For your delectation today, another mix of quarter-digested reading and half-baked speculation, seasoned with lashings of blithe ignorance. For dessert: remorse.
So once upon a time, money was a commodity much like any other. In the middle ages, money basically meant precious metals. But then things went weird – and, non-coincidentally, they went weird just as capitalism was getting up and running. The French Revolution, that triumph of property rights, internal markets and centralised contract law over protectionist local economies [I’ve been reading a bluffers guide; this is more than likely bollocks], was financed by the (inadvertent) creation of a paper currency, the assignat. And modern capitalism rests upon a financial sector whose baroque workings are incomprehensible even to the men, women and machines whose lives are spent in those virtual labyrinths. The weirdness upon which our world rests is, nonetheless, quite simple, in essence. It’s about the reflexivity of debt, or of the promise – solid Derridean themes. As all readers of J.L.Austin will know, a promise is quite a striking form of speech-act: it’s a performative, which means that what it says is also what it does. If I say (as Orwell liked to) “I brush off my coat. I floss my teeth. I glare at my reflection in the unforgiving mirror” (or some such) then my saying these things is different from my doing them. My speech is not the brushing, the flossing, the glaring. But if I say “I promise to give you five pounds” then the saying is the promising. The distinction between speech and deed here collapses, because this speech-act is a performative – the saying is already, irrevocably, no matter my ‘intention’, the doing of what I say.
Austin wants to reorient our attitude to language such that performatives are given comparable status to common-or-garden propositions – a project Derrida calls ‘Nietzschean’ in its implications. I think that’s pushing it. But I want to circle around a peculiar feature of promising that Austin nowhere, to my knowledge, remarks. This is fucking strange. Ready? Saying “I promise to give you five pounds” needn’t just make the promise it describes. It can also fulfil the promise it describes. Don’t believe me? Take out a five pound note. I have one here, and I transcribe:
Bank of England
I PROMISE TO PAY THE BEARER ON DEMAND THE SUM OF
[Autobiographical interlude: as it happens, this five pound note is, at time of writing, all the money I have in the world. No, don’t worry, it’s fine. Really: end-of-the-month wage-slave shortfall, nothing to worry about, thanks for your concern…] That’s what the note says: it’s a promissory note. This promise to pay me five pounds is itself five pounds. There is a total reflexivity of the promise, here. And this double performativity of the promise of money is possible because money is always already a promise – it was a promise even when it apparently had a wholly material form, as precious metal.
More on this as and when. For now, here’s another thing. Banks make money. Not just in the sense that they generate profits, but also in the sense that they manufacture our currency. Money is a commodity, and banks are the factories that produce it. Banks produce money physically: all English banknotes are printed by the Bank of England (although in Scotland practically anyone with a printing press can run off the stuff, which is going to cause serious problems if any of those currency-producing banks goes Northern Rock). More importantly, banks produce money virtually. Let’s say you have one hundred pounds. You deposit it in a bank. The bank (NatWest) then lends out the money to someone else, at a higher rate of interest than whatever they’re giving you. (This is the main source of the bank’s profits). The money the bank’s loaned out is then deposited at the self-same bank. So: NatWest has twice the money originally deposited. And it decides to loan it out again. NatWest loans its newly deposited money to a third party, at an even higher rate of interest, and this new customer, once again, decides to deposit their borrowed money at NatWest. The bank now has three times the money originally deposited. It has three times the money that actually exists, in any physical sense. Nonetheless: so long as the bank has promised to pay its customers whatever they’ve deposited, and so long as its customers believe that the bank will fulfil that promise, the money NatWest has created, out of thin air, is real. Because money is nothing other than the bank’s promise to supply money.
This ghost story is how our economy actually functions. There’s a good summary in this John Lanchester article. Our currency is made of debt. If even a substantial minority of any bank’s customers decided to ask for their deposits back all at once, the belief system upon which these promises are founded would collapse, and the bank would go under. Which is, more or less, what happened to Northern Rock when the credit crunch hit.
I’ve been reading around economics for about a year now, and while this basic economic fact is universally acknowledged, I’ve yet to find a book or article that places it centre-stage. [I know, I just haven’t read enough. Any tips?] In economics textbooks it’s often mentioned, in an ostentatiously casual tone, towards the end of the final section. “Oh *ahem* as it happens (*ahem*) everything we’ve told you is built on an illusion (is that the time?)”
I need to do more reading. But instead here’s a suggestion. Banks only survive because they are able to make profits. This is true of all capitalist industries; but of banks more than any. Why? Because banks always have to keep ahead of the moment at which their customers demand their money back. If, as a bank, I borrow X pounds off of you, and I lend X pounds to someone else, I need to be damn sure I’ll have the X pounds back by the time I have to repay you. If I don’t have it – if I don’t have it in hard cash – then I’ll be more than embarrassed: this scenario would produce the end of my business, because my business is entirely built on trust. If I can’t make good on my promises I’m no longer a bank; I’m simply a thief.
What does this mean for our economy? It means, perhaps, that banks need to keep producing more and more money. If the amount of money on a bank’s books starts declining for a prolonged period then that bank will go under, because it will be unable to fulfil its obligations. Banks are built on an upward spiral of money-production; a downward spiral is likely to mean not declining profits, but collapse.
Is this right? (The claim certainly doesn’t follow from what I’ve said; but I think it makes a certain intuitive sense… possibly…) If it is right, what would the necessity of ever-increasing money-production mean for the rest of the economy? It would mean, I think, one of two things: either massive inflation, or ever-increasing real production. The former would destroy our economic world; the latter is necessary to keep the quantity of ‘value’ in the economy more or less equivalent to the quantity of money.
I haven’t thought any of this through (as is clear). But this argument would provide a plausible explanation for the utter commitment of capitalist economics to ‘growth’. Growth is essential for capitalism, because capitalism is built on a financial system that has to grow or die.
That is all. Criticisms and/or explanations are, as always, more than welcome.