Cooking the Books: Money problems (2026)

The Cooking The Books column from the May 2026 issue of the Socialist Standard

Central banks and ordinary banks are both concerned about the spread of ‘private credit’, as reflected in two headlines last month in the Times: ‘Dimon alert on private credit loans’ (7 April) and ‘Bailey warns of private credit “lemons”’ (11 April). Dimon is the chief executive of JP Morgan and Bailey is the Governor of the Bank of England.

‘Private credit refers to loans that are provided by private equity firms, asset managers or hedge funds rather than banks. The sector has grown rapidly since the financial crisis [of 2008], as tighter restrictions on traditional banks pushed riskier forms of finance into unregulated markets. Dimon estimated that lending from private credit funds to heavily indebted companies was worth about $1.8 trillion.’

These financial institutions may not be banks from a regulatory point of view but, economically, they are as they borrow money from one source and lend it to another.  As the other article, on Bailey, put it, ‘private credit funds … take money from investors and lend it to other often privately-owned companies’.

Some of those engaging in this type of ‘shadow banking’ have got into difficulty or even gone bankrupt through making bad loans. Seeing this, some of those providing the funds have been asking for their money back or to be moved elsewhere. The concern is that, if the whole sector were to be affected, this could provoke a more general financial crisis just as another form of subprime lending did in 2008.

This brings out that governments can’t control lending in the way they — and the textbooks — claim. Where there is a demand for loans and money to be made from lending, then that demand will be met, one way or another.

It also brings out that the money that is loaned doesn’t come from nowhere. Not that anybody claims that it does; everybody can see that it comes from those who confide their money to the hedge funds, asset management companies and private equity firms concerned.

A question to ponder, then, for those who think that banks can create money to lend out of thin air: if private credit firms, which are performing the same economic function as banks, can’t, how come that ordinary banks can?

The other news about money is the Bank of England’s decision to replace pictures of famous people on bank notes with pictures of animals. This of course is a trivial matter but it led Private Eye (3 April) to ask why so many bank notes are needed in the first place. It quoted figures showing that the number of payments using cash ‘has fallen roughly 70 percent from around £17bn in 2015 to fewer than £5bn, or less than 10 percent of all transactions, last year’ but that, despite this, the total value of bank notes in circulation has continued to go up not down, even taking into account inflation.

The answer Private Eye came up with is that it is ‘very likely to be tax evasion and money laundering’. This seems a reasonable assumption as, normally, if cash transactions fall, the economy will need fewer notes for its economic transactions and, if the amount in circulation is not reduced, the result would be inflation in the sense of a rise in the general price level due to a depreciation of the currency. The fact that the non-reduction in notes issued has not resulted in such inflation suggests that there is a real demand in the economy for certain cash transactions, in the event tax evasion and money laundering. There is still a certain irony in the government making more cash available for this.

Letter: Jesus Christ! — monetary justice? (1994)

Letter to the Editors from the November 1994 issue of the Socialist Standard

Jesus Christ! — monetary justice?

Dear Editors,

Scorpion claims, in your August issue, that the Bishop of Birmingham "should be coming out against the market in its entirety and not just its application to one of the necessities of life”. But one has to start somewhere; and the NHS. which we use in times of great need, is as good as anywhere.

You yourself, re Tony Blair, suggest that he is "Christian maybe, but socialist never. He openly supports the market economy and all that goes with it". I point out that Christians worship Jesus who said "Lend expecting no return" (Luke 6.35), in accordance with Old Testament precepts against usury (Exodus 22.25, Leviticus 25.36. Deuteronomy 23.19, Nehemioh 5.7-12, Psalm 15.5, Ezekiel 18.8-17 and 22.12).

Now there are markets and markets; and there may be room for one conducted justly. Some local "LETS" schemes aim at this. It is clear to us in the Christian Council for Monetary Justice (CCMJ) that the capitalist system which has evolved over recent centuries is at variance with Christian ethics; but the churches have largely lost sight of this since the last "top-level" denunciation of usury was made in an encyclical of Pope Benedict XIV in 1745.

The traditional teachings about commerce were endorsed by public opinion until self-assertiveness increased at the Reformation, and Calvin offered a limited acceptance of lending money at interest. This put Europe on a slippery slope, with profound consequences. Moneylending became attractive, and the banks gradually developed the practice of lending more money than had been deposited with them, thus acquiring a private monopoly of credit (or money) creation. Rich men who invested in industries based on the new technologies of coal, textiles, steel and steam-power extorted similar unearned incomes whilst they kept wages at semi-starvation level. Now money and shares have lost their physical meaning as tokens of value; but public acquiescence, fostered by the "haves", lets the rich use them to stay rich in a hungry world. Their "riches are corrupted", their "gold and silver” is "cankered” (Epistle of James 5.2-

3) 

(Coun) Frank McManus, 

Todmorden.

Reply:

We can't argue at this level since we don’t regard the bible as holy writ and so don't regard what it says (even when it doesn't say contradictory things) on any particular issue as authoritative.

We are aware that at one time Christianity did condemn the taking of interest on loans but abandoned this with the coming of capitalism, as is well documented in R.H. Tawney's Religion and the Rise of Capitalism. For us, this is a striking confirmation of the materialist conception of history which sees ideologies, such as ethics, religion and philosophy, as reflecting the economic basis of society — and of course capitalism could not function without banks acting as financial intermediaries between those with idle money and those needing funds to invest in production and the exploitation of wage-labour for surplus value. So Christianity had to adapt or perish. This is what the Protestant Reformation was all about, and eventually — a century or so late, as ever — the Catholic Church too followed suit and adapted to the new economic and social reality. To want to impose the old Christian anathema against usury on capitalism today is. in the literal sense of the term, reactionary.

Incidentally, acting as financial intermediaries is all banks can do. They re-lend money that has been deposited with them and make their profits out of the difference between the rate of interest they charge borrowers and what they pay depositors.

The illusion that banks can lend more money than has been deposited with them arose from the fact that they had to hold as cash only a small proportion of the money deposited with them, since experience had shown that on average over a given period depositors were only liable to want to withdraw a small proportion of the total amount deposited. The rest was available for re-lending as short- or long-term loans.

A "cash ratio" of 10 percent does not mean that a bank can lend nine times the amount deposited; it means that it has to hold only 10 percent of the amount deposited as non-interest bearing, ready cash. If banks really could lend more than has been deposited with them as Councillor McManus asserts, and so create wealth out of nothing, then this would be a miracle to rival turning water into wine or feeding the five thousand. 

Editors.

The Socialist Forum: Bank Loans and Deposits. (1931)

Letter to the Editors from the March 1931 issue of the Socialist Standard

Two readers (W. Nicholls and E. Wright) draw attention to the address delivered by Mr. McKenna at the shareholders’ meeting of the Midland Bank. In the course of the address Mr. McKenna said : “It is evident that more money was created than trade actually needed.” These two readers both ask who “created the money” if the banks did not.

What these readers have not allowed for is Mr. McKenna’s notoriously loose use of words. If we had only this phrase to go upon, we might believe (as our critics want us to) that Mr. McKenna still holds the view which he is once alleged to have expressed in the phrase, “Every bank loan creates a deposit,” i.e., the theory which. Mr. Wright puts as follows : “Banks create money and lend it, using it as capital and so get interest for nothing.”

If, however, we read the whole of the passage in which Mr. McKenna dealt with the subject, he makes it quite clear that he does not hold that absurd view. In his speech he pointed out that during 1930 the amount of loans by the Midland Bank decreased while deposits increased by many millions of pounds. (For the whole of the banks on the London Clearing House, loans and advances in 1930 decreased by £50 million, while deposits increased by £72 million.)

What Mr. McKcnna really thinks can be seen from his speech at the shareholders’ meeting on January 22nd, 1930) (see Times, January 23rd, 1930) :—

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

The reply to the question, Who did “create,” if not the banks? is that the working class produce wealth by applying their labour-power to natural resources. The wealth when produced belongs to the capitalists. In the early days of capitalism they carried on the process of exchange (i.e., buying and selling) through the medium of gold. With the rise of the banks the latter, using a relatively smaller quantity of gold, act as intermediates between capitalist owners of various kinds of goods. Bank deposits represent in money terms some of the commodities which the working class have produced for the capitalists. Purchasing power arises from the ownership of wealth and cannot be “created.” Banks act as agents for facilitating exchange between owners.

Editorial Committee.

Cooking the Books: Poor Woman’s banker (2006)

The Cooking the Books column from the December 2006 issue of the Socialist Standard

This year’s Nobel Peace Prize has been awarded to Muhammad Yunus, an economics lecturer and banker from Bangladesh. The spread of “micro-banking”, which he thought up and put into practice, was judged to have contributed to world peace.

Leaving aside whether he should have got the Economics rather than the Peace prize, what is micro-banking? Actually, it is not all that different from ordinary banking in that it is still based on a bank lending out money that has been previously deposited with it. The difference lies in who the money is lent to. The Grameen bank, which Yunus set up in 1976, lends to poor self-employed people.

The established banks in Bangladesh had shunned such people because, being so poor, they had nothing to offer as collateral for any loan and so were not considered credit-worthy. In order to start up or keep themselves in activity, poor self-employed people had to resort to local money-lenders who charged usurious rates of interest. A typical example would be the woman in the story about how bank got set up:

“In the village of Jobra, Dr Yunus met a woman who made bamboo stools. Because she had no assets and was unable to borrow from conventional sources, she had to resort to the money lenders. For each stool, she borrowed the equivalent of 15p to buy the raw bamboo. After repaying at extortionate rates of interest she made barely 1p on each stool. This woman was hard-working and talented but was being held back by a lack of access to finance. Inspired by her story, Dr Yunus started a series of experiments and lent tiny sums of his own money to villagers. They used the money to set up small businesses such as basket weaving and raising chickens. He found that his borrowers — mainly women — repaid in full and on time” (Times, 1 September).

What Yunus had shown was that the poor self-employed can be credit-worthy. Banks based on his principles lend out very small sums for a year which have to be repaid, with interest (at just above the ordinary banks’ rate), from current sales. While a means of freeing the self-employed in countries like Bangladesh from the clutches of the money-lenders, micro-banking is not a solution to global poverty. Not only because not everybody in such countries could become a basket weaver or a chicken farmer or a maker of bamboo stools, but because those the bank lends to remain poor and dependant on the vagaries of the market.

Nor is there anything anti-capitalist about the scheme. The Times described Yunus in an editorial (14 October) as “the Adam Smith of the Poor” and their correspondent in Dhaka reported:

“Professor Yunus insisted that he was not against the free market, but that he wanted the market to be free for everyone. ‘I am a free-market guy and even the poor should be part of the free market’, he said. ‘Two thirds of the population of the world are not able to participate, so it is not free’”.

The way the Grameen bank works also confirms the Marxian view that banks cannot create credit out of nothing. Like other banks it can only lend what has been deposited with it. If certain banking theories were correct — that if you deposit £1 in a bank, it can then lend out £9 rather than only 90p — then Professor Yunus would have been able to help the poor self-employed of Bangladesh by a mere stroke of the pen. But if he had tried to run his bank on this theory it would have rapidly gone bankrupt, and the only prize he would have got would have been a booby prize for either stupidity or naivety.

Wages by Cheque (1959)

From the August 1959 issue of the Socialist Standard

The Government are to introduce legislation allowing the workers to be paid by cheque. This piffling proposal will probably produce a hurricane of opposition from certain windy quarters in the Trade Unions and Labour Party, and no doubt some Communists. The right of the worker to be paid, in ready cash will become part of the day-to-day struggles, a real cause celebre.

Tory backwoodsmen are saying that this will make the workers more thrifty. They will, they hopefully claim, put their cheques into bank accounts and not spend it all. Savings will increase, and with them, abstemiousness; sobriety, and all things beautiful. The ideal worker from the Capitalist point of view is the virtuous economic cabbage who can live on practically nothing and enjoy it. If he manages somehow to put a bit away so much the better. He won’t be a charge on the Rates or National Assistance later.

Confidence Tricks

This is the unspoken philosophy of Capitalist Governments. From time to time terrific confidence tricks are played by Governments on workers’ savings. Devaluation was introduced by the last Labour Government, and inflation has been the policy of both Conservative and Labour Governments.

Last Autumn the Government removed the credit restrictions on Bank lending. In a great splash of newspaper publicity the Banks announced a scheme for personal loans for such things as cars, houses, T.V. sets, refrigerators, etc. A few days after the announcement the Manchester Guardian reported the experience of about 50 Salford dockers who queued up outside the local branch of the Westminster Bank. It appeared that the dockers were naive enough to believe what they read. They told the Bank manager they wanted to borrow a few quid to tide them over a bad spell. The Bank manager, as Bank managers are wont to do, asked for some security. All the dockers produced their Union cards as a guarantee of their ability to repay the loan, that is, if they didn’t become unemployed or put on short time. The manager delicately informed them that the Bank could not take the risk, Union card or not. The less credulous of us are now asked to believe that if the dockers, and other workers, were paid by cheque they would have money in the Bank. The worker’s possession of a cheque-book is as meaningful as the verse in the Canadian folk song "Good morning Mum, I have a button here, can you sew a shirt on it?”

Robbery

An interesting reaction to this proposal comes from the Bank Trade Unions. They apparently do not relish the the increased work this will entail for the same pay. Heaven knows what might happen if the workers start subbing in mid week.

Apart from claims about saving time on accountancy and wage clerks, there is the question of armed robbery being prevented. Snatching the payroll could, by present ethical standards, be considered more a transfer of property than a theft. The biter bitten would be an apt description. After all, the robbery has already taken place at the point of production. As always, the workers are the victims, not the Capitalists.

Jim D'Arcy

Editorial: The American Loan and the Gold Standard (1946)

Editorial from the February 1946 issue of the Socialist Standard

Much ado about very little

Most people are frankly mystified about the intricate details of currency, banking, credit and international trade and consequently do not understand the issues involved in the controversy about the American loan and the gold standard. This includes many of the politicians who speak on the subject so that those who support one side or the other frequently cannot even agree about the facts let alone the desirability of taking one or the other course of action. The members of the Labour Party and the Conservative Party are divided among themselves. Even those in both parties who supported the American loan arrangements admit that they do so with great misgivings and without any assurance that things will work out as planned. Many who support the loan would like to join Lord Beaverbrook’s group in opposition but cannot convince themselves that his case for the British Empire to stand as a unit more or less independent of U.S.A. is practicable. They therefore take the view that no other course is open than to accept the loan and with it the conditions laid down by American capitalism. The Manchester Guardian puts it thus:—

   "The plain case in favour of the American loan is that we cannot do without it. We have got into a position . . . from which we cannot escape without hardships which would rend the political fabric of this country. . . . The idea that we cap turn down the American offer because we are shocked at the conditions they have extorted is simply childish." (12 Dec., 1945.) 

The immediate factors that determined the offer and the acceptance of the loan of £1,100,000,000, to be repaid at 2 per cent. over fifty years beginning in 1952, are the following. On the one side British Capitalists, during the war, lost the bulk of their export trade and foreign investments (the latter had to be realised to pay for imported food and war supplies) and are now so denuded of certain goods that they must get a loan from U.S.A. in order to pay for needed imports, pending the turnover to full-time peace production and the export not merely of the pre-war volumes of goods but a greatly increased volume. On the other side the loan was offered not on philanthropic grounds but because American industry is producing at such a rate that big business is already scared at the thought of the slump that will occur if markets cannot be found. Much of the loan will be used to buy American goods for shipment to the British Empire and the Continent. As The Times says, "The current objectives of the United States are not disguised. Like greyhounds in the slips their salesmen are ready. . . . American productive capacity has been much multiplied by the war. When civilian demand replaces military, there will be surpluses—and the prospect of considerable unemployment. The accepted solution is to employ the workers and dispose of the surpluses on oversea orders.' (Times, 7 Dec., 1945.)

Apart from repayment of the loan and payment of interest the American authorities imposed other conditions, in particular that the pound sterling shall remain at the present exchange rate with the dollar (4.03 dollars to the pound) and that the British Government shall enter into world banking and trading arrangements proposed by the U.S.A., the declared object of which is to get all the Powers to agree to establish "freer trade relations" unfettered by tariffs and preferences, import restrictions. State subsidies. State trading cartels and other types of trade barriers—in short, to make the world a vast market open for American exports.

The attempt to keep the paper pound at a fixed relationship to the dollar is a roundabout way of keeping it at a fixed relationship to gold, though the Labour defenders of the agreement point to the provisions which will enable the British Government to alter the relationship in certain circumstances, i.e., to fix it at, say, 3 dollars to the pound. Because of this “escape clause" the Labour Party maintains that it is not committed to being "on the gold standard." The difference is, however, only one of degree and of form. Before 1914 and from 1925 to 1931 the sovereign was by law fixed at a certain weight of gold, and corresponding to that relationship it was worth 4.86 dollars. Under present arrangements the paper pound, in effect, is equivalent to a smaller amount of gold than before 1914 and also the way is made easier to reduce that amount still more, within the limits of the agreement with U.S.A.; in other words the present arrangements are more elastic than before 1911 and the relationship between the pound and gold is altered.

The controversy about the amount of gold to which the paper pound (or the currency of any other country) should be related largely represents the rivalry of different sections of the capitalist class. A British firm engaged on the production for export of articles made out of home-produced raw materials has an interest in reducing the gold equivalent. This is because the foreign buyer, e.g., an American who at the old rate had to pay 20 dollars for £5 can at a reduced rate get £5 for, say, 16 dollars. This encourages exports from Britain; but at the same time it discourages imports to Britain. The British importer of foreign raw materials or finished products has an opposite interest, since he must now pay more paper pounds than before for an article costing 20 dollars.

It should, however, be noticed firstly that the effect of any change in the relationship of the paper pound to gold or to the dollar is only temporary since costs and prices adjust themselves; secondly, it helps one capitalist group at the expense of another without increasing total production even in the country concerned; and thirdly, all countries can play the same game—as for example, the recent devaluation of the French franc.

Overriding all these purely currency questions, which are of secondary importance; is the major fact that there is no solution—short of abolishing capitalism—for the endless crises and depressions, unemployment and trade rivalries of the system. Those who take the superficial view can state what looks like a convincing case whichever side they support in the controversy. The Labour Party, which opposes having the pound rigidly fixed to gold by Act of Parliament, can point to the poverty, unemployment and trade depressions that existed before 1914 and between 1925 and 1931. This, they say, proves that the rigid gold standard is bad. Likewise their opponents can point to exactly the same evils that existed after 1931. Both are right in saying that the evils exist, because they always and necessarily will under capitalism, whether adherence to the gold standard is rigid or elastic, at one ratio to gold or to a higher or lower ratio. They are also both wrong in thinking that currency factors are the cause of the evils or that, the evils can be remedied by currency manipulation. The Times, for example, holds out the hope that international agreement may lead to “ the restoration of the system of world trade which prevailed in the heyday of British free trade a generation ago." (Times, 7 Dec.) That "heyday" was, for the workers, a time of poverty, insecurity and unemployment just like the subsequent period. All through the 19th century, when the gold standard was said to be functioning well, crises and working class misery were in evidence. The "over-production" of capitalism, meaning the production of vast quantities of goods for which the workers lacked purchasing power is a result of the private ownership of the means of production and the resulting fact that the goods produced belong to the capitalist class and that class can and does curtail production when the goods cannot be disposed of at a profit.

One point, for the benefit of those who cherish the illusion that the gold standard has ceased to exist, is the recent heavy buying of shares in gold mining companies. The City Editor of the Daily Telegraph (24 Dec.) commenting on this, writes : 

  ". . .  the acceptance of Bretton Woods has removed any nervousness there may have been as to the status of gold in post-war international monetary arrangements. The metal remains the world standard of value, and those who produce it will be marketing a universally acceptable commodity."

In conclusion, it is a safe forecast that the agreements with U.S.A. will not work well for the working class. Nor would any alternative arrangement within the capitalist system. W. J. Bryan's declaration that mankind is crucified on a cross of gold, a flamboyant fallacy that still finds credence in Labour circles, should be re-written: the working class are crucified on a cross of capitalism; which is just as true though the cross now bears the Labour Party label, " Nationalisation.”

Time's Little Joke ! (1947)

From the October 1947 issue of the Socialist Standard

  “First, the balance of payments. Here we have done very well so far, much better than most experts expected; and there is no prospect of any ‘crisis.’ As Hugh Dalton has said, controls would prevent this; and all that could happen at the worst would be a prolongation of austerity. If we do not export enough, we shall have less oranges, bananas, tobacco, sugar, limber, etc., to consume. That is all.

  “But the figures are encouraging. It was expected that in 1946 we should have a total deficit on the balance of our oversea payments (including Government expenditure abroad) of about £750,000,000. But in fact it has only turned out to be about £450,000,000.

  “Since only £300,000,000 of this was due to ordinary exporting and importing, our excess of imports over exports in 1916 (if we allow for the changed value of money) was scarcely greater than the average for the 1930’s. This is an incredible success, which has not been widely enough realized.

   “It is for this reason that the American Loan is being used up so slowly. Those who say that it is being used fast have evidently not examined the figures very carefully. Hugh Dalton told us recently in Parliament that in the last six months of 1946 some 600,000,000 dollars of the American loan had been spent. This is a rate of spending of £300,000,000 a year. Since the effective part of the loan amounts to £937,000,000, it would last at this rate for rather over three years, i.e. till the autumn of 1949.” 

 (Douglas Jay, Labour M.P., “Labour Press Service,” March 7th, 1947.)

Editorial: Poland - crisis of state capitalism (1982)

Editorial from the January 1982 issue of the Socialist Standard

The crisis in Poland is not a crisis of socialism. They are not socialist military dictators who have formed a junta to coerce the Polish workers into what the Western press sickeningly calls ‘moderation’. They are not socialist banks that are banging on the door of the Polish Politburo, demanding the repayment of financial loans. They are not socialist journalists who compose the propaganda which the Polish media pours out in order to blind workers to their real interests. They are not socialist bureaucrats who sit in luxurious offices in the Kremlin and applaud every measure by the Polish rulers to subdue and humiliate the workers they exploit. It is not socialism which has been tried and found wanting; the social system which has led to misery for millions of Polish workers is STATE CAPITALISM.

The crisis of Polish state capitalism has its immediate origin in the investment boom of the early 1970s. In 1973 Poland had the third fastest national growth rate in the world. To pay for this investment it was necessary for the Polish government to borrow from the Western banks: in 1971, Poland’s foreign debt stood at 700 million dollars; by 1975, when the boom was in full swing, the debt had reached 6,000 million dollars. The interest on the loans was so great that the Polish government had to borrow more from the Western banks in order to pay its previous debts: by 1980 Poland owed approximately 27,000 million dollars to Western capitalists. With the shortage of consumer goods on the market, Poland’s private farmers — who own 80 per cent of all agricultural land — refused to sell their produce in return for money which could not buy them what they need. The scarcity of agricultural produce — meat in particular — led to price rises. The Polish workers, having been pushed to breaking point in a productive drive to produce enough profits to pay off their masters’ debts, regarded the increase in the cost of already scarce food as the final straw.

All of these problems were direct consequences of world capitalism: the farmers could produce enough food to feed everyone; the industrial workers could produce consumer goods and have plenty to eat; but under capitalism, financial debts come before food (profits before needs) and that is why the military has attempted to crush the working class organisation, Solidarity, while the wealth producers of Poland arc suffering, many on the verge of malnutrition.

The distortion of the idea of socialism has been one of the greatest political crimes of our age. So-called socialists who were once praising Stalin from the distance of Western Europe are now claiming to support Solidarity, even though many of them have not repudiated their Leninist sympathies. Yet as early as January 1918 the Leninist attitude to trade unions was clearly expressed by Zinoviev: “trade union independence is a bourgeois idea . . . an anomaly in a workers’ state”. In November 1920 it was Trotsky who proposed the sacking of the elected leaders of the Russian railway union so as ‘‘to replace irresponsible agitators . . . by production-minded trade unionists”. Even in the midst of the great strikes of August 1980, the New Communist Party’s newspaper referred to Solidarity as “the Gdansk wreckers” and stated that “irresponsible individuals, anarchic and anti-socialist groups are attempting to exploit work stoppages . . . for their own ends”. In the 1930s the Socialist Party of Great Britain had its meetings smashed up by members of the British Communist Party because we dared to expose the anti-socialist activities of their hero, Stalin. Today in 1982 we are still as hostile as ever to the pseudo-socialists of the Left who advocate state capitalism.

The only alternative to the system which oppresses the workers of Poland and all other lands is WORLD SOCIALISM: a society without frontiers, classes, property or rulers. Only democratic political action by the working class, without leaders or dogmas, will lead to the of a socialist society. By their actions, the workers in Solidarity have won the admiration of socialists, even though we strongly oppose their nationalist and religious illusions and even though we recognise the limitations of trade union action. Having defied their masters and combined together, the next step which the Polish workers must take is to organise a class conscious democratic political party to aim for the common ownership and democratic control of the means of wealth production and distribution. To this end, the Socialist Party of Great Britain offers support to our fellow workers in Poland.

Cooking the Books: Death of a Loan Shark (2018)

The Cooking the Books column from the October 2018 issue of the Socialist Standard

So Wonga, the notorious payday lender, has gone under. Very few will be shedding a tear. As a payday lender, its business model was to make small, short term unsecured (i.e. with no collateral) loans out of its own money. You could get a loan of £50 for a week if you wanted. Because there was no collateral, e.g. no house or car to repossess, and no serious credit checks, the risk of default and cost of recovering it was higher and so therefore was the rate of interest.

Since 2015, regulations have limited the maximum interest that payday companies can charge to 0.8 percent a day. That’s still quite steep – 80p per day on a loan of £100 for 30 days is about £24. Before that, companies like Wonga – and Wonga in particular – used to charge more than twice as much, with stiff penalty charges for not repaying on time.

One reason why companies like Wonga exist is that banks won’t touch poor people in need of short-term loans. But what is the difference between a moneylender and a bank? Some think that when a bank makes a loan it ‘creates’ money. The reasoning behind this is that, as the amount of the loan will be spent, when it is this adds to total spending. But why is this reasoning not applied to payday lenders or to other lenders such as credit card and car finance companies? Their loans also add to total spending.

One reason why loans by such financial institutions should not be regarded as creating new money is given in a short online article ‘Are credit cards a form of money? Credit cards and the money supply’. The author gives the example of him borrowing money from his girlfriend to buy a video game, and concludes:

‘[M]y debt to my girlfriend would not be considered money because she cannot use it as a form of money to make purchases and it is not trivial to find someone who is willing to pay her cash in exchange for the loan. The loan is a mechanism in which money will be transferred from me to my girlfriend, but the loan is not money itself. When I repay the loan I will pay her $50 which will be in the form of money. If we consider the loan as money and the payment of the loan as money we’re essentially counting the same transaction twice. The $50 my girlfriend pays the shopkeeper is money. The $50 I will pay my girlfriend tomorrow is money, but the obligation I hold between today and tomorrow is not money’.

This makes sense. The loan, i.e., the IOU to his girlfriend, is not money. What is money is what is used to pay for the video game and that was not ‘created’ but came from the girlfriend.

It’s the same with a credit card. The credit card company pays for what you purchase and you repay by the end of the month. In the case of a payday company, it lends you the money first until your next payday, and when you get paid you pay it back (with interest).

The difference between a bank and other lenders is that they are lending their own money whereas a bank is lending other people’s. This makes following what happens more complicated but the principle is the same. When the borrower buys something out of the bank’s loan, the bank pays for it, normally by a bank transfer to the seller’s bank, just as a credit company does. You pay the bank back later.

How, then, is a bank loan different? Good question.

Cooking the Books: No One’s in Control (2012)

The Cooking the Books column from the September 2012 issue of the Socialist Standard

Since World War Two governments have adopted various policies to try to control bank lending. This, to try to make the economy work smoothly without booms and slumps or “stop-go” as it used to be called. They are still trying.

At first they tried fixing a limit on the total amount of bank loans. Then they required banks to hold a given percentage of their assets as cash and hoped to influence  bank lending by increasing or decreasing this (this was known as “fractional reserve banking”, though this term has since taken on a wider meaning). This in turn was eventually abandoned in favour of trying to influence bank lending by manipulating interest rates.

Over time the language changed too. Instead of talking of controlling bank lending, economists began to talk about controlling the “money supply”. This led to a redefinition of money, which had previously meant currency (notes and coins issued by the state), so as to include bank and other loans. There are now at least five official definitions of money (M0, M1, M2, M3 and M4). Even so, economists have still found it necessary to maintain a distinction between “base money” and “bank money”, the former being what is directly controlled by the central bank (notes and coins plus banks’ cash reserves with the central bank, which is what M0 measures).

The failure of all these policies has led to a controversy among economists which is still going on. Some have come to the conclusion that the level of bank lending is linked to the state of the economy and so cannot be controlled by the central bank. This is undoubtedly true.

Banks lend more to businesses (and individuals) when the economy is expanding and less when it is not. This is being confirmed today when, despite government exhortations and incentives, the banks are not keen to lend more; they have calculated that with a depressed economy the risk of them not getting their money back is higher. Nor are established businesses keen to borrow as they know that the market for their products is stagnating.

So, on this point, these economists are right. However, some of them don’t see the banks as merely reacting to the state of the economy but as contributing to it by their lending policies; they attribute to banks an autonomous power to influence the economy. This leads them to offer a purely monetary explanation of the present (and past) economic downturn, in, precisely, the irresponsible use by the banks of their ability to “create money” outside the control of the central bank.

It also leads them to offer a purely monetary solution. Here some of them have crossed the fringe to join the currency cranks in advocating a return to gold-based money (as if there weren’t economic downturns when this applied) or to require banks to lend only what they’ve got (as if this wasn’t the case anyway).

Since the economic cycle is built in to capitalism, and slumps occur when during a boom one sector overproduces in relation to its market, their reforms won’t stop this any more than anything the central bank can do. The capitalist economy can be controlled neither by monetary policy nor by banking reform.

Cooking the Books: An Easy Match for Mammon (2013)

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

On 25 July the Archbishop of Canterbury, who fancies himself as a bit of a financial expert, said that it was his Church’s intention to drive the payday loan company Wonga out of business. He revealed that he had told Wonga’s boss that ‘we’re not in the business of trying to legislate you out of existence, we’re trying to compete you out of existence’ (London Times, 26 July).  The next day he was left red-faced when it came out that his Church had money invested in a venture capitalist, Accel Partners, that was one of Wonga’s financial backers.

His plan is to encourage credit unions by offering them premises in churches and expert advice from Christian businessmen. But the idea that credit unions could out-compete capitalist money-lending enterprises like Wonga is pure fantasy.

A credit union is basically a savings and loan club. People pay in small amounts of money (on which they receive some interest) which gives them the right to borrow small sums of money (on which they pay interest) when they need it. To remain viable by covering its administrative costs, the union has to charge a higher rate of interest to borrowers than it pays to savers. Basically, they are a form of bank, mainly for poor people. Ideally, they are run democratically by their members.

A payday loan company, on the other hand, is a profit-seeking capitalist enterprise specialising in short term (from payday to payday) loans at a very high rate of interest. They don’t particularly target poor people, but rather anyone in short-term financial difficulty. In fact they prefer people who have another payday coming. The money they lend is theirs (or put up by backers such as Accel Partners) – and they have to have it in the first place.

It’s all about money and getting an income from lending it, but the Archbishop didn’t offer to put up any of his Church’s money, merely to let the credit unions use his churches as their offices. Even if he had, it is unlikely that the Church Commissioners, who manage the Church’s millions, would have approved as the rate of return, though eminently ‘ethical’, would have been too low. They have to choose investments with a higher rate of return to generate the income to pay the salaries and pensions of the clergy and for the maintenance of the bishop’s palaces. They are forced to behave capitalistically too.

If the Archbishop really thinks that local credit unions, operating from churches, can out-compete capitalist enterprises like Wonga (who have the resources to advertise every day on TV) by stealing their customers, he can’t be the financial expert he thinks he is. But at least he doesn’t think banks can create money out of nothing which if true (but it isn’t) would surely solve the problem. A Church bank creating money out of nothing would easily out-compete a payday loan company which has to already have the money to lend.

The only way the Church would have a chance of driving payday loan companies out of business would be to set up its own payday loan company, charging ‘ethical’ rates of usury and sending polite, ‘ethical’ solicitor’s letters to defaulters.

You can’t stand a chance of beating capitalist businesses unless you join them but there’s no guarantee that if you do join them you will beat them, as the ‘ethical’ Cooperative Bank has found to its cost.