your money is not safe!

19 03 2013

What’s happening in Cyprus is hugely significant, says duvinrouge. Cypriots are having the money in their bank accounts taken by the government. The question people are now asking is if it can happen in Cyprus, can it happen anywhere?

your money is not safe

To understand what is happening requires an understanding of the nature of the crisis, the crisis of overproduction. Capitalism is based upon commodity production: things are produced for sale, to sell for money, not for immediate consumption. Furthermore, the price must be higher than the costs of production for a profit to be realised. Profit is the objective, not the satisfaction of human needs. But the problem with commodity production is the commodity that acts as the universal equivalent – money – must grow in line with commodity production in general for all the commodities to be sold. If money gets hoarded, e.g. capitalists refuse to invest because profit rates aren’t high enough, then we have stagnation, even a depression. This hoarding of money is what most Keynesians, and some Marxists, see as the cause of the current crisis. Hence they argue that the government must step in with fiscal stimulus until the capitalists return to their senses and start investing again. Crises due to hoarding are possible, but this is not overproduction and not the current crisis.

Overproduction occurs because credit money, created by banks through fractional reserve banking, grows too big. People and companies are buying things on credit. But although they notionally owe the money to bank, the bank never really had the money in the first place, it created it. Hence banks can find themselves exposed when they over lend. This is what happened to Northern Rock, RBS, Lloyds and of course many others, most notably Lehman Brothers.

During the boom phase and the growth of credit money everything looks fine. Profit rates appear sky high, there may even be full employment. But as debt saturation is reached the repayment of debts becomes a problem. As soon as a debt defaults start, previously looking healthy organisations get into trouble dragging down others. It’s like climbers roped together, as one falls the others are in danger of being taken down as well.

In 2008 the US authorities took a chance in letting Lehmans’ go under; it almost took the world economy and capitalism down. Only after many rounds of ‘quantative easing’ (essentially giving the banks money for their government and other bonds, which the banks will never buy back) they still haven’t resolved the crisis. This is because all they have done is stopped the destruction in credit money by moving the bad debts to the government books. This has now given them the excuse to cut government spending and roll back the state. This means the end of the welfare state which was used so well by social democracy to prevent revolution.

These attacks on workers through government ‘austerity’ is matched by below inflation pay rises in the private sector, even outright wage reductions. No forgetting the unemployment. Banks in particular are sacking huge numbers. Then of course there’s pension funds being raided and increases in the retirement age. All excused by the fact that we are living ‘too long’.

We’re told that there is no alternative. Well, as the people of Egypt glimpsed in Tahrir Square, there is an alternative. An alternative that doesn’t have crises of overproduction. An alternative where production isn’t based on profit. An alternative that is based upon human needs and dignity. An alternative where the people have direct democratic control of what is produced, how it is produced and who consumes it. An alternative that finally gives humanity control of its destiny. An alternative called communism.

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13 responses

21 03 2013

I’d be careful about making comments such as ”…the banks never really had the money in the first place… it created it..” and linking this to the concept of ‘fractional reserve banking’ . The notion that commercial banks as opposed to central banks ‘create money’ is something of a myth which has encouraged all manner of ‘currency cranks’ to suggest equality and even socialism being created through monetary reform.

See for starters ‘fractional reserve Banking refuted’ at:
and various discussions around this on the libcom website.

22 03 2013

Mike, thanks for the link.
I can’t say I’m very impressed with the article though. It seems to be written by someone keen to demolish the Ron Paul’s of this world & the argument that capitalist crises can be abolished through a return to gold & an end to fractional reserve banking, by denying that fractional reserve banking has any role in the creation of credit money & subsequently any role in allowing for crises of overproduction to occur.
Of course, capitalism & its crises go much deeper than fractional reserve banking, but we can’t dismiss reality & so try & come up with a one-dimensional, single cause of crisis – the falling rate of profit – that explains all crises.
Behind today’s crisis may indeed be a falling rate of profit, but crises of overproduction do not have to be caused by an increase in the organic composition of capital. Capital accumulation itself doesn’t always have to lead to, at least in short & medium time scales, a rise in the organic composition of capital in value terms & so a falling rate of profit.
Historical analysis of crises doesn’t convincingly support the falling rate of profit theory as explaining every single crisis. There is no theoretical reason why a crisis of overproduction cannot occur without a rise in the organic composition of capital.
The serious bank leveraging that we have witnessed recently & indeed over the last 40 years has created vast amounts of credit money. Debt %’s increased dramatically up to 2008. The private sector may be deleveraging now but this is largely a transfer of debt to the government sector as losses are socialised.
We shouldn’t be afraid of acknowledging the role of fractional reserve banking in the creation of credit money & its role in crises of overproduction. As I said it doesn’t mean that behind it there is no falling rate of profit, or that the falling rate of profit is not what ultimately matters for the continued existence of capitalism.

22 03 2013
22 03 2013


I don’t claim any expertise in this area but I certainly haven’t argued that the ‘rising organic composition of capital’ and ‘the falling rate of profit’ are anymore than the long term underlying cause of the major economic crisis in capitalism and it is certainly the case that speculation in ficticious capital are central to the onset of the current crisis, in which the commercial banks amongst other financial institutions have been significant players, but still think that there are some common false asumptions about the commercial banks so-called powers to ‘create money out of nothing’ or ‘ by some massive multiplier.

I might return to this later.

23 03 2013

Mike is right to warn about loose language that can suggest that banks possess some power which they don’t. That way leads to blaming just the banks for economic crises like the present rather than the capitalist system as a whole and even to support one section of the capitalist class (industrial capital) against another (financial capital).

There is nothing mysterious or conspiratorial about “fractional reserve banking”. The economic role of banks is to borrow money from those who have money but don’t want to use for the time being and lend it to those who want to invest or spend, their profit coming out of the difference (after deduction of expenses) between the rate of interest they pay depositors and others who lend them money and the rate they charge borrowers. To operate, they need to keep a “fraction” of the money deposited with them as a cash “reserve” on which they get no interest, to deal with likely withdrawals. That’s how banking works. It’s what banking is.

The view that banks can somehow lend more than they have themselves borrowed is based on a misunderstanding of what “fractional reserve banking” (ie all banking) means. If, say, the cash reserve has to be 10% of deposits (actually it’s much, much less than this these days) this means that for every £100 deposited with a bank that bank has to keep £10 as cash but can lend out the remaining £90. The misunderstanding is that a cash reserve ratio of £100 means that a bank can lend £900 for every £100 deposited with it. That this can’t be true can be seen by the fact that, if it was, bank lending would increase exponentially. But it doesn’t.

The level of bank lending depends in fact on the state of the economy, on whether there is a demand for money to fund some activity; which in turn will depend on whether capitalist firms can make a profit out of investing the money in production. If they judge they cannot as is the case today due, as you point out, to a fallen rate of profit, then they won’t want to borrow from the banks, no matter how low the rate of interest might be, as is been shown today in Britain and as happened in Japan in the 1990s.

The view that banks can “create credit” over and above what they themselves have borrowed, i.e “out of thin air”, is currency crankist not Marxist. The only way that new wealth can be created under capitalism is by the workers in productive industries and services working on and with materials that originally came from nature. As they produce nothing banks are in fact secondary, subordinate institutions to capitalist industry.

Nor should the credit supposedly created by banks be confused with the “fictitious capital” Marx mentions. This is simply the capitalisation of an expected future stream of income, eg from interest payments, but which doesn’t exist in reality but is only a notional capital sum.

24 03 2013


Have you read the link to Sam Williams’ article on money?
He explains quite clearly the different types of money: commodity, token & credit. It is the commercial banks that create credit money & one of the main ways is through fractional reserve banking. If there were no credit money there would just be token money, i.e. the monetary base. The money supply is a number of factors the size of the monetary base.
Of course the size of credit money is limited, this is exactly the point of a crisis of overproduction: credit money allows production to get ahead of what the market can realise in the medium to long-run.
None of this is to deny that behind the crisis of overproduction may be a falling rate of profit, i.e. a problem producing surplus value. But as Marxists we must also acknowledge the periodic problem of realising surplus value. It doesn’t have to be one or the other.
As for fictitious capital being ‘the capitalisation of an expected future stream of income, e.g. from interest payments, but which doesn’t exist in reality but is only a notional capital sum’ I’ve no problem with this definition. But just think for a moment about credit money. A bank may have given someone a mortgage to buy a house, the excessive lending may mean that the price paid for the house is highly inflated & as people struggle to pay their mortgages house prices fall & the bank has to repossess the house but can only sell it for half the price it was originally valued for. The bank has lost money. Some of the credit money simply disappears.
The business cycle & the creation & destruction of credit money are two sides of the same coin. At the high point we have overproduction. What we see now are the monetary authorities trying to prevent the destruction of credit money through tactics such as quantative easing. This is just shifting the debts from the banking sector to the state.
But I’m not saying that the abolition of fractional reserve banking & a return to the gold standard will abolish the business cycle, as many Ron Paul supporters seem to think. I think it could scale bank the size of the overproduction reached, but financiers always find ways to create credit, e.g. derivatives.
What is more important in the longer term is the state of the productive forces, the rate of profit, the rate of exploitation & the ratio of constant to variable capital. Coal, oil & gas enabled surplus value to grow relative to variable capital in value terms in the 20th century whilst still enabling vast numbers of workers, particularly in the West to be materially better off. It may be that further gains cannot be achieved, that might even be reversing. As profits come under pressure so workers wages, pensions & state benefits come under attack. The class struggle is back.

24 03 2013

Two things.

1. Returning to the gold standard (or rather to a currency convertible on demand into a fixed amount of gold) is not an alternative to “fractional reserve banking” as this still existed when gold was the currency. It just meant that the “fraction” of deposits banks had to retain as a “reserve” against likely withdrawals had to be gold coins.

In the article by Sam Williams you refer to he writes at one point:

“The system of commercial bank-issued credit money is called fractional reserve banking, because the bank maintains considerably less than a dollar in legal-tender token money behind each dollar its owes in checkable deposit liabilities.”

This is true. Banks don’t have to keep as cash all the money deposited with them or which they themselves borrow. They can lend most of it out, but not all of it as they must keep some to deal with withdrawals. This is why banks have always considerably less cash than they have lent out. All banking involves having a fractional reserve and lending out the rest. Otherwise banks would just be safe-deposits.

He also writes:

“The banks make loans in the form of promises to pay in legal-tender token money—that is, they issue the loans in the media of imaginary deposits they create when they make the loans.”

This is just double-entry book-keeping, but the money that is loaned is by no means imaginary. It comes from actual deposits of money (or money the bank has borrowed) not from book-keeping entry in the form of a “deposit” that is created for the borrower.

2. “Credit money” is not created from nothing. After all, what is credit if not lending somebody something that already exists? What the banks are doing when they extend “credit” is lending somebody’s else’s money to somebody and in effect charging a commission for doing so. Otherwise “credit” wouldn’t be the right word. Banks would not be lending other people’s money. They would simply be creating new money (purchasing power) out of nothing. It was no doubt because the passage in the original article that “the bank never really had the money in the first place, it created it” suggested that you held this view that Mike took you up on it.

This excursion into banking theory may seem abstruse but it is important to get the theory right year otherwise, as I said, we get into the position of blaming the banks for economic crises rather than the capitalist system as a whole, and so in effect supporting one section of capital (industrial) against another (financial) as Occupy has ended up doing.

24 03 2013


You still seem to be struggling with the difference between token & credit money.
The fact that the money supply is different to the monetary base still doesn’t appear to convince you that the commercial banks haven’t created money.
I don’t know what else to say.
Perhaps reading some of Sam’s articles on money might help.

I at least agree that it’s important for an understanding of the nature of crises.
Without the excessive creation of credit there can be no crisis of overproduction. But I repeat, that’s different from saying that excessive creation of credit is the cause of crises.

24 03 2013

This is partly a question of definition. If you define (as most textbooks do these days) bank loans as money then, of course by definition, banks “create” money. But that’s not the real question. It’s where does what they lend come from? Is it from what they already have (from depositors, from borrowing from the money market, from their own capital) or is it something they simply create from thin air by a keyboard stroke? You seem to accept that commercial banks can conjure up extra purchasing power from nowhere. but they can’t. Having said this, a central bank can and does do this (most often via the commercial banks, I agree but the commercial banks can’t do this on their own), but does not increase the actual amount of real wealth in existence. In the end it will just alter its price tag (inflation). The theory you accept attributes to banks a power that they do not have and is the basis of various theories of Monetary Reform offered as alternatives to getting rid of capitalism (and so also of banks).

24 03 2013


You seem to recognise that credit money is different to token money & that the banks create credit money through fractional reserve banking but then also deny they have created it because it’s come from depositors or the money markets.

Beyond the token money that depositors or money markets have, where have they got their money? Is it not credit money?

None of this is to deny the point you make about central banks & their creation of token money, which in the last few years has been dramatic. I think I’m right in saying that the US monetary base has increased almost 3-fold since the Great Recession.

The two actually go together, as credit money was being wiped out (I recall a figure of $55 trillion being estimated in the year after Lehman’s collapse), the state authorities stepped in to buy up the bad debts from the banks.

24 03 2013


My orginal caution was mainly to be careful in our use of terms given some of the incorrect and misleading theories floating around both historically and in the recent occupations movement in the USA and UK, so I think Mondiasliste’s comments are a useful clarification, which when you see careless responses such as those from David Jones to the same article posted on the IOPS site is more than justified.

Hopefully we have got to the correct substance of the matter beyond some differences over definitions.

25 03 2013

Duvin, you write:
“Beyond the token money that depositors or money markets have, where have they got their money? Is it not credit money?”
Purchasing power originates in production, either as wages or as surplus value (divided later into profits, ground rent and interest) and then circulates throughout the economy, including the banking system. It is not created by banks (they just help circulate it), not even, in real terms, by the central bank.

25 03 2013

Mondialiste, I’m afraid you’re stuck in Says Law.


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