Wednesday, 1 July 2015

Greece and The Money Myth - Part 1

Economists of left, right and centre, have misstated the nature of the problem in Greece. At the heart of this misstatement, even amongst those economists that claim adherence to Marx, is a failure to proprly understand the nature of value, money and capital. It is an example of what Marx calls commodity fetishism, or seeing what is actually a social relation between human beings, as being merely what it appears to be, a relation between things.

So, for example, the whole emphasis of the problem facing Greece today has been placed on a lack of money, most visibly portrayed by the imposition of “capital controls”, and the limit put on withdrawing “money” from cash machines. Sections of the Marxist left have swallowed this analysis hook, line and sinker. For example, the Weekly Worker has carried articles about the idea that if Greece does run out of “money”, ie. Euro notes and coins, because the ECB stops supplying them, then it would have to revert to the Drachma, or else issue I.O.U's, as a form of second class Euro.

This shows a complete lack of understanding about what money is, and its role in the Greek crisis. Let me try to explain it simply from a personal perspective. For about 95% of my life, currently, it would not make a scrap of difference to me if every £1 coin and every banknote disappeared from existence. If it became impossible to print them, or to mint them, I could not care less.

The reason is simple. I have never used an ATM, and I can't remember the last time I used notes or coins to pay for anything, or in turn was paid in notes or coins. Yet, like everyone else who will have a similar experience, it makes absolutely no difference to my ability to go about my life. My rent, my energy bills and other regular payments get paid by direct debit, from my bank account. Various other payments for food and other items, like petrol, are paid for using credit cards. Income is similarly paid directly into my bank account.

The issue then is not at all whether any £1 coins or notes of various denominations are in existence, to make these payments, because today far more efficient means of achieving that goal are available. It does not stop for one minute the prices of all these commodities being denominated in £'s. It is not whether any such notes and coins are in existence, which is the real issue enabling or preventing payments from occurring, but whether those doing the paying have the required funds in their account, so as to make the payment.

The real issue in Greece, was demonstrated on Channel 4 News tonight, which visited the the docks in Piraeus, which was once a thriving heart of the Greek economy. It is not a shortage of money that has left it an empty hulk, its workers now unemployed, and so without wages paid into their bank account, and so without funds to pay their rent etc., it is five years of Troika induced austerity, on behalf of conservative economic dogma, and in the interests of a small number of money lending capitalists.

Moreover, its quite clear that if all of these prices can be denominated in pounds, and if all of these money transactions can be effected without a single note or coin being used, there is nothing about those notes or coins that makes them money! In fact, as Marx long ago demonstrated they are not money, they are merely tokens representing a money commodity, such as gold, which in itself is merely a physical manifestation of value, a representation of a given quantity of labour-time. Money, as Marx defines it is merely the universal equivalent form of value.

These new payment methods not only effectively remove the need for “money” in the shape of notes and coins (currency) but also speed up the transmission of payments, which is itself beneficial to capital and profitability.

If we go back 200 years or more, currency took the form of precious metal coins such as gold or silver. To put this currency into circulation a country first had to obtain the gold or silver by mining it, or buying it from some other country in exchange for commodities. The gold then had to be minted into coins which could be put into circulation, which had its own cost because the coins wore out through use, and because they were deliberately clipped so as to obtain some of the gold or silver from which they were made.

But, use of the coins themselves limited the speed with which transactions could be undertaken. On the one hand, if all payments are made with such coins, everyone must keep a hoard of these coins for everyday transactions in their purse, or for businesses in their cash box. For all the time these coins simply sit there doing nothing, they are not in circulation, not acting as currency, and so for any given value of commodities to be circulated, in an economy, a greater quantity of these coins must be minted. In other words, the velocity of circulation of the currency is curtailed.

One of the problems that occurs in an economy that uses a lot of such currency is that when a situation like that in Greece arises, people will hoard even more of this currency. If we take the notes and coins that people are taking out of the ATM's, and from the bank today in Greece, the normal thing would be for them to spend this money in shops and so on, and the shops would then deposit that money once more in the bank. The question of the bank running out of such notes and coins does not arise, it just circulates, which is where the term currency is derived from, i.e. from it being a current, like a flow of water.

In the diagram above, this is represented by the flow of money from "Bank Deposits" to C'.  Notes and coins come out of the bank and into the hands of consumers, who use it as currency to buy commodities (which is why it is shown as a green line.)  The value of these commodities is labelled as C', because it already includes the surplus value that has been created in production, i.e. during P. Capitalists, thereby exchange these commodities with consumers for money.  In the hands of the capitalists, this money now becomes money-capital.  What was the commodity-capital of the capitalist has metamorphosed into money-capital.  The capital-value has remained but its form has changed from that of commodities to that of money.

It splits into two parts.  One part equal to M simply replaces the commodities previously consumed in the production process (or for the retailer the commodities they bought from the producer).  The other part equal to the surplus value, can be used either as revenue to fund the consumption of the capitalist, or else used as productive investment to increase the size of their capital.

But, in a credit crunch, people, such as the shops, instead hang on to the notes and coins paid to them, rather than putting them it into the bank.  They try to hold on to the notes and coins as much as possible, but to shift as much of their own purchases of materials and so on, to payment by credit, payment by cheque and so on.  So this currency circulation is frustrated.

Where the currency is comprised of precious metals that is real value, representing the expenditure of real social labour-time that is effectively being made sterile. It is being used neither as revenue, in other words, it is not being consumed to produce articles of consumption, like jewellery, not is it being used as capital to buy means of production and labour-power, so as to increase social wealth. It is not even being used as currency to facilitate consumption or the creation of capital.

In essence, it is as though social labour-time was used to dig up gold and silver from the ground, mint it, and then stick a portion of it back into the ground!

But, the use of precious metal coins is inefficient also for very large transactions. No business or individual would want to keep large amounts of gold or silver on their premises to cover very large purchases, because of the risk of theft. Large currency hoards are, therefore, kept in the bank. This has advantages also for the bank, as it lends out this gold and silver at interest. However, the person who wants to buy some expensive item cannot immediately do so, because to make payment for it, they must first make arrangements with the bank, to obtain all of the coins required, and have them transferred to the seller's bank.

Until such time as that occurs, the money is not in the seller's account, and not available for them to use for any purchases of their own.

One of the reasons that the arguments about Greece issuing Euro denominated IOU's to pay its employees, and what a catastrophe this would be, shows a lack of understanding about what money is, is that precisely in order to avoid the cumbersome procedures, described above, banknotes developed as precisely such IOU's, so that the transfer of funds could be effected much more quickly and at less cost.

Buyer A simply obtains a banknote, or several, from their bank, for the amount of the payment to be made, and hands it to the seller. The banknote is nothing more than an IOU, which contains the words, “I promise to pay the bearer the sum of x.”

What the bank promises to pay to the bearer is the stated quantity of gold or silver, equal to that specified on the bank note. The reason this speeded up the velocity of circulation, and so of commodity transactions, as well as significantly reducing the cost of those transactions is obvious.

Firstly, much less actual gold and silver is required in circulation, and as less is circulated, less of it was lost to wear and tear. Less social labour time was required to be expended to mine and mint coins, and so this social labour-time was released for actual wealth creation.

Secondly, the banks were able to create a system whereby they could collect all of the banknotes together and pair them off against each other. Suppose Bank A has issued banknotes to its customers with a value of £1 million. Those customers have handed these banknotes to sellers of commodities, and those sellers have then deposited these notes in their bank. Meanwhile Bank B has issued £1 million of banknotes to its customers, who have likewise, bought commodities with these notes, from sellers, who deposit those notes in Bank A.

Now Bank A has banknotes drawn on Bank B entitling it to £1 million of gold from Bank B's vaults, and Bank B has £1 million of banknotes drawn on Bank A entitling it to that amount of gold from Bank A's vaults. The two cancel out, so that, in fact, no gold need move an inch! It was for this purpose that the Banks' Central Clearing House was established.

I will continue to examine this tomorrow in Part 2.

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