Banking 7/7

Socialists have no love for banks. A world without banks would be a wholly better place. However to blame the banks for creating our debt-ridden society is just too biblical, like a re-run of Christ expelling the money-changers from the temple. Even if the banks were state-owned, they would still have to lend. If they didn't there would be no point in them existing. Banks and interest are not the villain of the piece but capitalism and production for profit. We need to abolish money before we can get rid of banks. But to get rid of money we need an end to property. And you can't abolish property relations until you abolish capitalism.



Islamic Banking 

The Koran prohibits something called riba, loosely translated as interest. In the Middle Ages the dogma of the Catholic Church banned usury, defined as charging money for a loan. Well, but not quite. No-one may charge money for a loan but they may take the profits of partnership, provided that they takes the partner’s risks. They may buy a rent-charge; for the fruits of the earth are produced by nature, not wrung from men. They may demand compensation – “interesse” – if he is not repaid the principal at the time stipulated. They may ask payments corresponding to any loss he incurs or forgoes. They may purchase an annuity, for the payment is contingent and speculative, not certain. What was banned, then, was only the certainty of being paid a pre-fixed sum of money for the loan. The very word “interest” derives from one of the ways of getting round the ban on usury. Islam permits those sort of partnerships as well as a number of other arrangements which allow the payment of a pre-fixed sum of money for advancing money. Salaam (“sale contract with deferred delivery”), arboum (“sale contract with a non-refundable deposit”) and murabaha (“deferred sale financing”). So, while Islamic banks do not borrow money on the money market, they can still make what are in effect loans which bring in money for them. This involves converting interest into a rent or a profit share

Social Credit

Historically, we have the Douglas Scheme of the 30s which did cast the banks as the villain and variants of the belief frequently spring up.

The Social Credit movement was started by Major Douglas whose argument was that there was a ‘chronic shortage of purchasing power’ due to the issue of money being in the hands of banks that had a vested interest in keeping money in short supply so as to be able to command a higher rate of interest on the money they lent out. Although, according to Douglas, banks had the power to create credit with the stroke of a pen they generally chose not to do so; this power should therefore be taken from them and vested in some public body which would make this extra purchasing power, supposedly needed to ensure the full use of productive capacity, available to all in the form of ‘social credit’. Take this power out of the hands of the banks that they use for their own special benefit, and transfer it to the Government and with this power, it can issue certificates, based on the national wealth, entitling all citizens to a share of the goods so abundantly produced in this age of plenty. Thus, the working class will get a greater portion of the wealth it produces, and the petty bourgeois will get a greater portion too, but what is more, though this is not explicitly stated, the small businesses will escape the clutches of its arch enemy ... the financial institutions.

Marxian economics constitute a direct refutation of the illusions up on which Social Credit doctrines are premised. Not only did Marx demolish the "credit creation" theories but this was already a hoary fallacy when John Stuart Mill disproved what he described as this "confused notion" in a work written before 1847 and published' in 1872. The notion that an insufficiency of money was the cause of sluggish trade was criticized by Sir Dudley North in 1691 before the development of the modern credit system and this was quoted by Marx.

Among other things what this theory overlooked from its deficiency of purchasing power standpoint was that interest charged by banks to capitalist firms is not an additional amount that is added to prices and which therefore cannot be paid for out of current income (wages and profits) generated in production. It is instead a part of the surplus value which the industrial capitalist has to hand over to the banking capitalist for the loan of their money and so is already included in total purchasing power.

It is as we shall see, an inadequate conception of the function of money and its relationship to commodities that underline Social Credit proposals. Money was shown by Marx to be, like labor power itself, also a commodity. Gold, or any of the previous materials that assumed the money form, did so, first of all precisely because they are commodities, and hence depositaries of exchange values. One of these commodities by general usage and agreement becomes the money commodity. By virtue of having the attribute common to all other commodities, of being the embodiment of so much labor time, the money commodity thus becomes the general equivalent and measure of value of all the other commodities. Money emerged and acquired its function of medium of circulation as a product of the historical development of exchange. The primitive inter-tribal direct barter beginnings of exchange was only of an occasional and non commodity nature since in primitive society goods were not originally produced for exchange, or sale. But occasional barter between one tribe and another developed into a more sustained form and provided an impetus to the development of the private property institution. Goods became more and more produced for the purpose of exchange, rather than for the personal use of the owners. The beginnings of commodity production and exchange, the production of goods for sale, demanded the use of one commodity as the universal equivalent which would serve as the translator of the values of all the others. It will be seen then that exchange did not originate with money but that the converse is true; i.e. that money arose as a medium of circulation only as a result of the circulation of commodities. At this point let us allow Marx to speak. "Although therefore the movement of money is merely an expression of the circulation of commodities it seems as if conversely the circulation of commodities was only an outcome of the movement of money. On the other hand money only has the function of a medium of circulation because it is the objectivized value of commodities. Consequently, its movement as circulating medium, is in actual fact only the movement of commodities under changed forms." (Capital, vol. 1)

 Purchasing power resides in the goods which when produced belong to the capitalists. Gold, which was the actual material medium of circulation in earlier times, was with the rise of banking superceded in that function by the development of tokens and of paper representatives, which were convertible into money. Today banknotes and other paper are no longer convertible into gold. Nevertheless gold remains the money commodity since it still functions as the measure of value and as world money.

The commercial credit which the capitalists engaged in reproduction extend to one another by means of the promises to pay, constituted by bills of exchange and other certificates of indebtedness, is the basis from which the modern credit system developed. Banks are the intermediary agencies which facilitate the exchange of goods between the various owners, whereby one set of ccmmodities is sold for another. They act as middlemen between buyers and sellers who are each both borrowers and lenders in turn, since every seIler must also be a buyer before he can seIl. The seIler on depositing the purchaser's check is in reality ordering the bank to collect the debt; to transfer this amount from his debtor's account to his own. When his own debt to another seller is due his check issued to this creditor is in essence an order on the bank to transfer the stipulated amount from his own account to that of the creditor's. "These mutual claims of indebtedness represented by bills of exchange or checks are balanced either by the same banker, who merely transcribes the claim from the account of one to another, or by different bankers squaring accounts with each other." Checks, being orders to pay money are therefore certificates of indebtedness. Banks are institutions for the transference of debts and purchasing power which arise from the sale of goods and services. The issuance of a check is the conversion of commodities into a form of credit money and if cashed, into another form of money, banknotes. Thus we see, contrary to Social Credit dogma that banks cannot create credit from nothing since it is the creation and sale of goods that create credit. Purchasing power derives from the ownership of goods and the consequent command of services and must therefore always be equal to the totality of goods on the market.The bank too occupies the dual position of being both debtor and creditor since it lends out at a higher interest rate the great part of the deposits it has borrowed at a lower rate. This is generally the source of its profits.

The total product of society (minus that portion necessary for the replacement of used up means of production) can be said to resolve itself into income of wages, profits and rent (including money rent) although value is not determined. by these elements of income. The A plus B theorem of Major Douglas, founder of Social Credit, is supposed to demonstrate that A payments for wages and dividends, plus B payments for raw materials, bank charges etc., comprise the cost of production, while only A gives rise to income. Therefore, says Douglas, B payments must Iead to a shortage of purchasing power. But this is fantastic nonsense, aside from regarding dividends as a cost as it can readily be seen that the cost of raw materials has already been included when dividends have been disbursed. Also considering category B it will be realized when viewing the process of production in series that the raw materials of one industry is the product of the previous producers and this product produced the distribution of wages and profits. By adding the cost of production twice and thus doubIing it Social Creditors have certainly merited the description of their propaganda as double talk and this is the twaddle that is passed off as economics. The total income of society can never equal its total product since a part of this product, which represents no profit, must be used to replace the constant capital consumed (means of production). But this does not mean that the result is a lack of purchasing power.