Who Represents ihe Consumers? 103 Major Douglas, like virtually all of capitalism’s critics, did not understand the doctrine of consumers’ sovereignty. He honestly believed that producers dictate terms of sale to consumers. He wrote: Let me repeat - the only true, sane origin of production is the real need or desire of the imiividual consumer. If we are to continue to have co-operative production, then that productive system must be subject to one condition only - that it delivers the goods where they are demanded. If any men, or body of men, by reason of their fortuitous position in that system, at- tempt to dictate the terms on wl~ich they will deliver the goods (not, be it noted, the terms on which they will work), then that is a tyranny, and the world has never tolerated a tyranny for very long~b There are indeed tyrants in the capitalist economy the consumers. They are merciless. They keep asking producers this question: “What have you done for me lately?” And this question: “What can I expect from you tomorrow?” But Major Douglas saw the producers as the tyrants. He therefore failed utterly to understand capitalism’s system of economic represen- tation: the owners of capital must serve the consumers or suffer the consequences, namely losses or forfeited profits. It is the producer’s opportunity to make a profit that serves the con- sumers as their hammer: share owners are pressured to elect managers who serve consumers well - with the least waste of scarce resources. Because Major Douglas misidentified the bankers as the true masters of the economy, he misidentified them as the hidden tileves in the system. Central brokers - those who use the State to gain a monopoly over the control of money and credit - were indeed thieves, and remain thieves. But this is not because they are bankers - agents of private depositors who lend mon- 46. Control and Dislribuiioa of Productmn, p. 13. 104 SALVATION THROUGH INFLATION ey. This is because the State has used its authority to create a private or semi-private monopoly over money Douglas never understood the difference between commercial banking and central banking. He therefore never proposed a workable rem- edy for the evils he perceived. In the name of pragmatism - “workability,” as he put it 47 - he offered a reform that could not possibly solve the problem he identified, as we shall see. Summary 1. Jesus told Satan that man lives by the word of God. 2. Magic is not the way to wealth. 3. Obedience precedes rewards: the way to wealth. 4. Douglas focused on society’s bread, not God’s word. 5. He announced that he was not bringing a moral criticism of capitalism, merely a practical one: pragmatism. 6. Douglas said: “That is moral which works best.” 7. Christianity teaches: “That which is moral works best.” 8. There is no moral neutrality. 9. Pragmatists are secret moralists. 10. Someone has to be the boss. 11. Capitalism says that the consumers are the boss. 12. Corporations establish that shareholders are the legal own- ers. 13. Shareholders, in order to profit, must hire managers who serve consumers well. 14. Shareholders exercise control by voting: at shareholder meetings (legal control) and by selling their shares (economic control). 15. The stock market is a giant auction. 16. Producers compete against other producers. 17. Consumers compete against other consumers. 18. There are two forms of ownership: legal and economic (stewardship). 47. Ibid., p. vii. Who Refiresents the Consumers? 105 19. Douglas did not understand consumers’ sovereignty. 20. He thought bankers are sovereign. 21. He did not believe in majority political rule. 22. He opposed Christian law irl society. 23. He blamed the financial system for unsold goods. 24. He did not blame the 1920 recession on prior monetary inflation: sending false signals to producers. 25. When the monetary inflation ended, the recession began. 26. It ended less than two years after his book appeared. 6 WHO SHOULD CONTROL DISTRIBUTION? And he causeth all, both small and great, rich and poor, fkee and bond, to receive a mark in their right hand, or in their fore- heads: And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name (Revelation 13: 16-17). Who should control distribution? This question has divided economists almost fi-om the beginning. We need to ask our- selves several questions. Which people should we trust? State bureaucrats who can rarely be fired if they price things incor- rectly? Or producers who lose their own money if they price their output incorrectly? Which group possesses greater power to coerce consumers, a monopolistic government bureaucracy or competing producers? Which group poses the greatest threat to our freedom? Which group is more likely to play God? In other words, who should be trusted by consumers: profit-seek- ing producers or Civil Service-protected bureaucrats? The Unity of Production and Distribution One of the most important errors in economics is to imagine that it is possible to separate free market production from Who Should Control Distribution? 107 distribution without affecting future production. Economist Murray Rothbard has said it well,: under capitalism, production and distribution are an unbreakable process. They are two sides of the same coin. In the free market process, therefore, there is no separation between production and “distribution.” There is no heap some- where on which “products” arc arbitrarily thrown and horn which someone does or can arbitrarily “distribute” them among various people. On the contrary, individuals produce goods and sell them to consumers for money, which they in turn spend on consumption or on investment in order to increase future con- sumption. There is no separate “distribution”; there is only production and its corollary, exc:hange.1 If producers are not allowed to bargain with final consumers or middlemen regarding the terms of sale, there will be eco- nomic consequences on the p reduction side of the process. Whatever producers decide to produce is heavily dependent on the nature of the distribution system. It is not possible, there- fore, for thieves or government officials to confiscate private property or exercise control over private property especially capital goods, without affectin{; the entire production system. Producers will seek to escape these controls, even if they must cease producing. As the old slogan goes, “You can’t redistribute it if there isn’t any.” We ask: “Who owns this?” Here is the theoretical answer: “The person who has the legal right to disown it.” If you cannot legally sell it, you do not legally own it: At most, the so-called owner may be allowed to consume it. This kind of ownership 1. Murray N. Rothbard, Man, Economy. and State: A Twatise on Econornit Pnnci#es (Princeton, New Jersey Van Nostrand, 1962), pp. 408-9. 2. F. A. Harper writex “The corollary of the right of ownership is the right of disownership,” Harper, Liberty: A Path to Its Recoverj (Irvington, New York: Founda- tion for Economic Education, 1949), p. 106. 108 SALVATION THROUGH INFLATION subsidizes a particular kind of use: consumption, which is a restricted form of disownership. We ask: “Who’s in charge here?” The answer, in the field of economics, is: “The one who is legally authorized to make the sale.” In most transactions, this means a seller of goods and a seller of money (called the “buyer”). When we begin a search to discover those who have econom- ic control over any institution, a familiar rule of thumb is this one: follow the mong. Those who collect the money (assets) and distribute it are the representatives of the legal owner or own- ers. In other words, the structure of institutional authority is intimately linked to lawful control over the use of the institu- tion’s assets. Is Capitalism an Inefficient System? As is so often the case with the critics of capitalism, Major Douglas’ criticism was that today’s capitalism cannot produce an abundance of goods and services. The ftilure of capitalism, he insisted, is the failure of its distribution system. Capitalism’s industrial efficiency is potentially very high, but this efficiency cannot be attained through free market ownership, he main- tained. The failure is supposedly on the distribution side. In other words, Social Credit rests on the argument that there is a separation between production and consumption under capi- talism, and that the State has an obligation - not a moral obli- gation of course, as Douglas assured us repeatedly -to step in and correct the failure on the distribution side. This is the argument of every socialist and every defender of the “mixed economy,” i.e., a mixture of private ownership and government control. Where Is the Evidence? D6ug1as never offered any statistical evidence supporting his argument that capitalism’s productivity is being significantly Who Should Control Distribution? 109 hampered by its distribution system. He cited as economic fact a rumor regarding the opinion of H. L. Gantt, one of the dkci- ples of scientific management picmeer Frederick Taylor. Taylor was the man who introduced time-and-motion studies in the 1880’s. Gantt invented the famous Gantt chart for diagraming projects from start to finish. Dou@as wrote: “The late Mr. H. L. Gantt, one of the most capable arid enlightened industrial engi- neers that A-nerica has producecl, is reported to have said that the industrial efficiency of the lJnited States was about 5 per cent. in 1919.”3 Reported by whom? Reported where? Douglas never said. On the face of it, Gantt’s reported statement is preposterous. I have little doubt that Mr. Gantt never said anything like this. If he did, his observation has never been substantiated by any economic historian. Taylor and his disciples would spend hours, even weeks, studying the motions of a single worker, trying to locate tiny inefficiencies, and then retraining him to follow a new pattern. These refinements did produce increases in output, but nothing on the scale of twenty to one (5% effi- ciency to 100%). To reduce a nation to five percent of its indus- trial efficiency cannot be accomplished by anything short of full- scale nuclear war. Nevertheless, Douglas used this and other equally preposterous estimates of industrial inefficiency again and again in his critique of capitalism. Douglas expected his readers, to take his word for a series of inconsistent facts regarding the underlying, “untapped,” pro- ductivity of modern capitalism. He refused to present evidence for his verbal estimates. His line of argumentation was anything but scientific. He had almost no information about the output of capitalism in his era. This seriously compromises his work. In book after book, Douglas repeated something like the following: if the industrial system someday could operate at a mere 75 percent of its potential efficiency, today’s level of pro- 3. Cmdit-hwer and Democracy (London: Cecil Palmer, 1920), p. 16. 110 SALVATION THROUGH INFLATION duction could be achieved by “the same number of persons working one-fifteenth of the time they now work - i.e., about thirty minutes per day instead of about eight hours, or by one- fifteenth of the present number of persons working the same hours.”4 This means that the economic output of workers could be increased by a factor of 15 to one by operating the economy at only 75 percent of its present unused potential. This statement is an example of Douglas’ totally unsubstantiated rhetoric. He offered no evidence of any kind. Yet his followers continue to regard him seriously as the pioneer of a theory of scientific pricing based on rigorous economic statistics. He made similarly outrageous and unsubstantiated claims in his first book. “It has been estimated by whom? - GN] that two hours per week of the time of every fit adult between the ages of 18 and 45 would provide for a uniformly high standard of physical welfare under existing conditions. . . .“ 5 Only two hours per week! Well, perhaps just a bit more. A few pages later, he wrote: “The exact figures are beside the point, but somethhg over three hours’ work per head per day is ample for the purpose of meeting consumption and depreciation of all the factors of modern life under normal conditions and proper direction.”s Either two hours a week or three hours a day. “The Facts Are Iwelevant” Notice his amazing admission. “The exact figures are beside the point.” Beside the point? Exact figures were absolutely vital in proving his case that the free market is woefhlly inefficient. Without such evidence, he was an emperor with no clothes, a critic without proof. This from the man who proposed, as we 4. Crsdit-Power and Democracy, p. 17. “. . . the employment of not more than 25 per cent of the available labou~ working, let us say, seven hours a day.” The intro- duction- of a horse-power-hour of energy could “displace at least ten man hours.” Social Credit (3rd cd.; London: Eyre & Spottiswoode, 1933), p. 18. 5. Economic Dsnsocraq (2nd cd.; London: Cecil Palme~ [1920] 1921), pp. 86-87. 6. Ibid., p. 105. Who Should Control Distribution? 111 shall see, that accurate statistics are absolutely crucial for eco- nomic planning by the administrators of the nation’s social creditkocial dividend: the State’s credit masters. Major Douglas was dressed in rhetoric, not science. His followers have never blinked an eye. Why, then, has such a cornucopia of either leisure or materi- al productivity not been attained under capitalism? He offered thii answer: “As the economic dktribution system stands at present, such a condition of afkirs is impossible of attainment, because, although the goods wcluld be produced, the purchas- ing-power to buy them would not be distributed.’” So, it is a luck of purchasing power in the had of consumers that is wholly to blame. He called this “sabotage: and labeled it “the outstand- ing feature of contemporary industry. . . .“ He said this sabo- tage is “solely due to the blind effort to equate purchasing- power to production without altering the principles of price- fixing.”s (Not a very clear statement, is it?) The Real Cause of Economic Contraction Government This criticism of the free market’s distribution system is at the technical heart of his proposal to reform capitalism. (The ethical heart is Douglas’ denial of the legitimacy of economic sanctions.)g There supposedly is insufficient purchasing power within the capitalist economic system. This is a fam~lar criticism of capitalism in every era, but especially during periods of economic depression. The problem is, this criticism is wrong. It fails to identify the cause of low sales: setters’ ignorance about the proper price at which to sell their inventories. The problem of distribution is not a system-wide lack of money or credi~ the problem is a general lack of accurate 7. Credit-Pmwr and Democracy, p. 17. 8. Ibid., p. 17. 9. See Chapter 11, below. 112 SALVATION THROUGH INFLATION information about consumer demand and sellers’ competi- tion,]o coupled with personal bull-headedness against lowering selling prices. Economy-wide incorrect information is almost always the result of previous policies of fiat money inflation by a nation’s central bank.1 * A second cause of the contraction is an increase in tarifEs or import quotas.12 A third cause is the government’s decision to pressure businessmen not to lower selling prices and/or pressure not to lower wages.ls A fourth cause of stagnation: the government raises taxes, especially taxes on profits and capital gains, discouraging entrepreneurs from creating new wealth and new jobs. In 1929-38, all four factors were present: prior monetary inflation that came to a halt around 1929, plus a worldwide tariff war begun in 1930, plus government price floors, plus higher taxes (in the U. S., under President Franklin Roose- velt). 14 This is why the Great Depression was the worst in modern history. In all four cases, the root cause of the econom- ic contraction is either civil government or its licensed monopo- listic agent, the nation’s central bank. Shrunken Markets The underlying cause of the visible economic crisis is the shrinking of markets, also known as a reduction in the division of labor. This reduces men’s economic efficiency by reducing the specialization of production. Producers in the new condi- tions become less efficient and suffer temporary losses because 10. Fritz Machlup, The Economics of Sellers’ Competition (Baltimore, Maryland: Johns Hopkins University Press, 1952). 11. Ludwig von Mises, Human Action: A Treatise on Ecorunaics (New Haven, Connecticut: Yale University Press, 1949), ch. 20. 12. Jude Wanniski, The Way the WWId Winks (New York Basic Books, 1978), pp. 125-42. 13. Murray N. Rothbard, Amerkah Great Depression (Princeton, New Jersey Van Nostrand, 1963), ch. 8. 14. Wanniski, World Works p p. 145. [...]... be produced with the same workers, raw materials, and machinery - is the result of a flawed system of credit He wrote: The industrial machine is a lever, continuously being lengthened by progress, which enables the burden of Atlas to be lifted with ever-increasing ease As the number of men required to work the lever decreases, so the number set flee to lengthen it increases.” 15 What, then, is tie economy’s... to other periods of history, 3 Social Credit (2nd cd.; London: Eyrt & Spottiswoode, 1933), p 85 122 SALVATION THROUGH INFLATION the less the degree of scarcity Prices will never reach zero in history the Bible teaches, for nature is under a curse, but it is a sign of God’s blessing that prices approach zero as a theoretical limit We therefore need to ask: Why are fdling prices inherently bad for the. .. account (credit) , or hidden under his mattress (cash) It does not mysteriously disappear I therefore ask: Why is there an inherent shortage of money under capitalism? Douglas’ Attempted Answer In the 1933 edition of Social Credit, Douglas responded to critics who had identified this flaw in his theory He wrote that the “orthodox theory” of the economy “assumes that the money, equivalent to the price of every... clear the market under capitalism because producers need to be repaid for production costs So, the system needs new money Scarcity is defined by economists as follows: “Greater demand for resources than supply of resources at zero price.” The higher the price relative to other goods or to other periods of history, the greater the degree of scarcity Therefore, the lower the price relative to other goods... about 95 percent inefficient He stated without proof that under Social Credit, families could live comfortably if the head of the household worked only three hours a day Or perhaps two hours a week This was total utopianism He never offered a shred of statistical proof for all of this The cause of economic contraction is government intervention into the economy: prior intervention (increasing the money... translate this offer into a realized sale Thus, the consumer is sovereign, not the producer The consumer has the ability to say “no.” summary 1 To discover economic control, follow the money 2 Douglas claimed that capitalism operates at 5 percent of maximum efficiency 3 There is no proof of any such estimate 4 He blamed the distribution system for this failure 5 The problem is a lack of purchasing power... line of motor cars, with prices from $900 to $2 ,50 0 (when prices generally were a less than a tenth of what they are today) That was the year that William Durant created General Motors Buick had 25 percent of market share in 1908 In the first year, Ford lost money He sold the Model T for $ 850 , but the car was no match for the more dashing $9 OO Buick To increase profits, Ford raised the price to $ 950 ... doubling of accumulated output Never is there a sign of long-run diminishing returns.”12 This remarkable and little-recognized rule of thumb applies to al10 .George Gilder, The S@-i/ of En@r@.se (New York Simon & Schuster, 1984), p 158 11 Ibid., p 157 12 Ibid., p 158 128 SALVATION THROUGH lNFLATION most every industry computers, chicken broilers, kilowatt hours of electricity, and the value of insurance... usefid in our further consideration of the :;ubject, the consumer cannot possi- bly obtain the advantage of improved process in the form of corwspondingtg lower prices, nor can he expect stable prices under stationmy processes of production, nor can he obtain any control over the programme of productwn, unkns he is provided m“th a supplg of purchasing-power which is not included in the price of !b goods... do not buy when they invest their money can be bought by the producers of capital goods who receive investors’ money Capitalist investment is productive, but not because investors give up ownership of pieces of paper with officials’ pictures on them Capitalist investment is productive because investors give up the use of consumer goods and services for a period of time for the sake of receiving a greater . supply of resources at zero price.” The higher the price relative to other goods or to other periods of history, the greater the degree of scarcity. Therefore, the lower the price relative to other. other goods or to other periods of history, 3. Social Credit (2nd cd.; London: Eyrt & Spottiswoode, 1933), p. 85. 122 SALVATION THROUGH INFLATION the less the degree of scarcity. Prices. question of belief about the conditions of the market, i.e., belief about the next buyer or seller. A seller thinks there is another buyer just around the corner A buyer thinks there is another