[OPE-L:261] Copy of: Re (PEN-L:853) The strange case of the reserve loan army

Alan Freeman (100042.617@compuserve.com)
Sat, 14 Oct 1995 14:36:59 -0700

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I thought this controversy from PEN-L might interest OPE members
who are not on PEN-L
---------- Forwarded Message ----------

From: Alan Freeman, 100042,617
TO: pen-l list, INTERNET:pen-l@anthrax.ecst.csuchico.edu
DATE: 10/14/95 9:48 PM

RE: Copy of: Re (PEN-L:853) The strange case of the reserve loan army

In (PEN-L:853) The general (f)law of capitalist accumulation? Gil
Skillman writes:
In Volume I, Ch. 25 of CAPITAL, "The General Law of Capitalist
Accumulation," Marx asserts that the primary direct consequence of
the process of capitalist accumulation is to raise the wage rate. The
rest of his Ch. 25 account is based on this premise: capitalists
respond by increasing the technical composition of capital, leading
contingently to the creation and preservation of an industrial
reserve army and (in Volume III) a tendency for the rate of profit to

However, from Marx's account in Volume III, Part 4, it is clear that
interest capital also presents itself to industrial capitalists as a
cost of production, in the form of the interest rate. Other things
equal, interest costs are increasing in the constant capital
coefficient (tools, machines, raw materials) in production. Marx
states that interest is a form of "irrational" price, in the sense
that its market level is determined *ultimately* and *only* by supply
and demand (in contrast to the case for true commodities).

Fine. Then why doesn't the process of capitalist accumulation cause
the demand for interest capital to increase along with the demand for
labor power, leading to an increase in interest rates and (following
Marx's logic), a potential desire among industrial capitalists to
*lower* the technical composition of capital?

And if there is such a desire, why isn't the general law of
capitalist accumulation that capitalist development creates an
industrial reserve army of finance capital? And if such is the case,
is there a corresponding tendency for the real interest rate to fall
to zero?

I checked these references and as far as I can see Marx didn't say
that the primary direct cause of capitalist accumulation is to raise
the wage rate, he didn't say capitalists increase the technical
composition of capital because of changes in the wage rate and he
didn't say that this causes an industrial reserve army. Nor did he
give the rise in the technical composition as the main reason for the
tendency of the rate of profit to fall. He also didn't say that
interest capital is a cost of production.

However the rest of the question is interesting. It shows why a
concept of value is needed, and it is easier to debunk capitalist
logic (which Gil explains clearly, although I don't know why he feels
compelled to dress it up as Marx's) concering interest rates than
concerning wages.

Marx did say that 'in disputes between the theoreticians and the
statisticians, the statisticians are right 990f the time'. The
British Blue Book (NIA) 'Sources and Methods' says:
'A problem which has always caused some difficulty in national
accounting statistics is the measurement of the contribution of
financial companies and institutions to gross domestic product
consistent with that of other companies. The contribution to gross
domestic product [V+S: AF] of an enterprise is measured by its 'net
output' - the excess of its receipts from the sale of goods and
services [C+V+S] over its operating expenditure on purchasing goods
and services from other enterprises [C] ... the same definition
should be applied to financial companies and institutions to reach an
all industry total output of goods and services. However, the
application of this definition to financial companies and
institutions produces a paradoxical result. The contribution to gross
domestic product of a bank, for example, is the excess of bank
charges and commissions received from depositors (the only receipt by
banks directly related to the services they supply over the operating
expenses for office materials, furniture, rent, etc (their only
purchase of goods and services from other enterprises). This net
output is naturally small.

'Moreover the 'profit' [S] remaining after deducting wages, salaries,
etc. [V] from net output [V+S] in the same way as for other
industries is usually negative...The reason for this peculiarity is
that banks derive much of their income by lending money at a higher
rate of interest than they pay on money deposited with them; and in
the national accounts interest receipts and payments are regarded as
transfers and not as receipts and payments for a financial service.
This income in a sense subsidizes the provision by banks of those
services for which inadequate payment is received in the form of bank
charges and commissions.'

(UK National Accounts Sources and Methods 1985, ISBN 0 11 620199 1,
p85, my annotations)

This is how the banks appear in the UK accounts, that is, more or
less correctly and not as Gil suggests. Their receipts are presented
as a transfer income, not as trading profits. They do not arise as
the difference between sales [C+V+S] and costs [C+V]. The counterpart
of this is that in the non-financial institutions they are presented
not as a cost [C] but as a deduction from profits, along with
dividends. Obviously if the banks do not sell services, others do not
buy them.

Thus for example in 1989 the UK banks made a 'profit' of -L4,967 m.
In the same year the Industrial and Commercial companies made profits
of L101,931 m of which they paid out L42,445 m in interest, L 8 bn in
profits due abroad and 18 bn in taxes, leaving the princely sum of
L31,496 m for accumulation, or 300f their profits.

Check it out.

Of course, you can 'present the accounts' as Gil suggests. But you
won't accumulate any faster. The statisticians go on to say:
'A possible solution is to treat all (or part) of the net receipts of
interest by financial companies and institutions as being in effect
an income, in addition to bank charges, etc, in respect of general
financial services rendered. This would increase the profit incomes
of financial companies and institutions to a figure nearer to that in
their published accounts. At the same time it would be necessary to
impute to other sectors a charge for these financial services. In so
far as these purchases are made by businesses they would be treated
like raw materials or any other intermediate goods; the imputed cost
of financial services would be regarded as an additional cost of
production, and their profit incomes would be reduced by the same
amount as profits of financial companies were increased.

'If all financial services were rendered to businesses the problem
would be limited to that of determining whether the net interest
income of financial companies and institutions should be regarded as
generated in that sector or outside it.

'However, some financial services are rendered to persons and the
government, as customers of banks and as borrowers from the banks and
other financial companies and institutions. The imputed charge for
these services to final consumers would therefore have to be treated
as final expenditure, mainly as a part of consumers' expenditure on
goods and services. To this extent the imputation would involve an
increase in total final expenditure and in national income.'

So you can rewrite the accounts as they 'present themselves' to
industrial capitalists. Then you must treat financial sector receipts
as an imputed sale ('imputed' means, pace postmodernism, 'not real').
What the banks sell, everyone else buys and the payments appear in
the accounts of both industry and private borrowers as a purchase,
equally imputed and equally unreal. Then instead of showing
industry's interest payments as they really are - a deduction from
profits - you treat them as a cost like any other, a deduction from
gross income before profits.

However, it doesn't make your profits any bigger, or everyone would
be at it. Nor does it 'really' increase the gross domestic product.
Gil should have asked 'why not?'

So much for the statisticians. Now for Marx

Value analysis like the NIAs show that interest charges are
transferred profits, not a cost of production. Therefore, ceteris
paribus, if interest rates go up, the share of profits going to
industrial capital falls. Interest and accumulation therefore show
the opposite tendency to each other and whenever (real) interest
charges go up, accumulation goes down. If all profit was paid out in
interest and dividends - in the UK 450f it is - accumulation would

The capitalists do the opposite of what their theory tells them;
whatever lipservice they pay to the idea that the banks add value,
they set up a remarkable clamour for interest rates reductions when
they want to accumulate. Logically, they should applaud when interest
payments go through the roof because of the vast sums of wealth being

Of course, if banks reinvested all their receipts in industry then
interest payments would merely redirect surplus value from one sector
to another and the banks would be a sort of dole office for idle
capital. In fact their receipts go to the idle rich, whose
consumption is a direct deduction from accumulation.

Even if this were not so, the banking sector would still be a drain
on profits and hence accumulation, because part of its receipts go to
pay for bank workers, vaults, security guards, computers and so on.
These are therefore rightly characterized by Marx as unproductive
expenditure, a deduction out of profits rather than a source of
value. If the whole of the 1995 profits of society were then spent on
the costs of the banking sector, in 1996 there would be no
accumulation. This is why it is correct to say that bank workers do
not create value. [Incidentally the national accounts still get one
thing wrong: they don't show the non-labour costs of the banks as a
component of final demand, which is the only way to be consistent
with treating its labour costs as a transfer income. They thereby
understate primary profit income, but that's another story].

If interest payments really were a cost of production, that is, an
input like steel or machinery, then they would add to the value of
the product just as consumed inputs do. They could be passed on to
the consumer and would reappear in the price of the product. Suppose
Gil produces a car costing $10,000 made up of $5,000 in raw materials
and (material) depreciation and $5,000 value added by the workers,
and suppose the bank makes interest charges of $10,000. Then he
should be able to pass on these interest costs to the consumer by
charging $20,000 for the car.

But this doesn't happen, very neatly showing why the price is
'irrational' and why it really is different from the 'rational'
price of a commodity, a product of labour offered for sale.

He can try it. He has a persuasive manner, and has only to find a
patsy to put up the collateral. He would however fail to get $20,000
for the car, because of the law of value inter alia. He would either
sell it for $10,000 and hand over the proceeds to the patsy, or fail
to sell it for $20,000 and have it repossessed by the patsy (who
would then have a car worth $10,000). In either case he would cease
to accumulate or even produce.

This would for sure create an additional demand for 'capital'; Gil
would join the large band of pauperized small capitalists demanding
debt reductions, lower interest rates and more bank loans.
Incidentally I support these demands, though the loans should come
from a state bank. The working class needs an alliance with small

However this demand for additional loan capital would not be met, or
more accurately could be met only at the expense of someone else. The
immense confusion surrounding this, amplified and broadcast by Gil in
the name of Marx, can be eliminated at a stroke with a concept of
value which clearly identifies *production by labour for sale* as the
only source of new value. The only source of loan capital is the
existing capital of society, its total stock of commodities including
money. To be sure, non-money commodities such as houses and goods in
transit can be monetised by such devices as bills of lading and
mortgages. But these merely multiply the claims on the existing
commodities and no new value can be thereby created. If it could, why
do anything else?

The total loan capital in money form can of course be increased
without limit. The simplest way is to print money. But this simply
inflates all prices and does not raise by one microsecond the real
purchasing power of this loan capital over the productive resources
of society. Without a concept of value, how can you make this

The irrationality of charging a price for the use of capital does not
merely consist in the fact that it has a price and no value. It
arises from the fact that the capital is already in use, is already
paid for. Capital as a commodity has what Marx calls a 'second use
value', its use as loanable capital. But this does not cause it to
lose its first use value, nor does it absolve society or even an
individual capitalist from paying for the labour used to produce this
first use value.

You cannot have your cake and eat it; you cannot loan your money and
spend it, and you cannot borrow against a commodity which you also
sell. If I borrow 50,000 to build a house this does not absolve me
from paying 50,000 for the house. There is not then twice as much
capital in society, the 50,000 house *plus* the 50,000 in loan

As Marx points out, the existence of a credit sector 'divides the
ownership' of the single $50,000 represented by the value of the
house. It creates additional titles in the $50,000. I have a claim on
the house, which is that I want to live in it. The lender has a
further claim on it, which is that he wants my interest payments. But
his claim of $50,000 and my claim of $50,000 do not add up to
$100,000 because there is only one house, only one product of past

It is therefore not true to say that interest rates are regulated by
supply and demand as if this regulation were the same as for any
other input to production. First of all, as we have just seen, the
supply of loan capital cannot be increased in the same way as other
commodities, simply by applying labour to its production. Quite the
contrary. If everybody worked for the banks 'producing' loans there
would be *no* loan capital because there would be nothing the loans
could purchase and nothing to secure them on. There would just be a
lot of unusable IOUs marked 'please, pretty please, pay the bearer
another IOU.' Reality here is the exact reverse of appearance; the
true source of loan capital is not the labour of the bankworkers but
the labour of everyone else. The supply of loan capital is therefore
regulated by the production of everything *but* loan capital.

Nor is the demand for loan capital regulated in the same way as any
other input.

I have my own question: what would happen if there was no credit
system, that is, if the capitalists financed accumulation internally,
as they indeed did in their majority during many prolonged major
industrial expansions? Would accumulation cease? No, on the contrary,
it would go faster, because less of accumulation fund would be
gobbled up by injudicious idlers.

How then can the process of accumulation create a 'demand for
capital' since it can proceed quite happily without it?

The demand for inputs to production of course increases with
accumulation, because without inputs, you can't produce. The demand
for 'capital' is caused not by accumulation but the growth of the
credit system which is relatively autonomous and depends on all
manner of accidental and historical circumstances. If capitalists
don't borrow they still have a source of capital: retained profits.

Their thirst for loan capital is a born of two things: first and not
least by people who can't pay. Demand from this source moves in
exactly the opposite direction to accumulation, which is why interest
rates rise just before a slump, as Marx explains at tedious length.

The demand for loan capital during a boom phase results from a desire
by individual capitalists to grow faster than they can using
internally-generated profits. It is set by the pace of *mobility* of
capital and hence the pace of technical change, not the rate of
expansion as such. Quite the contrary. Individual capitals can only
achieve this supernormal expansion only by taking resources away from
other capitalists, who lend out their capital instead of using it
themselves. And these lenders not being stupid, they demand in turn a
share of the proceeds in proportion to (in fact usually *out* of
proportion to) their lending. This is *why* claims on capital
multiply or, as Marx and to his credit Engels understood, the
ownership of capital becomes increasingly socialized within the
capitalist class.

Though this may increase the *efficiency* with which capital is
applied and thereby grease the wheels of accumulation, it cannot add
to the gross wealth of society. Ceteris Paribus it acts as a *brake*
on expansion, not a spur to it. Therefore the demand for loan capital
is not at all set by the pace of accumulation and to a degree it is
the reverse.

This is the significance of Marx's main point about interest payments
in Volume III: they are not an extra component of capital but a
charge on existing capital, a deduction from value already produced.
Most of the chapter Gil cites is a careful explanation of why this is
the case.

Interest can 'present itself' (but not always) in the accounts of the
individual capitalists as a primary cost. But in this capacity it
reduces retained earnings. It reduces profit on enterprise, the
profits of the company sector and ceteris paribus the profit rate on
industrial capital. Only the banks and their political
representatives, the Thatcherites, make the ridiculous assertion that
the multiplication of loans increases gross wealth.

The logic of the Thatcherite view is that anything which makes money
for an individual creates wealth for society (except, oddly enough,
theft: I have never understood why not). Taken to its logical
conclusion, it should be possible for the whole world to exist and
indeed thrive and prosper merely by charging itself interest.

But this does not happen because the only new value in society is
created by productive workers. If all capitalists raise prices by an
amount equal to their interest payments, the result is monetary

In fact there is only one primary stream of income from the capital
employed in production, namely gross sales revenue or the money
expression of the dead labour in the product; this stream *divides
up* into its components; one part replaces consumed capital, another
part pays wages and the third part is available either for private
capitalist consumption or for accumulation. Interest payments are
mainly a further subdivision of third stream of revenue, a secondary
tributary of primary income. If I borrow $5,000 to build a car which
I sell for $10,000, the interest payments come out of the $5,000
difference; they can't add to it.

So clearly the reality is different from the appearance. Interest
'presents itself' as a cost because of commodity fetishism. But it is
not a cost. The chapter Gil cites is dedicated to explaining the
distinction, so when he eradicates it, he creates a puzzle where
before there was none. If you conflate what a thing is and the way it
appears, you will always be unable to understand how it behaves.

Finally, we can now address Gil's putative 'reserve army' of loan
capital. Unlike the reserve army of labour which pays for *itself*,
idle capital must be paid for by the capitalists. Unused loan capital
is secured on unused *commodities*, commodities which formed part of
the capital stock of society. What is 'idle' capital in this context?
It is capital whose claim on the future value production of society
lies fallow. It is idle because the commodities on which it is a
claim have fallen out of the reproductive circuit of society.

Loan capital which finances productive assets can anticipate a share
of the profits which derive from the employment and consumption of
these assets by living labour. A certain proportion is also loaned
against consumer durables such as houses which complicates the issue;
but in this case they are a claim on a share of the income of the
user of these assets, who may either be a worker or a capitalist
considered as consumer. The deployment of this loan capital still
signifies the animation of a claim on the primary income stream of
newly produced value. If the workers stop being paid, the loans which
finance their houses cease being honoured; if the businesses which
employ them go bankrupt, the loans extended to these businesses
become worthless.

Loan capital therefore becomes idle if living labour cease to produce
value. Its claim on this value becomes unrealizable; it has no life
independent of it, being a purely parasitical form of existence of
value. This is why a collapse of both fictitious and non-fictitious
loan capital always accompanies a slump. A reserve army of loan
capital would signify, and could only arise from, a reserve army of
*unused productive assets*. Gil should therefore have asked, why
don't the capitalists create a reserve army of productive assets? But
immediately the question is put this way, the answer comes forth.
Idle productive assets constitute a part of advanced capital and as
such part of the denominator of the rate of profit. The more unused
capital there is, the lower the rate of profit because the new value
being produced with this capital is pro tanto a lower proportion of
the advanced value.

Gil, in common with many who reduce capital to its physical form, has
focused his attention on its 'technical composition' which he
believes a purely mechanical function of the structure of production.
However, the organic composition of capital, on which Marx actually
bases his law of the tendency of the rate of profit to fall, includes
the entire commodity stock of the capitalists [which incidentally
includes working capital and reserves, that is their money] and if
the capitalists stop using this commodity stock, it remains a part of
the denominator of the rate of profit. If the creation of loans was
really the creation of value, it would be a kind of Munchhausen
escape route; we could inflate our way out of anything. But the
creation of loans increases neither the capital stock of society nor
the new value from which profits derive, and if this loan capital
falls idle, it decreases the latter whilst holding the former

It is true and follows from the above that a reserve army of loan
capital, corresponding to a pile of rotting machines and unsold
goods, does indeed form in a slump but not as a matter of policy and
it is no aid to accumulation. It is brought on by the falling rate of
profit combined with a period of falling commodity prices which is a
feature of every slump. When commodity prices are falling, the
purchasing power of money is rising and in *value* terms, holders of
money are accumulating. They therefore decline to commit this money,
as Keynes understood although he typically attributes it to
psychology rather than the endogenous workings of the process of
accumulation. This brings not only accumulation but even production
to an abrupt halt.

The profit rate can only be restored by the liquidation of value, by
a reduction of the capital stock of society in value terms. This is
partially accomplished by the physical destruction of unsold assets.
But just as important is the decapitalisation of those businesses
which continue functioning through the slump, but do not re-invest. A
slump constitutes a reversal of expanded reproduction, contracted
reproduction or disinvestment. At this point, Marx argues, the
formation of a reserve, not of loan capital but of *money* is the key
element in the preparation of the boom. Idle reserves of money form
from the natural process of selling without re-investing, and
initiate the boom phase in a renewed burst of expenditure on fixed

But if the only problem confronting capital was a shortage of cheap
loans, why is it that during the slump proper, as Marx points out,
society is awash with 'money' and loans are to be had everywhere, yet
no-one wants them? It is, therefore, a reserve army of money proper
that forms the basis for a the renewal of accumulation; whether this
takes the form of loan capital or retained earnings is contingent and
historically determined.

Alan Freeman 15 October 1995