The
DOUGLA
THEORY
A Reply to
Mr. ]. A. HoBsoN
UC SOUTHERN REGIONAL LIBRARY FACILITY
'" "Ullll III mill III lllll ii|iiil|i|iln
AA 001 127 973 4
By
Major C. H. DOUGLAS
Author or
Ci'<;.lit: Power and !'
LONDON : CECIL PALMER
Oakley House, Bloomsbur
VV.C.i
SIXPENCE NET.
Kr^Mm
The
DOUGLAS
THEORY
A Reply to
Mr. J. A. HoBsoN
By
Major C. H. DOUGLAS
Aiithoi of
" Credit Power and Democracy,"
" Economic Dcmotracy," etc.
LONDON : CECIL PALMER
Oakley House, Bloomshury Street
W.C.i
VRL
Copyright Reserved. fj Q
^701
The Douglas Theory : A Reply
to Mr. J. A. Hobson
IN dealing with Mr. J. A. Hobson's criticism of my
theories on Credit, it seems desirable to follow the
order which he himself employs. This order is : —
(i) The general implication of the theory.
(2) An examination of certain details of the analysis.
' (3) A "destructive" criticism of the remedial pro-
posals based on (2).
(i) It is to be noted that, as miiLjht be expected from
a critic [possessing Mr. Ilobson's qualifications, there is
no disagreement with my statement that the rc^ot factor
in the whole industrial crisis and problem is lack of effec-
tive demand.
But at this point the fundamental divergence begins.
In his own exj)lanati(»n of the acknowledged fact, he says,
'T trace this failure, not to any lack of the monetary
power to purchase all the eommcMlities that could be pro-
duced, but to the refusal of those in possession of this
power of purchase to ap[)ly enough of it in buying con-
sumables, hrciiiisc they prefer to apply it in buying non-
consuniahles , in other icords, to luiying capital fyoods.'*
(My italics.)
This rejiresents a radical cleavage, the static versus
dynamic cleavage of attack on the iiroblem. Mr. Hob-
son regards it as an explanation; 1 would presc>nt it to
him as a fact arising out of a defective credit system.
3
Considered as an explanation, it carries the implication
that it "ought" not to be so, that improvement demands
its elimination; it leads to the assumption that, e.g., the
tmancial system is reasonably blameless, and only man
is vile. That, again, leads to the conclusion that all our
troubles are due to a bad Governmental and administra-
tive personnel, and if only Mr. Clynes in Parliament,
and Mr. Thomas on the railways could be put into power,
all would be well.
Considered as a fact, it is one of the many premises
of which to take cognisance in suggesting methods by
which to achieve the greatest enhancement of opportunity
of the greatest number. In other words, both Mr. Hobson
and I see a world whose financial mechanism is failing
to deliver the goods. Mr. Hobspn implies that a change
in the nature of the steam which i)rovides the motive force
is required; I suggest th.at the valve gear wants re-design-
ing. Both theories are conceivably tenable; it is a matter
for personal judgment as to which line of action is likely
to produce the earlier result.
(2) (a) "the central charge is that a large part of
the money representing the cost of produc-
tion, and helping to swell the selling prices,
is not available to buy the articles pro-
duced. . . . etc."
(b) "The second and more fundamental reason
is that large advances of bank credit are
utilised by manufacturers and enter into
the prices of the final product. ..."
Mr. Hobson says in regard to (2) (a): "Now the
fallac)' of this argument might, I think, be apparent from
the preposterous nature of the assertion that only a few
per cent, of the price value is available as effective
demand"; and in regard to (2) (b) : "In point of fact,
it is not true that the bank advances, by which the busi-
4
ness men at the various processes financed their trade,
are costs which enter final prices."
In regard to objection (2) (a), it is a simple state-
ment of fact to say that as the majority of the working
population are wage earners, paid weekly, and spending
within a few per cent, of the whole of their week's wages
in the current week, it is a physical impossibility for the
wages of the current week to buy the production of the
current week; it is not in the market to buy. It probably
will not come into the market, on the average, for at least
six months. They are buying the {)roduction, or {)art
of the production, of a fairly long past week, by drawing
on the purchasing power which goes to make up the costs
o< an unspecified quantity and variety of goods which
will be delivered sometime in the future. To reiterate
categoricall)', the theorem criticised by Mr. Hobson : the
wages, salaries and dividends distributed during a given
period do not, and cannot, buy th(.' production of that
period; that production can only be bought, i.e., dis-
tributed, under present conditions by a draft, and an
increasing draft, on the purchasing power distributed in
respect of future production, and this latter is mainly
and increasingly derived from financial credit created by
llie banks.
But further, because the general level of prices above
cost is equal to money/goods, these drafts on future pro-
duction still further raise present prices, hence general
increased production under present conditions means
either rising prices (instead of falling prices) or unemploy-
ment and failure of distribution. Prices cannot fall below
cost plus a minimum profit, under present conditions,
since profit forms the inducenK^nt to prochice.
To put it another way, the rate at which mcjuey can
be spent this week does not depend at all on the goods
which can be, and are, supplied this week, and is not
5
j}art of the cost of the goods which can be supplied this
week. An increase in the money paid this week is identi-
cal with any other form of money inflation under present
circumstances — it widens effective demand, stimulates
production, and raises prices. The real price paid for
the conszimablc goods bought this week is approximately
a week's production of both capital and consumable goods
(including exports) to be supplied at some future, and
increasingly future, date, and there is nothing in the
arrangement which guarantees tliat a larger amount of
consumable goods per head can be bought in the future
as a result of a larger amount of money distributed this
week, vide the war period.
Now I do not suppose that Mr. Hobson will, on
consideration, question these statements, but it is quite
clear that he does not appreciate their importance. He
does not appear to see that it results in the whole produc-
tion of the country, both tangible and intangible, what-
ever its magnitude and however strenuous the conditions
under which it is produced, being paid for by the concrete
consumption of the country over the same period of time,
and that there is no direct relation (although there is a most
important indirect relation) between these two. Funda-
mentally, under the present financial arrangements, the
[)rice paid for anything is what it will fetch; and the price
paid in purchasing power to the community as a whole,
by the financial system as a whole, for its co-operation in
production does not depend primarily on the production
or the productive capacity at all — it depends on wliat
purchasing power the individuals who form the com-
munity will accc[)t, i.e., how much money they can
acquire and what {)rices they will agree to pay, for that
part of the production they want to buy. The community
of individuals unquestionably sets a very low price on
its co-operation, i.e., it will agree to a very unfavourable
ratio of monev to prices, a price which does not give it
6
f)urchasing power over more than a fraction of total
production.
(2) (b). I do not understand what Mr. Hobson
means by this. He himself explains in his next para-
graph that bank credits are used by manufacturers '"to
pay wages, salaries and dividends to producers of raw
materials, plant, etc." If these have not gone into costs,
where have they gone .''
I do see clearly, however, that again the purely
static conception of the question has evoked his comment,
as evidenced in the tenses used in the paragraph to which
reference has last been made. There is implicit
in his argument the idea that a bank only lends its own
and its customers' money. A bank lends new money; to
quote Sir P^dward Molden, the late Managing Director
of the London City and Midland Bank — "Bank loans
create bank deposits." Space will nt)t allow of the treat-
ment of this most important question, and there is already
a considerable literature on the subject. The rise in the
figures of total bank deposits during the past twenty years
proves the dynamic theory up to the hilt, if any proof
is needed. I suppose Mr. Hobson would not contend
that it does not matter from where, in its cycle of revolu-
tion, money originates, for if he does so contend, I shall
at once demancl his assistance in setting up a bank-note
factorv !
At this point it may be convenient to deal with what,
in effect, is Mr. Hobson's dehnition of credit. It is so
important that it seems desirable to quote it in full. He
says, "... Credit can only work by reason of the prior
production of a surplus stock of food, clothing, etc.,
reserved from consumption by those who owned it and
might have consumed it but preferred to 'save' it and
to make a store which could enable these more lengthy
processes of production to be financed and rendered
economically possible. The credit furnished by bankers
7
draws on this stock of savings. The bankers do not,
indeed, themselves own these stocks of real savings; they
get them mostly from depositors and lend them out as
'credits,' taking as their charge for the utility of this
service the difference between the interest paid to them
by their customers and that paid by them to their
depositors."
Unfortunately, like so many of these "simple," "in-
telligible" (i.e., familiar) "explanations of the part
played by bank credit in financing trade" it is not, 1
think, even approximately correct. If it were, I should
agree that ''it furnishes no support to the Douglas
Theory."
So far as Mr. Hobson's own explanation is con-
cerned, a moment's consideration will show that a bank
loan does not form a draft on the specific goods in the
possession of the bank's depositors; it simply acts., during
the second portion of its cycle, in which it is being
returned to the banks through the medium of prices, as
a diluent of existing claims on goods, belonging to the
community as a whole and not to the bank's depositors
in particular. Bank money will buy any goods, not
merely the goods the bank's depositors are alleged to
have "saved."
But it is much more important to realise what part
credit does play, than what it is not.
A banker lends credit, which is not his, but public
property, because he expects to get something; in his
case, interest. An employer, in his turn, lends the credit
(wages, salaries) because he expects to get something,
[production, from which he will get profits. The indi-
\idual consents to work for money, which derives from
credit, because he expects to get goods, which to him are
profits. So far from the modern large-scale credit system
resting solely on a basis of "savings," as Mr. Hobson
would suggest — on something done in the past — it rests
8
more and more on a correct estimate of something to be
delivered in the future. "Faith (belief, credit) is the
substance of things hoped for, the evidence of things not
seen." That is a succinct statement of the part played
by credit in the psychology of production.
The conception advanced by Mr. Hobson is, of
course, exactly that which the banker would like the
public to accept, and which, no doubt, quite a large num-
ber of the rank and file of bankers themselves take for
granted. It suggests that banking is simply a private
pawnbroking transaction between borrower and lender.
This is, unfortunately, not true. The question of colla-
teral security, which may or may not be present, is quite
immaterial; every credit transaction definitely affects the
interests of every person in the credit area concerned,
either through the agency of prices, or by the diversion
ot the energies available for production purposes. Inci-
dentally, this is not an argument for nationalised bank-
ing, which, like all "nationalisation," is an administra-
tive measure, it is an argument for socialised credit.
Mr. Hobson's criticisms of the concrete proposal put
forward in 19 19 in the Draft Scheme for the Mining-
Industry really rest on his conception of the real basis
(jf credit.
He says, "... such a Producers' Bank might work
... if (the prime essential) enough of the money paid
i"! were left for a considerable time undrawn." This is
exactly the same argument as that employed by those
tragically mistaken persons who said that the First World
War could not last three months as no country had the
money for a lengthier period. The war lasted more than
four years; and in 19 18 every country, except, possibly,
Russia, which had destroyed the operation of credit, had
more money, and, what is much more important, more
productive capacity, than when it began. The "jirime
essential" of the workability of a bank founded on the
9
Mining Industry is not what "savings" it can hold; it
k that those connected with it are able to affect, by affect-
ing co-operation, "the correct estimate of something to
hedelivered in the future," which the community desires,
e.g., coal. The question of the "money" in the bank
is a mechanical question, just as the provision of more
currency to finance war production was a mechanical
question, solved, even if badly solved, in seven days. I
cio not say that the problem is a trivial one; it is not.
Kut it is in no sense fundamental.
In other words, the real essential basis of credit is
rot money; it is the capacity to deliver (not merely to
produce) goods and services; which involves the agree-
ment to co-operate of the whole community.
In regard to the last paragraph of Mr. Hobson'-J
article, the answer is substantially that "the whole market
price" paid by the existing banks for their use of public
credit is simply a very small part of the purchasing; power
value of that credit. The proposed banks use their whole
credit power for the benefit of their depositors.
There is no incentive to thrift provided by the
Scheme for the simple reason tliat, in my opinion, mone-
tary thrift is a wholly ineffective method of achieving the
economic security at which, presumably, it aims. The
wealth of a community is increased by spending, not by
saving — an apparent paradox with which on considera-
tion I feel sure Mr. Hobson will agree. What is true
of the community would be true of the individual if the
results of his spending accrued to him, which at present
they do not.
C. H. Douglas.
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