A critical and econometrical study in "social credit"

330.18 : 332 : 330.115

(378.245.2=20 + (048.6) = 089.2!(492.6l)„1951.10.17"

A CRITICAL AND ECONOMETRICAL STUDY

IN "BOQAL CREDIT"

A CRITICAL AND ECONOMETRICAL STUDY

IN '^SOCIAL CREDIT! .

[ BI2LIOTHrtK

JTECHNISCHt MOGtSCHOOL

P R O E F S C H R I F T

TER VERKRIJGING VAN DE GRAAD VAN DOCTOR IN DE TECHNISCHE WETENSCHAP AAN DE TECHNISCHE HOGESCHOOL TE DELFT, KRACHTENS ARTIKEL 2 VAN HET KONINKLIJK BESLUIT VAN 16 SEPTEMBER 1927, STAATSBLAD NR 310 EN OP GEZAG VAN DE RECTOR MAGNIFICUS DR O. BOTTEMA, H O O G L E R A A R I N . D E A F D E L I N G D E R ALGEMENE WETENSCHAPPEN, VOOR EEN COMMISSIE UIT DE SENAAT TE VERDEDIGEN WOENSDAG 17 OCTOBER 1951 TE 16 UUR DOOR

WILLEM P E T R U S R O E L O F S GEBOREN TE AMSTERDAM

DIT PROEFSCHRIFT IS GOEDGEKEURD DOOR DE PROMOTOREN PROF. DR J.A. VERAART EN PROF. DR H. BREMEKAMP

To the Memory of the

Rt, Hon. William Aberhart,

First Social Credit Premier of Alberta. To the People and the Government oj Alberta,

Stubbornly Fighting Money-Power. To my Parents.

To my Wife.

To the Memory of my War-Time "Foster-Father", Mr. G. H. Schoonderbeek, Victim of the I^azis. To my War-Time "Foster-Mother",

C O N T E N T S

page

Chapter 1. Introduction» 1 Chapter 2 . Money. 6 Chapter 3 . Investment. 11 Chapter 4 . The Shortage of Purchasing Power i n the Hands

of the P u b l i c . 19 Chapter 5. The J u s t P r i c e . 31 Chapter 6. The Inducement t o I n v e s t . 39

Chapter 7. C r e d i t for Consumption. 47 Chapter 8. S t a b i l i z a t i o n of the P r i c e Level. 56

Chapter 9. Some C o n s i d e r a t i o n s on the Rate of I n t e r e s t . 64

Chapter 10. A P r o f i t - l i m i t i n g Tax. 70 Chapter 1 1 . A Few I n t e r n a t i o n a l A s p e c t s . 77 Chapter 12. TlNBER(ffN's Short-term Model. 79 Chapter 13. TINBERGEN and DE WOLFF's Medium-term Model. 94

Chapter 14. Summary and Conclusions. 106

R e f e r e n c e s . 108 Index. 110 Besumo kaj Kcmkludoj. 121

C H A P T E R 1

I N T R O D U C T I O N

Since the f i r s t World War a new kind of economic ' h e r e s y ' , launched by Major C. H. DOUGLAS and now known as 'Social Credit', has come t o l i f e and found adherents, mainly in the English speaking c o u n t r i e s , but a l s o elsewhere.

I t i s a well known phenomenon t h a t h e r e s i e s u s u a l l y do not find very iiuch favour in the eyes of those who c l i n g to orthodox conceptions. But even Lord KEYNES, a former t e a c h e r of c l a s s i c a l economic t h e o r y , who himself i n l a t e r y e a r s became a c r i t i c of t h i s theory and came to sym-p a t h i z e with and to a sym-p sym-p r e c i a t e such economic h e r e t i c s as MANDEVILLE, MALTHUS, GESELL, and HOBSON, appears to have h e l d the views of Major DOUGLAS in only very moderate a p p r e c i a t i o n . The reason for t h i s may be

t h a t the t h e o r e t i c a l arguments of DOUGLAS and h i s followers have f a i l e d t o convince KEYNES, and with hira many o t h e r s , of the c o r r e c t n e s s of t h e i r a s s e r t i o n s . I must confess t h a t i t has been d i f f i c u l t for me t o find a chain of r e a s o n i n g l e a d i n g t o t h e conclusion t h a t these a s s e r -t i o n s a r e — i n p r i n c i p l e — c o r r e c -t . I -t i s p o s s i b l e -t h a -t -t h e cause of t h i s d i f f i c u l t y l i e s i n a r e a l inadequacy of DOUGLAS'S main arguments, a n d i t i s n o t t o be e x c l u d e d e i t h e r , t h a t h e r e t h e r e i s o n l y a m i s u n d e r s t a n d i n g , w h i l e r e a l l y t h e same t h i n g s a r e meant, I w i l l n o t t r y t o answer t h i s q u e s t i o n h e r e .

I f a theorem i s c o r r e c t , however, i t must be p>ossible t o find ade-quate arguments t o prove i t s c o r r e c t n e s s . What, now, a r e the a s s e r t i o n s of Social C r e d i t o r s ? In a n u t - s h e l l they are t h a t , as a consequence of t h e p r i v a t e c r e d i t system (by which term we have to u n d e r s t a n d any f i n a n c i a l system where money i s c r e a t e d t o a c o n s i d e r a b l e degree, i f n o t p r e d o m i n a n t l y , by p r i v a t e i n s t i t u t i o n s through t h e i r g r a n t i n g of l o a n s ) , e s p e c i a l l y in a modem i n d u s t r i a l comnunity, where work done by non-muscular energy i n c r e a s i n g l y r e p l a c e s the work performed by human muscles, ^ h e r a t e of g e n e r a t i o n of p r i c e s has a permanent tendency to exceed the simultaneous r a t e of generatiwi of incomes. From t h i s Social C r e d i t o r s i n f e r t h a t under e x i s t i n g c o n d i t i o n s the t o t a l p u r c h a s i n g power of t h e p u b l i c h a s a p e r m a n e n t and i n h e r e n t t e n d e n c y t o be i n s u f f i c i e n t t o buy the t o t a l product. T h i s , in i t s t u r n , leads (a) to s t r u g g l e s for f o r e i g n markets i n o r d e r to g e t r i d of so much of the produce a s cannot be d i s p o s e d of w i t h i n t h e p r o d u c i n g community,

-( b ) to d e v a s t a t i n g unemployment and war, - -( c ) t o a d e a d l y g r i p of money-power on man and s o c i e t y and a l l t h e i r a c t i v i t i e s , - and (d) t o

t h e p e r v e r s i t m of democracy.

Now t h i s a s s e r t i o n t h a t the r a t e of g e n e r a t i o n of p r i c e s may have, 1

and a c t u a l l y h a s , a tendency to exceed the r a t e of g e n e r a t i o n o f incomes, i s an economic heresy of the f i r s t order. C l a s s i c a l , as well as most o f the more or l e s s h e r e t i c economists, e v i d e n t l y agree that such a discrepancy i s an absolute i m p o s s i b i l i t y , regarding p r i c e s and incomes as t h e two s i d e s o f t h e same medal and, t h e r e f o r e , as n e c e s s a r i l y equal in s i z e , ^ p a r ö i t l y they b e l i e v e that t h i s conception i s so s e l f - e v i d e n t , that i t i s npt necessary to s t a t e i t e x p l i c i t l y . They hold, in f a c t , the view that the equivalent of the p r i c e o f an a r t i c l e , \«iiich i s the sum of a s e r i e s of c o s t s , entrepreneurs' p r o f i t s and t a x e s , has been d i s t r i b u t e d , or w i l l be d i s t r i b u t e d w i t h i n a reasonable time, among the different factors of production, and as the case may be, among c i v i l servants, e t c . From t h i s they infer that the total purchasing power vrfiich the members of the comnunity, either indi-v i d u a l l y or c o l l e c t i indi-v e l y , haindi-ve a t t h e i r disposal, must n e c e s s a r i l y be s u f f i c i e n t to buy and pay for the whole production of that community. Now I have not been able to grasp and appreciate most of the argu-ments intended by DOUGLAS and h i s followers to prove that Social Credit theorem. I do not think that, in general, i t i s necessary to c r i t i c i z e those arguments here - others have done so already, e s p e c i a l l y the so-c a l l e d A + B theorem '' - but, as I aso-cso-cept the t h e s i s , I w i l l defend i t and demonstrate i t s correctness with arguments of my own and such as I have encountered in the Social Credit l i t e r a t u r e and found to be sound.

I wish to emphasize that, in my opinion, the t h e o r e t i c a l arguments for the shortage of purchasing power (independent of i t s wrong d i s t r i -bution) and the theorem of the Just P r i c e are the weak points of the S o c i a l Credit c a s e , which, for the r e s t , deserves more appreciation

than i t u s u a l l y g e t s , e s p e c i a l l y on the part of the economists. I be-l i e v e DOUGLAS deserved a deeper t r i b u t e than KEYNES paid him in h i s General Theory on pp.370-1, and that there i s l i t t l e reason to accuse him in h i s f i r s t period of merely 'destructive c r i t i c i s m ' .

DOUGLAS' s books, as well as many other works on Social Credit, for instance those of C. Marshall HATTERSLEY, Brynjolf BJ0BSET, and others, are well worth serious study. I must refrain here from an extensive re-view of S o c i a l Credit l i t e r a t u r e , which I very much recommend to the a t t e n t i o n of economists, p o l i t i c i a n s , and a l l other people i n t e r e s t e d in the problems of modern s o c i e t y . I t may be useful, however, to quote the conclusions C. M. HATTERSLEY arrived at in h i s book 'This Age of Plenty' (1929):

1) A.W.JOSEPH: 'The A*B Theorem', reprint of a paper from The New Age. CM.HATTERSLEY: 'Wealth,Want and War', chapters 3 and 13, and AppoidixA. C.H.ÜDUGLAS: 'Economic Democracy',

'Credit-Power and Democracy' (pp. 19-24).

H.T.N.GAITSKELL, in 'What Everybody Wants to Know About Money' (p. 346), and in TTie New Age (Febr.28, 1935).

1 1 The e x i s t i n g economic system has developed in accordance with assump-t i o n s and assump-theories inheriassump-ted from assump-the pre-indusassump-trial era.

2 During the past ISO years the physical problem of production has been almost, i f not e n t i r e l y , solved.

3 The problem of the proper d i s t r i b u t i o n of i n d u s t r i a l products s t i l l awaits solntion. That i s a money problem.

2 4 Money i s not a conunodity ' : i t i s e s s e n t i a l l y a t i t l e to goods and services — a s o c i a l mechanism to f a c i l i t a t e their orderly production and d i s t r i b u t i o n .

5 Money i s of two k i n d s : currency, which i s t a n g i b l e and p a s s e s by delivery, and credit-mc»iey, which i s intangible and only transferable by e n t r i e s in the books of banks. The former, which i s created and issued by the Government and the Bank of England, bears a continually decreaang proportion to the l a t t e r which, under the present system, i s created and issued only by the banking system.

6 The u l t i m a t e control of the quantity of money in c i r c u l a t i o n r e s t s , under the present system, with the bankers, and ( i n the Ubited Kingdom) with the Bank of England.

3 7 Under the e x i s t i n g economic system, the t o t a l p r i c e s of goods awaiting buyers w i l l always be at l e a s t s u f f i c i e n t t o absorb the simultaneous monetary demand for goods.

B Under the e x i s t i n g economic system, any substantia] increase or decrease in the amount of money c i r c u l a t i n g within a cooinunity tends to cause a r i s e or f a l l in the genera] level of prices, but seldom to a correspond-ing extent.

9 Under the e x i s t i n g economic system, w h i l e the maximum p r i c e of an a r t i c l e i s '''^what i t w i l l fetch", the minimum price i s ultimately d e t e r -mined by the amount of money d i s t r i b u t e d in respect of i t s production

and distribution: all '''costs" must eventually reappear in price.

4 10 S c i e n t i f i c progress, in c o n f l i c t with the present economic system, has given us our problem of Unemployment - involuntary, unpaid l e i s u r e . 11 Under the p r e s e n t economic system, u n l e s s there i s a corresponding

i n c r e a s e i n the amount o f money i n c i r c u l a t i o n , every a d d i t i o n t o working c a p i t a l renders i t i n c r e a s i n g l y d i f f i c u l t for the modern industrial coomunity to absorb all i t s own production.

12 As a r e s u l t of the i n c r e a s i n g a p p l i c a t i o n of S c i e n c e t o I n d u s t r y , consumers to-day are unable t o purchase more than a continually decreas-i n g f r a c t decreas-i o n of decreas-i n d u s t r decreas-i a l output. In order, t h e r e f o r e , to madecreas-intadecreas-in the e x i s t i n g l e v e l of consumption, an a l t o g e t h e r unnecessary quantity of nan-consumable goods must also be produced.

5 13 The present economic system only endures by reason of p a l l i a t i v e s , prominent among which are insolvencies, bank creations of c r e d i t , export and war.

14 Of t h e s e , i n s o l v e n c i e s contravene the p r i n c i p l e that a l l c o s t s must enter price: liank c r e d i t i s s u e s not onl y have a tendency to raise prices, but a l s o are limited in amount by considerations of'''sound finance": the s t r u g g l e for dumping grounds n e c e s s i t a t e d by a p o l i c y of export leads d i r e c t l y to our l a s t p a l l i a t i v e , war.

15 War i s an i n e v i t a b l e consequence of the present syst<«m; i t i s a l s o the most expeditious method of disposing of unsold stocks.

1) Cf. E.v.Loo in "KoUcve I vaart* (Apeldoorn, N e t h e r l a n d s ) , O c t , 1 9 3 8 , pp. 106-7,

6 16 The p r o s p e r i t y o f a modern i n d u s t r i a l community i s d e p e n d e n t on a w i s e and d i s i n t e r e s t e d f i n a n c i a l p o l i c y .

17 C o n t r o l of f i n a n c i a l p o l i c y becomes y e a r by y e a r more c o n c e n t r a t e d i n t h e hands o f men who a r e n o n - e l e c t e d and n o t s u b j e c t t o d i s m i s s a l — a p l u t o c r a t i c h i e r a r c h y whose D e i t y i s a s y s t e m .

18 P o l i t i c a l democracy has f a i l e d because i t i s n o t economic.

7 19 A p o l i c y o f monetary d e f l a t i o n a f f o r d s m a t e r i a ] advantage t o t h o s e ])est a b l e t o b r i n g i t about. 20 A g o l d s t a n d a r d i s n o t e s s e n t i a l t o s e c u r e s t a b i l i t y o f t h e f o r e i g n e x c h a n g e s , which r e f l e c t p r e v a i l i n g i n t e r n a l p r i c e - l e v e l s . 21 Our s o - c a l l e d r e t u r n t o t h e g o l d s t a n d a r d s i g n a l i s e d t h e d o m i n a t i o n o f I n t e r n a t i o n a l over N a t i o n a l c o n s i d e r a t i t m s . 8 22 E v e r s i n c e t h e g e n e r a l r e t u r n t o t h e G o l d S t a n d a r d t h e w o r l d h a s e x p e r i e n c e d ( a ) a h e a v y and c o n t i n u e d f a l l i n t h e g e n e r a l l e v e l o f p r i c e s , ( b ) a s t e a d y i n c r e a s e i n and s p r e a d of unemployment, ( c ) spasmodic and d e c l i n i n g i n d u s t r i a l a c t i v i t y .

2 3 T h e s e d i f f i c u l t i e s , though i n h e r e n t i n ' t h e g o l d s t a n d a r d mechanism when a p p l i e d t o modern c o n d i t i o n s , h a v e b e e n a g g r a v a t e d by t h e a t t e m p t e d i m p o s i t i o n and c o l l e c t i o n of German r e p a r a t i o n s .

24 A l l m e a s u r e s t o overcome t h e s e d i f f i c u l t i e s w i t h i n t h e l i m i t a t i o n s o f o r t h o d o x f i n a n c i a l acce[>tances have f a i l e d and must f a i l .

9 25 The i n h e r e n t i m p o s s i b i l i t y of o p e r a t i n g t h e w o r l d ' s monetary s y s t e m s i n a c c o r d a n c e w i t h o r t h o d o x f i n a n c i a l a c c e p t a n c e s l e d t o t h e c h a o s which c u l m i n a t e d i n t h e f i n a n c i a l c r i s e s of 1931. 26 I n t e r n a t i o n a ] c o n f e r e n c e s f i n d i t i n c r e a s i n g l y d i f f i c u l t w i t h i n t h e frame o f o r t h o d o x f i n a n c i a l a c c e p t a n c e s t o a c h i e v e a n y t h i n g o f f u n d a -mental i m p o r t a n c e . 27 The e f f o r t s o f t h e f i n a n c i a l " e x p e r t s " are d i r e c t e d t o w a r d s r e i m p o s i n g an i n t e r n a t i o n a l g o l d s t a n d a r d . 10 28 The g o l d - b a s i s f o r a money s y s t e m i s an a n a c h r o n i s t i c s u r v i v a l , s e r v i n g a t t h e p r e s e n t day m e r e l y t o l i m i t t h e amount o f money t h a t may be p u t i n t o c i r c u l a t i e » .

29 The s a n e a l t e r n a t i v e t o a m e t a l l i c b a s i s i s a r e a l w e a l t h ' b a s i s , whereby t h e i s s u e and r e c a l l of money i s r e g u l a t e d s o l e l y by t h e r e a l n e e d o f t h e community i n r e l a t i o n t o i t s p h y s i c a l c a p a c i t y t o s u p p l y t h a t n e e d .

30 The f u l l b e n e f i t o f a money s y s t e m b a s e d on r e a l w e a l t h can o n l y be r e a l i s e d i f some method can be d e v i s e d and a p p l i e d t o p r e v e n t a d d i t i o n a l i s s u e s o f money b e i n g a u t o m a t i c a l l y a b s o r b e d by a h i g h e r l e v e l o f p r i c e s .

1 1 31 Every i n c r e a s e i n t h e r e a l w e a l t h of t h e community must be accompanied by an i n c r e a s e i n t h e p o s s i b l e e f f e c t i v e demand f o r t h e g o o d s i t s members r e q u i r e .

32 The d i s t r i b u t i o n t o i n d i v i d u a l s of c l a i m s t o goods and s e r v i c e s must be p r o g r e s s i v e l y l e s s and l e s s dependent on employment.

33 The r e g u l a t i o n o f t h e i s s u e and r e c a l l o f money must be a u t o m a t i c a l l y a d j u s t e d t o t h e r e q u i r e m e n t s o f t h e e c o n o m i c s y s t e m . F i n a n c i a l p o l i c y must be made t o s e r v e i n d u s t r i a l and n a t i o n a l r e q u i r e m e n t s .

12 34 The f i r s t s t e p i n economic r e c o n s t r u c t i o n must be t h e r e s t o r a t i o n t o t h e N a t i o n o f c o n t r o l over i t s money s u p p l i e s .

1) Real Wealth i s d e f i n e d by S o c i a l C r e d i t o r s a s t h e community's a b i l i t y t o d e l i v e r goods and s e r v i c e s a s , when and where r e q u i r e d .

35 T h i s c o u l d be a t t a i n e d by d e f i n i t e l y l i m i t i n g t h e amount of t h e banks' l i a b i l i t i e s t o t h e i r d e p o s i t o r s uncovered by N a t i o n a l currency i n t h e i r p o s s e s s i o n .

36 Future i s s u e s o f money s h o u l d be through a s u i t a b l e Government d e p a r t -ment a u t o m a t i c a l l y as r e q u i r e d t o m a i n t a i n t h e g r e a t e s t e f f i c i e n c y of

t h e economic s y s t e m .

13 37 In order t h a t t h e p u r c h a s i n g power of t h e p u b l i c s h o u l d correspond t o I n d u s t r y ' s p r o d u c t i v e c a p a c i t y , " u l t i m a t e g o o d s " s h o u l d be s o l d t o consumers a t t h e i r J u s t P r i c e , which b e a r s t o t h e f i n a n c i a l c o s t o f t h e i r p r o d u c t i o n t h e same r a t i o a s n a t i o n a l c o n s u m p t i o n b e a r s t o n a t i o n a l p r o d u c t i o n . ( C / . Ch. 5 ) .

38 The l o s s i n c u r r e d by s a l e a t t h e J u s t P r i c e s h o u l d be made good by i s s u e s of new, n a t i o n a l money.

39 The r e s u l t o f t h i s would be t o r a i s e t h e g e n e r a l s t a n d a r d o f l i v i n g by making proper u t i l i s a t i o n of the p r o d u c t i v e c a p a c i t y of I n d u s t r y . 14 40 A system o f N a t i o n a l D i v i d e n d s i s e v e r growing more and more n e c e s s a r y

t o supplement the wage system, which i s now a d m i t t e d l y i n a d e q u a t e . 4 1 N a t i o n a l D i v i d e n d s are e t h i c a l l y j u s t i f i a b l e .

4 2 N a t i o n a l D i v i d e n d s w o u l d s o l v e some o f t h e more d i f f i c u l t s o c i a l problems of the t i m e , and would add impetus t o i n d u s t r i a l development. 15 43 The S o c i a l C r e d i t p r o p o s a l s c o n s t i t u t e a p o l i c y c a p a b l e of a p p l i c a t i o n

i n many ways, and t h e community s e e k i n g t o adopt t h e same should s e l e c t t h e method most s u i t a b l e t o i t s p e c u l i a r n e e d s .

44 The v a r i o u s s c h e m e s d e v i s e d embodying t h a t p o l i c y must be r e g a r d e d a s i l l u s t r a t i v e o n l y and n o t a s d e f i n i t e l y a d v o c a t e d m e t h o d s o f a p p l i c a t i o n .

45 Adoption of such a p o l i c y would n o t n e c e s s a r i l y i n v o l v e any r e v o l u t i o n -ary u p h e a v a l , but would m e r e l y r e q u i r e a r e a d j u s t m e n t o f c e r t a i n p a r t s o f the e x i s t i n g economic s y s t e m .

17 46 No proposal f o r t h e improvement of economic c o n d i t i o n s can a c h i e v e any-t h i n g permanenany-t any-t h a any-t d o e s n o any-t p r o v i d e f o r an i n c r e a s e i n any-the effecany-tive demand of t h e c o n s u m i n g p u b l i c and f o r t h e d i s t r i b u t i o n o f a d e q u a t e p u r c h a s i n g power t o t h o s e from whom s c i e n c e has removed the burden o f producticxi.

47 Some a m e l i o r a t i o n o f c o n d i t i o n s might r e s u l t from t h e d e c e n t r a l i s a t i o n of money-power by t h e e s t a b l i s h m e n t o f municipal banks.

48 None o f t h e commonly a d v o c a t e d p r o p o s a l s e x a m i n e d h e r e i n v o l v e any change i n the u n d e r l y i n g p r i n c i p l e s of the e x i s t i n g system, and a l l must

t h e r e f o r e be d i s m i s s e d as i n a d e q u a t e .

18 49 The a p p l i c a t i o n o f s c i e n t i f i c p r i n c i p l e s t o the i n t e r n a l f i n a n c i a l s y s -tem o f any one c o u n t r y need n o t be made t o depend upon t h e a p p l i c a t i o n o f s i m i l a r p r i n c i p l e s t o the f i n a n c i a l s y s t e m s of o t h e r c o u n t r i e s . 50 The a d o p t i o n o f s u c h p r i n c i p l e s by any c o u n t r y would s o i n c r e a s e t h e

m a t e r i a l p r o s p e r i t y o f i t s i n h a b i t a n t s t h a t o t h e r c o u n t r i e s would f o l l o w s u i t at no g r e a t i n t e r v a l . U n i v e r s a l peace would be o b t a i n e d by removing t h e economic urge t o war.

51 The removal o f t h e a n x i e t y and p o v e r t y i n d u c e d by p r e s e n t c o n d i t i o n s would be r e f l e c t e d i n a f r e s h a p p r e c i a t i o n o f s p i r i t u a l v a l u e s . L i f e would become f u l l e r and more 'balanced.

* * * * *

C H A P T E R 2

M O N E Y

As we have s e e n a l r e a d y , HATTERSLEY s a y s ( c o n c l u s i o n 4 ) : ''Money i s n o t a conmodity". He does n o t d e f i n e , however, what i s t o be understood under t h e term 'conmodity'.

BJ0RSET, i n t e r p r e t i n g and p a r t l y m i s i n t e r p r e t i n g P r o f e s s o r F. SODDY, w r i t e s :

-''Professor SODDY c a l l s money 'virtual wealth', that i s to say something which hqs only the appearance of wealth. The possession of money implies a claim cm wealth, a r i g h t t o goods and s e r v i c e s , but money in i t s e l f i s not wealth. i f we assume that mcmey and wealth are i d e n t i c a l , we must arrive at the c o n c l u s i o n that the e a r t h ' s r i c h e s are made up of the t o t a l of sources of energy, plant and comnodities, plus all the money in e x i s t e n c e , which i s ab-surd. Obviously the wealth of the world can c o n s i s t of no more than the goods, plant and sources of energy in e x i s t e n c e . Money i n d i c a t e s only a right t o a c e r t a i n amount of t h i s wealth, a means of transferring i t from one possessor t o another. On the world's balance-sheet, therefore. Professor SoDDV asks us t o p i c t u r e a l l sources of energy, goods and machinery, as being th$ s o l e a s s e t s . Money, as a kind of c e r t i f i c a t e , a means of d i s t r i b u t i n g these a s s e t s among the shareholders, must be shown on the other s i d e , a l i a b i l i t y which must balcnce the assets. Hence we arrive at the d e f i n i t i o n of the function of money: i t must serve as a t i c k e t system for goods, s e r v i c e s , and energy, and i t s volume must a c c u r a t e l y correspond t o the wealth a v a i l a b l e . All other considerations must be subservient to this all-important function" ' .

However much I a g r e e w i t h t h e a u t h o r s quoted about the f u n c t i o n o f money, s e r i o u s o b j e c t i o n s may, n e v e r t h e l e s s , be r a i s e d a g a i n s t t h e i r s t a t e m e n t s :

-( 1 ) Money may be a commodity -( e . g . , a g o l d c o i n ) the nominal v a l u e o f which i s equal t o i t s i n t r i n s i c v a l u e . I t i s i n c o r r e c t , I b e l i e v e , t o s a y i n t h a t c a s e , t h a t money i s n o t a commodity, and t h a t i t must n o t b e i n c l u d e d i n t h e r e a l w e a l t h o f t h e community. I must admit t h e p o s s i b i l i t y t h a t BJÖRSET would have i t on t h e one s i d e o f t h e b a l a n c e -s h e e t a-s a conmodity, and on t h e o t h e r -s i d e a-s money. Then, however, i f t h e r e werenomoney but g o l d , the two s i d e s c e r t a i n l y would n o t b a l a n c e . ( 2 ) I f money has only a nominal, o r , more c o r r e c t l y , f u n c t i o n a l v a l u e , and no i n t r i n s i c v a l u e , i t s f u n c t i o n i s e x a c t l y the same as b e f o r e , and t h e r e f o r e a l s o i t s f u n c t i o n a l , i t s a c t u a l s o c i a l v a l u e . For what reason s h o u l d we a s s e s s t h i s v a l u e i n another way, or look a t i t from another p o i n t o f v i e w , t h a n , e . g . , t h a t o f means o f t r a n s p o r t which h a v e a somehow comparable f u n c t i o n ?

1) B.BJ0RSET: "Distribute or Destroy! ", pp. 41-2. See also Professor F.SoDDY (."Wealth, Virtual Wealth and Debt", pp. 137-8). who w r i t e s : - "There must be a rough, though not n e c e s s a r i l y exact p r o p o r t i o n a l i t y between the p o s i t i v e and negative components ( i . e . wealth, and virtual wealth), and both must s t a r t from zero . . . . " (p.138).

If we look at it from this point of view, there is, I believe, no reason why we should not call money (also if it is credit) a "good" or a conmodity, nor why it should not be looked at as an integrating part of the real wealth of the community, provided we remain clearly con-scious of the remarkable properties and the particular functions of this "good" that we cal 1 money,

These remarkable properties of money are: (1) liquidity; (2) conti-nuity of circulation; (3) the fact that, as far as money is credit, its marginal cost of production approaches zero; (4) the fact that its

car-rying costs are zero (which is true only under definite conditions, and is not an inherent property of money).

The first two of these properties of money follow directly from its social function as a means of transfer. I will draw special attention here to the third remarkable property which is characteristic of modem money: that its marginal cost of production approaches zero. This means that if the community left the production of such money to free com-petition, the price of money expressed in goods and services, i.e. its purchasing power, would be reduced to its marginal cost of production,

i.e. to approximately zero. Money is, now-a-days, a monopoly product, and therefore (cf. p. 72) its price is higher than its marginal cost. As we shall see later, it is in the general interest that for other goods and services the price be equal to or lower than the marginal cost of production. For money such is evidently not the case. For if it were, it would be in the general interest that its purchasing power should be zero, which is absurd. Where does the difference from other goods arise?

In order to answer this question, let us consider what happens when the quantity of money is changed, («nerally an increase in the quantity of money will cause a rise in prices and in wages, salaries and profits (expressed in terms of money), and lead to increased economic activity; overhead charges remain comparatively unaltered. So the result, both of the rise in price level, and of the increased economic activity, is an increased amount of payment per unit of time (to be called henceforward

rate of monetary turnover). Non-monetary (physical, psychological, and similar) limits determine the maximum expansion of the economic activi-ty at an^moment. When this limit has been reached, a further increase of the quantity of money cannot cause a further increase in economic aotivity. Above this critical point the general price level and the rate of monetary turnover will vary in direct proportion. Below this critical point the general price level varies less than proportionally with varying rate of monetary turnover, because a decrease (increase) in the rate of monetary turnover is caused partly by a decrease (in-crease) in economic activity, i.e. an increase (decrease) in unemploy-ment of human and material resources. The rate of real turnover as a measure for economic activity, may be defined as the rate of monetary

turnover divided by the general price l e v e l . This rate of real turn-over i n c r e a s e s from zero for monetary turnturn-over = 0 , t o a maximum,set by non-monetary l i m i t s , corresponding with the c r i t i c a l value of the r a t e of monetary turnover, and remains constant on further i n c r e a s e of the r a t e of monetary turnover. These r e l a t i o n s are expressed in the graph, where the general price l e v e l and i t s reciprocal, the pur-chasing power of the money u n i t , as w e l l as the real turnover, are presented as functions of the rate of monetary turnover. The values at the c r i t i c a l point are taken as u n i t s .

rate of monetary turnover -•

Fig. 1.

We may ask o u r s e l v e s : what are the c o s t s r e s u l t i n g from a c e r t a i n r a t e of monetary turnover? The costs of production of money, as far as t h i s i s c r e d i t , are s m a l l . The marginal c o s t of production of such money i s z e r o . On the other hand, because credit-money o r d i n a r i l y r e p r e s e n t s an i n t e r e s t - b e a r i n g debt, the c o s t s connected with the existence of money are not zero, but — expressed in terms of money — proportional t o the i n t e r e s t - b e a r i n g part of the t o t a l quantity of money of the conmunity. I t i s easy to s e e , that i f the rate of i n t e r e s t , the r a t i o between i n t e r e s t - b e a r i n g and non-interest-bearing money, and the turnover frequency of money, which I define as the rate of monetary

turnover divided by the quantity of money, are constant, then interest costs, expressed in terms of money, are proportional to monetary turnover, so that in that case real interest costs are a constant fraction of real turnover.

We may conclude, that if and as Jong as a larger rate of real turn-over corresponds with a greater satisfaction of human needs, this lar-ger race of real turnover is in the general interest. In such circum-stances, if the rate of monetary turnover is below its critical value, it should be raised to this value; but a further increase would mean only a senseless inflation.

From the foregoing it may be clear by now that for a community it is not the quantity of money as such which is of special interest, but the rate of monetary turnover, and even more, of course, the rate of real turnover. The same thing is true for the individual. It owy not matter to U8, whether we have on the average only half the amount of money in our money-box, if at the s:ame time its turnover frequency has been doubled. We may say, in that case, that its efficiency has been doubled. This is analogous to the case of two machines that make the same prod-uct and have cost the same price, but one of which produces twice as much per unit of time as the other. Assessing the amount of our posses-sions (capital), we are accustomed to leave the physical efficiency of our capita] out of account, at least as far as capital assets of different physical efficiency are not co-existing. Therefore we are entitled to do the same with respect to money,

From the foregoing considerations I infer, in contradistinction to Professor SODDY, BJ0RSÉT, and others {cf. p.6), that it is only logical, and by no means absurd, to include the total amount of money (or its purchasing power) in our real social capital *^, Above the critical point the real value of the (increasing) amount of money - provided that the turnover frequency is constant — does not change any more, and neither does our wealth.

I think it is useful to draw attention here to a difference in the definitions of (Real) Wealth, given by HATTERSLEY and other Social Creditors cm the one hand, and Professor SODDY on the other. According to the definition given by the latter the Conmunity's Wealth is the to-tal of our possessions, with the exclusion of credit-money^',whilst ac-cording to the definition of the former, it is the conmunity's capacity to deliver goods and services, as, where and when required, which in a

1) Gesell points out that money is a ware owing to its second remarkable property, and capital (i.e. yielding interest) owin^ to its fourth, while other assets are capita] by virtue of money's being capital. 2) It is only fair to point out, that Professor S O D D T states: «It is true

that the nation must act, and continue indefinitely to act, as if it pos-sessed more weal th than it does possess, by the aggregate purchasing power of its money, but the important thing is that this Virtual Wealth does not exist." (Wealth, Virtual Wealth and Debt, p,139),

sense, is the product of wealth (as defined, e.g., by SODDY) and its

efficiency,

Bank-credit appears as money that has the character of debt. As money we have to include it in our social capital or possessions. Its peculiarity is, however, that nobody owns it, not even the State, the organized community, which, itself, borrows from the banks. When the debt is discharged, then the credit-money ceases to exist. In the first instance nobody's property has become smaller in consequence of this transaction, and nevertheless our total social possessions have de-creased! This is the paradox of credit-money: it is nobody's property, and yet it is our social possession, it is s o c i a l credit. Now a priori it does not seem very probable, that it is in the general interest for this social credit to be administered by private institu-tions which are not responsible to the community, and even less, that it is left to these private institutions to determine monetary policy, as has generally been the case until recently, and is still the case in many countries.

We wil J now turn to another aspect of money. On account of its first and, especially of its fourth property (see page 7)i money is used not only as a means of transfer, but also as a **liquid form of property", as a store of wealth. While as a means of transfer it has a social function par excellence, its function as a store of wealth is essen-tially anti-social. The turnover frequency, that is to say the social efficiency of the money, is decreased by its use as a store of wealth. Under present conditions it is easy to keep money indefinitely, but generally it is impossible to do so with the goods and services for which this money presents a claim. In order to avoid depreciation, these must be distributed. If their distribution is made possible by the creation and distribution of new money, the hoarded money becomes a permanent threat; for if this latter money is suddenly dishoarded, a rise of the price level will be the consequence, unless the supply of goods and services can be expanded rapidly enough, A rational monetary policy, therefore, will have as one of its objectives the counteraction of the abuse of money as a store of wealth.

Finally attention must be drawn to a necessary alteration in the character of money, which is going on already and which must be clearly recognized. In former times money was a meeins of exchange, facilitating the mutual exchange of goods and services. For more than a century the productivity of labour has increased to such a degree, that we are ap-proaching an age of technological unemployment. Accordingly, in order that this age of technological unemployment may become an age of leis-ure: "The distribution to individuals of claims to goods and services must be progressively less and Jess dependent on employment", that is to say: money must be less and less a means of exchange, but must become more and more a means of distribution.

C H A P T E R 3

I N V E S T M E N T

Of t h e i d e a "-investment" d i f f e r e n t d e f i n i t i o n s a r e f e a s i b l e , and t h i s word h a s , i n d e e d , been used i n d i f f e r e n t s e n s e s . Which d e f i n i t i o n one w i s h e s t o g i v e , w i l l depend, i n p a r t , on t h e s u i t a b i l i t y .

In p o p u l a r u s a g e t h e v e r b "to invest" i s f r e q u e n t l y used w i t h t h e meaning: t o change m o n e y - p o s s e s s i o n s i n t o p o s s e s s i o n s o f g o o d s , r e a l e s t a t e , bonds and s h a r e s , e t c . I t would sound s t r a n g e i f we s a i d t h a t we i n v e s t e d our money i n money.

But i f we examine what has been i n v e s t e d i n any e n t e r p r i s e , then we s h a l l f i n d t h a t t h e i n v e s t m e n t c o n s i s t s o f and i s r e p r e s e n t e d by l a n d , b u i l d i n g s , equipment, s t o c k s , e t c . , p l u s c a s h , bank d e p o s i t s , e t c . In t h i s c a s e , as we s e e , money i s i n c l u d e d .

Let us now c o n s i d e r the t e a c h i n g s o f KEYNES. In h i s '^General Theory" KEYNES d e f i n e s "net investment" as "net addition to capital equipment", w h i l e " i n v e s t m e n t " i s "addition to capital equipment". Again a c c o r d i n g t o KEYNES: investment = saving, "net investment" = "-net saving". I f we i n t e g r a t e w i t h r e s p e c t t o t i m e , and do n o t d i s i n g u i s h between csq>ital-o r p r csq>ital-o d u c e r s ' gcsq>ital-ocsq>ital-ods and ccsq>ital-onsumers' g csq>ital-o csq>ital-o d s , but i n c l u d e a l l g csq>ital-o csq>ital-o d s , a s l o n g and i n as much as they have n o t hieen a c t u a l l y consumed, then from t h i s d e f i n i t i o n i t f o l l o w s t h a t total invested = total saved. I d e f i n e '*tota I saved" a s t h a t which has been prcxluced and n o t y e t been consumed

KEYNES b e l i e v e s t h a t h i s d e f i n i t i o n o f '^investment" i s in agreement w i t h popular usage, which I venture t o doubt, for t h i s d e f i n i t i o n would imply t h a t t h e t o t a l i n v e s t e d would i n c l u d e n e i t h e r gro> nd and o t h e r n a t u r a l r e s o u r c e s , nor c r e d i t - m o n e y , b e c a u s e , a s n e i t h e r o f them has been "produced", n e i t h e r can have been s a v e d . (Cf. KEYNES, G. T, p . 6 3 ) .

Oh page 75 KEYNES w r i t e s :

-" I f we reckon the sale of an investment as being negative investment, i.e. disinvestment, my own d e f i n i t i o n i s in accordance with popular usage; since exchanges of old investments necessarily cancel out. We have indeed to adjust for the creation and discharge of debts (including changes in the quantity of c r e d i t or money); but since for the community as a whole the increase or decrease of the aggregate creditor p o s i t i o n i s always exactly equal to the i n -crease or de-crease of the aggregate debtor p o s i t i o n , t h i s complication a l s o cancels out when we are dealing with aggregate investment. Ttius, assuming that income in the popular sense corresponds to my net income, aggregate investment in the popular sense coincides with my d e f i n i t i o n of net investment, namely net addition to all kinds of capital equipment, after allowing for those chan-ges in the value of the old equipment which are taken into account in reckon-ing net income.

Investment, thus defined, i n c l u d e s , therefore, the increment of capital equipment, whether i t c o n s i s t s of fixed c a p i t a l , working capital or l i q u i d c a p i t a l ; and the s i g n i f i c a n t differences of d e f i n i t i o n . . . . are due to the exclusion from investment of one or more of these categories."

I am of t h e o p i n i o n , however, t h a t KEYNES h i m s e l f a l s o commits onmissions. On page 81 he w r i t e s further:—

"The prevalence of the i d e a that saving and investment, taken in t h e i r s t r a i g h t f o r w a r d sense, can d i f f e r from one another, i s to be explained, I think, by an optical i l l u s i o n due to regarding an individual depositor's rela-tion to h i s bank as being a ene-sided transacrela-tion, instead of seeing i t as the two-sided transaction which i t a c t u a l l y i s . I t i s supposed that a depositor and h i s bank can somehow c o n t r i v e between them t o perform an operation by which savings can disappear into the banking system so that they are l o s t to investment, or, contrariwise, that the banking system can make i t p o s s i b l e for investment to occur, to which no saving corresponds. But no one can save with-out acquiring an asset, whether i t be cash or a debt or capital-goods; and no one can acquire an asset which he did not previously possess, unless either an asset of equal value i s newly produced, or someone e l s e parts with an asset of that value which he previously had. In the f i r s t alternative there i s a corresponding new investment: in the second alternative someone e l s e must be d i s -saving an equal sum. For h i s l o s s of wealth must be due to h i s consumption ex-ceeding h i s income, and not to a l o s s on capital account through a change in value of a c a p i t a l - a s s e t , s i n c e i t i s not a case of h i s s u f f e r i n g a l o s s of value which h i s asset formerly had; he i s duly receiving the current value of h i s asset and yet i s not retaining t h i s value in wealth of any form, i.e. he must be spending i t in current consumption in excess of current income. More-over, i f i t i s the banking system which parts with an asset, someone must be parting with cash. I t follows that the aggregate saving of the f i r s t individu-al and of others taken together must n e c e s s a r i l y be equindividu-al to the amount of current new investment,

The notion that the creation of credit by the banking system allows invest-ment to take p l a c e t o which "no genuine saving" corresponds can only be the r e s u l t of i s o l a t i n g one of the consequences of the increased bank-credit to the exclusion of the others. I f the grant of a bank-credit to an entrepreneur additional to the c r e d i t s already e x i s t i n g allows him to make an addition to current investment which would not have occurred otherwise, incomes w i l l nec e s s a r i l y be innecreased and at a rate whinech w i l l normally exneceed the rate of i n -creased investment. Moreover, except in conditions of f u l l employment, there w i l l be an increase of real income as well as of money-income. The public w i l l e x c e r c i s e "a free choice" as to the proportion in which they divide t h e i r in-c r e a s e of inin-come between saving and spending; and i t i s impossible that the intention of the entrepreneur who has borrowed in order to increase investment, can become e f f e c t i v e (except in s u b s t i t u t i o n for investment by other e n t r e -preneurs which would have occurred otherwise) at a faster rate than the public decide to increase their savings. Moreover, the savings which result from t h i s decision are j u s t as genuine as any other s a v i n g s . "

KEYNES then continues a t the bottom of page 83 as f o l l o w s :

-"Thus the old-fashioned view that saving always involves investment, t h o u ^ incomplete and misleading, i s formally sounder than the new-fangled view that there can be saving without investment or investment without "genuine" saving. The error l i e s in proceeding to the plausible inference that, when an individ-u a l s a v e s , he w i l l increase aggregate investment by an eqindivid-ual amoindivid-unt. I t i s true, that, when an individual saves he increases h i s own wealth. But the conclusion that he a l s o increases aggregate wealth f a i l s to allow for the p o s s i -b i l i t y that an act of individual saving may react on someone e l s e ' i savings and hence on someone e l s e ' s wealth."

KEYNES i s p e r f e c t l y r i g h t , a s l o n g a s we a c c e p t h i s d e f i n i t i o n o f " i n v e s t m e n t " . As a l r e a d y has been s a i d i n t h e b e g i n n i n g , o t h e r d e f i n i

-t i o n s a r e , however, f e a s i b l e . There a r e among -t h e s e such -t h a -t l e a d -t o t h e c o n c l u s i o n t h a t indeed t h e r e i s no n e c e s s a r y e q u a l i t y between " i n -v e s t m e n t " and " s a -v i n g " . As p r e -v i o u s l y s t a t e d , i t depends f o r a good deal on the s u i t t i b i l i t y , which d e f i n i t i o n one p r e f e r s .

We may c o n s i d e r t h e t o t a l i n v e s t e d from t h e p o i n t s o f view o f pos-session or holding, o f disposal, o f property, and o f total saved. The r e s u l t i s d i f f e r e n t f o r e a c h o f t h e s e f o u r c a s e s . KEYNES t a k e s t h e fourth p o i n t o f view; I take the seccmd.

I f we t a k e t h e f i r s t p o i n t o f v i e w , we c o n s i d e r what e v e r y under-t a k i n g , i n s under-t i under-t u under-t i o n o r p r i v a under-t e i n d i v i d u a l " p o s s e s s e s " , i.e. h o l d s , where i t i s i n d i f f e r e n t whether the h o l d e r i s owner or n o t . We add t h i s t o g e t h e r f o r t h e whole community and t h i s a g g r e g a t e we c a l l "total in-vested from the point of view of possession or tenure".

I f we adopt the second c o u r s e , then we c o n s i d e r the t o t a l a s s e t s a t t h e d i s p o s a l o< a l l u n d e r t a k i n g s , i n s t i t u t i o n s , or p r i v a t e i n d i v i d u a l s . I n order t o have t h e d i s p o s a l o f something, i t i s , g e n e r a l l y s p e a k i n g , n e c e s s a r y t o p o s s e s s , t o h o l d i t ; but we do n o t always happen t o have a t our f r e e d i s p o s a l e v e r y t h i n g we h o l d or p o s s e s s . So i t may o c c u r t h a t t h e total invested i s s m a l l e r when d e f i n e d from the point of view of disposal, than from t h e p o i n t o f view o f p o s s e s s i o n o f t e n u r e .

I f we t a k e t h e t h i r d p o i n t o f v i e w , we c o n s i d e r what i s owned by ea<:h i n d i v i d u a l and by a l l k i n d s o f a s s o c i a t i o n s o f i n d i v i d u a l s , and d e t e r m i n e the a g g r e g a t e . P r o p e r t y = p o s s e s s i o n + c l a i m s — d e b t s . The t o t a l i n v e s t e d from t h e p o i n t o f view o f p r o p e r t y i s the sum t o t a l o f a l l p r o p e r t y . We s h a l l s e e , t h a t t h i s siim i s s m a l l e r than the t o t a l i n -v e s t e d from the p o i n t o f -view o f d i s p o s a l .

KEYNES'S d e f i n i t i o n w i l l be shown t o l e a d t o a s t i l l s m a l l e r t o t a l i n v e s t e d , because a p a r t o f our t o t a l p r o p e r t y , namely the n a t u r a l r e -s o u r c e -s , d o e -s n o t b e l o n g t o t h a t which ha-s been "-saved", a-s i t ha-s n o t been produced.

In the following, small l e t t e r s refer to individual q u a n t i t i e s , c a p i t a l s t o the corresponding aggregates, I

define:-n, N as the value of natural resources (land), as far as t h i s value does not represent accumulated income, that i s to say: has not been produced, k, K as " c a p i t a l equipment", including that part of the value of natural

re-sources, which has been excluded from the preceding item, but from which i s excluded the following one. Subject to these limitations i t includes everything produced and not yet consumed.

g, G as money that does not represent a debt (issued by public authority), 6, B as claims on banks (debts owed by banks): (banknotes; bank d e p o s i t s ) . c, C as debts owed to non-banks.

m, M as debts owed to banks (bank c r e d i t s ) .

r, R as property which the owner holds and «Aiich i s at b i s disposal, V, V as claims on non-banks (debts owed by non-banks),

By the term "bank" must be understood any institution doing laankers' business, and only in as far as such business is concerned, while the term "non-banks" is applied to all other institutions and individuals

(hence undertakings, private individuals and public authorities). The index a marks those quantities that are at the disposal of

noa-banks, the index b those which are the disposal of banks. ij, I^ amount invested from the point of view of disposal.

i , I amount invested from the point of view of property.

ij, I, amount invested from the point of view of possession or tenure.

ij^, I. amount invested from the point of view of saving (KE'YNES). Let us now consider first I,. When, e.g., a non-bank owes a debt to another non-bank, then, in a sense, this debt(claim) represents for the creditor "property". But this property of the creditor is at the dis-posal of the debtor. The creditor has invested the amount of his claim

in that which is at the disposal of the debtor. We shall now consider what a non-bank has at its disposal, and next, who have claims (rights of property, owner's rights) on it. These two amounts we shall equate and call i . . A non-bank, then, has at its disposal:

1° natural resources . . . n ,

a '

2*^ capital equipment . . . fc^ ,

3° cash g„ ,

4° claims on banks (deposits) b .

In total: n_ + fe_ + g_ + 6^ = i._ ; this is claimed by: _{a a '^a a da ' *} 1° creditors - non-banks, for an amount c ,

2° creditors - banks (bank credits) « , 3° the tenant (possessor) himself r ,

so that we have: i,^ = n_+fe„4-g„+6_ «= c ^ + « +r_, _{na a a '^a a a a a'}

In the aggregate for all non-banks: I^^ = ^a+Z^a+G^+Ba = G^+^'o+^a* If we now consider what a bank possesses, we come to an equation of exactly the same form as we derived for the ncm-banks. But if we examine what a bank has at its free disposal, we find another amount. The bank, namely, has not the disposal of what we usually call "cover", which cover we have to define as the difference between deposits placed with the bank and credits granted by the bank, to be indicated by ( b - m ) . Let us see why this is so.

Let us supf>ose for a moment the existence of a legal obligation that money be covered fully by gold. Every note functioning as money, would be no more than the representative of a certain amount of gold, kept at

a certain place. It would make very little difference whether the gold itself circulated, or its paper representatives. If paper notes serve as money, we have not the disposal of the gold, as this must be kept as cover and hence be kept inmobiJized. As soon as we obtain the disposal of (part of) the gold, the disposal of an equivalent amount of notes is cancelled. If this gold were kept at a bank, the bank would possess (or hold) it, hiut would not have it at its disposal.

The actual situation in present-day society is such that deposits represent liabilities of the banks to the public. At the other side of the balance-sheet we find claims of the banks on the public for credits granted (debts owed by the public to the banks) and, for the rest, cash or its equivalent. The bank's customers have the full disposal of their deposits (on current account) and generally do the bulk of their pay-ments by cheque, which the receiver ordinarily pays into his account. To a small ^extent, however, they dispose of their deposits by claiming cash. In order to be able to satisfy this demtmd for cash, the bank is obliged to maintain a certain amount of cash. The size of this amount in proportion to the total of the bank's liabilities, in other words, the percentage of the cover in relation to deposits, is empirically determined. The bank must always hold this amount at the disposal of its depositors, and hence the bank itself does not have it at its own disposal. There is reason to suppose that this amount tends to coincide with ( 6 - m ) , that is to say, that under normal conditions bankers will try to avoid ( 6 - m ) being more than is necessary to meet the demand for cash on the part of the depositors. In other words: legal tender (or gold) kept by a bank, up to an amount of (b-m), is only crypto-money, just as the gold would be in the imaginary case supposed above. The bank has not the free disposal of this crypto-money, but must keep it at the disposal of its depositors. These depositors, for their part, have the disposal of no more than the amount of their deposits, the total of which deposits is given by B. So we can say, that the deposi-tors have the disposal of the sum of credits and cover, but not of the sum of deposits and cover, because that would mean a double counting. Hence we find, that a bank has the disposal of:

^db = "ö "'^ ^b "*' ^6 't" ^6 " (^"'")' *here 6 are the deposits placed at, faj, those placed by the bank, and m the credits granted by the bank. For the aggregate of the banks we should find: I^j, = /Vj,+ ^j,+Gfc +Bj,-(B-W). When banks grant each other credits, however, this occurs in order that

each bank may have the disposal of a greater cover {i.e. may put it at the disposal of its customers), while nevertheless the total cover of all banks together is not increased by these transactions. Hence we have to subtract A/j, and get: 7jj = A/j, + Kf^ + Gj, + Bj - A/j, - ( B - W ) . As, furthermore, B = B^ + Bj, and « = Af„ + Mf^ we have:

This may be regarded as in no part the property of the depositors — non-banks, because it is they who have the disposal of the whole of their deposits, and not the banks, and hence this amount for which depositors have claims, is excluded from I^j,. Therefore 7^^ is fully the proper*-y of the owners of the"banks, so that we have:

Idb = Ipb = ^6 + /ffe + G^ + M„ - B„ = R^.

Furthermore: B^ = Cj,, and M^ = Vj, so that:

Ipb -Idb = ^ 6 + ^ 5 + G , + « „ - B „ = B ,

and, as we have found, ƒ.„ = f^„ + K„ + G„ + B„ = R„ + C„ + M„. I * fia a a a a a a a

+ — . _

Addition yields: I. =N+K+G+M„ = R + C„ + M„,

a ^ a a a^ the total invested from the point of view of disposal.

Let us now look at it from the point of view of property. In that case we may define the sum invested as the difference between assets and liabilities. We then get:

Jn_{pa a <x a a a ct d ct <* a a} = f^. + K„ + G„ + B„ + V- C„ - M^ = R„ + V^ , where V = C„, and

I L - NL -^ Kr -^ GL - B + M = R. , ^ d addition yields:

p 0 0 0 0 a a 0

Ip = N + K + G = R + V^ = R + C„.

Hence, I . = I + M , or: the total invested from the point of view of disposal is more than the total invested from the point of view of property, the difference being the amount of credit granted by banks to non-banks.

Turning our attention now to the total invested from the point of view of possession or tenure, we find that I^^ = I^^, because a non-bank has the disposal of the whole of its possessions. Such is not the case with the banks, which do not have the disposal of their cover, (B„ - MJ, Hence, I^ = Ij + B„ - Af„ > I^.

Let us, finally, consider the total invested according to KEYNES's definition of investment. We have found: I = N + K + G^ + G" . Of this, K + G^ has been produced and is saved income. This does not

apply to N and G", so that I^ = /f + G'.

This is the place, I think, to point to an element of arbitrariness in this definition of I^, We have included G', to the exclusion of G". This means that we have excluded from G, a monopoly product, that part that accrues to the state or the conmunity as the "monopolist's profit". But is there any good reason for such a discrimination? Money is not the only monopoly product, to be sure. There are others contained in K,

in which cases no subtraction has been applied. Therefore, as an alternative definition we get: If^ = K + G, In any case we

h-Oh more detailed consideration we find that there is a difference between claims of non-banks on banks, and claims on non-banks. Anyone who has a claim on a bank in the form of a deposit on current account, has the immediate disposal of the amotmt of his claim, while the debtor (the bank) has not the disposal of it. In all other cases the creditor does not have at his dis{x>sal the amount of his claim {i.e. of the debt owed to him). The reason for this is, that an "I.O.U." of a bank (a banknote), or a deposit at a bank, serves as money.

Oving to the credit-creating activity of the banks, society has at its disposal more than the aggregate property. From this it may be in-ferred immediately that any endeavour to acquire full ownership of that which one has at his disposal (e,g,, an undertaking), means an endeavour to equate I^ and I , i.e., to reduce bank credit M to zero! So we come back to the paradox of credit, from which this paradox of investment arises.

These paradoxes arise from the very nature .of money, the thing-value, the "intrinsic" value of which is no more of any importance, - from the fact, that it is not - to put it in Marxian terms - the time of work socially necessary for its production that determines its value, but that money derives its significance and value, only and exclusively, from its function and its relative scarceness or abundance, together with its mean frequency of turnover {cf. the graph of the purchasing power of the money unit on p. 8 ) . At the moment this function is sus-pended or definitely ceases, as is the case, for instance, when bank-notes are returned to the bank that issued them, or bank loans are re-paid, only the thing-value remains, which ordinarily amounts to nought.

Meanwhile, as long as money functions, it h a s the functional value. As a society in which money (including credit) functions, is, indeed, being considered, it is, I think, only reasonable, from a social-economic point of view, to attribute to it the value it derives from its function.

Also from a private-economic point of view this conception of investment (I.) seems to be useful. An entrepreneur, to be sure, will regard as invested in his business everything which that undertaking has at its disposal. If he has sold and delivered goods on credit to his customers, he may look at the amount of debts owed to him as being invested in the "undertakings" of his customers, whilst, if his suppliers sold to him on credit, the amount of these purchases (his debts!) must be regarded as invested in his undertaking by his suppliers. He may, however, also allow in advance for credits and debts, anticipating their liquidation, in which case his claims on customers must be regarded as being invested in his own undertaking, while what he owes to his suppliers must be looked on as invested in the businesses of these suppliers.

I t i s , however, impossible t o allow i n such a way for debts owed t o money-lenders {e.g., bondholders and mortgagees) and banks. The amounts borrowed from these q u a r t e r s are a c t u a l l y and unambiguously invested in t h e e n t r e p r e n e u r ' s undertaking.

The s o c i a l consequence of the e n t r e p r e n e u r ' s endeavour t o d i s c h a r g e t h e s e l a t t e r d e b t s i n o r d e r t o become t h e a c t u a l owner of h i s under-t a k i n g , i s a ^ d e m o n e under-t i z a under-t i o n " of s o c i e under-t y , which i s l o c a l i z e d wiunder-th under-the consumer {cf, t h e n e x t c h a p t e r ) . Because of t h e f a c t , t h a t money f u l f i l s a very necessary function, we no doubt laecome a c t u a l l y " p o o r e r " by the discharge of debts t h a t r e p r e s e n t money. I f we do include i n the t o t a l i n v e s t e d , money whose i n t r i n s i c value i s nought or nearly so, but which does not r e p r e s e n t a debt and t h e r e f o r e i s p a r t of I , then t h e r e does not seem t o be any v a l i d reason why bank c r e d i t should be excluded. Because, i f a p u b l i c a u t h o r i t y should c r e a t e paper money and p u t i t i n t o c i r c u l a t i o n t o r e p l a c e bank c r e d i t , t h e n , w h i l e f o r t h e r e s t n o t h i n g r e a l would change, the t o t a l amount invested would i n c r e a s e by t h e amount of s t a t e paper money r e p l a c i n g bank money, which, I t h i n k , would be an absurd p r o p o s i t i o n .

Hence I define the t o t a l invested as I,, i.e. from the point of view of d i s p o s a l .

C H A P T E R 4

THE SHORTAGE OF PURCHASING POWER IN THE

HAJHDS OF THE PUBLIC

We f i n d DOUGLAS's economic h e r e s y e x p r e s s e d i n the s e n t e n c e : "The p o i n t we have to make i s n o t merely t h a t f i n a n c i a l p u r c h a s i n g power i s u n s a t i s f a c t o r i l y d i s t r i b u t e d , i t i s t h a t , in its visible form, i t i s c o l l e c t i v e l y i n s u f f i c i e n t " . {Social Credit, p . 8 2 ; Douglas Manual, p . 6 1 ) . I am u n a b l e t o a c c e p t t h e g r e a t e r p a r t o f t h e arguments o f DOUGLAS and o t h e r S o c i a l C r e d i t o r s i n support o f t h i s t h e s i s . DOUGLAS's b e s t arguments a r e , I t h i n k , t o be found in the f o l l o w i n g remarks:

"Purchasing power i s not, as might be gathered from the current discussion on the subject, an emanation from the production of real commodities and ser-vices much l i k e the scent from a rose, but on the contrary, i s produced by an entirely d i s t i n c t process, that i s to say, the banking system," (The Monopoly of Credit, p,23; Douglas Manual, pp, 14-15).

"There i s extant in the world a common, i f somewhat nebulous, idea that «Soever, for instance, grows a ton of potatoes grows thereby in some mysterious way, the purchasing power equivalent to a ton of p o t a t o e s . " (Social Credit, p,130; Douglas Manual, p. 15).

" I f the i n t e r a c t i o n between production for p r o f i t and the c r e a t i o n of c r e d i t by the finance and banking houses i s understood, i t will be seen that the root of the evil accruing from the system i s in the constant f i l c h i n g of purchasing power from the individual in favour of the financier, rather than in the mere profit i t s e l f . " (Economic Democracy, p.69; Douglas Manual, p.62). "The complaint which i s l e v e l l e d at the banks i s generally that they pay too large a dividend. Now, curiously enough, in my opinion, almost the only thing which i s not open to d e s t r u c t i v e c r i t i c i s m about the banks i s t h e i r dividend. Their dividend goes to shareholders and i s purchasing power, but t h e i r enormous concealed p r o f i t s , a small proportion of which goes in immensely redundant bank premises, e t c . , do not provide purchasing power for anyone, and merely aggrandize banks as banks. But the e s s e n t i a l point in the position of banks, which i s hard to explain, and i s grasped by so very few people, i s that t h e i r true a s s e t s are not represented by anything actual at a l l , but are re-presented by the difference between a s o c i e t y functioning under centralized and r e s t r i c t e d credit and* a free society unfettered by financial r e s t r i c t i o n s . ' (Warning Democracy, pp>42-43; Douglas Manual, pp.62-63).

"Apart from any other more subtle explanation, even great banks h e s i t a t e to d i s t r i b u t e t h e i r true o r o f i t s for fear of a t t r a c t i n g too much a t t e n t i o n . " (Social Credit, p, 151; Douglas Manual, p.63).

I w i l l now q u o t e h e r e e x t e n s i v e l y from a paper by A,W.JOSEPH, i n 1934 s u b m i t t e d t o and d i s c u s s e d by t h e Birmingham A c t u a r i a l S o c i e t y , and p u b l i s h e d i n The New Age, November 1 , 8 , 15, and 2 2 , 1934. The part q u o t e d has been t a k e n from The New Age ( 2 ) 56 18 (November 8 , 1 9 3 4 ) . The arguments g i v e n h e r e are among the b e s t I have found i n the l i t e r a

-t u r e ' ' .