The Social Democratic Fantasy of Money

The public square occupations are an explosion of public discontent. They prove that people are willing to act against a capitalist life which they find intolerable. We take spirit from that. But as the participants in the occupations surge out of the squares where they were initially confined and into the buildings from which they have always been excluded, the limpets of the establishment have moved to gain influence for themselves. Their aim is to repurpose the slogans of the movement to fit their agendas for moderate reform.

The Bloomsbury Social Centre is not going to bite its hands and sit on its tongue. The following will be the first short analysis in what we hope to become a series. The series will provide short discussions of the self-serving and economically falsified reform schemes that are proposed to the Occupy movement by those think tankers, aspirant bureaucrats and opposition politicians who would wish to usurp its influence. These clowns of the establishment fringe are adept at producing incomprehensible, turgid “programmes” which lightly criticise — and which therefore ultimately support — the system from which the clowns have always benefited. Most of us here believe that anti-capitalist thinking and practice must oppose capital, and not only one or the other of its symptoms.

The Bloomsbury Social Centre is not a group: the text below is not its “line”; but it is a provocation, intended for us and for you.

1: Economic Justice Can Be Achieved By Monetary Reform.

According to populist bureaucrats with a cosmetic interest in “social justice”, the main cause of social inequality can be traced to the structure of our financial services sector. In particular, the institutional structure of finance is understood to allow banks to “create money”, and then to “misallocate resources” in the interest of short-term profit, with “profound economic consequences for our society.”

According to the nightmare scenario which this position constructs, private banks “create money” by lending their deposits. One bank loans deposits to a second bank, the second bank loans a proportion of the deposits to a third, the third loans a proportion to a fourth, and so on. By this means a chain of credit relations is generated, in which the total value of the deposits in the chain is greater than the sum of money originally deposited. Most of the money in use in the economy is “credit money” in this sense. In other words, it is debt. Private-sector banks “create money” only in the sense that they mediate this chain of credit.

Proponents of economic justice by way of monetary reform argue that banks also gain control over where money is “allocated”. Money which ought to be allocated to “manufacturing and small businesses” is instead channelled into “assets”, like stocks and shares or the Collateralised Debt Obligations which went toxic in 2008.

The proposed solution to this problem is that the state resume control of money creation. By “digitally” creating money and then spending it directly on “socially useful stuff” like schools, hospitals and roads, or by lending it at “low rates of interest” to small businesses, a transformed state-capitalist economic policy will lead to a more just and equitable society, with increased living standards and better “access” to public resources, similar in structure to post-war Social Democracy (to “welfarism” in the broad sense).

This whole argument looks quite appealing, to anyone who doesn’t remember or who hasn’t studied the culmination of post-war Social Democracy in the 1970s, in a decade of stagnation, rising unemployment, high inflation, tumbling standards of living and increasingly desperate class struggle; but it remains to be indicated why this argument about monetary reform is such a desperately fabricated myth, generated by people who live comfortably within the current system, who are not the people who suffer in it, and who for that reason are opposed to any more fundamental change. The argument relies first of all (and quite explicitly) on the assumption that “creation of money” instigated by the state on a massive scale would not lead to a commensurate rise in inflation, devaluing the “purchasing power” of the working classes while obviating any increase in total economic activity. To prevent inflation (a decline in the value of a unit of money relative to the commodities it purchases), economic activity will have to expand in line with increases in the money supply. The argument that the state will organise that expansion itself by means of direct investment (by stimulating “aggregate demand”) fails to take into account the basic fact that demand itself needs to be sustained. If the state-managed direct investment doesn’t create long-term avenues for capital valorisation — if the new bridges don’t create new opportunities for profitable private-sector investment, commensurate to their own capital value — then inflation will occur in any case. Inflation here is not an absolute marker of crisis: it is the index of stagnation which has not been overcome.

Why wouldn’t the infrastructure create those avenues for value creation? The problem for monetary reformists who wish to shower down on us “useful stuff” is that under current conditions useful stuff is not likely significantly to extend profitability. The assumption that it will overlooks both the degree of lag by which Britain trails most competitive industrial exporters and also (and more importantly) the basic profitability crisis in which global capital has been acrimoniously embroiled since the early-1970s. Point by point:

(1) investment in “useful” infrastructure speeds up and reduces costs in the process of commodity circulation. This means that its beneficial effects on the economy as a whole depends on the existence of markets for the commodities which circulate. The beneficial effects of “useful” roads, towards which monetary reformists so frantically gesticulate, are contingent on the uses to which capital can put them. Alas, part of the reason for declining global profitability in major industrial sectors over the last four decades is persistent overcapacity, a problem which will not be solved by increasing the rate at which their commodities are brought to market.

(2) State loans to the neglected manufacturing sector at “generously” low rates of interest cannot be guaranteed to sustain domestic demand for the products of that sector (outside of a total war economy, the state can’t keep buying everything forever), with the effect that increases in the extent of sector activity lead only to upward trends in competition between enterprises exporting to international markets, and, ultimately, with the sickening inevitability which characterises almost everything capital does, to reduced wages and standards of living for workers. It hardly needs to be said that this applies to “small businesses” as well as to big ones.

(3) Meanwhile, from the commanding heights of their half-empty office buildings, private investors holding British currency are unlikely to look favourably on any massive scheme of state money-printing for the purposes of infrastructure investment. If these investors dump their currency, foreign exchange (FOREX) markets are flooded with unwanted Sterling, driving its price downwards – this, of course, is just another way of talking about inflation. Under capitalism, state involvement in the economy can only lead to growth, currency stability, healthy rates of interest and such other “primary goods” on the condition that intervention also improves the conditions for capitalist profit-making.

It might be asked why this would matter, since the state’s creation and use of money produces “socially useful stuff”. Can’t we just use it? But socially useful stuff is only useful to people who have access to a wage and whose wages allow them to reproduce themselves, unless social reproduction is conducted outside of the wage system. Where there’s no revenue to buy drugs, maintain equipment and pay staff, the hospital might as well be a ball pit. More generally, “long term” state financed investment in infrastructure is every bit as “short-termist” as the most rapacious short trade in financial markets, if that investment doesn’t lead to an increase in private-sector demand. Arguing that capital “comes from” banks and that it should “come from” the state, so that it could be used “usefully” and “democratically”, mistakes what capital is. Capital is money which is invested to produce more money. When it cannot be so invested (because the state has seized control of the money supply and is devaluing it), capital will go away, either by vanishing (by “devalorisation”) or by traipsing across the world in search of a more stable business climate; and this can lead only to further economic cataclysms on the domestic scene, which is to say, to massive unemployment, to increased “precariousness”, and to human misery in general.

What’s the alternative? Do we retreat to our bunkers and wait piously for the endtimes? And yet the conclusion isn’t bleak, because it simply means that people will have to learn to coordinate labour cooperatively, without the medium of money, which according to the Social Democratic argument is the agent which will solve the “injustice” of capitalism, but which is in fact nothing more than an element of its reproduction, and which is perfectly subservient to its logic. Compress the above into a slogan, and it is this: Without exploitation and injustice, money loses its value; and for so long as people rely on value to reproduce themselves, the devaluation of money by means of its ethically minded “creation” will only exacerbate the problem it purports to solve.

The fantasy of a Social Democratic “genuine alternative” to capitalism, conducted by way of monetary reform, is in fact nothing of the sort: firstly because it will never be implemented (it is not intended to be; it is a tool meant to win support for “Social Democratic” parties who are now incapable of introducing Social Democracy), and, secondly, because even if it were to be, it would lead to nothing besides more viciously accelerated domestic crisis and decline. The fantasy of a Social Democratic “genuine alternative” to capitalism is in fact an alternative to one thing only, namely, to communism, the practical means by which the majority of people might reproduce themselves without the exploitation on which profit is founded.[1]

[1] The quotations in this piece come from the New Economic Foundation’s overview to their book Where Does Money Come From?, available at []


4 thoughts on “The Social Democratic Fantasy of Money

  1. J says:

    Could you comment on the technical possibilities of having what some people refer to as an ‘investment state’ in conjunction with strong controls on capital flows. After all, your main argument above is that capital will flee the country when it cannot get good enough returns here. Some of the East Asian countries used ‘forced’ inward investment I believe and did fairly well out of it for a while (I’ve no idea if they later opened up due to pressure from outside or percieved ‘necessity’).

    Let’s bracket for a moment the political task of implementing these policies and the battles you would get into with the agents of capital. I am more asking whether such a policy could (perhaps with further partial de-linking from the global economy) technically create a stable situation of low inflation, stable or rising real wages and so on. Or do you think there are economic factors that would render this arrangement unstable?

  2. Robin Smith says:

    I agree with this in principle values. Another excellent example is the Tax justice network who claim to want to save the planet, yet ask for the worker and producer to pay more taxes, while ignoring the real perpetrator, the property owner.

    But anti capital? I dont think so:

    The Robin Smith Institute – Real Reform: Occupy London wants to Change the Regime of Corrupt Finance

  3. Robin Smith says:

    The bigger fantasy is the Giant Home Owner Ponzi scheme. Destroying our society, at the root. Banking and financial scams are mere minnows

    The Robin Smith Institute – Real Reform: Giant home owner ponzi scheme dwarfs the banking one

  4. cityeyrie says:

    Well fine, in terms of what would ultimately be a good way to organise the worlds/a locality’s resources I agree that co-operative pooling and money-less sharing of both work and stuff is the best way to go. To dismiss the whole monetary reform movement as deluded, however, is also not particularly useful.

    The whole point for me about the way money is created – and the author doesn’t really offer any alternative to NEF’s view, pretty much shared by all monetary reformists of whatever political stripe, and not denied by banks (there is a small corner of the Bank of England Museum where they do mention that money is normally created by banks as debt) – is that since most of it is attached to private interest-generating loans this creates a structural impetus for ‘growth at any cost’, whether ‘useful’ or ‘not’. It is this structural problem that many monetary reform groups are trying to attack, and while they range from ‘just tinkering’ with capitalism (usually the top-down reformists) to full-on utopianism (usually the bottom-up reformists working with community currencies) it is something people do need to get their heads around.

    Money, who controls its creation and how it is created is very much covered up – or perhaps simply ignored – by the standard economic theories which underpin most debates in the mainstream media. It is in the banks’ (or capitalists’) interest to leave it out, since otherwise the whole notion of money’s inherent scarcity, upon which so much of the austerity policy depends, falls on its head. Money has to remain a mysterious thing, since as long as people don’t realise that it is essentially whatever we collectively agree it is, how the current ‘agreement’ was manufactured, and what alternatives there might be, there is no hope of people ever controlling the process or even getting rid of it altogether.

    I’m not clear why the 1970s example is relevant here, since social democracy of the time didn’t address the structural problem of private money creation by banks, and the absurdity of the the BoE creating debt-free money to shore-up the banks, only for the gov’t to still have to borrow from them at interest. I share the author’s suspicion of think-tanks like nef (who only really got into this question recently with the rise of groups like Positive Money – though I’m also a bit suspicious of them!) but that shouldn’t stop people taking what’s useful from their analysis.

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