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The Breakdown of the Employment System
By Major C.H. Douglas
A speech delivered by Major C. H. Douglas
in Newcastle under the auspices of the Commercial Staffs' Association
on January 31, 1923.
There is not one person in a hundred who, if offered a stable income of, say, £500 a year, would not accept it in preference to an offer of employment at the same pay. That is to say, the cry for employment is an artificial cry - what the unemployed mean is that they want purchasing power, which we usually refer to as money.
A continuous supply of money is associated inseparably,
in the minds of the vast majority of the population, with employment.
In other words, employment is not an objective
of a co-operative production system -
Yet the Labour Party, in criticising the proposals put forward by me for the Mining Industry, say that " whether sound or not, the scheme is fundamentally opposed to the principles for which the Labour Party stands because its advantages are achieved without freeing themselves (the Labour Party) from the tribute payable to the other shareholders."
The whole question of the soundness of this
attitude turns on its workability. The unemployment problem can be
solved tomorrow, exactly as it has been solved in Germany, where
there is no unemployment.
Mr. Bonar Law said in so many words, to the
recent Labour deputation on the subject of unemployment, that the
situation was due to our financial policy. He was right. He also
defended that policy. In that, he pronounced the doom of his Government.
Neither of them, I think, either sees the problem
as a whole, or is prepared to deal with it as a whole. That is the
defect of our system.
In the meantime, however, you become more capable of the immense output which war demands; and your centralised industrialists, who do not expect to line the trenches, regard the prospect with complacency.
The characteristics of deflation are familiar
Somewhat lower prices, lower standard of living, industrial stagnation
and unemployment, bankruptcies, grinding taxation, and class cleavage,
are some of them.
And it must be borne in mind that when we speak of an unemployment problem, we are much too apt to consider only statistics, official or otherwise, in regard to those persons who are totally unemployed, and to omit or give wholly insufficient weight to the much more important consideration of general under-employment or employment in connection with production of the most dubious utility.
To put the matter another way: the real significance of unemployment is not to be gauged by any figures based on the mere counting of heads; it can only be gauged by a careful estimate of the production of the nation at the present time, as compared with the production of the nation in, say, 1918 - 1919 - a period in which 75 per cent, of the available population was withdrawn from productive activity.
It is by no means without significance in this
connection that " Kemp's Mercantile Gazette " states that
the bankruptcy during 1922 amounted to 5,109, an increase of 1,361,
or 27 per cent., over the preceding year.
Now, failure in any matter of common interest
is a legitimate target for criticism, and there is a storm of criticism
on this subject at the present time; and, as might be expected, and
again with reason, this criticism is loudest from those who are most
vitally affected by the failure.
I am not here in any way to defend those persons
who are referred to as " captains of industry " in many cases
they are men of quite extraordinarily narrow abilities, but I have,
for my own part,
If you accept these statements as being a fair presentation of the situation, you will agree that only one conclusion can be drawn from them, and that is, that it passes the wit and the capacity of human beings to obtain generally satisfactory results from the existing financial system, and that no mere change in persons could be expected to produce an acceptable result.
If, therefore, we refuse to be content with the present situation, and are not prepared to be labelled as, for instance, the Labour Party has been labelled, "an organised complaint" it is absolutely essential to understand what is the vital defect in the system which produces these results, and having understood it to make constructive suggestions for its modification.
It is to be hoped that it is clear that the vast majority of people only regard employment as a means to an end, and that end is the attainment of a sufficient supply of goods and services; that, at any rate, an enormous step forward would be made if this desire for goods and services were met, even if the alleged demand for employment remain for the moment unsatisfied.
Is this a practicable proposition?
There is not a single country where western
methods of production are in operation, in which there is any technical
productive problem at all, either agricultural or otherwise; and
the problem we have to solve is a problem of distribution.
The generalised ticket system, under which modern
distribution is carried out, we call money, and it is in connection
with the money system that we may expect to find what we are looking
In order to grasp the reality of this statement,
it is necessary to be clear as to the origin of what passes for money,
and to understand the remarkable powers which are vested in the banking
system and the financier.
Something curious does happen - it is the creation
of new money, which ranks equally with legal tender as purchasing
power, by banks and financial institutions.
At this point it must be realised, firstly, how complete and irresponsible is the control of the banker over the situation. His grant of the loan, if made, is entirely ex gratia; there is no appeal from it; two of the indispensable parties in the transaction, the consumer and the other nine depositors, are never heard in the matter at all; and the reasons operative in guiding the decision are not the same as those of any other party in the case.
If, collectively, the banks refuse the loan, both the producer and consumer are helpless. It is nearly irrelevant to the difficulty which arises out of this situation that bankers may be, and in many cases are, persons of great ability and probity.
Secondly, it should be noted that the situation
in which the financier finds himself is not one of his own making,
and only exists by general consent. At the moment the public ceases
to back him with its credit, which is the commodity in which he deals,
his power goes.
As the situation stands at present, the banker
is in an unique position. He is probably the only known instance
of the possibility of lending something without parting with anything,
and making a profit on the transaction, obtaining in the first instance
his commodity free.
Eventually, the manufacturer must look to the public, the consumer, for his demand, and the only form of demand he can recognise is a demand backed by money (called, for short, effective demand). Since the consumer, who originates the demand, never has sufficient money to back his demand, every "order" has to start with the banker (whose objective is not that of the consumer), percolate through the industrial system, and months or years afterwards reach the consumer, who should have initiated it, in a form which, by common consent, is unsatisfactory.
If this process has been thoroughly grasped, and it is admittedly not very easy to grasp, it will be seen that just as the manufacturer only receives a loan from the bank, which has to be repaid, so also does the workman, who is paid by this manufacturer, only receive a loan in the form of wages, which loan is repaid by him in the form of prices, and yet this loan, while cancelled in the books of the bank, is not cancelled in general prices; that is to say, the workman's cost of living today is quite inevitably added to his cost of living tomorrow.
I have no hesitation in saying that this situation I have attempted to outline to you is absolutely the core of the world crisis through which we are passing. To condense the situation into a paragraph,. what the population of the world wants, and is determined to get, is a sufficiency of goods and services; there is no lack of these goods and services, either actual or potential, but they cannot be obtained except through the agency of money, of which there is a lack.
This lack of money is, in no sense, natural, in the sense of being unavoidable, but is wholly artificial, and is the result of a deliberate policy in the operation of the money system, although that policy may not perhaps be wholly conscious.
No solution of the myriad of apparently unconnected social, industrial, and sociological problems can be found, unless we can bring ourselves to realise that 95 per cent. of so called crime is committed with the object of acquiring money, whether it be through the cocaine traffic or the abuse of public confidence in such cases as the failure of the City Equitable Insurance Company; that the cry for employment has no realistic basis other than an acceptance of the assumption that money can, or should only, be distributed through the agency of employment; and that, owing to its scarcity, the possession of money, in the sense of a claim on goods, confers upon its possessor the power to arrange the lives of others.
If you accept the foregoing statement as to
the inadequate supply of money together with the explanation of the
source out of which money is created (and you have only got to understand
these statements to be in the position of being obliged to accept
them), it is a short step to the realisation of, at any rate, the
general principles along which the solution of the difficulty must
Having broken that monopoly, we have to make such arrangements as will automatically prevent its re-establishment. Such arrangements cannot possibly be allowed to depend on a mere question of personnel. Fortunately, this requirement, which at first sight seems difficult of satisfaction, is, I think, interlocked with the second great objective to which we have to address ourselves, and that is, the adjustment of the rate of issue of the tickets or money to correspond with the rate of production of goods, so that there shall be a continuous relation between tickets and articles, and that there shall be neither an undue quantity of tickets, nor, as is at present, a lack of them.
You will remember that we ascertained that prices were too high in relation to purchasing power. It would seem, at first sight, that we could either issue more purchasing power or arbitrarily reduce prices, but the matter is not quite so simple as that.
If, having broken the banking monopoly of credit, we simply proceeded to give everyone large overdrafts, it is fairly well understood by now that all we should do would be to create a feverish boom in production, accompanied by a spectacular rise in prices. That, of course, is exactly what is happening in Germany today.
If, on the other hand, by means of a rigid government control, we arbitrarily reduced prices, it is equally obvious that we should strangle production, cause widespread bankruptcy, and probably arrest our sales of commodities; but if we are in a position to say to the manufacturers and retailers, "we will assist you to sell to the public at lower prices than you can sell without our assistance," we produce a series of results which, I think you will agree on examination, are remarkable.
In the first place, we benefit the public, as individuals, by lowering prices, and thus enable them at once to get goods and services which, we agree, they demand and intend to have; but even without going any further, it will be seen that we also benefit the trader to whom we extend this assistance because, as he is enabled to undersell any competitor not so assisted, his turnover increases, and thus his business from every point of view, flourishes and expands.
For the moment, at any rate, we solve the alleged problem of unemployment, because the immediate effect of this increased flow of business is to stimulate employment. These advantages alone are so outstanding that it would seem that we have only to be clear as to the existence of a source from which such assistance can be made, to have the necessary justification for action along these lines.
We have such a source, and that source is the same source from which the banker, now, for his own purposes, creates additional purchasing power through the medium of overdrafts, bills discounted, etc. We apply a portion of the created credit to the reduction of prices, and a portion to the creation of purchasing power through the distribution of dividends on Communal Credit Bonds - in fact, given the control of the mechanism of credit, we can make the material conditions of this country exactly what we wish.
The most grotesque objections have been raised to issues of credit in the manner I have just briefly outlined; in fact, it is a remarkable thing that large numbers of persons, who cannot honestly be suspected of direct connection with the banking system, seem feverishly anxious to ridicule it.
The first objection raised is that it would raise prices, a really remarkable statement in view of the fact that the suggested use of credit is absolutely contingent on a fall of prices. If cornered in regard to this objection, these persons say that it would result in a queue of the type familiar during the latter years of the first world war. The answer to this is, of course, that again the suggested credit issue is contingent on the ascertained fact that potential production is always in excess of consumption.
It will usually be found that when the quasi-practical objections have thus been disposed of, the objector discloses his real position, which is what he calls a moral objection, that he hates the very idea that anyone should be comfortable in this world without being made very uncomfortable in the process.
Some years ago I had the experience of discussing
these proposals with Mr. and Mrs. Sydney Webb, and, after disposing,
one after the other, of the objections raised to the feasibility
of the scheme, I was met with an objection with which, I confess,
I found myself wholly unable to deal, and I recognise that objection
in the Labour Party report on the Douglas proposals.
That is a clear-cut issue: it is an issue which goes right down to the bed rock of human philosophy. It claims that human nature is essentially vile, and can only be kept within bounds by being kept so busy that it has no time to get into mischief.
I have no doubt whatever that this philosophy
is at the root both of the present economic system and of all the
socialistic schemes of nationalised economic and social administration
which have culminated in the Russian Soviet Republic.
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