Socialist Standard July 2008 Letters

Socialist Standard Published since 1904 is the official journal of The Socialist Party

The Socialist Party Of Great Britain is a companion party of The World Socialist Movement

|July 2008

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Letters So that's why ...

Dear Editors,

Under the heading "Working classes 'have lower IQs'" the BBC reported on 22 May:
"Working class people have lower IQs than those from wealthy backgrounds and should not expect to win places at top universities," an academic has claimed. Newcastle University's Bruce Charlton said fewer working class students at elite universities was the "natural outcome" of class IQ differences. The reader in evolutionary psychiatry questioned drives to get more poorer students into top universities". (http://news.bbc.co.uk/1/low/england/tyne/7414311.stm)

So that's why I'm a bit thick and should know my place.Or does it say something about the validity of IQ testing or the disadvantage of just being poor and the limitations to knowledge opportunity? Or does it say something about a 'science' that justifies the status quo or about what is 'science' in this field of biological determinism which justifies the fundamental 'rightness' of our social organisation based on a hierarchy where those with the highest IQs take their natural place?

Obviously university is not the place for me if this is the type of thinking that goes on there. I'm the better for it. I wish I hadn't been born stupid but apparently it's quite natural. I should respect my betters with their superior intellect. I'm not a prisoner of my genes but of my limited intelligence. I know my place!

Stuart Gibson, Bournemouth

MP's pay

Dear Editors,

The ongoing row over MP's pay and allowances obscures that those elected to Parliament will always receive a remuneration far superior to the average income of their constituents regardless of what punitive measures are taken to masquerade it as greater equability.

Contrary to the conventional wisdom, MP's aren't elected to the House of Commons to represent their constituents in the running of the country's best economic and social interests. They are elected to assist in the running of capitalism's best interests and whatever personal style they choose to deal with the problems they encounter at their surgeries (all of which inevitably have their genesis in the traumas of the system), what they do and say will always be dictated by this factor.

Now that the underlying rottenness of the system is becoming more evident in the form of banks running dry, home repossessions, and global stagflation even the most opportunist of MP's particularly if they've used New Labour as a political career platform are placed in a dilemma in how to explain the economic crisis to their anxious electors particularly if those electors actually voted for them personally.

Consequently the whole purpose of such excessive remuneration packages they receive is to act as an inducement to ensure that all of them, particularly if associated with the left, act in the highest traditions of parliamentary etiquette and bi-partisan propriety so that none, apart from the odd maverick who can easily be marginalised, dares to challenge the wisdom in Parliament that there isn't an alternative to capitalism and the global chaos it causes when there quite clearly is!

This issue has all been comprehensively laid bare by New Labour's electoral drubbings in recent local elections and the Crewe and Nantwich by-election. Tory leader David Cameron was ironically 'right' when he said afterwards the results heralded the end of New Labour but not for the reason he infers. After ten years of an economy tied to the US dollar and credit, voters actually rejected the neoliberal economic policies New Labour had stolen from the Tories so that in effect politics, like the housing market has plummeted into a type of 'negative equity' where voters reject Tory policies by New Labour yet vote in official Tory candidates on the other.

Such apathy will persist as long as MP's are paid in a way that buys them off to defend or play down the woes of the system, regardless of what their previous political leanings were.

Nick Vinehill, Snettisham, Norfolk

Would you credit it?

Dear Editors,

In your reply to my last letter (Socialist Standard, May 2008), you deny that banks create money by lending. This flies in the face of the facts ... see any book on economics! How else do you explain the huge increase in the money supply over recent decades?

Yes, they do have to balance their books - so when they make a loan they account the money put into the borrower's account as a liability, and balance their books by entering the debt taken on as an asset. If the loan is not repaid, and has to be 'written off', then their books do not balance - hence their present woes.

You really ought to study the system. The fiction that they only lend money deposited with them is promoted to confuse the general public about this matter.

(At the end of the last World War, the government still did create almost half of our money - the notes and coins - and spent it into circulation; but with the decline in use of these, it now only provides about 3%, the rest being created by banks and other 'financial institutions'.)

Brian Leslie (by email)

Reply:

We have been studying the system for over 100 years and it is because of this that we know that banks are financial intermediaries who channel and distribute purchasing power rather than 'create' it. The idea that they can create vast multiples of credit from a given deposit base is a total fiction - it is theoretically incorrect and empirically unsupportable.

It was a view that gained credence because of the 1931 MacMillan Committee Report into Finance and Industry that was written in large part by John Maynard Keynes. You may be interested to know that a significant minority of the Committee at the time opposed the view promoted by Keynes and several of those who went along with it did not understand or realise the implications of what they had signed up to - and we know this because some of our members at the time (including a member of the Editorial Committee of this magazine) were in correspondence with them about it.

Interestingly, in his most renowned work, The General Theory of Employment, Interest and Money (1936) Keynes effectively abandoned the view he had promoted on the MacMillan Committee just a few years previously, stating that "the notion that the creation of credit by the banking system allows investment to take place to which 'no genuine saving' corresponds can only be the result of isolating one of the consequences of the increased bank-credit to the exclusion of others".

Indeed, what the simplistic model used in the Report had assumed was that banks kept a certain 'cash ratio' back for customers to access as a proportion of whatever is deposited with the bank (10 percent was assumed at the time though these days this would be far less). They then assumed that the whole of a new deposit by a customer could be held in cash to underpin the creation of credit nine times its value (i.e. operating with a 10 percent cash reserve an initial £1,000 deposit would enable the creation of £9,000 worth of credit). Bizarrely, it also then assumed that this cash was never called upon in practice. In other words, for the model to hold, they correctly assumed that banks kept cash in reserve for customer use, but then assumed that nobody ever withdrew any of it!

Very few economics textbooks today repeat this nonsense. Instead, they typically promote the version put forward by Paul Samuelson among others which explicitly rejects the approach used by the MacMillan Committee in favour of a multi-bank model. However, this model does not demonstrate anything more than that currency circulates around the banking system and can be used more than once in the process of customers' creating bank deposits - as opposed to banks somehow creating multiples of credit from these deposits (the July 1990 Socialist Standard dealt with this particular model in more detail).

If banks could create vast multiples of credit from their deposit base then the recent problems of Northern Rock and others would never have occurred. In reality, their problems arose precisely because they wished to lend out more than had been deposited with them and to do this they had to borrow 'short' on the money markets to finance their long-term loans and mortgages. When inter-bank lending rates hit the roof, the game was up - and the Bank of England and the Treasury did not just tell them to go away and create some more multiples of credit from their deposits.

Traditionally, banks have covered most of their loans through the generation of deposits by customers; Northern Rock was unique in that in its dash for growth it allowed its ratio of deposits to loans to go down to under a quarter, an unprecedented level in UK banking history (it was around £24 billion in deposits set against around £113 billion in loans and other assets at the time of its major crisis). The difference was not made up through 'credit creation' but simply by borrowing on the money markets at the prevailing inter-bank rates of interest, as can be seen from an examination of its balance sheet.

Similarly, the current £12 billion discounted 'rights issue' of new shares by the Royal Bank of Scotland is an attempt to shore up its asset base partly because of losses it has made on investment vehicles tied to the US sub-prime mortgage crisis. So again, much to the chagrin of their shareholders, there is no easy way out of this crisis for banks by attracting some more deposits and then creating vast multiples of credit from them to magically cover their losses.

Editors

Socialist Standard July 2008