Last Thursday we
looked at some of the flaws in Major Douglas’s social credit proposal, e.g., the wrong definition of money and
abolition of private property by taking away the usufruct, to say nothing of
allowing politicians to avoid accountability for their actions. After all, is it really coincidental that as
more and more of the government’s budget consists of money created by emitting
bills of credit instead of tax revenues, the number of programs that go
contrary to the fundamental beliefs of most people have proliferated?
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| C.S. Lewis: considered the "Douglas Scheme" a silly fad. |
To return to what
C.S. Lewis called “the Douglas Scheme,” however, Dr. Harold G. Moulton,
president of the Brookings Institution from 1928 to 1952, gave what is probably
the most economically devastating critique of social credit. (Moulton also critiqued von Hayek a few pages
later; none of the Currency Principle schools of economics really hold their
own against binary economics.)
Moulton (whose
four-volume study on the distribution of wealth and income in relation to
economic progress is essentially a study of Say’s Law of Markets) identified
Douglas’s mistake as one of omission: “Douglas arrives at the conclusion that
the money income available for the purchase of commodities is deficient by a
process which eliminates from the picture a large part of the national income.” (Harold G. Moulton, The Formation of Capital.
Washington, DC: The Brookings Institution, 1935, 180.)
That is, Douglas
did not take mortgages and bills of exchange into consideration in his
definition of “money.” This meant that
all transactions involving these forms of money were simply ignored in Douglas’s
analysis. At the time Douglas wrote,
between 70-80% of the U.S. money supply consisted of such “private sector
money,” (Harold G. Moulton, Principles of
Money and Banking. Chicago,
Illinois: University of Chicago Press, 1916, II.39) invalidating Douglas’s
analysis on that basis alone.
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| Major C.H. Douglas |
After quoting
Douglas’s explanation of his “A plus B theorem” (Douglas, Credit Power and Democracy, op. cit., 21‑22.), Moulton restated
Douglas’s extended analysis in simpler terms: “if the payments made by a given
business under A amounted to one
dollar and the payments made under B
amounted to another dollar, the price of the commodity produced would be two
dollars; but there would be only the A
dollar available with which to buy it.” (Moulton, The Formation of Capital, op. cit., 180.) Moulton then applied the
logic of Say’s Law to the “A plus B theorem”:
The fallacy in Major Douglas’
analysis is that he concentrates attention upon a single business rather than
upon the national economy as a whole. These “external” payments to other
organizations do not involve sending the money outside the country, and hence
their disbursement is a part of the national income as a whole. That is to say,
the payments for raw materials, bank charges, etc., are also disbursed to individuals by raw material producing
industries and “other organizations” in the form of wages, salaries, and
dividends. Taking the national economy as a whole the aggregate prices of goods
and services simply cover the aggregate disbursements of wages, salaries,
rents, commissions, and profits to individuals engaged in the processes of
production. (Ibid., 180-181.)
In other words,
in Moulton’s analysis it is not a question of there being insufficient money in
the economy to purchase the goods and services produced. On the contrary, as can be seen from reading The Formation of Capital, the problem is
the diversion of consumption income into reinvestment. (Ibid.,
37-48.) The money is there — it is just in the wrong place,
and there might not be any means of accessing it by discounting bills or
issuing mortgages to turn production into cash.
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| Jean-Baptiste Say |
Nor is the
rejection of Say’s Law the only error Douglas made — or the most profound. According to Douglas, the justification for
creating money backed by the incremental increase in annual production of
marketable goods and services is that such production is created by means of
the application of the inherited knowledge of humanity. Ownership of production — the usufruct of capital — is therefore vested
in the entire human race in common, not
to the owner of the capital that produced the marketable goods and
services. Douglas never explained why
the product of labor, which is due at least as much as the product of capital
to the knowledge and skills inherited from prior generations, should not also
belong to the human race in common once the State takes over effective
ownership by exercising total control.
In any event,
Douglas’s assertion of common ownership of production contradicted his claim
that social credit is “practical Christianity.”
As we have pointed out on this blog more than once, “property” consists
not of the thing owned, but the right to own, and the right to enjoy the “fruits
of ownership.” That is, property
consists not only of the natural right to be an owner, but of control over what
is owned, as well as receipt and free disposal of what the thing owned
produces. As Pope Leo XIII pointed out,
But it is precisely in such
power of disposal that ownership obtains, whether the property consist of land
or chattels. Socialists, therefore, by endeavoring to transfer the possessions
of individuals to the community at large, strike at the interests of every
wage-earner, since they would deprive him of the liberty of disposing of his
wages, and thereby of all hope and possibility of increasing his resources and
of bettering his condition in life. (Pope Leo XIII, Rerum Novarum (“On Capital and Labor”), 1891, § 5.)
In short, going
by the traditional natural law understanding of private property, and accepting
Marx’s definition of socialism as “the abolition of private property” (Karl
Marx and Friedrich Engels, The Communist
Manifesto. London: Penguin Books,
1967, 96.), social credit is socialism under a different name, just as the
Fabian and guild socialists contended.
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