The Credit System According to Marx
Taken as an integrated whole, the credit system may be viewed as a kind of central nervous system through which the overall circulation of capital is co-ordinated.
Capitalism could not survive long without it.
It permits the reallocation of money capital.
It facilitates the equalisation of the rate of profit: commodities trad at their ‘prices of production’ not their values.
Forms of fictitious capital link current money capital flows with the anticipation of future fruits of labour.
Money represents general social power.
Credit can be used to accelerate production & consumption simultaneously.
Wages can be whittled away by credit-fuelled inflation.
Mortgages & consumer credit are secondary forms of exploitation.
“[Credit] suspends the barriers to the realisation of capital only by raising them to their most general form” Marx, Grundrisse, p. 623
That is, the use of credit tends to make matters worse in the long run because it can deal only with problems that arise in exchange & never with those in production.
“…gentleman of high finance [can set about exploiting the credit system] as if it were their own private capital [& thereby can appropriate] a good deal of the real accumulation [at the expense of industrial capital.” Marx, Capital, Vol. III, p.478
Speculation in titles to totally unproductive land can fuel a fictitious accumulation process if these titles can be used as collateral for other sales & purchases.
“…all capital seems to double itself, & sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands”
Marx, Capital, Vol. III p. 470
“[The credit system] becomes the main lever for over-production & over-speculation.”
The ‘insane forms’ of fictitious capital come to the fore & allow the ‘height of distortion’ to take place within the credit system.
“[The credit system] accelerates the material development of the productive forces [& establishes the world market].”
But it also accelerates crisis formation & brings the ‘elements of disintegration’ of capitalism to the fore.
Marx calls this the “abolition of the capitalist mode of production within the capitalist mode of production itself, & hence a self-dissolving contradiction.” Capital, Vol. III, pp. 438-41
Finance Capital According to Lenin & Hilferding
Lenin wrote, “The 20th century marks the turning point from the old capitalism to the new, from the domination of capital in general to the domination of finance capital.”
He defines finance capital as ‘the bank capital of a few very big monopolist banks, merged with the capital of the monopolist associations of industrialists.’
A controlling ‘financial oligarchy’ arises on the basis of finance capital.
Lenin writes, that ‘capitalism’s transition from the stage of monopoly capitalism, to finance capital, is connected with the intensification of the struggle for the partitioning of the world. Imperialism is capitalism at the stage of development at which the dominance of monopolies & finance capital is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun…’
The inherent contradictions of capitalism are now expressed in terms of an ever more dramatic uneven development of capitalism & a radical restructuring of class relations.
A dominant financial oligarchy buys labour peace in the ‘core’ countries by encouraging the formation of a ‘labour aristocracy’, while the rest of the world is driven deeper & deeper into states of dependency, subservience & rebellion.
The competition within the financial oligarchy results in inter-imperialist wars.
Lenin drew on the works of Hobson, Bukharin & Hilferding.
Lenin accepts the framework provided by Hilferding, but with one reservation: his ‘mistaken’ views on money. But Lenin doesn’t elaborate.
H. assumes the state becomes an agent of finance capital & that finance capital operates as national capital on the world stage.
The rise of finance capital requires a state.
H.’s view of crises is based upon imbalances between departments I & II.
He argues that in a crisis the system returns to its ‘monetary basis’, casting off the numerous fictitious capitals acquired during the phase of prosperity.
Lenin has a more supra-national concept of finance capital.
H. depicts finance capital as both hegemonic & controlling, whereas Marx portrays it as necessarily caught in its own web of internal contradictions.
The contradiction for Marx lay between the financial system (credit) & its monetary basis.
The Contradiction Between the Financial System & its Monetary Basis
Marx frequently asserts that, in the course of a crisis, capitalism is forced to abandon the fictions of finance & return to the world of hard cash.
He jokingly characterises the monetary system as ‘essentially a Catholic institution, the credit system essentially Protestant’ because the latter is powered by faith in ‘money value as the immanent spirit of commodities, faith in the mode of production & its predestined order, faith in the individual agents of production as mere personifications of self-expanding capital.’
But ‘the credit system does not emancipate itself from the basis of the monetary system any more than Protestantism has emancipated itself from the foundations of Catholicism.’ Capital, Vol. III p.592
The central bank always remains ‘the pivot of the credit system’ & ‘the metal reserve, in turn, is the pivot of the bank’ pp. 572-3
The inevitability of the contradiction between the financial system & its monetary basis can be traced back directly to the dual functions of money as a measure of value & as a medium of circulation.
When money functions as a measure of value it must truly represent the values it helps circulate.
The reason for pinning that measure to a specific metal such as gold, is to ensure that the measuring rod, when it takes on material form, is as precise & unambiguous as possible.
The contradiction is that the product of a concrete, specific labour process – gold, is treated as the material representation of abstract labour.
When money functions as a medium of circulation, on the other hand, it must divorce itself from the ‘true’ representation of value, permit market prices to deviate from values & prove itself the flexible lubricant of an exchange process that is unpredictable & perpetually changing.
The ‘fictitious’ aspects of money – credit & paper moneys – are pushed to extremes & their links to the actualities of social labour become ever more tenuous.
If the pace of credit creation keeps pace with the socially necessary labour performed in society, then the effects of credit are beneficial with respect to the circulation of capital.
But there is little to prevent credit creation from getting out of hand.
If the fictitious values turn out not to be backed by the products of social labour, or if, for whatever reason, faith in the credit system is shaken, then capital must find some way to re-establish its footing in the world of socially necessary labour.
“…as soon as credit is shaken…all real wealth is to be actually transformed into money, into gold & silver – a mad demand, which, however, grows necessarily out of the system itself.”
The sudden surge of demand for liquidity & convertibility into gold far exceeds the available gold & silver.
The result is “It is a basic principle of capitalist production that money, as an independent form of value, stands in opposition to commodities…In times of squeeze, when credit contracts or ceases entirely, money suddenly stands out as the only means of payment & true existence of value in absolute opposition to all other commodities…Therefore, the value of commodities is sacrificed for the purpose of safeguarding the fantastic & independent existence of this value in money…For a few million in money, many millions in commodities must therefore be sacrificed. This is inevitable under capitalist production & constitutes one of its beauties.” Capital, Vol. III, p.516
Marx did not consider the case of inconvertible paper moneys backed by the power of the state.
Are we dealing with fundamental differences or simply with a change in the form of appearance?
Under conditions of inconvertibility into gold, the burden of disciplining the credit system & fictitious capital falls upon the central bank.
By raising interest rates they increase the cost of converting credit moneys into central bank money, & so cool speculation.
Can the central bank manage the supply of central bank money to match the growth in value productivity in the economy as whole & so smooth the cycle?
Firstly, the national central bank cannot isolate itself from world trade.
Its autonomy is limited by its foreign exchange position.
National money may be devalued in relation to other national moneys.
Secondly, Marx argues the central bank cannot stop the tendency to overaccumulation as ‘the accumulation of money-capital must always reflect a greater accumulation of capital than actually exists’ Vol. III, p.505
But as soon as overaccumulation becomes evident, the realisation of these fictitious values becomes threatened.
A return to the monetary basis destroys fictitious capitals & devalues commodities.
The only feasible defence by a central bank against such conditions is to print state-backed money to buy up the surpluses & so realise the values of fictitious capitals.
This devalues its own money.
It converts the tendency to overaccumulation into inflation.
The contradiction between the credit system & its monetary base boils down to a contradiction between capital in its money form & capital in its commodity form.
Marx argued that ‘no kind of bank legislation can eliminate a crisis’ though ‘mistaken bank legislation…can intensify [it]’ Vol. III, p.490
Accumulation for accumulation’s sake & the circulation of capital split asunder the functions of money as medium of circulation & as measure of value.
The Interest Rate & Accumulation
What fixes the rate of interest in general?
What are the forces that determine the supply & demand for interest-bearing money capital?
Money is demanded as a means of payment, & as a means of purchase.
The demand for money to launch new production is very different in its signification from the demand for money to realise values already produced.
The aggregate demand for interest-bearing money comes from both the circulation of capital & the circulation of revenues.
The supply of interest-bearing money is partly the product of accumualtion, partly the result of ‘circumstances which accompany [accumulation] but are quite different from it’ & partly the result of seemingly quite independent events. Vol. III, p.507
There is a constant guerrilla war between industrial capitalists & money capitalists over the share of surplus value between profit & interest.
The Accumulation Cycle
In the wake of the crash there is severe curtailment of production & low rates of profit.
Prices are forced downwards as producers dispose of surplus inventories at less than their prices of production.
Unemployment is widespread & wages are in decline.
The turnover time of commodities is shortened, since credit is not available to extend it.
The demand for money is low.
Money is used mainly as a measure of value.
Falling wages & interest rates mean a larger share of surplus value goes as profits to enterprises.
Devalued capital can be purchased cheaply & so the value composition of capital falls.
Modest expansion begins once most of the surplus inventories have been disposed of.
Prices start to rise but wages remain low.
The economic power of industrialists is strong relative to financiers.
Employment expands & wages rise.
Industrial capitalists exhaust their cash supplies & turn to the banks for credit.
Fictitious capital inceases.
Credit-based expansion fuels price rises.
Unemployment is low & wages increase rapidly.
Interest rates rise & profits to enterprise start to get squeezed.
The value composition of capital rises rapidly.
Fictitious capital causes a speculative bubble.
The crisis begins with a spectacular failure which shakes confidence.
There is a rush to cash.
The rate of interest rises.
The chain of payments is broken.
“On the eve of the crisis, the bourgeoisie, with self-sufficiency that springs from intoxicating prosperity, declares money to be a vain imagination. Commodities alone are money. But now the cry is everywhere: money alone is a commodity! As pants the hart after fresh water, so pants his soul after money, the only wealth.” Vol. I, p.138
“As soon as a stoppage takes place, as a result of delayed returns, glutted markets, or fallen prices, a superabundance of industrial capital becomes available but in a form in which it cannot preform its functions. Huge quantities of commodity capital but unsaleable. Huge quantities of fixed capital, but largely idle due to stagnant reproduction…factories are closed, raw materials accumulate, finished products flood the market as commodities.” Vol. III, p.483
Unemployment grows & wages fall.
Capital is devalued.
The Politics of Money Management