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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.”
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It is out of date, at least as far as the UK is concerned, in that there is now no longer a legal requirement on banks to keep as cash (or something that can quickly be turned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:
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.”
How nice of the capitalist class to hand back a little bit of the wealth they steal from the working class.
Pity that depending on their handouts is seen as the only game in town.
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.
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.
