This is a chapter from the book:
Finance Capital (2nd revised edition)

I. The basis of the credit system: On the art of lending money

The financial industry is not an industry like any other. Every public voice, every economics textbook, the lawgiver itself, all concede it a special position in the workings of capitalism: an overriding importance in the competition of the various lines of business. This importance arises from the character of the business it attends to. It is based on the special nature of the commodity that financial institutions have to offer, thus on the needs they serve and know how to exploit.

1. The notorious shortage of money in the capitalist business world and how it is overcome and exploited through the first fundamental equation of finance capital:
Money becomes a commodity as capital, thereby becoming money capital itself

a) The need

The need served by the banking industry arises within ordinary business life in the market economy, where wage labor is used to process elements of nature so artfully as to give rise to all sorts of useful goods. In the ‘real economy’ that has them produced, these products undergo a crucial quality control: by the proceeds that companies get from selling them they have to prove they are profitable. This is the result, to be achieved by way of competition with others — ‘on the market’ — that company managers are after. Every measure they take to purchase production factors, organize the work, and market the products is a component of a cost-profit calculation. This means, first of all, that the money for an accordingly efficient production and circulation has to be raised; and it has to be raised at the right time and in the required amount. This causes problems.

In order for the production of useful things to pay off, the money advanced must be sufficient to make the work of the required personnel so productive that the costs of paying for them and for the means of production relate to the market prices to be realized for the product so as to yield a profit that satisfies the company. Since these profit-making activities are supposed to keep going continuously, it is furthermore of crucial importance that the money advanced, plus a profit, returns to the company from the sale as swiftly as possible. The longer this period of time, the more capital has to be expended to keep the business running and generate steady revenues and profit; consequently the lower the rate of return. So speed is already important when it comes to production, and it is especially annoying that more time usually passes until sale, that it is in fact often enough not even clear how much time. But first and foremost, it is necessary to ensure that goods are actually sold, i.e., to win, defend, and expand market shares against competitors who are all pursuing the same objective. Each firm must therefore produce more productively and market more efficiently than its peers. The resources this requires over and over again must be had or procured — for plenty of money, which additionally has to be found. The amount of money needed depends on how fierce the competition between companies is. So it does not depend on the surplus already realized: capitalist enterprises must never restrict themselves to their profit if they want to win the fight for a continuous and profitable course of business. They have to invest in order to function; they have to grow in order to be able to invest; and in order to grow sufficiently they have to constantly ‘live beyond their means.’ So the time limits of capital turnover, and the pressure exerted by and on competitors, make themselves felt in the quite ordinary course of business as a permanently looming or actual shortage of money.

This distress is seen to by the financial industry. It has extremely little interest or involvement in the economic activities that bring about society’s material livelihood; but there are no limits to its participation in the calculation that industrial and commercial companies impose on production, distribution, and consumption. It accordingly acts as partner to all lines of business, and as the protagonist of economic growth per se.

Additional remarks

This starting point already distinguishes the modern credit trade from the business of money lenders in earlier times. The shortage it exploits on a grand scale is not the distress arising from poverty, nor the predicament of monarchs notoriously getting too little power and goods out of their subjects, but rather a necessity of capitalist growth.[1] The funds it makes available are not a stopgap for the companies that need them, but a means for their enrichment. The aim and result of the transaction is not to plunder a credited partner to the point of ruin, but to take part in its expansion and accumulation process. Besides that, banks of course also make money by lending to the broad masses of people, who are well acquainted with debt as a costly aid to coping with the narrow confines of their own ability to pay; usury is by no means extinct either. But in the main, consumer loans do not aim to take ruinous advantage of an exceptional emergency situation, but to continuously exploit a contradiction inherent to the system. The ‘law’ of profitable labor means that wages paid are, on the one hand, paltry in relation to wealth created but, on the other hand, indispensable for selling part of the commodities produced. Thus, financing the consumption of those consumers with insufficient buying power likewise serves, at their expense, the turnover and growth of the capital that makes its money on their needs.

b) The business item

The financial sector serves the business world’s urgent need for more money than it has yet earned. It supplies what is needed at interest, selling the disposal over a quantum of general, freely usable power of economic disposal, for a set time. The point here, from the outset, is the use-value of money as a source of money: as an advance for generating a surplus. What is being sold at interest is money’s capacity to function as capital; the loan period specifies the period of time in which the loaned money has to prove itself as capital.

Dealing in money’s capacity to act as capital presupposes, first of all, that the production of material wealth is subordinated to the purpose of capital accumulation, that monetary property’s command over society’s productive forces has become the economic norm; and that this has indeed become so universal that owning — sufficient — money is not just good for its accumulation, but acts as sufficient reason for it. This relation is expressed in the profit calculation of companies, which measure their revenue against their advance because that is what decides on success or failure in the market. The proceeds that they realize appear to derive from the sum of money advanced. And that makes perfect sense in a market economy: the only thing that counts as wealth in the products containing processed nature and labor that has been made productive by technology is in fact the sum of money earned on them in relation to the money spent on the regime over the labor and production equipment.

Dealing in this sort of wealth as the financial industry does presupposes, secondly, that the power of disposal over money’s capacity to bring about its own accumulation, when bought at interest for a set time, will serve just as well as money that one has. For that is the first, characteristic service of banks: they do not advance money to enter business life themselves, but put money in the hands of others; for a set time, during which the recipient is to use it as capital on his own responsibility and pay it back plus interest. They ease the financial distress of capitalist businesses by letting them use the monetary assets of others as a means of enrichment as if they were their own. Though that is normal, it is anything but self-evident. After all, the money that is displaying its productive power of command in the hands of others is nothing but the power of property that has acquired a material and therefore independent, sellable form. And that is a bit of a paradox: as a bank customer, a businessman doesn’t have to own property to make the power of property act for him, namely, to increase his property.

A short digression on the concept of property

To understand this paradox, it is helpful to consider the concept of property, which is unfamiliar to the very society that bases its whole mode of production on it — a seeming absurdity, but in fact with good, ideological reason.

  • The bourgeois world understands property to be an exclusive right of disposal to be protected by the state, or the objects this right pertains to. This includes more or, usually, less clearly the view that property is basically not the result of arbitrary allocation by a higher authority, but has been, or at least must have been, earned through one’s own efforts. The connection between property and productive activity remains rather vague here. It becomes explicit in — of all things — the universally usable ‘creations’ falling under the category of ‘intellectual property,’ products where excluding access by others contradicts the nature of the thing and has to be brought about by law in an accordingly artful way.
  • In actual fact, the bourgeois right of property presupposes as the first source of property that a thing has been produced — in legal terms, that a legal person has objectified his will in a product — when it makes the power of exclusive disposal over a thing a basic right, according to the great historical imperative, ‘To each his own!’ However, a bourgeois state does not relate this legal principle to the banality — which the concept of property includes as a presupposition — that willful individuals producing something are making a bit of nature (that might already have been processed) fit their needs and are thereby appropriating it in this material sense. Instead, the state is performing its elementary service of maintaining order in an economy that takes place as commodity trade. It is creating legal certainty for a form of economy where products of labor are not produced for general benefit, but rather on the one hand to be at the private disposal of their producer, and on the other hand as goods for him not to consume but to exchange with other products. Only in this way, i.e., through trade for another’s property, is a thing that has been produced as private property a part of and contribution to society’s total labor. The power of exclusive disposal that the bourgeois legal order ties to the production of a thing pertains to this economic purpose of the product, namely, to function as a means of exchange with other products. Hence the law stipulates that the true purpose of property is to acquire others’ property.
  • This economic purpose of property is turned by the money the actors in this economy use as a means of exchange into a separate, material quantity detached from the production of the products and independent alongside the goods whose production establishes ownership of them. When the state places commodity trade and the corresponding money transfer under its protection, it is securing and sanctioning this paradox of a power of private disposal independent of the production process giving rise to this power: property as a tangible thing independent of the process by which it comes about and the material result of this process, namely, as a power to get hold of all buyable products that is quantitatively determined and attached to a state-defined money material.
  • In societies protected under the rule of law where production takes place for the market, the power of disposal taking on the independent form of money develops its real productive force on the basis of the vast majority having no property, being separated under property law from the means of producing material wealth, and — complementary to that — these means and the money for procuring them being monopolized in the property of a minority. The state recognizes as lawful an exchange of money for services by which the majority without productively useful property sell the disposal over their ability to do productive work. Using his money’s power of access, the owner of the means of production takes command of his employees as their employer, determining the purpose and everything else about the work they carry out, thereby making himself the originator of production who is legally entitled to all the products as his achievement and consequently his rightful property. The people being paid reproduce in ‘their’ factory the access power that has disposal over them.
  • It is on this basis that the banking industry renders its characteristic service. It proceeds to separate the power to access products of labor and the power to command productive work, which are inherent in money as it makes property independent of its creation, from property itself, which exists in the independent form of money. The banking industry transfers this relation based on force to its customers — for a set time, and for a return that now represents the increased property actually created by the debtor. So in the end the paradox of the productive power of loaned property is resolved: such power serves both sides, borrower and lender.

Additional remarks

The banking industry’s achievements in serving the money needs of the capitalist business world go far beyond the facilities that industrialists and merchants have themselves invented and put into practice for shortening the turnover time of their capital and ensuring the continuity of their business.

Firstly, businessmen have developed the habit of separating the time goods are delivered from the time they are paid for, granting each other payment terms. That makes it a bit easier for all of them to bridge the gap between using the required means of production and earning the money to pay for them by selling their products. This means that harsh business life now contains a first element of trust: trust in the continuity of business and in each other’s ability and willingness to pay.

In addition, market pros have invented bills of exchange: the technique of accepting from the buyer of a commodity — instead of prompt payment — a promise to pay on a fixed date, which the recipient in turn passes on to his own suppliers as a means of payment, although he is now responsible for fulfilling it himself. This means that the power of money to get hold of goods owned by others is detached — temporarily, but effectively — from the money actually being available. It is replaced by a declaration of intent by which ownership of goods is irreversibly transferred. An access power based on mere assurance does not, of course, cease being bound to the production of valuable property and its independent form as money earned. Once the fixed period for which the promise of payment can act as a means of payment expires, money is due for payment. This commercial credit between industrialists and merchants at least frees the parties involved — who all have to struggle with the equation ‘time is money’ since their profit depends on it — a little further yet from the need to actually realize money before it can function as an advance for producing profit again. So such credit contributes to the continuity and the cheapening, hence growth, of business, while at the same time taking such continuity and growth for granted as its own condition.

This success is one of the starting points for finance capital in its untiring efforts to emancipate the capitalist power of money altogether from its source, the production of property in useful goods, and thereby unleash undreamed of forces of capitalist growth. This is in any case the way money traders stepped into the development of commercial credit: they bought up bills, thereby transforming promised payment into unrestrictedly usable liquidity before the deadline, and had this service remunerated with a portion of the sum owed, calculated from the interest rate set and the remaining term of the commercial paper. In credit-business practice, the discounting of bills of exchange was eventually replaced by bank loans, which serve to ensure and accelerate capital turnover.[2]

c) The yield

The financial industry’s business is based on a need that capitalist firms have as a result of their collective achievement: production and consumption have been subsumed so completely under the regime of money and the purpose of increasing it that nothing more than money is required to attain this purpose. Of course, enough money is needed; and every firm notoriously needs more for its never-ending competitive battle than it has to spare. The financial industry serves these needs with its loan business, thus making a crucial contribution to perfecting the regime of property over society’s productive forces and over its material life process. From the point of view of the financial industry’s calculation, the diverse branches of business in which society’s material wealth, the objects of private property, are reproduced and increased differ from the start only in the amount and the security of the profit from interest it can extract from the companies involved. When banks apply this criterion for allocating money, the all-dominating resource, they are ensuring that all the material needs and wants of societal production and consumption have to be geared solely to how much money can be made. This also leads to the politico-economically important step of freeing companies not only from the limitations of the size they have attained, but also from the limitations of their traditional line of work. Thus, commodities and services acquire the status of being indifferent means of profit once and for all, and capitalist competition becomes truly generalized. So banks tighten up the standards for competitive success that a firm has to meet, and intensify its need for funds not yet earned. And that, in turn, makes banks ever more important to companies, which have to compete for credit in order to compete with credit.

That secures the financial industry’s own growth, since by selling the use-value of money to the business world, banks are deploying it for themselves. The same sum that is to function as a source of profit for their customers when in their possession establishes a claim to growth in the hands of the banks by merely passing into their customers’ possession. Solely by lending, a proprietary act, entitling them to repayment of the loaned sum plus interest, they transform money directly into money capital. The power of money to bring about its own increase by granting control over means of production and property-creating labor gives the loaned money the right to increase. This right is the economic stuff, the substance, of the banking business.

It is up to the debtor to honor this right. And not by profit sharing, i.e., modestly granting the bank a share in its customer’s business success. It is simply taken for granted that loaned money will increase in the recipient’s hands. The bank’s claim to the loaned money increasing is absolute; it is not only detached from the debtor’s business success, but might also be contrary to it. What takes priority is that the loaned money prove itself as money capital; this overrides the practical creation and increase of wealth in money form that is served by the lending business. The yield of the money capital is calculated accordingly: as a percentage of the loaned sum, as if it were really only the work of this sum that it grows, and in terms of the period of time it is loaned for, as if the continuity of its growth were beyond any doubt. Of course, there is some reflection of the business that will have to service this legal claim, but the reflection is basically negative: if the credited company’s prospects for success are uncertain this means extra interest will be due. So, for the peculiarity of the financial industry’s business (viz., it hands over money and consequently has no more control over what becomes of it, and wants exactly that to be remunerated as its economic service) it makes its debtors pay double. It demands a fixed return, as if the successful increase of its money were a sure thing at least to that extent. And because this isn’t a sure thing, it charges a special extra price for what it sees as an unsafe loan transaction. This is how it takes account of two facts. First, the right to more money that it acquires by the legal act of lending money always includes the risk of not being realized, i.e, this right is basically speculative. Second, the only sure thing is that the growth that banks finance always comes about as a result of competitive battles they are arming their customers with credit for, so some loan transactions will definitely mean trouble, if not fail entirely. This necessary risk is something the banking industry foists off on its customers. So the price to be paid for the potential of a sum of money to act as a source of profit is higher the more doubtful it is that the borrower will actually realize this potential. And this makes perfect sense since the deal has nothing to do with helpful solidarity, but is made between capitalists out to use each other as a source of money in mutual opposition. And between them there is anything but an equal balance of power. The bank, which has the needed money, is always in a stronger position than the company that needs money; and its position is definitely all the stronger the less its customer has to show for itself and the more badly it needs money. In any case, banks make their borrowers very aware that the banking business depends on that of their debtors — so when finance capital serves the ‘real economy’s’ need for loaned money this is secondary to it serving itself.

2. Creating credit and money through the second fundamental equation of banking:
Debt functions as capital and generates ability to pay

a) The circle of credit creation

In the main, finance capital does not bring about its growth using its own money. It doubles its lending business in the reverse direction, procuring others' money by paying interest to anyone who has money to buy off his right of disposal over it whenever possible.[3]

This is another way it meets a pressing need on the part of the capitalist business world. On the one hand, firms mark it up as a loss of their capital’s productive force when it is lying around in the form of finished goods and time passes before it can be transformed into liquid funds to be used again. On the other hand, the same firms are likewise thwarted in their drive to constantly increase money when incoming proceeds lie around unused because they are not yet needed for continuing or expanding business. The financial industry sees to it that these funds too — in fact any sums of money not acutely needed — find use as capital by buying the right of disposal over them and doing business with them as if they were its own assets. It borrows from all those who have money to spare in order to be able to lend to meet the business world’s needs. The banking industry’s assumption is that the success of its loan transactions, i.e., the business success of its credit customers, justifies its own debt. It translates its power over the business world, whose profit-making is its own source of enrichment, into the capacity to be liable for the loans it takes out. A circle that yields well: by buying the power of disposal over others’ money, finance capital procures the ability to sell money as capital on its own account; by selling this commodity and trusting in the capacity of money to turn into real proceeds, it enables itself to appropriate the power of disposal over others’ money.

So the two-sided business of lending and borrowing does not consist in banks merely collecting and making available whatever earned money their clients have to spare at the moment and entrust to the banks to be put to better use. Their absolute legal claim to having the loans they grant serviced, regardless of whether the financed business succeeds, gives them a power they put to productive use. The achievement that already makes commercial credit between merchants promote growth, namely, doing business with promises of payment while relying on the financed business to continue and steadily grow, i.e., separating the power of money from its availability and bringing this power to bear in business to create the promised money — this achievement is utilized by banks on a high level and in a general form. Being sure that their financial operations will always keep going, banks ‘create’ credit, financing business according to their speculation for the capitalist business success they are getting underway. The surpluses the business world generates will redeem the advances banks have launched. The banking industry sets the process of capital expansion in motion and keeps it going by managing the power of money; in the economy of banks, this process justifies their speculation and is the material confirmation that money has the capacity they are bringing to bear.

So finance capital acts as a driver of growth; by driving its own it drives growth in general. It is not confined to the role of intermediary that, with all its power, on balance really only redistributes what the companies have basically already created on their own and ‘sweated out’[*] into cash. It functions instead as the growth-generating starting point, goal, and end point of capital accumulation in the modern market economy. This service does not only have consequences for the scope of business that companies make money on. It also gives business activities in industry and trade a binding aim and an ambitious criterion for success. They have to transform the debt the financial industry does business with, to pursue its growth, into accumulating capital and thus honor the right of the payment promises lent by banks to be realized in a greater sum of money. Otherwise, if the independent power of money dries up, so will the advance that a market economy lives on.

Additional remarks

Market-economy experts like to construe the banking business as a kind of overflow basin for money not in use at the moment, allowing it to flow out and supply those market participants who are strapped for cash. Their interpretation is thus geared to the needs that the banking industry serves and that they find perfectly reasonable. They do not turn their attention to banks as the ones running this business, or to its economic substance defined by their hold on the circulation of capital. In addition, some members of the informed public are familiar with the idea that the banking business ‘creates credit’; and with admiration or skepticism, as the case may be, they claim credit institutions are masters at the art of ‘creating’ money quite literally ‘out of nothing.’ This of course puts a finger on a mystery rather than explaining the use that banks make of their position as universal debtor to society and universal creditor of the business world. In reality, banks ‘create’ the credit their customers need — i.e., the advances they provide companies to enable them to grow continuously and competitively — not simply ‘out of nothing,’ but out of their power of disposal over the monetary proceeds of past and ongoing credited business and, based on this power, in anticipation of future business that will finally actually produce this advance plus a surplus, thus economically justifying the anticipation. And what banks ‘create’ is not simply ‘money’ but an ability to pay, in the form of ‘deposit money,’ that increases society’s capital advance to thereby make the banking business grow, i.e., further increase the banks’ power to create credit (more on how this works in section 2b). They supply the capitalist business world with capital that anticipates its own successful application, so that they hold the business world liable for the actual reproduction of this capital. Their ability to ‘create’ such a capital advance derives from — and depends on — the monetary yields deposited with and received by them justifying economically what they achieve (for themselves) with them.

b) Working capital (floating or circulating capital) under the modern credit system

Banks have consistently and effectively combined their circular loan business with their service as an agent for commercial — by now almost all of society’s — payment transactions. They handle these on a ‘cashless’ basis by mutually offsetting payment orders on bank accounts. This is a method they already used in the past to issue loans with the money deposited with them and make payments on behalf of deposit owners in the form of in-house book entries or via an exchange of money orders. Quite consistently, they have moved on to make borrowed money available to credit customers likewise in the form of money tokens, as banknotes or as callable credit balances on account; and to let the borrower use this sum with internal account transfers or with circular transactions with the payees’ banks, through ‘deposit money.’ The payment flows that their lending triggers are managed with ‘book money’: payment orders that they circulate among themselves. Banks have thus created the means to shape and extend their lending business in a way that is in keeping with their position, their power, and their freedom as financiers and beneficiaries of capitalist growth overall: the means of payment they provide their credit customers consist of their own promises of payment. The deposits they receive are from the start essentially money orders that are brought into circulation by credit institutions and that represent the circulation of ‘created’ credit. The payments they make consist of — virtually — nothing but such promises of payment, which represent the same thing: credit at the various stages of its use, from the purchase of means of production to the receipt of sales proceeds, from the payment of wages and salaries to ‘cashless’ purchases by the final consumer. The means of purchase and payment that circulate in society are essentially money tokens answered for by banks. In terms of their economic nature they are the derivative — and in terms of the reason for their emergence they are the means of circulation — of the credit business that gets capital growth going and is economically justified by its success: credit tokens. With this instrument, the banks generalize what bill-of-exchange business achieved, i.e., the use of promised payment as means of payment, thereby following through with what the logic of their business requires. They create a means of credit that makes their capital advances — to individual firms as well as to the economy as a whole — relatively independent of the already realized accumulation of capital; their lending depends instead on the course of finance capital itself, on the results of their own speculation on the capital growth that banks have initiated with their advances and seen in their turnover and launch again in the firm expectation of further growth.

This achievement also involves society’s bank-processed payment transactions being emancipated from a money that is just as much a product of social labor as are the commodities bought with it. This still of course presupposes a real money, which the banks’ ‘book money’ refers to, and that their money tokens denote, and it is also necessary to dispose of a quantum of real money for the banks’ booking entries to function reliably as a means for property to change hands. What is needed is a stringently stipulated amount of ‘abstract wealth,’ namely, of private property’s power of disposal over goods of every kind. And as assurance that mere booking entries merely representing private promises to pay actually have the power to move property from one hand to another, the private business world itself demands that money creators must be in a position to show on demand, in proper proportion to their loans, a money that harbors the power of property in a socially binding way.

A money meeting such high demands is provided by the originator and guarantor of all that is binding in a competitive society, the state monopolist on the use of force. It provides this money in such a way that the creation of credit and credit-money tailored according to need is bestowed full politico-economic legitimacy.[4]

c) Competition and unity of the business world in credit

With their activity as universal creditor and debtor of the business world and as creator and agent of society's ability to pay, banks establish a relation of positive, all-round dependence between the companies that meet as competitors on the market. By turning the capitalistic potential of money, no matter whom it belongs to, into a means of growth whose allocation they are in charge of, they entangle money owners, who are interested solely in continuously enriching themselves, in a high-level mutual dependence. They make the money owners’ property participate in their competitors’ profit-making, placing it at the service of general business success. Conversely, with their profits, capitalist businessmen indirectly serve the profit claims of the competitors with whose money they are doing business. In order to successfully enrich themselves, capitalists need their competitors’ success that they are going against with their own and borrowed means of success. Banks are so thorough about getting capitalist property owners to utilize each other in this paradoxical way that ultimately all of them are involved through their interest in enrichment in the efforts of all of them to achieve capital growth, and each individual company depends through its competitive efforts on the general course of business, which in turn depends on the success of the competing individual companies. The interest in their own business success forces capitalists to have a class interest in growth altogether.

The reason why this paradoxical collectivism of private owners persists is that it does not really come about between the mutually dependent competitors but through the business interests of the banks. They are pursuing their own enrichment by doubly utilizing capitalist commerce, taking advantage of shortages and excesses of money. Their own interest leads them to step in between competitors; they bring the moneyed class together by making all money-owners with their complementary needs dependent on them. They centralize disposal over society’s money in their own hands; by creating credit they monopolize the potential of monetary wealth to act as a source of profit; they secure the results of the business activity they credit, for themselves, namely, for their growing power to create credit. The capitalists’ material class interest in growth exists in real terms in this power of the banking industry to make businesses compete by all their competitive efforts for the credit it creates by accessing all money holdings. Its interest in growth establishes the symbiosis between the competing movers and shakers of the market economy.

Exerting this power has, of course, its own pitfalls; doing business on this basis consequently has its own logic.

3. The constant effort to establish certainty in the credit business by means of the third fundamental equation of the financial industry:
Liquidity generates trust, trust generates liquidity

a) The risk

The financial sector functions on the basis of its loans really proving themselves as money capital, i.e., being confirmed by wealth-increasing business. Its means of payment have to be ‘backed’ by such business, i.e., constitute quantified power of money, rather than just simulating it by performing its functions. Thus, capital has to actually undergo the expansion that is not merely intended but planned for in the legal relationship between banks and the ‘real economy’ as if it had already occurred: as a claim that justifies the bank’s liabilities; as a balance-sheet asset that vouches for the means of payment the financial industry equips the business world and has the public go shopping with.

At the same time, the financial industry is well aware of its dependence on the business world, which grapples with the perils of the market using borrowed money. Bankers know that for all their diligence in risk assessment and for all their influence on the course of competition, they can never guarantee what they are holding their customers liable for, namely, that the business they are financing actually succeeds. And guided by their practical interest, they — like all performers in the free-market circus — meet the challenge that this fundamental contradiction of their debt business means for their firms.

No bank is capable of offering proof that its money and credit creation will result in money capital being applied so as to effectuate growth. Yet each one is all the more eager to avoid becoming a victim of its speculation and to try and demonstrate to everyone how reliable its calculations are. Therefore, the money and credit creation that basically follows the one simple goal of increasing sales and profits has a consequence for its creators that they cannot escape: they have no choice but to keep a check on themselves in the midst of expanding the volume of their business. When making abundant use of their freedom to treat their own and others’ debts as money capital, i.e., as sources of money at their disposal, there is a line they must not cross: their fruitful dealings with their partners include the obligation to make payments when they are due. The bank’s power depends on its holding its own in its capacity as debtor; i.e., on its being liquid at all times.

That needs to be organized.

b) The necessity of orchestrating certainty:
Liquidity management and ‘interbank market’

When banks manage the payment flows they trigger with their lending by settling claims and liabilities among each other, when they record any remaining balance as a plus or minus in accounts they keep with each other — or with a third-party payment agency — and when they also pay or collect interest for doing so, then they are relying on each institution being able to vouch for the promises of payment it circulates its credit with, and their reliably doing so. Their participation in the cycle of credit creation and credit-money circulation is based on a relationship of trust that is customary in this sector but hardly to be taken for granted between competitors. Every bank has to earn and constantly justify its peers’ recognition as a reliable partner: by being absolutely dependable in servicing its payment obligations.

That is why the business routine with which banks handle their mutual payment transactions always involves a demonstration. To prevent liquidity gaps from occurring and, when they still do, to make them appear to be temporary, manageable delays that can quickly be made good, it is necessary to handle claims and liabilities properly according to amounts and deadlines. To prove how trustworthy they are, this being the basis for their participation in this sector’s business, banks sort their own investments and payment claims according to the level of ease with which they can be used to pay off the banks’ own liabilities when required. They make sure that assets varying in liquidity are built up and reduced so as to meet the requirements. By selling or lending them or by means of mutual credit agreements they arrange the secure refinancing of payment obligations they have entered into.

On the one hand, this liquidity management never proves what by its very nature cannot be proved, namely, that the circulated credit and credit tokens are supported by a previous economic success story with growth, let alone a future one. But, on the other hand, the indispensable proof of safety has a more modest intention from the outset. The bank is to be recognized as guarantor of the ability to pay that it creates with its debt business. And this recognition is itself a question of business practice: it consists in actually participating in the ‘interbank lending market’ where banks let each other have acutely needed means of payment, customarily for short time periods — mostly in the ‘overnight market’ — in contrast to other credit relations. Thus, in a fine circular way, as befits this trade, the finance industry trusts in the liquidity of the participants so as to produce the liquidity that is proof enough of their trustworthiness, as long as things take their routine course. With the institutions’ self-justifying trust in their partners’ willingness and ability to pay, the industry creates the certainty that is essential for expanding all their business.

c) Productive force and limits of ‘trust’ as a means of business

In the last analysis, the lending business functions on the basis of debt being successfully used as capital. This success is not up to the credit creators; but they base their calculations on it with such certainty that they act as responsible guarantors of their precarious debt business. Their dependence on their customers’ business success conflicts with their own autonomy as instigators and beneficiaries of capital growth and guarantors of society’s resultant ability to pay. They handle this contradiction with confidence-building measures that give them access to the interbank market for liquidity and, as a result, the power to vouch for the functioning of their business.

Of course, these measures do not overcome the dependence of their business on the competitive success of their borrowing clientele; they by no means do away with the contradiction between professionally presumed autonomy and incurred risk. They transform it into a business routine between banking institutions that makes their liquidity, and thus nothing less than the continued existence of each individual institution as an autonomous business actor, dependent on the trust of the others. Conversely, this means that the business operations of each individual bank become a risk for the others. The generous way the business partners lend to one another creates certainty for credit transactions whose success is not only altogether uncertain, but constantly endangered or even ruined by competing credit transactions with competing companies.

The consequence is clear: the trusting relationship they practice not only includes an always vigilant mistrust. What it brings about creates good reasons for suspecting that partners are failing at some important business and that their unquestionable ability to pay might only be a calculated sham. It can therefore be an existential problem for a banking institution if, to stay in business, it actually has to mobilize the collateral it presents to its competitors as evidence of its creditworthiness. It might thereby be confirming doubts about its liquidity, and that would make its continued ability-to-pay expensive, if not worse. The horror scenario of being excluded from the interbank market and thereby actually becoming illiquid would in turn fall back on the partners, undermining trust in their ability to pay and thus the actual ability itself. In the extreme case, the consequence would be an escalating banking crisis. That would then be admitting in practice that the productive circle of mutually ensuring liquidity has not really taken all the uncertainties out of the banks’ business, but rather effectively generalized their individual risks. When the virtue of trust penetrates the tough world of money business, this reproduces not only the power that it enables banks to give each other, but also the risky nature of the lending business, now in the form of all participants endangering each other, as ‘systemic’ risk.

This contradiction is achieved by financial institutions all by themselves, following the internal logic of their very own business. They draw consequences that add a few levels of escalation to this business. However, they are not solely responsible for this magnificent swindle being maintained on a permanent basis and being generally valid.

4. How the state certifies finance capital’s creation of credit and money by adding an equation to the other three as ‘bank of banks’:
What acts as money in payment transactions between credit institutions is a fully adequate substitute for the legally valid money ‘commodity’ (legal tender)

a) Legal tender

The wealth whose use as credit is the financial industry’s business, and whose increase is what the entire economy is about, is measured in a unit fixed by the authority of the state. The state is also responsible for the material that bindingly represents this wealth: the money for definitively honoring all payment obligations. The supreme powers do not need to define what kind of economic thing this money is: they simply take it for granted, as does the society they tie down to earning money to be able to survive, that what matters in the products of the capitalist economy is their exchange value, whose independent form is money. They also take for granted that ‘the market,’ i.e., the competition of business people, ultimately determines the correct exchange value of commodities, that is, their prices. What this actually means is that in the exchange value of commodities, their attribute of being a contribution, based on a division of labor, to society’s stock of goods is represented as a quantum of property, and that it is this portion of access power that money gives material existence to. But political rule needs no understanding of that to bring the regime of property into force with all its consequences, and to decree by law the form of the money that will bear value and be the standard measure for the continually reproduced ownership of the material wealth produced and consumed by society, that will bring about the transfer of property and thereby serve as the vehicle for business.

What the modern state accordingly defines as money and dictates to its society as the definitive means of payment is of course formally a mere promise of payment again: the banknote. It contains no productive expenditure of labor to make it an object of value constituting created property, a useful component of society’s material wealth, on an equal footing with the salable goods of the market economy, and to thereby qualify it for being the universal equivalent of all commodity values. So legal tender also consists of mere money tokens. Older versions are even explicitly connected to a quantum of precious metal as the actual ‘money commodity’ that would have to be handed over by the issuer upon presentation of the banknote — this being genuine at best in the earliest history of modern capitalism. The issuer of a contemporary national money spares itself such a connection altogether. There is thus no substance at all to the yardstick whose units connect the economy’s diverse goods labeled with corresponding prices — i.e., made commensurable with each other — and are used for tallying private wealth. What the monetary unit itself is worth, that is, how much property it represents, results solely from the commodities — the constituents of material wealth — whose exchange value is expressed in these units. A ‘basket of commodities,’ a hodgepodge of goods with price tags, is needed to show what value the particular unit of money has.

But state money does actually have that value. The state’s decree makes it the object of value that, regardless of its own lack of value, embodies property’s power of access. This decree is counterfactual and requires some effort to be expended on distinguishing features to preclude imitations and make the difference between money and a mere promise of payment real. It can be maintained solely by the threat of punishment for unauthorized reproduction.

b) The state as ‘bank of banks’

State-mandated money gets its value in practice through its use: by functioning as legal tender for the sale or purchase of the goods whose prices are given in its units. In a capitalism with a developed banking system, modern money fulfills this function in dependence — as desired and institutionalized by its issuer — on its other, capitalistically higher-ranking function, namely, as the absolute liquidity with which banks finally and definitively settle their obligations to each other. It is the material, and comes into the world as the material, that the banks’ ‘deposit money’ presupposes as a unit of measurement and to which it relates as the object of the promises of payment created by the banks and exchanged between them. It is the treasury, the store of exchange value in its independent form, that makes sure the commercial banks’ money creation is valid and the creation of credit reliable. It is the treasury because it fulfills for the banking world the function of being the reserve of unquestionable monetary value, made available to commercial banks in defined ratios to their various credit transactions by means of transfer or loan of bank assets, via open-market operations, or by other legal routes.

From the standpoint of credit institutions, these bearers of value from the fund of the state’s central bank involve first-class liquidity, an ability to pay that can be used immediately and unconditionally. When the central bank offers to lend out such means of payment at interest and with collateral, they utilize it accordingly — alongside other sources — for refinancing their liabilities in cases where absolutely liquid funds are required. The offer to cost-effectively manage money transactions between banks via accounts with the central bank is one they also readily accept to a certain extent. Included in such dealings are the following two services of crucial politico-economic importance.

Firstly, by lending its money for refinancing banks’ lending, the state’s central bank backs up the business of the private-sector banking industry with the authority of the state, with the sovereignty of its rule over a country’s money economy and over what counts as money there. By letting the banks have legal tender for their liquidity needs, the central bank gives their ‘deposit money,’ which they create as needed, recognition as a valid token of the wealth of society embodied in state money. It sanctions (in the positive sense of the word) banks’ credit creation by participating in their refinancing as it does. Secondly, in this way the state also sets the lending business free in a quantitative respect: there is no restriction by any need for liquidity. The required cash reserve is in no way limited by a predetermined fixed amount — as it was in times when state money was backed by gold or silver, even if that guarantee was always more fictitious than real. The only criteria guiding the growth of the lending business are the banks’ openness to risk and the conditions the state’s central bank set with its monetary policy.[5]

With its special contribution to the commercial banks’ refinancing, the central bank makes itself not only the guardian of the nation’s credit business, but also a partner in it. In so doing, it relates its money to commodity values; acting as their yardstick and universal equivalent this money is pragmatically rated as the measure and the embodiment of property. Therefore, the central bank’s balance sheets do not only reflect how successfully or unsuccessfully credit has been created and utilized (and what this means for the budget of the state as owner of the central bank): when legal tender is used as a reserve fund of the credit economy this affects its actual value.

c) The contradictory achievement: state credit-money

The nation’s credit business is the source of the sums of money circulating in society, and the success of this credit business is their economic justification. This applies not only to the promises of payment that banks conduct their financial transactions with, but also — in dependence on the banks’ business, as a component of their refinancing — to legal tender. In modern capitalism, legal tender is no longer the fixed given measure for success and failure of the private creation of credit and money, but rather the expression of what banks and the business world have done with the property it numbers. Its value, the quantity of disposal power that it bindingly represents, arises from all the business the banking industry advances money to. In other words, it arises from the relation between the mass of credit, which is brought into circulation as an advance, and the growth of capital’s access power, which is achieved with this credit and has to justify its being created.

That these two quantities diverge is hardly surprising in a system where credit is a means and a goal of competition. It is not only that when credit-financed companies compete there are necessarily losers that cannot service their debts and force their lenders to make ‘valuation adjustments’ — the money doesn’t lose value, it’s gone. With its power to finance whatever promises to pay off, the banking industry renders quite different ‘services’ as well. It fundamentally acts without regard for the limits of the markets where its customers enrich themselves. It ignores both the capacity of buyers to pay for a constantly increased supply of products, and the availability of means of production — including cheap labor. Banking customers, provided with the power of others’ money, treat ‘the markets’ all the more as the source of their business success, doing everything they can to get out of them a revenue that will cover their costs and earn the profit calculated as a markup on costs. Thanks to the freedom that credit gives them from the constraints set by whatever ability to pay they have already realized, their using each other as suppliers and buyers for their respective profit calculations leads quite automatically to the effect that price increases (for whatever reason), which make the capital advance more expensive, can be realized and passed on more or less successfully by the firms concerned. This ultimately takes place all the way around when seen as a whole, so that it is in fact not capitalistically produced wealth (i.e., the commodity value needed and calculated for renewing and expanding business) that has increased but merely the price, the expression of these values in legal tender. This effect — that the monetary expression of a capital expansion tends to increase more sharply than the real access power generated for capital — is handled constructively by the credit industry, which provides the required sums of money as long as it reckons on profit for itself. It reacts — preferably already anticipating the effect and — by charging more interest, which in turn hikes the cost of the credited business operations. This consistently generalizes the price rise trend in such a way that the value of legal tender accordingly sinks, being no longer determined by the access power of capitalistically expanded property produced in commodity form and realized on the market, but instead derived from the results of competition, from price tags and the sales transacted on that basis.

The lending business is thus set free by legal tender being subordinated to the function of credit token. Through the intermediary of the competition between credit-financed commodity producers and merchants, this emancipation results in the trend that the capitalistic increase of the power of property over the work and wealth of society lags behind the increase in credit and circulating credit money. The practical effect of this deficit is that the state-defined and state-mandated unit of measurement for abstract wealth shrinks. This is actually not a problem, as long as the power of capitalist property keeps increasing on balance.[6] The trouble starts when the state-approved creation of credit spawns no growth in the power of capital but only nominal growth, and perhaps not even a reproduction of the power of capital is achieved. What is even more trouble, however, is when prices generally decline and the value of the monetary unit rises. In that case, the lack of prospects for success has made the banking industry create and grant altogether less credit than is needed even to reproduce existing capital; firms have proceeded to ruin their competitors with price reductions in order to survive themselves.

Additional remarks

Inflation refers to a general rise in prices, expressing it by way of the money used for paying the lastingly increased and still increasing prices: as devaluation of money. The way the term is normally used loosely, it usually denotes nothing more than the numerical inversion of the rate of price increase, which is determined statistically on the basis of various baskets of goods. That informs the final consumer about the average increase in his cost of living. In economics, however, the inflation rate is to be understood as a verdict on the money. This diagnosis of a decrease in monetary value abstracts from all particular, sector- and product-specific competitive conditions and acts of extortion between ‘supply’ and ‘demand’ that are always at the root of a general price increase. It also disregards how differently the various business branches and social classes are affected. The construction of ideal-typical consumer baskets serves — for lack of a money-commodity as yardstick — as a device for measuring the time curve of monetary value against itself and documenting its decline. The metaphor of it ‘inflating’ indicates what the cause is thought to be: money loses value because there is notoriously too much of it in circulation, that ‘bloats’ the general price level.

The obvious questions are, what is the circulating quantity of money too large in relation to? what is the source of this excess? and why is it chronic? If one takes these questions seriously, they lead to the banking industry and the economic nature of its means of business. This sector has the power to give firms an advance for their competition for growth and to create ability-to-pay in anticipation of capital accumulation and as a way of facilitating it. The banking industry uses this power to an extent that satisfies its own growth demands and fits its risk calculation. Accordingly, it is able to finance both growth that is merely apparent and business that fails to reproduce its own prerequisites. The effect on the nation’s money, on the other hand, makes clear the state’s power to declare a mere money token to be society’s real money, and to make the banking industry, with its calculations and its successes and failures, the regulator of the value quantum embodied by its legally prescribed tender.

Market-economy experts, anxious about the success of the national economy, prefer to explain their finding — that a general price increase results from an accordingly large ‘glut of money’ — by a tautology. They apply the idea of a proper balance that has been upset: an amount of money that matches the amount of commodities somehow, but in any case exactly. It is just large enough to pay only reasonable asking prices so as to finance only sound growth and no unsound hike in prices. Economists stand by with their explanation of money: they simply equate it with the function of facilitating the sale of commodities. From this they derive the model-theoretic dogma that money basically only reflects the circulation of the goods economy in the opposite direction, i.e., it is to be assumed that the quantity of goods in principle matches the quantity of money needed for its turnover. This balance would be disrupted by surplus money — the government is always to blame with its ‘money-printing presses.’ The practitioners of monetary policy are constantly searching for the sum that comes close to the ideal of the correct money supply. They are always busy pursuing the ‘mission: impossible’ of steering the competition of capitalists by influencing the instruments of this competition, in this case the most important one of all, credit.[7]

It is not so rare, either, that there is a general fall in prices, this phenomenon being expressed in terms of money, by analogy to inflation, as ‘deflation.’ For this, market-economy experts have worked out a different explanation, not that the money supply is too small. Instead, they make it psychological: customers hold back on buying in anticipation of sinking prices, thereby forcing suppliers to really reduce prices, which makes buyers hold back even more in order to get what they need even cheaper later. In the end, the bargain hunters drive the business world into the ground — a rather comical interpretation of the fact that at times the financial sector sees the prospects of the business dependent on its loans as being so bleak that its financing services no longer even end up reproducing society’s capital. Monetary policymakers basically respond the same way as in their fight against inflation. The means (in this case a lot of cheap credit) is supposed to manipulate the end into existence (successful investments and overall capital growth). At any rate, it is an original idea to set an inflation target for monetary policy — about two percent would be all right. In other words, ostensible growth is not merely supposed to indicate the real thing but help bring it about…


The finance industry owes to the state its license to utilize the money needs of capitalistic companies for itself by creating and granting credit, and to circulate its credit-money to that end. It owes to the state a legal tender that is tailor-made for its liquidity needs. The lie it lives — that all the credit it creates and all the means of payment it circulates will prove themselves as money capital — is not turned into truth by having the state as patron, but is certainly made to last. As a result, the banks’ turnover and profit grow. And with the power that this allows them to accumulate over the rest of the economy, financial companies develop the need and suitable methods to emancipate further their growth from the course of the economy they supply with credit, quite a bit further than they already manage to do by their creation of credit.

Editors' Note

[*] “Circulation sweats money from every pore.” [“Die Zirkulation schwitzt beständig Geld aus.”] (Karl Marx, Capital, Volume One, Chapter Three: Money, Or the Circulation of Commodities)

Authors' Notes

[1] The financing of capitalistically unproductive state consumption, by which money-capitalists have always earned good money, is a story all to itself and will be dealt with in Part III.

[2] Accepted bills of exchange circulated between the banks, which used them to offset their reciprocal claims from their customers’ business dealings. It was only through this that payment with bills of exchange became widespread and subsequently came to an end. Commercial credit between merchants has been transformed into a credit relation between the bank and its customers, who handle their money transfers with customers and suppliers via a transaction account at the bank. The bank grants them a line of credit: an overdraft facility that companies make use of to bridge the time and value gap between incoming payments and payment obligations, thus ensuring the continuity of their turnover. At the same time, the credit line puts them in a position to allow their customers payment terms, which they in turn likewise make use of with their suppliers. As collateral for the overdraft, banks frequently demand that customers sign over their receivables. With this form of commercial credit, the creation of debt and thus of all beneficial effects on capital turnover lies entirely on the side of the bank; it is its decision how much of such a loan to grant its customers. The circulation of companies’ commercial debt is completely integrated into the account management within and between banks, i.e., the clearing or balancing of their business customers’ payment transactions handled through the banks, which will be discussed in section 2.b.

[3] A bank’s own financial assets essentially serve as the basis for the collateral it has to have at its disposal in order to take hold of others’ financial assets and earn money from financing others’ business. More on this in section 3b.

[4] What needs to be said about this will follow in section 4.

[5] The aim and object of this policy will be discussed in chapter III.

[6] One collateral benefit for capital should not be underestimated. The masses of wage-dependent market participants rank among the losers of general price increases, until they might fight for and win a compensatory wage increase. That is, the labor factor remains the weakest part of the general rise in prices passed around in a circle. This fact automatically makes quite a contribution to real capital accumulation. Of course, that doesn’t stop either the academic or the politically responsible partisans of this mode of production from identifying the real, ultimate reason for such a price ‘spiral’ as outrageous wage demands.

[7] The role of government budgetary policy in credit creation and inflation, and the efforts of government monetary policy to handle them as productively as possible, will be treated in chapters III and IV.

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