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INTRODUCING THE DRAFT SOCIAL CREDIT SCHEME

The 1962 document “Wealth - A Christian View” (reprinted recently in TSC) came to conclusions entirely compatible with social credit theory.

Nevertheless, although the report concluded by advocating the adoption of an economic system free from the pressure to wasteful economic growth, environmental destruction, international competition and warfare, it failed to spell out how that might be achieved. In my view the Draft Social Credit Scheme, published in 1920 as “The Draft Mining Scheme”, presents a sound basis for development of a sustainable economy founded on the Christian values of co-operation and social justice.

A CHRISTIAN VIEW OF WEALTH

The Dundee Report of the Congregational Union of Scotland came to three main conclusions.

1. Money should be created as a useful tool for society as a whole, rather than as interest-bearing debt for the benefit of a select few.

2. Banks create financial credit in order to secure interest on debt. The real credit of the nation consists of workers, skills and natural resources. Finance should bear a clear relationship to those physical facts.

3. The existing system of finance is based on international economic competition leading inevitably to warfare. The system is reliant on economic expansion through wasteful production of armaments, at the expense of producing a sufficiency of consumer goods. It is therefore a Christian duty to devise and introduce an economic system based on welfare, peace and co-operation.

A careful reading of Douglas’ original works, or failing that perusal of our explorations of his work, will identify these key conclusions as entirely consistent with Douglas’ social credit writings. For example, in The Political Economy of Social Credit and Guild Socialism compare pages 39-40 with point (1) above, pages 40-43 with point (2), and pages 69-72 with point (3). As Douglas crisply observed in debate with Hawtrey in Birmingham, “I do not regard it as a sane system that before you can buy a cabbage it is absolutely necessary to make a machine gun”. As Nobel prize winning economist Sir James Meade explained, although Douglas’ work was rejected by mainstream economists because it did not accord with mainstream theory, this does not automatically discredit Douglas’ analysis. Far from it. The question at issue is which brand of theory, mainstream or social credit, most closely accords with practice. In order to form a judgement on this matter it is necessary first to review mainstream theory.

Mainstream Economic Theory

Students of economics are instructed to adopt certain prior assumptions in order to analyse economic data. A central notion in economics is that individuals act as rational economic agents outside, and independent of, their roles as social beings with social responsibilities as citizens, family members and so on. Economics is the study of pure economic behaviour, and does not concern itself with morals, ethics or other ‘normative’ judgements based on notions of ‘right’ and ‘wrong’. In this elegant way of looking at economic issues, the student is told, it is necessary to distinguish between needs and ‘effective demand’. Effective demand is demand backed by money. This is the only form of demand recognised in economics. A starving person may need food, but if they have no money, they and their need do not register as an economic fact. In terms of economic theory it is wrong to take any account of need if it is not backed by money.

Demand, i.e. wants backed by money, calls a supply of goods onto the market. Goods are supplied for money, and demanded by money. As more of a particular commodity is demanded, its price will rise. This will cause more of it to be supplied. As more of a commodity is supplied, its price will fall until it reaches its ‘equilibrium price’.

The same is true for all commodities across the economy as a whole, and is described in terms of the ‘circular flow’.

In theory, the economy as a whole tends to equilibrium. According to circular flow theory, people offer factors of production, land, labour and capital to businesses, so that goods may be produced. In return money incomes are paid to the households of sellers of factors of production. Households take the money income and spend it on the commodities which have been produced. Any imbalance between goods produced and goods consumed is due to temporary causes which it is the task of economists to seek out and eradicate (or at least explain). Left to itself, the free market allows demand to create its own supply, and vice versa.

Hence, in theory, the circular flow of production and consumption should proceed like clockwork. Money acts as a neutral arbiter of supply and demand, through price.

In short, according to economic theory every sale is also a purchase, and every purchase is a sale. Businesses supply what households want, and households supply the factors of production that businesses want. Hence the economy tends to equilibrium over the long run. Finance merely oils the wheels of the clockwork economy. The problem is, as Douglas observed, the economy doesn’t actually work like that. Goods produced in the present period are not consumed in the same period. Goods exist in two time periods, the one when they are produced and the one when they are consumed. There is therefore no necessary or automatic match of money in circulation with goods available for purchase.

At the core of Douglas’ analysis was an elementary observation. By examining the real-life relationship between the financial system and economic activity it would be possible to convert the system from dictator to handmaid, making finance a tool rather than a power system beyond human control. The banks’ monopoly of the creation of credit could be brought under social control by recognising the social nature of credit.

The Money Illusion

Before the industrial revolution the formal cash economy governed the daily lives of only a very small minority of the world’s population. The introduction of cash crops and industrial production systems on a global scale has given rise to the illusion that natural cycles can be replaced by commercial cycles based on the circular flow. Production and distribution of agricultural and industrial goods is presently governed by financial rather than social or ecological considerations. However, the fact remains that human life on this planet is completely dependent upon social co-operation and ecological sustainability.

Finance and the circular flow economic system appear to have evolved in a natural progression of development from ‘primitive’ dependence on the soil to sophisticated dependence on a global financial system. Douglas questioned the very notion of progress in so far as it was based upon production of an ever-expanding output of armaments and wasteful consumer goods designed for early obsolescence. He put himself beyond the pale by asking the fundamentally heretical questions, Where does money come from, and who makes it? To economists, such questions are on a par with challenging parental assertions that babies arrive under gooseberry bushes. It simply is not done.

The Draft Social Credit Scheme

In real life, production occurs when people co-operate on the land and in industry. Natural materials are transformed into foods, fibres, fuels and other useful artefacts through labour and the co-operative use of the common cultural inheritance. The latter consists of the accumulated skills and knowledge belonging to human society and built up over past generations. No production takes place in isolation. All production occurs through co-operative endeavour. It follows that the claim of any individual to a share in the communal product by right of their individual contribution must be minuscule. Individuals do not create wealth on their own. Co-operation, not competition, creates wealth.

Douglas examined the conditions under which finance drew people into the productive process. He distinguished between production of goods and production of money. It is possible to produce food and useful artefacts by using tools, natural materials, labour and inherited skills. Money does not have to be involved. However, under our economic system, land, labour, skills and tools can lie idle, while needs are unmet, all because of the absence of money to initiate the production process. Money is necessary to buy tools and raw materials and to hire labour. However, money will only be forthcoming if there is likely to be a demand for the particular form of output, i.e. demand backed by money. Money (in its various forms, see James Robertson’s recent TSC article, Nov-Dec 2000) is created by banks and financial institutions almost exclusively as debt. Money is advanced to a new venture on the basis of careful calculations of risk by financial institutions. Once investment loans are agreed, the firm can pay out wages, salaries and other forms of income to households. The financial system therefore determines what is produced, not according to social necessity or ecological practicalities, but according to purely financial criteria based on purely financial data. Decisions based upon such calculations are portrayed as ‘rational’ in contrast to ‘normative’ decisions based upon subjective values arising from moral or ethical stands.

The present system is, nevertheless, highly normative in its rejection of all value-systems save that of money values.

Douglas proposed an intriguing adaptation of the money and banking system in order to secure social control over the money creation process. His draft social credit scheme envisaged all the producers in an industry combining together at local level. By forming a “producers’ bank”, all employees in an industry could be involved in developing a meaningful relationship between financial wealth on the one hand and real wealth (the potential to produce inherent in the factors of production and the common cultural inheritance) on the other. The scheme would involve detailed calculations and constant adjustments of output and prices. Complex calculations were already a feature of the evolving commercial world. The Douglas proposals differed merely in the open accountability not only to the ‘producers’ (the entire workforce in an industry) but also to the local community and its ecological environment. Although the draft social credit scheme was based upon devolutionary principles, it would necessitate the adaptation of the national financial infrastructure, including creation of a central clearing house and provision for the national debt to be converted into a national asset, as a resource for government expenditure to replace direct taxation (these ideas were adapted and developed by Sir James Meade (1993)). Although the original scheme was based upon the UK mining industry, which was experiencing severe problems as a direct result of the financial system after World War I, it could equally well be applied to any ‘industry’, including health, education and other forms of productive exercise of essential skills. In the present climate, application of the draft social credit scheme to farming would appear particularly appropriate.

Conclusion

Douglas’ social credit proposals have lain dormant throughout the closing decades of the twentieth century, despite their undoubted relevance to bodies such as the Congregational Union of Scotland who have raised fundamental questions about the economic system. The problem in large part stems from the unsound and decaying body of economic theory which continues to dominate the political economy of western nations. Despite well reasoned critiques, so-called free market equilibrium theory has ruled the teaching of economics, allowing marginalism and econometrics to create an aura of mystique impenetrable to lay people. For too long individuals who are perfectly capable of following a logical line of argument have allowed themselves to be blinded by figures, or perhaps more accurately the fear of mathematics. As economists, politicians and citizens, it has been all too easy to accept statistics as a form of reasoning without pausing to examine the assumptions underlying the data collection and analysis. This I am seeking to amend, with the valued help of several distinguished academics (See Hutchinson, Mellor and Olsen 2001).

In practical terms we now have the situation that goods are produced for financial reasons, regardless of their usefulness or disservice to society and its ecological support systems. It is financially cheaper to preserve, package and transport food from continent to continent, rather than to produce it locally. Farmers have been under financial pressure to intensify crop and animal farming, using petrochemicals and selling to massive food manufacturers, with devastating effects in terms of soil erosion, climate change, animal and human welfare (See Selly 1972 for an early warning well prior to the BSE crisis).

Vast quantities of the earth’s resources are expended on producing profitable foods, regardless of their nutritional value. A typical 16th century meal would consist of exactly the same foods as a 21st century meal: soup, meat, vegetables, bread, cheese, fruit desert and ale. However, once the food leaves the farmer the financial value of the food soars. As Vandana Shiva explained in her Reith Lecture, in Canada a bushel of corn sells for less than $4, while a bushel of cornflakes sells for $133. While food ‘manufacturers’ add financial value, they appear to be reducing the nutritional values of diets. As Coca-Cola machines displace school milk, childhood problems with diabetes, heart disease and osteoporosis increase manyfold.

There is as yet no evidence that the problems are linked to diet, but lack of evidence to the contrary should indicate recourse to the precautionary principle. Ditto for genetic manipulation of crops. It is time to drop the universal cry of “But where’s the money to come from if we want change?”, in favour of Douglas’ fundamental question, “Where does money come from, and how can we change that?” The Draft Social Credit Scheme provides an excellent starting point.

References

Hutchinson, Frances and Burkitt, Brian (1997) The Political Economy of Social Credit and Guild Socialism London and New York: Routledge.

Hutchinson, Frances; Mellor, Mary and Olsen, Wendy (2001) The Political Economy of Money London. Pluto.

Meade, James E (1993) Liberty, Equality and Efficiency: Apologia pro Agathotopia mea London. Macmillan.

Selly, Clifford (1972) III Fares the Land:

Food, Farming and the Countryside London. Andre Deutsch.



Frances Hutchinson is a leading authority on social credit. She teaches economics at Bradford University and is the joint author of numerous books and research papers, including “Environmental Business Management: Sustainable Development in the New Millennium” (McGraw-Hill 1997) and “The Political Economy of Social Credit and Guild Socialism”. (Routledge 1997).

–­from The Social Crediter, Jan-Feb 2001

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March 2001