While he was reorganising the work of the Royal Aircraft Establishment during World War I, Douglas noticed that the weekly total costs of goods produced was greater than the sums paid to workers for wages, salaries and dividends. This seemed to contradict the theory of classic Ricardian economics, saying that all costs are distributed simultaneously as purchasing power. Troubled by the seeming difference between the way money flowed and the objectives of industry, Douglas set out to apply engineering methods to the economic system. Douglas collected data from more than 100 large British businesses and found that all except those becoming bankrupt, paid less in salaries, wages and dividends than the costs of goods and services produced each week: the workers were not paid enough to buy back what they had made. He published his observations and conclusions in an article in the magazine English Review where he suggested: "That we are living under a system of accountancy which renders the delivery of the nation's goods and services to itself a technical impossibility." The reason, Douglas concluded, was that the economic system was organized to maximize profits for those with economic power by creating unnecessary scarcity. Between 1916 and 1920, he developed his economic ideas, publishing two books in 1920, Economic Democracy and Credit-Power and Democracy, followed in 1924 by Social Credit. The basis of Douglas's reform ideas was to free workers from this system by bringing purchasing power in line with production, which became known as social credit. His proposal had two main elements: a national dividend to distribute money equally to all citizens, over and above their earnings, to help bridge the gap between purchasing power and prices; also a price adjustment mechanism, called the "just price", to forestall inflation. The just price would effectively reduce retail prices by a percentage that reflected the physical efficiency of the production system. Douglas observed that the cost of production is consumption; meaning the exact physical cost of production is the total resources consumed in the production process. As the physical efficiency of production increases, the just price mechanism will reduce the price of products for the consumer. The consumers can then buy as much of what the producers produce that they want and automatically control what continues to be produced by their consumption of it. Individual freedom, primary economic freedom, was the central goal of Douglas's reform. At the end of World War I, Douglas retired from engineering to promote his reform ideas full-time, which he would do for the rest of his life. His ideas inspired the Canadian social credit movement, the short-lived Douglas Credit Party in Australia and the longer-lasting Social Credit Political League in New Zealand. Douglas also lectured on social credit in Canada, Japan, New Zealand and Norway. In 1923, he appeared as a witness before the Canadian Banking Inquiry, and in 1930 before the Macmillan Committee. In 1929 he made a lecture tour of Japan, where his ideas were enthusiastically received by industry and government. His 1933 edition of Social Credit made a reference to the Protocols of the Elders of Zion, which, while noting its dubious authenticity, wrote that what "is interesting about it, is the fidelity with which the methods by which such enslavement might be brought about can be seen reflected in the facts of everyday experience."
Death and legacy
Douglas died in his home in Fearnan, Scotland. Douglas and his theories are referred to several times in Lewis Grassic Gibbon's trilogy A Scots Quair. He is also mentioned, together with Karl Marx and Silvio Gesell, by John Maynard Keynes in The General Theory of Employment, Interest, and Money. Douglas's theories permeate the poetry and economic writings of Ezra Pound. Robert Heinlein's first novel describes a near future United States operating according to the principles of social credit.
