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THE LABOUR PARTY 1935

SOCIALISM AND SOCIAL CREDIT [1935]

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PRICE TWOPENCE
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THE LABOUR PARTY
TRANSPORT HOUSE,
SMITH SQUARE, LONDON, S.W.

INTRODUCTORY NOTE

THIS Report has been prepared at the request of the National Executive Committee by a Sub-Committee consisting of Messrs. E. F. M. Durbin, Hugh Gaitskell and W. R. Hiskett. The Report deals fully with Major Douglas's "Social Credit" proposals and the National Executive Committee associates itself with the Sub-Committee's conclusions on this subject. The Report also deals necessarily more briefly with the Labour Party's financial policy. This Policy has been set out in a series of Policy Reports which have been approved by successive Annual Conferences of the Party in 1932, 1933 and 1934.* This part of the Sub-Committee's Report, therefore, should be read, not as an official statement of policy, but as an unofficial presentation of the views of three individual Socialist economists.

The essential character and the very serious limitations, from a Socialist standpoint, of the "Social Credit" proposals have been well and clearly expressed by the late A. R. Orage, one of the leading exponents of Major Douglas's ideas:-
"His constructive proposals when they came to be clearly formulated, concerned mainly the only practically important question asked by every consumer - the question of price; and beyond a change in our present price-fixing system, there is in his proposals nothing remotely revolutionary. For the rest, everything would go on as now. There would be no expropriation of anybody, no new taxes, no change of management in industry, no new political party, no change, in fact, in the status or privileges of any of the existing factors of industry. Absolutely nothing else would be changed but prices."
+

* Currency, Banking and Finance (I932). Price 2d. Socialism and the Condition of the People (1932). Price 2d. For Socialism and Peace (1934). Price 2d. Labour's Financial Policy (I935). Price 1d.
+ New Age Supplement (November 22, 1934).

PREFACE

IN the following pages we have set down, impartially and objectively, the conclusions arrived at as a result of a reconsideration of the Social Credit proposals advocated by Major C. H. Douglas.
We were anxious to have the assistance of recognised supporters of these proposals in exploring how far they might be harmonized with Socialist belief and policy. We accordingly approached the Social Credit secretariat with an invitation to nominate a representative who would be willing to meet us for a discussion of matters in which we were mutually interested.

We received a letter in reply, from which we quote the following:- "Whilst we appreciate your courteous invitation, we would point out that your terms of reference do not make it clear whether it is the policy which underlies the Douglas proposals or their technical details with which you are concerned.

In regard to the former, responsible representatives of the official Labour Party have from time to time made it clear that they are not in agreement with the policy that underlies these proposals, which quite specifically does not regard administrative changes, either in the financial or industrial systems, as being the necessary component of an improved economic and social order.

In regard to the second aspect of the matter, every member of your committee has expressed, in print and otherwise, his disbelief in the technical soundness of the Douglas proposals, and is therefore committed to an adverse report."

In the hope of overcoming these initial objections, we continued the correspondence to some length. We explained that we made no claim to be an impartial committee in the sense of having no attachments, that we were, in fact, convinced Socialists and had been appointed by the Labour Party Executive to express the Labour Party's point of view. But we emphasised our desire to explore the possibilities of partial agreement between the Labour Party and the Social Credit Movement. The following quotations from our letters to the Secretariat indicate the stress which we laid upon this aspect of the matter: "We are anxious to recognise, fairly and impartially, whatever points of agreement may exist between us."- (January 22, 1935.)

"Our object in writing to you was to ascertain whether you would care to explore with us any points of agreement between the Labour Party's proposals and your own."- (February II, 1935.)

"We felt that it was advisable to give emphasis, wherever possible, to points of agreement between us, and we had hoped to have your co-operation in exploring those points of agreement. We should not have made the offer to meet you if we had not believed that it was possible, whilst differing on many major points, to meet in a perfectly friendly discussion of matters in which we are mutually interested."- (March 2, 1935.)

Our efforts in this direction were, however, unavailing. We had finally to recognise that it was not possible to overcome a difficulty arising from a mental attitude which had not changed materially from the suspicion and hostility expressed towards the earlier Labour Party Committee.

After the failure of our overtures to the Social Credit Secretariat a second attempt was made through the columns of The New English Weekly. We are glad to be able to report that this correspondence resulted in an acceptance of our invitation.

Mr. Alfred Newsome and Mr. W. T. Symons, accompanied by Mr. Philip Mairet, the editor of The New English Weekly, very kindly attended one of our meetings on behalf of that journal. We wish to express our gratitude for their courtesy and the assistance they have rendered us.

We also desire to thank the Right Hon. Thomas Johnston, P.C., and Mr. Norman H. Smith, prospective Labour Candidate for the Faversham Division of Kent, for their kindness in helping us. We were able to meet both these gentlemen, and in each case memoranda were submitted which we very carefully considered.

 

SOCIALISM AND SOCIAL CREDIT

I

POLITICAL IDEALS AND FINANCIAL POLICY

THE purpose of this Report is to describe the relationship between the policy of the Labour Party and the proposals for Social Credit generally associated with the name of Major Douglas. What is the Douglas scheme? How does it compare with Labour's policy? Are there any points of agreement between them? What are the points of disagreement and why? These are the questions which we set out to answer.

At the start some fundamental differences must be stressed. The Labour Party is a Socialist Party. It believes that the community should own and control the material means of producing wealth. It believes that, so long as the means of production are in private hands, it is impossible to make full use of the nation's resources or to eradicate the terrible evils of insecurity and social injustice. It seeks to convince the people of Great Britain that this is so, and, through the normal machinery of Parliamentary democracy, to carry through the great change over from Capitalism, to Socialism.

Major Douglas is not a Socialist. He does not believe that the State should own and control the means of production. He does not aim at eliminating class distinctions or securing equality of opportunity for all. He does not hold that economic individualism must inevitably produce unemployment and waste. He believes, on the contrary, that only a change in financial policy is required to make Capitalism work and secure permanent prosperity. Capitalism is for him the best possible system. There is only one simple flaw - a flaw in the money machine - and that can be put right, in his opinion, without any big administrative or institutional changes.

It might be thought that such fundamental differences - differences of ideals as well as analysis - would make all further comparison a waste of time. This, however, is not really the case. There is no doubt that many believers in Social Credit do not share Major Douglas' political opinions. Not a few are active supporters of the Labour Party, and many more have no particular bias against Socialism. These persons think that much of what Major Douglas says is not incompatible with a Socialist outlook and that there are definite points of agreement in the propaganda of the two movements.
They, in common with all Socialists, detest the injustice of the present system: they recognise, too, that public ownership will increase output and improve conditions of work. But they also believe that Major Douglas has laid his finger on the root cause of capitalist economic depression, and, what is really more important, that the remedy he suggests offers an immediate short cut to prosperity. They argue that however desirable the ultimate goal of Socialism may be, the Labour Party is bound for a time to govern in a capitalist system. There is inevitably a transition period. It is vital that during this period the Labour Party should pursue the right financial policy, and this policy is, to be found, according to their view, in the Social Credit proposals.

A part of this argument, of course, is accepted by all democratic Socialists. No one denies the inevitability of a transition period, or questions the profound significance of the financial policy pursued in that period. But financial policy, which is everything to Major Douglas, is to the Socialist only a part of a wider policy, a part which cannot be worked out except in relation to the whole. Financial policy cannot remove evils which are inherent in Capitalism itself. But it can, at least temporarily, modify those evils. It can, for this reason, smooth the passage to Socialism and be made into an exceedingly valuable ally.

In spite, therefore, of the very obvious differences between the opinions of Major Douglas and the principles for which the , Labour Party stands, there is no necessary or inherent contradiction between particular Social Credit proposals and Socialist policy. Social Credit might be regarded as a financial policy which would not necessarily be inconsistent with Socialist aims. Now in actual fact the Labour Party has not adopted it. It has a financial policy of its own to which no one would apply the name Social Credit. It is the business of this pamphlet to explain, among other things, why this is the case. The only way to do this, however, is to proceed to a more detailed comparison of the two financial policies, omitting deliberately all further consideration of the non-financial aspects of Labour's programme.

Some Points of Agreement

There are three important spheres of agreement between the Socialist and the Social Credit attitude. In the first place there is a common recognition that unemployment and trade depression are connected in some way with the money system. Both might agree that the depression is associated with a fall of prices below costs and that this fall must itself be caused by some immediate deficiency or withholding of purchasing power. Both would agree that the deficiency continues throughout the period of depression. Money is, so to speak, being drained out of the industrial system. Prices therefore continue to fall, stocks cannot be sold, profits dwindle and disappear and unemployment increases.

This partial agreement in diagnosis is naturally accompanied by partial agreement in the remedies prescribed. Both maintain that during a period of depression efforts must be made to increase the total volume of money in order to offset the drain of money away from the system.

Agreement about the deficiency, however, is strictly limited. The Labour Party believes that the deficiency is not chronic but confined to periods of depression. It is succeeded at first by a period during which the volume of money is more or less constant but inadequate to provide full employment. It is then followed by the boom period when the size of the money flow is growing larger, prices are rising and employment increasing. At such a time there is a "surplus" of purchasing power over prices. The movement, once under way, does not stop. The inflation proceeds to its inevitable climax, when the banks refuse to lend more money. The crisis is then reached and prices start falling fast. Depression and deficiency of purchasing power follows and the circle of boom and slump is completed. The deficiency is thus due to the contraction of the volume of money resulting from the restrictive policy of the banks which itself follows their expansionist policy during the boom.
In Major Douglas' opinion, on the other hand, the deficiency is chronic. According to him, the gap occurs during the process of building up costs and consists of an hiatus between (r) the price which is arrived at by the addition of all costs incurred by the producer plus his profit, and (2) the purchasing power which reaches the consumer through the medium of the costs incurred. A continuous deficiency exists because certain elements of cost are not being concurrently distributed as purchasing power. The system is never self-liquidating.
During the boom, he admits, the gap is temporarily filled, but only by the creation of additional debt to the banks. This is to Major Douglas evidence of deficiency. "We also know," he says, "that in fact, in those times of boom which are referred to by economists as proving that it is self-liquidating, the rate of increase of debt is greater than in times of depression; so that in real fact, in times of boom even, there is no justification for saying that, at any time of the trade cycle, the price system is self-liquidating." Again, in the same speech, he remarks: "To put it very shortly, the core of the defect in this price and money system under which we operate at the present time is that it cannot, without the help of the banks, liquidate "costs" as they are produced; or, to put it another way, it is under an inevitable necessity of piling up debt at an increasing rate."

We shall proceed shortly to examine the reasons which lead Major Douglas to this conclusion. For the moment we are concerned only to make clear the underlying difference of viewpoint about the significance of the "deficiency."

Another point of agreement, which follows closely from the first, is the common objection to destruction and restriction schemes as a cure for economic depression. The spectacle of millions of workers compulsorily unemployed, of idle machines, and factories closed, side by side with widespread poverty and starvation, is deplorable enough. The attempt to remedy this state of affairs by deliberately destroying goods which are needed and deliberately cutting down production and increasing unemployment would be ludicrous if it were not so tragic. Socialists and supporters of Social Credit join in denouncing the iniquity of these restriction schemes. Both recognise the schemes for what they are - monopolies which aim at holding up prices and squeezing the utmost from the consumer. Both insist that the cure for economic depression lies not in diminishing production still further, but in expanding consumption.

The third sphere of agreement is to be found in a common attitude to certain moral aspects of the banking system. Major Douglas deserves credit for repeatedly drawing attention to two of its characteristics.
(I) He has emphasised the fact that bank credit is just as much money as Bank of England notes or coin of the realm. The right to draw a cheque for £1oo is just as useful for buying purposes as £100 in notes. In fact quantitatively bank credit or cheque money-as it is sometimes called-is nowadays far more important than· cash, since nearly all business transactions take place by cheque.
(2) He has pointed out that new money comes into existence through the action of the banks in increasing their assets. It goes out of existence when those assets are being reduced.

These facts were not discovered by Major Douglas. They are to be found in all orthodox writings on the subject and are clearly stated in the pages of the Macmillan Report. But Major Douglas and other monetary reformers have certainly popularised them better than the text books, and have also pointed to certain implications which tend to be slurred over in more orthodox accounts.

To anyone who stops to think for a moment it is an extraordinary thing that such a vitally important matter as the creation or destruction of money should be left to private institutions. It is extraordinary both from an economic and a moral point of view. We have already seen the tremendous significance which , the inflow and outflow of money has for the working of the industrial system. Yet the most vital point at which, under the existing system, this flow can be controlled is left in the hands of private persons. It is true that a distinction has to be drawn between the Bank of England and Joint Stock Banks. To a very considerable extent the latter can be controlled by the former.

"If the Bank of England wishes, it can force the Joint Stock Banks to call in their loans and reduce the size of the money flow. To a much smaller extent it can also induce the Joint Stock Banks to lend more than before. Over the direction in which the new money goes, however, it has practically no control, and it is itself, in any case, a private institution. That such great powers - of special significance now that the money system of this country is not tied to others through the gold standard - should be exercised by bodies which are legally beyond the control of the Government, is an anachronism as dangerous as it is absurd.

This is indeed recognised so far as the issue of notes is concerned. The profits which the Bank of England makes from the issue of notes accrue not to the Bank but to the Treasury. Yet since credit is no less money than cash, and the former is, as has been pointed out, far greater quantitative importance, than the latter, there is a strong moral case against the exploitation of credit creation for the purpose of making private profits.

Perhaps the most striking of the effects of the present arrangement is to be seen in the financial history of the war. The National Debt of this country increased between 1914 and 19I9 from £600,000,000 to £7,000,000,000. How was the money raised. Ostensibly it was borrowed from private individuals and firms. In fact part of it was borrowed by those individuals and firms from the banks and then lent to the Government, and another part borrowed directly from the banks. The banks did not have to borrow this money. They were able simply to create it. Thus although they admittedly incurred a liability for the payment of interest in respect of part of the new deposits which accrued from the money so created, such interest payments were small in comparison with the earnings of the assets which they gained. They were able in fact, through the national emergency of the war, to enormously increase their business and enrich themselves at the public expense.*

Of even greater immediate importance is the difficulty in which a Government finds itself to-day when it wishes deliberately to increase the money flow. As the opponents of "public works" have hastened to point out, it can only do this by incurring a debt. It has to borrow the new money through the banking system and burden the future taxpayers with the interest and sinking fund payments. It is, truly, a humiliating position.
Simply because the right of creating new money does not belong to the State, the necessary impetus to recovery cannot be given. It is due in large part to these considerations that the Labour Party stands particularly for the Nationalisation of the Banking System. There can be no doubt that many supporters of Social Credit draw the same conclusion. Curiously enough, Major Douglas himself does not. He proposes both to leave the banks in private hands and to allow them to continue to finance industry. As we shall show later, it is most unlikely that the full Social Credit proposals could be applied, without either producing inflation, or making it impossible for the banks to exist in their present form. But this does not alter the fact that Major Douglas is opposed to Nationalisation. Partly, this is to be put down to a peculiarly strong anti-Socialist bias in his mind; partly to the special nature of his own remedy and the analysis from which it springs.

It is with the details of this analysis, to which we now turn, that the Labour Party finds itself unable to agree. The background of agreement on the three points mentioned gives way to a difference of opinion on the underlying causes of the capitalist crisis.

SOCIAL CREDIT ANALYSIS

As we have explained, it is the contention of Major Douglas and his supporters that the existing method by which industry is financed tends always to produce a deficiency of purchasing power. According to their view, the reason for this is that the sums of money paid out to consumers during the production of the goods are less than the costs of production incurred in making those goods.

Now it is useless to pretend that the arguments on which this conclusion is based are either simple or of a uniform character. In the literature of Social Credit, the conditions under which this deficiency of purchasing power is said to occur are by no means always the same. That under certain conditions a deficiency would occur is accepted by very many who do not agree with Major Douglas' general diagnosis. Indeed, as we have already indicated, it is the opinion of the Labour Party that deficiency exists during periods of depression. It is also their view that the price level should be stabilised, and consequently that purchasing power must be increased proportionately to production. If this is not done, it may be argued, there is a shortage if not a deficiency in Major Douglas' sense.

"The A +B Theorem"

The central argument on which Major Douglas bases his conclusion is generally known as "the A plus B theorem." The following quotation gives one of the most recent forms in which he has expressed it:-
"A factory or other productive organisation has, besides its economic function as a producer of goods, a financial object:
it may be regarded on the one hand as a device for the distribution of purchasing power to 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. 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.”

Simple as "the theorem" appears to be, it is in fact capable of different interpretations. The most straightforward and that to be derived on the whole from Major Douglas' earlier writings is to understand "A" as all the A payments made in the system, and “B” to mean all the B payments made in the system.
In this case the theorem is certainly true. But it is no proof of any deficiency. For Major Douglas is arguing that the money in the hands of consumers must be sufficient not only to pay the costs incurred by the retailer - the man from whom the finished article is bought - but to pay at one and the same time the costs of the retailer, the wholesaler, the manufacturer, the producer of raw material, etc. It is clearly totally unnecessary for the consumer, however, to do any such thing.
The retailer, at least, will be satisfied so long as he can recover from the consumer his own costs of production. The wholesaler wll1 be satisfied If he recovers his costs not from the consumer but from the retailer by means of a B not an A payment. Similarly the manufacturer and the producers at earlier stages will also be recovering their costs by means of B not A payments.

* According to Sir Walter Layton ("Introduction to the Study of Prices") Joint Stock Bank deposits rose from £895,000,000 in 1914 to £1,874,000,000 in 1919. Profits rose from £9,000,000 in 1914 to £24,000,000 in 1919. Mr. Reginald McKenna speaking in January, 1920, said "Bank deposits have increased by £1,230,000,000, of which £r ,100,000,000 is in consequence of Bank loans. £800,000,000 of this was lent to the State and only £300,000,000 to trade.

Alternative Interpretation

The theorem is capable, however, of another interpretation. It may be claimed that A and B refer only to the final stage of production. The producer at the last stage incurs A costs and B costs: his total costs are therefore A + B. But he has distributed to consumers only A. Is there not then a deficiency? The answer is clearly that the consumers' income which is available for buying the finished products is equal not simply to the A payments made by the last producer but to the A payments made by the producers of all stages.

To take an example:-
If a consumer buys a pair of boots and pays I5sh. for them, it is true that the boot retailer may only have distributed 5sh. or less in payments to individuals in respect of that pair of boots. But then the manufacturer of the boots, the grindery and sundries merchant, the tanner, the manufacturer of the machinery, the electrical company supplying power, all the other organisations contributing to the production of the boots have been making payments to individual although they may have produced no final product which the consumer buys.

Rate of Flow Argument

Major Douglas endeavours to meet this argument in the following way. It is true, he says, that the rest of the B costs of the final producer have been distributed by the subsidiary organisations, but only in some earlier period. These sums have already been spent and are no longer available as purchasing power. "It is the rate of flow which is vital." Again, he says,
"While the final price to the consumer of any manufactured article is steadily growing with the time required for manufacture, during the same time the money distributed by the manufacturing process is being returned to the capitalist through purchases for immediate consumption." Elsewhere he explains that the money which has been paid out in advance is actually repaid to the banks.
"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."

Now the question whether consumers will have sufficient purchasing power to buy the finished commodities at the moment when they reach the market depends not only, or so much, on what thee have received in the past, but also on what they are receiving in the present.

Major Douglas concerns himself wholly with the first of these. It is, in fact, impossible to say what will have happened to the money received beforehand. It may have been spent on other finished goods (it is, of course, assumed that the commodity in respect of which it is distributed is not yet finished), or it may have been held by consumers. Its destination is not of great importance. The much more crucial question is what consumers are receiving at the moment. Now it is clear that, providing the earlier stages of production are continuous, they will, in fact, be receiving a sum of money equivalent to the cost of the finished product. Of course, if the manufacturers of raw materials and machinery, and semi-manufactures were suddenly to cease production, there would be an immediate drop in the A payments, and in the B payments as well.
There would certainly be a shortage of purchasing power in respect of the finished goods. But so long as production in the earlier stages continues, and firms continue to employ labour, pay dividends, and replace stocks, they send out in the process a steady stream of purchasing power to consumers which is available to buy the final products then coming on to the market. The fact that some firms habitually distribute purchasing power a considerable time ahead of the completion of the final product, others a short time ahead, and others at the time of their completion, does not matter in the least, so long as their operations are continuous. The very fact that production takes time means that the distributed costs of the present period will always have to buy the product of a past period.

The attempt to overcome this point, and demonstrate a deficiency, by the "rate of flow" argument does not, in our view, contribute anything to an understanding of the matter. If, as Major Douglas admits, all B costs in addition to A costs, are at some period distributed to consumers as purchasing power, the volume of purchasing power must be equal to the volume of costs so distributed to consumers. In these circumstances it is not possible that the rate of flow of purchasing power could be continuously less than the rate of creation of costs. Possibly the point of confusion for Major Douglas is the fact that many B costs occur repeatedly at various stages of production. They are, in fact, merely transfers carried from one stage to another. But only the final cost - not the total of all these transfers - is included in the price charged to the consumer.

Repayment of Bank Loans

This brings us to another important argument put forward by the supporters of Social Credit. It is suggested that discontinuity of production is bound to arise on account of the fact that the money required to finance production is borrowed from the banks and therefore has to be repaid. Now it is certainly true that if on balance throughout the whole industry loans are repaid to the banks, a deficiency of purchasing power is bound to arise. For the A payments accruing to final consumers would then be less than the A + B payments of the final producer. The question here is simply one of fact. Is there a tendency for the total of bank loans to diminish? The answer is that at certain times - during depressions - this is the case, but that at other times the total of loans definitely expands.

Bank Debts and Costs

The Social Credit argument, however, explains the adverse effect of the borrowing of money in a rather peculiar way. It is implied that the mere fact that a producer is under an obligation to repay his loan forces him to include the sum which has to be repaid in the price which he charges the consumer.* Since the consumer cannot pay this the goods cannot be sold. According to an explanatory statement which appears in the New Age every week deficiency arises "because the money required to finance capital production, and created by the banks for that purpose, is regarded as borrowed from them and, therefore, in order that it may be repaid, is charged into the prices of consumers' goods."
This appears to imply that if a man borrows £100, and spends it on wages and materials, he must recover from the consumers not simply the £100 to cover his costs, but £200 in all, in order to repay the loan as well. It is obvious that it is quite impossible for industry as a whole to do this, and if it were true that no sales could take place except at a price which both covered costs and repaid loans, there would certainly be immediate glut and wholesale stagnation. It is merely ridiculous, however, to suggest that this is the was industrialists behave. In the example quoted they would be insisting on 100 % profits before selling their goods. It seems more reasonable to suppose that in order to sell their goods they would be content with a more moderate profit and leave their bank loans outstanding. The fact is that industrialists only repay loans to banks on two occasions (1) when they are compelled to because the banks insist, and (2) when they are making profits sufficiently large to justify repayment. It is clear that if the banks do insist on net repayment, then deficiency is bound to arise; wages are no longer paid and intermediate goods are no longer bought. Equally, if a firm is voluntarily repaying a loan out of profits and the banks do not immediately create another loan to another producer, then again deficiency is bound to arise. But as we have already said, the question here is really one of fact, and the facts show no general and chronic tendency for the total of bank loans to diminish.

* Major Douglas himself has put the point as follows: "If I as an individual require, let us say, 10,000 Kroners worth of goods per annum, and, while getting that 10,000 Kroners worth of goods per annum, I get into debt to the extent of 10,000 Kroners per annum, then it is quite obvious that the real price which I ought to be paying-in order that the system could go on for ever-is Kr.20,ooo, for what I am getting for Kr.1O,ooo and borrowing Kr.10,ooO to pay in addition."

The assertion of Major Douglas that the incomes distributed in the course of production always tend to be insufficient to purchase the commodities offered for sale, must, therefore, be rejected. It is also not possible to accept his belief that in practice if goods are sold and production maintained only when money is being borrowed at an ever-increasing rate from the banks. In our opinion deficiency can be avoided and production held constant provided that the banks maintain the quantity of loans outstanding, and offset, by increased lending, any hoarding which is taking place . If one loan is repaid it must be offset by the creation of another. For the same output to be sold, it is not necessary that a larger and larger debt should be piled up.

The qualification for "the same output to be sold" is of course an exceedingly important one. In so far as society can and does increase production, it may very well need a different monetary policy. If we have, as is the case to-day, heavy unemployment and quantities of unused resources, it stands to reason that we shall only be able to employ those unused resources if we increase the quantity of money. To attempt to employ them by simply withdrawing money from another part of industry would clearly leave a deficiency.

If Major Douglas were simply arguing that increased production required an increase in the amount of money, there would be very little to quarrel about. It is, in fact, the policy of the Labour Party to stabilise prices; and prices can only be stabilised, when production is increasing, if there is an adequate increase in the quantity of money. Although at certain times Major Douglas seems to introduce these dynamic conditions, it is quite clear that they are not essential to his main argument. He would doubtless agree that unemployed resources can only be brought into use if fresh money is injected into the system. But he would argue that even when they are fully employed, under existing financial arrangements, more and more money would have to be borrowed from the banks, in order to offset the "deficiency."

In conclusion, it is necessary to examine two other arguments sometimes introduced by Major Douglas in support of his view that in the present financial system there is a chronic deficiency of purchasing power. The first of these concerns the process of saving and investment, the second the replacement of labour by machinery.

lnvestment

With regard to investment, deficiency is said to arise in the following way. The act of saving withdraws money from the market for finished commodities and makes it impossible to sell a part of the product. The money which is saved is invested and paid out eventually in wages and so passes into consumers' income; but in the meanwhile, it is argued, the process of investment has led to the production of new capital goods and there is no purchasing power available to purchase these. Hence there is a deficiency, which is again only offset by fresh borrowing from the banks.

This argument is, in our opinion, quite unsound. It is based on an entirely false notion of the process of saving and investment.
It is of course true that the act of saving will create a deficiency if it is not balanced by an equal amount of investment in the same period. If, for example, consumers put additional money on deposit with the banks and the banks do not at the same time and to the same extent increase the amount of their lending, then there will be a net deficiency of purchasing power. Much attention has been paid by economists in recent years to this source of industrial depression; but this is not the deficiency with which Major Douglas is concerned. He assumes that investment does take place concurrently with saving. If this is so, there is no need to anticipate deficiency. It is true that if saving increases some finished commodities cannot be sold at their old prices, but at the same time some investment goods, machinery, buildings, raw materials, etc., will be sold at more than cost prices. There will be depression in certain industries and boom in others: less money will be distributed in some and more in others. Consumers' income as a whole will be unchanged if the saving continues at the higher rate there will be a movement of capital and labour away from the finishing industries into the industries producing capital goods. This is indeed necessary if the rate of production is to be increased. For the assumption from which we start is that all available resources are fully employed. The depression in the finishing trades, is, therefore, not only no indication of deficiency; it is also a necessary part of the process by which the rate of capital accumulation is increased. As the new capital goods are produced they will continue to be bought by the savings of consumers. They will then be used in production. This will lead to an increase in the output of industry. If there is to be no fall in prices it is necessary that the quantity of purchasing power and the incomes of consumers should now be increased. This is, of course, implicit in the Labour Party policy of stabilising prices. A failure to increase purchasing power at this point might be said to constitute a deficiency; but it is certain that this is not the main deficiency to which Major Douglas refers.

Depreciation

He refers, however, to another source of deficiency associated with investment. One of the costs which producers have to allow for is depreciation of fixed capital. Major Douglas argues that here, at any rate, is a cost against which no equivalent purchasing power is distributed to consumers. If a machine costs £500 and lasts five years, approximately £100 a year must be charged on its account into the costs of the article it produces. But, says Major Douglas, consumers are not receiving this £100 a year and hence there is a deficiency.

At first sight the argument seems plausible, particularly when we consider the individual producer and not industry as a whole; but a moment's consideration shows that at the same time as money is set aside for depreciation, new machines to replace the old ones are being constructed and in respect of these, purchasing power is being distributed to consumers. So long as the money so distributed in industry as a whole is equal to the depreciation costs incurred in industry as a whole there will be no deficiency. It cannot be claimed that this is always the case, but it must be pointed out that there is no reason to anticipate a chronic deficiency on this account. During depressions when producers postpone replacement, there is deficiency. During booms, however, the opposite takes place and the purchasing power distributed in respect of machines for replacement will exceed the depreciation costs being charged at the time.

This brings us to the last suggested cause of deficiency. This generally takes the crude form of a mere statement to the effect that since in respect of machines no wages are distributed, there is a growing deficiency of consumers' purchasing power. It is true that the introduction of machinery may tend to reduce the total wage bill of industry, but it is not true to say that consumers' purchasing power is necessarily reduced. Nor is it true to say that no payments are made to consumers m respect of machine costs.

The substitution of machinery for labour involves the substitution of two types of cost for one. Instead of the payment of wages there is (I) the interest, (2) the depreciation costs of the machine. Now the interest accrues to capitalists who are also consumers; depreciation cost, as we have seen, is accompanied by the construction of machines for replacement, and this involves the distribution of purchasing power to consumers. Thus a society which employs a high proportion of machinery distributes purchasing power adequate to costs no less than one which employs a high proportion of labour.

A more subtle form of this argument maintains that the actual change over from labour to machines causes a diminution of the actual monetary circulation. Since cost reduction, it is maintained, is the stimulus to replace labour with machines, the new costs will be less than the old and hence the amount of money used by industry will be less. There are, doubtless, occasions when this will be so, but it seems equally probable that since the reduction of costs offers the prospect of higher profits, more rather than less will be borrowed by industry. Because a firm reduces its unit costs, it does not necessarily reduce the total amount which it spends i.e., its aggregate costs.

The real objection to the replacement of labour by machinery is not, as the supporters of Social Credit believe, that it causes a monetary deficiency, but, as the Labour Movement fully realises, that it generally throws certain workers out of employment, and that in any case it continually tends to reduce the relative share of labour in the product and increase the share of capital. The method of dealing with this evil is not monetary policy, but Socialism. The community must, itself, own the machines.

III

THE CURE - THE ISSUE OF SOCIAL CREDITS

Having outlined Major Douglas' analysis, and our own objections to it, we now proceed to examine the cure which he puts forward. This follows, for the most part, quite logically from the analysis. It is, in effect, a device for filling the gap caused by the supposed deficiency without producing the undesirable consequences which are said to follow when it is filled by additional borrowing from the banks. The most usual form in which it is expressed is as follows:- An estimate must first be made of the extent to which consumption falls short of production.

Suppose that consumption is estimated to be 75% of

..................;..consumption
production, so that ----------------- = 3/4
......................production,

Then a decree is issued announcing that all retailers who reduce their prices by 25 % will be given "Social Credits" to the extent of the price reduction on every commodity sold at the reduced price. Thus, although prices are lowered to the consumer, no losses are incurred. Social Credits will take the form either of notes or of cheques drawn on a new Government institution: "The National Credit Authority." They will not be raised by taxation, but will be new money created directly for the purpose by the State.It is claimed that the immediate consequence of issuing Social Credits will be that consumers can buy more goods. For "prices are lower" and money will now "go further." The glut is, therefore, rapidly cured.
Producers, meanwhile, are not only safeguarded against loss, but also find their turnover, and therefore their total receipts (including Social Credits), increasing. They are, therefore, stimulated to produce more to meet the increasing demand. So long as consumption falls short of total production, Social Credits continue to be issued.

consumption
.......................As the fraction ...----------------- increases, they are diminished.
productIon

Finally, when it reaches unity, no further credits are issued.

Before proceeding to consider this scheme, we must emphasise that disagreement with Major Douglas' analysis is not in itself an adequate reason for rejecting his proposals entirely. It has already been pointed out that at a time when resources are not fully employed an increase in the quantity of money is required.

Major Douglas does, in fact, suggest one way by which this might be provided. It remains to be seen how far this is the best way, and also how far the Social Credit proposals can secure not only the achievement but also the maintenance of a level of production.

The following comments on this proposal appear to us necessary.

---------------------------------------------...consumption
(I) The basis on which the fraction ------------------ --and hence
----------------------------------------------..production

the actual price discount to be granted is estimated has never been made very clear. This is shown by the extraordinarily wide differences between the actual estimates made by Major Douglas at different times.

Probably the differences are due to a confusion about the principle involved. On the one hand there is the more straight-forward principle of the proportion of unemployed resources, which might be put at 30%. On the other hand there is the wholly distinct notion of the monetary gap between production costs and consumers' purchasing power. As we have seen, Major Douglas believes that this exists always, even when there is full employment, but that it is filled by additional borrowing from the banks. This difference about the basis for estimating the price discount is, as we shall see, reflected in a difference about the purpose of the Social Credits. These are required not only to stimulate full production, but also to fill the gap in the place of bank credit.

(2) Supporters of Social Credit do not generally appreciate that the percentage increase in the amount of money involved in their proposals is much larger than the percentage increase in consumers' incomes. If, for example, the fraction is 3/4 %, so that the price discount is 25 %, then new money would have to be issued to the extent of some £1,000,000,000, since the total retail turnover is approximately £4,000,000,000. But the total quantity of money in effective circulation is only about £1,000,000,000.* By the end of a year, therefore, the quantity of money in effective circulation would have increased by 100 %, and the money actually used in the purchase of retail goods might be more than doubled. If the Social Credits were continued, the increase would of course be progressive.

* Total bank deposits are approximately £2,000,000,000 and about half of this is in current accounts, and the remainder on deposit.

(3) Since Major Douglas does not propose to interfere with the Joint Stock Banks but is prepared to allow them to carry on their normal business of financing industry, it is important to examine what their position would be if the Social Credit proposals were adopted. Moreover, as we have already indicated, it appears to be the aim of Social Credit to relieve industry of debt to the banks. As Major Douglas himself puts it, "If you create money even at the astronomical rate at which debts are being created, you can apply the money so created to the liquidation of the debt, and both money and the debt will go out of existence at the same time. In that way the process will, as it has not for many hundreds of years past, become a self-liquidating process which can be carried on indefinitely."

If you take the numerical example already given, during the first year of the operation of Social Credit, £1,000,000,000 of new money will be handed to retailers. This new money takes the form either of notes or cheques drawn on the new "National Credit Authority." Now the primary purpose of the new money is to enable retailers to sell more goods, to enlarge their total receipts and so to order more from manufacturers, who in their turn will expand production. It is obvious that to the extent that the new money is required for this purpose, it cannot also be used to repay loans to the banks. Or, to put it in another way, if the money is used by retailers and others to repay overdrafts, then it cannot be used for expanding production.

It is sometimes assumed that Consumers' Credits can be used for both purposes, and it is necessary to be clear therefore that if they are issued as a relief to consumers they will only come into the hands of producers as a reimbursement of costs incurred, with the addition of the item of profit. The extent to which such credits will enable producers to payoff their overdrafts, whilst maintaining production at the higher level, is therefore limited to the amount which they are able to allocate for the purpose out of their increased profits.

The position of the banks may now be considered. In so far as the money is not devoted to repaying loans, the deposits or liabilities of the banks will be increased on the one side, and against these liabilities they will now hold cash either in the form of notes or credits with the "National Credit Authority." But this will clearly mean a very big increase in the ratio of cash reserves to deposits. If we assume that to begin with deposits are £2,000,000,000 and cash reserves £200,000,000, the issue of Social Credits will increase deposits to £3,000,000,000 and cash to £1,200,000,000. The cash ratio will have risen from 10% to 40%. If the banks are allowed to pursue their normal policy they will then expand their loans to £12,000,000,000.

Moreover, if the anticipations of producers are generally favourable, the banks will find little difficulty in lending more money; but it is equally certain that an increase in the amount of money on this scale would cause a terrific inflation. Prices would begin to rise rapidly and neither the mere cessation of the granting of Social Credits nor legislative attempts at price control would be of any avail. At the best we should be faced with the familiar boom of the trade cycle, assisted as always by the over-expansion of bank credit. It may be argued that this expansion on the part of the banks could be stopped by the Bank of England, which could sell securities to the open market and thus withdraw the excessive cash from clrculation. Under present circumstances, however, the Bank of England does not hold sufficient securities for this purpose. The only effective method of controlling the situation would probably be to make a certain cash reserve obligatory on the Joint Stock Banks, and to raise this considerably above the 10 % which has so far been customary. Incidentally, in such a case, the banks would be liable to pay interest on a proportion of the £1,ooo,ooo,ooo of new deposits, but would have no new revenue to meet it.

There remains, however, the possibility that the new money will be used to repay loans to the banks: in this way, it is sometimes suggested, the Social Credits would be "cancelled." Let us examine this possibility in rather greater detail.
No one for a moment would deny that the volume of bank money in existence may at any time be reduced by the repayment of a bank debt by a producer. But the reason for this is that when a debtor repays a bank loan, he normally collects existing money for the purpose. He therefore reduces the amount standing to the credit of all other depositors and places the amount to his own credit.
Consequently when the bank cancels his loan against his deposit, it reduces the total volume of deposits. It has destroyed a liability at the same time that it has destroyed an asset. In the case under consideration, however, the money is not collected from existing deposits but is a new creation. Hence the total of deposits remains unchanged and all that has happened is a change in the form of the banks' assets. It holds cash or credits with the National Credit Authority where it previously held loans to producers.

If we suppose the whole of the £1,000,000,000 devoted to the purpose of repaying the banks, the banks' balance sheet would still show a total of £2,000,000,000 liabilities and £2,000,000,000 assets, but its cash reserve would now be £1,200,000,000 instead of £200,000,000. Moreover, while having to pay interest on that part of its liabilities which took the form of deposit accounts, the bank would be deprived of the interest which it previously secured from the £1,000,000,000 lent to industry. There can be no doubt that under these circumstances the banks could no longer meet their interest liabilities and remain solvent. It is therefore clear that in spite of Major Douglas' antagonism to Nationalisation, his own proposals are quite inconsistent with the maintenance of private ownership of the banks.

We have already pointed out that their normal policy with such huge reserves would be to increase their loans to industry.

So long as the banks remained in private hands the pressure to do this would be irresistible; but if this were done there would once again arise that indebtedness of industry to the banks which Major Douglas regards with such suspicion. Social Credit can only free industry completely of debt to the banks by making the banks bankrupt. In the extreme case they would hold no interest-bearing assets at all, but they would still be liable in full to their depositors and still have to pay interest on approximately 50% of their deposits.

(4) This long discussion of the position of the banks leads to another conclusion about the consequences of Social Credit. In our opinion the fundamental cause of capitalist depression lies in the existence of excessive purchasing power at certain times and inadequate purchasing power at other times. This irregularity of the flow of money is due to the fact that both industry and the banks are in private hands. The issue of Social Credits offers no way of dealing with this problem, as the banks are to remain in private hands and industry is to continue to borrow from the banks. No suggestion is made by Major Douglas as to how the excessive issue of bank credit to industry is to be prevented. As a method of expansion, Social Credit may have something to be said for it. As a method of stabilising full production it offers no constructive suggestions whatever. The real reason why Major Douglas assumes that prices will not rise is that either because of the existence of very large stocks or because of an increase in production, there is an increase in the quantity of goods available for sale. But suppose this was not the case and that nevertheless Social Credits were introduced, it is clear that after existing stocks had all been bought at the lower prices, made possible by the issue of Social Credits, consumers would still have income available unspent.

As soon as they began to spend this they would drive prices up. This did not take place in the original illustration only because it was assumed that there were more goods available for them to buy. Now it is of course true that in a period of depression stocks accumulate and resources are unemployed, but it does not follow that these "surplus" stocks are of the magnitude which Major Douglas assumes. The growing complexity of the distributive system necessitates the holding of very considerable stocks and it is certain that prices would rise long before these stocks were completely dissipated. It may be said in reply that prices would be regulated and that the injection of fresh credits would stop as soon as prices began to rise at all. As we have already indicated, however, by the time full employment is secured the dominating factor in the situation will not be Social Credits at all but banking policy. Is the rate of interest to be put up when prices begin to rise? Are bank loans to be called in? If so, how is the crisis and depression to be prevented? If not, how will a rise in prices be avoided?

(5) Moreover, it must be remembered that the price situation will not be the same in every industry. Even at the outset before the introduction of Social Credits there will be considerable differences. In some industries producers will have cut prices and will be selling at a loss, in others wage costs will have been reduced so that the losses are borne by the workers as well; in these two groups production will probably have been well maintained. In other industries prices will have been kept up by cutting down the volume of sales and production. It is clear that the producers in the latter group will gain more from the introduction of Social Credits than those of the former.

The former may continue to receive approximately the same receipts as before, for the same turnover. The latter will benefit by getting back to their old turnover at the higher prices, and the policy of restriction and higher prices will reap a most unmerited reward. In other words the former group will receive credits on the basis of on a low price level, and the latter group on a high price level.
Nor will the mere refusal of Social Credits to industries where prices have risen prevent them rising further. For if prices remain low elsewhere, consumers can still spend their "surplus" on the industries where prices are rising because of a relative shortage of goods.

(6) Finally there are, of course, immense administrative difficulties in the proposal to control prices and grant Social Credits everywhere in proportion to price reductions. When the positively immense range of qualities in nearly all consumption goods is remembered, it will be seen that the task of ascertaining that the correct price reduction had in fact taken place before Social Credits were granted would be virtually an administrative impossibility. The temptation for the retailer to have it both ways, to charge the higher price and collect the credit, would be extremely strong. Without some form of nationalization beforehand, effective checks could not be imposed.

We therefore conclude that, while the granting of Social Credits-assuming favourable political conditions-would tend to cause monetary and industrial expansion, the proposals would create certain serious banking problems and offer in any case no permanent cure for the recurring capitalist depression. The hope that they would achieve permanent prosperity is entirely vain. Moreover, in their usual form of a universal price discount for all industries, they involve administrative difficulties of an almost insuperable character.

THE NATIONAL DIVIDEND

A further proposal, which is complementary to the proposal for the issue of Consumers' Credits, concerns the payment of a National Dividend. According to Major Douglas, this Dividend would be paid as a right of citizenship, and in his Scheme for Scotland he has estimated that it would be in the region of £300 per family per annum. An obvious fallacy here lies in the fact that Major Douglas appears always to include the capitalised value of all assets in his estimate of production, and even goes to the length of capitalising the productive capacity of individuals.

Capital assets are, however, only consumed at the rate of their depreciation, and so long as replacement takes place concurrently with depreciation, consumers will receive-for making the replacement-sufficient purchasing power to cover the depreciation charges which are included in the costs of the final products which they buy. If, on the other hand, purchasing power were to be distributed, not at the rate of depreciation, but equal to the total capital value of all assets, this purchasing power would not be used to purchase the capital assets, but would be available to purchase consumption goods, and a tremendous inflation would undoubtedly result.

THE REAL SOLUTION

The Problem
If Major Douglas is wrong, then what is right? That is the question which will leap to the mind of the reader. There must be some policy capable of relieving our economic distress. It cannot be true that we are forced as a society into penury through increasing productive power.

Socialists believe that the only complete solution lies in the centralised control of the means of production and exchange, but they would be prepared to admit at once that one of the most important advantages to be derived from economic planning lies in the sphere of credit policy. By varying the lending policies of the banks and thus the volume of money, it should be possible to increase very considerably the volume of output. The standard of living could be made to rise slowly but steadily as the real productive power of society grew larger. But how should lending be varied?

In the view of the Labour Party* the course of capitalist depression is characterised by a deficiency of purchasing power at certain times and excess of purchasing power at others. It would be silly to deny the obvious commonsense proposition of Social Credit reformers and economists alike, that during times of depression there is a purely monetary breakdown - a loss of economic efficiency directly traceable to a shortage of credit.

* "Socialism and the Condition of the People." (Labour Party, 2d.)

The creation of new money during such periods would release industrial activity. If we had more money to spend the volume of production that it would be possible to market safely would rise.

The increase in production would make possible an increase in consumption and the community would be that much better off; but again in the view of the economist and Socialist alike, the periods of monetary deficiency are closely associated with times of too rapid monetary expansion. It is during the booms-when purchasing power expands more rapidly than costs and excessive money profits are made-that the seeds of the future depression are sown.

So much is common ground between a large number of different schools of thought. It is not, however, so widely realised that this view contains a number of important implications with regard to policy. It shows that there are two essential and different tasks included in the correct credit policy:

(1) In the first place it is certain that during a period of depression the earliest and most urgent task is that of securing a credit expansion. An expansionist programme during depression is an essential part of the correct credit policy. The expansion must continue until the unemployment due to a shortage of purchasing power has been cured. *

(2) But it is equally obvious that expansion or reflation is not sufficient by itself to create the conditions of stable prosperity.

Expansion and reflation have occurred often enough before. It is the method by which recovery has always taken place.
Recovery has always been temporary in the past: it has led on to a new crisis and renewed depression. Unless something , new is done-at least in the later stages of recovery - there will be no reason to expect that such an induced recovery will be other than temporary. Something must be done which has never been done before.
It is the conviction of the Labour Party that the correct monetary policy can be constructed only by a Central Economic Authority,+ and can be enforced upon the commercial banks " only through a control of their lending operations in the social interest. We are not in this pamphlet concerned with the question of socialising the banks or with the machinery of control.

* This is not necessarily the whole of the numbers actually unemployed, because there may be some persons out of work for reasons other than that of general trade depression-requiring mobility between employments of both labour and capital.
+ "For Socialism and Peace." (Labour Party, 2d.)

We are considering credit policy; and we are faced with these two questions: "How is the expansion to be brought about?" and "By what measures is it to be directed into safe and stable channels at the right time?"

THE EXPANSION

There are a large number of ways of increasing the quantity of credit in circulation. To begin with, there are the perfectly orthodox forms of banking policy. It is possible to lower the rate of interest charged by the commercial banks for advances or for the Bank of England to buy securities in the open market.
The first policy makes it cheaper to borrow money from the banks, and so more people are likely to do so and the total advances of the banks are likely to rise. If the Bank of England buys securities, it pays for them with cheques on itself, and as these are paid into the Joint Stock Banks the deposits of these banks with the Bank of England rise. Such deposits are regarded by the Joint Stock Banks as equivalent to cash reserves, and as they try to keep a certain fixed proportion between their total loans and their reserves, their powers of lending are greatly improved by the action of the Central Bank.

The trouble with these orthodox policies is obvious. They are not likely to be very effective during a period of general business depression. No one wants to borrow money from the banks, however low the rate of interest, if they can see no method of employing these funds advantageously. When industries are on the point of bankruptcy they would not wish to increase their capital liabilities even if the rate of interest were nothing. Nor is it of much service to increase the reserves of the Joint Stock Banks. They have plenty of reserves already. They are weighed down with excessive quantities of cash. Hence it may be of little or no use to improve the powers of lending or borrowing. It is important to do this-no policy can succeed without it - but it may not be enough.

It is essential to get more money spent. Only money in active circulation provides a market for production and increases employment. One method, and again a perfectly orthodox one, of intensifying the activity of monetary circulation is for the Government to spend more money on capital account. It can either do this directly by expanding investment in public works, or it can aid the general body of industry to increase its own investment by extending Government guarantees to long term investment, and even subsidising the rate of interest upon such investment. All these steps have their place and importance. Once again, however, are they enough? In the first place, a great deal of money has already been spent in this country upon roads and other typical forms of public enterprise. It is not certain that the most urgent necessity is further expenditure in the same direction. The country has the best system of road communications in the world. What is far more important is the construction of more productive industrial capital. It has been calculated that only £70,000,000 a year has recently been invested in the whole of English industry. That is a relatively small sum. It is impossible greatly to raise the standard of living unless the investment in ordinary capital can be increased. No doubt there is room for further capital expenditure on housing, but it should always be accompanied by the kind of investment in productive industry which will provide continuous employment at higher real wages. The real social income must be increased. That brings us back to the central difficulty. It is not possible to persuade industry to borrow more when it is in the throes of acute depression.

The trouble about all these orthodox methods of expenditure on capital account is that with the exception of public works they do not operate directly on the income position of the community. Is it quite out of the question that we should devise some expansionist mechanism which will put money directly in the hands of the consumer during a period of depression? If we can do that the sales of the industrial system will be promoted, the advantages of borrowing will be increased, and a sharp expansionist movement will begin.

There are at least two simple methods by which something of this kind could be done.
In the first place, the Government could unbalance the Budget on current account by reducing taxation and filling the gap with borrowings from the banks.* The result would be to increase the purchasing power of the public and to secure the injection of new and active money into circulation. The result would be precisely the same as that of public works except that it would directly improve the position of the consumer and prevent the relative overproduction of large capital goods which can only be produced by Government investment. People would get what they want, expansion could begin, unemployment would diminish. At least, this would be the case so long as the confidence of the general business world was not adversely affected.

*If, and when, the banks are nationalised these securities will pass back to the ownership of the Government, and the State liability will then be limited to the comparatively small amount of interest payable on the accruing deposits.

This method, however, in so far as it involves an unbalanced Budget, is not in accord with the Labour Party's official policy. In the second place, a Labour Government could secure the same result by a slightly less direct and obvious way.* It could proceed to subsidise either the production of certain commodities consumed particularly by the poor, such as bread or sugar, or provide the unemployed and other poor persons with certain commodities at low prices. It could make use of the milk, the cattle, and the potato surplus, and possibly the surplus in other industries where production was easily controlled, by offering the products of the excess capacity of all these industries at very low prices to the poor. The difference between cost and price would be made up by money provided by the Government.

This latter method would have in its favour two very important advantages. In the first place it would ensure that the immediate relief was specifically directed to that section of the community most in need, and secondly it would minimise the possible waste of products which happened at the moment to be in plentiful ' supply. Now, if the money for these purposes was found by ordinary taxation the process would expand the consumption of the poor at the expense of the rich, but it would not directly increase the demand for goods. The increased consumption of the poor and the increased employment offered in the subsidised industries would be offset by the reduced expenditure of the tax-paying public. There would be little or no net gain in money outlay or employment; but if the Government subsidies - or Social Dividend - were provided by creating new credit, the result would be a direct and proportionate increase in expenditure and production.+

* We are indebted to Mr. Thomas Johnston for this suggestion.
+ It will be seen that this form of credit creation bears some resemblance to Major Douglas' own proposals. Our views differ from Major Douglas' in four respects: (a) that they are based on an entire different analysis of the credit mechanism as Part II has shown; (b) that in our view the credit creation is only a temporary expedient to get the national economy out of a depression; (c) that it is one of a number of methods of expanding credit; (d) that we disagree very profoundly with the quantitative powers of such polities. Major Douglas has placed the increase of production which may be reasonably expected as high as 1,600 per cent! We suppose it would be something like 20-30 per cent immediately, through the absorption of unemployment. After unemployment had been dealt with there would be a steady increase in output, due to the accumulation and improvement of capital resources, of something considerably less than this.

By these methods more money could be placed directly into active circulation at the consumers' end. The difficulty about such policies is purely psychological. They could and would be represented by the opponents of financial control as dangerously inflationary. They are nothing of the kind. They differ in no important economic respect from the most orthodox methods of financial reflation. But they could be misrepresented…
Misrepresentation would not matter unless it sapped financial confidence. If it did this it might lead to a contraction of private investment, or even a dangerous rush to buy goods. It is all a question of confidence and it demonstrates that the correct financial policy can only be pursued by a Government that has a firm hand on the levers of financial power and perhaps only a Government that has already socialised a very large section of productive industry. If that has been done, the most active expansionist policies can be pursued with perfect safety. Socialism is certainly the safest way to prosperity.

Stabilisation

Returning to the central problem of credit policy, it is necessary to take up the question of the second stage of expansion. Let us suppose that some general financial programme, including both orthodox and unorthodox methods, has been initiated. Expansion will begin. The size of the monetary turnover in the community will rise, unemployment will fall, real incomes will increase. Prosperity will reappear. This will seem a great achievement. It will almost seem a sufficient achievement in the realm of credit control. It is not enough, however, because it is nothing more than a deliberate engineering of what has often happened before-a temporary recovery. Unless something else is done, a new policy pursued, the expansion will move into a boom, the boom into a crisis, and the crisis into a depression.

It is absolutely essential in the later stages of such a recovery to obtain control of the general division of the community's expenditure between consumption goods and capital goods. It is of vital importance to see that the gross income of the community is divided between the purchase of consumption goods and the purchase of new machines in the same way that the real productive resources are divided between these two types of industry. Otherwise expenditure and production will get out of gear - the banks will lend more than they should and break down will become inevitable.

In order that the essential identity of proportions should be maintained, it will be necessary for the Government through the machinery of central economic and financial authorities to control the lending policies of the banks, the money income of the community, the volume of saving, and the volume of expenditure. It can do these things most easily if it owns all industries. If it does not, it must seek to control saving and expenditure by taxation and investment policy. If it can do this new thing, it can succeed in stabilising a higher level of employment of all the productive resources at the disposal of society. It will distribute a larger product more justly, more expeditiously, and more certainly.

================

Printed by The Victoria House Printing Co., Ltd. (T.V. all departments) Tudor Street, London, E.C.4, and published by the Labour Party, Transport House; Smith Square, London, S.W.I

THE FOLLOWING DOCUMENT IS THE 1935 SOCIAL CREDIT RESPONSE
TO THE ABOVE REPORT


THIRTEEN YEARS OF PROGRESS

A Review of the Official Labour Party Publication,

"Socialism and Social Credit," 1935

BY A. HAMILTON McINTYRE, C.A.

AUTHOR'S NOTE

In writing this review of "Socialism and Social Credit"--a Report issued by the Labour Party last year and priced at two pence--I have had, first of all, to consider whether the subject should be dealt with at length or whether it should be disposed of in as short a manner as possible. Was it worth while to deal with the pamphlet, as it were, page by page, or should the method to be adopted be one of putting down the fundamental ideas of the authors of the pamphlet with regard to the matters under consideration, and then, shortly, contrasting these ideas with the fundamental ideas of the Social Credit movement?

My decision was taken in favour of dealing with the matter at some length, following fairly strictly the order of the Report. Whether or not the adoption of such a method makes the review more interesting I leave to the reader. The method obviously has disadvantages, but these are possibly outweighed by the ease with which the reader may deal with the Report and this review concurrently.

INTRODUCTORY

It is stated that the Report was prepared by a subcommittee at the request of the National Executive Committee. Nothing is said about its submission to the Labour Party Conference at Brighton early in October, 1935, but it is understood that it was submitted to that conference and was adopted. The following extract is taken from the introductory note to the Report:-

"The Report deals fully with Major Douglas's 'Social Credit' proposals and the National Executive Committee associates itself with the Subcommittee's conclusions on this subject." (Page 3, line 4.)

The subcommittee consisted of three members- E. F. M. Durbin, Hugh Gaitskell, and W. R. Hiskett - each of whom had, previous to their appointment, repeatedly expressed their antagonism to the Social Credit proposals. I think it is true to say, however, that no one of them, in criticising Serial Credit, has ever given much indication of having really studied the main principles involved. Their criticisms have been directed largely against what is known as the A + B Theorem.

Mr. Hiskett, from one point of view, might be called the most logical critic of the Social Credit contentions regarding the gap between purchasing power and prices. He, at any rate, realises that if he is not going to accept the A + B Theorem he is logically compelled to postulate a condition of affairs where:-

"The total volume of money is sufficient to purchase at one time all final products awaiting sale or in process of manufacture, all raw materials and semi-manufactures and all the machinery for future production at its present value after allowing for depreciation." ("Social Credits or Socialism." -Gollancz, 1935.)

The committee state their purpose in the following terms:-

"What is the Douglas Scheme? How does it compare with Labour's policy? Are there any points of agreement between them? What are the points of disagreement, and why?" (Page 6, line 4.)

As to how far the committee have endeavoured to carry out their avowed purpose I will leave the reader of the Report to judge. It is probably agreed that they have searched for all points of agreement; but have they made any effort to find out and disclose in the Report what the vital points of disagreement are, and why? In view of the composition of the committee, one naturally expects the Report to be an attack on Social Credit, and so it is rather amusing to find that the Report begins by setting forth the alleged "Points of Agreement."

FIRST POINT OF AGREEMENT?

The first matter about which there is said to be some agreement is connected with the deficiency in purchasing power. It seems to me the committee suggest that Douglas maintains that there is a chronic deficiency between total purchasing power and RETAIL PRICES, or prices of goods for immediate consumption. This is illustrated by a statement in the Report that in boom periods there is a surplus of purchasing power over prices. This, the committee seem to think, disposes of Douglas's case that the money system is never self-liquidating.

What the committee do not seem to grasp or, alternatively, are quite determined to ignore, is that the Social Credit case is that purchasing power is never equal to TOTAL PRICES when both are regarded as a flow.

If purchasing power was chronically unequal to meet the prices of consumable goods on the market at the time, the system obviously would not last for very long.

The true position may be put thus:-

(a) The rate of flow of purchasing power will be, almost certainly, less than the rate of flow of prices of CONSUMABLE GOODS when the rate of production of intermediate and capital goods is slackened.
(b) The rate of flow of purchasing rower will, almost certainly, exceed the rate of flow of prices 0F CONSUMABLE GOODS when the rate of production of intermediate and capital goods is accelerated. (An inflationary rise of price and the investment of excess profits must be mentioned here--it is embraced in the A + B Theorem.)
(c) The rate of flow of purchasing power will always be less than the rate of flow of TOTAL PRICES. One might possibly add here a proviso to the effect that this may not be so during momentary periods of wholesale bankruptcies and losses. Even then, however, the deficiency will only be deferred.

Industry must recover its bad debts out of future prices, and losses must be restored by future profits. In other words, bankruptcies and losses are themselves a cost against the future.

That the committee hold, or pretend to hold, the idea that Douglas alleges a chronic deficiency between purchasing power and prices of goods for consumption, is further illustrated by the following quotation:-

"During the boom, he (Douglas) admits the gap is temporarily filled, but only by the creation of additional debt to the Banks. This is. to Major Douglas, evidence of deficiency." (Page 9. line 2.)

The above is rather an extraordinary comment. Commonsense would indicate that industry does not get into debt unless it is unable to pay its costs from its income, so that the fact of a creation of an additional debt to the banks should, in all commonsense, be evidence of deficiency. Yet the committee seem to think that this particular statement of theirs strikes a mortal blow at Social Credit.

SECOND POINT OF AGREEMENT?

The second point of agreement is stated to be the common objection to destruction and restriction schemes as a cure for economic depression. This is a point of agreement, without doubt, but the Report goes on to say that "both Socialists and Social Crediters recognise the schemes for what they are— monopolies which aim at holding up prices and squeezing the utmost from the consumer." (Page 9, line 31.)

I should hesitate to say that this sentence expresses a point of agreement. There is just a subtle distinction which illustrates the difference in .outlook between a Socialist and a Social Crediter. The Socialist sees in the situation the results of greed, extortion, profit, and so on. The Social Crediter sees the results of faulty arithmetic. The Socialist sees an evil Capitalist extorting money from the worker. The Social Crediter sees a harassed business man trying his best to square his accounts.

THIRD POINT OF AGREEMENT?

The third point of agreement is stated to be a common attitude to certain moral aspects of the banking system. Reference is made to bank credit functioning as money and the power of the banks to create and cancel money. The Report then goes on to say:-

"These facts were not discovered by Major Douglas. They are to be found in all orthodox writings on the subject and are clearly stated in the pages of the Macmillan Report, but Major Douglas and other monetary reformers have certainly popularised them better than the Text Books and have also pointed to certain implications which tend to be slurred over in more orthodox accounts." (Page 10. line 9.)

I am sure this paragraph must have given the committee much thought in its composition. Major Douglas, I am certain, would make no claim to being the first man to have discovered the facts, but he is entitled to claim that he published the facts and drew certain conclusions from them in 1918. The facts were certainly contained in textbooks prior to that date--for example, H. D. McLeod's--but the conclusions from the facts had not, so far as I know, been drawn until Major Douglas's first publications. To suggest that the Macmillan Committee had any share in pioneering is merely laughable. The phrase "certain implications which tend to be slurred over" is, I think, worth a second thought. Apparently the committee have also "slurred over" them.

THE NATIONALISATION COMPLEX

The Report proceeds, at some length, to consider the Socialist conclusions from these facts regarding our banking system, and it is obvious that the committee's whole outlook is coloured by the nationalization complex. There is no suggestion made at all that even if the banks were nationalised the methods used in accounting the public moneys would be changed. The complaint, according to the Socialist outlook, is entirely that such powers are in the hands of private persons or institutions. That no change of method is contemplated is evident, I think, from the following extract:-

"That such great powers--of special significance now that the money system of this country is not tied to others through the Gold Standard--should be exercised by bodies which are legally beyond the control of the Government, is an anachronism as dangerous as it is absurd." (Page 10, line 32.)

I am not at all sure what interpretation is intended to be given to this sentence, but the only conclusion I can come to is that the committee would not see so much harm in the condition described if the Gold Standard was in operation. This shows quite clearly, I think, how much they have misunderstood the true position. That the committee are suffering from the complex I have suggested is further confirmed by the concern they show over the profits which the Bank of England makes. Pointing out that the profits of the Issue Department fall to the Treasury, they seem to think that so far as the Issue Department is concerned that problem is disposed of; but they also point out that since credit is not less money than cash and bank credit is quantitatively of much more importance "there is a strong moral case against the exploitation of credit creation for the purpose of making private profits." (Page II, line I.)

All the above shows clearly that the committee have not concerned themselves with the method of issue and cancellation of money, but rather with the titular right to create money and the profits accruing from such right. It is quite fair to suggest that if the committee had their way and the banks were nationalised, the same methods of issuing and retiring money would still be in operation and the essential problem, therefore, would be no nearer a solution. An admission is made in the Report that expenditure on public works can be carried out only by incurring further debt, thus burdening future taxpayers with interest and sinking fund payments. The Report states:-

"Simply because the right of creating new money does not belong to the State. the necessary impetus to recovery cannot be given." (Page II, line 26.)

One is left wondering how, if the right to create new money belonged to the Labour Party, they would account it. There is nothing in the Report, so far as I am aware, to show that they would account it as anything else but debt, nor that they would not insist on its recovery via taxation. It is true that this point is dealt with to a certain extent on page 32 of the Report, but it is stated that where debt is not repaid out of taxation it is only a temporary expedient and the quantitative issues of such credit will not be large.

Before coming to their criticism of the Social Credit analysis the committee make the following statement:-

"It is most unlikely that the full Social Credit proposals could be applied without either producing inflation or making it impossible for the Banks to exist in their present form." (Page II, line 34.)

This statement is used as an argument for nationalisation. It is quite carefully worded. If we amend the terms of it a little, I think most Social Crediters would agree with it as follows:-

Social Credit proposals cannot be applied within the present money system. They can be applied only in a changed money system and such change involves a change in the policy of the banks and the Treasury. It is merely childish at this time of day to say the Social Credit methods would cause inflation. Social Credit could not be applied within any system which permits of inflation. The committee of the Labour Party is simply up to the old game of criticising Social Credit in terms of orthodox finance.

THE A + B THEOREM

The second division of the Report is stated to be a criticism of the Social Credit analysis, and early in this section the A + B Theorem is quoted. This theorem, it is said, is the central argument on which Major Douglas bases his conclusion. I would suggest that this is entirely wrong, and that the A + B Theorem is the method by which Major Douglas illustrates his conclusion.

According to the committee of the Labour Party, the suggestion seems to be that one day Major Douglas discovered the A + B Theorem and the rest of the analysis followed. However pretty the mental picture conjured up by such a suggestion, I am afraid that idea must be discarded.

The A + B Theorem is merely a condensed method of stating facts which were discovered by independent means.

In Major Douglas's first published book, "Economic Democracy ," the A + B Theorem does not appear.

The committee having decided to deal with the A + B Theorem, it is a pity, to my mind, that they could not quote it correctly in their Report. They state:-

"A factory, or other productive organisation, has, besides its economic function as a producer of goods, a financial object." (Page 12,line 34-my italics.)

While it is true that productive organisations have a financial object under the present system, that is precisely what the Social Crediter says is wrong. The correct statement of the A + B Theorem begins by saying:-

A factory, or other productive organisation, has, besides its economic function as a producer of goods, a financial aspect, which is an entirely different matter.

The Report proceeds to examine the A + B Theorem in its different interpretations. I do not intend to deal with these at length, as they have already, to my mind, been ably dealt with by Mr. A. W. Joseph in a pamphlet called "The A + B Theorem."

Broadly speaking, the Report ignores the facts of accumulation of financial capital and involuntary investment and, therefore, its arguments against the theorem are weak. I will, however, deal with a few of the higher lights in this section of the Report.

Under the division headed "Repayment of Bank Loans" the Report says:-

"Now it is certainly true that if on balance throughout the whole of industry loans are repaid to the Banks, a deficiency of purchasing power is bound to arise...The question here is simply one of fact. Is there a tendency for the total of Bank loans to diminish? The answer is, that at certain times--during depressions--this is the case, but at other times the total of loans definitely expands." (Page 16, line 5.)

Further on in the Report it is stated:-

"Equally, if a firm is voluntarily repaying a loan out of profits, and the Banks do not immediately create another loan to another producer, then again deficiency is bound to arise, but as we have already said, the question here is really one of fact and the facts show no general and chronic tendency for the total of Bank loans to diminish." (page 17, line 9.)

The argument here is not very clearly stated, but I think it is fair to assume that the committee admit that repayment of bank loans charged into prices and appearing, therefore, as profit, do create a deficiency of purchasing power, but that such deficiency is corrected by the banks issuing further loans to other producers, and, therefore, so long as total bank loans do not show any sign of diminishing, there is no deficiency.

In my opinion, this illustrates the fundamental difference between the views of the committee and the views of the Social Crediter. Social Crediters realise, as the committee apparently does not, that these further bank loans to other producers have got to be repaid, and, therefore, do not correct the admitted deficiency--they merely postpone it.

The committee evidently do not see that bank loans repaid may undergo a metamorphosis and become securities or reserves which still remain a charge against the ultimate consumer.

It is surely obvious that industrial debt and national debt, requiring ultimately to be met and forming a charge against the consumers (admittedly unpayable under the present system), are not to be measured by the increase in bank loans. While bank loans have on balance probably diminished since 1920, Government, municipal, and industrial debt has increased in fantastic proportions. The committee's failure to see this arises from the fact that they ignore accumulations of financial capital in considering the A+B Theorem.

A little later in the Report it is stated:-

"It is, in fact, the policy of the Labour Party to stabilise prices; and prices can only be stabilised, when production is increasing, if there is an adequate increase in the quantity of money." (Page 17, line 3B.)

It seems to be clear from this statement that the committee look on stabilisation as having some miraculous quality, and it is also clear that they regard the volume of money as being something which should control prices which again goes to show that they have not understood the principal Social Credit contention, which is that the money system must no longer be used to control prices through the so-called law of supply and demand. Prices should be controlled by the real cost of production.

THE ILLUSIVE INVESTMENT

In three paragraphs under the sub-heading of "Investment," the committee go on to record their criticism of an aspect of the deficiency. They record the views of the Social Crediter in the following terms:-

"The act of saving withdraws money from the market for finished commodities and makes it impossible to sell a part of the product. The money which is saved is invested and paid out eventually in wages, and so passes into consumers' income; but in the meanwhile, it is argued, the process of investment has led to the production of new capital goods and there is no purchasing power available to purchase these." (Page IB, line 15.)

The above statement of the Social Credit case is a reasonably fair one, but it does emphasise the problem as if it was entirely one of individual consumers or workers saving actual cash from their incomes and buying new investments. It ignores, or at any rate does not make it clear, that the processes of saving and investing are going on all through the industrial system and are being carried on by producers of all kinds in the form of reserves and undistributed profits.

The Report goes on to say that the above stated argument is quite unsound, for the reason that if investment takes place concurrently with saving the deficiency caused by the saving is balanced by the money spent on the investment.

"It is true that if saving increases, some finished commodities cannot be sold at their old prices, but at the same time some investment goods, machinery, buildings, raw materials, etc., will be sold at more than cost prices. There will be depression in certain industries and boom in others; less money will be distributed in some, and more in others. Consumers' income as a whole will be unchanged." (Page 18, line 36.)

One is left wondering what on earth the committee meant when they wrote this. Investment goods, machinery, buildings, raw materials, etc., are not sold in the sense that their costs are defrayed. They are merely transferred from one ownership to another, the financial costs attaching to them still remaining to be defrayed by the only person who can defray costs, namely, the consumer.

The following quotation, I think, shows clearly the wrong ideas on which the committee are working. It occurs shortly after the previously quoted extract:-

"As the new capital goods are produced, they will continue to be bought by the savings of consumers. They will then be used in production. This will lead to an increase in the output of industry. If there is to be no fall in prices, it is necessary that the quantity of purchasing power and the incomes of consumers should now be increased. This is, of course, implicit in the Labour Party policy of stabilising prices. A failure to increase purchasing power at this point might be said to constitute a deficiency; but it is certain that this is not the main deficiency to which Major Douglas refers." (Page 19, line 12.)

This extract is, I think, worth a little careful study. Take the first sentence. The suggestion that new capital goods are bought by the savings of consumers is nonsense if it is intended to suggest, as I think it quite clearly is, that the costs incurred in making these new capital goods are thereby wiped out. If new capital goods are paid for by the savings of consumers, the consumers who did pay for them are now investors holding shares, mortgages, or debentures, in the form of scrip. They look to this scrip to bring them a return in the way of income and ultimately to repay to them the money originally paid for the scrip. If consumers, as a whole, have invested in capital goods, then they can only look to themselves as the source out of which their dividends are to come and out of which their capital is to be repaid to them.

Consider the sentence above, beginning "If there is to be no fall in prices." This again shows quite clearly that the committee of the Labour Party think that the volume of money should control price. One can only assume from the next sentence that the official Labour Party policy of stabilisation recognises that in these circumstances there would be a deficiency of purchasing power and that they have a remedy for such deficiency. This remedy can take only one of two forms. It can take the form of encouraging still further increased production of capital goods, or it can take the form of distributing free credit either to the consumer or to the producer for reduction of prices.

There seems to be no doubt whatever which of the above two forms would be adopted by the Labour Party. It must be the former, through which schemes of public works or the encouragement of production of still further capital goods would provide an agency by means of which an increased total volume of wages would serve the purpose of preventing too severe a fall in the prices of finished goods.

STATIONARY EQUILIBRIUM?

The committee's arguments under the heading of "Depreciation" are a re-hash of the old argument that while depreciation is being charged on one factory, there would, or should, be another factory in the process of erection, the wages paid on the construction of which would meet the depreciation charged on the first factory.

It is merely another aspect of the argument about industry being in a state described by Professor Robbins as "Stationary Equilibrium," or, if one prefers it, "A steady state of self-repeating movement."

The argument takes no account whatever of the fact that although a factory may take only one year to build, it may take fifty years to wear out, and seeing such an argument in print, or listening to it in conversation, has always conjured up a vision before my eyes in which the erection of the second factory is carefully scheduled to take fifty years to build, in order that the money distributed in course of its erection will correspond to the depreciation charged on factory number one.

SUBTLETY

The opponents of Social Credit have often said, as indeed the Labour Party's Report suggests, that Major Douglas in his writings is very obscure. What, then, are we to make of the clarity of the following extract from the Report?--

"A more subtle form of this argument maintains that the actual change-over from labour to machines causes a diminution of the actual monetary circulation. Since cost reduction, it is maintained, is the stimulus to replace labour with machines, the new costs will be less than the old, and hence the amount of money used by industry will be less. There are doubtless occasions when this will be so, but it seems equally probable that since the reduction of costs offers the prospect of higher profits, more, rather than less, will be borrowed by industry. Because a firm reduces its unit costs, it does not necessarily reduce the total amount which it spends, i.e., its aggregate costs." (Page 20, line 25.)

The last sentence in the above extract is, of course, a clear statement of fact, but what the meaning, or intention, of the paragraph as a whole is, I must confess I do not know. Presumably this "subtle form of the argument" is being fathered on to the Social Credit movement, but Social Crediters will have no hesitation in disowning it.

LABOUR SAVING

This particular section of the Report finishes up by saying that "the real objection to the replacement of labour by machinery" is that it "generally throws certain workers out of employment," and that:-

"in any case it continually tends to reduce the relative share of labour in the product and increase the share of capital." (Page 20, line 40.)

The Social Credit proposal, as we all know, is to give every citizen of the country a share in the capital of the country in the form of a National Dividend, or, if you like to look on it in that way, to make everybody a capitalist.

But the Labour Party committee say:-

"The method of dealing with this evil is not monetary policy, but Socialism. The community must, itself, own the machines." (Page 20, line 41.)

It is evident, therefore, that the committee are still unable to distinguish between titular ownership and administration.

Incidentally, no Social Crediter has any objection, real or fancied, to the displacement of labour by machinery, but, on the contrary, welcomes it.

WHEN DOCTORS DIFFER

The third section of the Report is devoted to a consideration of the Social Credit cure, and the Report admits that this cure follows, for the most part, quite logically from the analysis. It is therefore rather extraordinary that, having to their mind completely disposed of the analysis, they should be at any trouble at all to deal with the cure. However, actually almost seven pages of the Report concern themselves with exposing the "fallacies" of the cure.

This particular aspect of the matter is dealt with by the committee in the following terms:-

"Before proceeding to consider this scheme, we must emphasise that disagreement with Major Douglas's analysis is not in itself an adequate reason for rejecting his proposals entirely. It has already been pointed out that at a time when resources are not fully employed an increase in the quantity of money is required. Major Douglas does, in fact, suggest one way by which this might be provided. It remains to be seen how far this is the best way, and also how far the Social Credit proposals can secure not only the achievement but also the maintenance of a high level of production." (Page 22, line 1.)

The above paragraph confirms my previous contention that the committee had, at the back of their mind, some faint hope or fear--whichever way you like to put it--that the Social Credit proposals might possibly be operated within the present system. Having failed altogether to consider in any adequate way the basis on which the Social Credit proposals are founded, the committee naturally adopt the above outlook. If the committee had really examined the basic ideas which are fundamental to the Social Credit proposals, and rejected them, then there would have been no necessity whatever for them to deal with the remedial proposals at all.

The Social Credit proposals fall under three heads:-
(I) The setting up of a National Credit Account: This proposal is based on a conception of Real Credit.
(2) The compensated price, sometimes referred to as the just price, or the national discount: This is based on the axiom that the real cost of production is consumption, together with a realisation of the uses to which financial credit can be put.
(3) The issue of a National Dividend: This is based on the previous conceptions together with a realisation of the part played in production by what is called "The Cultural Inheritance."

The astonishing thing about the whole Report is that nowhere in it is there any sign that the committee have considered either:-
(a) The distinction between Real Credit and Financial Credit.
(b) The axiom that the real cost of production is consumption, or
(c) The idea of The Cultural Inheritance.

Nowhere in the Report are any of these three things mentioned, and yet, as I have said, these three things are the fundamentals of Social Credit.

With regard to (b), namely, the axiom that the real cost of production is consumption, it is not surprising that the Labour Party committee do not deal with this, because, so far as I know, no critic of Social Credit has ever dealt with this. They have all considered it much wiser to ignore it.

STRANGE SILENCE

Assuming, for the moment, that the present money system works as the committee seem to think it does:- In any one year let us suppose that the financial figures attaching themselves to the total production of the country are as follow:-

Consumable goods £3,000 million
Capital goods and development £1,000
Total production £4,000 million

Then, presumably, the committee's conception of what happens is that people as a whole get £4,000 millions, out of which they spend £3,000 and invest £1,000. The question is, have the community been fairly charged?

If it is true that the real cost of production is consumption, then. the real cost of this year's production is only £3,000 million, not £4,000 million, and the correct price at which the £3,000 million of consumable goods should have been charged was-£3,ooo x - 3,000/4,000 or £2,250 million; so that on a question which suggests that the community as a whole are possibly being overcharged £750 million per annum, the Report is curiously silent.

THE DIVIDEND

The section of the Report which deals with the National Dividend is very small. Its value as effective criticism is even smaller. Reference in it is made to the Draft Scheme for Scotland which should, at any rate, suggest that the committee have studied that scheme. On the other hand, the paragraph goes on to suggest that it is proposed to distribute purchasing power equal to the total capital value of all assets.

There is, of course, no such proposal in the Draft Scheme for Scotland. The initial National Dividend in the scheme is suggested at one per cent. of such capitalised value, so that to the mind of the committee one per cent. must be equal to the total. This short paragraph on the National Dividend illustrates also the previous contention that the committee have made no study whatever of the question of Real Credit and Financial Credit. The following extract will make this clear:-

"An obvious fallacy here lies in the fact that Major Douglas appears always to include the capitalised value of all assets in his estimate of production, and even goes the length of capitalising the productive capacity of individuals." (Page 27, line 38.) .

What the significance of the words "estimate of production" is, in the above sentence, is one which I am not quite able to solve. If it is an estimate of real resources up to date, then that is one matter; if the committee are suggesting that it is an estimate of increase annually, then, of course, that is another matter altogether. To illustrate the real worth of the committee's statement, I would refer the reader to the Scheme for Scotland: "From the Grand Total thus obtained" (valuation in money of physical assets plus population) "a figure representing the price value of the Scottish Capital Account could be obtained."

By some peculiar means the committee translate "the price value of the Scottish Capital Account into "estimate of production."

THE ONLY WAY

The last section of the Report deals with what it calls "The Real Solution." It is quite clear that to the mind of the committee no change in the financial system is required, so that from one point of view further comment on this section should be necessary. There are, however, some high lights which might be dealt with:-

Extract (1)- "By varying the lending policies of the Banks and thus the volume of money, it should be possible to increase very considerably the volume of output." (Page 28, line 24.)

Again is illustrated the conception that money and the volume of money is to control production.

Extract (2)- immediately following Extract (1)- "The standard of living could be made to rise slowly but steadily as the real productive power of society grew larger." (page 28, line 26.)

Earlier in the Report the proportion of unemployed resources is stated at 30 per cent., so that it seems rather extraordinary to suggest that the standard of living requires only to rise slowly but steadily. One would think that a 30 per cent. increase at least would be due immediately.

Extract (3)- "In the View of the Labour Party, the course of capitalist depression is characterised by a deficiency of purchasing power at certain times, and an excess of purchasing power at others." (Page 28, line 30.)

Here, presumably, the committee are referring to purchasing power as against consumable goods.

Extract (4)- "Only money in active circulation provides a market for 'production and increases employment. One method, and again a perfectly orthodox one, of intensifying the activity of monetary circulation is for the Government to spend more money on capital account." (Page 30, line 33.)

The above illustrates the committee's belief in the velocity of circulation theory which, of course, is involved in their acceptance of control of price by the volume of money. The extract also illustrates what I have suggested earlier as the method the committee advocate of making good the deficiency which they see as between money and prices. The method, of course, is merely to "borrow yourself out of debt." The extract also shows that the committee think the objective of industry is to provide employment.

Extract (5)- "No doubt there is room for further capital expenditure on housing, but it should always be accompanied by the kind of investment in productive industry which will provide continuous employment at higher real wages. The real social income must be increased...It is not possible to persuade industry to borrow more when it is in the throes of acute depression." (Page 31, line 15.)

This extract again illustrates the previous statement that the committee think that the objective of the industrial system is employment. What real wages are, and what the real social income is, is perhaps a little doubtful, but there is a suggestion at any rate that it is only real if it is the result of work. The last sentence is, I think, of special significance.

Extract (6)- "This method, however; in so far as it involves an unbalanced budget, is not in accord with the Labour Party's official policy." (Page 32, line 5.)

So now Mr. Montagu Norman and his friends can sleep soundly at nights. Their pretty little financial system is in no danger from the official Labour Party.

At this point, one might pose a genuinely orthodox conundrum:-

Query: When is an unbalanced budget not an unbalanced budget? Answer: When the expenditure on public works is funded.

Illustration: If your football team gets beaten by four goals to two, the simple remedy is to fund three of your opponent's goals, in which case your team has won by 2--1, and for the next three years you start the match a goal down.

This illustration, of course, is given strictly within the orthodox framework of present-day finance.

Extract (7)- dealing with a suggestion made by Mr. Thomas Johnston in connection with applying new creations of credit to reduce the price of certain commodities for supply to the poor--

"The difficulty about such policies is purely psychological. They could, and would, be represented by the opponents of financial control as dangerously inflationary. They are nothing of the kind. They differ in no important economic respect from the most orthodox methods of financial reflation, but they could be misrepresented." (Page 33, line 2.)

Apart from the somewhat loose phraseology of the above--for example, "differing in no important economic respect from methods of financial reflation" it seems to me that the committee have, when they recorded this statement, come nearer the truth of the matter than in the whole of the rest of the Report. In view of this, it is a pity that they chose to ignore the fact that their own difficulty with the Social Credit proposals is purely psychological, too. They see in prospect, opposition to a particular aspect of their own ideas of precisely the same nature as their own opposition to the Social Credit idea. Whether such opposition is the result of an honest failure to grasp the proposals or not I leave to each individual reader of the Report.

Extract (8)- "It will be necessary for the Government through the machinery of central economic and financial authorities to control the lending policies of the Banks, the money income of the community, the volume of saving and the volume of expenditure.n It can do these things most easily if it owns all industries." (page 34, line 2.)

So now we know. Here is the picture of the ideal Socialist state. Studying the extract slowly again, one is tempted to add-- "and it can do these things more easily still if it owns all the population."

THIRTEEN YEARS' PROGRESS

It remains now only to consider the Report in relation to the previous Labour Party Report, which was published in 1922, and to which Major Douglas made an official reply published shortly afterwards.

It is interesting to note that the first Report by the Labour Party has been allowed to go out of print and is no longer available to the ordinary public, but presumably it was available to the present subcommittee of three. One would imagine, therefore, that the committee, in making this present Report, would have consulted the earlier one and also Major Douglas's reply.

In his reply to the first Report, Major Douglas laid down the four premises from which the first Labour Report proceeded, as follow:-
(1) That financial credit is a concrete thing conditioned by limitations inherent in itself.
(2) That banks and bankers cannot and do not create financial credit.
(3) That the price of an article should be what it will fetch.
(4) That the objective of the industrial system is employment.

These were the premises from which the 1922 Report proceeded. Does the 1935 Report show any alteration in these premises? The answer is that the present Report admits that banks and bankers can and do create financial credit. It has to admit that, because it has been proved; but obviously the implications of such an admission have been ignored.

For all practical purposes, therefore, the premises from which the 1935 Report proceeds are the same as the premises from which the 1922 Report proceeded. In his reply to the earlier Report, Major Douglas laid down the premises of the Social Credit movement as follows:-

(1) That financial credit is a mere device which can have no economic significance apart from real credit.
(2) That banks and bankers can and do create financial credit, and by successful manipulation appropriate the power resident in the real credit of the community for purposes largely anti-social as well as purely selfish.
(3) That the price of an article should be that which will get it produced and delivered in the maximum quantity desired.
(4) That the objective of the industrial system should be the delivery of goods and services to the orders of individual consumers. It should not be employment, nor is it a common aspiration of the community that it should be designed to place any individuals whatever, either high financiers or members of the Labour Party Executive (however great their moral and intellectual qualifications may be), in a position to arbitrate on what is, or is not, useful work, and to withhold a share in economic prosperity from "non-workers" as thus arbitrarily defined.

The Labour Party committee, therefore had this statement of the premises of the Social Credit movement before them for their consideration, and I leave to each individual reader of the Report the question as to how far the committee have studied these premises, and to what extent they have attempted to shake them.

Imagine that some person put forward for your consideration certain proposals. Would not your first questions be:-

(a) "What are you trying to achieve, and why?"
(b) "Are the proposals you suggest going to achieve your object?"

These questions show what might be called a commonsense attitude to any proposals of any kind. The question for the reader's consideration is--

"Have the committee of the Labour Party, before rushing in to criticise the methods to be employed, made any attempt to find out what the Social Credit Movement is trying to achieve, and why?"

The pronouncements of the Labour Party on Social Credit will, therefore, in my opinion, never be of any great value until they will make a pronouncement upon the aims of Social Credit as distinct from the methods advocated. However efficient the engine of a motor car may be, it is not of much value if the bonnet is aiming in the wrong direction.

CONCLUSION

In conclusion, I would draw the attention of the reader to the correspondence which passed between the Labour Party and the Social Credit Movement both in connection with the previous Report and in connection with the present Report.

The committee state:-

"We were anxious to have the assistance of recognised supporters of these proposals in exploring how far they might be harmorused with Socialist belief and policy. We accordingly approached the Social Credit Secretariat with an invitation to nominate a representative who would be willing to meet us for a discussion of matters in which we were mutually interested...We explained that we made no claim to be an impartial committee in the sense of having no attachments, that we were, in fact, convinced Socialists...We emphasised our desire to explore the possibilities of partial agreement between the Labour Party and the Social Credit Movement."

The above extracts and other statements of a similar nature included in the Preface to the Report show that the committee were trying to make their position clear. This is quite understandable when one considers who the committee were, but I do not think that the arguments put forward dispose of the particular aspect of the matter which I have dealt with above, and the Social Credit Secretariat, quite naturally, declined the invitation.

Somewhat the same position was disclosed in the 1921 correspondence, with the exception that no points of agreement were alleged to exist then.

I think, on the whole, that the truth of the matter is that the official Labour Party has never clearly stated the premises on which it takes its stand, what it is trying to achieve, and the methods by which it hopes to achieve it.

It has, more or less, confined itself in its publications to questions of administration as opposed to questions of policy, and to questions of morals -- that is to say, expressions as to things being right or wrong -- as opposed to questions as to whether things are workable or not workable.

In this sense the official Labour Party, it seems to me, are more concerned with making individuals "good" than with making them free.

Orthodox Socialism would suggest that only a limited number of individuals can be free and that these can obtain their freedom only at the expense of others. The Social Credit Movement, on the other hand, suggests that it is now possible to grant individual economic freedom to all, and that such individual economic freedom is socially desirable.

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