After the start of the First World War, numerous countries’ monetary authorities suspended their gold standards. Many reverted back to gold after the war only to abandon it once more during the Great Depression. During this era, the question of what money was, and what it should or shouldn’t be, were debated more than ever before and perhaps ever since. The spirit of economic reform unleashed by the war and depression meant these debates resulted in new monetary experimentation around the world. One of the most curious of these experiments was launched in Canada where the province of Alberta introduced a new currency, dubbed ‘prosperity certificates’. The new money was inspired by, though perhaps not completely in keeping with, a new economic theory, one of the many bubbling simultaneously in post-war Europe and America.
Clifford Hugh Douglas
The economic theory that motivated one of North America’s most peculiar monetary experiments was Social Credit, a set of ideas developed by the engineer-turned-economist Clifford Hugh “C.H.” Douglas. The doctrine of Social Credit may not be well known outside Britain and the Commonwealth, having largely failed to have a large political impact elsewhere; however, it was monumentally influential in some countries, Britain and Canada especially.
C.H. Douglas was a British electrical engineer born in Manchester in 1879. His training was in engineering, not economics, and he worked during the First World War at Britain’s Royal Aircraft Establishment, essentially an aircraft design plant, as an assistant director. While there, he noticed that the cost of the aircraft produced by the plant greatly exceeded what was paid out in incomes to those who manufactured the planes by supplying their labor or capital. If this tended to hold across other enterprises, public and private, then was it truly possible for workers and owners of firms to actually purchase their own production? How could it be true that “demand depends only on supply” as the economist David Ricardo thought?
The engineer underwent a change in profession, involving himself in economic research. Douglas conducted research that found that across British firms, incomes generated in the form of wages and dividends usually fell short of the cost of products and services produced by those firms. This would seem to mean that total domestic income fell short of total domestic production, resulting in a surplus of goods, only some of which would find demand abroad and thus at least some of which would produce a glut.
Social Credit’s Prescriptions
Two mechanisms were devised by Douglas and his disciples to resolve the gap between consumption and production; one was the “national dividend” and the other the “just price”. In Social Credit theory, a national dividend was an unearned payment made to all citizens, something similar to universal basic income. Because domestic consumption fell short of domestic production in ordinary circumstances, Douglas insisted that consumption could be increased without inflation.
While the national dividend would address incomes, the just price addressed the cost of consumption. The just price mechanism would set prices for goods and services by cooperation between government and firms. It would require existing prices be multiplied by a ratio calculated as total national consumption over total national production, a factor less than one. The state would provide subsidies to businesses as needed, to compensate owners and not cause a further drop in incomes.
The national dividend would not be funded by taxes but by the creation of a new “non-debt” credit, extended to citizens with no expectation of repayment. The policy amounted to the creation of new money akin to physical currency and in contrast to bank money which is secured by credit which naturally dissipates in a depression. The money would be issued in just an amount needed to absorb the surplus of production over consumption, eliminating the gap that caused gluts to form and kept society from enjoying the full fruit of its labor and capital. Political support for this Social Credit theory and its policies grew in Britain and some of its dominions, from Canada to New Zealand.
Alberta
In time, political parties were formed to push for Social Credit policies. In Canada, such parties were formed in British Columbia and Quebec. However, they enjoyed the greatest electoral success, at least in the early days of the movement, in Alberta. It is worth noting that the province suffered dearly in the early years of the Great Depression as high tariffs cut off the province from markets in the U.S. and low commodity prices reduced farm incomes. This required farmers to mortgage their properties to hold them over until conditions improved, a measure that only weakened their financial position and a source of temporary support that could not go on forever.
In these conditions, the Alberta Social Credit Party was founded in 1934. To the surprise of many, it won a majority government in the provincial elections the very next year. The party was led by William Aberhart, who thereafter served as Premier of Alberta from 1935 to 1943. Aberhart was a Baptist proselytizer who became famous for delivering popular sermons over radio. He came to lead such a political party after infusing Social Credit economics into his preaching. It was easy to see why Aberhart and the Social Credit Party might find strong support; they campaigned on giving each Albertan a $25 monthly stipend. The party won but such generosity would not be forthcoming; the government of Alberta was nearly bankrupt and defaulted on its bonds one year into the Social Credit government.
Prosperity Certificates
It was in Alberta where the short-lived prosperity certificate program was launched. During the Great Depression, several towns and cities in Canada had issued scrip as money, but Alberta’s was to operate on a larger scale. The province authorized the issuance of $2 million in prosperity certificates in 1936. In actuality, only a little over $350,000 in one-dollar notes were released into circulation that summer. The initial issuance was used to fund road construction projects employing the otherwise unemployed. It was later rolled out for the partial payment of provincial government salaries.
The prosperity certificates had a complex relationship with Social Credit theory. The new currency was intended by some to fulfill the “national dividend” plank of Social Credit policy. Nonetheless, the program was not quite what C.H. Douglas had intended when he introduced the economic theory more than a decade earlier.
The certificates instead more closely served as a practical example of what was proposed by the even more radical German economist Silvio Gesell. Like Douglas, Gesell was not trained as an economist but went on to influence monetary thinking nonetheless. However, Gesell’s interpretation of economic depressions placed more emphasis on the double-edged role of currency as a store of value than did Douglas’s monetary theories which were more concerned with the inadequacy of bank credit than a hoarding of physical currency.
To discourage hoarding of money and improve its circulation, the prosperity certificates bore an expiration date set two years into the future. At that point, the certificates would be convertible into ordinary Canadian dollars. That said, a holder of a $1 prosperity certificate nonetheless had to pay one cent per week to keep the notes from expiring within that period. This mechanism was designed to encourage holders to spend money more quickly, enhancing consumption.
The one cent charge was levied by the provincial government which sold small stamps that the certificates’ bearers would affix to the notes to keep them active. So, while the provincial government promised to redeem the notes for Canadian dollars in 1938, by that point, bearers would have had to pay $1.04 to keep the notes active, or one cent a week for 104 weeks. This benefited the bankrupt provincial government since it didn’t need to have the funds on hand immediately to back the certificates since the stamp sale proceeds would have been more than sufficient to provide funds for the certificates’ eventual redemption.
Results
In the end, the prosperity certificates saw little use. Retailers in the province were hesitant to accept them and even the provincial government refused to receive them as payment in many instances including for the payment of most fines and taxes. A national dividend along Douglas’s lines was still being planned by a special committee established by the provincial government but was never implemented due to disagreements within the cabinet. The prosperity certificates didn’t even make it to their anticipated expiration date; the program ended in April 1937 when the notes were redeemed early and the experiment discontinued.
Lesson
The prosperity certificates may not have lasted long enough to judge their efficacy. However, it is not everyday that novel monetary ideas are experimented with at any scale or for any duration at all. So, the lesson in the certificates is not its impact on the economy or finance but rather what the radical idea suggests about monetary conditions and popular satisfaction, or dissatisfaction, with them during the Great Depression. Social Credit had such an influence on certain countries’ economic and political discourse precisely because of dissatisfaction with the monies of old.
More from the Tontine Coffee-House
Silvio Gesell influenced a similar currency in Austria that also required stamps be affixed to the notes in order to keep them current. Also read about how monetary exigencies in Canada also led to the use of playing cards as money.
Further Reading
1. Bell, Edward Allan, and Maurice Pinard. Social Classes and Social Credit in Alberta. McGill-Queens University Press, 1994.
2. Heydorn, M. Oliver. Social Credit Explained in 7 Points. The Clifford Hugh Douglas Institute for the Study and Promotion of Social Credit, 28 Dec. 2014.
3. Irving, John A. “The Evolution of the Social Credit Movement.” The Canadian Journal of Economics and Political Science, vol. 14, no. 3, 1948, pp. 321–341.
4. Powell, James. A History of the Canadian Dollar. Bank of Canada, 2005.
5. Whalen, Hugh. “Social Credit Measures in Alberta.” The Canadian Journal of Economics and Political Science, vol. 18, no. 4, 1952, pp. 500–517.
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