ALB
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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.
Banks match borrowers to savers. Banks act as middlemen between people who want to save money and people who want money to spend.
A bank’s business model relies on receiving a higher interest rate on the loans (or other assets) than the rate it pays out on its deposits (or other liabilities). The commercial bank uses the difference, or spread, between the expected return on their assets and liabilities to cover its operating costs and to make profits.
Are these claims true or false?
Aging punk, I think that both of us agree with the basic description of how banks and the banking system works, as set out by the Bank of England and the Bundesbank. The differences are of emphasis and terminology.
Banks are profit-seeking capitalist enterprises whose source of income is the interest on the loans they make (in practice banks are involved in other activities such as selling financial services, but this is a sideline and not part of their core activity as banks).
Banks could not function without other people’s money whether deposits or what they borrow on money markets (other than the bank inter lending one). Paying interest on these loans to them is part of their expenses.
The clearing system for what banks owe each other means that what banks lend has to be funded one way or another. Since it is not profitable to keep doing this from borrowing either from other banks or the central bank (more expensive and a drain on reserves) the profitable way to do this is by attracting new deposits — which banks are in competition with each other to attract.
The difference between us is over whether bank lending can cause the currency to depreciate and so for the general price level to go up as it does year on year (and has been since 1940).
Our contention is that all currencies have depreciated as a result of governments and central banks over-issuing state money.
Your view (as I understand it) is that currency depreciation has become built-in to the process of capital accumulation; capitalist enterprises have come to rely on banks lending them the money to invest, and this creates a situation where more purchasing power is generated than the value of what is produced with the loan.
So let’s move on to discuss that.
But this claim of yours about the banks cannot go unchallenged:
“In effect they are loaning out £900 and seeking £90 (whether through deposits or central bank money or interbank lending) or whatever they calculate to be an adequate ratio necessary for the arse covering.”
On the face of it, this appears to be reverse currency crankism that claims that on the basis of a deposit of £90 a bank can make loans of ten times that amount or at least the lesser claim that the whole banking system can do this (which it could but only as long as the £90 is continually re-deposited).
The fact that only £90 is required to be covered under the clearing system does not mean that the £900 in loans doesn’t have to be funded.
Quick reply, kimschnitzer. Yes, in chapter 33 of volume 3 and elsewhere Marx “criticises the idea that the central bank can control the economy or the circulation of bank notes”. He was a critic of the “Currency School” which claimed that it could, on the basis of the Quantity Theory of Money (that the price level depends on the quantity of money in circulation). At that time money was gold or notes convertible on demand into a fixed quantity of gold. In those circumstances Marx’s position (basically that of the rival “Banking School”) was correct — it was the level of prices that controlled the quantity of money in circulation.
But these circumstances don’t obtain today. Today the currency is not convertible on demand into a fixed amount of gold. It is what Marx called in chapter 3 of Volume 1 an “inconvertible paper money issued by the State and having compulsory circulation.”
In this different circumstance, as he went on to point out, the quantity theory of money did apply:
“If the paper money exceed its proper limit, which is the amount in gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.”
In other words, the price level would double. If the State issues more than the required amount of such “fiat money” (money that the state creates as if by decree but in practice in different ways that we are quibbling about) the result will be the depreciation of the currency and a rise in the general level of prices (inflation).
What we have today is a “managed currency”, managed by the state. This does not mean that the state or its central bank can control the economy any more than they could in Marx’s day, but it does mean that the state can control the amount of money it issues and that that amount has consequences for the general price level.
The state can’t control the economy but its monetary policy can have an effect, whether intentional or accidental, on the price level.
Even Corbyn couldn’t overcome the Unite union’s defence of its members jobs over the Trident nuclear submarines. Leftwinger Len McCluskey supported making and maintaining warships (and other “defence” work) as jobs for his members. No doubt his successor, Sharon Graham. another Leftwinger, will take the same position, not that she will have to challenge the Labour Party leadership over the issue. They are fully committed to militarism.
I missed Heath. How could I have missed him? The 14th Earl of Hume was in fact No 13 as he came after Supermac. And the 14th Mr Wilson came before Ted Teeth.
So the both of you were born during the reign of Supermac (1957-1963) which wouldn’t make you pensioners yet. Quite young really.
What is necessary is the ability to cover the likely payments (after clearing) and cash withdrawals, not to cover the entire amount of each loan.
That’s the whole point. The outflow of funds as loans can be covered by an inflow of funds as deposits (payments into customers’ bank accounts). A bank will only have to resort to the interbank lending market if, after clearing, the net figure is negative. That will still mean that most of their loans will be covered by (proper) deposits.
There are also other things it can do, as pointed by the Bundesbank in another article:
“The banks also keep a constant eye on the costs that may incur by granting loans and creating book money. For example, if the customer uses the new credit balance to transfer money to an account at another bank, from the bank’s point of view money will be flowing out. The bank then often has to recover this money, for example by taking out a loan from another bank, or by “refinancing” itself with a loan from the central bank. Alternatively, it can persuade savers to invest cash or credit balances at the bank in the form of savings or fixed-term deposits. “(bundesbank.de/Redaktion/EN/Standardartikel/Service/book_money_text.html)”
I can’t find quickly the original Bundesbank article which is quoted in the article below from the Socialist Standard. Perhaps somebody in Germany can track it down.
To tell the truth, I find the Bundesbank’s account clearer than that of the Bank of England (though it too makes the same point about attracting more deposits from supposedly redundant savers). For instance, the use of the term “book money” rather than simply “money”.
“This will be the fourteenth prime minister I will have served under – and I’ve been poor under everyone of ’em.”
Sounds as if you must be a pensioner yourself. 14? I make that back to Anthony Eden who quit in 1957 (I think).
Ok, it’s not now the Bank of England but another government department but that doesn’t undermine the fact that it is the government, or if you like the state, that takes the initiative that leads to more fiat money being issued and not the commercial banks. The state’s role is not passive as suggested but, as you put it, pro-active.
That passage from Marx is pointing out how bills of exchange (private IOUs) economise on the use of cash as a means of payment. Nobody is denying that. The point at issue is not this but whether they can cause money to depreciate (inflation in its original sense). If you think they can or could you need to explain why they didn’t in Marx’s day.
Incidentally, while it is possible to imagine all sorts of scenarios where private IOUs serve as means of payment (and so economise on the use of cash) in practice historically this wasn’t so easy and involved the emergence of specialised bodies such as discount houses and acceptance houses.
Anyway, nobody is arguing that private IOUs cannot be used as means of payment and/or economise on the use of cash or that bank transfers can’t either. It’s about whether or not bank loans can lead to inflation.
As it happens, we published an article at the time on what the German Central Bank said:
Yes, a blueprint for a nightmare society where your work colleagues vote on what work you do and assess your work and your neighbours on what you consume. The ultimate surveillance society, a real “totalitarian democracy”. These people have nothing in common with us or socialism.
That’s the conventional way of putting it but it doesn’t follow from it that bank lending could cause the currency to depreciate, as claimed in the pamphlet under discussion here.
I would just make two points. The conventional view is not using the word “deposit” in a the way most people would understand it — as a sum of money deposited (whether in cash or by bank transfer) in a bank from outside; in effect a loan to a bank, something the bank owes to the depositor. In your exposition of the conventional view you use the word in the opposite sense of a loan from a bank, in the form of an account created by the bank in which it has “deposited” an amount that the borrower can draw on.
To use the sane word for two different and opposite things can only cause confusion (besides, is also not an accurate description of what happens; normally the borrower already has an account and is given a loan as an overdraft facility, so nothing is actually “deposited” and no loan is given until the borrower uses that facility).
So when you write “all with broad money initially created as a deposit”, it would be clearer to have said “all created as a bank loan”. Again, when you write that a bank “does not need to cover its deposits on a 1:1 basis”, to say “does not need to cover its loans on a 1:1 basis”.
But this is a matter of semantics that should be able to be sorted out.
The second point is one of fact. Is it the case that “when new base money [central bank money]is created this follows rather than leads broad money [bank loans]”? Does the central bank issue more money simply because a bank asks them to? I thought the process of introducing new money into the system starts with the central bank selling bonds or Treasury bills, ie that the initiative lies with the central bank.
Roger Hallam, the mad theorist behind XR and now its breakaway Just Stop Oil, is quoted in today’s Times as saying:
“You can basically save the next generation with 2 per cent of the American population mobilised, engaged in an intense intra-relationship between high-level disruption and intense mobilisation.”
It used to be 3 percent but seems to have been reduced now to 2 percent (unless he has been misreported) and is he really proposing to try those tactics in America where the police are not likely to be so polite as here?
But that’s not the main point I want to make. The assumption behind his thinking is that governments could “just stop oil” if they wanted to; that it is just a question of political will, and that governments can be forced by a determined minority to exercise that will.
The fallacy here is that it is just a question of political will. It’s not. It’s a question of economic reality which no government can overcome as long as capitalism lasts. But Hallam and Just Stop Oil don’t envisage this. They imagine that what they want could be implemented under capitalism. Not even a majority voting for it, let alone a determined minority, could overcome the economic laws of capitalism that dictate that the cheapest energy source will be used as long as remains the cheapest.
“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.”
That is not what is meant. If Alice spends the £100 to buy from someone or some shop that has a bank account with Barclays, what this means is that Barclays can record having a further £100 deposited with it from outside.
If she spends it — by cheque, card or bank transfer — to buy something from someone banking with a different bank then Barclays has to transfer £100 to that bank whose deposits therefore go up by £100.
To maintain its previous position Barclays has to get an incoming payment of this amount (there is no reason why this would have to be in cash; it could equally be, in fact, would be more likely to be a transfer from another bank). It may well get this, but if by the end of the day it hasn’t, then it will have to borrow £100 on the interbank landing market.
However it does it, Barclays has to have an incoming payment to cover the loan.
In the olden days — two hundred years ago — Barclays would have probably given a loan in the form of a bag of gold coins. Then it would be quite obvious what a bank loan was and that it did not involve the “creation” of any additional purchasing power (even if it did result in more things being bought).
The form in which a bank loan is made — gold coins, the bank’s own notes, Bank of England notes, an account with a cheque book, an account with a plastic card — makes no difference to the principle that a loan is a transfer of already existing purchasing power and not the creation of new purchasing power. It is a loan of the use of money no different in principle from the loan of a book or a car.
Once this basic fact is grasped it is easy to see why bank lending does not and cannot cause the currency to depreciate (however high finance might become).
