C.H. Douglas Out of Print ...... Mondo Politico
Social Credit, by
Major Clifford Hugh Douglas

Part II: The Mechanism of the Classical Ideal



IN the foregoing chapter we have endeavoured to establish two important propositions in generalised terms. The first of these is: -

(1) That the collective prices of the goods available for sale at any moment in a given community, if they have been produced by ordinary commercial methods, cannot be met by the money available through the channels of wages, salaries, and dividends, at one and the same moment. They can be exported in return for purchasing-power, or they can be destroyed, or they can be bought by purchasing-power which is created and distributed in respect of a separate cycle of production. This situation is worsened by what is called saving, but is independent of saving at the present time.

It may be noted that both in Europe and America, there are numerous endeavours being made, and theories propounded, to explain this fact; which was, until recently, denied as a fact. The foreword to a work by H. B. Hastings,* published in America, remarks:

"By an accounting method of analysis, the conclusion is reached that the value, at the current retail price-level, of goods produced far exceeds the flow of purchasing-power from permanent sources. In other words, recurring periods of business depression are shown to be the result of present financial and business policies.

"The importance of this new method of approach to the most important of modern economic problems is self-evident."

* "Costs and Profits."

(2) This situation would be almost immediately destructive to the working of the business system, if the financial technique did not provide a source of purchasing-power, or new Money, in the form of bank loans and credit instruments, which does not arise out of wages, salaries, or dividends, paid for past production. By the exercise of this technique, however, industry becomes mortgaged to the banking system.

While there are good, sound, and fairly obvious reasons why, in any case, the stupendous power of creating and destroying the major portion of the purchasing-power in the world should not be vested in the hands of private and irresponsible persons, it is probable that such considerations would fail to produce any very radical alteration in the system if they formed the only basis on which criticism could rest. It is probable that chattel slavery as an institution would be more or less permanent if every slave had been perfectly comfortable. That is to say, the objection to the situation is that it does not work, rather than that it is immoral. While the power of creating effective money has, up to the present time, enabled banks to mask a good many of the defects of the financial system, it has, particularly in the last few years, failed definitely to remedy some of the more vital of them. The financial mechanism has acquired a considerable control over the rate and the manner of issue of money and purchasing-power, and to a large extent, this power has become unified and centralised so that it forms an international organisation of the most stupendous power, but it has to a lesser extent only, achieved control of the other aspect of finance which is exhibited in the form of prices. It is true enough that widespread efforts have been made on the part of the large Joint Stock and International Banks to control general price levels by increasing or decreasing the amount of money available in the pockets of the public. But these efforts may be said quite definitely to have failed, or at any rate to have fallen far short of the expectations of those who have put them into operation.

The reasons for this failure are not far to seek. The financial mechanism has a positive and negative aspect, the positive aspect being represented by the issue of money, and the negative aspect being represented by the exchange of the money thus issued for goods and services, through the medium of prices. It is obvious that if money is the only claim upon goods and services, the less money there is available, the more goods and services each unit of this money will command, if there is always a willing seller. This is merely one method of stating the well-known quantitative theory of money. It results from this that if there were no other factors involved, a contraction in the amount of available money would result in a fall of prices, since each unit would buy more goods and services. And it is on this simple principle that, since 1920, the banks have endeavoured to control the general price levels, more especially in Great Britain. While prices have not fallen from this cause to anything like the extent that they rose under a contrary policy, the restriction of credit which has been in operation since 1920, did undoubtedly tend to arrest the spectacular rise in prices which was in progress at the time of its initiation. The reason for the limits which are set to the reduction of general price levels by "deflation" is simple; when prices are reduced to approximately the equivalent of costs, the willing seller disappears.

Even this modified success has been achieved at the cost of widespread distress arising out of unemployment and bankruptcy, results which must inevitably accompany such a policy. The natural and mathematical result of the operation of a financial and costing system, which requires that all the costs, or issues of purchasing-power, distributed during the production of an article, shall eventually be recovered in prices, is a continuous rise in the cost of production of any article produced by a given process. This rise can be, and is, temporarily offset by improvements of process, but only temporarily.

Now any attempt, by current financial methods, to reduce prices (or even to stabilise them, as the phrase goes) is a mathematical absurdity unless the cost of this stabilisation, or lowering of prices, is met from some extraneous source. Or to put the matter another way, the margin of profit which makes it possible for a producer to go on producing, disappears unless the financial cost, and consequently the price of production, is allowed to rise steadily in relation to direct labour cost. As a result of this, if prices are forced down, production stops, and stocks are sold only at prices which mean loss, and ultimately bankruptcy, to the manufacturer and distributor. This is the situation produced by the fall of prices again initiated in 1928.

To put the matter in a form of words which will be useful in our further consideration of the subject, the consumer cannot possibly obtain the advantage of improved process in the form of correspondingly lower prices, nor can he expect stable prices under stationary processes of production, nor can he obtain any control over the programme of production, unless he is provided with a supply of purchasing-power which is not included in the price of the goods produced. If the producer or distributor sells at a loss, this loss forms such a supply of purchasing-power to the consumer; but if the producer and distributor are not to sell at a loss, this supply of purchasing-power must be derived from some other source. There is only one source from which it can be derived, and that is the same source which enables a bank to lend more money than it originally received. That is to say, the general credit. In spite of the immense strides made in the direction of improved process since 1914, prices are still nearly double those obtaining at that date, while industrial profits are much less.

It may now be possible to see with some degree of clearness the difficulties in which those institutions and organisations which control the general credit at the present time find themselves. It is true enough that they can manufacture "money" to an almost unlimited extent; this power resting on the general willingness of the public to accept anything which will function as money. But the psychology which has grown up on the basis of the theory of rewards and punishments forbids the exercise of this power, except in return for services rendered. The financial equivalent of all services rendered in the production of an article, forms the cost of that article, and conversely, nobody will furnish any services in connection with the article which are not represented by cost, and therefore go into price. The old fable of the Fairy Gold which disappeared as it was grasped, can thus be seen in its every-day embodiment; and the result of these creations of credit granted to producers only, instead of to consumers, is to produce a rise of prices which nullifies the additional purchasing-power thus created.

There is, as a result of the problems created in Great Britain by a restriction of credit, a quite considerable body of persons, more especially among manufacturers, who are openly demanding a large increase in the volume of credit to be issued to manufacturers. It is hardly denied that such a process would cause prices to rise, and in fact it is frequently argued in quarters which might be expected to know better, that a rise of prices would be an advantage, because it would decrease the burden of the National Debt, since the amount of money represented by the National Debt would have a decreased purchasing-power in goods and services. There could hardly be a more vicious example of the classical or static method of thought and argument.

It is true that the National Debt was created and appropriated, by methods, subsequently to be explained, which are indefensible from almost any point of view, more especially as the greater part of the Debt is held by financiers and financial institutions. But a considerable, if minor, proportion of the Debt has been sold to members of the public in return for money which they obtained by legitimate methods, and in addition to this, it is of course impossible to reduce the purchasing-power of the National Debt without reducing, pro rata, the purchasing-power of other descriptions, however small in amount, of credit-instruments held by the general public. Now to a man who has one million pounds, it may be a theoretical hardship or "punishment" to reduce the purchasing-power of his one million pounds to that of five hundred thousand pounds, but the practical effect on his scale of life and on his personal freedom of his movements and initiative is nil. But to reduce the income of the man who has two hundred pounds per annum to one hundred pounds per annum, is the difference between simple comfort and practical starvation. And the number of persons who would be adversely affected by a rise of prices is incomparably greater, so far as numbers are concerned, than those who are hit by a fall of prices. The appropriation of large blocks of public credit is buccaneering; but the filching of the widow's mite by a "gradual" rise of prices is pocket-picking of the meanest type. It is not necessary to condone the monopoly of Public Credit, or to acquiesce in it, in order to agree that inflation is the very core of the evil. There is almost nothing to be said for a policy of deflation, as defined by the average banker, except that it provides a breathing space in which to consider what to do; the real argument against it is not that it reduces prices, but that it only does so at the expense of the producer; but a policy of inflation, that is to say, a policy of increasing issues of money or credit in such a manner that it can only reach the general public through the medium of costs, and must, therefore, be reflected in prices, has one thing and one thing only to be said for it at this time; that it is absolutely and mathematically certain to reduce any financial and economic system to ruins. It is in fact a Capital Levy of the meanest and most one-sided description, since it taxes the purchasing-power of those who obtained it by work for the benefit of those who obtain it by financial manipulation.

The condition which is produced by a policy of restricting the amount of money in circulation can be grasped without difficulty, if it be remembered that it must involve a numerical decrease in both the total figures of cost and the total figures of price for a given period of production. The only portion of the total costs which can be decreased without loss to the producer are those represented by wages and salaries, the remainder being fixed charges based on the capital costs already incurred. Wages and salaries costs are purchasing-power, and collectively are much less than collective prices. Imagine both collective wages and collective prices to be diminished by an equal amount x. This may be written:

Costs = purchasing-power.

Costs are < prices.




Costs - x
Prices - x


An addition to both the numerator and denominator of the fraction, such as is brought about by a rise of wages, accompanied by a rise in price, has, of course, the opposite effect; it brings the ratio of purchasing-power to prices nearer, though never to unity, with the result, seen in Germany in the inflation period, of immense, though unstable, economic activity, accompanied by great hardship to the professional and rentier classes, both of whom have claims to consideration, and a most undesirable concentration of economic power, resulting infallibly in the enslavement of the artisan.

Even without demonstration, therefore, it is easy enough to see the effect of either deflation or inflation by the exercise of analytical methods; but nothing of the sort is now necessary. A full-scale demonstration of both of them has taken place since Chapter XIII of Credit Power and Democracy was written; and the course of events in Germany, under a policy of reckless inflation of credit, reappearing in prices, followed with some exactness the sequence, both economic and psychological, which was explained therein, and can be considered and compared with the contemporaneous restriction of credit in Great Britain. During a few months of 1923 a condition of fairly steady, though high, prices was maintained at the cost of increasing industrial stagnation; and the fact that this situation changed into an era of rising prices, accelerated by every effort to grapple with the "unemployment" problem by orthodox methods, should be conclusive proof of the inability of the existing financial system to carry out the policy of "Stabilisation."

The efforts to control prices by manipulating credit along orthodox lines culminated in the unmanageable fall of prices which began in 1928, a fall which complicated, although it did not cause, the financial crisis of 1929 in which the world is still (1933) involved.