In the third part of his series on the history of money, Adam Booth looks at the growth of finance, the development of banking, and the role of credit within capitalism. As Booth stresses, the economic problems we face today lie not with an overbloated finance sector, greedy bankers, or a lack of credit, but with the anarchic, chaotic, and crisis-ridden capitalist system.
The growth of finance
It has become popular to blame the crisis on such parasitic layers of spivs and speculators, given the role that the bloated financial sector played in the events leading up to the 2008 collapse of the banking system that marked the onset of the Great Recession. But while it is true that finance and banking have ballooned out of all proportion, dominating the world economy today, the reality is that usurers and money lenders have existed throughout capitalism’s history—indeed, going back further, as Engels notes in relation to ancient Greece, for as long as money itself.
The most basic elements of banking—a system of accounts and loans—were even present thousands of years ago, within the ancient Mesopotamian societies described earlier. In these early urban economies, and in other later societies such as that of ancient Egypt, not only were individual goods kept and recorded at central storehouses for safekeeping, but people could borrow from these same storehouses in order to fulfill immediate needs.
“The lending system of ancient Babylon was evidently quite sophisticated,” Niall Ferguson, the bourgeois historian, writes in his book The Ascent of Money. “Debts were transferable . . . Clay receipts or drafts were issues to those who deposited grain or other commodities at royal palaces or temples. Borrowers were expected to pay interest . . . at rates that were often as high as 20 percent.” (Niall Ferguson, The Ascent of Money: a Financial History of the World, Penguin Books, 2009 paperback edition, 31).
Later on in Ptolemaic Egypt and Hellenistic Greece emerged the innovation of credit transfers, allowing cash transactions to be replaced in part with a system of credit receipts and payments. For example, on the Greek island of Delos, individual clients could “transfer money” simply by sending instructions to the bank to make payments to another person’s account. Delos’s banking methods, in turn, became the model for the Romans. Meanwhile, with the development of international trade and commerce, and the Romans’ preference for coinage, banking expanded to involve the exchange of minted coins of different origin.
With the collapse of the Roman Empire came the collapse of international trade and the banking system also. As Felix Martin comments, “the social and political stability required to underpin professional finance had, it seems, disintegrated.” (Martin, op. cit., 83). Markets shrank, the subsistence economy grew, and the money system regressed back both in terms of its size and its complexity, primarily consisting of a multitude of coinages catering to local fiefdoms and kingdoms.
Feudal lords and kings, meanwhile, would frequently use their privileged monopoly position as minters to manipulate the money supply and enrich themselves. The sovereign, in effect, could tax the holders of money by debasing the currency, changing the nominal value of the coins in circulation and pocketing the difference—a process known as seigniorage.
This continual process of debasement, over time, served to reinforce the symbolic nature of coins and their primary role as a representation of value, paving the way for paper money (which was originally invented in 8th-century China) and even the electronic money we use today—mere digital information on a screen. Money, in effect, becomes a mere token—a symbol of value, as Marx notes:
The fact that the circulation of money itself splits the nominal content of coins away from their real content, dividing their metallic existence from their functional existence, this fact implies the latent possibility of replacing metallic money with tokens made of some other material . . .
Relatively valueless objects, therefore, such as paper notes, can serve as coins in place of gold. This purely symbolic character of the currency is still somewhat disguised in the case of metal tokens. In paper money it stands out plainly. But we can see: everything depends on the first step. (Marx, op. cit., 223–24).
At the same time, this seigniorage was sowing the seeds for a monetary rebellion. Those in possession of money were finding themselves consistently robbed by the state; an alternative had to be found.
The shift in power came with the restoration of banking to its former glories. As international trade expanded once again, a new mercantile class emerged, centered on the medieval Italian city-states. A division of labor occurred within commerce, and international merchant houses grew which were concerned less with the transfer of the actual commodities (which was left to lesser mortals), and more with the transfer of wealth and property rights.
Rather than dealing with the myriad of currencies that could be found across the continent, the great European merchant houses in time came to circumvent the sovereign altogether, playing the role of bankers. Local tradesmen would deal with the merchant houses, who in turn would deal with one another to settle accounts, thus creating an international system of IOUs (such as checks and bills of exchange) and payments.
As the wealth of the rising merchant class grew, so did their power and influence. The state became increasingly reliant on this nascent bourgeoisie as a source of funds for their expenditure—in particular, to wage wars. The major shift in class relations can be seen in the way in which such public funds were obtained, as Ferguson notes in relation to the city-state of medieval Florence: “Instead of paying a property tax, wealthier citizens were effectively obliged to lend money to their own city government. In return for these forced loans, they received interest.” (Ferguson, op. cit., 72). The merchant bankers had become the state’s creditors. The era of public debts had begun.
In principle, the idea of state debt makes little sense. The same result—i.e., the government raising money for state expenditure—could just as well be achieved through taxing the rich, rather than borrowing from them. Of course, from the perspective of the wealthy, lending the government money (in the form of credit) rather than giving it over (in the form of taxes) is far more preferable: the rich get to keep their money, and at the same time earn a tidy sum on the side from interest.
The concept of a sovereign debt was not new to the capitalist epoch. Monarchs had frequently borrowed from the rich and wealthy; the problem previously, however, was that such royalty would often default on their loans. Tired of losing their money, the rising bourgeois class in England pushed through with the establishment of a national bank—the Bank of England—in 1694, which would guarantee the repayment of government debts and give the financial lenders monopoly privileges over the money supply—that is, over the issuing of new banknotes.
“To be granted the privilege of note issue by the crown,” Felix Martin writes, “which would anoint the liabilities of a private bank with the authority of the sovereign—this, they realized, was the Philosopher’s Stone of money. It was the endorsement that could liberate private bank money from its parochial bounds. They would lend their credit to the sovereign—he would lend his authority to their bank. What they would sow by agreeing to lend, they would reap a hundredfold in being allowed to create private money with the sovereign’s endorsement. Henceforth, the seigniorage would be shared.” (Martin, op. cit., 118).
Alongside the national debt developed the fiscal (taxation) system. With debts to repay, the state was required to establish a means through which to raise the taxes needed to fund these debts and interest payments. The result, however, as seen now in debt-laden countries across the world, is that the tail ends up wagging the dog. Government policy begins to revolve entirely around paying back the debts to its financial creditors, and—as is aptly demonstrated in modern-day Greece—new loans are required just to pay off the old ones.
So it comes about that the bourgeoisie takes complete control over the running of the country—not through the electoral apparatus of a country, but by dictating policy to governments, using strikes of investment and the threat of national insolvency. This is what we see today, where governments of every color are carrying out the same policies of austerity under the aegis of international finance capital—and this is what is meant by the dictatorship of capital, which rides roughshod over democracy in this time of crisis.
“The national debt, i.e., the alienation of the state—whether that state is despotic, constitutional, or republican—marked the capitalist era with its stamp. The only part of the so-called national wealth that actually enters into the collective possession of a modern nation is—the national debt.” (Marx, op. cit., 919).
Credit and crisis
Banking and finance are fundamentally based upon money’s role as a means of payment—a promise by the buyer to pay in the future. This “function of money as a means of payment,” Marx notes, however, is not unique to the capitalist epoch, but “develops out of simple commodity circulation, so that a relationship of creditor and debtor is formed.”
“With the development of trade and the capitalist mode of production,” Marx continues, “this spontaneous basis for the credit system is expanded, generalized, and elaborated.” Whereas coinage—that is, money as a means of purchase—once dominated, “money now functions only as means of payment, i.e., commodities are not sold for money, but for a written promise to pay at a certain date.” (Karl Marx, Capital, Volume Three, Penguin Classics edition, 525).
In other words, with money as a means of payment, it is possible to buy without having first sold; to own without actually paying anything in return. A disconnect develops between the commodities exchanging hands and the actual ability to pay for these commodities. Fragility, uncertainty, and risk are introduced into the system, which only increases as “the credit system is expanded, generalized, and elaborated.”
The complexity—and with it, the fragility—of the credit system took a qualitative leap forward with invention of fractional reserve banking in the 17th century. Whereas the banking system up until then had been primarily concerned with exchanges between accounts, or the provision of loans fully backed up by reserves, now banks began “lending amounts in excess of its metallic reserve . . . exploiting the fact that money left on deposit could profitably be lent out to borrowers.” (Ferguson, op. cit., 50).
In their role as lenders of credit, the banks play a dual role for the capitalists. On the one hand, relatively short-term credit is required to overcome bottlenecks in production and maintain the flow and circulation of commodities. For example, producers need to borrow money to pay for wages and raw materials while they wait for previously produced goods to reach the market and be sold.
On the other hand, credit may be used to allow producers to expand production when they don’t have the upfront capital to pay for it. In this respect, the banking and finance system serves to pool together and accumulate all the small savings and idle money within the economy—primarily those of individuals and households—in order to put them to use productively as investment in new means of production.
With the invention of fractional reserve banking, however, banks were no longer mere lenders of credit—they became the creators of credit, and thus the creators of money also. Only a fraction of deposits are backed up by liquid assets; the rest are simply loans created by the bank (at interest) in order to provide greater profits for the bank, thus increasing the money supply in the process. The credit lent appears in the form of a deposit in the bank account of the borrower, who can then spend this just as he/she would spend any other money.
Today, according to the UK-based campaigning group Positive Money, whose aim is to “democratize money and banking,” up to 97% of the money supply in the British economy is the creation of banks, with only 3% existing in the form of cash.
In this respect, credit plays another key role within capitalism: artificially expanding the market—that is, the purchasing power within the economy. At root, capitalism is a system of production for profit. If the capitalists cannot make a profit, then they will not produce; workers are made unemployed, investment dries up, circulation stops. The economy grinds to a halt and the credit system breaks down—that is to say: capitalism enters into crisis.
As long as the reproduction process is fluid, so that returns remain assured, this credit persists and extends, and its extension is based on the extension of the reproduction process itself. As soon as any stagnation occurs, as a result of delayed returns, overstocked markets, or fallen prices, there is a surplus of industrial capital, but in a form in which it cannot accomplish its function. A great deal of commodity capital; but unsaleable. A great deal of fixed capital; but in large measure unemployed as a result of stagnation in reproduction. Credit contracts, 1) because this capital is unoccupied, i.e., congealed in one of its phases of reproduction, because it cannot complete its metamorphosis; 2) because confidence in the fluidity of the reproduction process is broken; 3) because the demand for this commercial credit declines . . .
So if there is a disturbance in this expansion, or even in the normal exertion of the reproduction process, there is also a lack of credit; it is more difficult to obtain goods on credit. The demand for cash payment and distrust of credit selling is especially characteristic of the phase in the industrial cycle that follows the crash . . . Factories stand idle, raw materials pile up, finished products flood the market as commodities. (Marx, Capital, Volume Three, 614).
With a default on any debts, the anarchy and chaos within the balance of payments becomes apparent. Creditors demand their repayments and refuse to lend any further. Promises to pay lose any meaning; only hard cash will suffice. Credit is reined in, bringing the motion of circulation—and thus production also—to a halt. In short, the lack of credit does not cause a crisis; the crisis causes a lack of credit.
This contradiction bursts forth in that aspect of an industrial and commercial crisis which is known as a monetary crisis. Such a crisis occurs only where the ongoing chain of payments has been fully developed, along with an artificial system for settling them. Whenever there is a general disturbance of the mechanism, no matter what is cause, money suddenly and immediately changes over from its merely nominal shape, money of account, into hard cash. Profane commodities can no longer replace it. The use value of commodities becomes valueless, and their value vanishes in the face of their own form of value. (Marx, Capital, Volume One, 236).
In a system of production where the entire interconnection of the reproduction process rests on credit, a crisis must evidently break out if credit is suddenly withdrawn and only cash payment is accepted, in the form of a violent scramble for means of payment. At first glance, therefore, the entire crisis presents itself as simply a credit and monetary crisis. And in fact all it does involve is simply the convertibility of bills of exchange into money. The majority of these bills represent actual purchases and sales, the ultimate basis of the entire crisis being the expansion of these far beyond the social need. On top of this, however, a tremendous number of these bills represent purely fraudulent deals, which now come to light and explode; as well as unsuccessful speculations conducted with borrowed capital, and finally commodity capitals that are either devalued or unsaleable, or returns that are never going to come in. (Marx, Capital, Volume Three, 621).
At the heart of these crises is a fundamental contradiction within capitalism: that of overproduction. This arises from the nature of capitalism as a system of profit, and from the origins of profit itself—as explained earlier—as the unpaid labor of the working class. Since workers produce more value than they are paid back in the form of wages, the working class as a whole can never buy back the full value of the commodities it creates.
Capitalism traditionally overcomes this contradiction of overproduction by reinvesting the surplus value created into new means of production in the search for greater profits. This, however, only serves to create even greater productive forces, and thus an even greater mass of commodities that must find a market, and thus—rather than resolving the contradiction—only further exacerbates overproduction.
Credit, then, is used to artificially increase the consumptive capacity of the masses, and thus to temporarily overcome overproduction, allowing the productive forces to continue growing and the market to expand beyond its limits—but only by sowing the seeds for an even bigger crisis in the future.
Today, the capitalist system has extended far beyond its limits. The expansion of credit over the past thirty years —and particularly since the turn of the century—created the largest credit bubble in history. On the one hand, as a result of globalization, automation, and a full frontal assault against the working class, wages were driven down, and an ever-increasing proportion of wealth began to go to capital rather than labor. On the other hand, credit was massively expanded through the use of mortgages, credit cards, student loans, etc., in order to artificially maintain demand. While this had the effect of delaying the onset of crisis, it at the same time paved the way for the almighty collapse of 2008 and the continued chaos that we see today, as all the contradictions that have piled up for decades now come to the fore.
At root, it is the restricted consumption of the masses that prepares the way for crises under capitalism. The market is not only restricted by the amount of money that people have in their pockets to spend on goods and services (and the huge debts that hang around their necks), but also by the enormous level of excess capacity that has built up throughout the economy, creating a gigantic barrier to further investment. Today, the world is awash with such excess capacity; the market is saturated and the capitalists have had to cut back on production. Their attempt to overcome the crisis by credit has reached its limits. The productive forces have far outgrown the limits of the capitalist system.
Money and Capital
“After the advent of banking and the birth of the bond market,” Niall Ferguson comments in his Financial History of the World, “the next step in the story of the ascent of money was . . . the rise of the joint-stock, limited-liability corporation.” “It is the company,” Ferguson notes, “that enables thousands of individuals to pool their resources for risky, long-term projects that require the investment of vast sums of capital before profits can be realized.” (Ferguson, op. cit., 121).
With the advent of the joint-stock company, business owners were no longer purely reliant on the banks in order to obtain credit for making large-scale investments. Instead, such money could be raised from the accumulation of many small (or large) sums, by selling shares in the company to anyone who was willing to risk their savings in return for a portion of future profits.
As Marx emphasizes in Capital, however, such shares are not a share in the actual company itself, but rather are “an ownership title, pro rata, to the surplus value which this capital is to realize”; “nothing but accumulated claims, legal titles, to future production”; “a legal claim to a share of the surplus value that this capital is to produce.” (Marx, Capital, Volume Three, 597; 599 ; 608).
Today, giant financial firms, through the stock market, control the process of buying, selling, and trading shares as part of the wider credit system. Anyone with any savings or private pension is tied into this system, with investment banks and pension fund managers amalgamating the population’s nest eggs into larger amounts that can be invested to make a profit.
It is clear, however, that there is a qualitative difference between money and capital. While millions of people may have money invested in shares through their savings or pension, this does not make every thrifty saver or pension holder a capitalist. Only a tiny minority have enough money that they can live purely off the returns from stocks and shares.
Despite the propaganda of the bourgeoisie and their mouthpieces (for example, the rhetoric of Margaret Thatcher, who sought to create a middle-class “property-owning democracy” by selling off council housing and privatizing nationalized industries), the stock market does not serve to diversify society’s wealth and convert laymen into capitalists. Rather, the main function of the highly developed credit system that we see under capitalism is to do the opposite: to concentrate and “capitalize” all the small, scattered sums of money in the hands of a rich and powerful elite of bankers and financiers; to convert all money into capital—that is, into value that is capable of creating more value.
“Small sums which are incapable of functioning as money capital by themselves are combined into great masses and thus form a monetary power.” (Ibid, 529). “In so doing,” Lenin remarks in his Marxist masterpiece Imperialism, the Highest Stage of Capitalism, “they [the banks and financial firms] transform inactive money capital into active, that is, into capital yielding a profit; they collect all kinds of money revenues and place them at the disposal of the capitalist class.” (Lenin, Imperialism, the Highest Stage of Capitalism, Chapter II).
At the same time, the credit system serves to divorce the capitalists ever more from the process of real production. With the advent of joint-stock companies, the capitalist ceases to be the business owner or manager, and capital itself become less and less about owning actual tangible assets. Instead, the capitalist becomes simply “capital personified,” and capital ownership—in the form of stock and shares—is transformed simply into a claim to a share of the total surplus value produced in society; an asset that entitles the owner to a constant revenue stream, with a return equal to the average rate of profit. It is, in the words of Marx, the “transformation of the actual functioning capitalist into a mere manager, in charge of other people’s capital, and of the capital owner into a mere owner, a mere money capitalist.” (Marx, op. cit., 567).
It is the dominance of the banks, stock market, cartels, and monopolies, meanwhile, with the transformation of capital into primarily finance capital, that Lenin noted as being a defining characteristic of imperialism—the “highest stage of capitalism”:
It is characteristic of capitalism in general that the ownership of capital is separated from the application of capital to production, that money capital is separated from industrial or productive capital, and that the rentier who lives entirely on income obtained from money capital, is separated from the entrepreneur and from all who are directly concerned in the management of capital. Imperialism, or the domination of finance capital, is that highest stage of capitalism in which this separation reaches vast proportions. The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy. (Lenin, op. cit., Chapter III).
The rise of the stock market and the credit system, then, acts to accelerate the socialization of production, with businesses appearing “as social enterprises as opposed to private ones.” “This is the abolition of capital as private property within the confines of the capitalist mode of production itself.” (Marx, op. cit., 567).
On the one hand, this gives as an enormous boost to the development of the productive forces, enabling investment in new means of production on a scale that could never be achieved on the basis of individual private ownership. This provides a glimpse of what could be possible under a socialist plan of production, where the productive forces and resources in the economy were utilized according to a rational and democratic plan, on the basis of society’s needs, rather than for the profits of the bankers and bosses.
On the other hand, this same credit system gives rise to an orgy of speculation and “reproduces a new financial aristocracy, a new kind of parasite in the guise of company promoters, speculators, and merely nominal directors; an entire system of swindling and cheating with respect to the promotion of companies, issue of shares, and share dealings. It is private production unchecked by private ownership.” (Ibid, 569).
Trading and exchange of financial commodities become merely a means of attempting to make money out of money. Financial assets increasingly become mere fictitious capital. Activity on the stock market becomes ever more separated from the state of the real economy below, with prices of such stocks and shares ceasing to reflect the actual health of the companies whose value they are supposed to represent, giving rise to an endless froth of bubbles being vastly inflated only to later burst up against the pinpricks of reality. As Niall Ferguson remarks:
In the four hundred years since shares were first bought and sold, there has been a succession of financial bubbles. Time and again, share prices have soared to unsustainable heights only to crash downwards again. Time and again, this process has been accompanied by skullduggery, as unscrupulous insiders have sought to profit at the expense of naïve neophytes. (Ferguson, op. cit., 122).
And, of course, as we see from the financial crash of 2007–8, it is always the working class who are left to foot the bill for such recklessness, while the rich and wealthy continue to laugh all the way to the bank.
Far from being a malevolent tumor on the side of an otherwise benevolent system, however, we can see that such financial alchemy and “skullduggery” of “swindling and cheating” are an intrinsic part of the capitalist system that cannot be removed. The development of capitalism, from its mercantile beginnings in Southern Italy to the Industrial Revolution in England, was only possible due to the development of finance capital and the role it played in concentrating capital, expanding the productive forces, and creating the world market. Any separation between the “good” capitalism of industry and manufacturing, on the one side, and the “bad” capitalism of the “parasitic” and “irresponsible” finance sector, on the other, is purely artificial and completely idealistic.
Instead of attempting to regulate the unruly beast of finance and banking in order to create the utopia of a “responsible capitalism,” the leaders of the labor movement should instead put forward the demand for the nationalization of the banks under the control of the organized working class. Only in this way can the wealth in society be pooled and planned in the interest of the many.
The credit system hence accelerates the material development of the productive forces and the creation of the world market, which it is the historical task of the capitalist mode of production to bring to a certain level of development, as material foundations for the new form of production. At the same time, credit accelerates the violent outbreaks of this contradiction, crises, and with these the elements of dissolution of the old mode of production.
The credit system has a dual character immanent in it: on the one hand it develops the motive of capitalist production, enrichment by the exploitation of others’ labor, into the purest and most colossal system of gambling and swindling, and restricts ever more the already small number of the exploiters of social wealth; on the other hand, however, it constitutes the form of transition towards a new mode of production. (Marx, op. cit., 572).
Continue to Part 4 here...