COMMITTEE ON MONETARY AND ECONOMIC REFORM
FREDERICK SODDY
- and -
THE DOCTRINE OF `VIRTUAL WEALTH'
- - - - -A PAPER PRESENTED TO THE 14TH ANNUAL CONVENTION
OF THE EASTERN ECONOMICS ASSOCIATION
BOSTON, MASS. MARCH 1988
- by -
J. MARTIN HATTERSLEY, Q.C., M.A., LL.B.,
FORMER PRESIDENT
ECONOMICS SOCIETY OF NORTHERN ALBERTA
EDMONTON, ALBERTA, CANADA
T5J 3S4: February 1988
INTRODUCTION
The study of Economics has never lacked its `heretics' - those who, from outside the academic specialty, have often enough brought to the subject a fresh viewpoint, inspired not so much by theory as by a practical observation of the realities of trade and commerce, and a keen sense of the human element in what is otherwise a rather abstract discipline.
Among these pioneers, few have been so distinguished, from the point of view of academic credentials in other fields, as Frederick Soddy. Soddy was a world renowned researcher in the study of the chemistry of radioactive materials. His studies with Rutherford at McGill University between 1902 and 1904 had added the word `isotope' to the vocabulary of chemistry, had disclosed the immense stores of energy contained within every atom, and had ultimately earned him a Professorship of Chemistry at Oxford University, and the 1921 Nobel Prize in chemistry, awarded him in 1922.
Soddy himself was inspired by his experiences of the first World War to develop great concern on a subject that concerns scientists perhaps more today than it did at that time - the possibility that his invention could be used for destruction. He trod new ground when he began to apply his scientific mind and method to the investigation of the economic forces that could cause this to be so. (1)
The most comprehensive summary of his economic thought is a book of remarkable originality, first published in 1926. Its title: `Wealth, Virtual Wealth and Debt'. Its subtitle - `The Solution to the Economic Paradox'.
Soddy's assertion of his rightness in a field beyond his normal academic speciality was not well received. One reason, no doubt, was that he was an outsider in a field where policy solutions recommended by orthodoxy - such as Britain's return to the gold standard in 1925 - were causing visible economic distress. Economics was at once searching for new ideas, and sensitive to the criticisms of self appointed `experts' (such as the new Social Credit movement (2)), whose ideas, while superficially attractive, lacked academic depth. A second and more fundamental reason, though, was that the intellectual rigor of this `outsider' spared no criticism even of those who were to be the more progressive thinkers of monetary reform. Not only Major C. H. Douglas, founder of `Social Credit', but pioneers of new thought within the economic fraternity of the stature of J. M. Keynes and Irving Fisher felt the sting of his pen. (3) It was simply not Soddy's mode of operation to compromise with the truth as he saw it, for the sake of winning academic allies. As a result he had few of them!
Thus was created the disappointment and bitterness of a man who fell between two stools. On the one hand, the branch of chemistry where his reputation and his qualifications lay now had less to attract his interest. The chemistry of radioactivity had been definitively explored and its research from the standpoint of chemistry, as distinct from physics, had lost much of its former glamour. On the other hand, in the realm of economics and monetary theory, where his work exhibited the genius and the scientific rigor of a true researcher, he had earned the reputation of a heretic and a crank. (4)
This paper has a simple and modest objective. It is to reintroduce a thinker whose reputation and whose research deserve greater respect than they have to now received. In a world where the "economic paradox" still seems some way from solution, Soddy's claim to have found the answer has gone largely ignored. Perhaps, after sixty years, we owe him a hearing.
FREDERICK SODDY
Frederick Soddy was born in 1877, the youngest son of a London merchant. He obtained a first class honours degree in chemistry at Merton College, Oxford, and after two more years spent in research, travelled to Canada and took a position as a demonstrator at McGill University - where it was his good fortune to meet and work with another expatriate Britisher, Ernest Rutherford. Between 1904 and 1914 he was a lecturer at the University of Glasgow, then a Professor at Aberdeen, finally becoming professor of Chemistry at Oxford University, a post he held until his retirement in 1936. He continued with research and publications into chemistry, mathematics and monetary reform until his death on September 22nd, 1956.
The result of his early research was a new theory on the causes of radioactive decay. His outstanding contribution to chemistry was his explanation, consistent with the periodic table of the elements, of the existence of elements of identical chemical properties, yet different atomic weights, and of a process by which these elements, depending on their origins, transmuted in a sequence ending ultimately in different isotopes of the element lead. By the end of the Great War, and the time of his move to Oxford, much of the mystery of the properties of radioactive elements had been unravelled through his researches. His pioneering work was recognized when he was honoured by being awarded the Nobel Prize for Chemistry, in 1922.
Standing, as he did, at the forefront of investigation into the nature of atomic structure, Soddy very early realized the enormity of the power that was contained within the atom. In a lecture in 1915 he visualised that atomic energy could "virtually provide anyone who wanted it with a private sun of his own." (5)
Unlike many of his contemporaries, however, who felt that it was the task of others to control the use of the fruits of scientific research, themselves morally neutral, he became deeply concerned at the destructive possibilities that lay in the abuse of his discoveries. Recognizing the place of energy in the creation of all wealth, and armed with the knowledge of an energy source a million times more powerful, weight for weight, than coal, he was appalled at the way in which the resourcefulness of science for destruction during World War I could not be mobilized, when the war was over, for peace and prosperity.
"We have to find out how it comes about that science, which, without economic exhaustion, provided the sinews of war for the most colossal and destructive conflict in history, with the manpower of the nations engaged in military service, has not yet abolished poverty and degrading conditions of living from our midst in the piping times of peace." (6)
Unlike many of his contemporaries, who embraced various forms of Socialism or Communism as a solution to the troubles of the times, Soddy saw in the money system the key to the restriction and the abuse of the planet's resources.
"The threatened collapse of our Western civilization has nothing to do with the political issues between capitalism and communism, but is the consequence of its false money system." (7)
WEALTH vs DEBT: ECONOMICS vs CHREMATISTICS
In turning to his actual analysis, I will be esentially following the outline of Professor Soddy's book `Wealth, Virtual Wealth and Debt' (George Allen & Unwin, 1926). I also highly recommend the recently published symposium `Frederick Soddy, 1877 - 1956' (D. Reidel Publishing Co., 1986, George B. Kauffman, Ed.), which contains much material not otherwise readily available, both on Soddy's life, his chemistry and his economics. Thaddeus Trenn's contributions to this symposium are of particular value to those interested in Soddy's economic views.
The first `new path' trodden by Soddy was to define the clear separation between `Wealth' - a physical phenomenon - and `Debt', which is a mathematical one. The science of the production of Wealth is the true economics. The handling of Debt is the science of `chrematistics' (from the Greek, `chrema': money).
"Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era." (8)"Economics, in a national sense, is concerned with wealth as what is produced by human beings in order to maintain their lives. Chrematistics, the science of wants and demands and of how they exchange one for another, is quite a distinct study, more plainly termed commerce." (9)
Economics, Soddy claims, has confused debt - a claim on wealth - for wealth itself. Modern economics has therefore woven for itself a hopeless tangle, in which money is counted as an asset - that is, as if it were wealth itself - whereas in reality it is a liability - an obligation of the community to provide wealth on demand. A particular result of this is that those who create and deal in money can receive rewards from the economic system as generous as if the money they had invented by the process of banking had been real wealth created by the same sort of human effort as is required, for instance, for the mining of gold.
"It is difficult or impossible to get a physical means of measuring wealth ... but this difficulty must not blind us to the palpable absurdities in conventional economics introduced by always measuring wealth by exchange-value or money price. This may easily result in what could only be regarded as a national calamity appearing to increase the national wealth, or what is in every respect a national blessing appearing to reduce it. Unnecessary middlemen and speculators may much increase the prices of commodities without any addition to the national wealth. Combines of producers and trusts for limiting output and raising prices may reduce the national wealth and increase its monetary value ... Such `services' as these, which are properly means of acquiring wealth at the expense of the community rather than producing it, are, of course, not physically necessary ingredients of wealth at all." (10)
DISCOVERY, ENERGY, DILIGENCE - THE FACTORS OF PRODUCTION
After separating, therefore, wealth from debt, the next step in solving the `economic paradox' of poverty in a world rich enough to satisfy mankind's basic wants with ease, is to survey the process by which wealth comes into being.
Starting with a scientist's view of the process of production, Soddy replaces the traditional `factors of production' of Adam Smith (Land, Labour and Capital), with an alternative three: Discovery, Natural Energy and Human Diligence.
Before wealth can be created by man, man must first find out the means by which to make his efforts valuable in producing wealth, by the process of Discovery. Of discovery, Soddy says:
"We find both in biological and human history, not continuity, but a succession of great discoveries ... which once made, do alter abruptly the whole future trend and mode of existence." (11)
On the subject of energy, of course, Soddy is an expert. He points out that the wealth mankind enjoys is a kind of `damming up' of the great outpouring of solar energy the world continually receives, so as to make it serve a purpose useful to man before it is dissipated in worthless heat. In modern times, energy stored chemically in past ages in sources such as coal and oil has also become available to enrich mankind: additionally, man has learned to use the material and chemical resources available to him to draw on energy more and more directly, using, for instance, less and less help from the animal and vegetable kingdoms, with a consequent saving of human effort.
Finally, not human labour (for labour generally speaking has been replaced in production by the energy of machines), but human diligence.
"The function of the worker, since the introduction of mechanical power, has totally changed in many industries, and in none is the change unimportant. More and more, he does not work in the physical sense, but is directing an inanimate source of power to do what, left alone, it could not do." (12)
Soddy points out that, though a discovery once made is made for all time, the production of wealth will always require contribution of the second and third factors. `Perpetual motion machines' do not exist. The machine and the use of power are levers which extend the range of human effort more and more - but never replace it entirely. Consequently, when an investor or speculator makes an income by, say, investing in debt or driving up the price of commodities, the only effect of such efforts is that the investor takes for himself some wealth that has been created by the effort of others. It is the economic power given to such persons to batten on those who do create wealth that causes the `economic paradox' of poverty in a world technically capable of creating sufficiency for all.
"Never was there an age in history so dowered as ours with all that could have sufficed for a noble and enduring civilization, whereas it is still to ancient civiliations we must go if we wish to find evidence of human effort and imagination being squandered on a national scale on something not strictly utilitarian in purpose. The most gigantic powers await our commands to provide us with all that we require, but we lead a harried, driven life, concerned for the most part with the immediate necessity of keeping the wolf from the door, and destroying our trade rivals." (13)
One particular distinction Soddy makes with regard to wealth is to distinguish "permanent wealth" from wealth that is consumed in the very act of being of value to mankind. "Permanent Wealth" is, for example, the plough. Consumable wealth is the food grown with the plough. While consumable wealth provides value by being consumed, the whole value of permanent wealth is that it should be consumed as slowly as possible, in the mean time making the output from human diligence that much the greater per unit of effort.
The particular importance of this permanent wealth (some would call it `capital', but Soddy avoids the term), is that it can command a rent, because of its value in the productive process, yet it cannot eliminate all human effort. Because capital is not a `perpetual motion machine', the creation of debt which claims interest in perpetuity as the price of such capital gives a mathematical illusion of perpetual income, that is not reflected by any physically attainable form of wealth. "Psychologically, the economic aim of the individual is, always has been, and probably always will be, to secure a permanent revenue independent of further effort, proof against the passage of time and the chance of circumstance, to support himself in old age and his family after him in perpetuity. He endeavours to do so by accumulating so much property in the heyday of his youth that he and his heirs may live on the interest on it in perpetuity afterwards. Economic and social history is the conflict of this human aspiration with the laws of physics, which make such a perpetuum mobile impossible, and reduces the problem merely to the method by which one individual may get another individual or the community into his debt and prevent repayment, so that the individual or community must share the produce of their efforts with their creditor." (14)
`VIRTUAL WEALTH' - THE BASIS OF THE VALUE OF MONEY
Money, then, is not wealth. From the point of view of the community, it is not an asset but a liability. It is a claim against the collective wealth of the community at that time on the market.
"Money is not wealth, even to the individual, but the evidence that the owner of the money has not received the wealth to which he is entitled, and that he can demand it at his own convenience. So that in a community, of necessity, the aggregate money, irrespective of its amount, represents the aggregate value of the wealth which the community prefers to be owed on these terms rather than to own."(15)
One of the characteristics of production is that producers of goods tend to specialize, so becoming the owners of quantities of goods of one particular type for which, after consuming a very modest quantity, they have little personal need. As consumers, however, these same producers need a wide diversity of goods made by other producers. The difference between the `wholesale' value to the producer of these unwanted goods, and the `retail' prices these goods will command from persons not in a position to manufacture them, is the justification for exchange, making use of money, and is the source of the value contained in the tokens used as the nation's money supply. The total of this value is the nation's `Virtual Wealth'. In effect, the size of the Virtual Wealth of a community is an index of the value to each member of the community of the presence of the community there - it is an index of the value of the `increment of association', and the purchasing power of the totalilty of the monetary stock of the community will always equal this total of Virtual Wealth.
"It is true that the nation must act, and continue indefinitely to act, as if it possessed more wealth than it does possess, by the aggregate purchasing power of its money, but the important thing is that this Virtual Wealth does not exist. It is an imaginary negative quantity - a deficit or debt of wealth, subject neither to the laws of conservation or thermodynamics... It is the quantity of goods that the community abstains from possessing that is definite, and the number of units this definite quantity is worth is all the money, whatever that all may be."It is the virtual wealth which measures the value of the purchasing power of money, and not money which measures the value of wealth."(16)
In ancient times, of course, the tokens used for money had real cost and it was reasonable to pay a price for their use. Mining gold, for instance, takes effort which must be rewarded. But the development of Banking has enabled Bank Credit (indistinguishable in effect from other forms of money, and identical in effect), to be created at the cost only of pen and ink, and yet reap a reward for its use in the form of an interest charge paid to Bankers, for a value given by the Community rather than by any effort the Banker has put out.
Soddy is open to criticism here. The Banker who extends credit by way of loan is indeed creating credit by manipulating figures on paper, but that credit comes back to the banking system by way of deposits of Bank Credit on which interest has to be paid by the Banker, or the whole system will collapse. Soddy would have been more accurate to tie in the creation of credit by banks with a process by which all those who use the Banking system and the consequent free access to the community's `Virtual Wealth', with the well known phenomenon by which `the rich get richer and the poor get poorer'.(17) Not only bankers profit from this, but all who receive interest on their `money in the Bank', or who can borrow from Banks cheaper than from public savings for investment purposes. All who do business with a Bank, whether it is as depositors obtaining cheap accounting and chequing services, or obtaining interest on money deposits available virtually on demand, or as borrowers enjoying a rate of interest less than that required to cause the investment of real `savings', are exploiters of the public's Virtual Wealth by this process. Perhaps this is a reason why the financially most sophisticated members of the public are so slow to recognize the problems the Banking system creates.
THE EFFECT OF MONEY CREATION - THE `J' CURVE
The argument has reached a point where we have a quantity of wealth of a certain value `on the market', ready to be exchanged for money from any buyer who is willing to purchase it at a price acceptable to the seller. How great this quantity is depends to some degree on the price level at which this wealth will be bought. If the price level shrinks, a consequence, say, of a limited supply of money tokens, goods may be taken off the market rather than sold below cost, and the Virtual Wealth will also shrink. Cartels, and all similar schames to `rig the market' by curtailing supply of a commodity have this effect. Increasing the money supply, however, does not necessarily increase Virtual Wealth. Given physical limits on how much wealth can be put on the market in a period of time, an increase in the price level will occur when those limits are reached.
Soddy also considers what is today called the phenomenon of the `J' curve. The total money supply circulates from consumers to business and then back from business to consumers, conveying effort by consumers into the business sector, and wealth from the business sector to consumers, in a continuous stream, constant if the quantity of money remains constant.
If production is to be increased, a period of time has to go by in which more effort is put into the system by consumers, before the products `in the pipeline' emerge at the other end. If this increased effort is financed by new credit - say an expansion of the money supply by a bank loan, then the result is an initial period of inflation - a greater supply of money is chasing a supply of goods that has not increased. More than that, this increased money supply is chasing a supply of goods that is actually diminished by the amount of resources diverted to creating the Permanent Wealth needed to sustain the new rate of production.
Solving this paradox is the `pons asinorum' of the economic process - the `Riddle of the Sphinx'(18). Given the potential to increase overall output of wealth by the extension of human ability through increased use of machinery and energy, what techniques are required to ensure that this increase takes place, without simply causing an increase in prices, a cycle of `boom' followed by recession, or other untoward events?
The key lies in the relationship to each other of three processes -
- The abstinence of consumers, and their spending on investment rather than current consumption,
- The formation of new capital assets, and
- A subsequent increase in the supply of money to absorb the new productive capacity.
If the interrelationship of these elements is correctly achieved, then increased output at stable prices will result. If, as is so often the case, capital expansion is attempted financed by new (Bank) credit creation, without any abstinence by the consuming public, the result is only an inflation of prices, followed by depression as the loans are repaid. "When the loans cease, consumption will not be increased, unless the new workers are continued. Since, before, the money in circulation sufficed to distribute the former flow of wealth, it is obvious that it must now be increased proportionately to distribute the increased flow, and this can be most easily be put into circulation by remission of taxation and paying for Govenment expenditure with the new money issued. If no new money is issued to purchase the wealth for consumption, the whole of the elaborate process is undone. The stocks cannot be sold, the extra wages, salaries, profits, dividends, etc. cannot be paid, the extra hands taken on must again be dismissed, and class hatred ... is the natural outcome." (20) "Bypassing of the consumer's mart may be effected in various ways, all alike, however, in requiring genuine abstinence from consumption. Someone on the way to the mart to purchase supplies must be induced to lend his money to the industrialist and abstain from his customary consumption to that extent. In either case, the manufacturer increases his production, takes on more workers and diminishes unemployment by passing out the money loaned as wages, etc. (19)
HIS OWN SUGGESTIONS
The totality of the policy suggestions that Soddy puts forward, based on the above analysis, is the following:
- The issue and withdrawal of money should be restored to the nation for the general good, and should entirely cease from providing a source of livelihood to private corporations. Money should not bear interest because of its existence, but only when it is genuinely lent by an owner who gives it up to the borrower. "The real evil is that we now have a concertina instead of a currency." (21)
- The value of money should not depend on the quantity of a single commodity, such as gold. The index number of the general price level, or its reciprocal, the purchasing power of money, should be maintained constant by regulating the total quantity of money in circulation, volume being varied in order to maintain the price level constant.
- The issue of money should be regulated by its purchasing power, so as to maintain its purchasing power constant.
- A very substantial part of the National Debt should be cancelled and the same sum of National Money issued to replace the credit created by the Banks.
- Banks must be compelled to keep reserves of `National Money' dollar for dollar for each dollar on deposit with them, except for deposits that are genuinely `invested', and not available to be used as money,
- The taxation system must be used to prevent the permanent accumulation of debts to individuals as a result of their capital investments. These should be amortized so as to prevent the creating of a permanent and unrepayable debt burden on the community.
Soddy suggests as a means of achieving this, a tax free return being allowed on investments that will be fully amortized over a limited period, whereas those of indefinite length will be taxed, the proceeds of the tax being used to buy up on the open market and discharge such debts as are not self liquidating. In such a way, the financial accounting for investment in capital will be brought into line with the physical reality that capital has a finite life, and depreciates.
CONCLUSION
To summarize the problems that Soddy identifies is to indicate how little mankind has learned in sixty years. If the National Debt was a burden in 1926, the figures of 1988 are far, far greater, and the percentage of National Product taken by debt charges is greater, directly leading to poverty and the curtailment of social programs. The fluctuation of the monetary mass and so the cycle of boom and recession is as bad as ever - the `governor' of money supply regulated by the Price Index has never been applied. The poverty of the poor of the world continues - it has been added to by crushing international debts, enforced in the interests of sound Banking by the International Monetary Fund. Nonetheless, the institutions of the Banking world are themselves threatened by massive loan defaults. Without a doubt, the living standards of the world, rich and poor alike, are far below what is technically feasible. Personally and nationally, it is obvious that `the debt problem' is largely to blame.
Yet the `science' of economics continues to operate as if the laws of today's banking are the only ones under which a money supply can be provided. And, like the tobacco companies, though the institutions of finance purvey much disinformation to the world as to what is and what is not `good' for us, the cancer the world suffers from is nonetheless real. Soddy's unpopularity, it appears, comes from the fact that he chose to play hardball in a setting where such a game was unexpected and unpopular. Says Soddy:
"It was indeed a revelation to the author, accustomed to think of the battle for liberty of thought in scientific matters as having been fought and won centuries ago at the time of Galileo and the Inquisition, to find that in economics, as distinct from physics, it has not yet been won at all... If economics were really a science, it would not need to protect itself from criticism by a conspiracy of silence. A responsible criticism would in any scientific subject be met with instant response, and not by the ostrich policy of burying the head in the sand in the hope that that will thereby choke the ears and throw dust in the eyes of the pursuer also." (22)
Perhaps the real challenge of this outsider to the economic world, now as then, is his demand that economics become a genuine scientific discipline, not swayed by fashions, but bowing to truth wherever it leads, regardless of the disapproval of vested interests, whether academic or commercial. Do economists have the courage? Without it, we represent, not a science, but a sham.
NOTES
1. Thaddeus J. Trenn: "The Central Role of Energy in Soddy's Approach" (Kauffman, Ed.,`Frederick Soddy (1877-1956)') p.1852. C. H. Douglas's "Economic Democracy" and "Credit Power and Democracy" were first published in 1920.
3. F. Soddy: `Wealth, Virtual Wealth and Debt', pp.80,88,255
4. An account of the reception of Soddy's ideas in the academic world is given by A. D. Cruickshank (`Soddy at Oxford') as Chapter 8 of `Frederick Soddy (1877-1956)', George B. Kauffman, Ed.
5. F. Soddy: Lecture to the Royal Institution, 15 May 1915
6. Ibid.(note 3),p.19
7. F. Soddy: `Money Reform as a preliminary to all reform', Birmingham, 1950, p.2
8. Ibid.(note 3), p.70
9. Ibid.(note 3), p.73
10. Ibid.(note 3), pp.64,65
11. Ibid.(note 3), p.36
12. Ibid.(note 3), p.60
13. Ibid.(note 3), p.65
14. Ibid.(note 3), pp.122,123
15. Ibid.(note 3), pp.137,138
16. Ibid.(note 3), pp.139,140
17. I have discussed this point at more length in my brief to the McDonald Commission: J. M. Hattersley, `A New Way Forward': Brief to the Royal Commission on Canada's Economic Prospects 1983, page 29.
18. Ibid.(note 3), Chapter XIII, p.223
19. Ibid.(note 3), p.235
20. Ibid.(note 3), p.241. A statistical analysis of changes in the price level in Canada in accordance with Soddy's analysis will be found in Appendix II to my brief to the MacDonald Royal Commission (note 17 above). This indicates a very high degree of correlation between an Index predicted from sales figures and money flows in the economy, and the recorded Consumer Price Index. This would seem to indicate the practicality of the converse process suggested by Soddy - of maintaining the price level stable by control of the volume of the supply of money and credit.
21. Ibid.(note 3), p.296
22. Ibid.(note 3), p.292
I have always regarded Douglas's proposals as an incomplete solution to the
problem he identified, leaving the existing banking system unchanged, but
instituting countermeasures to mitigate its ill effects.
The problem identified, particularly I believe in the "Monopoly of Credit",
is that when bank credit (new purchasing power) is created to finance
industrial expansion, the wages paid to those who carry out the expansion
will be spent before new products resulting from this expansion come on the
market. Hence a period of inflation (more purchasing power chasing an
existing quantity of goods, or even chasing a supply of goods that has been
reduced by the physical demands of the expansion).
When the goods produced from the expansion finally reach the market, the
incomes that should buy them have already been spent. Consequently, the "Can
produce but cannot sell" phenomenon we are all so familiar with. Orthodox
economics tries to solve this with even more capital expansion, with public
and private debt, and with wars (which provide employment and distribute
incomes without requiring payment for products).
Douglas proposed a "Just Price" mechanism, whereby a National Credit Office
would determine the extent of the need for purchasing power in the economy
to cover this "gap", and cause it to be inserted into the economy either by
a subsidy to reduce prices, or a "Dividend" to all citizens, so balancing
supply and demand.
I believe that when Douglas first identified the way in which typical
businesses create more costs to be charged into prices than the wages,
salaries and dividends they pay out to potential consumers, he did not think
of the many businesses which (because they are engaged in capital
production) distribute incomes to potential consumers without placing
consumer goods on the market - which, of course, is what creates the "gap"
in the first place. Consequently, he envisaged a National Dividend far
greater than it would in fact be credible to anticipate. This has bedevilled
the whole Social Credit movement ever since.
I attach a paper I gave some time ago on the thoughts of Professor Soddy
(who sympathized with Douglas, without agreeing with him) on the whole
subject. And, of course, there's no reason why a National Dividend could not
be paid to all citizens, through some device such as Henry George's "Single
Tax", or the taxation scheme that Soddy proposes in this paper. This would
reverse capitalism's existing technique of "enclosing the commons" and
leaving the proletariat with nothing to live on but what they can earn in
exchange for their labour.
Martin Hattersley, 5929-189 St.,
EDMONTON AB CANADA T6M 2J1
Phone & Fax: (780) 483-5442
e-mail <jmartinh@shaw.ca>
Poor donkey! A long pole won't bring the turnip closer!
The Social Credit dividend would increase incomes
without increasing prices nor salaries nor taxes
COMMITTEE ON MONETARY AND ECONOMIC REFORM
FREDERICK SODDY
- and -
THE DOCTRINE OF `VIRTUAL WEALTH'
- - - - -A PAPER PRESENTED TO THE 14TH ANNUAL CONVENTION
OF THE EASTERN ECONOMICS ASSOCIATION
BOSTON, MASS. MARCH 1988
- by -
J. MARTIN HATTERSLEY, Q.C., M.A., LL.B.,
FORMER PRESIDENT
ECONOMICS SOCIETY OF NORTHERN ALBERTA
EDMONTON, ALBERTA, CANADA
T5J 3S4: February 1988
INTRODUCTION
The study of Economics has never lacked its `heretics' - those who, from outside the academic specialty, have often enough brought to the subject a fresh viewpoint, inspired not so much by theory as by a practical observation of the realities of trade and commerce, and a keen sense of the human element in what is otherwise a rather abstract discipline.
Among these pioneers, few have been so distinguished, from the point of view of academic credentials in other fields, as Frederick Soddy. Soddy was a world renowned researcher in the study of the chemistry of radioactive materials. His studies with Rutherford at McGill University between 1902 and 1904 had added the word `isotope' to the vocabulary of chemistry, had disclosed the immense stores of energy contained within every atom, and had ultimately earned him a Professorship of Chemistry at Oxford University, and the 1921 Nobel Prize in chemistry, awarded him in 1922.
Soddy himself was inspired by his experiences of the first World War to develop great concern on a subject that concerns scientists perhaps more today than it did at that time - the possibility that his invention could be used for destruction. He trod new ground when he began to apply his scientific mind and method to the investigation of the economic forces that could cause this to be so. (1)
The most comprehensive summary of his economic thought is a book of remarkable originality, first published in 1926. Its title: `Wealth, Virtual Wealth and Debt'. Its subtitle - `The Solution to the Economic Paradox'.
Soddy's assertion of his rightness in a field beyond his normal academic speciality was not well received. One reason, no doubt, was that he was an outsider in a field where policy solutions recommended by orthodoxy - such as Britain's return to the gold standard in 1925 - were causing visible economic distress. Economics was at once searching for new ideas, and sensitive to the criticisms of self appointed `experts' (such as the new Social Credit movement (2)), whose ideas, while superficially attractive, lacked academic depth. A second and more fundamental reason, though, was that the intellectual rigor of this `outsider' spared no criticism even of those who were to be the more progressive thinkers of monetary reform. Not only Major C. H. Douglas, founder of `Social Credit', but pioneers of new thought within the economic fraternity of the stature of J. M. Keynes and Irving Fisher felt the sting of his pen. (3) It was simply not Soddy's mode of operation to compromise with the truth as he saw it, for the sake of winning academic allies. As a result he had few of them!
Thus was created the disappointment and bitterness of a man who fell between two stools. On the one hand, the branch of chemistry where his reputation and his qualifications lay now had less to attract his interest. The chemistry of radioactivity had been definitively explored and its research from the standpoint of chemistry, as distinct from physics, had lost much of its former glamour. On the other hand, in the realm of economics and monetary theory, where his work exhibited the genius and the scientific rigor of a true researcher, he had earned the reputation of a heretic and a crank. (4)
This paper has a simple and modest objective. It is to reintroduce a thinker whose reputation and whose research deserve greater respect than they have to now received. In a world where the "economic paradox" still seems some way from solution, Soddy's claim to have found the answer has gone largely ignored. Perhaps, after sixty years, we owe him a hearing.
FREDERICK SODDY
Frederick Soddy was born in 1877, the youngest son of a London merchant. He obtained a first class honours degree in chemistry at Merton College, Oxford, and after two more years spent in research, travelled to Canada and took a position as a demonstrator at McGill University - where it was his good fortune to meet and work with another expatriate Britisher, Ernest Rutherford. Between 1904 and 1914 he was a lecturer at the University of Glasgow, then a Professor at Aberdeen, finally becoming professor of Chemistry at Oxford University, a post he held until his retirement in 1936. He continued with research and publications into chemistry, mathematics and monetary reform until his death on September 22nd, 1956.
The result of his early research was a new theory on the causes of radioactive decay. His outstanding contribution to chemistry was his explanation, consistent with the periodic table of the elements, of the existence of elements of identical chemical properties, yet different atomic weights, and of a process by which these elements, depending on their origins, transmuted in a sequence ending ultimately in different isotopes of the element lead. By the end of the Great War, and the time of his move to Oxford, much of the mystery of the properties of radioactive elements had been unravelled through his researches. His pioneering work was recognized when he was honoured by being awarded the Nobel Prize for Chemistry, in 1922.
Standing, as he did, at the forefront of investigation into the nature of atomic structure, Soddy very early realized the enormity of the power that was contained within the atom. In a lecture in 1915 he visualised that atomic energy could "virtually provide anyone who wanted it with a private sun of his own." (5)
Unlike many of his contemporaries, however, who felt that it was the task of others to control the use of the fruits of scientific research, themselves morally neutral, he became deeply concerned at the destructive possibilities that lay in the abuse of his discoveries. Recognizing the place of energy in the creation of all wealth, and armed with the knowledge of an energy source a million times more powerful, weight for weight, than coal, he was appalled at the way in which the resourcefulness of science for destruction during World War I could not be mobilized, when the war was over, for peace and prosperity.
"We have to find out how it comes about that science, which, without economic exhaustion, provided the sinews of war for the most colossal and destructive conflict in history, with the manpower of the nations engaged in military service, has not yet abolished poverty and degrading conditions of living from our midst in the piping times of peace." (6)
Unlike many of his contemporaries, who embraced various forms of Socialism or Communism as a solution to the troubles of the times, Soddy saw in the money system the key to the restriction and the abuse of the planet's resources.
"The threatened collapse of our Western civilization has nothing to do with the political issues between capitalism and communism, but is the consequence of its false money system." (7)
WEALTH vs DEBT: ECONOMICS vs CHREMATISTICS
In turning to his actual analysis, I will be esentially following the outline of Professor Soddy's book `Wealth, Virtual Wealth and Debt' (George Allen & Unwin, 1926). I also highly recommend the recently published symposium `Frederick Soddy, 1877 - 1956' (D. Reidel Publishing Co., 1986, George B. Kauffman, Ed.), which contains much material not otherwise readily available, both on Soddy's life, his chemistry and his economics. Thaddeus Trenn's contributions to this symposium are of particular value to those interested in Soddy's economic views.
The first `new path' trodden by Soddy was to define the clear separation between `Wealth' - a physical phenomenon - and `Debt', which is a mathematical one. The science of the production of Wealth is the true economics. The handling of Debt is the science of `chrematistics' (from the Greek, `chrema': money).
"Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era." (8)"Economics, in a national sense, is concerned with wealth as what is produced by human beings in order to maintain their lives. Chrematistics, the science of wants and demands and of how they exchange one for another, is quite a distinct study, more plainly termed commerce." (9)
Economics, Soddy claims, has confused debt - a claim on wealth - for wealth itself. Modern economics has therefore woven for itself a hopeless tangle, in which money is counted as an asset - that is, as if it were wealth itself - whereas in reality it is a liability - an obligation of the community to provide wealth on demand. A particular result of this is that those who create and deal in money can receive rewards from the economic system as generous as if the money they had invented by the process of banking had been real wealth created by the same sort of human effort as is required, for instance, for the mining of gold.
"It is difficult or impossible to get a physical means of measuring wealth ... but this difficulty must not blind us to the palpable absurdities in conventional economics introduced by always measuring wealth by exchange-value or money price. This may easily result in what could only be regarded as a national calamity appearing to increase the national wealth, or what is in every respect a national blessing appearing to reduce it. Unnecessary middlemen and speculators may much increase the prices of commodities without any addition to the national wealth. Combines of producers and trusts for limiting output and raising prices may reduce the national wealth and increase its monetary value ... Such `services' as these, which are properly means of acquiring wealth at the expense of the community rather than producing it, are, of course, not physically necessary ingredients of wealth at all." (10)
DISCOVERY, ENERGY, DILIGENCE - THE FACTORS OF PRODUCTION
After separating, therefore, wealth from debt, the next step in solving the `economic paradox' of poverty in a world rich enough to satisfy mankind's basic wants with ease, is to survey the process by which wealth comes into being.
Starting with a scientist's view of the process of production, Soddy replaces the traditional `factors of production' of Adam Smith (Land, Labour and Capital), with an alternative three: Discovery, Natural Energy and Human Diligence.
Before wealth can be created by man, man must first find out the means by which to make his efforts valuable in producing wealth, by the process of Discovery. Of discovery, Soddy says:
"We find both in biological and human history, not continuity, but a succession of great discoveries ... which once made, do alter abruptly the whole future trend and mode of existence." (11)
On the subject of energy, of course, Soddy is an expert. He points out that the wealth mankind enjoys is a kind of `damming up' of the great outpouring of solar energy the world continually receives, so as to make it serve a purpose useful to man before it is dissipated in worthless heat. In modern times, energy stored chemically in past ages in sources such as coal and oil has also become available to enrich mankind: additionally, man has learned to use the material and chemical resources available to him to draw on energy more and more directly, using, for instance, less and less help from the animal and vegetable kingdoms, with a consequent saving of human effort.
Finally, not human labour (for labour generally speaking has been replaced in production by the energy of machines), but human diligence.
"The function of the worker, since the introduction of mechanical power, has totally changed in many industries, and in none is the change unimportant. More and more, he does not work in the physical sense, but is directing an inanimate source of power to do what, left alone, it could not do." (12)
Soddy points out that, though a discovery once made is made for all time, the production of wealth will always require contribution of the second and third factors. `Perpetual motion machines' do not exist. The machine and the use of power are levers which extend the range of human effort more and more - but never replace it entirely. Consequently, when an investor or speculator makes an income by, say, investing in debt or driving up the price of commodities, the only effect of such efforts is that the investor takes for himself some wealth that has been created by the effort of others. It is the economic power given to such persons to batten on those who do create wealth that causes the `economic paradox' of poverty in a world technically capable of creating sufficiency for all.
"Never was there an age in history so dowered as ours with all that could have sufficed for a noble and enduring civilization, whereas it is still to ancient civiliations we must go if we wish to find evidence of human effort and imagination being squandered on a national scale on something not strictly utilitarian in purpose. The most gigantic powers await our commands to provide us with all that we require, but we lead a harried, driven life, concerned for the most part with the immediate necessity of keeping the wolf from the door, and destroying our trade rivals." (13)
One particular distinction Soddy makes with regard to wealth is to distinguish "permanent wealth" from wealth that is consumed in the very act of being of value to mankind. "Permanent Wealth" is, for example, the plough. Consumable wealth is the food grown with the plough. While consumable wealth provides value by being consumed, the whole value of permanent wealth is that it should be consumed as slowly as possible, in the mean time making the output from human diligence that much the greater per unit of effort.
The particular importance of this permanent wealth (some would call it `capital', but Soddy avoids the term), is that it can command a rent, because of its value in the productive process, yet it cannot eliminate all human effort. Because capital is not a `perpetual motion machine', the creation of debt which claims interest in perpetuity as the price of such capital gives a mathematical illusion of perpetual income, that is not reflected by any physically attainable form of wealth. "Psychologically, the economic aim of the individual is, always has been, and probably always will be, to secure a permanent revenue independent of further effort, proof against the passage of time and the chance of circumstance, to support himself in old age and his family after him in perpetuity. He endeavours to do so by accumulating so much property in the heyday of his youth that he and his heirs may live on the interest on it in perpetuity afterwards. Economic and social history is the conflict of this human aspiration with the laws of physics, which make such a perpetuum mobile impossible, and reduces the problem merely to the method by which one individual may get another individual or the community into his debt and prevent repayment, so that the individual or community must share the produce of their efforts with their creditor." (14)
`VIRTUAL WEALTH' - THE BASIS OF THE VALUE OF MONEY
Money, then, is not wealth. From the point of view of the community, it is not an asset but a liability. It is a claim against the collective wealth of the community at that time on the market.
"Money is not wealth, even to the individual, but the evidence that the owner of the money has not received the wealth to which he is entitled, and that he can demand it at his own convenience. So that in a community, of necessity, the aggregate money, irrespective of its amount, represents the aggregate value of the wealth which the community prefers to be owed on these terms rather than to own."(15)
One of the characteristics of production is that producers of goods tend to specialize, so becoming the owners of quantities of goods of one particular type for which, after consuming a very modest quantity, they have little personal need. As consumers, however, these same producers need a wide diversity of goods made by other producers. The difference between the `wholesale' value to the producer of these unwanted goods, and the `retail' prices these goods will command from persons not in a position to manufacture them, is the justification for exchange, making use of money, and is the source of the value contained in the tokens used as the nation's money supply. The total of this value is the nation's `Virtual Wealth'. In effect, the size of the Virtual Wealth of a community is an index of the value to each member of the community of the presence of the community there - it is an index of the value of the `increment of association', and the purchasing power of the totalilty of the monetary stock of the community will always equal this total of Virtual Wealth.
"It is true that the nation must act, and continue indefinitely to act, as if it possessed more wealth than it does possess, by the aggregate purchasing power of its money, but the important thing is that this Virtual Wealth does not exist. It is an imaginary negative quantity - a deficit or debt of wealth, subject neither to the laws of conservation or thermodynamics... It is the quantity of goods that the community abstains from possessing that is definite, and the number of units this definite quantity is worth is all the money, whatever that all may be."It is the virtual wealth which measures the value of the purchasing power of money, and not money which measures the value of wealth."(16)
In ancient times, of course, the tokens used for money had real cost and it was reasonable to pay a price for their use. Mining gold, for instance, takes effort which must be rewarded. But the development of Banking has enabled Bank Credit (indistinguishable in effect from other forms of money, and identical in effect), to be created at the cost only of pen and ink, and yet reap a reward for its use in the form of an interest charge paid to Bankers, for a value given by the Community rather than by any effort the Banker has put out.
Soddy is open to criticism here. The Banker who extends credit by way of loan is indeed creating credit by manipulating figures on paper, but that credit comes back to the banking system by way of deposits of Bank Credit on which interest has to be paid by the Banker, or the whole system will collapse. Soddy would have been more accurate to tie in the creation of credit by banks with a process by which all those who use the Banking system and the consequent free access to the community's `Virtual Wealth', with the well known phenomenon by which `the rich get richer and the poor get poorer'.(17) Not only bankers profit from this, but all who receive interest on their `money in the Bank', or who can borrow from Banks cheaper than from public savings for investment purposes. All who do business with a Bank, whether it is as depositors obtaining cheap accounting and chequing services, or obtaining interest on money deposits available virtually on demand, or as borrowers enjoying a rate of interest less than that required to cause the investment of real `savings', are exploiters of the public's Virtual Wealth by this process. Perhaps this is a reason why the financially most sophisticated members of the public are so slow to recognize the problems the Banking system creates.
THE EFFECT OF MONEY CREATION - THE `J' CURVE
The argument has reached a point where we have a quantity of wealth of a certain value `on the market', ready to be exchanged for money from any buyer who is willing to purchase it at a price acceptable to the seller. How great this quantity is depends to some degree on the price level at which this wealth will be bought. If the price level shrinks, a consequence, say, of a limited supply of money tokens, goods may be taken off the market rather than sold below cost, and the Virtual Wealth will also shrink. Cartels, and all similar schames to `rig the market' by curtailing supply of a commodity have this effect. Increasing the money supply, however, does not necessarily increase Virtual Wealth. Given physical limits on how much wealth can be put on the market in a period of time, an increase in the price level will occur when those limits are reached.
Soddy also considers what is today called the phenomenon of the `J' curve. The total money supply circulates from consumers to business and then back from business to consumers, conveying effort by consumers into the business sector, and wealth from the business sector to consumers, in a continuous stream, constant if the quantity of money remains constant.
If production is to be increased, a period of time has to go by in which more effort is put into the system by consumers, before the products `in the pipeline' emerge at the other end. If this increased effort is financed by new credit - say an expansion of the money supply by a bank loan, then the result is an initial period of inflation - a greater supply of money is chasing a supply of goods that has not increased. More than that, this increased money supply is chasing a supply of goods that is actually diminished by the amount of resources diverted to creating the Permanent Wealth needed to sustain the new rate of production.
Solving this paradox is the `pons asinorum' of the economic process - the `Riddle of the Sphinx'(18). Given the potential to increase overall output of wealth by the extension of human ability through increased use of machinery and energy, what techniques are required to ensure that this increase takes place, without simply causing an increase in prices, a cycle of `boom' followed by recession, or other untoward events?
The key lies in the relationship to each other of three processes -
- The abstinence of consumers, and their spending on investment rather than current consumption,
- The formation of new capital assets, and
- A subsequent increase in the supply of money to absorb the new productive capacity.
If the interrelationship of these elements is correctly achieved, then increased output at stable prices will result. If, as is so often the case, capital expansion is attempted financed by new (Bank) credit creation, without any abstinence by the consuming public, the result is only an inflation of prices, followed by depression as the loans are repaid. "When the loans cease, consumption will not be increased, unless the new workers are continued. Since, before, the money in circulation sufficed to distribute the former flow of wealth, it is obvious that it must now be increased proportionately to distribute the increased flow, and this can be most easily be put into circulation by remission of taxation and paying for Govenment expenditure with the new money issued. If no new money is issued to purchase the wealth for consumption, the whole of the elaborate process is undone. The stocks cannot be sold, the extra wages, salaries, profits, dividends, etc. cannot be paid, the extra hands taken on must again be dismissed, and class hatred ... is the natural outcome." (20) "Bypassing of the consumer's mart may be effected in various ways, all alike, however, in requiring genuine abstinence from consumption. Someone on the way to the mart to purchase supplies must be induced to lend his money to the industrialist and abstain from his customary consumption to that extent. In either case, the manufacturer increases his production, takes on more workers and diminishes unemployment by passing out the money loaned as wages, etc. (19)
HIS OWN SUGGESTIONS
The totality of the policy suggestions that Soddy puts forward, based on the above analysis, is the following:
- The issue and withdrawal of money should be restored to the nation for the general good, and should entirely cease from providing a source of livelihood to private corporations. Money should not bear interest because of its existence, but only when it is genuinely lent by an owner who gives it up to the borrower. "The real evil is that we now have a concertina instead of a currency." (21)
- The value of money should not depend on the quantity of a single commodity, such as gold. The index number of the general price level, or its reciprocal, the purchasing power of money, should be maintained constant by regulating the total quantity of money in circulation, volume being varied in order to maintain the price level constant.
- The issue of money should be regulated by its purchasing power, so as to maintain its purchasing power constant.
- A very substantial part of the National Debt should be cancelled and the same sum of National Money issued to replace the credit created by the Banks.
- Banks must be compelled to keep reserves of `National Money' dollar for dollar for each dollar on deposit with them, except for deposits that are genuinely `invested', and not available to be used as money,
- The taxation system must be used to prevent the permanent accumulation of debts to individuals as a result of their capital investments. These should be amortized so as to prevent the creating of a permanent and unrepayable debt burden on the community.
Soddy suggests as a means of achieving this, a tax free return being allowed on investments that will be fully amortized over a limited period, whereas those of indefinite length will be taxed, the proceeds of the tax being used to buy up on the open market and discharge such debts as are not self liquidating. In such a way, the financial accounting for investment in capital will be brought into line with the physical reality that capital has a finite life, and depreciates.
CONCLUSION
To summarize the problems that Soddy identifies is to indicate how little mankind has learned in sixty years. If the National Debt was a burden in 1926, the figures of 1988 are far, far greater, and the percentage of National Product taken by debt charges is greater, directly leading to poverty and the curtailment of social programs. The fluctuation of the monetary mass and so the cycle of boom and recession is as bad as ever - the `governor' of money supply regulated by the Price Index has never been applied. The poverty of the poor of the world continues - it has been added to by crushing international debts, enforced in the interests of sound Banking by the International Monetary Fund. Nonetheless, the institutions of the Banking world are themselves threatened by massive loan defaults. Without a doubt, the living standards of the world, rich and poor alike, are far below what is technically feasible. Personally and nationally, it is obvious that `the debt problem' is largely to blame.
Yet the `science' of economics continues to operate as if the laws of today's banking are the only ones under which a money supply can be provided. And, like the tobacco companies, though the institutions of finance purvey much disinformation to the world as to what is and what is not `good' for us, the cancer the world suffers from is nonetheless real. Soddy's unpopularity, it appears, comes from the fact that he chose to play hardball in a setting where such a game was unexpected and unpopular. Says Soddy:
"It was indeed a revelation to the author, accustomed to think of the battle for liberty of thought in scientific matters as having been fought and won centuries ago at the time of Galileo and the Inquisition, to find that in economics, as distinct from physics, it has not yet been won at all... If economics were really a science, it would not need to protect itself from criticism by a conspiracy of silence. A responsible criticism would in any scientific subject be met with instant response, and not by the ostrich policy of burying the head in the sand in the hope that that will thereby choke the ears and throw dust in the eyes of the pursuer also." (22)
Perhaps the real challenge of this outsider to the economic world, now as then, is his demand that economics become a genuine scientific discipline, not swayed by fashions, but bowing to truth wherever it leads, regardless of the disapproval of vested interests, whether academic or commercial. Do economists have the courage? Without it, we represent, not a science, but a sham.
NOTES
1. Thaddeus J. Trenn: "The Central Role of Energy in Soddy's Approach" (Kauffman, Ed.,`Frederick Soddy (1877-1956)') p.1852. C. H. Douglas's "Economic Democracy" and "Credit Power and Democracy" were first published in 1920.
3. F. Soddy: `Wealth, Virtual Wealth and Debt', pp.80,88,255
4. An account of the reception of Soddy's ideas in the academic world is given by A. D. Cruickshank (`Soddy at Oxford') as Chapter 8 of `Frederick Soddy (1877-1956)', George B. Kauffman, Ed.
5. F. Soddy: Lecture to the Royal Institution, 15 May 1915
6. Ibid.(note 3),p.19
7. F. Soddy: `Money Reform as a preliminary to all reform', Birmingham, 1950, p.2
8. Ibid.(note 3), p.70
9. Ibid.(note 3), p.73
10. Ibid.(note 3), pp.64,65
11. Ibid.(note 3), p.36
12. Ibid.(note 3), p.60
13. Ibid.(note 3), p.65
14. Ibid.(note 3), pp.122,123
15. Ibid.(note 3), pp.137,138
16. Ibid.(note 3), pp.139,140
17. I have discussed this point at more length in my brief to the McDonald Commission: J. M. Hattersley, `A New Way Forward': Brief to the Royal Commission on Canada's Economic Prospects 1983, page 29.
18. Ibid.(note 3), Chapter XIII, p.223
19. Ibid.(note 3), p.235
20. Ibid.(note 3), p.241. A statistical analysis of changes in the price level in Canada in accordance with Soddy's analysis will be found in Appendix II to my brief to the MacDonald Royal Commission (note 17 above). This indicates a very high degree of correlation between an Index predicted from sales figures and money flows in the economy, and the recorded Consumer Price Index. This would seem to indicate the practicality of the converse process suggested by Soddy - of maintaining the price level stable by control of the volume of the supply of money and credit.
21. Ibid.(note 3), p.296
22. Ibid.(note 3), p.292
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The circulation of money
in a Social Credit system
Lesson 7: The history of the banking control in the United States
The Social Credit proposals explained in 10 lessons
Lesson 5: The chronic shortage of puchasing power
The social dividend to every citizen
Today, goods are put up for sale at certain prices. People who have money buy these goods by passing over the counter the required sum. This method allows those who have money to buy the goods that they want and need.
Now, Social Credit would in no way change this method of distributing goods. The method is flexible and good — provided, of course, that individuals who have needs also have the purchasing power to choose and buy the goods which would fill these needs.
Purchasing power in the hands of those who have needs and wants: it is precisely here that the present system is defective, and it is this defect that Social Credit would correct.
The money distributed in the form of wages, profits, and industrial dividends constitutes purchasing power for those who receive these various allotments. But there are a few flaws in the present system:
1. Industry never distributes purchasing power at the same rate that it generates prices.
2. The production system does not distribute purchasing power to everyone. It distributes it only to those who are employed in production.
And they still hesitate to change the wheel!
Even if the banks charged no interest, at any given moment, the amount of money available to the community as purchasing power is never sufficient to buy back the total production made by industry.
The economists maintain that production automatically finances consumption; that is to say, that the wages and salaries distributed to the consumers are sufficient to buy all the available goods and services. But facts prove just the opposite. Scottish engineer Clifford Hugh Douglas was the first to demonstrate this chronic shortage of purchasing power. He explained it this way:
A cannot buy A+B
The producer must include all his production costs in the price of his product. The wages distributed to the employees (which for convenience's sake can be labeled "A" payments) are only one part of the cost price of the product. The producer has other costs besides wage costs (which are labeled "B" payments), that are not distributed in wages and salaries, such as the payments for raw materials, taxes, banking charges, depreciation charges (to replace machinery), etc.
The retail price of the product must include all the costs: wages (A) and other payments (B). So the retail price of the product must be at least A + B. Then, it is obvious that the wages (A) cannot buy the sum of all the costs (A + B). So there is a chronic shortage of purchasing power in the present system.
There are more reasons for this gap between prices and purchasing power: When a finished good is put on the market, it comes with a price attached to it. But part of the money included in this price was distributed perhaps six months or a year ago, or even more. Another part will be distributed only once the good is sold, and the merchant takes out his profit. Another part will perhaps be distributed in ten years, when worn machinery — of which wear is included as an expense in the price — is replaced by new machinery, etc.
Then there are those individuals who receive money, and who do not spend it. This money is included in the prices, but it is not in the purchasing power of those who need goods.
The repayment of short-term bank loans, and the present fiscal system, increase the gap between the prices and the purchasing power. Hence the accumulation of goods, unemployment, and all that ensues.
Some people might say that the businesses paid with "B" payments (those that supplied the raw material, machinery, etc.) then paid wages to their own employees, and part of these "B" payments therefore become "A" payments. This changes nothing of what has been said before: this is simply a wage distributed in another step of production, and this "A" wage cannot be distributed without being included into a price, which cannot be less than A + B; the gap is still there.
If you try to increase wages and salaries, the wage increases will automatically be included in the prices, and it will accomplish nothing. (Like the donkey on the cartoon running after the turnip.) To be able to buy all of the production, an additional income is needed coming from a source other than wages and salaries, an income at least equivalent to B. This is what the Social Credit dividend would do, being given every month to every citizen in the country. (This dividend would be financed with new money created by the nation, and not by the taxpayers' money.)
Poor donkey! A long pole won't bring the turnip closer!
The Social Credit dividend would increase incomes
without increasing prices nor salaries nor taxes
What has kept the system going
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.
Progress replaces the need
for human labour
The second flaw in the present system is that the production system does not distribute purchasing power to everyone. It distributes it only to those who are employed in production. And the more the production comes from the machine, the less it comes from human labour. Production even increases, whereas required employment decreases. So there is a conflict between progress, which eliminates the need for human labour, and the system, which distributes purchasing power only to the employed.
Yet, everybody has the right to live. And everybody is entitled to the basic necessities of life. Earthly goods were created by God for all men, and not only for those who are employed, or employable.
That is why Social Credit would do what the present system is not doing. Without in any way disturbing the system of reward for work, it would distribute to every individual a periodical income, called a "social dividend" — an income tied to the individual as such, and not to employment.
Earthly goods created for all
This is the most direct and concrete means to guarantee to every human being the exercise of his fundamental right to a share in the goods of the earth. Every person possesses this right — not as an employee in production, but simply as a human being.
"Material goods have been created by God to meet the needs of all men, and must be at the disposal of all of them, as justice and charity require.
"Every man indeed, as a reason-gifted being, has, from nature, the fundamental right to make use of the material goods of the earth, though it is reserved to human will and the juridical forms of the peoples to regulate, with more detail, the practical realization of that right.
"Such an individual right cannot, by any means, be suppressed, even by the exercise of other unquestionable and recognized rights over natural goods.
"The economic wealth of a nation does not properly consist in the abundance of goods judged by a sheer material computation of their worth, but it consists in what such an abundance does really and effectively mean and provide as a sufficient material basis for a fair personal development of its members.
"If such a just distribution of goods were not to be effected or just imperfectly ensured, the true end of the national economy would not be achieved, opulent though the abundance of available goods might be, since the people would not be rich, but poor, as it would not be invited to share in that abundance.
"Obtain, on the contrary, that this just distribution be efficiently realized on a durable basis, and you will see a people, though with less considerable goods at its disposal, become economically sound. "
The Pope said that it is up to the peoples themselves, through their laws and regulations, to choose the methods capable of allowing each man to exercise his right to a share in the earthly goods. The Social Credit dividend to all would achieve this. No other proposed system has been, by far, so effective, not even our present social security laws.
Why a dividend to all
— A social dividend to all? But a dividend presupposes a productive-invested capital!
Precisely! It is because all members of society are co-capitalists of a real and immensely productive capital.
We said above, and we could never repeat it enough, that financial credit is, at birth, the property of all of society. It is so because it is based on real credit, on the country's production capacity. This production capacity is made up partially of work, and the competence of those who also take part in production. But it is mainly made up of other elements which are the property of all.
There are, first of all, natural resources, which are not the production of any man; they are a gift from God, a free gift that must be at the service of all. There are also all the inventions made, developed, and transmitted from one generation to the next. It is the biggest production factor today. No man can claim to be the only owner of progress, which is the fruit of many generations.
No doubt that one needs men of our present times to make use of this progress — and they are entitled to a reward: they get it in remuneration: wages, salaries, etc. But a capitalist who does not personally take part in the industry where he invested his capital is entitled to a share of the result just the same, because of his capital.
The largest real capital of modern production is, in fact, the sum total of the progressive inventions, i.e. discoveries, which today give us more goods with less work. And since all human beings are, on an equal basis, coheirs of this immense capital that is always increasing, all are entitled to a share in the fruits of production.
The employee is entitled to this dividend and to his wage or salary. The unemployed person has no wage or salary, but is entitled to this dividend, which we call social, because it is the income from a social capital.
We have just shown that the Social Credit dividend is based on two things: the inheritance of natural resources, and the inventions from past generations. This is exactly what Pope John Paul II wrote in 1981 in his Encyclical letter Laborem Exercens on human work (n. 13):
"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 labor of others."
The folly of full employment
To speak of full employment, that is of universal employment, is to make a contradiction with the pursuit of progress in the techniques and processes of production. New and more perfect machines are not introduced to tie man to employment, nor are new sources of energy tapped for this end, but rather they are brought into production for the purpose of liberating man from work.
But, alas, we seem to have lost sight of ends. We are confusing means and ends, we mistake the former for the latter. This is a perversion, which infects our whole economic life and which makes it impossible for men to enjoy the logical rewards of progress to the full.
Industry does not exist to give employment, but to furnish products, goods. If it succeeds in furnishing such goods, then it has accomplished its purpose, met its end. And the more completely it meets this end with the minimum of time and the minimum employment of human hands, the more perfect it is.
Is Mrs. Jones going to bemoan the fact that she now has more time to do what she pleases? Or is Mr. Jones going to search for another type of work to replace that from which his wife has been freed? Certainly not. Neither one is that stupid.
But we do find such stupidity running rampant in our social and economic life, for the system makes progress penalize the individual, instead of bringing him relief, in that it persists in tying purchasing power, the distribution of money, to employment and employment alone — employment in production. Money comes only as a recompense for effort and labour in production.
It is true that production distributes money to those who are employed in the work of producing. But this is as a means, and not as an end. The purpose of production is not to supply money, but to furnish goods and services. And if production is able to replace twenty salaried individuals by the introduction of one machine, it has not in any way thwarted its true purpose. And if it could furnish all the production necessary for humans, and not distribute one cent of money, it would still be meeting the end for which it exists: to furnish goods and services.
When purchasing power disappears
In freeing men from labour, industry should certainly receive the same gratitude which Mr. Jones received from his wife when he liberated her from hours of work by purchasing an automatic washing machine for her.
But how can a man say "thank you" when he has been liberated from work by a machine, when he finds to his consternation that he has no money? (See the cartoon on the previous page, where workers are laid off and replaced by a robot.) This is precisely where our economic system has become defective, in that it has not adapted its financial mechanism to its productive mechanism.
In the measure that industry or production passes out of human hands, so too should purchasing power, in the form of money, be channeled to consumers through some other means than just recompense for employment. In other words, the financial system should harmonize with production, not only with respect to volume, but also with respect to the manner in which it is distributed. If production is abundant, then money should be abundant. If production is liberated from human labour, then money should be liberated and separated from employment.
Money is an integral part of the financial system, and not a part of the production system, strictly speaking. When the production system finally reaches a point where it can distribute goods without the aid of salaried individuals, then too the financial system should reach the point where purchasing power can be distributed by some other means than salaries.
If such is not the case, it is because, unlike the production system, the financial system has not adapted itself to progress. And it is precisely this difference which has given rise to grave problems, when in fact progress should make all problems of such a nature disappear.
Replacing men by machines in production should lead to the enrichment of men, to their deliverance from purely material worries and cares, permitting them to give themselves over to human pursuits other than those which are related solely to the economic function. If, on the contrary, such a substitution leads to privation, it is because we have refused to adapt the financial system to this progress.
Technology should serve every man
In 1850, manufacturing as we know it today was barely started, with man doing 20% of the work, animals 50%, and machines accounting for only 30%. By 1900, man was doing only 15%, animals 30%, and machines 55%. By 1950, man was doing only 6%, and machines the rest — 94%. (The animals have been freed!)
In 1964, a report was presented to the President of the United States, signed by 32 signatories, including Mr. Gunnar Myrdal, Swedish-born economist, and Dr. Linus Pauling, winner of the Nobel Prize, entitled "Social Chaos in Automation". This report said in brief that "the U.S., and eventually the rest of the world, would soon be involved in a 'revolution' which promised unlimited output… by systems of machines which will require little co-operation from human beings. Consequently, action must be taken to ensure incomes for all men, whether or not they engage in what is commonly reckoned as work."
In his book The End of Work, U.S. author Jeremy Rifkin quotes a recent Swiss study which said that "in thirty years from now, less than 2% of the present workforce will be enough to produce the totality of the goods that people need." Three out of every four workers — from retail clerks to surgeons — will eventually be replaced by computer-guided machines.
If the rule that limits the distribution of income to those who are employed is not changed, society is heading for chaos. It would be plain ludicrous to tax 2% of workers to support 98% of unemployed people. We definitely need a source of income that is not tied to employment. The case is clearly made for the Social Credit dividend.
Full employment is materialistic
If we must blindly persist in keeping everyone, men and women alike, employed in production, even though the production to meet basic needs is made with less and less human labour already, then new jobs, which are completely useless, must be created. And in order to justify these useless jobs, new artificial needs must be created, through an avalanche of advertisements, so that people will buy products they do not really need. This is what is called "consumerism".
Likewise, products will be manufactured to last as short a time as possible, with the intent of selling more of them and making more money, which brings about an unnecessary waste of natural resources, and also the destruction of the environment. Also, we persist in maintaining jobs that require no creative efforts whatever, jobs that require only mechanical efforts, jobs that could well be done by machines, jobs where the employee has no chance of developing his personality. But, however mind-destroying this job is, it is the condition for the worker to obtain money, the licence to live.
Thus, for all wage-earners, the meaning of their jobs comes down to this: they go to work to get the cash to buy the food to get the strength to go to work to get the cash to buy the food to get the strength to go to work... and so on, until retiring age, if they do not die before. Here is a meaningless life, where nothing differentiates man from an animal.
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Free activities
What differentiates man from an animal is precisely that man has not only material needs, but also cultural and spiritual needs. As Jesus said in the Gospel: "Not on bread alone does man live, but in every word that proceeds from the mouth of God" (Deuteronomy 8:3.). So to force man to spend all his time in providing for his material needs is a materialistic philosophy, since it denies that man has also a spiritual dimension and spiritual needs.
But, then, if man is not employed in a paid job, what will he do with his spare time? He will spend it on free activities, activities of his own choosing. It is precisely in his leisure time that man can really develop his personality, develop the talents that God gave him, and use them wisely.
Moreover, it is during their leisure time that a man and a woman can take care of their religious, social, and family duties: raising their family, practising their Faith (to know, love, and serve God), and help their brothers and sisters in Christ. Raising children is the most important job in the world. Yet because the mother, who stays at home to raise her children, receives no salary, many will say that she does nothing, that she does not work! (Ask any stay-at-home mother if she does not work!)
To be freed from the necessity of working to produce the necessities of life does not presume growing idleness. It simply means that the individual would be placed in the position where he could participate in the type of activity which appeals to him. Under a Social Credit system, there would be an outburst of creative activity. For example, the greatest inventions, and the best works of art, have been made during leisure time. As C. H. Douglas said:
"Most people prefer to be employed, but on things they like rather than on the things they don't like to be employed upon. The proposals of Social Credit are in no sense intended to produce a nation of idlers... Social Credit would allow people to allocate themselves to those jobs to which they are suited. A job you do well is a job you like, and a job you like is a job you do well."
Full employment is outmoded
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| John Paul II |
This exactly what Pope John Paul II said on November 18, 1983, when he received in audience the participants in a national conference sponsored by the Italian Episcopal Conference's Commission for Social Problems and Work. Here are excerpts from the Pope's address:
"The primary foundation of work is in fact man himself... Work is for man and not man for work... Furthermore, we cannot fail to be concerned about the opinions of those who today hold that discussion of a more intense participation is now outmoded and useless, and demand that human subjectivity be realized in so-called free time. It does not seem just, in fact, to oppose the time dedicated to work to the time that is free of work, in so far as all man's time must be viewed as a marvellous gift of God for overall and integral humanization. I am nevertheless convinced that free time deserves special attention because it is the time when people can and must fulfil their family, religious, and social obligations. Rather, this time, in order to be liberating and useful socially, is spent with mature ethical awareness in a perspective of solidarity, which is also expressed in forms of generous volunteer services." (Taken from L'Osservatore Romano, weekly edition in English, January 9, 1984, p. 18.)
Alain Pilote
Lesson 6: Money and prices – The compensated discount
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