The Federal Reserve is going to eat you… or is it?
If you spend much time surfing the web for a good conspiracy you may have heard recently that Illuminati reptile men are taking over the galaxy via the Federal Reserve. Or perhaps you’ve heard the milder version of the conspiracy- that balding men in grey suits have secretly taken over the country, enslaved us in debt, weakened the dollar, and readied the country for a global police/slave state, all through the agency of the Federal Reserve. Regardless of the version the message is clear- let’s take our country back from those evil bankers!
This is not a surprising response to our current condition. We are entering a period of severe economic instability- most likely crisis. Such crisis are always system-wide- that is, they appear everywhere in the circuit of capital. But the early warning signs of a crisis always appear first in the financial sector as a crisis of money. And so, of course, the Federal Reserve- as the guardian of the value of money is coming under a lot of criticism.
But the nature of crisis in a capitalist society is much deeper, far more profound. It is way too systemic to fall solely on the shoulders of any small group of capitalists, because capitalist crisis comes about as a result of capitalist competition. But you’ll have to wait a little longer for my videos on crisis- consider this another teaser!
The point of this video is to talk about the role of banks in our economy and the role of the Fed. To be clear: I am not here to defend the Fed. Instead I want to help contextualize the Fed- because the current level of discussion of the Federal Reserve is entirely devoid of context. To this extent I will argue 3 main points:
1. That the power of money capital stops where the power of productive capital starts.
2. That the power of the Fed stops where that of individual banks starts.
3. That money as a means of circulation stops where money as a measure of value starts.
I’ve said it before and I’ll say it again: This is the circuit of capital: M-C-M.
As capital flows thru the economy it takes on different forms. It starts as money. It gets turned into commodities. These commodities are sold for more money. This greater sum of money is the profit that drives capitalist production.
In a modern economy the capitalist class is divided into two factions: the productive capitalists are in charge of creating value which is the real source of profit in the economy. This value comes in the form of commodities (C). Money capitalists deal with the other part of the circuit of capital (M). Their job is to finance capitalist production and to guard the integrity of money. Money capitalists don’t create any actual value. Their profit comes from charging interest on loans. Interest, in turn is a deduction from the profits of productive capitalists.
So money capitalists and productive capitalists are in a constant battle over how much of the surplus value of society each group has a claim to. Productive capitalists (or their workers to be more specific) create the value. Money capitalists act as a parasite, siphoning off some of that value for themselves. Bankers have been around since way before capitalists, but whatever the mode of production in society, bankers have been a parasite- sucking out value from wherever it was produced. In times past this was called usury. Nowadays we call it the credit system.
The credit system can’t siphon off all of the value created in society. If it did it would completely strangle the mode of production. So it’s essential that the power of banks be subjugated to some extent by the power of productive capitalists. We have a very clear way of determining the power relation between bankers and productive capitalists. It’s called the Interest rate.
The interest rate is a measure of how much of the profits of capitalism can be appropriated by money capitalists. When credit is cheap, productive capitalists have the upper hand. When interest rates are high bankers come out ahead. But who controls the interest rate?
The most common answer is “The FED!” and the reptile men that run it. The power the FED has over interests rates is a real power that has real effects on the economy. Poor decisions made by the FED can have disastrous impacts on the economy. But the FED can only control interest rates within a narrow range. (In fact nowadays we witness the impotency of the FED to save the economy or to even control interest rates in light of cheap foreign credit.) In the long run, as far as economic crisis is concerned, the day-to-day fluctuations of the interest rate are not that important. What is important is long term trends in interest rates.
What are the wider forces that the FED finds itself emerged in? They are the supply and demand for money capital. That’s what primarily determines interest rates.
cut this because it’s boring: [The demand for credit comes from both capitalists and consumers. Capitalists use it to initiate production, consumers to buy commodities. And these demands are subject to the health of the economy, the prices of commodities relative to wages, the availability of new lines of production, the turnover time of machinery and other fixed capital, etc.....
The supply is fixed by many factors. The amount of capitalist profit and workers wages that are saved in banks to be mobilized as investment capital forms part of the supply. The overaccumulation of capital- that is capital that can't find profitable investments- leads to idle money capital which can then be loaned. Banks, of course, can create money for loans out of thin air, but if used too much this devalues the total amount of money. Debt can also circulate as loan capital to the extent that people trust fictitious capital. (Nowadays that trust is breaking and much of that fictitious capital is being called into question.)]
I’ve said it elsewhere but I’ll say it again: money has two complimentary but conflicting roles: it must measure value and lubricate circulation.
Commodities have values. And commodities need to be exchanged in order to get to consumers. We need some way of measuring these values and we need a better method than barter for circulating these commodities. Money solves both of these problems. But in doing so it internalizes these two problems. From time to time these two functions come into conflict… Watch my video on money.
Now what does this have to do with banks? In order for money to act as a measure value you need to be able to store it up- in order to save up to buy something expensive, in order to save for a rainy day, etc. Money needs to be hoarded. It needs to be hoarded safely. Banks are a place where everyone’s savings are hoarded. Thus banks help fulfill part of money’s role as a measure of value.
Banks also help circulate money (and thus commodities). Because all of the money is in the bank, a great deal of circulation is just the balancing of accounts between different savers- all done in computer banks. When money does leave the bank in the form of cash, it usually comes right back a little later.
By centralizing money in one place, the spacial barriers to circulation are diminished. In other words, money can transcend space in the bank. But there are still temporal barriers- when payments and production diverge in time we need a way of representing the value of future production now. That is what debt is. Debt allows money to transcend time.
Debt is also circulating thru banks- debts from one capitalist to another. Let’s take an example: At the beginning of a production period Ford buys a million dollars in widgets. It writes an IOU to Widget incorporated to be paid back at the end of the production period. Widget Inc. now has a piece of paper that says that Ford owes it a million dollars. But Widget Inc. wants to spend that million now buying steel. So why can’t they just present the IOU to the steel company as payment? Well this only works if the steel company trusts Ford to make the payment. We need some way of guaranteeing the value of the IOU. In circulating this IOU as money, money begins to come into question as a measure of value.
That’s where banks come in. They convert IOU’s between capitalists into bank money: they monitize debt. The bank money is supposedly reliable because it is backed up by the savings in the bank.
But banks also circulate money between each other. They must constantly settle accounts between depositors and debtors in each other’s banks. How does one bank know that the debt of another bank is reliable? How do we know they aren’t just creating a lot of worthless bank money not backed up by real value? Again it seems that the circulation of money is coming into conflict with measuring value.
That’s where the evil, reptilian Federal Reserve Bank comes in. Its job is to protect money while allowing it to circulate. It does that by creating its own bank money – Federal Reserve notes- which look like this (hold up dollar bill). All those digits circulating in the computers of private banks are backed up by a certain amount of Federal Reserve notes in their vaults. In other words, private bank debt is monitized into Federal Reserve money. But private banks don’t have enough Fed money to back up all of the bank money in their accounts so they must be careful not to over-extend their bank money too far beyond their actual reserve of Fed notes. In fact, there are laws which regulate the proportion of private bank money to Federal Bank money in banks. When banks need more Federal Reserve notes they must borrow it at interest from other banks or from the Fed itself. The Fed, by setting specific interest rates at which it loans Federal Reserve notes can “set” interest rates.
Federal Reserve notes then become the basis of all money- all other credit instruments have value to the extent that they are convertible into Federal Reserve money. Thus the diverse monies circulating in our economy have some common basis- a guarantee of value. And this guarantee is effective to the extent that people trust the Federal Reserve money as being representative of actual value. When the economy is healthy people tend to just trust this money. When the economy enters a period of crisis- and people are worrying about the nature of value- they can begin to question all the forms of money in our society from credit instruments to even Federal Reserve money. In times past Federal Reserve money was backed up by a gold standard. This is what ultimately served as proof of the value of Federal Reserve money. But we are no longer on a gold standard as so it is unclear how this will effect the dollar in the coming economic crisis. Will people still continue to trust the dollar? Nobody really knows.
All countries have central banks that operate more or less in the same way as the Federal Reserve. When countries trade with each other it is the job of these central banks to convert currencies between countries. In the days of the Gold standard this was simpler- all currencies related to the amount of gold held by that country’s banks.The World Bank and International Monetary Fund (IMF) were established as a sort of central bank for the world to manage the convertibility of currencies into each other based on their relation to gold. The US dollar functioned as the basic symbol of that value and so central banks stocked up on dollars as well as gold. Like the Fed, the IMF has to guard the value of the dollar on international markets and so it disciplines foreign economies if they act in ways that might hurt the dollar (structural adjustment policies). When Nixon suspended the gold standard in the US he effectively suspended the gold standard internationally. This means that the international economy increasingly rests merely on the faith in the dollar as a representative of value, even though this value isn’t backed by gold. Instead it seems to be backed the the strength of the US economy.
But because of the United States’ power in the IMF, the IMF can’t discipline the United States economy. It appears the US is working to destabilize the dollar itself. Since the 70’s the US’s economic supremacy has been increasingly challenged by the growing strength of other economies on the world stage. In response to the productive powers of Japan, the EU and now China capitalists in the US have increasingly turned away from real productive activity and focused on financial capital- that is, making money from fictitious capital. While this has created a huge bubble of wealth, this bubble is beginning to deflate and with it people’s confidence in the dollar.
All those dollars stored in the central banks of the world may soon lose their purpose as an international measure of value. When this happens it remains unclear what will serve as a measure of value in the global economy. The future is a scary and uncertain one not just for Americans but for the whole world as we come face to face with the basic contradictions inherent in the money form: that money must serve as a measure of value and a medium of circulation; but that the better it does one of these things the more it threatens the other.
To really understand the Fed we need to see it as nested within larger economic forces and contradictions. For one, we need to realize that a healthy economy must always have a balance between productive capitalists and money capitalists- that one cannot dominate the other. Within the world of money capital the Fed must act to regulate the activities of private banks in order to protect the value of the dollar. But there are many forces beyond its control that allow the Fed only a narrow range of influence. For one, it can only set interest rates within a narrow range based on the supply and demand for money capital- forces beyond its control. Also we have seen that on the international arena, the value of the dollar can be threatened by international balance of payments and the overall strength of the the US economy.
This is not to say that the popular criticisms of the Fed are invalid. In this video I merely attempt to give more of a context to the discussion. It seems that a lot of people are concerned about the coming economic crisis and they want someone to blame. The Fed, because it hold a strategic place in the global economy, is an easy target. But as I will hope to show in future videos, this crisis is a crisis of capitalism- not of banking.
In this video I have not addressed what is probably the primary libertarian critique of the Fed- that the government borrows from the Fed to pay for spending projects and then taxes wages and profits in order to pay back those loans, loans which were created out of thin air by the Fed. The implicit part of this critique is the classic libertarian argument that the government shouldn’t be spending money at all- that any government interference in the economy is bad. I think it’s important to distinguish the two levels of the critique. The Federal Reserve system is problematic from many different theoretical perspectives, not just the libertarian one, and so it doesn’t have to lead to a condemnation of state spending. It does not necessarily imply any solution because money is just part of capitalism. We can’t really understand the Fed or banks or money without understanding the role of money within capitalist accumulation and within capital.