Once it was a supposedly a physical thing, allegedly tied to an amount of gold — but money only really got into its stride when it was created out of nothing by nation states and financial institutions. What does that mean in a world with multiple currencies and distinct rich and poor nations,
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” (attributed to Henry Ford)
OUR last answer explored the way that money is central to the circulation of commodities under capitalism. It argued that money is more than simply a token of value, a facilitator of exchange: it is itself a commodity, with (as Marx declared) the remarkable property of being able to make more of itself.
Debt, in particular, has become a commodity, bought and sold between large financial institutions. Credit is the basis of what Marx called “fictitious capital” — value in the form of paper money, shares, stocks, securities, and debt, all today existing primarily in digital form and all above and beyond what can be realised in the form of commodities or physical, productive capital.
So where does that money — the coins, the banknotes, the numbers in your bank account, the state’s financial “reserves” or its “national debt” come from?
The answer is — it is created. By the state and by the financial sector (supposedly “regulated” by the state) itself. But the state is no neutral arbiter between different groups and interests, seeking the best for all. It is, ultimately, the guarantor of the status quo — of class rule.
The Tories’ “spending spree” has exceeded in a few short months anything envisaged in Labour’s (costed) 2019 manifesto. But analysis — from the left as well as the right — has been largely limited to issues of emphasis and detail.
“The perverse paradox is that in the Covid-19 crisis a Tory government has spent the kind of money that, in the hands of a socialist ministry, would reconstitute the welfare state, guarantee employment and training, finance the NHS and transform the education system into a fast track to improved life chances for millions. And that would be before cancelling Trident or building a single council house.”
Perhaps most significantly, the rhetoric of “good housekeeping” — TINA, “there is no alternative;” “balancing the nation’s budget,” so central to the myth of monetarism and to the tenure of Boris Johnson’s predecessors — has been abandoned. For a while.
The fact is that the new money has indeed come from “nowhere” — it has been “invented” as new government bond issue (“borrowing”), used to redeem existing bonds or, simply, entered as a series of new numbers on the computers of government departments according to their agreed budgets (the “ways and means facility”).
Even in Marx’s day the notion of “commodity money” linked to any physical standard was a fiction. Engels points out (in a footnote to Volume 3 of Capital) that the Bank of England was able “to issue any quantity of banknotes regardless of the gold reserve backing in its possession; to create an arbitrary quantity of fictitious paper money-capital, and to use it for the purpose of making loans to banks, exchange brokers, and through them to commerce.”
From the 1930s the “gold standard” was abandoned (initially in the US in order to end the Great Depression) to be replaced by “fiat money” — money issued by governments but not linked to any specific asset, whose “value” is essentially a matter of faith that it can be used to purchase something.
Since the pretence of the gold standard was finally abandoned there is no limit to the ability of “strong” currencies (though the pound is rapidly slipping down the ladder in this respect) to create money. Outside the eurozone, Britain issues its own currency. It has notional monetary sovereignty.
Countries such as Venezuela on the other hand, faced with the US blockade and a collapse in the price of oil, have no choice but to use their gold reserves as security for foreign purchases. Hence the Bank of England’s refusal to “release” Venezuela’s gold reserves for use by its democratically elected government.
Commercial banks and building societies also “create” money. In 1844 as a consequence of a financial crisis the then Conservative prime minister Robert Peel abolished the right of private banks to issue their own money.
Since then banks have effectively got around this law by giving loans — including your credit card balance — not backed by anything. Every loan adds money to the economy and although that money effectively disappears again when the loan is repaid, the total added (total indebtedness) continues to grow year on year.
“Fractional reserve banking” is the normal practice whereby the reserves held by a bank are merely a small proportion of its liabilities to depositors. This allows the money supply to grow beyond the base money created by the central bank. It means that those commercial banks also create (as well as “make”) money — and that the state has to act as lender of last resort to those banks when they go bust.
Corporations normally thought of as outside the finance game are also in on the act. Ford Money doesn’t just try to sell you a new car on HP. It also offers online savings accounts and ISAs. So does Tesco Bank alongside its credit cards and foreign holidays.
The list is endless. “Alternative” financial systems such as bitcoin (“a new kind of money”) give a glimpse of the future, though Facebook has declared that its proposed launch of its own proposed digital currency “the Libra” (launched supposedly to “empower” the third of the world’s population who are unbanked) will instead, like PayPal, be used to support existing government-backed currencies like the US dollar and the euro.
Today “quantitative easing” is a feature of monetary policy. In the crisis of 2007-8 some £45 billion was used to “buy” shares in RBS, subsequently valued at less than half of what the taxpayer paid for them.
Much higher sums were supposedly “injected” into the economy — not through direct investment in production, transport, education or health services, but rather to “buy” back bonds from the commercial banks who were then free to use the money as they wished.
Since then QE has continued to grow — from £200 billion in 2009, to around £500bn before coronavirus hit, to almost £750bn in June 2020. The difference then was that much of it was used to buy equity in failing entities alongside their debt. Today, with Covid, much of it is used as a direct subsidy to private capital.
While the state can create money at will, it finds it more difficult to regulate its price — the rate of interest paid on borrowed money and its exchange rate on international currency markets, as well as its purchasing power at home. Inflation is perceived as an ever-present danger, threatening economic “growth” (and profit).
And whatever its form, preserving the exchange value of money is central to capitalism’s ability to maintain the circulation of commodities. Ultimately, money only has value if there is production to back it.
That’s why the state is critical — its monetary and fiscal policy ultimately focused on enabling capital to realise the surplus value extracted from the labour of workers — whether employees, self-employed, full-time, part-time, on zero-hour contracts or piece work.
The reality is that under conservative rule, the state’s monetary policy (central bank policies on the quantity of money and credit to achieve macroeconomic policy objectives) are likely, under the direction of international financial institutions, to shift again in due course and the corresponding fiscal policies will include a return to “austerity.”
In the words of Rishi Sunak, “difficult decisions” will need to be made. It does not take a crystal ball to guess who will be made to pay.
The next answer will look at how left policies might be funded in relation to current government spending during the Covid-19 pandemic and its implications for socialist theory and practice.
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