"Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to communism."
- Karl Marx, 1867
This seems to look like what we have today, but it seems impossible for Marx to predict how the world will evolve in the 21'st century when he was wrong about pretty much everything else.
The world was still under the gold standard, and he wasn't talking about the USA where there's a FED, etc.
So what exactly did he have in mind when he said that?
Some people are doubting that this even is an actual Marx quote.
See the following comment:
xSFx:Owners of capital will stimulate the working class to buy more and more expensive goods
Marx is not making any logical connections here. This is a completely unsupported statement and it is not particularly difficult to see the flaws in Marx's absence of reasoning... since he is not conducting any reasoning the flaws are quite obviously and necessarily in the faulty premises that he assumes.
Marx assumes (he does not argue) that owners of capital will cause/force people to spend more than they can afford. However he omits that in a free market, consumers will also cause/force owners of capital to sell their goods ever and ever cheaper... which brings balance to the economy. Indeed history would suggest that if anything the consumers will always get the upper hand since, in the absence of fiat currency prices have historically fallen very consistently (Adam Smith conducts a very thorough analysis of this in The Wealth of Nations).
Further, Marx incorrectly assumes that consumer's purchases must be financed by debt. Where interest rates rise above the ability of the public to finance debt people will quite simply stop borrowing. I suspect that at the time of Marx's writing borrowing was much less common even in industry than it is today. Have a read through the opening chapter of Stefan Zweig's Le Monde d'Hier (that's the French title - I'm guessing it's called "The World of Yesterday" or something in English) and you'll get an idea of what I mean.
xSFx:The world was still under the gold standard, and he wasn't talking about the USA where there's a FED, etc.
In the United States no central bank existed in 1867. However the Bank of England was established in 1694 and was hardly the first attempt to establish central control over a coordinated banking cartel. Further, the root cause of bankruptcies is the fractional reserve system and legal tender laws, rather than the central bank per say. When all the banks are obliged to use the same legal tender, it becomes a race to the bottom as each bank tries to expand it's issue of certificates of deposit as quickly (if not quicker) than it's competitors. For when a bank fails to issue new certificates of deposit and their competitor succeeds in doing so, the bank's assets are devalued for the benefit of their competitor.
Marx states that the only way to deal with the defaulting of banks is to nationalize them. Once again this is merely dogma and no reason or logic is contained in this statement. In fact, if legal tender laws were repealed and if the government simply took a hands off approach to the banking sector (refusing to act as the lender of last or to lend any form of helping hand to the banks) then banks would not be in a special category apart from other businesses and the failure of one or any number of banks would not present any serious threat to the financial system.
In the absence of fractional reserves implicitly or explicitly backed by the government (and thus tax payer's money) banks that held insufficient reserves to cover their deposits would no doubt fail fairly rapidly. Depositors in those institutions would no doubt lose their deposits and banks that paid interset on deposits would come to be, correctly, identified essentially as investment companies (with a risk associated with them) rather than as safe houses for money. People who were willing to continue to risk potentially losing their savings would continue to hold accounts at investment banks and people who did not wish to risk their savings would choose instead to keep their money at money warehouses (where perhaps they would be required to pay a storage fee).
In time, banks with good practices would emerge to replace the cowboys that kept minimal fractional reserves and there would be absolutely no reason to have the government involved in the market for money whatsoever - much less to nationalize the banks.
Marx's writing therefore highlights shortcomings not in the free market system but in the system of socialism itself - for our current banking industry is essentially the most socialist of all the industries that we maintain. The central bank has a government created monopoly on issuing legal tender (the product) and through this monopoly they control the prices (interest rates). There is no notion of profit and loss, since banks are not permitted to make losses (they can only make profits - losses are covered by the tax payer). Does that sound like a free market to you? Is it any surprise that such a system is failing?
Once again, although the central bank may not have existed in the United States at the time of Marx's writings, the Bank of England has existed since 1694... so socialist banking systems were already well established in Europe at the time of Marx's writings. It is ironic that Marx himself should have identified these fundamental weaknesses of the socialist nature of central banking.
xSFx: "Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to communism." - Karl Marx, 1867
Yeah it's an email doing the rounds. Note that the source is not acknowledged, instead the author just wrote "Karl Marx, 1867" underneath. More:
http://cedarlounge.wordpress.com/2009/01/28/marx-not-as-we-know-him-or-why-bother-quoting-from-das-kapital-when-you-can-make-up-any-old-rubbish/
Irish Liberty Forum
In time, banks with good practices would emerge to replace the cowboys that kept minimal fractional reserves
xSFx:What would be optimal fractional reserves? What's the difference between keeping _some_ fraction of the money and FRB?
That's not the difference, that's the definition. Fractional Reserve Banking is the practice of maintaining only a fraction of the reserves required to honor all deposits on hand at any moment.
As for what the optimal reserve rate is, I don't think you can prescribe it. Rothbard would say 100% and, indeed, that's the only figure that will absolutely guarantee the solvency of the banking institution (any less and you're exposed to some extent to a bank run). In a free market, banks that kept less than was necessary would quickly fail - so the market would find a solution that would at least prevent the regular insolvency of banks - whether that would be 100% or not is hard to tell. Perhaps 90% would prove to be adequate over the long run - no one knows.
There is some disagreement in the Austrian school about whether 100% reserves should be enforced by law or not. That's a technical argument that revolves mostly around an interpretation of the nature of the contract that is formed between the depositor and the bank. If it truely is a "deposit" contract then historically the depositee would not have the right to dispense with the deposits or use them for their own purpose for the duration of the deposit contract... so the historic legal interpretation of a deposit contract is that no this should not be allowed (that was what I got out of the opening chapters of Huerta de Soto's book anyway). Rothbard also argues that the creation of false certificates of deposit (i.e. maintaining less than 100% reserves) is called embezelment in any industry except the banking industry. He notes that this crime was punishible by death when discovered with regard to grain receipts etc. and that the common law made two separate and contradictory decisions on this matter (obviously in two different courts with two different judges) in the cases of grain and money... If you're interested, grab a copy of "The Case Against the Fed".
The other side of the Austrian school argues that if banks want to keep less than 100% reserves that this is perfectly OK. In this case, the banks are basically investment companies and depositors are investors who are taking a risk. Personally, I think that as long as this fact is made known to depositors and no special privilege is granted to the banks (government doesn't come in and rescue banks/depositors when they do lose money) and other banks aren't forced to participate in the system by having their own certificates devalued by this behaviour (e.g. through legal tender laws) then this camp in the Austrian school are perfectly correct. However I'm not entirely certain that such "investment" banks should be able to call their accounts "deposit accounts" in this case, since that is rather misleading (in view of the historic and precise legal meaning of the term "deposit").
On average, banks around the world today keep around 3% reserves - but even with government guarantees and special privilleges this is obviously a little shy of what they really require. If they were operating in a totally free market then most banks around the world today wouldn't exist - they would have gone out of business many many years ago. They are but extremely well paid extensions of the government today though - not free market entities at all. They are private in name only - like the businesses of National Socialist Germany during the second world war.
Indeed. The attribution to Marx in 1867 imples that it was part of Capital, which he first published in that year.
A site search on http://marxists.org doesn't appear to turn up anything that would lend credence to this rumor.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
other banks aren't forced to participate in the system by having their own certificates devalued by this behaviour (e.g. through legal tender laws)
Juan:Anyway, phony credit, bank failures and bank socialism are nothing new. See, for instance, John Law. (~1700).
Or ancient Greece.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
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