1: Book Review:
The Politics of Money — Towards Sustainability and Economic Democracy
By Frances Hutchinson, Mary Mellow and Wendy Olsen, Pluto Press, London &
Sterling, Virginia, 2002
William Krehm
Time there was when Social Credit spoke its own arcane language not easy for outsiders to understand. That is no longer so. Anybody seriously concerned with money sooner or later must come to terms with Major Douglas; and in that respect the Social Crediters are meeting the rest of us more than half way. This is the second excellent book co-authored by Ms. Hutchinson that not only unrolls Major Douglas’s ideas, but presents him in the context of other great thinkers such as Karl Marx and Thorstein Veblen. That is an immense help, since, like Marx, Douglas has not been happy in some of his followers. Particularly was that the case in Canada.
Douglas devised his idiosyncratic tools because he felt he needed them to pursue some penetrating observations of his own. Money and its creation he identified as the root of much of society’s troubles – much as Freud did sex. While many orthodox economists dismiss money as “neutral” and attribute importance only to the “real” factors of production, they in fact call to mind the attitude of Victorians towards mating. Though supposedly practiced only in holy marriage and there only for procreation, from Gladstone to Oscar Wilde, sex played an obsessive part in their lives.
So, too, with the “neutrality of money.” “Of the total international transactions of a trillion or so dollars each day, 95% are purely financial. Globalization is not about trade; it is about money. Global trade as a percentage of national output is very little different to what it was at the end of the nineteenth century – around 40% (1999). Investors no longer put their money into factories or merchant ships but, instead, into a plethora of overlapping ‘financial products’ such as futures, derivatives, hedge funds or currency speculation.”
And corresponding to the institution of marriage, “there is also a theoretical assumption that economic activity is organized within an orderly circular flow. People sell their resources (labour, land, capital) so that tangible goods and services can be produced. In exchange they receive money. That money they take to the market place and buy the goods and services they require. This completes the circle. The assumption is that, left to itself, the circle will meet all economic needs. No one will produce more than can be sold, no one will be left without. If everything is not in order, the money and interest rates may need to be adjusted so that the quantity of money does not exceed the quantity of goods available for exchange. Next, economists distinguish between wants backed by money (effective demand) and needs that may exist but do not register as economic ‘facts.’ Economists also tend to assume that money prices have a natural equilibrium, e.g., an equilibrium exchange rate, as does the interest rate.
“Academic economists are judged by their publications in a ‘Diamond list’ seen as representing the best international journals constructed by Peter Diamond, an orthodox economist. The Diamond list concentrated on journals which espoused orthodoxy, such as the Economic Journal and omitted several important heterodox journals, such as the Cambridge Journal of Economics. In the US there is evidence of a purge during the 1990s of non-neo-classical and non-mathematically oriented economists from university faculties. This has been described as a ‘stalinization’ of the profession with history of economic thought particularly targeted.”
The Ultimate Pollution of Nature — Proclaiming Capital- ism a “Natural” System
“Central to the definition of orthodox economics as a science is the assumption [that] capitalism is the natural system. Its essence is the money/ market system. There is no alternative, because the ‘free’ market is the only route to political freedom.
“Within the classical theory which underpins conservative macro-analysis of the self-sustaining economy, money is purely a measuring device having no influence on economic outcomes. Commodities exchange for commodities, while money merely facilitates the exchange. There are two key ideas within this view: first that money is neutral and without history – it simply exists as a technical resource; sec- ondly, a circular model of the economy.”
“People are seen as utility-maximizers in all aspects of their life. Politics is taken out and replaced by economics. The irony is that economics itself is what Hazel Henderson has aptly termed ‘politics in disguise.’
“The non-existence of time is directly related to the non-existence of capital within the circular flow model. The study of economics postulates three physical factors of production: land, labour and capital. The owners of each factor receive a money reward (rent, wages or interest) for the ‘disutility’ of allowing the factor to be consumed in the production process. Abstinence, the failure to consume, normally considered the source of physical capital is a logical impossibility. Once the circular flow is established, the productive forces of land and labour sell in exchange for consumption goods. Whether the goods produced are ‘producers’ goods’ or ‘consumers’ goods’ is immaterial. In each period the real services of labour and land are exchanged for consumption goods produced in the previous period. Each good sees two periods, the one in which it is produced, and the one in which it is consumed. ‘Capital’ cannot be stored up because there are no gaps in the continuity between the process of production and the process of consumption. Counting abstinence as a legitimate cost would involve counting the same item twice (Schumpeter).”
Shockingly, the neo-classical circular model holds even many of the great rebels in thrall. Keynes’s final rebuttal of the self-balancing model [at least in public] still adhered to its basic paradigm. Despite Karl Marx’s astounding anticipation of the most involved curves that the contemporary financial sector can pitch, “many 20th century Marxists have followed the orthodox path of erasing finance from the study of economics (Alan Free- man). For Freeman, capitalist power stems from the financially based institutional constructs of legally enforced contract and sale. Unfortunately, Marx’s labour theory of value has been interpreted from the neo- classical simultaneous methodological standpoint, in which the profit rate is everywhere actually equal, technology does not change, and the market always clears during each act of circulation, and money is a pure numéraire. In this analysis money and time do not exist.
“The model of orthodox economics fuses and confuses wealth production with money making. Within a capitalist economy production would not occur if there was not a product. The starting point for establishing an alternative framework must be to question the construction. Separating production from wealth creation follows an old tradition that can be traced back to Aristotle. Daly and Cobb define chrematistics as the branch of political economy relating to the manipulation of property and wealth to maximize the short-term monetary exchange value to the owner. By contrast oikonomia is ‘the management of the household to increase its use to its members over the long run.’ Mainstream neo-classical economics has not only fused chrematistics and oikonomia, it has concentrated on the former to the exclusion of the latter.
“The fossilization of economic thought renders economists increasingly incapable of offering coherent explanations of economic phenomena. It would appear that the aim of neo-liberal economic theory is to dominate all other theories, just as the aim of market capitalism has been to eclipse all value systems beyond those of the money economy.”
“Evidence of the use of money dates back to 3000 BC, and the earliest writings were statements of accounts. There is evidence that communal grain stores were used as a banking resource in ancient Egypt with what were effectively cheques exchanged between depositors. However, until modern times the use of money to settle everyday social obligations was virtually unknown. Money was used in exceptional circumstances, in times of famine, hard times generally, for travel and warfare. What is new is a society driven by money, banking and credit. With Marx we agree that the role of money in acquiring the means of sustenance is the critical feature of modernity. Concern about usury in the Old Testament also shows that the idea of lending money for interest is very old and religious laws against that were carried into both Christianity and Islam. Usury is still against Islamic law.”
Indeed, it is the very taking of interest [“riba”] rather than just “usury” that is proscribed in the Koran. Profit from risk-taking was on the other hand allowed. Venice, whose trade was to a large extent with Islamic lands, devised risk partnerships between traders who accompanied their goods and the financiers who stayed behind that were acceptable to the Muslims Venice dealt with.
“The Lydians of Greek Asia Minor are credited with the invention of money as coin. In the seventh century BC they were striking coins from electrum, a gold-silver alloy occurring naturally near their capital Sardis. Their King Croesus became a symbol of the accumulation of riches. The distrust of money led to its being outlawed in Sparta. Aristotle records the marginal status of bankers in Athens.
“For James Buchan ‘since money is a purely social construct it is of concern that trust in money displaces other values like a cuckoo in the nest.’ This is the victory of money that Margaret Thatcher infamously celebrated when she said there was no such thing as society, only individuals and their families.
“What money does is enable things to happen. Money is not a neutral instrument within trade. It creates the very potential of trade. Control of, or access to the creation of money is vital to social and political power. Evidence for this exists in the ‘John Law’ phenomenon, an aspect of economic history which James Buchan argues has been largely hidden from main- stream economics.
“Law was the son of a goldsmith/ banker from Edinburgh born in 1671. After a rakish youth (including killing someone in a duel) he tried in 1705 to get Scotland to issue paper money to get out of an economic crisis. Law argued that what was needed was ‘stimulatory paper currency.’ He based the issue of paper money on the future productivity of land and rejected more traditional options such as exchange controls, coining plate, ‘raising the Money’ (devaluation), or a sovereign loan (viz. Bank of England).
“Still with an English warrant on his head, Law had to leave Scotland after the Act of Union in 1707 and continued promoting a ‘bank of issue’ in Paris. He was expelled from the city. Law’s last chance came to put his ideas into practice in Regency France, bankrupt after years of war and court extravagance. In 1715 Law opened a private bank which operated with only one-sixteenth of its equity in coin. The bank’s paper became highly valued and by 1717 was used to pay taxes. By 1718 the bank was effectively nationalized and used to capitalize the state of Louisiana. John Law became effectively Prime Minister and all national debt and credit was taken on by him. He converted rentes and billets into a national commercial venture and the entire liquid capital flowed into the company. The word ‘millionaire’ was coined for him as he owned a lot of France and half the present US. As Buchan points out, effectively the entire nation became a nation of traders.
“In many ways Law’s speculative ventures would have been at home today. He tried to buy into the English Indies market by selling short, but the market carried on rising and he ended up paying £372,000 for stocks contracted at £180,000. To maintain liquidity he increased money supply; this led to inflation. By 1720 it was all over and, in final irony, London and Amsterdam crashed not long afterward with their own bubbles.
“Schumpeter argued that the 17th century ‘cowboy’ experimenter in banking Law fully realized the business potentialities of the discovery that money – and hence that capital in the monetary sense – can be created.’ James Buchan agrees with Marx that he was a mixture of swindler and prophet.
“For Schumpeter when money has no intrinsic value it is possible to manage the quantity of money, paving the way for ‘management of currency and credit as a means of managing the economic process.’ Recognition of this destroys the concept of the equilibrating circular flow. Law observed that once a commodity like silver and gold is used as money in coinage, its value changes. And once such a commodity like silver is used almost exclusively as money, it can easily be replaced by one that has no commodity value at all like paper. Law saw money as ‘pure function’ and attacked the bullionists like John Locke who argued for a gold standard. Buchan goes on: ‘Law believed money was a distillation of human relations and might be turned to create a prosperous and just society and he damned near pulled it off.’
“Thereby lies an irony. While, as we have argued, money values are social, or at least relative rather than natural, the presumed ‘naturalness’ of the economy justifies extreme inequality even to the present day. It is taken for granted that there is no economic basis to question what ‘the economy’ is doing, whether making weapons, trafficking in women, enslaving children, using environmentally destructive productive methods, or trading in drugs. The will of the people can only be expressed through the cash register.
“Before Adam Smith it was assumed that bankers were intermediary lenders of other peoples’ money. However, economic outcomes are affected when such sums are lent out again and again ‘before the first borrower has been repaid.’ It would be logically possible for a cloakroom attendant at a restaurant to hire out the coats of diners while they were eating. But it would be impossible for two people – the owner and the hirer – to wear the same coat at the same time. However, that is exactly what happens when a banker makes a new loan. It changes the quantity of money in existence. ‘While I cannot ride a claim to a horse, I can, under certain conditions, do exactly the same with claims to money as with money itself. In short, the institutions of banking and finance create the money supply through a range of mechanisms ultimately endorsed by statutory authority.
“Real goods and services are created by labour’s use of the natural re- sources of the planet. Money, the defining element with¬in the formal economy, is created by financial institutions. [However], banks and financial institutions need to stay in business and the statutory framework is constantly adapted to take account of changing practice. With the development of off-shore financial havens (not tax havens), the legal loopholes are increasingly difficult to police, while international finance has become a law unto itself.
“When a bank issues a loan, it needs reserves of some kind to guard against the whole value of its outstanding commitments being presented at the same time. These fractional reserves may take the form of cash and coins held by the commercial bank, together with the bank’s deposits with the central bank. In theory the government/statutory authority, through the central bank, can regulate the money supply by manipulating reserves and reserve requirements. [Such] evolving financial practice is progressively endorsed by the statutory authority.
“Although the banking system as a whole creates 97% of new money as loans, it was, until very recently, assumed that the money creation process was regulated by a central banking authority through its ability to regulate the issue of notes and coins. However, the money created by banks is not the same as notes and coins, which have a tangible existence. We could call the former ‘bookkeeping money’ and the latter ‘pocket money.’ Pocket money, when used by ordinary people for their everyday transactions is normally regarded as real, tangible money, ‘as good as gold.’ Book- keeping money has no existence outside a bank or financial institution. To use bookkeeping money one needs a bank account. Bookkeeping money determines the quantity of cash in the economy.”
“Since the 1980s in the US and the UK money has been increasingly issued into the economy through credit card borrowing, giving rise to ‘credit card capitalism.’ Credit cards were originally issued as a company currency. The first Diner’s Club card of 1949 was issued by oil companies to create brand loyalty and a symbol of creditworthiness. VISA issued by the Bank of America in 1958 is now a network of 20,000 banks, and the largest mutual company in the world, of up to 600 million card-holders. The important change with the widespread use of credit cards is that the responsibility for the issuing of debt money into the economy and thereby ensuring its vitality now rests with consumers.” A form of economic democracy? “That ignores the role of advertising and the problems of those burdened with consumer debts. Credit cards also make a mockery of the idea of a control of money issue in an economy where nearly every store now has its own credit card. The non-bank financial markets have their own deposit banks, money-market funds that can be lent repeatedly (multiplied) without limit. Lending to the financial sector – up 40% since 1998 – is a turbo-charged credit machine into financial assets and corporate balance sheets.”
“The importance of the enclosure of land as private property is that many of the resources communities held would have been in the form of common land. Common resources are those which have no deeds of owner- ship but are regularly used for farming or harnessing subsistence. Under these conditions most people would have gathered, hunted, gardened and herded, growing and preparing their own food. The emergence of capitalist market society together with industrial patterns of resource use including agricultural production has broken down the direct relationship between people and the source of their subsist- ence for at least two-thirds of the world’s population. Self-provisioning has been replaced by waged labour contractually engaged ‘through a network of society-embracing markets.’ It was this compulsion into waged labour, ironically described as ‘free,’ which Marx argued made capitalism a unique form of exploitation.
According to John Locke (1632-1704), although God gave the land to be held in common, it was the duty of individuals to improve [it] with their own labour. Where the land is made more valuable and profitable, common possession must give way to private property. According to this theory, land has value in itself. Hence when an individual encloses waste or common land, and labours to improve it, they add to, rather than take away from communal welfare.
“Such improvements enabled the individual household or firm to produce commodities for sale for money in distant markets. In the process it created the illusion that unsustainable practices could be escalated indefinitely.
“The process of absorbing the commons into the market system continues apace today. Forest people in particular are struggling for the retention of the commons of tropical rain forests from Sarawak to the Amazon. Across the globe indigenous peoples are launching anti-globalization campaigns.
“Equally, the state can guarantee the rights of the international, global capitalist elite class to plunder the social and ecological commons, placing the short-term profit of powerful individuals and corporations before the common good. In the eyes of many people organizations like the World Bank, IMF and WTO are just that, agents of property regimes that seek to transfer all resources into capitalist corporate regimes.
“Capitalism is the enclosure not only of land but also of tools and knowledge for the purpose of private financial gain. As Veblen has argued, all invention is based on the common cultural inheritance built up over countless generations. Although the fencing of land is commonly portrayed as a means of introducing more ‘efficient’ farming methods, it entailed far more than mere fencing. Loss of subsistence access through enclosure, exclusion or patenting leads to a loss of social inheritance and knowledge.
“Intellectual property has now become an important aspect of world trade. The patenting of seed in particular is causing a loss of species as well as denying poorer people access to their traditional plants. Often this is be- cause the seed has been hybridized and patented. What this might mean in the longer run is that hardy species developed over millennia to resist salinisaion, drought or low temperatures, or forage animals that can live in difficult terrain, will be lost forever.”
“To live, people must do paid work or find a source of money income. The entire edifice of economic theorizing has been built upon the false premise that things exchange for things and not for money. That was why Marx was so outraged at the argument put forward by Jean Baptiste Say that in every sale there is a purchase, and in every purchase a sale, exactly as in barter. Marx is quite clear that money, not commodities, is the focus of the market economy.
“Only if money is eliminated is it possible to regard ‘capital’ as the commodities or ‘things’ comprising a necessary element in the productive process: hence the common misapprehension that ownership of the physical rather than the financial means of production is the key issue in the control and production of wealth. It is also possible to be drawn into the debate on booms, slumps, inflation, stagflation, unemployment and the general tendency for a falling rate of profit without challenging the conceptualization of a formal economy which is assumed to be providing for universal welfare through the production of things. According to Freeman and his colleagues the study of economics which ignores the central role of money in the economy has also invaded Marxist economics. Economics must be situated in real time and the real world.”
That is far truer than Alan Freeman seems to realize. Not only have money prices and money profits replaced the prime role of commodities in the economy, but the rate of growth of the profit already obtained by public corporations in a single year, is by grace of an alleged knowledge extrapolated into the remote future and then discounted for present value and incorporated into present price. The knowledge of such items is supposed available from equilibrium points located with “derivatives.” The result: market prices of successfully pro- moted stocks strive towards the exponential curve which is the mathematics of the atom bomb.
Man shapes his theories under the influence of his technology. Marx’s view of the society’s future, was obviously inspired by the railway- building age in which it was conceived: its course was plotted via foreseeable stations to the socialist terminal. This is what Veblen identified as Marx’s “teleological” aspect (Hutchinson et al., p.106). With our contemporary economists, the major influence is the split atom. It is the model not only for the stock market but for the entire economy.1
Veblen laid a finger on the vulnerable “romantic” side of Marxism (“a sequence of theory”). “Capitalism relies on two basic mechanisms of cultural conditioning. First, the conditioning of ‘chronic dissatisfaction’ associated with emulative consumption (consumerism) – the ‘spiritual’ poverty of labouring for a money wage, going into debt to acquire and consume more objects offering the illusion of leisure and status. He enriched the language and sociology with the term ‘conspicuous consumption’ that increasingly drives our world. Second, patriotism and military discipline to maintain its aggressive imperialist expansion.”
This might well have been written not in 1899, but the day before yesterday.
“Veblen provides a neat example of the ‘double-think’ of neo-classical economics when the factors of production are described in purely material terms. [He cites] John Bates Clark, an early American marginalist, dismissing the notion of capital as financial (money) value. In his view, it would be more accurate to regard capital as ‘a fund of productive goods.’ However, Veblen refers to Clark’s own contradictory example of the transfer of capital from a whaling ship to a cotton mill. Plainly, ‘capital goods are not purchase and sale.’ Finance capital intervenes to change the nature of exchange” (Hutchinson, p. 113). “Capitalism upsets all concepts of ‘natural’ returns to the factors of production.”
Veblen emphasized the rigidities into which the concept of “class” led Marxists. “The complexities of class within capitalized money/market systems have been somewhat obscured by Marxist thinking that narrows the emphasis to capital-labour relations. This not only ignores the problems of unpaid work but cannot make connection with the position of debt-based, small-scale property ownership such as the peasant land- holder. Veblen questioned Marx’s prediction that agribusiness would absorb the small proprietor, converting them to landless labour. As early as 1906 Veblen suggested that socialists and small peasant farmers should have common cause in resisting finance capitalism. However, Veblen was a voice in the wilderness. Henceforth, the small farmer, classed as ‘bourgeois’ by ‘socialists’, sought to oppose the hated financial capitalism by adopting an ideology on the far right.”
More recently, under the impact of other cultures, this has begun changing with leftist politicians lending a sympathetic ear to land claims of indigenous peoples. In India Marxists are recognizing the links between the rural bourgeoisie and urban industrial- ists, that is influenced by the caste system. The authors of the book under review bring to centre-stage the exploitation that occurs within families where the women’s unpaid labour is not recognized. “Social class is now just part of the set of resource factors and interrelated subjectivities such as gender and ethnicity that go into shaping social relations.”
Obviously, the Social Credit people, no less than other reformers, will have to invest further effort in grasping how society is to move to the solution of the seemingly impossible problems that beset the world today. In an earlier issue of ER (May 2004) we paid tribute to an earlier volume co-authored by Ms. Hutchinson in disclosing to us what had previously eluded us – what Douglas was saying with his A and B theorem. It was not capital budgeting, for capital budgeting recognized the capital investment in equipment, buildings and much else that would come back to the producer only over a long period. During that time capital debt would have to be financed. That was the entry through which exploitative financial capital took over. It had therefore to be bridged with a social dividend that could be justified by the heritage of all in previous generations who contributed in various ways to make possible the institutions, science, technology and social cohesion that made produc- tion possible in our day – slaves, martyrs, inventors, civic leaders, jurists. That social dividend would help make it possible to carry on production without being at the mercy of finance capital. Producers’ banks would make their contribution to this end. That, however, does not mean that in addition to Douglas’s A and B accountancy, we have no need of standard accrual accountancy (i.e., capital budgeting) that would keep us informed of when the total investment is to return and with what profits.
These two distinct gauges of the efficiency of a firm – or the economy as a whole – correspond to twin complementary concepts. One is liquidity that the Douglas A & B theorem addresses; and solvency which has to do with the existence of enough assets, liquid or otherwise, to cover the institution’s debt.
One of the goals of the A & B Theorem is to avoid the need for external financing of the productive process. To close this monetary gap while production is being completed and the income from the sale has come in, Douglas depended upon the Social Dividend. This would help the producers organize their own financing.
There is another important detail that our Social Credit friends should look into. In recent election campaigns on all continents we have witnessed a fixation on balancing the national budget. That of course, conflicts with what we learned in the 1930s at a shattering cost. But so long as our central banks insist on identifying any rise of price indexes with inflation, we risk repeating that experience. Since World War II, the market economy has become a pluralistic one, in which more and more human and physical infrastructures are needed to serve ever more complicated technologies and intense urbanization. And these only the state can provide. The resulting taxation, however, inevitably becomes a deepening layer of price. Thirty-five years ago I identified this as “the social lien.” This must be distinguished from inflation that properly refers to price rise resulting from an excess of demand over supply. Economic Historians (notably the late Ferdinand Braudel) have grasped the point. Economists have remained blind to it. Recognizing it would undermine the vested interests served by the self-balancing market construct, that dispatches all social and environmental concerns as “externalities”. Economic policy has become increasingly identified with balancing the national budget that is increasingly in deficit because of governments’ insistence on treating public investment as current spending.
Unless serious accountancy is introduced into our price theory, there will be no possibility of bringing in anything resembling the “social dividend.”
William Krehm
1. The exponential function will repay a little attention. It is constructed to the specification that the rate of growth equals the value already attained by the function itself. That implies, of course, that the same is the case with the higher derivatives to infinity.
The formula is:
Differentiating the function for the rate of growth: 1 being a constant doesn’t grow and hence becomes zero and x grows as the variable itself becomes 1 to replace the vanished first term on the left. The denominator of the next term is chosen so that its first derivative becomes x to replace the previous second term, and so on to infinity. Being an infinite series it doesn’t matter that the first term disappears and the expression shifts to the right. There are an infinite number of terms available on the right to absorb the losses on the left. As they occur you pass on to the next higher derivative. In graph form this is a curve that starts almost horizontal but in no time at all stands vertical.
–from Economic Reform, August & September 2004