Karl Kautsky

The Labour Revolution

III. The Economic Revolution


(a) Inflation

So far we have proceeded upon the assumption that, money will continue to exist and to function. Is this correct? Will not money be abolished in a socialist society? Is not this implied by the idea of production for use? As a matter of fact, even to-day many Socialists regard the abolition of money as an essential item in the socialist programme. We have already been shown by the Bolshevists that the best means to achieve this object is inflation, the flooding of the world with banknotes, which eventually become valueless.

It must be evident from the start that, if money is to be abolished, the only way to do so is to render superfluous the functions which money has hitherto fulfilled. Inflation, however, leaves these functions untouched; it only ruins the instrument with which they are fulfilled, and thus obstructs and disturbs the entire social life.

The first and most important function of money is to facilitate the exchange and circulation of commodities. Under commodity production, each person produces that which he does not need himself, and obtains the articles which he needs by exchanging the products of his labour, or of that of his workers, for the products of alien labour.

When complete freedom of competition and of labour prevails, products which require the same expenditure of labour-power are exchanged with each other as equal units of value. The production of commodities by wage-labour instead of by the producer’s own labour modifies this law to some extent, but does not invalidate it.

As soon as the exchange of commodities is effected by money, by a commodity which everybody accepts, the perpetual value of the money commodity and then of the money tokens, which represent specific quantities of the money commodity, becomes an important consideration; for it becomes possible to buy a commodity and to pay for it later. It also becomes possible to sell a commodity without expending the money received for it upon a fresh purchase. If the value of money does not remain constant, if it falls, after the lapse of some time it does not represent as much labour as formerly, and the possessor of this money has expended in vain a portion of his labour or that of his wage-workers. If I sell at its full value a commodity which embodies ten hours of work and the money which I receive only represents nine hours of work after the lapse of a month, I shall have worked one hour for nothing. If the depreciation of money is due to the printing of notes by the State for reasons that are not economically justified, I shall have worked for nothing for the benefit of currency speculators.

Inflation, or the depreciation of money, far from being a socialist measure, is a mode of taxing the people for the benefit of the State and of the speculators. On the one hand, it constitutes a tax which is more unjust, more oppressive, more disturbing, and more senseless than any other kind of tax. It is an indirect tax systematically imposed, and, in addition, is a means of enriching the most injurious elements of the capitalist class. The growing misery which is a consequence of inflation, necessarily creates the increasing wealth of the profiteer, who was neither to be put down by the guillotine at the time of the assignat economy, nor by the Cheka of the Bolshevist Terror.

Under all circumstances, inflation is a terrible evil. In a capitalist State it does not affect the workers alone, but also many capitalists. The profiteer thrives under it, but the rentier is plunged into poverty.

Of quite a different nature are the effects of inflation imposed as a socialist measure in a Soviet Republic of workers and peasants, where the whole capitalist class has already been expropriated, without any kind of compensation. Here money serves almost exclusively as means of payment to workers, officials, and peasants. In that case, currency depreciation is merely a means of cheating the workers, the officials, and the peasants of a portion of their wages or of the product of their labour.

If a Labour regime should find a system of inflation already in existence, it would have every cause to attempt to end it with all rapidity. In no case could it inaugurate such a system or permit it to gain ground.



(b) The Abolition of Money

Inflation, therefore, is not the proper way to abolish money. We have seen that capitalist economy is not to be removed at one stroke. So long as this object remains unrealized, it will not be possible to do without money.

Many Socialists regard Socialism as synonymous with “the end of money.” Thus Dr. Otto Neurath writes on page 14 of his book Wesen and Weg der Sozialisierung:

“We shall eventually have to emancipate ourselves from obsolete prejudices ... To retain the dispersed and uncontrollable monetary system and at the same time to aim at socializing is an inner contradiction. It is of the essence of money that it cannot be controlled, and all attempts to determine the proper quantity of money have been in vain. All previous efforts of financial policy have been practically ineffectual and theoretically unattainable, because money is an unsuitable object for all these endeavours. Once the nature of money has been fully recognized, the scales will fall from all our eyes, and the development of centuries will appear as a great mistake.”

The concluding lines of this extract are not quite clear. Does Dr. Neurath mean that he has at length discovered the essence of money, and that preceding generations have suffered and the history of centuries has been a mistake, because Dr. Neurath was not born before? In that case it would be his duty to sharp his discovery with us, so that the scales may fall from our eyes.

Meanwhile I am unable to cast off old prejudices if they are to include the Marxian theory of money.

According to Dr. Neurath, money follows its own course, which is quite anarchical and not to be influenced by anything.

I agree with Marx, who regarded this idea as mere appearance:

“Although the movement of the money is merely the expression of the circulation of commodities, yet the contrary appears to be the actual fact, and the circulation of commodities seems to be the result of the movement of the money.” (Capital, vol.i. p.90)

With the character of the circulation of commodities, that of the movement of the money also alters. There is no such thing as a movement of money, which operates as a socially independent and utterly uncontrollable force.

In place of the uncontrollable monetary system, Neurath would put “natural economy” What does this mean? At the beginnings of an economic system we find production is carried on for use. Each of the small communities of those times produced all that they needed and divided it among their members. There money would be quite superfluous.

Society progressed beyond this stage through the division of labour between various productive enterprises. Many of them now began to produce things which others did not produce but would be glad to have.

At this point the exchange of products between the undertakings commenced; these products thereby became commodities, and their production became commodity production.

At the outset commodities were exchanged directly. When such a transaction took place, it was quite a chance occurrence.

If a carpenter brought to market various tables, chairs, and chests which he had made, and a miller brought thence a sack of flour, it was not sufficient for the success of the transaction that the carpenter needed flour. The miller must also need a table, chair, or chest.

In the period of the direct exchange of commodities, no producer could rely upon effecting an exchange which he needed.

Each person had himself to produce all the necessary things of life. Only articles of luxury, or things for which one could await an opportunity to acquire them, came into the sphere of exchange. The division of labour between the producers was set within very narrow limits. Exchange transactions remained isolated and were an extremely clumsy process. Each person naturally tried to avoid working in vain for others. The measurement of the value of commodities according to the labour embodied in them was already beginning to take place.

But it did not systematically govern exchange; the conditions under which various commodities were exchanged for each other depended upon innumerable contingencies.

Great progress was made as soon as a commodity appeared which everybody was glad to take. Anybody who possessed this commodity could now acquire everything of equal value which came into the market.

If he possessed a supply of this commodity, he could always be sure of satisfying his needs so far as they could be satisfied by the products of other businesses which came to the market. On the other hand, everybody was ready to surrender his commodity for this, generally acceptable commodity, even when he had no immediate employment for the latter as an article of use. He knew that he would always be able to satisfy a need by its surrender.

Now exchange transactions became more numerous and the process of exchange was effected more rapidly and systematically. The direct exchange of commodity for commodity now gave place to the exchange of particular commodities for the general commodity which was gladly accepted by everybody.

As a result, division of labour among the businesses grew and production for the market tended to supplant production for use. The exchange of commodities, from being an accidental and occasional phenomenon, became a systematic process, the exchange value of each individual commodity tended to be embodied in a specific quantity of the commodity which facilitated exchange in general, and the determination of value by labour began to appear, not as a conscious act, but as an unconscious result.

The commodity which generally facilitates exchange is nothing else than money. Although what we have just expounded is familiar enough to students of Marx’s Capital, it must be developed once more in order to reveal the essence of natural economy.

Marx distinguishes between production for use and commodity production. From his standpoint, it is not very important whether the commodities are bartered or sold for money and purchased for money. The latter is merely a technical facilitation of the same process.

Orthodox economics makes a further distinction. It confuses the two essentially distinct economic stages of production for consumption by the producer himself and commodity production for barter under the name of natural economy. On the other hand, it distinguishes the two not essentially distinct stages of commodity production, that of barter and that of exchange through the medium of money. The first of these stages it assigns to natural economy, but the latter appears to it as a fundamentally distinct economic form, that of the monetary system.

In promising us a quite new perception of the nature of money which will cause the scales to fall from our eyes, Neurath shows himself to be far inferior to Marx in his knowledge of these matters.

Now what forms will the socialist economy assume? It will certainly not form a single factory, as Lenin once thought. In conformity with the requirements of the modern division of labour, it will fall into numerous undertakings, which in contrast to those of commodity production will no longer be the private property of individual producers, but the property of the whole of the consumers, whose needs they will exist to satisfy.

But the producers must be allowed the greatest possible freedom in every undertaking, which will be to a large extent autonomous.

At the same time, Socialism will not reverse the process of the separation of the household from industry, which is a product of industrial development.

Now this implies that a socialist society would not be able to exist without a system for the exchange of products. Their exchange would necessarily be of a two-fold kind : between enterprise and enterprise, for purposes of productive consumption, and between the undertaking and the household, for the purpose of personal consumption.

Even Neurath must admit this. Yet he imagines that it is a requirement of the socialist principle that this exchange should be made in kind, without the intervention of money. He has a superstitious fear of money, just as one used to have of intangible things. He fears that the intervention of money would ruin everything. He envisages the return to barter, as is usual among savages, as a long step towards Socialism. He announces triumphantly:

“Wherever we look we may perceive evidences of natural economic tendencies. Barter on a small scale is sufficiently familiar to everybody. But exchange in kind is also taking place on a large scale. During the war a number of Government authorities made the supply of sugar, etc., to the peasants dependent upon their delivery of foodstuffs. How far this undermining of the monetary system, how far this rationing system promotes natural economy will not be here discussed further.”

Nor need it be. What we have quoted suffices to show where we have to look for the source of the conceptions which Neurath and his like have of Socialism: from the emergency measures which sprang out of war-time necessities and disappeared with them, they generalize a whole system, which appears to them as Socialism.

It is a very peculiar idea to retain the institution of exchange, while abandoning the instrument which alone ensures the smooth and constant functioning of this exchange, without which division of labour and exchange upon the scale they have hitherto been carried out would not be possible.

Without money only two kinds of economy are possible

First of all the primitive economy already mentioned. Adapted to modern dimensions, this would mean that the whole of the productive activity in the State would form a single factory, under one central control, which would assign its tasks to each single business, collect all the products of the entire population, and assign to each business its means of production and to each consumer his means of consumption in kind.

The ideal of such a condition is the prison or the barracks.

This barbarous monotony lurks in fact behind the ideas of the “natural economy” of Socialism. We quote Neurath again:

“On the basis of the foregoing data, we should be able to compute how much bread, meat, accommodation, clothing, etc., could be allotted as a maximum to the individual. It would then have to be decided what provision should be made for meritorious work, heavy labour, children, the sick, and how specially important achievements should be rewarded, whether inventors, poets, engineers, artists, who had rendered great service to the community, should not be supported in institutions like the Pryntaneum of ancient Athens. The fixing of war rations has shown us that social measures of this kind are not excessively difficult.”

Assuredly not, if the entire life of a civilized man is to be reduced to war rations, and everybody to have the same quantity of bread, meat, accommodation, clothes, personal taste not playing any part and distinctions not being observed, although there is to be special cooking for poets and children. Unfortunately, we are not told how many hundredweights of books are to be allotted to each citizen in the course of a year, and how frequently the inhabitants of each house are to go to the cinematograph.

Besides this rigid allocation of an equal measure of the necessaries and enjoyments of life to each individual, another form of Socialism without money is conceivable, the Leninite interpretation of what Marx described as the second phase of communism: each to produce of his own accord as much as he can, the productivity of labour being so high and the quantity and variety of products so immense that everyone may be trusted to take what he needs. For this purpose money would not be needed.

We have not yet progressed so far as this. At present we are unable to divine whether we shall ever reach this state. But that Socialism with which we are alone concerned to-day, whose features we can discern with some precision from the indications that already exist, will unfortunately not have this enviable freedom and abundance at its disposal, and will therefore not be able to do without money.



(c) Socialist Money

Although money will exist in a socialist society, its functions will not be quite the same then as they are to-day.

Its most important function under the present mode of production is its transformation into capital. Each unit of capital must commence to function as a sum of money. If it is lent out at interest, it retains the money form, and becomes money capital transformed into commodities It may, however, also be which are to be resold at a profit – this constitutes mercantile capital. Finally, it may be employed in the purchase of means of production and labour-power, to produce new commodities with a surplus value -this constitutes the highest form of capital, industrial capital.

Whichever forms capital may assume in the course of its circuit it must always possess the money form at the outset. On the other hand, the opportunities for employing money as capital are to-day so very profuse that almost all money that is not destined for purposes of immediate consumption may become capital, at least in the form of interest-bearing capital.

Thus it frequently happens that money is identified with capital. Consequently, the abolition of the system of capital must involve the abolition of the system of money.

In a socialist society, where all the means of production were social property, there would of course no longer be any opportunity for individuals to employ money for the purchase of means of production, that is, to transform it into industrial capital. As the production of surplus value for private individuals would cease, the fund from which trading profits and interest are paid would likewise vanish.

The merchant will be ousted by consumers’ organizations, as well as by the direct buying and selling of the great producers’ organizations among themselves.

Thus in a complete socialist society all the conditions would be lacking for the transformation of money into capital.

But this fact would not exhaust all the functions of money. Thousands of years passed before a capitalist mode of production came into existence. As the measure of value and means of circulation of products money will continue to exist in a socialist society until the dawn of that blessed second phase of communism which we do not yet know whether will ever be more than a pious wish, similar to the Millennial Kingdom.

Whatever may be the lines upon which a socialist society is organized, very careful accountancy would be required. The books of each undertaking should show at any time how much it had received, how much it had expended, how much it had gained. This object would be quite impossible of attainment if the incomings and outgoings were entered in kind.

If a machine factory delivered a threshing machine, in return for which it was assigned, let us say, 40 pigs, 100 cwt. flour, 20 cwt. butter, and 2,000 eggs, how should we be able to tell whether it had gained or lost by the transaction, whether it had done more work for agriculture than the latter had done for it? It is manifest that bookkeeping in kind would soon lead to chaos. What would have to be entered and always kept quite clear are the costs of production of each product, each item of which dissolves into labour in the last resort. It is only by virtue of the fact that all products possess the common attribute of being creations of labour that the quantities in which they exchange with each other can be measured. What is indispensable as a measuring instrument for the exchange of commodities is a commodity whose use-value consists in the fact that it represents a specific quantity of labour or value, and this commodity is money.

We find that money functions as a measure of value under conditions of barter.

In 3000 B.C. the old Egyptians used copper and gold (not silver) as a money commodity and general measure of the value of products. But the commodities measured in terms of money according to their value were generally bartered.

If a bull formed the subject of one of these transactions, its value might be fixed at 119 copper utnu. It would be exchanged for a reed mat, computed at 35 utnu, 5 measures of honey at 4 utnu, 8 measures of oil at 10 utnu, and seven other articles for the remainder.

Similarly, if exchange transactions were strictly confined to the bartering of objects, the continued use of money as a measure of value and for computing the elements of every exchange would be essential in a socialist society.

Money will therefore continue to function as a means for the circulation of products, in addition to its being a measure of value.

But would the same money be necessary for this purpose as exists or ought to exist to-day, that is, money minted from a particular commodity, which is usually gold? Instead of using money as the embodiment of labour, could not labour itself be made to serve as a measure of value, involving the creation of labour-money which attested the amount of work performed?

Such a system as this might assume the form that each worker would receive a token for every hour of labour which he performed, and this token would entitle him to the product of an hour’s labour. It would be necessary to calculate how much labour every product cost. For the wages of a working day the worker would always be able to buy products which required one day to produce.

As the calculation would be. accurately made, any kind of exploitation would be excluded as a matter of course, and the worker would possess complete freedom as to the method of expending his wages. The tutelage of an authority which allotted rations to an individual would thus be avoided.

I do not doubt that such a monetary system is conceivable. But is it practicable? Let us ignore the complications which would arise from collective labour or from different scales of wages, as heavy or unpleasant work would have to be more highly remunerated than easy and pleasant work. Consider what colossal labour would be involved in calculating for each product the amount of labour it had cost from its initial to its final stage, including transport and other incidental labour.

What labour ought actually to be reckoned? Not the labour which each product had really cost. In the latter case, different specimens of the same article, produced under conditions of varying favourableness, would bear different prices. And this would be absurd. They would necessarily have to bear the same price, which would have to be calculated not according to the labour actually expended, but according to the socially necessary labour. Could this be ascertained in respect of every product?

This involves a two-fold calculation. The worker’s remuneration would be fixed according to the labour-time he actually expended, while the price of the product would be fixed according to the labour-time socially necessary for its production. The results of these calculations ought to be identical. But this would almost never be the case.

The proposal of labour-money is beset with initial difficulties, because it is based on a mechanical conception of the law of value.

How is the law of value discovered? By observing the movements and relations of prices. Ever since the mass production, of commodities for the market has been a systematic process, it has been noted that the prices of each commodity, in spite of all its fluctuations, continuously seek a certain level, however much they might at times be above or below it. On the other hand, it was found that the relations of the prices of each commodity to each other, amid all temporary fluctuations, showed a uniform tendency. Yet these relations and this level were not unalterable magnitudes; they did not follow the fluctuations in the state of the market; they altered only with changes in the conditions of production.

When these conditions were unaltered, the level of prices and their relations to each other do not change.

This level is described as the value of the commodity.

It was perceived long ago that the level of value of a commodity was determined by the quantity of labour necessary for its production. This doctrine was applied and refined more and more consistently until it found its highest expression in the Marxian theory of value.

No other theory of value than that of labour-value has hitherto been advanced. The theories of value which are opposed to it relate to phenomena quite different from those which the theory of labour-value purports to explain. What they conceive as value is, in part, nothing else than price. It is the superficial phenomenon, and not the determining factor.

But the subjective value of the final utility theorists is something quite different from value in the sense of a Ricardo or a Marx. The former is a relationship of an individual to the commodities which surround him, while the latter is a phenomenon which, under given conditions of production, is the same for all persons, who find it already in existence, however varied their subjective needs, inclinations, or circumstances may be.

These two kinds of value have therefore nothing in common but the name, which is not precisely an aid to clear thinking.

The value which Marx has in mind arises from and reacts upon specific conditions of production. It forms the starting-point for the comprehension of these conditions. Subjective value, on the other hand, is a relation of a single individual to the things which surround him, whether they are produced by human labour or not; it contributes absolutely nothing to the knowledge of definite social conditions of production.

For that value which Marx and classical economy had in mind, no determining factor other than labour has yet been found. The theory of labour-value has stood the test, inasmuch as it has afforded us a closer insight into the laws of capitalist enterprise than any other theory. We may therefore regard labour-value as a reality. All the same, it remains merely a tendency. It is real, but not tangible and exactly measurable. Measurements are only possible in the case of its temporary phenomenal form, price.

We are unable exactly to calculate and to fix the value of a commodity. Value is a social magnitude which can only be detected through observation of the conditions of production. The law of value operates in the following manner. Whenever the market prices of commodities exhibit wide or continuous deviations from their value, certain factors of resistance are set up, in consequence of which alterations are introduced into the conditions of production, which have the effect of counteracting the deviation of price from value.

In the light of this character of value, all attempts are doomed to failure which aim at “constituting” the value of each separate commodity, that is, to determine exactly the quantity of labour contained in it, and to issue a labour token as a means of circulation of the product thus determined. The labour involved in such an effort would be interminable. Yet the new labour token could not be allowed to function until the value of all products had been constituted.

Instead of grappling with the hopeless task of measuring running water with a sieve – and the constitution of value would be a work of this nature – a Labour regime should retain the means for the circulation of commodities which it finds ready to hand, viz. their price expression, which is to-day measured in money, and which is only concealed and confused, but never abolished, by the most drastic system of inflation.

The appraisement of commodities according to the labour contained in them, which could not be achieved by the most complicated State machinery imaginable, we find to be an accomplished fact in the shape of the transmitted prices, as the result of a long historical process, imperfect and inexact, but nevertheless the only practicable foundation for the smooth functioning of the economic process of circulation.

Although at the outset socialization would not effect any change in this respect, the role of price and therefore of money will undergo a fundamental transformation within the constantly extending realm of socialization.

To-day the private producers produce for the market. They decide the quantity of products which they supply for the market, in accordance with their previous experience and future expectations. The price they must try to obtain for their products is fixed by their costs of production. But the price which they really obtain depends not upon these, but upon the relation between supply and demand.

This applies also to commodities which are not produced haphazard for the market, but are manufactured to order. The difference between these acts consists in the fact that the producer for the market may find there such an abundance of commodities that he is obliged to realize his stock at ruinous prices, whereas the producer who works to order may refuse orders which would not cover his costs of production. Yet working to order may ruin him, if the prices of the raw materials employed in the production of his commodities rise to a higher level than was to be anticipated when the price of the commodities was fixed.

The scale upon which production is continued depends upon price. When prices fall, production is restricted, while it is extended with rising prices. The method of regulating prices is typical of capitalism. It always injures the working class, which oscillates between the two antagonistic poles of dear living and unemployment.

In a socialist society this regulation would be effected in another way. The magnitude of production and the level of prices would not be the result of anarchical production for the market. The means of production would belong to the whole of the consumers, who would then be synonymous with the whole of the workers. The whole body of consumers, in conjunction with the producers of every branch of production, would determine the scale of production and the level of prices on the basis of their knowledge of the economic conditions. Production as well as prices would thenceforth move on far more uniform lines. The workers would no longer need as consumers to suffer from occasional dearness, nor as producers from occasional unemployment.

The figures of production and of the prices of particular commodities could then deviate from those transmitted from the capitalist period, if social interest required it.

This would be a far simpler operation than the calculation of the labour-value of all commodities for the purpose of introducing labour-money.

The quantity of labour at the disposal of a given society is limited, and may not be increased at will. If the socialist society desired to extend a branch of production beyond its previous dimensions, this could only be effected by the restriction of other branches of production, unless technical improvements could be introduced. By the side of this the tendency towards the adjustment and equalization of wages would exist stronger than ever.

Thus the scale upon which a particular commodity is produced, as well as the fixing of its price, would be kept within defined limits. A fall in the price of a particular commodity would not be possible through a reduction in the wages of its producers, but only through a fall in its other costs of production, that is, through an increase in the productivity of labour or through a corresponding rise in the prices of other commodities, which would have to yield a surplus, if the fall in that of the former commodity involved a deficit.

We may therefore anticipate that the law of labour-value would on the whole assert itself in a socialist society, in spite of the abolition of private production and of private competition.

If the institutions of price and money continue to exist under a socialist mode of production, and if socialist prices are grafted on to the historical form of price, it would also be necessary to adhere to the historical form of money, and to retain gold as the money commodity. Actual gold need not be used.

As measure of value, only an imaginary gold is necessary, or rather the value of gold. In order to calculate how many gold marks will constitute the price of a pair of boots, no gold mark need be in actual existence.

As a means of circulation, money can of course only serve when it is actually on the spot. But even here, the natural form of gold coins may be dispensed with to a large extent, and replaced by paper promises to pay.

Of course, behind the imaginary gold as measure of value and the paper money as means of circulation, gold as a commodity which has a definite labour-value will also continue to exist in a socialist society. It is difficult to see why the production of gold should have to be suspended, as gold would still be required for industrial purposes, for teeth-stopping or for ornament. It is to be hoped that the people of the coming society will not cease to delight in ornament, brilliance, and beauty.

Gold will continue to be produced, although not for minting purposes, as this function will fall into disuse. Consequently, gold will still involve costs of production and have a value, so that specific quantities of this metal will continue to serve the purpose of expressing the prices of commodities.

The monetary system is a machine which is indispensable for the functioning of a society with a widely ramified division of labour.

It is quite conceivable that a more perfect form of this mechanism may eventually be invented, which would replace its present form. On the other hand, it would be a relapse into barbarism to destroy this machine, in order to resort to the primitive expedients of natural economy. This method of combating capitalism recalls the simple workers of the first decades of the last century who thought they would make an end of capitalist exploitation if they smashed the machines which they found to hand.

It is not our desire to destroy the machines, but to render them serviceable to society, so that they may be shaped into a means for the emancipation of labour.



(d) The Banks

It is not part of our plan to discuss the details of any particular sphere of socialization. But in dealing with the role of money in connection with socialization, a glance at the banking system cannot be avoided.

We have seen that under the capitalist mode of production, capital must assume the money form at the beginning of every enterprise and every transaction. The more money there is at the capitalist’s disposal, the more comprehensively he can organize his enterprise and the greater will be the mass of surplus value which it yields him, and the better will be his prospects of emerging victoriously from the competitive struggle. Consequently every industrial or commercial capitalist strives to extend his undertaking as much as possible, and for this purpose to secure control of as much money as possible. He is not satisfied with putting his own money into the undertaking, but seeks to utilize the confidence, the credit, that is reposed in him and his property, in order to borrow as much money as possible for investment in his enterprise. He gains from this operation when the profit which this money enables him to earn is greater than the interest which he must pay for its use. And this is generally the case.

The dimensions of present-day capitalist production could not be maintained without the assistance of credit.

The function of granting credit is performed by the financial capitalists, those capitalists whose capital always retains the form of money and never assumes another form. This function is to-day chiefly performed by the money-dealers, the bankers, and no longer by the old usurers, who merely exploited the needs of embarrassed persons in order to extort exorbitant interest from them. The modern banker, on the contrary, fertilizes industry, promotes the development of the productive forces, and thus appears to be a benefactor of mankind.

But like the industrialists and the merchants, the banker seeks to extend his business beyond the limits imposed by his own capital. And this endeavour soon becomes one of his chief functions.

More than other people, the bankers are obliged to take measure to safeguard the supplies of money which they possess.

As money is a commodity which everybody accepts, it is also an object which the thief prefers to take, the more so as it is easier to transport and conceal than most other, articles of use. Nobody would steal a factory of a barn. It is easier to steal the money of the manufacturer or of the farmer if they have no strong safes to put it in.

The great financial capitalists have ever been distinguished by the arrangements they make for the protection of their money.

They have every reason to do so, inasmuch as other possessors of large sums of money entrust them with these on deposit. What the bank does with the money is all the same to the depositors, provided they can obtain repayment in full whenever they ‘demand it. The banker does not leave the money lying idle, if he has an opportunity of lending it to a trustworthy business man at good interest. Thus the deposits increase his own capital and the credit which he is able to grant to trade and industry.

The high rate of interest which he receives enables him to pay interest to his depositors, of course on a more modest scale, and thereby attract ever larger sums of money from the strong-boxes and the stockings and other hiding-places where they have been lying idle.

The more commodity production supplants the other. forms of production, and thereby extends the employment of money, the more the sums of money grow which the individual accumulates, partly as a consumption fund, which he does not need at the moment, but which he will later expend on the purchase of food, furniture, articles of luxury, partly as a production fund which, as soon as it is large enough, will be devoted to the renewal of means of production, or to the extension of the business by means of supplementary means of production.

In this manner immense sums of money are accumulated by the whole body of saving individuals, which are not intended for immediate employment, and are meanwhile entrusted to the banks, through which medium they flow temporarily to industry and commerce. A huge stream of money flows unceasingly through the banks, or properly speaking two streams. The one consists of deposits which are paid in and lent out to numerous undertakings; the other consists of the monies lent by the banks which are repaid them, and those deposits which are repaid by the banks to the customers.

The sum-total of this money far exceeds the resources of the bank. Its own capital only serves to adjust various disturbances, when for instance more money is paid out of than is paid into the bank.

The larger the amount of money which thus streams from the bank to industry and commerce, the more the latter are able to extend their operations, and the more they become dependent upon credit. This colossal stream of money exerts an increasingly determinative influence upon the organization of industry and commerce. It is not the money of the banks, but the alien money entrusted to them which thus controls to an increasing extent the economic life of the nation. It is, however, the bank magnates, especially those of the few leading large banks, who direct the stream of money, who control the alien money as if it were their own, and thus become more and more the masters of the whole of capitalist enterprise.

It is an obvious conclusion that a Labour regime would be obliged first of all to secure control of these great banks, in order to break down the domination of the finance magnates, and at one stroke to secure a determining influence upon the whole of economic life, even upon those spheres which were not yet ripe for socialization.

I used to think, with a number of my friends, that this would certainly be the case. I was strengthened in my conviction by Marx’s observations upon the subject. In the third volume of his Capital we read:

“Without the factory system arising out of the capitalist mode of production, the co-operative factory could not develop, nor without the credit system arising out of the same mode of production. The latter is not only the principal basis for the gradual transformation of capitalist private enterprises into capitalist stock companies, but also a means for the gradual extension of capitalist enterprises on a more or less natural scale. The capitalist stock companies, as well as the co-operative factories, may be considered as forms of transition from the capitalist mode of production to the associated one, with this distinction, that the antagonism is met negatively in the one, positively in the other.” (Capital, Vol.iii. p.513)

In these observations, penned in the sixties of the last century, productive co-operation, the “co-operative factory,” at any rate in conjunction with others upon a graduated scale, is regarded as the only form of an undertaking of an “associated mode of production.” Possibly they exaggerated the part which credit would play in the development of the new mode of production. But that it will be an important one, and that a socialist regime must endeavour to master this instrument, cannot be doubted.

Experience and a closer examination of the question, however, do not support the contention that the nationalization of the capitalist banks is the proper method to adopt, not even if this operation were conducted less crudely and with more knowledge than was the case in Soviet Russia.

First of all, what part of the banks is to be nationalized? Their own capital? This, however, is relatively insignificant, and does not lend them their position of dominance.

Then the deposits which are entrusted to the bank must be nationalized. How is this to be done? By means of compensation? But this would mean something quite different with the banks than with industry. In the latter case, means of production would be acquired for money; in the former case, money would be exchanged for money, a perfectly absurd transaction. But is it intended to compensate the depositors, not by means of cash, but by means of State bonds? In this case they would be deprived of their economic function, which can only be performed in the shape of money, and the whole economic life would be brought to a standstill.

There would be an even greater objection to simply confiscating the deposits, for what are to-day deposits in the bank will to-morrow be used to continue and extend production, so far as they are not diverted to the ends of consumption, and production will still to a very large extent be conducted upon capitalist lines. Confiscation of deposits or cancellation of the claims of depositors would not nationalize, but kill the banks. Nobody would any longer entrust them with a deposit. With this cessation, the banks would lose the means of granting further credits, and would not be able to continue functioning. If the whole of capitalist economy cannot be confiscated and nationalized at one stroke, if capitalist undertakings must be allowed, at least in part, to continue functioning, then it would be inequitable to deprive them of that portion of the means necessary to their functioning which they have temporarily deposited with the banks.

Nobody who has properly considered the question would now advocate the socialization, by whatever means, of the capital which lies at the banks. What is advocated is merely the nationalization of the apparatus of banking.

Otto Bauer makes the following reference to this subject in his Weg zum Sozialismus:

“The socialization of the banks presents quite a different problem from that of large-scale industry or of land. Here it is not a question of transferring land and the means of labour to society, but of wresting from finance capital the power given it through its control over the alien capital which is placed at the disposal of the banks, and investing that power in society. Consequently no act of expropriation is called for in this case; it is sufficient to transfer the power which the shareholders of the banks now exercise through the boards of directors which they elect to the representatives of the community. This can be effected by passing a law which prescribes that the members of the directorates of every large bank should. no, longer be elected by the shareholders in general meeting, but by the bodies which the law sets up for this purpose. The law might determine, for example, that a third of the members of the directorate of every large bank should be chosen by the National Assembly, and the other two-thirds by the industrial associations, the agricultural co-operative societies, the consumers’ co-operative societies, the trade unions, and the vocational associations. A legal control of this kind over the composition of the board of directors would suffice to socialize the power over millions at the disposal of the banks.”

Such an institution is certainly possible. Only one thing must not be forgotten: the banks are institutions which not only grant credit, but which need credit themselves. Their whole power rests not upon their own money, but upon the alien money which is entrusted to them.

Now we must make up our minds to it that the capitalists will offer the strongest opposition to the socialist regime.

Democracy does not alter this fact. The effect of democracy is that the capitalists are deprived of the resources which would enable them to offer military opposition with any prospect of success, or even at all. They will therefore only be able to fight with peaceful weapons, with the lies and calumnies of their press or with economic resistance. It will depend upon the wisdom and determination of the workers whether these methods of capitalist resistance are successful or not.

Under these circumstances, it is scarcely to be expected that the capitalist will voluntarily place their money under the control of an institution if they anticipated that it would not be an instrument of capitalist expansion, but of Labour emancipation. The more the bank appears in this light, the sooner will the capitalists cease depositing their money with it, the sooner will they withdraw the deposits already there, and the socialized bank will be stranded.

Would the capitalists be compelled to place deposits in the socialized banks? This could hardly be done. They would withdraw their custom from the socialized large banks and bestow it upon the smaller private banks.

Would a State banking monopoly be introduced? This would offer considerable difficulties. And capital could easily create substitute organizations of money capital and credit.

The purpose of the foregoing is to point out the difficulties which beset the proposal, not to declare it to be impossible. Its success would depend upon the social atmosphere at the time of socialization. If the capitalist class formed a compact mass, its prospects would be very dreary. On the other hand, it might well be successful if a considerable section of productive capital were in antagonism to the bank magnates, and felt their domination to be oppressive. In that case, the banks organized on the lines of Bauer’s proposal might embark upon a prosperous career.

Yet a socialist regime would not be able to adhere permanently to a regulation of banking which depended upon the goodwill of at least a section of the capitalist class.

Only under favourable circumstances could a Labour regime ensure that socialized undertakings would participate in capitalist credit. Under all circumstances, however, it would be in a position to establish banks, which would relieve the workers, their institutions, and the socialized undertakings, of the necessity of placing their temporary accumulations of money at the disposal of capitalist banks, to be used for capitalist purposes.

With their private savings and their trade unions, cooperative societies and sick funds, the workers already possess not inconsiderable funds, which will grow with the increasing extension of their institutions and the elevation of the working classes. In addition, there will be the socialized municipalities with their undertakings, and the enterprises which are socialized by the State.

For the advantageous investment of all the funds which the above-mentioned factors accumulate for special purposes and must have at call, there now exist only the capitalist banks, which utilize the money so deposited for the extension and strengthening of capitalist economy.

If the working class and the Labour State power have their own bank, it may become the means for promoting socialist undertakings and rendering them independent of capitalist credit.

The socialist bank would of course have to pay interest on the deposits entrusted to it, in order to be able to compete with the capitalist banks. Consequently it would also have to take interest for the money which it lent. But this last-named interest would not serve the ends of profit. It would have to be higher than the interest paid to depositors to cover the administrative charges and the element of risk. It would, however, be considerably less than that of capitalist banks.

With the extension of socialization, there would be a growth in the strength of these banks, and also of their capacity to accelerate the pace of socialization.

Thus the complete nationalization of the banking system, which it was thought would form the starting-point of socialization, might be regarded as its termination.

When this stage has been reached, money would entirely cease to be used as capital, and consequently the banks as organizations of money capital, as well as the necessity for credit, would disappear.


Last updated on 27.1.2004