On Aug. 22, 1935, William (Bible Bill) Aberhart swept into power in Alberta, taking 56 of the provincial legislature’s 63 seats, on his promise to pay “social credit” dividends to every Albertan. A Social Credit government, he said, would pay $25 a month to everyone over 21 (and lesser amounts to everyone under 21) – a pledge of windfall purchasing power equal (adjusted for inflation) to $402 a month for every adult in the province.
Sophisticated people in the rest of the country sniffed and sneered, and the Socreds became the party of “funny money.” But there’s profound irony in this enduring insult. The Bank of Canada, which opened its doors the same year, now more or less performs for the nation the very function that Bible Bill promised for Alberta.
John Maynard Keynes understood the revolutionary implication of Social Credit and paid explicit tribute to it. Indeed, he named Major C.H. Douglas, the British engineer who promulgated Social Credit theory, as one of his four “brave heretics,” dissident economic theorists who (Keynes said) could have a more enduring influence on the world than Karl Marx himself.
Douglas (1879-1952) based Social Credit theory on the fact that banks get to create money out of thin air when they lend out people’s deposits – and get to keep the interest they collect on them. Whose money was this? It was, Douglas said, the people’s money. Therefore, governments should capture these profits and give them directly to the people – either as credit or cash.
From this perspective, Douglas was as much the radical socialist reformer as Keynes’s three other “brave heretics”:
British economist John Hobson (1858-1940), a prolific writer in the Christian Socialist tradition (with more than 50 published books) who advocated the dispersal of a country’s “excess savings” through confiscatory income taxes.
German economist Silvio Gessel (1862-1930), an anarchist who advocated the nationalization of all money (and who served as finance minister for seven days in the “Soviet republic” that briefly seized power in Bavaria in 1919).
English chemist Frederick Soddy (1877-1956), winner of the 1921 Nobel Prize for chemistry (for his discovery of the existence of isotopes), pioneer in the study of radioactivity at McGill University (with Ernest Rutherford) and proponent of three radical economic reforms: (1) abandoning the gold standard; (2) allowing currency exchange rates to float, and (3) using government “benefits” as a macroeconomic policy tool to either speed up an economy or slow it down.
Along with parts of the programs of Douglas, Hobson and Gessel, all three fundamental components of Soddy’s “scientific economics” are now the stuff of conventional, everyday Keynesian economics.
Back in Alberta, in the worst days of the Great Depression, Bible Bill Aberhart couldn’t implement his Social Credit creed. (Among the expert European advisers he hired as consultants was Gessel, the most radical of Keynes’s “brave heretics.”) The Supreme Court, quite properly, disallowed all of the Social Credit legislation, which sought to place national banks under provincial control – and which also sought to imprison people who might subvert the Socred revolution. (Further still, Social Credit was notoriously anti-Semitic – but then, some historians say, so was Keynes.) Yet, the Supreme Court had no problem when the federal government effectively put the national banks under federal control for the same “social credit” objective.
Graham Towers, first governor of the Bank of Canada, conceded the point when he appeared before a parliamentary committee in 1939: “The primary function of a central bank is the control of the commercial banks’ cash reserves.” For all practical purposes, government control of cash reserves is government control of credit. Raise the percentage of people’s deposits that banks are required to hold as reserves, and the banks get to create less new money; lower the percentage, and the banks get to create more new money. (In the 1990s, the Bank of Canada lowered the percentage to zero.)
Douglas, the funny-money theorist, proposed that governments end the Depression by expanding credit, by printing more money and by spreading it around. By this criteria, Social Credit dogma now governs the country and much of the affluent world. Douglas, though, would have preferred a more populist distribution of the wealth: Give the credit and the cash directly to the people – and let the banks fail.