kimschnitzel
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> 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.
> I thought the process of introducing new money into the system starts with the central bank selling bonds or Treasury bills to the banks, ie that the initiative lies with the central bank.
Ah, no, the central bank does not sell sovereign bonds. The government sells the bonds (gilts in the UK, treasury bills in the US) to private investors like banks. These can use these as collateral to borrow from the central bank, which then creates new central bank money (or at least account balances with the central ban that entitle the holder to get central bank money notes from the central bank, but that’s a minor technical detail).
An example: UK Government sells a gilt worth £1000, Barclays buys it for £1000, Barclays then borrows £1000 in cash from the BoE when it wants it, e.g. to satisfy some outgoing payments, this creates £1000 of central bank money.
The central bank might also proactively go out on the market and buy gilts, i.e. initiate purchases of gilts: quantitive easing. Finally, they may also want to wind down their gilt positions, i.e. sell gilts which they previously purchased, which would reduce the amount of central bank money in society: they sell the gilts and effectively destroy the money they receive.
References:
– Section 3 of https://critisticuffs.org/texts/inflation.pdf
– https://gegen-kapital-und-nation.org/media/sovereign-debt.pdf
– https://critisticuffs.org/economic-crisis-june-2020.pdfHi,
I re-arranged the order of the quotes and grouped them, I hope this helps to clarify rather than to confuse.
> The fact that there is more than one commercial bank and banks can and do borrow from each other doesn’t change this.
The example given above of Alice, Bob and Charley does not rely on more than one bank or any bank.
> As far as I understand it, deposits created by loans do not represent an increase in the total amount of purchasing power in an economy – since all credits and all debits cannot be spent at the same time.
> I was going to make the same point, so there is no need to repeat the argument that both lender and borrower can’t spend the same sum of money or activate the same amount of purchasing power (whichever way you want to put it). That would be, to coin a phrase, “cakeism”.
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. When Bob later pays Charley with Alice’s promissory note then he spends it. Where does “at the same time” come in? What is meant by that borrower and lender cannot spend the same sum of money here when in the example no money is being spent?
Do you perhaps mean the following? When Barlcays gives Alice a loan of £100 then Alice can dispose over £100 to spend. If Alice spends these £100 in cash, then Barclays cannot spend these £100 in cash, too. If that is what you mean, then we are back at the start. It is not correct to say that to spend £100 from your bank account £100 in cash are needed: within the same bank transfers are just ledger updates, between banks (at most) differences are settled in central bank money.
> Eventually, the total sums of credits and debits will have to match each other.
This seems to be a confusion about double entry bookkeeping. Indeed, in double entry bookkeeping assets and liabilities have to match. So if Alice gets a loan from the bank, this is recorded as: “Alice can get £10 from us because we added ’10’ to Alice’s bank account” and “We will get £10 + interest from Alice in the future”. Neither of those entries are actual money, they are mutual obligations to pay. See p.11 of https://critisticuffs.org/texts/inflation.pdf
There is no constraint in existing money on the sums involved, i.e. if both sides are £10, £100 or £1000. That is, what balances each other in this double entry bookkeeping is the two promises of payment, not some promise of and some sum of cash.
This latter point – debts and cash – is dealt with as “liquidity management” but as discussed above and in the piece, the key point is that debts can replace money and do so. So it is not enough to say that “and money I receive as credit can be spent” but you also have to say “the credit I have with the bank, i.e. its promise to pay me, itself can be spent” and that’s the sticking point here.
# Appendix
My response to your responses is essentially a repeat of what was already said, so this might be unproductive. However, the sticking point here isn’t actually that narrowly about inflation, but about finance capital more generally. So, perhaps some other ways of expressing this idea work better. Here are some examples.
Marx explains this as follows on p.525 of Volume 3:
> I have already shown (in Volume 1, Chapter 3, 3, b) how the function of money as means of payment develops out of simple commodity circulation, so that a relationship of creditor and debtor is formed. With the development of trade and the capitalist mode of production, which produces only for circulation, this spontaneous basis for the credit system is expanded, generalized and elaborated. By and large, money now functions only as means of payment, i.e. commodities are not sold for money, but for a written promise to pay at a certain date. 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. As these mutual advances by producers and merchants form the real basis of credit, so their instrument of circulation, the bill of exchange, forms the basis of credit money proper, banknotes, etc. These are not based on monetary circulation, that of metallic or government paper money, but rather on the circulation of bills of exchange.
GegenStandpunkt in their Finance Capital book https://en.gegenstandpunkt.com/books/i-basis-credit-system-art-lending-money-1 (highly recommended, but pretty dense) do it as follows:
> 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. It is replaced by a declaration of intent by which ownership of goods is irreversibly transferred. An access power based on mere assurance does not, of course, cease being bound to the production of valuable property and its independent form as money earned. Once the fixed period for which the promise of payment can act as a means of payment expires, money is due for payment. This commercial credit between industrialists and merchants at least frees the parties involved — who all have to struggle with the equation ‘time is money’ since their profit depends on it — a little further yet from the need to actually realize money before it can function as an advance for producing profit again. So such credit contributes to the continuity and the cheapening, hence growth, of business, while at the same time taking such continuity and growth for granted as its own condition.
>
> 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.[…]
> So the two-sided business of lending and borrowing does not consist in banks merely collecting and making available whatever earned money their clients have to spare at the moment and entrust to the banks to be put to better use. Their absolute legal claim to having the loans they grant serviced, regardless of whether the financed business succeeds, gives them a power they put to productive use. The achievement that already makes commercial credit between merchants promote growth, namely, doing business with promises of payment while relying on the financed business to continue and steadily grow, i.e., separating the power of money from its availability and bringing this power to bear in business to create the promised money — this achievement is utilized by banks on a high level and in a general form. Being sure that their financial operations will always keep going, banks ‘create’ credit, financing business according to their speculation for the capitalist business success they are getting underway. The surpluses the business world generates will redeem the advances banks have launched.
[…]
> Market-economy experts like to construe the banking business as a kind of overflow basin for money not in use at the moment, allowing it to flow out and supply those market participants who are strapped for cash. Their interpretation is thus geared to the needs that the banking industry serves and that they find perfectly reasonable. They do not turn their attention to banks as the ones running this business, or to its economic substance defined by their hold on the circulation of capital. In addition, some members of the informed public are familiar with the idea that the banking business ‘creates credit’; and with admiration or skepticism, as the case may be, they claim credit institutions are masters at the art of ‘creating’ money quite literally ‘out of nothing.’ This of course puts a finger on a mystery rather than explaining the use that banks make of their position as universal debtor to society and universal creditor of the business world. In reality, banks ‘create’ the credit their customers need — i.e., the advances they provide companies to enable them to grow continuously and competitively — not simply ‘out of nothing,’ but out of their power of disposal over the monetary proceeds of past and ongoing credited business and, based on this power, in anticipation of future business that will finally actually produce this advance plus a surplus, thus economically justifying the anticipation. And what banks ‘create’ is not simply ‘money’ but an ability to pay, in the form of ‘deposit money,’ that increases society’s capital advance to thereby make the banking business grow, i.e., further increase the banks’ power to create credit (more on how this works in section 2b). They supply the capitalist business world with capital that anticipates its own successful application, so that they hold the business world liable for the actual reproduction of this capital. Their ability to ‘create’ such a capital advance derives from — and depends on — the monetary yields deposited with and received by them justifying economically what they achieve (for themselves) with them.
In Kittens https://antinational.org/en/financial-crisis-2008ff/ the equation debt = asset was explained like this:
> Debt replaces money, but it does not work the other way around
>
> The credit cycle expresses a foundation of the financial industry: debt and credit replace money proper, increasingly if it works well. However, the reverse does not apply: money cannot replace debt and credit. This is fundamental to understanding the current crisis.
>
> Proper money was and is still available. In newspapers like the Financial Times amazement was expressed that banks did not lend each other money despite the fact that high interest rates were available and that on the other hand relatively large amounts of money were parked with the central banks for relatively low interest rates.
>
> However, the essence of a functioning banking industry is that actual possession of money becomes relatively unimportant through treating promises on debt like money proper. During boom, debt is accumulated in such quantities that in case of crisis, the available money reserves are not sufficient to balance outstanding claims. This principle shows up in all areas of the financial market, an important example is again Lehman Brothers.
>
> When it went bankrupt, the bank – according to the liquidator – was in possession of ca. $600 billion worth of assets. What are those assets? They consist of shares, commercial papers, state bonds and other securities in which Lehman invested. Apparently, the bank did not buy those assets using its own money but mainly using credit. Those assets in turn were nothing but the debt of other banks with Lehman Brothers. Not only Lehman Brothers attempted to use debt as a means of investment, that is business as usual. Shares, state bonds, commercial papers and all the other stuff which lays around in a bank are treated like assets, like actual wealth. These assets then basically exist twice, on the one hand for the new debtor, who might build a new office park using the money, and on the other hand for the bank as creditor, which treats the payment commitment as asset.PS: I don’t think there’s a disagreement here on that “sum of prices in society = sum of money in society” is false because of the velocity of circulation.
Thanks, I think that expresses the sticking point quite clearly and I think this formulation should allow us to get to the heart of the matter.
That is: You are assuming throughout that all ability to pay or spending power is money, by which you mean central bank money. In particular, this statement is not correct: “But [a bank necessarily has to have the money] as soon as the borrower begins to spend that loan.”
If the borrower spends their loan by paying another customer of the same bank then no money needs to be at hand to facilitate that transaction. When it comes to paying customers of another bank then payments need to balance out but the difference to be settled can be (and routinely is) smaller than the sums being moved around. We expressed this as follows in our piece: “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.”
But you’re right, we can consider the essentials of what is going on here without banks, which I quite like because it demystifies the whole process (and is a nice hedge against those who like to think that modern banking is a “deviation” from “proper” capitalism).
Alice pays Bob with a promissory note roughly stating: “I will pay the bearer of this note £10 in one week”. Afterwards, Alice has the goods and Bob has a promise of payment by Alice. Bob may be successful in convincing Charley to accept this promise to pay by Alice as payment for delivery of goods from Charley to Bob. Along the lines of “Charley, I don’t have £10 but I have this promise of Alice to pay £10 in a week, is that good enough?”. If Charley accepts then Alice’s promise to pay functioned as a means of circulation between Bob and Charley.
As it stands, at the end Alice still has to pay £10. However, if it now happens that Charley wants to buy goods worth £10 from Alice, he can be like: “Alice, I don’t have £10 right now but I got this note from you promising to pay me £10 in a week, how about we rip this up and the deal is done?”. Of course, things won’t work out this neatly in practice and some small amount will need to be paid in cash, but the point remains: promises to pay create ability to pay.
The “development” then described in the piece is that first banks injected themselves into that process by replacing promises to pay in a week by Alice etc with promises to pay by themselves redeemable at any point in time (these are “banknotes”) and then central banks injecting themselves into that process by essentially saying: if you have a good promise to pay, we’ll lend you money for that or we might buy the promise to pay with central bank money outright.
Hi again,
It is true that Barclays needs to be able to pay out cash if cash is demanded. However, the key point here is that promises to pay become means of payment (or “function absolutely as money” as Marx put it in Volume 1). This might be a key disagreement/talking past each other here: the claim in the piece is not that the central bank prints too much money which leads to inflation but that the banks create book money when granting debts, debts which the central bank asserts are equivalent to its money by making its money available to borrow against good debts. Put differently, private banks do not simply put the money printed by the central bank into circulation but they replace central bank money by promises to pay.
It is not quite right to summarise the piece as “but to capitalist firms wanting to borrow too much (in relation to some ‘heap of commodities’) and the banking system creating the money to lend to them.” We tried to avoid saying simply “money” to avoid the confusion of whether we mean cash (or central bank reserves) or “broad money”. Banks create ability to pay which is certified as money equivalent by the central bank.
We don’t claim a new theory of capitalist accumulation at all, we think what we wrote there is pretty bog standard Marx (cf. M-M-C-M’-M’ in Chapter 21 of Volume 3). Happy to discuss how what we wrote relates to Volume 3, but I feel this might quickly deteriorate into arguments by Marx’ authority, which is perhaps best avoided.
Note that this does not imply the conclusion “turning upside down the traditional Marxian explanation which makes interest a subdivision of profit rather than profit a subdivision of interest-bearing credit”. Indeed, on average and in value terms interest must be a subdivision of profit, there is no other source of surplus in society. However, this does not mean that the movement of capital does not start and end with credit and interest or that fictitious capital (capitalising a right to interest payment into a principal sum) does not exist as an asset in the books of banks.
Also, agreed that firms exist that expand from their own profits, but debt is a major source of investment. Doing an IPO (selling stocks) is a special form of financing that is not quite like a bank loan, this is true. We avoided talking about the details of those instruments (stocks vs bonds vs loans) because we figured it is not needed for the argument in that piece.
Hi there,
First: While I am in the group that wrote the piece under discussion here, I here don’t speak for the group, so these are just my spontaneous inputs to the discussion.
What that quote is meant to express is: yes, credit creation (i.e. the creation of ability to pay when granting credit and using promises to pay as payment) means that more ability to pay seeks to buy commodities and can realise higher prices. However, the processes started this way also create new commodities. It thus depends on how these two moments interact: ability to pay being created and commodities being created. So we cannot simply conclude that “a lot of credit means high inflation” but it depends how quickly/well that is turned into more material wealth.
I don’t know what is meant with these theories — “Bank-deposit Theory of Prices” and “Marx’s quantity” theory — but it might be worth noting that there is a difference between prices as determined in the olden times and in Marx’ Capital (more or less gold/commodity money, can discuss deviations from that already at Marx’ times and discussed in Capital, but perhaps not the most productive for now) and prices now under full blown credit money.
