Banks and Credit

This article from February 1975, is well worth a study and is still pertinent to the circumstances leading up to the crisis of recent years. Although some of the references are dated they have been retained for historical purposes.


Economics:

THE USE-VALUE of loan capital, which is made available through the banking system, consists of producing profit, and this type of profit is described as interest. The rate of interest is arrived at by competition between lenders and borrowers, or by supply and demand; the lender of loan capital striving to obtain the highest rate of interest for the use of his capital, and the borrower seeking the lowest rate. There is no "natural" rate of interest, nor is there any limit to the rate that can be charged.

 In the German Weimar Republic during the period of great inflation after World War 1, the rate of interest was raised weekly in some cases to 200%. The "natural" rate theory has its basis in the repetitive form of dealings between merchants and industrialists in the negotiation of Bills of Exchange. A substantial part of the business of a bank consists in discounting (cashing) Bills of Exchange. They are, generally speaking, promises to pay between merchant and industrialist at 60-90 day intervals, or longer. These Bills usually represent goods in transit or in store, and for the facility of advancing cash immediately on the strength of the Bill, which guarantees the value of the goods nominated in the Bill, the banker will deduct or discount a fraction of the amount shown and
buy the Bill. If, for example, a Bill of Exchange was valued at £10,000, and the annual rate of interest was 10%, and the Bill was due in 90 days, the banker would deduct the sum of £250, i.e. 90 days' interest, and advance the sum of £9,750. When the Bill was finally redeemed, the banker would then receive the sum of £10,000 - the full value of the Bill.

Rates of Interest

 Naturally the merchant and the industrialist (incidentally banking transactions as described above are not just confined to these two) would seek out the most favourable discount rates, and over a period of years the rate would tend to become adjusted at a regular rate. For many years between World Wars I and II the bank rate remained almost stable, around 2.5%-3%. The old bank rate was
based on this practice of discounting Bills, and gave rise to the theory of the "natural" rate of interest. Regarding the possibility of the banker getting the better of the merchant, industrialist etc., by successfully charging high discount rates; this would only result in a transfer of wealth between them. Were the British banks to consistently charge usurious rates, capitalists would endeavor to have their Bills discounted elsewhere, say New York or Paris.


 Since interest is part of industrial Profit, the maximum limit of interest is marked by profit itself.
The leaves can never be greater than the tree, or the part can never be greater than the whole. The high rate of interest today, i.e. 15%-16%, is distorted by inflation. The Chairman of Barclays Bank, Mr. A. Favil Tuke said:
"1t is worth recording that of the three parties who make up a bank, namely stockholders, staff and customers, none has gained much from these profits. Customers do not need to be told how much interest rates have risen in the last year or two; the increases in the salaries of our staff have been limited to about 7% per annum, and that of the stockholders dividend to 5% per annum; all
this at a time of inflation of some 10%, per annum." (Directors' Report to AGM, 1974).


 Obviously the depreciation of money is taken into account when fixing a rate of interest, and this is basic to the preservation of the value of the loan capital. On the other hand any prolonged fall, resulting in a total loss of interest, as well as an erosion of the value of the money capital, would eventually remove loan capital from the money market. This would, sooner or later, have repercussions in the productive process, as industrialists and other capitalists would find difficulty in raising capital for certain projects. As capitalism's wealth develops there is a tendency for the owner of inherited wealth to live on the annual interest without actively participating in the productive process. The same attitude is adopted by retired capitalists who want to take things easy,instead presumably of just taking them - as in their youth. Loan capital arises mainly from these sources.

 Were there no profit in loaning capital, that capital would be hoarded until such times as things improved. The owners of such capital would not retain it in the form of paper currency at the mercy of inflation, which has the effect of gradually reducing the wealth of the banker and the landlord, as well as literally confiscating such savings as are owned by workers. They would hold their hoard
either in gold, works of art, land, buildings, or any other desirable commodity which retained its value. No profits would accrue from assets held in this way, but on the other hand, there would be no losses either. However, if this happened on any scale there would be industrial dislocation.

Lenders & Borrowers

 The function of banks is firstly to make recurring payments on behalf of their customers; meeting mortgage payment rates, quarterly bills, and regular annual orders. These are payments which are entirely concerned with the circulation of commodities. But their second and most important function is to provide credit or capital for industry, commerce, property, etc. This is not provided out of the resources of the bank, as can be seen by the statement of the London Clearing Banks.
Total advances were £16.7 thousand millions (Quarterly analysis of Bank advances; Bank of England, 20th November 1974), whereas the total capital of these banks was £658 millions as at December 1973 (Annual Reports, 1973).
 Generally speaking, bank overdraft limits are reviewed every year, and bank borrowing is mainly short-term; up to 3 years in the main. Long-term loans are usually handled by the merchant banks who charge a higher rate of interest for this facility. The credit system which owes its development to the specialized function of the bank has proved to be a significant force in the centralization of
capital. Gathering as they do all the disposable money which is spread throughout society, they channel it into the hands of groups of capitalists, who turn it into capital. The accumulation of capital is speeded up, and with it the productiveness of labour, as more and more machinery is introduced into the productive process.

 Credit, and the credit system, have given rise to many misconceptions about the power of banks to create credit. Firstly, credit, whatever its form, whether in money or goods, consists in a transfer from one person to another.

"Credit, in its simplest expression, is the well or ill founded confidence which induces one man to extend to another a certain amount of capital, in money or in commodities, estimated at a certain value, which amount is always payable after the lapse of a definite time." (Tooke. Capital, Vol. III.Kerr edn., p. 471).


 Elements of social wealth, and the conditions under which the transfer takes place, or the trustworthiness of either of the parties to the transaction, need not concern us. An owner of goods may be separated by an interval of time from realizing the value of these goods in money. Certain articles take a longer time to produce than others, and others longer to market. The production of certain commodities, mainly agricultural products, depends on certain seasons of the year.

  Inevitably the owner of the commodities will borrow money on them, or sell his right to them for money on the spot, or the written promise of money. This is putting it at its simplest - the goods providing the security for the loan. In any case, goods are exchanged or secured against a sum of money which is due to be repaid at a given date in the future. Payment in advance of delivery, or
delivery in advance of payment, represent the two sides of simple credit. It is to be assumed that the credit seeker has a reputation for solvency, and that fraud is not the purpose. Credit advances in this way merely facilitate the circulation of com-modities by getting them to the market quicker.


Weakest to the Wall


 The second and most important function of the banker is to provide money for industry, which is capital. This has a separate function from money as the medium of circulation. The function ofcapital is not merely the circulation of commodities but their production in the first instance.


 Therefore, money used as capital is withdrawn from circulation because the wealth which it represents has been locked up in the process of production. The credit system of advancing capital allows individuals to use capital which is not theirs, and has opened the door to all sorts of swindles and reckless speculation. Who would not gamble with other people's money?


 If banks could create credit with the stroke of a pen, that would mean in effect they could create wealth, and consequently the Marxist Theory of Value would be shown to be wrong. However, as time passes the validity of the Labour Theory of Value, i.e. that wealth can only come into existence when men apply their energies to nature, is all too apparent. If banks could create credit, they would never be in financial difficulties, nor would they go bankrupt. As we have seen in recent years, a number of bank failures are taking place. The Ideal Savings Bank, and the Bank of the Lebanon, for example. More recently, the Herstatt Bank of Germany, and the Sindona group of Banks in Italy; the Israel British Bank (London) with deficits of over £40 millions. Many of the 40 or so fringe banks are in dire trouble, and some have gone into liquidation, including Mr. Jeremy Thorpe's London & Counties Bank. (His insight into the political future has not helped him in his banking adventures.) Many of these failed banks had the dubious benefit of advice from economic and political experts forecasting the future of capitalism. Once again they have come unstuck, and
we can say with certainty that more banks will fail as the competition increases - the large fish will gobble up the little ones.

Credit Creation a Myth

 In these circumstances, why did these banks not create a bit of credit for themselves and literally pull themselves up with their own shoelaces? The answer is all too obvious. The credit of the banker is provided only by his depositors. This is real money. It matters not whether the bank transfers depositors' credit to a bad risk or a dud enterprise - he is liable for its return. At the present time, the pro-perty market has turned out to be a bad financial risk, and the little fish are in trouble having lent long to property speculators, and borrowed short from their bigger brothers. The alleged "rescue" operations organized by the Bank of England are nothing other than the lambs being eaten
up by the wolves. The smaller fry of the financial and banking world are no more immune from the centralization of capital than the small car firms, garages, shopkeepers, etc. In the last four years the Big Five Banks, Westminster, Barclay's, National Provincial, Lloyd's and Midland, have become the Bigger Four. A number of Scottish banks have been taken over by the Big Four - the Bank of Scotland for example is now under the control of Barclay's, whilst the Clydesdale Bank is controlled by Midland; National Westminster controls Coutts & Co., also the Ulster Bank Ltd. Lloyd's control the Bank of London and South America, the National Bank of New Zealand and many others.


 If these small satellites wanted to remain independent all they need have done was to create credit by increasing their capital by a stroke of the pen. Such fictitious capital would no doubt pay a fictitious dividend, and create a series of fictitious deposits. Unfortunately, however, the original depositors who have loaned real money have no sense of fiction - even the science fiction of the
economic experts - and would require repayment in very realistic banknotes.


 The bank profits for 1973, the last accounting year of the London Clearing Banks and subsidiaries, do not bear out the miraculous power of credit creation. Although this was a bumper year the total profits, after tax, were £335.7 millions (Annual Statement for 1973). This is a large profit, but it is only a small portion of the total industrial profit.


Inflation Fraud

 The one institution which appears to create credit is the State, operating through the Bank of England. This is an act of deliberate political policy, the reasons for which will be given in aseparate article. The Government, in a variety of ways, instructs the Bank of England to print an excess of paper currency, which the Government uses to finance its own schemes, and without
having to introduce tax legislation to deal with particular cases. This inflation of the currency does not, nor cannot, add to existing wealth. What is really happening is that, far from creating credit, the Government is confiscating other people's. This has the same effect as a general increase in taxation. The constant dilution of the purchasing power of money by inflation raises prices and
dislocates production and distribution. This is public fraud posing as public credit.

  Capitalism is a system of production and distribution with many contradictions, and inflation adds yet another. Whatever strategy is worked out by economic planners and monetary specialists will make no difference. Capitalism will run according to its own laws, and they can only run after it.

After all - who ever heard of an expert on anarchy?

J.D

Socialist Standard February 1975

Its always the poor who pay

The poorest people in Scotland are being penalised by unfair overdraft charges, according to a report by Citizens Advice Scotland.

It said the banks' poorest customers were subsidising the richest by paying a higher part of their income in fees. Despite talk about being more responsible, banks were still imposing heavy charges on vulnerable people.

Citizens Advice Scotland chief executive Susan McPhee said "...the people who are worst hit by these charges are those who can least afford to pay them.Indeed these charges mean that the poor are actually subsidising the rich, like a reverse Robin Hood effect."

One pensioner was charged £66 for going overdrawn by 60p.

credit crunch bites

The number of Scots declared bankrupt is rising at record levels, figures have revealed.
Finance experts PKF said in the third quarter of 2008, 5,998 people had been made bankrupt or entered a voluntary repayment agreement with creditors.
The firm said this was an increase of 26.7% on the previous quarter and a 70% rise on the same quarter of 2007.
A total of 14,008 Scots have been made bankrupt so far this year, while the total figure for 2007 was 13,814.
PKF said around 20,000 Scots could be declared bankrupt by the end of 2008.

Debt Fears

One in five Scots home owners struggle to meet their mortgage payments, a survey suggests.

Almost one million people find it difficult to cover their monthly repayments and other debts .

Researchers also found 18% reported having to rely on credit cards or loans to pay for daily essentials like food.

Head of personal insolvency for the accountancy firm KPMG in Scotland, Andrew Kennedy, said: "Those people who have been robbing Peter to pay Paul, transferring balances from card to card, remortgaging and taking equity out of their property to pay off spiralling debt are fast running out of options."

KPMG said the global credit crunch meant payment troubles could worsen over the coming months ,people who previously had access to competitive mortgage deals, despite being late with a couple of payments, are going to find it very difficult to find a deal , and that the credit crunch is already seeing credit card companies reducing credit limits and increasing their rejection rates for new customers.

“Debt is the slavery of the free" - a Roman , 1st century B.C.
" A man in debt is so far a slave" - an American , 19th century AD

A Very Merry Christmas ?

Debt advisers are set to take a record number of calls as consumers are left to deal with a Christmas on credit. Leading debt charities said today that the credit crunch combined with five interest rate rises had made the problem this year even more serious. It was reported today that an estimated £34 billion has already been spent on credit cards this month – a £3 billion increase on last year.

A Consumer Credit Counselling Service spokesman said the organisation expected even more calls this year from people concerned they have over stretched financially this Christmas.He said: "We expect just under 34,000 calls to our helpline in January 2008, five per cent higher than in 2007."

And Credit Action spokesman Christ Tapp echoed the claims, saying the hangover debt from the festive reason reached way beyond the first few days of the New Year, and that homeowners may be particularly concerned. He said: "It could certainly be our busiest January and February ever. People are now more concerned about the economy than they have been for a long time.The nature of calls might be slightly different. It used to be about unsecured credit, but mortgages are becoming a much bigger problem than they were as rising living costs squeeze homeowners." (It is estimated this year that house repossessions will rise by 50 per cent to 45,000.)

Citizen's Advice added its weight to calls for belt-tightening around Christmas, pointing out that this time of year is traditionally gloomy for those with cash concerns. A spokeswoman said: "We know from experience that there is a seasonal surge of people who come to see us about their debt problems post-Christmas, and we know that the trend in debt inquiries is inexorably upwards. There is no reason to believe that there will be any let up in this trend."

Groups like the Samaritans say they also expect to be inundated with phone calls from people who feel they can't cope with their financial situation in light of lavish Christmas expenditure. A spokeswoman for the charity said: "January is a particularly bleak time with credit card bills arriving and the short, dark days."

Can we of Socialist Courier be blamed for saying " Christmas ? Bah - Humbug "

The Credit Crunch

Further to the previous post this news item perhaps explains the reason why many workers find it necessary to work long hours .

Around one in three mortgage customers face higher repayment rates and difficulty in borrowing more on their homes in the light of the recent credit crunch.Lenders have become increasingly cautious following the problems in the credit markets, and as a result many home- owners will be offered less favourable terms if they want to remortgage their homes. More people than ever are set to fall into the sub-prime category as a result of missed debt repayments, meaning that borrowing will now be put out of reach for many.

Mintel market analysts , estimates that around 9% of the UK's 16.5 million mortgage holders will now be considered sub-prime by lenders. It also forecasts that a further 24% could also be considered a high risk because of their personal circumstances, such as being self-employed or not having a regular income, or because they had moved frequently or fallen behind with household bills. Those coming off fixed-rate deals taken out before the recent interest rate rises will be particularly hard-hit and that many people may not be able to absorb these increases and millions of people could start to suffer financially.

Other research released yesterday, from web credit specialists uSwitch.com, claimed that one in four people are now struggling with unmanageable debts and 12% admit they have missed repayments during the past six months. Around 23% of people say their current level of borrowing either borders on being unmanageable or is no longer manageable. The group said 12% of people also admitted they have missed payments on debts or bills during the past six months and 10% have had a payment bounced by their bank because they had insufficient funds in their account. 38% of people applying for new credit were turned down with 19% of personal loan applications rejected.

One in 10 people claim they are now trapped in a vicious cycle of debt where they may need to get further into debt just to meet their existing financial obligations, and 13% may have to turn to credit just to meet their living costs. At the same time, one in five consumers say they have maxed out at least one of their sources of credit, with 11% going up to their spending limit on a credit card and 10% doing the same on an overdraft.

23% of people are now more worried about money than they were a year ago and 18% are more worried about debt.At the same time 34% say they are feeling financially worse off and more than half of people do not think it is a good time to make a life-changing decision such as buying a home, having a baby or changing jobs.

The average person now sees half of their take-home pay eaten up by debt repayments, with 35% going on their mortgage and 18% spent on unsecured debts.

Is it no wonder that many now try to earn more by working more - just to pay off debts