by Louis Even

New readers of the "Michael" Journal may be puzzled by the new ideas contained in this paper as regards economics and finance, even though the ideas seem logical and their application would bring a ray of hope into their lives. Where do these theories, that are so different from what is practiced today, come from? What is this "Social Credit", a term that is not even mentioned in the today’s economic textbooks? Could it be a stroke of inspiration from the editors of "Michael"?

No. The "Michael" Journal certainly spreads with much fervour what it considers to be an illuminating revelation and a discovery that arrived at the right moment. It would settle most of the problems of a economic and social nature that cause anguish in our world, when today’s huge progress should open new horizons. But the "Michael" Journal is not the author of this revelation.

C.H. Douglas

In regards the birth of Social Credit, there is only one name, a man of genius, a Scot named Clifford Hugh Douglas.

Douglas was an engineer by trade, a brilliant engineer who was entrusted with important projects. He was Chief Engineer and Manager for the British Westinghouse Company in India. In South America, he was Deputy Chief Electrical Engineer for the Buenos Aires and Pacific Railway and in England, was employed on the construction of the London Post Office Tube Railway. During World War I, he was Assistant Superintendent at the Royal Aircraft Factory in Farnborough, England.

Douglas was also an expert in cost price accounting. It is for this that the British Government asked him to go to Farnborough in 1916 to sort out "a certain amount of muddle" in the Aircraft Factory’s accounts.

Douglas never bore the title of economist; he would have considered this as an insult anyway because of the mountain of errors, based on false premises, in economic teaching in universities. Yet, Douglas was actually the greatest economist of all times, with his diagnosis of the major flaw in the economics of today and the proposals that he formulated to solve them.

A disciple of Aristotle in philosophy, Douglas considered the various functions of the economy in relation with their proper ends and he subordinated appropriate means to these ends. He did it as an engineer, proposing ways that were honest, simple, and potentially efficient. He also has an absolute respect of natural and moral laws. There is, he said, a "canon" that cannot be violated. Douglas was also concerned about preserving individual freedom and responsibility and about restoring rights to every individual. Institutions of every nature — political, economic, social — must serve the individual and not dominate or choke him. Also they cannot hinder his freedom of choice and dictate his way of life.

These principles and concerns of the human person are the least of the worries of our present monopoly of credit and the industrial giants that created or helped to foster this monopoly. These principles would put financial credit at the service of the skills of the population. Gradually, the massive and depersonalizing methods of hiring could give way to free associations that would take on the responsibility of supplying goods and services that answer the needs of the population. The individual would regain the freedom to accept or refuse his personal participation in every undertaking that asks for his assistance.

The monopoly of money and credit, and its loyal supporters quickly saw in Douglas’s proposals a threat to their privileged situation, which they absolutely wanted to maintain, even though it was harmful to the community. They therefore made use of their powerful influence over means of communication, governments, institutions and men in high places, to boycott the teaching of Douglas. First, it was a conspiracy of silence; then a false representation of Douglas’ theories in order to discredit them. After they threw people into confusion by degrading the term "Social Credit." Then after this, they pushed ambitious people to use this term to start a political party.

But Douglas left writings and made disciples in several countries, including Canada. These disciples continue to diffuse his teaching. The accumulation of the bad fruits of an unsound system cannot fail to force the governments to admit, even reluctantly, many assertions of Douglas against which the whole cohort of economists rose up. Thus, the gold standard myth has disappeared from national currencies and the monetary function of gold has become less and less important on the international level. And what did they do with this other sacred cow of the balanced budget? Governments were forced to disregard this so-called necessity, which was taught as a matter of life or death by orthodox economists. If governments did not have recourse to unbalanced budgets, all economic life would have been killed with the present financial system.

When governments are in trouble, they borrow something from Douglas’s teaching but afterwards they cook it in the sauce of the present system, just like in the case of budgets, when Keynes was the cook. And because of this manipulation, instead of having a financial reflection of reality, the creation of public wealth is expressed by an increase in public debt. This is why Douglas’s disciples must be able to distinguish what is reality and not take any social security measure for authentic Social Credit.

It was during the First World War that the engineer C. H. Douglas, with the experience of several past jobs done in India and elsewhere, carefully examined the financial sector of the economic system. He researched its laws and worked out appropriate measures so that the economic system could fulfill its proper function. This work was completed in 1917 and the first writings of Douglas on this subject were published in 1918 in the form of articles in reviews and in the economic section of newspapers; then in the book Economic Democracy which was first published in 1919. Other books and pamphlets followed, accompanied by lectures in England, Australia, Japan, Sweden, and Canada. Douglas died on the feast of Saint Michael on September 29, 1952.

Social Credit is not a fabrication of the mind based on unrealistic expectations. It is the fruit of discovery made and analyzed by a superior mind.

Let us mention some of the discoveries that led Douglas to enunciate his Social Credit proposals.

The first discovery concerns credit. During the completion of the work he was in charge of as an engineer, he had more than once been told to postpone the work because of the lack of financial credit. These jobs were easily feasible physically and the local population needed them badly but they had to be stopped, not because of a lack of manpower or materials, but because of a lack of money. This was certainly not very bright. What was the problem with money, that the presence or absence of it conditions the lives of men, as though it was an inevitable natural phenomenon?

Then, not long afterwards, he discovered that the true base of any money — either coins, cash or cheques — is the productive capacity of the nation. The gold standard as the basis of money does not make sense. When someone wants to make bread, he does not dig to find metal but rather cultivates a field and sows wheat.

Considering the factors of this modern productive capacity, it is obvious that its growth is more often due to the use of machines that are becoming more sophisticated and less due to the use of human labour. The biggest real capital of production is not money but machinery. The progress made during the centuries, especially during the last two centuries, when the driving force of steam replaced workers, horses were replaced by watermills and windmills which were also replaced by driven machines. Mankind was entering the era of motorization which has greatly expanded since that time with electric motors and internal combustion engines. We are now entering the era of automation.

But this progress, this succession of inventions and technical improvements, could never have taken place without life in society; an ordered society. This would mean a society that allows the division of labour, specialization, research and the transmission of knowledge. No one human being can pretend to be, more than any other person, the owner of all these community assets which are inherited from past generations. All the members of society are co-heirs to these assets and they must all benefit equally from them. To limit these benefits only to investors and employees, who make this great common capital yield, is an injustice towards the rest of the community.

It is from these situations that Douglas draws his proposal of a periodical dividend to every citizen, whether this person is employed or not in production. Because of progress, which is a common good that is very important in today’s production when human labour now is less required, purchasing power must be made up of dividends to all and not only to salaries linked to employment. Douglas explains: "The distribution of consumer money to individuals shall be progressively less dependent upon employment. That is to say that the dividend shall progressively displace the wage and salary, as productive capacity increases per man-hour." The simple reason is that this increase is the fruit of progress (common capital) and not the fruits of the greater effort of the employees.

Here is something that clashes head-on with the financial regulation that states that all distribution of purchasing power must be bound to participation in production. It also goes against the call for higher wages, which are the reward for human effort, since human effort diminishes in length and intensity because of progress.

Our "Michael" Journal has often written about this dividend to all and will continue to do so. But let us point out this for now: Douglas studied the economic situation, drew conclusions and looked for solutions. He did it as a realist, in a logical way and by respecting the dignity of the human person. In presenting his principles, he did not refer to what Catholic sociologists call "the social doctrine of the Church" (Douglas himself was an Anglican but he highly respected Catholic teachings). It is nevertheless the implementation of Douglas’s Social Credit proposals that would best allow the realization of many points of the social doctrine of the Church.

No wonder that Social Credit introduced by Douglas lends itself better to the principles of a just and human economy, since the present economic organism is vitiated by a financial system of economic life; Douglas rejects this falsehood categorically. Facts and truth are more useful and are more able to coincide with natural, human and Christian principles.

Let us recall the words of Pope Pius XII, taken from his famous Pentecost radio-address of June 1, 1941:

Douglas does not use this text but the development of his thesis brings him to the same conclusion: that each person is entitled to a share in the material goods that the economy of a country can provide. And his mechanism of the periodical dividend to each citizen, which he says can ensure at least the basic necessities of life, is a wonderful "juridical form" for the practical realization of that right.

This dividend has no conditions; it forgets or punishes no one. It does not harm the interest of any person. Compare it with governments who struggle with all kinds of taxes in an effort to hide the nauseating wounds, without attacking the cancerous financial system that causes these wounds.

Douglas wrote that any financial reform that ignores the price issue is doomed to failure. What would be the use of a reform that increases the revenue of the consumers, if prices also increase? This would be not be more intelligent than wage increases, followed by price or tax increases. Purchasing power is made up of two things: money in the hands of the consumers and prices asked by the retailers for their goods. It is the ratio between these two things that matters. With $15, you can buy only three-quarters of what is sold for $20. If the amount of money you have is doubled, you now have $30 but if the price of the same goods is doubled, they are now sold for $40. You will therefore find yourself in the same situation as before, being able to buy only three-quarters of the production. This is simple arithmetic.

The ideal example is a ratio of one, the equality between the means of payment and the prices. This is precisely one of Douglas’s proposals:

And Douglas adds (we will explain it later in this article): "whatever the cost price of these goods is."

Before this proposal, orthodox economists said contemptuously: "Sir, it is so, and it has always been the case; the price of any good is the sum of the money spent during its production, so the total amount of the money distributed to the consumers is always equal to the total of the prices."

A French banker made the same remark last May, while I was presenting Social Credit before a small group in Paris. "The French," he said to me, "do not lack purchasing power, since all the money asked for by prices is previously distributed to the consumers by paying for the costs of production."

Economists have been saying that for over a century but facts have shown the contrary for over a century. The economists do not talk about facts; they only repeat what they consider to be an axiom and they would like to submit facts, even though the facts do not fit. Douglas, on the contrary, first considers the facts and then applies himself to finding an explanation to them. He looks for a way to correct what can be corrected.

In the case of purchasing power, Douglas explains that the costs incurred during production are divisible into two distinct categories: 1. Money distributed in wages to individuals, therefore to the consumers: he calls these costs "A" payments; 2. Payments made to other organizations for raw materials such as machinery, etc.: Douglas calls these costs "B" payments. Both costs ("A" + "B") are included in the prices. The consumers receive "A" payments but the prices are a compound of "A" + "B". It is evident that "A" cannot buy "A" + "B", unless the consumers receive the equivalent of "B" from a source other than the payments made during production.

The first objection that orthodox economists raise is that, sooner or later, "B" payments become "A" payments, when the other organizations that received the "B" payments distribute these payments to their own employees or shareholders. The trouble with this objection lies precisely in the words "sooner or later", because these objectors do not take into account the time element involved. Douglas does take it into account; as an engineer, he knows that there is no equality between 100 revolutions per hour and 100 revolutions per minute, even if there are 100 revolutions in both cases.

What is called Douglas’s "A" + "B" theorem has been the subject of confrontations between economists and the followers of Douglas for years. This can be a topic for an article in future issues of this journal. But the amusing side of this controversy is to see the economists who refuse the explanation given by Douglas of an existing fact and who draw the conclusion that this fact does not exist, instead of looking for a solution to this fact that cannot be denied.

It is indeed undeniable that, despite the accuracy of cost price bookkeeping, the purchasing power of the public is not equal to the prices of the finished goods for sale. The economists themselves, while denying this disparity, advocate economic policies that confirm its existence. Are they not the first to promote exportation and to qualify as favourable the fact of exporting more than what one imports? They certainly do not mean that a country is richer in goods when more goods go out of the country than come in but they say it is a "favourable balance of trade" because these exportations cause more money to enter the country, thus increasing purchasing power and filling the gap to buy domestic production.

Likewise, do they not ask foreign investors and governments to create jobs for the unemployed in work that does not create goods for sale, like capital expenditures — building roads, bridges, factories, etc?

And does not the Government fall into debt for 15 or 20 years for goods that our country can make but cannot pay for, since the production of public goods does not distribute enough money to pay for them in taxes, just as the production of consumer goods does not distribute enough money to pay for them in prices?

This explains why there are so many sales on credit and why individuals have to go into debt to be able to purchase finished goods. These debts represent money borrowed to make up for the part of the "B" payments that are not yet in the hands of the public when the finished good is put for sale on the market. This happens when the price "A" + "B" arrives at the same time as this finished product.

What would you think of the following reasoning: "All men who are born, have to die, sooner or later. Thus deaths liquidate births. So the population of the world neither increases nor decreases. It is in balance!" You would certainly reply: "Idiot, you do not take into account that the rate of births and deaths are not the same!"

Well, orthodox economists reason like that: they do not take into account the rate of the creation of prices, which is not the same as the rate of the distribution of purchasing power to pay for the total cost of the finished good. There is a price that appears in front of the consumers at the same time as a new finished good appears on the shelves of a store but the elements of purchasing power ("A" payments and "B" payments) reach the public in different periods: some money reaches the consumers, before the finished good is put for sale, some money reaches them after and some money never reaches them.

Douglas advocated a combination of these two methods. With the dividend based on real rights given to all (as explained above), purchasing power is increased without going through production costs. It is increased through the general discount on every retail price, a discount that is calculated scientifically and that establishes a perfect ratio (equality) between the prices and means of payment. This discount would be compensated to the retailers by the National Credit Office.

All this evidently presupposes the existence of a financial system that is flexible enough to be able to reflect the facts of production and of consumption, to allow free producers to meet the demands of free consumers.

Douglas discovered a truth about prices and this revelation puts him above all economists who only repeat what they read in their textbooks. These textbooks only reproduce what was written in previous textbooks.

Douglas expresses this truth as follows:

This means that the real cost of production is not the same as the financial cost, even though the cost price is accurate.

Considered in real terms, the real cost of a finished good is the total amount of what was consumed during the process of its manufacture. If we consider, for instance, the making of a piece of furniture: the destruction of timber, the use of tools and machinery, the food, clothing and shelter used up by those engaged in its production: these are the physical costs attached to the manufacture of a product. The totality of these physical costs or all the goods and services consumed during the construction of this piece of furniture, constitute its real cost.

If this consumption (wood, wear and tear, retailers food, etc.) is expressed in monetary units, then one obtains the real cost of the finished good expressed in financial terms. This cost can be quite different from the cost price. If the wages distributed for the making of a living room set amount to $100, this amount is totally included in the cost price. But if the employees spend only one part of this $100 — lets say $60 — in consumer goods, the cost price of this set will be $40 higher than its real cost. On the other hand, if an accident occurs during the making of this set and some employees are injured, their hospitalization will represent more expenditures, so the real cost of the finished set could be also higher than the cost price.

Of course it is impossible to know the real cost of every article produced, for the simple reason that a contractor only knows the expenses incurred by his enterprise. He does not check how those he pays will use this money and this is none of his business, anyway. On the other hand, one can easily know, expressed in monetary units, how much was produced and how much was consumed in our country during one year.

Let us suppose, for example, that national accounts show that in one year the country’s total production has reached a value of $40 billion and that during this time, total consumption reached $30 billion. One can conclude that while the country has produced $40 billion of wealth, at the same time, it caused $30 billion of wealth to disappear (through consumption or depreciation). One then had to consume $30 billions worth of goods in order to produce $40 billion. The real cost of the production is therefore only three-quarters of its bookkeeping cost.

Moreover, the authors of this production must recover all their expenditures — $40 billion — to meet their obligations and stay in business. And yet, the population of the country must pay only for what it consumes. One cannot ask a man to pay for four loaves of bread when he consumes only three. It is the same thing for the population of the country as a whole: one cannot ask it to pay $40 billion, when it actually consumes only $30 billion.

After this period of one year, the ratio between the cost price (bookkeeping price) and the real cost could be different and the discount will be calculated accordingly but always scientifically. It would be calculated according to statistics, to the facts of production and consumption, resulting from the free facts of free producers and consumers.

The National Credit Office only records these facts; it neither creates or dictates them. Its function is to fulfill the objective set by the law of the country concerning prices: to establish a balance between prices and purchasing power without harming the producers. This objective (the compensated discount) would be as just and social as the other objective of the National Credit Office — the periodical dividend to all.

Except perhaps in temporary situations like wars or natural disasters, consumption cannot be greater than production, so the just price cannot be bigger than the cost price. In a general way, the just price would be lesser than the cost price, since there would be the general discount, which is just the opposite of inflation.

As for the objection that some retailers would be tempted to increase their prices, because people would have more purchasing power because of the dividend, it does not take into account several things: first, competition would continue to exist; second, the modes of implementation of the just price would discourage or neutralize the retailers who want to cheat since these retailers would have either the choice to join this system that is just for all or go out of business.

Besides, once money becomes a simple matter of bookkeeping to express the progress of wealth and its production and consumption, a totally different mentality will replace the mentality of domination by money.

To have an idea of what would become of the relationships between people in the economic, social, and political life, one must consider them in a climate that is rid of financial nonsense and of the tyranny it exercises and imposes.