C.H. Douglas Out of Print ...... Mondo Politico
Social Credit, by
Major Clifford Hugh Douglas
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Part II: The Mechanism of the Classical Ideal

CHAPTER V

WHY TAXATION IS HEAVY

IT has already been suggested that there is extant in the world, a common, if somewhat nebulous, idea that whoever, for instance, grows a ton of potatoes, grows thereby in some mysterious way, the purchasing-power equivalent to a ton of potatoes. This idea, while not specifically expressed in words, is sedulously fostered by the Press, and by the other media of propaganda which are employed to convince the public that our economic difficulties proceed from insufficiency of production. It is significant that the peculiar brand of economics popular amongst Marxian-Socialist and Communistic propagandists is at one with apparently more orthodox economists, in suggesting the comparative unimportance of money in the economic system; that it is nothing but a reflection of the economic facts beneath it.

If I grow a ton of potatoes and exchange those potatoes for five currency notes of one pound each, held at the moment by my neighbour next door, all that has happened is that I have five pounds which he had before. My ton of potatoes has not increased the number of pounds, although it may have, but probably has not, increased the purchasing-power of each pound. If we imagine this five pounds to be the only five pounds in existence, and money to be the only effective demand for goods, no one will be able to exchange any goods until I part with, at any rate, a portion of my five pounds. Now the distinguishing feature of the modern co-operative production system, depending for its efficiency on the principle of the division of labour, is that the production of the individual is in itself of decreasing use to him, as the sub-division of labour and process is extended. A man who works on a small farm, can live (at a very low standard of comfort and civilisation) by consuming the actual products of his own industry. But a highly-trained mechanic, producing some one portion of an intricate mechanism, can only live by casting his product into the common stock, and drawing from that common stock a portion of the combined product through the agency of money.

There are some deductions of major importance which can be made from these premises. The first is that money is nothing but an effective demand. It is not wealth, it is not production, and it has no inherent and indissoluble connection with anything whatever except effective demand. That is the first point, and it would be difficult to overrate the importance of a clear grasp of it. It lies at the root of the question as to the true ownership of credit-purchasing-power. The second point is that, so far as we can conceive, the co-operative industrial system cannot exist without a satisfactory form of effective-demand system, and the result of an unsatisfactory money system (that is to say, a money system which fails to function as effective demand to the general satisfaction) is that mankind will be driven back to the distinguishing characteristic of barbarism, which is individual production. And the third point, and the point which is perhaps of most immediate importance at the present time, is that the control of the money system means the control of civilised humanity. In other words, so far from money, or its equivalent, being a minor feature of modern economics, it is the very keystone of the structure.

Now, the amount of legal tender in Great Britain amounts to roughly four hundred millions sterling. That is to say about nine pounds per head. If, on a given day every description of effective demand, other than legal tender, was effectively demonetized, a number of interesting things would no doubt happen, but amongst them would be this: if this four hundred million pounds was to function as effective demand for the whole of the production of the country, the purchasing-power of each single pound would have to increase at the same rate as any increase in the rate of production. That would mean that prices would have to fall in proportion as the rate of production rose, or shortly, prices would be inversely proportional to the rate of production. This statement is independent of any questions in respect of the ownership of the legal tender.

But supposing someone discovered a method of increasing the legal or customary tender, either by counterfeiting notes, or in any other way; then this process of increasing the amount of legal or customary tender would operate in the reverse direction to a process of increasing the rate of production, and if the increase in legal tender, while continuing to function as effective demand, paralleled the increase in productive rate, prices would remain constant per unit of productivity, assuming (what would not be true) that costs did not rise in such a manner as to drive out the willing seller.

We know of certain things in connection with the productive system as matters of fact and not of theory. We know that the productive rate per man-hour has increased enormously, in some cases as much as one hundred times in comparison with the productive rate one hundred and twenty-five years ago. We know that prices over a period of years, not only have not fallen, but that they are rising. We know that there are many other forms of effective demand other than legal tender. And it does not appear to require much acumen to deduce that all these facts have some relation to each other.

We have already seen that the result of a loan by a bank is to increase the amount of collective deposits on which the bank's customers can draw; which deposits, of course, function as money. The repayment of these loans destroys these deposits, and thus destroys effective demand. This process of creating purchasing-power by means of book entries has, however, a further extension of far-reaching importance, which can perhaps be grasped by a consideration of the methods by which Great Britain financed the War of 1914-1919.

War is a consumer whose necessities are so imperative that they become superior to all questions of legal and financial restriction. Inter arma silent leges. That is why legalists and financiers, although their existing systems tend inevitably to produce wars, are so afraid of them, and why war, terrible in itself, has so often released humanity from bonds which threaten to strangle it. As a result of this situation, the bounds which are placed upon production for war purposes are defined by intrinsic forces and not by artificial limitations. That is to say, in order to maintain a connection between finance and production, finance has to follow production instead of, as in the normal case, production having to follow finance. The extension of production to its utmost intrinsic limits, therefore, involves an extension of finance at a rate out of all proportion to that which obtains in the normal course of events, and this extension at once reveals the artificial character of normal finance. It has been pointed out at some length, and probably sufficiently, that the Gold Standard, on which British finance was supposed to be based, broke down within a few hours of the outbreak of war. That is important; but it is only the first step, just as the Gold Standard itself is only one aspect of a system of finance in which currency is the basis of credit. What is more fundamentally important, is to observe that immediately production is expanded at anything like its possible rate, the idea that the financial costs of that expansion can be recovered in prices is seen in its full absurdity.

It will be understood that by far the major portion of the muniments of war (including not only warlike weapons and munitions, but the million articles required by the supply services of the armies engaged) were produced by so-called private undertakings, and paid for by the Government. Now, the normal method by which a Government obtains the money wherewith to pay for its purchases, is by taxation, and a balanced Budget means that the proceeds from taxation at least cover the expenditure on public services. Under these conditions, costs and profits of production are recovered by the Governments (through the medium of taxation) in prices; that amount of taxation which is represented by the supply services, representing the price of the goods delivered to the Government with all costs included.

The National Debt rose between August 1914 and December 1919 from about six hundred and sixty millions sterling, to about seven thousand seven hundred millions sterling. And this rise represents, on the whole, the expenditure over that period which it was deemed impracticable to recover in current taxation. That is to say, if we take the average taxation for supply purposes over that period 1914-1918, as being about three hundred millions per annum, the amount paid by the public as consumer for the goods and services supplied to it for war purposes, was about thirteen hundred and fifty millions, and the financial cost of those goods and services was about eight thousand three hundred and fifty millions, a ratio of cost to price of about roughly 1 : 6.2 . In other words, goods were sold to the public at one-sixth of their apparent financial cost, and no one lost any money over it at the time. How was this done?

A considerable amount of this money (some of which may be in excess of the figures just mentioned) was created through what are known as the Ways and Means Accounts, and the working of this is described in the first report of the Committee on Currency and Foreign Exchanges, 1918, page two. Paraphrased, the process may be shortly explained as follows.

If ten million pounds credit is advanced at the Bank of England to the credit of Public (i.e. State) Deposits (which simply involves the writing up of the Public Deposits account by this amount), this amount is paid out by the Spending Departments to contractors in payment for their services, and when the cheques are cleared, passes to the credit of the contractors' bankers (joint Stock Banks) account with the Bank of England. The joint Stock Banks are accustomed to regard their credits with the Bank of England as cash at call and, therefore, ten million pounds is credited to the depositors of the Joint Stock Banks, and ten million pounds to the Joint Stock Banks' cash account.

As a result of this, the joint Stock Banks, working on a ratio of one to four between so-called cash and short-date liabilities, are able to allow their customers (working on Government contracts) overdrafts to the extent of forty millions, a portion of which their customers may devote to taking up Treasury Bills or War. Loans. The banks themselves may take up about eight millions of Treasury Bills or War Loan, out of their additional "deposit" balances, or they may lend about eight millions to the Bank of England to lend to the Government. Eventually, the result is the same, namely that the Government owes forty millions to the banks, through the Bank of England.

Now the first point to notice is that the result of this complicated process is exactly the same as if the Government itself had provided forty millions, in Currency Notes, with the important exception that the public pays 4 or 5 per cent per annum on the forty millions, instead of merely paying the cost of printing the Currency Notes. The effect on prices, while the forty millions is outstanding, is the same, and the contractors pay 6 or 7 per cent for their overdrafts instead of getting the use of the money, free. But if the forty millions is redeemed through taxation, or a Capital Levy, the public pays not only the 5 per cent per annum, together with the contractor's 6 or 7 per cent, plus a profit on both of them, but it pays the whole of the forty millions out of money which has been received in respect of wages, salaries, and dividends. So far as I am aware, no one has ever suggested that Currency Notes should be retired by taxation. It is true that when this forty millions has been repaid, both the original debt and the repayment cancel each other, and only the interest charges go to the Profit and Loss Account of the Bank. But since, as we have seen, the repayment of bank loans means the immobilisation of an equivalent amount of price-values, this only means that a fresh loan with fresh interest charges has to be created. A consideration of these facts will make it easy to understand the implacable opposition of bankers and financiers to Government paper money and their insistence on the importance of what they term redemption. The payment in current taxation of only one-sixth of the price of war stores, etc., meant, therefore, that a credit grant of the other five-sixths of the price was made to the Public. The repayment of this credit is only justifiable on the assumption that banks own Public Credit.

The average banker, if confronted with the foregoing statements, would, while being obliged to admit the facts, probably say, "Yes, but printing paper money has no finality. Once you begin, you have to go on." Without admitting his contention, let us see what is his alternative.

Since bank loans create bank deposits, it will be seen without difficulty that the process which has just been described would either produce a fantastic array of depositors' accounts, or else would necessitate the calling in of such large amounts of overdrafts as would make it impossible for the manufacturer to carry on his business. It therefore became necessary to fund these unwieldy sums. That is to say, to convert them from something which will operate as currency into "Capital Securities," the interest only of which will operate as currency; and it will still be fresh in the memory, that every inducement, including loans up to 80 per cent of the face-value, was offered by the banks to their depositors, to convert such deposits into Government Stocks of various descriptions. The result of this was to convert a large portion of their unsecured overdrafts into loans against Government security. Observe what happened. The Government loans, 80 per cent of the value of which originally represented nothing but bank overdrafts created by a stroke of the pen, were held by the banks as security for this same overdraft. At the close of the War, or rather about a year after the close of the War, the banks began to call in these overdrafts. Had they called in the whole of them, there would have been no money in the country except the four hundred millions of legal tender, most of it already in the banks. As a consequence of the partial extinction of existing credits, and the reduction in the rate of issue of new credits, Government Stocks of all descriptions were thrown upon the market, to obtain money wherewith to meet the bankers' calls. Their value declined until the margin of their market price over the amount which had been lent upon them had disappeared, and, as a result, the stocks came into the hand of the banks; so that it is probably true to say that 90 per cent of the holdings of Government War Securities were under the ownership or complete lien of the banks and financial houses by about the middle of 1922. From this time on, a process of reselling these stocks to the public at enhanced prices began, fostered by the stagnation of trade, which forced any available money in the country into fixed interest-bearing securities. Owing to the comparatively small amount of money available for this purpose, and the fact that a large amount of Government Stock was acquired by the direct creation of bank credits on bank account, it is probable that even yet 75 per cent of the total issue of Government Securities is still in the hands of the banks,* or is held by them under a lien; sufficient only being in individual hands to ensure the protection of the loan as a whole. The net result of the process, is that the public pays the sum of three hundred and twenty-six millions sterling per annum as interest on an immobilised loan of which it has not the use as money, but which it has to repay in the form of sinking fund. Such sinking fund must either be collected out of the costs distributed in respect of future production, the public being thus further prevented from purchasing home-produced goods, or by the creation of a fresh debt in an open or disguised form.

* At the time the first edition of this volume went to Press, the absorption of the Guernsey Bank by the National Provincial Bank was announced. For each £10 paid share of the Guernsey Bank two £5 National Provincial shares and £18 in 5 per cent. War Loan was given.

The beauty of the transaction, however, is only seen in its entirety when it is recognised that the repayment of the loan, either by taxation or otherwise, unlike the repayment of the costless book-credit which originally created it, does not mean its extinction, but merely its re-transformation into the form of purchasing-power, since the sinking fund represents a cash payment to the holders of the loan in return for their securities. The public will therefore pay the interest and sinking fund for the term of the loans in order to get back the use of their money - and as the banks would be likely to hold most of the loan, the latter would get the money. In the third part of this book it will be necessary to consider the question of the beneficial ownership of financial credit; and a grasp of the results of the present method of operating the credit system as indicated by the financial operations of the past few years, is necessary for that purpose.

It may be asked why banks only pay a dividend of 25 per cent or so. The answer is simple.

Their real earnings are measured by the control over industry which they acquire - earnings so rapid that in a few years the control will be absolute, if not checked. The amount distributed in dividends is, or could be, any desired dividend on this capital control.

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