Saturday, 4 July 2015

Greece and the Money Myth - Part 4

In Part 3, the question was raised, why is so much being made of the shortage of money? Why are people queuing at cash machines to take out notes?

The answer to the first question is easy. Particularly in the last 30 years, when wealth has been almost exclusively associated with the possession of money, it takes on a mystical, god-like power. Even in the shape of worthless bits of paper, people, including economists, bow down before it. By contrast, if I were a Greek worker, or the Syriza government, I would say you can take as many bits of paper out of the country as you like, but leave the land on which we can grow agricultural commodities; leave the tractors and other machines required to plant and harvest the crops; leave the factories, shops and offices; leave the machines required to process the materials; leave the stocks of food and materials we require. We, the workers, will take those things off your hands for free, and run them as co-operatives, to directly meet our needs. If we need them, we can print whatever bits of paper we need!

As for the second question, of why people are queuing to get money out of ATM's, the answer is more complicated. In part, its similar to the answer to the first question. People over a long period have been brought to believe that these worthless bits of coloured paper actually have some value. As Marx puts it, “A Contribution To The Critique of Political Economy”,

Gold circulates because it has value, whereas paper has value because it circulates.”

The money tokens, like a €100 note, have no value, apart from the value of the paper and ink. They are mere representations of value, a claim to a portion of the product of total social labour. But, those seeking to take out the €60 maximum, each day, believe these bits of paper do have value. Part of the reason they want to take out these bits of paper is the same reason that, in the past, people wanted to trade in such bits of paper for the gold they represented. That is that they fear that the bank itself may collapse, and so their funds, deposited with it, will be confiscated. The latter reaction is more rational than the former, because gold, at least, does have value, whereas the Euro notes have none.

The other reason is that many of those queuing are pensioners, who do not have, and do not know how to use a bank card. But, the other reason for people to want actual notes and coins is because this is always what happens when there is a credit crunch, artificially induced as a consequence of restricting the amount of currency put into circulation. Its what happened in 1847, as a consequence of the Bank Act. Its why Phillippe Legrain, is quite right in describing the actions of the ECB, as directly political in restricting the ELA provision of notes and coins to the Greek banks. It is an act of political blackmail.

In 1847, Britain had a crop failure, which caused it to import food. It paid for it with gold. At the time, Britain had just entered upon a long wave boom, that started in 1843, and was to run until the late 1860's. But, the 1844 Bank Act forced the Bank of England to reduce the quantity of banknotes it put into circulation, as a result of the reduction in the gold reserves. That restricted the ability of other banks to discount Bills of Exchange, which were the main form of commercial credit, and discounting them was the main way businesses obtained banknotes. But, with fewer Bank of England banknotes made available, the other banks and discount houses found it harder to carry out this function, and so charged a higher commission to discount the bills.

Interest rates then rose, and credit shrank. Suppliers required payment in cash rather than on credit, and anyone who had notes and coins tried to hold on to them, for payment. The crisis was quickly resolved when the 1844 Bank Act, was suspended, and additional Bank of England banknotes were thrown into circulation. A similar thing happened globally in 2008, and in the Eurozone in 2010, and the same thing is being induced now in Greece, as a result of the actions of the ECB, in limiting its funding of the Greek banks.

This is one of the reasons that sovereign states have wanted to retain control over their currency. The actions of the ECB and EU leaders, is playing strongly into the hands of the conservative nationalists such as UKIP, and the FN, who use these kinds of examples, to demonstrate why each country should be outside the Eurozone, if not outside the EU itself. Rather than Draghi doing everything necessary to save the Eurozone, he along with Jean Claude Juncker and Angela Merkel appear to be doing everything necessary to blow it apart once and for all.

The actions of the ECB in not providing the required funding for the Greek banks, to meet the currency needs of their customers for withdrawals is quite grotesque. It is designed to cause the kind of bank runs that were seen with Northern Rock in 2007, for which the Bank of England was criticised. That is particularly the case as right-wing politicians and the right-wing media have been trying to encourage such a bank run over the last week, to put pressure on the government, and to create a climate of chaos ahead of the referendum on Sunday. The ECB's actions would not be tolerated in any other country, and represents an overtly political act.

One of the functions of a central bank, like the ECB, is to act as lender of last resort, and thereby to provide the currency required to prevent such bank runs. If customers of Eurozone banks have funds in their account, they are entitled to withdraw notes and coins up to the limit of the value of those funds, and it is the fiduciary duty of the ECB as the issuing bank, to ensure that sufficient notes and coins are supplied to its member banks to meet those requirements. After all those ECB issued notes and coins, like all other such fiat notes and coins, are merely a token of value that it has issued in place of real money.

Without that fiduciary duty being upheld by the ECB, no one can have any confidence that any Euro-denominated account is secure, and therefore, no one can have confidence that the Euro is a secure currency. It is as though people have taken a load of real money in the shape of gold to an ECB member bank, been given notes issued by the ECB with a promise to exchange them again for gold on demand, only to find that the ECB has chosen not to honour that promise in a particular country!

If today I have €100 in a Greek bank account that I cannot get hold of, because the ECB does not provide the required Euros to my bank, how can I have any confidence that tomorrow that will not be the case if I have an account in Portugal, Spain, Italy Cyprus, Malta, Ireland, Luxembourg or any of the other Eurozone economies, particularly those whose banks have been shown to be even moreexposed than were those in Cyprus. The banks in Luxembourg, for example, where Jean Claude Juncker, was involved in developing an economy that, like Cyprus, was built more or less on similar principles to a Ponzi Scheme, that attracted funds, on the basis of being a tax haven, have been shown to be more than twice as exposed to a potential crash, as those in Cyprus; a fact that the IMF itself drew attention to some time ago, given the interconnectedness of the banks in Luxembourg.

The problem of pensioners not having debit cards is perhaps easy to resolve. I'm surprised Syriza, as a party with grass roots connections, has not resolved it already. The obvious answer is to take action to get pensioners and everyone else to have debit cards, and know how to use them; organise credit unions with collective access to funds, run by people who understand finance, and have access to debit and credit cards that can act to make payments collectively by electronic means.

This really is a reflection of the extent to which socialists have become tied to statist conceptions, and reliant upon the mechanisms of the capitalist state rather than building up their own worker owned and controlled mechanisms in parallel to it. It really would be quite easy to achieve on the basis of nominal book transactions where commodities were supplied by worker owned co-operatives, and payments were effected via worker owned co-operative banks.

But, even in the immediate term, pensioners could make payment by cheque rather than cash, if they do not have a debit card. The government may have to take measures to ensure that payment can be made by such means rather than businesses bringing on a credit crunch by demands for cash payment, action which itself may be political, by some business owners.

The real reason for the queues at ATM's is a fear that deposits may be sequestered. That is a fear that conservative politicians and media have been fostering in order to create a bank run, and credit crunch ahead of Sunday's referendum.

I will conclude this analysis in Part 5 tomorrow.

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