Thursday, 25 December 2014

Fictitious Capital - Part 4

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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