Commenti disabilitati su PRIVATE OR PUBLIC CENTRAL BANKS : How to defeat speculative and economic attacks. September 21, 2018

In praise of public central banks managing public credit.


How to resist a speculative attack: a decentrating thought case study not far removed from actual facts. (In praise of Montesquieu’s « Les lettres persanes ».)


How do private capitalist Central banks work?

How did the public capitalist Central Bank work?

How should a socialist Central Bank work?

The inanity of the capitalist Fiscal Consolidation Path.



How to resist a speculative attack: a decentrating thought case study not far removed from actual facts. (In praise of Montesquieu’s « Les lettres persanes ».)

Imagine the following situation. The Ugly Empire realises that its own demise is approaching rapidly. The time of reckoning knocks at the door. But it desperately tries to deny the ineluctable outcome.  Its leaders are experts, or so they think, at provoked crisis management. Given that some 66% of international exchanges are still denominated in the Ugly Empire’s currency, they start revisiting the Volcker-Reagan’s strategy. The FED raises interest rates while the Treasury launches huge tax cuts and humongous military spending. This will ignite reverse carry trade and massive outflows of currency from the Emerging Markets to the Ugly Empire. It will also lead to the explosive rise of the Ugly Empire’s debt.

As with the original counter-reform, this strategy is bound to fail simply because the inflow of currency does not go into productive activities; indeed, this time, the speculative structure of the Ugly Empire and other markets will bring this cycle to an end even faster but without any prospect for a comprehensive Plaza Accord. Moreover, the Ugly Empire’s Establishment knows that military spending displays a very poor economic Multiplicator, especially when you buy many costly gadgets from foreign countries like Israel.  It knows this at least since the Report from the Iron Mountain, written long before the ex-chancellor Willy Brandt analysed the benefits of « peace dividends ». Originally the strategy had been thought of as a way to preventively control over-reproduction. In a nation which flashes fake full-employment with an active force fallen to 62 % of the total, this is far from rational. Furthermore, the disruption in EM will hit harder those go-between countries that bought into the so-called Washington Consensus. (On the counter-reform launched by Volcker-Reagan in 1979-1982 see my « The socio-economic consequences of MM. Volcker, Reagan and Co » in the Category « Another America is possible » in  )

Something more sanguine was needed. With the help of the Empire’s top Ugliest of Men – they cherish Nietzsche’s terminology, one of their Little Brothers’ Grand Master – they come up with a plan: they will pitilessly destroy all potential military and economic rivals. The top 4 Ugliest of Men from the Financial Center are charged with the economic war offensive. Their new designated « enemy » are the set of 66 or so Fatalist and Quietist countries. Now it is the turn of the X country to be subjected to an economic attack.

The plan is as devilish as it is simple. Start shorting massively the currency of the designated victim. It will quickly be forced to devalue pushing a  sheepish Central Bank to raise interest rates dramatically. This will impact strongly on the victim’s capacity to finance its public and private debts, part of it denominated in the currency of the Ugly Empire. The Ugly Empire expects the victim to try to defend the value of its own currency by depleting its currency reserves in a vain attempt to sustain its exchange rate. Not even the Ugly Empire’s Central Bank could do this any longer given the current hegemonic and global speculative financial context in which private banks sit on mountains of « money » that can be moved with a simple click. Failing to sustain the exchange rate, the X country would thus be quickly obliged to call in the IMF for help. This will subject it to the known IMF conditionalities and consequently to bloody austerity measures, namely drastic reductions of public spending and wall-to-wall privatization of all there is to privatise. In short, what they just succeeded doing in present day Greece under the grotesque pitre Tsipras and his servile government.

As the massive shorting would devalue the currency, the Ugliest of Men would come back and buy massively into the depreciated currency in preparation for the big privatization round. They are of the kind who takes no prisoners. Hence, as the massive shorts unfold, they slap heavy tariff duties on imports from the victim. This is done because the currency devaluation might have been partly offset by more competitive export from the victim country.

Except that this time around the strategy failed miserably. To start with, the X country never thought that speculative finance, based on « credit without collateral » and on the Ugly Empire’s Fiat to turn it into a worldwide legal tender, was really ethical. Its financial laws and customs are different. Lately it also realised that the Ugliest of Men’ textbook is more worthless than the Kerouac Rolls on which its Imperial currency is printed. It finds the plan to buy real assets produce by real work with quasi-toilette paper even more unethical and arrogant.

As the X’s currency devalues, strict capital controls are swiftly imposed taking into account the basic import/export needs. This is very efficient because it protects its foreign currency reserves and in one simple move defeats the whole Ugliest of Men’ strategy. Knowing that the already suffered deterioration of the currency together with the effects of the capital controls render access to – speculative – capital markets more onerous, it displays its scientific understanding of the discipline by quickly shifting to public credit.

Instead of uselessly playing with the interest rates, the Central Bank can manage money and credit supply by modulating the prudential ratios according to needs. It can do so even more precisely by functionally linking public banks to their specific sectors and industries in order to respect the sectoral asymmetric proportionality needed to avoid the usual sectoral expansion/contraction induced by unregulated private investments. In such a fashion it ensures a more harmonious economic growth. Furthermore, with a moderate prudential ratio a public bank can domestically finance both the public and the para-public debts, thus protecting the government’s budgetary margin as well as the public and private investment possibilities. Keeping these debts out of the speculative international market is the only way to keep them rationally low and to finance them without ruining the State’s coffers. These measures would keep the economy going.

Having been de facto designated as an « enemy » country, it equally understood that its reliance on the Ugly Empire’s currency as its main trading currency now acts as a dangerous Trojan Horse. But other trading partners do exist that can quickly provide almost all the goods and services the Ugly Empire can provide. Yet, the wise X country never equated the Ugly Empire’s leaders with its citizens. Though it has to protect itself, it has never been the kind to throw oil on the fire.

Knowing the difference between money and credit and knowing the role of credit in international exchanges, the X country and its new economic partners clearly understand that one does not need to already own a foreign currency to trade in that currency. This illusion was mainly derived by the Ugly Empire’s ability to link its own currency to the international value denomination of oil and other raw materials. In effect, currency swaps could be used. They would not to be used to vainly defend the exchange rate but in a more innovative fashion. Currency swaps would better be destined to offer bilateral lines of credit for import/export. These lines of credit waiting to be realised in real exchange values through trade in goods and services can very well substitute to the role played by already accumulated reserves of foreign currencies.

Credit is an anticipation of effective production so the amount of currencies needed for these swaps can be simply printed out, although the spending will have to be subjected to rigorous and quarterly auditing to avoid inflationary pressures and corruption. These lines of credit will smoothly reorient trade and potentially lead to a trade and payments equilibrium, especially as the bilateral lines of credit will have been preliminary calculated to meet specific production and consumption needs. A strict bilateral equilibrium is not necessary; rigidity should be avoided. The necessary flexibility can be afforded simply through the negotiation of the convertibility of at least part of the lines of credit into a basket of currencies – for instance a ruble and renminbi basket to which could later be added the euro and the yen. Later a real chamber of compensation could be devised within a truly reformed IMF or, more likely, at the beginning, outside it.

The Ugliest of Men are also pitilessly stupid, just like the Merchant of Venice. And so, they were bewildered because the X country did not play by their textbook. Never mind the fact that Nietzsche’s had warned them not to take themselves seriously the baseless and pretentious – nobelised – narrative craps they churn out for the ordinary use of the « rubbles » – pardon, the masses of citizens. They nonetheless noticed that the apt modulation of the Central Bank prudential ratios which the X country used instead of resorting to the usual useless and stupid hikes of the guiding interest rates, has freed up some 4 to 5 billion in gold reserves. They thus quickly attempted to grab this back by twisting the arm of the governor of the still independent Central Bank. The latter complied and uselessly raised the already high interest rates even higher. But by now the X country had soundly defeated the first wave of the attack and was prepared to quickly defend its economy and its national sovereignty. The Central Bank governor was sternly reprimanded and warned while a dozen billion loan from a friendly Fatalist and Quietist country was secured to further keep the Ugly Empire’s dominated IMF at bay.

The rest will be history. The economic and military diversification process triggered by the imbecilic and typical short attack will proceed. A policy of peaceful cooperation with regional and like-minded countries will be pursued, perhaps with the aim of developing a mutually beneficial regional fair-trade and exchange area. Indeed, the region is potentially rich because of its important supplies of oil and other raw materials and because of its demography. The population is young and already highly educated. It only needs to shed its imperial subordination to « take-off »  – to paraphrase the poor mainstream W.W. Rostow -, economically, scientifically and culturally.

Above all, the X country has taught the world an invaluable lesson in international political economy and in national dignity. The Tango country had done the same when it kept speculative finance and vulture hedge funds at bay, thus quickly lowering its national public debt to around 8 % of its GDP, the first time in its history. Its debt is now exploding « once again » because the present government is merely a « willing » little brother domestic to the Ugly Empire and to its Ugliest of Men of speculative finance. The Carnival country together with other hemispheric nations and notably with the once Sacrificed Pacific Neighbor, are now « on the road » again, walking alongside the current Tango’s leaders.

It is hoped all countries will ponder over this thought case study not too far removed from actual facts.


What is the legitimate cost of money and credit? It is not determined by the « market » in the guise of interest rates but rather the opposite. Risk does not enter into the equation: no one asks individual with a pathological « acquisitive mind »  to take risks at the expense of the general interest. Capitalist banking and finance, especially in the current hegemonic speculative form, is nothing but a dramatic ludopathy. The phrases « casino economy » and « vooddo economics » are apt descriptions. Innovation is radically different from this sort of gain-oriented gambling at the expense of the Community and existed long before the advent of capitalism as well as in post-capitalist socialist societies. R&D is no longer an individual endeavor and it supposes pure and applied research teams as well as publicly organised funding.

The sole legitimate cost of money and credit is what it takes to produce and circulate them: namely administrative cost. The rest is just a systemic capitalist monetary exploitation added upon the exploitation already suffered by all employees at any level in the productive labor process. With publically ran and managed money and credit, the administrated interest rate merely covers these administrative costs. Providing credit to the sectors, industries and enterprises is done through functionally specialised public banks, thanks to the modulation of reserve ratios by the public Central Bank according to the sectoral needs determined by a Central Planning subjected to a genuine « socialist democracy ».

The starting point of any worthy and scientific analysis is the distinction between money and credit. Money is the mass of the means of exchange that acts as a general equivalent. This mass is both necessary and sufficient to allow all the economic exchanges in a stationary or dynamic economic system. In a situation of full-employment the money mass necessary is equal to the « real salary mass ». In a situation characterised by unemployment the necessary and sufficient money mass is equal to the « social salary mass », namely the real salary mass of the active population plus the revenues afforded to the unemployed for their maintenance. (1)

What is credit? Credit is an anticipation of production by way of the creation of a extra-volume of the national means of exchange otherwise necessary and sufficient, namely money. Its modern form is the capitalist form. This is because the Capitalist Mode of Production is based on the accumulation of capital. However, assuming as a thought experiment – Koyré – a closed Enlarged Reproduction system, or dynamic equilibrium in mainstream parlance, it is clear that credit anticipation is only possible thanks to the preliminary advance made by labor to capital as demonstrated in my essay entitled Tous ensemble of 1998. (2) The general equivalent in the form of credit eventually needs to transform into real production of Means of production (MP) and Means of consumption (CN) through investments. Usually, some 60 % of any investment goes into salaries thus boosting economic growth. In an open Enlarged Reproduction system, credit equally implies imports and thus it has the potential to accelerate economic growth, provided the exchange rate corresponds to the real micro-economic productivity of the national enterprises and to the real macro-economic competitiveness of the Social Formation, thus keeping the external balances in equilibrium.

How do private capitalist Central banks work?

Their function is above all an ideological one. It is to maintain the formal equality among all capitalists, big or small, what Marx called « capitalist communism ». This also explains why, even before Fisher’s « income stream » falsification, the bourgeoisie did not distinguish between money and credit. It manages both in function of the maximum capitalist accumulation possible. To do so, while attempting to maintain some control over monetary policy, it devised monetary aggregates (3), mainly M1, M2 and M3. The salary masses, both real and social, are equal to M1 plus a small part of M2 – mainly individual bank deposits. The remaining part of M2 and M3 make up credit. (4) Interestingly with the confirmation of the hegemony of speculative finance the FED stopped calculating M3 …

The original confusion between money and credit colours everything else. For instance, the so-called quantitative theory of money which originated with Irving Fisher is nothing else than a puerile tautology: it equated the total amount of « money » with the total value of goods and services. It therefore borrows its main operating tool, that is to say « inflation » in the singular, from David Hume’s « monetary rain ». Given the original equation, if more money would rain from the sky, the prices of existing goods and services would automatically go up, causing inflation. However, Hume himself would be almost right only if you were to assume that capitalist credit plays a marginal role. Which was exactly the case in the society he lived in.

Exchange is always bilateral, a good or service being traded against « money ». But it is also a chain whose aim it is to guarantee the reproduction and the enlargement of the system by insuring households’ consumption and productive consumption. The bourgeois monetary tautology implies a further futility: the circulation of money which is evaluated in the time it takes « money » to leave the banks and return to them.

The capitalist bank’s operation is based on the fractional system embodied in its prudential ratio. Today this prudential ratio, the ratio between banks’ assets in reserve and the credit – M2 and M3 – it can lend on that basis, is very low. Not even counting the colossal shadow banking, a capitalist bank can now lend around 30-40 Euros for any euro it has in reserve. Not only huge volumes of credit are created with small amounts in reserve, but this induces a cumulative spiral assuming that most banking investments will return a profit, which in turn positively affects the bank’s reserves and increases it lending ability. We all intuitively understand that such private banks will spend much ingenuity in finding new investment possibilities. For instance, the housing market that led to the subprime crisis with the excuse of the « House Effect » which so-called « maestro » Greenspan irrationally borrowed from the fallacious « Wealth Effect » proposed by Pigou against Keynes. Both the « maestro » and poor Pigou had no clues on the importance of fair revenue distribution for real economic growth.

Before the abrogation of the Glass Steagall Act – 1933-1999 – the four pillars of banking and finance namely deposit banks, investment and commercial banks, insurance companies and credit unions, were functionally segregated. This insured some kind of connection with the real economy. To be sure the « invisible hand », operating through the actions of the investment and commercial banks, caused speculation bouts and recurrent crises. But the end of the Trade cycle usually led to an healthy purge of the system and also to further fusions in the financial sector. Such recurrent crises, not to be confused with structural crises opposing over-production and under-consumption, are the only cybernetic self-regulating mechanism operating within the Capitalist Mode of Production (CMP). It is congruent with the ideology of free competition.

As soon as this functional segregation is legally washed away, we witness the rise of the so-called « universal bank » that characterises the epoch of hegemonic speculation. The moment private banks are considered « too big to fail » the capitalist competition rule withers away and with it the only feed-back regulation mechanism known to the CMP. Banks must then ruinously be saved by State’s bailouts, including through the silent but permanent and tax-deducible bank provisioning.

The speculative slippery slope does not end there. It pollutes and cannibalises the whole economic realm. It does so by instituting itself as an autonomous economic sector. It now accounts for over 9 % of the GDP of the United-States. Given that it needs much less fixed capital, its greater but fake productivity induces greater volumes of profit. It equally determines the relative size of the other sectors and industries and dictates the exchange value logic – relative prices – of the whole economic system. This is the fundamental reason why the speculative Return Over Equity – ROE – is structurally unsustainable. This weakening of the real economy basis fatally leads to the real Fiscal Crisis of the State.

Money and credit being merrily confused as « money », the capitalist Central Bank fancies that it can rigorously manage the right amount of « money » that is presumed by its quantitative monetary theory. To do so it simply uses an « acceptable » inflationary target which, however, it is unable to scientifically define. Indeed why would 2 % be more acceptable than 1 % or 3 % ? Imagine this determination being done within a FED that stopped calculating M3! Of course, if the CPI – the consumer basket of the working population – is your main inflation criterion and if you live in a « credit without collateral » speculative world, perhaps even with a Central Bank in a Quantitative Easing mode, the enduring low inflation rate will only reflect the end of the « rising expectations » and the impoverishment of the laboring masses, while the stock market and speculative assets will reach bubbling heights. To enforce this unprecedented regression, the Trilateral Commission equally advised the strict control of the « flows of communication » in the optic of a « return » to the « deference to – self-nominated- Authorities ». In academia, especially in the « dismal discipline », this amounts to the reintroduction of the Inquisition’s Index. Later preventive wars, openly aimed at the preventive destruction of all economic and military rivals, were added to the same Samuel Huntington’s « strategic hamlets ». There remains only to add the official declaration of Apartheid which was finally and shamelessly done by Israel on July 19, 2018 (see )

Of course, capitalist economics is a set of constantly revised kitchen recipes based on an initial set of falsifications. As demonstrated, these aim at maintaining some semblance of plausibility to the bourgeois « dismal science ». (5) This is the only role played by the incestuously chosen pseudo-Nobel Prizes in economics. The problems do not end with the management of inflation. This « capitalist communism » leads the bourgeois Central Bank to devise a trick to ensure formal equal access to « money » from all capitalists big or small. It does this through its main interest rates. Interest rate is just a percentage but the return vary greatly when you consider volumes. 1 % on $ 100.00 brings $ 1 but $ 10 on $ 1000.00. In the Darwinian capitalist game, it pays to be big.

This formal equality is the crucible in which recurrent Trade Cycles, hence cyclical crises, are forged. In times, it ineluctably leads to structural socio-economic crises. This is because the capitalist allocation of resources is driven by egoistic private motivations – i.e. the « acquisitive mind » – which is supposed to optimise the general good through the unexplained operation of the « invisible hand ». (6) To point out only the obvious, if this were true, many essential basic needs would not go unanswered among systemic huge and unecological capitalist waste, as is patently the case today. Check for instance the « ecological footprint » of a working poor compared with that of Al Gore or of his over-represented class brothers and sisters. (7) Simple and Enlarged Reproduction, or if you prefer stationary and dynamic equilibrium, do suppose a socio-economic structure.

By definition, you always get a capitalist economic equilibrium but always an ex post one. In times of crisis, it simply turn out to be a « cemetery equilibrium ». This means that the equilibrium is not necessarily positive, for instance during a textbook recession. Even in case of economic GDP growth it can go hand-in-hand with the impoverishment of a great chunk of the active and inactive population. This is partly demonstrated by the increasing inequalities accompanied by greater levels of relative and absolute poverty within Western nations. See for instance the annual reports from Oxfam, although, lately, even the IMF, the OECD and the EU Commission feign to notice.

This evidence is made crystal clear when you refer to the Equations of Simple and Enlarged Reproduction: when investments – credit –  do not respect the sectoral symmetric proportionality of the two main Sectors, namely Capital Goods and Consumers Goods, you fatally end up with sectoral expansion in one sector and sectoral contraction in the other. This can be mediated somewhat by the external – trade and payment – balances, but this mediation often leads to even bigger crises. (8)

How did the public capitalist Central Bank work?

The public capitalist Central Bank used the same structures and criteria mentioned above. But it did so with two huge differences because it kept part of the available credit strictly public.

First, public credit can greatly activate public and private investments at a very low cost. This is because a public bank does not need to run after short-term, quarterly profits just to keep shareholders happy. It must however ensure the amount of profit necessary to pay for its administration cost and for some provisioning. It thus relies on a much safer prudential ratio. The public Central Bank was backed by some sort of Indicative and Incitative Planning that relied on strategic State enterprises, especially in those sectors corresponding to essential public services and infrastructures. Furthermore, it relied on the functional segregation of the four main pillars of banking and finance, namely deposit banks, investment and commercial banks, insurance companies and credit unions. When conjunctural crises struck, the investment and commercial banks were likely to be more impacted. If they failed, this would help purge the system and through the concentration-centralisation of capital – or fusion process – this would eventually lead to a new cycle of growth. Provided they were not small shareholders, ordinary people and households were not ruined especially if their « global net revenue » was covered by a decent portion of institutional savings financed through their « differed salary ». (9) As Lord Beveridge had already made clear after the First World War, such social safety nets do act as  very efficient counter-cyclical mechanisms in time of crisis.

Second, a public Central Bank was the only player in charge with the financing of the public and the para-public debt. By keeping this debt out of the claws of the private banks, particularly the dozen primary banks which now dominate the financial markets – and the currently privatized Central Bank – it kept public and para-public debt very low. Before the privatisation of the Banque de France in 1973 – the so-called Pompidou-Giscard-Rothschild law -, the French public debt was around 20 % of GDP. It remained at that level up until 1980 ( ) In 2017 it was at 96.8 % and growing. The same applies to Italy, where the subordination of Bankitalia to the Italian Treasury ended in 1981-1983. In 1945 the Italian public debt was at 32 % of GDP; it barely reached 37 % in 1970, 50 % in 1973 – with the oil shock -, but quickly shot up to 74 % in 1984 thanks to the deleterious impact of the monetarist counter-reform launched by Volcker-Reagan in 1979-1982. (10) It is now at 132 % of GDP in an Italy promised by its national and European masters to a Greek-Tsipras’s kind of future. The later explosive trends are mainly due to the monetisation of this debt on the financial markets through the intermediation of the primary so-called  « universal banks ».  Instead of borrowing from the Central Bank at close to zero interest, capitalist countries now borrow at high interest rates from private and often stateless banks which are refinanced at low – and now even negative – rates by their own privatized Central Banks, such as the ECB and the FED.

The rapid post-war reconstruction of European nations was based on this public model. The descriptively termed Glorious Thirty Years – Jean Fourastié – did however correspond to a general advancement in economic, social, scientific and cultural areas. Given that we were dealing with a mixed economy with private credit, the unfolding of the Trade cycles – conjonctural crises – come to no surprise. The longer so-called Kontratiev cycles should be interpreted as the « medium duration » of economic waves prosperity associated with the massification of earlier know scientific and technological innovations. This was particularly the case with the post WWII intermediary sectors which were still labor-intensive, for instance the automobile and domestic utilities sectors.

One legitimate question that could be asked concerns what was then called during the late 60s and early 70s « stagflation », namely a high level of inflation conjugated with an economic stagnation. We should point out that the socio-economic logic of the Welfare State rested on the socio-economic coherence of the Social Formation. Basically Keynes’s General Theory was stationary and assumed domestic coherence. The same can be said of Harrod’s dynamic version of it. As we know, Keynes was defeated by H. White at the Savannah conference when the Bretton Woods system was devised. Keynes’s currencies compensation chamber needed to facilitate international trade was pushed aside in favor of the Bretton Woods Gold-Dollar Standard. More ominously the Bretton Woods system was quickly followed by the Havana Conference and by the formation of GATT under the hegemony of the USA, then obsessed by the Cordell Hull’s philosophy that condemned any « beggar-thy-neighbor »  initiatives.

The GATT completed the new World Order ran by the Twin Sisters housed in Washington in front of the Federal Reserve, namely the IMF and the BIRD. In short, the gradual dismantlement of tariff barriers through GATT increased the economic contradiction inherent to the private credit system, particularly as Western Central banks had to deal with the supremacy of the US dollar as the main world reserve currency. The end of the Bretton Woods system – in 1971/1976 – and the ushering of free-float made this task even more difficult and almost impossible to manage as soon as the Central banks started to become independent from the Treasury.

The impact of the dismantlement of the tariff barriers together with the increased independence of the Central Bank destroyed the domestic coherence of the various Social Formations. The increasing extroversion of the Economic Multiplicator destroyed the – poorly Keynesian but political – credence in the so-called « pump-priming » making it more difficult to insure a resilient economic growth rate compatible with increased social redistribution, even in the form proposed by the Vietnam-worried President Johnson with his Just Society.

Yet, these mounting economic difficulties were going hand-in-hand with the bourgeois economist puerile understanding of inflation. The collective agreement mechanism had played a great role in furthering vital internal social demand during the Glorious Thirty Years. The US industrial relations experts, even such as Dunlop and Kerr, understood the mechanism as one that could co-opt most labor leaders while stabilizing production relations during the whole duration of the collective agreement. Workers’ organisations, especially those inherited from the CIO before it merged with the AFL, rightly understood the mechanism as a redistribution mechanism. The practice was slowly establish to generalise the collective agreement won in one big corporation to the whole industry and possibly to the entire economy. The standard of living of the American workers increased dramatically especially as retraining, formation and security on the work place became main issues to be included in the collective agreements.

Both tendencies were totally misunderstood by bourgeois economics and eventually led to the hysteric reaction of an Establishment which could not make sense of stagflation. The Trilateral Commission sold to the imperial opening of the whole world gained pre-eminence with its gospels of « strategic hamlets » and « ending of the rising expectations » of the citizens, read of the workers, thus ushering the way to the worse reactionaries like von Mises and the Chicago Boys fresh from their philo-Semite Nietzschean « return » cold-bloodily implemented in post-Allende’s Chile. « The World is our oyster » as the ineffable US business leaders said while preparing to strangle Mexico after the peso crisis of 1982, check Global Reach, by Barnett and Müller (1974)

How should a socialist Central Bank work?

A socialist Central Bank knows that money and credit are general equivalents which smooth economic exchanges. It knows that the sole universal equivalent is the exchange value of the labor power. It also knows the basic structure of stationary and dynamic equilibria –see my Synopsis of Marxist Political Economy for details. Following Marx, in scientific parlance we talk of the Equations of Simple and Enlarged Reproduction. (SR-ER)

On that basis the socialist Central Bank can easily determine the salary masses which will define the amount of money necessary and sufficient, given its rotations, to allow all the exchanges implied by the given SR-ER situation. Theoretically speaking the real salary mass will suffice in time of full-employment. However, even in time of full-employment, some production processes are seasonal and others are discontinuous, so that a frictional unemployment is likely to be present. Add to these the periods of inactivity happening « through no fault of our own » as the working organisations used to call them. The Central Bank will cover the needs of the unemployed issuing the amount of money necessary for their upkeep, although a well-planned socialist country will prefer to use a fringe of over-employment, coupled with re-training, as well as continuous education. In these two later cases, a different sharing of the « social surplus value » will be implied. This will entail the implementation of a different « epoch » of redistribution. As far as the financing of unemployment stricto sensu is concerned, it will transform the real salary mass into a social salary mass. The ratio social salary mass/real salary mass gives the rate of structural inflation which in my Tous ensemble I called « civilised inflation ». (11) This slight distortion can be dealt with easily by revisiting the Fisher Chain.

A socialist country will use various forms of institutionalised savings simply because the labor force works to insure what Karl Polanyi called its « livelihood ». This includes its reproduction inside households of various sizes. Humanity is a species based on sexual reproduction. Its revenue must therefore be enough to sustain the labor force during its activity and inactivity – unemployment, maternity-paternity leaves and allowances, sickness, accidents, old age etc. The necessary saving will be institutionalised in various Social or Workers’ Funds. Furthermore, individual saving accounts will also be organised. This is because the consumption of the daily basket of goods requires less money than the buying of durable goods such as cars, domestic utilities etc., or than some leisure expenses such as trips and so on and so forth. The payments out of these funds should be treated as money. The easier way to show this is to underline the three components of the « global net revenue » of households namely « individual salary », « differed salary » and the fiscal portion on the paycheque which corresponds to the financing of universally accessible public services and infrastructures.

This provides the Scientific hence Marxist Quantitative Theory of Money and Credit. On this scientific basis, the management of money and of monetary phenomena – inflation, deflation – is plain foreword at least if you suppose a closed system. We will talk about the rate of exchange in a moment.

The socialist Central Bank knows that credit is an anticipation of production in the scientifically elucidated context provided by the SR-ER Equations, that is to say by national planning. It knows that the sheer possibility of such a monetary anticipation is only possible thanks to the advance labor power always makes to production since labor power is always paid after the completion of the production process. It is easy to understand if you assume a closed system: you cannot buy commodities that have not already been produced. At most you can order them. In concrete terms, a space for credit intermediation is opened in the form of stocks and of installed over-production capacities – on average the use of installed production capacity amounts to roughly 80 % – and also in the form of import/export. Indeed any economic system presupposes a World Economy. In turn this raises the thorny question of the proper rate of exchange of the national currency.

Furthermore, a socialist or civilised society relying of State planning will strive for an harmonious dynamic reproduction in order to secularly raise the standard of living of its citizens. It will do so according to a list of social priorities collectively determined with recourse to « socialist democracy » (12) In a socialist or civilised society all the profits, that is to say the amount over and above the individual salary, are controlled collectively thus forming the « social surplus value ». A part goes into institutionalised saving and the rest is allocated according to the priorities chosen in the optic of dynamic reproduction, that is economic growth. This allocation is mediated by the appropriate exchange means, namely credit. The Central Bank will then be flanked by specialised Public Banks closely tied through Central Planning to their specific sectors and industries.

It quickly becomes apparent that on this basis alone the endogenous reproduction rate will be steady but slow. It will mainly depend on the increase of productivity. Which is not necessarily endogenous. The main example is Stalin’s brilliant planning: having access to the European Financial System, it chose to export agricultural goods to earn the foreign currencies necessary to buy the machines, technologies, patents and know-how – including the hiring of foreign engineers – to accelerate the industrial and scientific development of the USSR. Collectivisation of the countryside was launched simultaneously to alleviate some of the pressure on the peasants. The collectivisation was accelerated thanks to State-owned Machines Cooperatives and thanks to the emphasis given to the production of Means of production for Means of production. This crucial phase of the class struggle took a specific constitutional form. (14)

Socialist import/export strategies fall into the legitimate use of credit in so far as it optimises the insertion of the Social Formation in the International Division of Labor. But the credit available always depend of the available « social surplus value » and on its allocation to satisfy planning priorities. This allocation will be done directly without any financial lever. In general a sane socialist money and credit management has no need for the banking fractional system. We will see below when exceptions are called for and for what purpose.

Because no nation can live long above its means, the rate of change of the national currency will then need to correspond to the macro-economic competitiveness, knowing that micro-economic productivity strongly depends on strictly public social services and infrastructures. For instance, the Private Health Care in the USA wastes more than 19 % of GDP for the sole benefit of Big Pharma and private insurance companies while still leaving some 40 million citizens without coverage. (see « Where does it hurt ? » in . Unfortunately, since then, the UK as emulated the US health model …) In the EU, at least before the current rampant privatisation, universally accessible public Health Care systems did only cost around 9 % of GDP. Because of the potency of regimes based on mutualism and abstracted from the logic of capitalist profit, the same applies to Pension Funds, car insurance etc., etc.

In a socialist system the rate of interest as it would apply to consumers’ demand – eg., saving accounts or various kind of loans – would simply be fixed by the Central Bank. Such vehicles are necessary to buy durable goods. It would follow two main criteria: a ) offsetting the rates of inflations and b ) insuring the minimum return needed to run these services. The same would apply for credit.

To understand credit as a formal anticipation in reference to Enlarged Reproduction, one must take into account the whole duration of the reproduction cycle. We know that there is a installed overcapacity of production – including overtime from the labor power – one that is strongly influenced, whenever possible, by the introduction of the greatest productivity; and we know that there are domestically available stocks. In a closed system, credit anticipation would simply accelerate and fluidify the realization of planning priorities over the whole duration of the Plan. It permits to switch resources accordingly thus in part away from the enterprises where the profit originated while keeping an accurate accounting ledger of the exchanges.

The main function of socialist credit is to smoothly and rapidly operate this switching of resource allocations. Hence the ratio credit/assets of the banks would be relatively low. The anticipations translate for 60 % – on average – in a real salary mass while the rest is made of by orders for machines, services etc. Some stocks would remain unsold and in need to be recycled. Socialism implies the rigorous implementation of Ecomarxism, namely: a) recycling taking into account the whole life cycle of the products; b) natural and artificial renewal of needed resources; c ) search for substitutes that can be massified ; d ) production of agricultural surpluses – « agricultural sovereignty » as opposed to the deleterious « agricultural security » based on global trading on speculative markets – and the production of energy surpluses since any modern economic activity – including data processing – is a transformation endeavor, hence a very energivorous one. (15)

In an open economy in which import/export would concretize the insertion of the Social Formation within the World Economy the same logic applies. A socialist economy does not need a suzerain international currency which pretends to dominate the global financial world. Such a choice fatally leads to the capitalist switching from agriculture and industry to services, notably financial speculative services; it fatally leads to ineluctable crises both cyclical and structural. But here too credit can smooth and accelerate the complexion of the Plan. But its function would better be carried out in the context of a planned international division of labor.

This means that trading partners can open for each other the necessary bilateral lines of credit knowing that these nominal amounts would be fully realised in exchanged goods and services. Such currency swaps for lines of credit would simply have to be printed out by the Central Banks and their planned realisation be followed by rigorous accounting and regular auditing. To avoid rigidity – there is no need to necessarily reach a bilateral equilibrium – a Compensation Chamber would have to be devised based on the possible convertibility of a national currency into a common vehicle or basket, for instance a democratically reformed SDR or its equivalent. Given the known origin of the various inflations and given the low and administrated rates of interest, the rigorous accounting will be done in real exchange values, thanks to the revisiting of the Fisher Chain.

The essential underlying logic of money and particularly of credit is what Marx called the realisation of exchange value.  Since productivity can be integrated coherently within the Equations of SR-ER and since these Equations lead to a Marxist quantitative theory of money and credit, socialist accounting does not need to be done in the form of a material net product, it can now be done in terms of real exchange values with the extra degree of flexibility provided by socialist credit. I have called for scientific, hence Marxist, statistics based on the SR-ER Equations, for instance in my Synopsis of Marxist Political Economy.

In such a planned system indebtedness in the capitalist sense would cease to exist: there would only be amounts of credit anticipated with the planned knowledge of their effective realisation in real exchange values. In a mix World Economy – for instance as was the case for the Eastern Bloc until 1989-1991 – things were more complex because the indebtedness occurred with capitalist-imperialist powers. The unexpected Volcker-Reagan counter-reformist financial roller-coaster with its double digits interest rates is one of the main cause of the collapse of the Eastern Bloc: it suddenly had to repay higher debts denominated in foreign currencies without full access to the World Market for its import/export needs. Now however, there exist many countries capable to provide access to most raw material and sophisticated goods. In such a multilateral context, the lines of credit strategy is useful for all countries, socialist or not, in so far as they can reorient and diversify international exchanges with an eye on the main external balances. Similarly, it can easily defeat any pretence to the extraterritoriality of the laws of any putative imperialist power.

The inanity of the capitalist Fiscal Consolidation Path.

A long economic cycle had been initiated in 1979-1982 with the Monetarist counter-reform launched be Volcker-Reagan. It was based on the emergence and consolidation of speculative capital as the hegemonic form of capital. It substituted the hegemony of internationalised productive capital embodied in the MNCs. This cycle is now coming to a dramatic end. The real fiscal crisis of the State is its hallmark, the privatisation of credit, above all the monetisation of the public and para-public debts abandoned in the hands of so-called « universal banks », is its main vehicle. Today, with the instauration of the Monetarist Minimal State and with the various QE causing a drastic « credit crunch » – and failing to cause inflation, let alone the hyperinflation expected by Bernanke to shift the burden of debt financing on creditor countries such as China and Japan (16 ) – any average citizen would quickly realise the crass inanity of the so-called « crowding out » effect of public investments and of the public financing of the State’s debt.

Today, the so-called Fiscal Consolidation Path is used as an ideological tool. It takes over where the monumental tax expenditures had left. As we know the hundreds billions grated in the form of tax expenditures to capital without the least counterpart for the labor force, except longer working hours for less pay and increased precariousness, have a nice aspect to them: once granted they disappear from the budget – and media – radars. In effect, they were used to legitimize monetarist austerity policies, mainly the linear cuts in safety nets and wall-to-wall privatization, with the fake promise that balanced budgets would reduce the weight of debt financing and return the economy on a growth trajectory.

The Fiscal Consolidation Path plays the same role but in a coordinated European setting. It comes with disciplinary tools and eventual penalties attached. This is another instance of « capitalist communism » since all States, big or small, are uniformly prescribed the same horse remedies. While the dismantlement of their Social or Welfare States is been completed and while the « palestinisation » of the Western and World proletariat is being savagely enforced by the new Crusaders and putative « masters of the Earth » – pace Suetonius -, the citizens are told that transitory austerity measures will soon restore the economic health of the system. Once again, as explained in my « Nietzsche as an awakened nightmare » (17), these philo-Semite Nietzscheans aim at forcefully returning Humanity to a new slavery and a new domesticity. Some regions of the EU, like Calabria and Sicily, are already close to that stage.  In Calabria, for instance, the active labor force is officially estimated at around 42 %  in a system characterised by the wall-to-wall corruption involving all institutions including the justice and police apparatuses; it has fallen to some 62 % in a United-States which brags of full-employment, in the sense of the ILO which counts as employed any person who has worked one hour during the last labor survey!

Debunking the Path is easy. It suffices to shade away the Marginalist regime phraseology and look at the bottom line:

  1. GDP accounting has been modified in 2014 in the EU in order to add some 3 % to 3.5 % growth thanks to an evaluation of drugs, prostitution, fiscal evasion, some armaments and some aspects of the so-called immaterial economy such as copyrights. Hence, if a country announces a 1 % GDP growth it really suffers a real negative growth of 2 % to 2.5 %.
  2. This fake GDP growth lowers the weight of the public debt but, of course, does nothing in helping lowering it in reality. Note that the volume of public debt in most EU countries continues to rise. Moreover, this fake GDP growth does not contribute much to significantly raise fiscal revenues.
  3. In this deleterious context any containment of the public debt, let alone any lowering of it, rests on linear cuts in public spending – social safety nets and infrastructures – and on wall-to-wall privatisation conducted years after years. This is done without ever thinking to ask the rich and the private banks, which have been bailout out at a tremendously high cost on the public purse – 17 % of the GDP of the EU according to Trichet who understood that the indirect cost was much higher -, to contribute a little more to State Revenues. The only exception is the actual drive to get some 3 to 5 billion from the GAFAM; such razor-hedge budget management is intended to give the impression that the Fiscal Compact diktats are respected. One does not discontinue a program that works as expected, right? Indeed, the real purpose of the Path is to legitimise this philo-Semite Nietzschean regression and savage dispossession of sovereign citizens and nations.
  4. Suppose the financing of the debt amounts to 4 % of GDP and that the primary surplus – namely the fiscal surplus in abstraction of this debt financing – amounts to 1.5 %, then the real deficit will be around 2.5 %. This last ratio can be lowered somewhat through various gimmicks, always una tantum, the most hideous being the repatriation of evaded capital outflows enticed by a very low taxation rate, the whole thing amounting to a legal fiscal pardon for the rich. This is a rather strange way to fight the huge and systemic fiscal evasion problem (it is around 300 billion euros in Italy) let alone dubious fiscal optimisation using various tax havens and Head Offices than exist only on paper.
  5. Note that the privatisation of State enterprises brings una tantum sum of money to the State coffers but ineptly sacrifices the annual dividends which would accrue to the Treasury year after year as the sole or main owner. Often, before privatisation kicks in, State enterprises are intentionally pushed in the red to better legitimise the privatisation process with the excuse that private interests would be more efficient in insuring the right « market » price. No private buyer would ever buy an enterprise that is not profitable. Furthermore, the market is now prisoner of a short-term logic and counts on the State to provide the long-term capital needed to finance the necessary infrastructures which they then pretend to run according to the magical market logic. This logic transforms public services beneficiaries into clients who are worthy of respect only in proportion to their ability to pay. The same goes for geographical and urban peripheries. Furthermore, the logic of profit and dividends maximisation leads to financial and material catastrophes and hence to the need for the State to socialise the losses. Think of Enron but also of Fukushima – the plant had to be closed 5 years before the tragedy occurred; the closing did not happen because of the juicy dividends derived from an already paid-off costly equipment. The same deleterious logic leads to sacrifice routine maintenance and security costs as with the recent Morandi bridge in Genova.

This Fiscal Consolidation Path must promptly be thrown into the waste basket where it belongs. Together with the economics textbooks that inform it.

In the present context, a EU country could instead chose to pay the penalty of 0.3 % instead of subjecting to the deleterious Path logic. This would be done to entice other EU members to renegotiate the Treaties especially because the Fiscal Compact, the Two and Six Packs and the Fiscal Consolidation Path that goes with them did not get a unanimous approval yet. On that basis a real budgetary policy could be devised over a medium term. While the instruments would be different the objectives remain, namely lower the debt and restore the budgetary margin necessary to finance the strategic intervention of the State in the economy in view of supporting the welfare of all citizens. The main planks would necessarily have to be :

1 ) The creation of a public bank with an initial average financial lever – say of 40 to 1 – which will be lowered gradually. In this way, the management of money will be left to the ECB for the time being while the State will recover an important role in the creation and management of public credit. This will immediately defeat any speculative attack exercised in the EU through the manipulation of the spread by the big players in the « market ». Later the CDS on the public debt will have to be abolished because they are obviously absurd: the States, not the primary banks, ensure the legal tender of their respective currency. This public bank would help finance the public debt on the primary market at close to zero interest rate. It will also slowly buy and simply cancel the public debt already traded on the secondary market. This will free budget room. Similarly, it can provide public credit to rebuild the infrastructures and the industrial core and even provide the co-financing necessary to use the EU structural funds. EU resistance should be pushed aside and ignored especially by those countries which contribute more than they get back. Furthermore, Article 107 of the Tufe provides for many exceptions to the vague rule of « free competition ».

Remember that competition was already in the Rome Treaty and it was compatible with a strong State’s economic and social regulation. Furthermore, as originally proposed in my Tous ensemble, the reduction of the public debt could also be achieved through swaps debt-against-investment. A public consortium backed by the public bank would manage and guarantee the swaps while launching the necessary and long overdue public works – including the maintenance of roads, bridges, railways, sewers and sewers treatment plants. The swaps would in effect restructure the public debt over a 20/30-Year period at a low but secure return. Banks’ non performing loans could qualify but with a correct readjustment of their values, thus cleaning up part of the mess and consolidating the banking sectors with more tangible assets. No private banks should be rescued any longer without their nationalisation. This is because this nationalised public recapitalisation costs only a fraction of the present recurrent and ineffective bailouts. Just look at the crassly inept and costly Atlante Italian Fund devised to rescue relatively small financial speculative institutions which once were Banking Foundations with strong ties to local industry.

2 ) The legal reduction of the work week. This could be done at a low cost by reorganising useless exonerations to capital and many existing and inefficient social assistance programs. In fact, this is exactly what Prime Minister Jospin’s « gauche plurielle » did: its RTT did cost only 23 billions but quickly lowered unemployment to 8 % – from more that 10 %; it almost completely eliminated the deficit in Social Security thanks to the full social contributions levied on the paycheques while extending the Health-care coverage; it equally increased fiscal revenues thus providing more room for  socio-economic and cultural budgetary measures and it helped lower the public debt to 59 % of GDP, namely one percentage point lower than the Maastricht Criterion. It did so in only two years. We also did witness the spontaneous emergence of a sociology of leisure time. Conversely the economic and fiscal crisis became evident as soon as the rightwing government which followed the « gauche plurielle » suffered a loss of more than 250 000 jobs after having dilapidated most of the earlier gains. Note that any version of the so-called Citizen guaranteed revenue is nothing else than a cynical joke simply because it would have to be financed year-after-year out of dwindling general fiscal revenues. Instead the RTT creates full-time jobs and is thus based on the virtuous capital circuits induced by the institution of a strong « differed salary ».

3 ) A new anti-dumping definition based on the three components of the « global net revenue » of the households must be negotiated. The time is right given the unfolding of Trump’s tariff war. As a matter of fact, this trade war could be interpreted as a chaotic groping toward this new worldwide necessity. While this new anti-dumping would be negotiated it could be anticipated on the national or better European scale by a small import surtax intended to protect national and EU-based enterprises of all origins. Given the global organigramm of transnational firms it could also work as a targeted addition on the usual Value Added Tax duly excepting the components which enter into the ordinary consumers’ basket as well as publishing and arts. This would be legitimate since Social Affairs remain an exclusive competence of EU member States. The new definition of anti-dumping would simply be used as a interpretation norm of existing free-trade arrangements turning them into fair-trade deals without any arduous re-negotiations. As we know the WTO processes require unanimity!!!

Paul De Marco

Copyright © La Commune Inc, September 21, 2018


1 ) For the full theory see my Synopsis of Marxist Political Economy in the Livres-Books section of my old site . The term « maintenance » comes from the works induced by the Tennessee Valley Authority during the Great Depression. They noticed that after two years of unemployment, aside from the expected lack of working experience, workers accumulated serious physiological lacunae which made them unfit for the required available jobs. This realization led to the FDR’s New Deal Programs, including Public Works. It also provided the origin of modern bourgeois statistics soon elaborated upon by Kuznets.

2 ) See same section, same site.

3 ) See

4 ) The hegemony of speculation led to what I called « credit without collateral ». With the permanent bailouts of private banks, including the continuous provisioning deducted from taxation, the capitalist Central Bank’s lending propensity has become the de facto prudential ratio of the current banking system. This trend was aggravated after the abrogation of the Glass Steagall Act – 1999 – and after Treasury Paulson’s bailout of US banks – systemic and allegedly « too big to fail » – after March 2008. See « Credit without collateral » and « The Treasury and the FED » in the International Political Economy section of . For an update see « The FED dilemma » in the Category « Another America is possible » in

5 ) These falsifications are exposed in my Methodological introduction and in my Synopsis of Marxist Political Economy freely accessible in the Livres-Books section of by old site

6 ) A quick résumé is provided in the article entitled « The pseudo-economic science of the bourgeoise: Here is why we should quickly change economic paradigm », in

7 ) In the section « Commentaires d’actualité » in , see the note on Al Gore, in « Le Pacte Hulot: Nouvelle écologie du charbonnier ou pacte socio-économique communiste?  (voir aussi Al Gore) ».

8 ) For a shortcut see the « Annex » of the article referenced in Note 6 above.

9 ) The « global net revenue » of households include the capitalist individual salary, the differed salary – mainly pension and UI – and the transfers to households in terms of universal access to social services and public infrastructures. This characterised the so-called Welfare State and its more virtuous capital circuits. This socio-economic organisation was mostly dismantled by the Monetarist and neoliberal Minimal State and its destructive anti-dumping definition enshrined by all free-trade deals and by the WTO. This definition excludes any reference to labor rights or to minimal environmental criteria. For a résumé see my « Foreword » and « Appeal » in

10 ) For the statistical series on the Italian public debt from 1861 to 2015 see . For Volcker-Reagan, see my « The socio-economic consequences of MM. Volcker, Reagan and Co » March 1985, in the Category « Another America is possible » in . The fabricated crisis was caused to allow imperial crisis management in order to comfort the American World dominance after the official collapse of the Bretton Woods System during the Jamaica Summit in 1976. Trump’s policies follow the same crisis triggering followed by crisis management logic. However, this time around the fallacious promises of « asymmetric interdependence » – Joseph Nye and Kehoane and al – have been washed away and new economic rivals have emerged in a multilateral military and economic world. Planned systems relying on public credit can sustain trade and speculative attacks with relative ease.

11 ) In my Tous ensemble I addressed one other main type of inflation, imported inflation.

12 ) On Socialist democracy namely the crucial power exercised by citizens over the allocation of resources and over the production-reproduction process, which goes much further than the fake bourgeois pluralist representative democracy, see the chapter entitled « Pour le socialisme cubain » in my Pour Marx, contre le nihilisme – Livres-Books section of – as well as the section « For Cuban Socialism » in the same site. For civil rights see the second part of this book, in part translated in English as far as the Marxist Theory of Psychoanalysis is concerned (idem), as well as the essay « Mariage, unions civiles et institutionalisation des moeurs » in the Pink section of the same site.

13 ) Along side with my concept of « global net revenue » of the household, I use this formulation « social surplus value » to define the specific socialist character of the extraction of surplus value in a Socialist Mode of Production. It is derived from Marx’s crucial initial analysis of Social Funds offered in the Critique of the Gotha Programme. ( see )

14 ) Stalin did not have a Marxist theory of productivity fully integrated within the Equations of SR-ER. I was the first to demonstrate this theory – which eliminates many falsifications notably the fake so-called Transformation problem or the puerile emphasis on the Tendency of the rate of profit to fall which confuses rate for volume and even fails to notice the following chapter in Book III of Capital which addresses the reverse tendency! Making a difference between rate and volume is the only way to make sense of what Lenin following Marx called the Laws of motion of capital, notably the centralisation and concentration tendencies. Stalin took the Schema of Simple Reproduction – it remains coherent with identical v/C and pv/v in Sector I and Sector II – as its working model. He opted pragmatically for the introduction of the highest productivity whenever possible – including buying technologies from outside – and adjusting the planning discrepancies along the way. His choice was right: my coherent insertion of productivity changes in the SR-ER Equations – sectorally different v/C and pv/v – proves that the SR Equations do not need to be thought of as a special case. This explains the tremendous success of Stalin’s planning. All was thrown out by Lieberman/Khrushchev’s revisionism. See on the subject my  « Marginalist socialism, or how to chain oneself in the capitalist cavern » in

15 ) On Ecomarxism see the Introduction and the Appendix of my book III entitled Keynesianism, Marxism, Economic Stability and Growth (2005). The concept is more elaborate than the simplistic and Marginalist idea of a circular economy.

16 ) See for instance « The FED finally admits: it does not know what inflation is », in  See also « The FED DILEMMA » in the International Political Economy of  ; see also « Another America is possible » in  Note that Bernanke’s doctoral research was on inflation – in the singular.

17 ) See the Livres-Books section o . See also « Heidegger, the intimate corruption of the soul and of human becoming. » , idem.

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