C.H. Douglas Out of Print ...... Mondo Politico
Social Credit, by
Major Clifford Hugh Douglas
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Part II: The Mechanism of the Classical Ideal

CHAPTER I

THE WORKING OF THE MONEY SYSTEM

IF the considerations thus far advanced are accepted as valid, certain conclusions seem inescapable. A system of Society which depends for its structure on the theory of material rewards and punishments, seems to involve, fundamentally, a general condition of scarcity and discontent. You cannot reward an individual with something of which he has already sufficient for his needs and desires, nor can you easily find a punishment which will be effective in a world in which there is no incentive to crime. We might legitimately expect, in such a Society, a mechanism which would ensure a continual, and, if rendered necessary by the advancement of science, an artificial disparity between demand and supply of material goods and services, together with an organisation which would prevent any infringement of the rules by which this disparity is maintained.

We do, in fact, find exactly such a state of affairs in the world to-day. The exact methods by which the financial organisation produces the illusion of scarcity will demand our attention almost at once, and at some length; the organisation by which these arrangements are enforced is, of course, familiar in the form of the Common Law.

It is astonishing to what an extent the co-operation between Finance and Law extends without attracting any considerable body of specific comment. What is called Civil Law is concerned almost wholly with matters which can be referred ultimately to the Money System. That is obvious. But it is not less true to say that an overwhelming majority of so-called criminal cases can be traced, either directly or indirectly, to a financial incentive. Even crimes of passion take their origin, in the majority of cases, from physiological or psychological reactions which can be traced back to economic or financial causes. The world is full of organisations for the suppression of such social evils as inebriety and prostitution. The financial origin of the latter hardly needs emphasis, but it is not so generally recognised that habitual industrial overstrain, long hours, and insanitary conditions of work, and the excessive indulgence in alcoholic or other artificial stimulation, are almost invariably found in one and the same geographical locality. And in nearly every case, attention is directed to the suppression of the symptom, rather than to the removal of the cause, with the result that the partial suppression of one evil is only achieved at the cost of producing a fresh and probably more insidious disease.

It has already been, it is hoped, made clear that the gap between Demand and Supply has nothing to do with the ability of the production and industrial system to meet the calls which are made on it; it has to do with the organisation which stands in between Demand and Supply, that is to say, the Financial or Ticket System. In other words, the persons who want and cannot do without the goods which the productive and industrial system can, and is anxious to supply, have not in their possession the tickets, the possession of which is essential before these goods, under present conditions, can be handed over.

Now this condition has not entirely escaped attention, but most, if not all, of the attention which has been directed to it is, I think, stultified by accepting as true, premises which proceed from the very system which is attacked. There is, of course, the crude idea on which, originally, most of the orthodox Labour-Socialist propaganda was based. Observing the condition we have just outlined, the simple suggestion was put forward that the majority of the population were so poor, because a minority were so rich. This simple explanation died hard, even if it can be said to be dead. It survived a number of statistical investigations, mostly with the intent of showing that we do not work hard enough, of which perhaps the latest and most complete have proceeded from the London School of Economics, an institution which combines the curious qualities of being the fount of financial orthodoxy, staffed by the flower of Socialistic personnel, chiefly chosen and paid by bankers and financiers. Professor Bowley, who was, if I am not mistaken, connected with this institution, in a treatise on the Distribution of the National Income, referring to a period immediately preceding the first world war, estimated that the total British income in excess of 160 per family per annum, was only 250,000,000. Taking the population of Great Britain as forty-five millions, and the average number of persons per family as about 4.5, which is a usual assumption, it is clear that an "equitable" division of this income would result in an increase of the average family income by 25 per annum, which can hardly be said to be a promising basis for a sweeping reform by taxation. As in addition, such a distribution would, under present conditions, make the possession of such articles as motor-cars impossible to any private owner, and so would completely inhibit their production, and the wages, salaries and dividends distributed in respect of that production, it must surely be obvious that an explanation more complex than this must be looked for. The point we have to make is not merely that financial purchasing power is unsatisfactorily distributed, it is that, in its visible forms, it is collectively insufficient.

One stage in advance towards this end is the theory generally associated with the name of Mr. J. A. Hobson, who attributes the general lack of purchasing-power (the fact of which he most properly emphasises), to the undue investment,of savings, on the part of the more fortunate members of Society, in what are termed capital undertakings, with the result that production of capital goods is in excess of the amount required. That such unbalanced production does take place, is unquestionable; but that Mr. Hobson's explanation is inadequate to explain the process which accompanies and complicates this unbalancing, is, I think, not less certain. Nor does this theory account for the collective growth of bank deposits.

Both of these explanations really proceed from a misconception of what actually takes place in the financial and costing departments of industrial organisations, and a further failure to grasp the possible relation which can exist between the abstraction of money and the concrete physical realities to which it relates. There is every justification for these misconceptions; they are strictly orthodox in the sense of being the general teaching of the majority of those persons who claim to be experts on the matter; and it is necessary that they should be stated in order that the invalidity of them may be exposed.

This orthodox theory, then, assumes that the money, equivalent to the price of every article which is produced, is in the pocket, or the bank pigeon-hole of somebody in the world. In other words it assumes that the collective sum of the wages, salaries and dividends distributed in respect of the articles for sale at any given moment, which represent collective price, are available as purchasing-power at one and the same moment. Certain persons have more money in their pockets or bank pigeon-holes than they wish to spend on consumable goods. They do not spend it, they save it, as the phrase goes. By this abstinence from spending, they form a fund which enables capital goods, i.e. tools, plant, factories, to be paid for, and therefore produced, and because of the process by which these are paid for the capital goods thus produced become the property of those persons who have thus saved.

Now the first point to be grasped in regard to this argument as a whole is that, even supposing at any given moment it were true, one week afterwards it could no longer be true. If on a given day, there was extant in the world, sufficient money to buy all the goods in the world at the prices it had cost to produce those goods, and any portion of that money were applied to form the payment for the production of new goods, then that money so applied forms the costs of the new goods, and immediately there is a disparity between the total costs, which are the minimum total prices of goods, and the amount of money in the world which would ex-hypothesi, be exactly the same as before. This would be true even if no one "saved" any further quantity of money. The persons who had saved the money would not have saved the goods which the original money represented, they would merely have transferred their claims from the original goods in existence to new goods, and could only "get their money back" by the sale of those goods; nor would there be any mechanism in existence by which the old goods could be bought. That surely must be self-evident.

But the process does not stop there. From the investor's or "saver's" point of view, his only object in putting his money into capital goods is to get an increased amount of money back, and on Mr. Hobson's assumption, in particular, he can only get this money back from the public in the form of prices. The condition then is, that there are more goods in the world at each successive interval of time, because of the financial saving, and its application to fresh production, while the interest, depreciation, and absolescence, on this financial saving has to be carried forward into the prices of production during a succeeding period. Each pound saved would be a pound withdrawn from consumption and put into production. Since costs must be less than prices, it only requires a very simple examination of this condition to see that the cycle would become unworkable in a very short period of time, since no one would be able to buy anything. Depreciation alone would absorb the world's purchasing-power, although not seriously diminishing the world's true wealth, and if no other factors intervened, we should have starved in the midst of plenty many years ago.

In every criticism of the social distribution of wealth made public prior to 1918, the assumption is implicit that money or purchasing-power is confined to legal tender, and that bank deposits, etc., on which cheques are drawn, are deposits and withdrawals of legal tender only. This is in part equivalent to saying that banks and financial institutions only re-lend money which has previously been lent to, or deposited with, them. There is also a nebulous idea involved, I think, to the effect that the man who grows, e.g. a ton of potatoes, also grows the purchasing-power of a ton of potatoes. The facts are far otherwise, as no doubt large numbers of potato-growers could testify. Given a fixed amount of legal tender, and assuming legal tender to be the only purchasing-power, no amount of production would increase it. Probably a minimum of nine-tenths of the immediately available purchasing-power in the world arises out of bank loans or their equivalent in bills discounted. These loans and the purchasing-power which they create have no automatic relation to either production or consumption. This question has aroused a good deal of controversy and has been treated at some length in previous volumes. But a short and, I think, conclusive mathematical demonstration is available which may serve to dispose of the matter.

Let Deposits = D
Let Loans, etc.
= L
Let Cash in Hand
= C
Let Capital
= K

Then we have

Assets = L+C
Liabilities
= D+K
So that L+C
= D+K

Differentiating with respect to time, we have -

dL
dC
dD
dK
----
+
----
=
----
;
K being fixed,
----
= 0
dt
DT
DT
DT

Assuming that the Cash in Hand is kept constant

Cd
----
= 0.
DT

Therefore

dl
DD
----
=
----
DT
DT

which means, of,course, that the rate of increase, or decrease, of loans is equal to the rate of increase, or decrease, of deposits.

Now this theorem that bank loans create bank deposits, and the deduction from it that the repayment of bank loans destroys deposits, is vital to an understanding of the process we have been discussing. The deficiency between purchasing-power, and goods with money prices attached to them, can be made up (at any rate to a large extent) by this process of creating bank money. This enables the business cycle to be carried through. And conversely, the refusal to create fresh money by banking methods or otherwise, whatever the cause of this refusal may be, is sufficient to paralyse both production and consumption. There is no doubt whatever about the facts; in the past three years we have had the two conditions side by side; in Great Britain a restriction of credit and consequent industrial stagnation; on the Continent, enhanced credit issues, and great industrial activity.

The repayment of bank loans, unaccompanied by the destruction of the article produced as a result of its creation, immobilises an equivalent body of price values, so that neither can the articles to which the prices refer be sold, nor in the case of machinery, etc., is it possible to make any charges in respect of consumption goods which are consequent on the use of such machinery, without still further increasing the disparity between the goods available still, and the money available to buy them.

This is surely plain enough; but it has also to be remembered that this process of repayment of bank loans, is a "chain" process, which starts with the repayment, by the last business concern engaged in the manufacture of the articles, of the costs and profits incurred by the stage of manufacture immediately preceding it. If this operation be clearly visualised, it will be seen that all payments of costs of goods supplied by one business firm to another business firm for re-sale, can be assumed to be the repayment of bank credit, if the first stage in the manufacture of the goods was financed by a bank credit. But we can go further and say, that the difference between finance by bank credit, and finance from so-called capital or savings, is only one of degree and not of kind, since those very savings, as will be seen by a careful examination of the foregoing argument, had their origin in a creation of credit.

We may now be in a position to appreciate the bearing of the foregoing analysis on such theories as those of Mr. J. A. Hobson. We have seen that the factor which modifies so profoundly the importance of the considerations adduced by Mr. Hobson, is that the inadequacy of the money available in the hands of the, public to buy the goods normally available, at the prices necessitated by the system under which they are costed, is countered by the ability, and the normal practice of banking and financial institutions to create and circulate forms of purchasing-power which function quite as effectively as the sovereign or the treasury note. This circulation largely functions through wages and salaries paid out in respect of capital production or goods destined for export. Unlike the sovereign, or the currency note, however, these forms of bank-created purchasing-power, are nearly always redeemable within a definite period of time. It is a feature on which the banks place the most weighty importance; and exactly why this is so is worthy of, and will receive, close consideration in a succeeding chapter.

It is fair to say that almost any explanation which is not a full and accurate explanation of the working of the financial system, has the curious result of playing directly into the hands of the upholders of that system. The simple Labour-Socialist criticism, which emphasises the contrast between the rich and the poor, forms a perfect moral sanction for the imposition of taxes on any portion of the community which is above the starvation level, since to the man who has only two hundred a year, the man with six hundred a year is rich. And it is logical, on the theory that purchasing-power is merely mal-distributed, that Mr. J. A. Hobson should devote much of his attention also to taxation.

The business of dealing in money as a commodity is, as has already been pointed out, advantaged by anything which accentuates the scarcity of money, so that any form of attack on the business system, the constructive effect of which is to support increased taxation, can, and does, receive support from the inner circles of High Finance. Since the greater part of the real purchasing-power of the world is in a potential form which is not represented by any figures anywhere, but can be materialised by those in possession of the secret of the process, as and when required, taxation of visible purchasing-power is exactly what is most valuable in maintaining the power and supremacy - the power to reward and punish - of the money-"makers." There is probably not a "levelling-down" movement of any description anywhere, which is unsupported from Lombard Street, Wall Street, and Frankfort.

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