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Cornell University Library 
 HG3701.D7H6 
 
 The Douglas theory, a reply to Mr. J.A. 
 
 3 1924 013 919 976 
 
The original of tliis book is in 
 tlie Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924013919976 
 
The 
 
 DOUGLAS 
 
 THEORY 
 
 A Reply to 
 
 Mr. J. A. HoBsoN 
 
 -By 
 Major C. H. DOUGLAS 
 
 Author of 
 
 " Credit Power and Democracy," 
 " Economic Democracy," etc. 
 
 LONDON : CECIL PALMER 
 
 Oakley House, Bloomsbury Strp<!^ 
 
 W.C.I 
 
Copyright Reserved. 
 
 The Douglas Theory : A Reply 
 to Mr. J. A. Hobson 
 
 IN dealing with Mr. J. A. Hobson's criticism of my 
 theories on Credit, it seems desirable to follow the 
 order which he himself employs. This order is : — 
 
 (i) The general implication of the theory. 
 
 (2) An examination of certain details of the analysis. 
 
 (3) A "destructive" criticism of the remedial pro- 
 
 posals based on (2). 
 
 (i) It is to be noted that, as might be expected from 
 a critic possessing Mr. Hobson's qualifications, there is 
 no disagreement with my statement that the root factor 
 in the whole industrial crisis and problem is lack of effec- 
 tive demand. 
 
 But at this point the fundamental divergence begins. 
 In his own explanation of the acknowledged fact, he says, 
 "I trace this failure, not to any lack of the monetary 
 power to purchase all the commodities that could be pro- 
 duced, but to the refusal of those in possession of this 
 power of purchase to apply enough of it in buying con- 
 sumables, becatise they f refer to apply it in buying non- 
 consumables, in other words, to buying capital goods." 
 (My italics.) 
 
 This represents a radical cleavage, the static versus 
 dynamic cleavage of attack on the problem. Mr. Hob- 
 son regards it as an explanation; I would present it to 
 him as a fact arising out of a defective credit system. 
 
 3 
 
Considered as an explanation, it carries the implication 
 that it "ought" not to be so, that improvement demands 
 its elimination; it leads to the assumption that, e.g., the 
 financial system is reasonably blameless, and only man 
 is vile. That, again, leads to the conclusion that all our 
 troubles are due to a bad Governmental and administra- 
 tive personnel, and if only Mr. Clynes in Parliament, 
 and Mr. Thomas on the railways could be put into power, 
 all would be well. 
 
 Considered as a fact, it is one of the many premises 
 of which to take cognisance in suggesting methods by 
 which to achieve the greatest enhancement of opportunity 
 of the greatest number. In other words, both Mr. Hobson 
 and I see a world whose financial mechanism is failing 
 to deliver the goods. Mr. Hobson implies that a change 
 in the nature of the steam which provides the motive force 
 is required ; I suggest that the valve gear wants re-design- 
 ing. Both theories are conceivably tenable; it is a matter 
 for personal judgment as to which line of action is likely 
 to produce the earlier result. 
 
 (2) (a) "the central charge is that a large part of 
 the money representing the cost of produc- 
 tion, and helping to swell the selling prices, 
 is not available to buy the articles pro- 
 duced.- . . . etc." 
 
 (b) "The second and more fundamental reason 
 is that large advances of bank credit are 
 utilised by manufacturers and enter into 
 the prices of the final product. . ." 
 
 Mr. Hobson says in regard to (2) (a): "Now the 
 fallacy of this argument might, I think, be apparent from 
 the preposterous nature of the assertion that only a few 
 per cent, of the price value is available as effective 
 demand"; and in regard to (2) (b) : "In point of fact, 
 it is not true that the bank advances, by which the busi- 
 
 4 
 
ness men at the various processes financed their trade, 
 are costs which enter final prices." \ 
 
 In regard to objection (2) (a), it is a simple state- 
 ment of fact to say that as the majority of the working 
 population are wage earners, paid weekly, and spending 
 within a few per cent, of the whole of their week's wages 
 in the current week, it is a physical impossibility for the 
 wages of the current week to buy the production of the 
 current week; it is not in the market to buy. It probably 
 will not come into the market, on the average, for at least 
 six months. They are buying the production, or part 
 of the production, of a fairly long past week, by drawing 
 on the purchasing power which goes to make up the costs 
 of an unspecified quantity and variety of goods which 
 will be delivered sometime in the future. To reiterate 
 categorically, the theorem, criticised by Mr. Hobson : the 
 wages, salaries and dividends distributed during a given 
 period do not, and cannot, buy the production of that 
 period; that production can only be bought, i.e., dis- 
 tributed, under present conditions by a draft, and an 
 increasing draft, on the purchasing power distributed in 
 respect of future production, and this latter is mainly 
 and increasingly derived from financial credit created by 
 the banks. 
 
 But further, because the general level of prices above 
 cost is equal to money /goods, these drafts on future pro- 
 duction still further raise present prices, hence general 
 increased production under present conditions means 
 either rising prices (instead of falling prices) or unemploy- 
 ment and failure of distribution. Prices cannot fall below 
 cost plus a minimum profit, under present conditions, 
 since profit forms the inducement to produce. 
 
 To put it another way, the rate at which money can 
 be spent this week does not depend at all on the goods 
 which can be, and are, supplied this week, and is not 
 
 5 
 
part of the cost of the goods which can be supplied this 
 week. An increase in the money paid this week is identi- 
 cal with any other form of money inflation under present 
 circumstances — it widens effective demand, stimulates 
 production, and raises prices. The real price paid for 
 the consumable goods bought this week is approximately 
 a week's production of both capital and consumable goods 
 (including exports) to be supplied at some future, and 
 increasingly future, date, and there is nothing in the 
 arrangement which guarantees that a larger amount of 
 consumable goods per head can be bought in the future 
 as a result of a larger amount of money distributed this 
 week, vide the war period. 
 
 Now I do not suppose that Mr. Hobson will, on 
 consideration, question these statements, but it is quite 
 clear that he does not appreciate their importance. He 
 does not appear to see that it results in the whole produc- 
 tion of the country, both tangible and intangible, what- 
 ever its magnitude and however strenuous the conditions 
 under which it is produced, being paid for by the concrete 
 consumption of the country over the same period of time, 
 and that there is no direct relation (although there is a most 
 important indirect relation) between these two. Funda- 
 mentally, under the present financial arrangements, the 
 price paid for anything is what it will fetch ; and the price 
 paid in purchasing power to the community as a whole, 
 by the financial system as a whole, for its co-operation in 
 production does not depend primarily on the production 
 or the productive capacity at all— it depends on what 
 purchasing power the individuals who form the com- 
 munity will accept, i.e., how much money they can 
 acquire and what prices they will agree to pay, for that 
 part of the production they want to buy. The community 
 of individuals unquestionably sets a very low price on 
 its co-operation, i.e. , it will agree to a very unfavourable 
 ratio of money to prices, a price which does not give it 
 
 6 
 
purchasing power over more than a fraction of total 
 production. 
 
 (2) (b). I do not understand what Mr. Hobson 
 means by this. He himself explains in his next para- 
 graph that bank credits are used by manufacturers "to 
 pay wages, salaries and dividends to producers of raw 
 materials, plant, etc." If these have not gone into costs, 
 where have they gone ? 
 
 I do see clearly, however, that again the purely 
 static conception of the question has evoked his comment, 
 as evidenced in the tenses used in the paragraph to which 
 reference has last been made. There is implicit 
 in his argument the idea that a bank only lends its own 
 and its customers' money. A bank lends new money; to 
 quote Sir Edward Holden, the late Managing Director 
 of the London City and Midland Bank — "Bank loans 
 create bank deposits." Space will not allow of the treat- 
 ment of this most important question, and there is already 
 a considerable literature on the subject. The rise in the 
 figures of total bank deposits during the past twenty years 
 proves the dynamic theory up to the hilt, if any proof 
 is needed. I suppose Mr. Hobson would not contend 
 that it does not matter from where, in its cycle of revolu- 
 tion, money originates, for if he does so contend, I shall 
 at once demand his assistance in setting up a bank-note 
 factory ! 
 
 At this point it may be convenient to deal with what, 
 in effect, is Mr. Hobson's definition of credit. It is so 
 important that it seems desirable to quote it in full. He 
 says, "... Credit can only work by reason of the prior 
 production of a surplus stock of food, clothing, etc., 
 reserved from consumption by those who owned it and 
 might have consumed it but preferred to 'save' it and 
 to make a store which could enable these more lengthy 
 processes of production to be financed and rendered 
 economically possible. The credit furnished by bankers 
 
 7 
 
draws on this stock of savings. The bankers do not, 
 indeed, themselves own these stocks of real savings; they 
 get them mostly from depositors and lend them out as 
 'credits,' taking as their charge for the utility of this 
 service the difference between the interest paid to them 
 by their customers and that paid by them to their 
 depositors." 
 
 Unfortunately, like so many of these "simple," "in- 
 telligible" (i.e., familiar) "explanations of the part 
 played by bank credit in financing trade" it is not, I 
 think, even approximately correct. If it were, I should 
 agree that "it furnishes no support to the Douglas 
 Theory." 
 
 So far as Mr. Hob.son's own explanation is con- 
 cerned, a moment's consideration will show that a bank 
 loan does not foim a draft on the specific goods in the 
 possession of the bank's depositors; it simply acts, during 
 the second portion of its cycle, in which it is being 
 returned to the banks through the medium of prices, as 
 a diluent of existing claims on goods, belonging to the 
 community as a whole and not to the bank's depositors 
 in particular. Bank money will buy any goods, not 
 merely the goods the bank's depositors are alleged to 
 have "saved." 
 
 But it is much more important to realise what part 
 credit does play, than what it is not. 
 
 A banker lends credit, which is not his, but public 
 property, because he expects to get something; in his 
 case, interest. An employer, in his turn, lends the credit 
 (wages, salaries) because he expects to get something, 
 production, from which he will get profits. The indi- 
 vidual consents to work for money, which derives from 
 credit, because he expects to get goods, which to him are 
 profits. So far from the modern large-scale credit system 
 resting solely on a basis of "savings," as Mr. Hobson 
 would suggest — on something done in the past — it rests 
 
 8 
 
more and more on a correct estimate of something to be 
 , delivered in the future. "Faith (belief, credit) is the 
 substance of things hoped for, the evidence of things not 
 seen." That is a succinct statement of the part played 
 by credit in the psychology of production. 
 
 The conception advanced by Mr. Hobson is, of 
 course, exactly that which the banker would like the 
 public to accept, and which, no doubt, quite a large num- 
 ber of the rank and file of bankers themselves take for 
 granted. It suggests that banking is simply a private 
 pawnbroking transaction between borrower and lender. 
 This is, unfortunately, not true. The question of colla- 
 teral security, which may or may not be present, is quite 
 immaterial ; every credit transaction definitely affects the 
 interests of every person in the credit area concerned, 
 either through the agency of prices, or by the diversion 
 of the energies available for production purposes. Inci- 
 dentally, this is not an argument for nationalised bank- 
 ing, which, like all "nationalisation," is an administra- 
 tive measure, it is an argument for socialised credit. 
 
 Mr. Hobson's criticisms of the concrete proposal put 
 forward in 19 19 in the Draft Scheme for the Mining 
 Industry really rest on his conception of the real basis 
 of credit. 
 
 He says, "... such a Producers' Bank might work 
 ... if (the prime essential) enough of the money paid 
 in were left for a considerable time undrawn." This is 
 exactly the same argument as that employed by those 
 tragically mistaken persons who said that the First World 
 War could not last three months as no country had the 
 money for a lengthier period. The war lasted more than 
 four years; and in 1918 every country, except, possibly, 
 Russia, which had destroyed the operation of credit, had 
 more money, and, what is much more important, more 
 productive capacity, than when it began. The "prime 
 essential" of the workability of a bank founded on the 
 
Mining Industry is not what "savings" it can hold; it 
 is that those connected with it are able to affect, by affect- 
 ing co-operation, "the correct estimate of something to 
 be delivered in the future," which the community desires, 
 e.g., coal. The question of the "money" in the bank 
 is a mechanical question, just as the provision of more 
 currency to finance war production was a mechanical 
 question, solved, even if badly solved, in seven days. I 
 do not say that the problem is a trivial one; it is not. 
 But it is in no sense fundamental. 
 
 In other words, the real essential basis of credit is 
 not money; it is the capacity to deliver (not merely to 
 produce) goods and services; which involves the agree- 
 ment to co-operate of the whole community. 
 
 In regard to the last paragraph of Mr. Hobson'?* 
 article, the answer is substantially that ' 'the whole market 
 price" paid by the existing banks for their use of public 
 credit is simply a very small part of the purchasinp^ power 
 value of that credit. The proposed banks use their whole 
 c.redit power for the benefit of their depositors. 
 
 There is no incentive to thrift provided by the 
 Scheme for the simple reason that, in my opinion, mone- 
 tary thrift is a wholly ineffective method of achieving the 
 economic security at which, presumably, it aims. The 
 wealth of a community is increased by spending, not by 
 saving — an apparent paradox with which on considera- 
 tion I feel sure Mr. Hobson will agree. What is true 
 of the community would be true of the individual if the 
 results of his spending accrued to him, which at present 
 they do not. 
 
 C. H. Douglas. 
 
 Printed by National Labour Press, Ltd., 8 lolinson's Court. Fleet St., EC. 4; also at Mancliester 
 and Leicester. — 11358 
 
The DOUGLAS New-Age Credit Scheme. 
 
 Economic Democracy 
 
 By Major C. H. DOUGLAS 
 
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 Credit Power and Democracy 
 
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