CREDIT and FICTION
Kenneth Burke in his 1935 book Permanence and Change was probably not the first to point this out. But he did it very nicely, imagining a number of Wall Street financiers in the middle of the depression sitting in a room discussing problems of belief.
Ever since, journalist and television commentators wanting to look smart point out to us that the word credit means ‘belief’.
Given that the fundamental notion of credit is that I have some extra money lying around and you need to borrow some. So I lend you some with the belief that you will pay me back at some fixed time.
Or I let you have some goods with the belief that you will pay me for them at a fixed later date.
To this we can add the notion of “interest”, payment for the use of my money. This is such an unnatural notion that the Catholic Church made it a sin, and Ezra Pound’s life foundered on the discovery that it was the root of all evil. For money, according to this view, was not fundamentally something you could buy or sell. It was what you bought and sold FOR.
But even with interest charges the only credit necessary was the belief I had that you were a person who would pay me back.
So it was a shock in Economics One – to discover that the money I put in
the bank was not just lent out to others. For when the others deposited the money that was lent them it did not sit there, but in turn was lent out to others. (Minus the reserve requirements necessary to cover moments when a bank might need to have money on hand if a number of its customers asked for money at the same time. Or worse if they pulled their money out in a loss of “belief” that the bank would still have their money the next day. Say twenty percent was held back which covered most problems unless everybody wanted their money all at once – a “run” on the bank which clearly did not actually have their money in the building. (At which point the bank failed and all the supposed money simply disappeared.)
So when all went well the second bank was in actuality lending out “my” money twice.
And the money that was lent was again deposited, and that money was lent out again, minus a reserve which in reality some banks did not keep at a safe level. So this process continued until the holding of “reserves” depleted the amount available to lend to zero. If we assume a 20% reserve then
the process could theoretically take place until the total amount lent by all these banks combined could equal several times the original money I
deposited in the bank. Money which had no physical reality anywhere.
The system was playing with about five times the amount of money it
“really” had to play with.
And this was and is called a “sound” economy. And has been since banking was invented on the Rialto bridge in Venice in the 14th or 15th century.
But of course there have always been those who were not sound, who found ways to get by lending say 95% of the money they received in deposits.
I remember one of the great New York real estate moguls in the 1950’s
saying that if you didn’t get credit of $99 for every dollar you actually put
down, then you were a loser and could not make money.
And then there have always been the outright swindlers like Bernie Madoff.
But what I have been describing is just the sound normal base of the
economic world we think we live in. And that includes bubbles such as
the Tulip bubble in Holland in the 17th century when one Tulip bulb could cost a years salary or the price of a house. Until – that is – people stopped believing they could always sell their tulip for more money tomorrow no matter what it cost today. And then the crash came. And the loans were not repaid and all the fictional deposits disappeared, and everything shut down.
But clearly what I have described is a primitive world, a far cry from the
layers on layers of fictions with which we manipulate today.
So if that world was a house of cards, how much more unreal is our world today. Our world of repackaged sliced up mortgages where nobody knows who owns what. Where the lender does not keep his loans but sells them off combined with others, in pieces, almost immediately so he has no care for what happens to the loan, the property or the borrower.
And of course this is a tiny snippet of the fictions by which our world now operates. In the last five months we have been privileged to participate in a lesson in how the financial system and financiers and world leaders operate that few in the history of the world have had a chance to study so clearly.
And yet they raise us and still want us to believe in a world in which money is solid, in which thrift and hard work for wages is a virtue, and that a waster’s life will surely lead to damnation. Which, if you do not have your wits about you, and considerable luck it surely will.
For what other kind of fiction can we have as a fundamental belief than my relation to you and yours to me, in the reality of our money and our house and our children. So we must give credit to this world which has made us so “prosperous” – those who had only the fruits of their labor and honest debts were indeed poor. But we have learned to recognize that this world of ours and we ourselves are on loan.
There was a time in history when indeed we were on loan. When we were the surety for loans, when we could be claimed as payment and become debt slaves. “We” have made a law against that in modern times – and such laws show us the way towards making a safer and more reliable world – if we don’t get caught in a nucear blast or a building collapse or an envelope with a little white powder doesn’t land on our desk.