by Louis Even

New readers of the “Michael” Journal may be puzzled by the ideas — which are new to them — contained in this paper as regards economics and finance, even though these ideas seem logical, and their application would bring a ray of hope into their lives. Where do these theories, which are so different from what is practiced today, come from? What is this “Social Credit”, a term that is not even mentioned in current economic textbooks? Would 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 a illuminating revelation: a discovery that arrived at the right moment to settle most of the problems of economic and social nature that cause anguish to our world, whereas today’s huge progress should open new brilliant horizons for our world. But the “Michael” Journal is no the author of this revelation.

C.H. Douglas

Clifford Hugh Douglas

At the origin of Social Credit, there is one name, the name of a man of genius, a Scot: Clifford Hugh Douglas.

Douglas was an engineer by trade. A brilliant engineer, who was entrusted with important projects. He was, in India, Chief Engineer and Manager for the British Westinghouse Company; in South America, Deputy Chief Electrical Engineer for the Buenos Aires and Pacific Railway; back in England, he was employed on the construction of the London Post Office Tube Railway; then, 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 expertise 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 monument 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 today’s economics, and with the proposals he formulated to solve it.

A disciple of Aristotle in philosophy, Douglas considers the various functions of the economy in relation with their proper ends, and he subordinates appropriate means to these ends. He does it as an engineer, proposing ways that are both straight, simple, and potentially efficient. He also does it with the 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 every individual in his right. Institutions of every nature — political, economic, social — must serve the individual, and not dominate or choke him, or hinder his freedom of choice and dictate his way of life.

These principles and concerns for the human person are the least of the worries of the present monopoly of credit and of the industrial giants created or helped by this monopoly. These principles would put financial credit at the service of skills. Gradually and quickly, massive and depersonalizing 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 help.

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’s theories in order to discredit them; and then, by throwing people into confusion by degrading the term “Social Credit” and by pushing ambitious people to use this term to designate a political party.

But Douglas left writings, and made disciples in several countries, including Canada, especially in French 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 official 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, the balanced budget? The 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 thus borrow something from Douglas's teaching, but they cook it in the sauce of the present system, just like in the case of budgets, with Keynes as the cook. And because of this cooking, instead of a financial reflection of realities, the creation of public wealth is expressed by an increase in the public debt. This is why Douglas's disciples must be able to distinguish, and not take for authentic Social Credit, any social security measure being adopted to alleviate very aggravating situations.

A tranquilizer may relieve a suffering person, but it does not cure him. The present system may have recourse to all kinds of pills, but it remains sick. Social Credit would create a healthy economy, and his is infinitely better.

It was during the First World War that the engineer C. H. Douglas, with the experience of several past works done in India and elsewhere, carefully examined the financial sector of the economic system, found 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 economic pages 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, Canada. Douglas died on the Feast of Saint Michael, on September 29, 1952.

Credit

Social Credit is not a fabrication of the mind based on unreality. It is the fruit of discoveries made and analyzed by a superior mind.

Douglas was able to discover facts and defects in the workings of the present capitalist system; flaws inherent in the bookkeeping of the price system, even if this bookkeeping was accurate, and also defects related to forgetting or perverting ends and means in economic functions. He was able to examine how these defects harmed the smooth running of the social and economic organism. He was able to draw conclusions, and the show how to rehabilitate capitalism, how to make it a wonderful servant of individuals and of the community alike, an enrichment and liberation for all, instead of looking for solutions in a Fabianist or Marxist socialism, which is tyrannical, degrading, and deceiving for the peoples that are subjected to it.

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 works he was in charge of as an engineer, he had more than once been told to postpone work because of the lack of financial credit. These works were physically easily feasible, 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 trouble with money, of which the presence or absence conditions the lives of men, as though this presence or absence was due to inevitable natural phenomena?

Douglas soon discovered that virtually all the money upon which economic life depends is nothing but mere entries in bank ledgers, credited to borrowers. Not palpable money (cash), but credits that circulate through cheques, transferring sums from one account to the other. Why limit the liberation of these credits, when it is the only thing missing to make use of the productive capacity and to answer real needs?

Then, Douglas was not long to discover 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 any sense. When one wants to make bread, one does not dig to find some metal, but one rather cultivates a field and sows wheat.

And since the basis of financial credit, the productive capacity, is almost limitless today (at least to answer the basic needs of all), restricting financial credit to make use of these possibilities of production, as long as they are not exhausted, or as long as basic human needs are not answered, is unjustifiable, odious, and criminal.

A real social capital

Then considering the factors of this modern productive capacity, it is obvious that it is more and more due to the use of machines that are more and more sophisticated, and less 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, first of steam, replaced workers, horses, watermills and windmills, to drive 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, of technical improvements, could never have taken place without life in society, an ordered society, which allows the division of labour, specialization, research, the transmission of knowledge. No present 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 coheirs of these assets, and they must all equally benefit from them. To limit benefits only to investors and employees, who make this great common capital yield, is an injustice towards the rest of the community of coheirs.

A social dividend to all

It is from this consideration that Douglas draws his proposals 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 becomes more and more important in today’s production, whereas human labour is less and less required in production, purchasing power must be more and more made up of dividends to all, and less and less made up of 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 (a common capital), and not the fruit of a 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.

The fact that financial credit is based on productive capacity, and that productive capacity is due in larger part to a community inheritance, suggests that the status of capitalist must be granted to every member of society, from the cradle to the grave. The practical modes of implementing this status must be adapted to the type of economy of the particular country that adopts this philosophy of distribution.

Our “Michael” Journal has often wrote on this dividend to all, and still will in the future. 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 who 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.

One only has to think about what attention is paid today to the social function of private property: Who cares about it? Yet, this function is more relevant than ever, in a world where the means of production is owned by less and less people, and only 8 people out of 20 can get an income through employment in production. Will not the social dividend to each and every individual automatically ensure them with a share in the fruits of private enterprise?

No wonder that Douglas’s Social Credit 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. The agreement with facts, the truth, is more able than lies to put the economy in keeping with natural, human, and Christian principles.

A realized fundamental right

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

“Material goods have been created by God to meet the needs of all men, and must be at the disposal of all of them, as justice and charity require.

“Every man Indeed, as a reason-gifted being, has, from nature, the fundamental right to make use of the material goods of the earth, though it is reserved to human will and the juridical forms of the peoples to regulate, with more detail, the practical realization of that right.”

Douglas does not use this text ; but the development of his thesis brings him to the same conclusions: each human being 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 is linked to no conditions, it forgets no one, it punishes no one, it harms nobody's interests. Just compare it with the governments who flounder with all kinds of tax measures to try to hide nauseating wounds without attacking the cancerous financial system that causes these wounds.

Prices

Louis Even

Douglas wrote that any financial reform that ignored the price issue was doomed to failure. What would be the use of a reform that increases the revenues of the consumers, if prices also increase? This would be no more intelligent than wage increases, followed by price increases 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 this production. This is simple arithmetic.

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

“The cash credits of the population of any country shall at any moment be collectively equal to the collective cash prices for consumable goods for sale in that country.”

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

“A” cannot buy “A” + “B”

In the case of purchasing power, Douglas explains that the costs incurred during production are divisible into two distinct categories: 1. Money distributed to individuals, therefore to the consumers, like wages: he calls these costs “A” payments; 2. Payments made to other organizations for raw materials, 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 Douglasists 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 want to draw the conclusion that this fact does not exist, instead of looking themselves for a solution to a 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 exportations, 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 works that do not put goods for sale, like capital expenditures — building roads, bridges, factories, etc ?

And does not the Government get 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 get 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, or no more, in the hands of the public when the finished good is put for sale on the market, when the price “A” + “B” arrives at the same time as this finished good.

What would you think of the following reasoning: “All men who are born, 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 the rate of births and the rate of deaths, which are not the same!”

Well, orthodox economists reason just like the reasoning above: they do not take into account the rate of the creation of the 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.

Correction

This disparity is inherent in the present system. How can it be corrected? Not by falsifying the cost price, which is the result of accurate bookkeeping, and which must be recovered in full by the producer if he wants to be able to stay in business and continue to produce. The right way to correct this disparity is to increase purchasing power through another channel, which reaches the consumers directly without going through production, therefore without being included in prices. Another way can be to lower prices to the level of the means of payment in the hands of the consumers. In both cases, the ideal purchasing power would have been reached, a ratio of one; an equality between the prices and the means of payment.

This is what is advocated by Douglas, with a combination of these two ways. With the dividend to all, based on real rights (as explained above), purchasing power is increased without going through production costs; and with a general discount on every retail price, a discount that is calculated scientifically, and which establishes a perfect ratio (an equality) between 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 demand of free consumers.

A flexible financial system : this is what Social Credit is all about. Social Credit considers the financial system to be nothing but a matter of bookkeeping, and its function must be to serve, and not to lead, the economic organism of our nation. This is just, well-ordered, and easily feasible as well, as long as one begins to admit that financial credit is based on real credit, that is to say, on the productive capacity of our country, which is basically social wealth.

The just price

About prices, Douglas discovered a truth, of which the very revelation puts him above all economists, who only repeat what they read in their textbooks, which only reproduce what was written in previous textbooks.

Douglas expresses this truth as follows:

“The just price of production is consumption.”

This means that the real cost of production is not the same as its financial cost, even though this 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 wear and tear of tools and machinery, the food, clothing and shelter used up by those engaged in its production, are the physical costs attached to its manufacture. The totality of these physical costs, or all those 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, on the one hand, 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 — let us 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, but does not check how those he pays will use this money; besides, this is none of his business, anyway. On the other hand, one can easily know, expressed in monetary units, how much was produced in our country during one year, and how much was consumed.

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

This is why Douglas says that the “just” t of price of production is the cost of consumption, no matter what Its bookkeeping cost. In the example given above, the National Credit Office would decree a 25% general discount on retail prices. The buyer would pay only $3.00 of what costs the retailer $4.00. The National Credit Office would pay back to the retailer the $1 that was discounted.

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, according to statistics, to the facts of production and consumption, resulting from the free facts of free producers and free consumers.

The National Credit Office only records these facts; it neither creates nor 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 periods 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 of some that some retailers would be tempted to increase their prices, seeing that 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 sound for all, or to go out of business.

Besides, once money becomes a simple matter of bookkeeping to express the movement of wealth, its production and consumption, a totally different mentality will replace the mentality of the 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 the financial nonsense, of the tyranny it exercises, and of the harebrained schemes it imposes.

                                                                                                 Louis Even

This article was  published in the January-February, 2004 issue of “Michael”.

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