Critisticuffs on Inflation
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I do not think that banks and bankers are going to say that the real problem is capitalism
What is necessary is the ability to cover the likely payments (after clearing) and cash withdrawals, not to cover the entire amount of each loan.
That’s the whole point. The outflow of funds as loans can be covered by an inflow of funds as deposits (payments into customers’ bank accounts). A bank will only have to resort to the interbank lending market if, after clearing, the net figure is negative. That will still mean that most of their loans will be covered by (proper) deposits.
There are also other things it can do, as pointed by the Bundesbank in another article:
“The banks also keep a constant eye on the costs that may incur by granting loans and creating book money. For example, if the customer uses the new credit balance to transfer money to an account at another bank, from the bank’s point of view money will be flowing out. The bank then often has to recover this money, for example by taking out a loan from another bank, or by “refinancing” itself with a loan from the central bank. Alternatively, it can persuade savers to invest cash or credit balances at the bank in the form of savings or fixed-term deposits. “(bundesbank.de/Redaktion/EN/Standardartikel/Service/book_money_text.html)”
I can’t find quickly the original Bundesbank article which is quoted in the article below from the Socialist Standard. Perhaps somebody in Germany can track it down.
To tell the truth, I find the Bundesbank’s account clearer than that of the Bank of England (though it too makes the same point about attracting more deposits from supposedly redundant savers). For instance, the use of the term “book money” rather than simply “money”.
One last go, as we seen to be talking past each other, and I’m not sure how productive this is anymore.
1. The SPGB position is that banks are intermediaries only.
2. The counter position is that banks do not lend out money deposited with them by their customers, but instead make loans based on the creditworthiness of the customer.
3. Continuing this position: this is not some conjuring trick. The loan created is an asset to the bank. Furthermore, there are constraints on this creation, e.g. liquidity concerns.
4. SPGB position seems to be that yes, book money can be created without a prior deposit, but the bank needs to ensure that it seeks a deposit to cover this in full, perhaps also relying a bit on acquiring reserves/central bank money.
5. Counter position is that banks do not seek to attract deposits which they loan out, whatever the sequence is. Commercial banks simply need to be able to cover likely needs regarding bank transfers or cash withdrawals. That is, banks have to cover payments/transfers, not loans. Bank transfers clear, so the amount of reserves needed is like a kind of reverse multiplier (they hold a certain ratio against the book money they create) They do at the same time seek deposits, as part of this same liquidity management process – they’re not redundant, simply not the source of lending. This is not the same as receiving a deposit of £1000 and lending out £900, as an intermediary would, nor would they lend out £900 and seek deposits to the value of £1000 in some reverse version of fractional reserve banking. They just need to cover their arses, factoring in the wiping out of mutual obligations in bank transfers, the risk of defaults on loans etc. There are also central bank facilities and/or loans from other banks to meet any shortfalls. In effect they are loaning out £900 and seeking £90 (whether through deposits or central bank money or interbank lending) or whatever they calculate to be an adequate ratio necessary for the arse covering.
The key point here is that those £900 are not created from “thin air” but based on the success of capital to accumulate, that money now promises to be more money in the future, Alice’s credit worthiness – the other side of the double entry bookkeeping – and the Bank’s credit worthiness to be able to live up to any demands in cash against it.
I think there’s very little gap between point 4 & 5, , and it is a matter of legality not economics: how far are the bank management prepared to risk being indicted for fraud? As Bernie Madoff, and countless other fraudsters and pyramid salesmen have proven, you can indeed invest without covering the balance of the liability.
Demand over the counter is all that is needed for money proper, but the bank cannot completely ignore the total potential demand. Under double entry book keeping, iirc, the loan is an asset and a liability, the two cancel out. Yes, the bank has an incentive to play as fast and close as possible when issuing loans, but regulators, the management and the shareholders have an interest in making sure that the full value of loans can at least be potentially covered (but they don’t need to have the cash immediately in hand).
Much the same happens with pension schemes which while immediately solvent, the law requires to be operated on a ‘wind-up’ basis.
And, yes, the capacity of the borrower to repay is an important part of the total loan process, they too have to realistically be able to repay. So, the important point is, and this is in part why I Marx dumped a load of text, that the real economy drives the banking process, not the other way around. The wealth has to be there, somewhere, to make the numbers match.
> Ok, it’s not now the Bank of England but another government department but that doesn’t undermine the fact that it is the government, or if you like the state, that takes the initiative that leads to more fiat money being issued and not the commercial banks. The state’s role is not passive as suggested but, as you put it, pro-active.
The take-away that that the state is pro-active is a bit thin here. First, when the Government sells gilts — to finance itself not to create money — this does not create central bank money. Rather, it sells these gilts for money already in circulation in society. Those who purchased these gilt may use these to borrow from the Bank of England but whether they do this is a separate questions. They may choose to sit on those gilts and collect interest payments or they may use these as collateral to borrow from other private financial institutions. Only when banks approach the BoE to borrow against or sell their gilts is BoE money created to lend or purchase.
The BoE and other central banks may also actively go out and purchase gilts (or other securities, such as those issued by private entities). It has done so a lot more since 2008 as crisis intervention, i.e. preventing the collapse of these securities.
It is not correct to summarise this as “it is the government that takes the initiative that leads to more [central bank] fiat money being issued”, it is not the Government that creates BoE money but the BoE and at the very least you would have to say both exist: financial capitalists approaching the BoE and the BoE approaching financial capitalists. With the former being the ideal and often reality of the BoE.
> That passage from Marx is pointing out how bills of exchange (private IOUs) economise on the use of cash as a means of payment. Nobody is denying that. The point at issue is not this but whether they can cause money to depreciate (inflation in its original sense). If you think they can or could you need to explain why they didn’t in Marx’s day.
The Marx quote does not say what you seem to think it is saying.
First, it is in contradiction to what you seem to be saying above, as Marx points out in both paragraphs quoted above that the volume of means of circulation in circulation depends solely on the credit that capitalists give to each other and not the central bank: “But the very existence of these bills of exchange depends in turn on credit, which the industrialists and merchants mutually give one another. If this credit declines, so does the number of bills, particularly long-term ones, and consequently also the effectiveness of this method of balancing accounts. And this economy, which consists in eliminating money from transactions and rests entirely upon the function of money as a means of payment, which in turn is based upon credit” (Marx, above) and “The quantity of circulating bills of exchange, therefore, like that of bank-notes, is determined solely by the requirements of commerce” (Marx, above). Both of these statements agree with the statements you object to in this thread and in the Critisticuffs piece, i.e. that promises to pay are means of payment and that credit drives business.
More broadly, Chapter 33 is Marx’ critique of the ideas you put forward in this thread. In that chapter he criticises the idea that the central bank can control the economy or the circulation of bank notes, i.e. it is a chapter about the limits of central bank power vis-a-vis the credit-driven capitalist economy. In a crisis promises to pay lose their quality of being assets, e.g. to be means of purchase, and everyone tries to flee into cash (gold or BoE notes, back then). This is touched upon in the second paragraph cited by YMS above. The central bank tries to regulate this but realises that it controls neither the circulation of its banknotes nor of bills of exchange, since those are determined by the demands of society. The only power the central bank has is to escalate the crisis by restricting its money in a moment of a slump. Thus, voices came up already at Marx’ time to instead prop up bills of exchange, i.e. securities, that have “temporarily” lost trust with central bank money, roughly analogous to what central banks did in 2008 and since.
So, the phrase “bills of exchange (private IOUs) /economise/ on the use of cash as a means of payment” obscures more than it clarifies in this discussion. What is at stake here is how bills of exchange or bank accounts replace payment in actual money with promises to pay. The Marx quote YMS gave expresses this, and as mentioned before, Marx summarises this as follows in Chapter 25 (where Marx explains how banks collect all money in society as the basis for their private banknotes and deposit system, how what they lend out is itself debt) of Volume 3: “Until they expire and are due for payment, these bills themselves circulate as means of payment; and they form the actual commercial money. To the extent that they ultimately cancel each other out, by the balancing of debts and claims, they function absolutely as money, even though there is no final transformation into money proper.”
This, to me, is the sticking point.
> Incidentally, while it is possible to imagine all sorts of scenarios where private IOUs serve as means of payment (and so economise on the use of cash) in practice historically this wasn’t so easy and involved the emergence of specialised bodies such as discount houses and acceptance houses.
This is a bit of a red herring when we are (a) talking about a scenario where bills of exchange “form(ed) the actual commercial money” (Marx, Volume 3, Chapter 25, cited above) and (b) talk about bills of exchange or promissory notes on your recommendation (which I agree with): “In fact, how is a bank loan different in principle from any other loan? If Alice makes a loan to Bob she can no longer spend it. Only Bob can. Both the lender and the borrower cannot spend the same sum of money. The basic fallacy of “credit creationist” theories is to assume that they can.“ (ALB)
> Anyway, nobody is arguing that private IOUs cannot be used as means of payment and/or economise on the use of cash or that bank transfers can’t either. It’s about whether or not bank loans can lead to inflation.
Let’s do another example, this time with banks to avoid the red herring above.
Alice banks with Barclays. Charley banks with Deutsche Bank. Alice gets a loan from Barclays worth £100. Alice may have had to offer something as collateral for this loan.
Charley gets a loan from Deutsche Bank, £100 too.
Status: £100 is owed to Alice by Barclays (in her bank account), £100 + interest is owed by Alice to Barclays (the loan contract). The books are balanced. £100 is owed to Charley by Deutsche Bank (in his bank account) and £100 + interest is owed by Charley to Deutsche Bank (the loan contract). Again, double entry bookkeeping is happy.
Now, Alice buys raw materials worth £100 from Eve who banks with Deutsche Bank. Charley buys raw materials worth £100 from Frederick who banks with Barclays.
Barclay customers: Alice and Frederick.
Deutsche Bank customers: Charley and Eve.Alice and Charley both do bank transfers. So Barclays now owes Deutsche Bank £100 and Deutsche Bank now owes Barclays £100. These cancel out and no central bank money is transferred.
Status:
– Barclays owes Frederick £100 (bank account) and
– Alice owes Barclays £100+interest (loan contract), double entry bookkeeping is happy.
– Deutsche Bank owes Eve £100 (bank account) and
– Charley owes Deutsche Bank £100 + interest.No central bank money was touched yet purchasing power of £200 confronted Eve’s and Frederick’s commodities. These £200 do not represent realised value, successful business, but anticipated future success, the expectation that Alice and Charley can pay in the future. The prices they can realise do not depend on the prices they have realised but merely in how bold the expectation of future success is. If that turns into inflation and how much depends on what Alice, Charley et al do with their raw materials, how much new value do they create and how quickly. This is because the central means of accumulation and thus the production of value of value is credit.
Apologies for my naivety but where does quantitative easing feature in the creation of money and credit?
An SPGB summary is here
But I stay baffled
Hi Kimschnitzel,
Status:
– Barclays owes Frederick £100 (bank account) and
– Alice owes Barclays £100+interest (loan contract), double entry bookkeeping is happy.
– Deutsche Bank owes Eve £100 (bank account) and
– Charley owes Deutsche Bank £100 + interest.Yes, Alice and Charley can buy £200 of commodities, and Barclays and deutsche Bank have to have the active potential of handing over £200 in value: and this is what stops this process being inherently inflationary (in the strict sense of a change in the value of money), since demand is drawn from elsewhere in the economy, so there is no net change in global demand.
There might be local increases in prices (for example, if Frederick is selling Corn, then the increased demand for corn might lead to a rent price increase on available corn supplies) in specific sectors. (By this model is is possible to have positive inflation and falling prices at the same time, if say price are falling due to technical changes in production).
In this story, the only way this would be inflationary is if Barclays and Deutsche bank do not in fact have enough to cover the loans, and cannot raise it from other banks, and the central bank steps in to cover the funding gap and in fact creates new money.
Quick reply, kimschnitzer. Yes, in chapter 33 of volume 3 and elsewhere Marx “criticises the idea that the central bank can control the economy or the circulation of bank notes”. He was a critic of the “Currency School” which claimed that it could, on the basis of the Quantity Theory of Money (that the price level depends on the quantity of money in circulation). At that time money was gold or notes convertible on demand into a fixed quantity of gold. In those circumstances Marx’s position (basically that of the rival “Banking School”) was correct — it was the level of prices that controlled the quantity of money in circulation.
But these circumstances don’t obtain today. Today the currency is not convertible on demand into a fixed amount of gold. It is what Marx called in chapter 3 of Volume 1 an “inconvertible paper money issued by the State and having compulsory circulation.”
In this different circumstance, as he went on to point out, the quantity theory of money did apply:
“If the paper money exceed its proper limit, which is the amount in gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.”
In other words, the price level would double. If the State issues more than the required amount of such “fiat money” (money that the state creates as if by decree but in practice in different ways that we are quibbling about) the result will be the depreciation of the currency and a rise in the general level of prices (inflation).
What we have today is a “managed currency”, managed by the state. This does not mean that the state or its central bank can control the economy any more than they could in Marx’s day, but it does mean that the state can control the amount of money it issues and that that amount has consequences for the general price level.
The state can’t control the economy but its monetary policy can have an effect, whether intentional or accidental, on the price level.
In this example no actual central bank money is touched. Deutsche Bank and Barclays will need enough to cover what is demanded from them *in cash and is not netted*.
In the example, however, everything is netted and no central bank money is used or “activated”. Nothing is drawn from anywhere else in the economy. To hedge against transactions not netting, Barclays and Deutsche Bank may hold on to promissory notes, e.g. gilts, which they can sell in the event that cash is demanded. See p.11 of https://critisticuffs.org/texts/inflation.pdf
I think you’ll need to be more careful about phrases like “enough to cover the loans” if you want to get to the bottom of this.
No bank has “enough to cover the loans” in the sense that they have on hand all cash that can be demanded from them by people withdrawing their bank balances in total. People doing that is known as a “bank run”.
Hi Kimschnitzel,
we are in essence agreeing, AFAICS: the central bank only comes into play during the clearing process if a bank needs an overdraft.
As the Cristicuffs doc says: “The key point here is that Barclays does not need to have £100 in its vaults when it grants Eve an entitlement to £100. However, **Barclays must be able to get its hands on £100 when payment in actual money is demanded** i.e. when satisfying payment demands with promises to pay does not suffice. Barclays’ ability to grant credits and collect interest on them is premised on its success in managing its income streams and financial assets.”
And again: “On the other hand, the Bank of England creates credit without any reference to gold or any other commodity money. It simply decides how much money it wants to lend out according to its monetary policy. It creates this money in a similar way as private banks create money of account. They lend it out – HSBC wants a loan for £1000, the Bank of England adds £1000 to HSBC’s central bank account. The difference to private banks is that the “vault” of the Bank of England is never empty, it always has those £1000 lying around, should HSBC wish to withdraw them. **They can print it and thus the BoE is always solvent**.”
The point I am taking issue with is this: “For the avoidance of doubt, the claim here is not that central banks cause inflation (type I) when “printing money”, i.e. lending to private banks. Rather, this inflation is a phenomenon produced by the credit operations of private banks when they create credit because they see lucrative business, i.e. in a boom.” In that precisely this is the only cause of inflation, if the central bank did not print money, the private banks would end up contracting their lending to keep within their liquidity, it is *only* the possibility of the state increase in the issue of money that creates actual inflation (a fall in the value of money) when dealing with fiat currency.
And, again, the point that rising prices does not equal inflation itself.
And, just to say “be able to get its hands on” means it is drawing demand from elsewhere in the economy (or at least freezing it) preventing bank loans alone from creating inflation.
Aging punk, I think that both of us agree with the basic description of how banks and the banking system works, as set out by the Bank of England and the Bundesbank. The differences are of emphasis and terminology.
Banks are profit-seeking capitalist enterprises whose source of income is the interest on the loans they make (in practice banks are involved in other activities such as selling financial services, but this is a sideline and not part of their core activity as banks).
Banks could not function without other people’s money whether deposits or what they borrow on money markets (other than the bank inter lending one). Paying interest on these loans to them is part of their expenses.
The clearing system for what banks owe each other means that what banks lend has to be funded one way or another. Since it is not profitable to keep doing this from borrowing either from other banks or the central bank (more expensive and a drain on reserves) the profitable way to do this is by attracting new deposits — which banks are in competition with each other to attract.
The difference between us is over whether bank lending can cause the currency to depreciate and so for the general price level to go up as it does year on year (and has been since 1940).
Our contention is that all currencies have depreciated as a result of governments and central banks over-issuing state money.
Your view (as I understand it) is that currency depreciation has become built-in to the process of capital accumulation; capitalist enterprises have come to rely on banks lending them the money to invest, and this creates a situation where more purchasing power is generated than the value of what is produced with the loan.
So let’s move on to discuss that.
But this claim of yours about the banks cannot go unchallenged:
“In effect they are loaning out £900 and seeking £90 (whether through deposits or central bank money or interbank lending) or whatever they calculate to be an adequate ratio necessary for the arse covering.”
On the face of it, this appears to be reverse currency crankism that claims that on the basis of a deposit of £90 a bank can make loans of ten times that amount or at least the lesser claim that the whole banking system can do this (which it could but only as long as the £90 is continually re-deposited).
The fact that only £90 is required to be covered under the clearing system does not mean that the £900 in loans doesn’t have to be funded.
> Apologies for my naivety but where does quantitative easing feature in the creation of money and credit?
QE is a crisis intervention by central banks where they buy securities (bonds, etc) outright (usually, they only lend against such securities, i.e. those given as collateral). They are essentially “printing money” and buy for (now foul) securities. The idea behind this is to prevent the collapse of these securities and thus of finance capital and thus of the national economy. The hope of central banks was that these interventions re-establish confidence in these financial assets and in the credit cycle more generally, leading to a return of growth (they were routinely disappointed). Despite the massive sums involved this did not produce unusually high inflation, however. See Section 2.4 of https://critisticuffs.org/economic-crisis-june-2020.pdf
> And, again, the point that rising prices does not equal inflation itself.
We wrote Section 1 dedicated to arguing this, with paragraph headings like “Single commodities becoming more expensive does not produce inflation” and “All commodities becoming more expensive is not inflation as we know it” and concluding with: “In other words, money losing value is – we claim – what inflation is in a strict sense. An indication that this is the case can be found in that the institutions tasked with managing and controlling inflation – the Bank of England and other central banks – are the institutions in charge of society’s money. They do not attempt to tweak prices (say, by building more nuclear power plants to reduce the impact of the price of oil on other commodities) but rather adjust the interest rate to control inflation.”
> In that precisely this is the only cause of inflation, if the central bank did not print money, the private banks would end up contracting their lending to keep within their liquidity, it is *only* the possibility of the state increase in the issue of money that creates actual inflation (a fall in the value of money) when dealing with fiat currency.
In the example no central bank money is required, in the Marx quote you posted little central bank money is used when capitalists deal with each other but they use bills of exchange.
There is no “money multiplier” of broad money to central bank money. The central bank prints money in response to demand of commercial banks (something ALB denies above) and it does not print money in a fixed ratio to the credit volumes created by private financial capitalists.
The two parts of your sentence do not fit together. Either the central bank must print money to keep up with the credit creation of private banks (which I understand is the SPGB position of banks being intermediaries[1]) or the mere *possibility* of the central bank acting as a lender of last resort secures and underpins but does not match the credit creation of finance capital.
In other words, you’ll have to decide if the *actuality* of the central bank printing money is the cause of inflation (roughly: SPGB position) or the *possibility* of it doing so which enables private banks to expand their credit further without it collapsing down to the narrow (gold) money basis in every slump (roughly: Critisticuffs piece)
Indeed the paragraph that you took the quote from in full reads: “For the avoidance of doubt, the claim here is not that central banks cause inflation (type I) when “printing money”, i.e. lending to private banks. Rather, this inflation is a phenomenon produced by the credit operations of private banks when they create credit because they see lucrative business, i.e. in a boom. Central banks support these endeavours by providing the ultimate means of
liquidity management as “lenders of last resort”. What happens when the ability of credit to start and facilitate successful business is in doubt, is another question (see below).”But perhaps you guys don’t actually agree with each other.
[1] “Basically, they (banks) are financial intermediaries, accepting money originally generated in production from business and individuals who don’t want to spend it immediately (but to ‘save’ and spend later) and lending most of this to fund some business project or purchase.” (The Magic Money Myth) This claim is false.
Banks match borrowers to savers. Banks act as middlemen between people who want to save money and people who want money to spend.
A bank’s business model relies on receiving a higher interest rate on the loans (or other assets) than the rate it pays out on its deposits (or other liabilities). The commercial bank uses the difference, or spread, between the expected return on their assets and liabilities to cover its operating costs and to make profits.
Are these claims true or false?
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