There are three main divisions within capitalist society which share the surplus-value which is socially extracted from the working class; the industrialist, the landlord and the banker. These divisions historically reflect the application of the division of labour to the specialised investment of capital in any field of production and distribution, any process of circulation, of which banking is part. Banks produce nothing. They are really middlemen or custodians of idle capital which must be available as a hoard, as potential money capital waiting to be put to use. Their profit is made during the process of circulation. The difference between finance capital and industrial capital is that the owner of money capital who wishes to earn interest on that money throws it into circulation not as capital for himself, but so that others can use it; and consequently gains a profit by this service.
Contrary to popular belief, banks do not dominate the capitalist system (The two largest corporatrions in the world are WalMart, bigger than the Pakistan and Exxon bigger than the New Zealand economies). In the list of companies by revenue size the first financial business enterprise to appear is Fannie Mae at number number 16. This mistaken view is due to the fact that wealth is represented by enormous quantities of money. All wealth under capitalism expresses its value in the symbolic money form, but that form tends to conceal the fact that capital exists in the physical implements of the labour, factories, minerals, buildings, ships, etc. If for some reason, whether it be that the market is already overloaded and cannot absorb further commodities, or that over-production has already taken place, then production will be scaled down, curtailed, or in some cases halted entirely, and workers will be laid off. In these circumstances there will be little prospect of profit, and as experience has shown a number of capitalists, the smaller ones, go bankrupt All the machinations of the banks, either by advancing or retarding credit, whether charging low interest rates or not, cannot alter this. At the moment there is no shortage of cash available for investment. However, in a failing market there is little incentive to the industrial capitalist to commit himself to paying interest when the prospects of earning surplus-value on the borrowed money are extremely remote.
Speculation basically involves buying cheap and selling dear. When it comes to banking, what banks are doing is borrowing money cheap and lending dear, pocketing the difference as profit. Basically the same as any merchant who buys below value but above the cost-price of the producer of the commodity, and then sell above their own cost-price. There is nothing very specialk about banks; they are not wicked finance capitalists against whom the anger of workers should particularly be directed, just capitalists with their capital invested in a particular line of business, no more nor less reprehensible than the rest of the capitalist class.
Banks lend money and charge interest on it, but they don't create this money themselves but many have come to accept a myth that banks can create money "out of thin air." No, they can't. They can only lend out either what has been deposited with them or what they themselves have borrowed on the money market.
True, they don't have to hold all of this as cash, but only a very small proportion, as little as 3%. There's nothing dubious about this. It's what banks do - lend money that people and firms don't want to spend for the moment to those who do want to, and making their profit out of the difference between the rate of interest they pay depositors and what they charge borrowers. It is quite true that banks do not have to retain all the money deposited with them in the form of cash. If they did, they would never be able to make any profit, since it is only by re-lending, at a higher rate of interest, the money they have in effect borrowed from their depositors that they make profits. It does not mean that they can lend out many times any amount borrowed by or deposited with them as cash, raking in the interest. It means that they can only lend 97 per cent of this amount.
The money lent, obviously, is spent on something, the proceeds of which ultimately end up back in the banking system and are then available for lending all over again. This is not creating new money out of nothing. It is re-lending already existing money. If the money lent does not return to some bank when spent - and so become part of its assets - then no more loans can be made. So, banks cannot lend out more than they have.
Derivatives, collateral debt obligations and the rest are not relevant here as they are not bank loans or money. They are what Marx called "fictitious capital" - ie the conversion of a stream of interest into a notional capital sum which can be bought and sold. Packaging and selling these was an alternative to lending at interest that the banks found to turn a profit. According to Marx the securities themselves really have no value and represent nothing more than a legal claim to a portion of future surplus-value. So any sale of these assets (at any price) represents a transfer of value from buyer to seller, although assuming that there is no default on the asset it will serve to eventually increase the amount of value in the hands of the buyer. The owner of a financial asset records the asset in his books as if it had a value just like any other commodity. This turned out to be disastrous when it was discovered that the stream of interest was also in many cases fictitious.
If there is one lesson of the current financial crisis it is that banks can only lend out what they have borrowed either from depositors or from their own borrowing on the money markets. It was an over-reliance on the latter that largely led to the collapse of Northern Rock and the near collapse of so many other banks. If banks could really create vast quantities of credit at "a stroke of a pen" then none would ever go bust. Neither would they need to tap the money markets for funds.
The second and most important function of the banker is to provide money for industry, which is capital. This has a separate function from money as the medium of circulation. The function of capital is not merely the circulation of commodities but their production in the first instance. Therefore, money used as capital is withdrawn from circulation because the wealth which it represents has been locked up in the process of production. The credit system of advancing capital allows individuals to use capital which is not theirs, and has opened the door to all sorts of swindles and reckless speculation. Who would not gamble with other people's money?
Credit creationism is a myth first given respectability by the 1931 MacMillan Report on Finance & Industry, though a significant minority of economists, bankers and trade unionists on the MacMillan Committee rejected it, while others later got cold feet when the implications of what they had signed up to became evident. It didn't stop a version of it (later highly amended by Samuelson and others) entering into standard economics textbooks.
One of the origins of the banking system was the practice of depositing money for safe keeping with the goldsmiths and paying them for this service. The goldsmiths subsequently adopted the practice of paying interest to the depositor, and they re-lent the money at a higher rate of interest to a borrower. This was only an indirect way of the depositor himself lending his money at interest to the borrower. Whether the goldsmith acted as intermediary or whether the lending was done directly the general effect was the same, i.e., the owner of the money (representing a command over goods) was lending it to a borrower, who would thus, for a specified time, have at his disposal the means of buying goods. It was not an act of “creating” goods or values, but only of lending them, the banks being intermediaries between lenders and borrowers. Fundamentally, the same process underlies the modern banking and credit system. Many proponents of the credit creation myth repeat the goldsmiths allegory as proof of creating money "out of thin air" but as this more or less contemporary account makes clear there is nothing about the goldsmith banker being able (or even trying) to lend more than the 100,000 ounces of silver deposited with them, as often ascribed in the many web accounts.
It's from Richard Cantillon's "Essai sur la nature du Commerce en General" written in 1730. Here's what he wrote:
"If a hundred economical gentlemen or proprietors of land, who put by every year money from their savings to buy land on occasion, deposit each one 10,000 ounces of silver with a goldsmith or banker in London, to avoid the trouble of keeping this money in their houses and the thefts which might be made of it, they will take from them notes payable on demand. Often they will leave their money there a long time, and even when they have made some purchase they will give notice to the banker some time in advance to have their money ready when the formalities and legal documents are complete.
In these circumstances the banker will often be able to lend 90,000 ounces of the 100,000 he owes throughout the year and will only need to keep in hand 10,000 ounces to meet all the withdrawals. He has to do with wealthy and economical persons; as fast as one thousand ounces are demanded of him in one direction, a thousand are brought to him from another. It is enough as a rule for him to keep in hand the tenth part of his deposits.
There have been examples and experiences of this in London. Instead of the individuals in question keeping in hand all the year round the greatest part of 100,000 ounces the custom of depositing it with a banker causes 90,000 ounces of the 100,000 to be put into circulation. This is primarily the idea one can form of the utility of banks of this sort. The bankers or goldsmiths contribute to accelerate the circulation of money. They lend it out at interest at their own risk and peril, and yet they are or ought to be always ready to cash their notes when desired on demand. If an individual has 1000 ounces to pay to another he will give him in payment the banker's note for that amount. This other will perhaps not go and demand the money of the banker. He will keep the note and give it on occasion to a third person in payment, and this note may pass through several hands in large payments without any one going for a long time to demand the money from the banker. It will be only some one who has not complete confidence or has several small sums to pay who will demand the amount of it. In this first example the cash of a banker is only the tenth part of his trade."
Cantillon's full account of how the banks of his time operated can be found in Chapter VI
What is of significance for those who describe thmselves as socialists yet espouse the idea of credit creationism is that runs counter to one of the basic precepts of Marxian economics, namely that value arises in the sphere of production not circulation. If banks could create credit with the stroke of a pen, that would mean in effect they could create wealth, and consequently the Marxist Theory of Value would be shown to be wrong. However, as time passes the validity of the Labour Theory of Value, i.e. that wealth can only come into existence when men apply their energies to nature, is all too apparent. If credit creationism were true, the solution to society's problems would indeed be monetary reform, not socialism - exactly the sort of argument put forward by Major Douglas in the 1930s (see below) to the American libertarian anti-fed reserve conspiracy theorists of today.
The confusion about the role of banks in creating money arises partly because of a lack of clarity as to the nature of money. Money is anything that people are prepared to accept as money and which circulates freely. As youngsters we get to play with toy money. This works perfectly well within the confines of play because players accept it as money and it circulates freely between them. The Bank of England's official measure of the money supply employs a number of different definitions leading to a number of different totals. M0 comprised sterling notes and coin in circulation outside the Bank of England (including those held in banks’ and building societies’ tills), and banks’ operational deposits with the Bank of England. On the narrowest definition the new bank deposits that arise as a result of banks lending money to customers do not count as money. On broader definitions they do. Keynesians and the Monetarists include "bank deposits" as money and that this confuses the issue. Especially as even the term "bank deposits" includes two entirely different types. Most people will interpret the term "bank deposit" to mean money that someone has and that they deposit in the bank, ie in effect lend to it even if they are not paid any interest (but are granted free banking in lieu of this). But the Keynesians and the Monetarists also include as bank "deposits" loans made by banks which take the form in effect of a credit line on which the borrowers pay interest to the banks. So, they mean by "bank deposits" both money that is lent to the banks and money that is lent by them. This involves double counting as some of the money that the banks lend will come from the money that has been really deposited with them.
The continuous concentration of money capital into banks and the expansion of the credit system allows a great number of transactions to take place without the mediation of any money. This is due to what Marx calls the mutual settlement of accounts. If there is a series of exchanges based on credit such that Capitalist A owes £500 to Capitalist B, and Capitalist B owes £600 to Capitalist A, the only amount of money necessary to realize the £1100 of commodities is a £100 -- the £500 owed to each (£1000 in total) are simply canceled on the books and no money is necessary to intervene in the realization of this portion of the value of the commodity capital. The amount of actual money intervening in giant purchases is surely very small. The bulk of purchases take place against credit, where the mutual settlement of accounts is always possible. The move towards a "cashless society" , debit and credit cards, can be seen as increasing the velocity of circulation of the currency.
Ultimately money will only be acceptable and circulate freely if people using it have confidence in it. That is why, for so much of modern history, money has either contained precious metals or has been a token representing a call on precious metals. Today a country's currency depends not on how much precious metal backs it up, but on how productively powerful its economy is.
The one institution which appears to create credit is the State, operating through the Bank of England. This is an act of deliberate political policy. The Government, in a variety of ways, instructs the Bank of England to print an excess of paper currency, which the Government uses to finance its own schemes, and without having to introduce tax legislation to deal with particular cases. This inflation of the currency does not, nor cannot, add to existing wealth. What is really happening is that, far from creating credit, the Government is confiscating other people's. This has the same effect as a general increase in taxation. The constant dilution of the purchasing power of money by inflation raises prices and dislocates production and distribution. This is public fraud posing as public credit.
Socialists have no love for banks. A world without banks would be a wholly better place. However to blame the banks for creating our debt-ridden society is just too biblical, like a re-run of Christ expelling the money-changers from the temple. Even if the banks were state-owned, they would still have to lend. If they didn't there would be no point in them existing. Banks and interest are not the villain of the piece but capitalism and production for profit. We need to abolish money before we can get rid of banks. But to get rid of money we need an end to property. And you can't abolish property relations until you abolish capitalism.
Historically, we have the Douglas Scheme of the 30s which did cast the banks as the villain and variants of the belief frequently spring up.
The Social Credit movement was started by Major Douglas whose argument was that there was a ‘chronic shortage of purchasing power’ due to the issue of money being in the hands of banks that had a vested interest in keeping money in short supply so as to be able to command a higher rate of interest on the money they lent out. Although, according to Douglas, banks had the power to create credit with the stroke of a pen they generally chose not to do so; this power should therefore be taken from them and vested in some public body which would make this extra purchasing power, supposedly needed to ensure the full use of productive capacity, available to all in the form of ‘social credit’. Take this power out of the hands of the banks that they use for their own special benefit, and transfer it to the Government and with this power, it can issue certificates, based on the national wealth, entitling all citizens to a share of the goods so abundantly produced in this age of plenty. Thus, the working class will get a greater portion of the wealth it produces, and the petty bourgeois will get a greater portion too, but what is more, though this is not explicitly stated, the small businesses will escape the clutches of its arch enemy ... the financial institutions.
Marxian economics constitute a direct refutation of the illusions up on which Social Credit doctrines are premised. Not only did Marx demolish the "credit creation" theories but this was already a hoary fallacy when John Stuart Mill disproved what he described as this "confused notion" in a work written before 1847 and published' in 1872. The notion that an insufficiency of money was the cause of sluggish trade was criticized by Sir Dudley North in 1691 before the development of the modern credit system and this was quoted by Marx.
Among other things what this theory overlooked from its deficiency of purchasing power standpoint was that interest charged by banks to capitalist firms is not an additional amount that is added to prices and which therefore cannot be paid for out of current income (wages and profits) generated in production. It is instead a part of the surplus value which the industrial capitalist has to hand over to the banking capitalist for the loan of their money and so is already included in total purchasing power.
It is as we shall see, an inadequate conception of the function of money and its relationship to commodities that underline Social Credit proposals. Money was shown by Marx to be, like labor power itself, also a commodity. Gold, or any of the previous materials that assumed the money form, did so, first of all precisely because they are commodities, and hence depositaries of exchange values. One of these commodities by general usage and agreement becomes the money commodity. By virtue of having the attribute common to all other commodities, of being the embodiment of so much labor time, the money commodity thus becomes the general equivalent and measure of value of all the other commodities. Money emerged and acquired its function of medium of circulation as a product of the historical development of exchange. The primitive inter-tribal direct barter beginnings of exchange was only of an occasibnal and non commodity nature since in primitive society goods were not originally produced for exchange, or sale. But occasional barter between one tribe and another developed into a more sustained form and provided an impetus to the development of the private property institution. Goods became more and more produced for the purpose of exchange, rather than for the personal use of the owners. The beginnings of commodity production and exchange, the production of goods for sale, demanded the use of one commodity as the universal equivalent which would serve as the translator of the values of all the others. It will be seen then that exchange did not originate with money but that the converse is true; i.e. that money arose as a medium of circulation only as a result of the circulation of commodities. At this point let us allow Marx to speak. "Although therefore the movement of money is merely an expression of the circulation of commodities it seems as if conversely the circulation of commodities was only an outcome of the movement of money. On the other hand money only has the function of a medium of circulation because it is the objectivized value of commodities. Consequently, its movement as circulating medium, is in actual fact only the movement of commodities under changed forms." (Capital, vol. 1.) Purchasing power resides in the goods which when produced belong to the capitalists. Gold, which was the actual material medium of circulation in earlier times, was with the rise of banking superceded in that function by the development of tokens and of paper representatives, which were convertible into money. Today banknotes and other paper are no longer convertible into gold. Nevertheless gold remains the money commodity since it still functions as the measure of value and as world money.
The commercial credit which the capitalists engaged in reproduction extend to one another by means of the promises to pay, constituted by bills of exchange and other certificates of indebtedness, is the basis from which the modern credit system developed. Banks are the intermediary agencies which facilitate the exchange of goods between the various owners, whereby one set of ccmmodities is sold for another. They act as middlemen between buyers and sellers who are each both borrowers and lenders in turn, since every seIler must also be a buyer before he can seIl. The seIler on depositing the purchaser's check is in reality ordering the bank to collect the debt; to transfer this amount from his debtor's account to his own. When his own debt to another seller is due his check issued to this creditor is in essence an order on the bank to transfer the stipulated amount from his own account to that of the creditor's. "These mutual claims of indebtedness represented by bills of exchange or checks are balanced either by the same banker, who merely transcribes the claim from the account of one to another, or by different bankers squaring accounts with each other." Checks, being orders to pay money are therefore certificates of indebtedness. Banks are institutions for the transference of debts and purchasing power which arise from the sale of goods and services. The issuance of a check is the conversion of commodities into a form of credit money and if cashed, into another form of money, banknotes. Thus we see, contrary to Social Credit dogma that banks cannot create credit from nothing since it is the creation and sale of goods that create credit. Purchasing power derives from the ownership of goods and the consequent command of services and must therefore always be equal to the totality of goods on the market.The bank too occupies the dual position of being both debtor and creditor since it lends out at a higher interest rate the great part of the deposits it has borrowed at a lower rate. This is generally the source of its profits.
The total product of society (minus that portion necessary for the replacement of used up means of production) can be said to resolve itself into income of wages, profits and rent (including money rent) although value is not determined. by these elements of income. The A plus B theorem of Major Douglas, founder of Social Credit, is supposed to demonstrate that A payments for wages and dividends, plus B payments for raw materials, bank charges etc., comprise the cost of production, while only A gives rise to income. Therefore, says Douglas, B payments must Iead to a shortage of purchasing power. But this is fantastic nonsense, aside from regarding dividends as a cost as it can readily be seen that the cost of raw materials has already been included when dividends have been disbursed. Also considering category B it will be realized when viewing the process of production in series that the raw materials of one industry is the product of the previous producers and this product produced the distribution of wages and profits. By adding the cost of production twice and thus doubIing it Social Crediters have certainly merited the description of their propaganda as double talk and this is the twaddle that is passed off as economics. The total income of society can never equal its total product since a part of this product, which represents no profit, must be used to replace the constant capital consumed (means of production). But this does not mean that the result is a lack of purchasing power.
And its resurgence http://www.worldsocialism.org/articles/major_douglas_rides_again.php