Marx and Banks (2013)

The Cooking the Books column from the May 2013 issue of the Socialist Standard

The Morning Star (23-24 March) carried a cartoon which has Marx holding a piece of paper on which is written ‘Cyprus banks grab’. He is writing on a blackboard:  ‘Banks in Capitalist society are institutions created for the systematic robbery of the people’ and asking, ‘Now will you believe me?’

The only problem is that this is not a quote from Marx, nor does it correspond with Marx’s expressed views on banks. Marx was well aware of the opportunities for swindlers opened up by the coming of limited liability companies and their promotion, and by stock exchange manipulations in which some financiers and banks already were involved in his day, and wrote about this.

However, Marx’s whole analysis of the nature of exploitation under capitalism was that this took place in the course of production in the places where real wealth was actually produced when capitalist employers extracted surplus-value from wage-workers, not in the sphere of money and finance.

In Volume 1 of Capital he specifically repudiated such views:

  ‘The great part that the public debt and fiscal system corresponding to it have played in the capitalization of wealth and the expropriation of the masses, has led many writers, like Cobbett, Doubleday and others, to seek here, incorrectly, the fundamental cause of the misery of the people in modern times’ (Chapter 31).

A large part of Volume 3 of Capital is devoted to a discussion of banking and finance. Here Marx analysed banks as being essentially institutions for collecting the savings of people who did not want to spend their money for the time being and channelling these as money capital for productive industry. As he put it:

  ‘A bank represents on the one hand the centralization of money capital, of the lenders, and on the other hand the centralization of the borrowers. It makes its profit in general by borrowing at lower rates than those at which it lends.’

In other words, banks were not a scam to systematically rob people but institutions which played an essential role in the operation of the capitalist system.

There is another problem with the cartoon’s supposed quote. When it says ‘banks in capitalist society’ this could imply that banks in a non-capitalist society would have a different role. But it was Marx’s view that banks would have no place in a socialist society (or as he preferred to call it, a communist society, meaning the same thing).

In Volume 2 of Capital he wrote: ‘if we were to consider a communist society in place of a capitalist one, then money capital would immediately be done away with’  (chapter 14, section 3) and that ‘with collective production, money capital is completely dispensed with’ (Chapter 18).

This is clear enough. Banks channel savings as money capital. Money capital won’t exist in socialism. Therefore banks won’t exist in socialism.

Ironically, since the paper normally gives free range to currency cranks, Richard Seymour writing in the Guardian (27 March) got it better when he concluded an article: ‘Cyprus crisis: why do we need banks at all?’

‘To paraphrase Karl Marx on religion, the demand to abolish banking is a demand to abolish the state of affairs that needs banking.’

That’s what Marx is more likely to have written on the Morning Star’s blackboard.

Answer To Correspondents: "Bank Loans and Deposits" (1930)

Letters to the Editors from the March 1930 issue of the Socialist Standard

"Bank Loans and Deposits"

Mr. Nicholls (London, N.4).

We see no reason to believe that the late Mr. Walter Leaf meant anything but what he said. His words are quite plain—“The banks are strictly limited in their lending operations by the amount which the depositor thinks fit to leave with them.” ("Banking" p. 102.) And, "the banks can lend no more than they can borrow—in fact not nearly so much ” (ibid). There is nothing in the context to indicate that he could possibly have meant anything else. You ask, “is it possible to make any normal person believe that there is a moneyed class in this country willing to remain depositors in the Big Five to the extent of upwards of £1,000 million.”

If you will look up the latest balance-sheets of the "Big Five” banks you will see that their deposits total well over £1,600 million. The total of their loans and advances is only £880 million.

The relationship of gold to deposits is a quite different question. Banks pay interest on deposits not merely on the amount of gold they happen to hold. 

Ed. Comm.

#    #    #    #

Mr. F. L. Rimington.

See reply to Mr. Nicholls. Ed. Comm.

#    #    #    #

Mr. Edwin Wright.

You based your case on a statement ("every bank loan creates a deposit ”) which you attributed to Mr. McKenna. We did not attempt to meet the point merely by quoting a different opinion expressed by the late Mr. Walter Leaf, but gave as well the evidence on which he based his opinion. We notice that you ignore this evidence.

Mr. McKenna's present views and the practice of the bank of which he is Chairman, certainly do not correspond with the theories which you say were held by him. At the Midland Bank annual meeting (22nd January) Mr. McKenna made the following statements in his address (See Times, 23rd January):—

  It is a common notion to judge from speeches and letters in the Press, that the banks have an inexhaustible power of lending money to industrial enterprises, and that any industry suffering from general depression could be restored to prosperity if only what is termed a more generous policy were adopted by the banks. (Laughter!) A moment’s reflection, however, will show that the banks have no inexhaustible fund to draw upon. The sums they lend are balanced by amounts due to depositors, who would certainly not rest content unless confident that their money was being wisely used and could be repaid to them at any time.

According to the theory which you say Mr. McKenna held, the banks ought to be able to create deposits at will and thus draw upon "an inexhaustible fund.” It is evident that Mr. McKenna, like the late Mr. Walter Leaf, does not share your view.

Ed. Comm.

So They Say: A Decent Idea (1974)

The So They Say Column from the April 1974 issue of the Socialist Standard

A Decent Idea
“They fly forgotten, as a dream”: things said in General Election campaigns, of course. Here is one which should not be allowed to do so.

Before the election Mrs. Mary Whitehouse, as secretary of the National Viewers’ and Listeners’ Association, sent a five-point questionnaire to each of the party leaders purporting to seek their views “on the issues of indecency, obscenity and sex education”. In fact three of the questions were on that theme. The fourth asked for the leaders’ assurance that Christian religious teaching would retain a strong footing in schools. And the fifth? It ran:

  Would you establish a broadcasting commission to inquire into every aspect of broadcasting, particularly that of the facilities granted to the viewer and listener, and the effectiveness of existing safeguards against corruption and the exploitation of broadcasting by small and unrepresentative groups, whose activities enshrine anti-social and political aims.

(Guardian, 18th Feb.; our emphasis.)

Nothing about obscenity there. It means Mrs. White- house and her supporters want minorities to be refused expression of their views in the broadcasting media. Whose activities “enshrine political aims”?


Down With Profit — not Exactly —
During and after the Election the “big four” London Clearing Banks declared profits totalling over £600 millions, embodying increases over the past four years ranging from 67½ per cent. (Lloyd’s) to 99 per cent. (National Westminster). Whereupon Roger Opie, in The Guardian's Economic Notebook (4th March), carried on dreadfully — “effrontery”, “fantastic", “oligopolistic”, etc.:

  The Bankers have always had some excuse or other for their anomalous prosperity . . . Now a new one has been invented. The Chairman of the National Westminster Bank now has the impudence to argue that his and other banks’ vast profits are “in the national interest”.

Opie argues that the banks’ ordinary customers are made to subsidize their lending to pay for “the grasping excesses of the fringe bankers” and demands for advances from industry, and of the latter he says:

  Nor is this the only or the proper way to provide finance for industrial borrowers in liquidity trouble this year. Again, it is the responsibility of the Bank of England.

But this means Opie himself acquiescing in the myth of “the national interest”. He agrees that firms must be lent money at interest so that they can make profits. What is the difference? Is it nicer to see Carrington Viyella Ltd. on 11th March declaring a profit of £12,017,000 — or ICI’s £311 millions announced on 24th February? Presumably he would say these are features of the acceptable face of capitalism, as against the “unpleasant and unacceptable” one of the banks’ raking-in.

— in fact, Not at All

The source of all profit is the exploitation of the working class; where it goes is irrelevant. Part of the propaganda for nationalization (which Roger Opie ends up advocating, vis-à-vis the Clearing Banks) is that under State auspices workers are not exploited as they are under private ones.

The East German propaganda organ Democratic German Report (13th February) had a naive story on these lines. It told of Hermann Helbig, who had built up a small tailoring business after the war. It was one of 3,000 small enterprises nationalized in 1972, and he became manager. The article says:

   Property relations have changed fundamentally. Although the work is done on the same machines as two years ago, the workers are now the owners of the means of production.

That’s nice, Hermann. So the profit motive, wage- slavery and all that are abolished and . . . but what’s this?

  Hermann Helbig’s firm holds first place in the innovators’ movement of his district. Last year they achieved a per capita profit of 2,646 marks from innovations in the factory . . . New production techniques are to be introduced in the next few years and will provide for a further increase in productivity and reduction of costs.

So only the words are different. The actuality is the same.

Look, Mum — Twins !

We may have been wrong in insisting there is no difference between the “New” Left and the Old. There is a difference. The present lot are incontestably funnier, and International Socialists the most mirth-provoking of all.

Their paper Socialist Worker on 9th March had a front-page article headed keep your guard up! It began:

The Tories are out. Good.
The government that hammered workmg-class pay, living conditions and trade union rights for 3½ years has been kicked out of office.
Labour is back. That’s good, too.
We wanted a Labour victory because a vote for the Tories was a vote to carry on union-bashing, rent-raising, wage-freezing and profiteering.

Well, hurrah. And, having campaigned for a Labour government, what do IS anticipate from it?

For Labour supports the capitalist system . . .  it will surrender to the demands of the employers at home and the moneylenders abroad.
Don’t forget, the last Labour government — with a majority in parliament — froze your wages, hoisted your rents, boosted prices and profits and attempted to bring in anti-union laws.
This time the economic crisis is worse. Labour will attempt to shore up the tottering system by again turning on the organised labour movement.

Part of the System

IS, like the rest of the Left, want “organized labour” to take the form of extra-legal militancy. Something we have pointed out consistently is that workers’ organizations need trade-union law just as much as the employers and the government. One reason is simply to protect their funds which otherwise would be vulnerable.

As an example, in 1960 (chosen as a characteristic year, not an exceptional one) the Transport and General Workers’ Union lost £3,805. 4s. Id. through defalcations by Branch collectors. The standard resolution in each case includes that “proceedings be instituted under the Trades Union or other Acts” for the recovery of the moneys.

The sum is small in relation to the huge funds of the TGWU but the need for legal protection of funds is obvious. However, it can be added that in the same year the Union donated £75,000 to the Labour Party.

From Rags to More Rags

One of the myths of capitalism is that any man can become his own master and climb above the rest. The November issue of the New Zealand transport-union paper, Wheels, which has just reached us, has something on this subject. It cites a submission made by the Wellington Union to a Labour Bills Committee hearing:

The attraction to a worker to become an owner-driver is that:—
(a) His income will be greater than if he was an employed driver.
(b) He will, by physical effort and the application of his own initiatives, be able to increase even still further his income, and
(c) He will enjoy greater freedom of living, working, etc., due to being “his own boss”.
On examination it is found that in a great many cases this attraction is more illusory than real . . . The realities of this situation are that these workers are generally more heavily exploited than “employed drivers”.

Down to the See Again

On 3rd March The Sunday People, searching diligently as ever for scandals, found them among the priesthood in Rome:

I can inform His Holiness that when it comes to La Dolce Vita, the “sweet life” of Rome, there are no sweeter-living exponents than some of these young priests — and their more experienced seniors.

Lots about wine, night clubs, and permissive nuns. It would hold no interest — except that the Catholic Church lays great store by the text “By their fruits ye shall know them”, The common condemnation of Protestantism is that Martin Luther was a debauchee.

Will Catholicism therefore consent to being known by these fruits picked up by the Sunday People? Of course not. There are none like the religious for having their fruit and eating it. But how absurd they all are — reporter, Pope and priesthood alike!

Robert Barltrop

Public Accounts Hodge Podge (2015)

The Greasy Pole column from the May 2015 issue of the Socialist Standard

If anyone had any doubts about the purpose and activities of those luminous, towering buildings in what was once London Docklands they can refer to the most assertive of them, announcing itself in enormous letters on high, as HSBC. This is the successor to what was named the Hong Kong and Shanghai Banking Corporation, founded in 1865 to spread out until it achieved its place as the second biggest bank in the world, reminding us of the power of the class who own it and fashion all its operations. But now the bank is under pressure to justify its record in matters such as the failure to pay legal taxes, the rewards to its upper management and a pervading policy of corruption. All of which has attracted the attention of the Public Accounts Committee (PAC) where they are assumed to be certain of their sources of information and of their intention to use what they know. Such as was ruthlessly imposed by its recent Chairman Margaret Hodge MP for Barking – who insists that she is not to be known as Chair.

Exasperated
HSBC was among the victims of the PAC, under suspicion of colluding in tax avoidance at their Swiss Branch, leading to the withdrawal of blocks of cash amassed through such activities as dealing in drugs, armaments and all that entailed. Shortly before grilling some of the bank’s top executives Hodge had set the scene by informing another witness who exasperated her with his evasions that ‘. , , honestly, I want to put a bomb under you guys’. So the prospects were not promising for HSBC’s Non-Executive Director Rona Fairhead, who assured the Committee that it did not follow from her salary of £513,000 a year that she would be expected to be aware of the tax offences, even though they were estimated to have reached some £135 million in the UK ‘. . . I can assure you we had no evidence of tax evasion’. But Hodge was unimpressed: ‘I think you knew. Either you colluded in tax evasion or you didn’t know. In that case you are either incredibly naïve or totally incompetent’. And then, in relation to one of Fairhead’s other lucrative responsibilities ‘. . . you should think about resigning and if not, I think the government should sack you’.

Loony
Who is this fearless, feisty champion of truth and probity in public office? Hodge is a multi-millionaire who was brought to England as a child when her family left Egypt to escape the anti-Semitism arising from the 1948 Egypt/Israeli War. Settled in London, they grew massively rich on the proceeds of their family-owned steel processing and trading company which now has a turnover reckoned in billions, and of which she is still a shareholder. After university Hodge worked in Market Research and in 1973 she was elected as a local councillor in the London Borough of Islington. She rose to Chair of the Housing Committee, something of a hot seat in a borough notorious for its housing problems. But she was well-connected; her Vice Chairman was Jack Straw and a neighbour was Tony Blair, whose wife Cherie was employed in the legal firm of Hodge’s husband. At that time the Social Democratic Party was growing, causing large scale desertions among Islington’s Labour Party – an opportunity for Hodge to take over as Leader of the Council. Islington was reputed to be a hot-bed of ‘loony lefties’ where they attempted to conceal attention from the chaos on the ground by flying a red flag from the roof of the Town Hall.

Abuse
Hodge stepped down from the Council in October 1992. The more suspicious observers may have regarded this as an example of shrewd timing because it happened when a massive scandal about sexual abuse of children in Islington council care was about to be exposed. In 1985 Demetrious Panton had written to the council to complain about his treatment when he was in their care during the 1970s and the 1980s. The doubts and anxieties about this were aggravated by the council’s failure to reply to Panton until 1989, and then to inform him that while regretting his experience they did not admit to any fault on their part. But the matter did not die away because at that time Senior Social Worker Liz Davies and her manager were facing a succession of severely damaged youngsters who, apart from other problems such as homelessness and involvement in petty survival crime, were saying that they were regularly abused in private or council homes. ‘It was like a queue’ was how Davies described what she found at her office each morning; ‘There is a lot that I just can’t speak about’. Apparently, Hodge would not hear social workers’ pleas for additional resources: ‘She only cared about the budget’. Then some crucial publicity was threatened in October 1992 from the Evening Standard publishing the first of a series of reports on the abuse at the care homes, which Hodge chose to describe as ‘a sensationalist piece of gutter journalism’.

Apology
It was shortly after this that she left the council and, after a by-election in 1994, entered the House of Commons to support Tony Blair’s campaign for the Labour leadership. Her reward came in 2003 when she was appointed as Minister for Children. This was too much of a shock for even the most ardent of Blairites as it aroused the still festering anger about what had happened, and what had allegedly been suppressed, in Islington. For one thing an independent report by the Director of Oxford Social Services in 1995 had largely found that the original complaints had been valid and described the affairs of Islington council as ‘disastrous’. But Hodge fought back, writing to the chairman of the BBC in an attempt to stop a Radio Four programme about the abuses which she described as ‘deplorable sensationalism’ and to inform him that Panton was ‘an extremely disturbed person’. In all this she was going too far; she offered to apologise to Panton but he refused this as inadequate so that in the end she had to make a public apology in the High Court and to pay him £30,000. So it could be said that at least the Panton episode had reached some kind of conclusion 25 years after it had begun. And in June 2010 Hodge was made Chair of the PAC, in which job she has impressed a clutch of Members too easily blinded by her energetic concealment of cruel facts under her fog of self-promotion.

Ivan

The problem is not the banks . . . it’s capitalism (2018)

From the December 2018 issue of the Socialist Standard

In April 2017 the German central bank, the Bundesbank, published a paper on ‘The role of banks, non-banks and the central on the money creation process’ (LINK). Accepting the current prevailing definition of money as including bank loans, it was mainly about bank lending and what determined its level. Some have read into it more than may have been intended.

At one point, the article stated:

   ‘. . . a bank can grant loans without any prior inflows of customer deposits. In fact, book money is created as a result of an accounting entry when a bank grants a loan. It posts the associated credit entry for the customer as a sight deposit by the latter and therefore as a liability on the liability side of its own balance sheet. This refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant loans using funds placed with them previously as deposits by other customers.’ (‘book money’ and ‘sight deposits’ are translations of German terms corresponding to ‘bank credit’ and ‘current account’ in English.)

This passage was seized on by adepts of the thin-air school of banking to support their contention that banks mysteriously create out of nothing the money they lend. But this is not what the passage or the rest of the article says. Just because banks may not get all the money they lend directly from deposits does not mean that they therefore simply conjure it up out of thin air.

The passage was in fact very carefully worded. First, it brings out, with the use of the terms ‘book money’ and ‘accounting entry,’ that what is being described is an accounting practice followed by banks when a decision to grant a loan has been made. Double-entry bookkeeping requires that a loan, like a deposit, be entered both as an ‘asset’ and as a ‘liability’.

Second, its description of the ‘popular misconception’ is qualified by the words ‘at the time of lending’, leaving open the possibility that the loan may have to be funded at some point from deposits. These words were clearly deliberately inserted because this is precisely what the article does go on to explain.

Whatever the way in which the accounts are presented, the money has to exist since, as soon as the borrower spends the money that the bank has put into their bank account, it has to be found. So where does it come from? According to the article, it comes in the first instance from the bank’s ‘reserves’ at the central bank. The article uses the example of where the borrower uses the loan to buy a machine and where the seller puts the money paid for it into an account at a different bank. The first bank therefore owes the second bank money, which is settled by a transfer of some of its reserves at the central bank to the reserves held there by the other bank.

But what are these reserves? Where do they come from? Far from being conjured up out of thin air, they will have come either from the bank’s capital or from depositors. In either case, previously- existing money.

But that’s not the end of the story. In a section entitled ‘Constraints on the creation of money and credit by individual banks’, the article lists three: ‘interaction with non-banks’ (i.e., other businesses and households), banking regulations, ‘and, not least, by banks’ own inherent interest in profit maximisation’.

Banks are profit-seeking financial intermediaries that borrow money at one rate of interest (either ‘retail’ from individuals or ‘wholesale’ from the money market) and relend the money to borrowers at a higher rate. The spread between the two rates is the source of a bank’s income; after it has paid its operating costs, including staff wages, what remains is the bank’s profits.

Banks’ ‘inherent interest in profit maximisation’ affects how what the article describes as ‘the need for banks to find the loans they create’ is met. It means that they are going to seek to obtain the needed funding as cheaply as possible, i.e., at the lowest possible rate of interest:

‘Deposits play a major role in this regard, for while banks have the ability to create money – that is, to accumulate a stock of assets by originating liabilities themselves in the form of sight deposits – they need funding in the form of reserves.’

They need this because, when a bank makes a loan and the borrower spends it, the money will leave the bank and most if not all of it will normally be deposited by those the borrower bought things from in some other bank. Although the immediate way to replace this – fund the loan – will be to use reserves the bank already has or can procure ‘at any time via the interbank market or the central bank’, this is not the cheapest way:

‘Using short term interbank liabilities as a source of funding gives rise to liquidity and interest rate risk because of the danger that the bank might, at some point in the future, no longer be in a position to prolong the short-term interbank loan or that it can only do so at a higher cost. As for interest rate risk, the risk of interest rates increasing for central bank and interbank could drive up funding costs, thus eroding, or wiping out altogether, the income derived from lending.’

Which is precisely what happened to Northern Rock and HBOS during the financial crash of 2008.

To avoid this, banks seek longer-term loans, in particular from depositors (deposits into a bank are in effect, and in law, a loan to the bank). Here they face competition from other banks. Fixing what rate to pay those they want to borrow from is a delicate balancing act. If it’s too low it will put off depositors who will then go instead to one of the bank’s competitors; if it is too high this will cut into their income and so their profits.

Although we can have misgivings about describing a bank’s decision to authorise a loan, and the accompanying accounting practice, as ‘creating’ money rather than simply ‘making a loan’, the Bundesbank article shows that even the banking authorities themselves acknowledge that banks are financial intermediaries which borrow money at one rate of interest and re-lend it at a higher rate; that banks cannot really ‘create credit’ whatever the bookkeeping practice might suggest.

What banks deal in – and lend – is a financial representation of wealth, not wealth itself which can only be produced by humans working on materials that originally came from nature, fashioning and refashioning them into something useful.

There is nothing especially bad about banks compared with other profit-seeking capitalist enterprises. They are merely in a different line of business. Banks are not the cause of the problems that the majority class of wage and salary workers face. It is capitalism and its production for profit. So the solution is not to reform banks but to abolish capitalism.

Adam Buick

No Mystery About Banking (1966)

From the December 1966 issue of the Socialist Standard

Banks have been in the news, with the failure of the Intra Bank in Lebanon, the largest in the Middle East and a bank in Detroit, the Public Bank of Detroit.

Both banks claimed to have assets more than sufficient to pay depositors eventually, but neither had the cash available when the depositors took fright and wanted their money back. The Intra Bank is reported to have invested much of the £86 million deposits (some of it from oil-rich Arab clients) in such varied properties as a West End Hotel in London, docks in France and properties in Paris and America. As the Sunday Telegraph (23 October) remarked:– “This is dangerous banking practice – office blocks cannot be sold overnight to repay depositors”.

The Detroit Bank, which had deposits of $117 million at the end of 1965, had got heavily involved in financing “home improvement” work.

It was the biggest American bank failure in thirty years.

It was the familiar story, recalled by the failure of a small British bank a few years ago, when the manager complained sadly that “depositors were taking the money out faster than they were putting it in”.

The outcome has been that the Detroit bank has been taken over by another American bank, and the Intra Bank, with Government and other aid, has re-opened. Among those who propped it up were the Maronite Patriarch of Antioch, with that the Times described as “the not inconsiderable resources of his Church”.

But what is of more lasting interest is the light such bank failures throw on the absurdities of the banking theories held by what the late Professor Cannan called the “Mystical School of Banking Theorists”.

Before their ideas gained their present widespread acceptance economists and bankers, though they disagreed about other things, had no doubts about the basic principle that what a bank lends or invests is placed at its disposal by depositors.

Marx for example wrote: –

A bank represents on one hand the centralisation of money-capital, of the lenders, and on the other the centralisation of the borrowers. Its profit is generally made by borrowing at a lower rate of interest than it loans (Capital Vol. 111. P. 473).

And a banker, Mr. Walter Leaf, Chairman of the Westminster Bank, wrote: –

The banks can lend no more than they can borrow – in fact not nearly so much. If anyone in the deposit banking system can be called a “creator of credit” it is the depositor; for the banks are strictly limited in their lending operations by the amount which the depositor thinks fit to leave with them. (Banking. Home University Library 1926.)

But the mystical school (which included Keynes) would have none of this. They saw by experience that a prudently conducted bank, having the confidence of depositors, could rely on them to leave the bulk of their deposits in the bank, so that the latter could safely invest about twelve to fifteen per cent, keep about 20 per cent in a form of lending which they could call on immediately, keep about 10 per cent in cash in their tills or at the Bank of England, and use about one half to make advances to customers. From this they make the topsy-turvy deduction that out of the 10 per cent cash (it is now down to 8 per cent) the bank had “created” the rest.

The Committee on Finance and Industry (The Macmillan Committee) in its report in 1931 claimed that “the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on an overdraft or purchasing securities a bank creates a credit in its books, which is the equivalent of a deposit”.

They went on to give what they called a simple illustration. First they assumed that all banks had been merged into one bank. Then they described what they said would happen if a depositor deposited £1,000 in cash, the bank relying on past experience that it was only necessary to keep £100 of it in cash. The bank, they said could now make loans (or purchase securities) up to a total of £9,000 “until such time as the credits created . . . represent nine times the amount of the original deposit of £1,000 in cash”. They were of course assuming that when each borrower drew on his account to make payments the cheques would come back into other accounts in the bank.

Two things they overlooked or obscured. In the real world there are quite a lot of separate banks and in the nature of things most of the loans made by each bank are used to make payments, not to customers of the same bank, but to customers who have accounts in other banks. So if for the moment we accept the assumption that the banks by making loans have created deposits they are doing most of it not for themselves but for their rivals. More important, their simple illustration is too simple. If their argument is sound it could be applied to a bank just being formed just as well as to a bank already functioning. (They were silent on this.)

But as soon as it is put like that its absurdity becomes apparent. A newly formed bank with no deposits except the £1,000 cash just handed in would, on the past experience which the Macmillan Committee itself accepted, invest £150, have £200 on call, £100 in cash and make advances of £550. Thus its total of investments and advances would be, not £9,000, but £900. It would only need one borrower of £1,000 to draw a cheque paying it to an account in another bank, for the first bank’s £1,000 cash to be reduced to nothing.

The same principle applies to an existing bank; for example if we take total deposits £100,000, with £15,000 invested, £20,000 on call, £10,000 in cash and advances of £55,000. For the existing bank would only have been able to expand to the £100,000 level by treating each additional deposit of £1,000 cash in the same way, with investment and advances totalling £900 out of each £1,000, not the mythical £9,000.

The members of the Committee were soon faced with a problem. Taking their words at their face value the late Major Douglas concluded that this power of “creation” meant that a bank “acquires securities for nothing”, creates new money “by a stroke of the banker’s pen”, and that the banks “are the potential or actual owners of everything produced in the world”.

Faced with this, members of the Committee who were asked about it, including the late Reginald McKenna, Chairman of the Midland Bank, had to repudiate Major Douglas. The fact remains however, that Major Douglas was only taking them to the logical conclusion of their own mystical theory of banking.

Edgar Hardcastle

It's always warm in a bank (1974)

From the August 1974 issue of the Socialist Standard

A building of strong architecture with a fine oak door and shiny brass. In winter the snow is cleared from its doors. Inside we find leather-upholstered seating and the smell of polished wood and floors. But most of all we find it is always warm. No overnight ice on the windows like the bedrooms of millions of houses, the reason being the heating is on all night. Surely this should be a haven for weary travellers, a refuge for the old and cold? But it isn’t, it’s a bank.

It’s always warm in a bank, unlike the overcrowded draughty conditions of a doctor’s surgery or any waiting rooms that affect the working class.

You would say that the workers there must surely be lucky, but seeing all the job advertisements in the papers and on the television, the mundane work must undoubtedly cancel out the warm conditions. Then when they leave work for home they also become weary cold travellers struggling with the elements, the fuel bills and inflation.

How long will you live in a world where only the quest for profit can bring comfort? In a world where thousands of old people are dying of the cold, it’s always warm in a bank.

D. Wright

50 Years Ago: Lord Beaverbrook & Nationalisation of Banks (1982)

The 50 Years Ago column from the May 1982 issue of the Socialist Standard

It is the fate of labour Party reformists always to have their reform demands stolen by the openly capitalist parties as soon as the work of popularisation has been carried sufficiently far to give the demands an electoral value. A particularly cruel theft has just been perpetrated at the expense of the Independent Labour Party by Lord Beaverbrook who is a Conservative.

At the last election the workers showed emphatically that they did not like the Labour Party-1.L.P. programme. This chilling experience caused the I.L.P. to polish up its old reforms and look around for some new and more attractive ones. One of the old demands that appeared to contain promise of being a good vote-catcher was the nationalisation of the banks. But hardly had the I.L.P. published the Report of its Finance Policy Committee, recommending a scheme of state control for banking and credit, than Lord Beaverbrook snatched it up. These are the two proposals for a state bank.

The I.L.P.:

A central bank supervising the issue of credit and currency, international exchange operation and government income and expenditure. A unified banking system, with branches throughout the country, for the local financing of industry and commerce. (New Leader, March 25.)

Lord Beaverbrook:

Send the Bank of England about its business! Let it continue to perform the functions of a joint-stock bank, establish a Central bank, owned by the nation, equipped with all the powers necessary to provide abundant credit and hedged about with all the restrictions required to safeguard the permanence and stability of the structure. (Sunday Express, April 17, 1932.)

Lord Beaverbrook’s article was headed “Don’t reduce wages”, and in it he appealed to the workers to rally round the demand for nationalised banking as the way to prevent wage reductions. 

(From an editorial State Control of Banking- Lord Beaverbrook steals some thunder, published in the Socialist Standard, May 1932.)

Sting in the Tail: Labour Sees Stars (1992)

The Sting in the Tail column from the April 1992 issue of the Socialist Standard

Labour Sees Stars

The main British political parties have long-since been aping the American practice of wheeling-out showbiz stars to support them at elections.

Last month there was a big swing of Scottish "artistes" from Labour to the Scottish National Party. Labour countered by parading their famous faces before the media with comedian Robbie Coltrane topping the bill.

Alas, the show bombed when Robbie fluffed his lines by voicing support for "an Independent Scotland", which is the SNP's policy, instead of Labour's devolution policy.

Serves the Labourites right! What kind of party is it that would even want, let alone seek, the votes of those who would vote for it because some politically clueless entertainer supported It?

Where Power Lies

At a recent Socialist Party meeting a young left-winger claimed that real power lay not with parliament but in the boardrooms of big business. It Is an old, familiar argument but it bears no resemblance to what actually happens.

For example, the Institute of Directors urges the government to cut the standard rate of taxation to 20p and so bring economic recovery. The Confederation of British Industries tells the government that the way to recovery is not through tax cuts but by more government spending, training programmes, etc.

What does the government do in the face of all this boardroom "power"? It simply ignores the I of D and the CBI and steers the course it thinks is best for British capitalism.

& Where It doesn’t

The other leg of the above argument is that real power lies not only in the boardrooms but with the military brasshats.

That this belief is equally wrong can be shown by the latest cuts in the size of the army. These are so large that the House of Commons Defence Committee warned that: -

The reduction might be so great that the force would not be able to cope with crises or even peacetime duties . . .  and effectively police Northern Ireland.

ITV's Oracle 6 March

And what can the brasshats do about It? Nothing except fume with impotent rage as the number of soldiers that they have to play with is cut and cut again. Where does power lie?

Don't Bank On It

Many people have funny ideas about banks. They think banks have unlimited funds to lend, make bigger profits than any other industry and so on.

To these errors is added one from a writer in the February issue of the anarchist paper Freedom. He claims that banks are a "largely risk-free Investment" for British capitalists.

A glance at the current plight of the banking industry shows otherwise. During February Britain's "Big Four" banks, Barclay's, Midland, Lloyd's and NatWest, between them declared another £6 billion in bad debts for 1991 to add to the £4 billion total for 1990.

On top of this their combined profits fell by £700 million, their share prices are depressed and all four predict more hard times to come.

If British capitalists are looking for a risk-free investment then banking certainly isn't it.

Got Your Share?

Since 1979 the number of shareholders has increased from 3 million to 11 million now. This is almost entirely due to privatisation, the flotation of Abbey National, etc., but even so, the proportion of shares held by individuals has fallen from 28.2% to 21.3% during that time.

Now comes an organisation called ProShare which aims to reverse this decline:

The ProShare chairman said yesterday that share ownership was hindered by ignorance, high dealing costs and unfair tax treatment . . .

The Herald 21 February

ProShare plans to educate the ignorant about the risks and rewards in owning shares, press for individual investors to get the same taxation treatment as the big institutions, promote the spread of employee share owning schemes, and more.

Do we have a moral to this story? The Herald obligingly provides one for us:

It all sounds very grand and ambitious. Of course one "black Monday" could undo all the good work.

Dignity of Labour?

The quest for profit is unrelenting in a capitalist society. How unrelenting was shown in The Independent (13 March). German shipowners have been given a trial dispensation by the government on the manning levels of container ships.

And so it is that the glass lavatory has made its debut as a new navigational aid to keep up 24-hour-a-day productivity. A transparent toilet giving panoramic views of both port and starboard has been installed on the bridge of three ships owned by Hapag Lloyd, the large German shipowner. The commanding WC allows crew numbers to be cut to 13 for the 30,000 ton container ships as part of trials for new low-manning arrangements. The requirement to have at least two people on lookout at any time has been suspended as a result.

It is good to see that the workers are not taking this lying down - or rather sitting down. Indeed one of them Knut Schronder, a ship's pilot on the Kell Canal, shows a great deal of awareness about capitalism and how it works.

In a recent letter of protest to the German transport ministry he wrote: "To me this is an expression of utter contempt for human beings. Productivity must be kept up even when shitting. You can’t say clearer than that when declaring your support for an unsocial market economy."

The Scorpion.

Sting in the Tail: Perks of the Job (1992)

The Sting in the Tail column from the July 1992 issue of the Socialist Standard

Perks of the Job

Whenever one of Europe’s African colonies achieved independence its new black ruling class quickly adopted the luxurious lifestyle of its white predecessors.

In South Africa the leaders of the African National Congress are introducing themselves to the good things In life. According to The Independent on Sunday (17 May) Nelson Mandela has bought a "spacious new home in gracious Houghton, Johannesburg's answer to Hampstead", for £100,000, but this is probably a hovel compared to ANC chairman Oliver Tambo's £500,000 house in Sandhurst, "the most expensive suburb In the country".

Their good taste also extends to cars: a national executive member "recently remarked that the underground garage at ANC headquarters looked like a Mercedes and BMW showroom".

In one way the ANC leaders are different from those black ruling classes elsewhere in Africa: they aren't waiting until they actually get their hands on political power before they get them on capitalism's little luxuries.

Baying for Blood

Aren't our policemen wonderful? At the annual conference of the Police Federation in Scarborough a call to abandon their policy of restoring hanging was heavily defeated.

Not even the examples of the Birmingham Six, the Guildford Four and the numerous other innocent people who would be dead if hanging was still law, made any difference to this bloodthirsty mob.

Pro-hanging delegates raged at liberals, wets, do-gooders, etc., and the conference was urged to "Remember our murdered colleagues" (The Guardian 22 May).

So, in the Federation's eyes killers should hang, but do they think this should apply to policemen who were later found to have had innocent people convicted and hanged on trumped-up murder charges?

Taming the Trots

During the mid 1970s the Socialist Party in Glasgow had competition for a while at its Saturday outdoor meetings from some young Trotskyists of the long-since vanished International Marxist Group.

Their speakers outdid one another In demanding violent insurrection, denouncing the Labour Party and ridiculing electoral activity. One in particular was fond of telling his audience "we don't want your votes, It's your ACTION we want!"

During this year's local elections, there on TV was a Labour Party official condemning the Trotskyists of Scottish Militant and especially Tommy Sheridan. He looked familiar. . . yes, it was that same firebrand from the 1970s!

This poacher-turned-gamekeeper is now one of "the leading lights in the movement to rid the city of Militant" (The Glaswegian 16 May), and his attitude to votes has changed too: he was an unsuccessful Labour candidate at the general election and in the May local elections he lost again to . . .  Tommy Sheridan!

The spectacle of Trotskyist zealots ending up as Labourites is a familiar one, and nobody should bet against the same thing happening, sooner or later, to the current crop in Scottish Militant.

In a Nutshell

The killing and atrocities in what was Yugoslavia are being blamed by the West (the US and Its allies) on Serbia and in particular its leader Slobodan Milosevic.

A letter writer in The Guardian (27 May) pointed out the double standards used by the West in condemning Serbia for the use of force while remaining silent when East Tlmoreans, Thai demonstrators, Latin American peasants and Indians, Palestinian refugees and the victims of Pol Pot are slaughtered.

He added that whatever crimes Milosevic may be guilty of

He has a long way to go before he can be classed with the likes of Pinochet, Duvalier, Suharto, Pol Pot, Saddam Hussein, Samuel Doe and D'Aubuisson, all of who enjoyed the protection of the US while perpetrating unspeakable atrocities.

"Mean Jeane” Kirkpatrick, a prominent member of the Reagan administration, summed up very well the view taken by the US government of the above-mentioned murderers, when she said - "They may be bastards, but they are our bastards."

High Street Massacre

The news that Lloyd's bank has dropped its bid for Midland bank has been welcomed by the banking trade union BIFU.

If the takeover had succeeded then Lloyd's, besides getting rid of a major competitor, would have made huge savings by closing 1,000 High Street branches and cutting 20,000 jobs.

BIFU opposed the proposed takeover and accused Lloyd's of being more interested in bigger profits for its shareholders than it was in worker's jobs!

But this is only normal practice in capitalism. British banks cut 40,000 jobs in 1990-91 with possibly another 30,000 in 1992, and all this without any takeovers.

The fact is that there are too many banks in Britain competing for the available business. To make matters worse the building societies are now providing banking services so the pressure to cut jobs will continue.

BIFU should know that banks, like any other business, exist to make as much profit as possible and not to provide jobs for workers.

Scorpion.

Singing the Praises of the Beautiful Banks (2017)

From the June 2017 issue of the Socialist Standard

The Co-operative bank has had various scandals in recent years, financial and otherwise. The Co-op 'brand' has decided it needs to clean up its image. The result is a current television advertising campaign which is as preposterous as it is insulting to our intelligence. The television ads are voiced by Russell Brand’s former radio show on-air commentator, George The Poet, who utters ponderous platitudes as if these capitalist high-street banks and supermarkets were some kind of socialist utopia. In fact, of course, today’s Co-op bears hardly even a trace of the idealism of the Rochdale Pioneers of 1844. Like the John Lewis Partnership, it has long succumbed to the pressure to act just like any other profit-hungry, hierarchical corporation within a capitalist world.

In 2016 a total of £16 million was allocated nationally by the Co-op to community projects and 'good causes', out of a group turnover of £7.1 billion. Just three of their bank directors (Niall Booker, Liam Coleman and John Baines) that year shared an income of £4 million, a quarter of the entire national community causes budget. So when George The Poet intones 'let’s work together and strive for unity' as 'great things happen when we work together', it is an utter sham. Likewise, when he asks, 'What if communities got a share of the profits? What if everyone could win from this?' he neglects to mention that last year the share handed to 'the community' (in lieu of tax) was only 2p out of every £10.

The recruitment of artistic talent to sell such messages has become the holy grail of companies, and it was a great coup that they had this film directed by one of our greatest living film makers, Shane Meadows (This Is England, Dead Man’s Shoes, SomersTown, A Room for Romeo Brass), well known for his working-class realism and affinity. Rather than carp from the sidelines, however, we can rely on the self-description from the horse’s mouth, as it were. The director of the Co-op brand, Helen Carroll, has praised the style of this new campaign, as it 'doesn’t feel like advertising at all. It shows the power of community'.

In using that power to sell products and make millions for people like Niall Booker and Liam Coleman, the Co-op has shamelessly copied a series of adverts run shortly before by a rival bank, also with false pretensions to being less bank-like than other banks, the Nationwide. Those ads featured a whole range of 'cool' and popular young performance poets, telling us through their rhyming sermons that Nationwide is another bank devoted to sharing, caring, community, responsibility and fairness. But try going to either of these banks if you have just been made redundant and can no longer pay your mortgage or rent. Ask them to show a bit of community spirit by covering it for you for a couple of years. Let us know their response.

All of those poets were either incredibly stupid and gullible, or ambitious and easily bought. The Nationwide, like the Co-op Bank, is a capitalist institution, committed to invest in order to accumulate surpluses. It stands right at the heart of the most exploitative system ever to curse the human species. Is this what music and lyrics are for, to praise banks? If only these artists had possessed one tenth of the decency and principle of Ricky Gervais, who once turned down a million pounds rather than advertise something he found tacky and undesirable – and that was at a time when he was not yet wealthy himself. What those cheap, venal sell-outs bought into was the modern trend in which capitalist corporations do not advertise the products they are selling, but rather their proclaimed decency and high moral values. Of course, they protest too much. The people and organisations who really devote themselves to caring about people and working for the community do not need to spend millions of advertising dollars insisting how nice they really are.

Clifford Slapper

Economics: Banks and Credit (1975)

From the February 1975 issue of the Socialist Standard

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.

Inflation Fraud

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? 

Jim D'Arcy

Economics: Do Banks Produce Wealth? (1975)

From the January 1975 issue of the Socialist Standard

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.

Capital

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.

(To be concluded)

Jim D'Arcy