Once again, as in 2007 and 2008 a financial crisis is ripping across the global system of production and consumption and media confusion is following in its wake. For those interested in understanding the basis of this latest US Silicon Valley Bank triggered crisis rather than wrestling with the superficial froth and myth which is always spun around the production and financial manipulation of the capitalist mode of production I offer the following 10 points. This should simplify this recurring problem.
1. The banking system consists of masses of paper symbolic representations of the surplus value created during general production. They are created in the form of tokens representing profits made during the production of goods and services. To create profits the costs of production must always be lower than the value produced by production. This means the producers (masses of workers) must always be paid less than the value they create whilst working. This is contradiction number one, because purchasing power in one country can never buy everything produced. Production is always surplus production.
2. Those profits areplaced in banks by the profit takers, as money and is used by them to live from day to day and also to invest to make more money through profits or interest. The banks therefore lend this money (and the credit they create through loans, overdrafts and credit-based ‘instruments’), in order to create more monetary value than the value of the assets they hold. However, much of this ‘money’ is fictitious. It only exists as paper promises if investments return as hoped for. If it does, any extra surplus the banks subsequently make, is kept by them for their investers and their own salaries.
3. The banks creation of credit and credit-linked instruments, plus quantitive easing (printing more currency) creates more paper money value than the value of the commodity production noted in point 1. This in effect DEFLATES the general value of money. If a house costs twice as much ten years later, it has not gone up double in value, it is the currency which has halved. However, this deflation symptom appears in everyday life as an increase in the costs of purchasing the production noted in point 1. Therefore, deflation of money-value appears as the inflation of prices. This is contradiction 2.)
4. Furthermore, any reduction in the production of commodities and services when there is considerable amount of available money (and credit used as money) will also have a similar effect. The existence of more money and credit value than the value of available commodities, will mean more can be paid for them. This symptom also makes it appear as if prices are rising when in fact it is still the currency which is devaluing or losing its previous purchasing ability. (A continuation of contradiction 2).
5. An institutional financial crisis therefore, begins when; A) the present value of money becomes obviously insufficient to maintain (or increase) its value to purchase the things produced; or B) the money returning from bank investments is no longer sufficient to honour the interest promises the banking institutes have made to its clients.
6. Both of these symptoms cause people to remove their value containing instruments from the banking systems and place them elsewhere , say in Gold, Silver, Government Bonds etc. This is contradiction 3, because it reveals the entire banking system is unstable and just needs a relative failure in one part to trigger a whole chain of unresolvable debt chains and payment failures.
7. This collective action can create a run on the banks and banking institutions, who because they have created more paper value than the value they actually have, cannot honour their promises to pay. Therefore, the banks must default and go bankrupt or be rescued by other people’s money (public or private) and have a partial default – as occurred in 2008 and i’s happening now in March 2023.
8. These types of crises have happened continually throughout the history of the capitalist mode of production at least one or more times per generation. The crises are, of course, amplified by corruption, pandemics, famines and wars, but they are not created by these secondary amplifications. This because these crises are caused by the continued unsustainability and instability of the system based on the three fundamental contradictions noted above.
9. So to be clear, the three fundamental contradictions are as follows. First that more product value is created than can be consumed by the purchasing value given to the producers; and Second; the huge amounts of banked surplus value in money form is used to increase money value without increasing the number of value containing products. Consequently huge amounts of it turn out to be fictitious amounts of paper or bookeeping value when the promises of their promissory notes are defaulted. Third, the removal of assets from banks can effect the millions of people who have done nothing to cause the problems.
10. This means that political and banking solutions which do not remove these three fundamental flaws in the whole capitalist mode of production, will not prevent them from occuring again. (Reformism being contradiction 4) The symptoms will continue (including the attendent poverty, pollution, ecological damage of the economic system as a whole) as long as the causes of them – the capitalist mode of production are allowed to continue.
For further detail on the system and crisis see the economic sections in ‘The beginners Guide to Revolutionary-Humanism’ on this blog.
Roy Ratcliffe (March 2023)