Dividends Under Capitalism 169 would issue fiat money based on the monetary value of the nation’s assets. This would replace the present system of corpo- rate dividends to investors. In other words, Douglas adopted the same word, dividend, to describe two radically different systems: one compulsory and the other voluntary one govern- ment-mandated and the other a matter of private decision- making. One system is based on a person’s decision to turn his money over to a corporation in the hope of future income and capital gains, while the other is based on the government’s issu- ing of fiat money in terms of a statistic: the estimated money value of all the assets inside the nation’s borders. Machines and Productivity Major Douglas argued that “the increased utilisation of me- chanical power and machinery. . . tends to contract the area of the distribution of wages.”g Why should this be true? Some people are released from a particular type of service by the substitution of a machine, but humans are remarkably versatile. They are not highly specific capital goods. In short, men are not machines. The fact that a man loses one job to a machine does not mean that he cannot get another job, such as building more machines or repairing machines or selling the products of machines. If machines replaced men in general rather than specific men working on specific tasks, hardly anyone would be employed today. Machines in Douglas’ view are like slaves prior to the mid-nineteenth century low-paid servants. But don’t machines replace men? Yes: specific men in speci- fic jobs. But machines also make men more productive. For example, a bulldozer can be used to build a road, and the road opens up new markets. If we argue that bulldozers lead to unemployment, shouldn’t we conclude that the government ought to make the use of bulldozers illegal in order to further the hiring of lots of men using shovels? Taking this even far- 9. Credit-Power and Democracy, p. 43. 1’70 SALVATION THROUGH INFLATION ther, shouldn’t the government make shovels illegal, so that construction firms will have to hire even more men who use only stainless steel teaspoons? Would society be richer if such a law were enacted and rigorously enforced? The argument that machines create unemployment are always variations of the teaspoon argument. Such arguments assume that most of those men who are freed up by labor-sav- ing machines never get another job, never find other areas in which to serve their fellow men in the production system. These arguments do not view capital-intensive economic im- provements as a means of producing greater wealth for all, or almost all, members of society. Douglas argued the opposite: machines should be encour- aged because they will produce unemployment. He wanted to take men out of the work place. He wanted the government to send “dividends” to them to make their early retirement possi- ble. But this argument rested on the assumption that capitalism is capable of huge and rapid increases in productivity merely through the substitution of Social Credit (fiat money issued by the government). He never provided a single statistic to prove this assertion; he merely stated it repeatedly using different figures every time, as we have seen.10 Both views are false: “abolish machines” and “abolish labor.” The substitution of machines has reduced the need for men to labor in order to obtain a traditional income, but this added productivity opens up new possibilities for increased productivi- ty and therefore increased income. Men stay in the work force in order to buy the ever-increasing output of capitalism. The Lure of Dividends The early Machine Age, which Douglas regarded as a good thing, was financed by a tiny number of people who bought equipment that employed laborers. The population of industri- 10. See above, pp. 109-10, 136. See below, p. 173. Divid& Under Capitalism 171 fllzed companies expanded rapidly in the nineteenth century. These people got jobs in factories. The machines that investors provided to workers made life better for them; they increased labor productivity and therefore labor income.ll Why would the opportunity to pool capital in a limited” liability corporation reduce the number of wage-earners? Always before, an increase in the amount of capital had increased the productivity of labor and made possible an expanding labor market. How was this connection destroyed by the coming of limited liability compa- nies and local banks? Douglas never said. The return on invested capital has fluctuated over the years between six percent and twenty percent. For example, the yield to industrial capital in Germany 1850 to 1910, stayed in the narrow range of 6.590 and 7Y0. 12 The reason for these fluctua- tions is often statistical; until the twentieth century, statistics on invested capital have been unavailable for most countries. This return is normally an interest payment. Rare is a company that earns above ten percent on capital invested, and even more rare is a firm that continues tQ do so year after year. Also, ‘ companies rarely pay out in dividends all of the profits earned. It is not uncommon for half of the profits to be retained for capital investment. How could this tiny percentage - a percent- age that did not increase under limited liability - have affected the wage system? Employee compensation in the United States has remained in the narrow range of 65% to 73% of national income since 1930.1$ This is not fundamentally different from other industrial nations. Dividends play a very small role in the overall demand for consumer goods, but they play a crucial role in persuading investors to forfeit present consumption. 11. R. M. Hartwell, “The Srandard of Living Controversy A Summary” in Hartwell (cd.), The Industrial Revolution (New York Barnes& Noble, 1970), ch. 8. 12. Solomos Solomou, Phases of Econw”c Growth, 1850-1973 (Cambridge Univer- sity Press, 1990), p. 109. 13. Herbert Stein and Murray Foss, An Illustrated Guide to the American Economy (Washington, D.C.: AEI Press, 1992), p. 47. 172 SALVATION THROUGH INFLATION Douglas vaguely understood this. He said that “probably 94 per cent. of the purchasing power which constitutes the distri- bution system of this country, is wages and salaries, and, on the whole, this percentage of the total tends to increase, and divi- dends collectively tend to decrease. . . .“14 But if this is true, then Social Credit is irrelevant. If 94% of national income is going to wage earners, and this percentage is rising, there is hardly any break in the j?ow of funds to conmmers. With this one admission, Douglas introduced what he regarded as statistical evidence of the ultimate success of finance capitalism. His re- form would not be needed. He never seemed to recognize just how damaging this admission was. If this growing percentage of national income accrues to wages, what will be the source of Social Credit’s proposed Na- tional Dividend? Wage-earners are steadily absorbing the bulk of production. Consumers are buying up their own production! But excess fn-oduction - production not being gobbled up by wage-earners - must accompany the mailing of government checks if society is to avoid mass inflation. We know that divi- dends under capitalism are related closely to the return on capital. Yet dividends represent a small percentage of national income, as Douglas freely (and fatally) admitted. Social Credit cannot overcome this limitation on dividends except by reduc- ing wages as a percentage of national income. This is exactly what Major Douglas promised - the replacement of wages by the National Dividend - but he never indicated how this vast increase in the post-reform productivity of capital will be ac- complished by the State credit masters. He merely announced that this will surely occur once society adopts Social Credit The scientific organisation of industry and the introduction of increased quantities of solar energy into the productive system means, and can only mean, the displacement of human labour 14. Warning Denwcraq (2nd cd.; London: Stanley Nott, 1934), p. 86. Dividends Under Cafiitalism 173 from the economic process. Even now there is very little doubt that the present standard of living can be maintained by the working efforts of 10 per cent. of the population if the produc- tive system were not so largely directed towards money-making rather than goods-making. . 15 Here is the reality there are no dividends for investors until after the firm has paid wages, rent, raw materials, interest payments (usually three to ten percent), insurance, capital replacement, capital improvement, advertising expenses, and taxes. Dividends are a small percentage of national income because the bulk of most peo@e’s income comes from wages. This has not changed despite the advent of modern machinery Dependence on wag- es is an aspect of creation: man was placed on this earth to extend his dominion as God’s agent, and when he sinned, his labor was cursed (Genesis 3:17-19). Perhaps the best definition of “rich” is this one: a person is rich if his lifestyle would not change even though he lost his job today and never again gained employment. Douglas wanted all people to become rich in this sense. He believed that a restruc- turing of the allocation over credit would achieve this goal. Do this, he promised, and governments can cut taxes permanently This was why he called for a National Dividend program. This would create wealth for all. What Are Dividends? Dividends are that portion of a firm’s income that is paid to investors who have provided capital to the firm. This return normally fluctuates from about three percent to ten percent, paralleling the rate of interest. A firm can borrow money to buy capital goods. It can seek investors who will provide funds to buy capital goods. In the case of interest payments, those providing the money do not “ 15. Ibid., p. 87. 174 SALVATION THROUGH INFLATION participate in the profits of the firm. Whether the firm makes a profit or not, the lenders must be paid. Not so the owners of common shares. They receive payments at the discretion of the firm’s management. While management will try to find enough money to pay investors in order to keep share prices high, the managers are not legally compelled to pay dividends to com- mon stocks. Share owners may be willing to receive a reduced rate of return from dividends in order to participate in greater capital gains, meaning an increase in the value of ownership shares. In effect, they re-invest their dividends. A lender does not partici- pate in a company’s capital gains. He also does not participate in a company’s capital losses unless it goes totally bankrupt. The shareholder has different financial expectations fi-om those of the lender. He expects capital gains: profits from owning the shares of an unexpectedly more profitable company. Except in public utility corporations, where a rate of return is guaranteed by government regulatory agencies, the rate of return from dividends is normally below the rate of return from interest. The reason for this is simple: investors expect to receive capital gains, i.e., increases in the market value of the shares. Lenders demand and receive a higher rate of return, since they do participate in capital gains, i.e., profits. Reducing the Need to Work Douglas wanted to substitute a National Dividend because he believed it would be large enough to relieve people from any need to work for a living. The modern economic system, Doug- las said, “has widened the area of the distribution of purchas- ing-power through the agency of dividends, while, at the same time, the actual necessity for ‘direct’ wage-earning Iabour has been diminished by the increased utilisation of mechanical power and machinery, which tends to contract the area of the Divtiends Under Capituli.sm 175 distribution of wages.’’lfi This was incorrect. It still is. Dividends in today’s economy Douglas said, go to a “large body of shareholders. . . .“1 7 This was incorrect. If his estimate was correct, namely, that 9490 of national income went to wag- es, then there clearly was no “large body of shareholders” in his day. Prior to the late twentieth century, the number of share- holders in corporations was a tiny fraction of any nation’s popu- lation. Only with the rise of tax-deferred pension funds and mutual funds has this situation changed. 18 Profits What is the source of profits? This has baffled many econo- mists. Profits are a residual that is left over after all expenses have been paid. Where do they come from? From the differ- ence (spread) between what the producer has paid out for all operating expenses and what he has taken in from buyers. But how can there be a spread between costs and income in a sys- tem that pays everyone the value of his output? The answer is: entrepreneurship. An entrepreneur is an eco- nomic forecaster who buys resources in order to sell them for more later. He believes that some resource factors are priced too cheaply compared to what they would be worth if every producer could correctly forecast the juture state of consumer demand. That is, the entrepreneur buys up raw materials, labor, and all other factors of production that will be used to produce a product or service for~uture consumers. He guesses that consumers in the future will be willing to pay more for the product than what rival producers presently estimate. The only way he can make a profit is if his competitors, meaning other producers, have not spotted the opportunity As 16. Credit-Pmoer and Democraq, p 43. 17. Ibid., p. 43. 18. Peter F. Drucker, The Unseen Reooluiion: HOUJ Pension Fund Socialism Cam 10 Anwica (New York Harper& Row, 1976). 176 SALVATION THROUGH INFLATION soon as they spot it, they will enter the markets for production factors and bid up the prices. (Remember my parrot: “High bid wins.”) AISO, because there will be more producers, they will increase the supply of the product or service. This will lower the selling the price of each unit unless there is an even larger (unforecasted) increase in demand. The presence of profits for company A alerts companies B through Z that there are factors of production in today’s market that are priced too low com- pared to their future value in the form of consumer goods. The price spread between today’s factor prices and tomorrow’s product prices will soon be reduced to the discount rate, i.e., the rate of interest. That is to say, profits will disappearlg Profits are not automatic. This means that capital gains are not automatic. If a firm’s profits get higher than the rate of interest on loans, other firms will be alerted to the opportunity Thus, it is rare for any company to be able to produce profits - income higher than what it could get simply by lending the money - year after year. Profits come only fi-om correct forecasting and efficient organizing. Projits are a residual. Profit is whatever is Iefi over after all the previous exchanges have been made. Profit is al- ways threatened by loss: less than what the entrepreneur start- ed out with when he began to produce the product. There can be no guarantee of profits or dividends. Losses always threaten them. All of this was known when Major Douglas began publishing. Economist Frank H. Knight’s classic book, R&k, Uncertainty and Projit, appeared in 1921. It provided a detailed examination of the origin of profits. But Major Douglas never quoted from Knight or from any of the economists who followed his lead. Neither have his followers. This places them at a tremendous intellectual disadvantage. They do not understand profits. 19. Ludwig von Mises, Human Action: A ?leattie on EconomiJs (New Haven: Yale University Press, 1949), ch. 19. Dividends Under Capitalism 1’77 Douglas said that “the root motive of human nature and the mainspring of human advancement is profit.”2° But he meant this only in the sense of working for our own individual advan- tage. He never provided an economic definition of profit with respect to planning in the present for an uncertain future. Douglas Confused Dividends With Wages Douglas insisted that “the dividend is the logical successor to the wage, carrying with it privileges which the wage never had and never can have. . . .“21 This analysis is incorrect. A wage comes from the temporary sale of labor services, just as rent comes from the temporary sale of land’s services. Something knmnz is voluntarily exchanged. Not so with dividends. The investor turns over his money to a seller of shares to buy a share of ownership. He may or may not receive a future pay- ment from the company. There is no assurance that he will receive any dividends. A divtiend is not gum-anteed by any jirm to holders of its common stock. He cannot sue the management sim- ply because they refise to pay dividends to shareholders. What does Douglas say a dividend is? A dividend is “a pay- ment, absolute and unconditional, of something due.”2 2 This is what distinguishes a wage from a dividend, he insisted. “The first is servitude, however disguised, the second is the primary step to economic emancipation.”2s Once again, he had things exactly backwards. Fh-st, a wage is based on a contractual ar- rangement between the seller of labor services and a buyer of these services. Wages are money due to the wage-earner for services received by the employer. Wages owed are legal claims by wage-earners against money in the possession of employers. In contrast, a dividend is not received on the basis of a contrac- 20. Warning Democracy p. 125. 21. Credit-Power and Democracy, p. 43. 22. Ibid., p. 44. 23. IbkL, p. 44. 178 SALVATION THROUGH INFLATION tual agreement. Second, a wage is not a form of servitude. A wage is legal payment for agreed-upon senices r&ed. The free market economist teaches this. So does the Bible. The parable of the Righteous Employ-r In the parable of the just employe~ Jesus defended the principle of voluntary contracts for labor. A farmer hired men in the morning to work at an agreed-upon wage. He hired other laborers later in the day. He paid them all the same daily (not hourly) wage, which he and they had agreed upon. At the end of the day, he paid them exactly what they were due. Z?u3 payment was a legal entitlement on their part. But those workers who had worked longer complained. They wanted more than what they had agreed to in the morning. But when the first came, they supposed that they should have received more; and they likewise received every man a penny. And when they had received it, they murmured against the goodman of the house, Saying, These last have wrought but one hour, and thou hast made them equal unto us, which have borne the burden and heat of the day. But he answered one of them, and said, Friend, I do thee no wrong: didst not thou agree with me for a penny? Take that thine is, and go thy way: 1 will give unto this last, even as unto thee. Is it not lawfi.d for me to do what I will with mine own? Is thine eye evil, because I am good? (Matthew 20:10-15). The employer’s answer was to the point: “Didst not thou agree with me for a penny? Take that thine is, and go thy way.” The employer was a free man. He was under no moral or legal obligation to pay them more. Nevertheless, their pay was theirs. It belonged by law to them. This was not servitude. Douglas Con.fhsed Dividends With Interest Having completely misrepresented wages as a form of servi- [...]... be published in the name of Social Credi~ the State is the Iawfid custodian of the nation’s wealth, for it is the true representative of the community He wrote: Economically regarded, a nation is an association of people engaged in the production of Real Credit, and in this sense the State, as the custodian of the Real Credit of the community, may be said to represent the interests of Producer and... that they who control the allocation of capitaZ thereby control the economy If this control is forced on producers and lenders by the State, then the State has become the true owner The tools of production are in the hands of the State Thk is the essence of socialism Decapitalization Through Mass Inflation During the French Revolution, the government confiscated the monasteries and landed estates of. .. to the creation of Real Credit Since, however, Producers and Consumers between them make up the whole community, we may conclude that ReaI Credit is social or communal in origin; that it belongs neither to the producer nor to the consumer, but to their commm element, the community, of which they each forma pam5 Let the reader be reminded: the idea that the community (society) owns the wealth of the. .. rests on a single legal principle: the luwful authority of the consumer over the allocatwn of his money and other assets Yet the technical heart of Social Credit s proposed reform is the forcible transfer of the authority over capital allocation from consumers to the State A R Orage set forth the justification for this massive transfer of authority in his section of Credit- Power and Democracy, and Douglas... “Similarly, the Trusts and Banks, obliged, as a condition of existence under the system, to reabsorb the majority of the credit distributed as wages, through the agency of prices, restricted the supply of ultimate commodities, not only by their own forms of sabotage, but by directing production more and more to capital goods and goods for export.”2b The banks sabotage the system that feeds them If we... p 32 21 T/le Monopoly of Credzt (London: Chapman& Hall, 1931), p 4, footnote Sociul Credit Means State Monopoly Credit 1 97 your ideas, and when he links them with the ideas of Karl Marx, you have a problem if you are presenting yourself as a zz conservative, let alone a Christian This is the dilemma of Social Credit The Sovereignty of the Credit Masters In a world of scarcity, there is always more... Society and State in Social and Political Thought Under Social Credit, the central government must control the distribution of business capital, as we shall see This recommendation is the technical heart of Social Credit s proposed reform This is why it is called Social Credit Major Douglas’ system is governed by a formula even more fundamental than his A + B theorems The heart of Social Credit s political... time Social Credit s credit masters made a loan, and every time the dividend masters sent out monthly checks, they would do so not simply on the basis of tax revenues collected Douglas hated taxes - but on the basis of the estimated monetary value of the nation’s capital, meaning Real Capital But because the government would not officially own this capital, it 28 Sociul Credit, pp 205-6 Social Credit. .. gets the limited (scarce) supply of credit We cannot reasonably hope to solve the fundamental problem - guaranteeing honesty and efficiency from the credit masters of a State monopoly banking system -by adding layers of representation The problem remains: someone has to decide who gets the credit Douglas admitted as much: 11 Credit- Power and Democracy, p 142 12 Ibid., p 7 194 SALVATION THROUGH INFLATION. .. Under Capitalism 181 Worse, the trusts and banks then suppress output They get rich only when others get poor This, too, is Marx’s argumenti the supposed impoverization of the proletariat, the declining condition of the working class Marx wrote that the general tendency of capitalistic production is not to raise, but to sink the average standard of wages, or to push the value of labour 5 more or less . In the case of interest payments, those providing the money do not “ 15. Ibid., p. 87. 174 SALVATION THROUGH INFLATION participate in the profits of the firm. Whether the firm makes a profit. principle: the luwful authority of the consumer over the allocatwn of his money and other assets. Yet the technical heart of Social Credit s proposed reform is the forcible transfer of the authority. association of people engaged in the production of Real Credit, and in this sense the State, as the custodian of the Real Credit of the community, may be said to represent the interests of Producer