It is impossible to understand the way in which the Capitalist system works without some knowledge of basic Marxian economics. Such knowledge is invaluable to the Socialist because he can use it to expose the myth that the capitalist is the lynch-pin of society and without him, civilization would perish.
The Marxist theory of value is based upon the analysis of the commodity. Marx describes the commodity as being the “cell form” of capitalist society, and that wealth within capitalism presents itself as a vast accumulation of commodities.
First and foremost, a commodity is a product of human labour under definite social conditions of production which can only apply to capitalist society. It is an article produced for sale or exchange with a view to profit. It contains two diametrical opposites—Use-Value and Exchange-Value.
Use-Value is the utility of an article and is something concrete. Food can be eaten. Homes can be lived in. Clothes can be worn. This is self-apparent. But as we Socialists are well aware, the production of use-values is not the prime function of capitalist society. That function is the production of Exchange-Value.
Exchange-Value or price is the proportion in which commodities exchange with each other. A thing possesses exchange-value only to the person who has no use for it and loses its exchange value when its use-value asserts itself or is eventually lost in consumption.
Commodity production is peculiar to capitalist society. When we talk about commodity production we mean a condition where the dominant means and almost the entire means of social production are devoted to the production of articles for sale and exchange. Commodities have been produced in past societies before capitalism, but their production was confined to the handicraftsmen or to incidental surpluses. Their production was never a mass social process as it is today. It is only in capitalist society that commodity production becomes the prevailing mode of production.
Use-value has nothing to do with whether or not an object or service is useful to humanity. The whole economy of capitalism has a multitude of products and services which are incontestably useless, and indeed harmful. Nuclear weapons; military bases; equipment for armies; banking, insurance and the whole apparatus of wholesale and retail. The institutions and services, however, are useful to capitalism and use-value in this context is related to the needs of capitalism and whatever these needs may be from time to time.
The most practical way to find out whether an article or service is useful or not is when it is offered for sale. If no-one wants it, then it is socially useless whatever its virtues in other respects. Production of that particular commodity or service would then cease as its reproduction would be unnecessary. To put it another way, the production of any commodity or group of commodities which cannot be marketed or sold is useless by capitalist standards. The fact that a social need may exist for unwanted commodities has nothing to do with the case. There is no morality in capitalist economics.
Some things which are bought and sold are not commodities. Bearing in mind that (a) a commodity must contain a certain amount of human labour and (b) that it must be capable of being reproduced we find that there are a number of instances where this does not apply.
Land (excluding buildings) for example contains no value; there is no labour involved in its production. It cannot be reproduced. Nevertheless, land is bought and sold; it has a price, and that price is determined by competition between buyers. A woman’s virtue is not a commodity but we know that virtue may be sold by prostitution. Likewise with a man’s character. You can buy a man’s character by bribing him. What happens in effect is that these non-commodities assume the commodity form. They take on an abstract exchange-value, and successfully masquerade as the real thing. Likewise with works of art.
The value and consequently the price of a commodity is determined by the amount of social labour spent on its production. Social labour includes the materials used in the productive process and is measured in time.
There is one important qualification and that is that the labour must be socially necessary. If this were not the case, the more inefficient and time-wasting processes would produce the most value, which is nonsense. Socially necessary labour means the average time that is spent in any field of production or distribution in the manufacture of articles or services. For example, if crude oil was shipped from Europe to the Middle East, the cost of society’s time, including the element of wear and tear on the ship etc., could not be added to the product because this would have been unnecessary labour (as crude oil is found in abundance in the Middle East). Again, if a group of capitalists decided to erect a factory on the Island of Tristan de Cunha or some other remote spot, say for the manufacture of textiles, the cost of the textiles would not have a greater value on account of the cost of shipment, transport and other charges, for the obvious reason that the areas for producing textiles are mainly concentrated in industrial areas with all the attendant services of railways, roads etc. Again (although the example may be open to question due to the capitalist energy crisis), if a firm decided to build Hansom cabs to be drawn by horses to replace taxi-cabs, the social time spent on these would be quite valueless, as this commodity (transport) by horse-drawn carriage is obsolete and is not used by society outside of its novelty value which is minute.
Socially necessary labour must take into consideration the things which society now requires, and the average methods through which they can be obtained. This average working raises another question, and that is whether by using the latest machinery the value of the product is less than that of similar products produced by relatively old machinery, because the time spent on the former is naturally less. The answer is that we have to take an average throughout the whole field of this production in particular. In the coal-mining industry throughout the world, methods of extracting coal vary from working narrow seams to exploiting huge faces by coal-cutting machinery. The hand-cut coal is not more valuable, and in any case the entire production of coal cannot be carried out by hand. Neither can it be entirely carried out by machinery; therefore the average time is proportioned between the two methods. Again, if we take ten firms with varying degrees of efficiency say from 1-10, the average would be 5 and this would represent the social necessary labour time. Socially necessary labour is the substance of value, or conversely value has for its substance embodied or congealed labour.
Articles are exchanged because they are different. This means that they possess a different kind of useful labour. It is the quality of the labour which makes them different. The labour of the bricklayer is different to that of the fitter, as is the labour of the pattern-maker to the coal miner’s. Consequently, the products are different. Identical goods or services are not exchanged for each other as there would be no useful purpose in doing this. Coal is not exchanged for coal. In a world of commodity production, this qualitative difference between definite types of useful labour develops into a complex system. A social division of labour. These useful forms of labour are carried on independently by individual producers working on their own account.
Human labour, in addition to producing Use-Values also produces value — It has a double function. The commodity is the depository of Value. Whilst everyone can see, eat or feel the Use-Value of a commodity, i.e. its material side, it seems impossible to grasp its Value. It is the very opposite of its Use -Value. Use -Value is something which can be experienced but Value is an abstract quality. However, we know that all commodities have one thing in common; they are products of human labour, and it is this which gives them their Value, and consequently their social reality. It is only during the social process of exchange that Value will declare its origin, that is, when commodities containing different forms of human labour confront each other on the market. This is nothing other than the social relation of commodity to commodity.
It follows then that value is a social relation not between persons but between their products. It is a relation between objects which contain an identical social substance, human labour. The multifarious sub-divisions of labour are directed entirely to the exchange of commodities, and there is no direct relation of social production to social producer.
The capitalist system does not produce for consumption. Its function is to produce surplus value, out of which the capitalists — industrialists, banks, landlords — take their profits. The sole agency through which Value comes into existence is the international working class (including Russian and Chinese who work within State capitalism). They allow the capitalist not only to take the fruit of this labour, but also to dictate the conditions under which they produce, no matter how soul-destroying and tedious. “Allow” is the operative word, because the capitalist system could not survive against the wishes of workers collectively opposed to it.
The worker’s access to his own product is through the wage packet. He obtains his means of subsistence in the form of commodities — articles produced for sale or exchange with a view to profit. This peculiar way of getting his livelihood, where there is no direct relation between production and consumption, leads to a situation where workers tend to avoid thinking about the overall purpose of production, and lend their thinking and activity to engaging in the wages struggle, which from their point of view is at least simple and uncomplicated. The capitalist is the enemy to be attacked but, as we know only too well, only on the wages front. It is the Socialist who tries to show the real significance of the class struggle by refusing to be dominated by the narrow Trade-Union issue, and demands that the capitalist be stripped of the means of production and that these become social property.
Because capitalism produces wealth in the form of commodities, the relations between the various producers are not direct. That is to say that there is no conscious co-ordination or specific purpose between the various branches of production and distribution. Everything appears to happen spontaneously or accidentally; everything has to be done for an anonymous market. Nobody has any direct control over what will be produced, when, or in what quantity. In earlier forms of society there was social co-ordination and planning of production, even though this was on a simple scale due to the undeveloped nature of the productive forces. The food supply was obtained through hunting, fishing, fruit-gathering, etc. Some members of the community made cloth, others pottery, weapons, etc. This simple division of labour produced simple methods of distribution, and both were integrated with the needs of the community and under its direct control.
Today we have a fantastic situation where the only laws governing production are the laws of exchange. Not having any direct interest in production as such, but only in the production of Value and the exchange of their own commodity — labour-power — the working class are unable to comprehend the social powers of production. The real world for them is the world of exchange. They wish to live in a situation where the hazards of capitalism can be tolerated, and where they can sell their lives in instalments of their labour-power, which will be exchanged ultimately with instalments of fellow-workers’ labour- power. However, capitalism will not let the worker live quietly or stabilize his slavery. It steps up the pressure, and eventually forces him into a situation where he has to learn something new in order to escape from the pressure-cooker.
The capitalist class, including their governments, do not control capitalism, do not control production, nor can they anticipate demand. Each capitalist carries on independently. His knowledge of the market is restricted because he cannot know how much will be produced and sold from time to time. Competition between capitalists creates conflicting interests, and these are a barrier to balanced social production. Most capitalists will back their experience, or engage in market research, in the hope of foreseeing demand. However, there is always some unforeseen factor. For example, few capitalists in Europe could foresee the action by Arab capitalists which was taken strictly in line with economic interests, and in opposition to the interests of other world capitalists. This was inevitable: in a capitalist society you cannot expect the Arabs to behave in a non-capitalist way. Our Alice-in-Wonderland economists are now desperately trying to explain away the advice they gave to their masters on the imminent boom which turned out to be a slump. The whole picture of capitalist production is one of social anarchy. This anarchy is the direct result of social production being appropriated by the capitalist class, resulting in the antagonism between producers and possessors — the class struggle.
Some things which are bought and sold are not commodities. Bearing in mind that (a) a commodity must contain a certain amount of human labour and (b) that it must be capable of being reproduced we find that there are a number of instances where this does not apply.
We have the absurd situation produced by the relation of Value where the products, in effect, govern the producer. The Socialist proposes that the social means of production, including distribution, should be directly controlled by a society whose overriding concern is to provide all men and women with the best existence society is capable of, without the Value relation, or any other economic relation based on Value. The physical production of wealth is well within the technical capability of a world-wide community with the will to do it. We are forced to stand by when ignorant experts hold the field lecturing on the economics of scarcity and belt-tightening. Despite the scare stories about falling world resources, there is sufficient wealth-potential — used in a responsible way, not squandered or vandalized as is the case today — to maintain a Socialist society for a very long time. As for the figure of 3.5 annual growth rate, Socialist society would disdain such a small increase and take the fetters off the productive forces. Capitalism has nearly succeeded in creating a race without real ambition.
The social relation of Value represents a condition where the exchange of the product represents the exchange of the various types of labour embodied in the product, and consequently provides the only social link between the producers. It is a relationship of things rather than persons. The Value relation can only exist in a society concerned with exchange, where things are more important than people. If the social powers of production are brought under the democratic control of society, a new and progressive era will have been founded; exchange will become obsolete, and the higher social relations based on planned production for need will have been established.
3: Money and Prices
The whole financial edifice of capitalism at first sight appears incomprehensible to the average person. Ignorance concerning the financial and monetary system has given rise to many unsound theories, and consequently has prevented a proper understanding of what it is, how it came into being, and the circumstances which will make the monetary system unnecessary. This is not an intellectual exercise but a vital element in exposing the nature of capitalism.
The monetary system has evolved gradually and has been in existence as a system for about 250 years in England and for a much shorter period abroad. We make a distinction between the ancient coinage of Greece, Carthage and Rome, which although used to effect the exchange of commodities was at that period incidental to the main stream of an exchange system which was based on surpluses and barter. As a general social form, money developed alongside the development of commodity production, and at the point in history when all wealth was produced in the form of commodities money became the universal medium or equivalent through which all exchange transactions were carried out.
The first condition for the introduction of a monetary system is when social products become commodities, i.e. articles produced for sale and exchange. It is quite obvious that commodities cannot go to the market on their own. As they are owned by someone or other, he is the person who will take or send them there. Likewise, there are other owners of commodities carrying out a similar function. Each will recognize the other as a private proprietor — that is, they respect each other’s rights to dispose of the social product to their own immediate advantage. Eventually they embellish their right through a set of legal relations:
This juridical relation, which thus expresses itself in a contract, whether such contract be part of a developed legal system or not, is a relation between two wills, and is but the reflex of the real economical relation between the two. It is this economical relation that determines the subject matter in each such juridical act. (Marx, Capital Vol. I, p. 96. Kerr edn.)
The capitalists who are the owners of commodities have to appropriate the wealth of society before they can sell it. Once having done so, they create a juridical system backed up by the State machine which politically safeguards their position and consequently the whole institution of private property.
When exchange becomes a normal social practice, and the volume of transactions is being constantly repeated, inevitably one commodity emerges — either through custom or the stamp of legality — in which all the others can represent their value or express their price, which is the money-name for Value. This one commodity, which is historically acceptable, becomes the recognized universal equivalent: it becomes money — it becomes the measure of Value.
All commodities will therefore express their price through the agency of this single commodity, whatever it happens to be at any given point historically. Gold became the universal equivalent and still is for international transactions. Gold evolved as such because of the facts that it had a certain amount of social labour in it; that it was relatively durable; easily divisible; and kept its value for a long period.
The fact that currency notes without gold backing have replaced gold as the means of circulation within individual political states, does not materially alter the function of the universal equivalent. Symbolic money, introduced by state compulsion, can only circulate within the political sphere which created it. We are not concerned here with the interminable international squabbles between capitalist powers who refuse to take each other’s bad money. The fact that symbolic money is now used does not remove gold as the measure of Value, as eventually all symbolic currencies will require to be related to one another at some point, and are finally adjusted through the medium of gold.
Let us assume that 1 oz. of gold contains 100 hours of social labour, and that 40 gallons of wine also contain 100 hours. In that case 1 oz. of gold would be equal to 40 gallons of wine, or ½ oz. equal to 20 gallons of wine, or ¼ to 10 gallons — and so on. The same thing would apply to every other commodity. For example, if 4 washing machines also contained 100 hours of social labour, then 4 washing machines would be equal to 40 gallons of wine, or 1 washing machine to 10 gallons of wine or ¼ oz. of gold. The change from one universal equivalent to another does not, nor cannot, alter the exchange value, or the proportion in which one commodity exchanges with another. Gold, as the money commodity, or currency, as the recognized legal form, are really external factors. Different products of labour are being equated with one another, and the function of money is to facilitate this equation for practical commercial purposes. The law of Value, like the law of gravity, is not subject to amendment by Acts of Parliament. Currency is not Value.
The amount of currency notes needed to carry out exchange transactions depends on the number of transactions, the speed with which they are conducted, and the volume of commodities to be exchanged. If for example £5 million (currency) was required to circulate £50 million worth of commodities, and the Government decided to print £10 million, then the purchasing power of the £ would have fallen and it would take £2 to purchase what would previously be purchased for £1: prices would rise accordingly. The value of the commodities has not changed, but merely that their standard of measurement has altered. You do not alter temperature by changing the numbers on a thermometer. Prices will rise because the measure of price has fallen. Prices will rise higher, and in direct ratio to the depreciation of the symbolic standard of measure. This is the main factor in rising prices. The exchange of commodities is not based on legal promises to pay or arbitrary standards which alter according to political expediency. Therefore they will express their value, as they have always done, on the amount of socially-necessary labour contained within them.
Supply and demand do not determine prices, although they influence them. A shortage will create higher prices, a surplus low prices. But invariably, throughout most fields of production and distribution, through repetition the supply of commodities becomes equal to the demand for them and the two therefore cancel each other out. These are accidental factors and do not determine value, any more than a train driver can determine the route between London and Glasgow.
Other factors which influence price are monopoly and subsidy. Monopoly action by certain groups of capitalists with-holding supplies of a given commodity can cause prices to rise. The Arab oil sheikhs demonstrated this recently. Monopoly does not add to the surplus wealth but merely redistributes it. Capitalism cannot run on the basis of permanent monopoly anymore than it can run on the basis of permanent subsidy. Subsidy is the action which is carried on by certain governments to keep prices below the current market level, from time to time. For many years the prices of food and housing were kept artificially low deliberately in order to keep wages down.
The introduction of an excess of currency notes over and above those required to circulate will undoubtedly cause dislocation not only in the marketing process but also in the productive process. This we are now witnessing. You cannot print Value. If governments could only follow the example of King Midas how happy they would be. Like the old Canadian bum, they have the button of inflation if only someone would sew a shirt on to it.
4: Do Machines Produce Surplus Value?
Historically the function of the capitalist system of production was to replace the previous mode of production prevailing within Feudal society by the more efficient capitalist mode of production. This involved the amalgamation of small fragmented and even individual means of production into a social force. Capitalism socialized the means of production. All the productive forces which were capable of being developed were developed. The capitalist could ensure the presence of large numbers of wageworkers in any one place co-operating with each other within the process of production, with a view to cutting down the time expended in the process.
Even on the basis of simple manual labour, it is a fact that 20 men working in unison can perform tasks that 40 men working individually could never do. The secret is that the 20 men are operating socially, or in concert, as a productive force; a force almost as old as mankind. The sub-division of labour is accelerated as each process becomes repetitious and broken down so that a number of operations can happen at the same time. It is quite obvious that a productive force based on even a high sub-division of manual labour was inadequate so long as it continued to rely on mainly manually operated tools. There were limits as to how many men you could get into a factory or one place, and there were also limits to the amount of time you could work the labourer without his health deteriorating. This productivity of labour could only be increased by the introduction of machinery. The motive force for this machinery was, in the first instance, provided by men or animals, but eventually by water, steam, gas and electricity, in that order.
It should always be borne in mind that the natural forces in social labour, i.e. sub-division of labour and co-operation, cost the capitalist nothing; likewise with the physical forces, water and steam. It is true that physical forces have to be harnessed in order to be exploited. This involves costly power-generating stations, hydro machinery, etc., but the cost of these is recovered over the period of their operation. Capital, therefore, has not only inherited the earth, but the natural physical forces so far discovered, and perhaps some at present undiscovered.
The gigantic means of production existing today bear little resemblance to the industrial scene when Marx made his analysis of machinery, manufacture, and the position of the working class in relation to the development of these technical productive forces. Automation, computers, nuclear energy, are certainly new, but the basic Marxist theory on machinery embracing these new developments is as true today, and of equal application, as it was in 1860. Today, capitalists and their economic advisers will go to great lengths to stress that most of the profit created by modern industry is due mainly to the increasing mass of constant capital vested in plant and machinery.
This appears on the surface to be the case, but Socialists do not take things at their face value. We fully agree with Marx that machines do not produce surplus value, and consequently profit, even if whole areas of production were based entirely on automated processes involving little direct labour participation. The reason why machinery, however highly developed does not produce surplus value is not difficult to understand. Machinery is an extension of the labour process which is carried on mechanically.
Machines are, in effect, social tools created by the man for the sole purpose of replacing human labour-power, and cutting down the time expended by human labour. The productiveness of machinery is measured by the labour it replaces. It is a fact that there are quite a number of processes which can only be done by machines, but all complicated processes have evolved from a sub-division of simple labour, and therefore the fact that simple labour has been intensified to the point of the scientific skill needed to produce and operate a machine to replace that simple labour, in no way alters the basis for calculating the productiveness of a machine.
No matter how complicated machines become, even to the point of the capitalist’s wildest dreams — the push-button society — they are still produced and maintained by men. Being a product of labour, a machine like every other commodity contains value in addition to its use-value. That value is determined by the amount of socially necessary labour required to produce the machine. During the productive process, the machine wears out, and has to be replaced in the course of time. It follows then that the machine cannot pass on any more value than that which is contained within it in the first place. The machine is used in the production of commodities, and it gradually by stages, perhaps over years or decades, comes to the end of its working life. But during its working life it has added value to the particular commodity for which it was designed. Each of the commodities, therefore, has consumed part of the value of the machine, and consequently the machine has transferred its value to the products.
Suppose, for example, a machine cost £10,000, and would operate efficiently for 10 years, and at the end of the period would require to be replaced. The capitalist owner of the machine would therefore add £1,000 to the value of the products produced annually, representing 1/10th of the value of the machine. In this way the capitalist ensures that he can replace that portion of his capital vested in the machine. Any depreciation of value of machinery, however complicated, is always compensated by the amount returned to the capitalist by way of the value added to the commodity.
Value, in the form of capital, lives on — it has the gift of eternal life. Not only do the workers produce surplus value at the point of production, but they also preserve existing value. It is the phenomenon of the social relation of value that whilst it owes its origin to the social relation of human labour it has an independent existence, working through its own anarchistic economic laws; consequently it is no longer under the control of the society which gave rise to it.
If we consider the productive process as a whole, with computers, electronic devices, and highly developed machinery, there can be no doubt that these have added greatly to production. It appears that any increase in profit, apart from cutting wages, can only be derived by introducing machinery. This is true, but the profit, or surplus value, cannot come from an inanimate object. The technical foundations of modern industry are built on machinery. This machinery has been created by men under the capitalist mode of production and distribution; the incentive to its invention and introduction has always been the profit motive. If a machine is to replace labour it must perform its operation in less time than that required by human labour — it is no good otherwise.
Any substitution for labour, including the substitution of natural force for human force, is an extension of the labour process carried on by the working class. It is not disputed that machinery is a means to the production of surplus value, but this surplus value is produced by the people who make and operate the machines. The production of the worker working with machinery is increased tremendously, but the workers are paid not for what they produce but for what they sell, their labour-power. It follows, therefore, that the introduction of machinery serves only to increase the rate of exploitation; that is, the difference between what the worker produces and what he receives in the form of wages.
Each fresh introduction of machinery into the working process is always done with a view to cutting down the amount paid in wages, by reducing the number of wage workers. Capitalists find the machine a useful ally in the struggle over wages.
Most of the industrial processes today could not, as they are, serve the needs of a Socialist society. Existing technology would provide the basis for developing socially acceptable industrial processes, free from noise, dirt, and non-injurious to life and limb. At the moment, the plain fact is that scientific progress in the development of machinery, as in all things, serves capital and not man.
“The lazy men squandered their substance whilst the diligent saved theirs—thus Capital was born from thrift.” This fairy tale has about as much real application to the origins of Capital as Adam’s Rib has to the origins of women. The important point is: how are private fortunes created and how do they grow?
We know that prior to the capitalist system of production the producers owned their means of production, and the primitive accumulation of capital is nothing less than the process of divorcing the producers from their means of production and turning them into capital. When this process is completed historically we arrive at the situation which exists today, where the producers are totally alienated from the social means of production. They are propertyless wage-workers selling their life-activity to their employers, with enough to live on and sometimes not even that.
Capital has not existed from all time. It commenced in Europe out of the ruins of the old Feudal society around the fifteenth and sixteenth centuries. It is a social relation of production, and came into existence with the production of commodities and their circulation. The circulation of commodities means the development of an exchange system which finds its ultimate expression in the introduction of a monetary system. Any stated sum of money is representative of any stated quantity of commodities or Value. Money is the final product of the circulation of commodities, and capital appears in the first instance in that form. But capital can also appear in the form of a sum of commodities (Values); raw materials, instruments of labour, in fact, any sum of Exchange Values. What distinguishes the commodities comprising capital from any other group of commodities is the way in which they are used. The object behind their use must always be to produce a greater Value than that existing. Capital functions solely to produce a Surplus-Value greater than the sum originally advanced, either in the monetary form or in the commodity form, or both.
It is important to differentiate between capital trading transactions and share or stock dealings carried out mainly on the world’s stock exchanges between rival stockholders and investors, each trying to improve his financial position individually, or in a group. These represent transfers of capital between various people and institutions. They do not add to the total wealth, but change the ownership of existing wealth (Value), much in the same way as you can move furniture from one room to the other within the same house. You finish up with the same furniture but in different rooms. One man’s loss is another man’s gain.
The function of capital production is to increase existing wealth. The production of wealth cannot, therefore, depend on trading transactions, neither can it depend on nature or heaven, despite “the Lord’s bounty.” When the parson gives thanks every harvest festival “when all is safely gathered in”, it should never be forgotten that every day is harvest day for the capitalist, sowing capital and reaping Surplus Value.
Raw materials, and even the most sophisticated machinery, or gold bars, do not possess magical powers, and cannot increase their own Value merely by being placed together in any sphere of production. Being inanimate objects they are dependent on men, either to produce them in the first instance, or to maintain or supervise their operation. Living Labour is vital to the whole function of capital. If the machine or the materials cannot change their Value, and if there is an additional or Surplus Value created, then it could only have come from living labour, there being no other possible source. The legendary brilliance of the capitalist, his organizing ability, and other associated fables, have little to do with the social production of wealth and its accumulation. Some are clever, some are industrious, most are ignorant of the source of their wealth, inefficient and self-indulgent. Were they all in the first category it would make no difference, because the fact remains that capital is a social relation of production working independently from personalities clever, stupid, or mediocre.
The social capital mainly consists of the means of production and distribution; factories, industrial complexes, oil wells, mineral workings, means of transport, ships, aeroplanes, railways and road transport systems, agricultural land, plantations, etc. Most of these have been created gradually by workers long since dead. This is the accumulated labour (Value) of the past which provides the basis for the living labourers’ productive activity in the present. The employer (capitalist) allows the worker access to this existing social capital, created by the worker’s predecessors, for the sole and specific purpose of adding a greater Value than that previously existing. This marriage between living labour and capital (past Labour) is a necessary condition for the social extraction of Surplus-Value. But, as has been stated, the element of Surplus-Value, or Profit, cannot come from a fixed quantity of accumulated wealth. If anything, without the fertilization of living labour the accumulated wealth of the past which exists in the objects of social labour—factories, machinery, road systems, industrial centres, shipyards, cultivated land, etc.— would deteriorate and eventually become wasted assets. Living labour serving capital therefore performs two functions: first it produces a Surplus-Value working together with the accumulated labour of the past; and second, and by virtue of its productive activity, it preserves the means of production from decay. Every act of production is, in effect, also an act of reproduction, and it is through this act of reproduction that the means of production remain intact, and are preserved for the capitalist.
The employers, as a class, who own the social capital, buy social labour-power, giving wages in return. The amount of the capital is described by Socialists as Variable capital, because we claim that it alone changes in quantity at the end of the productive process. This is because the workers produce more Value than they receive back in the amount of wages paid to them. The difference is described by us as the rate of Surplus-Value, or exploitation. If a company pays annually the sum of £1 million in wages, and £9 million in raw materials, machinery, etc. (£10 million total), and shows a profit of £1 million, the rate of exploitation is 100 per cent irrespective of the claim of the capitalist that he only earns 10 per cent. The variation upwards in total Value has been entirely due to living labour.
On the other hand, if a capitalist spends £10 million in wages and £1 million on raw materials, fuel, machinery, etc. and shows a profit of £1 million, the rate of exploitation would be 10 per cent.
The rate of exploitation is measured against the amount paid out in the form of wages, and not the total capital. The constant capital vested in machinery, raw materials, fuel, buildings, etc., is constantly replaced, or constantly reproduced by the capitalist adding the Value of these elements to the commodities which he produces. Constant capital cannot add any additional Value to the products, other than that contained within itself. In fact, it is only through the agency of human labour power during the productive process that dead capital (accumulated labour) gives birth to new additional Value.
Capitalism is basically a system of accumulation, and that portion of Surplus-Value which is not consumed by the capitalists on luxury living, is remitted to the fund of accumulated labour, where it can serve as fresh capital to exploit workers again and again, increasing with every phase of circulation. It is indeed the dead hand of the past weighing heavily like an Alp on the living. The greater the fund of accumulated capital the greater the pressure on the workers to serve that capital, to augment it ad infinitum.
It is often stated by supporters of capitalism that capital has opened up new horizons, and that men have access to things and technological discoveries previously undreamed of. But it should be remembered that men, together with their fellow men, live in society and create their own environment. That environment is anti-social, because men’s creative ability is stifled as they do not own or control the means of production. It is hardly an argument to suggest that man is adequately compensated for this social loss by the ownership of TVs, motor cars and central heating. As Marx stated: “Whether his wages be high or low, or whether the chains that bind him be made of gold, the worker is as firmly riveted to capital as was Prometheus to the rock.”
Capital appears to have a separate existence outside the control of man. As a social relation, it Frankenstein-like, dominates all forms of human behaviour, where everything is related to the money principle. The measure of a man is his wealth not his intellect or culture. The ability of a man is determined by his financial power. The big spender has inherited the earth—that is why he is a big spender. Capitalism has created a phoney culture, and has debased man’s intellect to the level of a commodity. Happily we have not all succumbed to its pernicious influence, and we know, and are optimistic enough to believe, that society can be turned the right way up—which means that civilisation can survive and prosper without capital.
6: Surplus Value
Capitalism’s innermost secret is the production and the accumulation of surplus value. This is sub-divided into Profit, Interest and Rent, and it is the blessed trinity dominating the entire international economic and political structure of the capitalist world. The seed corn of Surplus Value is Labour-power. Labour-power is now a commodity. It is different from all other commodities in that it produces more Value than it takes to reproduce itself. The mental and physical capabilities of human beings are thus appropriated as commodities and set to work to produce other commodities.
Social freedom, despite the high sounding phrases, is nothing less than permission to sell labour power from employer to employer, who are the only people in a position of purchasing it. And this is taken to be in the natural order of things. It, however, is not nature which produces this strange relation, nor is the social basis of selling labour-power a normal social practice which has existed throughout the history of civilized society. On the contrary, the emergence of the commodity labour-power has been the result of many historical developments of propertied society, culminating in the establishment of the capitalist form of production.
Certain historical conditions are necessary before the product of labour-power can become a commodity, and these historical conditions apply equally to living labour-power itself. These conditions are:—
1. That the means of exchange must be developed.
That the means of production must be privately owned and operated socially.
That the labourer must be separated from his means of production.
The value of a commodity is determined by the amount of labour which is socially necessary to produce it, and no more than is socially necessary. If the labour time remains constant the Value remains constant. New production methods cut the time required, and consequently reduce the Value. Other factors intervene like increased skill, state of science etc. When mineral deposits for instance, become less accessible so as to increase the labour time socially necessary, this increases the Value. We have a society where homogeneous human labour working within an average social time is expended in producing a huge mass of commodities. At any given period during the life of that society, a definite amount of value is produced.
Exploitation is, therefore, measured in time which is translated into monetary symbols. Time is money — a vulgar description for a most anti-social practice. If a group of workers each work 160 hours monthly for an employer, and the employer makes a profit at the end of 12 months, then where does the profit come from? The raw materials used in the productive processes cannot add to their value, nor can the machinery add to its own value. In fact, it transfers its value to the products as it wears out. Plant and industrial installations are in the same category. Likewise with the bricks and mortar of the factory, steel mill and shipyard. The worker has not been cheated because on average he receives the value of the commodity which he sells to the employer for wages — his labour-power.
Surplus-value is not created by trading transactions, even by cartels or monopolies. A manufacturer may corner a market and grab the lion’s share of the profit to the detriment of other capitalist groups. But no monopoly can create surplus value. In any case, goods have to be produced before they can be sold, and the producing capitalist would expect to make a profit apart from his trading partner’s profit. The only possible explanation left to us is that surplus-value comes from labour-power.
The capitalist buys labour-power in order to use it and puts the seller to work, providing the raw materials, machinery, factories, etc., the subjects of labour power, or the place where the labour process is to be carried on. Labour-power in motion becomes Labour, that is, it becomes congealed in the objects it produces. The capitalist buys labour-power, but he sells labour, and that labour is presented to us as a vast conglomeration of commodities. The value of labour-power and the value of labour are not the same thing. The commodities are sold, and the cycle is repeated. The capitalist buys labour power for money (wages) (M); labour power becomes labour (products, commodities) (C); commodities are sold (money) (M) — M.C.M. But the commodities are sold at their value not at the cost of production. That value is determined by the amount of socially useful labour contained in them. No capitalist sells goods or services at the cost of producing them — he is not in business merely to receive his money back.
Wages represent a certain period of time which the worker contracts to work for the employer, whether it be an hourly or weekly rate, or a monthly salary. He must, at some point, require to produce the value of his own wages. So, if a proportion of the working day is devoted to this purpose, then it becomes necessary for him to labour up to the point where he has in effect produced the value of his own wages. This is necessary labour. It follows that if he continues to work beyond this period of necessary labour he is in effect rendering a certain amount of superfluous labour, or surplus labour. The worker does not own his labour, this is the property of the capitalist. He owns his labour-power; indeed it would be hard to separate it from him as it exists in the form of muscle, brain and nerve, the human organism. He is, therefore, making a gift to his employer for every atom of time he spends in the labour process over and above that necessary to reproduce the value of his wages, which is the necessary labour-time. It is precisely this surplus labour-time which manifests itself in the physical products of labour (values), and this becomes surplus value, an additional quantity for which the capitalist has not paid.
We speak of time only at this juncture, but the workers are supplied, in addition to raw materials, with highly developed machinery and other sophisticated tools of production; the tempo of production is intensified. The greater the degree of production which can be achieved using up-to-date methods and techniques within the same time, or even less time, means that the rate of exploitation is higher, because the necessary labour time will have been reduced and the surplus labour time increased. This is what happens in real life. The TU movement has for years been trying to cut down the workers’ hours, although most Trade Unions have long-term agreements whereby their members work considerable amounts of overtime. The official working week has been reduced in most industries to around 40 hours in 1973, as compared to 52 hours per week in 1900, but even allowing for the additional number of workers in industry, production has increased at least two-fold, and this has been due to the extension of machinery over a whole range of labour processes. It is the capitalist who stands to benefit by this, as he benefits by every advance in science and technology. Whilst wages have risen above prices compared with 1900, the rate of exploitation has increased, and the capitalist class are much better off. Marx put it succinctly : “The bigger the banquet, the bigger the crumbs which fall from the table.”
The capitalists do not arbitrarily fix their profits over their cost of production. They sell the goods for what they think the market will stand, but the starting point is what it costs them. It is, however, the secret of commodities that, when brought to the market, they will exchange with other commodities according to the amount of socially-necessary labour time contained within them, and no capitalist knows this, although he will obviously know the amount of time his process has taken. Value contains surplus-value. The fact that articles do not always sell at their Value — sometimes above sometimes below — does not alter this rule. Buying and selling influence prices — they do not determine them. Profit is not made from trading transactions but from the productive process. The surplus product becomes the surplus value — the surplus value is the social fund from which the profits of all sections of the capitalist class — bankers, landlords and industrialists — are derived.
It is not our concern to take sides in disputes which occur from time to time between sections of the capitalist class on whether landlords’ or bankers’ profits are too high and industrialists’ too low. This is a matter for the Labour Party and the small fry of the Left, who usually side with the industrial capitalist. It is sufficient for our purpose to show where surplus-value comes from and not its final destination. We know it doesn’t go to members of the working class.
Surplus value is produced at the point of production and not during the process of circulation, i.e. banking, insurance and commerce. Whilst it is true to say that only productive workers produce surplus-value, it is equally true to say that all workers are exploited. How would the banking capitalist appropriate his share of the surplus value unless he employed bank clerks, accountants, etc. to appropriate it on his behalf? Where would the landlords get their share without the chartered surveyor, rent-collector and estate agents and clerical staff? How would capitalism function without street cleaners, refuse collectors, health services, and every other service, including police, civil servants and other ancillary workers?
Whilst the basic mechanism shows the original source of surplus-value to be labour-power at the point of production, in fact you cannot separate the main divisions of capital which through custom and the division of labour have historically impressed themselves on the capitalist mode of production — banking capital; industrial capital; landlord capital. Capitalism has to be taken as an organic whole, or an indivisible system. The extraction of surplus-value is a social act, consequently the entire resources of the body politic exist for that one purpose.
Every member of the working class plays a part, either directly or indirectly, and all are therefore exploited.
Do Banks Produce Wealth?
There are three main divisions within capitalist society which share the surplus-value which is socially extracted from the working class; the industrialist, the landlord and the banker. These divisions historically reflect the application of the division of labour to the specialized investment of capital in any field of production and distribution, any process of circulation, of which banking is part.
Individual capitalists, or groups of capitalists, may have financial interests in all three of these groups. There is nothing to stop the industrial capitalist from becoming his own landlord and banker, but were he to do so he would require to hold huge reserves of cash, or have part of his capital locked up in bricks and mortar, thus preventing it from being more usefully employed in the exploitation of human labour-power. Generally speaking, the industrialist, the banker and the landlord pursue their own separate courses. Their interests are intertwined but nevertheless are antagonistic. Whilst it is true that the capitalist class have more in common with each other than with the working class, it is necessary to add that a class society must inevitably produce a conflict of interest between capitalist and capitalist, as it does between capitalist and worker, and worker and worker.
Interest and Profit
In capitalist society all wealth takes the form of commodities and is bought and sold. Capital itself is subject to this process: the price of capital represents the amount paid for the use-value of that commodity for a prescribed period. The lender sells to the borrower the use-value of his capital, and expects to receive an additional payment (i.e. interest) as well as having the original sum returned to him at the end of the mutually agreed period.
If we assume annual average rate of profit is 10%, this would mean that anyone owning £10,000, employed as capital, and provided it was used with average intelligence under normal conditions, would expect this capital to yield a profit of £1,000. If, however, he gives or transfers this £10,000 to another person who also proposes to use this as capital, then he has given to that person the power to produce a profit of £1,000; a surplus value which would have cost him nothing. Obviously this person does not expect to receive this privilege without making some payments in return. If he decides to pay, say, £250 to the original owner out of the £1,000 profit, for making the £10,000 capital available to him, that part of the profit is called interest. It is a payment made for the use-value of the capital.
The banker makes his money out of the process of indirectly bringing borrower and lender together. The banker borrows money at say 10% and lends it at say 14%, and the difference between the two rates, after deduction of expenses of book-keeping, rent, wages, etc., represents his profit. It should be borne in mind that the rate of profit has its origin in the productive process, or at the point of production: that is, at the place and places where socially useful human energy or labour-power transforms natural wealth and natural forces into commodities. The essence of the capitalist form of exploitation is that the capitalist does not, nor cannot, pay the full amount of the value of that socially-necessary labour, and pays only the value of the living labour as represented by wages, and that is not the same thing.
The surplus-value is the difference between the value of the product and the value of the producers. Living labour produces a greater value than it takes to reproduce itself, and consequently all surplus- value comes from the exploitation of human labour-power under a wages system. Banks produce nothing. They are really middlemen or custodians of idle capital which must be available as a hoard, as potential money capital waiting to be put to use. “The purely technical labour of paying and receiving money constitutes an employment by itself which necessitates the making of balance, the balancing of accounts, as far as money serves as a means of payment. This labour belongs to the expenses of circulation and does not create any value. It is abbreviated by being organized as a special department of agents who perform this work for the rest of the capitalist class . . (Marx, Capital Vol. Ill, p.373). Their profit is made during the process of circulation, as is the case with all commercial and interest-bearing capital.
The difference between interest-bearing capital and industrial capital, or capital used in the productive process where wage-labour is exploited, is that the owner of money capital who wishes to earn interest on that money throws it into circulation not as capital for himself, but so that others can use it; and consequently gains a profit by this service. The basic difference is that whereas the individual capitalist has his capital locked up in factories, mines, heavy machinery, ships and means of transport and distribution, stocks of materials, or committed to a wages bill, the lender of interest-bearing capital invariably has it returned to him. The main exception to the rule is when certain money has been loaned to the government, in which case the lender has a legal title to a permanent income at a fixed rate of interest.
Banks not Dominant
It is quite true that individual sums of money deposited with banks may be too small to function as capital by themselves, but they can be gathered together into useful masses of capital, and advanced to industrialists and others who use the banking system. In the main, however, the hoard of capital which is deposited with the banks is the residue of unconsumcd profits, or capital which is surplus to immediate requirements.
Contrary to popular belief, banks do not dominate the capitalist system. This mistaken view is due to the fact that wealth is represented by enormous quantities of money. All wealth under capitalism expresses its value in the symbolic money form, but that form tends to conceal the fact that capital exists in the physical implements of the labour, factories, minerals, buildings, ships, etc. and that these are the dominant form of capital; the expansion of capital can only arise from these sources and not from the variety of banking and commercial transactions involving interest-bearing capital. At the present time banks have advanced £8,897 million to the manufacturing industries, including £2,103 million to the engineering and metal industries, £2,247 million to the construction industry, and £1,187 million to food, drink and tobacco. The balance of the loans is mainly divided between chemicals, electrical engineering, shipbuilding, agriculture, and forestry (Financial Statistics, HMSO, Table 53. Oct. 1974).
An estimate of the value of the physical assets of the UK wealth was published recently. The total value of the assets was estimated at £400,000 millions. Of this, the figure of £175,000 million was allocated as representing the value of assets which were directly productive. These are mainly the manufacturing industries referred to above. (Times 16/11/74: “Wealth of the UK” by J. Rothman). The banks’ advances, on the basis of this estimate, show that the banks have a stake in British manufacturing industries of about 5 per cent., and this could hardly be regarded as a dominant interest. In any case, banks do not exist to lend their own money, but other people’s. The total advances made overall by the London Clearing Banks — Barclay’s, Lloyd’s, Midland, National Westminster, Williams & Glyn’s, amount to £21,992 million, but the combined deposit and current accounts (money loaned by depositors to the banks) were £37,374 million (Committee of London Clearing Banks statistical unit, 16th Oct. 74).
Effects of Crises
The Labour Party and the Communist Party mistakenly argue that the slump of the ’thirties was due to the fact that the banks withheld loans from industrialists. A variation of the same argument being used today by politicians of all parties, including the residue of the Left and a number of economists, is that the present high rate of bank interest will dissuade the capitalists from borrowing for fresh investment, thus causing unemployment by reducing production. The assumption behind this rather naive conception of capitalism is that as long as the industrial capitalist can find capital, whether by borrowing from a bank or out of his hoarded resources, he can maintain full employment. The point that they constantly overlook is that the function of capital is to produce profit. This can only become a reality when the commodities produced can be sold.
If for some reason, whether it be that the market is already overloaded and cannot absorb further commodities, or that over-production has already taken place, then production will be scaled down, curtailed, or in some cases halted entirely, and workers will be laid off. In these circumstances there will be little prospect of profit, and as experience has shown a number of capitalists, the smaller ones, go bankrupt. “In the first 9 months of this year, 4,000 Receiving Orders were made … an increase of 40% over the same period for last year” (Sunday Telegraph City 4, 24 Nov. 74). All the machinations of the banks, either by advancing or retarding credit, whether charging low interest rates or not, cannot alter this. At the moment there is no shortage of cash available for investment, and the banks are only too eager to make capital available to bona-fide capitalists. However, in a failing market there is little incentive to the industrial capitalist to commit himself to paying interest when the prospects of earning surplus-value on the borrowed money are extremely remote. Only these capitalists in dire financial trouble, or those who have to meet certain contracted obligations, will be forced to borrow.
Generally speaking, in periods of crisis, when the capitalist’s position deteriorates and he has to meet payments, he will borrow money almost at any price to stay in business. Invariably the rise in the rate of interest implies a fall in the value of shares and securities. Interest comes out of profit, and in these periods the fact that the capitalist needs to borrow means that his normal source of profit has temporarily dried up, therefore the price of shares has fallen. The present rate of interest, i.e. 14-16 per cent, is the highest for over forty years, and the price of shares the lowest for sixteen years (Financial Times Index 168.5, 23 Nov. 74). There is, of course, the element of inflation written into the present interest rate. Unlike real wealth in the physical sense, loan capital exists as a symbolic paper hoard, and as such is subject to the hazards of inflation. Were the commercial capitalists not to take some preventive action their assets, as they exist purely in the monetary form, would be eroded year by year as a result of inflation. So the price of capital rises as with other prices, and the high interest rate is the protective mechanism the banks etc. use to protect their assets. The Utopian promise of low interest rates, at times when the operation of capitalism is forcing high ones, can be ruled out as a pious hope.
The industrial capitalist does not suffer to any great extent from the ravages of inflation as his assets consist mainly of real wealth, whose relative value rises as the purchasing power of paper currency falls, and he can adjust his prices upwards taking into account the rising cost of production. On the subject of inflation generally, we are reminded of the small boy at the seaside saying to his father “Dad, where does the water go when the tide goes out?”. It had obviously gone elsewhere, but it certainly wasn’t lost, and neither is wealth during periods of inflation.
The rate of interest, or bank rate, itself is not arbitrarily fixed. It fluctuates according to the conditions of the market. Supply and demand cause competition between buyers and sellers, and raises or lowers prices. Competition between borrowers (buyers of capital) and sellers (owners of capital) operating through their banking agents, determines the rate of interest.
The mythology surrounding the power of banking helps those who take the view that this vast institution is so necessary that the prospect of a world without money would be unthinkable. The present world with money is becoming uninhabitable, and that is why we want to establish Socialism.
Banks and Credit
The use-value of loan capital, which is made available through the banking system, consists of producing profit, and this type of profit is described as interest. The rate of interest is arrived at by competition between lenders and borrowers, or by supply and demand; the lender of loan capital striving to obtain the highest rate of interest for the use of his capital, and the borrower seeking the lowest rate. There is no “natural” rate of interest, nor is there any limit to the rate that can be charged.
In the German Weimar Republic during the period of great inflation after World War 1, the rate of interest was raised weekly in some cases to 200%. The “natural” rate theory has its basis in the repetitive form of dealings between merchants and industrialists in the negotiation of Bills of Exchange. A substantial part of the business of a bank consists in discounting (cashing) Bills of Exchange. They are, generally speaking, promises to pay between merchant and industrialist at 60-90 day intervals, or longer. These Bills usually represent goods in transit or in store, and for the facility of advancing cash immediately on the strength of the Bill, which guarantees the value of the goods nominated in the Bill, the banker will deduct or discount a fraction of the amount shown and buy the Bill. If, for example, a Bill of Exchange was valued at £10,000, and the annual rate of interest was 10%, and the Bill was due in 90 days, the banker would deduct the sum of £250, i.e. 90 days’ interest, and advance the sum of £9,750. When the Bill was finally redeemed, the banker would then receive the sum of £10,000 – the full value of the Bill.
Rates of Interest
Naturally the merchant and the industrialist (incidentally banking transactions as described above are not just confined to these two) would seek out the most favourable discount rates, and over a period of years the rate would tend to become adjusted at a regular rate. For many years between World Wars I and II the bank rate remained almost stable, around 2½%-3%. The old bank rate was based on this practice of discounting Bills, and gave rise to the theory of the “natural” rate of interest. Regarding the possibility of the banker getting the better of the merchant, industrialist etc., by successfully charging high discount rates; this would only result in a transfer of wealth between them. Were the British banks to consistently charge usurious rates, capitalists would endeavor to have their Bills discounted elsewhere, say New York or Paris.
Since interest is part of industrial Profit, the maximum limit of interest is marked by profit itself. The leaves can never be greater than the tree, or the part can never be greater than the whole. The high rate of interest today, i.e. 15%-16%, is distorted by inflation. The Chairman of Barclays Bank, Mr. A. Favil Tuke said:
“It is worth recording that of the three parties who make up a bank, namely stockholders, staff and customers, none has gained much from these profits. Customers do not need to be told how much interest rates have risen in the last year or two; the increases in the salaries of our staff have been limited to about 7% per annum, and that of the stockholders dividend to 5% per annum; all this at a time of inflation of some 10%, per annum.” (Directors’ Report to AGM, 1974).
Obviously the depreciation of money is taken into account when fixing a rate of interest, and this is basic to the preservation of the value of the loan capital. On the other hand any prolonged fall, resulting in a total loss of interest, as well as an erosion of the value of the money capital, would eventually remove loan capital from the money market. This would, sooner or later, have repercussions in the productive process, as industrialists and other capitalists would find difficulty in raising capital for certain projects. As capitalism’s wealth develops there is a tendency for the owner of inherited wealth to live on the annual interest without actively participating in the productive process. The same attitude is adopted by retired capitalists who want to take things easy, instead presumably of just taking them – as in their youth. Loan capital arises mainly from these sources.
Were there no profit in loaning capital, that capital would be hoarded until such times as things improved. The owners of such capital would not retain it in the form of paper currency at the mercy of inflation, which has the effect of gradually reducing the wealth of the banker and the landlord, as well as literally confiscating such savings as are owned by workers. They would hold their hoard either in gold, works of art, land, buildings, or any other desirable commodity which retained its value. No profits would accrue from assets held in this way, but on the other hand, there would be no losses either. However, if this happened on any scale there would be industrial dislocation.
Lenders & Borrowers
The function of banks is firstly to make recurring payments on behalf of their customers; meeting mortgage payment rates, quarterly bills, and regular annual orders. These are payments which are entirely concerned with the circulation of commodities. But their second and most important function is to provide credit or capital for industry, commerce, property, etc. This is not provided out of the resources of the bank, as can be seen by the statement of the London Clearing Banks. Total advances were £16.7 thousand millions (Quarterly analysis of Bank advances; Bank of England, 20th November 1974), whereas the total capital of these banks was £658 millions as at December 1973 (Annual Reports, 1973).
Generally speaking, bank overdraft limits are reviewed every year, and bank borrowing is mainly short-term; up to 3 years in the main. Long-term loans are usually handled by the merchant banks who charge a higher rate of interest for this facility. The credit system which owes its development to the specialized function of the bank has proved to be a significant force in the centralization of capital. Gathering as they do all the disposable money which is spread throughout society, they channel it into the hands of groups of capitalists, who turn it into capital. The accumulation of capital is speeded up, and with it the productiveness of labour, as more and more machinery is introduced into the productive process.
Credit, and the credit system, have given rise to many misconceptions about the power of banks to create credit. Firstly, credit, whatever its form, whether in money or goods, consists in a transfer from one person to another.
Credit, in its simplest expression, is the well or ill founded confidence which induces one man to extend to another a certain amount of capital, in money or in commodities, estimated at a certain value, which amount is always payable after the lapse of a definite time. (Tooke. Capital, Vol. III. Kerr edn., p. 471).
Elements of social wealth, and the conditions under which the transfer takes place, or the trustworthiness of either of the parties to the transaction, need not concern us. An owner of goods may be separated by an interval of time from realizing the value of these goods in money. Certain articles take a longer time to produce than others, and others longer to market. The production of certain commodities, mainly agricultural products, depends on certain seasons of the year. Inevitably the owner of the commodities will borrow money on them, or sell his right to them for money on the spot, or the written promise of money. This is putting it at its simplest — the goods providing the security for the loan. In any case, goods are exchanged or secured against a sum of money which is due to be repaid at a given date in the future. Payment in advance of delivery, or delivery in advance of payment, represent the two sides of simple credit. It is to be assumed that the credit seeker has a reputation for solvency, and that fraud is not the purpose. Credit advances in this way merely facilitate the circulation of commodities by getting them to the market quicker.
Weakest to the Wall
The second and most important function of the banker is to provide money for industry, which is capital. This has a separate function from money as the medium of circulation. The function of capital is not merely the circulation of commodities but their production in the first instance. Therefore, money used as capital is withdrawn from circulation because the wealth which it represents has been locked up in the process of production. The credit system of advancing capital allows individuals to use capital which is not theirs, and has opened the door to all sorts of swindles and reckless speculation. Who would not gamble with other people’s money?
If banks could create credit with the stroke of a pen, that would mean in effect they could create wealth, and consequently the Marxist Theory of Value would be shown to be wrong. However, as time passes the validity of the Labour Theory of Value, i.e. that wealth can only come into existence when men apply their energies to nature, is all too apparent. If banks could create credit, they would never be in financial difficulties, nor would they go bankrupt. As we have seen in recent years, a number of bank failures are taking place. The Ideal Savings Bank, and the Bank of the Lebanon, for example. More recently, the Herstatt Bank of Germany, and the Sindona group of Banks in Italy; the Israel British Bank (London) with deficits of over £40 millions. Many of the 40 or so fringe banks are in dire trouble, and some have gone into liquidation, including Mr. Jeremy Thorpe’s London & Counties Bank. (His insight into the political future has not helped him in his banking adventures.) Many of these failed banks had the dubious benefit of advice from economic and political experts forecasting the future of capitalism. Once again they have come unstuck, and we can say with certainty that more banks will fail as the competition increases — the large fish will gobble up the little ones.
Credit Creation a Myth
In these circumstances, why did these banks not create a bit of credit for themselves and literally pull themselves up with their own shoelaces? The answer is all too obvious. The credit of the banker is provided only by his depositors. This is real money. It matters not whether the bank transfers depositors’ credit to a bad risk or a dud enterprise — he is liable for its return. At the present time, the property market has turned out to be a bad financial risk, and the little fish are in trouble having lent long to property speculators, and borrowed short from their bigger brothers. The alleged “rescue” operations organized by the Bank of England are nothing other than the lambs being eaten up by the wolves. The smaller fry of the financial and banking world are no more immune from the centralization of capital than the small car firms, garages, shopkeepers, etc. In the last four years the Big Five Banks, Westminster, Barclay’s, National Provincial, Lloyd’s and Midland, have become the Bigger Four. A number of Scottish banks have been taken over by the Big Four — the Bank of Scotland for example is now under the control of Barclay’s, whilst the Clydesdale Bank is controlled by Midland; National Westminster controls Coutts & Co., also the Ulster Bank Ltd. Lloyd’s control the Bank of London and South America, the National Bank of New Zealand and many others.
If these small satellites wanted to remain independent all they need have done was to create credit by increasing their capital by a stroke of the pen. Such fictitious capital would no doubt pay a fictitious dividend, and create a series of fictitious deposits. Unfortunately, however, the original depositors who have loaned real money have no sense of fiction — even the science fiction of the economic experts — and would require repayment in very realistic banknotes.
The bank profits for 1973, the last accounting year of the London Clearing Banks and subsidiaries, do not bear out the miraculous power of credit creation. Although this was a bumper year the total profits, after tax, were £335.7 millions (Annual Statement for 1973). This is a large profit, but it is only a small portion of the total industrial profit.
The one institution which appears to create credit is the State, operating through the Bank of England. This is an act of deliberate political policy, the reasons for which will be given in a separate article. The Government, in a variety of ways, instructs the Bank of England to print an excess of paper currency, which the Government uses to finance its own schemes, and without having to introduce tax legislation to deal with particular cases. This inflation of the currency does not, nor cannot, add to existing wealth. What is really happening is that, far from creating credit, the Government is confiscating other people’s. This has the same effect as a general increase in taxation. The constant dilution of the purchasing power of money by inflation raises prices and dislocates production and distribution. This is public fraud posing as public credit.
Capitalism is a system of production and distribution with many contradictions, and inflation adds yet another. Whatever strategy is worked out by economic planners and monetary specialists will make no difference. Capitalism will run according to its own laws, and they can only run after it. After all — who ever heard of an expert on anarchy?