Politics: Syndicalism and the General Strike (Part II) (1975)

From the February 1975 issue of the Socialist Standard

Part 1 of this article can be read here.

In order to illustrate the power of the General Strike, the syndicalist Roller in his pamphlet The Social General Strike gives examples which point instead to the power in the hands of the state. He instances the General Strike which started in Alcoy, Spain, in 1874 where: “The accomplishment of the reconstruction, however, was prevented by the troops, which were sent by the government to reconquer the city." (Page 26; italics ours.) Next, the eight-hours movement in America, which culminated in the Haymarket tragedy in May 1886; here again the Government showed its teeth and the labour movement suffered. Referring to another general strike, at Barcelona in 1902, he concludes with the fatuous remark: “The comrades of Barcelona finally were defeated, nevertheless they proved the invincibility of the General Strike.”

Before leaving Roller we will give one more illustration of the influence on his outlook of anarchist ideas which, incidentally, are still propagated by the superficial and the impatient.

It is an indisputed fact that a brave deed, be it one of a single individual, or of an energetic enthusiastic minority, arouses thousands from their slumber, and with one thrilling shock turns them desperate fighters for the good cause, while ten years of theoretic agitation could not tear them away from their apathetic condition. 

This was implicit in it Blanquism and propaganda by deed. It is another way of saying: “The time for theory has passed, the day for action has come.” All action is based on theory, but when the theories are out of tune with the facts as in the case of the syndicalists, the action is likely to lead to disaster.

The syndicalists were also opposed to democracy. A. D. Lewis in Syndicalism and the General Strike quotes Emile Pouget’s views as follows:

Syndicalism and democracy are the two opposite poles which exclude and neutralize each other . . . This is because democracy is a social superfluity, a parasitic and external excrescence, while Syndicalism is a logical manifestation of the growth of life.

Another syndicalist work, Syndicalism and Revolution, says:

It is better to have an active group who know how to carry the masses and turn them in the right direction by their words and actions.

Sorel also makes bitter attacks on democracy. In fact all minority groups have always claimed to be acting for the mass of the people, whether the latter recognize it or not. The only movement in the interests of the great majority that can ever be successful is one they understand, desire, and freely and willingly work for.

In time, the CGT began to lean more towards political action and reform policies. After bitter experiences, belief in the General Strike lost its strength and the influence of ideas of sabotage and violence declined; until the movement paralleled that of the English trade unions that had absorbed numerous craft unions into a comparatively few large organizations. Then, after the first World War, the propaganda of Bolshevism gave new life to the old futile ideas.

The European syndicalist movement received considerable impetus from developments in America that culminated in the formation of the Industrial Workers of the World. The leaders of the radical movement in America, both political and industrial, were misled into believing that this movement was going to sweep all before it; they therefore wanted to get in and influence it with their particular ideas. Hence, like the old International, it was a hotch-potch of conflicting ideas and soon fell to pieces from internal quarrels.

The closed-shop attitude of the American Federation of Labour was stirring up revolt among unskilled workers and those organized in the Western Federation of Miners, the American Labour Union, and the American Railway Union. The AF of L’s policy of collective bargaining and separate contracts led to one union scabbing on another; the leaders of the AF of L acted on the principle that there was a harmony of interest between employers and employed, and they urged that the strike should be replaced by a mutual contract. High initiation fees (up to £100) and high membership dues closed the unions to almost all but the highly- paid skilled workers, who were a peculiarly American product. The masses of poorly paid men, women and children, as well as black workers, were practically ignored by the AF of L and had little chance of rising out of their depressed condition.

In January 1905 a few prominent trade unionists, some of whom were members of the Socialist Labor Party and the Socialist Party of America, decided to call a conference to set on foot an industrial union, based upon the class struggle, that would include all workers, skilled and unskilled, white and coloured, on an equal basis. The conference in June and July 1905 produced the Industrial Workers of the World. It was attended by anarchists, advocates of the General Strike, and advocates of political action; the result was a programme that endeavoured to meet these conflicting views. The futility of this compromise programme soon became evident, and after a few years the anti-political elements captured the movement. It was reduced to a few thousand members and, after the 1914-18 war, most of what was left was swallowed in the Communist movement.

At the founding conference of the IWW the General Strike was scarcely mentioned: the only two to do so were the anarchists Klemensic and Lucy Parsons. The latter referred to it in an emotional moment when speaking of the Haymarket affair and the execution of her husband. It may be mentioned that she, like many other delegates, had been carrying on a prolonged and unselfish struggle against the terrible conditions suffered by the workers.

The most controversial proposal adopted by the conference was that the workers must struggle to “take and hold that which they produce by their labour through an economic organization of the working class without affiliation with any political party”. The most persistent and acomplished defender of this standpoint was Daniel De Leon. His standpoint can be summarized as follows. Both political and economic organization are necessary, but the latter is more important because only it can “take and hold”. If the workers take political power out of the hands of the capitalists, the latter still retain their economic power. Political power is a reflex of economic power, and the former cannot reach fruition until the latter exists: the economic power of the workers can only be obtained through industrial unionism which organizes industry on a plan that gives the workers control.

In laying down this position De Leon made an astonishing statement. He repeated it a few days later, in more detail, in a speech which was published by the SLP in 1919 under the title Socialist Reconstruction of Society.

In no country, outside of the United States, is this theory applicable; in no country, outside of the United States, is the theory rational. It is irrational and. therefore, inapplicable in all other countries, with the possible exception of Great Britain and the rest of the English speaking world, because no country but the United States has reached the stage of full-orbed Capitalism—economic, political, and social—that the United States has attained. In other words, no other country is ripe for the execution of Marxian revolutionary tactics . . .

Later on, history played its little joke. The Bolsheviks put forward the above argument but based it on exactly opposite grounds—that it was because Russia was a backward country that circumstances made it the country where the Marxian theory of “tactics” (as defined by them) was first applicable!

According to De Leon, the political organization is not capable of organizing production. “Shoemaking, bricklaying, miners, railroad men” and the like were jumbled together in each parliamentary district. Only the organization based on industries is capable of industrial control, and therefore “taking and holding”: “Where the General Executive Board of the Industrial Workers of the World will sit there will be the nation’s capital.” (Socialist Reconstruction of Society.) How the workers are to get control of industry without first getting control of political power De Leon nowhere explains; he makes the nebulous argument that the socialist ballot is the emblem of right but is useless unless backed by industrial might to enforce it. The serpent of reform raises its head in his argument that, while the political movement must make a clean sweep, the industrial one can take over production gradually, a little at a time.

De Leon’s defence of industrial unionism sounds curious when taken in conjunction with an entirely different contention which he argued in two of his most popular lectures:

Obviously, independent, class-conscious political action is the head of Labour’s lance. Useful as any other weapon may be, that weapon is the determining factor. Entrenched in the public powers, the Capitalist Class command the field. None but the political weapon can dislodge the usurpers and enthrone the Working Class; that is to say, emancipate the workers and rear the Socialist Republic.

(Two Pages from Roman History, Edinburgh, 1908.) 

De Leon is an instance of the contradictory positions into which those are led who set out to build large followings by compromise, instead of waiting upon the growth of the workers’ knowledge. His difficulties were partly due to his treatment of the industrial and political movements as two absolute entities. He overlooked the fact that when the workers are sufficiently class-conscious to capture the political machinery for the purpose of introducing Socialism, the same people are in the industrial organizations and will have used their knowledge to bring these organizations to a similar state of development.

The total number of workers represented at the 1905 conference was nearly 50,000, but the main voting strength came from the Western Federation of Miners and the American Labour Union. There were a number of delegates representing small unions, and a number representing only themselves. The form of organization adopted for the IWW was “Thirteen industrial divisions subdivided into industrial unions of closely kindred industries”. A chart was subsequently published in a pamphlet by Trautmann, One Big Union, which gave a picture of the proposed constitution. Its final working-out deprived the ordinary members of real power. Delegates were appointed to committees, which in turn appointed delegates to higher committees, and so on in the fashion later adopted by the Russian Soviet constitution; ultimately, the officials of the Central Board were those wielding controlling authority.

There was a general subservience to the leadership idea, and the confused attitudes were expressed in a statement by a committee, which defined the co-operative commonwealth as

a system of society in which there shall be neither exploiter nor exploited, and in which he who contributes to the well-being of society shall receive the equivalent of the full product of his labour.

This attitude had been pulverized by Marx in the Critique of the Gotha Programme. According to it, those who produced most received most and those who produced nothing—the sick, crippled and aged, and children—received nothing! Also there would be no provision for future production. Behind the statement, however, lurks the syndicalist attitude—the mines for the miners, the factories for the factory workers, etc.

The IWW, like the syndicalist movement in general, was an attempt to force the pace without regard to, and in spite of, the backwardness of the workers. Failing to realize the significance of the phrase that the emancipation of the working class must be the work of the working class itself, they set on foot leadership movements that failed to achieve their avowed objects just because of the workers’ backwardness. Even the methods they advocate for developing working-class consciousness are such that they fail in their purpose and only breed confusion. A common argument was mentioned by Trautmann in his One Big Union pamphlet:

Equipped with the power of an industrial organization, with the knowledge gained in the everyday struggle against the oppressors, they will successfully strive for a higher standard of life-conditions, within this system, and they can master things and forces so that they will reach the final goal of their efforts—complete industrial emancipation.

As the industrial union movement claimed to be out for the overthrow of the system but as, at the same time, it professed to be able to fight the workers’ battle for better conditions more successfully, it would draw into its ranks those who agreed with its object and also those who thought it offered a better medium for gaining improvements in conditions. If the movement attracted a large number of workers, the first group would of necessity be very small, while the second would be so large that it would swamp the organization and turn it into a pure and simple trade-union movement.

But the chance of large bodies of workers deserting established unions for small organizations that can show no evidence of power, which is an immediate question for them, is poor. The IWW anticipated getting round this by striving to organize the unskilled workers who were excluded from the established unions; but these were just the workers who stood least chance of stopping the wheels of industry, and who also were not greatly attracted by the object and the grandiose scheme of organization. Although the IWW had some success at first and caused some employers a pain, it never reached threatening proportions and therefore could not offer the workers the alleged experience in the day-to-day struggle that was to clear their heads. (In fact the concentration on day-to-day struggles has usually the opposite effect.)

Syndicalism as a movement has a number of objectionable features from the working-class point of view. Its principal weapon the General Strike, if it could be as successful as its advocates hoped, would only result in social disaster. Its vision of the future is mixed, envisaging either groups of autonomous communities or a society split into self-contained industries. Its propaganda drives it to include violence. And violence kills free discussion, attracts the worst elements, breeds disunity, invites repression, and plays to the emotion rather than to the intelligence; it develops fear instead of conviction and encourages mutual distrust; it encourages the worship of leaders and endows them with an inordinate amount of power. Finally, syndicalism, by ignoring the source of state power and its effect, is incapable of enabling the workers to achieve their emancipation from capitalism and establish Socialism.

Gilmac.

Politics: Syndicalism & the General Strike (1975)

From the January 1975 issue of the Socialist Standard

Just as a seed contains the varied hues in a flower, so capitalism at its birth contained all that has flowered into various expressions of revolt. The misery it brought has fostered ideas of short cuts to salvation that continually reappear with different signposts.

Thus, the main arguments of Syndicalism were repeated by the Bolsheviks and their servile followers in Britain in the ’twenties and ’thirties. The Claims that Syndicalism was based on the principles of Marx; that the mass of workers were ignorant and inert, and required leading (and forcing) into the promised land; that the days of theory had passed and the days of action come — these and a host of other ideas demonstrated not only a similarity in outlook between Syndicalism and Bolshevism, but the common source of both movements.

The backbone of Syndicalism was the General Strike. As a proposed means to achieve the workers’ emancipation it has an old history, and received considerable support before the capture of power by parliamentary action had come within the workers’ reach. Like Anarchism, it attracted artists and professional people by its insistence upon leadership, its violent attacks on established institutions, its spurning of theoretical knowledge, and its promise of rapid victory.

After they were expelled from the International the anarchist movement fell to pieces, unable to make progress because of their own opposition to all organization; and the acts of violence to which groups of anarchists resorted led to vigorous police action against them. In their extremity they sought a new lease of life by infiltrating the developing trade union movement. The propaganda of the General Strike fitted in with their anti-State and general-destruction policies, as well as the idea of the capture of power by a militant minority. Sorel describes the position as follows:

Many anarchists, tired at last of continually reading the same grandiloquent maledictions hurled at the capitalist system, set themselves to find a way which would lead them to acts which were really revolutionary. They became members of syndicates which, thanks to violent strikes, realised to a certain extent, the social war they had often heard spoken of. Historians will one day see in this entry of the anarchists into the syndicates one of the greatest events that has been produced in our times, and then the name of my poor friend Fernand Pelloutier will be as well known as it deserves to be.

(Reflections on Violence)

In England and America the influence was brief (though for a short time it captured the imaginations of some who should have known better). The main support was in countries where small industries flourished as France, Italy, Spain and Russia.

It was in France that the General Strike was first exhaustively discussed and propagated. The growth of the trade-union movement led to a struggle between its advocates and those of political action At the Trade Union Congress in 1879 the Guesdist movement, which stood for the conquest of political power, scored a temporary victory, but political action subsequently lost its hold. To the impatient, industrial action appeared as a royal and easy road without having to wait. In 1888 the Congress of the French National Federation of Trade Unions voted in favour of the General Strike and the idea then spread rapidly, even receiving some support from political parties. Among its champions was Aristide Briand who, later as a capitalist cabinet minister, was its vigorous opponent and oppressor.

The arguments for the General Strike at that time may be summed up as follows. To strike was legal, so no matter how widespread it might be the government was unable to prosecute the strikers. A general stoppage of work would reduce the ruling class to famine; it would need to be operated only a short time to compel the government to capitulate and bring the workers into control of power. Its spontaneity meant that it could begin at any time and, hastened by propaganda and organization, bring about the revolution rapidly. The workers must have an organization to take over production afterwards, and the trade unions were admirably suited for this purpose.

Although a minority in the trade-union movement, the anarchists soon occupied key positions and by the middle of the ’nineties were the dominating section. Apart from their fanatical activity, they were assisted by the method of selecting delegates by group and not by number. Being divided in many small groups while their opponents were in fewer larger ones, the anarchists were able to capture the controlling influence; the few highly industrialized parts of France were not able to send as many delegates to conferences as the scattered backward parts where the anarchists predominated. Consequently each congress was “packed” by anarchists — a form of “tactics” with which we are still familiar.

Under their influence, General Strike propaganda went beyond just sitting down and folding arms. Sabotage was adopted, involving the destruction of means of production and the forcing of the support of the unwilling. The practical policy that grew out of the French Revolution and was adopted by Blanqui, Bakunin, De Leon and Lenin was based on the idea that an active minority can carry with it an inert and ignorant mass. It is a policy that depends upon leadership and always places power in the hands of one or two outstanding persons, finally degenerating into personal quarrels between these leaders. Behind it, though rarely recognized, is the conflict between idealism and materialism: the power of the idea alone against the power of material circumstances, which include ideas.

In 1895 a new federation of workers was formed, the General Confederation of Labour (known as the CGT — Confederation General de Travail). It included the General Strike as part of its programme. A conglomeration of unions and federations, it comprised all political shades but was ruled by the anarchist minority until 1909, when the crushing of a large-scale postal strike made clear the weakness of industrial action against the power of the state. The opposition to the General Strike policy, particularly by the Guesdists, also showed its failings. For example, the syndicalists were compelled to include anti-militarist propaganda, as an admission that governmental power would not collapse in a general cessation of work.

Probably the most complete expression of the syndicalist outlook is  contained in Arnold Roller’s The Social General Strike (published by the Debating Club No. I, Chicago, 1905). Sliding over difficulties and inconsistencies, the writer distinguishes between strikes for higher wages or political privileges and the strike. According to him the General Strike begins in a small way, spreads in sympathetic strikes, and develops into the overthrowing of the system; it is the culmination of hundreds of earlier strikes in which the workers have gained experience and an ever-stronger sense of solidarity.

Following that argument, one would imagine that the majority of workers had gradually acquired sufficient class-consciousness to understand their social position and desire a change in the basis of society. But this is not the syndicalist view. According to them, the mass of workers are backward and inert until the General Strike commences. Then, in the course of the movement, they become more active and enthusiastic until they convert the strike from the attainment of some minor object into the social revolution. And this change is supposed to occur in a few days or weeks, as production and distribution are brought to a standstill: knowledge grows like a mushroom out of the quagmires of disaster!

Roller is not disturbed by the fact that all workers will not come out on strike. He says: “This ideal of propaganda will, however, in spite of its beauty always be a dream.” He claims that it is only necessary to interrupt production in the whole country for long enough to totally disorganize capitalist society; this, he claims, can be done by sabotage in the principal industries. (But at another time he insists that a great advantage of the General Strike, that will gain for it many adherents who lack courage, is that it will be perfectly legal.) He makes the following very significant statement:

Modern industry, with its extremely specialised labour division and complications, is but poorly adapted to oppose a general strike caused by a minority, for the strike will completely wreck the whole system necessary for the management of production, and vital to the life of modem society.

The sabotage to assist in this wrecking was to include cutting telephone and telegraph wires; tearing up railway lines; causing accidents; loosening screws in machinery; destroying supports and applying fire and dynamite in mines; sinking ships; and many other methods of destruction — a choice assortment is also described by Pataud and Pouget in their phantasy Syndicalism and the Co-operative Commonwealth, 1913. Thus, as in the policy of Bakunin, society is to be completely wrecked.

In such circumstances, what would be the position of the workers? The inert mass that has suddenly developed “revolutionary fervour” is supposed to trust local leaders, who will pacify them by reporting the progress of the revolution (how, with the means of communication smashed, is not explained). The feeding of the population in the midst of this wreckage is also glossed over with childlike simplicity, with the answer that hungry people will attack stores of food. Leaving out of consideration the action of the government, what city has stores of food to support its inhabitants for any length of time? And what about water and sanitation? It does not require a great deal of imagination to foresee disease and devastation sweeping through cities like London, Paris, Berlin and New York. If the syndicalists were as successful as they hoped, it would not be a question of bringing the ruling class to their knees but of submerging everyone in a common holocaust of disaster.

But before matters had reached such a pitch the government would have stepped in with the forces at its disposal. Roller has an inkling of this. He claims first that the destruction would be so widespread that there would be insufficient military forces to cope with it, and then that it is essential to get the military on the side of the workers: “For the revolutionising of the present order of society, anti-militarism and its propaganda is an absolute necessary supplement to the General Strike.”

Time after time the power of governments to smash big strikes has been demonstrated. Sometimes naked power has been used, sometimes concessions made, and sometimes the workers have been starved into subjection. The condition the syndicalists take for granted, lack of knowledge on the part of the majority, is a condition that is bound to defeat them by playing into the government’s hands. The experience of large strikes has been the very opposite of that anticipated by the syndicalists. The government smashed the French postal workers in 1909 by simply calling the postal workers to the colours and then sending them back to their old jobs as soldiers. Soldiers are average members of the working class made more amenable by the discipline to which they are subjected and, like the mass of workers up to the present, accept the suppression of "disorder" as a proper course of action.

Gilmac.

Part 2 of this article will deal with the Syndicalist movement in the United States of America.

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