Question of Credit Money and Problem of the Crises
J.B. Say`s Law, or simple commodity production
Let's begin from the history. In due time, Jean-Babtiste Say(1767-1832), a French thinker, in his work Treatise on Political Economy (1802) formulated several positions which today one can find in any textbook on “economics”. First of all, this is the theory of three factors of production under which labour, land (in more broad concept - any natural resources) and capital take part in the formation of the cost of goods. These factors of production are the sources of incomes of the society. Another relevant provision: offer of goods under the normal market exchange automatically creates the effective demand, the supply is always equal to the demand. This provision is accepted as the Say`s Law or Say`s Dogma. According to Say, there cannot be any crises of overproduction or underproduction in the “market economy”. Say lived up to the time when the first large crisis of overproduction (1825) broke out, however, he believed that the crisis was an annoying misunderstanding, “ exception to the rule” conditioned by such subjective reasons as “wrong” behavior of the bankers. The logic of Say who formulated the law was very simple: the production costs of the goods are equal to the amount of money which an owner of every factor of production receives. A worker receives money in the form of wages, a land (natural resource) owner - in the form of rent, a capital owner – in the form of payment for the loans granted. So, the amount of the production costs is equal to the amount of the money which appeared in the hands of every owner of a factor of production.
But in this outline there are the questions which require additional understanding.
The first question. What if the owners of the factors of production use not all the money received for buying goods for the reason that some goods appear unnecessary? That is the effective demand will appear above the offer of goods? It can really happen but it is a “technical” failure which provokes an underproduction crisis instead of “overproduction” of goods. Strictly speaking, they are just “products of labour” which did not turn into “goods” (definition: the goods = the products of labour obtaining public recognition in the market). The capitalistic businessmen with the lapse of time improve their business skills and produce goods really necessary for customers. The evidence is the fact that the capitalism almost exclusively faces the crises of “overproduction”. The capitalists instantly react to any “underproduction” and instantly eliminate them.
The second question. The equal balance between the supply and demand can be destroyed because of the owners of the factors of production spend not all money for the goods. A part of money they will set aside, i.e. it is going to be a saving. But this doubt is relieved if we take into account that in the “market economy” the competition takes place, and the producers of goods tend to cut costs up to the minimum level. And this minimum level is specified by the minimum necessities of the owner of every factor of production.
But here there is the third question. It is doubtful whether the capitalist wants to live like how the “Puritans” lived in the years of the capital primary accumulation denying themselves the most necessary. It is doubtful whether the capitalists want to live like how their hired workers live. For this purpose, a capitalist (at least, in 90 % of cases) becomes a capitalist to live in a big way and always to have a lot of money. But this money he receives not as compensation of costs for granting of his capital as a factor of production. He receives his millions in the form of profit. The profit is a difference between the price of the sold goods and production costs. In other words, the capitalism, or the “market economy”, can exist only under the condition if the capitalist receives profit. The profit is the purpose and driving force of the “market economy”. As they taught us in the Soviet time, the “main economic law of the capitalism is profit –making by capitalists”. If there is no profit, the production becomes pointless for the capitalist. Production in this case stops and the crisis occurs. The capitalism without profit is nonsense! It is therefore called by capitalism that all its “economy” is aimed for the capital gain, and the capital can be increased only by profit. The truth is Marx in Das Kapital speaks about the tendency law of decrease of the profit rate within the capitalism development. In the conditions of crisis there can be even massive losses. But, nevertheless, the capitalism cannot exist without profit, like a fish cannot exist without water (though it can live without water for some time).
So, the principal defect in the Say`s outline is the fact that he “forgot” about the profit. The given outline is referred to not capitalism but another model of the economy. For example, to the simple commodity production, when individual commodity producers sell their goods not for profit but for production cost recovery and supply of simple reproduction. Probably, Say developed his own theory having in front of his eyes not capitalism but simple commodity production which was not completely exterminated yet in his time.
Capitalist production: where does the profit come from?
And the capitalists receive the profit. Of course, loss also happens. Under conditions of permanent loss, a capitalist dies in social sense: bankruptcy happens, and he (if he has not put a bullet through his head) continues to live already in another capacity (not as a capitalist). The main thing is not the actual state of an individual businessman but the fact that all the society is “programmed” for production and profit –making (the “basic economic law of capitalism”). For some time all the “economy” of the capitalist society can have a negative financial result, i.e. a loss. But it is an “emergency” for the capitalism, it is called by “crisis”. It cannot last too long. Otherwise, in the eyes of capitalists a ghost of the “end of the world” starts looming, or, at least, a “ghost of communism”.
There is a question: where does a profit for an individual capitalist and for the whole class of capitalists come from? Marx gets away from the direct answer to this question, but he in Das Kapital tells about a “secret” of formation of surplus value. The classic scrupulously (on tens pages) tells that it is a difference between the total cost of the goods after deduction of the cost of the basic and variable capital (costs for raw materials, machinery, manpower etc.), and that the surplus value goes to the capitalist, the owner of production. Though then this capitalist had to share his surplus value with trade and money capitalists who require their shares for the “services” rendered. The surplus value after its “sawcut” receives the names: manufacturing profit, trade profit, loan interest (bank profit).
If to express a provision of Marx in the formula, we will receive:
Surplus value = profit of all groups of capitalists =
= Price of the goods - production costs.
Despite of the long and quite boring description in Das Kapital of the processes of creation and “sawcut” of the surplus value, we do not find an answer to the question: why does the goods price (its cost) appear more that production costs? Let's remind that according to Say, it should be:
The price of the goods = production costs = money compensation of the owners of the factors of production (hired workers, land owners, capitalists).
So, “it doesn't fit together”. Marx, as opposed to Say, is not a “romantic”. The more so because he lived and created half a century later than the French, when the capitalism already formed completely. I think, that Marx understood everything, but he kept something back. He kept back that the excess of the price over production costs could take place only if the buyers of the goods have any additional money which do not go into the composition of the production costs. It allows commodity producers to increase the price over the level of costs and make profit. Where is additional money come from?
Additional money, for example, can come to the country from outside. In particular, as a result of maritime banditries, “new geographic discoveries”, robbery of colonies etc. By the way, this very fact predetermined quite quick development of the English capitalism, gave an opportunity to different groups of capitalists to make profit and to become a “model” of a new way of production and a “lighthouse” for other countries. And many fighters with the “backwardness” of Russia, not examining what is what, offered already in 19 century to follow an example of England as the most “progressive” country. That is to follow the road of the international robbery.
If to take a closed model of the “economy”, inside the country the source of such additional money is only one, the credits of the usurers. On these very credits all that social-and-economic formation of the capitalism is kept. K. Marx wrote about that formation on a few thousands pages of Das Kapital but he did not uncover the main secret of the “capitalist way of production”.
The credits can be granted to different categories of the borrowers:
a) companies of not financial sector of the economy (production of goods and services, building, transport, communication, wholesale and retail trade etc.);
b) housekeeping (in other words, individual citizens, physical persons);
c) state (central government, regional authorities, municipalities).
Irrespective of a channel for “emission” into the “economy” of additional money in the form of loans, they, by one way or another, will get in the hands of those who form the effective demand for the goods (as wages, bonuses, fees, pensions, benefits consumer and mortgage credits etc.). An additional effective demand will allow the producers of the goods and services to set the prices above the production costs and to make the desired profit. Further, the profit of the capitalist businessmen is voluntarily or under pressure transferred by the capitalist businessmen to the safes of the usurers. Voluntarily - as placement of the means on the different bank accounts. Under pressure - as a kind of “requisitions” which the bankers carry out amid the crises (we are going to speak about it below).
Unfortunately, the modern textbooks on the economic theory, macroeconomics, microeconomics etc. say nothing intelligible about the origin of the profit in the “market economy”. Like Marx, they carefully save the “secret” of the capitalist mode of production.
Credit money - profit - crisis
But “pumping” of the “market economy” with excessive (from a point of view of the tasks of organisation of production of goods) money in the form of loans means that sooner or later such an “economy” will come to a crisis. Why? Because it is necessary to return the borrowed money, and it means that at a certain moment the withdrawal of money from the “economy” into the safes of the usurers will exceed of the inflow of money from the usurers into the “economy”. At this moment, a rate of profit in the whole “economy” will come to zero and then take on negative values. And it is a crisis of “overproduction” indeed, when the effective demand will appear less than the production costs. In fact, the society faces the crisis manifestation at the moment when money, besides its primary functions – the instrument of payment and exchangebegin performing the function of a medium of savings, and in such a specific form as a medium of profit formation. We have used the word “moment” rather conditionally, as the “mutation” of money functions was taking place not for a day or a year, and was lasting for decades and centuries. The illness grew ripe very slowly and unnoticeably. And it came out for the first time in the form of a scale crisis of overproduction only in 1825.
Imbalances in the “economy” with the credit pump are unavoidable. Even if credits are interest-free. But the situation gets worsen if they charge loan interests. Therefore, the usurers are called by usurers because they lend money on interest.
Let us study the mechanism of imbalance formation in case of the interest loans in more details.
The amount of money available in the economy is equal to the amount of all the money emitted by the central bank and commercial banks in all forms. We suppose that the banks have emitted credit money for the amount of 1000 units. Exactly so much money will circulate in the economy, and other money is not and cannot be. At the same time, in the economy the liabilities appear which are equal to the principal amount of the debt, i.e. 1000 units plus the interests on the debt. Supposing that an average period of the debt repayment is equal to one year, and the amount of the interests accrued for this period will make up 500 units. In such a way, the total amount of the liabilities which should be repaid at the end of the period will make up 1500 units. But you know that in the economy there are only 1000 units of money! I.e. not enough for all debtors! As a result, sacramental phrase “Money is always tight” which we sometimes say has the very deep meaning. Of course, we speak not about that the man by his nature can unrestrainedly cultivate and accumulate his needs which all money of the world cannot cover. We speak about that the credit money available in the society is not enough for covering of all appearing liabilities.
At the moment of “money revolution” in the times of the late Middle ages just a few (usurers) suffered from the “thirst for money”, they considered money as general and most effective means of the power and domination. For the New time (epoch of the capitalism), the “thirst of money” has become the general illness. But at the same time, for 99 percents of such “money-hungry” the pursuit of money became only means of survival, a way to jump out of the debt pit of the creditors - usurers. The pursuit of money has made a competition by a standard of life, the very legalization of usurious interest quickly turned the society relations into the “bellum omnium contra omnes” (Hobbes).
Again we shall return to our numerical illustration.
Supposing that the businessmen obtaining credits expect to receive a profit equal to 500 units after the goods have been sold. Therefore, the amount of prices of the goods will be equal: 1000 units of the credit (which was spent for the wages of the workers, raw, energy, machinery etc.) plus 500 units of interests (which are necessary to be paid to the creditor within one year) plus 500 units of anticipated profit. In a result, the amount of the prices of the goods (in the businessmen`s calculations,) is equal to 2000 units. In our conditional example, the rate of profit anticipated by the businessmen is equal to 33.3 % (500 units of profits: 1500 units of the production costs including the interests payment). Taking into account that the businessman still should pay profit tax, the net profit rate can be much lower.
Then, our conditional illustration visually demonstrates that the goods at the cost of 2 money units compete for every monetary unit circulating in the country. This is a simple numeric explanation of what where within the capitalism the competition comes from and why the “professional” economists call the “tendency to a competition” by a “natural” (and even “eternal”) feature of the man. We will tell in more details about the competition as a unavoidable attribute of the “money economy” in the following section.
But, despite of all tricks of commodity producers and hardening of the competition, the effective demand of the society always appears less than supply of goods, and the difference is equal to the value of the accrued interest (in our example - 500 units). And you can forget about the planning profit making (in our numerical illustration – 33.3 %)! From here – unavoidable bankruptcies and all other attributes of the crisis of overproduction.
Unfortunately, the above explained simple truth of the causes of the crisis originating is uncovered in the “economics” textbooks. Why not to explain to students these very simple things on a few pages? The whole point is the following:
a) a cause of crises is the profit (in the final analysis, bank profit, interest);
b) the modern civilization (under the name of “capitalism”) is built so that to ensure the profit receiving by capitalists (in the final analysis, bankers);
c) for the crisis overcoming, the society must change the model of its development, refuse the model under name “capitalism”.
You understand that the textbooks on “economics” are written not to unmask the capitalism (“money civilization”), but to demonstrate: “the capitalism is the most perfect public formation”. I.e. to ensure to the usurers the conditions that they could indefinitely long gain their loan interest.
Thank God, today students (and not only students) have an alternative to the textbooks on “economics”. In particular, in the Internet there have appeared recently a number of publications on the issue brought up in this chapter. For example, an article by Andrei Makson ‘Anti-recessionary Tax’ where he, in particular, writes:
“The basic conflict of the modern economic system of the capitalism lies in the fact that the profit of a capitalist and bank loan interest recall a part of the money supply from circulation resulting in the chronic lack of money for the customer. Money is accumulated in the hands of the owners of means of production and bankers which results in the deficit of money for the customer and slowdown of consumer demand. Curiously enough, but if a capitalist has got profit today, tomorrow he will receive no profit (we should note that this provision does not cover the world usurers - they receive profit always - V.K.). It is a paradox of the capitalism. To keep the balance of the market system, the money supply should circulate between the aggregate producer and aggregate customer lossless, i.e. without the profit of a capitalist and the loan interest of a usurer (italics mine - V.K.). For restoration of this balance, it is necessary to withdraw from the personal incomes of a capitalist and usurer that part which goes for the capital accumulation and to return it into the circulation in the form of additional incomes of customers”.
Credit money: risks of the usurers and society
There is a natural question: whether the crisis infringes on the creditors, whether the “domino effect” appears when the bankrupt credit recipient entails the banker into the pit? Nothing of the kind! Bankers do not like risk, and to protect themselves against similar situations they have a tested instrument – a pledge. Let us tell more: bankers even wish their client to get bankrupt. Why? - Because the value of collateral (even taking into account its possible devaluation), as a rule, much more exceeds the amount of the debt. The classic literature portrays an image of the usurer who, by the way, dreams not of interests but a pledge! (Gobseck by H. Balzac, Venetian Merchant by W. Shakespeare etc.).
Not only “professional” businessmen and other dealers suffer from “thirst for money” but the whole society. You know that money is generated at the expense of increase of the debt of all members of the society - businessmen (companies), private persons (so-called “households”), state. If to speak about the state, today it becomes the major debtor which issues bonds, and under these bonds the central banks emit the legal means of payment (banknotes). In such a way the emission of the “real” money is organised in developed countries. All members of the society as tax bearers in spite of themselves become the debtors of the usurers. Every year a share of so-called “interest” expenditures (i.e. expenditures for the service of the national debt) in the state budgets is increasing. In some countries it makes up already a half and even more.
The man who, for example, holds in his hands a dollar note, thinks: I honestly “have earned” this money, I owe nobody nothing, I will not give it to anybody. This man is mistaken. “Birth” of this money is conditioned by occurrence of a debt for somebody else. Usually for the state or private business, which need this money badly for this very debt repayment. And they will do their best to make you be indebted to the state or private business and part with your money. It also will be made without additional noise, “culturally”: either with taxes or with an instrument of increase in prices (inflation). We do not speak about frankly gangster methods to take money away.
There is another question: why crises of overproduction arise with definite periodicity, and the periods between them are quite long (10-20 and more years)? Probably, because of disproportions between the amount of credit money in circulation and the amount of liabilities which are subject to repayment, the capitalist economy would stay in the condition of permanent stagnation. However, bankers have an opportunity to control the money supply, in particular, to increase the amount of money in circulation be means of refinancing incipient debts. In other words, against covering the old credit instruments, bankers issue new loans. Unless they do so, the process of creation of goods and services will stop at all, as money will quickly go out of circulation accumulating in the safes of usurers.
That the client may not be “off the hook”, the bankers have drawn up an “iron clad rule”: the client who has not enough money for redemption of all liabilities to the creditor should at first pay the interests, in which case the principal sum of the debt remains not repaid. It ensures maintenance of dependence of the client on the creditor. This also is promoted by a rule: if the client wants to repay his liabilities to the creditor earlier, he should pay a penalty. Sometimes an advance repayment is forbidden in general. By one word: “one ruble for in, ten rubles for out!”
Crises is the “golden” time of usurers.
In such a way a debt “pyramid” is being built. The “economy” is given a chance to “accelerate”. For such an “acceleration” medium-term and long-term credits are suitable very much, which are usually used for investments in that very retooling of the production which we have spoken about above. But we should clear up: what is the primary and what is the secondary. Does the technological progress control the supply of credit money (what K. Marx postulated in fact) or does the regulation of credit money supply allow to control the technological progress? Certainly, the second. Bankers are not interested in that the “economy” permanently stagnates or permanently “stumbles”.
Resting on the debt refinancing instruments and increasing the credit periods, the bankers expand the business cycle up to 10-20 years. For this very period the economy has time to give a good “increment”, then it is possible to begin “shearing sheep”. Yes, yes! Exactly so such an event which is called by “recession” in clever books on economics in the cynical language of the world bankers. Maybe, they could delay for some time a joyful for them moment of “shearing”, but there is a slight objection which does not allow them to delay the “shearing”. The matter is the further issue of loans becomes impossible because there is nothing to ensure new loans. The society has accumulated a lot of any property, however, for the period of 10-20 years most of all valuable and liquid property appears collateral for usurers. And usurers, as we know, are cautious players and give nothing for no particular reason. For the last decades the virtual assets have begun their booming in the form of securities. But the real usurers offer such virtual property to others, and they themselves prefer something more tangible (physical property). So, today this tangible property is getting worse: against the background of the thriving mass of virtual property, its relative scale is growing shorter; the absolute scale of such property also is growing shorter because the society over the last decades actively have spent “on food”. Therefore it is possible to expect that the periods between “shearing” are getting shorter.
The “harvest” which usurers gather during crises is beyond comparison with those incomes which they receive in the “peace time” (i.e. in periods between crises). As the saying runs: “war (that is a crisis) makes some people rich”.
They gather two “harvests” at least. The first one is the pledges of their bankrupt clients. The second is other solid assets (including shares of plant facilities, transport and trade companies etc.), free circulating in the market and which dramatically fall in price during the recession periods (it is called by “diflation”). Thank goodness, for this purpose the usurers accumulated the vast money capital, plus “greenback printing machine” which is always in readiness.
The same rich “harvest” the bankers, perhaps, can gather only in case of man-made catastrophes like wars and revolutions. But it is already a subject of a special talk.
It is possible to agree completely with the writer of the located in the beginning of 2008 in the Internet publication where he uncovered the essence of the economic crisis approaching to the West: “The economic crisis approaching to the USA and all western world plays into the hands of the financiers, the industrialists in the conditions of depression will gain no profit and will have to return industrial assets to the financiers for the debts. Striking examples have already followed. The main result of the future crisis is redistribution of the property for the benefit of the financiers (italics mine - V.K.). So, Ford will get beyond control of the Ford`s clan and go into hands of the Rothschild` clan. So, General Electric, which has already been half under the control of the financiers, becomes their property already 100 %. There will be such results of the Second Great Depression for industrial national bourgeoisie.”
To “launch the process” (i.e. “crisis launch”), it is necessary just to cut off the “valve” of the money supply. Usually the “general staff” of usurers which is called by the central bank does it. It terminates the operations of refinancing and / or dramatically increases the rate which makes money expensive and not available. After the actions of the “general staff”, the individual usurers start acting. For example, they start to require immediate repayment of the valid credits (quite often credit contracts do not specify the exact periods of repayment, such credits are called by “on-call” – repaid at the first request of the creditor). There are also other “detonators” which can provoke crises, but it is already a talk for the professionals.
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