Since the 1980s, world capitalism has become more reliant on credit. New financial instruments have been invented, such as the mortgage-backed security, or MBS, which have allowed credit to be swapped around with unprecedented “liquidity.” Increasingly, national governments such as the United States have been racking up unprecedentedly large debts to creditors who apparently have nothing better to do with their superfluous capital—no better profit-yielding investments—than to earn nominal returns of about 2% (and thus real returns of about 0%) by lending to the U.S. government. And consumer debt has been on an upward climb (although less so since the start of the Great Recession in 2008), thus leading to a huge expansion in the so-called “FIRE” economy (finance, insurance, and real estate).
Marx foresaw that credit arrangements tended to become more and more complicated and precarious as capitalism developed. In times of crisis, there are often backlashes against these “financial sophistications” as people blame credit failures for the outbreak of crises of overproduction (rather than realizing that this increasing reliance on credit is a symptom and not the disease—the underlying disease being the lack of commodity-money needed to purchase the expanded production, which then entices capitalists to extend credit in the hopes of keeping a boom going longer). Inevitably in these times of crisis, some regulations are re-introduced to slow the expansion of credit, but sooner or later the fear of credit from the previous crisis fades, and capitalists will convince them that, this time, things will be different—the boom will last forever, and there will be nothing wrong with increasing reliance on credit leverage once again to milk the boom for all it’s worth.
Sam Williams discusses this seesaw back-and-forth between fear of credit and embrace of credit in this series on the capitalist business cycle.
(See also this post from Sam Williams on money as a means of payment to get a better background for what I am about to discuss).
As Sam Williams points out, one effect of increasing reliance on credit during a capitalist business cycle is to artificially over-inflate the demand for all commodities except for the money commodity, and thus raise the prices of all commodities other than the money commodity above their values. Increasingly, the same amount of commodity-money (gold) will buy less and less other commodities, thus increasing costs in the gold mining sector and lowering world gold production (at just the very same time when it would be preferable for the capitalist system to have expanding gold production, so as to increase the market for all other commodities by increasing society’s real monetary purchasing power without relying on an increasingly shaky pyramid of credit money).
(And here we are ignoring token money under the conclusion that expanding token money does nothing to expand aggregate demand).
In other words, the more capitalism needs commodity-money, the less incentive there is to produce it. And this is more and more true the more capitalist society relies on credit.
Imagine if credit in any form were suddenly outlawed around the world sometime tomorrow. Imagine that all credits and debts were written off and forgiven, and no new credits/debts were allowed to be agreed upon. Imagine that there was somehow a worldwide totalitarian police state that could enforce this. What would happen?
For one thing, prices would plummet (back to their underlying values…and probably then some). For example, consider real estate. The only people who would be able to buy houses would be those with the cold hard cash up-front to buy a house in one lump-sum transaction. No mortgages allowed. Prices would have to be slashed to attract enough buyers who would have the ability to pay up-front. A house selling for $100,000 today might very well only be sell-able at perhaps $10,000 tomorrow. The same sort of thing would happen with every commodity, including labor power. Companies would not be able to raise money through bonds or other credit arrangements. They would only be able to pay their workers with what cold, hard cash they had on hand. Wages and employment would plummet. It would be a crisis of epic proportions.
But what else would happen? Well, gold mining would suddenly become very cheap and profitable. World production of gold would soar. “Soon” thereafter (perhaps a few years later), there would be more and more real commodity-money material entering into the economy. People (who somehow survived the previous deflationary crisis that would make the Great Depression of the 1930s look tame by comparison) would be able to buy things again—this time on the basis of hard currency rather than credit.
A new boom would not be possible because, as soon as investment and production of all commodities other than the money commodity started to outstrip world gold production, there would not be buyers for this increased commodity production, and an immediate crisis of overproduction would break out. Unsold inventories would pile up, prices would be slashed, and because companies’ cash flow would be entirely dependent on selling previous inventory (no credit arrangements being possible), this miniature crisis of overproduction would be immediately diffused by a small halt to the production of all commodities other than the money commodity, and a relative cheapness in the gold mining business, thus quickly expanding the supply of money material and allowing for the market to expand again.
In other words, “boom” periods would not be possible, but a constant level of “quasi-prosperity” would be possible because the crises of overproduction would be continuous, but very very miniature in their extents. Money-commodity production and production of all other commodities would pretty much rise (very slowly, but stably) in tandem, with small adjustments constantly evening them out.
In one sense, this deletion of all credit and debt would make capitalism more “stable” by getting rid of the business cycle and the resulting acute crises of overproduction and credit crises.
On the other hand, this decision to get rid of all credit would be bad for capitalism because it would do nothing to address capitalism’s long-term tendency for the rate of profit to fall. The slow, but stable rate of growth would get slower…and slower…and slower. And, without the business cycle to complicate things, it would be readily apparent exactly what was going on. Capitalism’s need to extract an ever-greater rate of surplus value from workers in order to stay afloat would become obvious. Capitalism’s inability to expand production for the benefit of the vast majority at the maximum physical limit would be obvious. The need to transcend capitalism and consciously plan production to increase production at the maximum physical limit for the benefit of all would be obvious.
In a way, credit makes capitalism more stable not by making capitalism less crisis-prone, but by making capitalism MORE CRISIS-PRONE. In a way, it is a good thing for capitalism to be prone to acute cyclical crises because these cyclical crises obscure any conscious understanding of the long-term trends in capitalism (unless you have a Ph.D. in Marxism and can study capitalism enough to sift through all of the incidental stuff to get at the fundamental, abstract stuff).
If you read the bourgeois press, you can see how every crisis can always be plausibly (but erroneously) blamed on some contingent factor or another (drought, strikes, “greedy Jews,” financial irresponsibility, “irrational exuberance,” “animal spirits,” etc.) The long-term tendency for the rate of profit to fall—and thus the necessity to transcend profit’s fetter on the means of production—is obscured.
Only by studying capitalism as Marx studied it—abstracting away as much as possible—can these tendencies be seen. And this, unfortunately, seems to be too mentally-laborious of a task for most workers to engage in. I myself am barely starting to manage it, even with the significant free time I can devote to studying this stuff.
This is credit’s true advantage—the cyclical crises of overproduction that it enables, and thus the contingent complications that it creates to help obscure capitalism’s fundamental dysfunctions.