Lesson VII – The Views of the Reformers
At the outset of this course, we laid down certain basic principles which we felt were essential to good government and a sound economic system. These principles included a maximum of individual freedom of choice; a government policy in accord with the general will of the people while respecting the rules of morality and the position of minorities; economic security for the individual without sacrifice of personal freedom, and a monetary system that made possible the achievement of goals that were physically possible and desirable within the community.

Our study of our present day economic system has led us to believe that it is at present falling far short of these objectives. In particular there is an acute and growing lack of economic security for the average person who depends chiefly on sale of his labour for daily income. There are levels of poverty which could be easily eliminated were the financial means available to set available resources to work to bring them to an end. There is an increasing tendency for the will of the individual person to be subordinated to the direction of “big business” or “big government”, making it more and more difficult for the individual person to exercise his or her personal initiative, enterprise and freedom of choice in the daily affairs of life.

Three Areas of Fault.
In our studies so far, we have seen three major reasons why this should be the case. The workings of the economic system are set in motion, as we have seen, by the various wants of consumers, which are made “effective” by the ability and willingness of consumers to pay a certain money “price” to satisfy them. This “price” goes to compensate those who sacrifice either their labour or other resources that go into the form of wealth required by the consumer, giving those people in turn the right to set the economic machine in motion in the same manner to produce something that will satisfy their desires. Increasingly, also, because of the development and efficiency of the “tools” used in the process of manufacture, the labour purchased is only partly labour that is currently expended – a great and increasing part is labour bought and paid for by businesses at some time in the past, whose purchase was financed either (1) by bank credit, or (2) by money invested by consumers, the cost of which will either (1) be repaid to the bank and canceled, or (2) accumulated in business reserves, when the product is finally sold.

Fault Number One lies in the ownership of natural resources – that is, possession of the legal right to the exclusive use of either the surface of land, or its minerals or other resources, now and for an indefinite time into the future. If the value of these rights is not fairly distributed among citizens, there will be excessive riches for some, and excessive poverty for others.

Fault Number Two lies in the private creation of the economy's money supply. Apart for the “small change” put out by the Royal Mint, and Bank of Canada notes (which are still the “small change” of the nation's credit supply) the whole of our nation's money supply is created and loaned into existence by private institutions as they grant new credit to borrowers. These charge the public approximately ten times the amount that it costs our publicly owned Bank of Canada to create its share of the nation's money supply. A system such as this not only yields excessive profit to private interests: it also places control of our country's economic welfare in the hands of a private cartel to a very dangerous degree, and embroils consumers, businesses and governments alike in an ever increasing nexus of debt..

Fault Number Three lies in the manner in which new credit is normally introduced into our economy. The private banking system is part of the nation's “capital market”, and the new credit it creates flows by way of loan either to industry or to governments or consumers. Because the quantity created is determined both by the creditworthiness of business and consumers, and because the quantity created itself has a direct influence on business profits and prosperity, a money system such as this incorporates “positive feedback” and will swing repeatedly between over- and under- stimulation of the economy – between “booms” and “busts”. To avoid recession, it continually asks for stimulants such as trade surpluses, government deficits and spending programs, increased consumer borrowing, inventory and capital formation – even when these are not reflected in any physical demand on the part of the people the system is supposed to be serving.

These three faults have generally speaking been ignored by the “classical” economists, although the publication in 1936 of J.M. Keynes' work “the General Theory of Employment, Interest and Money”, which treats of the third, has left an important mark on orthodox economics, and may ultimately lead to the conclusions being dealt with here. There have, however, been a number of extremely capable writers outside the sacred circle of 'orthodox” economists, who have in different ways dealt with one or more of these topics. In the present lesson, it is proposed to give a brief, critical outline of the analysis and proposals of a selection of these, and in the next, make their ideas the basis for a constructive economic policy for Canada at the present time.

Henry George – the “Single Tax”:
George was an American newspaper correspondent whose classic work, “Progress and Poverty” was published in 1879. Faced with the problem of poverty being widespread, while others enjoyed extreme wealth, he accounted for this by saying that this was the consequence of private ownership of land and other natural resources, which was in turn the result of “enclosure” for private purposes of areas that once were held by the community in common.

Private property gives a regular income to the owner of the value of the natural resources of the earth placed at his disposal. He can either use these resources for his own advantage (such as using a location as a site for building his house) or for receiving an income, if he rents the site out to another person for that other person's advantage. Since some sites have much more value than others, the better sites will command a higher rental value. As George puts it:

“As wages and interest tend to a common level, all that part of the general production of wealth which exceeds what the labour and capital employed could have secured for themselves, if applied to the poorest natural agent in use, will go to landowners in the shape of rent.” 1

The amount of rent that can be charged depends very much on the quality of the resource in question. If it is far away from civilization, the rent it can command will be low or non-existent. But if its is a lot in the centre of a major city, it can be enormous. And that value comes, not from anything the owner has done, but from the presence of the community and the surrounding infrastructure it has provided. The rent a site can receive, or course, also directly affects the price at which the site can be sold, and the profits that can come from real estate development.

George therefore proposed a “single tax” on the value of sites, whether surface or mineral, which could capture this unearned rental value, created by Nature and the community, for the benefit of that community. It was not his intention that any tax be put on the owner for the value of the buildings, oilwells or other improvements that the owner had put in place at his own expense: simply the site, and the resources that Nature and the Community had provided to give it value.

As an illustration of this principle, contrast the difference between the millionaires of Texas, who have been fortunate to find oil deposits under their land and keep these for themselves, and the folks of Alaska, where oil revenues taxed by the State have been invested and distributed in a dividend of over $3,000 per year to every resident.

George's remedy was the abolition of private property in land rents, to be achieved by a tax that would confiscate from private owners the whole yearly value of the land standing in their name, though not in any way taxing man made improvements – that is “to appropriate rent by taxation”, and by this means abolish all other forms of taxation.

George's proposals were backed not only by sound reasoning, but by history. Under Old Testament law, as well as under the feudal system that had prevailed in Great Britain from the Norman Conquest to the late sixteenth century, every citizen was assured of a definite landholding in the nation, supplemented by specific rights e.g. of common pasture, in return for definite services either to the state or to his feudal lord, which were designed to uphold the fabric of society. The process by which these rights had been taken away by “enclosures” of common land by landowners was little short of legalized robbery, and an immediate cause of the growth of an impoverished, propertyless, urban population. 2

However, George did not direct his attention to financial reform, or if he did, considered it not of fundamental importance. He did not conceive of the possibility, therefore, that even were his proposals carried out, faults in the workings of the mechanism of money creation might still prevent proper and effective functioning of the economic system, unless other reforms were also carried out.

Silvio Gesell - “Stamped Money”
Silvio Gesell, a German author, first published his “Natural Economic Order” in two parts, in 1906 and 1911. An admirer of George, he nevertheless clearly saw that George's reforms would not prove adequate without additional reforms in the monetary field. Consequently, Parts III to V of his book analyze the nature and function of money and interest, and make the revolutionary proposal of “stamped money” - money issued by the state that regularly requires a tax to be paid on it in order to remain valid – in addition to land reform on the lines that George suggested.

Gesell's concern was with the acutely powerful bargaining position that the possessor of money was in, because he could, by holding back from buying, force a prospective seller into a position where he had to sell at cut rate prices. Gesell rightly understood that money had a value only because of the rights it gave, quite apart from its intrinsic value, and that State issued money was as good as gold. He appears not to have recognized that banks were not lenders of the funds of their depositors, but were actually creators of new credit money. Consequently he appears to have been under the impression that the expansion and contraction of credit by the Banking system, which is closely connected with the trade cycle, was actually caused by persons in possession of money who were alternately spending it freely, or causing business stagnation by failing to do so. His demand for a unit of money that carried with it a negative rate of interest loses much of its force, therefore, when one realizes that it was based on a misapprehension of the function of the banking system and of credit money. It is also difficult to see how “stamped money” could in fact be practically used in an economy such as our own, that makes such extensive use of transfers of credit through the banking system by cheque.

Fisher and Soddy - “100% Money”
Two writers on monetary reform, with extremely distinguished academic backgrounds, are Professor Irving Fisher (author of “100% Money”), and Frederick Soddy. Irving Fisher was Professor of Economics at Yale University, while Soddy (Author of “Wealth, Virtual Wealth and Debt”), was a Nobel Prizewinner in Chemistry, who made an independent and scholarly investigation of the origins and working of the money system, and the nature and value of money. 3

The ground covered by each of these writers was practically exclusively problem number two of our earlier analysis – the defects of the banking system. Their recommendations was a Banking system that did not have the power to create new credit money, but held, dollar for dollar, legal ender money behind every dollar of promises to pay that it has made. This could be supplemented by State issued legal tender money, in quantities required by the economy.

The chief merit of 100% money, besides its simplicity and the fact that financially it is very beneficial indeed to the public revenues, is that it can, in theory at any rate, entirely eliminate the Trade Cycle. In our previous illustrations of the Trade Cycle, we have assumed that the entrepreneur who wanted to expand his business by increasing investment in the tools of production or in stocks of materials, obtained a loan of newly created Bank credit for this purpose. This causes inflation, because it distributed additional incomes to consumers without any increase in the volume of consumer goods reaching the market at that time. Suppose, however, that such a Bank created increase in the money supply was impossible. Our entrepreneur would now have to seek his funds for expansion from the capital market – and ultimately his additional capital spending would be financed out of the money savings of consumers.

Inflation would therefore be avoided. The wages of those engaged in expanding the capital plant would give them additional power to buy, of course. However, this additional power to buy would be balanced by lessened power to buy on the part of those who had invested their money to finance this expansion. All tendency to inflation would by this means be canceled out – and to some extent also, the later tendency to deflation.

A related system of reform is known as the Hallatt Plan. This again, demands 100% State created money, and requires that such money be spent into circulation and backed by State owned permanent capital assets and be retired as these assets depreciate. The volume of money in circulation would be balanced so as on one hand not to inflate the price index, and on the other, to maintain full employment. While the actual need for “backing” of the type suggested, and the insistence on introducing money through public capital works may be disputed, this plan does give a practical approach to a money reform program. 4

All of these 100% money plans, however, cannot claim to be comprehensive cures to the whole economic problem – none really treat with the subject of rents and ownership of natural resources and Soddy alone rather briefly treats on the problem of capital accumulation in the hands of corporations, which he suggests be countered by an appropriate taxation policy.

C.H.Douglas - “Social Credit”
The outstanding – though in some ways the most difficult – economic reform writer of the twentieth century has been Clifford Hugh Douglas. Douglas was a Scottish engineer employed prior to World War I with the British Westinghouse Company in India, and during that war at the Royal Aircraft Factory at Farnborough, England, where he conducted a very extensive study of the cost and accounting processes taking place at this plant. As an engineer before the war, he had became concerned with the degree to which physically attainable and desirable engineering projects on which he was engaged were continually being frustrated by lack of money. He observed very quickly also, that in wartime those barriers were in some way mysteriously removed, and money was always available to make financially possible whatever the physical needs of war demanded. His accounting studies at Farnborough led him to understand the manner in which industrial costs tended to exceed the incomes available to liquidate them (as we saw in Lesson 6), which he formulated under the name of the “A+B Theorem” in a number of articles originally published in the “New Age” magazine, then collected into several books published between 1920 and 1924. He was also well aware of the then disputed fact that the commercial banking system was the major source of the nation's money supply, and could create and destroy financial credit at will.

Most of Douglas's approach has, of course, already been developed in this course, and will not be repeated here. However, attention is drawn to the following aspects of his writings, which make them mark a turning point in economic thought:

(1) His philosophic approach. At least from the publication of Adam Smith's “Wealth of Nations” in 1776, economists had tended to assume that the object of an economic system was primarily the production of a maximum amount of material wealth, and the maximizing of profit to those who controlled its production. To Douglas, the prime objective was economic power to choose in the hands of the individual consumer – so giving economics a chance to become divorced from the completely materialistic approach into which it had fallen, and study the process of distribution as being at least as important as that of production

(2) His analysis of the Banking system and the business cost structure: His writings anticipated the development of Keynesian “New Economics” in both of these fields, and mark a real advance in economic understanding.

(3) His support of the principle of the “Dividend” Aware of the productive power of modern machinery, and the fact that production now depended far less on the physical efforts of the worker, than on our growing knowledge of effective methods of using labour and natural resources to ever greater advantage (the common “Cultural heritage” of the community), he insisted:

“That the distribution of cash credits to individuals shall be progressively less dependent upon employment. That is to say, the dividend shall progressively replace the wage and salary, as productive capacity increases per man hour.” 5

Douglas felt that the citizens of a country could be likened to shareholders in a gigantic “holding company”, and as such were entitled to share equally in all profits over and above the actual physical cost of production. He did not develop in detail the exact manner of financing this dividend, although one other early Social Credit writer6 suggested that it should be by a tax of some sort on Industry – possibly a tax on the credit used by it, equivalent to the interest now paid by Industry to the Banks for the Bank credit that it uses. Obviously the “single tax” proposals of Henry George could be very easily tied in with the Douglas “dividend” proposal.

(4) His proposal for a “Just” or compensated price. Unlike the “100% money” reformers, Douglas did not propose to eliminate the creation of new credit by banks to finance new production. On the contrary, he wished this to be the exclusive method of financing new production, though preferably through a public authority rather than through the private banking system:

“The credits required to finance production shall be supplied, not from savings, but by new credit relating to new production, and shall be recalled only in ratio of general depreciation to general appreciation”

Instead, therefore, of achieving balance by regulating the issue of credit, Douglas proposed to vary the consumer price level, and at the same time balance the rate of flow of industrial costs with consumer incomes, by paying a discount on all retail purchases (in effect, an inverted sales tax) so as to lower the price to the consumer.

“The greater part of the surplus production is capital production, and we have to find a method of restoring his money to the producer of capital goods as soon as they are produced, while only charging the consumer for them at the rate they are used up. The justification for this, of course, is that real credit is a measure of the rate of production, so that, if total production equals (B) capital goods plus (A) consumption goods, production costs are A+B, but true consumption costs are A+B/x, where x is the average life of real assets. If we are only going to charge the consumer true costs, we have to pay the producer B-B/x, representing the value of the capital goods, to enable him to carry on business. But if, in addition, he recovered the whole of his costs eventually from the public in prices, he would have recovered his costs twice over. Therefore it is necessary to reduce the price to the public by the same amount, B-B/x, that we repaid the producer of capital goods: that is to say, retail prices must bear the same ratio to total costs that consumption bears to production. 7

The above is a very clear statement of the problem Douglas is attempting to solve, though doubt remains in this writer's mind as to whether the Just Price proposal as put forward by Douglas in fact solves it. This question of the actual economic reform proposals that should be adopted in Canada at the present time will be discussed in Lesson 8. 8

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QUESTIONS:
1. List three basic areas of fault in the workings of our current economic system.
2. How far is an approach to reform made in each of these areas by
i. Henry George
ii Silvio Gesell
iii. Frederick Soddy
3. Is it possible to differentiate between the profits of business, and the unearned return that comes from ownership of land and natural resources?
4. What changes do advocates of “100% Reserve Banking” wish to see carried out in the commercial banking system?
5. Why is it claimed that 100% reserve banking can help prevent the trade cycle?
6. In what way does the philosophy of C.H.Douglas as to the purpose of an economic system, differ from that of earlier, “orthodox” economists such as Adam Smith? Do you agree with him?
7. What did Douglas mean by the “Common Cultural Heritage”? Is his idea of a “dividend” for every citizen similar to that of the “single tax” of Henry George.
8. What name did Douglas give to the device by which he intended that the flow of business costs would be matched with the flow of consumer incomes?


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FOR FURTHER READING:
Henry George: “Progress and Poverty”
Silvio Gesell: “The Natural Economic Order"
Frederick Soddy: “Wealth, Virtual Wealth and Debt”
Irving Fisher: “100% Money”
H. Hallatt; “The Hallatt Plan for economic democracy.” (his critical chapter on Social Credit on page 57 is worth study, although his comments on the A+B Theorem are very superficial.)
C.H.Douglas: “Economic Democracy”
“The Monopoly of Credit”
“Social Credit”
Arian Forrest Nevin: “National Economy: The Way to Abundance”



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Notes and Sources:
(1) Henry George: “Progress and Poverty” Robert Shalkenbach Foundation 1956, p.170.
(2) The history of the rise of the landowning class in Great Britain and its consequences to the rural worker who was turned into a propertyless urban factory worker, is excellently and scathingly dealt with in Part VII of Karl Marx's “Capital”. Marx, however, fails to make any distinction between normal business profit (return on the initiative, risk, and effort of the entrepreneur), and this unearned profit arising from monopolizing natural resources previously more widely distributed or shared in common. Consequently, he uses this evidence to incite hatred against both legitimate business profits, and misappropriation of the unearned return of rent on natural resources. This error is behind many of the policies – and errors – of Socialism.
(3) Soddy's analysis is generally followed in Lessons 2-5 of this course.
(4) This outline of the “Hallatt Plan” is taken from “Money, Master or Servant”, by George E. Creed. Although superficially attractive, the idea of interest free financing for public works does have the defect that it makes such works appear cheaper than they would be if market interest costs were taken into account. The public is in fact obliged by the government to work for an increase in the money supply, that is rightfully theirs already by virtue of its nature as title to part ownership of the Social Credit of the community.
(5) These paragraphs are part of the “Swanwick Principles” set out in full in C.H. Douglas, “Monopoly of Credit”, 1951 Ed. Pp 108, 117.
(6) C. Marshall Hattersley: “The Community's Credit” 1922 Ed. Pages 108, 117
(7) C.H. Douglas “the New and the Old Economics”, a reply to the criticisms of Professors Copland and Robbins, Section 5. Reprinted in “Extracts from Douglas” New Zealand Social Credit Association.
(8) A recent publication by Richard Cook, entitled “We Hold These Truths” gives a detailed proposal for a Dividend plan and control of the Banking system in the United States, foretells much of the economic disasters caused by speculation which have indeed come true, and adopts much of Douglas's philosophy and policies. A criticism is his assumption that Douglas's A+B theorem indicates that at all times and in all places, there is a deficiency of consumer purchasing power which can be made up by state issued Dividend money. In the writer's opinion, this is not necessarily always the case and his analysis at this point needs more refinement.