Blog post number two. For this blog post I am going to dive into the topic of money and money creation.
As I mentioned in my last blog posting, I actually enjoyed the first three chapters of Capital despite David Harvey’s warnings to the contrary. I do admit that it was at times tough reading, but only because Marx was very precise with his language. I found myself reading over sentences and paragraphs until I felt I understood what the hell he was on about. Luckily I had already been up on economic theory at the Von Mises webpage in relation to fiat currency. In addition I was well acquainted with Marx from previous studies.
A few things struck me from reading Marx’s account of commodities and money:
Money doesn’t really exist. Of course money exists as a medium of exchange, but what it represents – socially necessary human labour time – is a social convention and exists only in the mental realm. To put it in layman’s terms, have you ever noticed why a pet dog will drool when you have a piece of food but couldn’t care less about your spare cash? Dogs don’t care about exchange value, only use. Same as most other animals. B.F. Skinner suggested that our fixation with money was due to conditioning which he elaborated with his work into token economies as a method of behavioural control.
What I felt was lacking in Capital was any reference to the process of fractional reserve banking. For those unaware of what fractional reserve banking is, I would suggest reading the entry on wikipedia.
In essence, a large proportion of the money supply does not take the form of note or coin, but rather is created at whim by commercial banks when they loan money to customers. I was astonished when I first discovered this and thought this was a crazy conspiracy theory! Sometimes reality can be stranger than fiction.
The former deputy prime-minister and treasurer of Australia, Dr Jim Cairns, described it in his book ‘Oil In Troubled Waters’:
…most writers still confuse and underestimate the matter, banks certainly create credit or, more exactly, they create money. Creation of money by the banks is a simple process. The banks have to be able to meet the demands of their customers for money which the customers have on deposit with them. Customers as a whole will demand some of this in cash, but never all of it; mainly they will demand their deposits in cheques. [blogger's note: in today's society this takes the form of electronic banking, credit card transactions rather than cheques] … Hence the banks know that they will not normally have to give to their customers more than one fifth or less of their deposits in notes and coin. (pp. 54 -55)
This has been a well guarded secret for a long time and was revealed in the 1935 Tasmanian Parliamentary Inquiry into the money system:
Currency forms only a small amount of the total money of a country. The bulk of the money is created by commercial banks. By granting loans, allowing money to be drawn on overdraft, and purchasing securities, banks literally create money.
There is no indication of the amount of money being dependent upon the needs of the productive system to supply the community with goods and services. Rather it seems that an arbitrary fixed amount of money now demands the restriction of production to the quantity of money.
Again, the fact that the authority for the creation of money is thus vested in private institutions seems an anomaly, for the ‘credit’ or ‘belief’ upon which the monetary system is based is inherent in the community.
If this is news to you I would suggest watching this video:
The 1935 Tasmanian Monetary Inquiry also asked the pertinent question: “It is, perhaps, not very easy for a layman to see why a bank should lend what does not belong to it and get interest, and be called quite honest if it gets the money back in time to meet the demands of the owner of the money; while it is recognised that it is quite dishonest for a trustee or shop girl to gamble with trust fund or till money, even if the gamble succeeds and the money is replaced before discovery.”
Whilst Marx did not did not mention the direct practice of fractional reserve banking, this passage from Capital would suggest that Marx was aware that the core of bourgeoisie parasitism was within the central banking system:
Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. – http://www.marxists.org/archive/marx/works/1894-c3/ch33.htm
That is my fiat 2c.