation of the currency to bring the dollar down to the level of the wheat-producing foreign competitors of the Alberta farmers! Like certain English economists who have been prepared to give conditional support to the Douglas scheme, the Alberta farmers will be willing to do so simply because it involves currency inflation which they believe will help to reduce the burden of their indebtedness to the Canadian banks, mortgage companies and insurance companies.

Douglas – Defender of Capitalism

Before leaving Major Douglas it may be worthwhile to remind those misguided workers who support him how essentially capitalistic is his movement. He is himself an unrepentant anti-Socialist. In his Monopoly of Credit (Chapman & Hall, 1931) he describes the relationship between capitalism and workers as “a perfectly equitable arrangement” (p. 34) and in his Draft Social Credit Scheme for Scotland he emphasised that there was to be no ” interference with existing ownerships, so called,” and there would continue to be profits, wages and capitalist ownership (see appendix to Social Credit, revised edition, 1933, Eyre & Spottiswoode). He constantly puts forward the absurd theory – but a very useful one to the industrial and commercial capitalists in hoodwinking the workers – that capitalists and workers are both exploited and impoverished by their common enemy, the banker. One of the journals which espouses his cause, the New English Weekly, tells us (May 26th, 1932) that Douglasism could be introduced only under two forms of government

“A dictatorship … or a Patriotic largely and predominantly composed ‘Tory aristocrats’…”

On January 26th, 1933, the same paper had the following frank admission about the aims of the Douglas movement:

“… if by capitalism is understood the system of competitive production for profit, it can be said that the required change would not involve its destruction but only its regulation.”

Edgar Hardcastle

Political shadow-boxing in Canada (1985)

From the Spring 1985 issue of the World Socialist 

The following article is based on the leaflet issued by the Socialist Party of Canada for last year's federal elections.

The material needs of every individual on earth can be met with only a few hours of work each week from all able-bodied people. This situation is not only practical now without man-made pollution, but has been for years, if existing industrial capacity with some enlargement, in conjunction with available natural resources and current technological knowledge, is used solely for satisfying the needs of humanity. There is no physical barrier to a world virtually as full of the good things of life and as free as air and water is now.

A democratic world community without frontiers must be established, in which the natural and industrial resources of the earth have to become the common heritage of all humankind, and used to provide a cornucopia of material wealth which people can take and use freely according to their own self-defined needs.

Such a moneyless, stateless world commonwealth is the only framework within which current social problems can be permanently solved, since it is exclusively on this basis that production can be oriented towards satisfying human needs. Such a basic social change can only be carried out when a majority of wage and salary workers in the industrialized parts of the globe is aware that the means of production and distribution under world capitalism are not used for social purposes, because they are privately or state-owned by a minority. They are restricted, wasted in the profit interests of that minority. The awakened majority will want this social change, fully understand its implications, and organize democratically and politically to achieve it.

The global village is here now, technologically, not socially.

When a sane society has been organized, so that people are free to voluntarily co-operate according to their ability, death by starvation can be stopped immediately with present food supplies. Food consumption in third world countries can be brought up to European standards in ten years. Rewarding, meaningful work will replace wage-slavery. The working population will be expanded through the addition of people now engaged in socially harmful occupations. For instance, production for sale-profit will be finished. This means that international competition and armed conflict over markets, materials and trade routes will cease. Members of armed forces, arms industry workers, scientists will disband, and together with that equipment, these techniques and materials, will make themselves available for socially useful production.

This basic social change will involve the abolition of the state and the conversion of any useful government functions for the democratic administration of needs, operating through a decentralized system of decision-making on world, regional and local levels. The wages system will be replaced by the voluntary co-operation between people.

As astounding as this solution may seem to be, it is based upon the following analysis of present-day society.

Exploitation

The only way a wealthy minority class can live without having to work is to exploit another class which is forced to work to try to "make ends meet". Exploitation simply means that wages are less than the value of what workers produce. Workers are legally robbed of an unpaid-for surplus where their jobs are. Employees produce all the luxury goods and services that the rich enjoy, but are denied consumption of these things themselves because they are confined to what wages and salaries will buy. This is the cause of the relative poverty, insecurity of the mass of "ordinary" people. It is a losing proposition. Leftists, religious crusaders and social workers who try to alleviate poverty and destitution while ignoring the cause of deprivation, that is the working class's subservient position in society, are not friends of the workers. They are aiding the employing class.

Normally any member of the working class found in any factory, mill or other parts of the boss's property who is not busy working, that is, being robbed by his employers, is trespassing.

To protect its privileged social position the owning class is obliged to spread confusion about the source of its opulence. Its media spread ideas such as, the rich are more ambitious, smarter or harder working than "ordinary" people; or that they stay rich by evading taxes, making the rest of society shoulder the burden; or that corrupt or naive politicians make unnecessary expenditures, adding to the government deficit that keeps workers poor through over-taxation. Confusion is accentuated by the fiction of a common interest within each nation. The national interest is really a mask for the bosses' interest.

Unemployment

Every party in the political spectrum, large or small, is promising that it can do something substantial about unemployment. Alas, as much as they would like to, or as sincere as some of them may be, this is a pipe dream. Governments have no more control over fluctuations in supply and demand on world markets than grain farmers have over hail storms. It ought to be obvious that if governments had the ability to end recessions, they would also have the capability of preventing them from occurring in the first place.

Unemployment helps to show what governments really are, guardians of the existing state of things of private property in the means of production. Governments are at the mercy of capital. No investments are ever made by that small minority which owns capital unless there is a potential of profit. No profit and industries shut down; no production.

A form of cruel and unusual punishment awaits the workers who swallow the vote-gathering promises about recovery. Even if the dreamers could do it, the promised land of low unemployment with rising wages and doles would be merely a matter of getting out of the fire into the frying pan. The ordinary people's degree of insecurity would become elevated to the level of the last boom. For instance, after 40 years of the "prosperity" of the last business crest, Canadian workers had sunk into a consumer debt of $44 billion more than the value of their steady job wages. (Weekend, 6/1/79) And this was way below their needs. Naturally unemployment is high in Russia and China too, since their state capitalist economies are integrated with the rest of the world.

Reforms

Contrary to what many "leftists" have thought, capitalism cannot be reformed out of existence. On the contrary, reforms to the superstructure of the system are necessary to preserve the base. The system has been reformed since 1849 when Robert Owen's Factory Act in the British House of Commons limited the hours of work for children, allowing them to get some education to increase their profitability in the factories.

Some reforms alleviate problems, often while other problems are being created by the system. Where the disadvantaged majority are concerned, reforms deal with effects, leaving causes untouched. Workers are encouraged to think that revolutionary change is impossible, the failure of "Communism" in Russia/China being cited as proof, when the change in those countries was really from feudalism to state capitalism. This tied in with the deception that nationalization was socialism.

Reforms are wonderful for the owning class (1) They give false hope to the workers that something can be done, without basic change. (2) They lower wages and increase productivity which equals increased profits.

Those 1,500.00 dollar bottles of wine would not be for sale in Calgary if there were no idle recipients of profits of the upper class there to buy them.

Even before this recession, some workers were agitating to reform existing reforms so that they would work according to the ideals involved in their establishment. Some are now being eliminated, after years of struggle to get them.

Perhaps it can now be seen that "social services" were never for the people, now that these crumbs are being cut back at the same time as the needs of the poor have increased. Medicare cutbacks for instance, where elderly workers die after months or years of waiting for treatment. Reforms are back-to-work measures, subsidies that lower wages and raise the productivity of labor. More of these services for the rich are required when more producers are required, in periods of business booms.

Voting for reforms is something like voting for a bed of thorns, then spending a lifetime trying to dull the thorns.

Left Wing Parties 

No one thought it unusual, during the time the NDP governed B.C., when "prosperity" was still with us, that some elderly people had to eat pet food. Some eyebrows were raised when Dave Barrett ordered 50,000 striking workers back to servitude, helping to push wages down. There was some union objection, as there was in Saskatchewan and Manitoba when CCF/NDP governments broke strikes.

Generally leftists and rightists parties advocate and bring in the same reforms. For instance the first Socred government of B.C. brought in some nationalization and extensive welfare measures. If the NDP had done this, the bosses' media would have called it socialism, to help induce working class voters think there is some basic difference between the organizations of what can be called the capitalist party.        .

About half of all the world's governments are "left wing" all presiding over capitalism. Mother Theresa has recently been asked to send nuns from third world countries to the slums of Winnipeg to fight destitution a few city blocks from an NDP administration.

The "Political Spectrum" 

The shadow boxers of the so-called left-centre-right are only arguing about rearranging the worm-eaten social furniture. From the "Communist" party to the Western Concept Party, they are not much more than wings of the national capitalist party. There are some differences but they are united in their support of the present world social division of society into "haves" and "have-nots".

They steal each other's policies, hop from party to party with no ideological effort.

Some people are Socreds provincially and Conservatives federally. "Leftwing" and "rightwing" parties have formed coalition governments. Some individual candidates have run for office on a combined "leftist" and "rightist" ticket.

Their reaction upon hearing the ideas of the Socialist Party of Canada is open hostility, ridicule or taunts about utopianism. Whenever they are in office, they administer the profit system in the only way it can be, by assaulting the living standards of the majority who voted for them.

Human Nature

Is the voluntarily co-operative world of socialism impossible because of innate human aggressiveness and greed? If the world's rulers believed this fairy tale they feed to their victims, they would immediately stop funding their arms race from their own abundant coffers and start financing potential destruction through voluntary, door-to-door donations from the humble, mortgaged homes of their underlings. Conversely, they would abandon the crusade to encourage the majority to help others who are worse off than they are through huge charity programs.

Society can only be operated in the interest of all when the downtrodden majority becomes conscious of its inferior social position and wins elections to end the imbalance.

Leadership

When workers accept the ideas of leaders, that is, follow them, they have no real say. They are leaving their lives in the hands of politicians and governments, who are preserving the profit interests of the masters who live off the workers. They are mis-using the ballot to hand power back to a parasitical minority.

Political leaders need no special talents except how to deceive ordinary people. When the NDP's John Schreyer began his final election bid as the Premier of Manitoba, he wore his "lucky shoes". When Pierre Trudeau was trying to decide for the last time to step down, he walked into a nocturnal Ottawa blizzard to consult the stars.

It mattered not that a millionaire, university graduate playboy, holding a flower and spouting philosophy took over the helm in 1968. Nor does it matter that a possible new messiah is a corporate board member and lawyer. The idol of 1968 is the scoundrel of the '80s. The search is on for a new shepherd to become tomorrow's scoundrel.

The world's rulers, in one-party police states, as well as civil rights countries, take the class war of ideas very seriously and spend millions on presenting their side. Generally, the workers' only retaliation so far has been to reject some of those ideas. The owning class fervently hopes the world's workers won't carry the struggle any further than the defensive one on the economic field, over wages and working conditions, merely involving the terms of their exploitation.

Therefore, no government on earth can afford to care about the majority who are wage and salary earners. They are running a system where share and bondholders live parasitically off workers.

It doesn't matter who takes on the job of running the wages-prices-profits system. Or how it is done. No party, including the Socialist Party of Canada, could humanize the system or make it run in the interest of the class it exploits.

By voting for reforms and promises in the last election what did wage workers actually vote for? What has been happening to workers since then? This election is the same. The parties and issues spotlighted by the bosses' media are irrelevant to the interests of the ordinary people. To deal effectively with their problems they must win elections so that they can control, and change society.

The Socialist Solution

The socialist solution to the problems of the non-owning majority can be achieved with only a fraction of the heroism that is required to cope with the present social arrangement.

Since the formulas of the past have been proven wrong, why opt for more of the same? It is not necessary to vote for any wing of the capitalist party in acquiescence because there seems to be nothing better, or in a vain hope that it will do something right, or that someday it might conform to a fond ideal.

The "ordinary" people should become somebodies. They have a potential power at their disposal, brains, logic and the vote. They should assume control of their minds, and claim the world for themselves. They are the class that produces everything in it. There is no third option. Some of the 20 to 30 per cent eligible voters who consistently abstain are undoubtedly knowledgeable enough to not want to vote for any wing of the Capitalist Party. Canada's electoral system is not democratic enough to allow 20 per cent space for a write-in ballot.

But the word "socialism" can be written over the names of the capitalist wing candidates wherever an SPC candidate is not running.

Those who wish to hear more, or wish to join write to: Socialist Party of Canada, Box 4280 A, Victoria, B. C. V8X 3X8 or phone 382-5927 or 479-26-26

Read "The World Socialist" — International journal produced by parties, groups and individuals of The World Socialist Movement. Printed in London. Available (in Victoria) at Griffin Books, 587 Johnson St. $1.00 or postage free $1.50.

In Duncan at Don's Book Store, Sun Valley Mall.

Socialist Party of Canada

Major Douglas rides again (2003)

From the September 2003 issue of the Socialist Standard

In the course of our nearly one hundred years of socialist activity, one of the ideas that we have had to deal with from time to time has been currency crankism – the idea that economic and social problems are caused by some flaw in the monetary system and that what is required to put things right is not to get rid of the profit system that is capitalism but mere monetary reform (of one kind or another, depending on which particular school the currency crank belongs to).

Between the wars the most popular school of currency crankism in Britain was Social Credit, based on the ideas of Major Douglas (as he was known). His explanation for the slump – of poverty amidst potential plenty, of unmet needs alongside idle factories and widespread unemployment, of piles of unsold goods being destroyed – was simple, not to say simplistic: it was due to a lack of purchasing power, to people not having enough money to buy what they needed or to constitute a market worth catering for. The solution, too, was simplistic: distribute purchasing power free to people in the form of a “social dividend” paid by the government.

Douglas believed that banks could “create credit” by the mere stroke of a pen, but that they deliberately kept money scarce so as to be able to charge a higher rate of interest. Hence his solution that the banks should be taken over by the government and their supposed power to create credit exercised but in the general interest, as “social credit”.

In fact, there is no chronic shortage of purchasing power. Sufficient to buy the product is generated as wages and profits in the course of production; slumps are not caused by an absolute shortage of purchasing power but arise when, because of falling profit prospects, capitalist firms choose not to spend all their profits on fully renewing or on expanding production. Nor can banks “create credit”; they are essentially only financial intermediaries, borrowing money at one rate of interest from people with cash to spare and lending this at a higher rate to those needing money to spend or invest, their profits coming from the difference between the two interest rates.

This being the case, the main result of applying “social credit” would be roaring inflation. All the other problems of capitalism, including periodically re-occurring “poverty amidst plenty”, would continue unabated. They will only end when the means of production are brought into common ownership and democratic control so that they can be oriented towards directly satisfying people’s needs – when banks, money and all the rest of the buying and selling system will have become redundant.

Normally, lack-of-purchasing power currency crank theories flourish in times of slump. However, according to an article by Derek Wall, “Social Credit: The Ecosocialism of Fools”, in the September issue of Capitalism, Nature, Socialism, the modern-day followers of Major Douglas are well ensconced in the Green Party:

“Brian Leslie, whose parents were members of the Social Credit Greenshirts during the 1930s, chairs the Green Party Economics Working Group. The newsletter, Sustainable Economics, is almost entirely concerned with social credit and Party economics speaker Molly Scott Cato advocates monetary reform . . . Frances Hutchinson, a former member of the Green Party left grouping, the Association of Socialist Greens, has revived the Douglas Social Credit Secretariat . . . Wilfred Price, a member of the Greenshirts in the 1930s, joined the Ecology Party (now the Green Party) in the early 1980s and powerfully spoke for social credit as a form of green politics.”

Currency cranks find it easy to infiltrate the Green Party because of the tendency amongst its members and supporters to blame “big banks” and international financial institutions for ecological problems and the ravages of capitalist globalisation. The Green Party has, for instance, lined up alongside the Tories, the UKIP and other reactionaries in the “defend the pound” camp because it sees the euro as an international (in the sense of anti-national) currency.

Derek Wall’s article concentrates on the political side of Social Credit rather than on its economic fallacies (though he recognises these), in particular on the anti-semitic position it took up between the wars. The title of his article is taken from August Bebel, a pre-WWI German Social Democrat, who once quipped that “anti-semitism is the socialism of the fool”, by which he meant the anti-capitalism of the fool. And it is, of course, a short step between denouncing “global finance” for causing problems to blaming “international Jewish bankers” or some other supposed international conspiracy or cabal. It was a step that Douglas himself took. Wall quotes him as writing in Social Credit (1933):

“In a remarkable document which received some publicity some years ago, under the title of ‘The Protocols of the Learned Elders of Zion’, a Machiavellian scheme for the enslavement of the world was outlined. The authenticity of this document is a matter of little importance; what is interesting about it, is the fidelity with which the methods by which such enslavement might be brought about can be seen reflected in the facts of everyday experience.”

Wall – a Green Party member who describes himself as an “eco-Marxist” – recognises that Social Credit doesn’t have to be anti-semitic and that its supporters in the Green movement (with one exception) are not. His concern is to warn the Green Party and the anti-globalisation movement against embracing monetary reform as a quick-fix solution but also of the dangerous company they risk falling into if they continue down the road of blaming “global finance” for ruining “national” – and local – economies.

Adam Buick

Letter: Socialists and Social Credit (1987)

Letter to the Editors from the October 1987 issue of the Socialist Standard

Socialists and Social Credit

As a member of the Green Party, I was greatly impressed with the August issue of the Socialist Standard, particularly with the fair and balanced interview with Jonathon Porritt. At least on this occasion you seemed to have dropped the customary "we have an answer to everything" boast which has turned so many otherwise sympathetic potential socialists away from the SPGB before now. I was sent the August issue by a union colleague who is a SPGB member, and if this change is not just a one-off, I may become a regular reader or even subscribe.

The article on Ireland was similarly refreshing in its balance, but Ivan's piece on Parliamentary Rituals was an absolute classic. It should be distributed outside the TUC and Labour Party conferences as a leaflet, and at the next General Election. Great stuff. And now my question. What is your attitude to social credit? You must be against it because everyone else seems to be. Even the Green Party will not mention it by name. I am assuming that you know what it is as the SPGB pre-dates it by sixteen years.

Bill Whitbread 

London N22.

Reply.

We are pleased that Bill Whitbread enjoyed the August Socialist Standard and we hope that he will not only take out a subscription but decide, as a person who is concerned for the future of the world and its population, that his place is with us socialists in the work to replace capitalism with socialism.

Social Credit was a proposal by a Major Douglas to pay everyone a "social dividend" to make up for the chronic lack of purchasing power which, he alleged, was built into the financial mechanism of capitalism. It was one of a number of "under-consumptionist' theories that flourished during the 1930s.

All such theories assert that not enough money is distributed to enable people to buy all that has been produced. If this were true, capitalism would be in a permanent state of depression, whereas in fact it goes through alternating periods of boom and slump; indeed it would be difficult to see how capitalism could ever have come into existence in the first place.

While the Green Party does not mention Douglas by name, their manifesto for the last election bears evidence of the influence of his mistaken ideas;

The Green Party would take steps to end the monopoly of private banks over money creation (. ..) Community banks would be encouraged, subject to licence and with the power to create money, a power which would be withdrawn from private banks. Community banks would invest local savings in local enterprises, and invest newly-created money in those enterprises.

Closed factories alongside mass unemployment suggest that if only people had more money to spend boom time would return. But at no stage of the business cycle is there a shortage of purchasing power; there is however a difference between having the power to buy something and actually using that power. In a slump some capitalists choose not to invest all of their money in productive activity, as they would in a boom. Rather than being hoarded it is lent out at interest on the money market. This is the situation today and explains the paradox of the growth of financial institutions — evident from a stroll down any High Street — in the middle of a depression.

Douglas also believed that the banks had the power to create purchasing power, in the form of credit, by the stroke of a pen. If they had this power, why would firms ever go bankrupt, or make losses, or resist wage claims from their workers? Banks are in fact one of a set of financial institutions which make a profit out of the difference between the interest they charge borrowers and the interest they pay their depositors. The amount they can lend is thus limited by the amount they borrow from depositors as also applies (and nobody contests this) to building societies. In fact, due to the need to hold some money as ready cash, banks can only lend less than their deposits.

The solution to problems like unemployment does not lie in the reform of capitalism's monetary system but in the abolition of capitalism with its class ownership and production for profit, which involves the complete disappearance of money, banks, credit and all the rest of the financial system.

Editors.

Aspect: Can Banks Create Credit? (1971)

The Aspect column from the July 1971 issue of the Socialist Standard

Confusion about banking operations and the power of bankers has been in evidence for a long time. It was known before 1848, and that year saw the publication of two works putting opposite points of view. One was Lectures on the Nature and Use of Money in which John Gray outlined a scheme which was the forerunner of the Social Credit Movement founded by Major Douglas in the nineteen twenties. The other was John Stuart Mill’s Principles of Political Economy which contained the following:

“Credit has a great but not, as many people seem to suppose, a magical power; it cannot make something out of nothing … It seems strange that there should be any need to point out that credit, being only permission to use the capital of another person, the means of production cannot be increased by it, but only transferred … The same sum cannot be used as capital both by the owner and also by the person to whom it is lent . . .”

Part of the confusion arose out of the loose use of the term “credit creation”; by some writers to mean merely the grant of a loan by a bank, but by others to mean what Mill had in mind as making something out of nothing.

Marx on occasion wrote of the “creation of credit and capital” by the banks but not meaning anything more than the act of lending or investing. Elsewhere he described banks as merely institutions for bringing together and relending sums deposited by depositors. He ridiculed the “illusions concerning the miraculous power of the credit and banking system”, which he said, were held by those who failed to understand the nature of capitalist production and the credit system (Capital, Vol. III p. 713).

Sir Ralph Hawtrey in his Currency and Credit dealt with another confusion of terms:

“It is true that we are accustomed to think of bank credit as money. But this is only because for the practical purposes of every day the distinction between bank credits and money is rarely of any importance. And for all that a bank credit is merely a debt, differing from other debts only in the facilities allowed by the banker for transferring it to another creditor. No one imagines that a trade debt is money, though it may be as good an asset as a bank credit” (2nd Edition, p. 5).

Major Douglas, like John Gray, would have rejected outright the views of Mill, Marx and Hawtrey on credit. He claimed that bank loans are the issue of money just like the issue of notes by the Bank of England and that, by making loans, “a bank acquires securities for nothing”, and that “it is absolutely correct to say that . . . new money has been created by a stroke of the banker’s pen.” (The Monopoly of Credit, 1931 pp. 15 and 17). In the words of one of his supporters, banks can create “untold wealth at the cost of a few drops of ink and the fraction of a clerk’s wages”.

Basically the dispute is between those who hold that banks are merely intermediaries to whom depositors make purchasing power available by depositing with them, and which then make that purchasing power, or most of it, available to others by transferring it to them as loans or using it to purchase securities etc; or whether the banks themselves, by making loans create the largest part of the deposits.

Starting from the production of value by the application of human labour to nature-given materials and its conversion into money, is it that some part is lent to the banks in the form of deposits, for the banks to relend or invest, or is it the banks which create large amounts over and above the amounts deposited?

G. D. H. Cole accepted the “creationist” view. He wrote that bank loans “represent a real creation of additional money — additional purchasing power”. (What Everybody Wants to know about Money, p.39).

Among those who have held the “intermediary” view, along with Mill and Marx were many bankers and, notably Professor Edwin Cannan in his An Economist’s Protest.

Of particular interest were Reginald McKenna, politician turned banker, who was Chairman of the Midland Bank, and J. M. Keynes, both of whom at first supported creationist theory and later changed their attitudes.

One of many anti-creationist statements made by bankers, was that by Walter Leaf, Chairman of the Westminster Bank:

“The banks can lend no more than they can borrow — in fact not nearly so much. If anyone in the deposit banking system can be called a ‘creator of credit’ it is the depositors; for the banks are strictly limited in their lending operations by the amount which the depositors think fit to leave with them” (Banking. Home University Library, 1926, p. 102).

Hartley Withers, sometime editor of the Economist popularised creationist theory in his The Manufacture of Money and used the phrase “every bank loan makes a deposit”, later expanded to “every bank loan or purchase of securities creates a deposit”; and its converse that every withdrawal of a loan or sale of a security destroys a deposit.

McKenna repeated this and provided Major Douglas with weighty support.

The theory was given official endorsement in the Report of the MacMillan Committee 1931, (Committee on Finance and Industry) and found its way into the textbooks. Though McKenna was a member of the Committee he then denied that he agreed with Major Douglas about the creation of credit; which was really rather hard on Douglas who had, after all, only taken McKenna’s words at their face value. Another signatory of the Report was Professor T. E. Gregory who held the Chair of Banking and Currency at the London School of Economics and who in that capacity took Cannan’s line.

The Macmillan Committee’s support for creationist theory is still widely accepted. It turned up recently in Ernest Mandel’s Marxist Economic Theory where Mandel quotes it with approval.

One argument used by creationists to support their case was that, without creationist theory, it was not possible to explain how the deposits of the commercial banks could exceed the total amount of notes and coin in circulation. This is easily disposed of. If a bank receives deposits of £5 million a week and has £4 million a week withdrawn by depositors, deposits will increase by £1 million a week and the eventual total is in no way limited by the amount of currency in circulation. In 1937 the Post Office Savings Bank had no cheque facilities and made no loans to businesses or private borrowers, but its total deposits did in fact exceed the total amount of notes and coin in circulation with the public. The deposits were invested in government securities.

The statement of the “creationist” case in the MacMillan Report started with the following:

“It is not unnatural to think of the deposits of a bank as being created by the public through the deposit of cash representing either savings or amounts which are not for the time being required to meet expenditure. But the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on an overdraft or purchasing securities, a bank creates a credit in its books which is the equivalent of a deposit. A simple illustration, in which it will be convenient to assume that all banking is concentrated in one bank will make this clear”.

The illustration assumed that a depositor deposited £1,000 in cash. The bank then lent £900 which was withdrawn by cheque and came back as new deposits. At this stage the deposits in the bank totalled £1,900 made up of the original £1,000 and the later deposits of £900. Against this liability the bank would show, on the assets side of its balance, cash £1,000 and loans to customers £900.

This lending process was repeated with nine more loans of £900, so that the bank’s books would then show £10,000 deposits, balanced by £1,000 cash and £9,000 loans owed to it by borrowers. The bank had thus “created” deposits of £9,000 by making loans, and the creationist case was proved. Or was it?

Certainly the Committee got the answer they wanted but in view of the way the conditions were rigged that was not surprising; little in the example had any resemblance to real banking conditions.

Not only did the Report make the thoroughly artificial assumption of only one bank in existence but it also assumed that none of the borrowers made withdrawals except by cheque, never by cash to hold and not to be returned to the bank. This enabled them to proceed on the basis that all the cheques drawn (or all the cash withdrawn) come back to the one bank — there was no other bank to which they could go. Actually the Report did not allow for any withdrawal in cash at all but treated the £1,000 cash deposit as remaining unchanged throughout the operations; which meant that the Committee was assuming, but without saying so, that a change had occurred in the world outside the bank which led to a permanent increase by £1,000 in the amount of cash left in the bank.

This line of reasoning, which isolates from a continuous in-and-out flow of deposits and withdrawals of cheques and cash, one single deposit of cash, is fallacious. If it were valid it could be applied in reverse; that is the Committee could have isolated a single withdrawal of £1,000 cash and treated it is a permanent reduction by £1,000 of the amount of cash left in the bank. It only needed one of the ten borrowers of £900 to take it out in cash or destroy the whole of the Committee’s case.

It appears to have been a belated recognition of this fallacy that later led J. M. Keynes to put a view contrary to that of the Report he had signed.

In his General Theory of Employment, Interest and Money (1936) he wrote:

“It is supposed . . . that the banking system can make it possible for investment to occur to which no saving corresponds. But no one can save without acquiring an asset, whether it be cash or a debt or capital goods, and no one can acquire an asset which he did not previously possess, unless either an asset of equal value is newly produced or someone else parts with an asset of that value which he previously had . . . The notion that the creation of credit by the banking system allows investment to take place to which ‘no genuine saving’ corresponds can only be the result of isolating one of the consequences of the increased bank-credit to the exclusion of others” (p. 80-1).

Actually, under the conditions assumed in the Report the bank was needlessly modest in making loans of only £9,000. They could have made it £90,000, or any figure they had cared to name, because every cheque had to come back to the one bank and they had in practice, but without saying so, prescribed that nobody was to draw and hold any of the £1,000 cash.

They also claimed that the result would be the same if there were many banks, i.e. that all withdrawals would automatically come back into the banking system, but this, as already mentioned, was based on the fallacy of supposing that the £1,000 deposit of cash was a permanent increase of cash in the banking system but without going into the change of outside conditions which would make it possible.

In practice there is nothing automatic about deposits. Banks have to attract money on deposit account by paying interest of millions of pounds on it and they spend tens of thousands of pounds on advertisements to attract new depositors.

The Committee also overlooked the fact that banking figures vary according to the method of investing. If a depositor with £1,000 in the bank draws a cheque to lend that amount to a business, bank balance sheet figures are completely unaffected since the £1,000 deposit has merely been transferred from the depositor’s account to the account of the business; but if the depositor leaves the £1,000 on deposit and the bank lends £1,000 to the business, bank deposits and loans both increase by £1,000.

The absurdity of creationist theory can be seen in practical terms if we consider what happens if the owner of £1,000 lends it direct to a business firm, and the effect if he deposits it in a bank and the bank then lends to the same firm. The MacMillan Committee’s example would have it that though the original owner had only £1,000 to dispose of the bank can lend £9,000 to the firm if it receives the £1,000 on deposit.

The Committee’s example also took it for granted that banks with money to lend can always find “creditworthy” clients who want to borrow all the banks have available. When trade is slack, as in recent months, they cannot.

If creationist theory had been correct banks would make profit at a rate far above that of industry — “fabulous profits” and “hundreds per cent” were the claims. It does not happen.

There is one company with wide interests in publishing, oil, engineering and other manufacturing activities, S. Pearson and Son Ltd. which also has a controlling interest in a bank, Lazards. Yet only about a sixth of Pearson’s profits come from Lazards. Lazards had a director on the MacMillan Committee who was also on the board of Lloyds Bank. It seems that he failed to convince Lazards — assuming that he even tried — that they really have the creationist powers set out in the Report he signed.

The MacMillan Report worked out its figures on the basis that banks need to keep ten per cent of their deposits in cash “to meet the demands of customers”. This ten per cent ratio enabled them to suppose that banks can lend nine times the amount of the £1,000 deposit. The conventional cash ratio is now down to 8 per cent, which would increase the creationist power to eleven and a half times the deposit. But the cash ratio is largely window dressing. If there were a mass withdrawal by depositors of the London Clearing Banks, £700 million of notes and cash would be quite ineffective if the depositors wanted to withdraw their £11,000 million of deposits. What banks endeavour to do is to anticipate events and match outgoing withdrawals and loans with incoming deposits and repayments of loans. If they could match these outgoing and incomings completely day by day they would need no cash in their tills, without the banks thereby being any less safe. If they could get it down to one per cent the assumed creationist powers would then be 99 times the £1,000 deposit. The cash ratio of the Savings Bank in 1937 was a quarter of one per cent.

Another consequence of creationist theory, accepted by its supporters, is that bank loans by increasing purchasing power have a determining influence on the price level. The facts show this to be baseless. Between the first quarter of 1921 and the first quarter of 1933 prices were falling continuously, by a total of forty four per cent. They fell when the deposits and loans of the London Clearing Banks were falling, when they were stationary and when they were rising. At the beginning of 1931 deposits and loans were at the same level as in 1921 but prices had fallen by forty per cent. Between 1926 and 1933 deposits and loans went up by seventeen per cent while prices went down by nineteen per cent. (Incidentally the MacMillan Committee wanted prices to rise in order to cure the depression). Bank deficits went down slightly between 1968 and 1970 while prices went up by twelve per cent.

Mention has been made of Marx having a view on the specific question of credit creation which was in line with that of some other economists, but he did not share their views on wider aspects. He wrote:

“The superficiality of Political Economy shows itself in the fact that it looks upon the expansion and contraction of credit which is a mere symptom of the periodic changes of the industrial cycle, as their cause” (Capital Vol. I. p. 695)

Against logic and all the weight of evidence, credit creationism still has its believers. Professor Cannan hit the nail on the head when he called them “the mystical school of banking theorists”.

Edgar Hardcastle

Canada's White Hope — the C.C.F. (1934)

From the June 1934 issue of the Socialist Standard

Ever since Jack Johnson won the heavyweight championship many moons ago, the world has with eagerness watched the coming and going of white hopes. In the more important realm of politics new movements are born and quickly die, the remains creating fertilizers for new hopes to befog the minds of the majority, who so far have shown no desire for a real change in the system.

It is two years since the birth of the C.C.F. in Calgary, and British workers may be interested to know what the mystic letters “ C.C.F.” mean, and what the organisation stands for.

The Canadian Co-operative Federation is the fine-sounding title represented by the letters in question, and to those of us who have had the Co-operative Commonwealth, i.e., Socialism, as our objective for years it is difficult to understand the minds which claim that their ultimate aim, but spend all their time advocating something else now.

The outstanding figure of the C.C.F. is James S. Woodsworth, one of the Winnipeg Labour M.P.'s in the Parliament at Ottawa. He is an ex-preacher noted for his radical ideas, and has turned out an able politician, judged by the standards of the capitalist parties.

In the 1921 election to the Federal House, sixty-four Progressives were elected, all with more or less Radical ideas. By 1925 most of them were absorbed by the Liberal Party, and in 1930 (including the Labourites), they only mustered fifteen members, who have since that time cooperated in a loose group.

August 1st, 1932, saw the first meeting and the first attempt at organisation, when a Farmer-Labour Federation was formed. This meeting was attended by delegates of Labour Parties of the four Western Provinces and the organised farmers of Alberta and Saskatchewan.

The movement spread rapidly and culminated in a great Convention, held in Regina, July 19th to 21st, 1933. It was attended by 135 delegates, from Toronto and Montreal in the East to Vancouver on the Pacific Coast, at which the Cooperative Commonwealth Federation was founded.

The affiliations of the Federation consist of the Farmer-Labour Party of New Brunswick, the Labour Party of Quebec, the Labour Conference of Ontario, the I.L.P. of Manitoba, the Labour Party of Saskatchewan, the Canadian Labour Party of Alberta, and the so-called Socialist Party of British Columbia. Next, and perhaps most important, the organised Farmers of Ontario, Saskatchewan and Alberta joined up, with Manitoba farmers giving half-hearted support, but likely to continue to vote for the Farmer-Liberal Government which has power in this Province at present.

Another group giving support to the C.C.F. consists of a sprinkling of “intellectuals” of the Radical type, mostly college professors, doctors, lawyers and preachers. In addition, the organised Protestant churches have practically blessed the C.C.F. by passing resolutions calling for the "transformation of the present competitive system into a co-operative one.” C.C.F. leaders frequently quote from a recent encyclical of Pope Pius in an effort to link up the powerful Roman Catholic vote to their side.

The semi-feudal background of the peasants and workers of Roman Catholic Quebec will be hard to overcome, and radicalism of the pinkest type has not yet penetrated to that home of what has been termed bush-culture. To illustrate the outlook of some of the farming element of Canada to which the C.C.F. appeals, it has been related that a C.C.F. speaker, after declaiming against the Wages system, had one farmer agree with him in the following words: “Yes, I agree we should abolish wages. Hired men want far too big wages nowadays.”

The economic background of the new movement, therefore, is made up of, first, a very reactionary farm population whose main desire is a big price for farm produce. On the other hand, they demand a low wage scale for labour, not only amongst their hired hands, but also amongst the men who make their farm machinery, and those who on the railroads, etc., transport their produce to the markets of the world.

Secondly, a Labour movement with the regular Trade Union outlook largely imported from Great Britain but contaminated by the ideas of that most pitiful Trade Union movement, the American Federation of Labour, to which most of our unions are affiliated.

There are also groups organised as Social Reconstruction Clubs which are affiliated to the C.C.F., and from the leaders of those clubs flow a constant stream of half-boiled schemes and plans, and a constant fight against anything pertaining to a recognition of the class struggle.

The usual Left and Right Wings are already developing. The reformist S.P. of British Columbia is led largely by some ex-members of the old S.P. of Canada, who could see no possible career in the new Party organised in Winnipeg a few years ago with a programme similar to that of the S.P.G.B. They, along with some young members of the I.L.P. in Winnipeg and a small group of ex-semi- Communists in Toronto, comprise the Left.

The Farmers of Ontario are led by an avowed anti-Socialist, Miss Agnes McPhail, M.P. She has the help of two other fierce opponents of Sodalism, in the persons of Mr. Elmore Philpott, much boosted soldier-orator-journalist in Toronto, and Mr. John McLean, M.A., B.A., L.L.D. (Oxon.), Rhodes scholar and lawyer here in Winnipeg.

We see then that the new Federation represents (a) the wage workers of Canada, whose ideas are as nebulous as the ideas of the same class in other lands, and of course it can well be understood their immediate demands are equally confusing; (b) the farmers of Canada, whose hopes and demands have already been outlined as high prices for farm produce and low wages for the industrial workers as well as the farm labourers.

The C.C.F. have fourteen planks in their platform, subject, of course, to additions and reductions to suit the vote-catching needs of the moment. Some of the planks appeal specially to the wage workers. Plank 7, for instance, calls for “A National Labour Code to secure for the workers maximum income and leisure, insurance covering illness, accident, old age and unemployment, freedom of association and an effective participation in the management of his industry or profession.”

Mr. Elmer E. Roper, one of the Alberta Labour leaders, tells us, in the February issue of the Saskatchewan C.C.F. Research, that this plank is one that might easily appear in the Election platform of either of the old parties.”

The same could well be said of the other thirteen planks, but we will deal with them as we go on.

Plank 4 deals with “Agriculture” and features as its chief aim “Security of Tenure” for the farmers of Canada. To get what is meant by that elusive term we can refer to the "C.C.F. Agricultural Policy” as outlined by their principal farmer leader, G. H. Williams, President of the Saskatchewan Farmer-Labour group, in his speech at the Regina Convention, July 22nd, 1933. The present real owners of Canadian Farm lands—the Mortgage and Insurance Companies—are to be treated real rough by Mr. Williams and the C.C.F. when they get power. He says: ”We will give you bonds for your equity, bonds that will not carry interest. . . . These bonds will be payable over a period of years in the currency of the province as it may be at the date of payment." Then to the farmer, Mr. Williams says: “All improvements will, of course, increase the value of the land, and the State will guarantee to compensate you for the increase in the value of the land, brought about by your efforts." Not only that, but Mr. Williams says they are going to supply “through Socialism to the agriculturist, a marketing board, State credit and pegged prices. . . . In industry we guarantee to the worker a job at an adequate wage and we use the production for the benefit of the Canadian people. We will do the same for agriculture."

So that brings us to a new problem for the C.C.F. What will people use for money? Planks 2, 11 and 14 deal with this absorbing question. 1 Mr. C. G. Coote, M.P., one of their money experts, tells us, in the House of Commons on February 1st, 1933: “ The first step is a planned economy," and the next: "A central bank owned by the State, whose duty it would be to see that sufficient money is at all times available to allow us to distribute among our people the consumable goods which we can produce."

That, in part, is what the C.C.F. have copied from that enemy of Socialism, Major Douglas. Let us again quote from the organ of the "Saskatchewan C.C.F. Research Bureau," December, 1933, issue, where we read: "The only shortage is in money, and this artificial shortage is due to the policy of the financiers and is maintained by the powers of the State. The State will then make every man, woman and child an equal partner in the wealth of the country as a going concern. Backed by the inexhaustible resources of the nation the State can issue as much credit as is needed." Later we read: "There is no shortage of anything, except money, wherewith to purchase the things we produce, and a sane system of finance is all that is required to make things available. Sufficient purchasing power for everybody is merely a matter of accounting."

Here we have revealed the C.C.F. answer to Socialism. Socialism involves that goods shall be produced for use and not for sale. The C.C.F. say goods will be produced for sale, but that they will provide the people with money to purchase them, an impossible attempt to keep capitalism but escape the consequences of so doing.

The depression of the Seventies produced on this Continent the American Grange or the Patrons of Industry, the Nineties had their Populist Movement, and later we had Townley and his Non- Partisans, and in Canada the depression of the early Twenties produced the Progressives.

The Farmer Movement of Canada has its roots in those old discredited movements, with the same kind of currency cranks leading them, and the British Columbia “Socialists" and Winnipeg I.L.P.'ers trailing behind. Reactionary farmers representing the dog, and confused workers the tail. Why should the gods not laugh?

Plank 1 calls for “ Planning," as if capitalism was not planned beautifully for the capitalists!

Plank 3, on Social Ownership, reassures the most reactionary that confiscation is unthought of. It says: "We do not propose to adopt any policy of outright confiscation," and again: “We recognise the need for compensation."

Plank 5 calls for “ Import and Export Boards" to deal with foreign trade.

Planks 8, 9 and 10 deal respectively with “Health Service", “The British North America Act,’’ which governs the Canadian Constitution, and “External Relations." Then 12 and 13, dealing with “Freedom" and “Social Justice" bring to a close a programme which is a mixture of decadent Liberalism, Fabian Bureaucracy and Currency Confusion.

Practically every plank and clause is a denial of the purpose of the Federation, which is supposed to be: “The establishment of a Co-operative Commonwealth, in which the basic principle regulating production, etc., will be the supplying of human needs and not the making of profits."

The attitude of the Socialist Party of Canada towards this Federation is one of unbending opposition. We are opposed to the spurious “Socialism" advocated by their spokesmen and leaders, the Socialism that “recognises the need for compensation," or a Socialism which is going to issue money “to purchase the things we produce," or one that guarantees to the worker “a job at an adequate wage." We do not want a “Co-operative Commonwealth" like the one envisaged by Professor Frank H. Underhill, the head of the Brain Trust, when he says in his essay on Dictatorship: “The direct ownership and operation by government of the great strategic services, such as transportation and distribution of electric power." We don’t even want our planning done by “public officials."

No! we are opposed to bureaucracy, to a wage system, to compensation, and not only to Government ownership but to the coercive State itself. When all the people own all the earth and the means whereby wealth is produced, classes will automatically disappear, and if society has no owning and governing class, how can we have a Government, the function of which is to protect class ownership? The kind of administrative organisation then required will be essentially different.

To the young and earnest workers in the Federation we constantly repeat the old truth, that non-Socialists organised on a programme of reforms cannot further the work for Socialism. The changing economic conditions are working for us, disillusion will follow the futile efforts of Woodsworth, Pritchard and Queen to make a coherent movement out of such widely divergent elements as constitute the C.C.F. Some of their leaders will openly join the avowedly capitalist parties, but there will be no place for any of them in the Socialist movement, which has no use for Leaders, any more than it has for the other evil features of a system so detrimental to human welfare as modern capitalism.

Alex Paterson

(Socialist Party of Canada)

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)

The Douglas Credit Scheme Exposed. (1924)

From the December 1924 issue of the Socialist Standard

A Review of Douglas and Orage's Credit, Power and Democracy.

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.

Jack Fitzgerald