Voice From The Back: Pollution and profits (2010)

The Voice From The Back Column from the January 2010 issue of the Socialist Standard

Pollution and profits

Every vote-seeking politician in the world waxes eloquent about the urgent need for a curb to be placed on global emissions. They fly hither and thither across the world addressing congresses about their deep concern for the planet’s future. Behind these vote catching antics however lies a more pressing problem – how to compete against international rivals in obtaining a larger share of the profits. At a recent meeting in Singapore those politician showed where their real priorities lie. “A key element of the international plan to address climate change is in jeopardy after several of the most powerful nations failed to confirm a previous commitment to halve gas emissions by 2050. The Asia-Pacific Economic Co-operation (Apec) forum, which includes the US, China, Japan and Russia deleted their commitment from the final version of the official communiqué issued after a two-day meeting in Singapore. …Most climate scientists believe that a 50 per cent reduction in global emissions by 2050 is the minimum needed to have a chance of avoiding catastrophic change.” (Times, 16 November) For some national governments to reduce industrial pollution could be economic suicide. Their costs would go up and they would not be able to compete with other nations that had not reduced their pollution. Inside capitalism in the battle between less pollution or more profits there is only one winner.

Capitalism in action

The case for a transformation of society from one of class division to one to one of social ownership was made very powerfully by two recent press reports. Here is how the present class division favours a tiny minority. Take the example of John Paulson, a hedge-fund manager in New York. “His firm made $20 billion between 2007 and early 2009 by betting against the housing market and big financial companies. Mr. Paulson’s personal cut would amount to nearly $4 billion, or more than $10 million a day.” (Wall Street Journal, 15 November) At the other end of the class division we read of this. “According to the FAO, the number of malnourished people in the world rose to over 1 billion this year, up from 915m in 2008. Economists at the World Bank reckon that the number living on less than $1.25 a day will rise by 89m between 2008 and 2010 and those on under $2 a day will rise by 120m..” (Economist, 19 November) Some people trying to survive on a couple of dollars a day while some useless parasite rips off millions, don’t you think we need a new society?

The next war? 

Capitalism is an explosively competitive society. We have had two world wars. One was supposed to be “the war to end all wars” the other was supposed to be a “war for democracy”. That was all nonsense of course. War inside capitalism is the logical outcome of competition for sources of raw materials, trade routes. markets and spheres of political dominance. Where is the next powder keg of competition? No one knows, but here is a possibility. “At the crossroads between east and west in the desert nation of Turkmenistan, a quiet battle is under way for natural gas, oil and influence, and the U.S. and Europe are losing out to China and the Muslim world. There’s a lot at stake: the Central Asian country has the world’s fourth-largest reserves of natural gas and substantial oil reserves, putting it in the same energy league as Saudi Arabia, Russia and Iraq. Plus, its position just north of Afghanistan could be hugely beneficial to NATO as it seeks more reliable supply routes to its troops on the ground there.” (TIME, 29 November) Socialists are as clueless as everyone else about where the next conflict will arise. What we are certain about is that thousands of men and women will die in conflicts in the future over their master’s quarrels. We are also certain that only world socialism can stop such a tragedy.

 

It must be obvious

“Hospital cleaners are worth more to society than bankers, a study suggests. The research, carried out by think tank the New Economics Foundation, says hospital cleaners create £10 of value for every £1 they are paid. It claims bankers are a drain on the country because of the damage they caused to the global economy. They reportedly destroy £7 of value for every £1 they earn. Meanwhile, senior advertising executives are said to “create stress”. The study says they are responsible for campaigns which create dissatisfaction and misery, and encourage over-consumption.” (BBC News, 14 December) Of course think tanks, because they are servants of capitalism see everything in terms of pound notes, but even they must see that all useful work and a lot of useless work is carried out by the working class. The owning class produce no wealth whatsoever. All they do is consume wealth.

World View: Nothing new to report (1998)

From the November 1998 issue of the Socialist Standard

Two recently published reports make compelling reading for those who think capitalism is a fair and efficient system of global organisation and provide undeniable evidence, if ever it was needed, that the case for world socialism is as pressing now as it ever has been.

Coming within one month of each other, the UN Human Development Report 1998 and the Living Planet Report from the World Wide Fund for Nature, the New Economics Foundation and the World Monitoring Centre, paint anything but a picture of a world run on rational lines.

Launching the Living Planet Report on October 1st, Nick Mabey of the WWF announced that “time is running out for us to change the way we live if we are to leave further generations a living planet . . . we knew it was bad, but until we did this report we did not realise how bad”. (Guardian, 2 October).

The report he speaks of points out that since 1970, humans have destroyed more than 30 percent of the natural world, the UNHDR claiming that this has happened because of “consumption increasing six-fold in the last 20 years, doubling in the last 10”. (Guardian, 9 September).

Over-consumption lies at the heart of both reports, which are critical of the lip service paid by governments to the notion of sustainable development.

While the Living Planet Report points out that CO2 emissions have doubled since 1960, and to a level now exceeding the natural world’s ability to absorb them, the UNHDR reveals that the burning of fossil fuel has in fact quadrupled since 1950, with the wealthiest one-fifth of the world’s population accounting for 50 percent of this. The poorest one-fifth account for only 3 percent of CO2 emissions, yet countries like Bangladesh and Egypt pay the highest price for the global warming CO2 helps produce—rising sea levels with the loss of homes and livelihoods.

Both reports point out that for the first time one of the most serious problems that faces us is a depletion in the world’s fresh water reserves, with fresh water eco-systems declining at the rate of 6 percent per annum While 50 percent of all fresh water supplies are monopolised by humans, three-fifths of the developing world’s 4.4 billion population have no safe drinking water.

The reports find that wood and paper consumption have increased by two-thirds since 1960—with little or no sustainable management of forests—and that the marine catch has quadrupled in this period, with one-quarter of fish stocks now depleted and a further 44 percent fished at their biological level.

The UNHDR claims that global inequality increases apace with 20 percent of the world’s population consuming 86 percent of the earth’s natural resources. To emphasise this discrepancy, the report reveals that a child born in New York or London will consume, pollute or waste more in a lifetime than 50 children born in the developing world. Meanwhile, the Living Planet report says that the average American or Japanese consumes 10 times more of the earth’s resources than the average Bangladeshi. The UN report also lists the latest figures on world wealth distribution. The world’s wealthiest 225 people now have combined wealth equivalent to that of the poorest 47 percent of the global population, while the world’s three richest people have assets that exceed the combined GDP of the world’s 48 least developed countries.

It further estimates that “the additional cost of achieving and maintaining universal access to basic education for all, basic health care for all and adequate food…water…sanitation for all is roughly $40 bn per year…(a figure which is)…less than 4 percent of the wealth of the 3 richest”. (Guardian, 9 September).

As could have been anticipated, the reports’ suggested remedies to redress the above fall well within the category socialists term reformism, amounting to the same battle cries of the well-meaning, though less well informed, without visible results for decades.

It is perhaps a forgone conclusion that such statistics will not fair any better in the years ahead, and we may well wonder how long their compilers will juggle with them before they conclude capitalism can’t be tinkered with in our interests.

Instead of producing volumes of such statistics each year, which on the face of it are only of any use in the armoury of the socialist, wouldn’t it be wiser if the “experts” decided to work out how much better the world would be if we freed production from the artificial constraints of profit, and organised production in a rational and sustainable manner and to the benefit of all. Or would these same experts fear they would be labelled socialist and their reports taken less seriously?

John Bissett

Letters: The money system (2009)

Letters to the Editors from the April 2009 issue of the Socialist Standard

The money system

Dear Editors

The letter by Ken Scragg and the articles by Janet Surman in your issues of December 2008 and January 2009 herald a further evolution for homo sapiens.

We are a primitive lot. Every few decades the money system collapses and we write tomes trying to explain why, but we still cling to it as if it were sacrosanct, an integral part of us. Yet it is no more than a reflection of the primitive assumption that resources are scarce, a set of symbols that are supposed to represent those resources; but symbols are not the resources themselves nor do they produce anything, only lead to the infinite complexities of marketing and exchange in which everything that we do is controlled by cost. In a moneyless system there would be only production and distribution according to demand, a simple matter in these days of instant communication.

Economists hope that the recession will end and once again be followed by boom, but there is a limit to the creation of ever-more trivia to employ us and to stimulate our greed, so that unemployment is likely to increase without limit.

The basic tenet of the capitalist system and the one over-riding impediment to social advance is the limit we impose on the quantity of money in circulation to preserve its value, so that to rid ourselves of the money system would require no more than to allow the quantity of it to increase until it lost all value, a process that, despite all our efforts to control inflation, is happening gradually all the time.

Without that impediment there would be an advance in human understanding as significant as were the development of speech or writing. Money is just a parasite.

We are very clever but by failing to distinguish between cleverness and intelligence, cause and effect, we have allowed our primitive emotions of greed, selfishness and aggression to control our intellectual and social development, leaving us struggling against each other in wars and political/economic cut-and-thrust that defeat all attempts at social advance.

Directly or indirectly all social problems, all human sufferings have their origin in the money system. There would be no arms trade, so none would be produced or promoted; and with drugs available only on prescription we would be healthier.

Janet Surman mentioned a few of the inefficiencies and wastes of the money system, its inequalities and use of power. Its endless complexities frustrate all human endeavour. No doubt she could have gone on and on for the simple reason that nothing can be done with money that could not be done more efficiently without it. Efficiency depends upon simplicity.

Melvin Chapman, 

Bath

Reply: 

Actually, what we want is not just to abolish money but to see established a society based on the common ownership of the means of wealth production, where money would be redundant. We don’t think this will happen through money gradually losing its value, as you seem to be suggesting. It will require a determined political struggle against those who currently own and control the means of production and benefit from the money-wages-profits system that is capitalism – Editors.

Greenpeace 

 

Dear Editors

For what it is worth (really nothing) I have supported Greenpeace over a number of years. In response to a recent questionnaire as to what I thought of Greenpeace I said that the world’s problems in my opinion could only be resolved by the dismantling of capitalism. I received a reply recommending me to have a look at the New Economics Foundation.  I did this and replied as follows.

I have looked at the NEF Website and have to say that NEF is simply another reformist outfit that thinks with a little tinkering capitalism will work. On this evening’s BBC 5 o’clock news mention was made that 40,000 homes having been repossessed in the current crisis – 40,000 homes lying empty. I heard Dyson (vacuum cleaners) the inventor saying that by encouraging children in schools to learn engineering Britain could reclaim some of the lost ground in manufacturing, etc. We live in a society in which goods and services are carried out solely with the aim of making a profit. People are ejected from good homes because they haven’t the means to repay debt. Goods are manufactured abroad because labour is cheaper and owners can achieve more profit. These are the laws of the ‘free’ market economy. Oceans are poisoned because of ‘cheap’ disposal of waste. Rainforests are cleared to make way for moneymaking industries. Farming, cattle raising etc. Despite the efforts of the likes of Oxfam and Greenpeace, etc the world situation is worse now than ever. People in the Third World starve not because there isn’t enough food but because they are too poor to buy it. Think of that.

The alternative is a cooperative form of production whereby goods are produced not for profit but to meet needs. This means that ownership of the means of creating wealth, i.e. factories, land, resources have to be taken away from the few who currently own them so that they become the property of all the people under democratic control.

Just think – governments are currently subsidising car manufacturers to keep people producing cars that are not needed in order to keep people in jobs. I have sympathy for the poor devils thrown out of jobs leading to all sorts of problems (loss of homes etc) but what a crazy state of affairs.

I received a reply saying that by their calculations we’ve only got about seven years to get on top of the problem of climate change and that the writer didn’t think the change of economic system I was suggesting could be made in that sort of timetable. Maybe not, but what if the problem just cannot be solved within the present economic system? That would be seven wasted years.

Peter Finch, 

Reading

LETS Abolish Money? (1994)

From the December 1994 issue of the Socialist Standard

If you listen to the enthusiasts they can recreate communities, cure unemployment, undermine the multinationals and even provide an alternative to the global capitalist economy. What can? LETS or Local Exchange and Trading Schemes.

This is what the enthusiasts say. First, Harry Wears from Haverfordwest:

  “I’m really enthusiastic about LETS. I think it’s the most exciting mechanism for social change I have ever come across. In LETS, debts don’t accrue interest and there is no pressure to pay. A LETS cheque can’t bounce, nor a LETS business go bust. LETS sees money as a symbol but, unlike sterling, it can’t be manoeuvred to the detriment of people using it” (Woman & Home, October 1993).

Then Donnachadh McCarthy from Southwark:

  “It is a system to recreate a community economy which we were losing because of multinational companies and big supermarkets. Money which comes into Southwark is used once and then leaves via the banks which use it to finance projects elsewhere” (Independent, 13 December 1993).

And Ed Mayo of the New Economics Foundation:

  “With mass unemployment in Britain many people have the time but not the cash. LETS gives them access to things they would not otherwise have” (Guardian, 12 March 1994).

Finally, from the same Guardian article by John Vidal:

  “The implications, say the theorists, are enormous. In a cash-starved economy (one in five British households is severely in debt), despite the existence of wealth in the form of skills and resources, traditional exchange is hijacked by a lack of cash. With local currencies, as long as people make their goods and skills available, their exchange can go round and round. ‘The community therefore becomes richer,’ says Paul Ekins, a green economist”.

It is, of course, absurd that people who need things should go without even though the skills and resources to provide for them exist. We can go along with the LETS enthusiasts in denouncing this scandal of unmet needs alongside unused resources. The difference between Socialists and LETS enthusiasts is that, while both of us criticise money, they answer “yes” to the question “So, you want to go back to barter?” while we answer “no”. They want to retain exchange and trading with some new kind of money; we want a society based on common ownership geared to producing things directly for people to take and use in which exchange and trading, and money as the means of exchange, would be redundant.

Back to Barter
LETS schemes are essentially local barter clubs. A group of people with varying skills get together and agree to exchange the services they can provide with any other member without using money.

Records, however, have to be kept. Each member has an account and when one member’s services are used their account is credited with the exchange value of that service while that of the user is debited by the same amount. What normally happens is that each member is given a sort of cheque book which they can use to pay for other members’ services either at a published price or as agreed between the two. Clearly for all this a unit of account is needed.

Some schemes define this unit in terms of labour time. Others tie is to the pound. The accounts could in fact be done in pounds but generally the unit is given a special name. In Bath it is an “oliver”; in Brixton it is a “brick”; in Reading a “ready”, and so on.

Do LETS schemes really allow people, as is claimed, to by-pass money and so have “access to things they would not otherwise have”? Two unemployed people with different skills can always barter their services. Thus an unemployed plumber can repair an unemployed electrician’s central heating in exchange for some rewiring by the electrician. Neither needs money for this. A LETS scheme is merely an extension of this: the plumber or electrician joins a barter club and so gains access to a wider range of potential clients as well as access to a wider range of reciprocal services (too often, though, things not normally needed by the unemployed like aromatherapy, holistic massage, acupuncture, tarot reading and other such New Age fads). So, it’s an alternative to placing cards in newsagent’s windows or relying on the grapevipe to learn about work opportunities. As such, like the black economy, it’s one way of surviving in the capitalist jungle but that’s all. But don’t LETS schemes help create a “local community spirit”? Maybe, but no more than any other local club.

Small is Small
The trouble is that the idea has been hijacked by all sorts of currency cranks and funny money theorists who see it as the basis for an “alternative money” and an “alternative economy”. But they overlook two important facts.

First, the nature of the activities covered by LETS schemes. They are all activities that can be carried out by a single individual such as repairs and personal services, and which in the normal money economy could be done by self-employed people working on their own. In fact, from an economic point of view, LETS club members are acting as self-employed; a LETS scheme is a club in which self-employed individuals barter their services. It could never extend beyond this to productive activities that require expensive equipment and plant and a large workforce—such as, precisely, the manufacture of the things that LETS members and the self-employed repair.

Secondly, there are definite limits to the size a LETS scheme can attain. The biggest in Britain only has 300 members. If they got much bigger than this the administrative work of recording all the transactions would grow and could no longer be done by voluntary or part-time labour; people would have to be employed to do it, which would add to the running costs of the scheme and have to be shouldered by the members. The membership fees and transaction charges already levied by the scheme would rise. At a certain point this would cancel the advantages of being in the scheme and members would find it more convenient to re-enter the money economy and resort to newsagent’s windows and contacts.

Funny Money
What most of the currency cranks who have latched on to the LETS idea envisage is converting the units of account the schemes use — olivers, bricks, readies, etc—into a real money that would circulate.

In fact most commentators, like John Vidal in the Guardian article, refer to the LETS units of account as “currencies”, but this is misleading. They are not money; they do not circulate. They only exist on paper or computer disk as a record of transactions. LETS schemes are in fact more cumbersome than money. After all, with a real money that circulates an individual account of a person’s exchange transactions doesn’t have to be kept.

Some of the advantages claimed for LETS units also apply to cash. So when Harry Wears says “a LETS cheque can’t bounce”, this is true but neither can cash. Similarly, when it is argued that people have an incentive to use LETS credits—and that when they do accumulate them this doesn’t give them any power to manipulate other people—as they don’t pay interest, the same applies to cash as such. A hoard of cash is no more useful than a large LETS credit balance.

What is being advocated as the ideal is a money that can’t be accumulated and can’t be lent at interest, with LETS units being seen as the formula to achieve this. But such an “alternative money” is never going to come into being, because it would be worse than existing money. If you have an exchange economy (which the LETS enthusiasts accept, as is seen by the full name Local Exchange and Trading System) then conventional money is the best means of exchange. Not only does it allow many more exchanges to take place than barter or a modified form of barter like LETS schemes, but the payment and receipt of interest also facilitates more exchanges.

Banks are not, as some LETS theorists (along with the traditional currency cranks) suggest, the villains of the peace who interrupt the normal circulation of money and goods by not making money available to match needs and resources unless they are paid a tribute in the form of interest. Banks are financial intermediaries which borrow money from people who have some but don’t want to spend it immediately, and then lend it those who have something to spend money on but no money of their own. Naturally the banks take precautions to ensure that they are going to get back any money they lend, but the overall result that they help keep money circulating and exchange going.

To want to keep exchange but do away with banks and the taking of interest is unrealistic in the extreme. It is typical currency crankism.

The way to end the scandal of unmet needs alongside unused skills and resources is not to retain the exchange economy while trying to get rid of some of its effects by reforming the money system. It is to get rid of the exchange economy altogether by establishing a society based on the common ownership of productive resources where goods and services would be produced directly for people to take and use and not to be exchanged, or bought and sold, at all.

Adam Buick

Where Money Comes From: A Reply to the New Economics Foundation. (2012)

Book Review from the February 2012 issue of the Socialist Standard

In a 140-page booklet entitled Where Does Money Come From? the New Economics Foundation (NEF), a greenish think-tank, set out to refute one theory of the nature of money and banking and replace it by another which they consider more accurate.

Money

“What is Money?” is not just a question of fact but of definition. “We disagree with the view of money as a commodity,” says the NEF, “and show instead that money is a relationship of credit and debt” (p. 9). More boldly, they declare “money has never been a commodity” (p. 51).

In Classical Political Economy (Adam Smith, David Ricardo, John Stuart Mill), and in Marx too, a commodity is an article of wealth produced to be exchanged. Wherever commodity-production has been widespread one commodity has emerged that can be exchanged for any other commodity. To be able to be such a “universal equivalent” this commodity must have its own intrinsic value, i.e. must also be the outcome of a certain amount of labour; otherwise nobody would exchange the product of their labour for it.

Other commodities have functioned as the universal equivalent, but in the end it was the precious metals, gold and silver, that proved the most convenient (because of their divisibility and their concentration of value in a relatively small bulk). To make things even more convenient states eventually stamped pieces of gold and silver as a guarantee of their weight and value. Hence coinage, which is still the popular idea of what money is.

To deny that the commodities that have functioned as a universal equivalent were “money” is to give a quite new definition of what money is. The NEF don’t deny that to be called “money” something has to be, as in the traditional definition, a medium of exchange, a store of value and a unit of account.

If they had just claimed that, today, money is not a commodity, they would have had a point. But to claim that no commodity has ever served as a medium of exchange, store of value and that accounts have not been kept in units of it, is clearly at variance with the historical facts. But, to sustain their definition that money is essentially a “social relationship of credit and debt”, they had to make this extravagant and historically incorrect claim. They are right, however, to see money as a social relationship but it’s one between buyers and sellers rather than creditors and debtors.

It is true that it does seem strange to still describe money today as a “commodity”, even though modern money does have a commodity ancestry. Modern money consists of paper notes and metallic coins that are accepted in payment (of taxes and debts as well as to buy things). These notes and coins have virtually no intrinsic value; they are like all-purpose, re-usable vouchers that can be used for any payment, just as the old commodity-money (such as gold) could be. We know where they come from: the state, which issues them via its central bank or finance ministry, and makes their circulation and acceptance compulsory. Because such money is entirely a state’s creation it is sometimes called “fiat” (“let there be”) money.

Purchasing power

“Money” and “purchasing power” are not the same. If they were, the total face value of the currency would have to be equal to the value of all the newly produced wealth. One feature of money (in the classical sense) is that it circulates: one coin or note can be used for many transactions. Hence the concept of the “velocity of circulation” of money. The amount of money needed by the economy to make payments is thus not the total value of these payments but this divided by the velocity of circulation of money.

One thing banks do is to reduce the need for cash. They have done this ever since, in the 17th century, they became an important feature of the capitalist economy. In addition, through clearing houses, they settle payments without the actual transfer of cash. Nowadays the vast majority of transactions are made through banks using cards, cheques and bank transfers, with cash (notes and coins) reduced to being the small change of the economy.

What this means is that today most purchasing power is exercised via the banks. But can banks create extra purchasing power that did not exist before? The NEF are in the tradition of economic thinkers (and monetary cranks) who have said “yes”. In the past the argument used to be that banks could create extra purchasing power in the form of “credit”.  Nowadays, as the distinction between deposits in banks made by savers and deposits created by banks for borrowers has become blurred, the same idea has come to be expressed by saying that banks can create new “money”.

Though this looser definition of money is popular today, even those who favour it feel obliged to distinguish between traditional money (today, notes and coins issued by the state) which they call “base money” and “bank money” (bank loans).

Calling bank loans “money” instead of “credit” doesn’t alter the facts. When banks make a loan, or extend credit, they do enable idle purchasing power to become effective; they do allow spending to take place – which is something that modern governments do strive to control. But the basic question remains: when banks make a loan do they create new purchasing power?

Purchasing power is generated in production as added value and is distributed in the first instance as the wages and salaries of productive workers and as the profits of capitalist firms. A large proportion is later redistributed by the state as “transfer payments” to others, via taxes and public service salaries, pensions and other state payments. But National Income (total new purchasing power) and National Product (total new value added) are always equal (there is no built-in or chronic shortage of purchasing power compared to new production, as economic theorists known as ‘underconsumptionists’ claim).

Some of the purchasing power is saved (not spent) by the recipient on consumption. When income is saved it is not simply hoarded. It is typically deposited in a bank or a building society. The bank doesn’t hoard it either. It lends it to someone else to spend: to capitalist firms to expand production; to the government; or to workers (to buy a house or a car or a holiday). It should be clear, then, that such bank loans come out of income (purchasing power) that others have saved (refrained from spending themselves).

Banking a fraud?

This, however, is not clear to the NEF. In fact, they vehemently deny that this is the case. They attack the view that banks are financial intermediaries whose core activity consists of “taking money from savers and lending it to borrowers” and even criticise the recent Independent Commission on Banking for accepting this view. They declare:

“private banks can really create money by simply making an entry in a ledger” (p. 5).
“when a bank makes a loan it does not require anyone else’s money to do so” (p. 21).
“Banks create brand new money whenever they want by extending credit or buying assets” (p. 100).
“Those with the power to create new money have enormous power – they can create wealth simply by typing figures into a computer” (p. 51).

That banks can lend something they haven’t got is an extravagant and extraordinary claim. The NEF attempt to trace this back to goldsmiths in seventeenth-century London who, they claim, as custodians of other people’s money, adopted the practice “of issuing deposit receipts to a value greater than the value of the deposits the custodians actually possessed – a practice that would later be described as fractional reserve banking” (p. 35).

If goldsmiths did do this, it would have been fraud. In theory they could have done but there is no historical evidence that this was the normal and widespread practice that the NEF and others allege it was.

Because they think that banks today behave like they imagine the London goldsmiths did, the NEF describes modern banking as an “innocent fraud”. They have also misunderstood the nature of “fractional reserve banking”. It merely means that anyone taking in someone else’s money can safely lend only a proportion of it, a “fraction” having to be retained as a “reserve” against likely withdrawals.

The NEF claims that, “commercial banks can be seen to generate ‘special profits’ from their power to issue money in the form of credit through the interest charged upon loans and used overdraft facilities” (p. 68) and that “bank loans are rather special since they do not cost the bank anything to create, but the bank can charge very profitable rates of interest on them”. (p. 97)

But there is nothing special about bank profits compared to those of other businesses. Banks do not make their profits by charging interest on loans they conjure up out of thin air. Their income comes from the difference between the rate of interest they charge borrowers and the lower the rate of interest (if any) they pay savers. Their profit is what remains after they have paid the expenses of the business (buildings, computers, staff salaries).

Incredible credit unions

Any organisation that lends other people’s money has to keep a part of what is deposited with it as cash but can lend the rest, and so practises “fractional reserve banking”. The NEF does not shrink from this logical deduction from their position and asserts that banks are not the only organisation that can create money (new purchasing power) out of nothing:

 “Building societies and credit unions also have the right to create money through issuing credit” (p. 18).

A credit union, as a mutual society in which members save and lend to each other, is a good example to judge whether or not a lending organisation can lend more than has been saved with it. Merely to pose the question is to answer it – with a ‘No’. The only source of what a credit union has to lend is what its members have paid in; the loans it makes come entirely out of this.

Suppose that a credit union tried to lend more than had been saved with it. If its loans were payable in cash, clearly it would be impossible to hand out more cash than it had. If the loan were paid out by a cheque or some other kind of money order, if more of these were issued than the union had in savings then not all of them would be able to be honoured. The union would go bankrupt. The same would apply in the case of electronic transfers.

Building societies were originally like credit unions – members saved to be able to later get a loan to buy a house, their money in the meantime being loaned to other members to buy one – but these days they accept savings from anyone. But what they can lend is still limited by what has been saved with them. Building societies are in competition with each other and with banks to attract savings. If they could simply give a loan by typing figures into a computer then they wouldn’t be under such competitive pressure.

Banks are no different in principle from building societies and credit unions, although the link between savings with them and the amount of loans they can give is perhaps not so obvious. They can lend more than has been saved with them, but only by borrowing from elsewhere (“wholesale” from the money market, as their jargon puts it).

Banks cannot create extra purchasing power; they can only redistribute it from those who don’t want to use for the moment (“savers”) to those who need money to spend immediately, whether for consumption or investment (which is really spending on production). Contrary to what the NEF asserts, banks essentially are financial intermediaries.

Central banks

The NEF seems to have been carried away by its own arguments when it claims that commercial banks (and, by inference, credit unions) create new money not only when they make a loan but even whenever they spend any money, as on buildings, computers and the wages and salaries of their staff:

 “the bank creates new money when it buys assets, goods or services on its own account, or pays its staff salaries or bonuses” (p. 57).

This is an own goal as it would mean that to set up a bank you wouldn’t need any capital. You could go to an internet café, conjure up some money by typing some figures in a ledger and then spend it to buy a building and hire staff, which is ridiculous.

There is, however, one type of bank that can and does do this – a state’s central bank. A central bank can create purchasing power out of thin air and use it to acquire assets, as recently with so-called “quantitative easing”. However, this action does not create any new wealth (that can only be done by people actually working, not by any bank operation). It is popularly called “printing more money” but this does not necessarily involve in the first instance actually printing more bank notes. The new purchasing power is created in the way the NEF mistakenly thinks commercial banks can do it, electronically as digital money, though with quantitative easing it is a temporary phenomenon.

Conclusion

Banking is neither a form of magic nor a fraud. Those who believe that it is (and the NEF is far from being alone in this) are led to waste their time campaigning to reform something which doesn’t exist. In fact, the situation most of them want to achieve – control of the creation of nominal purchasing power by the government instead of by private bodies that profit from it – is what already exists but they can’t see it.

Adam Buick

Cooking the Books: A Reply to the New Economics Foundation (2013)

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

Reply sent to a letter from the Green-leaning think-tank asking for a financial donation.

Thank you for your letter of 18 July addressing me ‘as an owner of the Royal Bank of Scotland …’  I am afraid there has been a misunderstanding. I don’t own any shares in RBS.

I expect you have addressed me in this way because at the moment RBS is majority-owned by the government and because you have been taken in by media propaganda that, as the government is financed by taxes and as we are all ‘taxpayers’ even if only nominally, what is owned by the government belongs to us all. It does not take much thought to see through this fallacy. Or will your begging letter next year begin ‘As an owner of the British war fleet …’?

The basis of the fallacy that what belongs to the government belongs to everybody is the illusion that the government represents all the people, when this is clearly not the case. Governments represent the interest of some ‘taxpayers,’ only, of those on whom the burden of taxation ultimately falls – the owners of property and the employers of labour. The taxes nominally paid by most ‘taxpayers’ are passed on to their employers in the form of higher than otherwise wages and salaries. So most of us are not really ‘the taxpayers’ in any meaningful sense.

This is recognised by an article on, of all places, the UKIP website (LINK). Discussing ‘income tax (and NI) extracted from wages through the PAYE system’, the anonymous author says:

  Like VAT there is a general failure to distinguish the mechanics of the tax’s calculation from its incidence (who actually bears it).  Tax under PAYE is calculated by reference to a purely notional figure called ‘gross pay’, which no employed person in history has ever seen, let alone touched or spent.  The employee’s real income is of course the net pay; and that amount of tax which has been ‘deducted’ is always the employer’s liability, to be remitted by the employer to HMRC in full, every month.  As with VAT, the employers are the de facto tax-collectors.  In this case they are also the tax-payers!

And it explains how this comes about:

  This phenomenon was clearly set out 220 years ago in Adam Smith’s illustration of an employee earning £100.  If the state imposes a tax of 20% his pay must rise by 25% in order to re-instate the employee’s former purchasing power (£100).  He must now be paid £125 so that the 20% tax leaves him with disposable earnings of £100.  In practice there may be a time-lag over which purchasing power (or the basic standard of living) is restored …

He ends up proposing that, instead, corporations should be directly taxed on a part of their profits on the grounds that ‘taxable capacity is a corporate, not an individual, concept.  The employed individual has no taxable capacity.’

It seems that not all UKIP members are the know-nothings they present themselves as. At least one has a better understanding of taxation than those you call your ‘brilliant banking team.’

I am not advocating that the tax system should be reformed so that only corporations pay taxes (how the rich and powerful distribute the burden of taxation amongst themselves is a problem for them to settle). But at least this would make the situation clearer and in future you ought to address your ‘as an owner of the RBS’ letters to capitalist corporations. Because it is they who are the ultimate ‘taxpayers’ and the collective owners of what the government owns, not people like me.