[I apologize beforehand for the very scattered thoughts and sketchy nature of the article, these are notes that will serve as the basis for further investigations into Marxist and Maoist theory.]
At the beginning of their political career, Marx and Engels were both radical democrats, not communists, as People’s March’s Marxism-Leninism-Maoism Basic Course outlines:
During this period, from 1841 to 1843, Marx was deeply involved in the stormy political life of that period. However he was basically a radical democrat and did not at that time hold communist views. At the level of philosophy his major transformation during this period was in 1841 after reading a book The Essence of Christianity by Ludwig Feuerbach which presented a criticism of religion from the standpoint of materialism. This book played a major role in shifting Marx’ ideas from the idealism of the Young Hegelian group to materialism. Another philosophical work of 1841 (The European Triarchy) that influenced Marx was the attempt by his friend, Moses Hess, to develop a communist philosophy by combining French socialist and Left Hegelian ideas. However at that time Marx yet had only a limited knowledge of the ideas of the socialists and communists. His first contact was in 1842 when he read with interest the works of many of the leading French socialist theorists. He was however not converted to communism or socialism by these readings. This change came about more through his contact with working class communist groups and study of political economy, both of which took place mainly after moving to Paris at the end of 1843.
Towards the end of 1839 [Engels] started a study of Hegel, whose philosophy he tried to link with his own radical democratic beliefs. However he only made further progress in this when he finished his clerkship in Bremen in 1841, and, after a few months gap, moved to Berlin for one year’s compulsory military service. While in military service he joined the Berlin University as an external student and did a course in philosophy. He then became closely connected with the Young Hegelian group which Marx had been part of. He, like Marx, was also influenced greatly by the materialist views in Feurbach’s book that came out in that year. Engels’ writings now started to have some materialist aspects. The main thing he always stressed was political action. This was what made him split, in 1842, from his earlier Young German group, which he felt restricted itself only to empty literary debate. He however continued to strongly be linked with the Young Hegelians, particularly Bruno Bauer and his brother. […] It was Engels’ experiences in England that made him a communist. He developed very close links with the workers of Manchester, as well as the leaders of the revolutionary workers Chartist movement. Manchester was the main centre of the world’s modern textile industry and soon Engels undertook an in-depth study of the working and living conditions of its workers. He would regularly visit the working class areas to gain direct knowledge. […] Besides collecting material for his future book on the conditions of the working class in England, Engels came to understand the revolutionary potential of the proletariat. His regular participation in the movement convinced him that the working class was not merely a suffering class, but a fighting class whose revolutionary actions would build the future.
Their respective observations of the conditions of the working class in Germany, France and England made Marx and Engels renounce their radical democratic reforms, limited by the demand of constitutional reform. An analysis and study of the working class’ conditions led the two to realize constitutional reform was simply not enough for the liberation of the masses, because its objective was to free the bourgeoisie from political subordination. However, while the bourgeoisie at the time was oppressed by the old order’s state, the working class was oppressed by another, greater and more dangerous force: the power of money as capital. The liberal state at first sought by Marx and Engels would only grant complete freedom to the capitalist class to perfect its rule, a realization that brought their critique of society beyond the critique of the autocratic state to a critique of political economy.
Marx’s investigation of political economy started from the most important figure of the time, Adam Smith. Smith’s account of money was one of a rational development from barter, a technical tool able to facilitate exchange between independent producers coordinated by a hidden hand. What underpinned this understanding was his proclamation: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”. Specifically, the two problems of the barter system that Smith saw money originating from where:
- the multilateral character of exchange relationships: it is hard to find someone who has the commodity a producer wishes to purchase and desires the one he wishes to offer, so one would have to exchange his commodity for another, and then the latter for the one he originally wanted; money can help in this case by making all goods commensurable;
- exchange relationships are unplanned and anarchic, producers aren’t sure anyone will take their commodities in the first place.
In neither of these two cases, however, does money solve the problems of unplanned production, it merely extends them to the entirety of society.
Marx, not limited by the bourgeois point of view and hagiography of the system, noticed that money was precisely the inverse of what Smith claimed: money is the inversion of means and ends in the relationship between producers and consumers, in which human needs are not recognized as the end of production anymore, but as the means; the new end goal of production is now the acquisition of money, making money an independent social power.
It is quite common today from capitalist apologist crowds to blame economic problems on specific monetary policies, the banking system in general, or even absurd conspiracies; however, as Marx held and as I hope to explain in this article, monetary disturbances are simply the reflection of deeper issues, contradictions within the capitalist system of production and distribution itself.
The equality bourgeois political and economic theory speaks about is only formal; the content of this “equality” is in fact being inequality. Here Marx’s concept of bourgeois right, taken from the Critique of the Gotha Program, might be useful. Bourgeois right refers to relationships that are free and equal in form, but unfree and unequal in substance. This is because, while the value of commodities is determined by the conditions of production, the same amount of labor time may for two producers yield a different mass of commodities as a result of varying levels of productivity. In exchange, the more efficient producer will spend less labor time to acquire an amount of commodities than less efficient producers. The inevitable result of this dynamic is polarization, i.e. a small number of people will acquire increasing amounts of money and capital.
In present-day capitalist society each industrial capitalist produces off his own bat what, how and as much as he likes. The social demand, however, remains an unknown magnitude to him, both in regard to quality, the kind of objects required, and in regard to quantity. That which today cannot be supplied quickly enough, may tomorrow be offered far in excess of the demand.
— Friedrich Engels, “Preface to The Poverty of Philosophy“
The anarchic nature of capitalist production will lead to sectors of the economy producing more than the population will demand from them. As a result, small producers in these sectors won’t be able to meet their costs or even their consumption needs, since they aren’t able to realize the value they created in exchange. One of their options would be to move to another branch of production, since modern capitalism has undergone a process of Taylorist-Fordist deskilling and rationalization of work. Most of modern work is broken into its component parts, each of which requires less skill than the entire process taken as a whole, now reorganized as a coordination of independent tasks inside the workplace, not just outside of it in the form of independent producers. Workers rarely see the entirety of their product, they usually see parts of it before they are passed for refinement to the next person on the assembly line. With work reduced to a repetition of atomized tasks requiring little skill, the intensification of the labor process becomes easier to achieve for capitalists. For one, the intensity of workers’ labor, being part of a larger whole, is disciplined by the average intensity in the workplace, making it easier for managers to control the pace of work. Another important effect for capitalists is the deskilling of laborers, which cheapens labor-power, makes workers easy to replace, and boosts profit.
Hence, petty producers have to either join the proletariat, work harder, or enter credit relations to stay afloat. The pauperized will eventually be unable to renew their productive capacity and they will lose their means of production, which will be most likely bought by larger capitalists. More or less, this is the history of the displacement of petty commodity production by the factory system.
You are horrified at our intending to do away with private property. But in your existing society, private property is already done away with for nine-tenths of the population; its existence for the few is solely due to its non-existence in the hands of those nine-tenths. You reproach us, therefore, with intending to do away with a form of property, the necessary condition for whose existence is the non-existence of any property for the immense majority of society. In one word, you reproach us with intending to do away with your property. Precisely so; that is just what we intend.
— Marx and Engels, “Manifesto of the Communist Party“
Private property is an impossibility for nine-tenths of the population partly because of the factory system as well, as it concentrated the utilization of labor-power geographically, forging the basis for money as an independent form of value first and means of exchange second, since petty producers still reflected older forms of production in which money wasn’t primarily the basis of the social power of capital, but rather mostly a rational means of exchange.
In the sixteenth century, as quoted in Yanis Varoufakis’ “Foundations of Economics”, “German traders had to stop every 10 km to pay customs tolls which were decided after intense bargaining. Most villages had their own currencies and in an area the size of London there were 112 different measures of length. Moreover, from France to Russia, from the Ottoman Empire to Scotland, there was nothing that we would recognise today as markets for labour or for land.”
In the past, in societies that still reflected older forms of production, it was possible to observe economies that, while involving petty commodity production, weren’t entirely regulated by the law of value but rather by other forms of distribution, such as collective regulation of conditions of production. Even when goods were sold, they weren’t sold at competitive conditions but were bound by guild-like organizations or established religious norms of distribution which banned competition among producers. These types of mutual obligation and established norms of allocation limited money’s regulatory role, although the contradictions between dying older forms of production and the embryo of capitalism remained. How was capital to resolve this contradiction in its favor, how was it to batters down all Chinese walls?
Historically, merchant capital and armies acted as the battering-rams. Through the plunder of non-Europeans, enough surplus was accumulated to give rise to demand by the European capitalist system first, and Euroamerican later. It’s somewhat necessary to invoke Wallerstein for a moment, and his “The Modern World-System”, where he argues against the bourgeois-centric idea of the international trade which gave rise to the modern imperialist world-system. The mainstream bourgeois narrative is centered on the European expansion, beginning in the 16th century, aimed at acquiring luxury goods, such as spices and rare metals. He is however skeptical of the luxury goods exchange functioning as a vehicle for a colossal task like the expansion of the Transatlantic world, and even less explain the creation of a Europe-centered world-economy. In the long-run, Wallerstein argues, the products of consumption required by the masses are better at explaining economic progress. Europe needed food, both to increase the consumption of calories and to distribute food prices so as to free demand for more business-accomodating purchases, and fuel, and they got it with the expansion in the Atlantic and Northern and Western Africa. Grain was at the heart of production and trade during the birth of capitalism, and when the Northern forests and Mediterranean plains became insufficient to fuel population growth, Europeans had to expand. An important precious good that pushed Europe toward insular expansion was sugar, at the basis of European diet. Another one was wood, indispensable for construction and exploitable as fuel, and so on.
An historical investigation isn’t the point of these notes. What we know is that colonialism, plunder, expropriation, dispossession and copious amounts of violence led to the rise of the commercial capitalist, the functionary of money as capital, money as an independent substance of value. The function of money as a circulatory tool, as captured by the C-M-C circuit, is subordinated to the independent form of value, the universal equivalence of money expressing the subordination of commodities to money, captured by M-C-M’. Money no longer serves as a transitory expression of value, rather other commodities become the transitory embodiment of value, abstract labor, whose universal expression is money.
Schematically, we can say the history of money is the history of a struggle between two different classes and their corresponding circuits of money; the independent producers, engaging in petty commodity production and having no or insignificant control over others’ labor-power, and the industrial capitalists, having considerable control over labor-power. While for the former the main function of money is its circulatory function, a tool that lessens the trouble of exchanging use values, for the latter money functions as an independent form of value through which producers are subordinated to the social power of capital.
As a tool of circulation, money has to remain inside the system of exchange; as an independent form of value, however, it can stand idle. This contradiction between the requirements of the economy as a whole and the requirement of the single independent capitalist and his possible desire to hoard for whatever reason can become violent if industrial capital becomes unprofitable, which forces capitalists to withdraw money from circulation; granted, this is bound to happen because of the tendential fall in the rate of profit, a law of historical materialism. This leads to a spiral of falling prices, speculative demand for money, a subsequent shortage of money, and finally a collapse of exchange, culminating in crisis.
As the economy expanded and more nations were subjugated to the rule of capital, substitutes for money developed; credit instruments quickly became negotiable, replacing traditional money, and the money commodity remained mostly stored in banks. With the rise of credit money, one new inversion is observable: while traditional money is money serving as capital, the introduction of credit money means capital itself is now serving as money. This means credit isn’t just a new means of exchange, but it is also the means of increasing the money capital of which credit money has become the token.
The principal and primary function of banks is to serve as middlemen in the making of payments. In so doing they transform inactive money capital into active, that is, into capital yielding a profit; they collect all kinds of money revenues and place them at the disposal of the capitalist class.
As banking develops and becomes concentrated in a small number of establishments, the banks grow from modest middlemen into powerful monopolies having at their command almost the whole of the money capital of all the capitalists and small businessmen and also the larger part of the means of production and sources of raw materials in any one country and in a number of countries. This transformation of numerous modest middlemen into a handful of monopolists is one of the fundamental processes in the growth of capitalism into capitalist imperialism; for this reason we must first of all examine the concentration of banking.
— Vladimir Lenin, “Imperialism, the Highest Stage of Capitalism”
Credit money is the keystone to the new form of banking, which socialized the power of capital, permitting independent capitalists to draw from the capital of the entire capitalist class; the capitalist class as a whole, despite having internal contradictions, becomes a super-entity and exploits the proletariat as a whole. A core of 1318 companies with interlocking ownerships, according to world-systems researchers, controls the vast majority of large blue chip and manufacturing firms, the real economy, representing approximately 80% of global revenues; what’s more, 147 of them control 40% of the entire network. All the top 20 companies are financial corporations: Barclays plc, Capital Group Companies Inc, FMR Corporation, AXA, State Street Corporation, JP Morgan Chase & Co, Legal & General Group plc, Vanguard Group Inc, UBS AG, Merrill Lynch & Co Inc, Wellington Management Co LLP, Deutsche Bank AG, Franklin Resources Inc, Credit Suisse Group, Walton Enterprises LLC (holding company for Wal-Mart heirs), Bank of New York Mellon Corp, Natixis, Goldman Sachs Group Inc, T Rowe Price Group Inc and Legg Mason Inc.
The contradiction between individual capital and the circulation of commodities, however, is not resolved by this socialization of the capitalist class’ capital; rather, it is generalized. Capital as a whole, as a super-entity, enters into a contradictory relationship with the sphere of commodity circulation as a whole. The detachment of the real economy from the financial sphere can even intensify the contradictions inherent in the capitalist mode of production. If not backed by production of surplus value, the expansion of capital as a result of the usage of credit money is just an accumulation of claims on non-existing value; the stable expansion of credit can only be sustained if capitalists are able to produce surplus value. Capital accumulation, however, doesn’t need to be stable.
The free issuing of credit reveals its instability when it confronts the real world of commodities. Capitalists and the state, during periods of (apparent) stability borrow money.
The capitalists’ dependence on credit is well known:
“A steadily increasing proportion of capital in industry,” writes Hilferding, “ceases to belong to the industrialists who employ it. They obtain the use of it only through the medium of the banks which, in relation to them, represent the owners of the capital. On the other hand, the bank is forced to sink an increasing share of its funds in industry. Thus, to an ever greater degree the banker is being transformed into an industrial capitalist. This bank capital, i.e., capital in money form, which is thus actually transformed into industrial capital, I call ‘finance capital’.” “Finance capital is capital controlled by banks and employed by industrialists.” This definition is incomplete insofar as it is silent on one extremely important fact—on the increase of concentration of production and of capital to such an extent that concentration is leading, and has led, to monopoly. But throughout the whole of his work, and particularly in the two chapters preceding the one from which this definition is taken, Hilferding stresses the part played by capitalist monopolies. The concentration of production; the monopolies arising therefrom; the merging or coalescence of the banks with industry—such is the history of the rise of finance capital and such is the content of that concept.
— Vladimir Lenin, “Imperialism, the Highest Stage of Capitalism“
The state, too, is subject to the same dependence on credit; it is hard to find a modern capitalist state that doesn’t rely on short-term borrowing and long-term deficit financing as components of public budgeting, as Ernest Mandel argued:
Parliament and, even more, the government of a capitalist state, no matter how democratic it may appear to be, are tied to the bourgeoisie by golden chains. These golden chains have a name – the public debt. No government could last more than a month without having to knock on the door of the banks in order to pay its current expenses. If the banks were to refuse, the government would go bankrupt. The origins of this phenomenon are twofold. Taxes don’t enter the coffers every day; receipts are concentrated in one period of the year while expenses are continuous. That is how the short-term public debt arises. This problem could be solved by some technical gimmick. But there is another problem – a much more important one. All modern capitalist states spend more than they receive. That is the long-term public debt for which banks and other financial establishments can most easily advance money, at heavy interest. Therein lies a direct and immediate connection, a daily link, between the state and big business.
— Ernest Mandel, “Marxist Theory of the State“
All this reliance on credit is granted by the expectations capitalists have of repaying their creditors from the increased profits, in the case of the capitalist, and increased revenues, in the case of governments. However, not realizing these profits will result to defaults. Creditors will lose confidence, decide to withdraw their cash deposits, and we will witness a bank run. The bank will fail and will bring down any illusion that the capital currently in circulation is anything but fictitious. The overextension of credit, which doesn’t take into account the increasing limits of profitability resulting from the tendency of the rate of profit to fall, causes turmoil in the financial sector.
Although it seems money can be made out of thin air, a common view gifted to us by the world of Wall Street, money only conceals the importance of labor for the economy, it doesn’t eliminate it. It is a natural law that the amount and type of commodities that can be produced depends on the pool of labor available to society at any given time, and it is a natural law that this labor pool has to be distributed among sectors of the economy. How this is done is one of political economy’s fields of study; in an economy of simple commodity production, the distribution of labor is determined by the exchange of commodities as products of labor; another inversion is witnessed here when we move our eyes to capitalism, where exchange becomes the exchange of commodities as capital. Capitalists don’t sell commodities to acquire other commodities, nor do they sell at cost-price to simply renew their production, they sell them to enlarge their capital. We can measure the health of this system of capital accumulation by the rate of profit; this rate of profit is what regulates the allocation of concrete labor throughout the economy.
Our previous mention of the factory system contains another thesis, that of the precondition of capitalist production: the separation of laborers from the instruments of labor. The struggle for the subordination of labor to capital in the workplace is the most immediate form of class struggle facing the single worker; this struggle takes the form of a struggle over wages, over the length of the working day, over the intensity of labor, over safety regulations, etc.
The capitalists’ drive to reduce wages, to increase the working day, to increase the intensity of labor and to remove labor regulations isn’t just a product of their greed, it is also and mostly a response to the objective force of competition, intensified in the era of finance-capital, where capitalists have to realize not only their own capital, but the capital requested as interest by their creditors. Not only the worker, but the capitalist too is subjugated by money.
There are however limits to how much the working day can be increased, wages reduced, etc., found both in the physical limitations of people and class struggle. Capitalism overcomes this limitation by the drive to revolutionize the means of production, which gives rise to contradictions within the capitalist class itself: by improving the conditions of production, less productive capitalists are forced to intensify the pace of labor, extend working days, force down wages, etc., leading even to the laying off of workers unfortunate enough to be working for inefficient capitalists.
A capitalist will improve his means of production, another will follow, and a generalized pattern of competition will be traced; revolutionizing methods of production is the precondition for the survival of capitalists, and the historical justification for capitalist production. The pressure by the market is not a pressure of demand for products; capitalists don’t produce for others’ consumption. The pressure by the market is the pressure to revolutionize the means and methods of production to increase the mass of commodities and realize a profit. This is where a contradiction between the needs of realization of the bourgeoisie come in conflict with the purchasing power of the masses.
In their struggle to economize on living labor by bringing down wages and reducing costs of production, capitalists will restrict the effective demand for their products, intensifying competition. The better capitalists are at squeezing surplus value out of the proletariat, the more problems will be encountered in the realization phase of the circuit of capital C’-M’. Here, another law of historical materialism can be seen.
At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure.
None of this would happen if, as Say would say, monetary exchanges boiled down to the exchange of one commodity for another: “[W]hen the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another”. The purpose of production under capitalism is another, it is the production of surplus value: “Accumulate, accumulate! That is Moses and the prophets!”. The production of surplus value is the most important law of motion of capitalism, it is the law driving the revolutionizing of means and methods of production. A corollary to this law is that commodities aren’t produced as use values according to human needs, but they are produced as values, embodiments of abstract labor. Commodities aren’t brought to market to turn them into use values of another quality, rather they are converted into the money form of capital. Of course, if capital is to be realized, it is to be sold and has to be a use value; this however means consumption isn’t the end of production, but a limit to the realization of capital.
The prospect of overaccumulation is a fundamental result of the need to revolutionize the productive forces, it isn’t an unintentional mistake of the capitalists, nor an intentional plot by the Fed or the Illuminati. A single capitalist will earn a surplus profit by revolutionizing production, which will enable him to reduce his price and undercut his competition. Improving conditions of production for an individual capitalist, however, may lead to overproduction in a specific sector. For the less efficient capitalists, this means an accumulation of unsold stocks. The first reaction to the unsold stocks will be an attempt to maintain selling prices, for not doing so means not realizing an anticipated profit or even facing a loss, and expanding credit. If they didn’t recur to credit, they would have to revalue stocks, devalue their capital, and see their credit worthiness undermined, the worst nightmare of a capitalist.
If prices start falling, less efficient capitalists will come under pressure and petty producers capitulate en masse; 224,000 petty producers went bankrupt in Italy, for a recent example. Capitalists can’t immediately withdraw capital from their sector since it’s not always in liquid form, but more often in the form of fixed capital and stocks. Less efficient capitalists will stay in business until they can cover their costs by cutting wages, extending the workday, etc. until the limits of class struggle send them out of business. More efficient capitalists will introduce newer means and methods of productions reducing their costs, but at the same time increasing the mass of commodities even further, contributing to the overproduction of commodities. The effort undertaken by independent capitalists to improve their own situations by improving the conditions of production of surplus value intensify the tendency to overproduction and the pressure of competition for the capitalist class as a whole; this is because capitalists don’t plan their economy, they don’t act with their class’ long-term interests in mind, they act in the immediate pursuit of profit.
Overaccumulation can take two forms: stagnation or crash. If means of production are improved slowly and harmoniously, profits will be small and the pace of capital accumulation slow. If they are improved substantially, profits will be much larger, accumulation faster, and overproduction inescapable. When commodities come to market, their fall in price will eliminate the profits of most producers, leading to a generalized crisis in which capitalists accumulate debt while trying to restore the rate of exploitation by means of class struggle. As their debt mounts, their credit dries up. With nothing else to do, they will unload their unsold stocks, dragging prices even further.
The first to go bankrupt are capitalists with high fixed costs and large debt. This debt facilitates the law of concentration and centralization of capital: if indebtedness is toward banks, they will take ownership as debt settlement; if the enterprise was mostly financed by bonds, the enterprise will be taken over by bond holders; if it was financed by shares, those shares will be devalued by the fall of share price until bigger capitalists take them over.
The destruction of capacity and the devaluation of capital prepares the ground for renewed accumulation. The destruction of stocks and productive capacity will reduce overproduction, allowing prices to recover, and reducing costs by relieving pressure on the supply of raw materials, means of production, and labor power, because of the expanding reserve army of labor. Devaluing capital will restore the rate of profit. Overaccumulation, appearing as an overproduction in relation to a limited market, can’t be alleviated by expanding demand, since this expansion of demand would do nothing more than stimulate new overaccumulation. Overaccumulation is a result of competition itself.
Accumulation is uneven among sectors of the economy because the revolutionizing of means of production is uneven throughout the economy, within and between branches. Since we are talking about existing enterprises, which exist on a real territory and are located in real nations, there is a corollary of geographical unevenness of accumulation taking place in particular geographical centers where new means and methods of production are introduced. Producers in high-productivity countries, because of their advantage in international exchange, are able to plug back their profits, higher than the average, into innovation, revolutionizing the means of production. The price of technology is a quasi-monopoly of the high productivity countries; technology is hence much more expensive than global South countries can contribute to purchase it. While the imperialist core enjoys rapid accumulation and widespread prosperity, which trickles down to the working class of the global North, the periphery of the global South suffers the destruction of precapitalist production forms and inefficient but capitalist production forms, from too intense competition, devaluation of capital, intensified class struggle, and massive dispossession.
The geographical unevenness of accumulation becomes a limit to capital accumulation itself, for the rapid growth of demand for labor power in the centers of accumulation of the core capitalist-imperialist countries is geographically distant from the labor power freed up by the destruction of less efficient forms of production present in the world-system periphery. While capital in the global North suffers from shortages of labor power, the productive capacity in the periphery is destroyed by foreign pressure. A labor power abundance in the periphery pushes metropolitan capital, undermined by rising costs in its home country, to attempt to overcome barriers to accumulation by extending their capital to the periphery, enjoying the advantage of lower costs. Monopoly capital hence tries to overcome geographical unevenness not only through the international trade of commodities, but principally through the international movement of capital; Lenin’s thesis is vindicated: “Typical of the old capitalism, when free competition held undivided sway, was the export of goods. Typical of the latest stage of capitalism, when monopolies rule, is the export of capital.”
The contradictions inherent in capital accumulation aren’t noticed by isolated capitalists. They mobilize their money to buy labor power and means of production to produce commodities to sell at a higher price. Isolated capitalists try to realize their capital stock so as to renew production on an expanded scale; the barriers to accumulation appear to them as a shortage of money, whether in their hands, or in the hands of their customers.
With credit, accumulation can overcome the limits of money in the hands of both individual capitalists or customers, freeing it from the barrier of a limited supply of money. During a boom phase of development, credit provides finance for new investments, sustaining unprofitable capitalists, sustaining state expenditure, etc.; the availability of credit becomes the new limit to accumulation. The availability of credit, alongside its negotiability, reduce the demand for cash, leading to a reduction in cash ratios for banks and an expanding credit which feeds the boom, making credit freely available and cheap.
This expansion by means of credit is, however, only a new vehicle of overaccumulation. If a sector of the economy where means and methods of production are revolutionized starts overproducing, the intervention of credit will absorb the problem, but only temporarily: this intervention of credit will stimulate continued overaccumulation, inflating the demand for credit. Credit growth increases demand in other sectors, pushing up prices and profits which put pressure on profits of capitalists in overproducing sectors, which have to tap on the resource of credit even more, fueling inflation. Rising prices sustain accumulation by eroding wages, inflating paper profits, and devaluing money capital. If barriers to accumulation aren’t overcome, the uneven development within and between sectors of the economy will increase and inflation will accelerate. New plans for investments will be annulled, unsold stocks of commodities will accumulate, debt-exposed capitalists will be unable to repay their debts, and bankruptcies and defaults will mount. Profitable loans with which banks offset losses become rare, and anything the banks try to do will only stimulate further overaccumulation.
Inflation devalues credit money, making it unable to function as capital, and the rising demand for liquid money will put growing pressures on the financial system and force a contraction of credit. Any sector at this point may trigger the crisis as the contraction of credit leads to defaults that spread in the entire financial system. Overaccumulation appears in its naked form: a huge amount of worthless debt and claims on non-existing value, and an overproduction of commodities. The increasing demand for cash, needed to meet obligations, ensues. Speculators too need cash when the prices of their shares, properties, and commodities fall; the prospects don’t look pretty for the next capitalist cycle, considering the 1.2 quadrillion dollar derivatives bubble. Banks fail en masse as bank runs escalate, and credit stops acting as money. The demand for a store of value leads to escalating interest rate, which undermines the profitability of industrial capitalists and increases the class struggle, with wage cuts etc.; accumulation interrupts, demand for means of production and subsistence falls, overproduction leads to capital devaluation and the destruction of productive capacity, as well as the expansion of the unemployed population. The chain of bankruptcy spreads throughout the entire system.
The contraction of production and exchange, the liquidation of bad investments, and the collapse of new investments lead to a contraction in the demand for credit and consequently to falling interest rates. The reserve army of the unemployed enables a rising rate of exploitation and a restored profitability, which stimulates renewed investment. The recovery of investment leads to increasing demand for means of production and subsistence, and unused capacity is put back into use, making profits rise sharply, starting a new cycle of accumulation.
– Klaas V.