But, despite
this reality, described in Parts 1-3, the development of
interest-bearing capital, creates the conditions for an enormous
expansion of this fictitious capital. As described above, a bank, A,
for example, which loans £10,000 to productive-capitalist B, to buy
a machine, appears to create £20,000 of capital, even though only
£10,000 of real capital exists in the shape of the machine. The
other £10,000 exists as fictitious capital in the shape of a loan
certificate owned by the bank. This certificate now forms part of
the bank's capital. All loans appear as assets of the bank, whilst
all deposits with it form liabilities.
The bank can
use the loan certificate as capital against which it can make further
loans, provided it has adequate liquidity. Alternatively, the bank
can use the loan certificate as collateral in order to borrow money
itself. A bank can, for example, borrow money from the central bank,
and give the central bank such a loan certificate as collateral for
this loan. The bank can then use the money so obtained to make
further loans to its customers. Often the means for doing this is
that banks use bonds in their possession as collateral. Such bonds
are no different in essence than such a loan certificate. A bond is
simply a legal document issued by the borrower, which sets out the
amount borrowed, the duration of the loan, and the amount of interest
to be paid. When central banks have engaged in Quantitative Easing,
what they have done is to buy such bonds from banks, and thereby to
provide the banks with newly created money tokens.
But, each
new loan here appears as yet another piece of capital, because each
attracts interest. Each appears to be self-expanding value. If the
bank has found from experience that it only every needs to retain 10%
of deposits as cash to meet the needs of its customers, then it can
loan the remaining 90%. So, here, if the bank starts out by loaning
£10,000 to B, who uses it to buy a lathe, this loan appears as
£10,000 of bank capital, against which the bank can then make
additional loans. So, on this basis, it may make a further loan of
£9,000, to C, which then also appears as additional bank capital.
The bank can then make an additional loan of £8,100 to D, which then
appears as additional bank capital making possible a loan to E and so
on. Instead, of just issuing a loan of £10,000, this initial bank
capital of £10,000 enables the bank to issue loans of up to
£100,000, and each of these appear on its books as capital, whilst
in fact this £100,000 is only fictitious capital, it is only able to
earn interest to the extent that the money loaned out is used to buy
productive-capital, and thereby generate surplus value.
This, of
course, is all well and good, provided the loaned money-capital is
used for such productive purposes, and does indeed result in the
creation of surplus value, out of which the required interest is
paid. But, there is no such guarantee that even where the money is
used for such purposes that profits will be made, and that interest
can then be paid. That is why banks are cautious about lending money
to small businesses, which frequently are unable to make profits, and
almost as frequently go out of business. When a business to which
such a loan has been made goes bust the truly fictitious nature of
the capital in the possession of the bank becomes apparent. Not only
is it unable to obtain the interest on the loan, but frequently, the
actual productive-capital that was bought with the loan, becomes
seriously devalued, so that when sold it does not even raise enough
to cover the original capital sum borrowed. Instead of it being
self-expanding value, it has become diminished value.
Even more is
this the case where the loan is made for purposes that have nothing
to do with the production of surplus value. The owner of loanable
money-capital, is not interested what purpose the borrower has for
the money they borrow, any more than the seller of electric
toothbrushes has any interest what purpose the buyer has for them.
All they are interested in is obtaining payment for the commodity
they sell. As set out above, interest is merely the price for the
sale of capital as a commodity, for its use value as self-expanding
value.
If the
borrower, the buyer of that commodity, does not use it for that
purpose, it is of no concern to the lender, the seller of the
commodity. They will still be expected to pay its price, i.e. to pay
interest to the lender. If the borrower uses the money-capital they
borrow, for other than productive purposes, they will then have to
find other means of paying this interest. Take, for example, the
government. The government borrows money by issuing bonds. The
bonds are bought by rich individuals, banks and finance houses, large
companies, and by other states. These bonds appear as capital to
those who have bought them.
However,
from what has been set out above, its clear that these bonds are only
fictitious capital. They are nothing more than a loan, and only able
to produce interest to the extent that those who have borrowed
against them use the proceeds for productive purposes, as capital, to
produce surplus value. But, a government that borrows by issuing
such bonds does not generally use the proceeds as capital, as
self-expanding value, i.e. to engage in productive activity, and
generate surplus value. Money raised by such borrowing, merely to
cover the government's own running costs, does not act as capital, but
only as revenue, i.e. it is only a money equivalent of that portion
of society's consumption fund, drawn upon by the government to meet
its needs. The same applies where it is used to cover various
welfare functions.
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