By 1919, just one hundred years ago now, C. H. Douglas, an Anglo-Scottish engineer, had discovered the interesting fact that all modern economies are continually generating a deficiency of purchasing power to buy all the consumer production in the marketplace. He did this by observing the accounts of an aircraft factory at Farnborough during World War I and crunching the numbers of another one hundred companies. I will spare you the technicalities.
He concluded that as consumer incomes were insufficient to buy the consumer products offered, this would best be rectified by declaring the surplus to be a profit and distributing new money to consumers in the form of a national dividend to buy it.
In 1923, Douglas was invited to dinner by New York’s top bankers. Bernard Baruch was among them. Douglas thought he would have to argue his technicalities and was prepared for this. They took him by surprise by telling him that they completely accepted his diagnosis and all they wished to know was what he intended to do about it. Douglas’s response included the suggestion of paying a national dividend to all to overcome the deficiency of income—that is, to distribute the national profit and do it equitably. It was made clear that there was no interest from the banks in a national dividend. They had other plans.
The bankers’ intent was to simply expand the public indebtedness owing to themselves and thereby fund the deficiency of consumer purchasing power to distribute that production which consumer incomes could not buy. The profit of society was considered as theirs by right of fiat money creation.
This was done largely by financing an expansion of industry. To sustain increased production, markets needed to be expanded. To do this, consumerism was encouraged, built-in obsolesce practised, and government deficit financing undertaken. In time this proved to be inadequate; even consumer credit through credit cards and personal loans proved insufficient. The need to increase the money supply (read: consumers’ increasing indebtedness) could not, on its own, finance full consumption of our production. This was in spite of myriad new goods after World War II coming into common use: refrigerators, second cars, dish washers, vacuum cleaners, computers, mobile phones, and all the rest. When these needs were satiated, a new stage was reached.
Financing residential housing became the main means of increasing the money supply through debt. The banks progressively raised the money value of residences by loaning more money to more people to bid up house prices. This was largely achieved by bringing women into the workforce. With two incomes, families could devote one of them to servicing a mortgage.
In England, the United States, Australia, and elsewhere, two thirds of all the money in circulation has now been originally loaned into existence as residential housing loans. This has inflated house prices beyond precedent. It has also reached a point of saturation in which increasing numbers of people are finding it very onerous, or indeed impossible, to own their own home. What to do now?
The next recourse was to lower interest rates and thereby encourage more acceptances of loans. Bank loans do not reduce anyone’s bank deposits, but they do increase the deposits of those to whom the loans are paid. The money supply is thereby increased.
By 2019, all nations’ central banks were lowering interest rates, with some, such as Japan and Germany, slipping into negative interest rates. This was thought to be the last best thing for continuing to increase the money supply through higher debt. Yet how far could this go?
Once the interest rate was 0 per cent, it would then have to go to a negative percentage to continue the process. So how could the banks survive if they were to pay people to accept their loans? The only answer would be to impose higher negative interest rates on deposits. If banks are paying 1 per cent to those taking loans, they will need to charge perhaps 3 per cent on deposits to maintain their “spread”—the difference between what they pay and what they receive. Obvious difficulties arise.
If people are losing 3 per cent of their deposits each year, they will naturally prefer their money to be in notes and coins, as these are not available for the banks to make any deductions. Legal restrictions on the size of cash payments are now being legislated in Europe, Australia, and elsewhere. Outlawing or abolishing cash is fraught with enormous political difficulties in democracies. Even if this could be done, there are other things which the public might do.
Durable commodities would certainly be used to store value in these circumstances. And not just gold and silver are of consideration here. Copper, nickel, and tin ingots have a high ratio of value to storage volume. Could all these be regulated also? The authorities could try through scrutinizing these metals’ end users, but this is problematical. Everyone is an end user of preserved foods; canned meats and vegetables, dried foods, grains and condiments in sealed containers, hermetically preserved nuts, and much else are tradable with one’s neighbours. Could all homes and storage places be scrutinized adequately? In a free society, it is politically impossible, and freedom is the last asset of us all.
When we have all had enough of this, it is probable that paying a national dividend, debt free, will enter into public consideration. Thus far the idea that necessary money increases should be the property of the people (the owners and true shareholders of their nations) has suffered much contempt.
Milton Freidman referred to the distribution of a national dividend as “helicopter money”. The idea was that when no other recourse was available to increase the money supply adequately, cash be dispersed by helicopter into populated areas. In other words, it was painted as ridiculous in the extreme.
So far as is known, nobody has suggested distributing bank dividends by helicopter. When flying over the Chamber of Commerce, one would really shovel it, out as one might expect many shareholders may be there. Whilst over the local pub, perhaps the odd handful might be dropped; and over a farm, where drought, flood, and hard work would preclude owning bank shares, nothing would be given at all.
John Maynard Keynes suggested putting cash at the bottom of deep, old depleted mine shafts, filling the mine with refuse, and giving the employment of getting the money out as a means of paying the populace.
Neither of these people, nor any other economists, have ever done a national profit-and-loss account. Yet sometimes even things which one hasn’t thought of may exist. See NationalAccountsPrototype
The profit (consumer production above total personal income) of US consumers in 2014 was measured as $7,500 for every American.
So a national profit has been measured, and it can therefore be thought of as existing. It is not beyond the wit of man to distribute it in the same way as other dividends are distributed—directly into the bank accounts of its owners.