Letter: Not obscure nit-picking (2025)

Letter to the Editors from the April 2025 issue of the Socialist Standard

Not obscure nit-picking

Thank you for publishing a review of my pamphlet entitled Time to Get Rid of Money (as are the Old Moles Collective as a whole for the various reviews of our books that you have published).

However I do find it sad that the SPGB needs to criticise in such a petty way. Why cannot you engage in a serious discussion? After all, as the review seems to grudgingly accept, we do both believe that class society and a society based on money must be eliminated. One would think this would be a basis for a more in depth review and some serious analysis and discussion of a complex money system and the way it works eg, its impact on the poor under capitalism, the wealth pyramid, the anarchy of the market, the increase of working class debt and debt generally, let alone the fact that money is purely electronic and that today gold is not used to backup currency.

But no, ALB ignores all these issues to perpetuate a traditional weakness of discussion by the leading figures of the SPGB in favour of the need to score cheap jibes through a mixture of false representation of ideas and a lack of effort. I don’t pretend to have expert, detailed workings of today’s complex financial systems at my fingertips but at least I am trying to explain the essentials and engage in discussion about what it really is. The Old Moles know that we will not convince everybody instantaneously of the absolute correctness of our political positions, so discussion is what we primarily aim to develop with our books.

First of all let us take note of some brief but important facts:

The level of world debt in 2024 is approx $300 trillion yet the level of world GDP for 2023 only equals approx $100 trillion dollars. The total value of gold in mines to 2024 is much less than this and equals only $18.07 trillion (212,582 tonnes of gold have been mined to date at a market price of $85 per gram at end of 2024).

For the UK the economy’s net worth is about £11 trillion (2020) and the level of UK GDP equals £2.5 trillion (2022). Nevertheless, the level of debt in the UK is approximately £5 trillion (2024) and, according to the Bank of England, the level of bank deposits in the UK come to £1.5 trillion (2023). However the amount of actual sterling available comes to only £94b (2022)

Did ALB make any real effort to understand such figures? They are easy enough to find and check online and clearly show that the money in circulation is much less than deposits in the banks and especially of the value of debt that exists. Furthermore, bank reserves are restricted to a small proportion of the deposits held by banks. Where then is the real money that ALB has so much trust in? ALB’s faith in the capitalist banking system is touching but that is what the financial system depends on ie faith and it is sadly misplaced in a socialist.

ALB blithely dismisses the evidence from the Bank of England and the former head of the US Federal Reserve and tries to devise his own better explanation of loans that use reserves and bank deposits, but fails to realise that only 4 percent of deposits is kept as cash by bank, the remaining deposits and reserves are entirely electronic!

Yes, the idea of creating currency ‘out of thin air’ is hyperbole and yes the banks need to make a profit on this activity which may well limit the amount they can create at any given time, but this electronic money is created by computer and cash is printed to maintain this system. This is the money system in today’s capitalist economy.

In every economy, the level of currency is only sufficient to facilitate the circulation of commodities so it does not cover total deposits let alone total GDP and the deposits and reserves held by banks. Moreover there is the fact that the valuation of a currency can change and even collapse — as recently in Argentina.

Any rational interpretation of this situation can only say the money is not worth actually anything. It is backed only by other coins and notes or by electronic records. All currency physical and electronic is only valuable and only works because the state backs it with promises and relies on the population keeping its faith in the money system — and ALB, I’m afraid, does his bit to support that system.

Debt is not the main problem, capitalism and its shit financial system is and perhaps SPGB needs to investigate and discuss how capitalism really works instead of scoring debating points.

Phil Sutton

Reply:

It was the title of your pamphlet and your political background that led us to read and review it. We had expected ‘some serious analysis and discussion of a complex money system’ from a Marxian point of view but were disappointed to find that it endorsed a mistaken theory of the nature of banking that we had been combating for years, viz., that banks can create money ‘by a stroke of the pen’ (as it was put in the 1920s) and generate an income for themselves from the interest they charge for lending it — ‘an electronic data entry costs virtually nothing but earns interest for the bank!’, as you put it.

If this was the case, a bank would be a very special capitalist enterprise, one that could create a part of its capital out of thin air and obtain a profit from it. Every capitalist would want to be a banker. Actually, a bank’s business model is to borrow money at one rate of interest, whether from savers or the money market, and to re-lend it at a higher rate. This ‘spread’ is the source of its income; what is left after paying its costs in terms of buildings, computers and staff is its profit.

You claimed the authority of an article in a Bank of England publication for your view. Nearly one third of our review was taken up with an extensive quote from the article in question which showed that it did not support your view. What you call our ‘own better explanation of loans that use reserves and bank deposits’ was in fact that of the Bank of England article. You now concede their point that the need to make a profit ‘may well’ limit the amount of money banks can lend at any one time. But ‘may well’ is too weak; a bank will stop lending at the point where it costs it more in interest to cover its loans than the rate it could charge borrowers.

You also concede that to say that banks can create money out of thin air is ‘hyperbole’. If banks really did have that power then the labour theory of value would be invalid.

Value is only created in production by workers exercising their physical and mental energies to transform materials that originally came from nature into goods and services for sale. Initially it is divided into wages and surplus value, generating purchasing power. Money measures and circulates value. Originally money was a product of labour with its own value. The precious metals ceased to function as cash ages ago and, since 1971 when the US cut the link between the dollar and a fixed amount of gold, ceased to be the general standard of value as well (even if they remain with other things a store of value). Nowadays what is popularly called ‘money’ are tokens for it, electronic as well the more traditional pieces of coloured paper and metal disks, all of which are, as you point out, intrinsically worthless.

Money has various functions and you are confusing money as a means of payment with money as a unit of account. The fact that GDP (what is produced in a year) is expressed in units of money does not mean that an equivalent amount of money is required to buy it. Money circulates, ie, can be used in any number of transactions. Similarly, it is not a problem in itself that total debt (what businesses, governments and people owe each other), expressed in units of money, is greater than GDP, if only because the same sum of money can be used to make and settle more than one debt. Again, there is no need for a bank to hold the full cash equivalent of what it lends. That would undermine the whole idea of banking which is based on the assumption that those who have lent it money will only want to withdraw an average amount of it at any one time (4 percent seems to be the current norm in Britain), meaning that the rest can safely be loaned out. Thus, the total amount a bank lends is greater than the amount it needs to hold as cash, even if it can’t be greater than the amount the bank originally borrowed or borrows.

Fundamentally, the main point at issue here is not just some academic disagreement about how banks work, but that this has important political implications. It’s not obscure nit-picking. Those who believe that banks have the power to create money by a keystroke (formerly stroke of the pen) advocate that this supposed power should be taken from banks and used by some public body either to finance better social amenities or to pay everyone a ‘social dividend’. It is the theory behind a specious form of reformism. Socialists need to be able to refute it as part of our case that capitalism cannot be reformed to work in the interest of the majority. How can we do this convincingly if we share the same mistaken premise as them?

Editors.

Letter: The compensation of Bank of England stockholders (1946)

Letter to the Editors from the January 1946 issue of the Socialist Standard

(We have received from a correspondent the following letter, which we consider will be of interest to our readers.— Ed. Comm.)

Sir,—A few facts regarding the compensation terms given to Bank of England stockholders might be of interest to your readers. The unit of Bank of England stock is £100. It was quoted on the Stock Exchange recently at £382. Stockholders have been receiving 12 per cent during the past 20 years. The Labour Government proposes to give stockholders, in exchange for their Bank stock, four £100 units of Government stock, equal to £400 for each unit of Bank stock. This new stock will have the guarantee of the State behind it. At 3 per cent. the Government stock will give the same return as Bank of England stock, namely, 12 per cent. The new stock is redeemable in 1966 at the option of the Government. I have found; Mr. Editor, that many Labour Party supporters conclude that at the end of 20 years the stock will be cancelled without the stockholders receiving anything in return. This, of course, is not the case. It is not surprising that such a misconception should have arisen. Several Labour journals did not appear over anxious to explain the details of the compensation terms. Journals devoted to the interests of investors appear to have been more liberal in giving details of the compensation terms. For example, the following appeared in the "Investors' Chronicle," 13th October, 1945, page 444: "So far as holders of Bank stock are concerned, in the circumstances of the case the provisions are satisfactory. They will receive £400 of 3 per cent. Government stock for each £100 of Bank stock. They will have the same gross income as they had before. . . . But the new Government security is not redeemable till 1966, and then the redemption is optional. . . . In other words, present Bank stock looks as though it is worth little short of £400 on the compensation terms. On news of the terms. Bank stock rose to a record level of 390-395."

It seems clear that the redemption terms mean that in 20 years' time, if the stock is redeemed, the stockholders receive roughly £400 for each unit of Bank stock formerly held. Should redemption not take place in 1966, then the stockholders continue to draw their usual 12 per cent, until the stock is redeemed.

Hoping the above facts will be given wide publicity, and thereby help to remove a misconception from the minds of many well-meaning supporters of the Labour Party.

Yours, etc.,

D. A. (Glasgow).

Ours and theirs (1981)

From the September 1981 issue of the Socialist Standard

The main points in the Bank of England Bulletin, which was issued last month, were well covered by television, radio and newspapers. Anyone taking what was said in these reports as what was meant would have been delighted with the good news. Here are some of the ways in which the news was reported: “Recession or no WE are getting richer abroad”; “According to figures assembled by the Bank’s statisticians . . . OUR external wealth was actually £4.3 billion more in 1979 than we thought it was a year ago”; “In 1980, for the first time, OUR assets abroad exceeded £200 billion ...” (Our emphasis).

Great, you might think. You can leave that dreary job, or stop looking for one. You can move out of your cramped home and move into spacious accommodation with pleasant amenities. No longer will your lifestyle be tethered by a meagre and insecure income. No longer will your impulses be repeatedly smothered by your poverty. So you get on the blower to the Bank of England, explain that you have heard the news about our great wealth which is invested abroad and ask how you might go about getting some of your share now.

Waiting for your reply from the other end of the line, the dialling tone, or worse, would be your signal that all is not as it seems. In fact what is described as "our overseas wealth’, if it was being reported from the point of view of the great majority, would be described as "their overseas wealth’. In Britain today, the entire pooled wealth of the poorest 80 per cent of the adult population amounts to less than that which is owned by the wealthiest 1 per cent (Report of Royal Commission on Distribution of Income and Wealth, 1980) and 93 per cent of adults do not own any stocks or shares. (CIS report, The Wealthy).

Meanwhile, in Japan the capitalist minority’s quest for profit continues with its inevitable disregard for the common social good. For many years a drug developed by a Professor Chisato Maruyama to treat terminal cancer has been dispensed at his small clinic in Tokyo. The vaccine seems to be regarded as effectual, at least by the hundreds of people who queue from dawn every day outside the clinic to collect a forty days’ supply for their suffering friends or relatives.

Research conducted at Tohoku University suggests that where the vaccine has been used in conjunction with other medical treatment survival rates in terminal cancer have much improved over treatment with other drugs. However, the small clinic cannot keep up with the demand and at the moment it is the only place allowed to dispense the vaccine. In order for the drug to become generally available it must be licenced by the Pharmaceutical Council of the Health Ministry. The Health Ministry usually rules on new drugs within 18 months but the Pharmaceutical firm making the vaccine first applied for licensing five years ago, and still no decision has been reached.

The issue became publicised after patients’ families petitioned the Ministry with 60,000 signatures, and the clamour could no longer be ignored by the government. The reason for the extraordinary delay in official approval being granted to the drug cannot be certain as deliberations of the decision makers—and this applies across the world under capitalism—are conducted in secret, or privately as they would prefer to call it.

But all of the available evidence suggests that there have been “close relations" between the Health Ministry and major drug companies. It seems that these firms are exerting strong pressure (the Yen variety) on health officials to block the commercial licensing of the Maruyama vaccine, which would present damaging competition to their own anti-cancer drugs already on the market. There is a trend for many senior ministry bureaucrats who are ‘co-operative’ with the representatives of large drug companies to be given highly paid appointments with the companies once they have retired from government employment. The rather well-titled ‘vice-president’ of one of the largest Japanese pharmaceutical companies was Deputy Health Minister a few years ago. Until the power of control and decision-making is withdrawn from the minority who now exercise it all over the world, society will continue to be run by us for them.

Gary Jay

Britain’s Third Labour Government (1945)

From the September 1945 issue of the Socialist Standard

“This time there can be no Alibis.”

For the third time Great Britain witnesses the spectacle of capitalism being administered by a Labour Government – though this time with a difference. The Labour Governments which entered office in January, 1924 (for eleven months) and in June 1929 (for two years) had only minority representation in the House of Commons, and were dependent on the support of Members of Parliament belonging to the Liberal Party. This time the Liberal Party is almost wiped out (only twelve M.P.s in a House of 640), and the Labour Party has an overwhelming majority. There are 390 Labour MPs, and with the support of three I.L.P. M.P.s, two Communists and some Independents and Liberals it can count on well over 400 votes as against about 210 Conservative M.P.s and others who will vote Conservative. As one of the Labour M.P.s writes “Labour has no alibi left. If it fails to produce the goods – full employment, all-round national prosperity, international concord, health, homes and happiness for the whole people – it can fall back on no excuse.” (Garry Allighan, M.P., Daily Mail, July 31st).

This time the Labour leaders have given away in advance the “alibi” they used in 1931 when they pleaded that their failure, and the secession of their leaders to form National Government, as the result of an “economic blizzard” – the world industrial crisis – and of a “Bankers’ ramp.” They are going to nationalise the Bank of England and are naively confident that through a National investment Board they can eliminate the normal capitalist trade cycle of expansion and depression. Nationalising the Bank merely means bringing this country into line with the rest of the capitalist world. As the Manchester Guardian points out “Great Britain is almost the only country in the world to have a privately owned central bank.” (Manchester Guardian, August 2nd)

In an Election broadcast Mr. Herbert Morrison, who occupies one of the most important Cabinet posts in the Labour Government, declared that the Employment Policy accepted by the late Government (in which, of course, the. Labour Party was strongly represented), “has quite a fair chance of smoothing out booms and slumps. The idea is very simple. It is one of Labour’s basic ideas. It is to make sure there is enough spending power to buy enough goods to keep everyone at work making them. The thing can be done. Whether it will be done depends on bow firm a grip the Government intends to keep on the spending policies of the great private industries.” (Daily Herald, June 30th, 1945)

The experience now being embarked upon is that of trying to run the capitalist system as if it were not a capitalist system. A Labour Government is going to try to straddle the class struggle and to represent at one and the same time the interests of the owning class, and of the class exploited by the owning class! Labour supporters expectantly and hopefully await the outcome. Socialists do not need to wait to prophesy failure.

After experiencing Labour attempts to run capitalism in Great Britain the workers will discover that Labour administrators cannot make capitalism function in any but the accustomed way.

The reasons for the Labour victory are many, though it must be admitted that hardly any observers expected the turnover of votes to be so large. “Working class mistrust of the Tories, who had been dominant since 1931 in all the National Governments; the discontent and impatience with slow demobilisation of men in the Armed Forces, most of whom voted Labour ; the usual desire of many electors to have a change; the feeling that the very acute housing shortage would best be tackled by a Labour Government – these are some of the factors.

How have the Capitalists taken the event of “Socialism”? Their attitude may, perhaps, be described as one of waiting on events, worried but not seriously alarmed. The avowedly Capitalist Press is disposed to assume that the cautious Labour leaders will prevent any very drastic demands of the rank and file from being pressed. This is illustrated by the attitude of the Conservative Daily Mail (August 2nd), which urges the Labour Government to take steps to let the Press and public in the U.S.A. know that their “ludicrous and dangerous doubts and fears” of the Labour Government are needless and misplaced. The Times (July 30th), accepts that the Labour Government may nationalise coal, at least part of the transport industry, and possibly electricity and gas supply, and is not greatly perturbed. It points out that “to bring public utilities under direct public control and possibly even outright public ownership, is not wholly revolutionary; and coal is politically a special case.” The Times goes on to plead that “with steel, or with manufacturing industries of any kind, the case is rather different,” and takes comfort in the view that “the responsible leaders were more hesitant” than the rank and file on nationalisation, and that they may seek a further mandate from the electors before converting any manufacturing industry into a State monopoly.

The Liberal Manchester Guardian (July 27th), declared that “Banking opinion expects the Bank of England to be ‘nationalised’ but does not turn a hair at the thought.” Mr. Herbert Morrison recalled during the Election campaign (Daily Express, June 18th), that in 1932 the Tory Lord Beaverbrook was advocating nationalisation of the Bank of England in his Daily Express, and likewise it was Mr. Morrison who stated in a speech on February 11th, 1944 ” that more Socialism ” (meaning State Capitalism) “was done by the Conservative Party, which opposed it, than by the Labour Party which was in favour of it.” Times, February 12th, 1944). Mr. Morrison had in mind, of course, the nationalisation of Telegraphs and Telephones and setting up of Public Utility Boards (which are the model the Labour Party will follow in its nationalisation schemes) such as the Metropolitan Water Board, the British Broadcasting Corporation and the London Passenger Transport Board. The last named was initiated by Mr. Morrison and completed by the succeeding Tory Government.

A factor of importance from the capitalist standpoint is that the Labour Party is wholly committed when taking over industries to do so “on a basis of fair compensation” (“Let us Face the Future,” Labour Party, 1945, p. 7). Some capitalists – those in declining industries – can welcome a change which guarantees their investments against further depreciation since they may receive Bonds with a Government guarantee in place of shares dependent on the ups and downs of fortune of a private company; which recalls a curious comment made by the Times (September 19th, 1942), in an article which urged its readers that “we must beware of the people who advocate Socialism in order to make the world safe for capitalists.”

Doubtless the Labour Government will do away with the restrictive clauses on trade unions introduced by the Tories in their Trade Union Act of 1927. This in itself may have little direct effect in the direction of encouraging strikes, but it is certain that the rule of the Labour Government will be accompanied by many and large industrial disputes. A Tory Government at this time would be faced with much industrial unrest, but with a Labour Government there is no doubt that the trade unions will feel encouraged to make large demands for higher wages and shorter hours. This was doubtless foreseen by Mr. Ernest Bevin, Minister of Labour in the Churchill Government, who has now become Foreign Secretary instead. The Daily Express (July 28th), published the following report from Stockholm of a statement made some time ago by Mr. Bevin to a Swedish trade unionist. Mr. Bevin is reported to have doubted a Labour Victory and to have said “Even if we win we shall have hard times before us. To convert industry to peace production with lower wages as a result will be an enormous problem.” Like other governments in this dilemma the Labour Government may be tempted to make the adjustment by allowing prices to rise instead of lowering wages.

In one field the Labour Government will be tackling a problem that many leading capitalists and capitalist politicians are agreed has to be tackled, in order to prevent the interests of the whole capitalist class from being damaged, that is the problem of monopolies. Here the language of the Tory Times and of Mr Churchill in his calmer pre-election frame of mind, is identical with the views advocated by Mr. Herbert Morrison in a series of speeches in recent years. Mr. Churchill in a broadcast in 1943 said – “There is a broadening field for State ownership and enterprise, especially in relation to monopolies of all kinds.” (Manchester Guardian, April 5th, 1943). And the Times put its view in words every one of which could have been lifted from one of Mr. Morrison’s speeches: “It is a sound principle that, whenever competition is ousted by monopoly, the monopoly must come under Government control – though certainly not under Government management – either through a public utility corporation or by other means appropriate to the differing circumstances of different businesses.” (Times, Editorial, September 19th, 1942)

On Foreign Affairs Mr. Bevin hastened to declare “British foreign policy will rot be altered in any way under the Labour Government.” (Evening News, July 26th). In this sphere and in handling India, Egypt, Palestine, etc., the Labour Government will be faced with many knotty problems, not of their own making or to any extent under their control, but arising inevitably out of the normal trade rivalry between the Powers. Here in a most glaring form is demonstrated the childishness of the Labour Party’s belief that Labour Governments, by exercising goodwill, can keep capitalism and yet suppress its tigerish propensities.

To conclude we may repeat the words published in the Socialist Standard in June, 1929, when the last Labour Government entered office:

“We deal elsewhere in this issue with the failure of Labour Government in Queensland. We prophesied that: failure, and with absolute confidence we prophesy the similar failure of Labour Government here. No matter how able, how sincere, and how sympathetic the Labour men and women may be who undertake to administer Capitalism, Capitalism will bring their undertaking to disaster. As in Queensland, those who administer Capitalism will find themselves, sooner or later, brought into conflict with the working class. Like their Australian colleagues, the Labour Party here will find themselves in a cleft stick. Raving no mandate to replace Capitalism by Socialism, they have pledged themselves to solve problems which cannot be solved except by doing the one thing for which they have no mandate.”

There is no need to add anything to that. It still stands, as those who have voted Labour will discover.

Edgar Hardcastle

Letter: Wicked Uncle (1955)

Letter to the Editors from the September 1955 issue of the Socialist Standard

A reader in Canada writes asking for information about the nationalisation of the Bank of England. His letter and our reply are printed below.

Victoria, B.C., Canada. 

July 11th, 1955.

Dear Comrades,

A reformist friend of mine claims that when the Bank of England was nationalized, a 90 per cent. tax was imposed by the Labour Government upon the Government stock, thereby leaving the bondholders with only one-tenth of what they formerly owned. I can’t see a Labour Government being so unkind to stock or bond-holders.

I showed my friend the affixed letter taken from the January ’46 Standard, and he said the tax must have been imposed after nationalisation, because he has an uncle in England who was a shareholder in the Bank of England, and he lost “just about” everything through nationalization and the imposition of this tax.

If it doesn’t take too much of your valuable time, I would like to get the facts on this matter.

Thanking you, I am.

Yours for ours,

J. G. Jenkins.

Reply.

Our correspondent provided his friend with a copy of a statement published in the Socialist Standard of January, 1946 (not reproduced here), which explained the compensation terms given to Bank of England stockholders. The basis of the compensation was to give the holders Government stock sufficient to provide the same return as had been paid by the bank on average in the previous 20 years, i.e., 12 per cent This was done by giving them £400 Government stock yielding 3 per cent., in return for each £100 of their bank stock paying 12 per cent. The Government stock is redeemable by the Government in 1966, so that the stockholder will then or after be paid off at £400 for each £100 bank stock that was originally held.

The story given by uncle to his nephew is a pure fabrication. There has been no such tax imposed on his stock, either of 90 per cent. or any other figure, except, of course, income tax, which is, however, lower now than it was then. Can it be that uncle just wanted to plead that he is hard-up?

The utmost that he can say is that the present higher money rates have depressed all gilt-edged stocks. The stock given to Bank of England stockholders is at present down to about three-quarters of its nominal price so that if uncle had to sell now he would get about £300 for each £100 he originally held of Bank Stock. But this is a temporary situation. When money rates fall again the price, will recover and in any event he will receive the full £400 on redemption in 1966. And in the meantime, irrespective of fluctuations of the selling price of the stock, he goes on receiving his £12 a year on each £400 stock, in place of the original £12 on £100 of Bank Stock.

Ed. Comm.

Answers to Correspondents

C. Luff (British Columbia). Many thanks for letter. Hope to deal further with currency in later issue.

E. Littler (Ashton-in-Makerfield). We will deal with the problem you pose in a later issue.

Ed. Comm.

Cooking the Books: Rating the Bank Rate (2022)

The Cooking the Books column from the December 2022 issue of the Socialist Standard

The Bank Rate has gone up to 3 percent. What does it mean? As the rate which the Bank of England charges or pays the high street banks, it affects the rate that these charge or pay their customers. Those who borrow from them will have to pay more and those who save with them will be paid more on their savings (the first much more quickly than the second).

The Bank of England makes a wider claim. According to its website, this is ‘how changes in Bank Rate affect the economy’:

‘A change in Bank Rate affects how much people spend. And how much people spend overall influences how much things cost. So if we change Bank Rate we can influence prices and inflation. We aim to keep inflation at 2% – this is the target set by the Government (…) Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending’ (BoE as at 7 November 2022).

The theory is then that if the Bank Rate goes up, people will spend less; a higher interest rate means that those trapped into a mortgage have to pay more to their bank or building society and so have less to spend on other things, the same goes for credit cards; and, since the interest paid on savings goes up, people are attracted to save more and so have less to spend. The overall result will be less spending on consumer goods and services, which is expected to reduce the rate at which their price goes up.

But does it work? Could it work? By ‘inflation’ they mean a rise in the consumer prices index which is a measure of how the prices of a typical basket of goods and services bought by a typical consumer change. So, the claim is that a change in the rate of interest can change the way the economy works by increasing or decreasing the overall amount people spend on buying consumer goods and services.

This might make some sense if the purpose of capitalist production was simply to meet the paying demand of consumers, but it isn’t. It’s to make and accumulate profits to be re-invested as more capital. What drives the economy is what businesses invest, not what consumers spend. This primarily depends on the rate of profit rather than the rate of interest, and that is not something that the Bank of England can affect. Small businesses, dependent on modest bank loans, may be influenced by a change in the Bank Rate in the same sort of way that consumers are supposed to be, but Big Business is typically not.

Big Business is, if anything, more interested in the prices of producer goods, intermediate goods such as materials, parts and energy, used in the production of other goods, which the Bank of England doesn’t even claim to be trying to affect. In fact, the level of consumption is more affected by the level of business investment than it is by the Bank Rate since when business is booming consumption goes up and when there’s a slump it goes down.

Nor does there seem to be much evidence that changes in the Bank Rate do have the intended effect on consumption. In his 22 October blog Michael Roberts quotes a study which concludes: ‘It is difficult, however, to find empirical evidence that households do indeed raise or lower consumption by a significant amount when interest rates change.’ But, even if they did, it is difficult to see how this would affect the general price level. The Bank of England could only do that by inflating the basic money supply.

The Gold Standard and the crisis. (1931)

From the November 1931 issue of the Socialist Standard

Each of the periodic economic crises brings its own particular explanation. Publicists, orthodox economists, and politicians of every shade of opinion, are agreed that on this occasion the nigger in the wood-pile is the “gold standard,” or rather the failure of France and the U.K.A. to operate that standard “according to the rules of the game.” But despite their unanimity our scepticism is reasonable when it is recalled that there have been 16 crises during the past 150 years, and that a different explanation has been forthcoming each time. All of those crises, including the present one, have exhibited, in greater or less degree, the same features, viz., an accumulation of stocks of all commodities, a decline in production owing to the inability to sell the products of agriculture and industry at a profit, bankruptcies and banking difficulties as a consequence of the general fall of prices, falling money wages, growing unemployment, and for the mass of the population want in a time of superabundance.

This general similarity between one crisis and another points to there being a general explanation for all of them. Instead of which the explanations are always changing. This time we are told that the trouble has been caused by the attempt to operate the gold standard in a world split up by tariff walls and burdened by war debts. Can this explanation be accepted? To answer the question it is necessary to consider what the gold standard is and what its history has been.

First of ail it must be noticed that while the gold standard implies a monetary systen based on gold, it does not require that gold coins shall actually circulate. For all practical purposes there is no difference between a country whose monetary unit consists of a gold coin which circulates and is used as money in ordinary commercial transactions, and a country in which there is a paper currency convertible into gold. Both are on the gold standard. Before the war this country had, as its monetary unit, the sovereign, which passed freely from hand to hand in every-day transactions. Between 1925 and September of this year monetary settlements were effected in paper pounds which (above a minimum value of £1,700) were exchangeable into gold at a fixed rate. At both periods Great Britain was on the gold standard. What is necessary for a country to be on the gold standard is, then, not that there should actually be gold coins circulating, but that the unit of currency must, if it is a paper unit, be exchangeable on demand at some central institution, whether a bank, mint, or Government department, without charge to the holder, for a known and fixed amount of gold. Conversely any holder of gold must have the right to exchange it for currency, either coin or paper, at the same rate. Finally free importation and exportation of gold must be permitted so that a holder of currency who has to settle a debt abroad may do so by exporting gold obtained at the central institution in exchange for his currency at the fixed rate; while anyone having funds abroad must be able to convert them into the currency of his own country by importing gold and exchanging it for the currency of his own country at the central institution. In order to avoid complicating the question later it should be pointed our that free importation and exportation of gold is not necessary for this purpose provided that the central institution is compelled by law to buy and sell gold-backed foreign exchange, i.e., the currencies of other gold standard countries, at fixed rates corresponding to the amount of gold in the monetary units of the respective gold standard countries.

Given that these conditions are observed the country is on the gold standard, the significance of which is twofold. The first is that the value of the currency is the same as, and is dependent on, the value of gold. In other words, the amount of commodities that can be bought with £1 will be determined by the amount of commodities that will exchange for 113 grains weight of gold, that being the amount of gold for which £1 can by law be exchanged. Movements in the value of gold will be accompanied by corresponding changes in the purchasing power of the currency unit. As the value of currency reflects itself in the form of prices this is the same as saying that, under the gold standard, if the value of gold falls, prices will rise, and the amount of commodities which can be purchased with a £1 will diminish. Conversely if the value of gold rises, prices will fall. The second significant feature about the gold standard is that the general level of prices in two gold standard countries must be in equilibrium. This follows from the fact that, as has been pointed out, gold moves freely between the two countries. The price levels will not be exactly the same in the two countries for reasons which, however, are of no importance from the point of view of the present article and can therefore be ignored. The two price levels will tend to move up or down together, in accordance with changes in the value of gold.

So much for the value of a currency in terms of commodities, i.e., its internal value. Now let us consider the value of one currency in terms of another, usually referred to as its external value. Under the gold standard the value of one currency in terms of another, expressed in what is known as the foreign exchange rate, is fixed within narrow limits. For example, when this country was on the gold standard £1 was exchangeable by law for 113 grains of gold, and the American dollar was exchangeable by law for 23.22 grains. If 113 is divided by 23.22 the result is approximately 4.86. So that, apart from certain small variations that can be ignored here, the value of £1 was automatically fixed at 4.86 dollars. The exchange rate with francs, marks, etc., was similarly fixed.

To sum up the argument to this point we see the following consequences of an international gold standard :—

1. The value of the currencies of all gold standard countries is determined by, and fluctuates with, the value of gold.

2. Prices in all gold standard countries tend to move up or down together.

3. Exchange rates between gold standard countries remain stable.

After this brief survey of the principles of the gold standard now let us turn to its history.

As soon as division of labour resulted in individuals and social groups ceasing themselves to produce all the articles they consumed, a system for exchanging the products of various forms of human activity became necessary. In the first place recourse was had to simple barter. Cattle, for example, would be exchanged direct for corn or some other article. In the course of time direct barter became too cumbersome and a “universal equivalent” was evolved for the purpose of effecting exchanges. For a variety of reasons the universal equivalent that ultimately came to be generally adopted was a given weight of metal. In Western Europe this metal was silver. It soon came to be realised that it was more convenient to have coins of a known weight of metal instead of having to measure out quantities of the metal for each transaction. Gold coins were introduced in the 15th century, and finally this country led the world in making gold the basis of its currency, relegating silver coins to the position of “token” money, their value being fixed by law as a proportion of that of the gold coin. During the second half of the 19th century most of the leading countries of the world also abandoned the silver standard, and reorganised their currencies on a gold basis. When the war broke out in 1914 all the leading commercial countries were on the gold standard, and their currencies were gold coins winch actually circulated. At the same time there were in circulation bank notes which were redeemable into gold coin or bullion. The war saw the collapse of the old gold standard and the replacement of gold coins, as circulating media, by paper money. After the war, when the gold standard came to be restored, certain countries, including Great Britain, did not restore gold coins to circulation. Instead they retained their paper currencies, but made them convertible into gold, and permitted the export of gold. The notes, therefore, had the character of gold.

Another significant difference between the post-war and pre-war systems was that after the war certain countries did not revert to the simple gold standard, but to a developed standard known as the “gold exchange standard.” Under the pre-war system it had been the rule for each country to keep its own separate gold reserve for cashing notes. Under the gold exchange standard a country—Austria is an actual example— keeps part of its reserves not in the form of actual gold in the vaults of its own Central Bank, but in the form of balances with the Central Banks in other gold standard countries. As these balances could always be withdrawn in gold and taken back to the country of origin, it was thought that they were “as good as gold”; as indeed they were, so long as conditions remained normal. But the system had one important consequence. Gold deposited, say, by the Austrian National Bank with the Bank of England, was not only the basis of currency issued in Austria, but also provided the Bank of England with funds which it proceeded to utilise in this country. Under the pre-war system the withdrawal of gold from the Austrian National Bank would only have affected, directly, that bank. But under the new system the Bank of England would aiso be affected. In other words, under the “gold exchange system” events affecting the credit situation in one country would be likely to have immediate consequences in other countries, because the credit structure of more than one country had come to be based on the one lot of gold.

There remains another aspect of the post-war situation to be examined. The gold standard was never intended, as is so frequently alleged, to provide for the liquidation of an adverse balance of payments between two countries by the shipment of gold. Under the gold standard the function of gold shipments is to produce conditions in which an adverse balance of payments is eliminated. To reduce the matter to its simplest terms, the position can be explained as follows :—If people in country A are buying more goods and services from country B than B is buying from A, it must be because commodities are cheaper in B than in A. As the currencies of both countries are based on gold this is equivalent to saying that the purchasing power of gold is lower in A than in B. Consequently, gold will be sent from A to B. The gold for shipment will be obtained by changing notes into gold in A, and sending it to B. When it reaches B this gold will be converted into the currency of that country. The result will be to cause monetary stringency and a probable rise in the bank-rate in A, thereby lowering prices there. While in B the monetary situation will be eased and prices will rise. This will tend to discourage people in A from buying goods in B, and will encourage people in B to buy goods in A. This will continue to the point where A’s exports are increased and its imports diminished, sufficiently to eliminate the former adverse balance. From the foregoing it will be seen that under the gold standard the function of gold shipments is to cause adjustment of prices in the countries between which gold shipments take place, such that their international payments and receipts shall balance by the exchange of goods and services.

Owing to conditions arising out of the war gold shipments in recent years have been resorted to for the purpose of adjusting unfavourable balances of payments. What these conditions were can only be referred to here very briefly. Among the more important are the post-war system of tariffs, particularly in America, which prevented debtor countries from liquidating their indebtedness in goods, and compelled them to pay in gold; the flow of international payments in one direction, principally to U.S.A. and France, owing to Reparations, etc. ; and finally deliberate action by Central Banks to neutralise the effects that gold shipments would otherwise have had on the credit structure and the price levels. So that the adjustment of adverse trade balances by means of goods and services, in the manner discussed earlier, was impeded. In Great Britain, for example, the Bank of England consistently counterbalanced withdrawals of gold by what is known as its “open market” policy. In other words, when gold was withdrawn, and credit as a consequence became scarce, the Bank of England restored the position by buying securities, so that the funds that the money market lost as a result of the gold shipments were restored to it by the payments made by the Bank of England for the securities it bought. One of the main reasons why the Bank of England did this was probably that it was seeking to keep interest rates as low as possible in order that the Treasury should not have to pay more interest on its large floating debt. Whatever the reason may have been, the important fact is that Central Bank action frequently operated to make gold shipments of no avail, so far as concerns the adjustment of international balance of payments, by means of alterations in the relative amount of commodity imports and exports. This means that the gold standard in recent years was called upon to achieve purposes it was never designed to fulfil and which it was incapable of achieving; gold was used to liquidate adverse balances instead of operating to promote conditions in which adverse balances would disappear. Finally the inevitable happened. The gold standard broke down.

What will happen in the future to the gold standard need not be discussed here. For us the problem is, “Was the crisis caused by the failure of the gold standard ? Can it be overcome and economic welfare assured to all by a re-establishment of the gold standard, as we have known it or in some revised form, or by its supersession by some other currency system?” The answer to both questions is an emphatic “No.” The reasons for this answer must be reserved for a later article. Here it will suffice to point out that the recent acute world depression started, and has been most pronounced, in U.S.A. If gold is the cause of all the trouble this is rather strange seeing that U.S.A. was crammed with gold. Secondly, it is hard to see how the world in general,, and the working-class in particular, would have benefited if, before the crisis, there had been another £100 million, or even £1,000 million, of gold available in the world. What could have been done with it that would have overcome the fact that world stocks of all kinds, and especially of raw materials, were so high tthat they could not be disposed of at prices which would yield a profit ? The plain truth is that capitalism had again run up against its permanent and insoluble problem of being unable to distribute all the goods produced, because capitalist production is for sale at a profit and not for use. Therein is the cause of this, as of every other economic crisis of the past 150 years.

B. S.

Cooking the Books: Digital pound, what’s that? (2023)

The Cooking the Books column from the September 2023 issue of the Socialist Standard

‘New deputy governor will oversee project to mint digital pound’, was how the Times (2 August) reported the appointment of Sarah Breeden as a deputy governor of the Bank of England. Here’s the Bank’s description of what is envisaged:

‘The digital pound would be a new type of money issued by the Bank of England for everyone to use for day-to-day spending. You would be able to use it in-store or online to make payments. This type of money is known as a central bank digital currency (CBDC). […] The digital pound would be denominated in sterling and its value would be stable, just like banknotes. £10 in digital pounds would always have the same value as a £10 banknote. […] The digital pound would be like an electronic version of the banknotes issued by the Bank of England. […] The way that you would access digital pounds would be through a digital wallet that would be provided by a private company’ (Digital Pound ).

The press statement issued by the Treasury and the Bank in February announcing a consultation on the subject explained that the Bank would provide the infrastructure in the form of a ‘core ledger’; the private companies would offer people digital wallets through smartphones or smart cards (tinyurl.com/4nkjxvpt).

Money, as Marx pointed out in section 4 of chapter 1 of Capital on ‘The Fetishism of Commodities’, is not a physical thing but the expression of a social relation. He wrote of ‘a definite social relation between men that assumes… the fantastic form of a relation between things’. The relation between people he had in mind was between producers of different articles for sale who could only be brought into relation with each other via the market, which required a means of exchange. Today this includes the relation between buyers and sellers of labour power.

The physical thing in which this social relation is expressed can, and has, varied. In pre-capitalist times it had been, among other things, cows and cowrie shells but historically the most important form that money has taken has been the precious metals gold and silver. However, even these haven’t expressed money for many years now, having been replaced by intrinsically valueless paper notes and cheap metal coins issued by the state. We are currently in a period where these are being increasingly replaced by a computer code. The coming of central bank digital money would complete this change in the form (though not the substance) of money.

You can see the logic, from a capitalist point of view, of doing something like this. Payments these days are increasingly made electronically anyway, by transfers to and between banks. However, the ‘libertarian’ right are up in arms about it. Soon after the government’s announcement Nigel Farage tweeted on 7 February: ‘Central Bank Digital Currencies will give the state total control over our lives. This must be resisted’. In the recent by-elections, the Reform Party, the successor to the Brexit Party, promised to ‘oppose a cashless society and central bank digital currency’ while Piers Corbyn shouted ‘KEEP CASH!’ Yet another conspiracy theory.

The government is saying that the new form of money would not replace cash but that notes and coins would continue to be issued. What it would replace is bank transfers. Which would make it even clearer that banks only circulate money. They don’t create it. Only a central bank like the Bank of England can do that.

The socialist retort to Piers Corbyn might be ‘Smash Cash’, or, rather, change the social relation of which money is an expression by making productive resources commonly owned and democratically controlled. Money would then vanish into thin air.

The problem that never went away (2001)

From the September 2001 issue of the Socialist Standard

Unemployment has not gone away because, as Eddie George has admitted, the labour market needs unemployment to function properly

At the beginning of August it was announced that the UK manufacturing sector had finally fallen into official recession, that is two consecutive quarters of negative growth. Given that capitalism tends to be at the height of what it is capable of immediately before it goes into crisis, it is worth examining what conditions the height of British capitalism constituted.

It is particularly pertinent to examine employment, both as an index of the scale of modern capitalism, and in terms of the fact that recession will inevitably cause unemployment to rise from whatever levels it still stands at. Unemployment has come to be seen as a long term feature of capitalism. Indeed, the Governor of the Bank of England, Eddie George, got into trouble a couple of years back for stating what is widely known in professional circles to be a fact: that the labour market requires a degree of unemployment among workers in order to be able to function properly.

Even during the long post-war economic stability, full employment was always taken to mean a margin (in the hundreds of thousands) of unemployed people. It is a notable fact that during Labour’s first term, Gordon Brown, in the light of favourable employment figures, decided to proclaim once more that full employment was their aspiration. Of course this time full employment meant a much higher margin of unemployment than it did in the 1960s. In the context of the routine millions of unemployed in the economy since then – with up to three million unemployed in the UK as little ago as 1992 – getting it below one million would do.

In recent months the media was able to announce the headline that unemployment had fallen below one million for the first time in twenty years. This figure was arrived at by the governments preferred method of calculating unemployment – the claimant count. It is obvious quite why they should prefer to measure unemployment solely in terms of how many people are claiming unemployment benefits, largely because these people are costing the state money, but also because it produces a generally lower result, since not all unemployed people are claiming benefits. The UN recognised International Labour Organisation (ILO) measure of unemployment – using a survey to find people who are out of work and have sought work in the previous four weeks and able to start within a fortnight – places unemployment currently at 1.48 million.

This level of employment still represents a record high, with 24.4 million people currently in work. The intensive exploitation of workers up to April this year was also very high. With a total of 920.6 million hours being worked a week (as compared with 850.3 million in 1992). This works out at something like an average of 38 hours per week for the average full-time worker, with some 24 percent of the workforce working 45+ hrs. The UK economy requires a massive amount of effort to operate. These figures represent an increase in work being performed above that which would stem from a simple increase in the number of workers.

The extensive increase in the workforce can be seen from the actual decline of self-employed workers as a trend. The statistics for self-employment are liable to distortion at the best of times due to the numbers of contractors who, whilst bureaucratically self-employed for tax purposes, actually simply sell their labour power to firms on a temporary basis. Although the changes to IR-35 have seriously affected their tax status, it still remains a significant part of corporate culture. The position of these contractors highlights the contradiction that lies between the trend of proletarianisation and the fantasy of self-employment (and thus freedom) as propounded by Thatcherism. Yet again, a seeming way out within capitalism turns out to be a blind alley.

These levels, of course, although aggregated nationally by the Office for National Statistics don’t reveal the uneven character of these levels of employment. The spread of this variety is quite wide. In the North East unemployment (ILO basis) was 7.7 percent, compared to the south-east (excluding London at 6.4 percent) which had 3.3 percent. Even these figures do not tell the whole story, since within these regions it is possible to find specific areas and estates where unemployment soars: since, after all, unemployment and poverty tends to cluster, for reasons of housing costs if nothing else. Of course, the simple measures of unemployment do not cover the exact extent of economic inactivity within a specific area.

The clearest problem within this context is that of rising long-term sickness. Labour ministers have managed to incur the wrath of disabilities groups by trying to clamp down on the rise in long-term sickness benefit, largely by claiming that many of those who are on that benefit are simply the unemployed cynically re-designated by the Tories to remove them from unemployment statistics. It has to be asked why Labour did not draw attention to this callous behaviour in the 1997 election, rather than waiting until the time came to lower their budgets. Perhaps the beneficial distortion of the statistics served their purposes too for a while? Nonetheless, it is clear that a huge growth in long-term sickness benefit has occurred, from 414,000 recipients in 1993 to 727,000 in 2001.

The real measure of unemployment as a problem can be found in long-term unemployment. Over a third of the currently unemployed have been unemployed on a long-term basis (over 6 months). As of April this year 222,000 had been unemployed for over two years. Many of those people will probably never find employment again. Within the context of clusters of unemployment, it becomes possible to see how such areas can become charged with desperation and misery.

That even at the height of economic prosperity capitalism can leave so many members of its society in abject misery and poverty demolishes absolutely the lie being propounded by Tony Blair that “economic prosperity” is automatically in everyone’s interest. The anarchy of the capitalist market lies at the heart of the problem. In April this year there were some 395,000 (and rising) job vacancies that could not be filled due to the disproportion between the use-value of labour power required and the quality of labour available. This relentless and blind pursuit of the market has led to the utter denial of ability for over a million workers.

In this context, it becomes understandable why the government places so much emphasis on training and directing labour in an effort to bridge this gap. It is, though, a wasted effort since the problem lies with the subordination of labour to the needs of capital accumulation, rather than its own self-development. The subordination of human beings to the law of “no profits, no work” means that we live in a society irreconcilably opposed to our interests. The presence of large-scale unemployment even in times of relative economic boom and super-high profits alone proves this. If a slump is round the corner, we can possibly look to a return to three million on the dole (or maybe more), as in the recent past. Only the removal of the wages system itself will free us from the threat of its inevitable consequences.

Pik Smeet

Cooking the Books: What the market will bear (2023)

The Cooking the Books column from the May 2023 issue of the Socialist Standard

Some people think that businesses can fix at will the price of what they sell. Among them, it seems, is the Governor of the Bank of England. After announcing on 23 March an increase in the Bank rate to 4.25 per cent, Andrew Bailey asked business to ‘please’ not increase their prices. As the headline in the Guardian the next day reported, ‘Bank of England boss urges firms to hold back price rises or risk higher rates’. His argument was that ‘if all prices try to beat inflation we will get higher inflation’ and that, if that happened, the Bank would have to increase the Bank rate to an even higher level.

It may seem surprising that the Governor of the Bank of England should not understand how businesses operate, but then finance is a bit isolated from the real world of production. Patrick Hosking, the Financial Editor of the Times, was particularly scathing in his column on 28 March:

‘Surely, when first introduced to an economics textbook, Bailey learnt that firms are not driven by altruism or patriotism but by market forces and profit? They will charge what the market will bear. If possible, they will go further, ever on the lookout for, in Adam Smith’s immortal phrase, “some contrivance to raise prices.” It’s a boardroom instinct as natural as breathing. While modern-day corporations have to consider many stakeholders, they still see their prime duty over the long run to maximise profits for the shareholders’.

In other words, if they can increase prices without jeopardising sales and so profits they will; otherwise, they won’t. It all depends on market conditions for what they are selling. Hoskins reckoned that for the time being the market for most goods can still ‘bear’ a price increase. But this might not necessarily continue:

‘Until businesses see more capitulation by their customers, the price escalation will go on. Businesses will stop lifting their prices only if enough customers defect to competitors, trade down to cheaper lines or find near-substitutes. Or stop buying at all. For the poorest households, this has happened already’.

There is some evidence that people have been trading down, buying in Tesco and Sainsbury’s instead of Waitrose, or else in Lidl and Aldi instead of Tesco and Sainsbury’s. So, if prices do stop rising so much this will not be because Bailey’s plea was listened too, but because the limits of ‘what the market will bear’ would have been reached.

This, incidentally, explains why businesses cannot automatically pass on a wage increase. Sometimes they can, but sometimes they can’t. It depends on market conditions.

In any event, businesses can’t cause inflation in the proper sense of the term — a rise in the general price level due to a depreciation of the currency — but Bailey wasn’t using the word in that sense but in the simplistic sense in which it has come to be widely used of an increase in the consumer price index. An increase in the price at which businesses sell consumer goods and services, for whatever reason, will cause an increase in ‘inflation’ in that sense because it will cause the index to go up. But that’s by definition. And, equally by definition, if businesses don’t increase their prices then there won’t be ‘inflation’. So Bailey was calling on businesses not to increase prices so that prices don’t increase. How very profound.

How political power works: what we can learn from the fall of Truss (2023)

From the January 2023 issue of the Socialist Standard

The short-lived tenure of Prime Minister Liz Truss is a case study of how political power works in the United Kingdom. By any institutional measure, Truss was in a strong position: her party had an unassailable majority in the House of Commons, she could wield the power of the Prime Minister over the civil service and the power of considerable patronage was hers. She also had the option of the Prime Ministerial megaphone: everything she could have said would be newsworthy and reach every home in the country. All she had to do was play the cards she had been dealt tolerably well and she would have been set for a minimum of three years in office.

As she misplayed that hand, though, it became clear how the might of political office is constrained by a series of golden chains, each interlocking and pulling together to ensure that political power (backed, ultimately, by the military force of the state) does not threaten the dominance of the section of society that owns its productive wealth. These same chains ensure that no one individual or faction gets to turn the state into its private property.

The Establishment

To be clear: there is no secret cabal of capitalists directing the state – different groups and factions of wealthy individuals and institutions compete to try and bend political power to serve their interest. Which means, incidentally, that the space is open for the working class, organised consciously and politically, to wrest control of that same machinery and convert it to our own ends.

Truss came to power after an election among Conservative Party members. Thousands of ideologically motivated people joined the political party to advance the cause they believe in. She won because she promised them the policies they wanted – most importantly, lower taxes. In this case, the wishes of the lay membership did matter, and their expressed preference was conveyed by Truss into government policy. She could, indeed, have reneged on that promise, but activists matter because they operate the machinery of competing for elections on the ground: they can only be disregarded so far before it starts to have an effect on the electoral chances of a party.

Truss was, herself, a relative outsider within the networks of UK power. She was a former Liberal Democrat activist, who went to a Leeds comprehensive school. She did, however, go to Oxford, and gained the advantage of the network building opportunities there. By contrast, her Chancellor, Kwasi Kwarteng, was educated at Eton, just like two of the last three Prime Ministers before Truss. The small number of elite schools providing for the upper class in the UK helps build the personal and social bonds and networks that lead to common understanding and a form of trust between them. Truss herself supplemented these general networks by specific links to the Tufton Street set of libertarian lobby groups whose ideas she put into place.

The wider electorate

Politicians, however, also need the votes of the wider electorate: and so, rather than cut government spending to allow tax cuts, with all the economic and social pain that entails, Truss and her Chancellor Kwasi Kwarteng chose to cut taxes and borrow to maintain government spending. They argued the tax cuts would incentivise economic growth (and thus allow the spending levels to be maintained medium term, even as the tax take falls as a share of the national effort). This argument wasn’t entirely without merit, and could, in theory, pay off.

Cutting taxes would raise savings and mean there would be more money in the system available to invest in growth. Likewise, cutting taxes might make what had previously been unprofitable business models work (for their owners, at least), and so spur economic activity. The downside is that by borrowing, the government would still be soaking up a lot of the investable wealth (probably pushing up interest rates across the board), and the rate of profit for businesses might remain so low as to continue deterring growth and investment. Truss and Kwarteng might have been able to sell such a plan, given time, but their proposals were put forward as a response to a weak position in UK government finances, and so it looked more like a panic response, rather than a considered and carefully prepared plan.

Market forces

This in turn brought the great machine of class rule into play: market forces. Investors and speculators responded by moving their money away from the UK: fewer people wanted to do business or hold assets denominated in pounds, and so Sterling fell against the Dollar. This, in turn, led to the Bank of England putting up its interest rates to try and attract them back, and to restore (or at least defend) the value of the pound. Had the Bank failed to act, it would have meant significant increases in the cost of imported goods (and the UK economy depends on imports very much). Although UK exports would have become more competitive, that would not necessarily happen fast enough to offset the immediate pain and cost of living changes people would have experienced.

Again, there was no meeting of capitalists to decide this although undoubtedly, the common ideology, background and prejudices of fund managers may have played a part. They would have met and discussed this in the course of their daily activity; but, fundamentally, they would be acting in the interests of themselves, their funds and their clients by responding to the British government’s policy in this way. By forcing up interest rates, with the government planning to borrow more, this was a devastating blow. The national debt, and the requirement for governments to behave in a manner which will satisfy lenders, is a key means of ensuring the general financial probity of the state.

Another related – and nearly disastrous – consequence of this was that the Bank of England was also forced to intervene to protect the UK pension fund markets. Pension funds have to hedge against a potential fall in their incomes, since they must guarantee pensions to their beneficiaries. The rapid rise in interest rates led to a nominal fall in the value of the bonds they were holding as security (so called Liability Driven Investments, LDIs). So they had to start selling off assets in order to pay the collateral on their hedges, since there was immediate demand for funds. As this happened to many valuable funds at once, this led to systemic risk to the whole pension industry: in turn, the Bank of England had to spend £65 billion in order to shore up the system and prevent collapse.

This was a devastating reputational blow to Britain’s financial system, and also to the Prime Minister, since her policy had endangered the pension provision of much of her core electorate.

The Members of Parliament

This brought into play Conservative MPs. Prime Ministers, although nominally appointed by the monarch, in reality serve at the confidence of their party in the House of Commons. Truss did not have the support of the majority of Tory MPs in the first place, leading some liberal commentators to opine that allowing party members to elect the Prime Minister is an affront to democracy and the Tories should go back to a leader simply ‘emerging’ from within their ranks, or having MPs only voting in a ballot. Keeping the pool of electors small promotes stability and predictability, and benefits the ruling class, but the demand for party members to be involved has drawn that power away, and it looks unlikely that it will be done away with completely – if and when possible, instead we’ll probably get ‘managed’ coronations, like that of Sunak or Brown before him.

Added to this weakness, in Truss’s case, was that the Tory MPs feared that their seats were now at risk en masse, and that Truss was a threat rather than an asset to their political careers. This is a feeling that would have been reinforced financially as various Tory donors made their displeasure felt. In the UK, the party that wins elections is usually the party that spends the most money. This isn’t necessarily a direct result of spending, because the party that looks like winning attracts the most donors and so has more money to spend in any case, but it is clear that funding of political parties is another means by which the wealthy section of society can exert influence over the political direction of the government.

In this case, they were helped by changes in the positions of the opposition party – the fact that Labour was now, again, a safe party for business people to invest in, means it could be used as a threat to the careers and aspirations of Conservative politicians. After all, it doesn’t matter what party is in power, for the truly wealthy, as long as their policies are at least congenial. During the Corbyn years, they could not be sure of the Labour Party, and this helped solidify elite support for the Tories, whatever their other misgivings about them. Now Starmer is in place, and Labour is ‘Pro-worker, pro-business’, they can be used to discipline the Tories. Some large Tory donors even came out of the woodwork to support higher taxes, as necessary to stabilise the economy, ie looking at their long-term interest, rather than the short-term rewards of tax cuts.

The mass media

Finally, the mass media, particularly the newspapers, played a big role, both before and after the rise and fall of Truss. The Daily Mail played a significant part in getting her elected in the first place, emphasising that she was the front runner (and exaggerating her support in the wider party, compared to the actual rather close race between her and Sunak). The Times and The Sun, the Murdoch papers, were typically more sceptical, and intensified their periodic attacks when she was elected. The focus of the press on the failure of her budget exacerbated the crisis, and clearly indicated that they would turn their considerable fire power against the Tories at any coming election while Truss was in charge.

Most people rely on the mass media for their information on how to place their votes. It is indicative that Boris Johnson, who just one year ago seemed utterly invincible, vanished in a puff of smoke the second the press began to focus like a laser on his behaviours. The press is certainly not all powerful, but it typically generates the headwinds which can push up and pull down political careers.

Elections and voting are thus, contrary to the anarchist saying that ‘if voting changed anything, they’d get rid of it’, key to political success or failure, and they involve considerable management to win the ongoing support of the majority of the public for government policies.

To take a counter-factual: if Truss had just won an election, her MPs would probably have stood by her longer. If she had a more connected background, she might have been able to ask informal favours of people in other institutions, or had more trust from important market agents. She would have been able to face down the press more convincingly and might even have been able to stand up to the market pressure (blaming spivs and speculators for the short-term harm) and stabilise the situation. If there had been an election’s worth of debate and policy documents talking up the planned budget, the markets may even have reacted differently. But she had none of that – she had a party divided, a press divided, and a risky, short-term emergency response to the situation with the public finances.

What is clear is that although the power of the state is very great indeed, in practice it cannot challenge the overall balance of class power, international market forces and the inbuilt advantages that accrue to the owners of capital. No secret cabal, no grand conspiracy: but the collective capitalist class lost confidence in their chief executive, and so as a result she was removed by the management board.

Pik Smeet

Cooking the Books: ‘Ignorant and mistaken’ (2022)

The Cooking the Books column from the November 2022 issue of the Socialist Standard

The irony of it! A government with a free-marketeer Prime Minister and Chancellor punished by ‘the markets’. This normally happens to reformist governments that have promised to spend money on improving conditions for the workers. The 1929-31 Labour government was said to have been brought down by a ‘bankers’ ramp’. In France the term used was that such governments came up against a ‘wall of money’. Harold Wilson in the 1960s blamed ‘the gnomes of Zurich’.

The villains in question are international speculators – sometimes politely called ‘international investors’ – who buy and sell the bonds issued by different governments. Governments borrow money by selling bonds. These have a face-value and a rate of interest fixed as a percentage of this. Say, £100 at 5 percent. However, while the amount of interest payable remains the same (in the example, £5), the price at which the bonds are bought and sold on the bond market varies. So, if the price falls to £90 the interest is still £5, but 5/90 is 5.56 percent. If the price rises to £110, this ‘yield’ (interest/selling price) is 4.5 percent. When the government sells new bonds it has to take into account the yield on existing bonds and offer that as the rate of interest.

When on 23 September Kwarteng announced tax cuts to be funded by borrowing, the speculators perceived the new government as behaving like a reformist one. Cutting taxes without reducing government spending and covering the extra deficit by borrowing was seen as no different from increasing government spending by extra borrowing. So they sold UK government bonds. With more sellers than buyers, the price of these fell and the ‘yield’ went up, meaning that government has to pay a higher rate of interest to borrow.

This had an unintended side-effect. Some pension fund managers had been persuaded by clever City financiers to borrow money by effectively betting on the price of government bonds they hold not falling significantly. They lost the bet and were required to pay cash to settle. This they could only get by selling some of their bonds, so driving their price further down. To prevent the pension funds becoming insolvent and the risk of this leading to a wider financial crash, the Bank of England stepped in to buy bonds and keep their price up.

This was a classic case of how a central bank has to deal with a dash for cash – it makes more cash available to prevent the whole financial system clogging up. Marx came across this in his time. Under the 1844 Bank Charter Act, the Bank of England was allowed to issue money not backed by gold in its vaults only up to a certain amount. However, in the financial crises of 1857 and 1866 the Act had to be suspended to permit the Bank to make more cash available. Gordon Brown thought he had invented the wheel – and saved the world – when he followed this long-established practice during the Crash of 2008.

Marx’s comment was:

‘Ignorant and mistaken bank legislation, such as that of 1844-45, can intensify this money crisis. But no kind of bank legislation can eliminate a crisis’ (Capital, Vol 3, ch. 30).

Governments can’t make things better but they can make things worse, as we have just seen. Starmer tweeted that ‘the government has lost control of the economy’ (2.02pm, 28 September). But governments don’t control the economy. It’s the other way around, as he will find out if ever he gets the chance to have a go.

The Labour Party Programme: 'Let Us Face The Future' (1945)

From the October 1945 issue of the Socialist Standard

The Labour Party was returned to Power on a Declaration of Labour Policy under the above title.

Very briefly its salient points may be summarized as “public ownership” of the “fuel and power industries"; “transport”; “iron and steel”; “public supervision of monopolies and cartels” and “public ownership of the Bank of England.” (Pages 5 and 6).

Right at the outset, the Labour Party says in this document.

“The nation wants food, work and homes. . . . These are the aims, in themselves they are no more than words. All parties may declare that in principle they agree with them. (pp. 3). . . . The nation needs a tremendous overhaul—all parties say so—the Labour Party means it.” (pp. 4.)

It is thus clearly stated that all parties proclaim the same programme; “food, work, homes,’ the difference being that the Labour Party means it. This genuine workman like plan is the proposal for Public Control.

Despite the fact that on page four of “Let us face the Future” all parties say they stand for the same objects—on page 6 a rather startling change takes place.

“The Labour Party is a Socialist Party—and proud of it.”

“Its ultimate purpose at home is the establishment of the Socialist Commonwealth of Great Britain. "

But Socialism cannot come overnight, as the product of a week-end resolution .... There are basic industries—ripe and over-ripe for public ownership and management in the direct service of the nation.”

The question therefore arises! Will “Public Ownership" as propounded by the Labour Party “ultimately” establish Socialism?

There can be little doubt that the astounding success of the Labour Party at the polls was largely due to the association, in the minds of the workers, of Government Control with Employment.

The bitter memory of the Depression years after the last war still rankled; and many jumped to the false conclusion that what had found them regular Work, was not War, but Government Control.

When this is coupled with the specious, though spurious, notion that Government Control and State direction lead to Socialism—a perfect vote-catching programme results.

Let us see what the Labour Party is actually doing to “implement its election serenade.”

Immediately it was returned, two authoritative spokesmen were put up; one from inside the Government and one from outside, to reassure the American capitalists.

Sir Stafford Cripps, on August 1st, outlined the Five Year Plan of the Labour Government in an important broadcast to America.

“The Labour Party, Sir Stafford said, did not believe in Confiscation, but rather in fair compensation for any person whose interests were taken over by the State, whether in Industry, Land or Finance.”— (News-Chronicle, August 1st, 1945).

“Professor Laski, chairman of the Labour Party National Executive, in a broadcast to America last night said he had been asked what would be given priority in Labour's programme of Nationalisation.

The Bank of England was going to be socialised and the direction of investments planned as part of the progress of industrial re-organisation.

This would follow nationalisation of mines and electrical power and the iron and steel industry.

The programme would follow the broad outline of the Tennessee Valley authority scheme—planned production by the State. . . . ”—(Evening Standard, August 1st, 1945).

In response to urgent requests from the Conservatives. Mr. Hugh Dalton, the Chancellor of the Exchequer, intervened in the Debate on the King’s Speech to make perfectly plain exactly what the Labour Party means by “Socialisation” of the Bank of England.

“To a large extent the changes we propose will have the effect of bringing the law into accord with the facts ... as they have developed. . . . Private stockholders will disappear from the scene, carrying with them fair compensation. They will be fairly treated. They will lose the powers which legally they still possess, though they may have fallen into disuse, it is proposed to eliminate the stockholders with appropriate compensation from the State.”—(Manchester' Guardian, August 22nd, 1945).

This was quite clear to all the financial Editors beforehand, who said the same sort of thing as the News of the World, for example

“The ‘socialisation' of the Bank of England will do no more than give formal recognition to what is already an established fact.

Ever since we came off the Gold Standard in 1931, responsibility for the general direction of our financial and monetary policy has been assumed by the Treasury. And since .the outbreak of war in 1939 control over the Bank by the Government has been absolute. It is not expected that there will be any change in the Governorship, which is at present held by Lord Catto.”— August 20th, 1945).

In any case, Dalton had already made the position obvious to the Bankers by shouting at them in the Lobby.

“Tell your friends there is no need to sell their Bank shares. Now is the time to bay.”—(Daily Mail, August 6th).

Articles are now appearing in the public press, like that of Mr. Laurence Wilkinson, in the Evening Standard for August 28th which discuss How stockholders of the Bank of England (17,000 of them) are going to be compensated! He points out that the Bank has paid a dividend of 12 per cent for the past 29 years but claims, on all sorts of grounds, that more should be paid in compensation, because the Bank stock is actually worth more. Another Argument is that; if Bank stockholders are to be given a fixed interest Government security in exchange for stock (say 12 per cent.) they lose all hope of the small gradual increase which the stock showed! And well-meaning members of the Labour Party are solemnly debating these points!

The same largely applies to the Mining Industry—except that it consists of tangible assets, i.e., the actual material and plant involved.

On August 16th the National Mining Association passed the following resolution :—

“In view of the fact that legislation for the transfer of the industry from private enterprise to public ownership is to be proceeded with, and having regard to the statement made on behalf of the Government that the industry would be fairly treated as far as compensation is concerned, the colliery owners, through the Mining Association place themselves at the disposal of the Government.”—(Manchester Guardian, August 31st).

At the same time, Mr. Shinwell, the Labour Minister of Fuel, has demanded more production (exactly like Beaverbrook and Churchill), and appointed the Communist Miners’ Official, Arthur Horner, to get going. Horner has already called on Miners to be “ Stakanovites.”

The net result of the Labour Party's “Socialist” Public ownership, so far, therefore; is that the value of the Bank of England stock has gone up—Coal Mine shares are at a premium—and the miners are expected to work harder this winter.

On the same day that the Mine-owners “placed themselves at the disposal of the Labour Government”—the Daily Herald declared in an editorial, that “the foundations of the Socialist Britain,” will be “laid in the coal pits”? Which makes one wonder what the Labour Government have got to do with it—the coal pits are the last place to find them. “Socialism” has been proclaimed from some very funny places—Karl Kautsky twitted Bernstein with discovering it in every municipal public lavatory fifty years ago—but never before down the coal pits.

The foundations of Labour Party “Socialism” may be in the coal pits—the first floor is already in the British, owned lead and zinc mines of Yugo-Slavia.

“The British Government intend to make an urgent protest to Marshal Tito's Yugo Slav Government against the nationalisation of British lead and sine mines without compensation.

The French Government are to make similar protests. . . .

The protests are considered not important in themselves, bat they are being watched as test cases concerning other Allied properties and concessions in the Danubian and Balkan States, including oil in Rumania, gold, copper, zinc and lead in Bulgaria, lead zinc tin and steel in Yugo-Slavia and other interests in Poland and Hungary. (Evening Standard, August 28th).

Poor Tito—he believed those election speeches too! Socialism is the Common Ownership of the means of wealth production. The means of wealth production under capitalism are the private property of the capitalists. The only way to transform Capital (private property) into Social Wealth is to take it away by expropriating its present capitalist private owners. Socialism cannot be inaugurated by compensating capitalists—which leaves wealth in its Money form (Capital) in the same hands. Nothing whatever is changed by the Labour Government's “Socialisation” of the Bank of England, except the name on the documents entitling the owners to their pound of flesh. Same owners—same flesh—“the 12 per cent." comes out of the hides of the workers.

Banks are institutions of the Money system—Capitalism. They only function for, and in that system: They can only operate when the great mass of production is carried on to exchange products—for profit. They are the clearing houses of that commodity—(or its paper tokens) gold; which serves as the universal medium of exchange—which stems from private ownership.

Banks borrow—and lend other peoples money, i.e., they take deposits, and make advances on security (property). Banks make profits (without which they close their doors) from the difference between the cost of attracting deposits; and what they make by lending or investing a large part of these deposits for short periods. Banks are Profit making concerns of Capitalism. They are nothing whatever to do with Socialism; which will abolish Money and Banks, along with parsons, prostitutes, pawnbrokers and politicians.

Mr. Arthur Greenwood told the Conservatives that the Labour majority in the House to-day is “quite different,” from the Conservatives, but went on to say of his own Labour Party colleagues:—

“I look around among my colleagues and I see landlords, capitalists and lawyers. We are a cross- section of the national life.”—(Hansard, August 17th, Column 261.)

And not one voice was there to interject, “Double-cross section”!

The Labour Government's object is not the establishment of the Socialist Commonwealth of Great Britain—which can only be done by “dispossessing”—“taking away,” (Oxford Dictionary) expropriating—not compensating Capitalists. Marx's slogan was:—

“Expropriation of the Expropriators.”

“Public Ownership” simply means wealth in the form of “public corporation” stocks, quoted on the Money Market to the highest bidder, in place of private stockholders. Mr. Dalton has already expressed the hope that British Government securities will increase in value, as a result of his legislation. Under the Labour Government's convenient “Socialism," the profits and wealth of the capitalists increase.

For a great many years the Socialist Party has declared that:—

“It is impossible to exaggerate the harm done to the Socialist movement, by those who, calling themselves Socialists, have taught the workers to believe that State Capitalism and Social Reform are Socialism.

The Socialist Party of Great Britain has always been careful to define what Socialism means. Nobody who grasped that definition ever made the error of supposing that State Enterprise like the Post Office or Public Utility Corporations like the London Passenger Transport Board had anything to do with Socialism. Nor did they imagine, even for a moment, that Hitler and Mussolini were Socialists, or that Socialism could result from the Bolshevist dictatorship in Russia or from a Labour Government in Britain or Australia. But our critics who ridiculed what they called the “doctrinaire” Socialist Party of Great Britain, all fell into these errors—with disastrous results."

The greatest disaster of all will befall the National Labour Party—as the workers discover, by bitter experience, that it does not stand for Socialism. We shall proclaim louder than ever what Socialism means—the workers will learn—and the Labour Leader take his place in the museum of antiquities, with Money—Banks, “ the spinning wheel, and the Bronze axe."

Horatio.