Cooking the Books 2: Brown re-invents the wheel
Gordon Brown has written a book. Not gossip about what went on between him and Tony Blair but about the Crash of 2008 and what he thinks should be done to avoid another one. Called ,Beyond the Crash, the subtitle of the first part could well have been “How I saved the world from financial meltdown.”
He writes that by 26-27 September “the choice was clear: either we had to step in and accept all the associated risks, or simply leave the free-market system to collapse”:
“We were facing a situation that risked becoming worse than 1929. No one trusted anyone in the banking system, and people were predicting not a recession but a depression. People were panicking, asking which would be the next bank to collapse. The financial system was looking over an abyss.”
Brown puffs himself for discovering that the way to end a financial panic in which banks and other financial institutions are afraid to lend to each other is for the government to make more money available. As if governments hadn’t done this in the past, even in Marx’s day.
In Volume III of Capital, Marx quoted extensively from the parliamentary reports into the financial panics which occurred in 1847 and 1857. This from the Report on the Commercial Distress, 1847-8:
“[T]he bankers and others finding that they would not rely with the same degree of confidence that they had previously done upon turning their bills and other money securities into bank-notes, for the purpose of meeting their engagements, still further curtailed their facilities, and in many cases refused them altogether; they locked up their bank-notes, in many instances to meet their own engagements; they were afraid of parting with them… The alarm and confusion were increased daily; and unless Lord John Russell…had issued the letter to the Bank…universal bankruptcy would have been the issue.”
Lord John Russell was the Prime Minister and his letter to the Bank of England suspended the Bank Charter Act of 1844. Engels explained in a footnote what this meant:
“The suspension of the Bank Act of 1844 permits the Bank to issue any quantity of bank-notes regardless of the gold reserve backing in its possession; thus, to create an arbitrary quantity of fictitious paper money-capital, and to use it for the purpose of making loans to banks, exchange brokers, and through them to commerce.”
Marx wrote of “a point where either the entire industrial world must go to pieces, or else the Bank Act”, and went on:
“Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis.”
So Brown did nothing extraordinary. He merely did what the capitalist class expect their government to do when there’s a financial panic that threatens to seize up commerce and production – make more money available to the banks. As in similar circumstances in the past, this stopped the immediate financial panic. But it didn’t stop the coming slump, as GNP fell from that quarter on and is nowhere near its pre-crisis level even today.
Lord John Russell was more modest. He didn’t write a book about how in 1847 he had saved the world from universal bankruptcy.