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Hud955 wrote:

Assume a single bank for now and assume a bank rate of 10%.  If the bank receives a deposit of £100 and lends 900% of that or £900 as your green party guy claims, it will in due course receive a deposit of £900.  Its books will then show £1000 in deposits (£100 and £900) and a £900 loan.  There would be no obvious way of distinguishing between this situation and another where it recieved an initial deposit of £1000 and loaned 90% of that or £900.  Again, its books would show deposits of £1000 and a loan of £900.

But it would be what happens next that would be different. Assuming that the bank has chosen or is obliged by law to keep 10% of any deposit as cash, if on receiving a deposit of £100 it can lend then out £900 which then comes back to it, this means that it could then immediately lend out 9 times that, ie. £8,100. And when this comes back 9 times that, or £72,900. And when this comes back it could lend 9 times that, or £656,100. And then 9 times that, or £5,904,900. It doesn’t finish there. In fact in never finishes. I think the Ancient Romans logicians used to call this refutation by means of reductio ad absurdum.

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Hud955 wrote:

I think of only two ways to counter the positive money argument.  The first would be to provide empirical evidence that this is not actual banking practice.  But where would that evidence come from?

Here’s what Glen Arnold (described as “a businessman, investor and a professor of investment at Salford University.”) says in an FT Guide to Financial Markets published earlier this year. After describing the classic way in which, with a required cash reserve, the banks collectively (but not one on its own) can use the money from an initial deposit to make loans many times that amount, through the loans, after being spent, being deposited in one or other bank, he comments:

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The central bank is the only player here which can create money out of thin air and pump it into the system if the system is at equilibrium.Thus, despite the commercial banks’ ability to create money on the way to equilibrium, there is a limit to the amount that the system can go up to, because for every dollar, pound, euro, etc created there has to be a fraction held as a cash reserve. It is the central bank which controls the total volume of monetary base (reserves at the central bank plus cash in circulation and at deposit-taking institutions) and so the broader aggregates of money have an upper limit. (p. 126)

Creationists oppose this “deposit multiplier” theory because they realise that it is based on each new loan being preceded by a new deposit.The sub-plot here is that there is a disagreement amongst economists about the way banks and the central bank (in the UK, the Bank of England) interact. Some say that commercial banks take the initiative and make loans without having the funding in the knowledge that the central bank will always create the funds needed to cover these loans (which still acknowledges that loans do need to be funded). Others challenge this view (such as Arnold above and Paul Krugman), pointing out that there are limits to the amount both an individual bank and the banking system can make.Positive Money relies on quotes from the first school of economists, especially as some of them do talk the language of “creating money from thin air”, even though none of them think that a single bank can do this on its own or that banks collectively can either without the intervention of the central bank (which, as a State institution) can create money out of thin air (if you want to put it that way).But surely the main argument against the Positive Money position is that banks do seek outside deposits and do borrow wholesale from the money market.? If they could create the money to lend from thin air why would they need to do this? For someone expressing the view that “banks do not (and never have) needed depositors for enable them to make loans” and “deposits play no part in that process” (his emphasis) on the Positive Money website and endorsed there as “an excellent comment” see this. Surely there is enough “empirical evidence” to show that this is not actual banking practice? 

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jondwhite wrote:

http://www.theecosocialist.com/1/post/2012/08/marx-meets-manga-japanese-publishing-sensation-now-available-in-english.html

The original Japanese manga was reviewed in the July 2009 Socialist Standard here (scroll down to the last item):http://www.worldsocialism.org/spgb/socialist-standard/2000s/2009/no-1259-july-2009/book-reviews

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Also Marx’s Das Kapital For Beginners, Michael Wayne. Illustrated by Sungyoon Choi

This is reviewed in the September Standard out tomorrow or Monday.

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Hud955 wrote:

What I doubt is that the whole banking system could keep up a massive overselling of loans indefinitely while maintaining  the system in balance.

Isn’t that the answer to your original question?Positive Money says that Northern Rock went bust because it expanded its loans faster than the other banks (so violating one of the assumptions of your ideal scenario). If you think that banks “create money” from thin air rather than from funds they already have this is the only logical explanation you can give. But since banks do make loans from funds they have it is perfectly possible for one bank to expand its loans faster than others, as long as it gets the extra funds. Northern Rock did so by borrowing heavily from the money market. It got into trouble when the interest rates at which it could borrow from here rose. What has been called “funding strains arising from reliance on short-term wholesale funds”. Positive Money of course deny that this could happen or would be a problem because they don’t accept that banks need funds to make loans.

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gnome wrote:

Here’s what that nice man Mr Graeber

If we are going to be all formal about this, shouldn’t that be “Dr Graeber”. Let’s hope he’s not aware that in our circles to refer to somebody as “Mr” is an insult !   

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Here’s a hint of what their line might be. From here (BD is Ben Dyson):

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AB: The left appear to be wilfully blind about this most important of issues; according to the Socialist Party of Great Britain (in an attack on the Social Credit proposals of Major Douglas): “[banks] are essentially only financial intermediaries, borrowing money at one rate of interest from people with cash to spare and lending this at a higher rate to those needing money to spend or invest, their profits coming from the difference between the two interest rates”. As you pointed out in your critique of Bob Diamond last year, this is not true. Worse than that, it is an outright lie, because now it is generally accepted that banks do create credit ex nihilo. Why do so-called socialist organisations peddle such lies and toe the banks’ line?BD: It’s the ideological attachment to getting rid of capitalism that blinds them to seeing how things really work.

Lies? Toeing the banks’ line? 

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SocialistPunk wrote:

I was wondering what others think of the party argument on human nature?It can be found on this site, under publications – pamphlets – “Are We Prisoners of Our Genes?”Seems spot on to me.

There’s also these two articles from the September 1969 Socialist Standard recently added to the Archives section here:http://www.worldsocialism.org/spgb/socialist-standard/1960s/1969/no-781-september-1969″Man: Ape is Wolf’s Clothing?” is a classic.

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You keep saying that the scheme you are thinking about (where banks all extend credit at the same rate) has nothing in common with what happens today but I think it has. See if you can spot the error in this explanation by Positive Money of why Northern Rock went bust. According to them, it was because it extended credit too much and too quickly and so ended up with a continuing negative balance when the clearings with the other banks were over.

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Hud955 wrote:

I’ve only ever heard one person claim that he would not be able to co-operate with others when asked this question.  The person was Keith Joseph, Maggie Thatcher’s idiotic ‘political philosophy’ guru.  It was during a public debate with the party (Hardy leading for us) in the 1970s. The response was a torrent of laughter from the audience – much to his chagrin.

By coincidence the tape of this debate has just been digitalised and so will soon appear on this site under Audio Visual. Be interesting to see if this incident is there (not sure if questions and discussion have been included).

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DJP wrote:

With regards to Marx and ‘the labour theory of value’. I’m beginning to suspect that this was first used by the neo-classical economists so that they could lump Marx, Ricardo and Smith together then attempt to trash Marx by critiquing Ricardo.

I think it is more likely that it was first used by Socialists to explain the exploitation of the working class. Although Marx’s theory of value is different from that of Adam Smith and Ricardo (I don’t think they used the term “labour theory of value” either), it clearly is a theory of value based on labour. So, to talk of Marx’s labour theory of value doesn’t seem out of place.

DJP wrote:

Just to be clear I’m not saying that Marx did not have a theory of value, but when it is (mis)understood as a theory of the prices of individual commodities (i.e price=value) it doesn’t add up properly.

I agree that Marx’s theory of value was not a theory of price (as were Smith’s and Ricardo’s), as misunderstood by some of his supporters as well as by his opponents.

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Socialist Party Head Office wrote:

Among other things Lanchester claims that Marx never used the word “capitalism”:

I’m not sure how significant this is. After all, language like everything else changes, but I suppose it could tell us what Marx would have meant by the word had he used it rather than the term he did use, i.e. the capitalist mode of production. In other words, capitalism is a way of producing things, based, as he explained, on the production of commodities by wage-labour.

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There were 30 or so people present at the meeting including 9 members. The CPGB people argued that the real Lenin wasn’t the Lenin of What Is To Be Done nor the post-1917 Lenin (when he advocated a top-down party of professional revolutionaries to lead the working class) but the Lenin of 1905-1914 who was a leftwing Social Democrat whose hero was Kautsky and whose model was the German Social Democratic Party (a bit like Martov in fact, though they didn’t draw this conclusion!). We didn’t buy that one. Nor do most others calling themselves “Leninists” (as they do).We also discovered that they don’t think that Russia was capitalist (at least not after 1929), though it wasn’t clear what they did think it was. A return meeting might take place at which we can explain that commodity-production and wage-labour were never at any time abolished in Russia and that Lenin himself pointed out that capitalism under state control was the only possible economic course for Russia (as Martov had said all along).The meeting was recorded and presumably will be made available in due course for anyone to listen to.

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I suppose your ideal system could work, but it assumes two things:1. Even if a bank does make a loan without having the money to cover it, it is expecting to get this by the end of the day. But this money would be coming out of payments due to it from other banks. So the loan would be being backed by funds the bank had (or got the same day).2. That, when it comes to settlements between banks at the end of the day, no bank finds itself in the red (surely this is highly unlikely except as an accident). So unlikely in fact that this is why the Bank of England is involved as a backstop in this process supplying any missing liquidity, as explained here on the Bank of England’s website:http://www.bankofengland.co.uk/markets/Pages/paymentsystems/default.aspxInsofar as any money is being created “out of nothing” it is being done by the Bank of England not the commercial bank.

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But, in your example, the banks are not creating loans “out of nothing” but out of deposits (real deposits by people with money, not “deposits” they open for borrowers). The process can only keep going if deposits do. (And every loan does not create a deposit: money loaned by one bank may find its way into another bank, but there’s no guarantee that all of it will).By co-incidence I’ve been having a e-mail exchange with someone who puts a far more subtle theory of banks creating money “out of nothing” which does have something in common with your scenario. Not the one we were entertained to at the meeting with Zeitgeist which claims that a single bank can create money to lend by a mere stroke of the pen, but one involving the whole banking system including the Bank of England. This is how he put it:

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When the commercial bank makes an advance, it simultaneously creates a deposit: i.e.money is put in the borrower’s account. That deposit is then used by the recipient of the advance to buy things: it is money. Of course, when the recipient of the advance uses it to buy things from a customer of another bank, the bank that created the advance has to settle with the other bank by using with a claim on the central bank – that is how banks settle with one another. So it must either borrow from the central bank or own reserves at the bank (at present, the banks own vast reserves at the central bank, because of QE. But that’s not usual). Provided the commercial bank is deemed solvent (and often even when it is not), the central bank will always lend it the needed central bank money, at its official rate. So the central bank will provide the needed backing to the money created by the commercial bank. In this way, the money supply grows and normally net transfers of reserves between banks are very small, though that changes of course with a run on one of them.Now suppose the central bank thinks the money supply is growing too fast, then it will raise its interest rate. That will then become the rate charged by the bank on its loans (it doesn’t want to charge less than it pays the central bank on money it needs to borrow). That will reduce the number of willing borrowers from the bank and the growth of the money supply will slow.The answer then is that commercial banks can create money out of nothing, because the central bank will always lend a solvent bank the CB money it needs to convert its liabilities into CB money, at par. The commercial bank tail wags the CB dog, so to speak. They do not act on their own. They act in conjunction with the CB.Thus, all money in a fiat money system is created out of nothing. Nothing backs it. It is the joint product of the commercial banks and the central bank, acting together.

Since nobody (not even us) denies that a central bank can create money “out of nothing” (that’s what “fiat money” is) this theory is not necessarily based on a silly fallacy. It does not claim that a single bank on its own can create money out of nothing. What it is saying is that a bank (in the system) can risk making a loan without first having the money because it knows that at the end of the day (literally, when balances between banks are cleared) it can get the money from the central bank. And of course it’s the central bank that’s doing the creating of any money out of nothing. Also, the commercial banks’ loans are in fact covered by something (a loan from the central bank).This said, this model is challenged by other economists, notably Paul Krugman who deny that this is the way the banking system works and that the commercial bank tail does or could wag the central bank dog. This is an argument about the best way to control banking lending (via interest rates or via central bank controls) which, as socialists, we needn’t get into. Personally, I’m inclined to agree that there are limits to the system working in the way described above.The other objection to this theory is the language in which it is expressed. By talking about “banks” being able to create money out of nothing this allows the real banking cranks to use this in support of their nonsensical theory that a single bank can do this on its own.

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Socialist Party Head Office wrote:

Reply received from David Graeber:Dear editors:A far larger percentage of Wall Street’s profits is now derived from the financial sector than from industry or commerce – that is, from the exploitation of wage laborers. Where does that profit really come from? It would be very interesting to know what percent of the average (say) American’s income is now directly expropriated by the FIRE [Finance, Insurance, Real Estate] sector, compared to what might be said to be extracted indirectly, through the wage.

The whole letter with a reply from the editors will be published in the October Socialist Standard, but this is by far the weakest part of what he has to be say. He seems to be suggesting that the profits of the financial sector might come from interest payments by workers on mortgages and other loans. This sounds a bit like the “secondary exploitation” discussed in another thread here (the one on Untermann), only he seems to think that it is primary. Otherwise why does he say that exploitation through working for wages is “indirect”? No wonder he is so popular in currency crank circles and others who think that the banks are the main villains of the piece.I would have thought that the source of all profit is obvious: the surplus value produced by workers in the productive sector of the economy. This includes the profits of the financial sector. How could it be otherwise when wealth can only be produced by work transforming materials that originally came from nature into something useful and the whole financial sector doesn’t produce a single item of wealth?

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