The Problem of Financing Consumption

The Nineteenth Century 105 (June 1929), 792-801

Those who read my article ‘The Lesson of South Wales’ in the February number of The Nineteenth Century may recollect the two principal conclusions arrived at – first, that industrial civilisation as a whole has reached an ‘artificial saturation point’; and secondly, that the necessary remedies are to ‘finance consumption’ and correlatively, to ‘organise leisure’. Industry appears unable to find any means of producing and delivering to the consumer a larger quantity of goods. It has reached, therefore, a saturation point. That this saturation point is not a real one, however, was seen to be demonstrated by the co-existence almost everywhere of under-consumption, unemployment, and a hunt for markets – the ‘triangle of impotence,’ as someone has excellently called it. On the other hand, the world-wide extent of the phenomenon proved that the other proposed remedies, all of which are based on unqualified acceptance of the principle of international competition for markets, and on the anticipation of our personal success in that competition, are no more than short-sighted palliatives. Attention was also drawn to the political complications inevitably involved and the obvious danger of war. An article by Lieut.-Colonel C. G. Maude, D.S.O., which supports this last conclusion with detailed arguments, has since appeared in the Army Quarterly (April 1929).

Now America has already recognised the necessity of financing consumption; the thing is actually being done there already, but only, as was pointed out in the last article, by various backstairs methods, of which their so-called ‘consumer-credit’ (instalment selling) is one. The question I think we should ask ourselves, then, is this: Are we going to learn from America’s mistakes at the beginning of the machine-using age, as the other nations of the world learnt from our mistakes at the beginning of the machine-making age? The Industrial Revolution took us unawares; we were the ‘dog,’ so to speak, on which the world ‘tried’ it. Hence the Black Country! The Continental nations learnt something from our mistakes; they put up industrial towns that were planned as such, and built railways with a strong suspicion from the start that, before they had done, their whole country would be a network of them. If England was the dog on which the world tried the machine age, I believe it will be found that America is the dog on which it is even now trying the leisure age. And if that is so, it must be possible to learn something from her blunders – but only if we manage to wake up and grasp the technique of financing consumption before we find ourselves already doing so willy-nilly on a large scale instead of afterwards. Something was said in the previous article of the habits of thought which, before all else, stand in the way of such an awakening. And one of the most important of these is the average man’s idea of the meaning of the word ‘money.’

In order to evolve a technique of financing consumption we should have to recognise from the start this simple proposition: that, pari passu with the introduction of labour-saving machinery, the conception of money as consisting of ‘savings in the past’ becomes inadequate. Money, of whatever it consists, is simply the means for the distribution of goods – as railway tickets are for the distribution of seats in railway trains. As more seats become available, more tickets are required, whether or no there may be any unused tickets from the past to draw on. Should the total number of seats increase, new tickets must be printed; should it decrease again, some of the existing tickets must be destroyed. In point of fact a change of this kind in our conception of the nature of money is taking place under our eyes. The chairman of the Midland Bank, for instance, has more than once explained publicly how ‘every banks loan creates a deposit’ and every repayment of a loan destroys one – a proposition which at once takes us right away from that hydra-headed prejudice that all the money existing in the world must have been ‘saved’ by somebody in the past. If we define money, along Professor Walker’s lines, as something which, no matter what it is made of1 nor why people want it, no one will refuse in exchange for his goods, we protect ourselves from this damaging preconception as well as many others.

The inevitable consequence of such a change in our conception of ‘money’ is an altered conception of the position of the banker in society, and thus of the whole relation between finance and industry. Those who are alive to the signs of the times will no doubt have observed how questions concerning this relation are beginning to crop up with increasing frequency. I refer the reader to such a document as the recent manifesto of the British Electrical and Allied Manufacturers’ Association on the subject of Finance, and even the annual speeches of the bank directors themselves – notably Mr. Tennant – for the current year. The absolute dependence of industry on banking policy is being realised on all hands; on the other hand, it is an open secret that banking prosperity, if it depends on the prosperity of industry at all, only does so in the very long run.

Now the main purpose of this article is to urge that we as a nation, as an empire, or as a community of many nations, should bring about consciously and of our own will those changes that are being thrust upon us in any case, in order that, working with knowledge, we may avoid the incalculable disasters which Nature will otherwise use to bring about the same end. Accordingly the first practical suggestion which I have to make is that an exhaustive inquiry be held as soon as possible into the whole question of the modern relation between finance and industry. Ideas on the subject are in the melting-pot: let us seize the opportunity to hammer them into shapes that are at the same time realities.

But here a word of warning:

Such a suggestion, as it stands (and it is being made in many quarters), may mean almost anything. Everything would depend on the personnel and terms of reference of the inquiring body; and the whole affair would be useless if it were conducted, as all economic inquiries have hitherto been conducted, solely from the point of view of maintaining a soi disant ‘sound’ finance. The terms of reference must include as their first and foremost item the effect of financial policy on the interests of the ultimate consumer. The financial expert or practitioner must be well represented, therefore, at this inquiry, but he must be represented in the witness-box, and not on the bench. I only say this because it is so easy to foresee such an inquiry being held and degenerating immediately into one more of the innumerable meaningless ceremonies of that name that characterise our post-war society. Nor are interests wanting that would be only too glad to guide it into such (to them) harmless channels. One foresees an interminable urbane discussion between big-endians and little-endians, between the credit ‘expansionists’ on the one side and the ‘deflationists’ on the other, or between those who advocate nationalising the banks and those who advocate leaving them alone. One sees six months or so spent very pleasantly by a group of nice happy gentlemen, and at the end of it the crucial issue never even raised!

In demanding an inquiry, then, what I am demanding is a public inquiry into the whole relation between the financial system and the interests of the consumer, not an inquiry into some single point of banking policy such as nationalisation or inflation, though these questions should of course be considered among others.

If our material salvation depends on getting a clear idea of the meaning of ‘money,’ it may depend still more on getting a clear idea of the meaning of ‘inflation.’ For any scheme of financing consumption is quite certain to be stigmatised, both by those who do not understand and by those who do not like it, as ‘inflation.’ This is an absolutely foregone conclusion. We shall do well, therefore, to ask exactly what inflation means. To inflate the currency is to increase the quantity of money without increasing purchasing power. By purchasing power we mean money considered, not by itself, but in relation to price. Thus, a man has 5l. to spend on boots which cost 1l. a pair. If you give him another 5l. and at the same time raise the price of boots to 2l. a pair, you have increased his quantity of money without increasing his purchasing power – i.e., as far as that transaction goes, you have inflated the currency. But if you give him the extra 5l. and keep the price of boots down to 1l. or if you give him nothing extra, but reduce the price of boots to 10s., then you have increased his purchasing power.

If we express purchasing power in the simple formula Quantity of Money/Price, then inflation is an increase of the numerator which does not in the end involve any increase of the whole fraction. It follows that the denominator must increase proportionately. In other words, a rise in prices is actually a differentia of the term ‘inflation.’ This seems a simple enough point; nor would it be necessary to labour it but for the extraordinary confusion of thought which prevails over these questions. Indeed, one is sometimes tempted to believe that the power of grasping more than one idea at a time is gradually dying out of the human race. For it is quite a common thing nowadays to hear some gentlemen with the ear of the public expounding in one breath the Quantity Theory of money and the impossibility of reducing prices by any means except the withdrawal of money from circulation, and speaking in the next as though the consumer would benefit by the ‘lower prices’ produced in this manner.

I trust, then, that I may be excused from transporting readers of The Nineteenth Century to the specious simplicity of a desert island in order to demonstrate that the problem of financing consumption is the problem of increasing, not money, but purchasing power. You have to increase the value of a fraction, x/y; it does matter whether you increase x or decrease y, so long as you keep the other figure constant.

From this we may assume that any scheme that may be evolved for the financing of consumption must, if it is not simply a hoax, contain some provision for reducing, or at any rate for preventing the rise of, prices. What else may we expect?

Those who read my previous article may remember how it was there pointed out that the time factor – the ‘period of industry,’ as I called it – which is so essential a part of an industrial civilisation, has never been properly understood. It is not sufficiently realised that, wherever a large proportion of the population is engaged in elaborately organised productive industry, the power to increase consumption depends ultimately on a confused faith in a still further increase in consumption in the future. For the inevitable interval between the finished article on the market works in such a way that everything is referred forward to to-morrow. I added that it is now necessary for us to realise that ‘to-morrow has come.’

We may fairly expect, then, that any sound scheme for the financing of consumption will contain, in addition to its provision for price regulation, some provision for counteracting the influence of this ‘time-interval.’ In this, too, it will differ wholly from schemes involving ‘inflation.’ When fresh or easier credits are issued for the financing of productive enterprise, the price of the finished article has usually risen proportionately before the article actually appears on the market. A wholesale financing of production is quite properly described, therefore, as inflation. Our process of directly financing consumption will have to guard against this; it will have to look backward instead of only forward.

We know, then, this much already about any feasible scheme for financing consumption: it must provide, on the one hand, for the price factor and on the other hand for the time factor. Suppose we provide for the time factor by starting at the opposite end. Instead of borrowing money (= creating a deposit) for the purpose of building a factory in which to make lucifer matches, we borrow money for the purpose of reducing the price of those lucifer matches already in existence. Then we have provided for both factors at the same time; for we have increased our purchasing power at the moment of sale (i.e., economic ‘consumption’), and we have done it by means of a reduction in price. It is hardly my part to work out the details. One line along which it would be possible to work would be an official undertaking to reimburse any retailer who could produce receipts showing what he had sold at the lower price level. It must not be forgotten that there is scarcely an industry in Europe and America which is not ready to produce more goods if it could only find consumers with the right price in their pockets. It must not be forgotten that there is – or there could be – plenty for all.

Presumably one would choose some more urgent necessity than matches, which are already cheap enough for nearly all, and therefore probably not much under-consumed. It was the coal problem which led to the writing of these articles, and a scheme for financing the consumption of coal on these lines was actually sketched out some years ago by the distinguished economist C. H. Douglas, to whose writings2 I am largely indebted for anything constructive I may have been able to say in these columns. To these writings I refer any reader who is sufficiently interested in what I have said to raise more detailed problems of practical administration, such as that of determining the degree of price reduction possible at a given time.

Meanwhile there is a grave theoretical objection which I must hasten to meet. Let us lump together the whole cycle of production and consumption under the heading ‘industry.’ Existing financial policy, it was said, finances industry at the production end by granting it loans, which it recovers at last out of the price charged for its finished goods to the consumer, and then repays to the bank. Here, on the contrary, it is proposed to finance industry at the consumption end by granting it loans after the price of the finished goods has been paid by the consumer. When and out of what are these ‘loans’ to be recovered and repaid?

This takes us back once more to the rapidly changing meaning of such words as ‘money’ and therefore ‘loan.’ We have only to restate the above process, bearing in mind the axiom that every bank loan creates a deposit, and it appears as follows. Existing financial policy finances industry at the production end by creating deposits which are at least recovered out of prices and destroyed. Here, on the contrary, it is proposed to finance industry at the consumption end by creating deposits, which are used to reduce prices and – how are they to be destroyed?

But why should they be destroyed? The very fact that we assume it to be necessary shows that we are thinking of ‘money’ in the old terms. It shows that we have forgotten the object with which we set out, which was to increase the purchasing power of the consumer. If we destroy the deposit (repay the ‘loan’), we shall only end by bringing purchasing power back to its old level. What we have done so far is to increase the quantity of money in circulation without raising the price to the consumer. And this is exactly what we wanted to do.

It was only possible to do it because the productivity of industry exceeded the actual consumption of goods. Now if we envisage a condition of affairs in which the financing of consumption had already gone on so long that this was no longer the case – in which, therefore, every article which industry could produce was sure of a sale – then it would no longer be possible to finance consumption in this way. But the reason would be, precisely, that it no longer needed financing. Our industrial civilisation would have passed from its present artificial saturation point to a real saturation point.

It will be seen then that the theoretical objection really arose from the use of the word ‘loan’ in this connexion. Rather it is our problem to find a way of creating bank deposits otherwise than in the form of these temporary and repayable loans. But as soon as we set the problem thus in a clear light, my purpose in retaining the word ‘loan’ up to this point, in spite of its misleading nature, becomes clear. For the word reminds us that the whole technique, habit, and book-keeping methods for creating the fresh necessary to the financing of consumption are already in existence. All that is needful is to recognise that the deposits created by a bank, when it makes what is now called a ‘loan,’ may, in certain circumstances, be permanent instead of temporary.

As a matter of fact no honest man who is acquainted with the manner in which war production was financed in all countries, or with the colossal extension of the funded debt system, will pretend to be amazed at the idea of a ‘loan’ that is never repaid. And indeed it might well be possible, in order to avoid fluttering any dovecotes, to start the ball rolling with a loan funded at some exceptionally low rate of interest, say, the half of 1 per cent.

How often does it not work out in practice to-day that the interest on a funded loan is repaid with money borrowed from the same source as the principal! And ‘loans’ of this kind are already, in all but name and one other thing, gifts. The other thing is the power of control which the lender retains by means of his nominal ownership over the borrower. And it is here that the real obstacle to the financing of consumption will arise. I doubt if it is possible to exaggerate the tenacity with which those financial interests and institutions which virtually ‘own’ that actually common property, our credit, will cling to the price of control which it gives them over national policy and individual destiny. I do not say that such control has always been exercised in a wholly unwise or consciously reactionary manner; but he would be a rash man who would praise the way in which it is being used to-day. We are faced here, then, not with a technical difficulty, but with a moral one. Does our credit, which is really the product of our financial institutions which we rightly pay to guard it in its financial form? As a matter of fact the economist to whom I have already referred, Major C. H. Douglas, distinguished some years ago in these very pages this question of the ownership of credit from the more popular one of the nationalisation of banks.3 It is an important distinction.

The wealth of the twentieth century is compounded of many factors, among which there is one that takes a very high place. I refer to that imponderable increment that arises from the development of industry in the past, from the inventive genius of scientists and the devotion of all manner of nameless men to problems of industrial administration. Whatever may be said of other factors, I challenge anyone to deny that this increment belongs to us all. The law at any rate signifies its tacit assent to this proposition by refusing to grant patents in perpetuity. You may keep your estate in your family as long as you please, but not your genius. What is so little realised as yet is the enormous importance which this imponderable increment has at length attained. There is – or there could be – plenty for all. Anyone who keeps a weather eye open for statistics of productivity can convince himself of the fact in a few months. Thus, Lieut.-Colonel Maude in the article in the Army Quarterly, to which I have already referred, points out that

in a short period of one hundred years steam, electricity, machines, and the other inventions and organisations connected with them, converted a world of shortage into a world of material plenty. This is the cardinal economic fact of to-day… If, then, production is ample and consumers eager to consume, why have we got a seeming paradox of poverty and want, even in the civilised and highly industrialised nations of the West? The answer is to be found in the third of the economic trinity, distribution…. The chief agent for distribution is, of course, ‘money,’ or, to be more exact, ‘purchasing power,’ which means money in relation to prices…. Therefore it is the lack of purchasing power which stands between the consumer and his desires.

Money is the chief agent for the distribution of the common wealth. In other words, when we speak of the ‘financial credit’ of a person or a group, we mean the power to claims so much of that wealth for his own particular use. It follows that the total ‘financial credit,’ the total purchasing power, of the community should be enough to purchase all the wealth it can produce. Is this the case? Is our financial credit being distributed sufficiently or insufficiently? – well or ill? Is it distributed on the assumption that it belongs to those who distribute it or that it belongs to those to whom it is distributed? These are some of the questions that will have to be thrashed out when a public inquiry is held into the working of our financial system. And it is only be means of considering these questions, and some others, with a certain high seriousness that is rapidly disappearing from our political consciousness that we can hope to learn anything from America’s obvious mistakes. Vote-catching stunts like Mr. Lloyd George’s, for the ‘distribution of employment’ can at best put off the evil day a little longer. For they are based on acceptance of the central fallacy that, apart from dividends, the only way of distributing increased purchasing power in the present is in the form of rewards (wages and salaries) for a still further increased production in the future. And where, then, is all this enforced acceleration to end? There is a fundamental dishonesty behind a policy which keeps people’s attention fixed on the problem of distributing employment, when the real problem is that of distributing goods – and leisure.

And it is here that I think we could learn especially from America’s mistakes – by never forgetting that goods and leisure are correlative. I believe the problem of the right use of that leisure, which the machine age is offering us with both hands, may turn out to be the most important problem of all. There is something about the endless rush to increase consumption – to increase material wealth – which we are witnessing in America, which would, to say the least of it, not suit Europeans. If we are to grapple adequately with the machine age we must learn to rest on our oars and to know when to do so. For Europeans have not yet quite forgotten that they need other things beside bodily comforts, and nothing but disaster will come of pretending that they have. With wealth, which serves the body, we remain in the practical sphere. But with leisure, which serves the spirit, we come at once into the moral – and spiritual – sphere.

When I spoke of leisure in my last article as the ‘soul-creating’ thing, I supposed that many, who knew the inspiriting effect which hard and even enforced labour may produce, violently disagreed with me. Incidentally, this conviction of the moral value of hard work is undoubtedly a very great stumbling-block in the way of a proper understanding of the approaching leisure age. Here, however, we reach the threshold of a subject into which it is not possible to enter in an article on economic problems. It was the Austrian philosopher, Rudolf Steiner, who pointed out in his Threefold Commonwealth that the moral-spiritual aspect of human society will undoubtedly need to become articulate, to be in some sense organised, certainly to be definitely recognised as a third element, alongside of the political and economic. It was the same universal genius who pointed out in a course of lectures on economics that in the age which is approaching industry will be obliged, if only for its own sake, to recognise the gift as a third form of money transaction alongside of the loan and the wage.

It is, I think, reasonable to speak of economic leisure as the ‘soul-creating’ thing in this sense, that it alone makes possible an entirely free, an entirely individualised, spiritual activity, whether good or bad. In the last few centuries we have become more and more accustomed to think of the way in which a man spends his leisure, and indeed of his whole moral character, so long as he keeps within the law, as being his own affair. This freedom is the gift to us of all those, of whatever faith, who faced the religious persecutions. And what was the Romantic movement, with all its reverberations, but the amazed discovery that the spirit speaks to us to-day more loudly and more clearly through art, which is of the individual, than through religious observance, which is of the mass? The problem of the leisure age, then, will be the problem of organising this free and individual spiritual activity, to which modern men feel themselves obscurely impelled (and for which a good deal of vice is no more than a kind of groping pis aller), while at the same time leaving it free and individual – to provide leisure from enforced activity – for voluntary activity. But this is rank idealism, someone will object, not practical politics at all! I am inclined to agree with him. There is not a single idea in either of these two articles which does not arise with rigid necessity out of the most practical problem imaginable – namely, the existing unemployment in the coal industry. After all, they are not yet facts. Now emigration, road-making, higher death duties, these are nice solid facts! They are already in existence. And when you have got a nice fat fact to be going on with, why look ahead?

Owen Barfield

1 Including, therefore, cheques, in so far as they comply with the other conditions. Return.

2 E.g., Credit-power and Democracy, Social-Credit, and other books, which have been published by Cecil Palmer and translated into numerous foreign languages. Return.

3 ‘Socialism and Banking: a Reply,’ March, 1925 Return.