Friday, 6 February 2015

Greece Doesn't Need Money, It Needs Capital

All of the discussion about the debt crisis in Greece, is conducted in terms of a need, by Greece, for money. But, Greece does not need more money; it needs more capital. Greek Finance Minister, Yanis Varoufakis, is, therefore, quite correct in saying that he is not interested in a solution to Greece's problems based on the current solutions that simply provide Greece with additional loans to cover its expenses, - a large part of which, in any case, consists of repaying the the interest and return of principal on existing debts – but which simultaneously, via austerity, diminish its capital.

Existing debts can always be covered by borrowing more money. Its that reality which lies behind the business model of the pay day lenders and credit card companies, and the policy of governments, over the last 30 years, that has encouraged individuals to take on increasing amounts of private debt, which then inflates property prices, and the prices of financial assets, which then acts as collateral for yet more extreme levels of borrowing.

But, although such debt can give the impression of wealth and affluence, what it really represents is the growing impoverishment of the debtor, who is simply allowed to fool themselves into believing that they own what they have only in reality borrowed. I used to know someone, where I trained in Kung Fu, who repossessed cars for finance companies. He often had Ferraris outside his house that he had repossessed, and he said nearly all the cars he repossessed were of this expensive kind, and nearly all were repossessed from outside properties that were correspondingly expensive.

Simply borrowing more, to cover existing debt, only digs a bigger hole, increasing the amount of interest that must be paid back, and thereby diminishing the potential to repay the principal sum borrowed. Only where money is borrowed to finance the generation of additional income is that not the case. In other words, what is required, to repay debt, is capital, the ability to use one amount of value to generate a greater sum of value.

What Greece needs is not more money, so as to keep buying German commodities, or to pay interest to its creditors, but capital, so as to be able to produce commodities, that either substitute for those German commodities, or can be exchanged for them.

As Marx describes in Capital III, what appear superficially as the same kind of transaction, between countries, hides substantial differences. If country A sells £1 million of commodities to country B, and country B sells £1 million of commodities to A, in reality, what we have here is no different to a situation of barter. In fact, no money need be exchanged in such a situation. Money here only acts as a unit of account, a means of denominating prices. If both sides simply issue bills to the other for the value of commodities sold, at the end of the period the bills can simply be netted off against each other, leaving a balance of zero.

However, Marx says, if A sells £1 million of commodities to B, which pays for them by drawing £1 million of gold from its reserves, then what it has shipped to A is not commodities, but capital. By reducing its reserves by £1 million, what B has done is to reduce its ability to create additional deposits, to loan out money-capital within its economy, for the purchase of productive-capital. It thereby constricts the expansion of capital within its economy.

By contrast, when B shipped £1 million of commodities to A, in exchange for the £1 million of commodities it imported, these commodities already contained surplus value. They represented a self-expansion of the value used in their production, and so the potential for capital accumulation.

If A sells £1 million of commodities to B, and also lends £1 million to B, to pay for them, the situation is even worse, because not only does B suffer a £1 million loss of capital to A, which must occur at some point in the future when the repayment of the loan falls due, but it must also transfer additional to capital to A, in the form of interest payments on the loan! This is why foreign aid is given in this form.

This is the situation that Greece finds itself in. Having been encouraged to borrow money, in the past, to buy German commodities, German banks were keen to lend to Greece for that purpose, until such time as it appeared that Greece may not repay the loans. Then German and other banks were keen to offload the risk of default, by passing that risk on to European taxpayers. So, they sold their Greek bonds to European central banks and the ECB.

The obvious answer here is that Greece needs to increase its capital so that it increases its ability to generate additional value, and thereby to cover its purchases via the exchange of commodities, rather than additional shipments of capital.

This illustrates a number of points made by Marx in relation to the difference between money and capital. As described above, if A and B exchange commodities, of equal value, there is no reason for money to be present. It is the same situation as under barter. Money only acts as unit of account, denominating the amount of value on either side of the exchange.

But, for a long time, economies have essentially worked on this basis. If I go into a shop, to buy a loaf, the shop expects me to hand over £1.20 or so in coins, that is the equivalent of its price. In turn, this £1.20 may be part of the money I have received in wages. Money here is functioning as a means of circulation as well as unit of account. I have sold a commodity, labour-power, and received money in exchange, rather than receiving commodities to that value in exchange. I use the money to buy those commodities. Money has simply functioned to circulate the commodities being exchanged.

The situation is different with businesses. Firm A sells £1,000 of commodities to firm B, which sells £1,000 of commodities to C and so on, until X sells £1,000 of commodities to firm A. In the past, businesses drew Bills of exchange against the buyer, which was effectively an invoice setting out when payment for the goods must be made by. These Bills of Exchange were negotiable. In other words, they could be used themselves to pay for goods or to settle bills.

So, here A draws a Bill for £1,000 against B and so on. When X comes to obtain their £1,000 from A, therefore, A simply endorses the Bill drawn on B, and hands it to X. X then endorses it and passes it to W to cover their debt to them, and so on. So, in the end, each bill is cancelled out, and no money needs change hands. If, in the process of reconciling these bills, they do not completely cancel out, a money payment is required to cover the balance. In this case, money acts not as a means of circulation, but rather as a means of payment.

The same thing applies with payments by cheque. The Banks' Central Clearing House, takes all of the cheques drawn on accounts in the different banks, nets them off against each other and only transfers the balancing figure. But, today, the vast majority of transactions occur on this basis because people have their wages paid directly into their account by electronic transfer from the account of their employer. Most bills are paid by similar electronic transfers, and many purchases are made by debit or credit card, which similarly results in payments made electronically from one account to another, which ultimately again only requires payments of balances.

As a result, the amount of money, or more correctly money tokens, in the form of notes and coins, required in the economy, has been massively diminished in relation to the total value of transactions undertaken. The introduction of things such as ApplePay could remove the need for money tokens as currency entirely.

In relation to Greece, this presents the ECB with a considerable problem, which once again demonstrates the problem of having a monetary union without a single state standing behind it. In the past, the state preserved the right for itself of a monopoly in producing the money tokens. Print your own Pound notes, and you would be thrown into the clink for a prolonged period.

But, this did not prevent banks from creating other forms of money. A bank only needed to retain enough actual money, as notes and coins, so as to meet the requirements of its depositors for withdrawals. If that meant they only needed to keep 10% of their deposits as notes and coins, they could lend out the other 90%. In that way, the banks themselves effectively created 90% of the money in circulation.

The bank simply establishes a deposit for a borrower, who then makes payments from this account. The recipients of these payments then pay them into their bank account. Their bank thereby increases its deposits, allowing it to lend more money and so on. A bank can lend money in this way in return for collateral. So, a government can issue a bond for £1 million, agreeing to pay £50,000 p.a. in interest upon it. A bank buys this bond, and gives £1 million to the government, which it does by establishing a £1 million deposit in the account of the government. The government then pays wages, and other bills from this account. The recipients of these wages and other payments, pay these into their own bank accounts, thereby increasing the banks' total deposits once more, and enabling them to loan additional sums. £1 million is turned into £10 million in circulation.

In terms of a need for money as means of circulation and payment, this was a simple solution for the Greek Government. No need to rely on the IMF or Troika for additional money, just sell Greek government bonds to Greek banks. No actual money tokens are required, as set out above, because the whole process can simply be effected by electronic transfers.

The ECB on Wednesday night, cut off that possibility. It issued instructions that Greek banks could no longer accept Greek government bonds as collateral. However, its not clear that this applies to the Greek Central Bank also. The talk is, therefore, that this will lead to a Greek banking crisis, forcing Greece out of the Euro, unless Syriza buckles and makes concessions over austerity, in order to obtain additional funding. But, that need not be the case.

As described above, money as the universal equivalent form of value, is, in a sense, only a given metric for determining value. Its no different from choosing to measure length in metres rather than yards. If I look at the price of a villa in Spain, the first thing I do is to convert the Euro price into Pounds, for example. In reality, the value of the house is the same, whichever measure is used, just as the a table gets no longer or shorter because I choose to measure it in yards rather than metres.

Whatever the EU, IMF, and ECB might want, therefore, Greece is free to continue denominating prices in Euros rather than Drachma, if it so chooses, just as Britain is free to denominate distance in miles rather than kilometres. Moreover, because the majority of transactions are conducted electronically, where this function of money as unit of account is all that is required, Greece has a diminishing need to rely on the ECB to provide it with notes and coins. The more its economy is converted to such electronic transactions, the more that is the case.

The Greek state, if the ECB tries to exclude it from its remit, rather than being forced to adopt some other currency, as the result of an ultimatum, could simply say, “No, we will continue to denominate prices in Euros, we will instruct our central bank to accept our sovereign bonds, and to create Euro denominated deposits in our account in return for them."  The Greek state could then continue to make Euro payments of wages and to cover other expenses from that account.

Greece would then be in a similar position to the UK, whereby it could conduct its own policy of QE, but with its prices denominated still in Euros. The result may then be an internal Greek inflation of prices, as the currency circulation expands, but, given the current deflation that would be helpful.

What this demonstrates is that Greece does not need money – it can create it itself – but what it does need is capital. Greece would still have a problem paying for its imports by selling commodities. But, at least, by ending the austerity imposed on the economy – which destroys its actual capital – it would create the conditions required for an accumulation of capital, and the means of resolving its problems.

1 comment:

George Carty said...

Isn't the fundamental problem with Greece that it is a country with poor agricultural productivity and which never became truly industrialized, and which depended almost entirely on tourism to pay its way in the world?

In the 2008 crash (like previous recessions) one of the first things ordinary Europeans cut back on was foreign holidays, which was devastating to Greece.