Economic democracy

The following text was recently sent for study to a group of economists, sociologists and theologians gathered in Rome. For this text I am heavily indebted to the research done by the late Diane Boucher.

Douglas’s ideas were first called Economic Democracy, which is the title of the first book he wrote on the subject in 1919. He wrote other books afterwards, the major works being The Monopoly of Credit and Social Credit – the name most often used today to describe his philosophy.

The goal of this philosophy is to make sure that consumers have enough purchasing power to buy the finished goods that satisfy their basic needs. Douglas asserts that a flaw in the present price system causes a chronic and increasing shortage of purchasing power and that it is impossible to correct this flaw in a financial system where money is a commodity created for profit. According to him, this correction requires a financial system where the purchasing power of the consumers can be adjusted by a discount on prices and the general distribution of a dividend (sum of money) based on the production capacity of the nation.

In his encyclical Caritas in Veritate, Pope Benedict XVI wrote in Paragraph 66: "A more incisive role for consumers, as long as they themselves are not manipulated by associations that do not truly represent them, is a desirable element for building economic democracy."

Money can be compared to a ballot, with which you can "vote" for the goods and services of your own choosing. Each individual should have enough of these "economic ballots" to get the necessities of life. (Today one tries to achieve this through social programs financed through taxation but, as we will read further, Douglas proposes something different; a dividend.) In order to stay in business, producers would generate only the goods and services ordered by the population. By voting for the goods and services they want, consumers would ultimately decide what would be produced but obviously not how to produce it. (This expertise belongs to the producers.)

Douglas wrote in 1920 in Credit–Power and Democracy: "Social Credit is a socio-economic philosophy wherein consumers, fully provided with adequate purchasing power, establish the policy of production through exercise of their monetary vote. In this view, the term economic democracy does not mean worker-control of industry. Removing the policy of production from banking institutions, government, and industry, Social Credit envisages an ‘aristocracy of producers, serving and accredited by a democracy of consumers.’"

Don’t confuse ends and means

Pope Benedict XVI signing his encyclical letter Caritas in Veritate on July 7, 2009

While quoting John Paul II’s Message of the World Day of Peace for the year 2000, Benedict XVI writes about the need for "further and deeper reflection on the meaning of the economy and its goals." (Caritas in Veritate, no. 32.) It is important not to confuse ends and means. The goal or the end of economics is to allow goods to meet the needs; not only to produce the necessities of life but to also make sure that these goods actually reach the people who need them. We have to be sure that the goods, once produced, do not remain on the shelves and starvation occurs. It is therefore a matter of both production and distribution: goods must be produced and after, distributed. There are products in plenty today; it is their distribution that is defective. It is not capitalism per se (private property, free enterprise) that is defective, but the financial system it utilizes that is flawed.

In his first encyclical letter Deus Caritas Est (God is Love, no. 25-26) Benedict XVI wrote: "In God’s family, no one ought to go without the necessities of life... The aim of a just social order is to guarantee to each person, according to the principle of subsidiarity, his share of the community’s goods."

The objective of economics is not to supply jobs or to make profit and economic growth at any cost. All of these – jobs, profits, economic growth – are only the means; the end is to satisfy human needs in the respect of the dignity and freedom of the human person. If goods can be produced with less human labour, thanks to machines and new technology, that is wonderful. It will allow man to give his leisure time over to free activities of his own choosing. (This is providing he is given an income to replace the salary he lost with the installation of the machine. The Social Credit dividend is designed for this.)

Profit is not the ultimate end, but is also a means. The end or goal, we repeat, should be the satisfaction of human needs. Benedict XVI writes: "Profit is useful if it serves as a means towards an end that provides a sense both of how to produce it and how to make good use of it. Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty." (Caritas in Veritate, no. 21.)

A few lines earlier, in Paragraph 32 of Caritas in Veritate, the Holy Father talks about the massive increase in poverty in our society that brings about "the progressive erosion of ‘social capital’: the network of the relationships of trust, dependability, and respect for rules, all of which are indispensable for any form of civil coexistence."

It is very appropriate to be reminded of this basic truth, for no economic system can work without trust. It reminds me of these words of Geoffrey Dobbs that I quoted in Lesson 1 of my book The Social Credit financial proposals explained in 10 lessons:

"‘Credit’ is another word for ‘faith’ or ‘confidence’, social credit is therefore the faith or confidence which binds any society together… How can we live in peace or comfort if we cannot trust our neighbours? How could we use the roads if we could not trust others to observe the rules of the road? And what happens when the concept of Christian marriage and to the Christian family and its upbringing, is abandoned?"

Three basic ideas

According to Douglas, the philosophy rests on three basic ideas¹:

(a) "That the financial credit pretends to be, but is not, a reflection of real credit as defined in;

(b) Real credit is a correct estimate or, if it be preferred, belief as to the capacity of a community to deliver goods and services as, when, and where required;

(c) That the cost of production is consumption."

These three proposals are linked to the "control of production by consumers" and "integral bookkeeping", which are the pivot of Douglas’s system.

Real credit has a twofold aspect. The first one is the capacity to deliver goods and services. The second one is the existence of an effective demand for those goods and services.²

The consumers’ effective demand is production sought after by consumers, made up of consumable goods and services that answer human needs in quantity and quality: food, clothes, and other basic needs. Douglas adds: "it would be necessary that an effective demand – that is to say, a demand backed by ‘money’ – should be forthcoming from the public."³

The real credit of a modern producing community, its capacity to produce wealth in its real sense, rests not only on material factors but also intangible ones, now preponderant: the cultural inheritance and the unearned increment of association:

Cultural inheritance

"The original conception of the classical economist that wealth arises from the interaction of three factors – land, labour, and capital, was a materialistic conception which did not contemplate and, in fact, did not need to contemplate, the preponderating importance which intangible factors have assumed in the productive process of the modern world. The cultural inheritance, and what may be called the ‘unearned increment of association’ probably include most of these factors, and they represent not only the major factor in the production of wealth, but a factor which is increasing in importance so rapidly that the other factors are becoming negligible in comparison."⁴ "(...) the simple fact is that production is 95 per cent a matter of tools and process, which tools and process form the cultural inheritance of the community not as workers, but as a community (...)."⁵

"Men associate together in industry because there is a true unearned increment in association – a telephone system requires a population to give it a value; ten men pulling on a rope can accomplish that which ten separated men could never achieve. With the growth of machine production and the utilisation of non-human sources of energy, this unearned increment is growing enormously more important than the earned increment (...)."⁶

These two major factors of production belong to all of society: "It is both pragmatically and ethically undeniable that the ownership of these intangible factors vests in the members of the living community, without distinction, as tenants-for-life. Ethically, because it is an inheritance from the labours of past generations of scientists, organisers, and administrators, and pragmatically because the denial of its communal character sets in motion disruptive forces, threatening, as at the present time, its destruction."⁷

Karl Marx claimed that work created all wealth and Adam Smith said that capital (money invested in an enterprise) also contributes to production. However, both ignored what C.H. Douglas called the "cultural inheritance", the double inheritance of natural resources and inventions of past generations that are responsible for more than 90% of today’s production in developed nations. Pope John Paul II wrote about this in 1981 in his Encyclical letter Laborem Exercens (On human work):

John Paul II

"Through his work man enters into two inheritances: the inheritance of what is given to the whole of humanity in the resources of nature, and the inheritance of what others have already developed on the basis of those resources, primarily by developing technology, that is to say, by producing a whole collection of increasingly perfect instruments for work. In working, man also ‘enters into the labour of others.’" (No. 13.)

In his new encyclical Caritas in Veritate (no. 69), Benedict XVI also talks about technology: "Technology enables us to exercise dominion over matter, to reduce risks, to save labour, to improve our conditions of life… Technology, in this sense, is a response to God’s command to till and to keep the land (cf. Gen 2:15) that he has entrusted to humanity, and it must serve to reinforce the covenant between human beings and the environment, a covenant that should mirror God’s creative love."

Also in Caritas in Veritate (no. 27), the Holy Father wrote that "hunger is not so much dependent on lack of material things as on the shortage of social resources." As the Pope pointed out, it is not production that is lacking, "lack of material things", but distribution that is defective. One must therefore have recourse to "distributive justice", to distribution through a dividend.

"The social doctrine of the Church has unceasingly highlighted the importance of distributive justice and social justice for the market economy (no. 35) …Economic life undoubtedly requires contracts (wages given in exchange of work, for example), in order to regulate relations of exchange between goods of equivalent value. But it also needs just laws and forms of redistribution governed by politics, and what is more, it needs works redolent of the spirit of gift." (Caritas in Veritate, no. 37)

A dividend for an economy of gift

Those who have studied the Social Credit philosophy know that wages and salaries are not sufficient to buy all of production and that it is not everyone who is hired into the workforce. (Because of machines that replace human labour, etc.) That is why Social Credit proposes to give a monthly dividend (sum of money) to every human being, over and above the wages and salaries of those who have a paid job. This is because each human being is truly co-owner and co-heir of the two largest factors of production: natural resources (such as the sun, water, rain, wind, minerals, all of which are gifts of God to all men) and progress, (meaning the legacy of the inventions of past generations).

In Caritas in Veritate, Benedict XVI insists forcefully on the economy of gift, for people and institutions alike, an economy in which many goods and services can be obtained for free. Everything cannot be calculated in wages and salaries, a lot of good can be done through charity work. In a Social Credit system, since all citizens would have economic security guaranteed by a dividend; mutual aid and volunteer work would naturally occur. True happiness and holiness rests in the gift of oneself, in serving others. This is true love. One could see then, the blossoming of what Pope Paul VI called the "civilization of love", with "the economy at the service of the human person, and the daily bread distributed to all." (Encyclical letter Populorum Progressio, no. 86)

Some economists, like Milton Friedman, are fond of saying that "there is no such thing as a free lunch" or that there is no gift possible in today’s economy; that one cannot get anything for nothing. But nature abounds in examples that prove to be the opposite. The air we breathe, the sun, water, etc., are all free gifts from our Creator. He showers us with free production with natural resources and food in plenty, the Social Credit dividend would simply be the reflection of this generosity of God.

Financial credit and real credit

For Douglas, "financial credit is ostensibly a device by which this capacity [the real credit] can be drawn upon."⁸ Financial credit is therefore "a sort of reflection of this real credit in figures, and might be defined as a correct estimate of a person’s or a community’s ability to deliver money".⁹

The true function of the financial system is therefore to issue financial credit to be an exact reflection of real credit: "The business of a modern and effective financial system is to issue credit to the consumer, up to the limit of the productive capacity of the producer, so that either the consumer’s real demand is satiated, or the producer’s capacity is exhausted, whichever happens first."¹⁰

This conception of financial credit as being the literal expression of real credit rests on a modern and systemic definition of money. "Orthodox economics" defines money as a medium of exchange but Douglas goes beyond that definition.

According to him, money has ceased to be a medium of exchange for the last 200 years, since the contribution of human labour to the central pool of wealth has become smaller and smaller, thanks to automation and other factors of modern economic production.

For Douglas, money is basically a ticket system, a unit of information: "The proper function of a money system is to furnish the information necessary to direct the production and distribution of goods and services."¹¹

Following his unique conception of money, Douglas gives a polarity to the various flows of money. Some monetary flows are positive, some are negative: "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 the goods and services, through the medium of prices."¹²

Douglas’s concept of the true cost of production is a real or physical approach, not a monetary one: "Reverting to the physical realities of the productive system, it can easily be seen that the true cost of a given programme of production is the consumption of all production over an equivalent period of time (...). In other words, the true cost of a programme of production is in general not the money cost, but considerably less than the money cost, and a given programme of production can be distributed to the buying public only if sold at its true cost."¹³

A chronic shortage of purchasing power

Here is what Douglas had to say about the chronic shortage of purchasing power: "We are often told that it is obviously absurd to say that the financial system does not distribute sufficient purchasing power to buy the goods that are for sale. We never said it! What we do say is that, under the present monetary system, in order to have sufficient purchasing power to distribute goods for consumption, it is necessary to make a disproportionate amount of capital goods and goods for export. (...)"

"That is, broadly speaking, the situation. In this country, and in every modern country, in order to make the present monetary system work at all, you have got to make a whole lot of things that are not immediately bought in order to distribute what is already available."¹⁴

"(...) it must be borne in mind that the existing economic system distributes goods and services through the same agency which induces goods and services, i.e., payment for work in progress. In others words, if production stops, distribution stops, and, as a consequence, a clear incentive exists to produce useless or superfluous articles in order that useful commodities already existing may be distributed."¹⁵

What has kept the system going

Without another source of income (the dividend), there should be, theoretically, a growing mountain of unsold goods. But if goods are sold all the same, it is because, instead, we have a growing mountain of debt! Since people do not have enough money, retailers must encourage credit buying in order to sell their goods: buy now, pay later (or should we say more precisely, pay forever...) But this is not sufficient to fill the gap in the purchasing power.

So there is also a growing stress upon the necessity for work that distributes wages without increasing the quantity of consumer goods for sale, such as public works (building bridges or roads), war industries (building submarines, airplanes, etc.). But this is not sufficient either.

So each country will strive to achieve a "favourable balance of trade", that is to say, to export, to sell to other countries more goods than it receives, in order to obtain from these foreign countries, the money that the population is lacking at home to buy their own products. However, it is impossible for all nations to have a "favourable balance of trade": if some countries manage to export more goods than they import, there must also necessarily be countries that receive more goods than they export. But no country wishes to be in that position, so it causes trade conflicts between nations that can degenerate into armed conflicts.

Consumerism

Geoffrey Dobbs

Consumerism, or the need to create artificial needs to sell goods which otherwise do not answer real human needs come directly from this chronic shortage of purchasing power. Hence the strain on the environment that amounts to the colossal sabotage and waste of natural resources and energy involved just to supply purchasing power: we have to mortgage our future to be able to buy things that were produced in the past. Dr. Geoffrey Dobbs of Wales had these interesting comments in his introduction of the 5^th edition of Economic Democracy, in 1974:

"As Douglas makes clear, production is the conversion of matter or energy from an unavailable form to one in which it is available for the use of mankind. The efficiency of this conversion depends primarily upon usefulness of the end-product. Usefulness to whom, who is to be the judge of it? Douglas says these resources are common property; which means that they ought to be made available for our use, and we are the judges of that use. And that means consumer control of production: Economic Democracy; which is incompatible with a system which distributes goods and services only through the process of producing more goods and services, thus giving a clear incentive to produce useless, unwanted or superfluous things, and to create a ‘demand’ for them.

"We are said to live in a ‘Consumer Society’ suffering from the disease of ‘consumptionism’ due to the greed of the common people as consumers. But this puts things upside down. ‘Productionism’ or ‘employmentism’ would be better names for the disease, for we are passing increasingly under producers’ control, the consumers, whose greed is much exploited in the process, being force-fed with the by-products of an industry which is primarily concerned with the provision of work and the distribution of money.

"This aim is opposite to, and incompatible with, that of production for use with minimum cost and waste of energy and resources. Douglas never said that our producer-dominated credit distribution system could never distribute money to buy the goods wanted, but that it could not do so without producing what was not wanted, and with accelerating waste and sabotage.

"If work accomplished, priced to cover an accumulation of costs over an indefinite period, can be distributed only through work in progress (to be piled onto the accumulated costs of work completed next year) then we have the recipe for our modern predicament – the necessity for continuous ‘economic growth’, with ever-growing squandering of energy and resources, as technological advance increases the product per man-power. Unless inflationary producer credits, supplemented by consumer credits mortgaging future wages, are poured out faster and faster, then we can buy less and less of what we have already produced."

The A + B theorem

Douglas summarized his diagnosis of the flaws of the present price system in two proposals:

(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. (...)"

(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."¹⁶

In his second book, Credit–Power and Democracy, Douglas crystallizes his thought about the double-circuit of money in industry in the form of what will be known as the "A+B theorem":¹⁷

"A factory or other productive organization has, besides its economic function as a producer of goods, a financial aspect – it may be regarded, on the one hand as a device for the distribution of purchasing-power to individuals through the media of wages, salaries and dividends; and on the other hand as a manufactory of prices – financial values. From this standpoint its payments may be divided into two groups:

Group A: All payments made to individuals (wages, salaries, and dividends).

Group B: All payments made to other organizations (raw material, bank charges, and other external costs.)"

"Now the rate of flow of purchasing-power to individuals is represented by A, but since all payments go into prices, the rate of flow of prices cannot be less than A+B. The product of any factory may be considered as something which the public ought to be able to buy, although in many cases it is an intermediate product of no use to individuals but only to a subsequent manufacture; but since A will not purchase A+B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing-power which is not comprised in the descriptions grouped under A. It will be necessary at a later stage to show that this additional purchasing-power is provided by loan credit (bank overdrafts) or export credit."

The creation of a substitute for money in the form of interest-bearing loans by private banks could be criticized for moral reasons but Douglas’s criticism of the present system is from a functional point of view:

Pius XI

Pope Pius XI had strong words about the discretionary power of private lenders to create or cancel money (through loans or the repayment of loans) in his encyclical letter Quadragesimo Anno, back in 1931 (no. 106): "This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow; so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will."

A deeper study by the Church on this issue of money creation and interest would be more than timely, especially in view of the serious problems of indebtedness facing various countries, not only from the so-called Third World but even developed countries, including the U.S.A. If the principle that debts must be paid is just,¹⁸ it is certainly unjust to pay back the principal several times. This is what currently happens because of compound interest.

Douglas summarized his reform in three proposals:¹⁹

"The general principles required of any financial system sufficiently flexible to meet the conditions which now exist and that continue to reflect the economic facts as these facts change under the influence of improved process and the increased use of power, are simple and may be summarised as follows :

(a) That the cash credits of the population of any country shall at any moment be collectively equal to the collective cash prices for consumable goods for sale in that country (irrespective of the cost prices of such goods), and such cash credits shall be cancelled or depreciated only on the purchase or depreciation of goods for consumption.

(b) That the credits required to finance production shall be supplied not from savings, but be new credits relating to new production, and shall be recalled only in ratio of general depreciation to general appreciation.

(c) That the distribution of cash credits to individuals shall be progressively less dependent upon employment. That is to say, that the dividend shall progressively displace the wage and salary, as productive capacity increases per man-hour."

A dividend and a discount on prices

Douglas points out the fact that two policies are essential to make the financial system an exact reflection of the real credit – the capacity to produce and deliver goods. The first policy is the lowering of retail costs under production costs through a discount given to consumers and compensated to producers. The second policy of the general distribution of purchasing power corresponds to productivity gained in the form of a dividend based on the country’s real capital. Douglas adds: "That is to say, we must give the consumer purchasing power which does not appear in prices."²⁰ For Douglas had observed the corrective mechanisms already existing in the economic system, and he proposed an adaptation of these mechanisms in relation with his conception of real credit and its reflection, financial credit:

"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."²¹

The technicalities of these mechanisms go beyond the scope of this text, but there is plenty of literature available to explain them.

To conclude, the Church’s social doctrine is a real treasure and we are thankful to our present Holy Father for updating this teaching for today’s new circumstances.

Footnotes

1. Douglas C.H., The New and the Old Economics, The Scots Free Press, Edinburgh, 1936, p. 5
2. Douglas C.H.; Credit-Power and Democracy, Stanley Nott, London, (1920), 4^th edition, 1934, p. 102  
3. Douglas C.H.; ibid, p. 104
4. Douglas C.H.; Social Credit, The Institute of Economic Democracy, Canada, (1924), 5^th edition, 1979, p. 189-190
5. Douglas C.H.; Economic Democracy, W. & J. Barr Pty, Australia, (1920), 5^th edition, 1974, p. 95
6. Douglas C.H.; These Present Discontents and The Labour Party and Social Credit, Cecil Palmer, London, 1922, p. 13
7. Douglas C.H.; Social Credit, The Institute of Economic Democracy, Canada, (1924), 5^th edition, 1979, p. 190
8. Douglas C.H.; The Control and Distribution of Production, Cecil Palmer, London, 1922, p. 10
9. Douglas C.H.; "The only real socialism", in Warning Democracy, Stanley Nott, London, (1931), 2^nd edition, 1934, p. 27
10. Douglas C.H.; Credit–Power and Democracy, Stanley Nott, London, (1920), 4^th edition, 1934, p. 10
11. Douglas C.H.; Social Credit, The Institute of Economic Democracy, Canada, (1924), 5^th edition, 1979, p. 62
12. Ibid, p. 97
13. Douglas C.H.; "The Application of Engineering Methods to Finance, World Engineering Congress Tokyo, 1929", in The Monopoly of Credit, Bloomfield Books, England, (1931), 4^th edition, 1979, pp. 165-166
14. Douglas C.H.; The Approach to Reality, K.R.P. Publications Ltd, London, (1936), 1966, p. 26
15. Douglas C.H.; Economic Democracy, W. & J. Barr Pty, Australia, (1920), 5th ed., 1974, p. 82
16. Douglas C.H.; Social Credit, The Institute of Economic Democracy, Canada, (1924), 5^th edition, 1979, pp. 94-95
17. Douglas C.H.; Credit–Power and Democracy, Stanley Nott, London, (1920), 4^th edition, 1934, pp. 19-20
18. cf. John Paul II, encyclical letter Centesimus Annus, n. 35
19. Douglas C.H.; "Social Credit Principles", in Warning Democracy, Stanley Nott, London, (1931), 2^nd edition., 1934, pp. 37-43
20. Douglas C.H.; Social Credit, The Institute of Economic Democracy, Canada, (1924), 5^th edition, 1979, p. 37
21. Ibid, p. 99

 

Diane Boucher died of cancer on May 4, 2008, at the age of 55. Mother of four, she left a very lucrative job in computer research (in which she had a Masters’ degree), in order to homeschool her children. She learned Social Credit through her husband, Francois Couture, and decided to take courses in economic science at Laval University in Quebec City in order to prove the truthfulness of Social Credit. She studied the theory in depth and compared orthodox economics to Douglas’s new economics. A professor recognized the value of her research and accepted to review her work. She was then able to obtain her Masters’ degree in economics. She said: "I do not say that I believe that Social Credit is good, I say that I KNOW that Social Credit is good."