Tuesday, October 23, 2012

Social Credit

The discussion of Fisher's "Chicago Plan" below reminded me of another monetary reform movement -Social Credit, proposed by British Engineer C. H. Douglas in 1924. It had much traction in the 1920s and 1930s, and lasted into the 1980s in some variants. The ideas proved very attractive in Western Canada, especially Alberta. The British Columbia Social Credit Party, the SocReds, ruled the province for forty years, until it imploded in 1991, although it had abandoned most of the earlier monetary ideas.

Much of the theory is a little hoary, like Douglass's "A+B theorem" which appears to overlook multiplier effects. But some of it appears of contemporary relevance. For example, he emphasizes the stock of knowledge and technique and wealth. From the Wikipedia article:

Douglas disagreed with classical economists who divided the factors of production into only land, labour and capital. While Douglas did not deny these factors in production, he believed the “cultural inheritance of society” was the primary factor. Cultural inheritance is defined as the knowledge, technique and processes that have been handed down to us incrementally from the origins of civilization. Consequently, mankind does not have to keep “reinventing the wheel”. “We are merely the administrators of that cultural inheritance, and to that extent the cultural inheritance is the property of all of us, without exception.”[9] Adam Smith, David Ricardo and Karl Marx claimed that labour creates all value. While Douglas did not deny that all costs are ultimately due to labour charges of some sort (past or present), he denied that the present labour of the world creates all wealth.

And he was correct in focusing on the nature of money:

According to economists, money is a medium of exchange. Douglas argued that this may have once been the case when the majority of wealth was produced by individuals who subsequently exchanged it with each other. But in modern economies, division of labour splits production into multiple processes, and wealth is produced by people working in association with each other. For instance, an automobile worker does not produce any wealth (i.e., the automobile) by himself, but only in conjunction with other auto workers, the producers of roads, gasoline, insurance, etc. In this view, wealth is a pool upon which people can draw, and money becomes a ticketing system. The efficiency gained by individuals cooperating in the productive process was coined by Douglas as the “unearned increment of association” – historic accumulations of which constitute what Douglas called the cultural heritage. The means of drawing upon this pool is money distributed by the banking system.

Douglas believed that money should not be regarded as a commodity but rather as a ticket, a means of distribution of production.

He was also very conscious of the issue of abundance, which I am very interested in. Scarcity is no longer the essential problem of mankind, but distribution (and incentivizing innovation and good behavior).

Douglas also claimed the problem of production, or scarcity, had long been solved. The new problem was one of distribution. However; so long as orthodox economics makes scarcity a value, banks will continue to believe that they are creating value for the money they produce by making it scarce.[20] Douglas criticized the banking system on two counts:

for being a form of government which has been centralizing its power for centuries, and

for claiming ownership of the money they create.

The former Douglas identified as being anti-social in policy.[21] The latter he claimed was equivalent to claiming ownership of the nation.[22] According to Douglas, money is merely an abstract representation of the real credit of the community, which is the ability of the community to deliver goods and services, when and where they are required.

He proposed a "national dividend" to consumers, a form of basic income, to make up for inherent deficiencies in effective demand.

I don't think the solutions he proposes necessarily work out, although I haven't read the original books and papers. But much of the diagnosis is intriguingly correct.



  1. Hi:

    Interesting blog and an excellent post on Social Credit.

    In the article you write, "Much of the theory is a little hoary, like Douglass's "A+B theorem" which appears to overlook multiplier effects."

    Are you referring to the velocity of circulation of money when you talk about the "multiplier effects"?

  2. I was thinking more about the standard Keynesian spending multiplier, that demand propagates through the economy. I haven't thought much about the velocity of money. It probably meant much more back in Douglas's day, or even in the 1960s. But I would buy the general sense in the central banks that velocity has become so unstable in the last thirty years that it isn't that useful for practical purposes. There are innovations in the payments system almost every day. Think of Square, the credit card reader, or Google Wallet. So even if it is conceptually clear, in practical terms velocity is very murky. Monetary aggregates may have some signaling properties, but he reason we pay so much attention to interest rates these days is because the old quantity theory of money and monetary aggregates are too hard to use,

  3. Hi Mapper:

    I thought you might be referring to the quantity theory of money which C.H. Douglas called a "myth". I'm a little unclear as to how the multiplier effect negates the A+B theorem.

    One thing to keep in mind is that Douglas was a cost accountant along with being an engineer. The A+B theorem is a theorem based upon his observations of the actual accounts of businesses. What the theorem states is that in any given time period the prices generated by all firms is always greater than the income distributed. People are unable to purchase what they produce - unless they go further and further into debt (both public and private). The system is not "self-liquidating" (i.e. there is no "equilibrium").

    A tenuous equilibrium between income and the price of consumer goods can be brought about by creating goods and services the consumer does not buy (i.e. physical capital or military goods and services), but eventually those costs make their way to the consumer. Even Keynes recognized the folly of this way of attempting to obtain equilibrium between production and consumption when he said:

    “Thus the problem of providing that new capital-investment shall always outrun capital-disinvestment sufficiently to fill the gap between net income and consumption, presents a problem which is increasingly difficult as capital increases. New capital-investment can only take place in excess of current capital-disinvestment if future expenditure on consumption is expected to increase. Each time we secure to-day’s equilibrium by increased investment we are aggravating the difficulty of securing equilibrium to-morrow.”

    C.H. Douglas said the exact same thing nearly a decade earlier when he said:

    "In the first place, these capital goods have to be sold to someone. They form a reservoir of forced exports. They must, as intermediate products, enter somehow into the price of subsequent ultimate products and they produce a position of most unstable equilibrium, since the life of capital goods is in general longer than that of consumable goods, or ultimate products, and yet in order to meet the requirements for money to buy the consumable goods, the rate of production of capital goods must be continuously increased. "

    What I would call "banker capitalism" can only work if a country continuously expands its investment in physical capital or militarizes. Neither policy is tenable in the long-run. Both increase debt loads both private and public.