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 trade 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.
Hilferding 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.
Hilferding’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.
Hilferding 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
Stagnation
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.
Recovery
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.
Credit-based Expansion
Employment expands & wages rise.
Industrial capitalists exhaust their cash supplies & turn to the banks for credit.
Fictitious capital inceases.
Speculative Fever
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 Crash
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.
Prices collapse.
Capital is devalued.
Capitalists seek to stay alive by cannibalizing each other.
The Politics of Money Management
The role of monetary & fiscal policy in relation to the cycle.
The simplest way to regulate the quality of money in society is to tie it to some universally accepted money commodity such as gold.
The disadvantage is that the value of social labour is tied to the condition of concrete labour in gold production.
If the latter changes, then so does the general expression of social labour as a price.
The state becomes involved in regulation of money as soon as coins, tokens, paper & credit moneys are introduced as means to circulate commodities.
The rise of a full-fledged credit system & the creation of fictitious forms of capital with legal backing posed the capitalist state with even more far-reaching problems.
Because the central bank has the power to set the conditions under which other moneys are convertible into its own money, it can, within certain limits, regulate the market rate of interest.
It is constrained by its foreign exchange position, gold reserves & other links with some kind of supra-national money [e.g. $] on the world stage.
Central bank decisions can dampen or exacerbate cyclical oscillations.
The severance of central bank money from gold gives rise to the possibility of sustained inflation.
Inflation as a Form of Devaluation
The competitive struggle to acquire relative surplus value should increase the physical & value productivity of labour & so cheapen commodities.
Against this is the rising costs associated with natural resource depletion, bottlenecks in the production process, the class struggle on the part of the labour movement. & increasing monopolisation.
Within the business cycle prices are depressed in the stagnation phase, rise gradually, & then accelerate rapidly during the boom.
A fiat money system permits the printing of currency during crises to negate price falls.
But the printing of money goes against Marx’s rule that the realisation of values cannot be achieved through a mere increase in the supply of money.
Money cannot abandon its role as a measure of the value of social labour.
Expansionary monetary & fiscal policies can increase effective demand for commodities, but also support speculative asset-price bubbles, e.g. property prices.
The state substitutes its own fictitious capital (an increase in the stock of state-backed money) for the mass of privately held fictitious capital in the credit system.
Harvey appears to see the business cycle as a cycle of value composition, where ‘over-accumulation’ is to do with the technological mix, i.e. capital-intensive, relative to labour-intensive.
That the role of crises is to resolve this over-accumulation of capital.
When state-backed money breaks free from any pretence of acting as a firm measure of socially necessary labour, generalised inflation results.
Instead of the devaluation of commodity prices, money [currency] gets devalued through inflation.
Inflation tends to redistribute money power from savers to debtors because the latter pay off their debts in depreciated currency.
Wage cuts are hard to impose in periods of price deflation, but employers can concede nominal wage increases, yet still cut real wages with inflation.
The devaluation of wage labour, & so an increase in the rate exploitation, is easier to achieve.
Finance Capital & it’s Contradictions
The financial system is shrouded in mystery born out of sheer complexity.
It encompasses central banking, international institutions like the IMF & World Bank, the interlocking financial markets such as stock exchanges, commodity futures markets, mortgage markets, & financial institutions including pension funds, investment banks & savings banks.
The 2008 crash highlighted its vulnerability.
Finance capital as the ‘class’ of financiers & money capitalists
Those who control the flow of money as an external power in relation to production occupy a strategic position in a capitalist society.
Finance capital as the unity of banking & industrial capital
Large-scale banking & corporate capital are necessary to each other.
Hilferding & Lenin assert that that this is a working unity which dominates the accumulation process & carves up the world into regions of subordination to the collective power of a few large banks & corporations.
Finance capital & the state
‘the executive committee of the bourgeoisie’ no matter what their political allegiance.
The state colludes directly with industrial & financial interests.
But the central banks has the task of disciplining errant industrialists & bankers & penalising them for their inevitable excesses in the race to accumulate – ‘moral hazard’.
‘Finance capital is such a decisive force in all economic & in all international relations, that it is capable of subjecting, & actually does subject, to itself even states enjoying the fullest political independence’. Lenin
This can only occur if the flow of interest-bearing capital achieves a supra-national aspect.
The ‘Second-Cut’ Theory of Crises: The Relation Between Production, Money & Finance
The ‘first-cut’ theory of crises revealed their origin within production.
Given the contradictory unity that necessarily prevails between production & exchange, crises inevitably find expression in exchange.
Crises therefore have a monetary expression.
The inner contradictions within production are manifest in exchange as an opposition between money & commodity forms of value which then becomes via the credit system, an outright antagonism between the financial system & its monetary base.
“No social order is ever destroyed before all the productive forces for which it is sufficient have been developed, & new superior relations of production never replace older ones before the material conditions for their existence have matured within the framework of the old society. Mankind thus sets itself only such tasks as it is able to solve, since closer examination will always show that the problem itself arises only when the material conditions for its solution are already present or at least in the course of formation.” Marx, Critique of Political Economy, p. 21
Once the limit of the state’s capacity to manage the economy creatively is reached, the increasingly authoritarian use of state power appears the only answer.
Crises unravel as rival states, possessed of different money systems, compete with each other who will bear the brunt of devaluation.
The struggle to export inflation, unemployment, idle productive capacity, etc., becomes the pivot of national policy.
War becomes one of the potential solutions to capitalist crisis,