Major Douglas and the “Social Credit” cult

John Ray

I see that there are still some people around who believe in the “Social Credit” movement founded in the 1930s on the madcap ideas of Major C.H. Douglas. Douglas was a clever engineer with an enquiring mind. He did not restrict his reading to engineering. And one day he made a most interesting discovery: There was far more money in circulation than the government had ever issued. How come? He could have asked economists and bankers why but instead he made up his own explanation for it.

He decided that it was the fault of the banks. Bank bashing goes back nearly a thousand years, if you count the expulsion of the Jews from England by Edward Longshanks in 1290 A.D., so it was no wonder Major Douglas eyed the banks with suspicion.

But the theory he came up with was really weird. He decided that the banks lent out money they did not have. He decided that a banker could have a ledger with $5,000 lent to Bill Blogs at the top of it and the $5,000 would somehow magically end up in the pocket of Bill Bloggs.

He was aided in this preposterous theory by something known as Fractional Reserve Banking. Under FRB, banks don’t have to keep all their deposits under lock and key. They can lend out (say) 80% of their deposits because most people leave their money in the bank for safekeeping. They don’t all suddenly to withdraw all their money at once. On the rare occasion that DOES happen it is called a “run” and is sparked by some panic or other.

So major Douglas opined that the $5,000 to Bill Bloggs came out of the funds that were available for lending after the reserves were set aside. What the good Major didn’t realize was that banks have a legal obligation to lend no more than their deposits minus reserves. Only the government is allowed to print money and any bank that tried to do so would have the government come crashing down on its head. The money for Bill Bloggs had to come from deposits. It could not be conjured up out of thin air.

So how does it all really work? It’s so simple it should be taught in grade school. What happens on average is that when Bill Bloggs gets his loan from Bank A, he promptly deposits most of it in another bank — or even the same bank. Say he deposits $4,000 of his $5,000 in Bank B. That bank now has a nice little deposit that it can lend on. The original depositors who gave bank A the deposit of $5,000 to mind still have $5,000 to their name and can draw on it at any time while Bill Bloggs now has $4,000 to his name in bank B and can draw on that at any time. Add those two together and the citizens of the place where the banks are located now have a total of $9,000 to their name ($5,000 plus $4,000). $4,000 of money has seemingly been created out of thin air.

So that was what Major Douglas saw. There was far more money in the banks than there “should” have been. And he was nearly right in attributing that extra money to the banks. It was the banking system as a whole that created the money, not any individual bank. No bank benefited from the “created” money. Only the community as a whole did. Economists refer to the whole thing as the “velocity of circulation”.

If you Google “Major Douglas”or “Social Credit” you will get up heaps of sites claiming that Major Douglas was right. What I have just said is usually found only in Economics textbooks. I taught senior High School Economics for a couple of years so that is why I know about it

The above example is of course simplified. The money held in reserve is not cash. Cash only forms a small part of the money supply. Most of the money supply exists in the form of credit balances. So banks keep only a minor amount of their deposits in cash. Most of their reserves are amounts they have to their credit with the central bank.



  1. Sean, how can you endorse this sort of idiocy? It is now accepted by the mainstream that banks create money ex nihilo. Gotta luv the 1290 reference, the usual smear. Douglas provided a mathematical proof for credit creation but here is a simple explanation:

    A new bank is started, and 10 customers each deposit £100, making a total of £1,000 liabilities. These parties do business with each other, mostly by cheque. After a while, customer number 10 decides he needs a £100 loan.

    He is a manufacturer, and has just had a big order, so he goes to see his bank manager and says I’ve just got a big order for a new project. He shows him the order and everything; the bank manager is very impressed, advances him a £100 loan and says give me the deeds to your house. He opens a loan account and credits it with £100 repayable at 2% interest.

    The situation is now as follows: All 10 customers including the manufacturer have £100 each in their accounts, but the manufacturer also has a debit of £100 to his loan account. This is new money, it has been created at the stroke of a pen.

    After handing over the deeds to his house as security, a loan account is opened in which the bank deposits £100 to be repaid at 2 percent interest. The bank has not taken a penny of this money from any of its existing customers, it is literally new money.

    The manufacturer draws the full amount, and is successful. He fullfils his order and is paid, pays his staff in turn, his mortgage, gives his wife some housekeeping money, and sends his son to Switzerland for the school holidays. Then he pays £102 into his loan account; £100 disappears, it is cancelled out of existence. Every loan creates money; every repayment of a loan destroys it. The remaining £2 is the bank’s profit.

    The manufacturer obtains his money including his profits from his customers, but it is easy to see that if all manufacturers and everyone else must ultimately obtain money from the banks, that the entire world must go progressively in hoc to the banking system. This is where we are at the moment. This is why we have defaults, inflation, and even war.

    • When you say banks create money “ex nihilo” you are expressing something that has a kernel of truth, but your understanding is, I believe, erroneous, and as a result, you misrepresent the position in your example. I acknowledge that central banking does involve the creation of money under state direction, which is why we use the phrase ‘fiat money’ for central bank money, i.e. coins and notes, however that is not what you address in your comment.

      I think the mistake you make is in thinking that because banks “create” bank money by issuing loans, this must mean that banks create bank money out-of-thin air. One does not follow from the other.

      The bank money is created as a result of an underlying transaction, in which a promise mirrors a debt. Thus the bank money is not characteristically ex nihilo, but rather it is founded on certain promises received for the repayment of debts by borrowers, in most cases supported by security, and converse promises for the payment of deposits as debt to depositors.

      In other words, from the perspective of the larger banking system, what appears to you to be money created out-of-nothing is in reality a series of value-for-value exchanges.

      I know that you will point to the practice of fractional reserve banking, by which the appearance is given of commercial banks “creating” bank money, but fractional reserve theory does not involve the creation of bank money ex nihilo. Rather, the bank is loaning out a demand deposit received, and does so in aggregate up to its prudential liquidity ratio limits. The ‘money’ only exists at the point of liquidation when value is transformed into fiat money, which is produced on demand from a creditor, who in the case of a bank, will be a depositor. This is in so far as we can say fiat money exists at all. Until that point, the ‘money’ is just a series of value exchanges.

      To explain what I mean, let us say that I loan £1,000.00 from a commercial bank to buy a car. If I have to pay in cash, then I draw the money from the bank and I have fiat money in my hands, and that resolves the point simply enough. The cash I hold has been funded by the bank’s depositors, and perhaps also by loans that the bank has from the central bank or some other banking authority in order to support functional liquidity. The bank has created the money that forms the loan advance – you are right to that extent – but it has not created the money ex nihilo.

      If I pay the car seller by a non-cash method instead, say cheque, postal order or bank transfer or whatever, then my loan advance, i.e. the relevant bank money, funded by the depositors, is transferred to another bank, or perhaps to a different account with the same bank. This bank money does not necessarily physically assume the form of fiat money, as there has been no transformation from value into cash. For the time being, it is just a value-for-value exchange, in which I have promised to repay the bank the loan advance, plus interest (which is the bank’s commercial profit), this promise perhaps supported by security in addition to my contractual commitment, and the bank in turn has promised to pay its funding depositors their deposit on demand.

      • But, are banks that issue loan advances many times beyond their physical paper deposits, still technically ‘printing money’ in the form of credit?

        It would seem that loan advances still inflate the money supply – or at the very least artificially increase national purchasing power (with resulting inflation and over consumption of scarce resources).

        • To recap what I stated above, the loan advances are a value exchange – between, respectively, banks and consumers/businesses, between the retail banks and commercial banks they receive loan advances from, and between retail banks and central banks – supported by promises and securities, and remain so until the point of liquidity.

          Banks do create ‘bank money’. That part of fractional reserve theory is true. But it does not follow that the bank money is created from nothing. It is funded by deposits and also borrowed on a secure basis just as borrowers then in turn borrow from the bank; and, contrary to what fractional reserve theory holds, this ‘wholesale’ borrowing is a function of capitalisation, not the sum total of deposits.

          I do accept that the bank money is technically ‘debt-based’ in the sense that it is ‘paid down’ and thus the credit position ‘contracts’ as the loan is repaid, but unless the deposit has been liquidated, it is just a value-for-value exchange, in which case there is no ‘cash’, so there is no additional ‘printed money’ in circulation.

          On the point about inflation, I would disagree somewhat. “Printing money” does not in and of itself cause inflation. Or at the very least, I think that’s debatable. The problem there arises from certain assumptions that underpin the MV = Py equation of exchange, an axiom of monetary theory, which is basically a tautology. The usual assumption when Friedman and others applied that equation was that V (transactional velocity) and y (national income) would remain the same, thus the equation ‘proves’ monetary inflation theory on that basis. In reality, things don’t really work that way. To put the point simply, putting more money into circulation can only cause inflation if productive capacity in the economy remains constant or shrinks, but as the new money is ‘investment’ or consumer cash that expands productive capacity then the equation of exchange should remain roughly in equilibrium.

          • So banks are not collectively creating money out of nothing, but are in fact a cartel, backed by a central bank that creates money out of nothing… Doesn’t this equate to the same thing?

            Take away the central bank for a moment, and an individual bank is still lending out more than it has in private deposits (even if these loans are guaranteed by other banks etc.). I would hardly call this arrangement ‘free market competition’, where the customer gets the best possible service and deals.

            What’s problematic with the current banking system is that savers get little or no remuneration for savings which the banks undervalue due to being in a cartel with other banks – the thrifty are subsidising the careless; leading to rampant consumerism, mad state spending, funding of wars (especially towards countries that reject the banking cartel), damage to the environment etc. – rather than a sedate economy and sane society. Also, a central bank has the authority to create money out of nothing for its ‘associates’ while the rest of us would go to jail for doing the same.

            “Printing money does not in and of itself cause inflation.”
            Then let everyone have a million pounds each – the rest of us know what will happen next…. At the moment, everyday necessities are rising about 10% a year (contrary to Government inflation figures), but the wages of the lowest earners are not rising at the same pace (savings also have less purchasing power every year). However, servants of the state and the corporate establishment are gaining unprecedented wealth – their ivory towers growing taller; becoming more detached from their fellow man (those silly plebs who provide the real commercial labour upon which prosperity is based, and who keep the sewers running etc..).

            Your bank system is nothing but a wealth transfer from the more marginalised to the well-connected (and other politically-favoured groups). Ultimately, terms like ‘GDP’, ‘growth’ and ‘productivity’ etc. are nothing but abstractions of a system that gives immense power to a few, at the expense of the many who are coerced or duped into supporting it.

            • Well, technically-speaking printing more money IS inflation, so what I am saying strictly is that printing more notes does not in and of itself cause the economic symptoms associated with inflation, since there are a number of other factors aside from money supply. The monetary theory of inflation, which you regurgitate here, is outdated, or rather, was wrong from the start.

              The point I make above is that any money creation is in consideration of a promise or security. It’s not something created out of nothing, but rather something that is created in consideration of something else being given in return. Often that ‘something else’ might be property or other assets charged as security, or it might simply be a promise to repay based in contract. If there is no ‘value’ in the first place available to be exchanged, then no money can be created. So in effect the money creation exercise is a valuation of assets and securities available to support promises to repay.

              A system that creates money out of nothing would be quite different as the ‘money’ itself would have no value (it has been created out of nothing, after all) and it would not pass through any system of value exchange, as ‘easy money’ and ‘bank money’ does. Not even the cost of making the bank notes could be redeemed by the banker, as the note has minimal utility in and of itself and nil transferability. Thus there would be no incentive to extract value before disbursing such ‘money’, which presents an odd contradiction. In fact, it wouldn’t be ‘money’ per se, as its political and psychological credibility as a means of exchange would be non-existent.

              This in turn also points to an explanation for why it is against the law for you and I to print our own bank notes. The currency is free-floating, so the monetary system is based on political confidence in the bank notes used. Everybody who holds a five pound note knows that it can be used to pay for items and will be generally accepted within the jurisdiction. The same cannot be said for any bank notes I forge and print out at home. That would be a true example of creating money out of nothing, and it would be fake money or anti-money. If I were to go ahead and do this, the contradiction mentioned earlier is resolved: I am holding in my hands money created out of nothing and any value I extract by disbursing this money represents a criminal profit since the fake (or anti) money disbursed is, by definition, non-redeemable – i.e. it is not backed at my end by any underlying redeemable asset value or credible nugatory value, such as political confidence in the currency issuing authority.

              If I decided to reform and go straight after my spell in prison for currency fraud, I could use my experience as a forger to start up a legitimate private currency scheme in my local community. This might be based on actual money with bank notes that I print, or some sort of coupon system, maybe based on labour time or bartering. In order to ensure this new enterprise is legitimate, I would not be creating money ‘out of nothing’. Instead, I would be devising a system that users have confidence in and know that they can rely on to pay for goods and services. As such, there would need to be a value exchange implicit in the system, which would have at its root some source of confidence. In a local private currency system, the source value might be a local asset or community funds, or it might just be political confidence in the community.

              • “The monetary theory of inflation, which you regurgitate here, is outdated, or rather, was wrong from the start”

                I’m not regurgitating any theory, just common sense. A simplification would be if you’ve got 10 apples and 10 notes – then a central bank prints 10 more notes – you still only have 10 apples, but now they cost 2 notes each instead of 1. The people inside the system (bankers, financers, bureaucrats etc.) can still buy the apples at 1 note each with this new ‘free money’ if the act quickly enough, but by the time any ‘trickle down’ wealth filters through to the rest of us; we pay an inflated price for good and services. Many are experiencing this first hand – no need for ‘monetary theory’.

                You make a lot of word salads (gobbledygook) to express what should be some fairly simple points. There are lots of people using BS and sophisms in an attempt to mask/justify unethical practises and centralisation. What a civilised society really needs is a currency like/similar to bitcoin which is not regulated by a central authority or cartel of banks (backed by a military); purely for the benefit of those inside the system, and/or to buy votes in the now at the expense of future generations.

                • Sorry, but it’s not “common sense”. You just don’t understand inflation. Again, an increase in money supply IS inflation, but the economic consequences of inflation do not necessarily follow. That’s the precise position. You have an A-level sort of understanding where all the variables are controlled, but it doesn’t work that way in reality.

                  And I am not posting ‘word salads’. Actually, that criticism is somewhat ironic, as it seems to me that you’re the one here with the a priori assumptions, based on your bitter, conspiratorial views. If anybody is posting word salads, it’s surely yourself. I also don’t appreciate you personalising this and suggesting that I am somehow in hoc with the banking system or am an apologist for it. My interest is in understanding how the system works, not moral pontification.

                  What I am trying to communicate are original insights/ideas in what is a very complex subject. The basic problem is that you just don’t understand the subject at a sophisticated level, so I’m talking over you.

                  Best to leave it.

                  • “bitter, conspiratorial views”. “The basic problem is that you just don’t understand the subject at a sophisticated level”……

                    Spoken like a true sophist. ‘Bitter’, ‘conspiratorial’ etc., are not arguments. You’re basically saying that I’m too stupid to understand your ambiguities, contradictions and gobbledygook. The solution is to present your arguments in a clear, concise & honest manner.

                    I don’t even need to understand inflation to know that increasing the money supply makes things more costly for the rest of us – I know there are some benefits – like increased productivity, economic stability etc., but any benefits are mitigated when your food bill is raising 10% a year and your savings are worth less each year.

                    I do understand the basis of the arguments you are providing, but for instance, your ‘value to value banking exchanges’ are just euphemisms for what is still typical cartel activity. It’s also still similar to ‘printing money out of nothing’ but presented in a different context….

                    Ideally, a private bank should only lend out what it has in deposits. It should compete with other banks to provide the best interest rates for both savers and borrowers. It should not be bailed out with public money. This would lead to a more sedate society, as opposed to a consumerist one. A central bank is a legalised counterfeiting operation, which directs ‘free money’ and cheap loans to the well-connected. There is no place for it in a truly civilised society. Political and monetary power needs to be decentralised – central authority = corruption, favouritism and serfdom.

                  • Googled ‘inflation’: “In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.”

                    What is so hard about that? Naturally, in other contexts, inflation means different things, but your arguments seem to be more about semantics than real-world observations and theories.

                    “Again, an increase in money supply IS inflation, but the economic consequences of inflation do not necessarily follow.”

                    But they do follow – the weekly shop confirms this – they are only being offset slightly due to policies like unsustainable immigration etc.. The richer you are, the less you are effected by food inflation, but I’ve been trying to highlight the disastrous effects it has on the politically disenfranchised and those on fixed incomes.

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