The Prime Minister, Gordon Brown, speaking on Radio 4′s flagship current affairs programme this morning, repeated something he says regularly: that ‘interest rates are low’ and that his government, through the Bank of England, kept them low. The question the BBC should have asked is this: if interest rates are low, and have been so, why on earth are people/companies/banks having such a hard time paying debts? Surely the Credit Crunch crunched, because debts – of banks in particular – became both too large, too expensive, and unpayable? Do small businessmen/women pay low rates on investments? Mortgages? Credit Cards? Car loans? Does the PM live/work on another planet?
Interest is the ‘rent’ paid for money or capital – and right now, in a world in which millions have unpayable debts, unemployment is rising and incomes are shrinking as a share of the economy – the central banks of Britain, Europe and even the US are refusing to lower the ‘base rate’ or ‘policy rate’ which influences the remaining interest rates paid on capital. In Britain the rate has almost deliberately been kept at a level that will first bankrupt many individuals, small businesses and companies – and then bankrupt their bankers.
Only mainstream economists, dismissive of history, and who have therefore failed to learn the lessons of the 1930s and of Japan after 1990, could come up with such a ‘sound’ financial strategy.
Keynes wrote at the end of his great work ‘The General Theory of Employment, Interest and Money’ that ‘the owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital”.
On the same page, he wrote, somewhat over-optimistically it turns out, that his new framework for ensuring that capital is never scarce could ‘mean the euthenasia of the rentier and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital”. For, he argued “interest today rewards no genuine sacrifice, any more than does the rent of land.” (The General Theory. Macmillan, 1973. P. 376.)
Keynes defined the ‘rentier’ whose euthanasia he so ardently wished for as a ‘functioneless investor’. I prefer the more democratic Wiktionery definition: “an individual who does not work for a living, but instead receives an income, usually interest or rent, from their assets and investment.” Wall St. and the City of London are awash with members of this rentier class.
Money, or capital is not a commodity – like land. It is a social construct. It is, to put it crudely, a device that society has constructed to facilitate the exchange of goods. It is the thing that oils the wheels of commerce. However, unlike that viscous liquid, it is not dug up from the bowels of the earth. Its extraction is not likely to ‘peak’. It does not grow on trees. For, unlike trees, it is not dependent for its existence on the vagaries of the weather. No society can ensure – or more specifically society’s civil servants at the Bank of England can ensure – that this valuable economic lubrication is never scarce. The ‘guardian of the nation’s finances’ can undertake certain measures to ensure that the rent on this vital ‘ lubrication’ is not scarce and its rent not high for an economy like the UK’s, where many are drowning in debt. Instead society (via its elected politicians) has chosen to allow the Bank of England to hand control over this vital asset to a rentier class.
This happened when the BoE, egged on by the finance sector, abrogated its powers (set up under Keynes) to end the scarcity of capital, and to keep the rent on capital low. Instead it has authorised and overseen the building of a liberalised financial system (by the private sector) that has succeeded – against all the odds - in making capital scarce. Furthermore this private financial system, after blowing up a gigantic bubble of debt, has ratcheded up the rent on these debts, rendering debts unpayable. This incompetence – for that is what it it is – has led to a global financial crisis, described variously as the ‘armageddon’ the ‘credit crunch’ or a ‘financial train crash’ – that is destroying, yep, you’ve got it - the private financial sector. A form of painful self-harm by a rentier class reluctant to take up Keynes’s suggestion that they go all the way and commit euthenasia.
Instead, like Old Testament Methuselas they go on, and on, and on – extracting high rents from capital they have made scarce. And the Prime Minister remains blissfuly ignorant, and the Old Lady of Threeadneedle St. stands by, twiddling her thumbs.