Critisticuffs on Inflation

January 2023 Forums General discussion Critisticuffs on Inflation

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    There’s a new Critisticuffs article on inflation, and the SPGB Magic Money Myth pamphlet gets a mention:

    “Growth anticipation creates credit
    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.”

    “The SPGB and others would object to this statement. For example, they write: “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)”

    for now I’ve only quickly read the article, but I’m not sure what the disagreement is here, unless Critisticuffs are claiming that banks can issue as much credit as they like regardless of what amount they have received in deposits or have borrowed on the money markets? But I don’t think they are claiming that?

    “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.”

    • This topic was modified 3 months, 1 week ago by DJP.

    “Thus, an increase in credit volumes does not directly translate to a proportional devaluation of money, in the sense of a simple quantity mismatch: more money confronting the same heap of commodities, but this increased credit volume may be the fundamental reason for an increased heap of commodities.”

    So they are saying that “more money confronting the same heap of commodities” does not directly lead to a fall in the value of money? What about indirectly, whatever that may mean?

    “The rate of inflation is thus explained by the motley competition of capitals for solvent demand and credit and how quickly they turn this credit into additional commodities.”

    So quick turning of credit into more commodities produces more or less inflation than a slow one? I can’t make sense of this in light of the first claim.

    Edit: Seems to me they are subscribing to two things at once, what is called the “Bank-deposit Theory of Prices” and “Marx’s quantity” theory. But I could be misunderstanding.

    • This reply was modified 3 months, 1 week ago by DJP.
    • This reply was modified 3 months, 1 week ago by DJP.

    When they sent Head Office a copy, they added a covering note:

    “Hi there,
    We assume (and reference in the piece) that you’d disagree with this piece. Let us know if you’d like to discuss this disagreemnt. FWIW We don’t think it is terribly important politically, but clearly cared enough to write up our thinking, so happy to discuss 😄

    Not read it yet, but they seem to think that there is a difference.


    I have now read their pamphlet and it is clear that they are full-blown “credit creationists”. Not cranks who think that a bank can create credit out of thin air. They accept that a single bank on its own can’t:

    “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.”

    Precisely. So making a bank loan does not create any new money by the mere strike of a pen or keyboard, as the real currency cranks claim. All that is created is a promise to pay.

    Their argument is that the “banking system”, with the central bank at its centre, can. This is given some plausibility in that the central bank can create money at will and that it gets this into circulation via the commercial banks.

    Extra money can be needed for all sorts of reasons, such as an increase in transactions or of the population, so providing this is one of the functions of a central bank. However, if the central bank issues more new money than the economy requires the result will be a fall in the purchasing power of the monetary unit, resulting in a rise in the general price level.

    They seem to accept this definition of inflation but argue that it is not due to the central bank issuing too much money 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. In other words, a variation of the conventional view that the Bank of England plays merely a passive role and just makes available the amount of money demanded by the economy.

    This leads them to a new theory as to how capital accumulation works. Under the heading “Credit is the foundation of capitalist growth” they write:

    “This allows businesses to turn their growth and their competitive behaviour upside down. They no longer simply advance their own money, reap the profits and turn those into bigger advances for even bigger profits. Rather, they borrow money against interest, expand their business with this loan, pay the interest with a part of the profit then made and pocket the other part themselves.
    Capital growth is not constrained by the profits already made, but only by the business outlook, how promising they are as debtors to those willing and able to extend credit. This alters the calculation for businesses in that profits are no longer the basis for growth. Rather, debt is the basis for this growth and profits must justify the creditworthiness to acquire debt.”

    This would seem to make debt and interest the driver of capitalist production, turning upside down the traditional Marxian explanation which makes interest a subdivision of profit rather than profit a subdivision of interest-bearing credit.

    And there are plenty of firms that, to expand, use their own reserves (from past profits) or raise more capital on the stock exchange, rather than borrowing from a bank.

    Anyway, there is something odd about their theory.


    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.


    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.


    Dealing for the moment just with the case of a single bank, the question is: when it makes a loan is it creating new purchasing power or is it simply redistributing already existing purchasing power?

    Banks get money in two main ways: (1) from individual depositors — retail; and (2) on the money market from other financial institutions and banks — wholesale. In both cases, from already existing sources of purchasing power.

    Those who deny that banks are merely financial intermediaries assume that those who accept this are saying that banks lend just the money of retail depositors. We don’t. We know that banks also borrow wholesale from the money markets.

    It is true that a bank doesn’t necessarily have to have the money before it makes a loan. But it does as soon as the borrower begins to spend that loan. The bank has to transfer purchasing power (and so can’t spend it itself) to the person or shop that the borrower bought something from. I don’t think this is a point of contention as the Critisticuffs pamphlet accepts this in the passage quoted.

    Every day there are all sorts of payments coming into a bank (deposits, wages, etc) and going out of it (direct debits, loans being spent, withdrawals to buy things, pay bills, etc). At the end of the day (literally) a bank has to balance these. If, after what it owes other banks and what they owe it have been “cleared”, its outgoings are more than its incomings then it has to borrow money on the interbank lending market.

    Banks want to avoid being in this position as they have to pay interest on what they borrow, and this is where the “liquidity management” referred to in the pamphlet comes in.

    If incomings are more than outgoings then a bank can lend money on the interbank lending market. This is banks lending money to each other. But it’s a zero sum game. All banks can’t have more money coming in than going out. If one bank has, then some other bank or banks haven’t.

    This means that all the loans made by all the banks are covered by — come from — already existing purchasing power. At most what a bank will have done is to increase the amount spent by activating already existing potential purchasing power that might otherwise have lain idle. In fact to activate such latent purchasing power (arising out of past production) can be said to be the economic role of banks.

    The Bank of England doesn’t have to assert that the loan a bank makes is the equivalent of state money any more than it does a loan between two individuals.

    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.


    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.


    “You are assuming throughout that all ability to pay or spending power is money, by which you mean central bank money.”

    I don’t think that’s a correct reading of what is being said. Purchasing power is the ability to purchase something – it could be represented by either central bank money or credit money (i.e a deposit created by a loan). The important thing to think about is what can cause an increase in the aggregate total of it.

    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. The fact that there is more than one commercial bank and banks can and do borrow from each other doesn’t change this.

    “promises to pay create ability to pay.” I wonder if “create” is the right word here? A debt is a promise to pay. And money I receive as credit can be spent – this is true, but it is not something that can expand infinitely. Eventually, the total sums of credits and debits will have to match each other. In the end, it is the deposits of central bank money that create the ability.

    • This reply was modified 3 months, 1 week ago by DJP.

    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”.

    All I need to add on this point is that I was using the word “money” a bit loosely when I used it interchangeably with “purchasing power”. Since money circulates (one note or coin can make multiple purchases or as you describe with a bank loan), there is no need for the amount of money in circulation to be the same as the total amount of purchasing power generated in production as wages and profits. The amount needed depends on its “velocity of circulation”.

    More broadly, while classical currency cranks such as Major Douglas (whose Social Credit followers sometimes visit us here and may well do again now I have mentioned them) and mistaken Marxian economists such as Rosa Luxemburg see the flaw in capitalism as being that it doesn’t generate enough purchasing power to buy all that is produced, you seem to be claiming that, on the contrary, it generates too much, hence permanent “inflation” (depreciation of the currency) at least since the Gold Standard was abandoned.

    What might be called overconsumptionism as opposed to the others’ underconsumotionism.

    Young Master Smeet

    Literally anyone can issue an IOU, since that is a creature of contract law, and the acceptance of IOUs is limited only by whether creditors will believe that the issuer is good for the money and that they can enforce it. An IOU can circulate (indeed, in a way, with the gold standard, paper money was literally just an IOU, it still has the ‘I promise to pay the bearer on demand’ statement on it, in England.

    You can even use the IOU as a financial instrument, and borrow against the expectation. The IOU could circulate forever, without ever being redeemed, but an honest issuer would have to account for its continued existence, even if the risk of it being called in were low (and they could, in theory, buy a hedge against the IOU being redeemed, creating yet another financial instrument from the same piece of paper and payment stream).

    So, when we’re talking about ‘purchasing power’ we need to come back to value, and how a portion of value in the economy is employed as means of circulation, and why this whole debate matters, because banks cannot create value (saving, arguably, through financial services, but that’s a slightly different story).



    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

    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 (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 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.


    Pity your post crossed with that from YMS.


    Just to add some light humour to this serious exchange


    I like to keep economical definition in a simple way, inflation is over issuance of inconvertible currency, or monetary devaluation, intelectual like to complicate everything

    Four Fallacies About Inflation

    The Evolution of Money: From Barter to Inflation (Pt. 2)

    The Evolution of Money: From Barter to Inflation (Pt. 1)

    The Marxian Theory of Inflation

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