kimschnitzel
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> You want me to save you the trouble of re-reading Hilferding by quoting what he wrote? Ok, here goes.
Thanks for those excerpts. Agreed, Hilferding is Team SPGB in this matter. More narrowly on the subject we were discussing:
> So why are we talking about loans of £100 to Alice and not tens of not millions of pounds of loans to big capitalist enterprises? Long term loans which won’t enter into the daily clearing process. These couldn’t be covered on the interbank lending market or by loans from the central bank. In fact many of such loans will be made by investment banks, which are not clearing banks.
Indeed, the ability to use promises to pay as means of purchase is premised on the creditworthiness of the issuer not narrowly on its immediate access to central bank money:
> 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.
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> That is, banks do not simply take possession of cash and then hand it out for a fee, but they create ability to pay. A bank cannot create ability to pay “out of thin air” but it creates it out of its and other financial institutions’ power and success in turning credit advances into financial assets and out of the thus produced creditworthiness.https://critisticuffs.org/texts/inflation.pdf page 11 (see also page 13, already quoted above and thus not repeating here)
But we’re running in circles.
This thread has thrown up all kinds of questions about the fundamentals of finance capital: capital becomes a commodity (credit), capitalist accumulation is driven by credit, central banks vs government, double entry bookkeeping, promises to pay replace money and create ability to pay, what are the assets in bank vaults.
As mentioned above, figuring out inflation is perhaps not the most important issue, but getting to grips with finance capital is useful regardless of what that means for inflation. Austerity 2.0, related to sovereign debt, seems to be coming, central banks compete against each other in anticipation of the coming slump/crisis etc. With crises come silly ideas about positive money, finance regulation etc. Agitators for a rational organisation of production need to be able to explain that those ideas are wrong.
From our/my experience I can recommend starting a reading group on finance capital. Here, something along these lines worked for us: We read one paragraph at a time, out loud. Then one of us phrases it in their own words and we discuss if we can settle on what the paragraph claims. Following that we discuss if the argument and the result are correct. If not, we discuss if the claim is incorrect or the argument, i.e. if an alternative argument arrives at the same correct claim or not. Rinse and repeat. Sorry if that’s a weirdly detailed and rigid description, I just wanted to emphasise how slow we take/took this on our end.
As for texts to pick:
1. One option is to read the BoE or Bundesbank pieces together. They have the advantage of being rather accessible. On the other hand, central banks are invested in saying “everything is great and when they aren’t then it is a question of liquidity”. Also, this wouldn’t allow you to rely on your knowledge from, say, Volume 1 of Capital.
2. Read the GegenStandpunkt book on Finance Capital: https://en.gegenstandpunkt.com/books/finance-capital-2nd-revised-edition This is comprehensive, builds on Marx but is hard going, very dense. You do eventually get used to the writing style but it’s a difficult text. It also assumes quite a bit of knowledge about the accumulation of industrial capital.
3. Read Volume 3 of Capital, i.e. the classic. While the earlier chapters in Volume 3 are quite developed, many chapters on finance capital are drafts and it shows. In addition, translating between banking in Marx’s day and today can be daunting, I for one struggled with this and these chapters quite a bit. Also, this, of course, requires a good working knowledge of Volumes 1 and 2, so the entire project would take years if not a decade to complete.
4. Of course, I think the Critisticuffs and Groups against Capital and Nation pieces are accessible and correct.
– https://antinational.org/media/pdfs/en/financial-crisis-2008ff.pdf
– https://gegen-kapital-und-nation.org/media/sovereign-debt.pdf
– https://critisticuffs.org/economic-crisis-june-2020.pdf
– https://critisticuffs.org/texts/inflation.pdf> Can someone please explain how it is affecting the present cost of living crisis in the simplest of language?
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> Which of the explanations, Criticuffs or the SPGB, explain best what is happening globally where working people are once again paying the price with their increased poverty?
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> I know the media talk of inflation, and it has been referred to on this thread, but I still am not clear on either Critistcuff’s or SPGB’s answer to its cause…much less any cure.
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> It all remains something of an abstraction or academic to me. How does it relate to people ditching capitalism and seeking revolutionary change?I’d agree that the explanation of inflation is a bit academic (see also an early post by ALB quoting a Critisticuffs e-mail as “FWIW We don’t think it is terribly important politically”.) So in that sense I’d say you can safely ignore this discussion unless you somehow want to go down this rabbit hole of resolving this somewhat interesting theoretical riddle.
As for a “cure”, on a rather high-level I don’t see much of a difference between what the SPGB is saying and what Critisticuffs are saying: the reason why we are poor and stressed is the capitalist mode of production, attributing that to finance capital or money instead is a mistake.
What makes this discussion a wee bit more relevant than suggested by the previous two paragraphs is that I’d say it reveals some important misunderstandings or errors about how industrial capital accumulates (through debt), how finance capital accumulates (debts are accumulated as assets) and how those two are related (the success of the former is the foundation of the latter, the latter is the judge of the former).
These errors affect e.g. how you then go about arguing about austerity (which is motivated by finance capital’s judgements of the finances of the state under a framework maintained by the state) and about (financial) crises.
To give you an example, see e.g. https://critisticuffs.org/texts/covid-19-and-crisis-20 (it’s short). If you deny the centrality of debt to a capitalist economy and that the maintenance of this debt as an asset is a significant policy goal for states around the world, you’ll have trouble understanding the crisis and crisis measures by the state.
Actually, you might find https://critisticuffs.org/economic-crisis-june-2020.pdf useful (it’s a bit long). It tries to explain the fundamentals of finance capital using the crisis of 2007/2008, the fundamentals of sovereign debt using the 2010 sovereign debt crisis and central banks/currencies using the central bank crisis interventions since then. This gives the conditions under which then Covid-19 hit and the piece then gives crises interventions of states in response. It concludes with (quoting in full as an illustration for how these explanations translate to political conclusions):
> This debt-financed crisis mitigation programme will increase the mountains of debt on all sides. Future growth must then justify this.
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> Two possible development paths are currently being discussed in the business press.
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> – There will be a V-shaped recovery. Now a quarter of significant economic collapse, then, if the pandemic measures are eased, first a slow and then a more significant upswing.
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> – There will be a severe disaster for all sectors of the economy in all countries.
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> On the first: If this were to happen, it would escalate the hardship of the global economy from the period between 2012-2019. The upswing would anyway only express that the production capacities that have been cut back are increasingly being restarted. A new credit-financed global economy will not yet come about in this way. It remains to be seen what the planned reconstruction programme of the EU states will achieve. If it comes to that, sovereign debts will at least rise considerably, and only then will we see what economic growth this will bring.
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> On the second: If the financial markets speculate against one of the world’s currencies, then the only thing that helps is the mutual assurance of the world money central banks to lend to each other without restriction. This may well not happen due to the competition between economies. This threatens produce a local slump, which is guaranteed to have an impact on the other regions. How strong, we will then see. Alternatively, the world money central banks give each other unlimited credit and then finance capital speculates against all world money. Then everything is fucked.
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> Either way, it is clear that the working class will be liable for the successful economic growth as well as for the crisis.
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> Money and private property are not clever mechanisms for the supply of goods in a society based on the division of labour, but the basic principles under which material life, work, the division of labour and the means of production are bent – within developed capitalism then in the complicated but appropriate way this text has explained.> That wasn’t the cause of the 2008 crisis, it was just the way it manifested, investment went into financial services largely because there wasn’t a decent return on investment elsewhere (and because lots of governments had inflated their way out of the Asian Tigers crisis).
I wasn’t talking about cause. I was talking about that when the “smoke and mirrors” in the vaults of Lehman collapsed that took down the world economy with it. You might take this as a starting point to study how something so imaginary – “smoke and mirrors” – can bring industrial capital into a deep crisis.
To avoid getting side-tracked into “what caused the financial crisis of 2007/2008”, let me just quickly point out that Kittens criticised the position you put forward in https://gegen-kapital-und-nation.org/en/financial-crisis-2008ff/ Incidentally, I already quoted a paragraph arguing against the idea in your post in https://www.worldsocialism.org/spgb/forum/topic/critisticuffs-on-inflation/page/4/#post-235219
(Also in Kittens #0 was a longer piece on that idea: https://gegen-kapital-und-nation.org/en/surface-tension/ Maybe that is more helpful, but looking back at those pieces I’d recommend “Financial Crisis 2008ff” over “Surface Tension” now.)
> So why are we talking about loans of £100 to Alice and not tens of not millions of pounds of loans to big capitalist enterprises?
You will find that we did talk about capitalist enterprises in the piece we are discussing here.
To understand who “Alice” and “Bob” are see e.g. https://en.wikipedia.org/wiki/Alice_and_Bob They are ways to avoid saying “Customer A” or “Business A” to make a text more readable. Apologies if that caused confusion.
As for the rest of your post, I struggle to see how it connects.
> If purchasing power (the ability to circulate commodities) is something created by banks issuing credit (possibly it is), how is this different to value and what is the relationship between the two?
First, a very general short answer: Value is the material wealth produced in capitalist societies considered in the abstract. Purchasing power is *access to* this wealth, command over it, if you like.
In more detail:
Early in Chapter 1 Marx arrives at that the ability of a commodity to access social wealth (be exchanged for it) — “exchange value” — is a result of it itself being a bit of this social wealth: “value”. A commodity can be exchanged against other bits of social wealth because it is itself a bit of social wealth. However, the next step follows almost immediately, in Section 3. Commodities need to express their existence as values. To express their participation in social wealth they need to be exchanged for money. That is being a valuable thing and being ability to pay, purchasing power or power of access are two different things. The value form analysis establishes that for value to appear commodities have to “elect” a master: money. At the end of Section 3 of Chapter 1 the “task” for a commodity is no longer to realise its value but to become money, value pure and simple, immediate social wealth.
(One could say that the value form analysis establishes an awkward result for the capitalist mode of production, it is all about abstract wealth but then makes everything dependent on something as mundane as a yellow metal. With debt as an asset, promissory notes, commerce frees itself from these shackles in a fashion. However, it keeps collapsing back to them until central banks replace gold money with their own creations.)
In the money form – social wealth existing in the abstract immediately – the need and desire arises to do with it the only thing that can be done with it: grow it. This is the transition to capital (first surplus value, then accumulation). In Volume 2 we then learn how capital reproduces its own conditions. In the beginning of Volume 3 the rule of capital over the reproduction process is completed with the establishment of the average rate of profit where a sum of money can demand a rate of return on average.
This permits the next transition: capital itself becomes a commodity, a “valuable thing” that can be traded. Its ability to augment itself can be bought and sold: credit and interest. Now this asset, the entitlement to a return, is in itself a valuable thing and functions not only as purchasing power (corporate takeovers are done with shares, bank loans buy commodities, etc.) but as an asset in the vaults of banks.
Debt being an asset means capital – the power of value to augment itself – as a thing, as a tradable commodity. When Alice pays with a promissory note (or with a promise to pay by her bank) this is premised on the title to future payments being a valuable thing.
(Side-note: the above might be too short or too long, too informal or too pedantic for you. It’s hard for me to gauge the “right level” to pitch an answer at.)
> The £100 worth of goods were created in the real economy. Existing wealth moved around.
It is ironic to say “£100 worth of goods were created in the real economy” as a punchline in a discussion about *inflation*.
To explain this, let’s keep everything as is but re-introduce Frederick. Frederick has £100 worth of cash that he earned from selling something. Frederick and Alice both approach Eve to buy her £100 worth of goods. Frederick’s ability to pay is constrained by the £100 he earned. Alice’s ability to pay is derived from the expectation that she can pay in the future. But there’s only £100 worth of goods for sale by Frederick. Frederick can use this increased effective demand to sell his commodities for more each. Maybe he gets away with charging £200 in total for those goods, maybe that wouldn’t work with Alice’s expectations of what she’ll realise on the market herself eventually. But the fact remains that Frederick is now confronted by more effective demand than without Alice having received her loan. If that translates into inflation then further depends on whether this sort of credit creation is widespread to the point of being universal (every capitalist is an “Alice”) and what Alice manages to do with those goods in contrast to Frederick.
> The only part of your story that creates purchasing power is the bit where the loans are repaid through new economic activity realising value. The rest is smoke and mirrors.
It is this “smoke and mirrors”, i.e. debt being an asset, that brought us a global economic crisis from which the world economy has yet to recover.
> Banks have no special powers beyond those granted by the state (which are, thus, really state powers). I’ve, in the past, told the story of fractional reserve banking using a shoe shop (that bought and sold on credit).
The power of an employer to extract surplus value rests on the State granting this employer the right to private property. The legal title does not explain the economic substance.
> Just like the IOUs I can issue, and you can issue. When we do so, we do not create spending power, we simply realise spending power that is available elsewhere.
The economics of the promissory notes I issue is that they’re not worth the paper they’re written on. The economics of the promissory notes created by industrial capitalists, commercial capitalists, financial capitalists and the State is that they are promises of future income because the capitalist mode of production roars. We criticised this mistake of identifying the economics of a capitalist loan with that of a consumer loan in our piece, page 8 of https://critisticuffs.org/texts/inflation.pdf:
“There is a fundamental difference between credit taken by businesses to run and expand their business and the sort of credit payday lenders offer. The former interest charge partakes in the success of capitalist enterprises, the latter squeezes the already insufficient income of the borrower. The former allows the debtor to grow their income which allows them to repay the loan with interest, the latter takes from the limited income of the debtor. The former partakes in the enrichment of the debtor, the latter impoverishes them. (This qualitative difference in the economic substance of the debt relation finds expression in the quantitative difference of interest rates. Payday lenders charge about 1,250% per year, credit cards about 20%, personal loans about 8%. The BoE rate in August 2022 was 1.75% per year)”
> The basic question is still: what is the origin of the original £100?
The basic answer is still:
– YMS: “In your example, no central bank money, or other, is required, because of [the coincidence, which would in real life be accidental, of] Barclays and Deutsche bank both paying each other exactly £100.”
– me: “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.”
– AE: “Archibald wants £10 worth of chicken feed. He doesn’t have £10 but writes Belinda a promise to pay her £10 in a week and gets the chicken feed in return.”
– Marx (quoted by YMS): “The pure economy in medium of circulation appears most highly developed in the clearing house — in the simple exchange of bills of exchange that are due — and in the preponderant function of money as a means of payment for merely settling balances. 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, can only be of two kinds (aside from the more or less developed technique in the concentration of these payments): mutual claims, represented by bills of exchange or cheques, are balanced out either by the same banker, who merely transcribes the claim from the account of one to that of another, or by the various bankers among themselves.”
– Marx (quoted by YMS): “Finally, in a period of crisis, the circulation of bills collapses completely; nobody can make use of a promise to pay since everyone will accept only cash payment; only the bank-note retains, at least thus far in England, its ability to circulate, because the nation with its total wealth backs up the Bank of England.” (this implies that when there is no crisis then promises to pay are accepted in lieu of cash)
– Critisticuffs piece under discussion in this thread: “When Alice now needs to pay, say, £10 to Charley, who happens to also bank with Barclays, then she can simply instruct Barclays to subtract ‘10’ from her account and add ‘10’ to Charley’s. No real money needs to be moved for this transaction. When Charley banks with Deutsche Bank then Barclays and Deutsche Bank engage in a similar process as described above: In total, today £1000 was paid from your customers to mine and £900 from my customers to yours, so you pay me £100 in real money and that’s that.”
– me: “Alice pays Bob with a promissory note roughly stating: ‘I will pay the bearer of this note £10 in one week’.”
– me: “When Alice writes a promissory note to Bob ‘I will pay you £10 in one week’ and uses that to pay Bob then Alice spends her promise to pay, i.e. pays with it. Alice is the borrower and Bob is the lender.”
– Marx (quoted by me): “For the sake of brevity, we can refer to all these promises to pay as bills of exchange. 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.”
– Gegenstandpunkt (quoted by me): “In addition, market pros have invented bills of exchange: the technique of accepting from the buyer of a commodity — instead of prompt payment — a promise to pay on a fixed date, which the recipient in turn passes on to his own suppliers as a means of payment, although he is now responsible for fulfilling it himself. This means that the power of money to get hold of goods owned by others is detached — temporarily, but effectively — from the money actually being available. […] This success is one of the starting points for finance capital in its untiring efforts to emancipate the capitalist power of money altogether from its source, the production of property in useful goods, and thereby unleash undreamed of forces of capitalist growth. This is in any case the way money traders stepped into the development of commercial credit: they bought up bills, thereby transforming promised payment into unrestrictedly usable liquidity before the deadline, and had this service remunerated with a portion of the sum owed, calculated from the interest rate set and the remaining term of the commercial paper. In credit-business practice, the discounting of bills of exchange was eventually replaced by bank loans, which serve to ensure and accelerate capital turnover.”
> Yes, we would object to the last statement. We have always been opposed to “credit creationism” on the grounds that it contradicts the labour theory of value that “the ability to pay” arises out of production as wages and surplus value (itself later divided into ground-rent, interest and profit). Banks are not “creating” an “ability to pay” that didn’t exist before. What they are doing is redistributing, in a more efficient way from a capitalist point of view, the “ability to pay” arising from production.
It is a bit ironic to say “credit creationism” is false because it contradicts the “labour theory of value” when the topic of conversation is how the augmentation of credit causes *inflation*, i.e. how this increased ability to pay does not represent an increase in material wealth (considered in the abstract, i.e. value), the kind of stuff produced by labour.
However, it makes sense that you are flagging this as it’s the “natural” objection to come up.
Indeed, I do not claim that *all* creation of ability to pay through credit operations causes inflation. First, there is the simple case that it realises commodities that would otherwise be left unsold, i.e. the private labour that produced them is not validated as abstract labour.
This, as an aside, is an indication that value is not simply something that labour produces but something that labour only produces under the dictate of a market economy, i.e. in capitalism. Not labour but abstract and socially necessary, i.e. validated, labour creates value.
Then, there are the assets in the books of banks that represent social power of access, ability to pay, without being used to purchase *commodities*, i.e. material wealth. What grows in the vaults of banks are debts counted as assets and not realised wealth. All surplus value produced in society cannot realise it. This can and does grow separately from material wealth considered in the abstract, i.e. value.
This is not even a theoretical verdict but an observation about the world we live in. An explanation of this observation needs to start from it and not deny its reality because it has already been decided that “the ability to pay arises [only] out of production as wages and surplus value”.
It then turns out that the explanation of finance capital’s apparent power to grow beyond the limits of earned surplus value necessitates rather than contradicts the beginning of Volume 1, i.e. the “labour theory of value”.
In Volume 1 Marx explains how the accumulation of industrial capital works. Where does the additional value come from? For this, he first makes the simple observation that wealth needs to be produced. “If then we disregard the use-value of commodities, only one property remains, that of being products of labour” is all he feels he needs to say on that matter. He then observes the nature of the labour under question — abstract and socially necessary. What matters is the effort and what matters is not what effort has been expended but whether this effort is validated by society. This qualifies a commodity as a value, this is what counts in a capitalist society. The production of surplus value then proceeds by the difference in value required to maintain the commodity labour power and the value this commodity can produce. You more or less know this, but bear with me here.
On the one hand, that debts — the promise of future wealth — are an asset is already mentioned in Chapter 3 of Volume 1. When Bob pays with Alice’s promissory note he holds an asset — ability to pay — that is merely Alice’s promise to pay. The reason why all of this works, as Marx explains in Chapter 3, is because the future values of the respective commodities work out/align/can be netted.
Indeed, the confidence in future success is key here. At the end of Chapter 15 of Volume 3 the system of accumulation is, in some sense, completely described when we arrived at the average rate of profit where a certain sum of capital can successfully demand a rate of return. Then, a sum of money is the promise of maintaining itself and becoming more. On this premise, capital itself becomes a commodity: credit that bears interest. This is the economic foundation which allows legal titles to debt payments to work in this society, i.e. these titles are not precarious and shaky endeavours but as good as wealth. We explained this on page 8 of https://critisticuffs.org/texts/inflation.pdf
> There is a fundamental difference between credit taken by businesses to run and expand their business and the sort of credit payday lenders offer. The former interest charge partakes in the success of capitalist enterprises, the latter squeezes the already insufficient income of the borrower. The former allows the debtor to grow their income which allows them to repay the loan with interest, the latter takes from the limited income of the debtor. The former partakes in the enrichment of the debtor, the latter impoverishes them.
Only on the foundation of the functioning of the production of value, exploitation and accumulation can we explain the economics of considering the promise of and legal title to future payments as an asset.
Then, as DJP remarked: “On reflection, this ‘eventually’ is only a theoretical reference. In reality, the process never ends the ‘eventually’ never comes. New deposits are loans are continually being made and paid off.”
That is, it is no use to say that “eventually” this return must happen when the point at which this must happen is decided by those who give credit (in reflection on the data and in competition against each other) and, critically, when this debt is an asset *now*. This is the wealth in a bank vault. When these demands against the future were at a risk of being voided (2007/2008) the State stepped in to maintain them in value, which is an indication that everything in this economy depends on them.
An explanation of finance capital should reflect on how the billions in the vaults of banks in the form of securities are anything but smoke and mirrors: they managed to produce a global crisis when their value was in doubt.
Some further reading:
– https://en.gegenstandpunkt.com/article/value where they essentially respond to your point above which was raised by many of their readers when their finance capital articles appeared.
Teaser quote: “We consider the liberties taken by the financial industry in matters of money creation and profit generation to be the state of affairs that demand explanation; to deny these liberties because they don’t go with an explanation of capital accumulation one has worked out is not good. These liberties represent the achievements of a power over society’s money transactions and the business use of money that have not fallen from the sky, but have their foundation in the political economy of money-making: the power of finance capital to make money by trading borrowed and loaned money is based on the fact that in a market economy, money functions in general as a source of money — the commercial customers of banks are, of course, after nothing else. The power of money to become more money through its use in business is not, on its part, a mysterious property of money, although it simply works that way in a market economy, like an objective fact. It is a consequence of the fact that in this system, a livelihood can only be obtained by acquiring money, but most people never have enough money to unleash its power to increase itself through a proper business use of it; they are instead compelled to work for money — that is, for the minority that has enough of it to “let their money work for them.” It doesn’t matter which jobs are sought and found by the majority of people dependent on earning money through work in the system of market economy freedom; nothing there is impossible; job-seeking people can find opportunities in every imaginable service. One difference, however, is readily overlooked, one that is crucial for the unconditional and universal necessity to earn money. Even the most advanced capitalistic society, in which industry is counted among the dying lines of business, lives off the material goods that must be produced with material means of production. Even if most wage-earners and smalltime self-exploiters are occupied with other tasks — such as those that, on a massive scale, have to do with the marketing of goods, the management of a society that runs on money, the financial constraints of the bourgeois mode of existence — society lives from the labor that produces the vitally necessary goods. The universal compulsion to work for money is ultimately based on the fact that the means for producing these goods belong to those who have invested their money in them, and who only allow production of something if it pays off for their interest in money. The necessity of earning money for a living defines a mode of production. The liberties of finance capital are thus the product, inherent to the system, of the capitalist mode of production. The stuff of financial transactions attests to its being a consequence of the system of wage labor.”
– https://antinational.org/en/financial-crisis-2008ff/ in the section titled “How come the banks can turn debt into gold?” we tried to explain how the success of industrial capital is the premise for finance capital’s growth of assets separately from industrial capital.
Teaser quote: “This need of companies for more money to increase their gains is taken advantage of by the owners of money when they give money the form of a commodity. They lend money and secure themselves a part of the profits – which were generated elsewhere – by fixing an interest rate. The trust in the social production process, which aligns everything towards gains, explains one half of the puzzle: why debt and claims on debt can be treated as assets themselves and function as replacement for money. Because interest rates are paid quite naturally, at least by and large, the financial industry assigns a price to pure legal claims on yet to be produced, abstract wealth. Some on the Left follow a theory which claims that the financial industry grew so much because productive capital was in crisis already. The rate of profit would shrink for the so called ‘real economy’ and so investing there would become unattractive. Thus, according to these left-wing theoreticians of crisis, money is put into the financial market. To summarise in an exaggerated form: because normal capital does not function properly any longer, financial capital prospers. We will criticise this theory in a separate text, but for now we want to emphasise the difference of this theory to the theory presented so far: Not because productive capital fails to function properly, but because it grows so steadily – if we ignore the periodic economic slumps everyone takes for granted anyway – the financial superstructure grows. Because the workers in the industrial centres are so well disciplined, and hardly start strikes which harm capital, because there are hardly any places left which resist the grab of ‘Western’ capital, financial capital puts trust in interest. Those last two points are a result of ‘Western’ violence and economic blackmail; this spurred the financial markets.”
> In your example, no central bank money, or other, is required, because of the coincidence, which would in real life be accidental, of Barclays and Deutsche bank both paying each other exactly £100 – banking clearance, though, like the owl of Minerva, only spreads its wings with the dying of the light, and if Charley had only bought £75 from Freddie, the central bank would come into play.
To be precise about “central bank would come into play”: If at the end of the day, when balances are netted, Barclays owes Deutsche Bank £25, it needs those £25 in central bank money. It can have these as central bank money on hand, it can sell some promissory note to some other private financial capitalist or it can borrow this money, e.g. from Deutsche Bank. The balance is settled in cash (central bank money) but not necessarily in freshly printed central bank money. I don’t think so far you’d disagree, I’m just being explicit: it’s not the central bank that comes into play here but central bank money.
However, and this is where we do disagree, the purchasing power in society is not a function of those £25, but of the 2x £100 in book money. This purchasing power relies on the central bank preventing the collapse of the credit towers down to pure cash but the increase in purchasing power is an act of banks/fiance capitalists/private credit operations.
> This is why I shaded with ‘possibility’ because it is not something known in advance and controlled, but contingent arising from multiple actors.
> It would be possible for those actors to not need central bank clearance, but accidents can happen: the central bank could restrict the money it is prepared to print to purely over the counter demand and kill off inflation, but there would be knock on effects in the economy elsewhere.
Yes, the central bank could kill the growth of finance capital by restricting its money (the situation Marx is discussing in the quotes you gave), so the central bank propping up private credit is prerequisite for fiance capital’s growth but it is the latter that expands ability to pay on this basis.
It seems to me, ALB and you disagree on this point, i.e. what you write here (if I understand it correctly) is in contradiction to the SPGB position. I’m not asking you to declare allegiances, I’m trying to make explicit that we seem to be having at least a three-way disagreement here.
> Are these claims true or false?
They definitely *also* do that, but it is my understanding that you claim they *only* do that. FWIW, in our piece we put this as:
> Above we wrote “the modern banking system […] collects all money in society and makes that the foundation for its lending business against higher interest rates”. The word “foundation” carries a lot of meaning here, which we unpack next. In summary, banks do not simply redistribute money in society and charge a fee for this service but they create ability to pay through their credit operations.
It is my understanding you would object to that last sentence.
> 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.
> 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
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”.
