At 21:17 15/08/2012, Arthur wrote:
1. That western capitalist society has solved the production
problem.
Largely so (perhaps!). But what was the production problem in the
first place? It's actually a fascinating piece of history which you
would never discover were you to read text books on economics or banking.
What the sea merchants of England (the first capitalist society in
the world) learned to do in the 17th century was to form merchant
banks in London (as also contemporaneously in Amsterdam, Gdansk,
Genoa and one or two other seaports in Europe). Each bank (London had
about 150 of them) consisted of a small group of trusted friends
(usually no more than a dozen) who would insure one another's
ventures, lend to one another and mutually guarantee loans that any
of them might make to other (trusted) friends outside the group who
might be facing a temporary financial difficulty or who needed money
to build a house or for a new project.
During the same period, similar groups of trusted friends in the
provinces formed "country banks" in most counties of the countryside
(but nowhere else in the Europe and Asia because provincial banks
were vulnerable to constantly marauding armies). The trusted friends
of a typical country bank would consist of a few of the local large
farmland-owners and also the businessmen of the new small towns that
were springing up all over the country. In times of exceptionally
good harvests, the land-owners could only charge cheap prices for
their food; thus prosperity would spread through all classes,
including normally poor people who could then afford to buy the new
goods (new iron tools, warmer wool clothing) that were being made in
the townships. The country banks were then be awash with businessmen's profits.
At times of exceptionally poor harvests, the town businessmen
suffered through the general lack of prosperity but the land-owners
could charge the earth for food and the country banks would also
start accumulating surpluses.
Depending on the weather and the consequent extreme harvests every
few years, many country banks would frequently have surplus funds in
their strong rooms that they had no immediate use for. However, they
soon learned to send their spare cash to London where the merchant
banks (with their high profit margins from international trade) could
pay good interest rates to the country banks, making the rich
partners thereof even richer.
Then -- with new scientific ideas in the air (the Royal Society
forming in 1660) -- some of the country banks wanted to invest money
in new local schemes (e.g. canals. iron trackways to their stone
quarries, wool-weaving belt-driven factories). If they didn't have
enough funds of their own then the merchant banks of London would be
only too pleased to lend money to them (so long as they received
dividends in due course!). However, this would only start to happen
when the merchant bankers of London got to know the country bankers,
and vice versa -- when they felt they could trust one another
implicitly -- when the other's "word was their bond".
Thus a pattern of capital transfers began in the 17th century whereby
some (mainly agricultural) countries would be sending money to
London, which would then be recycled to other (proto-industrial)
counties for their new projects.
But this was chicken-feed compared with what was required -- such
were the number of new ideas tumbling out of the scientific
excitement of those times. Far more money (that is, gold coins) was
required than was coming from the gold mines. For this reason new
money had to be made. It wasn't real money but it was an adequate
practical substitute. These were notes that were hand-written by
banks and used between them. These were promissory notes. These were
used not only between banks but also between businessmen who trusted
the banks. Whenever possible these promissory notes were exchanged
backwards and forwards many times before finally being deposited in a
bank account or exchanged for real money at the bank counter. In due
course, these promissory notes were printed, requiring only the
signature of a bank's partner.
Gradually, over a period of a century or so these promissory notes
became increasingly widespread and were known as banknotes. Every
bank had its own banknote design. Because they were trusted ("as good
as gold") then any businessman with a temporary surplus of banknotes
on his person or in his house would feel himself just as vulnerable
to thieves as if he were hoarding gold coins. So, increasingly,
businessmen and others would ask the banks (the merchant banks and
the country banks) if they, too, could become depositors. In that
case, they could simply deposit their banknotes and, instead of
taking gold coins away, they were given a bank account with a credit entry.
From then onwards (18th and 19th centuries), the amount of banknote
money grew enormously as the industrial revolution grew. It didn't
take the place of gold, of course. In times of panic many people
would rush to the banks and exchange their banknotes (and their
credit accounts) for real gold coins. Gold coinage would be too
little to keep the economy going at full speed, so for a while
(usually a couple of years) while people got their nerves back, and
banknotes resumed again, there'd be an economic recession. When the
economy resumed then, for practical reasons, the gold coins would
disappear again into the bank vaults and banknotes would do most of
the heavy lifting.
Yet another new paper document arose in the 19th century and this was
the personal bank cheque. This, too (if it was "open") could be used
backwards and forwards for most sizeable transactions until, by 1900,
there were far more personal cheques being used in England than
banknotes. So we had a massive superstructure of personal cheques
resting like an inverted pyramid on a smaller number of banknotes
which was, in turn, resting on a smaller number of gold coins.
Then again, with the invention of the personal credit card, the
inverted pyramid becomes even larger. The order and extent of
practical money use for the ordinary consumer expanded enormously and
goes thus -- credit card --- personal cheque --- banknote -- gold.
The ordinary consumer never uses gold at all. It is too rare and too
valuable for practical use.
Then again, there is yet another inverted pyramid of new
pretend-money items sitting on top of credit cards! This time they're
not used by individuals but by the banks themselves. They are a vast
array of documents (electronic this time, not paper) created in order
to augment the money circulation system even further in order to keep
the Western economies going. These are derivatives such as CDOs
(Collateralized Debt Obligations), and CDSs (Credit Default Swaps).
All these arose since the 1980s.
The money system has now become very dangerous indeed -- as we have
been experiencing since the 2008 Credit Crunch. Because the system is
so large with so many complex interesting layers it can no longer
unwind as it used to do before about 1900. Before then, whenever
there was a trade panic (a large business or a bank collapsing, say,
due to foolish directors) the financial system would rapidly unwind
until many businesses and banks went completely broke and the more
prudent banks had paid out almost their gold coin that had been kept
in reserve. These panics used to occur every ten years or so.
Afterwards there'd be quiescence for a while. But then, as confidence
in banknotes and cheques returned, the economy would survive. Gold
would return to the banks' vaults as reserves. Within a year or two
the economy would be restored at full strength.
Today, the capitalist system in the West is now in danger of breaking
down completely. Because central banks (officially) excoriate the use
of gold as a currency then the present economy can't fully unwind.
The major banks (and even some large firms such as General Motors)
are not allowed to go bankrupt. Instead governments print more money.
But they're actually delaying the problem. No Western government yet
knows how economic growth can be revived. The banks can't, or won't,
lend to business start-ups. Large businesses sitting on large amounts
of money don't know what to invest in.
So what can we reply to Arthur's question? The production problem was
solved once. It's no longer soluble by present methods of money
printing. We'll either have to sit the present situation out as a
long term depression (while the governments pluck up the courage to
purge the worst banks) or face a hyperinflation catastrophe (when
many banks will be destroyed more dramatically).
Keith
Keith Hudson, Saltford, England http://allisstatus.wordpress.com
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