C.H. Douglas and the Forbidden Politics of the Anglosphere
reading time: ~90 min
C.H. Douglas is a name that, for many of those who know of him, summons up a handful of connotations that are just as quickly dismissed: 'underconsumptionism', 'overproductionism', 'universal basic income', and so on and so forth. The name of Douglas has been shoved into a slot that is not really appropriate for the content of his works; either that or into a slot of total obscurity. This is understandable for a couple of reasons. The first is that the substance of his thought is grossly juxtaposed by the depth and quantity of his writings. His insights into economic theory are important, and yet he wrote about a half-dozen books, in each of which economic theory, strictly speaking configured only about a third of the pages; the rest of the pages are filled with comments on sociology and politics – the British Empire's accursed export trade is a common theme. For someone whose combined experience and intellectual acuity yielded powerful insights, there should have at least been one text that laid everything out clearly and systematically. The second is that the practice of his politics was often undertaken by people who didn’t understand what they were doing, didn’t understand what they had read, didn’t have the means or integrity to pursue a Douglassian program, or any combination of the above. Hopefully by the end of this essay, the reader will understand what C.H. Douglas and Social Credit Theory are all about, hopefully with a minimum of dilution from the author.
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The Man
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Clifford Hugh Douglas was born in Manchester and went into engineering from an early age. He taught in a grammar school for while, which is presumably where he picked up his impeccably posh accent. But after this he was sent around to various outposts in the British Empire to work as engineer and oversee vast industrial projects. He worked in India for the Westinghouse Company, for the Buenos Aires and Pacific Railway Company in South America, for the London Post Office Railway (which is today London’s metro system), and for the Royal Aircraft Factory in World War I, where he was given the honorary title of Major. After World War I, he started to write about economic issues. Having been acquainted with the heights of modern productivity (the physical aspect of economy), and the financial system that ran alongside it (the virtual aspect of economy), he was a man that had gone down into the belly of the beast of the British Empire and observed its inner workings and dysfunctions. As a decorated engineer, well-equipped with a high society accent, but also uncompromising man of Christian faith, he was a perfect – and perfectly irritating – dissident.
In his view, Social Credit Theory dovetailed perfectly with the message of grace brought to mankind by Jesus Christ. In Social Credit he compares the Mosaic and legalistic ethic of punishments and rewards that has so dominated English culture historically with the Christian ethic that God has extended his grace to us and that we are saved by pure dumb luck. In the former, man is burdened with the immediate culpability for all his actions and in the latter, he is simply forgiven. And that’s how it is with Social Credit as well: he didn’t see why, if civilization had materially progressed to such a point that not everyone had to work in order to live, everyone should be forced to work. If the productive power of the community (or what he called ‘Real Credit’) had reached a point where only a fraction of the populace had to work in order to produce for the sustenance of the whole, why couldn’t that community simply accept its good fortune and reap the rewards of the inventions and technical works of their ancestors? He was calling into question the deeply bourgeois assumption so ingrained into English culture that “everything has a price”. Instead, he thought that ‘systems exist for man, and not the other way around.’ Furthermore, he predicted that the forcible entry of the population into employment would retard the progress of industrial efficiency, by forcing it to accept more labor-intensive techniques where capital-intensive techniques would otherwise be used. And that is, after all, just another way of saying: preventing the productivity of labor from improving. His view of the future, then, which was populated with competing visions of the Mass Society, was very dim. The emphasis on labor, rather than banking, seemed to him a bit like rearranging the chairs on the deck of the titanic.
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Economic Theory
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Readers somewhat familiar with Douglas and Social Credit Theory will have heard that it has something to do with banking. Those more familiar will have heard that it has something to do with the ‘A + B Theorem’. Both are true but neither encapsulate the core concept of SCT, which is that: in each period of production, more in prices is disbursed to the economy than is distributed in purchasing power. Holding that, it follows that in order for these disbursed prices to be resolved (i.e. for the economy’s product to be bought and consumed), purchasing power must be distributed from somewhere else than the local period of production. That purchasing power can come from government spending (which, in Douglas’ UK, always came with debt attached as it was financed in bond issues rather than simply issued by fiat), from the export trade, or from a new wave of production. In the case of the last option, whatever difficulty the original discrepancy between prices and purchasing power first presented is resolved in the immediate-term but exacerbated in the medium-term. That is to say – if one wants to put it this way – today’s equilibrium is secured at the cost of making tomorrow’s equilibrium twice as difficult to secure. In the case of all of these options, all solutions entail, in some form or another, an expansion in debt, whether it be private debt or public debt. These few sentences cover basically all of Social Credit Theory but everything will be explained in greater detail.
On the basis of the above, Douglas predicted a mix of disasters to befall the UK: that its need for purchasing power would stimulate the politics of the export trade, i.e. hunting for foreign markets and elbowing other powers out of the way, leading to war. The other disaster would be a mounting accumulation of debt, which couldn’t ultimately be repaid but kept in the immediate-term by freshly taken-on debt, and in the long-term by cycles of bankruptcy and the consolidation of industrial holdings within the banking sector. Grim verdicts, but can they really be denied at this point?
Social Credit Theory rests, at first glance, on two planks: (1) the mechanics of the banking system and (2) the A+B Theorem – we will see later that the third (3) plank is corporate accounting practices, but these two must suffice for now.
For those not up-to-snuff, Douglas’ view of the banking system was correct from early on, and most economists still aren’t there yet (their stipends don’t allow them to): the Fractional Reserve Theory of Banking, in which banks and bank-lending are collectively constrained by reserves, is wrong and the Credit Creation Theory of Banking, in which bank-lending goes first and reserves are gathered up and/or provided later, is right. Douglas has yet to be credited by the economic profession for getting it right when so many were apparently incapable. A popular exposition of this can be found by economist Richard Werner under the title “Lost Century in Economics: Three Theories of Banking”. The important thing to realize is that banks are essentially unconstrained by reserves as the lenders of credit and creators of the large majority of an economy’s money supply – traditionally 90% or greater in the 20th Century. Bank-lending creates the money supply or, as Sir Edward Holden, director of Midland Bank and Chancellor of the Exchequer said, “Bank loans create bank deposits.” Equally true, then, must be the fact that the repayment – or default – of a loan means the extinguishment of a segment of the money supply. Again this may be old-hat for some but it’s necessary for everything to come together that we’ve established that bank-lending creates money, loan-repayment destroys money, and that none of this is dictated by the collective reserves of the banking system. There’s plenty more with which to take issue, but this is what we need for now.
The A+B Theorem first appeared in Douglas’ Credit-Power and Democracy (1920) and is presented thus:
“A factory or other productive organisation has, besides its economic function as a producer of goods, a financial aspect – it may be regarded on the one hand as a device for the distribution of purchasing-power to the individuals through the media of wages, salaries, and dividends; and on the other hand as a manufactory of prices – financial values. From this standpoint its payments may be divided into two groups:
Group A – All payments made to individuals (wages, salaries, and dividends)
Group B – All payments made to other organisations (raw materials, bank charges, and other external costs).
Now the rate of flow of purchasing-power to individuals is represented by A, but since all payments go into prices, the rate of flow of prices cannot be less than A+B. The product of any factory may be considered as something which the public ought to be able to buy, although in many cases it is an intermediate product of no use to individuals but only to a subsequent manufacture; but since A will not purchase A+B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing-power which is not comprised in the descriptions grouped under A. It will be necessary at a later stage to show that this additional purchasing-power is provided by loan-credit (bank overdrafts) or export credit.”
The reader might stand a little vexed having just read this: “Huh? That’s it? That’s what it’s all about? I feel gipped.” To restate roughly what Douglas seems to be saying: productive businesses pay out less to their workers in owners in profits (dividends) and labor costs (wages, salaries) than they create as prices, which must be equal to profits plus labor costs plus all the other costs (overhead costs, raw materials, etc.). Therefore additional purchasing-power must come from outside the structure of production for ‘prices to be resolved’, i.e. for the whole product to be sold off.
“But that’s retarded,” the discerning reader might say, “because ‘payments to B’, i.e. payments made to other firms, also resolve into profits and labor costs. Ultimately everything resolves down to profits and wages. So what’s the difference between A and B? There isn’t any, right? Is this really as dumb as I think it is?”
Fortunately, the answer to that question is: No. Douglas provides good responses to those questions elsewhere, which we will cover. The rest of Credit-Power and Democracy is a bit light on economic theory and a bit heavier on the mechanics of banking, the spur to export, and the Social Credit ideal. We can never know why Douglas chose to state his argument in these terms. Maybe it’s because he thought that ‘A < A+B’ would be the easiest way of conveying an essential truth to the masses. Unfortunately, on the other hand, many to most economists did not bother to even ask themselves whether it was as dumb as they thought it was, and just assumed it was. Much easier to rest on the laurels of apparent victory than work hard digging deep just to find demise at the bottom of the hole.
– For the record, it’s not dumb to wonder about whether wages and profits would be able to buy their own product but the way it’s stated in Credit-Power and Democracy easily lends itself to easy ridicule; it looks like a sophomoric error and it provoked the contempt of his contemporaries –
The frustrating thing about Douglas is that he only makes himself clear either in examples or when he is being pressed by an acute and insightful critic (like J.M. Keynes). He doesn’t make things clear in categorical statements, but in examples, and then he just passes by them without codifying the principles laid out in them for the reader; it’s infuriating. In order to really to get it, one has to parse through the examples and contemplate them individually (but we won’t have to here).
In Douglas’ The Monopoly of Credit (1931), we’re given something meatier to chew on:
“In the modern industrial system, [the process of replacing human labor with mechanical labor] can be identified easily in the form of machine charges. For instance, a modern stamping plant may require to add 600 percent to its labour charges to cover its machine charges, this sum not being in any true sense profit. In such a case, for every £1 expended in a given period in wages, £6, making £7 in all, would be carried forward into prices. Although this is an extreme case, the constant, and in one sense desirable tendency is for direct charges to decrease and for indirect charges to increase as a result of the replacement of human labour by machinery. There is no difference between a plant charge of this nature and a similar sum repaid as a “B” payment. The essential point is that when a given sum of money leaves the consumer on its journey back to the point of origin in the bank it is on its way to extinction. If that extinction takes place before the extinction of the price value created during its journey from the bank, then each such operation produces a corresponding disequilibrium between money and prices. For these causes and others of a similar character, it seems to me quite beyond argument that the production of such a quantity of intermediate products, including plant, machinery, buildings, and so forth, as is physically necessary to maintain a given quantity of consumable products, will not provide a distribution of purchasing power sufficient to buy these consumable products.
[...]
It is also clear that the longer the average period over which money is collected in respect of the creation and destruction of a capital asset (which corresponds to the "life" of an asset), and the shorter the average period over which money is collected for day-to-day living on the part of the community (which corresponds to the "life" of consumable goods), the greater will be the discrepancy between purchasing power and prices.
The former period is the average time in years (N2) taken to make and wear out a capital asset; it is the time covered by the production and destruction of a cost. Obviously, such a period will vary greatly according to the nature of the asset, but a fair and usual average is twenty years.
The latter period is the average time in years (N1) during which the money at the disposal of the community (total income) circulates from industry to the consumer and back again.
‘In Great Britain, for instance, the deposits in the Joint Stock Banks are roughly £2,000,000,000. In rough figures, the annual clearings of the clearing banks amount to £40,000,000,000. It seems obvious that the £2,000,000,000 of deposits must circulate twenty times in a year to produce these clearing-house figures, and that therefore the average rate of circulation is a little over two and a half weeks. . . . The clearing-house figures just quoted contain a large number of 'butcher- baker' (second-hand) transactions, and these must be deducted in estimating circulation rates.’
After making the necessary correction for the volume of second-hand transactions and for payments that do not go through the clearing-house, we may conclude that the average period of circulation of the money spent upon consumable goods is about two months, or one-sixth of one year.
The effect of the very great disparity between these two rates is as follows:
Let N1 = 1 = number of circulations per year, say 6.
N1
Let N2 = 1 = number of circulations per year, say 1
N2 20
Let A = all disbursements by a manufacturer which create costs = wages and salaries
Let B = all disbursements by a manufacturer which transfer costs = payments to other organisations
The manufacturer pays £A per annum into the N1 system, and £B per annum into the N2 system.
Disregarding profit, the price of production is £ (A + B) per annum. But to purchase (i.e.to cancel the allocated cost of £(A + B)) there is present in the hands of the consumer :-
£(AN1 + BN2)/N1 = £(A + B(N2/N1)) ---------> (N2/N1) = 1/120, less than one-hundredth
Consequently, the rate of production of price values exceeds the rate at which they can be cancelled by the purchasing power in the hands of the consumer by an amount proportional to:
B (1 – (N2/N1)) = approximately B
To recap what Douglas is saying here: imagine a normal firm in the UK is financing plant and capital machinery and the loan schedule for all this is 20 years. Let us assume that this loan covers all the firm’s B payments. When the firm takes out the loan to buy the plant and machinery, this introduces the purchasing power into the economy necessary to buy the plant and machinery. With respect to these, after the initial purchase, that purchasing power (plus the required interest) once recouped in the prices of the successfully sold-off articles, begins its long slog back to the bank, i.e. back to its extinguishment as purchasing power as the loan is repaid. The costs which the plant and machinery represent go into the price of the good that is produced. Businesses of course must sell its goods at a price at least equal to its costs, right? So the costs are allocated, but the actual purchasing power is drained out of the economy during the lifecycle of these capital goods.
So now we’re getting somewhere. We can restate this principle in an easier way: due to the way the banking system works, creating purchasing power upon purchase and extinguishing it upon repayment, bank-financed purchases of heavy capital equipment initially raise up prices but from that point onwards, until the extinction of the loan, represent a kind of gravitational black hole of purchasing power in the economy; as it is producing, it is disbursing prices (in A+B), but all the while as it is laying out payments, its A payments go to profits and wages, but its B payments send purchasing power to the sinkhole at the bank’s balance sheet. It follows then, that to the degree that national economies are highly-industrialized, the discrepancy between prices and purchasing power (called ‘the Gap’ by Douglas) will be greater. Lowly-capitalized economies will have a small ‘Gap’ and highly-capitalized ones will have a large ‘Gap’ (and thus a great need to procure purchasing power by exporting!). But we are getting ahead of ourselves here. Let us be content for now to say that we’ve touched on one of the causes of the Gap, locating it at the intersection of the dysfunctional banking system and heavy industry. When all B payments are payments to the bank, those payments are destructions of purchasing power, and disbursements of prices on the basis thereof are exacerbations of the Gap.
So we’ve clarified one thing so far – let’s call it the Financed CapEx (Capital Expenditure) Problem – but Douglas gives lots of other examples, some of them perplexing. In Douglas’ The New and Old Economics he responds to a handful of criticisms from English economists Professor Douglas Copland and Professor Lionel Robbins. Copland advances his argument along the same lines as the perplexed reader we imagined above:
“Taking the first part of this argument, it is assumed that the so-called B payments are not distributed to consumers. This I believe to be the fundamental fallacy of the Douglas Credit Analysis.”
To which Douglas responds, saying:
“I trust Professor Copland will not consider me unduly elementary if I explain that a cost is created either by the application of paid labour to production or by the allocation of book costs in respect of previously-incurred expense, or by both together. Payments to labour distribute purchasing power to consumers, who supply the labour as workers, and create costs which go into prices of the goods that they produce. The allocation of book costs does not distribute purchasing power, but is the presentation of a claim on purchasing power already distributed, and is met, if it is met, by the inclusion of the sum claimed, in price. B payments are a settlement of the combined claim produced in this way at every separated stage of production.”
This helps us start to clear up why Douglas framed things the way he did in his presentation of the A+B Theorem. As an engineer and manager of not a few industrial concerns in his lifetime, he understood that businesses pay out actual money as wages, salaries and dividends to workers and shareholders, but that the non-labor costs were resolved on a non-cash basis. To the economists, we might speculate, it hadn’t occurred to them that businesses didn’t pay money to manufacturers and raw materials providers just as they paid money to workers. They settled things through a financial intermediary, by buying on credit and then resolving the debt by allocating funds. The A+B Theorem was inspired by first-hand experience with a way of doing business that operated on two circuits: the A circuit in which money was actually distributed to individuals, and the B circuit in which payments were simply creations and clearances of debts. On the B circuit, businesses aren’t throwing money back and forth at each other as households and businesses do via incomes and purchases, rather they are recording and then clearing costs with each other.
The reader might find it interesting that Douglas responded to a critique given by J.A. Hobson who can be considered the godfather of Marxian Imperialism theory, although he wasn’t himself a Marxist. Douglas’ response was called The Douglas Theory. We might expect that this would be an interesting correspondence between Douglas and Hobson: both were critical of Britain’s unslakable thirst for export trade and in much the same way. Unfortunately, Hobson’s critique of Douglas falls flat in a bizarre and unexplainable way for someone who was otherwise so intelligent. Hobson writes of Douglas’ theory:
“The central charge is that a large part of the money representing the cost of production, and helping to the swelling of prices, is not available to buy the articles produced. The second and more fundamental reason is that large advances of bank credit are utilised by manufacturers and enter into the prices of the final product.”
.. and then..
“Now the fallacy of this argument might, I think, be apparent from the preposterous nature of the assertion that only a few percent of the price value is available as effective demand. In point of fact, it is not true that the bank advances, by which the business men at the various processes financed their trade, are costs which enter into final prices.”
Evidently Hobson, in seeking to rebut Douglas, was trying to say that costs do not go into prices, but only if they are financed costs? As in, purchases made on credit? We are not sure how to respond to something so self-evidently false. When a business incurs costs in creating a product, prices will be at least equal to that cost. When those costs are financed by a bank, prices will be at least equal to the costs plus the interest charge on financing. There’s not much more to say here.
Douglas’ most shining moment is perhaps his testimony before the Macmillan Committee in 1929. The Macmillan Committee was a response to the great market crash of the same year, and economists were invited to come and deliberate among each other on the causes of the problem and possible solutions. Since Douglas had been hammering the same note of financial instability for years, and his prediction came true, he had accumulated a little clout in the UK. Somehow, Douglas was invited to come and say his piece before a panel of gentleman-economists, among whom was J.M. Keynes.
The questioning between Douglas and Reginald McKenna, Theodore Gregory, and J Frater Taylor – these were the orthodox economists – is not of much interest. The proposal that the banking system worked the way he said it did, and that the central bank could simply “print money” in order to subsidize purchases at the retail level confused and irritated them. They didn’t like the idea of money entering into the economy willy-nilly – that is to say, without interest attached. They just go back and forth, with Douglas patiently trying to explain to these London School of Economics graduates and bankers that A) banks lending creates deposits and B) the central bank can create money as it sees fit.
Keynes, on the other hand, was ahead of his peers and appears to have been able to see what Douglas was saying. He had some criticisms, but also seems to have genuinely been interested in the theory. The line of question-and-response between them recorded in the Macmillan Committee’s minutes teases out the root of Douglas’ thinking and gives us the clearest glimpse we ever get. He went up against an intellect both acute and not boneheadedly opposed to anything outside banker orthodoxy, and that clash was fruitful. We present it as follows:
[Note: This is a longish passage. If some of the terminology is a little confusing, just bear with it and keep going. The idea isn’t as complicated as the language makes it seem.]
“KEYNES: Is it not probable that those of us who are criticising are not inclined to accept the inherent difficulty which you develop in paragraph 16 of your Memorandum. You divide payments there into A and B payments?
DOUGLAS: Yes.
KEYNES: Where else does it go?
DOUGLAS: I felt sure that this would arise, because it generally does arise. May I put it this way? The wording of this statement is very careful. I always make the wording very careful. I say “Since A will not purchase A+B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing-power which is not comprised in the description grouped under A.” I have not said it must be paid.
KEYNES: I did not want to go on as far as that. Just previous to that you see “Group B,” which includes raw material; I assume you mean imported raw material; is that right?
DOUGLAS: “Group B. All payments made to other organisations (raw materials, bank charges, and other external costs)”. Yes; simply what we should call in a company, bills payable at the end of the month.
KEYNES: If they are paid through another business then that business will pay the amount as part of its cost of production to individuals? Is that it?
DOUGLAS: Yes, I quite understand that difficulty. The real weight to be attached to this undoubted statement of fact – as it stands it is simply a statement of obvious fact – is whether the transfers from one firm to another are financed by either trade credit or from the firm’s own credit, let us say its working capital, or by a bank’s credit. The exact weight which that has in the whole of the statement depends to a very large extent on that. If the B payments are really financed from working capital then that working capital must, I think, inevitably have been obtained by the process of investment which is criticised under (b) in the same precis. That is to say, the whole of the savings which have formed the working capital of that concern must previously have appeared in the cost of production.
KEYNES: That would be true, but I thought the emphasis here was on the phrase “other organisations,” and what you are saying has no bearing on that.
DOUGLAS: I am sorry! I missed that.
KEYNES: I thought the force of the argument here was that it was a payment made by this manufacturing firm to other organisations?
DOUGLAS: Yes.
KEYNES: Its working capital is required to meet its expenditure under Group A during the period of production just as much under Group B, so what you are saying now does not seem to me to distinguish between Group A and Group B?
DOUGLAS: Yes, it does, because in Group A you are paying out to the consumer; all the payments under Group B are purchasing power, which, if it was obtained by re-investment, was originally in the hands of the public and never gets back into the hands of the public at all.
KEYNES: Other organisations which were receiving money under Group B are getting back that amount from this first one?
DOUGLAS: Yes, that is the case; but there is a large amount of purchasing power which is permanently retained purely in the productive system, and never gets out into the consumers’ system.
KEYNES: If all firms were united in a single firm would your difficulties be overcome?
[Note: Keynes here is pointing toward the idea that if business-to-business transactions were not financed on credit, but instead entirely in-house allocations of costs, purchasing power would not be created and destroyed in the act of allocating costs]
DOUGLAS: That is the obvious remedy for the financial difficulty but not necessarily the right remedy. Even from the purely financial standpoint it is a little difficult to say; you understand a time lag comes in.
KEYNES: You think it would vanish?
DOUGLAS: No, I do not think it would completely vanish.
KEYNES: Why not?
DOUGLAS: Because there would be a considerable amount of money being paid out in wages for delayed production, and your hypothesis assumes that the distributed costs of a given week are the total prices of the goods for sale in the same week.
KEYNES: It would be diminished?
DOUGLAS: It would probably be diminished I think, yes.
KEYNES: Insofar as the fact that you have a differentiation in industry means that some people have to have bank accounts which they pay to others, it means you have to create a certain amount of credit, and really it acts as a revolving fund?
DOUGLAS: Yes.
KEYNES: If a revolving fund has been established, why do you have to add to it?
DOUGLAS: If the revolving fund is as large as the total amount of money required to finance the whole of all business from the time the first process takes place to the time the article goes out to the consumer, it is possible – I should not be inclined to admit it offhand – that the question might disappear; but that is certainly nothing like the actual case.
KEYNES: If you once raise the volume of credit to whatever level may be required by your profit in relation to the volume of production you have only to go on increasing it in proportion as production increases?
DOUGLAS: No; there are all sorts of questions that would still arise. The question of turnover, deprecation, and the fact that the purchasing power of credit, or whatever you like to call it, which has been transformed into price values of fixed assets in the industrial system would in existing circumstances have to enter into the cost of the goods – and cost items of that type would always raise the price of the articles above the amount of purchasing power.
KEYNES: And if in the interval you had to have new machines to replace old ones you would have to have individuals to produce them. How does that differ from any other form of consumption?
DOUGLAS: Because you are not starting from zero. You are starting from the world as it is.
KEYNES: How does that bear on the matter?
DOUGLAS: It bears on the matter that you have a tremendous amount of real capital which at the present time is creating prices and which has not contributed anything like that amount of purchasing power.
KEYNES: Do you mean that the receipts of capital are greater than the amount it pays out in dividends?
DOUGLAS: Yes; that is an obvious statement of fact; the accounts of any company will show that.
PROFESSOR GREGORY: What happens to the difference?
DOUGLAS: It is represented by the fixed assets in the company which it cannot distribute in the form of money.
PROFESSOR GREGORY: It does not distribute it to its shareholders, but if a company earns £100,000 in one year and puts £50,000 towards increasing its plant does not that £50,000 flow out in additional wage payments?
DOUGLAS: No, that does not happen at all. What really happens is, that during a given year’s working it is necessary to create a number of things like tools, or jigs, or something of that sort, which must be charged in the cost of the product to the consumer. The same result is obtained if profits are invested in new tools.
PROFESSOR GREGORY: That is perfectly true. What I am asking you is this: when a motor-car company makes new patterns, and so on, it has to pay its workmen for them just as much as for other things; consequently it does flow back to the consumer?
DOUGLAS: No, it does not flow back if it is charged to its fixed capital. A company at the end of the year shows a profit of, say, £10,000. We all know perfectly well that probably £8,000 of that is in fixed assets. It distributes of that product £2,000 in the form of dividends; it is quite obviously only distributing £2,000 out of which £10,000 appeared in prices.
PROFESSOR GREGORY: What happens to the £8,000 which it does not distribute?
DOUGLAS: That is in the form of fixed assets, which it is incapable of distributing except by getting a creation of credit to distribute them.
PROFESSOR GREGORY: It does not want to distribute these things. What you want, to get the equilibrium between the income of the company in the first instance and its out-payments, is that it should pay somebody for making those fixed assets, and if it pays somebody for making those fixed assets it is in effect returning to the stream what it has taken cut?
DOUGLAS: I think I can prove the fallacy of what you are saying, if you imagine that it did distribute the whole of that £10,000 in a year. By your argument, if it did distribute that £10,000, it would be distributing £10,000 more than it had made.
PROFESSOR GREGORY: It has made £10,000 profit?
DOUGLAS: Of course it has made £10,000 assets. This is jumping from the money to the goods all the time: it has made certain prices, things to which you attach prices and which are valued in its assets at let us say £8,000. But the money portion of those assets does not amount to £10,000, and it has already recovered the cost of them from the consumer. It is exactly the same thing as going to a man who has had 30,000 acres of land left him by will and saying “That is £1 an acre; now you have got to pay £10,000 in death duties.” The man has not got £30,000. He has got 30,000 acres of land which has a price of £1 an acre. He has not got £30,000.
PROFESSOR GREGORY: Nobody ever said that he had?
DOUGLAS: He is in exactly the same position as the works which show a possible profit.
CHAIRMAN: I quite follow that, but after all, the manufacturer is himself a consumer of tools; he has spent £8,000 in replacing his worn-out tools by new machines, and in doing that he has given employment to people and has paid £8,000 to another manufacturer. He is a member of the consuming public. The particular commodity he wants is tools. When I buy a box of tools I am a consumer?
DOUGLAS: Yes, I quite realise the difficulty; I felt this would arise.
CHAIRMAN: I am sure you are prepared for it?
DOUGLAS: Would you bear with me if I read an article which I wrote, which I think will probably be more lucid?
CHAIRMAN: If it is not too long.
DOUGLAS: It is not long. It is the shortest form in which this statement can be put, I think. Suppose first that I have £1,000, and I pay that £1,000 away for the purpose of having a house built. We will imagine that the whole of the £1,000 goes in nothing but wages, which does not in any way affect the argument, and we will also suppose that by doing work on something else the workmen could live and save all that they earned by house-building. Suppose now that the workmen who built the house, who collectively would have my £1,000, decided to buy the house, and I agree to sell to them for £1,000. Notice that no question of profit arises. The workmen now have the house, and I have my £1,000 back again. In other words, the workmen have got the house merely by working for it. But these workmen would express it by saying they had paid £1,000 for the house. I am now out of the transaction altogether, and we will suppose I and my money removed to another planet, or we can suppose that I tore up the money when it was returned to me (which is the equivalent of the repayment of a bank loan). Suppose now that the workmen decide to use the house to make and sell shoes. If they carry on the business on orthodox business lines the cost of the shoes will consist of at least three items:—(i) Wages, (ii) raw materials, (iii) rent of factory, i.e.,house. We will suppose for the moment that they get their raw materials for nothing, and that the “rent” of the house is nothing but an appropriation of money of such amount that when the house eventually falls down they will have got back their £1,000. It is technically called “depreciation.” Since the public get the shoes, clearly they ought to pay “depreciation.” Notice, therefore, that neither interest— i.e., “usury”—nor dividends, nor land monopoly are imported into the question. But the simple and vital fact remains that the wages paid during the production of the shoes are less than the price of the shoes by an amount, large or small, which is added to the cost of the shoes before the shoes are sold, representing, at least, “depreciation”. This amount which is added to the cost of the shoes represents overhead charges in their simplest form, and in many modern productions overhead charges are between 200 and 300 per cent, of the direct cost of the product. It is NOT profit.
KEYNES: By whom are the overhead charges paid?
DOUGLAS: They are put into the cost of the product. They are not paid to anybody. They have in previous cycles of production appeared in the cost of the factory.
TULLOCH: Part of them represent the depreciation of the house, which I understood you to say would fall down in a certain period?
DOUGLAS: That is the case.
TULLOCH: They have not been paid in that case?
DOUGLAS: The whole cost of the house was previously paid, in the example, £1,000. Might I just finish and then we will go into it? Suppose in the instance given above that having sold my house to the workmen I had used the £1,000 to build another house, with which I had repeated the identical process. Once again I should have got the same £1,000 back again; once again the workmen would have got into possession of the house, merely by working for it; once again they would have created an overhead charge on anything they manufactured in the house of £1,000; and although there would only be £1,000 of money in existence in respect of the production of the houses there would be £2,000 of prices created in respect of the two houses which would have to be recovered in the price of something sold to the public, and the amount of money and purchasing power would be exactly what it was before the houses were built.
PROFESSOR GREGORY: I do not quite see what you want to prove by this illustration. Is it that there is always a tendency for the quantity of purchasing power to lag behind the volume of output?
DOUGLAS: That is what I am trying to prove.
Whew! It took a lot of effort to get Douglas to say what he wanted to say, but ultimately it came out. To recap this discussion: Keynes first directed Douglas to show how there was any difference between A payments and B payments. They both got around to agreeing that if all the economy’s B payments took place within one gigantic monopoly corporation, where credit would not be needed to facilitate exchange between its parts, and purchasing power would not be created (expanding prices) and then sucked out as loans, then the difficulty of the gap between prices and purchasing power would be greatly reduced. But Douglas says that it would still not be entirely solved. Even if the problem that the banking system poses to the Gap were solved, there would still be an issue. After some teeth-pulling, Douglas shows that the remaining difficulty would be in the fact that accountants at businesses record the cost of depreciation. And the trouble with recording the cost of depreciation is that it is a cost with no corresponding income stream.
The thing about fixed assets in corporate accounting practices is that capital is double-costed. The cost of capital is recorded twice on the books: once in the amortization (i.e. the repayment of the loan), and then again as depreciation (the cost of the wear-and-tear of the machinery, plant, etc.). The way that depreciation is costed in accounting practice, the cost goes into the price, and when the product is sold, revenues are allocated for the depreciation cost into a kind of corporate savings account. This corporate savings account for depreciation costs is often called a ‘sinking fund’, but we can also call it a money hoard (as in hoarding). The Ricardian idea that all costs ultimately resolve into incomes paid for services performed, that rent goes to the landlord, profit to the capitalist, and wages to the laborer, is incomplete. Whenever a fixed asset like plant or machinery is created and sold off, it creates its own intrinsic cost, that does not accrue as profit to the person that made and sold it, but simply begins as soon as it comes into the possession of its new owner, who then starts to use it for production. In short, it is a cost with no corresponding income stream. Businesses charge consumers for both the cost of creating capital and for the cost of a future time when the capital will have lost its value. Therefore, even if we assume an economy with an honest non-dysfunctional banking system, where money circulates as a token, there would still be a Gap between prices and purchasing power and, in order for prices and purchasing power to be in equilibrium, additional money would have to come from outside the process of production (or otherwise be obtained from exports).
Let’s call this the Real Depreciation Problem – we call it real to distinguish between it and the Financed CapEx Problem, which ultimately has its basis in the dysfunction of the banking system. From this it seems clear that Douglas’ theory about A+B and the Gap between prices and purchasing power, resolves down to two fundamental pillars: the Financed CapEx Problem and the Real Depreciation Problem. One of these is real (as in, non-monetary in origin) and the other monetary. If we accept this, it follows from this that heavy capital expenditures impose a double-whammy of purchasing power deficiency on an economy, first in the bank’s destruction of loan repayments, and secondly in the business’ hoarding for deprecation.
– As an aside: this lends us some insight on the struggle of political factions in the antebellum American republic: the slaveholding agrarian South wanted a relatively token money in the form of specie, and the protectionist industrial North would have wanted a flexible currency standard that only a well-developed banking sector could provide. Industrial elites would have been the first to feel the lack of purchasing power, which would help to explain why their preferred policies were generally to protect and foment American banking. One will notice that generally, in economic history, periods of rapid industrialization are accompanied by thirst for monetary easing and foreign markets. The agrarian South which was, in comparison, very lightly-capitalized – labor costs in the form of maintenance of slaves were far and away the greatest cost – had relatively little need of a flexible currency system. For one, much of its product was exported, and it thereby offloaded the problem of currency management onto its clients. But secondly, as an economy with very little in the way of fixed assets (plant, machinery, equipment, etc.) the Gap between prices and purchasing power would have been much lesser, relative to the North. –
Having boiled down Douglas’ economic theory to its two important points, we can start to see the A+B Theorem in a new light. This was the theory of someone who was familiar, in a very practical sense, with both the workings of the financial system and with corporate accounting practices. If one understood, as many economists apparently did not, how only the costs on the A circuit were actually disbursed as money, and how the banking system actually worked, then the phrasing of the A+B Theorem presents no particular problem. But it takes some work to get there. On the one hand, it is unfortunate that Douglas had so many opportunities to clarify his theory but always did so in unsystematic fashion. On the other hand, we’re fortunate that he aroused the irk of his contemporary economists enough that they forced him to explain himself in explicitly economic terms.
Keynes mentioned Major Douglas a few times in his General Theory (1936), giving him a begrudging particle of respect, writing:
“Since the war there has been a spate of heretical theories of under-consumption, of which those of Major Douglas are the most famous. The strength of Major Douglas’ advocacy has, of course, largely depended on orthodoxy having no valid reply to much of his destructive criticism. On the other hand, the detail of his diagnosis, in particular the so-called A+B Theorem, includes much mere mystification. If Major Douglas had limited his B-items to the financial provisions made by entrepreneurs to which no current expenditure on replacements and renewals corresponds, he would be nearer the truth. But even in that case it is necessary to allow for the possibility of these provisions being offset by new investment in other directions as well as by increased expenditure on consumption. Major Douglas is entitled to claim, as against some of his orthodox adversaries, that he at least has not been wholly oblivious to the outstanding problem of our economic system.”2
To translate this, Keynes says that some of what Douglas says is important and some is just fluff, and that his critique would be more powerful if he kept it focused on the way that depreciation allowances exacerbate the Gap. And maybe that is true. However, when Keynes says ‘But even in that case it is necessary to allow for the possibility of these provisions being offset by new investment in other directions’ he is skimming over much of what Douglas already does focus on. To call him an ‘under-consumptionist’ is inaccurate because in The Monopoly of Credit, Douglas identifies the stimulus to further production, particularly production for export, as a means to the end of distributing sufficient purchasing power, as both a symptom of and wrongheaded response to the Gap.
On production for its own sake:
“Now, because ‘production’ is, at present, the chief agency through which is circulated the purchasing-power necessary for distribution, there is an immensely strong incentive to sabotage – the waste of work on the side both of the Capitalist and of Labour – and for this reason the consumption of the world is most unquestionably higher than it ought to be. But even taking this into consideration, it must be obvious that the credit-value of production – the amount by which the work of a community during a given period of time increases the correct estimate of the capacity of that community, with its plant, culture, and labour, to deliver goods and services [Note: long-winded way of saying ‘productive power’] – is enormously in advance of the actual consumption.
[…]
The business of a modern and effective financial system is to issue credit to the consumer, up to the limit of the productive capacity of the producer, so that either the consumers’ real demand is satiated, or the producers’ capacity is exhausted, whichever happens first.”3
Again on production:
“It is interesting to note how the obsession of ‘work for its own sake’ has held this school of thought. To its members production, any sort of production which ‘makes money,’ is wealth, and you cannot have too much of it; and, seeing quite accurately that their constructive proposals would, if carried out, enormously increase ‘employment,’ it is clear that no misgiving alloys their vision of an earth packed solid with the most modern and highly efficient factories, pouring out massed production into limitless space.”4
On the folly of distributing purchasing power via employment, rather than simply distributing directly:
“It has previously been suggested that the facts in relation to this situation do not furnish any justification for suggesting that even a large number of commercially unemployed necessarily threatens the material welfare of the community and there is a large amount of sound evidence pointing in the opposite direction.
But we can go further. It is not sufficient to say that the unemployment problem, as distinct from the distribution problem, is largely a delusion. As we have seen in the immediately preceding chapters, there is an employment problem in the sense that our financial mechanism does not bear any specific relation to, nor fundamentally does it take any account of, the introduction into the equation of production of solar energy in its various forms. To put the matter another way, if the unemployment problem were solved to-morrow, and every individual capable of employment were employed and paid according to the existing canons of the financial system, the result could only be to precipitate an economic and political catastrophe of the first magnitude, either through the fantastic rise of prices which would be inevitable, or because of the military consequences of an enhanced struggle for export markets.”5
He was saying that boosting unemployment by stimulating even more investment in capital goods industries is a stupid solution to the initial problem of insufficient purchasing power, because, among other things, it will bring about a greater insufficiency of purchasing power tomorrow, when those works mature and start to produce prices. This is echoed in Hobson, Lenin and Luxembourg, for whom, at the time, the primary obstacle to capitalistic accumulation was the lack of markets at the given level of income.
Douglas considers England an over-industrialized country, and that it would be more preferable for purchasing power to simply be created and distributed, rather than created and distributed under the guise of make-work projects and stimulated production. It would be more accurate, if you wanted, to call him an ‘over-productionist’. But really, neither under-consumptionist nor over-productionist are accurate labels because they both miss the point, which is that the combined financial-industrial system as it is intrinsically produces discrepancies between prices and purchasing power; it is not a mere question of increasing or decreasing consumption or production. If Keynes had read him with closer attention to detail he might have seen that.
It is all the more ironic that Keynes makes this criticism of Douglas, i.e. that he didn’t suppose that increasing production could alleviate insufficiency of purchasing power (he did and he thought it was stupid), because Keynes echoes a distinctly Douglassian train of thought in the following passage:
“Consumption is satisfied partly by objects produced currently and partly by objects produced previously, i.e. by disinvestment. To the extent that consumption is satisfied by the latter, there is a contraction of current demand, since to that extent a part of current expenditure fails to find its way back as a part of net income. Contrariwise whenever an object is produced within the period with a view to satisfying consumption subsequently, an expansion of current demand is set up. Now all capital-investment is destined to result, sooner or later, in capital-disinvestment. Thus the problem of providing that new capital-investment shall always outrun capital-disinvestment sufficiently to fill the gap between net income and consumption, presents a problem which is increasingly difficult as capital increases. New capital-investment can only take place in excess of current capital-disinvestment if future expenditure on consumption is expected to increase. Each time we secure to-day’s equilibrium by increased investment we are aggravating the difficulty of securing equilibrium to-morrow.”6
Keynes is saying here that increasing production for the sake of boosting the incomes of the populace enough that they could buy yesterday’s product, only results in a greater difficulty in buying the new production’s product tomorrow. Increasing production is not a simple matter of putting matter into motion because there has to actually be a market of people that actually want to buy. Where have we heard that before? This is, more or less, the core of Douglas’ thought: that the Gap will only be filled by increasing drafts of credit, used in service of increasing productive capacity, which in turn further exacerbate the Gap.
Now that we have a better understanding of what the A+B Theorem is all about – mainly, the Financed CapEx Problem and the Real Depreciation Problem – the rest of Social Credit Theory is a cinch. In order for the Gap to be bridged, purchasing power must come from an increasing draft of credit: either public credit, export credit, or credit for new rounds of production (which exacerbates the problem). The hidden option, however, was that the state could simply issue the purchasing power without debt attached in order to bridge the Gap. Douglas had a few ideas as to how this could be done, the most well-known being: (1) consumers could get a price rebate from the central bank whenever they bought something, or (2) money could simply be credited to people’s bank accounts straight from the central bank (aka ‘Helicopter Money’). Moving from explanations of the economy as it is to proposals of how it might be, we’re brought to the following section: Social Credit as world-historical farce in Alberta Canada.
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Social Credit Politics
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In the mid-1930s the Alberta Social Credit Party, centered in Alberta Canada, shot up into national prominence. The economic landscape of Alberta and its relationship to the Eastern and Great Lakes regions of Canada were similar to those of the American South and Midwest and their relationships to the same places. Alberta was populated mostly by heavily indebted farmers or workers in the natural resources sector. Most importantly, it had no money of its own; all the money that circulated in Alberta was bank-credit and it circulated scarcely, such that there was almost always a draining pressure of intensified indebtedness, even before the Great Crash of 1929. Alberta was poorly developed and its educational curriculum was based on the Bible. Ethnically speaking, its inhabitants were mostly Canadian founding stock, but with a significant minority of Ukrainian and German immigrants. The World Depression of the 1930s hit Alberta hard. It hit everywhere else hard too, but as we know the relationship between farmers and creditors has a long and sorrowful history, for the reason that farming, as it existed before the advent of megafarms, is a business both highly sensitive to credit conditions and poorly positioned vis a vis the credit-creators in terms of bargaining power. In other words, 19th and 20th century farmers were often, due to the nature of the business, at the whim of the banks. This, combined with the uniquely horrible money stringency of the 1930s, made for explosively fertile soil for C.H. Douglas’ message of credit and money plenty.
The public face of the Alberta Social Credit Party was Bill Aberhart, an ethnically German Albertan, devout Christian and loyal subject of the British Empire. Aberhart rode the wave of Social Credit politics, which mixed its brand of rural Christianity with Douglas’ Social Credit theory, to become Alberta’s premier (a Canadian political position kind of like a governor) in 1935. He held this office from 1935 until his death in 1943. Almost as soon as Aberhart got into office, the frustratingly pathetic farce of Canadian Social Credit politics began. C.H. Douglas watched Canadian politics with enthusiasm and, upon Aberhart’s victory, sent him cables and messages offering his support and consultancy in applying an effective Social Credit monetary policy in Alberta. Aberhart responded to these cables with a counter-proposal, requesting that Douglas should send an actionable plan for reform. Douglas fulfilled these requests, sending back several proposals for the ways that Alberta ought to begin to position itself in order to execute policy, with contingency scenarios considered, and extending enthusiastic offers of help once again. Aberhart thanked him for these, but then proposed that Douglas send out a full plan, rather than come out in person to help administer Alberta’s policy. Douglas didn’t want to do this because he feared that the plans, if sent by mail instead of from mouth to ear in trusted company, could be pried open by hostile parties, namely agents of the banking interests. Aberhart then complained about the press coverage that Albertan Social Credit was getting in London.
He also appeared not to understand some of the points outlined in Douglas’ proposals. For example, Douglas proposed that Alberta’s monetary authorities should issue cheques that circulated at a premium in regards to the payment of tax, so that say, for example, with a premium of 5%, if it cost you $100 to pay your taxes in Canadian dollars, you could pay them with $95 with the Albertan-issued Social Credit currency. Aberhart responded with confusion, wondering why it would be necessary to do that. It was clear to Douglas, who had had some experience with political reality, that the banking lobby would propagandize the business community into rejecting Social Credit money, with scare-stories of expropriation-via-inflation. Thus, Alberta Social Credit had to have its own inducement to accept its currency. Douglas understood that this was a war with the powers of high finance, and in war one needs weapons. In wars such as these, the weapons are good policies competently applied.
We can never know for certain, but Aberhart appeared to have no awareness of the nature of the struggle he had taken on. Douglas was playing things smart, trying to keep sensitive information protected and preparing for war. Aberhart, on the other hand, was treating the whole thing with an unexplainable levity. The Aberhart farce only worsened from here on out.
Shortly after their exchange regarding monetary policy, Douglas caught wind that Aberhart would be traveling out to Ottawa, to meet with a council of Canadian Treasury officials and Dominion bankers, ostensibly to smooth out any disparity in expectations for Social Credit’s intended policies. Aberhart had to fly out to Ottawa because, upon his victory, banks closed their credit-windows to Alberta’s Ways and Means Committee (i.e. the fiscal branch of Alberta’s government). Douglas was disturbed and concerned by this news for two reasons: firstly, Aberhart had appointed John Hugill to be his Attorney General. Hugill was mostly a lawyer for banks and railroads, who had been educated at the City of London School and then worked shortly as a Canadian diplomat to England. Obviously Hugill was a product of the financial world and his support of Social Credit politics had to be taken with a grain of suspicion. Again, apparently this was not obvious to Aberhart. Secondly, Montagu Norman, the Governor of the Bank of England (who, by the way, made the following disparaging remark in regards to Douglas and Social Creditors: “The dogs bark but the caravan passes on.”), had flown out to Maine, ostensibly for a vacation, a month before Aberhart’s election. On his vacation, however, Montagu made a trip to Ottawa to christen the newly-chartered Bank of Canada. One might speculate that he could have given some council to the financial community on the best course of action in the event of a Social Credit victory. To Douglas it was obvious that Aberhart was in over his head, and he sent him the following desperate plea:
“Dear Mr. Aberhart,
The following extract is from a well-informed correspondent:
‘Mr. Weir, head of the Banker’s Clearing House Association, dropped in for a chat last night and I gathered that it has been agreed for a long time that if Aberhart comes in in Alberta that their plan would be to separate him from Douglas and urge him bit by bit into co-operation with the banks, and then put in Banking Committees to control the finance of the Province as in Newfoundland.’
Yours Truly,
C.H. Douglas”7
Aberhart responded to this by essentially telling him not to worry, that he had not experienced any hostility or animosity in his visits to Ottawa and that, despite knowing that the interests of the banks and those of Social Credit were not perfectly aligned, this was no problem as long as he stuck to his guns. The problem with this, however, was that Aberhart had no idea what his guns even were.
Not only did Aberhart never invite Douglas to come help in the execution of Alberta’s policy, but he took up the consultation of one R.J. Magor to administer Social Credit policy, on the recommendation of John Hugill. R.J. Magor was the president of the National Steel Car Corporation of Canada and also a friendly face in the circles of Canadian high finance. What followed then was such a humiliating spectacle of stupidity and farce that Douglas separated his involvement with the Aberhart government and contest any connection between it and the ideas of Social Credit. R.J. Magor instituted a new and quasi-radical monetary policy, but it was in no way a Social Credit policy.
To preface the Magor policy in Alberta: the 1930s were a time of radicalism, especially in monetary policy. In the wake of the Great Crash and the authorities’ and bankers’ seeming inability to put everything back together again, the public sphere was fertile soil for new monetary thinking. Douglas expanded into this opening, as did Keynes, and others. One of these others was a German hyperliberal by the name of Silvio Gesell. Gesell proposed, among other things, the reorganization of national economic policy such that all land rents were captured for public use and that a special kind of tax was applied to money itself. This special tax was called ‘demurrage’, and was not really so much a tax as the application of decay to money. His proposal was that money would have to be stamped at the time of purchase or else it would lose value incrementally. The result would be that money hoarded, i.e. not spent on goods and services, would lose its value. Accordingly, people would be incentivized to spend their money and quickly as possible and keep the velocity of money high.
This proposal of demurrage followed from a fundamentally liberal conception of economy, in which the actual supply or nature of the money in question was not the problem. The problem, rather, was the psychology of the workers and consumers who refused to spend it. Rather than addressing stringency or debt-burden, the demurrage solution pointed at everyday consumers, i.e. at penalizing frightened people who wanted to hold onto whatever security (in the form of cash savings) they could keep together in a time of mass poverty.
From a Social Credit perspective, the idea of demurrage as an effective solution to the Great Depression economic conditions is totally wrong-headed. People do not need to be spurred and prodded on to spend what meager lifeline they have, they need to simply have money with which to spend. Then, if they had more, the wouldn’t consider their last remaining dollars so precious (marginal utility hello!). It seems obvious to say that in times of desperation, people will scrimp and save what they can to best ensure that they keep from starving as long as possible. Gesell’s idea was that these savings should be squeezed out of their hands, by the pressure of his demurrage policy, back into the market, and that that would get everything going again. Douglas’ idea stands at the other pole: the problem is not people’s psychology so much as the monetary and credit system itself. And, in the context of the Depression, the defects of that system are easily – painfully easily! – obviated by just increasing money by fiat. Gesell’s radicalism was a ruling-class radicalism: radical to the highest extent that any radicalism can be, that leaves the banks’ usurpation of the national credit untouched.
R.J. Magor, once he was given the reins to policy-making in Alberta, put a Gesellian demurrage policy into force, but one that was somehow even worse. Instead of the normal demurrage idea, where $1 becomes $0.99 after 2 weeks, and then $0.98 after another 2 weeks, and then $0.97 after another 2 weeks and so on and so forth, the Magor demurrage plan was, in principle, that the $1 was worth $1, and then after 2 weeks one had to pay $0.01 to keep it at $1, and then after another 2 weeks one had to pay $0.0.1 to keep it at $1. Far from being a Social Credit policy, this was a Gesellian demurrage policy twisted into a more explicitly anti-Social Credit policy that actively drained purchasing power out of the economy by increasing taxation on money. The Alberta Social Credit Party was deliberately decreasing the money supply.
Understandably, once Douglas learned of this, he threw his hands up and walked away from the whole thing. Aberhart treated him like a dairy animal from the start, wanting the milk but not the cow. Douglas did in fact fly out to Edmonton in 1935 to congratulate Aberhart in person, on the expectation that his services would shortly be needed there, but he was mysteriously not invited to any official position. In fact, the story of Douglas’ invitation to Alberta is one big mystery. He was, at first, invited by Richard Reid, who was the Albertan premier in 1934 of the Alberta Farmer’s Party, but who also purportedly did not think much of Social Credit. In the wake of his defeat to Aberhart, Reid joined up with the Social Creditors and apparently was talked into inviting Douglas by comrades. This, at least, is the account given in Douglas’ own history The Alberta Experiment.
Aberhart was then all too easily convinced by high finance businessmen into appointing one of their own and instituting an explicitly deflationary policy. It’s hard to think of Aberhart as other than a perfect useful idiot. Although the Social Creditors did manage to put through some other useful policies in Alberta, it wasn’t Social Credit. The Albertan people who placed their faith in Aberhart were at least saved in part by genuine Social Creditors surrounding him: Solon Low, Joshua Haldeman, Louis Even, and others. A social insurance policy, a writing down of debts, and a subsidy for Alberta-produced goods; these policies were put through, to some degree or another. But an actual Social Credit policy there was never achieved and this can be said to have happened in large part because of Aberhart’s friendliness with Eastern Interests-affiliated people, his unexplainable distance from Douglas, and his unexplainable failure to comprehend Social Credit itself.
There was in fact a kind of mini-revolt within the Alberta Social Credit Party in 1937. Many Social Creditors could see that Aberhart was screwing things up. Moreover they couldn’t understand why Douglas hadn’t been invited as a consultant. Social Credit ‘backbenchers’ such as Solon Low, L.D. Byrne, and George Powell staged a revolt, gathering up support from the party and threatening to hold a vote of No Confidence on Aberhart. The result was that Aberhart made concessions to these backbenchers, who were then given the party clout to put through three legislative items in quick succession. The items were as follows: 1) that every bank in Alberta would need to get a license from the Social Credit Commission and accept one of its officers as a director on their boards; 2) that unlicensed banks would not be able to initiate civil actions; and 3) that none of Alberta’s laws could be challenged on a constitutional basis without the approval of the Monarchy. This was an ambitious set of laws, seeking to set Social Credit authority over the banking sector in concrete as soon as possible. The Federal Government, however, overruled these items shortly afterwards. The backbenchers didn’t expect anything else. George Powell, co-author of the legislation, remarked, “the Acts had been drawn up to show the people of Alberta who were their real enemies, and in that respect they succeeded admirably.” Aberhart remained in office after the backbencher revolt. Powell, on the other hand, was charged and convicted with libel and council to murder when he published a pamphlet titled The Bankers’ Toadies that read, “God made snakes, slugs, snails and other creepy-crawly, treacherous and poisonous things. NEVER, therefore, abuse them – just exterminate them!” He was deported from Canada after serving six months in prison.
Aberhart was succeeded by fellow Alberta Social Credit Party official Ernest Manning (who was previously the Party Treasurer) in 1943, who abandoned all pretense of ambition toward Social Credit policies, while also seeking to purge any traces of anti-semitism within the party. The politics of Albertan Social Credit and charges of anti-semitism are unavoidable in this period for the reason that Jewish identity in Canada functioned as an effective obstacle to financial reform. Janine Stingel’s Social Discredit: Anti-Semitism, Social Credit, and the Jewish Response, though without a doubt inadvertently, illustrates that fact.
In order to understand that we first have to understand the Alberta Social Credit Party’s (ASCP) peculiar brand of politics. At the time, it had not become public knowledge that Hjalmar Schacht, Reich Minister of Finance, had financed the German economic recovery by discreetly issuing fiat currency from the Metallurgical Research Corporation. The notes issued from the aforementioned corporation, named MeFo bills, were used to pay for the state’s expenditures in its re-armament/re-industrialization policy, which could then be exchanged for marks at par, meaning with no devaluation. Essentially, the MeFo bills were German legal tender.
The ASCP took countries’ financial policies as proxy signifiers for their relation to the international banking cartel. That is to say, if a country did not issue its own money from outside the typical banking channels, it could not be said to be sovereign. It followed then that its foreign policy orientations were downstream of, i.e. only made permissible by, the discretion of the big banks. Neither Douglas nor the ASCP were aware of the MeFo bill program, which led them to believe that Nazi Germany was an insincere puppet-state. The ASCP’s politics were a strange amalgamation of theories in that they located their nemesis within an international banking cartel, and yet many of them were avowed partisans of the British Empire (which is essentially the same thing). They feared the new world that would be created by the high powers of finance, not only for the obvious reasons of an increasingly regimented, bureaucratized and indentured way of life, but also strangely for fear of being separated from the British Empire and from what they thought to be one of the last of the Christian Monarchies. Social Creditors accused German-Jewish financiers of cultivating Nazi Germany into a world-class aggressor. Take the following, from M.P. Jaques’ Saskatoon-based Western Producer:
“There is only one thing that functions as a ‘power’ on an international basis and that is international finance. And who controls international finance? A gang of German-Jewish international bankers… Not only German military totalitarianism, but its evil twin, German-Jewish financial totalitarianism, must be destroyed.”8
Douglas echoes the sentiment in the preface to Alberta Experiment, writing:
“In the years which have succeeded the European War of 1914-1918, the world has witnessed at least three developments in those associations which we choose to call the ‘State’. I refer, of course, to the Soviet Republics of Russia, to the Fascist Corporative State of Italy, and the National Socialist State of Germany. To what extent these developments are administrative and have to do with Law and the means of enforcing Law, and to what extent they are economic and financial, is not easy to determine. What is clear about them is that they do not openly and consciously challenge the international credit and financial monopoly which interpermeates them and, in many cases, transcends them.”9
This is interesting because, as an anti-Nazi political faction, the ASCP demonstrated the acceptable limit to which one could advance the politics of financial reform, acceptable vis a vis Canadian Jewry. The Canadian Jewish Congress (CJC) began a campaign of anti-defamation in 1934 in response to a concerning increase in circulation of The Protocols in western Canada. In 1938, the CJC and B’nai B’rith joined together to form a Joint Public Relations Committee (JPRC). This signified a somewhat ramped up effort, possibly in response to the backbenchers’ revolt, but it also had to be kept quiet. Rabbi Harry Stern noted on the JPRC that “Anti-defamation is of such a nature that it cannot be publicized. Hence the failure of the Congress (CJC) executive to record in the general press its accomplishments in that important direction.” It was not until 1940 that the JPRC, headed by Lewis Rosenberg, wheeled its attention more openly to western Canada. Going by Rosenberg’s statements, it would seem that the JPRC’s anti-defamation campaign was inspired mostly by the impassioned M.P. Jaques of Saskatchewan, who was, among the Social Creditors, uniquely vocal about The Protocols. The difference between Jaques and the other Social Creditor politicians was, according to Rosenberg, “was that he spoke openly about ‘international Jewish bankers’ and had no qualms about listening various Jewish names, whereas Manning, Blackmore, and Low used the same propaganda and quoted from the same list of names, but merely omitted the word ‘Jewish’.” This quote is interesting as an insight into the hermeneutic of Jewish suspicion, as is the following from one A.V. Bourcier, shouted out at a meeting in Edmonton:
“I have no hatred for any race or any religion. I have always attacked the group of men whom we call international finance – and I will continue to attack them, whether their names be Finklestein or MacGregor.”
Solon Low, ASCP member and provincial treasurer, expounded along similar lines at a meeting in January of 1945 (which Stingel calls ‘blatantly anti-Semitic’):
“We very definitely are not anti-Semitic or anti any race or religion… The only times when the Canadian Social Credit movement can possibly be brought into conflict with any racial or religious group would be if those comprising such a group conspired together as a group in an organized attack on democracy and Christianity. I am sure that our fellow Canadians of Jewish origin recognize that a truly democratic and Christian society … alone will give them the social objectives they seek as individuals in common with all Canadians … I will go further and point out to our fellow Canadians of Jewish origin that actually the Social Credit movement is the most powerful influence in the country working for their emancipation.”
These are interesting because the aggressiveness of the Social Creditors was most often delivered as anti-oligarchical politics, and the people doing the things to which they objected often happened to be Jewish. But to the JPRC and CJC, they never failed to equate hatred of oligarchy or hatred of anti-social financial practices with racial hatred. Stingel writes: “After witnessing the exchange between the Tribune and the party organ and Bourcier, Alberta Congress officers and agents decided to act.” It seems like there was no way to pursue a Social Credit politics – no world wars and restoring the national credit – without, in the view of Stingel and the JPRC, satisfying the definition of anti-Semitism.
The thing about the JPRC at this time is that it is hard to take its anti-defamation campaign in good faith because the President of the CJC, starting in 1934 and going onwards, was Samuel Bronfman. The Bronfman Family has for a long time been both one of the top families of the organized crime syndicate in North America and intelligence operatives for Zionism / the Israeli government. Bronfman built up an intelligence empire alongside his criminal syndicate, starting in the early 1900s, in which he would use his chosen areas of enterprise, alcohol and hotels, to procure sexual blackmail over friends and foe alike. The Bronfman family remains tied in, to this day, with Israeli intelligence operations in this respect, helping with sexual blackmail, child trafficking, and involving itself with bizarre sex cults like ‘NXIVM’. Since, historically speaking, finance and intelligence are always tightly bound, Bronfman, as a Zionist intelligence operator, can’t have been more than one degree removed from a comrade working from the financial side. For example, Meyer Lansky, treasurer of the organized crime syndicate, filled both roles by being one of early-Israel’s greatest bond salesmen. Furthermore, although this isn’t hard proof of anything, the Bronfman family married into two wealthy Jewish Wall Street families, when Edgar Bronfman, Samuel’s son, married Ann Lehman Loeb in 1953, and into the most powerful Jewish banking family, the Rothschild family, when Samuel’s daughter Minda married Alain de Gunzburg, a Rothschild on his mother’s side, also in 1953. It’s possible, however, that the Bronfmans weren’t yet so personally well-acquainted with international finance in the 30s and 40s.
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CONCLUSION
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Hopefully this essay has granted some insight into the political and economic legacy of one of history’s most unsung characters. Douglas pioneered a new insight into economics which, to this day, seems not to be very well understood, although it most definitely appears as though Keynes cribbed from his work to populate the pages of his General Theory. The discrepancy between prices and purchasing power resolves down to two factors: the credit-creation nature of the banking system and the incompleteness of the Ricardian trinity of Land, Labor and Capital. Banking-as-it-is pushes prices up (or out) with each extension of credit but does not disburse the purchasing power out to the circuit of consumption, and in fact, the larger loan, the greater the gravitational sinkhole of purchasing power being removed from the economy over the lifecycle of the credit. Accounting practices create capital costs with no corresponding stream of income so that, again, prices must be higher than purchasing power. The combined result of these is as Douglas predicted: economies with an ever-intensifying thirst for money.
The A+B Theorem or Social Credit Theory or whatever you would like to call it calls into question our current habit of referring to monetary phenomena in the one-dimensional language of inflation and deflation. If it is true that not every cost has a corresponding income, and that not every price increase has a corresponding emission of monetary increase, then this is an entirely unsuitable mode of monetary analysis. Inflation or deflation doesn’t even begin to cover it, because it doesn’t specify what’s being inflated or deflated. Is it prices or purchasing power? If you refer simply to Money Supply, you implicitly assume a parity between the two. Our monetary system makes for inflation on the price-side and deflation on the purchasing-power side. So how can one-dimensional language comment on this? Orthodox economic language can hardly comment on anything accurately within Social Credit Theory.
Furthermore, we might surmise that one of the ways that the American policy-making elite have coped with this contradictory tension between credit and debt in the Post-Bretton Woods Era has been to regress the country less and less capital-intensive modes of production and employment. With a relatively lesser degree of capital expenditure, and more people working service, retail, or e-commerce jobs, the contradiction between debt and credit is relieved, though by no means resolved.
On the political side of things: the Alberta Social Credit Experiment is almost too awful to touch on, but there are valuable lessons within. It shows the importance of everyone being on the same page, and not entrusting political agency to people who lack the faculties for analytical thinking (like Aberhart). Lenin’s idea wasn’t bad: Democratic Centralism – everyone argues about the idea, but once the debate resolves and the idea is decided, everyone must commit to it unconditionally. The ASCP’s cries for Peace, Bread and Christ were poorly received by the criminal financial elements in Canada and for this their name has been dragged through the mud. There are remnants of ASCP in Canada today but it has long since had any substantial connection to Social Credit.
Douglas is a strange figure. Personally, I have always been frustrated with Douglas’ proposals for financial reform – issuing a dividend or a supported price yes would bridge the gap, but doesn’t restore the sovereign privilege of the national credit to the State/Public. I suppose his fix is good as far as it goes for a comfy English distributist, and the restoration of the national credit would require, once again, oceans of blood to be spilled on the world-stage. But then again maybe not. His work as an economist is more complicated than it appears and takes much work to dredge up into clarity, but it is in any case well worth investigating and badly overlooked. Hopefully this paper will help to stimulate some interest in the readers.
BIBLIOGRAPHY
1. Committee on Finance & Industry. Macmillan Report. Osaka: Shoseki, 1973.
2. Douglas, C. H. Credit-Power and Democracy: With a Draft Scheme for the Mining Industry. London, 1934.
3. ———. Social Credit. London: Eyre & Spottiswoode, 1933.
4. ———. The Alberta Experiment. London: Eyre and Spottiswoode, 1937.
5. ———. The Monopoly of Credit. A New Edition, Revised and Enlarged. London: Eyre & Spottiswoode, 1937.
6. ———. The New and the Old Economics. A Reply to Professor D.B. Copland and Professor Lionel Robbins. Edinburgh: Scots Free Press, 1936.
7. Keynes, John Maynard. The General Theory of of Employment Interest and Money. New York: Harcourt, Brace & World, 1936.
8. Stingel, Janine. Social Discredit Anti-Semitism, Social Credit, and the Jewish Response. Montréal: McGill-Queen’s University Press, 2009. http://site.ebrary.com/id/10135206.
9. “Hidden in Plain Sight: The Shocking Origins of the Jeffrey Epstein Case.” MintPress News, July 18, 2019. https://mintpressnews.cn/shocking-origins-jeffrey-epstein-blackmail-roy-cohn/260621/.
Footnotes:
1Douglas, 1930, pg. 19-23
2Keynes, 1936, pg 370-371
3Douglas, 1921, pg. 101-106
4Douglas, 1921, pg. 138
5Douglas, 1924, pg. 50
6Keynes, 1936, pg. 105
7Douglas, 1937, pg. 135
8Stingel, 1997, pg. 37
9Douglas, 1936, pg. V
As a lifelong student of Douglas you have made a great contribution to my understanding, and helped answer many of my questions. Thank you very much.
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