Credit and the Economy

Summary of a lecture by Robert Guttmann, given at The Brecht Forum, New York Marxist School, 15 February 1995

Following is the summary of a lecture entitled "Credit and the Economy" presented by Robert Guttmann at The Brecht Forum in New York City on Wednesday, February 15, 1995.

1. In today’s new world economy there are some key questions that have come to the fore in the 1990s, and these questions all point to profound contradictions in the relationship between industrial capital and financial capital.
   • Why has policy-making in the United States and elsewhere become so dominated by the imperatives of the bond market?
   • What are the forces behind the unprecedented confluence of industrial stagnation and financial explosion?
   • How has the world economy been affected by global speculation in the currency markets, which today amounts to more than $1000 billion per day?
2. These questions can only be properly analyzed if we understand money as social institution which is subject to historic evolution (instead of just another good or as something natural, thus immutable). From that alternative perspective as social institution, money appears at the center of economic activities, as well as social relations underlying those activities (between buyers and sellers, among producers through different forms of competition, between workers and managers, between creditors and debtors) both of which it helps to shape in spatial and temporal dimensions. Money structures social time (e.g., investment) as well as social space (e.g., markets, relations between cities and rural areas, inter-generational transfer); that is why money is the quintessential form of capital.
3. 3) The money-as-social-institution perspective I have developed stresses three things about money:
   • The prevailing form(s) of money defined by the institutional regulation of its creation and circulation, plays a crucial role in shaping long-term growth patterns and distribution channels in an economic system. In this context, I have analyzed in great detail the transition from commodity-money to credit money in the interwar period and how that fundamental change in money-form has transformed the capitalist economy into an overdraft economy based on continuous debt financing of excess spending and its partial monetization.
   • Money has a conflictual dual existence of being both a private commodity that can be traded (against other currencies in the foreign exchange market, or with other financial assets in the securities markets) and a public good that must be accessible to anyone in a non-discriminatory fashion and circulate smoothly. This is an inherently contradictory duality, since much of our money is private bank money whose creation is subject to the private profit motive (tied to acts of bank lending) and thus subject to a procyclical bias as banks typically manage their tradeoff between profitability and safety in recurrent cycles of overextension and panic-ridden cutbacks.
   • This contradictory existence of money must be managed by the state which sets up a special institution for that purpose, a central bank operating the nation’s payments system. Management of money has been a central aspect of state power since the first nation-states emerged in antiquity (after private agricultural money was replaced by precious metals that had to be mined, thereby leading to centralized control of mines). The central bank’s monetary policy has two fundamentally political functions: externally, vis a vis other countries, as a buffer between the domestic sphere and the international sphere of the nation’s economy; and internally, to regulate social conflicts and spread adjustment burdens between different groups.
4. These points have an interrelated relevance today. What we have faced over the last couple of decades is a transformation of our monetary regime. That transformation has involved the step-by-step disintegration of the postwar monetary regime during the stagflation crisis of the 1970s and early 1980s (a process which I discussed extensively in my book): the collapse of BW in 1971, the deregulation of money (exchange rates in 1973 and interest rates in 1979-1980), erosion of structure regulations keeping financial institutions apart and financial markets controlled, and the counterproductive extension of LOLR mechanisms, making crises deeper and bailouts more expensive. It has also been driven toward a qualitatively new kind of money and banking system by a huge wave of innovation thriving in the climate of the information revolution and deregulation. So, we have the emergence of a new, highly volatile monetary regime based on:
   • a new form of money—electronic money&@8212;that is increasingly harder to distinguish from other financial assets (e.g., money-market instruments), and is very mobile and subject to a great deal of portfolio shifts, and is largely outside the control of central banks;
   • a new IMS based on managed float and a multicurrency standard which comprises three currency zones/trade blocs: EU, NAFTA, and APEC (centered on Japan).
5. A change in money-form and monetary regime not only transforms the way the economy works, but also redefines the state and its policy-making intervention capacity. Specifically, the combination of electronic money and the multicurrency system has brought forth the following major changes in this regard:
   • Deregulation of money has turned many Americans into investors (see especially the role of pension plans and mutual funds), and has allowed the middle class to join the rentier class (the money class). This change in class composition is reinforced by aging baby boomers going from being debtors in the 1970s (favoring inflation) to becoming savers (favoring low inflation and high real interest rates). This gives the Federal Reserve a political constituency for the hard money course of the last fifteen years, which favors financial investors.
   • Deregulation of money has also led to much more volatile interest rates and exchange rates, which in turn have dramatically accelerated the use of hedging and speculative investments for capital gains as the new profit-center of MNCs and TNBs, and with a concomitant wave of innovations to facilitate this activity (e.g., financial futures and other derivatives). The trend toward the dominance of a new kind of financial capital, which I characterize as fictitious capital has also been profoundly deepened by the rapid securitization of credit (as a now more attractive form of financial capital for both sides, as opposed to the traditional loan capital mediated by commercial banks), which has helped to promote securities trading as a profitable, high-risk activity. This leads to an unprecedented combination of financial explosion and industrial stagnation, with ST-oriented shareholder capital combining with international competition battles and the labor-saving information revolution to enforce global downsizing.
   • Electronic money is entirely global in nature, composed of an unregulated worldwide Eurobanking network, global investment portfolios, and interconnected financial markets. This means that a huge amount of hot money flows constantly between countries and currencies, up to an average of $1400 billion per day. The dollar is in long-term decline, first, because of the relative catching-up of Europe and Japan, and second, because of the United States’ talking the dollar down as a form of monetary protectionism, and, third, the emergence of the DM/ECU and Yen as new currencies competing with the dollar.
6. This combination of speculation and enterprise, this bifurcation between industrial capital and financial capital, creates a situation of high unemployment and wage stagnation, but global financial capital has made Keynesianism in one country impossible. The need for an international policy regime and supra-national credit—money has been created.