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CREDIT -POWER AND DEMOCRACY

CREDIT-POWER AND DEMOCRACY

WITH A DRAFT SCHEME FOR THE MINING INDUSTRY

BY

C. H. DOUGLAS

MAJOR, ROYAL AIR FORCE (rESERVe), M.I.MECH.E. AUTHOR OF "economic DEMOCRACY"

WITH A COMMENTARY ON THE INCLUDED SCHEME BY

A. R. ORAGE

BDITOR OF "the NEW AGE"

LONDON

CECIL PALMER

OAKLEY HOUSE, BLOOMSBURY STREET. W.C.i I92I

First Edition - - October, 1920

Second Edition - - May, 1921

TO MY OLD, THOUGH YOUTHFUL, FRIEND,

c. J.

PREFACE

Man does not live by bread alone but without a reasonable amount of food, clothes and shelter, his activities on this planet are both circumscribed in extent, and unduly limited in duration.

In what is undoubtedly an attack on certain features of the so-called Capitalistic system, in this book, no attempt or desire to judge that system on any grounds but those of workability is made or implied. The business of an economic system is to deliver the right goods to the right users, and the private financing of public pro- duction is doomed because it is failing signally in delivering the goods.

That is moral which works best.

C. H. DOUGLAS. Heath End,

Basingstoke,

October, 1920.

Vll

CONTENTS

CHAPTER I

PAGBfi

Fallacy of Marxianism Administration is not the organ of policy-control Definition of individual freedom Policy of industry rests with finance The bank is its organ ^Meaning of Democracy The " change of heart " idea ^The modern Pharisee _ _ _ _ - 1-13

CHAPTER II

H. L. Gantt on Industrial Efficiency ^The owner- ship of the product of industry ^The basis of collective industry ^The leverage of real capital ^The flow theory of prices and purchasing- power ^The artificial necessity for exports - 15-26

CHAPTER III

The two divisions of Estate ^The business of mobi- lising credit Effect on prices ^And on variety of production ^Why the public does not control production - - . _ - 27-35

CHAPTER IV

All credit-values are communal Credit and price- making are complementary and indispensable Why the present economic system fails Why the present control of production is anti-public ^The climax approaching The advantage of the dividend Destined to succeed the wage Cen- tralisation of Finance and Labour- Power Mis- direction of effort ^The precedent condition of Economic Democracy - - _ 37-47

CONTENTS

CHAPTER V

PAGES

Breakdown imminent ^The attack on ownership A phantom enemy ^Analysis of Nationalisation ^A reversion to the Middle Ages ^The Two Great Policies ^The lesson of Russia ^A financial problem of centralised credit - - - 49-57

CHAPTER VI

The two aspects of credit Both based on psychology ^The administrative basis and the machine- gun ^The nemesis of Fabianism - - 59-65

CHAPTER VII

The Capital Levy ^What it means ^Who would pay it ^The immunity of the price-maker - 67-74

CHAPTER Vin

National Guilds ^Their genesis ^Their corruption by Fabian thought ^The use and abuse of Com- mittees— ^The prerogatives of policy ^The dimin- ishing importance of " Labour " Its lost oppor- tunity— ^The site of the final struggle - - 75-86

CHAPTER IX

Summary of analysis of the Machine Age ^Trust Capitalism essentially anti-public And anti- democratic— ^The nature of the coming State 87-95

CHAPTER X

The production of Real Credit ^Delusive account- ing— The limits of Financial Credit -issue Present economic system based on currency Coming system will be based on Real Credit The fraudulent standard Delivery is part of credit-basis ^The fallacy of " National Poverty " Increased effective demand necessary 97-109

X

CONTENTS

CHAPTER XI

PAGBS

Fitness the qualification for executive authority The producers not the owners of the product Solar energy the great producer ^The method of policy-control The Producers* Bank Its operation ^The consumer-interest in it ^The community-component of credit How it would operate in the coal industry The "Idle Rich" ----- 111-126

CHAPTER XII

The measurement of Credit-production ^What is "capitalisation"? The growth of wealth True Price ^The sources of statistics - 127-134

CHAPTER XIII

Finance as a creator of things ^The producer-credit school ^A form of Syndicalism ^The tyranny of " work " again Analysis of producer-credit Certain rise of prices ^And failure Consumer- control the only way to free producer-initiative The world-conspiracy ^The end - 135-146

APPENDIX

A Practical Scheme for the Establishment of Economic and Industrial Democracy 147-212 Draft Scheme - - - 1 48-1 51

Commentary, by A. R. Orage - 152-212

XI

CREDIT-POWER AND DEMOCRACY

CHAPTER I

Fallacy of Marxianism Administration is not the organ of policy-control Definition of individual free- dom— Policy of industry rests with finance The bank is its organ Meaning of Democracy The " change of heart " idea The modern Pharisee.

CHAPTER I

One of the most fundamental fallacies which has ever afflicted a just cause is the delusion so dear to the sentimental propagandist of the Labour Movement, that Labour (by which the broader-minded of such advocates mean labour both by hand and brain power) creates all wealth. With this idea goes inevitably the assump- tion that Capital and Capitalism are one and the same thing, both being of the devil.

Mention has been made of this matter before,* but the subject is of such outstand- ing importance at this time that no apology seems necessary for a further effort to clear away a little of the misconception in which the actual relationship of Capital, Labour,

* " Economic Democracy." (Cecil Palmer.)

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CREDIT-POWER AND DEMOCRACY

and the Community has become involved, as much from the distortion and suppression of facts by the Financial Hierarchy as from the misdirection of organised Labour by persons of more zeal than discretion; a misconception which is tragic in its influence on the strategy of the Labour Movement, since it results in for ever placing that strategy in a position of antagonism to the interest of the rest of Society.

Before proceeding to the further exam- ination of the facts, it may not be without value to note the willingness with which the orthodox i.e., capitalistic Press is prepared to allow this contention, or, at any rate, its implications, to go by default. Witness the unctuous agreement, heard on all sides, with the sentiment that Labour, as such, should increasingly share in the *' control " of industry. This sentiment is, of course, derived from the major premise, because it is clear that if Labour produces all wealth, then the deraocratic control of Labour by itself

3

CREDIT-POWER AND DEMOCRACY

i.e., elective and representative industrial administration means the democratic control of the production of wealth.

It is amazing how this error has misled millions of men and women, determined to assert their claim to consideration, whose experience of life is yet su^cient to expose the fallacy of it. The foreman controls the workshop and all who labour therein; does he then control production? But perhaps the manager, who controls many foremen, is the ultimate focus of power ? Ask him, and he will tell you that he is the slave of the sales department on the one hand and the chairman of the board on the other. The chairman must clearly be seated on Olympus; but observe this demigod when, faced with a deficit on the year's working, he endeavours to con- vince a shareholders' meeting that all is well with their undertaking, because the staff is contented and the product is un- rivalled. It will avail him little that each shareholder may be a believer in demo- cracy in industry.

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CREDIT-POWER AND DEMOCRACY

Yet in the face of the determination of organised Labour to *' share in the control of industry," see how a broad-minded Press agrees with them. It is all for a Guild Socialism of the glorified Whitley Council variety. The columns of any metropolitan new^spaper in England or America are open to the description or discussion of such *' committee " schemes, and will print reams of articles by their more distinguished advocates, even where they condemn their conclusions. From which the cynically minded may justifi- ably conclude that there is no danger to capitalism in a bushel of them.

But to resume our search for the true seat of power. It is clear that if we replace the foreman, the manager, and the chair- man, each by a committee, all that we do is to affirm our belief that it is better to have half a dozen men giving orders than one man a belief that may or may not be well founded, but, in any event, is not likely to result in the democratic control of production. The shareholders,

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CREDIT-POWER AND DEMOCRACY

it is true, are already a committee, and would seem at first sight to have no master; but how much latitude in making decisions have they ?

Now, this is the citadel of the fortress we are attacking, for power to make decisions is freedom for the individual, and a share- holder in a trust-capitalistic manufacturing enterprise has no power to change the fundamental poHcy of the concern, which is to pay its way as a means to the end of maintaining and increasing its financial credit with the hanks.

Hence we see that the last word on policy is with finance, not with administration, and is concerned with the control of credit by the banks; and to democratise the policy of production we have to democratise the control of credit.

Before concentrating on this problem of the democratisation of the bank, and of the practical application of the credit principle which it administers, the satisfac- tory solution of which will have incom- , parably greater influence on the future of I

6

CREDIT-POWER AND DEMOCRACY

the world than any other single change of which we can conceive at this time, let us consider for a moment Democracy itself as an organised system of carrying on the business of society as a whole.

Democracy is frequently and falsely defined as the rule of the majority a definition quite sufficient to account for its unpopularity with many persons whose opinion is not unworthy of consideration. As so defined, it is a mere trap, set by knaves to catch simpletons; the rule of the majority never has existed, and, fortunately, never will exist. If such a thing were possible, it would be the ultimate Terror, beside which the worst individual despot would seem a kindly patriarch. It is under cover of this definition, however, that unscrupulous men in every country are enabled to evade the consequences which antisocial intriguing would bring upon them, by working up a spurious, because uninformed, public opinion, which is the greatest barrier to effective and rapid progress known to the hidden hands of

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CREDIT-POWER AND DEMOCRACY

finance and politics. Real democracy is something different, and is the expres- sion of the policy of the majority, and, so far as that policy is concerned with economics, is the freedom of an increasing majority of individuals to make use of the facilities provided for them, in the first place, by a number of persons who will always be, as they have always been, in the minority.

Any other conception of democracy simply does not take cognisance of the facts, does not believe in human nature as it is, and, consequently, taking its stand on the doctrine of original sin, requires as a first postulate of improvement a change of heart which is expected to make all men and women over again, so that a standardised world will be uniformly attrac- tive to all of them. A standardised world requires someone to set the standards, and it is to this authoritative democracy that the capitalistic governments of the world are willing, if they must, to resign , the sceptre of Kaiserism and plutocracy,-^

CREDIT-POWER AND DEMOCRACY

knowing quite well that it will avail no- thing that Labour has its administrative councils, its shop committees, its constituent assemblies, or even its Soviets, so long as the control of credit enables the real policy of the world the policy which controls the conditions under which mankind obtains board and clothing, without which the mightiest genius is more helpless than a well-fed idiot to be dictated from the sources out of which it now proceeds.

Let no one imagine that real democracy, however, has its opponents only amongst the great financiers, ecclesiastics, and politicians. There are just as many po- tential despots amongst the careerists of the Labour movements as among the employing class, and in a mere choice of tyrants it is quite a sound principle to keep the devil you know in preference to the devil you don't know.

A warning in regard to this aspect of the situation is contained in the arbitrary division of society, now so popular with captains of industry, '' sane '' Labour

9

CREDIT-POWER AND DEMOCRACY

leaders and extremists alike, into ''workers*' and a " parasitic class/' the latter being supposed to be without useful function, and having no " right '' to exist, held up to execration as battening on the virtuous industrial system, and robbing it, by so much as that class consumes, of what is its moral due. I realise the unpopularity of any defence of this class, but it is a defence which has to be undertaken, not from any special liking for the task (though Mr. Ber- trand Russell, in his defence of idleness, has shown that to be quite reasonable), but because the attack on it leads nowhere useful. In the first place, when we leave the easy ground of generalities and come down to concrete detail, we find it over- whelmingly difficult to define useful work. Not only is it difficult, but it is in the highest degree mischievous.

In spite of the fact that the Founder of Christianity directed his most biting invective against the legal and juristic habit of mind of the priests and scribes " who made the Word of God of none

10

CREDIT-POWER AND DEMOCRACY

effect by their traditions/' this desire to classify and pass sentence upon every variety of human effort has been the curse of the churches and codes of the Christian era. At this time there goes up in Central Europe a cry for bread such as (perhaps) the world has not known for cen- turies; the mutterings of coming revolution are heard in every country; yet the victims of this deadly habit of mind, both on the side of Capitalism and Labour, are still explaining that, unless a man do '' useful " work, neither shall he eat ; regardless of the fact that both England and America are glutted with goods, that in both countries foodstuffs are allowed to rot, or are being actually destroyed, in order, to keep up prices, the high-priests of industry cry for more and yet more production as a con- dition of existence, even though that pro- duction may be, as it often is, detrimental to society in general, and the worker in particular.

On the side of Labour a great part of the force which this movement against '' para-

CREDIT-POWER AND DEMOCRACY

sitism '* has acquired is due to the idea that it is only by the strenuous efforts of the orthodox worker, straining every nerve and muscle, that the world is maintained at its present standard of living; whereas it is, on the contrary, only by the most gigantic and organised sabotage on the part of the capitalistic system and Labour itself, not only positive but negative by the refusal^ tp_ use modern tools and pro- cesses, as well as the misuse of them that the standard of living is prevented from rising higher, with the expenditure of less human effort, than the most exacting would require at this time. In effect, the validity of the Labour protest rests, not on any prerogative Labour possesses of fixing the value of any individual to Society, but on the practical question as to whether Society would be benefited if the protest against parasitism were upheld. Since it may be contended that no reasoned argument has yet been brought forward to show that the '' just " payment of Labour is not measured by the total of what Labour

12

CREDIT-POWER AND DEMOCRACY

produces, it is one of the objects of the following pages to show that to strain after '* justice" in this manner is not only to miss it, but is the sure and certain way of handing over the world afresh to the tender mercies of the high- priests and the scribes. In passing, it may be observed that Labour has never been in danger from the Idle Rich it is the hardworking rich who are the chief champions of the status quo.

13

CHAPTER II

H. L. Gantt on Industrial Efficiency The owner- ship of the product of industry The basis of collec- tive industry The leverage of real capital The flow theory of prices and purchasing-power The artificial necessity for exports.

CHAPTER II

The late Mr. H. L. Gantt, one of the most capable and enlightened industrial engineers that America has produced, is reported to have said that the industrial efficiency of the United States was about 5 per cent, in 191 9. He was under no delusion as to the cause of this; it was because it did not pay those in control of the industrial pro- cess to make it any higher, not, be it noted, because those operating it did not know how.

This is a remarkable statement, coming from such a source, and has a number of important implications. If we assume that an overall industrial efficiency of 75 per cent, is attainable (by which we mean that 75 per cent, of the out- put possible with a given number of man-hours, working on a given plant, 16

CREDIT-POWER AND DEMOCRACY

might be obtained and distributed), and we also assume, as is the case, that the United States is able to pro- duce all she wants by working at the low efficiency quoted by Mr. Gantt, then, without working any harder, she could, under proper conditions, produce the same amount by the same number of persons working one-fifteenth of the time they now work i.e., about thirty minutes per day instead of about eight hours, or by one- fifteenth of the present number of persons working the same hours. As the economic distribution system stands at present, such a condition of affairs is impossible of attain- ment, because, although the goods would be produced, the purchasing-power to buy them would not be distributed. The enor- mous increase of sabotage of all descriptions which is the outstanding feature of con- temporary industry is due to the blind effort to equate purchasing-power to pro- duction without altering the principles of price-fixing.

Now the possibility of meeting the re- 17

CREDIT-POWER AND DEMOCRACY

quirements of society for goods and services in a small and decreasing fraction of the man-hours, or time-energy units, which society has at its disposal comes from improvements in the industrial machine as a whole. If there is one thing more cer- tain than any other in this uncertain world it is that the industrial machine is a com- mon heritage, the result of the labours of generations of people whose names are for the most part forgotten, but whose efforts have made possible the triumphs of the past hundred years. Therefore, ^ while society is justified i.e., is judicious in demanding that this machine shall be operated by those capable of obtaining the best results from it, irrespective of any other considerations whatever, society as a whole, not the operators Labour or any other function of society, has a *' right '* to the product, a '' right" founded in the nature of things because, if it is denied, the machine begins to develop abnormal friction, with a consequent loss to every constituent member of society.

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CREDIT-POWER AND DEMOCRACY

It must be borne steadily in mind in considering this question that the object of industry is not work for its own sake; the industrial system exists firstly because society has need of goods and services. The fact that the creative instinct of mankind can find satisfaction in crafts- manship is beside the point; men associate together in collective industry because they hope, and are justified in hoping, that there is an unearned increment in association ; that they will thereby obtain the required goods and services with less effort than by isolated endeavour.

Let me, if possible, make this point clear beyond any misunderstanding. It is a question of priority. After the fundamental requirements of humanity for food, cloth- ing, housing, etc., have been met, any excess energy in the community must find an outlet any man whose energy is in excess of that necessary to maintain his vital processes wants to work, in fact must work in some way, as an elemental proposition in dynamics. Therefore the more this ^ 19

CREDIT-POWER AND DEMOCRACY

maintenance of life can be shifted from the ; backs of men on to the backs of machines | the more important it is to find a creative; outlet for the human energy released, andj the more certain is it that a considerable portion of this energy will, without com- pulsion, be devoted to the improvement of the industrial machine. That is to say, if a practical policy based on these con- siderations be pursued there will be a fall in the man-hours required for routine or operating work, and a consequent rise in the man-hours available for design and research work. The industrial machine is a lever, continuously being lengthened by progress, which enables the burden of Atlas to be lifted with ever-increasing ease. As the number of men required to work the lever decreases, so the number set free to lengthen it increases. It is true that, owing to the defective work- ing of an outworn financial system, the lengthening of the lever has been ofiset by obstacles to its beneficent employ- ment, but these very obstacles, by raising

20

CREDIT-POWER AND DEMOCRACY

up a worldwide unrest, will secure a rectification of the means of distribution, which is the first step to a better state of things.

In order to see that this is so it is necessary to restate in general terms an argument which has been dealt with else- where in detail {'' Economic Democracy"). / A factory or other productive organisation I has, besides its economic function as a ! producer of goods, a financial aspect it 1 may be regarded on the one hand as a I device for the distribution of purchasing- I powder to individuals through the media of wages, salaries, and dividends; and on the other hand as a manufactory of prices fii^ncial values. From this standpoint its payments may be divided into two groups :

Group A All payments made to indi- viduals (wages, salaries, and divi- dends).

Group B All payments made to other organisations (raw materials, bank charges, and other external costs),

21 c

CREDIT-POWER AND DEMOCRACY

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 propor- tion of the product at least equivalent to B must be distributed by a form of purchas- ing-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 pro- vided by loan-credit (bank overdrafts) or export credit.

This somewhat elusive conception, the grasp of which is vital to an understanding of the modern economic problem, may be made clearer by considering Labour as an intermediate product, the raw material of further production, which is, of course, the orthodox capitalistic view, and imagining a

22

CREDIT-POWER AND DEMOCRACY

Labour corporation for instance, a trade union as being in a position to make up the costs and consequently the selhng price of this commodity on orthodox principles. In this case using small letters, group b would include all the costs of living i.e., the overhead charges of the men who are the '' machines " for the production of Labour and group a would be their direct remun- eration, and the '' factory cost '' of the commodity would again be a + b. Let us call this '^ factory-cost-of-Labour '' c. Now c cannot be greater than A in the pre- ceding formula for material - production cost, and yet if human beings are to buy A + B with their earnings and dividends, A + B must be included in c. Again we see that this is only possible by the inclu- sion of an external factor credit— which allows an ostensibly stable value c to mean different things at successive intervals of time.

The general statement has been put with great conciseness by '' H. M. M.'* in a letter to The Guilds'man:

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CREDIT-POWER AND DEMOCRACY

'' The explanation of this is that in highly developed countries such as ours practically air purchasing -power commences life as a credit created by the banks. These credits are created at the instance of manufacturers and dealers; are distributed by them in the shape of wages, salaries, and profits, and spent. Trade is thus almost entirely carried on with borrowed money or credit, although the fact may be hidden at various points. The goods we buy are produced on borrowed money; the money we buy them with goes to extinguish the debt; but it itself is derived from credits that have been borrowed from the banks, and consequently its value must reappear in selling prices somewhere, and be recovered again from the consumer if the banks are to be repaid their advances. It is clear, there- fore, that one credit is only cancelled by the creation of another and larger credit.*'

In considering the above arguments, let not the reader allow himself to become confused by the fact that B has 24

CREDIT-POWER AND DEMOCRACY

at some previous time been represented by payments of wages, salaries, and divi- dends. While this is of course true, it is irrelevant it is the rate of flow which is vital. The whole economic system is in ceaseless motion purchasing-power is constantly flowing back from individuals into the credit system from whence it came, and if the outflow is less than the inflow, someone has to lose purchasing-power.

At the moment the point to be borne in mind is that B is the financial representa- tion of the lever of capital, and is con- stantly increasing in comparison with A. So that, in order to keep A and the goods purchased with A at a constant value, A + B must expand with every improve- ment of process, while at the same time this increased production must, in the nature of things, be of such a nature as will enable it to be paid for under Group B. It must not, therefore, be an ultimate product something that human beings, as such, require for their personal use but must take the form of factory buildings, 25

CREDIT-POWER AND DEMOCRACY

machinery, etc., for the production of which bank overdrafts can be obtained, or else be production for export. A consideration of these matters will remove any difficulty in understanding why the orthodox manu- facturer is calling so loudly for increased production, increased exports, and economy of consumption by individuals, without obtaining any very enthusiastic response from Labour; and why, in consequence, the cost of living rises daily.

36

CHAPTER III

The two divisions of Estate The business of mobilising credit Effect on prices And on variety of production Why the public does not control production.

CHAPTER III

The estate of any society or community may always be considered as having two component parts wealth and capital. If this statement is considered from a realistic point of view it means that the said estate consists not only of ultimate commodities, services, and amenities in esse, but the capacity for reproducing or enhancing them if destroyed. This latter component is essentially bound up with time it involves a rate.

Finance is, or should be, a reflection in figures of physical facts, therefore we ought to, and in fact do, find that the physical facts of social estate are represented by two divisions in financial estate cash and credit : cash being the instrument of retail transactions or transfers of ultimate com- modities; and just as real capital represents

28

CREDIT-POWER AND DEMOCRACY

potential production of ultimate com- modities, so financial credit is convertible into the cash which will buy them.

Now, it has been universally recognised

that the minting of money is a prerogative

j of the community, State, Government, or

whatever name we choose for the moment

^ to apply to the body politic, and the coining

\ and counterfeiting of it has uniformly been

V4)enalised; but the creation of financial

credit which is convertible into money has

become a lawful, recognised and respected

occupation open to any association or

individual who can obtain the confidence

of the community and is in possession

of the necessary facilities and technique.

Let me explain.

Imagine an individual possessed of a reputation for wealth and probity to open an office in the City of London. It is immaterial whether he has the wealth or not. Such a man may conceivably go into business as a dealer in debts i.e., a large number of persons may find it convenient to go to him with their claims 39

CREDIT-POWER AND DEMOCRACY

against each other for collection and settle- ment. At first he will collect the money (cash) from each debtor and pay it over to his client, but it will soon come to pass, as his business expands, that there will be cross-debts. Brown will owe Jones for boots, but be owed by Robinson for corn, who has a claim against Jones for leather. It will be simpler for everyone concerned that our debt-dealer should '* clear '' or set off these debts against each other and pay over the balance where it belongs. But the final creditor may and will know that he will have more similar transactions and will instruct his debt-dealer or banker to hold this balance against such a contingency. The bank- ing business expands; and everyone finds it simpler to leave their balances with the banker to the '' credit ** of their accounts, circulating in place of coin pieces of paper or cheques instructing the aforesaid banker to adjust their credits in accordance with the transactions they represent. So far so good. 1 Enter now the enterprising manu- / 30

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CREDIT-POWER AND DEMOCRACY

facturer or trader, who explains to the banker that he has received a large order, wishes to purchase raw materials whose value is in excess of his '* credit " balance, and would like to deposit the title-deeds of his factory as security for a loan. The banker agrees, on terms; and the borrower is allowed an " overdraft " on his credit account. As by now only a small pro- portion of the banker's business is done in cash, this means for the most part a circulation of cheques. But the important point to notice is that this overdraft is just as absolutely new money as if the hanker had coined it or printed bank-notes for the amount. None of his other clients have the figures of their credit accounts altered by the transaction, and the title-deeds deposited as security are returned unal- tered when the '' overdraft '' is balanced. This new credit, however, dilutes the pur- chasing-power of all other money so soon as it becomes operative as a demand for goods, because under the financial '' law '' of supply and demand prices equal effective

31

CREDIT-POWER AND DEMOCRACY

demand i.e., desire to purchase backed by money to buy, divided by number of articles for sale.

Observe that the transaction is a proper and, from certain points of view, desirable one. Production is necessary, and this transaction enables production to take place. It is flexible; an enterprising individual without sufHcient purchasing- power was enabled to draw it from the community and to make something. From the producing side it is a good system, although it leaves to the banker the decision as to whether the production is desirable production. But let us follow it a little farther on the assumption that it is no use producing things unless someone gets them.

Our manufacturer, having got his over- draft, *' gets busy." More men are taken on, not only at his factory but at the fac- tories of the allied traders who supply him with intermediate products, and, as our Federation of British Industries would say, there is more employment for everyone. Quite so. But the first thing to note is 33

CREDIT-POWER AND DEMOCRACY

that all these concerns are distributing purchasing-power to individuals, in the form of wages and salaries, ahead of pro- duction, which causes a rise in the price of existing ultimate commodities, the only commodities that individuals buy; or, to put it in the way described above, all money existing is diluted. Secondly, they are distributing this purchasing-power obtained out of " credit '' largely (and this is in- creasingly true) in respect of capital pro- duction— i.e., things which in themselves are of no use to consumers : tools, factories, etc. The community as a whole, therefore, is producing and being paid for real capital as well as ultimate products, and much of the real capital is permanent and survives the lifetime of its producers.

Now consider these points in connection with the proposition explained in the foregoing chapter viz., that the current flow of wages, salaries, and dividends is less than the current flow of price- values of articles produced bearing in mind the fact that prices vary between

33

CREDIT-POWER AND DEMOCRACY

a lower limit represented by cost of pro- duction and an upper limit defined by ''what they will fetch" i.e., effective demand. It will be seen, as has been pointed out by Mr. A. R. Orage and other writers on economic subjects, that the wages and salaries (already insufficient to buy the whole production) tend to be diluted in value until they represent the subsistence allowance of the persons concerned in other words, total prices of ultimate commodities barely necessary for the accepted standard of life tend to equate themselves to the total effective purchasing-power of individuals, and this is true even if dividends to individuals are included and are widespread. Conse- quently, and this is the all-important point we wish to make, although the un- regulated system of credit-issue and price- making distributes purchasing-power both in respect of capital production (tools, factories, intermediate products) and ultimate products (necessaries, services, amenities), it takes back in the prices of 34

CREDIT-POWER AND DEMOCRACY

ultimate products only, practically the whole of this purchasing-power, leaving the com- munity, considered as a permanent insti- tution, in the position of having bought both the plant and the product, but having only got delivery i.e., control of the product. Such a state of affairs so long as it continues makes the control of the policy of the world in the interest of the community a mere sentimental chimera no nationalisation, guildisation, or any other administrative manipulation can affect the existing control otherwise than to introduce friction into it (at the cost of everyone concerned) so long as the prices of ultimate product the taking back of purchasing - power derived from credit are equal to or greater than '' costs " the dispensation of purchasing - power derived from credit. Further, the exist- ing control is semi-automatic ; every increase of credit-expansion on these terms means a greater capital-production and a pro- portionately smaller use of that capital to deliver ultimate products.

CHAPTER IV

AH credit-values are communal Credit and price making are complementary and indispensable Why the present economic system fails Why the present control of production is anti-public The climax approaching The advantage of the dividend Destined to succeed the wage Centralisation of Finance and Labour- Power Misdirection of effort The precedent condition of Economic Democracy.

CHAPTER IV

As a result of the foregoing analysis, then, it seems certain that :

(a) All credit- values are derived from the community, regarded as a per- manent institution; not merely from the present generation of workers " by hand and brain/'

{b) The rate of production is pri- marily dependent on the scientific and cultural inheritance of the community ; secondly, on its tools and plant (both of which have a rough financial equiva- lent in Group B, Chapter IL) ; and, thirdly, on personnel. Personnel, how- ever, sets the *' pitch " i.e., determines the efficiency of the use of capital, for any given policy, and the arbiters of policy, whoever they may turn out to 38

CREDIT-POWER AND DEMOCRACY

be, have an interest in selecting the finest personnel available to operate it.

(c) The financial system recognises these facts by deriving all financial values from credit, which takes all these factors into account. As, how- ever, the existing system of making prices includes all dispensations of purchasing-power to individuals during the processes of production {i.e., *' costs '*), in prices; and all '* prices *' are purchasing-power taken from individuals, it must surely be clear that credit-issue and price-making are the positive and negative aspects of the function which controls the economic life of the community, and so controls the community itself.

(d) The community does not control credit-issue or price-making, at present.

It is probable that some system of credit- issue and price-making founded on a policy of which society, as a whole, approves, is an integral part of any immediately pos-

39

CREDIT-POWER AND DEMOCRACY

sible civilisation; and if this be so, it is of the highest importance to decide on that poHcy, and to see how it differs from the existing one, against which society is in rebeUion.

It is above all things desirable to recognise that the problem is a practical one, and that nothing is to be gained by assuming that Capitalism in its present form has always been fundamentally bad. The capitalistic system is doomed because the world has ceased to have need of it in that form, not because it was the invention of the devil. That is not to say that there is not a good deal of original sin about, in the opposition to its modification !

To understand the trend of the present system from the standpoint of policy, in the light of the above analysis, we must notice that it results in keeping the majority of persons employed ap- proximately eight hours per day either in producing, distributing, or safeguarding, what is admittedly a deficient supply of ultimate commodities, and this in spite

40

CREDIT-POWER AND DEMOCRACY

of the advancement of science and its application to Production. We see also that whatever the amount of these ultimate commodities produced, and how- ever much cash the community earns, the aggregate prices of mere consumption goods can be made to equal the aggregate earnings in respect of the production of