Review
of The Political Economy of Social Credit and Guild Socialism
by
Bill Krehm
Review
of a book by Frances Hutchinson and Brian Burkitt, Routledge, London,
1997
This
remarkable book on the history of social credit was given to me by
Michael Rowbotham some years ago. I must have read it carefully at
the time for my margin pencillings are much in evidence. But clearly
it required the disturbing developments in the intervening years for
me to make a greater effort to appreciate fully some of the
conclusions that Major C.H. Douglas had arrived at. The problem was
that he was using an approach that varied from that of less
unconventional reformers – to the point that they did not even
grasp what it was that he was seeking and to an extent actually
found. Reflecting that, his solutions and even his language seemed
clumsily at odds with the accepted vocabulary and grammar of economic
thinking, right or left. Even his A and B Theorem which seemed to us
an unschooled blunder of an engineer lost in the labyrinth of
accountancy and economic thought.
But the
misadventures of the world are forcing us to penetrate the
obscurities of his language that barred access to many potential
allies.
But
a bit of background. “The writings of Major Douglas gave rise to
the social credit movement, popular throughout the inter-war years.
Douglas’s earliest books, Economic
Democracy and Credit-Power
and Democracy,
first appeared in serial form in the socialist journal the New
Age in
the period immediately following World War I. Close examination of
the early Douglas/New
Age texts
alongside the literature of guild socialism reveals that the editor
of the New
Age, A.R.
Orage, provided
Douglas with a great deal more than editorial support in the
formulation of the original texts. Without Orage’s guild socialist
contribution [the Douglas doctrine] would have provided unpromising
material for a popular debate which was to be sustained over two
decades throughout the English-speaking world.
“Guild
socialism and Douglas had this in common: In their different ways
they both questioned the deep faith that Marxist and most brands of
socialism shared with the prophets of capitalism – that economic
growth was in itself beneficent and necessary, and ultimately
liberating. The guild socialists questioned this on esthetic,
philosophic and social grounds under the influence of William Morris,
John Ruskin, and even of Robert Owen.
The
guild socialists saw in excessive industrialization an undermining of
the elements of pluralism and local autonomies in earlier societies.
Current Globalization and Deregulation with its destructive effects
on the environment, the family, the multiplicity of life styles, is
only an explosive manifestation of this trend. As important as the
effort to safeguard the jobs of workers may be, it is an uphill
struggle, given the concentration of power in the financial sector.
The incorporation into current price of the rate of growth already
achieved brings with it the need to continue that growth, and its
rate of its growth into the distant future. The slightest shortfall
of this commitment triggers the collapse of the price structure. And
since share values serve as collateral for further financing, it
becomes unsustainable. The mathematics of the model in fact are those
of the atom bomb.
An
Unequalled Thoroughness
Douglas-Orage
review the nature of money from the ground up with a thoroughness
that has few if any equals. “Douglas stressed that production does
not create money. It is possible to imagine a producer in a system of
single-stage production [i.e., without the purchase of intermediate
goods and hence not incurring costs that have need of money]. Having
access to land (which has not been bought) and a discarded spade, and
having saved seed potato and horse manure (discarded A), it is
possible for a producer to plant, tend and harvest a potato crop at
no financial cost. The crop can be put in a discarded sack and sold
to a neighbour for £5. Has the producer created £5? Or any money at
all? That is the sort of maddeningly basic question Douglas was given
to asking.
“Nevertheless,
at the point of exchange no value is created. However sophisticated
the system, production of all commodities follows the same pattern as
the potato example. All production requires inputs from the natural
world which the economy cannot create. All production requires human
inputs. First, an inherited body of knowledge, as in the ability to
save seed, cope with pests and drought and so on. Second, a
‘producer’ who may be employed or self-employed, but who comes to
the task physically developed from infancy to maturity and still
requires social care. Neither form of ‘human input’ is produced
through exchange on the market. Wealth creation can take place
outside the exchange economy.
“Money
is a commodity itself. In a single-stage production a large
proportion of subsistence requirements can be seen to be produced
outside the formal economy. Hence in newly monetized economies
‘cheap’ labour occurs because subsistence requirements continue
to be provided from outside the cash economy.
“Money
has no intrinsic properties, only those which people choose to give
it. Hence a comment such as ‘There is no money in the country with
which to do such and so’ is meaningless, unless it is an indication
that the goods and services required to perform the task in question
do not exist and cannot be produced. In that event it would be
useless to create the money-equivalent of the non-existent resources.
On the other hand, it is misleading to argue that the country ‘has
no money’ for social betterment or for any other purpose, when it
possesses the skill, the labour and the material and plant to create
that betterment. The financial system in the form of the banks or the
Treasury can, if they so wish, create the necessary money in five
minutes. Indeed, they are creating money for ‘necessary’ tasks
every day, and have done so for centuries.
“Money
can be described as a ‘ticket system’ whereby money ‘tickets’
or grants the right to participate in the economy. The ticket office
[of a railway] is not the place where the measurement of productive
capacity should take place. To orthodox economists steeped in
general competitive equilibrium theory the dynamic relationship
between money creation and policy formation in production and
distribution was incomprehensible.
“‘In
popular belief, banking is understood to be no more than a private
pawnbroking transaction between borrower and lender: lenders place
their savings in a bank, and borrowers take that same money to
invest in new machinery, labour and materials. In reality the
banker is in a unique position of lending something without parting
with anything, and making a profit on the transaction’ (Douglas,
1923). ‘The bank lends new money; bank loans create money and the
uses to which it can be put are dependent upon these transactions’
(Douglas, 1922c). ‘Every credit transaction affects the interests
of every person in the credit area concerned, either through its
effect on prices or through the diversion of the energies available
for production purposes’ (Douglas, 1922c). ‘An overdraft,
arranged perhaps on the basis of the title deeds of a factory,
facilitates production. However, the overdraft is new money exactly
as if the banker had coined goods for sale’ (Douglas, 1920). Hence
the granting of credit by a financial institution is more
realistically viewed as the creation of a mortgage on future
production than as the allocation of the past savings of industry.
The term ‘deposits’ is highly misleading, implying something
deposited for safe keeping, like jewels in a safe deposit. Bank
deposits are not like that. The deposits of commercial banks are to
them liabilities, although they are assets to their holders.”
Our
Censored Textbooks
“As
later explained (by Encyclopedia
Britannica,
1979) – a bank that received, say, $100 in gold might add $25 to
its reserves and lend out $75. But the recipient of that $75 would
himself spend it. Some of those who received gold in this way would
hold it as gold but others would deposit it in this bank or in other
banks. If, for example, two-third were deposited, some banks would
find $50 added to deposits and to reserves and would repeat the
process. When this multiple expansion process worked itself out
fully, total deposits would have increased by $200, bank reserves by
$50 and $50 of the initial $100 would have been retained as ‘currency
outside banks.’”
You will
find that process explained in even greater detail in just about any
textbook on economics published in Canada prior to 1991 when the bill
was passed abolishing statutory reserves that banks had to redeposit
as security against the deposits received in chequing accounts. By
that the key mechanism of banking had been suppressed. That, of
course, and the speculative banking orgies that have taken over since
banks were deregulated to empower them to acquire brokerages,
underwriting, merchant banking, derivative boutiques, are what have
made the ideas of Douglas-Orage more important than ever before.
“‘Problems
occur when the banking system operates according to its own agenda,
with the requirements of the consumer a secondary consideration.
Unlike the social reform business, the banking business is immensely
powerful, talks very little, acts quickly, knows what it wants’
(Douglas, 1922b). ‘The quantity of money is dependent upon the
power of the banker’s pen. Banks create new money which ranks
equally with legal tender as a means of exchange. Although credit is
more properly regarded as common property, it is administered by the
banker primarily for the purpose of private profit’ (Douglas, 1923,
1919b). According to orthodox theory, money, equivalent to the price
of every article produced, exists in the pocket, or in the bank, of
somebody somewhere in the world. It is assumed that the collective
sum of wages, salaries and dividends distributed in respect of the
articles for sale at any given moment is available as purchasing
power at the same moment. Some persons may have more money in their
pocket or bank than they wish to spend on consumable goods. By
abstaining from consuming, they form a fund which enables capital
goods such as tools, plant and factories, to be paid for, and
therefore to be produced. Crucially, the money which they ‘use to
spend or invest is constantly created and destroyed by the banking
system for its own financial advantage’ (Douglas, 1924a).
“Real
credit is the ‘effective reserve of energy belonging to the
community.’ Its administration has fallen to the banking system and
financial institutions generally. Consequently the ‘creative energy
of mankind’ becomes subject to artificial restrictions which bear
no relationship to the realities of everyday existence’ (Douglas,
1919b). The potential real wealth of society is communal in origin
and should therefore be subject to the control of the entire
community. Financial credit is administered by the banking system
‘primarily for the purpose of private profit’ (Douglas, 1919b).
“The
Douglas/New
Age texts
note that banking originated as a private venture, observing that at
the time the Bank of England remained a private institution.
Nevertheless, the guild socialists did not consider that a
politically controlled central bank would be truly independent of
private banking interests. Just as state capitalism, i.e., a
socialist government under the existing economic conditions would
produce wage slavery as effectively as private capitalism, so too
would state banking continue the status
quo in
terms of financial control over industrial policy. Hence Orage’s
derision of the Labour Party, on its rejection of the Douglas/New
Age scheme.”
History has confirmed his judgment, but it is, however, important to
remember the international campaign of the Bank for International
Settlements in the 1980s to declare the independence from their
governments of all central banks. Given what it had in the works, the
world banking community clearly needs all the safeguards and secrecy
it could get.”
Finance
Rules the Rulers of Kingdoms
“The
creation of ‘financial credit’ ensures that ‘industry becomes
mortgaged to the banking system’ (Douglas, 1924a). ‘Appreciation
of the role of finance in initiating economic activity was noted
in The
National Guilds’ edited
by Orage (1914) and originally printed as a series of articles by
S.G. Hobson in the New
Age in
1912-13. ‘A great financial network covers the world, operating on
an informal but highly centralized basis. It rules the rulers of
kingdoms.’
“At
this point, Hobson and Orage went no further than suggesting that the
(industry-based) guilds would have to become their own bankers,
working through a national clearing house.”
At this
point Douglas formulated his “A+B theorem,” which focused on an
aspect of financing production quite different from what economists
and accountants had even considered.
“In
1908 he had been in India in charge of Westinghouse’s interests in
the East. One of those concerned the survey of a large district with
a view to installing hydro-electric equipment. The prospects were
good. On his return to Calcutta, however, it became clear that there
was no money to proceed with the project. At the time labour was
plentiful in India and the manufacturers in Great Britain were short
of orders. Furthermore, prices for machinery at the time were very
low indeed. Douglas recalled having been taken into the confidence of
the Comptroller-General of India in Calcutta on the matter of
‘credit.’ He was told of the trouble he experienced with the
Treasury officials at home in England, and with their departments in
India, in regard to the extraordinary operations they undertook
melting down rupees to deal with the exchange. This was done with
regard to ‘what they called the quantity theory of money.’ The
Comptroller-General concluded that ‘money and currency and the
silver rupees, etc., have almost nothing to do with this situation.
It almost entirely depends on credit. Silver and currency form only a
very small part of financial operations. Douglas noted this for
future reference.’
“Some
years later, before the outbreak of World War I, Douglas states he
was employed by the British Government at home to design and
ultimately construct a railway which runs underneath London from
Paddington to Whitechapel. Despite the absence of physical or
engineering problems and a plentiful supply of labour, the project
could not be completed. Finance lay at the root of the problem.
However, as soon as the war commenced, money was available for
practically anything.
“After
‘an interval’ Douglas ‘was sent down to Farnborough, to the
Royal Aircraft Factory, in connection with a muddle into which the
institution had got.’ Douglas concluded that the only way to
ascertain how work was being allocated ‘was to go very carefully
into the costing which took place.’ The existing costing system
produced ‘admirable information about what happened three years and
two months before, but that was not of any use to me.’ According to
Douglas, he introduced very early computers – ‘tabulating
machines’ used on the London and North Western Railway. Information
was punched on to cards and the cards were put into the machine that
processed them. One day it occurred to him that by the end of the
week total wages and salaries were not equal to the value of the
goods produced during the week. The fact of this happening in every
factory across the land at
the same period of time meant
that the purchasing power distributed in the form of wages and
salaries will not be sufficient during any week to buy the product
unless extra money is being injected into the system each week.”
That was
the origin and significance of the notorious A+B theorem. It was not
enough to point out, as did many including myself, that the
discrepancy was because many items produced both as intermediate
goods as manufacturing parts, buildings, engineering projects would
be useful over many years and would be financed until they were fully
depreciated years later. That is exactly what he wished to free
society from – dependence on the financial institutions. Hence he
brought in the concept of a social dividend representing the
contribution of society over generations in creating the
institutions, the inventions, the scientific and technical
discoveries that made the productive potential of our world possible.
It would include, too, the unrewarded labour of slaves, the
contribution of martyrs and prophets that made possible the social
and legal framework for modern society and its productivity. That
could be allotted to all citizens and it would fill the gap and free
society from servitude to financial capital.
Instead
of patenting scientific discoveries, even genes, for speculative
investors to collect a rent on them, the social dividend would
contribute to gear down the drive to maximization of the financial
sector. It would encourage alternative life styles that would
cultivate other goals than the consumption of highly promoted items
of little or negative usefulness.
The
contribution of Douglas-Orage to the incorporation of the non-market
sectors of the economy – health, education, social security, the
environment – is crucial. The power-grab of the banking system that
Douglas and his associates identified almost a century ago, have come
into a lethal flowering. In the long-overdue reassessment for what
passes as economic science, their ideas will require careful
attention. The Hutchinson-Burkitt book is mandatory for
preparing ourselves for the task.
William
Krehm
Wikipedia:
William
Krehm (November
23, 1913 – April 19, 2019) was a Canadian author, journalist,
political activist and real estate developer. He was a
prominent Trotskyist activist
in the 1930s and went to Spain where
he participated in the Spanish
Civil War.
In the 1980s he co-founded the Committee
on Monetary and Economic Reform (COMER)
and continued as the group's principal leader until his death in
April 2019 at the age of 105.[1][2]
Read more on Wikipedia...
