Social Credit Summarized

Frank Chodorov

[Reprinted from Land and Freedom, January-February 1937]

The Social Credit Plan is based upon the belief that "private finance, operating together with a monopolistic system of capital, causes poverty and depression by constantly increasing prices." This effect is super-induced by the bankers' practice of giving overdrafts that is, by making loans beyond what is justified by the assets of the borrower. Now, the borrower pays his laborers and creditors and stockholders (who pay their laborers, etc.) with this credit, which will then, in the form of money, come into the market for consumers' goods. But as the consumer's goods, which must be the ultimate result of the borrower's efforts, are not yet in the market, there is an increase of consumers' credits (money) without a corresponding increase of goods. Then prices must rise for the demand for goods in terms of money (credits) will increase. Thus is the consumer's dollar continually lessened in purchasing power.

Of course, we would eventually get the goods to the consumer, but could hardly lower prices thereby, since the desire of the banker for interest leads him to issue overdrafts with continuous abandon, thus generating an always rising rate of flow of credit. The flow, and the rate of it, are given considerable attention by Douglas, who says that credit flows out from the bank and back into it, via the monopolistic producer, who, having borrowed from the bank, and distributed his borrowings to his laborers and creditors, fixes his price to get back, in addition to a profit for himself, the amount of his loan, plus interest, for the banker. This goes back into the bank and then out again, swollen by overdrafts. Such is the flow of credit, and the rate of flow (rapidity of circulation of currency to the vulgar) is continually increasing faster than the production of goods.

So wages, salaries, and dividends, which Douglas speaks of as the forms of consumers' credits, are continually being weakened in purchasing power by the rise of prices. They cannot ever expand in purchasing power by the lowering of prices because even if no overdrafts were issued, capitalists would still fix prices to get back all the credits which they had paid out. And the normal increase in production to be expected in a progressive society would merely enhance the flow of credit controlled by the banker, for, Douglas says, a modern factory produces credit as really as it does tangible goods.

This last is a very interesting point. It is common in metaphysics, when philosophers make arguments with undemonstrable premises, to give such premises greater validity by first offering proofs of a sort, and then by declaring very vigorously that they are real that is, that people should have the same faith in their existence as I have in the existence of the chair on which I sit. Such a belief is the one of Plato that only mind is real that the chair is the result of an idea in the mind, rather than what most people find obvious, that the idea results from the sight and feel of the chair. To convey a sense of reality in ideas apparently unreal, great vigor and frequency of declaration are necessary, and Douglas does not spare himself in this when he confers upon what he calls Real Credit (the capitals are his) the dignity of an equal actuality with tangible wealth. It functions, he thinks, at least coordinately with, if not more importantly than the actual production of goods.

Real Credit (as distinguished from ordinary financial credit) is defined as a correct estimate of a nation's ability to produce during a given period. It is based on all the factors of production as they exist in that nation. If this is done by experts of publicly owned "People's Banks" who will issue financial credits in accordance with the limits of this estimate, controlling the rate of flow of credit for the people's good, then we can abolish poverty and depression, and create prosperity.

The method which these experts will follow is most intriguing. They will not only fix prices for the producer, but will require him to sett below cost, so that he will have to come to them to get the difference between the actually selling price and the price authorized by the bank. This plan is designed to give the bank complete control over the producer, whom its experts can punish by withholding the difference.

The People's Banks, one to each industry, are to be controlled in matters of broad policy, though not in detail, by the people themselves. Each worker will have an equal vote as to what purposes increases in production shall be devoted whether to capital, expansion, or for consumption goods for themselves. The experts will determine how much to lower or raise prices to secure the desired effect. If the people wish to heighten their standard of living, for example, prices should be lowered on consumption goods, and the experts will have to juggle prices until consumption goods are cheaper. Douglas thinks that this system will make for real democracy, for he believes that the people cannot judge of the technical questions with which politicians now merely confuse them, but that they are capable of determining what they want in their economic lives, if the issues are broad and simple enough.

The price-fixing is not to be according to the arbitrary opinion of the experts, but is to be based upon a definite formula the ratio of consumption credit to Real Credit. A proper fraction is supposed to always result, since Real Credit (the correct estimate of production in the future) will always outrun the consumption credit issued on present production, inasmuch as men working in social cooperation get an increasingly greater "unearned increment" (everything above what a single person could get entirely by himself), from the division of labor and the use of capital. Next year's production will always be greater than this year's if rising prices do not prevent the people from buying the goods which now pile up into surpluses.

The banks will make the profits (the present owners of businesses after paying all credits into the banks of their particular industries, will get only a flat rate of interest on an assessed valuation of their properties) as well as direct the industry, re-investing such profits in the industry These capitalizations of profits will be represented by interest bearing shares which the bank will hold on account for the workers, equally dividing the interest among them. Eventually, with the increase of the unearned increment, efficiency of production will rise to the point where a few workers will be able to supply all the desires of the people. By that time the constantly re-invested profits will supply the technologically unemployed population with the necessary purchasing power to keep the system running. Major Douglas expects that this happy consummation would come about not long after the adoption of his plan, for he thinks it probable that the potential productive power of modern society, if allowed to operate efficiently, is already equal to the full supply of men's wants with little labor. Moreover, it would not be possible under his system, to hold back invention for the purpose of saving private vested interests when everything would be controlled in the private interest. And men and money would be eagerly devoted to developing the direct use of solar energy when society would have the means to purchase its project, and evidently considers its success of prime importance to social economy.

I hope that all of the above is clear to the reader, but I doubt that he will easily master the subject from this brief summary. It is more likely that it will master him if he tries to grapple with it seriously. The author himself barely emerged from the study of it with his sanity, and his head is bald from tearing out his hair in a fine frenzy of confusion over the difficulties of "Credit Power and Democracy," Douglas' magnum opus. However, he has pulled through with sufficient strength to present the reader with the main elements of the Social Credit Plan of Douglas. If that reader is still uncertain what those main elements are, I will leave him with this final word : Douglas has had some popular success because he attacks a real and notorious evil, though a minor one, in the practice of bankers of issuing credit on false values, and because he promises something for nothing with a vengeance. His finer-spun theories are not at all understood by most of his followers, who are content with a Devil and a Paradise.