Charles Booth and Major C.H. Douglas: The Social Credit Proposal

There is no point that we can describe as the end point of globalization. It is possible to determine its level in different areas. There is a lot of data that we can use to determine this level. However, making comparisons is very important to determine the level.

There is an experience of the end of the 19th century that we can analyze with which we can compare the period we are in and especially the stages we have achieved in the last 25 years. Indeed, in the books I have been reading recently, I have frequently come across historical reminders that deal with the end of the 19th century and the changing atmosphere that followed with two world wars and a great depression.

Analyzing income inequality and how the conditions that created income inequality later brought totalitarian regimes to power throughout history is of great benefit and importance in making many determinations about today.

Today’s globalization process has started to slow down in recent years. In fact, according to some data, it has even gone backwards. There are differences between the end of the globalization process in the 19th century and the slowdown of today. Today, major wars have been replaced by numerous large and small regional conflicts. Another major difference is the rise of the East this time. At the end of the 19th century, after the Industrial Revolution, global leadership was in the West. But today, the East is also involved. The center of gravity of the global economy has shifted significantly eastward.

We can discuss in books, articles and conferences how today's globalization phenomenon will end or what course the globalization movement will follow, but there is a common feature that these great changes reveal: in these processes, certain segments of society feel social, cultural and psychological discomfort and begin to seek solutions to the problems that arise.

Let's go back to the end of the 19th century and give an example from the 19th century about the income inequality issue that we talk about so often today.

A wealthy capitalist named Charles Booth conducts a study in the late 19th century in London to document the living conditions of the working class. He takes a statistical picture of the poverty experienced in London. He tries to measure the social damage caused by the period that started with the Industrial Revolution and continued. The prime minister of England at the time was Gladstone, who was known as a staunch advocate of strong liberal policies. He learns about Charles Booth's work and invites him to politics, but Booth rejects this offer. However, Booth is interested in politics.

Charles Booth, who took over his family's business after his father's death and successfully ran it, emphasized the importance and necessity of social reforms. He expressed that some social policies should be implemented based on the social problems experienced by the working class in London. It can be thought that Booth shifted to socialist thought because of these thoughts. However, such a result did not occur. In fact, as a boss who continued the business of a capitalist family, he shifted from the Liberal Party to the Conservative Party.

As a businessman who cares about social elements, Booth's works and views attract attention and interest. He put forward an opinion that was rarely seen in the class he lived in during his time.

The social, cultural and psychological discomforts created by every major change bring with them solutions. The concept of social credit, developed by an engineer named Major CH Douglas, goes far beyond the views put forward by Charles Booth. Social credit parties are even established in England and Canada.

Douglas's thoughts matured between 1916 and 1920. He put forward his ideas in his books Economic Democracy, Credit-Power and Democracy and Social Credit. Douglas claims that the capitalist system is a system with deficiencies in terms of purchasing power. He says that workers in different stages of production never have the economic power to purchase the final products. For this reason, he suggests the development of a "social credit" system. In evaluating Douglas's thoughts, it is necessary to know the economic conditions of the years in which he lived very well.

World War I has broken out. The world is under crisis conditions. Therefore, there is idleness in production capacities, and Keynes also bases his theory on the existence of idle capacities when producing a theory for a developed economy in crisis to get out of the crisis. In other words, there is no problem such as not being able to produce. Because, the established production capacities are idle due to crisis conditions. The problem is that those capacities cannot be activated.

Douglas described production that did not improve the economic situation of individuals as "waste" or "economic sabotage." In other words, he was describing the situation in which individuals were forced to produce something they did not have the purchasing power to produce. Thus, unnecessary work was being done for a product that could not be purchased.

Douglas had a perspective that came from being an engineer. He analyzed the economy with the working principles of machines. He questioned the purpose of the industrial system. He explained that unemployment was a logical result of machines replacing humans. However, he said that those who were left out of working life as a natural result of mechanization could still benefit from the industrial system. Because society was the heir of a "cultural heritage."

Money was effective demand. The banking system through which money was demanded was a "distribution mechanism". This distribution mechanism was actually the distribution of production. Wealth was formed thanks to this mechanism. In other words, cultural heritage was formed thanks to the banking system that provided the distribution of production and was the efficiency obtained in the production process. Cultural heritage was formed cumulatively in the historical process. Thus, "unearned surplus" was created in society.

The contribution of the banking system to production was obvious, but there were two points that needed to be criticized. The first was the existence of a banking system that wanted to centralize its power. This situation was turning the banking system into a government model and this was a phenomenon that emerged over centuries. The second was that banks were claiming ownership of the money produced in the banking system. This claim was the same as claiming ownership of society.

In the modern economy, money was not just a medium of exchange but a part of the credit mechanism. Therefore, the Classical Economics model of goods being exchanged for goods was not valid.

The factory was not just an organization that produced. This organization also had a financial dimension. While individuals were paid wages, salaries and dividends, payments were made to other organizations for raw materials, banking expenses and other purposes. Douglas grouped payments made to individuals under group A and payments made to other organizations under group B. Payments made under groups A and B created purchasing power. The ideas under this grouping were called the A+B Theorem.

Production was in a process that the consumer would not be interested in or would not have sufficient purchasing power. For this reason, imbalances were occurring in international trade. This process was the reason for the emergence of countries that imported more than they exported or exported more than they imported. The long-term effect of this result was trade wars between countries. Considering these conditions, John Hargrave stated that under the Social Credit Party of Great Britain and Northern Ireland (established: 1920), "a country that demanded full employment was actually inviting a real war." In other words, trade wars would turn into armed wars.

Production costs consisted of direct labor, raw materials/materials and general expenses. As the importance of raw materials and production methods increased in the modernizing and industrializing production style, it was observed that the general production expenses/direct labor ratio was increasing. The increase in this ratio was an indication that machinery and technology were replacing labor. According to the A+B Theorem, the main reason for inflation was not monetary abundance, but the general expense increase resulting from industrialization. Therefore, inflation would show itself even if there was purchasing power to purchase the goods and services resulting from the production.

Douglas proposed a mechanism called the "national (or consumer) dividend" to bridge the gap between purchasing power and the general price level. The National Credit Office would be responsible for determining the amount of payment to be made available to society.

Developments in production technology allow more output to be obtained with less input. Thus, the real cost of production decreases. While real costs decrease with the use of the machine, the existence of costs such as renewal, depreciation, etc. begins to have a greater effect on costs. In other words, in addition to real costs, there are financial costs. Accordingly, if consumption remains lower than production in a certain period of time, the real cost of production remains below financial costs.

If the sales price of a good is 100 TL and the consumption/production ratio is 3/4, the real cost of production will be determined as 75 TL (100x3/4). 75 TL represents the payments under groups A and B and therefore the purchasing power. The consumer will provide the 25 TL purchasing power in between thanks to the National Credit Office. Thus, a "fair price" will be established in the market. In this equation, the cost of production also meant consumption.

Douglas' A+B Theorem has been rejected by academic economists. There have been objections to the fact that group A and B payments lose their feature of being income for individuals and organizations over a certain period of time. In addition, group B payments made during the production process of products in production support the purchasing power for the existing product. Douglas' model is also inflationary. Douglas was also criticized by Keynes.

In the model put forward by Douglas, both Say's Law and Quantity Theory were rejected. Say's Law was criticized because it claimed that supply was formed in a quantity that did not allow all the goods produced to be swept away from the market. The basis of the criticism of Quantity Theory was the concept of velocity of money. The velocity of money increased as the frequency of transfer of goods from one hand to another increased, but it did not increase purchasing power. Because each transfer of goods also produced costs.

Douglas gave his objectors the example of increasing indebtedness in society: If goods and services on the market could be purchased with purchasing power, there would be no need for borrowing.

Another idea of Douglas was that all taxes on real estate should be abolished within the framework of the concept of "absolute economic security" of the individual. This view differed from the views of Henry George. Douglas did not suggest that labor should control industries with the concept of economic democracy. Economic democracy would be provided with social credit. The democracy of the consumer should be established together with the aristocracy of the producer.

It was not possible for a balanced budget to exist in the social credit mechanism. Douglas accepted this. However, he adopted the principle that the state should serve the individual and rejected the opposite. Society was a metaphysical concept and dialectical materialism was not correct.

Now, the views put forward to keep the system alive need to be examined carefully. Charles Booth makes a point and also makes a suggestion, but his analyses are not as deep as Douglas's. Douglas's deep analyses are only enough to understand the world he is in, but his suggestions are wrong. However, when we consider that these suggestions went as far as the formation of political parties based on the idea of social credit in England and Canada, we can see that the ideas that created excitement at one time have been forgotten in the corners of history over time.

Today's world economy has major problems. There are both observations and suggestions. I attach great importance to institutional economics' search for local and global solutions. Unlike the 19th century, environmental issues are very important among today's problems.

Economics is a social science. Unless you sit in front of computers and add a “social” content to your graphical analyses, you can only be a market analyst, but not an economist.

Today, the world frequently talks about income inequality. Just as it did in the late 19th century. Many things change, but the basic concepts and problems do not.