Re: [OPE] FW: Paul Mason on Europe

From: Paul Cockshott <>
Date: Sun May 30 2010 - 16:20:52 EDT

Paul C
> What they are not facing up to is that a reduction in deficits
> means a reduction in the assets of the saving classes either by> taxing them or by reducing GDP till they save less.


Well, wouldn't a reduction in the budget deficit might also tend to cause interests rates to diminish which would decrease savings by that same class? It would also tend to cause the rate of inflation to diminish - depending on _how_ the deficit was reduced.

Your proposition seems to be based on a set o neo-classical illusions. I had to dispute some similar points on my economics blog a couple of weeks ago, so I am going to quote that:

I had been asked the following questions after my last posting.

" a) we have a structural deficit which requires fresh debt to be raised and b) a lot of debt repayment is met by refinancing i.e. by issuing more debt to pay the holders of gilts reaching maturity.

    Given that state of affairs, if:
    i) The Gov prints Sterling to meet payments causing inflation to rise to deliberately erode debt (if that is the proposed policy) – why would an investor the period after buy debt from a country who does that? (except perhaps at a stonking yield).
    ii) We whack a massive tax on savings. It instantly becomes less profitable to but government debt – cue mass sell off and fall in demand for future gilt offerings.
    iii) The markets crash and value of sterling drops significantly. Why has that happened? Because investors have pulled their cash out – no more demand for gilts.

    Why wouldn’t these things happen?"

I replied:

I think that these questions show a misunderstanding of the role of the Crown in the financial system of the country.
The impression is that the Crown is dependent on the financial system, whereas historically the whole financial system
from the foundation of the Bank of England grew up to service the tax and spending activities of the Crown.

The early English taxation system well described in Peter Heather’s recent book and in Menninger rested on a system of tallies. The Lords Lieutenantof the shires initially had to render taxes in kind to Crown in return for which the exchequer gave them split tallies which recorded their payment.
Tallia divendia
One side of the tally was kept by the Exchequer and the other by the person rendering taxes. Later it was found that the tallies could be used to pay directly for Crown expenditure – the purchase of naval stores etc. The merchant delivering the stores to the Crown would get a tally which they could then sell to somebody else who could render it in lieu of tax. The birch sticks having been split down the middle were proof against forgery, since only the twin of a divided tally would match it.

After the establishment of the Bank of England these wooden records were replaced by paper ones, but the essential principle has remained the same. If you are paid by the Crown you get a slip which looks like a cheque but isnt. A cheque is drawn on a bank. The Crown makes payments in the form of drafts on the Queen’s and Lord Treasurer’s Remembrancer in Scotland or the Paymaster General in England. These drafts, which now go through the automatic bank clearing system with a Bank of England sort code, can be used by the banking system to offset taxes falling due. The banks also use them as the foundation of their whole lending system. Payments by the banks are drafts on private a bank that are only ultimately valid so long as they can ultimately be translated into drafts on the Paymaster General.

At times the banking system creates more private liabilities than it can back up with drafts on the Crown – when this happens as it did in 2008, there is ultimately no recourse but for the Crown, via the Bank of England to create additional such drafts, a process with now goes under the term quantitative easing.

In the normal course of events drafts are continually being created by Crown expenditure and anulled by tax payments. If the Crown expenditure exceeds tax liabilities falling due, it offers to annull the drafts for a period in return for interest. Barney asks what will happen if there is no more demand for gilts? What will happen if investors pull their cash out?

This is to confuse the position of an individual holder of government bonds with the position of the financial system as a whole. The banking system can not ‘pull its cash out’. Its monetary base exists purely in the form of records of credit with the exchequer, managed via the Bank of England. The only thing it can do with these is use them to settle taxes, or to lend back to the Crown. And in recent months, the problem has been not a superfluity of these credits with the Crown, but a lack, hence the need for quantitative easing.

An individual firm can decide to sell UK gilts and buy US Treasury bills, which, if pursued by sufficient firms, may push down the exchange rate of Sterling relative to the Dollar, but the UK banking system as a whole has no option but to go on buying Crown instruments of debt. But as I argued before, a fall in the value of Sterling is sufficiently necessary that the Bank of England would be better to engineer it if it fails to happen spontaneously.

The banking system today hides and mystifies what was transparent in feudal society – that all are subject of the Crown and liable to duties on its behalf. We no longer have to do duties in person in Britain except in time of war. Instead we render to the Crown that which is the Crown’s: money. Because a vast private bureacracy has grown up to manage this process the illusion arises that that bureacracy – which we now call the banking system – creates money.

I did not prescribe a tax on savings, but on the saving classes. The Crown, appropriates a large part of the social surplus product. In Commercial Society, the real appropriation of the surplus — real consumption of labour and goods by the Government, becomes separated from the symbolic appropriation in tax payments. The public debt is the resolution of the contradiction between real and symbolic appropriation. It is a matter of politics and administrative capability to resolve how effectively the symbolic appropriation matches the real appropriation. Those classes currently saving, predominantly from the higher income groups, are symbolically appropriating part of the social surplus product whose real appropriator is the state. A change in tax rates on higher income groups will help bring symbolic and real appropriation into alignment.

From: [] On Behalf Of GERALD LEVY []
Sent: Sunday, May 30, 2010 12:30 AM
To: Outline on Political Economy mailing list
Subject: [OPE] FW: Paul Mason on Europe

Subject: Paul Mason on Europe
Date: Sat, 29 May 2010 15:39:18 +0200

There is a new Statesman article by the BBC Marxist Paul Mason on Europe, which may be of interest to OPE-Lers.

In the same issue, there is a good article by David Blanchflower
on the Tory cuts.

As I've argued last year on OPE-L, I don't think they will cut extremely heavily across the board in aggregate, since the math tells them that the cost-savings are not great and may even be negative. But you can rely on the
Tories to home in on every area where they think they can make net cost savings. Cost-cutting is also a neat way to take away the budgets of your opponents, it often has more to do with budgetary control. After all, those who control the budgets have the power.

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Received on Sun May 30 16:28:06 2010

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