The Fallacy of a Balanced Budget
C. H. Douglas
[Reprinted from the New English Weekly, 28
July, 1932, pp. 346-7]
The writings of C. H. Douglas on
social credit theory are available from social-credit.com,
located in Sherwood Park, Alberta, Canada. The Monopoly of
Credit is one of his major works, in which he describes his
so-called A + B Theorem and discusses the ramifications of a
balanced budget program by government.
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A common cause of confusion to those unfamiliar with the technique of
finance can be found in the excusable assumption that a statement
which is true and obvious in regard to individual experience of money
matters is equally true in regard to the money matters of a nation.
There are at least two assumptions made by those who argue in this
way. The first is that the process by which a community obtains money
is fundamentally similar to the process by which an individual obtains
money. The second is the idea, alternatively, that money is limited in
quantity by the laws of nature, or that it is always exactly equal in
amount to the price values of the goods which it is supposed to
represent.
Now, as a matter of fact, no one of these common assumptions is
justified, as can easily be seen by anyone who will take the trouble
to give the matter a little thought. All individuals obtain money by
getting it from somebody else, i.e., so far as individuals are
concerned, money is quite correctly defined as a medium of exchange
(although not an invariable medium of exchange). But in the case of a
sovereign community, this never is and never has been the case.
Whether the power be delegated, as in the case of Great Britain to the
Bank of England, or not, a sovereign community has the power of
actually creating money--it is self-financing, a situation which in
fact places the community and the individual in a position of
technical opposition, the community and the individual always being on
opposite sides of the ledger.
The first alternative of the second assumption is quite obviously not
true if it be granted that a sovereign community has the power of
creating money, and the second alternative assumption can, I think, be
disproved with very little additional difficulty. Before attempting
this disproof, however, it may be desirable to point out that the
statement that the first essential of sound finance is that a
country's budget must be balanced, that is to say, that all the
expenditures made by government departments must be recovered from the
public in the same period of time, i.e., at the same rate, that they
are disbursed, depends absolutely for its soundness on the failure to
disprove this contention.
A balanced national budget means, and can mean nothing else, than
that all national expenditure is financed with what we may call "old
money." A portion of this expenditure is distributed in
government wages and salaries, much of which goes to the production of
what we may call "intangibles," such as defence,
organisation, education, and so forth, and a further portion in
payment of the interest on outstanding loans. In regard to that
portion which goes to the production of public works, the position
would hardly seem to require argument.
Now in regard to the first portion of this, if the whole of it is
recovered at the same rate at which it is distributed, it must be
quite obvious that the assumption is made that there is an absolute
equilibrium between production and consumption, and such an assumption
is never justified. Leaving out of account the physical assets, many
of them having many years of life, which are produced by a portion of
government expenditure, it is undeniable that there is a constant
increase in the real value of intangibles, such as better
organization, better education, increased scope of intercommunication,
utilisation of the possibilities of modern science, and many other
bases of real credit, which means that every year's working carries
forward into the succeeding year a considerable body of real values
which would be quite correctly represented in a business by an
increase of good will. In regard to the portion of the national budget
commonly called the "consolidated fund," and the service of
various loans, any examination of the destination of the greater part
of this must make it obvious that it is re-invested and not spent upon
the purchase of consumable goods. Any portion of it paid by industry,
as such, must appear in the prices of consumable goods, since the
producer-taxpayer must charge his taxation into the cost of his
product if he is to remain in business. The portion of the taxation
paid directly by the consumer means a correspondingly less body of
effective demand against the goods for sale, or it means an increasing
body of sales below cost, resulting inevitably in the bankruptcy of
the producer. That all these causes operate to produce a lack of
effective demand is obvious to anyone who will observe the "To
Let" and "For Sale" notices which are our chief
national exhibit.
To put the matter another way, a balanced national budget and a
balanced budget of all the country is an arithmetical impossibility,
even if every business disposed of its product at cost, but as the
current theory of business is that it should be carried on at a
profit, the proposition can only be made to function by each balanced
business budget being paralleled by a corresponding loss in some other
business. This loss is approximately the difference between price
values produced and purchasing-power available to meet these values.
This purchasing power includes not merely that relating to goods for
sale but also payment for exports and other monies not distributed in
respect of goods for sale in the home market; and these payments go
some way to reduce the apparent loss.
The position disclosed by this examination is, in fact, similar to
that disclosed by an examination of the price values which are
produced in a manufacturing business in comparison with the amount of
money available at any moment as a demand against these price values.
There is always a body of price values against which there is no
existing effective demand, but upon which those institutions which are
in a position actually to create money [those comprising the banking
system] are generally willing to do so upon terms sufficiently
satisfactory to themselves [emphasis added]. As, however, this money
is always loaned, and a price is charged for the loan, it is clear
that the unbalancing process is cumulative. In periods of excessive
capital production, financed by large creations of new money, this
situation is not so noticeable, and is precisely similar to that
produced by a budget balanced by loans instead of taxation.
The issue involved in this question of the balanced budget is
precisely the same as that involved in the maintenance of the present
price system, and can be clearly enough stated. It is that all
improvements of process, together with the potential benefits of
machine production, shall go to form a reserve of security against
loans created by the financial system, and the public at large shall
pay an increasing tribute to the financial system for their use. It is
not a highly ethical situation, even if it could be made to work, but
it have dealt with at some length elsewhere [The Monopoly of
Credit, etc.]. This is, perhaps, unfortunate, since it seems
unlikely that our financial rulers can be made to appreciate that they
are themselves the greatest, if not the only danger to the social
system they control. Being, as apparently they are, determined upon
suicide, we shall probably have to endure a reorganisation of a
productive system which is quite satisfactory, in order to demonstrate
that it is not the same thing as an immoral distribution system which
its controllers do not even understand. The above position was
concisely summarized by Major Clifford Hugh Douglas in the following
brief excerpt from a letter of advice (see The Alberta Experiment)
written from London to the Premier of Alberta and the Executive
Council on the 24th of February, 1936:
THE HONOURABLE WILLIAM ABERHART, M.L.A., B.A. Premier of
Alberta, Edmonton, Alberta, Canada. Strictly Confidential to
Executive Council of Alberta
DEAR MR. ABERHART,
This seems to be a suitable occasion on which to emphasise the
proposition that a Balanced Budget is quite inconsistent with the
use of Social Credit [i.e., Real Credit--the ability to deliver
goods and services "as, when and where required"] in the
modern world, and is simply a statement in accounting figures that
the progress of the country is stationary, i.e., that it consumes
exactly what it produces, including capital assets. The result of
appreciation becomes quite automatically the property of those who
create an issue of money [i.e., the banking system] and the
necessary unbalancing of the Budget is covered by Debts.
C. H. Douglas
London, England
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