A series of big banking losses have had directors claiming it is all due to rogue traders. Not so, says Keith Spencer, who finds that Marx described the role of credit in speculation and economic crisis 150 years ago.
Over the next few weeks, banks have to declare their 2007 balance sheets. Already:
• The Swiss bank UBS has written off £7 billion in the US mortgage market because of collateralised debt obligations and lost a total £2 billion last year
• Credit Suisse has cut the value of its assets by £1.5bn
• Barclays bank has declared losses on sub-prime mortgages of about £1.6 billion
• The US insurer AIG found an extra £5 billion of losses on sub-prime related investments between last November and December
• The smaller Bradford and Bingley released new figures showing £144 million of sub prime related losses, only a few weeks after saying it had none.
And we can expect more losses to come as more banks declare their balance sheets over the weeks ahead.
But what will all these losses have in common? The various boards of directors will blame individual traders or back room checking staff.
A Paris court detained Societe Generale trader Jerome Kerviel earlier this month for supposedly causing SG losses of nearly 5bn euros in “rogue trading”.
Credit Suisse blames a “small number of its traders” for pricing errors. AIG says its back office staff weren’t robust enough, claiming they overvalued assets. Bradford and Bingley’s losses appeared nearly overnight (where were they hiding before?). Barclays investment arm Barcap is mired in sub-prime losses.
The Northern Rock bank fiasco has been blamed on loose regulation, poor government and dithering decisions by Brown and Darling.
What rubbish!
The bosses are offloading the blame for their crisis onto individuals’ poor regulation or trades.
No, the mounting banking crisis is not the act of a few individuals but the result of role credit plays in capitalism.
The sub-prime mortgage market, collateral debt obligations and the variety of dodgy financial packages are examples of what Marx described as “insane forms of money”- back in 1857.
Marx quoted the likes of the banker Lord Overstone and the director of the Bank of England, Mr Norman, who on the verge of the crisis of 1857 assured a parliamentary committee that the banking system was safe, that the huge rise in credit was a sign of healthiness and that their ever-greater profits in the form of interest were well-deserved. A few months later they were plunged into chaos (in fact Overstone had done exactly the same thing before the crisis of 1847, even advising on new banking laws). (See chapter 26 of Marx’s Capital volume III).
Overstone and Norman are mirrored today by the leading bankers, the press and capitalist politicians, who up to the middle of last year were arguing that globalisation had dragged capitalism out of its pattern of repeated cycles of recessions, and who even at the end of last year were saying that little was wrong with the credit system.
Then, as today, the speculation that accompanies booms was seen as an example of the near unlimited potential of capitalism and not of the swindling that is integral to the system.
The rise of the speculators
Writing in volume three of Capital, Marx described the crisis of 1845-7 in Britain and the European-wide crisis of 1857. He exposed the speculation and swindling that took place and predicted that the massive expansion of credit that is needed for the globalisation of capital would see only more cheating among the “money-dealers”.
Credit is based on the rising trade in commodities and the use of bills of exchange, i.e. it is a means of payment between buyers and sellers of commodities. Marx emphasises that credit does not rest on the circulation of metal money, i.e. gold or silver coins, or notes issued by a bank such as the Bank of England, but on the circulation of commodities (Chapter 25, Capital volume III).
Credit also creates a stratum of people whose function is to deal in money, either to lend or to borrow, and these people Marx calls the money-dealers. These people work at banks: the banks concentrate huge amounts of money via deposits and the like and loan money out to capitalists.
The difference between the interest offered by the banks on deposits and that offered on loans becomes the source of their profits: “A bank represents a centralisation of money-capital, of the lenders, on the one hand, and on the other a centralisation of the borrowers. Its profit is generally made by borrowing at a lower rate of interest than it receives in loaning.” (Marx, ibid)
Marx describes in great detail the various forms of loans: bills of exchange, cash, credit etc, and the many ways in which money is deposited or enticed into the bank such as gold, banknotes, and deeds to fixed capital or collateral. A bank only need keep in its vaults the amount of money it believes it will have to pay out to customers in any given day; it can create more money by lending credit. For example, a bank may have £10,000 in it vaults but loan out £20,000 in the form of credit. Only when people wish to withdraw more than £10,000 would there be a run on the bank such as at Northern Rock when its customers realised that their money was at risk if it stayed at the bank.
Such a system opens itself to speculation. Marx, quoting approvingly a theorist of money, says, “Trade and speculation are in some cases so nearly allied that it is impossible to say at what precise point trade ends and speculation begins.” (Marx, ibid)
Marx describes the great railway swindle of 1847, brought on in part by “overproduction in industry, underproduction in agriculture”, which “gave rise to an increased demand for money capital i.e. for credit and money.”
He describes how a massive increase in trade led to speculation, which led to a crash, the crisis of 1847 and the railway swindle. In a passage that could have been written about Societe Generale today, Marx said: “The easier it is to obtain advances on unsold commodities, the more such advances are taken, and the greater the temptation to manufacture commodities, or dump already manufactured commodities in distant markets, just to obtain advances of money on them. To what extent the entire business world of a country may be seized by such swindling, and what it finally comes to is amply illustrated by the history of English business during 1845-47. It shows us what credit can accomplish.”
How does credit lead to speculation?
In a simple commodity system, a buyer hands over money to a seller to purchase a good. There is a physical unity of the act of buying and selling that constrains the action in time and so shapes its development.
Credit separates the act of buying and selling. It allows capitalists to borrow or lend, to put off the day of payment, or to have several capitalists involved in the transaction. Marx uses the example of how a 21-day bill of payment (i.e. to be paid on a date 21-days hence) may go through several hands before it is due to be paid. During this 21-day period the bill is only a means of payment or a promissory note (a promise to pay on a certain date) and only when it is due does it become commercial money.
Marx identifies the separation between buying and selling as the basis of speculation (Chap 27 Vol III). For example, during the 21-day period the bill can be used by the possessor as a promise for more money, it can used to buy capital, borrow money or make good cheques. It is this gap that allows fictitious money to grow and multiply.
This divorce between selling and buying is necessary to capitalists when the sums are so great they cannot access enough cash to pay immediately. Cotton, ships, cargoes, machines, etc are all paid for on some future date, either through a company raising the funds itself or going to the bank for a loan, and even then it would have to pay back the loan over a period of time. Or it is necessary because of geography – commodities have to travel to be sold, tea for example would be bought in India (with money from a London bank) and then sold again in London.
Therefore the separation in time between buying and selling is necessary for capitalism but opens they way to speculation.
Marx says that credit “with the same magnitude and number of actual turnovers of commodities for consumption, a smaller quantity of money or money tokens performs the same service. This is bound up with the technique of banking. On the other hand, credit accelerates the velocity of the metamorphoses of commodities and thereby the velocity of money circulation.” (ibid)
Today of course we have billions transferred around the globe in shares, bonds and futures along with all the various forms of “insane forms” or “funny money”. They are all means of payment. The speed at which computers can trade these means of payment and the amounts involved greatly increase the trends towards speculation and swindling. Where in Marx’s time a 21-day bill would pass through say four or five hands, today sums of money can pass through many more hands as the physical limits of post, cheques, couriers, meetings between people have been abolished by computers. Computers have abolished any physical presence of money i.e. no more notes, cheques, letters, IOUs, bills of payment – and so buying and selling can become one (as it is in purchasing household goods, books online) or money can be moved in seconds around the globe at the very last moment, reducing the actual time between buying and selling and raising the number of times it can be circulated. Obliterating physical limits on the means of payment leads to far greater velocity of circulation.
Today, the same amount of money will go much further given the huge increase in turnover time; with the massive amounts of money in circulation we saw a frenzied boom – and we are witnessing the end of it now.
The money-traders
Joint stock companies have given the banks and the money traders even greater power over capital. The creation of huge stock companies has led
“The capital, which in itself rests on a social mode of production and presupposes a social concentration of means of production and labour-power, is here directly endowed with the form of social capital (capital of directly associated individuals) as distinct from private capital, and its undertakings assume the form of social undertakings as distinct from private undertakings. It is the abolition of capital as private property within the framework of capitalist production itself.” (ibid)
The stock company has become social capital, an aggregate of private capitals into one large socialised form. The owners of capital become precisely that, mere owners; the other roles that they had as private property owners such as managers have been handed to the joint stock company.
Money-traders are the managers of social capital and control the capital of others. This control is put to the service of speculating in more credit as the trader risks only the property of others not his own.
“The capital itself, which a man really owns or is supposed to own in the opinion of the public, becomes purely a basis for the superstructure of credit. This is particularly true of wholesale commerce, through which the greatest portion of the social product passes. All standards of measurement, all excuses more or less still justified under capitalist production, disappear here. What the speculating wholesale merchant risks is social property, not his own. Equally sordid becomes the phrase relating the origin of capital to savings, for what he demands is that others should save for him.” (Ibid)
Kerviel and the heads of companies such as Enron are money-traders as described by Marx 150 years ago. They earn huge amounts on the basis of controlling other people’s capital. They are not aberrations or a few bad apples, rather they are personifications of the development of capitalism; greater trade hand-in-hand with greater credit leading to more speculation. It is in effect socialisation of risk and privatisation of profit.
Even today they continue to make money when those around lose. [EXT http://www.breakingviews.com/2008/01/18/Bonuses.aspx?sg=breakingstories]One economic commentator has calculated that traders at five top Wall Street banks were last year rewarded with an average of $350,000 for losing £274,000.[/EXT]
Imperialism and transition
There is another aspect of the joint stock company analysed by Marx and later developed by Lenin. This social capital is actually the abolition of private capitalism; it undermines the market and the law of value. Marx refers to the joint stock company as being:
“This result of the ultimate development of capitalist production is a necessary transitional phase towards the reconversion of capital into the property of producers, although no longer as the private property of the individual producers, but rather as the property of associated producers, as outright social property. On the other hand, the stock company is a transition toward the conversion of all functions in the reproduction process which still remain linked with capitalist property, into mere functions of associated producers, into social functions.” (chap 27, op cit)
Marx goes on:
“This is the abolition of the capitalist mode of production within the capitalist mode of production itself, and hence a self-dissolving contradiction, which prima facie represents a mere phase of transition to a new form of production. It manifests itself as such a contradiction in its effects. It establishes a monopoly in certain spheres and thereby requires state interference. It reproduces a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation. It is private production without the control of private property.”
It is this transition that we find in Lenin’s theory of Imperialism as being the Highest Stage of Capitalism. Joint stock companies, monopolies and so on undermine capitalism and lay the basis for the transition to socialism. Lenin called it “moribund” or capitalism “in decline” not because of any failure to grow but because the actual process of its growing was undermining capitalism’s innermost laws and even private property itself.
However this transition is not automatic. It requires the conscious act of the working class and its allies to overthrow private property, the capitalists and their supporters, and create socialism through organised action. The increasing monopolisation of capital (which has been a key feature of the current boom) may well earn greater profits for capitalists, but at the same time it creates crises in which the transition becomes a possibility.
The current crisis
We have concentrated on the credit crisis and how, rather than an aberration, it is the culmination of capitalist cycle. The credit crisis, while appearing as a function of exchange, really originates in the overproduction of commodities, not in the realm of trade but in the process of production itself. It appears at first as a crisis in the credit system as this is the main lever of “over-production and over-speculation” (Marx ibid).
The growth in US capitalism’s mass of profits has taken place alongside an even greater expansion of credit-led capitals in search of higher profit rates in more risky investments (see this website for more explanation of the current crisis). Now millions of US families face homelessness while bonuses to the money traders in US banks continue to grow.
Marx says: “The credit system accelerates the material development of the productive forces and the establishment of the world-market… At the same time credit accelerates the violent eruptions of this contradiction – crises – and thereby the elements of disintegration of the old mode of production.”
He ends with a characteristic flourish:
“The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to a new mode of production. It is this ambiguous nature, which endows the principal spokesmen of credit from Law to Isaac Pereire with the pleasant character mixture of swindler and prophet.”
Rather than the actions of rogue traders, poor regulation or sleeping back office staff, the credit crisis is the result of the feverish boom. It is no accident but the expression and concretisation of the laws of the capitalism system.
We must ensure that the colossal system of “gambling and swindling” really is the transition to a new mode of production – by rousing the mass of humanity to drive the capitalist system of profiteering and swindling off the face of the earth, and replace it with a socialist society that will democratically plan the wellbeing of all, not obscene profit for the few.