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Banking

Cooking the Books: Marx and Banks

The Morning Star (23-24 March) carried a cartoon which has Marx holding a piece of paper on which is written ‘Cyprus banks grab’. He is writing on a blackboard:  ‘Banks in Capitalist society are institutions created for the systematic robbery of the people’ and asking, ‘Now will you believe me?’

The only problem is that this is not a quote from Marx, nor does it correspond with Marx’s expressed views on banks. Marx was well aware of the opportunities for swindlers opened up by the coming of limited liability companies and their promotion, and by stock exchange manipulations in which some financiers and banks already were involved in his day, and wrote about this.

However, Marx’s whole analysis of the nature of exploitation under capitalism was that this took place in the course of production in the places where real wealth was actually produced when capitalist employers extracted surplus-value from wage-workers, not in the sphere of money and finance.

Fractional Reserve Banking Refuted

Since the financial crisis first erupted in the summer of 2007, there has been a renewed interest in what is now commonly called ‘fractional reserve banking’. This is mainly from those who contend that it is the root cause of the problems besetting the world economy. But is this idea really plausible? Both logic and the available evidence would indicate not.

Fractional reserve banking (the idea that the banking system can lend out vast multiples of what has been deposited with it) is not a new theory. It is also – and perhaps more accurately – sometimes called ‘credit creationism’ as it assumes banks can create almost endless amounts of credit from what has been deposited with them by savers. Ever since the MacMillan Report into Finance and Industry in the UK in 1931 gave it credence, variants of this theory have been taught to students in universities and colleges across much of the world.

Cooking the Books: The Bank Charter Act

The Bank Charter Act of 1844 is back in the news. An article in the Guardian (17 July) by Deborah Orr discussed its terms and stated that it “removed from banks their licence to print money.” It did remove the right of banks other than the Bank of England to issue their own bank notes, but gradually rather than immediately. Banks which had been issuing notes until 1844 were allowed to continue until they merged or were taken over, but not to increase the amount they had been issuing. Some banks continued to issue notes for the rest of the 19th century, the last continuing till 1921.

According to the wikipedia entry, “The Act exempted demand deposits from the legal requirement of a 100-percent reserve which it did demand with respect to the issuance of paper money.” The source for this claim is given as the Ludwig von Mises Institute, as if this could be regarded as a source of reliable information.

Editorial: Crunch Time for Credit Creationists

Since the Credit Crunch of 2008 and the accompanying depression, a flood of ideas has appeared on the internet and in discussion forums of all kinds claiming that, like a stage magician, high-street banks have been creating credit, money or even wealth out of nothing. This, it is claimed, has led to the continuous enrichment of fat-cat bankers at the expense of everyone else. Anarchists, conspiracy theorists, reformists, academics, professional economists and those simply looking for someone to blame for the economic collapse have all taken up the idea and elaborated it into a number of more-or-less confused theories about the way banks operate.

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