There is a story about a police officer who sees a drunken man late at night searching around in the gutter below a street lamp and asks what the man has lost. He says he has lost his keys and the officer helps the man look for them. After several minutes of searching with no result, the police officer asks the drunk if he is sure this is where he dropped the keys. ‘No’, the man replies, ‘I lost them by my front door, but this is where the light is’.
This story may serve as an analogy for the way that the financial crisis has been handled in Europe as well as in the USA. By referring to this crisis as ‘financial’, we have already pre-structured our diagnosis of the problems and hence also our thinking about possible solutions. Government and central bank efforts to resolve the crisis through quantitative easing and stricter banking regulations do not address the root cause of the problems. What we are facing today is not merely a financial crisis but a monetary crisis. The question we need to be asking ourselves is not how money circulates in financial markets but rather where money comes from in the first place. But just as looking for the keys by the front door is highly inconvenient for the drunk, so too is addressing our contemporary problems as symptomatic of a crisis of money itself because it compels us to challenge vested interests in the current money system.
How to Make Money
In an economy where physical notes and coins are the only practical means of payment, a bank must necessarily hold money before it can lend money out to customers. This is, however, not how banking works today, not even in principle. Over the course of the thirty or forty years, our economies have become increasingly digitalized. Commonly regarded as merely a matter of providing efficiency and convenience, this development has in fact implied fundamental changes to the way that money is created. While notes and coins are of course still produced by central banks such as the Bank of England, electronic money is created when commercial banks issue new loans to customers. This happens in the following way:
The issuance of a new loan of say £10,000 consists of two transactions. On the one hand, the customer signs a contract stipulating that they owe the bank £10,000. On the other hand, the bank credits their account thus stipulating that the bank owes the customer £10,000. Since credit in a bank today is equivalent to money, the bank has just increased the total supply of money by £10,000. Commercial banks are of course required, for legal or just practical reasons, to hold reserves in the form of cash or central bank credits. However, cash constitutes only 3 percent of the total supply of money while the remaining 97 percent of the total UK money supply is made up of electronic credit money created by private banks.[1] While the outsourcing of many of the constituent parts of our social infrastructure such as telecommunications, transport, energy, health care, and education over the past thirty or forty years has attracted much public and political attention, this privatisation of the production of money has gone largely unnoticed. This is a serious analytical deficit on the part of the left since money privatisation has a set of important consequences, which are worth exploring:
- Today most money is created concurrently with the creation of debt. Since customer debt to banks typically has higher interest rates than bank debt to customers, the overall level of debt tends to increase at a faster rate than the supply of money. This creates a vicious circle where the need to repay the principal and interest on debts requires more money creation which in turn creates more debt, more interest, more money. With levels of debt at an all-time high and interest rates at an all-time low, we seem to be reaching the limits of this system.
- The willingness of banks to extend credit and issue new money into the economy is both a function and a cause of cycles in macroeconomic performance. When the economy is doing well with falling unemployment and rising house and stock prices banks extend more credit. This in turn contributes to the further inflation of house and stock prices, fuelling a bubble. Once the bubble bursts, banks switch to restricting the issuance of new credit thus furthering the decline of the economy. Where economic cycles are an inherent product of the drive to capital accumulation, the privatisation of the money supply has made this pattern of boom and bust more extreme. The pro-cyclical behaviour of the creation of money by banks creates an unstable economy, constantly moving between boom and bust.
- Banks prefer to lend against collateral in the form of real estate or financial assets. This means that most of the money created by banks is not spent on investments in new productive enterprise but rather on the purchase of assets already in existence. In the UK today just 12 percent of outstanding loans are to businesses, whilst around 76 percent of loans are mortgages secured on residential and commercial property.[2] The result is a new surge in house prices, while the productive parts of the economy are still in a recession.
The Class Struggle between Debtors and Creditors
The absence of critical inquiry into the fundamental issue of money creation is a matter of political as well as simply economic failure. As the financial part of the economy is becoming gradually more and more decoupled from the real productive part of the economy, we also see a decoupling of mainstream institutionalized parties and politicians from the rhetoric and priorities of popular concerns. The reason for this political disconnect is not, as it is sometimes suggested, that people are not interested in politics. On the contrary, a vibrancy of political activity and mobilisation has taken hold on the streets of contemporary societies, which we have not seen since the 1970s. Mainstream political parties and mainstream politicians seem, however, largely unable to tap into these political undercurrents in a way that would channel these popular energies into established democratic institutions. It is tempting to jump to the conclusion that politicians are simply just ignorant or downright evil. Without ruling out the possibility that there are elements of both ignorance and evil in mainstream politics, a more general explanation may be found in the very framing of contemporary political struggle.
The preponderant division of political parties between left and right is anachronistic to the actual conflicts dividing Western societies. This is the real reason why more and more people feel increasingly alienated from their alleged representatives in parliament. The division between Labour and the Conservatives in the UK, the SPD and CDU in Germany or even also to some extent between Democrats and Republicans in the USA is ultimately modelled on the oppositional class interests of nineteenth- and twentieth-century industrial capitalism with labour on one side and capital and land owners on the other. The problem is that we no longer live in the age of industrial capitalism but rather in one of financial capitalism. This shift accentuates new lines of conflict and class opposition that are not expressed through the traditional oppositions between left and right.
In the traditional Marxist analysis, class position is determined by the subject’s position relative to the means of production. The capitalist class is defined as owners and controllers of the means of production while the subjects of the labour class own nothing but their own labour, which they are forced to sell to the capitalist. In financial capitalism, the appropriation of wealth and profit is not only and sometimes not even primarily mediated through the production and selling of commodities. The very production and circulation of money has become one of the most profitable and influential enterprises of our time. This creates a second axis of class opposition supplementing the classic Marxist distinction between worker and capitalist. While the creation of money was once a state monopoly, the evolution of an economy largely based on electronic credit money has gradually outsourced the privilege of creating money to private banking agents. When this money is sent into circulation in financial markets, it serves to redistribute and appropriate the profits generated in the productive sphere of the economy for the benefits of those agents in an advantaged position relative to these markets. In financial capitalism, class position is thus determined by the subject’s position relative to the network in which credit money is created and circulated. Ultimately, this criterion renders two opposing classes: debtors and creditors. The creditors are the ruling class while the debtors are the exploited but potentially revolutionary class.
The capacity of the traditional capitalist class is to make money through the exploitation of labour. Today, the defining privilege of the ruling class of creditors is to make money simply by making money. As we have discussed, most money today is issued as debt in the form of commercial bank credit. Nonetheless, not all debt creation is money creation. Many people today are able to take out a loan and thus create debt. Few people, however, are in a position where they can create debt that functions as new money. This is the difference between an individual and their bank, expressing at the microeconomic level the difference between the two classes of debtors and creditors. Creditors are able to make their own money, or at least they are in a position to benefit from the creation of money. Debtors, on the contrary, cannot make their own money. Therefore they have to pay money to use money. In the simplest form, this money is paid as interest. Credit money generates surplus-value as it must be repaid with an amount of money exceeding the principal. We can think of interest payments as a kind of tax, which is paid by the debtor as a price for their participation in the money system. Today even many nation states are net-debtors and interest payments on loans to banks and private investors constitute major items in their budgets. Some of the ordinary taxes paid by citizens are thus converted into the government’s payment of interest-as-tax on the money they use. To the extent that interest is paid on money created by banks, we can think of it as a form of financial exploitation.
Finding the Keys to Unlock the Crisis
Once we begin to understand our contemporary state of affairs as a monetary rather than a simply a financial crisis, we may also start looking for the keys to solving it in places where they are likely to be found, rather than simply where vested interests would like us to keep looking. Once we start thinking about money, debt and interest as forms of class struggle, the inevitability with which we accept a monetary system based largely on commercial bank credit money begins to disappear. Why must money users put themselves in debt to become part of the monetary system? Why should money users in an economic community pay a fee to particular agents in the money system to be allowed to participate in a system that is only maintained through the common effort and investment of all the members of the community? What is the moral obligation of debtors to repay their debts, if this debt has been imposed upon them by a system that inevitably creates more debt than what can possibly be repaid? We should insist on the political nature of money because it gives every citizen the right to question every aspect of that particular monetary system to which he/she is subject. The failure of institutionalized political parties organised along the axis of left and right consists in their neglect of such questions of debt and money creation.
While our established parties largely fail to include the fundamental questions of debt and money creation in their programs, it is easy to recognise the contours of class struggle around these issues if we look beyond the boundaries of parliamentary politics. It is appropriate, then, to conclude with a few examples from the front line. It is worth noticing how questioning the nature of our monetary constitution not only opens up the space of politics and economics but also the space of religion:
Between 2006 and 2008, a Spanish citizen named Enric Duran took out a total of sixty-eight loans from a number of Spanish banks and used these funds to finance various political and social activities to fight capitalism. He justifies his actions as follows: ‘I saw that on one side, these social movements were building alternatives but that they lacked resources and communication capacities. Meanwhile, our reliance on perpetual growth was creating a system that created money out of nothing.’[3] While Duran has been called a ‘Spanish Robin Hood’, his willingness to suffer personal default on behalf of the entire class of debtors also evokes the image of Jesus, who took upon himself all the sins and guilt of the world (indeed in German ‘Zins’ and ‘Geld’ mean ‘interest’ and ‘money’ although the connection may be merely phonetic rather than etymological).
Claiming to be collecting material for an art piece, Chilean artist Francisco Tapia managed to gain access to the vaults of the private Universidad del Mar, where he removed and ultimately burned student tuition contracts making it near impossible for the university to collect up to £297 million of student debts. If Duran is a kind of Jesus, Tapia is perhaps more comparable to Martin Luther, who insisted that everyone should have a direct relation to the knowledge of God and protested against the church getting paid in indulgences to act as a middle-man.
A less spectacular but still illustrative example is provided by the small Danish company Stubkjær & Nielsen, who specialise in providing financial advice to debtors. Exploiting special stipulations in the Danish mortgage system, Stubkjær & Nielsen is able to gradually decrease the outstanding principle of their client’s debts by converting the loan whenever interest rates move either up or down. In 2013, Stubkjær & Nielsen decreased the outstanding debt of their clients by an average of 4½ percent without increasing net-interest rates. The company is performing a kind of financial jujitsu, where the opportunities and loopholes of financial markets are exploited not in order to increase fortunes but to decrease debt.
A further example is especially interesting as an offshoot of the Occupy movement. The Rolling Jubilee initiative works by fundraising an initial sum of money that is then used to buy cheap debt on the so-called secondary debt market, where banks sell off non-performing loans at a fraction of their nominal value to more aggressive debt collectors who aim to make a profit by recuperating some of the loans. Rolling Jubilee has been able to purchase medical and other forms of personal debt at rates of less than 20 to 1. Rather than trying to collect these loans as aggressive debt collectors would do, Rolling Jubilee simply abolishes them thus liberating the debtors. The initiative takes its name from Christian, Muslim and Jewish traditions. In Biblical times, ‘jubilee years’ marked the regular intervals at which all debt was cancelled and all those in bondage set free.
While Rolling Jubilee is most likely carried by a broadly socialist sentiment, it is worth mentioning Bitcoin as an initiative rooted in a more libertarian ideology. Bitcoin is a decentralized crypto-currency with the purpose of making a new form of money that is not subject to the inflationary policies of commercial as well as central banks. Even though the system favours early adopters, its decentralized nature makes it a popular (in the original sense of the word) form of money that challenges vested interests and privileges in the current monetary-financial-complex. It removes control over money creation from the creditor class. One of the benefits of Bitcoin is that new money is created as credits against the system with no counter entry. This means that the supply of money is decoupled from the creation of debt.
A final example, which is also my personal favourite, is the UK organisation Positive Money that is mobilizing people for monetary reform along the lines of Full Reserve Banking. In this model, the central bank not only holds the monopoly for creating new physical cash but also new electronic money. Money would be owned by private individuals, held securely at the central bank but with payments administered through commercial banks. This model separates the creation of money, which is undertaken by the central bank, and the financial intermediation between lenders and borrowers, which is undertaken by commercial banks. The fact that the reform has found support from Jaromir Benes and Michael Kumhof of the IMF as well as the (Keynesian) Financial Times commentator Martin Wolf serves as an indication that this idea cuts across established political divisions. One of the beauties of the reform model is that it is simultaneously revolutionary and conservative. Since private commercial banks would no longer be able to create new money as they issue new loans, a Full Reserve Banking reform would radically transform the money system. Its radicalism, however, resides in limiting the function of banks to doing only what most people think they are already doing.
If democracy is to mean anything in capitalism it must include the right of citizens to have an influence not only on how the government spends the money of the community but also on which kind of money should be circulating in the community. As long as political responses to the ongoing crisis are merely aimed at consolidating the monetary status quo through bail-outs, the Basel Accords, quantitative easing, near-zero central bank interest rates, the EU Banking Union, etc., the established parties at both ends of the political spectrum as well as our central banks fully live up to the Marxist claim that the function of the state is merely to defend the interests of the ruling class. Today these are the interests of the class of creditors. Accordingly, what we need is a party of debtors, which insists on putting the issues of debt and money onto the political agenda. The creation of such a party requires a transformation of the class of debtors from a simple class in itself, where each individual faces the burden of interest and the fear of bankruptcy on their own, into a fully fledged, self-conscious class for itself, where the threat of collective debt refusal is mobilized as a potent weapon against the tyranny of usury. Escaping the old co-ordinates of left and right, we need a political manifesto written in the language of contemporary social realities. It should declare: ‘Let the ruling class of bankers, rentiers and financiers tremble at a monetary revolution. The debtors have nothing to lose but their debts. They have a world to win. Debtors of all countries, unite!’
Ole Bjerg is an Associate Professor at Copenhagen Business School and a tutor in the MSc program in Business Administration and Philosophy. He is the author of Making Money: The Philosophy of Crisis Capitalism (Verso, 2014).
[1] Josh Ryan-Collins et al., Where Does Money Come From?: A Guide to the UK Monetary and Banking System (London: New Economics Foundation, 2011), p. 48.
[2] Ibid., p. 107.
[3] Quoted in Ashifa Kassam, ‘Spain’s “Robin Hood” swindled banks to help fight capitalism’, The Guardian, 20 April 2014 <http://www.theguardian.com/world/2014/apr/20/spain-robin-hood-banks-capitalism-enric-duran> [accessed 16 January 2015], para. 3.
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