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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).
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.
I don’t know about that. There are plenty of socialists who are pensioners. Actually I was in a pub when she made her announcement. Those there were happy saying “about time” and “good riddance” Then they said “Bring Back Boris”.
Maybe the Tory membership should decide whether it’s Larry or the lettuce.
I have to say, though, it is a pretty good passing show they are putting on. With Boris trying to stage a comeback, it’s a rival to Coronation Street and EastEnders.
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.
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.
I think you are probably right that the Republican politicians are just vote-catchers trying to use voters’ resentment at the government spending money for a war in a faraway land while they suffer from rising prices.
It does seem to be sign of the times that, while those calling themselves (falsely of course) socialists are rallying support for one or the other side in the Ukraine war invoking vague slogans like “anti-imperialism” and the “right to self-determination”, the opposition to the war is being expressed by isolationists and populists.
Another reason why reformists are worse than useless.
