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The philosophy and analysis of C.H. Douglas

John Rawson

In view of the fact that numerous economists seem to be drawing conclusions similar to those of the founder of the Social Credit movement, it is timely now to have a look at the analysis and proposals he put forward ninety years ago.

Clifford Hugh Douglas was an engineer with an international practice, particularly in railways. During World War 1, the British government appointed him to improve the organisation of their aircraft industry. His personal philosophy was strongly individualistic. “Organisations exist to serve people” not the reverse. He promoted the idea of “increment of association”; two people working together cooperatively can do more than twice what any one of them can do on their own.

Financial Analysis
In the course of his work, he noted that the final cost of each industry’s product was greater than the total of purchasing power, wages, salaries and dividends, paid out in the course of its production. If they had wanted to, the workers and owners would not have been able to buy all the goods and services they produced. After the War, he studied other industries and found that the same situation applied to all. He concluded that this situation must apply to the economy as a whole. He labelled costs of wages etc. which provided “purchasing power” as “A” costs, and others such as depreciation allowances as “B” costs. Obviously “A” purchasing power could not match prices comprising “A+B” costs. This was named the “A+B Theorem”.

Banking, Creation of Money and Accounting At that time, few people realised that banks created credit money when they made loans. Douglas demonstrated that they did, basically showing that the money supply increased from time to time and that commercial banks had the ability to do that. He saw very little wrong with this situation, pointing out that the banks gave valuable services to the community. He was highly critical of the fact that they held a monopoly of the process, forcing communities to borrow the nations’ money from them. He held that such money is given value only by the production of the nation and the faith of the people in it as a reliable means of exchange. Therefore morally it belongs to the people, not to corporate institutions. He also was critical of the fact that, while debt was accounted fully, the nation’s assets were not. He considered these assets to include the accrual of skills and knowledge gained over past generations, which could be described as society’s cultural heritage.

As an Engineer, Douglas was well aware of the implications of the displacement of labour by machinery. He was most critical of the “full employment” ethic, pointing out that the purpose of industry is to provide goods and services for people, not jobs for wage slaves.

Clearly, any economy needs a flow of new credit (money) so that people can enjoy the use of their own production. Within the existing system, while industry is expanding all is more or less well. When new factories are being built, wages etc are paid out before they produce any goods, and “times are prosperous”. If this process slows down or ceases, then there is an accumulation of unsold goods. This problem can be overcome by government deficit spending, but this implies a build up of public debt which – under the currently accepted rules – is generally viewed as being (eventually) unsustainable. Except in wartime, of course, when the rules are conveniently changed because industry must produce large quantities of non-consumer goods as armaments.

For sustaining anything like a stable economy, it is generally conceded that new money must be injected into the economy periodically. Douglas insisted that this is best done by crediting the individual consumer, either in the form of a national dividend paid to each consumer or as a discount scheme for prices, or both. He saw this as encouraging “economic democracy”, with the individual citizen determining what should be produced. To ensure that this is done carefully, without causing demand inflation or deflation, he envisaged a national credit authority, independent of political influence (like the judiciary), tasked with assessing and authorising issue of the amount needed. He recommended no major changes to banking other than additional regulatory controls, including the licensing of bankers. However, with public issue of new credits, banks will have lost their monopolistic power.

Testing the Theory
Douglas is possibly the only economics thinker whose every prediction has come true. For reasons obvious from the above, he predicted the breakdown that occurred in the slumps of the ‘twenties and ‘thirties of last century. He pointed out that the system, a combined effect of unsold goods and rising debt, would force nations to attempt to export more than they imported. He observed that struggles for markets in this way can lead to wars. Possibly he did not regard the system as a driving force to capture markets through colonialism, although it is now obvious that this is so. Other recent evidence supports the veracity of his ideas:

  1. It is an obvious corollary of the A+B analysis that we are more likely to be afflicted by cost-push inflation than demand-pull inflation. Refusal by orthodox economists to accept this has resulted in the misguided application of “credit squeezes” when they were not only not needed, but economically suicidal.
  2. Orthodox economists have no adequate explanation for “stagflation”, costs remaining high or rising in times when the volume of money is dwindling. It is very easily explained by the Douglas analysis.
  3. Orthodoxy also has no realistic explanation for the ongoing and continuous rise in indebtedness, since it mistakenly conceives of the business of banking as borrowing and on-lending, fully failing to recognise that banks create new credit money when they advance retail loans. The need for a continuous inflow of new credit money to keep a modern economy healthy, money that under the current banking system must be borrowed at source, explains debt escalation simply and realistically.

John Rawson is a member of ERA living in New Zealand

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