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ALB, I really do not understand what you are saying in 258804. It makes no sense.
Firstly i do not accept the banks as intermediaries theory but your quote from the bank of England i do accept and think everybody does. Of course banks earn money from charging more for loans they make than they are charge on loans they receive. This is obvious and nothing to do wtih the idea that banks loan out deposits they received which is what i thought the intermediary theory is.Then. you say that “… a bank’s business model would be that a bank creates the money it lends and uses the interest to cover its operating costs and to make profits” is incorrect because this is banks being new money creators.
I think you have got confused somewhere and if something was written incorrectly please do change it.
Lastly let me quote from the same Bank of England link you used but which i do agree with:
“This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.”
This has been an interesting discussion as to how banks work that has pushed me to finding out more about bank systems, trouble is that the various websites are not necessarily clear nor do they say the same thing and i do not think that some of the SPGB contributors here have not bothered to investigate the details and do little more than make up their own assertions about how accounting works. So I remain unconvinced by the intermediary theory.
No currencies in the world are exchangeable for gold. There is no real money in the economy any more. All money is either electronic money or well as notes and coins and they are all simply tokens of exchange with no real value.
Most currencies use just fiat money but there is an increasing creation of cryptocurrencies or Central Bank Digital Currencies.
What is absolutely clear is that all electronic money is created on computers, there is no other way possible – the issue here is more about who creates this money, banks or governments.
To be honest I can find not clear history of money that identifies the proportion of whether governments or banks created it. Of existing money in the UK, 3% is cash, 20% is electronic central bank reserves (both created by the government) and the rest is electronic money. It may well be that over time the Bank of England has destroyed the previous cash and replaced it by electronic money but the economy has more than tripled in size since the 1960s when cash still dominated so new electronic money has clearly had to be created.
It is clear that commercial banks do create electronic money when they make loans and this fact is irrespective of how much cover you believe is held against such loans. These loans and hence the money involved are deleted when the loans are repaid. So this means that at any given time, there is a quantity of loans and hence of electronic money circulating in the economy in a cycle of creation and deletion.
I accept that loans made by banks need to be limited in some way, but i can find no ‘rules’ that loans have to be the same or less than deposits and loans from other banks. In fact the evidence I have found is that the proportions do vary but this is overseen by banks to ensure banks do not lend out too much – but this is related to whether they have sufficient capital holding rather than deposits to justify the level of loans.
Bank deposits cannot be used to pay out loans, if there is a rule, then this is an accounting rule that banks must abide by. Bank deposits are IOUs and can only paid out to the depositors themselves. Loans made and deposits received are separate records that are kept permanently separated in the banks’ Balance Sheet. Runs happen when trust in the banks falls and the banks do not have enough cash to repay depositors.
Also bank losses similarly are not paid out of deposits but out of its capital holdings. A bank will go bankrupt when the capacity of its capital to cover losses is insufficient this may be too much risk taking or failure to make a profit. If a bank goes bankrupt, it still owes the depositors the value of their accounts even if it cannot pay them
Banks can go bankrupt for a range of reasons eg due to market changes, investments failings, loans not repaid, risk taking and not just because they have made too many loans as some are have implied. A bank will go bankrupt when the capacity of its capital holdings is insufficient to cover losses.
Thanks for the responses folks
Im glad to see that ALB is now agreeing with me about the labour theory of value. As all money, whether cash coin or electronic, is token money however we think it is created, whether by government or banks, it has no intrinsic value therefore the argument that money created by banks that is presented by SPGB is clearly invalid. Glad we have that settled as I think this is an important point. That all money is token money today has significant implications for analysing how the money system works.
I think ALB argues that government create money not banks but this is not correct. The Bank of England only creates the notes/coins and the central bank reserves which accounts for about 20% of the money in the UK. Governments only create money by purchasing bonds that are issued by banks and financial institutions. This is also used to add money into the central bank reserves which acts as a back up to allow commercial banks to issue more loans. The reserves however are only used for inter-bank settlements and enable banks to create more loans by acting as a back up for those increased settlements.. All these transaction are electronic money though so again it is a creation of new money whether by banks or government; the bonds issued act as IOUs
The covering of outgoing loans issued by banks are covered by borrowing money from banks, money markets as discussed but these are all new entries on the bank balance sheets and they exist alongside loans the banks issue. They are separate entities. They do not means that banks do not create money when they make loans.
Young Master Sweet is correct in his assessment that token money is backed up by the force of the state and is correct in recognising that banks are limited in their transactions by the need to ensure that loans are capable of being settled appropriately by the borrower and by the need to make profits but also by government rules for the administration of banks and the financial sector. As Robbo203 says these rules also exist to prevent bank runs and also ensure the viability of the financial system; something essential to keep production and the economy as a whole running.
So banks have to aim at behaving legally and in accordance with financial rules just like businesses and directors have rules about their performance and my argument is that banks creating loans is within those rules. Citizen of the World and Bijou Drains fail to recognise that these rules exist and makes some ridiculous assertions that my idea is that banks can loan out or make money willy-nilly including to themselves and that governments can do the same as ways to prevent them going bankrupt etc. Perhaps reading what i have actually said in my book and in the discussions properly might be of help.
“If we can agree on these three points then we can move on to discuss the real point at issue — when a bank makes a loan, is it creating purchasing power (in the form of electronic token money) that didn’t exist before or is it recycling already existing purchasing power? Or, if you like, can excessive bank lending cause a depreciation of the currency leading to a rise in general price level?”
As i say i dont disagree that excessive lending can cause problems for the economy but is that the real issue.
The point i made in my first contribution here is more important i think. When 97% of all money is electronic, then how else can it all have been created but by computer. It must have been created by the computers of the banking system whether by commercial banks or the Bank of England and each ‘creation’ means more electronic money exists than previously
1. I think ALB confuses money and value. If all money is token as ALB agrees, then there is no value in it, it is just an exchange token. If money is just a token then when banks create money, as i argue, they do not create value they only create exchange tokens, as you indeed say only labour power can create value. This must surely be the same for your interpretation of money. I think this is an important point to be clarified as i do not think you are applying the labour theory of value correctly which is probably why you argue for the intermediary theory.
2. Also i accept that banks borrow money at lower interest rates than they lend money. This is clear and i am not arguing otherwise. Remember also that generally speaking deposits do not receive an interest payment. I do not see this an significant element of either theory, it is just one way banks make profits.
LDR simply suggests the loans make do not always equal deposits received and i note yr quote only says ‘the bank may need to borrow money’ suggesting it is not essential as you imply however.
3. As you say it is only a claim that ‘the bank cannot lend more money than it already has or can get quickly’. This is confusing statement as if it needs to ‘get it quickly’, then it clearly must have loaned out more than it has. It de facto created electronic money, an electronic exchange token. I use evidence in my book that the Federal Reserve in America lent out money to bailout a firm and had not source for it. There are other examples which is did not use where people working in banks admit they lend out money without making checks on what is available. If the bank does cover it by taking in loans, then it is done in arrears.
I think this point is precisely the point that when banks make loans they create purchasing power. I agree that there is oversight of this process by the banks themselves and governments and I agree it would be disruptive if too many loans were created relative to the overall economy. Isnt this in essence what happened in 2008 where debts were trading on insufficient basis
I would like to add that although i agree this discussion is not the most critical issue and certainly not a discussion between a marxist and a mon-marxist viewpoint, I do think that money and the way it is used today is an important, everyday feature of the capitalist system and when the working class takes power it will need to attack and remove quite systemically the whole financial system. The focus of my book was therefore the absurdity and unreliability of how money is used in today’s capitalist economy where the whole system is based on a belief that the state generates and maintains, and not on any real value.
I have replied to the SPGB criticisms of my book ‘Time to get rid of Money’ and ALB asked me to continue my response on this thread. I want to respond to some specific points of criticism made about the so called magic money theory in the recent review and editorial
Firstly, that the idea of banks creating money contradicts the labour theory of value. I do not understand this argument at all as the labour theory of value relates the value of a commodity to the labour hours in its production and the monetary value ascribed to it relates to the current cost of labour, wage increases/decreases inflation, currency used, supply and demand and possibly other factors too. The monetary value therefore can vary and money is there as an exchange token to be able to the equate labour value of differing products.
In the early days of capitalism, money would have its own value from the gold, silver and copper content but this type of money has been replaced over the years so we now all money is either fiat money as cash or electronic money ( bitcoins are a different creature and not part of banking system as yet) and these 2 forms of money are pure tokens of exchange with no intrinsic value so i do not see how they can subvert the labour theory of value.
Amongst others, ALB suggests incorrectly in my view that : The thin-air theory posits that banks can create money — and so what it reflects and measures (value) — other than by labour being applied in a capitalist context to materials that originally came from nature. At most, all that banks would create would be extra tokens for money, which would only have the effect of devaluing the money unit as a standard of price (inflation). But they can’t even to do that. Only the state can.
But the creation of electronic money by the banks is clearly not the creation of value but precisely that creation of exchange tokens that is the whole point. No money today has any value in itself. This does not devalue money unless far too many loans is created which is not the norm as this is overseen by the banks and government. Even The Magic Money Myth is forced to admit: If you define bank loans … as money, then, by definition, banks “create money” whenever they make a loan; they are one and the same thing. but that is all I am arguing even if the book suggests that creating a bank loan instead ‘means creating fiat money’ – which it of course does not. Normal practice is that bank loans are of course electronic money and as ALB says: cash is only marginally used for this today. Most payments to and from banks are made electronically.
So secondly we must accept that today’s money is 3% fiat money and 97% electronic money and all bank accounts all transaction by banks eg government and bank, loans accounts, bank transfers, interbank settlements are made using electronic money. In all these accounts in which money is stored and from which these transactions are conducted all records are electronic too. Electronic accounts mean that the accounts records can only created by computer, stored on a computer and transferred by computer. There is no ‘real money’ in the system outside of fiat money and electronic money. Notes and Coins are only held in the commercial bank as stocks for the cash points and as reserves in case of runs on the bank and to support the needs of individuals for withdrawals but also as stocks.
In my book i underestimated the extent to which banks cover loans but even so when they do cover loans it is only going to by by an account containing electronic money therefore any suggestions made about loans being covered by accounts with some form of actual money or cash is completely wrong.
Thirdly here are various points to consider regarding the actual double entries of a loan onto a bank’s accounts. Even if the banks have to cover the amount they loans they make by funds contained in other accounts, they have to keep these 2 accounts separate. It is argued that deposits are used to make loans with but on the banks balance sheet these have to be kept separate. Indeed it is the case that deposits are normally used to earn interest from short term investments like the money market rather than be utilised for loans despite what is suggested by the SPGB book, the Magic Money Myth.
One important way the bank has to analyse its loan making is the Loan to Deposit Ratio which may vary between about 130% and 80% so it is not always the case that loans are less or equal to deposits. This ratio means that loans made and deposits received by the bank must be kept in separate accounts for recording purposes, they do not pay for one another. This need to keep accounts separate is why the Bank of England argues that banks create money as the loans they create are recorded in additional accounts recording whoever is the borrowing the loan and not deducted from the deposit accounts. Loans made by the bank therefore exists in addition to consumer and business deposits in banks.
When a loan is created by a bank, one side of the double entry is an asset ie a loan to be repaid, and the other is a liability account, a ‘Customer Demand Deposit’ account, from which the borrower is paid. This payment of this amount to the borrower is not made in cash, but is normally transferred electronically to the customer and also posted to the interbank settlement system which settles electronically at the end of the day. The loan remains as an asset for the bank until the loan is repaid and at that point both sides of the double entry are cancelled out and all that remains in circulation s the interest received by the bank.
So electronic money is created when a loan is made but importantly it is also deleted when the loan is repaid. This means that talk of devaluation of money is not relevant
Lastly a technical issue regarding the process involved in transferring money from one account to another. I have asked 2 computer specialists on this and both were in agreement that the transfer on computers is conducted by deleting the original amounts of money in an account and creating the same figures in a new account. It is not that a package of money is handed from one account to another as though they are some form bitcoins, it is a new creation in the new account. In the end the same process of money creation by loan is repeating with a transfer to a new accounts.
It seems to me these points are fundamental to an accurate understanding of money creation not the confused arguments used by SPGB and others about money being transferred from account to account and somehow being covered by accounts that contain ‘real money’. This is something that just does not exist today.
ajjI am listening to the argument that when the working class moves then the state institutions cannot fight back. As is argued, these institutions are relationships not solid objects. Break those relationships and they don’t work. In the background I am pondering the relevance and value of these arguments.However if I may respond first to some of the point you make in the last contribution because when I raise the issue of what workers councils can do in a revolutionary situation you respond by point out problems in trade union, the NUM, the RNLI and charities in general, local government institutions and parliament within capitalismThese are state capitalist institutions (apart from the charities which are capitalist institutions) run with capitalist norms and goals. I think that is significant. They are not ‘natural’ institutions that appear in all societies and can be adapted at will. These institutions are all products of capitalist society Feudal society had kings and queens and layers of aristocracy all of which were supported by workers (serfs as they were called then). Lets go back further to slave society. It was a society in which workers achieved massive amazing feats of construction.. Maybe they get adapted somewhat to work in other class societies but the features of these institutions are specific to their mode of production and can only be used as suchPerhaps I am exaggerating again but I don’t know how to argue this. You say don’t reinvent the wheel, but I think socialism requires very different organisations to capitalist one. Yes let’s use the buildings and the desks and chairs, lets use computers and the internet but don’t expect workers to keep the same relationships between people. I don’t believe TUs and local councils and parliament with all their paid officers, managers, chairman, boards, executtive committees, permanent ctte members and so on and so on, will play any part in genuinely socialist society.I absolutely agree with you that : “One thing (the workers) don't require (being) told is our capability and capacity to organise society…the working class problem is that they do it for our ruling class rather than for ourselves. “So why say keep using the same institutions that keep them held down. When workers become conscious and radical then they build new organisations not ones that politicos like us tell them to use or that capitalist have oppressed them with. Perhaps you believe me but when I say that workers councils are products of struggle not me – I don’t expect or need to tell workers to use them. Workers councils are simple structures based in amongst the workers themselves not capitalist institutions which tell them what to do. I do not therefore accept that TUs, charities, local government, parliament are based in the working class simply because they have workers in them. You could say the same about Ford or IBM too – why not just use them as they are. Let me pick on poor old parliament again. Parliament is an assembly but it is an organization with the key features of periodic voting of representatives for large numbers of people, it is comprised on political parties that represent specific policies/groups/vested interests and from it a government is selected and sits above it. This structure will not, sorry, I hope not exist in socialism. We don’t know how socialism will be organised in detail really, but I would suggest that assemblies will be needed but that they will use ‘delegates recallable at any time’. This would mean there would have to be a long chain (network, structure) of assemblies with different responsibilities – you cant call that structure a parliament nor a local government either.Socialism is a revolution not a reform of capitalist institutions.
ALB I do think you should have read the link to Rosa Luxemburg which you suggest refutes my argument – Hardly. One paragraph says: ‘In order to do this, is a majority in the National Assembly necessary? Only those who subscribe to parliamentary cretinism, who would decide the revolution and socialism with parliamentary majorities, believe this. Not the parliamentary majority in the National Assembly, but the proletarian mass outside, in the factories and on the streets, will decide the fate of the National Assembly.”Do you agree with this then?Yes I agree the approach to the use of parliament was different in the 19th century certainly to what I would argue now. The problem of the use of parliament is after all one reason why the SPGB left social democracy if you remember.I do agree that there needs to be a balance between the discussion of history and current events. I don’t think you have not found that yet though. First you criticize me for too much history about the workers councils in Russia in 1905 and 1917 and Germany 1918 (which I did mention briefly) as well. Then you come up with other historical references to criticize me for using too much history and NOW you demand that I go back over ‘when and where has this happened’ which is precisely what I discussed in the first place.Are you now agreeing that you should have read/listened to my presentation?
It seems to me a bit sad that you resort to all these strange distortions of arguments put before you and chase the old Aunt Sallyies that you prefer to dismiss and mock.. Proletarian makes valid points about how workers councils in a revolutionary situation yet you mock the idea that workers councils can run an enterprise within capitalism. He makes valid points about the emergence of learning from economic struggles but you prefer not to reason with that or provide alternate sources of learning.On my contribution earlier you ignore the history I suggest is relevant and complain about it, then you raise all sorts of historical points against, some relevant some irrelevant. The quote from Luxemburg is certainly a problem for me but reading the chapter, I do think she is here arguing against the anarchists that their vision of revolutionary activity was shown to be wrong by events in 1905? It was written at the end of a period when all of social democracy was in favour or using parliament as a strategy for propaganda – it was the reformists that were starting to seek power through elections! Thank you anyway for the reminder about the Mass Strike booklet that Luxemburg wrote – do please read the rest of it because I would argue that it entirely supports the arguments I am putting forward. For example she goes on to say: “But in order to be able to overthrow it, the proletariat requires a high degree of political education, of class-consciousness and organisation. All these conditions cannot be fulfilled by pamphlets and leaflets, but only by the living political school, by the fight and in the fight, in the continuous course of the revolution.”Let me add here that I think Workers Councils are a product of the period of mass strike – genuine workers councils (now that’s another topic to take up) appear in revolution situations and there is real evidence that they happened, were run by workers not by the party, were capable of taking over society and still representing workers in a way that parliament never can. They don’t run capitalist enterprise and they don’t take over and run the capitalist state. When run by class conscious workers, they showed the capacity to enable workers themselves to run society according to socialist principles ie ignoring money, costs, profits and focusing instead on need, on equality and recallable delegates. This is Socialism in embryo appearing in practice, surely you can appreciate the importance of that?
I am actually still learning about the SPGB’s view of the world and do find that ALB is diminishing the agreements or the good things in the discussion in BirminghamI felt there did end up establishing a good deal of agreement on the role of militants/political party for example despite the bit you focus on when there were some sharp accusations about Leninism. I note also that you keep ignoring the emphasis we all put on direct democrary and on the use of delegates recallable at any time. Surely this is a lesson from workers councils themselves – you certainly didn’t learn that from parliament!Im disappointed that you dismiss the value of history – something I wasn’t expecting from socialists. The discussion itself only spent maybe 45 minutes talking such things and nobody who took part in that would suggest that that is all that needs discussing. Its pretty sad if you cant cope with that in a discussion. It was a after all a meeting on the role of the workers councils (a title that was the SPGB's suggestion) and it would be absurd to do that without looking at actual examples. Your attitude however does perhaps explain how the SPGB can suggest that parliament can be used to overpower the capitalist class – you don’t care about history and you don’t need historical examples to believe something to be possible!! Ah – the role of faith in history!! Yes conditions now are very different to the end of the first world war, so, at least ask what lessons can be learnt and how they apply now. Don’t just mock the idea.I keep being surprised the SPGB feels hard done by the suggestion that you dismiss economic struggles. Its clear from the SPGBs (ALB?) presentation that you see workers councils ‘merely’ as tools of economic management and to quote AJ earlier in this thread: “workers’ movement that fights for economic gains, yes! A socialist party that fight for the emancipation of the working class, even better!”Don’t think there is any doubt is there? Now clearly I know that you are on the side of the workers in economic and limited struggles, nobody is suggesting otherwise. Such struggles are not struggles for socialism ok but at certain times in history, workers learn from then and as they learn, the struggles become political and become confrontations with the capitalist state. I want therefore to emphasise the link between economic and political struggles within capitalism. Whilst I think we can all say, that limited economic struggles are not enough and that only political struggles of class conscious workers can lead to socialism. The question here is how what is the relationship of one to the other and I would like to hear how the SPGB explains this.The value of looking at the history of workers councils is in the way they manage to combine the economic and political and as an organisational form allow workers as a class to manage those struggles. With such organisations emerging in periods of heightened class struggles, the workers don’t need parliament and political parties to take control – hopefully wont let them – they can do it themselves. If they don’t emerge from struggles, then I am wrong but at some point if workers don’t vote for the SPGB (there aren’t any other genuine socialists in parliament after all) then you will have to admit that you are wrong too.
