Critisticuffs on Inflation
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Kimschnitzel,
we are cutting down to some very fine differences here. I accept ‘possibility’ was a loose word. I understood the former meaning, that only state issuance fiat money in excess to the need over the counter is what creates inflation, but they do that in order to prevent banks stalling and to allow them to lend freely.
In your example, no central bank money, or other, is required, because of the coincidence, which would in real life be accidental, of Barclays and Deutsche bank both paying each other exactly £100 – banking clearance, though, like the owl of Minerva, only spreads its wings with the dying of the light, and if Charley had only bought £75 from Freddie, the central bank would come into play.
This is why I shaded with ‘possibility’ because it is not something known in advance and controlled, but contingent arising from multiple actors.
It would be possible for those actors to not need central bank clearance, but accidents can happen: the central bank could restrict the money it is prepared to print to purely over the counter demand and kill off inflation, but there would be knock on effects in the economy elsewhere.
> Are these claims true or false?
They definitely *also* do that, but it is my understanding that you claim they *only* do that. FWIW, in our piece we put this as:
> 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.
It is my understanding you would object to that last sentence.
Yes, we would object to the last statement. We have always been opposed to “credit creationism” on the grounds that it contradicts the labour theory of value that “the ability to pay” arises out of production as wages and surplus value (itself later divided into ground-rend, interest and profit). Banks are not “creating” an “ability to pay” that didn’t exist before. What they are doing is redistributing, in a more efficient way from a capitalist point of view, the “ability to pay” arising from production.
It is a bit weak to say that banks “also” doing those things (incidentally quotes from the Bank of England). They are what banks ”essentially” do.
For the record here’s what we say about banks in “An A to Z of Marxism” on this site here:
Banks Financial intermediaries which accept deposits and pay interest (if any) to savers and lend at a higher rate to borrowers. The difference between the two is their profit, after paying costs. Banks and other financial institutions do not create wealth: their profits are ultimately derived from surplus value created in the production process.
Capitalist economics maintains that banks can create money by making loans. For instance, David Graeber (author of Debt: The First 5000 Years, 2013 ) has argued that: ‘When banks make loans they create money… There’s really no limit on how much banks can create, provided they can find someone willing to borrow it’ (The Guardian). But, if this were true, no bank would ever get into financial difficulty. They would simply pull themselves up by their own bootstraps by creating the required credit and money. The history of the collapse of banks shows that they cannot create money.
> In your example, no central bank money, or other, is required, because of the coincidence, which would in real life be accidental, of Barclays and Deutsche bank both paying each other exactly £100 – banking clearance, though, like the owl of Minerva, only spreads its wings with the dying of the light, and if Charley had only bought £75 from Freddie, the central bank would come into play.
To be precise about “central bank would come into play”: If at the end of the day, when balances are netted, Barclays owes Deutsche Bank £25, it needs those £25 in central bank money. It can have these as central bank money on hand, it can sell some promissory note to some other private financial capitalist or it can borrow this money, e.g. from Deutsche Bank. The balance is settled in cash (central bank money) but not necessarily in freshly printed central bank money. I don’t think so far you’d disagree, I’m just being explicit: it’s not the central bank that comes into play here but central bank money.
However, and this is where we do disagree, the purchasing power in society is not a function of those £25, but of the 2x £100 in book money. This purchasing power relies on the central bank preventing the collapse of the credit towers down to pure cash but the increase in purchasing power is an act of banks/fiance capitalists/private credit operations.
> This is why I shaded with ‘possibility’ because it is not something known in advance and controlled, but contingent arising from multiple actors.
> It would be possible for those actors to not need central bank clearance, but accidents can happen: the central bank could restrict the money it is prepared to print to purely over the counter demand and kill off inflation, but there would be knock on effects in the economy elsewhere.
Yes, the central bank could kill the growth of finance capital by restricting its money (the situation Marx is discussing in the quotes you gave), so the central bank propping up private credit is prerequisite for fiance capital’s growth but it is the latter that expands ability to pay on this basis.
It seems to me, ALB and you disagree on this point, i.e. what you write here (if I understand it correctly) is in contradiction to the SPGB position. I’m not asking you to declare allegiances, I’m trying to make explicit that we seem to be having at least a three-way disagreement here.
In one of my previous posts I said “Eventually, the total sums of credits and debits will have to match each other.” – On reflection, this ‘eventually’ is only a theoretical reference. In reality, the process never ends the ‘eventually’ never comes. New deposits and loans are continually being made and paid off.
All that a credit does is move a date of payment into the future. And, ‘in the end’ (which may not ever come) payments cannot be put off by seeking further credit indefinitely. Credit money speeds the circulation of commodities, so isn’t what we are dealing with here an increase in the velocity of money rather than a decrease in the value of it? Or is there some relation between the two?
If purchasing power (the ability to circulate commodities) is something created by banks issuing credit (possibly it is), how is this different to value and what is the relationship between the two?
FWIW The latest Michael Roberts blog post is on this topic too. It has a graph of US M2 and CPI growth compared. A lot of it seems to be talking about ‘inflation’ in terms of general price rises, rather than a loss in the value of money though – which may not necessarily be the same thing. But I guess as you cannot observe the value of money directly, we are stuck with using things like the CPI as a metric.
Actually, the piece he wrote a couple of years ago referenced in that article is more immediately relevant to the discussion here:
It shows that you can’t adequately elaborate a theory of the general price level without taking into account the labour theory of value, especially that if there were a stable price level the tendency would be, due to increasing productivity, for the prices of most manufactured goods to fall. The fact that they don’t shows that there must be some counter-tendency at work. But what?
This point Roberts makes in the comment section accepts the view that purchasing power originates in production:
“New value is created by labour power and then divided between wages and profits by class struggle. New value must be represented by money and so money is ‘created’ to match.”
Hi Kimschnitzel,
As far as I’m aware, I’m not saying anything different to ALB: banks are unproductive financial intermediaries who make their cut of the surplus value through economies of scale and sweating their workforce.
The only part of your story that creates purchasing power is the bit where the loans are repaid through new economic activity realising value. The rest is smoke and mirrors.
Banks have no special powers beyond those granted by the state (which are, thus, really state powers). I’ve, in the past, told the story of fractional reserve banking using a shoe shop (that bought and sold on credit).
Just like the IOUs I can issue, and you can issue. When we do so, we do not create spending power, we simply realise spending power that is available elsewhere.
Here’s an example of what used to be the prevailing orthodoxy (before this money-as-debt stuff caught on) and which apparently is still being taught.
It clearly identifies the source of a loan as that part of an initial deposit that a bank is not required to hold as cash.
The misleading (by omission) part is that the “multiplier” effect on bank loans which the initial deposit allows is dependent on a part of each loan being re-deposited, so that in the end total loans and total deposits match. No new money is “created”. It’s just that money is circulated. But at least there is an understanding that no bank on its own can make a loan out of thin air.
It is out of date, at least as far as the UK is concerned, in that there is now no longer a legal requirement on banks to keep as cash (or something that can quickly be turned into cash) a proportion of money coming in. This has been replaced, as YMS has been pointing out, by other regulations about capital and reserves designed to have the same effect of stopping banks lending recklessly and so both putting depositors at risk of losing their money and destabilising the whole banking system.
The bottom line is that you can’t set up a bank and start lending unless you have already accumulated considerable reserves of already-existing money — and that loans ultimately come from that part of what a bank acquires over and above the minimum capital and reserve requirements.
Anyway, here it is:
I’ve spent too much time thinking about Alice and Charley, I think we need to be clearer what happened:
Alice gains an asset of £100 from Barclays, and has a liability of £100 to Barclays (her debt – let’s leave interest out of this). Barclays gain and asset of £100 (Alice’s debt) and a liability to cover paying Alice for that debt.
Alice buys the goods from Eve, thus wiping out her asset of £100 at the bank to replace it with capital of £100 in the form of goods. This effectively moves Barclays liability from Alice to Eve, as they now face having to pay Eve (or Eve’s bank).
No net value is created here, until Eve starts to draw upon actual cash, in which case her bank will have to draw on equity to meet it’s liability to her.
The £100 worth of goods were created in the real economy. Existing wealth moved around.
For anyone in the London area wanting to hear Roberts and Carchedi explain their value theory of inflation, they are both speaking at the Historical Materialism conference next Saturday at 11.15 in room G51 at the School of Oriental and African Studies.
I don’t know if there is anything in their theory but they are certainly starting at the right end, by seeing purchasing power as arising out of production not the banking system. As Roberts has put it:
“The demand for commodities depends on the new value created in production. New value commands the demand or purchasing power over the supply of commodities. New value is divided by the class struggle into wages and profits. Wages buy consumer goods and profits buy capital or investment goods.”
> Yes, we would object to the last statement. We have always been opposed to “credit creationism” on the grounds that it contradicts the labour theory of value that “the ability to pay” arises out of production as wages and surplus value (itself later divided into ground-rent, interest and profit). Banks are not “creating” an “ability to pay” that didn’t exist before. What they are doing is redistributing, in a more efficient way from a capitalist point of view, the “ability to pay” arising from production.
It is a bit ironic to say “credit creationism” is false because it contradicts the “labour theory of value” when the topic of conversation is how the augmentation of credit causes *inflation*, i.e. how this increased ability to pay does not represent an increase in material wealth (considered in the abstract, i.e. value), the kind of stuff produced by labour.
However, it makes sense that you are flagging this as it’s the “natural” objection to come up.
Indeed, I do not claim that *all* creation of ability to pay through credit operations causes inflation. First, there is the simple case that it realises commodities that would otherwise be left unsold, i.e. the private labour that produced them is not validated as abstract labour.
This, as an aside, is an indication that value is not simply something that labour produces but something that labour only produces under the dictate of a market economy, i.e. in capitalism. Not labour but abstract and socially necessary, i.e. validated, labour creates value.
Then, there are the assets in the books of banks that represent social power of access, ability to pay, without being used to purchase *commodities*, i.e. material wealth. What grows in the vaults of banks are debts counted as assets and not realised wealth. All surplus value produced in society cannot realise it. This can and does grow separately from material wealth considered in the abstract, i.e. value.
This is not even a theoretical verdict but an observation about the world we live in. An explanation of this observation needs to start from it and not deny its reality because it has already been decided that “the ability to pay arises [only] out of production as wages and surplus value”.
It then turns out that the explanation of finance capital’s apparent power to grow beyond the limits of earned surplus value necessitates rather than contradicts the beginning of Volume 1, i.e. the “labour theory of value”.
In Volume 1 Marx explains how the accumulation of industrial capital works. Where does the additional value come from? For this, he first makes the simple observation that wealth needs to be produced. “If then we disregard the use-value of commodities, only one property remains, that of being products of labour” is all he feels he needs to say on that matter. He then observes the nature of the labour under question — abstract and socially necessary. What matters is the effort and what matters is not what effort has been expended but whether this effort is validated by society. This qualifies a commodity as a value, this is what counts in a capitalist society. The production of surplus value then proceeds by the difference in value required to maintain the commodity labour power and the value this commodity can produce. You more or less know this, but bear with me here.
On the one hand, that debts — the promise of future wealth — are an asset is already mentioned in Chapter 3 of Volume 1. When Bob pays with Alice’s promissory note he holds an asset — ability to pay — that is merely Alice’s promise to pay. The reason why all of this works, as Marx explains in Chapter 3, is because the future values of the respective commodities work out/align/can be netted.
Indeed, the confidence in future success is key here. At the end of Chapter 15 of Volume 3 the system of accumulation is, in some sense, completely described when we arrived at the average rate of profit where a certain sum of capital can successfully demand a rate of return. Then, a sum of money is the promise of maintaining itself and becoming more. On this premise, capital itself becomes a commodity: credit that bears interest. This is the economic foundation which allows legal titles to debt payments to work in this society, i.e. these titles are not precarious and shaky endeavours but as good as wealth. We explained this on page 8 of https://critisticuffs.org/texts/inflation.pdf
> There is a fundamental difference between credit taken by businesses to run and expand their business and the sort of credit payday lenders offer. The former interest charge partakes in the success of capitalist enterprises, the latter squeezes the already insufficient income of the borrower. The former allows the debtor to grow their income which allows them to repay the loan with interest, the latter takes from the limited income of the debtor. The former partakes in the enrichment of the debtor, the latter impoverishes them.
Only on the foundation of the functioning of the production of value, exploitation and accumulation can we explain the economics of considering the promise of and legal title to future payments as an asset.
Then, as DJP remarked: “On reflection, this ‘eventually’ is only a theoretical reference. In reality, the process never ends the ‘eventually’ never comes. New deposits are loans are continually being made and paid off.”
That is, it is no use to say that “eventually” this return must happen when the point at which this must happen is decided by those who give credit (in reflection on the data and in competition against each other) and, critically, when this debt is an asset *now*. This is the wealth in a bank vault. When these demands against the future were at a risk of being voided (2007/2008) the State stepped in to maintain them in value, which is an indication that everything in this economy depends on them.
An explanation of finance capital should reflect on how the billions in the vaults of banks in the form of securities are anything but smoke and mirrors: they managed to produce a global crisis when their value was in doubt.
Some further reading:
– https://en.gegenstandpunkt.com/article/value where they essentially respond to your point above which was raised by many of their readers when their finance capital articles appeared.
Teaser quote: “We consider the liberties taken by the financial industry in matters of money creation and profit generation to be the state of affairs that demand explanation; to deny these liberties because they don’t go with an explanation of capital accumulation one has worked out is not good. These liberties represent the achievements of a power over society’s money transactions and the business use of money that have not fallen from the sky, but have their foundation in the political economy of money-making: the power of finance capital to make money by trading borrowed and loaned money is based on the fact that in a market economy, money functions in general as a source of money — the commercial customers of banks are, of course, after nothing else. The power of money to become more money through its use in business is not, on its part, a mysterious property of money, although it simply works that way in a market economy, like an objective fact. It is a consequence of the fact that in this system, a livelihood can only be obtained by acquiring money, but most people never have enough money to unleash its power to increase itself through a proper business use of it; they are instead compelled to work for money — that is, for the minority that has enough of it to “let their money work for them.” It doesn’t matter which jobs are sought and found by the majority of people dependent on earning money through work in the system of market economy freedom; nothing there is impossible; job-seeking people can find opportunities in every imaginable service. One difference, however, is readily overlooked, one that is crucial for the unconditional and universal necessity to earn money. Even the most advanced capitalistic society, in which industry is counted among the dying lines of business, lives off the material goods that must be produced with material means of production. Even if most wage-earners and smalltime self-exploiters are occupied with other tasks — such as those that, on a massive scale, have to do with the marketing of goods, the management of a society that runs on money, the financial constraints of the bourgeois mode of existence — society lives from the labor that produces the vitally necessary goods. The universal compulsion to work for money is ultimately based on the fact that the means for producing these goods belong to those who have invested their money in them, and who only allow production of something if it pays off for their interest in money. The necessity of earning money for a living defines a mode of production. The liberties of finance capital are thus the product, inherent to the system, of the capitalist mode of production. The stuff of financial transactions attests to its being a consequence of the system of wage labor.”
– https://antinational.org/en/financial-crisis-2008ff/ in the section titled “How come the banks can turn debt into gold?” we tried to explain how the success of industrial capital is the premise for finance capital’s growth of assets separately from industrial capital.
Teaser quote: “This need of companies for more money to increase their gains is taken advantage of by the owners of money when they give money the form of a commodity. They lend money and secure themselves a part of the profits – which were generated elsewhere – by fixing an interest rate. The trust in the social production process, which aligns everything towards gains, explains one half of the puzzle: why debt and claims on debt can be treated as assets themselves and function as replacement for money. Because interest rates are paid quite naturally, at least by and large, the financial industry assigns a price to pure legal claims on yet to be produced, abstract wealth. Some on the Left follow a theory which claims that the financial industry grew so much because productive capital was in crisis already. The rate of profit would shrink for the so called ‘real economy’ and so investing there would become unattractive. Thus, according to these left-wing theoreticians of crisis, money is put into the financial market. To summarise in an exaggerated form: because normal capital does not function properly any longer, financial capital prospers. We will criticise this theory in a separate text, but for now we want to emphasise the difference of this theory to the theory presented so far: Not because productive capital fails to function properly, but because it grows so steadily – if we ignore the periodic economic slumps everyone takes for granted anyway – the financial superstructure grows. Because the workers in the industrial centres are so well disciplined, and hardly start strikes which harm capital, because there are hardly any places left which resist the grab of ‘Western’ capital, financial capital puts trust in interest. Those last two points are a result of ‘Western’ violence and economic blackmail; this spurred the financial markets.”
> The basic question is still: what is the origin of the original £100?
The basic answer is still:
– YMS: “In your example, no central bank money, or other, is required, because of [the coincidence, which would in real life be accidental, of] Barclays and Deutsche bank both paying each other exactly £100.”
– me: “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.”
– AE: “Archibald wants £10 worth of chicken feed. He doesn’t have £10 but writes Belinda a promise to pay her £10 in a week and gets the chicken feed in return.”
– Marx (quoted by YMS): “The pure economy in medium of circulation appears most highly developed in the clearing house — in the simple exchange of bills of exchange that are due — and in the preponderant function of money as a means of payment for merely settling balances. 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, can only be of two kinds (aside from the more or less developed technique in the concentration of these payments): mutual claims, represented by bills of exchange or cheques, are balanced out either by the same banker, who merely transcribes the claim from the account of one to that of another, or by the various bankers among themselves.”
– Marx (quoted by YMS): “Finally, in a period of crisis, the circulation of bills collapses completely; nobody can make use of a promise to pay since everyone will accept only cash payment; only the bank-note retains, at least thus far in England, its ability to circulate, because the nation with its total wealth backs up the Bank of England.” (this implies that when there is no crisis then promises to pay are accepted in lieu of cash)
– Critisticuffs piece under discussion in this thread: “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.”
– me: “Alice pays Bob with a promissory note roughly stating: ‘I will pay the bearer of this note £10 in one week’.”
– me: “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.”
– Marx (quoted by me): “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.”
– Gegenstandpunkt (quoted by me): “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. […] 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.”
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