Poland is state capitalist (1982)

From the October 1982 issue of the Socialist Standard

Before the Second World War Poland had been governed by a military junta led by Pilsudski. The political outlook of Pilsudski was close to that of the largest pre-war political grouping in Poland, the National Democrats — a band of crudely anti-semitic fascists whose national ideal was similar to that of Hitler’s Germany. During the war the Polish working class were victims of some of the foulest Nazi atrocities. In June 1945 a Committee of National Liberation declared Poland to be a ‘People’s Democracy'. There was by no means a wide Polish consensus in favour of the new government, which was seen to be a political puppet of the Stalinist state bureaucracy which was effectively the capitalist ruling class of Russia. In 1945 a "Democratic Alliance", comprising the Communist Party of Poland and the Socialist Party of Poland, won a number of votes in the election. Soon after the election the Socialist Party was expelled from the “Alliance" and the agents of Russian capitalism dominated Poland.

The leader of the Polish Communist Party in 1945 was Gomulka who, above all else, was a Polish nationalist. Even before adhering to the Russian policy of state capitalism he was committed to the equally anti-socialist policy of strong national pride. The difference between state capitalism and private capitalism is that under the former a state bureaucracy (composed of senior Party members) possess capital, whereas under the latter form of capitalism the means of wealth production and distribution are privately possessed. Neither form of capitalism excludes the other entirely; for instance, in 1945 the Labour Party nationalised a number of industries; this did not stop them from being capitalist concerns, which produced wealth for profit rather than use. but simply altered the political arrangements.

Similarly, although Gomulka's Poland was primarily state capitalist, this did not stop his government from trading with the West and borrowing 40 million dollars from Western banks. These bank loans are of crucial importance: as soon as a professedly ‘socialist state’ borrows money from a bank it has to repay the loan and the only way it can do this is by the process of exploiting its workforce. A second economic area in which Gomulka resisted pressure from the Kremlin to establish total state capitalism was agriculture. The Stalinist policy was to nationalise all land, but Gomulka found it politically inexpedient to do this. He had gained power by promising the Polish peasant farmers that they could retain ownership and control of their land. Lenin and the Bolsheviks had promised the same thing to the Russian peasants in 1917, but they broke their promise when in power. Gomulka kept his promise to his supporters and as a result 80 per cent of the agricultural land in Poland remained the possession of 10 per cent of the population. This is still so today.

Gomulka's political insolence, which he was forced into in order to retain the support of his capitalist-nationalist-minded supporters, earned him the criticism of his Russian masters. In September 1948 Gomulka was removed from the leadership and replaced by the hard-line pro- Kremlinite, Bierut. From 1949 until 1956 Poland, like other Stalinist satellites, underwent a period of state terror and unprecedented economic hardship for the workers. During this period, marked by the notorious Six-Year Plan, everything was sacrificed so that industrial capital could be accumulated. The aim of the government was to turn Poland into an industrial power and in order to do this maximum profits had to be extracted from the labour of the wealth producers.

Just as in Britain in the early 1800s. and in Chile and Zimbabwe today, working class combination is outlawed so as to ensure the passivity of labour which is necessary for the rapid accumulation of capital, so in Poland the trade unions were regarded as an unacceptable obstacle to the objectives of state capitalist production. As in Nazi Germany, the state did not ban unions, but took them over. During 1949 and 1950, 80 per cent of Polish trade union officials were purged. The state-run unions ceased to be a weapon of working class resistance against the rate of exploitation (which even before 1948 they were hardly able to be) and became a weapon in the hands of the exploiters to extract as much profit as possible out of the exploited. The excellent Polish film, Man of Marble, provides a vivid social portrait of the appallingly tyrannous condition of Polish capitalism during the period of the 'plans' for capital accumulation.

The death of Stalin and Bierut, and the relaxation of state terror which occurred after Krushchev denounced Stalin at the Tenth Congress of the Communist Party of the Soviet Union, resulted in a desire on the part of many Poles — including some Party members — to liberalise state capitalism. In Hungary, the period of so-called destalinisation was considered by the Kremlin to be excessive and in 1956 the Russian tanks went in to Budapest. In Poland the end of the brief period of “liberalism" was decisive, if less dramatic. In 1956 fifteen thousand workers in Poznan held a demonstration to complain about the high production targets which they had been set. The militia was used to break up the demonstration and eighty workers were murdered on the streets.

After 1956 Gomulka returned to power. As in 1946, he chose to finance Polish industrialisation by borrowing from the Western banks. Between 1957 and 1963. 529 million dollars were borrowed from America alone. The result was a consistent effort by the state authorities to intensify the rate of exploitation — notably in heavy industries like ship building. In 1970 the workers in the Gdansk shipyard decided that enough was enough: they went on strike and made the fatal mistake of demonstrating in the streets. The state responded in the only way it knew—just as the authorities in Manchester did at Peterloo — and once again workers were fired on and killed.

In Gdansk in 1970 the state had exposed itself as a ruthless defender of capital and an opponent of the working class interest. Learning from the street demonstrations of 1970. many Polish workers began to realise the need for organisation. After the Gdansk affair Gomulka was removed for a second time and Gierek was brought in to replace him. Although the leader was new, the policy remained the same: Gierek borrowed heavily from the West, receiving 100 million dollars from Russia and 50 million dollars from the West in 1971 alone. There seemed to be an initial success. By 1973 Poland had the third fastest productivity growth rate in the world. Production of consumer goods rose by 7 per cent and real wages rose by 40 per cent between 1970 and 1975. By 1975 Poland owed 6,000 million dollars to the Western banks. To pay off these debts more wealth had to be produced. To produce more, machinery had to be imported. To buy the machinery, more debts were incurred. Eventually, the Polish state decided to cut back on the production of consumer goods for the home market and devote more and more production to goods for export. The contraction of production for the home market led to increased prices of consumer goods and a second problem: the private farmers, who own most of Poland's land, refused to sell their agricultural produce to the state because they had nothing useful to buy with the money. The commodities required by the peasant farmers, such as machinery and chemicals, were being produced for export. Consequently there was a desperate shortage of food, as the price increased still more.

By 1980 the Polish state owed 27,000 million dollars to the banks. It was finding it difficult to sell its goods on the world market because of the world recession. Productive growth, which increased by about 9 per cent between 1971 and 1977, was contracting. Sixty per cent of the industrial products due to be completed in 1980 were unfinished at the end of that year due to lack of goods, leaving Poland with 10.6 billion dollars worth of frozen assets. In 1975, 30 per cent of Polish government expenditure was on food subsidies and welfare services; by 1980 this had fallen to 20 per cent. In 1980 there was a coal shortfall of 12 million tons; shipbuilding amounted to 400,000 tons, 35 per cent less than in 1978. Truck production fell by 6 per cent of 1979 figures and there was a sugar beet shortfall of 30 per cent.

It was thus in response to a crisis of capitalism that the workers in the Gdansk shipyard went out on strike in 1980. In 1981 the workers' journal, Jednosc, contained an article which posed the question: how is the emancipation of labour to be achieved? The answer given was that "it involves true socialism, undistorted socialism . . ." and went on to make the highly perceptive statement that “State ownership and social ownership of the means of production are two completely different concepts which should never be confused. The means of production may be owned by the state, but this does not mean that it is thereby the property of the working class”.

Socialism means the common ownership and democratic control of the world and everything in it by the whole community. There cannot be socialist countries or socialist governments or socialist banks or socialist police or socialist prisons. Our fellow workers in Poland must learn from their experience of opposing their oppressors in recent times. The enemy is capitalism, whatever its form, and to the end of destroying it the Polish workers will have the support of socialists everywhere.

Steve Coleman

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.

The New GDP: Gilts, Debts and ‘PIIGS’ (2010)

From the October 2010 issue of the Socialist Standard

During 2010 the most talked-about consequence of the housing and banking crisis has been its knock-on effect for governments – those charged with masterminding the bailout. We examine the state of what is euphemistically known as the ‘public finances’.

There are ultimately only three sources of revenue for any government – taxes, borrowing and printing money. The economic crisis has led to a media preoccupation with all three. Because of the bailout of the banks and massive financial stimulus programmes initiated by governments the world over in an attempt to avoid another Great Depression, there is quite some interest in how all this is going to be paid for.

One aspect of this, which the Cameron government is now grappling with, is to try to compensate for the bailout and the costs of the recession by reducing other government expenditure (e.g. on state-provided services like education, on defence, and on staffing in the civil service, etc). However, if printing money causes inflation, and there are limits to the amount that can be raised through taxes, why not just borrow more to avoid the need for big public spending cuts?

The borrowing option is very often there, but government borrowing is not always as straight forward and risk-free an exercise within capitalism as it may appear at first sight.

Good as gilts

Governments borrow money through the issuance of bonds, which are sold to investors with the promise to pay a rate of interest and – usually – to return the original capital advanced by the investor at a pre-determined time (when the bond ‘matures’). The issuance of debt in the UK is overseen by an agency of HM Treasury called the Debt Management Office. Bonds issued with maturities of less than a year in the UK are called Treasury Bills and are traded on the money markets, typically by big financial institutions who only want to tie-up some of their money for short periods. However, the vast bulk of the bonds issued in the UK to finance government debt are for maturities over a year and are called ‘gilt-edged securities’ because the original bond certificates had a gilt-edge to the paper.

Gilts are usually issued for £100 each but come in various types and maturities – which means that the issuing and paying back of government debt is a far from straightforward business. The defining features of a conventional gilt are its ‘coupon’ (the interest payment) and its maturity, both reflected in the name of the gilt e.g. 8% Treasury 2013, a gilt which pays 8 per cent a year – in other words £8 – and for which the government will pay back the initial £100 in 2013.

Other gilts are ‘index-linked’ in that the coupon and final repayment amount are linked to movements in the Retail Price Index, while another category are undated or ‘irredeemable’ gilts such as 4% Consols, gilts often originally issued in the nineteenth century and which pay a regular coupon but for which the government is not bound to pay back the original sum advanced at any set date. The vast majority – nearly three-quarters – of UK gilts in issuance today are of the conventional variety and these are clustered into ‘shorts’ of under seven years maturity, ‘mediums’ of seven to 15 years and ‘longs’ of over 15 years.

The issuance of gilts, as they are commonly called, is a regular activity because government revenue from taxation does not neatly match patterns of government expenditure, either because spending is running ahead of government revenues, as at present, or because tax-collection typically has greater seasonal variations than government spending. And even when governments might be paying back some gilts as they mature (‘redeeming’ them) they will usually still be issuing others.

Other countries have similar mechanisms for issuing debt (in the US the bonds are called ‘Treasuries’) and all have similar issues at root. In particular, the laws of supply and demand will affect the level of the interest payments demanded by investors as will the general level of confidence in a country’s ability to pay both the coupons and the original capital advanced when the bonds mature. In the UK there are usually weekly gilt auctions and the government will have to respond to a lack of demand for gilts by increasing the coupon on new issues thereby making them more attractive – but at the same time making them more expensive from the government’s own point of view.

A big influencing factor on this is the ‘secondary market’ for already existing gilts – the billions of pounds of gilts in circulation until they mature do not usually trade at their face value after they have been issued, but at rates determined by the market. For instance, the return investors want on long-dated gilts may rise to 5% (the interest payment in relation to the price paid is called the ‘running yield’). If so, this means that a long-dated gilt with a 4% coupon is not going to trade at the original £100 face value it was sold at but only at £80 instead, as this is what would give a 5% running yield (a gilt costing £80 which pays £4 on the coupon). This type of shift in price and yield opens up the possibility for investors of capital gains and losses, and also leads to the concept known as the ‘redemption yield’, the running yield investors achieve adjusted for such capital gains and losses. In its simplest form, buying above the initial £100 face value will give a redemption yield lower than the gilt’s coupon rate as there will eventually be a capital loss to be taken into account, buying below face value will increase the redemption yield above the coupon rate as there will be a capital gain when the government repays the face value of the gilt.

Such market gyrations in gilt prices and yields as determined by capitalist investors daily will influence the way and cost at which a government can borrow by issuing new gilts, with shifts in yields being crucial. Because investors may be tying their money up for long periods it is normal for the yield on long-term bonds to be generally higher than for short-term bonds too. However, periods of financial uncertainty and likely recession usually lead to interest rates being temporarily higher for shorts than for longs as investors do not want to tie their money up for extended periods. This leads to what is called an ‘inverted yield curve’, with higher short-term interest rates in the economy than long-term rates, as happened for a time at the start of the credit crunch  (the yield curve is the relation between interest rates, i.e. the cost of borrowing, and the time maturity of debt).

These ever-changing market interest rates at which governments have to issue gilts in order to finance their borrowings is of obvious concern to them. But the maturity of the bonds is a significant issue too.

‘PIIGS’ at the trough

In the last few months a new acronym has arisen in the financial press reflecting the times. Instead of the talk being of the fast-growing emerging market ‘BRIC’ countries of Brazil, Russia, India and China, we have the ‘PIIGS’ instead. These are countries that have been deemed by the international bond markets to have issues regarding the amount and/or nature of the government debt they have outstanding, the unfortunate acronym standing for Portugal, Italy, Ireland, Greece and Spain. The most serious situation, now accompanied by massive government spending cuts and riots on the streets, has been that encountered by Greece, which has implemented austerity measures of around 30 billion euros in return for a 110 billion euro rescue package from the EU.

Interestingly, Greece’s annual budget deficit – its annual expenditure over its annual revenue – is projected to amount to about 8 per cent of GDP this year, actually less than the US’s 11 per cent (Financial Times, 23 June). And its total accumulated national debt built up over time is, at around 110 per cent of one year’s GDP, a lot less than Japan’s at 190 per cent of GDP. The problem, however, with Greece has been that much of its debt was due to be retired in the next couple of years (i.e. a large proportion of the bonds it had issued were due to mature) and there was no guarantee it had the money to be able to do this. This prospect sent the bond markets into fright to the extent that long-dated Greek debt was yielding over 10 per cent at one stage, more than double that typical for other western economies. This was because investors dumped their bonds, in the belief they may not get their original investment back, sending the prices of the bonds plummeting and their yields soaring.

This has been a clear example of the way in which the bond markets are able to determine which countries are able to carry on issuing debt investors are willing to buy, and which countries investors have lost confidence in. This is precisely what has happened to a number of Latin American states such as Argentina during the last 30 years too – and the retribution has usually been severe. When a country shows signs that it cannot pay back its debts or may default on coupon payments on its bonds, a restructuring programme initiated by the International Monetary Fund is not far away, typically leading to cuts in state spending coupled with tax rises and the inevitable social unrest.

Once a government defaults on its debts, the bond markets tend to have long memories, and the fear of future default will push up interest rates (yields) for years to come, making the cost of government borrowing high. In such situations, international investors retreat to ‘safe havens’ like the US and UK, countries that have never had any significant default on their debts during their history.

Just like BP?

In this respect, the markets treat countries and their governments rather like they treat individual companies. Just as credit rating agencies like Moody’s or Fitch  give credit ratings to companies (the highest being ‘Triple A’) so they rate nations too and this influences market perceptions. Credit rating agencies and other financial firms view companies likely to default on their debt (whether to banks, or to investors such as the owners of corporate bonds) with the utmost suspicion. Defaulting on debt or inability to pay coupon payments on bonds or on promised dividends is one of the greatest corporate sins and companies deemed at risk of default have their bonds rated as ‘junk’ and are punished by markets.

Recent examples of those falling foul of financial markets because of a perceived inability to service their debts would not only include the banks but also major companies like William Hill and Premier Foods which have had to go back to their shareholders cap-in-hand asking for money to reduce their debt and shore up their balance sheets. Yet, a company like BP can have a temporary dip in its share price but otherwise largely escape the type of battering from the markets meted out to others despite its involvement in one of the biggest and costliest environmental disasters of all time. And the reason . . . ? BP’s net debt is little over one year’s typical profits (last year being $20 billion) and it has a flexible debt structure.  In other words, it is highly cash generative, has headroom on its debt and so investors have more confidence it can meet its financial obligations.

Little headroom

Like companies, some countries have more headroom to tackle their financial situation than others. Where confidence in government finances are high and where debt servicing is manageable, governments will be able to issue bonds at rates that are not exorbitant and thereby finance their expenditure. This also applies to governments that have more headroom to increase taxes because state spending in the economy is lower (another reason why the US and UK have been seen as safer havens for bond investors than countries like Greece).

But in truth there is an historical element to this as well. The story of the last 20 years or so isn’t that there has been a massive explosion in government debt – the explosion in debt has been in personal debt. In the US this rose from 80 per cent of average disposable income in 1990 to over 140 per cent, and in the UK a similar measure of personal debt rose from 100 per cent to 170 per cent of household income under New Labour (Financial Times, 9 August 2008). By contrast, while government deficits in a given year are now significant (a record £159 billion or 11.4 per cent of GDP last year in the UK) and have caused some market wobbles, the accumulated national debts of most countries have not been particularly high by historic standards.

Because of inflation over time, the big number headline figures of billions and trillions are misleading, and percentages give the best picture. By way of example, total accumulated national debt as a percentage of one year’s GDP is currently around 70 per cent in the UK. According to figures from the Bank of England this compares with over 250 per cent in 1946 at the end of the Second World War. Indeed, for all the period from the start of the First World War in 1914 until the early 1960s it was far higher than it is now, and the situation in the US has been very similar in percentage terms. Indeed, only as recently as 10-15 years ago governments in the US and UK were running big budget surpluses when the economy was booming and were paying back the national debt as quickly as they could, reducing national debt to GDP ratios to well below 50 per cent in both countries for a while.

What this means practically is that it usually tends to be sudden upward changes in the rate and nature of government debt that tends to really spook markets, drain them of confidence and lead to the type of government austerity measures we are now seeing, rather than particular total levels of debt as such. Indeed, a comparatively healthy economy like Singapore’s has a national debt equivalent to 113 per cent of GDP, while – perhaps counter-intuitively – Uganda, Iran and Mozambique have national debt of less than 20 per cent of GDP. After myriad failed government stimulus programmes over the last two decades Japan has accumulated the second highest national debt to GDP ratio in the entire world (after Zimbabwe) but despite its ongoing problems has comparatively little difficulty borrowing funds via the bond markets.

You can’t buck the market

What is certain from all this is that governments are far more like companies than they would ever generally like to admit, and certainly cannot ‘buck the markets’ and market perceptions, which are always crucial. But then again, who are ‘the markets’ anyway?

The market for UK gilts is typical and is dominated (at around 40 per cent) by insurance companies and domestic pension funds, followed by overseas investors and financial institutions, hedge funds, etc (at 35 per cent). The rest is made up of recognised collective investment vehicles like unit trusts, by banks and lastly by households (households being less than 3 per cent of the total). In other words, the bond markets – like the equity, commodity and currency markets – are dominated by the big capitalists and institutional investors. Their flows of investment capital are substantial and cross national boundaries at the press of a button. These are the people always on the look out for gilt-edged opportunities in life. The laws of the market economy dictate that no government will – or can – argue with them for long.

DAP

Letter: A discussion of the Money Question. (1927)

Letter to the Editors from the February 1927 issue of the Socialist Standard

To the Editor,

“Socialist Standard.”

Dear Sir,

In reply to A.W.S. in the December issue of the Socialist Standard, on the question of currency, you deny that inflation had taken place during the war period, and, presumably during the years immediately after. In support of that contention you employ a formula which, as you insist, requires for its validity, “any given period under normal conditions” (italics mine).

2) It would be interesting to know by what line of reasoning, or by what stretch of imagination, the war period, and the post-war period up to the resumption of the gold-standard by this country, could be regarded as normal, and treated as such by you.

3) Gold was at no time during the actual war period allowed to function freely as a commodity. The whole supply of the British Empire representing upwards of 60 per cent. of the total gold output of the world, was commandeered by the Government for the use of the Bank of England. Consequently the possibility of measuring the depreciation of paper-currency, relative to gold-currency, which obtains during normal times, by the excess of the market-price of gold over its mint-price, was denied us.

4) No person was permitted to melt or export gold. Those who defied the law were known to make large profits; and thus the depreciation of the paper-pound could be gauged roughly by inference.

5) During the sterling exchange slump in 1915, the Bank made a gallant attempt to maintain the sanctity of the gold-standard and exported a considerable quantity of the metal over a short period. The pace was found too hot, however, even for a Bank that could monopolise for its exclusive use the major part of the newly mined gold, in the world, and the Government was compelled to come to its assistance and by the mobilisation of American securities held in this country, and by their subsequent sale abroad, managed to peg the dollar-exchange at a rate that made it more profitable to settle adverse balances by the purchase of bills, or drafts, than to export bullion.

6) The phenomenon of rising prices preceding the increases of currency during the war period you cite as proof evident that inflation could not have been the cause of high prices. A little consideration, however, will convince one that such precedence is quite in harmony with excessive issues of bank credit. The total credit-units, i.e., legal tender—currency, plus cheque currency, operating at a given time being conditioned by, and strictly limited to, the mass of credit entered on the books of the banks.

7) Thus in the sense that currency is merely an effect, the terms inflation, and deflation, of currency, are meaningless. The amount of currency employed being that needed to allow commodities to circulate at their prices ; which may, however, be paper prices.

The war-time inflation was a credit inflation which in its turn necessitated additions to the currency to give effect to it.

8) For example, as late as 1920 the Government still owed the Bank of England the sum of £400,000,000, which it had borrowed from time to time on “ways and means” account. Is it reasonable to suppose that when the Bank created that mass of credit (purchasing-power) goods of a gold value equivalent to the nominal amount of the loans, were actually available for exchange? And if not then rank “lawism” was being indulged in.

9) It is a matter of common knowledge that on the unpegging of the exchange in 1919, and when gold was again permitted to function freely on the open market it immediately commanded a premium ; thereby pricking the bubble of pretence of non-inflation.

I am, sir,

Yours faithfully,

William Nicholls.

Reply to W. Nicholls. 

For ease of reference we have numbered our correspondent’s paragraphs, but before dealing with his letter in detail it may be as well to note that the only place where he attempts to deny, definitely, our case is in the last line of his letter. All his other objections are in the form of suggestions and inferences.

1) This paragraph reads rather strangely. Mr. Nicholls introduces an emphasis not to be found in our reply to A.W.S., when he says we “insist” upon a certain formula, We did not “insist.” We merely stated the facts in ordinary terms. Why does Mr. Nicholls introduce the emphasis? Perhaps the second paragraph will supply the answer.

2) Neither in the reply to A.W.S., nor anywhere else, have we stated that the war period, or the post-war period, could be regarded as normal. This is a deliberate misrepresentation of our statements. When this is noticed the emphasis of his first paragraph may be explained as a stepping stone to the misrepresentation of his second.

3) This paragraph is just journalistic claptrap. For some time after the war had started gold was still in use as currency, but neither then, nor at any subsequent period would a sovereign purchase more commodities in the ordinary market than a £1 currency note. The two circulated as equals, proving there was no depreciation of the paper currency here.

4) This paragraph displays an ignorance of the economic basis of money. Outside of currency, gold is a commodity—a paper note is not. The only place where they can be compared accurately is in the country issuing the paper. (See June, 1922, S.S.)

5) This paragraph shows the confusion that arises from merely looking at the surface. The Government had to make huge purchases abroad, chiefly in America, and, with the issue of the war in doubt, the paper of every belligerent country was either only accepted with reluctance or entirely refused. But this has nothing to do with “inflation” here. If the amount of paper currency had been reduced to one tenth of the quantity then existing, it would have made no difference to the reluctance to accept this paper abroad. Hence the paying for the goods ordered by the securities called in.

6) Here Mr. Nicholls has to abandon his case. The careful reader will notice that he does not deny our statement of the facts. Neither does he say that the rise in prices was due to excessive issues of bank credit. He only suggests it by a non-sequitor. The question is not whether a rise in prices could

result from an excessive issue of bank credit, but whether the particular rise we are dealing with did so result. Mr. Nicholls does not definitely claim that this was the cause.

Although it is a side issue in the present discussion we may point out that there is no such thing as “cheque-currency.” Currency consists solely of legal tender. Cheques are not legal tender and therefore cannot be currency.

7) This paragraph gives us our case once more. That the wartime inflation was a “credit inflation,” we had already explained in our June, 1922, issue. But a credit inflation is not a currency inflation. Neither are additions to the currency necessarily inflation, as we have already explained.

8) This paragraph really has nothing to do with our case, but it shows once again how Mr. Nicholls has missed the essentials of the problem. For what purpose did the Government borrow the £400,000,000 “from time to time”? Firstly, for munitions of war. Secondly, to pay interest falling due on the loans. In the first case it is not only “reasonable to suppose,” but an actual fact, that goods of a gold value to the amount of the loans were available—and delivered—to the Government to be consumed in war operations. In the second case it is simply an alternative to raising taxes to pay this interest. Ultimately these loans will be liquidated by operations with the taxes.

9) This paragraph mixes two things—the so-called unpegging of the exchange, a Government manipulation—with the restoration of the gold standard. Gold was not permitted to “function freely” until the gold standard was restored in 1925 and only then if the “bull” may be permitted, under certain restrictions. That there was no such thing as “the bubble of pretence of non-inflation,” was shown by the fact that neither then nor now will a sovereign purchase more than a £1 currency note. And this despite the enormously important fact that, along with the so-called restoration of the gold standard, the £.l currency note was, for the first time, made inconvertible.

Editorial Committee.

Muddled Money Theory (2021)

Book Review from the March 2021 issue of the Socialist Standard

The deficit myth: modern monetary theory and how to build a better economy. Stephanie Kelton, John Murray Publishers, 2020

You may have read or heard about Modern Monetary Theory (MMT), which has become popular in some left-wing circles as a means for justifying government spending programmes. In essence, it affirms that any state that can issue its own inconvertible (fiat) currency, cannot go bankrupt (so long as it only borrows in its own currency).

This leads to a model of the state in which it is not reliant on taxation nor borrowing to spend. Taxes, for MMT, are merely a means for driving demand for the state-issued currency, and any money paid in tax is effectively destroyed. All state spending is simply the issuing of newly created money. The national debt is simply a different form of money that attracts interest in the normal money the state issues. The national debt, in this model, is merely a means to regulate interest rates.

The only limit to state spending, for MMT, is the availability of resources in the real economy. These limits only become evident through the appearance of inflation: prices would begin to rise as demand from government spending outstripped supply. The method that Kelton promotes to regulate this spending is a government jobs guarantee scheme, so that full employment is maintained at all times. If private sector employment drops, the government jobs scheme kicks in to offer employment, at a minimum rate. As the economy recovers, people leave the job scheme, attracted by private sector wages.

This is, then, unlike the Keynsian prescription, in that MMT encourages government spending at any stage of the business cycle, rather than cutting spending during the upswing and borrowing during the recession.

The core premise of MMT is banally true: the state can always issue more money in its own currency. There is a question of just how much scope there is for increasing state spending before inflation kicks in, and Kelton certainly seems to write a lot of cheques against that spending capacity: healthcare, university education, pensions, etc.

She seems to imply that the current models, wherein the state is assumed to be funded through taxation and borrowing, are simply an error, rather than representing the ideological form of the interests of the owners of money and capital.

Before 1971 other currencies had a fixed rate of exchange with the dollar and the dollar was convertible into gold at the fixed rate of $35 an ounce. This provided an indirect link between a currency and gold. The currencies themselves, however, were not convertible into gold and states could issue as much as they wanted. To the extent that they over-issued them this led to inflation and in the end to a formal devaluation of their exchange rate with the dollar.

When this ‘gold exchange standard’ was abandoned by the US in 1971 the commodity origin of currencies was completely disguised, giving rise to the illusion on which MMT is based that money is entirely a creation of a state. Since then currencies have floated up and down against each other in accordance with the demand for them, for instance to pay for imports. An increase in their supply was still liable, if excessive, to cause inflation. The result wasn’t a formal devaluation, simply a downwards float vis-à-vis other currencies.

To an extent, the commodity origin is still relevant because the state monopoly of fiat currency is not absolute. People can abandon pounds or dollars by buying foreign currencies or value-bearing commodities (in a crisis, the price of gold shoots up, as people buy gold to try and protect the value of their assets). Contrary to Kelton’s assertion, the banks do not have to buy the national debt, they have other options, but it has to remain attractive, and the currency has to retain confidence.

Further, her dismissal of ‘crowding out’ theory only goes so far. The usual idea of crowding out is that government borrowing attracts investable capital and pushes up interest rates, making it harder for private sector businesses to find investment and thus damping down overall economic growth. Kelton argues that the state can effectively set its own interest rates for borrowing, and can thus borrow and hold down interest rates at the same time.

To an extent that is true, but only within broad limits governed by general confidence in the security of the government debt. With international money markets, setting the interest rate too low or too high would make the currency a target for speculation, as people would move their assets into or out of the country. Further, leaving interest rates to one side, as the state can only consume resources (as a state) all the resources employed by the state cannot be employed by private capital to produce profits. Whether this transfer really comes from borrowing, taxation or from creating money is moot, the fact remains that from a capitalist’s perspective, state spending is a threat to their profitability. This means less wealth overall is created for the state to commandeer.

The same can be said for a jobs guarantee. It is useful for Kelton to tell us that the US Federal Reserve sees it as part of its role to deliberately sustain a certain level of unemployment in order to control inflation. While she sees this as the result of mistaken theory, we would see it as part of the essential features of capitalism. Capitalism relies on the lash of the threat of poverty and unemployment in order to sustain its profitability for the capitalists, as well as having a buffer of laid-off workers in reserve for the next boom.

A job guarantee scheme would see wages pushed up to the point where they cut into the profits the capitalists make (and this would happen without causing inflation, since the demand would simply be transferring effective demand from one pocket to another). This would likely result in a capital strike occasioning a form of economic crisis. Just as likely, the state might be called in, as it was under the Keynesian nostrums, to regulate wages and use its job guarantee to control wage levels.

To the extent that Kelton talks about looking past money to think about real economic resources and how they can be commanded for the interests of the whole community, she is on the right path. The lever of state-issued money is insufficient. The distortion of money markets would get in the way of that. Likewise, simply seeing the problem as a misunderstanding of theory, rather than actual contesting class interests, is a greater barrier than any theory of how the state is financed.

Pik Smeet

Cooking The Books: Is capitalism based on unsustainable debt? (2021)

The Cooking The Books column from the March 2021 issue of the Socialist Standard

A new group calling itself ‘Blue Revolution’ has sent us a couple of pamphlets. In one of them, The History of Politics Simplified, they talk of the ‘debt based free market system’ and make the claim that the ‘free market … relies on an economy that is dependent on debt’. They invoke Marx in support of this:

  ‘… unless change take place the western economy will in the words of Karl Marx collapse under the weight of its economic contradictions … Reliance on this system will bankrupt the government first and then, the nation.’

Marx never expressed such words. He never wrote of capitalism collapsing under its economic contradictions. He did point out capitalism’s contradictions – such as between use-value and exchange value, and between co-operative production and private ownership – but did not expect these to lead to the system’s economic collapse. What they did cause was production under capitalism to be erratic, veering continuously between boom and slump and back. His view was that capitalism would have to be brought to an end through conscious action by the wage-working class.

Marx didn’t even see dependence on debt as one of capitalism’s contradictions. Debt is something owed by somebody or some organisation to some other person or organisation that has lent them money. So, if you are claiming an economic system is based on debt you are at the same time claiming that it is based on lending.

Borrowing (i.e., getting into debt) and lending are certainly features of capitalism, and if lenders stopped lending the system would be in trouble, but why would lenders do that? Banks and other financial institutions make money by lending money (theirs or other people’s or organisations’) in return for interest, a part of which is their profit.

There are three types of borrowers – individual workers, capitalist enterprises, and governments. Lenders lend workers money to buy consumer items such as household goods, a car or a house but they always check first the chances of getting their money back out of future wages; if they don’t think these chances are high enough they will refuse a loan. Lenders lend to capitalist enterprises to invest in some profitable project and calculate whether they will get their money back out of future profits. They lend to states for the interest states will pay them out of taxation.

In all cases they weigh up the chances of getting their money back with interest and, if the chances are not good enough, they won’t lend. They sometimes get it wrong, but not on the systematic and massive scale assumed by those who think that debts are likely to get out of hand and bring the system down.

Ironically perhaps, it is governments that are the least likely to default. This is because they have the power to raise money from taxes. Which is why, when they scent a recession coming, financial institutions switch to buying government debt (bonds). The leading capitalist states are not going to go bankrupt; their borrowing is sustainable and lenders know it.

It is lending to capitalist enterprises that causes trouble for the system from time to time. Capitalist enterprises are driven by the pursuit of profits; in a boom one sector always eventually overestimates the chances of this, as do those who lend them money. The result is an economic downturn and financial crisis. However, this is not the end of the system. Slumps eventually create the conditions for a recovery by restoring profit-making prospects, and profit-making and capital accumulation resume until the next slump.

The present economic system is not dependent on debt but on making profits.

Keynes can't help (1994)

From the December 1994 issue of the Socialist Standard

Throughout the post-war era, Sweden has been portrayed as the archetypal model of the Welfare State having had a Social Democratic government for all but six years. The reformist parties have instanced Sweden as an example of the successful application of Keynesian theories to remedy the worst aspects of capitalism.

Unemployment pay was guaranteed at 90 percent of wages received at the last full-time job. Two-thirds of the population either worked for or received benefit from the State. Public expenditure amounted to 75 percent of GDP (Financial Times, 14 September). In order to finance this degree of spending, the Swedish government had to raise the revenue from taxation and the sale of government stocks. These in reality are lOUs guaranteed by the government to the purchaser. There are however limits to the extent to which governments can raise money by selling government stock. This was forcibly demonstrated last July when Skandia, the largest financial, institution in the Nordic region, sold all its government bond holdings and announced it would not be buying any more in order to finance public debt. Other Swedish institutions have acted likewise (Wall St Journal, 11 July). Overseas purchasers sold theirs and the price plummeted.

Sweden today is facing its worse recession since the 1930s. Gross public debt is projected to reach 92.9 percent of GDP. According to OECD estimates "Sweden has the fastest growing National Debt of any member of the OECD" (Daily Telegraph, 6 July).

Prior to his recent election defeat Bildt and his party of Moderates attempted to deal with the escalating debt problem by privatisation, raising interest rates and cutting the 90 percent dole payout to 80 percent. Unemployment rose to around 15 percent and the Swedish kroner lost one third of its value. The electorate responded by returning the Social Democrats under Carlsson in the naive belief that they can return to the conditions of the pre-slump period. The new Social Democrat government has given priority to cutting the budget deficit, which at present is 11 percent of the GDP, by increasing taxes. Since these already comprise 57 percent of GDP (Financial Times, 30 September) it is probable that other remedies such as welfare cutbacks will be applied. These problems are not unique to Sweden.

In Italy a coalition under Silvio Berlusconi is struggling to maintain what is financially a House of Cards. Italy's borrowings are projected to be nine percent of national output. Pension payments are to be cut back. At present, women retire at 55, men at 60. Early retirement is available after 15 years’ work, pensioners are entitled to 80 percent of earned payments. The Italian government have embarked on drastic cutbacks in pension payments along with an extension of the retiring age. The trade unions have responded with a one-day general strike.

Canada has similar problems. Debt to GDP ratio is at 95 percent:

   “Canada is in the vicious circle where deficits lead to higher interest rates, which in turn create further budgetary problems. Such is the compounding effect of interest on the outstanding debt that despite federal spending now being lower today as a proportion of GDP than in the mid-1970s fiscal deficits have become endemic." (Financial Times, 25 October).

Banking crisis

Along with the plethora of media claims that sustained economic recovery is now here comes the claim that the world banking crisis has gone away with the writing-off of the debts of the lesser developed countries. But has it? The Economist (21 October) in an article entitled "Hidden Horrors” suggested that "American banks were taking big new risks, but keeping the exposure to individual countries just below the reporting threshold of bank’s total assets.” The article suggested that the banks are “hiding their exposure behind the individual country reporting threshold." How does this tie in with governments’ debts? Banks hold large amounts of government stock as well as Treasury Bills as part of their day-to-day operations in the banking system. If the bond markets of the world including government bonds lose their value and gyrate wildly then the world banking system is affected. The extent of the volume of bond debt around the world has been estimated at $16.2 trillion (one trillion = 1.000 billion) as the size of the world bond market at the end of last year (Barry Riley. Financial Times, 10 September "A new phase of crisis").

At the recent G7 meetings in Madrid, the spokesman for the various capitalist countries put forward possible solutions. Kenneth Clarke suggested easier terms for borrowing by poorer countries by increasing special drawing rights at the International Monetary Fund, along with a not-so-well received suggestion that the Central Banks should sell some of their gold reserves to help moderate the growing financial crisis. The real concern of the G7 meeting is that the bond debt crisis is related to the heavy borrowings by governments, exemplified by Sweden and other countries mentioned, in order to sustain huge welfare budgets could lead to a major dislocation. The present bond debt crisis is a major contributor to the banking crisis which has not "gone away", but has reappeared in a different form and will not be resolved by all the attempted economic gravity-defying antics of the G7 participants or any other reformist solutions.

The welfare systems as we have known them are coming to an end. The assumption that a capitalist economy that can endlessly maintain welfare payments is false. The notion that “the government will have to do something" or “will find the money somehow" is being disproved by slow but steady developments within capitalism. Re-electing the Social Democrats in Sweden can be seen as an attempt to put the economic clock back to the period of several years ago. The electorate are doomed to disappointment.

In Britain the Social Justice Commission has outlined its plans for the "biggest shake up of welfare for 50 years”. The proposals range from guaranteed minimum pensions, increased child benefits, a national minimum wage along with "community responsibility” and other vote-catching ploys. Tony Blair gave the proposals a "guarded welcome", but the Labour Party can no more solve the problem of a declining welfare system than the Swedish, Italian or any other government.

We are witnessing the demise of the Welfare State as we know it along with the discredited Keynesian economic theories on which it was based. The fact that large sections of the population need welfare payments is itself an indictment of the present profit-based system. The solution is to end the system where people do need them. For this to happen, the working class will have to realise and understand the ultimate failure of these welfare reforms to eliminate poverty and raise their horizons above the derisory crumbs that they offer. 

Terry Lawlor