Money, it’s a gas.
Grab that cash with both hands and make a stash.
Roger Waters, The Dark Side of the Moon
Lending and borrowing are as ordinary as giving and receiving. They all help to maintain the social bond by encouraging reciprocity. They were probably customary from the start, as humanity has always relied on mutual exchanges.
Sharing has also played an important part and was probably the reason counting was developed so early by the Sumerians. Irrigation by canals and the storing of grain crops are best done collectively, but who has the right to what must be carefully measured, the hours for the watering, the bushels for the barley and the numbers for both. The citizens of Ur invented a counting system based on 60 (instead of 10), dividing days into twice twelve hours and hours into 60 minutes, and the compass into 360°. So the signs for numbers led to signs for words and to cuneiform writing (1).
Elsewhere, the discovery of metals nurtured a new kind of wealth. Bronze Age weapons and armour gave god-like power and plunder had to be transportable. The ancient Stone Age civilizations based on collective solidarity and casts were swept into oblivion, but counting and writing survived. The Phoenicians and the Hebrews, the Mycenaean and finally the Greeks transformed both into fine arts, into geometry and calligraphy.
Metals, their extraction and their usage, changed human relations irremediably. The perpetual arms race was on. Achilles’ body-armour was made of bronze and offered almost (the heels) complete protection. But copper-ore is fairly rare and tin-ore even more so, which meant that those who controlled these resources had all the wealth and power. Ships were built for raiding and trading, while cooking tripods became the ordinary measure of value.
Iron-ore is quite common and iron can be hardened by simply dipping it in water when it is red-hot. Towards the end of the second millennium BC, a vast movement of peoples, later called Indo-Europeans, got under way. It seems likely, as the dates coincide, that they were armed with iron when they took the world by storm. The Celts, the Dorian, the Iranians and the Aryans of India were the outcome of this prehistoric human current. The Ionian Greeks and the Phoenicians may have been part of an earlier move. That of a seafaring people whose incursions were recorded by the Egyptians, without naming their origins. Were these the longboats drawn up on the beaches during the siege of Troy? Were the Bronze Age heroes being pushed East and South by the advancing Iron Age, in the way the 5th century AD Barbarian invaders of Western Europe were pushed by the advancing Huns?
By the beginning of the first millennium BC, iron had become the most important commodity in peace and in war, as ploughshares were hammered into swords for the summer raids, and back again for the winter furrows. As bronze became redundant, its function as measure of value was subjected to inflation. And iron, as a reserve of value, has the double inconvenience of being too abundant and rusting too fast. It is about this time that silver and gold stopped being merely decorative.
Comparing values is as old as exchanging gifts. However, an abstract measure of value (a bronze tripod, or an animal hide, or whatever) supposes a market where this abstraction is accepted by all those concerned. The circulation of money, which does not have any use value per se, depends on an even wider consensus. There must be agreement on the value represented and on the representation of this value, on what the coin will buy and on what the coin is made of. Before, no one had found any use for silver and gold, other than apparel (Industrial use of both is very recent). This meant that most of the precious metal belonged to the gods, their temples and clergy. As was still the case in Gaul when Caesar devastated it, or in Mexico before Cortez, or Peru before Pizarro. And, as late as 88 BC when it was plundered by Mithridates, the central bank of the Athenian confederation was in the temple of Apollo on the island of Delos. And again, almost 12 centuries later at the start of the crusades (1096), it was the churches and monasteries that funded the journey with bullion, usually guaranteed by a mortgage, literally a death pledge.
Trade routes, by land or sea, meet up at a market place, where exchanges take place. These exchanges are greatly facilitated by a common measure of value represented by some form of currency. Silver and gold could seem to exist for just this purpose. Both are rare, both resist oxidisation and gold is almost unalterable. So gold (2), money and wealth became indistinguishable. And, as the market expanded, so did the circulation of precious metal of which there was never enough. Wealth was money, and money was gold, whose possession obsessed not only merchants and bankers but also rulers and war lords, those who use wealth to wield power. This lust for gold helped to maintain a perpetual state of war, of conquest and empire.
Meanwhile, merchants (soon to be merchant bankers) were rediscovering the accounting measure of value. Quantities of bullion and coin could be reduced to figures in a ledger with a plus or a minus and to bills of exchange. Credit was invented. And, as merchants had learnt that buying commodities to sell them again should make a profit, bankers in turn learnt that money for money, without the intermediary commodity, should pay interest.
And such was the greatness of Rome before the fall. Money all but disappeared in the Dark Ages. But Byzantium preserved this ancient knowledge. Until the Baghdad caliphate and the republic of Venice revived it, as East and West were joined again by (holy) war.
Trade and banking have always been closely linked, money being the ideal commodity, the value of value. Their mutual revival in Western Europe can be traced to Venice. Followed by the Lombard, who crossed the Alps and opened counters in all the Renaissance capitals. The counter-reformation proved to be a set-back, as usury was judged heretical by absolute monarchs and indebted princes of church and state. But the Dutch republic and the Swiss confederation offered Protestant safe havens to members of the banking trade. The Dutch bankers naturally followed William of Orange, when he was offered the English throne (1689), and crossed the Atlantic to New Amsterdam, recently renamed New York (1661), the future centre of the financial world.
The Roman and Renaissance bankers had materialised the alchemist’s dream of making gold. They had realised that money was merely a promise of value, and that a promise could take any of a number of forms. And, when Caesar and Pompeii swamped the market with silver and gold or when bullion poured into Europe from America, that some promises were a better guarantee of value than were the precious metals, as they compensated inflation with interest.
Bankers had known from the start that account and paper money were as real promises of value as coin or bullion. The next step was the clearing house, which needs stability and seems to have been initiated by the Dutch. But the idea spread quickly to London, and from there to the rest of the world. Paper promises of value could be exchanged in a way that each bank recovered the promises of its own depositors. And any outstanding promises could be settled by promises between the banks themselves. Coin and bullion no longer changed hands, except to re-establish chronic unbalances. Coin and bullion were reserves of value, a mere fraction of the value of exchanges and of the credit that could be granted. However, until quite recently, banks were only concerned by commercial transactions, while the rest of humanity had to manage with minted coins.
To be able to function, the measuring of value with money, and its use as the intermediary of commodity exchanges, must be universally accepted. Money is a medium and a bond. It strengthens national cohesion, as do languages. Money is the symbol of nations, and proudly proclaims this on coins and notes. Minting (or printing) money is the prerogative of a sovereign state. But this public control of money contradicts the private control of credit by banks. The creation of money is both a public and a private matter, and the two have different interests.
Money has a double identity. On the one hand, it is cash, the coin of the realm, or the green-back. On the other hand, it is credit. Both are promises of value to come. Cash is immediate, whereas credit concerns delayed promises of value. And it is this delay that justifies usury and discounting. Minting money had traditionally been a government monopoly. Meaning that all new money was usually put into circulation by public spending. This is an inflationary measure, which rarely got out of hand, as long as money was gold and silver coin. However, since the introduction of paper bank notes, the cases of massive inflation and bankrupt states are innumerable. In fact, paper money’s dubious value wasn’t really resolved until the US dollar replaced the failing gold standard as world currency, in the 1970’s. Though the notes issued by private Scottish banks were already deemed surer than coin, more than a century earlier.
Making money was the right of kings, but some constitutions took this function out of the hands government, by instituting autonomous central banks, notably the Bank of England and the US Federal Reserve Bank. This did not please every one. Thomas Jefferson warned of the dangers of such a lack of public scrutiny (3). But history has shown that the autonomous central bank is a more successful institution that its state controlled counterpart. And so Germany was able to impose the statutes of its autonomous central bank, as opposed to France’s state controlled one, on the actual European Central Bank, the euro zone regulator.
Ideally, banking is a private affair, a confidential relationship with customers concerning money matters. But money is also a very public concern. What does it buy? How much is in circulation? What does it cost to borrow? Who has and who has not? Money is what the taxman takes. And, as our intermediary of exchange, it is what keeps us alive. Without money, we might just manage to go on breathing. Banks manipulate in a very arcane manner the most public of commodities. Banks are the primal and the ultimate model of capitalism, of the private property of the means of production.
Banks are only marginally interested by the actual cash flow, as their real business is granting credit. And credit is only marginally based on reserves of currency. By controlling credit, banks decide who may increase their spending and who may not. They also decide whether the increased spending goes to investments or to consumption. Traditionally, of course, banks only granted credit to commercial enterprises and, later, to industry. Though they would fund monarchs, usually for war, and accept mortgages from land-owning aristocrats. Ordinary consumers would go to the pawn-broker to get some extra spending money. But micro-credit is a lucrative business, and banks finally took control of that too.
Credit allows spending to increase beyond actual income. If the increased spending is an investment, and all goes well, it will increase income and reimburse the credit. While the profit made on the investment should cover the interest paid for the credit and leave something for the investing entrepreneur. If the increased spending is consumption, none of this happens. Consumption does not increase income. Consuming more to-day only means consuming less to-morrow, when the credit is paid back with interest.
When credit increases demand for investment, this extra investment goes into the production process and modifies the value produced. It may increase, maintain, or reduce the work force, depending on whether it duplicates existing technology or introduces new technology and productive gains. The decision to increase investments depends on state of the art technology and demand on the market. An expanding market invites duplication of existing production, which increases the work force and the value produced. A stable or contracting market imposes gains in productivity. These gains can result from technological advances, or from economies of scale, when there is concentration of capital wealth and out-sourcing. These changes maintain, or may even reduce the value produced. Their aim is to increase profit margins by reducing the cost of labour and laying off part of the work force.
Capitalism expands and concentrates, and these two phases repeat themselves in succession. As the expansion phase gathers momentum and new forms of energy are harnessed (by steam or by internal combustion), new forms of wealth are produced. This is a time of social and political progress and full employment. This is the benign phase of capitalism, when it appears almost egalitarian in its aims, promising work and prosperity for all humanity. Credit is granted for investments both public and private. And most of the value goes to wages. But investments precede consumption, often by several years, which means that demand constantly exceeds supply, and inflation is widespread.
Credit is invested in infrastructure and production and increases demand for consumption ahead of supply. It increases employment and encourages subsequent wage rises, countered by price rises. When high inflation sets in, as a consequence of this, there is a sharp rise in interest rates, which leads to renewed price rises and social unrest over wages, followed by more inflation. At some point, there is a credit squeeze. Banks are recovering less actual value than the value of credits granted, and find themselves in financial difficulties. There is a general slow down of production and the consequent redundancies reduce demand. Inflation is stabilised, allowing the concentration stage of capitalism to take off.
The value added by human activities is shared between the work force and the state, the landowners, the merchants, the bankers and the industrial entrepreneurs. Salaries, taxes, rent, commercial margins, interest and corporate profits are the monetary equivalent of the goods and services produced. If some recipients get a lesser share, the others get a larger one. If salaries and taxes are reduced (not necessarily in absolute terms, but by following low inflation instead of high productivity gains), then rent, commercial margins, interest and corporate profits will increase their total share, though this increase is not necessarily divided in equal parts. As the work force and the state compound most of demand for consumption, the reduction of their respective shares of added value must be compensated by cheap credit, cheap consumer goods and affordable rents (4). While corporate profits can soar unhindered. Both of these effects help concentrate the ownership of capital. Low land rent puts small farmers out of business, and low commercial margins do the same to small shopkeepers. Low interest rates are compensated by increasing the amount of credit granted (it’s only account money anyway). While increasing corporate profits become the financial tools for the global control of production.
Added value, in the form of corporate profits, is invested in stocks and shares and concentrates the control of production into quasi monopolies. Reduced taxes are compensated by public borrowing and stagnant wages by mortgages and consumer credit. Credit turns from investment to consumption. But investment creates value, whereas consumption destroys value. Invested credit puts people to work and is restituted by the added value they produce. Consumer credit, public or individual, does neither. It can only be restituted by a new, larger (because of interest) credit, or by reducing future consumption.
Capitalist control of production concentrates ever greater quantities of profit, which in turn accentuate the concentration of capital. The necessary growth in consumption by state and individuals is fuelled by credit and mortgages. But, because of interest, simply sustaining demand requires increases in credit, while growth in demand needs that much more. State and individual debts must have a growth rate that includes the growth rate of demand for consumption and the rate of interest. For demand to increase by 3%, when interest rates are at 3%, there must be a 6% growth in debts.
Credit passes from investment, where value is returned through the production process, to consumption, where value is destroyed. Meanwhile, the added value of incomes, which is supposed to be consumed, is accumulated in the form of capital wealth, as the private property of the means of production. As consumption does not return value, credit for consumption must be renewed and increased (interest), just to maintain demand. Renewed credit in general and credit for consumption in particular have growth cycles of two kinds, with a variety of time scales related to the range of durations of the credits granted.
State borrowing takes the form of Treasury bonds reimbursed at term, mainly 10 and 30 years. This means that state borrowing should increase considerably and suddenly every 10 and 30 years. As this does not happen, there is a down turn in the growth curve when returned debts (and interest) exceed renewed ones. Individual borrowing is generally reimbursed piecemeal over the duration of the credit (or mortgage). This means that the periodic surges in returned debts and the corresponding down turns in growth are more progressive than for T-bonds (5). Individual consumer credit varies in length from the weekly or monthly overdraft to the cost of a TV or a new car (1-5 years), to the housing market (10-30 years).
When increased incomes are invested in capital wealth, increased demand for consumption depends on increased credit. But credit growth is cyclical, as returned debts must be renewed and returned debts increase abruptly or progressively, always according to a very precise calendar. In 1939, J.A.Schumpeter published a time scale for growth (Business cycles, p. 213). He included Kitchin, Juglar and Kondratieff curves, but not Kuznets ones, as they were only studied at a later date. Schumpeter gives a time scale, for the long Kondratieff wave, of 57 years. That means that the closest corresponding period to the present time is 1950. A date that did not appear in the long list of equivalents recently given by Alan Greenspan: 1837, 1907/87/98 (6). 1950 was the inauguration of a stagnation and inflation cycle and of an Orwellian turn about, when yesterday’s allies (USSR, China and the Communist Parties of Europe and Asia) became enemies, and yesterday’s enemies (Germany, Italy, Japan and the Fascist Parties of Europe and Asia) became allies (7). 1950 was the year Joseph McCarthy began his campaign in front of the Republican Club at Wheeling, West Virginia (8). It was the year Ethel and Julius Rosenberg were put on trial. 1950 saw the start of the Korean War, of the Indo-Chinese war and of wars of liberation from colonial rule all over the planet. Can the same position on the debt cycle bring about the same consequences? In many ways it seems that we are already there, somewhat ahead of schedule. Though looming stagflation has yet to hit the world markets.
KENNETH COUESBOUC can be reached at email@example.com
(1)This also took place in Egypt, but their counting system seems to have been lost, and hieroglyphs could not compete with the phonetic alphabets.
(2)In the Grundisse, Karl Marx goes into the value ratio between silver and gold. There is no such thing as gold-ore, though alchemists long sought after it. Gold is always in its elemental state, often alloyed with small quantities of silver. This is the origin of the first silver, which was hence rarer than gold and more valuable. Once it was known how to extract silver from silver-ore, and silver being far more abundant than gold, the ratio inverted itself and silver became ever less valuable compared to gold. With a few early local exceptions mentioned by KM.
(3)”If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. Thomas Jefferson (http://www.apfn.org/APFN/fed_reserve.htm)
(4)In a previous article I have explained how this can be resolved by foreign trade.
(5)Supposing that a new 5-year credit is introduced, with a yearly interest of 5%. This new debt is intended to increase demand by 100 units of value per year. How much must be borrowed each consecutive year for this to be the case?
(For simplicity, the interest of interest is ignored).
(6)Le Monde, September 8 2007.
(7)Nineteen Eighty-Four was first published in 1949.
(8)Harry Truman had signed Exe