The New Age – June 22, 1933 – No. 2128 – Vol. LIII. – Page 93-94
The Douglas Cure for the Economic ills.
By Gorham Munson.
There is living in London today a gentleman who departs as widely as possible from the revolutionary type and who is yet regarded as profoundly revolutionary by thousands of followers in the British Isles and in the Dominions. A cousin of Lord Weir and a graduate of Cambridge, he looks like a British squire, stocky, ruddy of complexion, well groomed, and his temperament is Tory, as one might expect. There is not a trace of the fanatic about him. He has written books in a style marked by great condensation and understatement. He has worked hard at his profession, engineering; he has made inventions whose royalties now give him a comfortable life; he has a military title gained as assistant director of the Royal Aircraft Works during the World War. He enjoys fishing and yachting. He is a patriot.
Yet to this man, Major C. H. Douglas, the following tribute has been recently paid by a weekly devoted to spreading his ideas: “Adam Smith was the first great political economist. Since his day there have been only two others, Karl Marx and Major Douglas. All the rest have been and are “economists” without political sense or vision. Adam Smith for capitalism; Karl Marx for communism; Major Douglas for economic democracy.”
Major Douglas began his career in India in the early part of the century. He was considered a brilliant engineer and was in charge of the Westinghouse interests. By profession he was trained to grapple with physical difficulties, but he soon found that in any undertaking assigned to him there were financial anomalies to contend with which were far more effective in impeding his work than physical realities he faced. The Controller General of India was a friend and at dinner used often to dwell on financial anomalies, invariably concluding his remarks with the statement that gold and silver have very little to do with the industrial situation while credit had everything to do with it. Major Douglas has since confessed that at the time “credit” was a word without meaning to him, but all the same the Controller General gave his mind a focus that it has never lost.
Just before the outbreak of the War, Major Douglas returned to England to do some railroad building. The war was a series of revelations to him, culminating in the great revelation, according to his followers, of the mathematical defect in national loan accountancy which results, along with other better known causes such as saving, in a chronic insufficiency of purchasing power. This defect he has sought to express in what is known as the “A plus B theorem,” which, it is claimed, has never been refuted. It can be claimed, too, that it has never been accepted, and is still, as it was when first propounded, a matter for sharp controversy
To explain this theorem Major Douglas represents as A the flow of purchasing power to individuals (wages, salaries, and dividends), and points out that all A payments go into price. But there is another class of payments represented by B, which are made not to individuals but to organisations (banks charges, taxes, raw materials, overheads of one description or another), and these also enter as costs into price. Hence the rate of flow of price cannot be less than A plus B. Obviously, A cannot purchase A plus B, and a proportion of the product at least equivalent to B must be distributed by a form of purchasing not comprised in A. That form of purchasing power consists of money created by the banks to finance capital production. It is regarded as borrowed from the banks, and therefore, in order that it may be repaid, it is charged into the price of consumers’ goods.
The practical outcome is that the population of the world cannot purchase the goods already in existence without engaging in the further production of goods that are not and may never be required. The people’s current income must meet in retail prices the accumulation of costs, both current and past, and the point to be emphasised is that money issued as a bank loan to industry has usually been recovered by the bank and destroyed before the goods have come on the market; this destroyed money is a cost carried on from a previous stage of production. It is about this time-factor or time-lag of goods behind credit-issue and credit-recall that most of the disputation over the A plus B theorem occurs. The Douglas argument, in the words of D. W. Burbidge, is that “in effect the prematurely destroyed credit or money must be recreated by the banking system and issued on behalf of consumers at the rate at which the B or overhead charges of industry are reckoned into prices of consumable goods.”
The other things Major Douglas especially noted during the war were the flexibility of the financial system when for once the prime insistence was on the prompt delivery of goods, the facility with which industry, thanks to science, met the demands made upon it even with the best part of the productive population drafted into military service, and, finally, the rising standard of living for the whole community while the fight was going on. When “peace broke out,” as some wit has said, Major Douglas was astonished to hear from all sorts of official voices that England was a poor nation. Accustomed as an engineer to look at physical things, it seemed to him that on the contrary the capital recognition of England had been immense and she was anything but a poor nation. So Major Douglas began to write in 1918 articles for The English Review attacking what he considered to be the fallacy of super-production and arguing that the real wealth of England was still great.
Basing his proposals on “consumer-credit,” he urged that a direct attack be made on the problem of consumption. The Labour reformers were all treating production as the prime problem and thought the economic solution lay in changing the administration of production or, as it is more common to say, in socializing the means of production. But to Major Douglas production by private enterprise was a success. Whatever the sins of capitalism might be, inability to produce a glut of goods and services was not one. Industry, however, as the A plus B theorem demonstrated, could not distribute sufficient purchasing power to the community to enable it to claim industry’s total output. By mathematical law money must be in short supply. There is only one way out, Major Douglas concluded, and that is to issue credit to the consumer in the form of a scientifically determined discount on retail price when a sale is effected. In short, by a reform in the distributive (money) system he proposed nothing less than the continuous selling of goods below their apparent financial cost but at their true cost – and provided a method whereby the seller could be reimbursed for the amount he was out of pocket. This was to be done by debiting the National Credit Account.
Inasmuch as Major Douglas’s contention is that our entire financial system is upside down in an age of technology, dominating industry instead of being its handmaid, practically all his proposals are simply for turning existing financial axioms and devices right side up – “consumer credit,” for example, instead of “producer credit.”
After writing his articles in The English Review, Major Douglas began to explain his ideas in The New Age, a London weekly, edited by A. R. Orage. This magnetic figure in English intellectual life had been affected by the currents of social reform in England during the ‘90’s, and for a time was a member of the Fabian society. When, however, in 1907 he took over The New Age he soon made it the organ for the National Guilds movement. He and A. J. Penty had formulated independently the leading ideas of guild socialism, and for the next twelve years these ideas were pushed so hard by them and their adherents that G. D. H. Cole once referred to the period 1910-14 as the “Orage period” in British economics.
After about a year of consideration Mr. Orage announced himself, to the consternation of Guild Socialists, as unhorsed by Major Douglas and thereupon joined forces with him.
From 1919 to 1922 Major Douglas and Mr. Orage made determined efforts to get the Social Credit scheme considered and adopted. The depressed post-war situation in England was favourable to them; they early gained some brilliant adherents, among them Will Dyson, famous for his savage political cartoons; they saw behind the scenes a great many people of importance and sought to win them. Two books by Major Douglas appeared: Economic Democracy (1920), which was also published in America, and Credit-Power and Democracy (1921), which contained a draft scheme for the mining industry and a long commentary on it by Mr. Orage. But these efforts were in the main doomed to failure. The first chapter of the Social Credit movement ended with the adverse report of the British Labour Party and the departure in 1922 of Mr. Orage to Fontainebleau to study advanced psychology.
The impetus for the Bitish Labour party’s investigation of Social Credit came from certain elements in the Scottish Labour groups, which in 1920 became interested in Major Douglas’s draft scheme for the mining industry. In January, 1921, the Scottish Labour Advisory Committee advised the central executive committee of the Miners’s Federation to investigate this scheme. “We are convinced,” the committee said, “that bank credits are one of the main constituents – if not indeed the main constituent – of selling prices; and that no final solution of the problem is possible that does not bring the issue of credit and the fixing of selling prices under the community’s control.” The central executive of the Miners’ Federation referred the whole matter to the Central Labour party executive, and this body appointed a committee to look into what they termed the “Douglas-New Age Credit Scheme.” The Frank Hodges, F.B. Varley, G. D. H. Cole, Hugh Dalton, J. A. Hobson, C. M. Lloyd, Sir Leo Chiozza Money, R. H. Tawney and Arthur Greenwood (secretary), met on May 24, 1921, and invited Major Douglas and Mr. Orage to appear before it.
The authors of the scheme, however, objected to the personnel of the committee. They contended that only Mr. Hodges had any direct knowledge of coal mining or any experience either of the concrete problems of business management or of the operations of practical finance, and that the majority of the committee was already committed to the support of economic dogmas expressly challenged by Social Credit. They then proceeded to suggest the kind of committee before which they would be glad to appear, but their lack suggestion was rejected.
Without hearing Major Douglas and Mr. Orage, the committee prepared a report and issued it sixteen months later, condemning the Social Credit scheme. The report declared that the statement that the rate of flow of purchasing power into the hands of consumers is not and never can be adequate to purchase the goods available to them was fallacious.
(To be continued in the September edition.)