Britain: Why and How to Nationalize the Banks

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Last September 2012 the British Trade Union Congress (TUC), at it’s annual meeting of delegates from the whole trade union movement p assed Resolution 27. For the first time in its history the TUC voted a resolution which called for the full public ownership of the banks and financial institutions. This resolution built on similar ones that had been passed at trade union conferences in 2012, in particular those of Unite the Union and the UCU.

“The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about "regulating economic life" and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the "common people" by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.” V.I. Lenin. - The Impending Catastrophe and How to Combat It.

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The Unite Resolution 1 on the Economy agreed to prioritise a campaign for “democratic control of the banks and financial institutions” as well as for the “campaign to also be directed at the non-state owned banks and to include the demand for their nationalisation.” UCU motion B14 stated that “the capitalist system caused the crisis” and that “banks and finance houses are not fit for purpose and should be taken into public ownership under democratic control.”

In addition to calling for public ownership TUC Resolution 27 also called upon the TUC to organise a through inquiry into the banking crisis. In other words it echoed a call often made by trade unionists when confronted by intransigent bosses pleading poverty – Open the Books!

Furthermore, on two levels Resolution 27 should mark a decisive shift in the battle against the government. Firstly, it deals with the issue of policy. Over the past year almost all of the discussions in the labour and trade union movement have been about tactics, in particular the tactic of the general strike as a means to stop the austerity policies of the government.

Strike

This is not to say that the question of a general strike is not important. However, for many in our movement, unfortunately, it has become a panacea – an all ills cure for the attacks on the standard of living of the working class who are being made to pay for a capitalist crisis that they did not cause. This tactic has been elevated to the status of a programme, a goal, rather than simply a means to a goal and motions on the general strike that have been passed up and down the country in trade union branches and trades council meetings have been devoid of any political programme.

Secondly, our labour movement now has something concrete to fight for rather than simply being against austerity. One of the accusations levelled against us by our enemies in the capitalist press is that we are always against what the Coalition is doing but we do not say what we would do. For the first time Resolution 27 poses the possibility that there is a real alternative – if we in the movement are prepared to fight for it.

It was no accident that at the TUC Congress Resolution 27 was moved by the General Secretary of the Fire Brigades Union (FBU), Matt Wrack. Over the past period Matt, along with Mark Serwotka of PCS, Len McClusky of Unite and Bob Crow of the RMT, has been at the forefront of the battles against the austerity policies of the ConDem (Tory) government.

It is in this context that the FBU has now produced a pamphlet entitled “It’s Time to Take over the Banks – a contribution to the debate from the FBU”. This is an historic step forward and the FBU should be applauded by all in our movement as the pamphlet serves two purposes: it is an expose of the rottenness of the banking and finance sector and therefore justifies the need for public ownership. However, it is also an invitation to discuss the issue at all levels of the industrial and political wings of the labour and trade union movement.

Tone

The introduction, written by Matt Wrack, sets the tone. Working people everywhere are facing “horrific attacks on living standards” and these attacks are supported by governments, employers and international bodies such as the IMF, ECB and the World Bank. The policies of austerity have been held up as the solution to the crisis but they have failed. We need to set a different agenda.

We all know that the crisis was “sparked by the banks” but while we suffer cuts the top bankers get “disgusting…bonuses” and billionaires “are still avoiding paying their fair share of tax.” Given these policies we “face mass unemployment”, the “growth of poverty” and “food banks” in one of the richest countries in the world. Right from the outset, however, we are told that the pamphlet “does not intend to address or answer every issue that arises from the crisis and the role of the banks within that process”. This is important as it explains a glaring omission that we will return to later.

Time and time again we are told that the “private banking system has failed” and that what we need is “a publicly owned finance industry”. Until the crash of 2008 the banks were involved in “an orgy of swindling and speculation” that created “toxic assets (that) served to poison the bloodstream of the world economy”. It started with “sub-prime mortgages” and ended with the Labour government bailing out the banks with “cash of £133bn to restore (bank) capital”. The total level of support in all forms was nearly £1.2trn and of the original cash outlay only £14bn has been recovered. The point is made: “The banks made the mess, but workers are made to pay to keep them afloat”. “The cuts, job losses and falling living standards are a direct result of the crisis sparked by the banking system”. In 2009, Mervyn King, Governor of the Bank of England, paraphrased Churchill when speaking about the estimated bailout with public money, “Never in the field of financial endeavour has so much money been owed by so few (the bankers) to so many (Joe Public)”.

Facts

We are given facts and figures that show that despite the crisis being “triggered” in 2008 as a result of the role of the banks, the scandals continue – Libor, PPI, money laundering, incompetence, scandalous bonus payments and tax avoidance. The Tax Justice network estimates that “between £13trn and £20trn in financial assets have been hidden from the world’s tax authorities in offshore banks.” And that does not include physical assets such as “art, yachts and mansions.” These assets could “pay off government debts, pay for investment in public services”….and “fund economic recovery”, and as the pamphlet says, “Public ownership and democratic control of the banks will put an end to these scandals.”

Banks are not lending despite historically low interest rates. They have £6trn in funds. “This is equivalent to the amount that more than 60m British people produce in four years.” This money could be used to build houses and not make people homeless. It could be used to create jobs and rebuild the economy but instead “finance chases around the globe seeking out the maximum profit – driving down wages, exploiting children, destroying the environment – all in the endless search for profit.”

Public Ownership

The pamphlet demonstrates the potential advantages of public ownership of banking and finance: “a cap on the ratio of the highest paid employee to the lowest paid,” the return of surpluses to the “public purse” and not to “private shareholders,” the return of lending to the public and small businesses and the “handling of people’s money honestly.” It also shows how regulation has failed in the past as “banks will always get round these regulations”. Splitting or breaking up banks will also not work as the “banking system is so interlinked that a crisis anywhere threatens to disrupt the whole system”.

The cost of nationalisation is also dealt with. “At current market rates (it) would cost about £55bn, or just 3% of UK GDP”. That presumes, of course, that we decide to pay compensation to people and institutions that have swindled us out of our money! As the pamphlet says, “there should be a public debate on the issue of compensation” and “shareholders should be subject to a means test on their compensation, as benefit claimants are at present”.

Mutuals and cooperatives also come into the picture but it is also shown that demutualisation has “worsened the service and increased the risks within UK banking” and that today the banking scene is now  completely “dominated by the big five – Santander, HSBC, Barclays, RBS/NatWest and Lloyds/HBOS.”

Banking in Britain has therefore also led to a greater concentration in the system, job losses and a worse service. Even when it comes to taxation the banks get more in bailouts than they pay in tax.

Living Standards

The pamphlet concludes by stating that since 2008 living standards have been cut by an average of 13.2%; that the growth of jobs has been mainly low paid, temporary and part-time; that austerity means a shift of wealth from the majority to the wealthy minority and the policies of the Coalition have failed. However, it also says that: “Taking over high finance is the beginning of the way to change society for the better, it is not the only thing that needs to be done, but it would be central to any serious plan to rebuild the economy in the interests of the majority”. The final message is stark and truthful. The “economy does not exist to provide jobs for workers or to deliver growth. It functions to produce profit for a tiny minority, regardless of the needs of the rest of us”.

What the pamphlet does in its entirety is to show that the economic system we have is owned and controlled by a tiny minority whose sole purpose for existing is to produce profit for the tiny minority.

This is capitalism yet, strange to say, the word capitalism does not appear anywhere in the pamphlet. It talks of “those in power,” “a wealthy minority” and producing “profit for a tiny minority.” This could describe any class based society. What the pamphlet describes is what happened and is happening in capitalist society, yet the word is not mentioned. Would a rose smell as sweet by another name?

Even more, the pamphlet talks of the banks having “triggered the crisis”, that the “worldwide economic crisis was sparked by the banks” and the “chaos sparked by the banking system”. This is not a question of semantics. If the banks “triggered” or “sparked” something, there was something that was waiting to be set off, some explosive or combustible material.

Yet this is not mentioned and for me this is the shortcoming of an otherwise excellent pamphlet. In short, we have a description of what happened but not an explanation of why it happened.

What is that material that is missing? It relates to the nature of our capitalist society, the private ownership of the means of production and the exploitation of the working class.

Right at the start of the pamphlet reference is made to the sub-prime mortgages scandal where “mortgages were issued to people who couldn’t possibly afford them.” Why? Why were some people allowed to take out a mortgage to buy a home when they were not able to pay back the loan? This is the nub of the crisis that needs to be explained.

Production

Under capitalism the driving force for production is profit for the owners of the means of production. So if £100 worth of goods is produced, part of that worth or value will be paid in wages and part in profit. Given that workers will never be paid the full value of what they produce, they will never be able to buy back all that is produced. This leads to a stockpile of goods or overproduction.

Under capitalism this can be temporarily overcome through credit where you borrow today to buy something, but tomorrow you have to pay the loan back. So through credit you can expand the market today but at the expense of contracting the market tomorrow. With “sub-prime mortgages” credit was advanced to buy up a stockpile of homes that people could not afford without credit. But in theory banks could only lend what had been deposited by savers.

What in fact happened was that banks were set free to create money unrelated to their capital assets. Jim Bendell, a professor at Cumbria University, has shown that only 3% of money in circulation, in the form of notes and coins, is produced by governments. 97% of money is created by the banks out of nothing. This fuelled the credit boom.

Banks borrowed from each other to lend to people who at some stage would not be able to pay back the loans. As Mervyn King explained, on May 2nd, 2012, at the BBC, “Our banking and financial system overextended itself……banks were lending too much….most of that increase in lending wasn’t to families or businesses, but to other parts of the financial system….to finance this banks were borrowing large amounts themselves…by the end of 2006 some banks had borrowed as much as £50 for every pound provided by shareholders… banks got bigger…their balance sheets rose from about one-half to more than five times our national income in a generation...in order to expand banks made increasingly risky investments… they started making huge bets with each other on whether loans that had already been made would be repaid.”

Money

If you are religious, at this stage you might echo the words from Job 15:6 in the King James Bible, “Thine own mouth condemneth then and not I: yea, thine own lips testify against thee”. What an indictment of capitalism and the banking sector from the mouth of the Governor of the Bank of England! Banks did not engage in productive investment to create jobs. They gave money they did not have, money that they created out of thin air, what Marx called fictitious capital, to people who could not pay it back so that homes could be bought.

The result was massive house price inflation and the inevitable collapse of a housing credit bubble, leading to a bailout with public funds that put governments into debt and these in turn then ushered in austerity policies to reduce this debt. All of this is tied in with the way that capitalism extracts surplus value from the working class and that in turn is tied to private ownership.

As Adam Booth explains it in his excellent series of articles on Marx, Keynes, Hayek and the Crisis of Capitalism (see www.marxist.com):

“…this process of private ownership and competition contains the seeds of its own destruction. It is in the interest of the individual capitalist to pay their own workers as little as possible in order to maximise profits. However, these wages – and the wages of the workers employed by other capitalists – also form the demand for the commodities that capitalism produces, i.e. the market. Each individual capitalist would like to pay his/her workers as little as possible in order to maximise profits; but at the same time, he/she would also like his/her fellow capitalists to pay their workers as much as possible so that these workers can buy the commodities that are being produced”.

“Each capitalist is, however, trying to do the same thing; therefore, as individual capitalists compete against one another, trying to maximise their own profits, they cut the wages of the working class as a whole, thus reducing the market and destroying the basis on which they can sell their commodities and realise their profits. It is this interactive process of competition between many individual capitalists – each making decisions that are completely rational from their own individual perspective – that leads to an overall process that is distinctly irrational for the capitalist class as a whole.”

Capitalism attempts to overcome this contradiction through the expansion of credit. But this too has its pitfalls as it merely postpones to another day an even greater crisis. As Adam outlines,

“Marx explains the role of credit under capitalism in Capital, explaining that credit serves a dual function. On the one hand, relatively short-term credit is required to overcome bottlenecks in production and maintain the flow and circulation of capital. For example, businesses need to borrow money to pay for wages and raw materials whilst they wait for previously produced goods to reach the market and be sold. Alternatively, credit may be used to allow firms to expand production when they don’t have the upfront capital to pay for it.

"On the other hand, credit also plays the role of artificially expanding the market – i.e. effective demand – and thus helping to delay a crisis……under capitalism, the working class can never buy back the full value of the commodities it creates, due to the fundamental nature of capitalism as production for profit…….capitalism traditionally overcomes this contradiction of overproduction by reinvesting the surplus value created into new means of production in the search for greater profits. This, however, only serves to create even greater productive forces, and thus an even greater mass of commodities that must find a market, and thus – rather than resolving the contradiction – only exacerbates overproduction.

“Credit – formed by the concentrated savings and deposits of individuals and firms in the banks – is used to artificially increase the consumptive capacity of the masses, and thus to temporarily overcome overproduction, allowing the productive forces to continue expanding. …the expansion of credit over the past twenty years – and particularly since the turn of the century – created the largest credit bubble in history and was the primary factor in delaying the onset of crisis”.

Wealth

“This expansion of credit was required to overcome the growing proportion of wealth going to capital rather than labour, which became increasingly unequal with the attacks on the working class that followed the crisis of the 1970s and continued in the 1980s with the policies of policies of Reagan, Thatcher, and the other political representatives of capitalism. This ever increasing exploitation of the working class continued into the 1990s and the 21st century though the intensification of the working week and the increase in overtime, attacks on wages and conditions, and with many workers being forced to take two jobs in order to just get by. Alongside this increasing exploitation, credit was massively expanded through the use of mortgages, credit cards, student loans, etc.”

All of this is confirmed by publications from the TUC over the past period.  The TUC analysis shows that wages as a share of GDP have declined over the past 30 years; that as a result workers have resorted to taking loans to make ends meet so that debt has increased and also that within the GDP share going to labour there has been a division of income so that higher earners have got more and lower earners less.

The figures are startling. According to the TUC document ‘Unfair to Middling’: 

“The wage share held its post-war level at between 58-60 per cent until the early 1970s and then rose to a high of 64.5 per cent in 1975. It then started drifting downwards reaching a post-war low of 51.7 per cent in 1996, largely as a result of the rise in unemployment in the slump at the beginning of that decade. From then it recovered slightly to reach 55.2 per cent in 2001 before slipping back to 53.2 per cent in 2008 – close to its post-war low in 1996.”

Decline

Accompanying this decline in the share of wages in GDP there has also been an increase in productivity. 

“Steadily, however, the ‘profits squeeze’ of the 1970s has given way to the much more sustained ‘wage squeeze’ of the last three decades. During this period … real wages have been rising more slowly than productivity, with the gap widening since 1990. Since 1980, real wages have risen by 1.6 per cent per annum while productivity has been rising at 1.9 per cent per annum. In the post-millennium years, the gap has opened with real wages rising by a mere 0.9 per cent while productivity has averaged 1.6 per cent.” (TUC)

So workers are getting less as a proportion of the value they produce and at the same time they are producing more. The only result that can happen from this scenario is that workers would have to resort to taking our loans and thereby increasing debt levels. “The falling wage share has contributed to the sharp rise in private debt of the last decade. To maintain spending power, wage-earners turned increasingly to credit. …. the debt/income ratio rose from 91.1 in 1997 to 157.4 in 2007. In 1980 it stood at 45 per cent” (TUC). Towards the end of 2011 similar figures were produced by the BBC economics correspondent Robert Peston. He showed that the total level of UK indebtedness was 492% of GDP, some five times the value of annual production.

Crisis

That is how it all developed: profits rise, wages fall, workers take out loans, banks advance credit with money they do not have, the loans are not repaid, banks get into difficulty and are bailed out with public money, governments then get into debt and introduce austerity policies to balance the books and workers suffer with cuts in wages, jobs and services.

Therefore, the crisis in the banking and finance system that led to a public bailout, governments getting into debt, austerity policies that are driving down living standards, the creation of a “precariat” (unstable, temporary, low paid, short term contact workers), cuts in public services and jobs was sparked/triggered by banks that sought to overcome within the confines of capitalism the contradictions of the market. These contradictions were in turn caused by the nature of the exploitation of labour, the extraction of surplus value and private ownership. Each time credit is expanded to falsely inflate the market preparations are being made for an even greater crisis in the future.

Socialism

The only way to ensure that we as workers do not pay for the crisis is to fight to end the anarchy of capitalism and that means fighting for a socialist society. That begins with the taking into public ownership of the banks and finance houses under workers control and management. But in order to ensure that wealth that is created socially is also used for the benefit of all in society and not for the parasitic class of capitalists that owns and controls society, we have to also take into public ownership the large monopolies, finance houses and insurance companies that dominate the economy. Then we can begin to democratically plan to build homes, schools, hospitals; to guarantee to all a real living wage and decent pensions; to reduce the working week and provide leisure facilities; to enable the flowering of humankind, the development of culture and learning; to finally banish from the planet want, deprivation and disease and in doing so protect the environment so that humankind can continue to exist in harmony with its environment.

This is the kind of discussion that this FBU pamphlet can lead us to and for that we once again applaud the FBU and the authors of the pamphlet. However, it is up to us in the movement to ensure that such a discussion happens and from that discussion to draw the necessary conclusions: Capitalism cannot be reformed. We must fight for socialism.

TUC Resolution 27: Public Ownership of the Banks.

“Congress notes the disastrous role of the banks over the past five years.

Congress condemns the scandalous levels of pay and bonuses for senior bankers, while workers are expected to pay for the economic crisis.

Congress condemns the interest rate-fixing by Barclays and other banks, which demonstrates again that the banking industry fails to operate in the interests of the majority of people.

Congress notes that despite the tax payer funded bailouts and quantitative easing, the banks have failed to provide adequate lending and investment to assist economic growth and the creation of jobs.

Congress calls upon the TUC to organise a thorough enquiry into the banking crisis. This should involve finance experts, trade unionists working within the sector and representatives of mortgage holders, small businesses and others affected by the crisis.

Congress believes that the de-regulated, free market model that has dominated for the past three decades has been exposed as a failure; a major change of direction is needed.

Congress believes that the economic chaos and devastation sparked by the major banks and financial institutions should be ended through full public ownership of the sector and the creation of a publicly owned banking service, democratically and accountably managed.

Congress believes that the banking and finance industry should be developed as a key public service.

This new form of banking could play a central role in building a sustainable economy, investing in transport, green industries, housing, creating jobs and assisting the recovery in the interests of working people”.

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