Banking 2/7

"I think that people have learned that money is not made in banks. It is made by real people working hard at real jobs. Actually, deep down we knew that all along. We just have to learn it again." Asbjorn Jonsson, an Icelandic fisherman, in a week when Iceland was effectively a bankrupt state. Its banks owed the world an astonishing £35 billion - 12 times the size of Iceland’s gross domestic product and £116,000 for every man, woman and child.

Because money so dominates people's lives and because they associate money with banks, people's resentment at their money problems is aimed at banks but banking or monetary reform are not going to stop money dominating people's lives.

Many seek out solutions without understanding the causes. Marx wrote extensively on money and banking and credit yet how convenient it is to forget his conclusion that it is the entire capitalism system not simply individual aspects of its functioning that is the problem. Theorists seem to forget that the capitalist system remains, in all essentials, the same as it was when Marx studied in the British Museum. Lest we forget, the source of all Rent, Interest and Profit is the unpaid labour of the working class. It’s not a revolution if you’re only taking out the bankers. The bankers are not wicked finance capitalists against whom the anger of workers should particularly be directed, just capitalists with their capital invested in a particular line of business, no more no less reprehensible than the rest of the blood sucking parasitical capitalist class. Recessions are inherent in the boom bust cycle of capital. “Greedy bankers” are a scapegoat distracting from the fact that this will happen again and again and again. Blaming them alone implies you could have a nicer capitalism with good bankers. Pinning the blame on “greedy bankers” lets the rest of the culprits off the hook. This is not just a financial crisis, but a crisis of the whole capitalist economy in which the whole business and political class are fully implicated.


If a few get rich while millions lose out, then this is capitalism working as it only can work. If there is slump followed by boom followed by slump, then capitalism is working as it should. It works the only way it can work – in an anarchic and chaotic manner, oblivious to the misery and suffering it creates. As usual it is the working class that suffers the cutbacks, the reduced standard of living, and the vicious and austerity programmes that every such crisis engenders.

That capitalism is chaotic is evident. Its frequent bubbles and recessions — its unavoidable features— become global. The disasters get bigger, and nastier.

There can be no such thing as a permanent boom. Marx, the first person to provide a convincing analysis of how the capitalist economic system worked, explains how capital accumulation proceeds by fits and starts, periods of relatively rapid growth being followed by periods of contraction and stagnation. The graph of long-term growth under capitalism is not a straight line moving up from left to right but a jagged line with peaks and troughs, with each peak normally higher than the previous one. Marx argued that this cyclical pattern of growth was not just accidental but was inevitable under capitalism - it was the way capitalism functioned and developed, its “law of motion” as he put it - with each period of rapid growth ending in a slump and each slump preparing the conditions for the next round of growth. Capitalism is driven, not by consumer demand, but by the drive to make and accumulate profits as further capital and that this is by no means a smooth process.

In order to maintain or increase their share of the market and realise the surplus value embodied in their products, capitalist firms are compelled by competition to reduce their costs by improving their productivity, in particular by the introduction of more productive machines. This leads to an increase in overall productive capacity. During the period of recovery that follows a slump this poses no problem as the market is beginning to recover and expand again. However, as the competitive pressures to increase productive capacity continue, the point is eventually reached when productive capacity in a key industry or group of industries comes to outstrip the market demand for its products. At this point a crisis of overproduction breaks out. As profits fall, production is cut back, workers are laid off and, through the knock-on effect on other industries, the market shrinks, so inaugurating the period of slump. During the slump, the least productive machines are taken out of production and capital is depreciated or simply written off. This purge of under-productive machinery and over-valued capital eventually creates the conditions which allow capitalist growth to recommence, so beginning the boom-slump cycle again. This is how capitalism has developed and continues to develop.

A key factor in this is that capitalism’s financial apparatus is largely built on confidence that transactions will be smooth and payments will be met. When this confidence in the efficiency of trade and commerce starts to ebb then things can take spectacular and serious turns for the worse. The erosion of financial confidence is one of the ways in which a downturn in one sector or country can spread to others.

The financial crisis is a reflection of the fact that stock exchange and foreign currency gamblers have realised that countries have expanded their productive capacities beyond market demand. One consequence of the past period of slow growth was that significant amounts of profits were not being reinvested in production but, instead, being held in liquid form and invested in financial assets with the aim of making as large a short-term profit in as short a time as possible. All the multinational corporations had treasury departments engaged in financial speculation of one form or another whether on the stock exchange, the bond market, currency transactions, commodity markets or dodgy hedges such as derivatives.

This extra demand for financial assets, deriving from non-reinvested profits, has driven up their price, so creating the anomalous situation of a stock exchange boom in what is essentially a depressed economy. Most of the financial transactions that took place were not investments of productive capital- not used to set up factories or to buy machinery, equipment or raw materials-but are to buy and sell shares or bonds or foreign currencies or commodity futures or property or failing companies to asset strip them. Such purely financial transactions are utterly unproductive, even from a capitalist point of view. Not only do they not result in the production of a single extra item of wealth but they don’t even increase the amount of surplus value available for sharing amongst the various sections of the capitalist class. It’s a zero-sum game. As socialists have always maintained, stock exchanges are places where capitalists gamble and try to cheat each other with a view to acquiring as large a mass as possible of the surplus value that has already been produced by and robbed from the workforce.

Marx dealt with the illusion that money can give rise to more money without production in Volume 3 of Capital, chapter 29, where he introduced the concept of “fictitious capital” (imaginary wealth). Examples of those are government bonds, the price of land, and stocks and shares. Marx called these “fictitious” capital because the capital sum did not really exist, only the estimated future income stream did and that depended in the end on future production. What the banks have been doing in recent years was to increase the amount of such fictitious capital by turning mortgage repayments into bonds – “securitising” them.

Marx also in Volume 3 examines “interest” and “profit of “enterprise” – the former being the revenue that the money capitalist is entitled for loaning capital to the industrial capitalist, while the latter is the profit the industrial capitalist receives after paying that interest to the money-capitalist. His observations reveal why it is so easy for bankers to be cast in the role of villains, while those capitalists owning actual means of production appear in a more favourable light. Money seems to have the magical power to breed more money. It thus appears at first glance that profits can emerge regardless of production. Overlooked is the intervening process of production, which is the actual source of the interest earned. This illusion is reinforced by the fact that individual money owners can indeed loan money for non-productive uses. Yet that freedom to direct money towards non-productive sectors, or to engage in speculation on fictitious forms of capital, only holds true for individual capitalists. If a large portion of the industrial capitalists were to withdraw from production, so as to become money capitalists, the ultimate source of profit would quickly dry up and the rate of interest would plummet.

Nevertheless, if we view the capitalist world from the perspective of the individual interest-bearing capital, it seems that profits can materialise out of thin air, without actual production. Marx thus calls interest-bearing capital the “most superficial and fetishized form” of the capital relationship, where capital “appears as a mysterious and self-creating source of interest, of its own increase.” Instead of appearing to be one part of the total surplus-value, interest seems to arise from an inherent property of capital itself, so that any owner of it is entitled to interest. With interest, we are one step removed from the actual process of production; and from the exploitation of labour that occurs within that process. This fact is at the root of the tendency for people to view money capitalists as inhabiting in a rarefied world where it is not necessary to get one’s hands dirty. The money capitalists who engage in this mysterious process, whereby money is able to breed more money, both dazzle and disgust those who must earn a living in more pedestrian ways.

What some argue is that if the interest that the money capitalists earns seems to spring out of thin air, the industrial (productive) capitalists, in contrast, seem to earn their profits from the sweat of their brow. Their “profit of enterprise” – which is what remains after they pay money capitalists interest – appears to be the fruit of functioning capital, rather than the fruit of owning capital. Just as there is an abstraction from the actual production ( exploitation) process in the case of interest-bearing capital, in the case of profit of enterprise the production process is separated from capital itself, so that it appears merely to be labour process. Profit seems to accrue to industrial capitalists as payment for a useful function performed in that labour process. The fact that industrial capitalists play an active role in the production process provides a basis for the claim that they are preferable to the money capitalists who do nothing more than provide the investment. Marx’s theory of surplus-value brings to light the ultimate source of capitalist wealth.

Some apologists for capitalists say productive businesses produce value. Speculation is the use of money-capital, not to invest in the production of new wealth and new surplus value, but unproductively to try and swindle other capitalists’ out of their past profits. Yet the total amount of profits remains the same but merely gets redistributed differently amongst capitalists depending on their speculative skills.

Real value is only created by the worker. It is labour power, which is a source of more value than it has itself. The capitalist, having bought the labour power, engages the worker to work for longer than is required to produce the value of that labour power, and so surplus value is produced. It is working for the capitalist class that we produce a greater value in the form of the commodities we create than the value of the wages we receive. Out of this “surplus value”, the capitalists obtain an income to support his consumption but also the new capital to reinvest in their business enterprises.

So ultimately the source of capitalist profits is the difference between the price of product of labour, and the cost of hiring the specific types of labour involved in realising it. That is, between the value of the work we do, and the cost of maintaining and reproducing our capacity to do that work. Once that profit has been realised, there is no hard and fast rules determining how that profit is divided among the various members of the capitalist class. It becomes a matter for legal and contractual relations between capitalists, as they use a variety of rights to secure their share of the profit, with landowners securing rent, financiers securing interest. Each takes a profit from the total of surplus value extracted.