The credit system
The credit mechanism began in the first period of development of capitalism in order to bring solution to the needs of commodity and capital trade. Emerging as the modern system of lending/borrowing the credit mechanism was a reaction against the usury of the old times. This situation was an expression of the interest-bearing capital adapting itself to the conditions and needs of the capitalist mode of production. The credit institutions began to appear from the twelfth and fourteenth centuries in the city-states of Venice and Genoa where capitalist commercial relations made an early start. This development enabled to save the wholesale sea trade from the old system of usury. Also in the seventeenth century in the Netherlands, which was the model of economic development then, credit money thrived to break the monopoly of usury capital. These developments were also a harbinger of modern banking system. With the development of trade and capitalist mode of production the base for credit system expanded and became prevalent. Credit became diversified in time with changing needs and eventually set to serve capitalism with different forms such as commercial credit, banking credit or investment credit, housing credit.
Historically commercial credit is the essence of the credit system and has the aim of satisfying the needs of the capitalist reproduction process which comprises the whole processes of production and circulation. Spreading of capitalist commodity production and trade distanced the purchase and delivery of goods, seller and buyer, and hence commercial credit has become an indispensible element of capitalism. Within the chain of diversified commercial relations capitalists constantly give and take bills of debt. The purpose of these credits is to get the money equivalent of the commodity produced before the actual selling of it, thus realizing the value of it at once, and maintain without interruption the capitalist business process by means of the bills of debt traded and transferred in buying and selling during the process of circulation. These credits between capitalists are represented by trade bills with a due payment date.
Capitalist process of development accelerates development of banks as well as commercial activities. With the development of banking activities individual money savings of small sizes, which cannot play a role as money-capital by themselves, accumulate in banks as massive aggregates. These reserves accumulated in the hands of banks are the source of credits (debts) given to individuals and institutions for various businesses, investments and needs. Because the interest rate of the money they lend is higher than that of the one they borrow, banks or similar financial institutions make massive gains apart from their other important economic activities such as investment partnerships. Capitalist development leads gradually to separation of the ownership of capital and entrepreneurship. This results in an increased number of entrepreneur capitalists around, in need of investment credit, which makes banking credits more and more important.
The credit system accelerated the circulation process and successive phases of capitalist production process. There is a directly proportional interaction between the operation of credit mechanism and the phases of expansion and contraction of capitalist production process. Expansion in production expands credit and, on the other hand, development of credit mechanism leads to an increased scope and speed of industrial and commercial transactions. In periods of boom and upswing regular repayment of credits by debtors is ensured. As far as these conditions hold the credit system keeps expanding its operation. However when the time of crisis comes we see disruptions in repayment of debts which means serious delays. Now there are halts in capitalist process of reproduction and therefore the problems created by credits are added those losses due to the decreased credit demand for new businesses to boost the capitalist economy.
Marx, in those chapters of the third volume of Capital, which were compiled by Engels, threw light upon the role of credit in capitalist production in an amazing accuracy and farsightedness, and he did this in an earlier historical moment from the standpoint of the development of this role. Thanks to his efforts secrets of a mature capitalist operation with deepened inner contradictions have been worked out. As Marx noted credit system accelerated the process of concentration and centralisation of capital and consequently individual private capital institutions which had dominated the earlier periods of capitalism lost their importance and stock-companies gained prominence. Credit system not only encouraged individual private capitalist enterprises to become stock-companies, which made ownership a joint one, but it also laid the basis for their spread and expansion on a national level. Hence the credit system became the lever for transition from the free competition period of capitalism to monopoly capitalism period and for monopoly enterprises to establish their dominance on a national scale. Obviously this development did not remain within nation-state barriers and there arose, with time, big monopolies having international dominance. In this sense the credit system is the creator of huge stock-companies sweeping away the individual private capital, of monopoly capitalism, of the imperialist stage of capitalism, and consequently, of capitalist globalisation.
Analysing the dialectical consequences of the development of stock-companies Marx threw light upon opposing historical functions of it. While stock-companies accelerate, on the one hand, the development of capitalism, on the other hand they become the capitalist form of the need of social ownership imposed by the growth of productive forces acquiring a social character. Marx notes that this form could be termed as temporary forms preparing the transition from the capitalist mode of production to the associated one and makes very important remarks in this context. First, these companies create an enormous potential for the expansion of the scale of production and enterprises, which is not possible for individual private capitals. Second, capital which leads to social concentration of means of production and labour power assumes the form of social capital thanks to these joint-ownership companies as different from individual private capital. This situation is, in a sense, abolition of capital as private property within capitalist production, in other words, negation of capitalist mode of production within the framework of capitalist mode of production itself. Third, this development replaces the former capitalist who has an actual function in the process of production with mere managers administering other people’s capital. And it eventually turns certain capital owners into mere money-capitalists.
Obviously, as stock-companies develops and becomes common the function of capital is divorced from its ownership. And during this process labour is divorced completely from ownership of means of production. In other words, small property owning producers are divorced from the means of production once they had and turn directly into wage workers. Stock-companies prepare an objective base which forces all the functions performed in the framework of capitalist ownership in the production process turn into social functions that indicate the future mode of production. The development and spread of joint-stock companies create big monopolies in decisive industries of production, also requiring a higher level of state intervention in economy compared with the past, despite all kinds of liberal rhetoric. In the process of capitalist development stock-companies that signify the domination of finance-capital lead to creation of a new finance aristocracy, money speculators. On this basis a different type of parasitic stratum from the old times takes shape. Joint-stock companies turn the age of finance-capital into a downright system of gambling and swindling through stock speculation.
The credit system is the principal factor which has accelerated all these developments, their spread and the process on the whole. Credit mechanism offers to the capitalist a means of absolute control over the capital and property of others, and thereby over the labour of others. The transition from a level of relations that dominate earlier periods of capitalism, resting upon capitalist’s individual control over his own individual private capital to this level of control over social capital means that finance-capital has the control over social labour. Marx points especially to the fact that all morals that belong to the period of individual control of capital have disappeared. For instance, what the speculating wholesale merchant risks now is social property, not his own property. Excuses which may have served to justify capitalists in earlier periods, such as the phrase relating the origin of capital to savings, are refuted. Because what the finance capitalists demand is that others should save for them and they seek to make big fortunes by gambling on other people’s money.
While this development of capitalism into finance capital domination increases the concentration of capital on the one hand, it led to the process of abolition of individual private property on the other hand. The abolition of private ownership of the means of production extends here from the direct producers down to the smaller and the medium-sized capitalists. Private property once was the point of departure for capitalism, now the accomplishment of the abolition of this ownership becomes the goal of capitalist mode of production itself. Obviously, as capitalism develops, it turns capitalist ownership from individual private ownership into collective private ownership. Then even under capitalism, as social production develops means of production cease to be the means and products of private production. And as if to demonstrate that they are products of social production process, they assume the form of a capitalist social property (collective capitalist property). However this expropriation that takes place within capitalist workings against individual private property never establishes a genuine social property. On the contrary, it assumes the form of appropriation of social property by a tiny capitalist minority.
Credit system lends this minority more and more the character of, in Marx’s words, a mere bunch of adventurers. And transfer of property becomes purely a result of gambling on the stock exchange, where the little fish are swallowed by the sharks and the lambs by the stock-exchange wolves. By the potential of expansion it created the credit system keeps forcing the capitalist reproduction process to its extreme limits, which would bring about eruptions of historical importance. This system procured both the development of means of production on a world scale and a unified world market. By doing this it necessarily lays the material foundations for a new mode of production. While it appears to do a great service to capitalism it aggravates and concentrates the contradictions and crises of capitalism. It develops enrichment to the point of a pure system of gambling and swindling, on the other hand it reduces more and more the number of the few who exploit the social wealth. Hence the credit system ripens the contradictions of capitalism to the point of necessitating its overthrow. As an irony of history, it could be said, the credit system itself which is regarded so high by capitalism performs a historical function bringing about the end of capitalism.
A worn-out credit system
Acting always in search of maximum profit capital cannot fit the scale of production to the purchasing capacity of the masses. The gap between planless and uncontrolled growth of capital and limited consumption (under-consumption we may call) of the masses widens up. Also on this basis, the capital invested in production hardly returns and reproduction of capital becomes to a large extent dependent on the speculative gains of unproductive capital. Capitalist crises arising out of such unbalances and contradictions are in essence manifestation of over-production of commodities gone well beyond the purchasing power of the masses. As Marx underlined, the ultimate reason of all real crises is the poverty and limited consumption of the masses. It is the credit system that tries to mitigate the menacing consequences of the gap between the limited capacity of the masses and tendency of capital to over-produce. Although it has been able to perform this function for a certain historical period, crises of capitalism inevitably reach destructive dimensions despite the credit mechanism.
Bourgeois economists are unwilling to accept such kind of realities that are inherent in capitalism. In general they tend to dodge the problem by ascribing crises to wrong economic policies, to deficiencies in financial system or to bubbles in credit mechanism. The reason for such analyses and comments are accepted by the public is that the capitalist crises initially appear as mere credit and money crises. Because, while a crisis is in the making in the capitalist production process, banks and big financial institutions face deadlocks with enormous dimensions that threaten them due to the fact the debtors become unable to pay their credits back. With the stoppage of credits one after another the crisis hinders the production process and manifests itself on the surface with eruptions hitting hard the big banks and finance monopolies.
When it is carefully examined, it would be seen that the source of capitalist crises, in the final analysis, is the production process. Therefore those crisis analyses that are not based on production process end in a point of nonsense. Typical examples for such analyses are those approaches that ascribe crises to mere speculative plays in the financial system, claiming at the same time that capitalism does not pay much attention to industrial production any more. Such approaches come to mean, as Marx expounded in a striking way, that capital can yield interest without creating a surplus-value and thereby completely wrong. If a great majority of capitalists withdraw their capital from production and turn it into mere money-capital, with the idea that interest-bearing capital creates profit on its own right without the troublesome production process, there would be a great depreciation of money-capital and a huge fall in interest rates. In the end, most of the capitalists would be unable to lead their lives on incomes based on interest and consequently the capitalist cycle would necessarily force itself again to function on its productive foundations. And, as most of the capitalists cannot become money-capitalists a considerable part of them would turn industrial capitalists.
As is seen, Marx analysed the laws of the operation of capitalist economy in an unmatched accuracy and profoundness. And the frivolous theories invented by bourgeois economists completely lack the quality and power of passing the test of realities. This aspect of the question is evident especially in periods of great crises of capitalism.
Credit mechanism is a phenomenon developed and become common as a product of modern capitalism to overcome the obstacles raised by inner contradictions of capitalism. In retrospect, credit system indeed served, beginning from the period of development of capitalism, and especially over the course of the imperialist stage, to mitigate, to a certain extent, the problems arising out of the inner contradictions of this mode of production. However as demonstrated clearly by the present system crisis, unless the inner problems are solved –which is impossible as long as capitalism exists- it is inevitable that the mitigating mechanisms wear out with time. And this is what happened with the credit mechanism. The credit system which was supposed to play a positive role from the standpoint of capitalism by accelerating the process of reproduction, has triggered over-production crises with such concentration, scope and depth that capitalist system finds itself increasingly unable to cope with.
Therefore, while it is true that the expansion in credits enabled capitalism for a certain period a possibility of upswing which appeared endless, it is equally true that the negative side of the credit system gradually dragged capitalism into a deep system crisis. Although the credit mechanism is employed at full swing at present compared to the past the gap between capitalist over-production and the limited consumption capacity of the masses has now reached unbridgeable dimensions. Hence capitalism has been dragged into a historical deadlock where old curing mechanisms do not work as expected. This historical loss of power of the credit system which once saved capitalism is an extremely important reality of the present day, which must be paid a special attention.
This crisis of capitalism and the credit system suggests the tendencies of development remarked by Marx many years ago. It would be useful to remind here briefly what Marx indicated in this context. Credit system is objectively a powerful lever from the standpoint of the transition from the capitalist mode of production to the socialist mode production. Breaking the narrow limits of capitalist distribution within the framework of capitalism credit system serves to pave the objective base for the relations of division of the future society. Development of the credit system to a certain stage of maturity manifests itself, as experienced today, with deep crises and social upheavals unprecedented hitherto.
Capitalist mode of production is now faced with a situation where the contradiction between the means of production that has assumed a social character on a world scale and the capitalist relations of production is now objectively matured to the point of causing big violent eruptions. To the grief of the proponents of the capitalist order and to the joy of all revolutionaries over the world, capitalist system is indeed in a deep deadlock that would trigger inevitable revolts of the working masses in all countries. Once progressive capitalism has now turned into a destructive fetter for the humanity to advance. The present capitalist system crisis is much more serious and deeper than the past crises. This situation manifests itself in the credit system being worn out which makes the world bourgeoisie very worried and points to the impasse of capitalism. This historical moment is also the expression of the fact that capitalism is now approaching the end of the game of avoiding the problems, created by the inadequate purchasing power of the working masses resulting from the capitalist relations of distribution, by means of credit mechanism.
As can be seen by considering carefully, the opening of the twenty first century heralded the beginning of a new era of great upheavals pregnant with deep social transformations all over the world. And the series of staged events around the scenario of “attacks” on Twin Towers on 11 September 2001 have been the signal flare of the era of the third great repartition of the imperialist capitalist system. While capitalism drops bombs over various peoples of the world under the pretext of “war on international terror”, the work of the dialectics of social history is accelerated. While capitalist system resorts to “Shock and Awe” operations to avert its crisis, the mace of history is accelerated in the direction of dragging the bourgeois rulers to shock and awe.
A new revolutionary situation is in the works all over the world as the harbinger of a new future. The sense of revolt in the heart of the broad masses evoked by illnesses of capitalism such as inequality, injustice and persecution ushers in an era of great social revolutions to change the fate of the world. It is becoming more and more obvious that the only solution of social problems is through overthrow of capitalism and bringing about socialist relations of distribution throughout the world. With all its signs socialism winks at humanity through the dilemmas of capitalist system!