Edgar Hardcastle
Source: Socialist Standard, June 1933.
Transcription: Socialist Party of Great Britain.
HTML Markup: Adam Buick
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The origin of the Douglas theory has been explained by Major Douglas in this way. Out in India, before the war, he was struck by the way in which building operations were held up from time to time by "financial considerations." It appeared to him that if raw materials, human labour, tools and machinery, etc., are available it ought to be possible to go ahead with production to meet human needs. He was led to examine this problem and eventually put forward his theory of a permanent deficiency of purchasing power. In its simplest form the proposition is that a factory, or other productive organisation, makes payments under two heads: —
" (a) 'All payments made to individuals (wages, salaries, and dividends),' and (b) 'All payments made to other organisations (raw materials, bank charges and other external costs).'"
Then Major Douglas says: —
"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) plus (b). Since (a) will not purchase (a) plus (b), a proportion of the product at least equivalent to (b) must be distributed in the form of purchasing power which is not comprised in the description grouped under (a). " (See evidence to MacMillan Committee.)
This is the "kink" which Major Douglas professes to have discovered in the money system. It is wholly imaginary. Major Douglas is looking at only half of the process of production and sale. It is quite true that the money paid out in the form of wages, salaries and dividends in any week or other period will not be sufficient to buy all the products placed on the market by a particular firm, or by industry as a whole, but it does not have to do so. In any given week the persons with cash and bank deposits with which they can purchase goods, do not consist only of people holding unspent wages, salaries and dividends. It also includes persons (and companies) who have just received payment for raw materials and finished articles which they sold and delivered some time previously (in the previous week or other period) and who are now in the market buying finished products and more raw materials, partly for personal consumption and partly for further production.
Going back to our underlying picture of capitalism as a process of the production and the sale (or exchange) of articles whose values are determined by the amount of labour required in their production, although the price of an individual commodity need not be the same as its value, the sum total of all values is identical with the sum total of the prices at which all the goods actually sell. The total "purchasing power" in existence at any given time is the sum total of all the values and, therefore, cannot be more or less than the commodities in existence because the two things are the same. To say that there is a "deficiency of purchasing power" is like saying that the total values or prices of all the goods in the market is greater than the total values or prices of all the goods in the market; or like saying that there are goods in existence which have value but which cannot be exchanged for other goods having value — which is absurd. What are they? Who owns them? Neither Major Douglas nor anyone else can tell us, because they do not exist.
What Major Douglas has tried to explain does, it is true, need explaining, i.e., certain aspects of trade depression and unemployment.
Some Aspects of Trade Depression
It is not necessary to go into all the causes and symptoms of trade depression, as that would take us far beyond the point necessary to deal with the Douglas theory. The following points will suffice.
There is at the best of times always some unemployment. There is, for example, always a margin of unemployment due to workers leaving one job for another, or displaced by machinery, or thrown out of employment by an article going out of fashion which causes the industry to close down. There is under capitalism a permanent need for a "reserve army of unemployed." Rent, interest and profit can only be paid provided that there is an income for the investors, i.e., a sum over and above the amount invested. In other words, capitalist industry can normally function only if the workers produce goods having value in excess of the value of the goods required for their own maintenance. If that surplus disappears in any particular firm production soon stops. How can the workers be compelled to accept a wage which is low enough to leave a surplus? The Government, under the control of political parties with a mandate to safeguard the present order of things, protects the ownership of the means of production and distribution, and prevents the workers from taking possession. Being thus deprived of the opportunity of supplying themselves directly with the necessities of life, the workers are faced with the alternatives of stealing or begging or living on the bare margin of subsistence on unemployment pay, or of accepting employment on terms to which the employers will agree. If life on unemployment pay were to be made sufficiently agreeable, wages would be forced up because the number of workers seeking employment would decline. The surplus out of which rent, interest and profits are paid would then disappear. Hence the truism that some margin of unemployment is a necessary pillar of capitalist industry. Labour-saving machinery and methods keep renewing this margin of unemployment.
Nevertheless, in periods of "good trade" there is a more or less close approximation to full employment. Thus, in 1929, when it was customary to bemoan the high level of unemployment, nine workers out of every ten were actually at work.
As was pointed out in the first part of this article (see May Socialist Standard) the workers are engaged in producing articles of three main kinds, (a) articles for their own consumption, (b) articles for the employers' consumption, and (c) articles needed for the extension of the means of production and distribution (e.g., new and enlarged factories). In times of good trade, as fast (or nearly as fast) as the various kinds of articles are produced and put into the market, they are bought and taken out of the market. Production and consumption are fairly closely in harmony, and there is not acute "over-production."
Then periodically comes a time of "crisis," when consumption fails to keep up with the old rate of production, prices and profits fall, production is curtailed and men are thrown out of work in large numbers. Once the crisis has begun it is aggravated by the fact that consumption by the workers is further cut down through unemployment and reduced wages. This curtailment of consumption is forced on the workers. Another curtailment—the curtailment of consumption by the employers, is not strictly forced by lack of means to buy, but is in a sense a voluntary curtailment; it is due to the fact that in times of "crisis," owing to a feeling of insecurity, wealthy people decide to reduce their luxury expenditure.
There are many factors which may combine to cause a crisis. They may be lumped together under the description "factors which dislocate the market." Wars, revolutions, stock exchange slumps, an excessive volume of production of one or more articles (e.g., an unexpectedly big wheat or cotton crop), strikes and lockouts, labour-saving machinery, new inventions— all of these may help to upset world markets by causing a fall in demand or an increase in supply, by depressing security prices, or by causing sudden rises or falls in the prices of particular articles, or (if the value of gold is affected) by rises or falls in the prices of all articles. But whatever the causes may be the general underlying picture of production and consumption during a crisis is the same. The owners and controllers of the means of production and distribution are saying, in effect, to the workers: Because we cannot see the prospect of making a profit we have for the time being curtailed the output of our factories, and our plans for extending our factories, and also our own personal consumption of goods. We shall therefore not need the services of large numbers of you. Millions of workers then having been deprived of their employment and their consumption accordingly reduced, the employers still further curtail the production of new articles, while they consume the abundant unsold supplies which have accumulated.
The Douglas theorists (who naturally receive more attention during a crisis than at other times) explain the depression by saying that there is insufficient purchasing power to take the goods off the market, and add that this is all due to the abuse of their power by the banks. Yet it is not because the banks have or have not done certain things that those who need goods but are poor cannot get them, it is because they are poor. It is because the goods and the means of producing them are owned and controlled by the propertied class, with the backing of the police and the armed forces. There is no lack of purchasing power for society as a whole, but a concentration of purchasing power; not in the hands of the banks alone, but in the hands of all who own and control.
How true this is can be clearly seen from the activities of the State during times of crisis. Although members of Governments frequently make the same kind of panic statements about "universal poverty" during a crisis as are made by the business men who demand lowered taxation because "they cannot afford to pay," the measures taken by Governments to alleviate the misery caused by unemployment belie their statements. Although production declines during a crisis all Governments are forced to take steps to transfer purchasing power from the rich to the unemployed to enable them to live, and as the amount of unemployment grows so the amount of purchasing power transferred in this way also grows. In other words, the purchasing power does exist, and it is only one section of the population which is largely or very largely deprived of it. Looking below the surface to get true picture of the State grants and charitable gifts to the unemployed we see that the property-owners are in effect allowing the unemployed to consume part of the accumulation of goods free of cost. In U.S.A., where a general system of unemployed pay is lacking, the Government has actually distributed enormous stocks of cotton and wheat, to be made into clothing and bread for the unemployed workers and ruined farmers. We see here how crises could be avoided.
If the means of production and distribution were taken out of the ownership and control of the employing class, and placed under the control of society, production would be planned instead of being haphazard, goods would not be produced by independent producers each unaware of the plans of the others. If surplus goods of some particular kind were produced they would not derange the consumption and production of other goods, and workers temporarily not engaged in production would not get penalised by semi-starvation. (This of course does not mean the so-called Planning in Russia, for there the basic conditions are capitalistic, not Socialistic.)
So much for the general principles underlying the Douglas Theory. It may be remarked that there appears to be precious little theory about it, This is true. There is really nothing in the Douglas theory except the one total fallacy. Nevertheless a large number of subsidiary errors have been evolved or borrowed by the Douglasites. They are worth dealing with, because, quite apart from their having been taken up by Major Douglas, they are to be found in all kind of other useless and harmful movements.
Some Fallacies of Major Douglas
One is a fallacious theory about the working of the banking system. Basing their belief on a statement made by Mr. Reginald McKenna, Chairman of the Midland Bank, the Douglasites believe quite literally that Banks possess an inexhaustible power of "creating credit" by the simple device of making book entries. They think that banks lend what they have not got to business men for the purpose of financing production; that the business men deposit the loans in the banks, thus making more deposits; that there is no limit to it; that it is done without cost to the banks; and that all our economic problems could be solved by the simple device of the banks giving away money free to the general public, under the name of "social credit."
The whole thing is a colossal myth. In the first place, if the Douglasites would only take the trouble to read what McKenna actually said in the addresses reprinted in Post-War Banking Policy (Heinemann, 1928. 7s.6d.) they would realise that he never for a moment meant what they thought he meant by the statement that "every bank loan creates a deposit." He did not mean that something is created out of nothing. For example, in a loose phrase, but one which most people have no difficulty in understanding, he says (p. 4): " Anyone who takes notes out of his note-case and pays them into his bank creates a deposit." This sufficiently indicates what Mr. McKenna means when he says "creates."
On page 8 he says: —
"Traders sometimes assume that banks have an unlimited power of making advances. They forget that every advance made by a bank comes out of the bank's cash resources. It is true that advances return to the banks in the form of fresh deposits and thus restore the bank's cash resources to their former level, but the result is to leave them finally with additional liabilities to their depositors without any addition to their bank cash."
On page 93 he refers to the notion that the banks or the Bank of England "can create or destroy money," or "increase or diminish wealth," and says: "I need hardly say nothing of the sort happens. A bank loan creates a deposit and therefore it creates money. But the deposit is a liability of the bank against which a debt is due to it, and the bank merely stands as an intermediary between the depositor and the borrower."
"All that is done by the banks when they create money is to increase the amount of debts due to and from themselves."
The late Mr. Walter Leaf, Chairman of the Westminster Bank, in his Banking (Home University Library) was even more explicit in ridiculing the whole idea.
The fact is, as Mr. McKenna pointed out, that banks are merely intermediaries between one set of property-owners and another set. They place purchasing power or command over goods belonging to the depositors at the disposal of the bank's borrowers. They naturally do not lend money without security in the form of a hold over the property (the factory or stock of the borrowing firm). In effect, as was pointed out in the first article (see May Socialist Standard) the business man who borrows from a bank on the security of the assets of his business is in the same position as the man who pledges his watch at a pawnbroker's. The bank does not "create" the money it lends to the borrower. Like the pawnbroker, the bank cannot lend what it has not got. The difference is that the pawnbroker works on his own money, while the bank works on borrowed money (i.e., the money deposited with it).
At the MacMillan Committee ("Committee on. Finance and Industry") in 1930, Major Douglas claimed that Mr. McKenna, who was a member of the Committee, agrees with this notion about banks creating credit. Major Douglas, therefore, argued that it was not necessary for him to prove the theory. Major Douglas pressed his view that the banks "create credits" at no cost, by book entries and loans to industry. Mr. McKenna (Question 4423 and 4425) had to explain to Major Douglas that the banks paid (at that time) an average of about two per cent or three per cent on money deposited with them. It was here that Mr. McKenna added, evidently with good reason, "Possibly you are not familiar with the working of the banking system."
This entirely disposes of the claim that Mr. McKenna accepts or works on the theory attributed to him by Major Douglas and his supporters.
Many other Douglasite fallacies were exposed at the MacMillan Committee's inquiry.
The Douglas Theory and Past Crises
The Chairman, Lord MacMillan, put one question which shook Major Douglas badly, He was asked (Question 4380-4388) if he considers that the alleged "inherent defect in our financial or monetary system" had existed for 100 years. Major Douglas said yes. He was then asked to explain why this "inherent defect" has not gone on causing "progressive unemployment and progressive depression" through the 100 years, and why in fact there have been periods of expansion. Major Douglas was only able to give the lame reply that he would like to look into a particular period to give an answer (Question 4386) and that he thought the rate of increase in productive capacity could have been greater had this alleged defect not existed.
Neither answer meets the question, and nothing in Major Douglas's statements of his theory will really serve to explain the known alternation of trade expansion and trade depression.
Major Douglas was evasive when he was asked to say what are his practical remedies. He has been studying the question for 18 years or more, but replied (Question 4389): "Well, I am afraid my training and experience as an engineer makes me want to hedge on that point. I would say that what I should first want to do would be to examine the situation very closely — more closely than in my position I am able to do."
When pressed to explain at least the principles of his remedies, he said (Question 4432), that whereas now a person pays, say, £100 for a motor car, he would under the Douglas scheme pay £75, and the other £25 would be supplied by the Treasury, via the Bank of England. When asked where the Treasury would get the £25, Major Douglas could only keep on repeating his strange delusion that the banks have the power to "create credit" out of nothing, and without cost except the cost of making book-keeping entries.
It is true that Major Douglas, even without being a banker, can write down at no cost except that of ink, pen and paper, fabulous sums purporting to represent wealth, but he has never explained how bread and boots and bricks and motor cars can be extracted from a fictitious fund of that kind.
In a concluding article some other fallacies of Major Douglas will be considered.