Why Do We Even Need Private Banks?
The Federal Reserve Headquarters are pictured on March 21, 2023 in Washington, DC. (Kevin Dietsch / Getty Images)
Since Silicon Valley Bank’s collapse, some commentators have been waking up to the need for a socialization of deposit-taking banking. They’re right — but the same logic leads to a more radical conclusion: a fully socialized capital market, with no private banks.
You probably know all about Silicon Valley Bank (SVB), whose dramatic failure on March 10 triggered a slow-rolling crisis in the global banking sector that still appears to be ongoing.
But unless you follow the discourse in some of the more esoteric corners of the economics and finance worlds, you might not realize that over the past three weeks the fiasco has forced open a surprisingly radical debate within mainstream policy and banking circles that — believe it or not — touches on some of the most important issues in the economics of socialism.
The debate broke open because of the events of March 12, when, in an effort to prevent the bank run from leading to a broader financial crisis, Fed chair Jerome Powell, Treasury Secretary Janet Yellen, and Federal Deposit Insurance Corporation (FDIC) chair Martin Gruenberg issued a joint statement announcing that the federal government would guarantee all deposits — insured and uninsured — issued by SVB and Signature Bank (which had failed the same day).
Of course, ever since the creation of the FDIC in the early days of the New Deal, US retail bank deposits have been insured by the federal government up to some limit — currently $250,000. What the government has now done is to admit, in effect, that when the rubber meets the road, it will never allow any bank depositors to lose money, even those with balances above the insurance limit.
It might seem odd that deposit insurance — a subject that sounds as dry and technical as you can get — could have radical implications. But as it turns out, the whole concept of it is rooted in one of the central contradictions of capitalism.
Two of them, actually.
One of those contradictions narrowly concerns the issue of the government’s role in the banking sector. That’s been the focus of most of the debate so far, in part because a cohort of progressive scholars of finance has been shining a spotlight on the irrationality of private retail deposit banking for a number of years — including Saule Omarova of Cornell Law School, whose 2021 nomination to a position in Joe Biden’s Treasury Department was derailed by a tragicomic red-baiting campaign organized by the banking lobby. (They tried to insinuate that Omarova, who was born in the Soviet Union, is still secretly a member of the Soviet Communist Party. Yes, really.)
More on that in a moment.
But there’s actually a broader, more fundamental contradiction in play that hasn’t gotten much attention (or any attention, really) but whose implications for the economics of socialism are profound. So let’s start there.
Fragmented Ownership
In a capitalist economy, there are two sides to any act of production. There’s the “real,” physical side in which something useful is produced; this side involves physical inputs (machines, facilities, raw materials, etc.) and outputs (finished goods and services for sale). And then there’s the monetary side: for each of those inputs and outputs, some monetary payment is made.
Since capitalist production is carried out for profit, the people paying for the inputs do so in expectation of a profitable return on their investment. And that return, if it materializes, comes out of the flow of payments going in the opposite direction — the payments by the customers who purchase the outputs.
The classic example of this setup in its most direct form would be a proprietary family business — say, a restaurant — in which the owning family directly pays for the inputs out of its own pocket (ingredients, advertising, rent) and directly collects all the payments made by customers, pocketing the difference as income.
But in a modern economy, most production is organized in much more complicated and indirect ways. Unlike a family-run restaurant, most production is financed by people who are far removed from it; in fact, usually they have no involvement in the planning or execution of production whatsoever.
Instead of directly owning the physical materials or equipment and directly collecting payments for the output, what they typically get in exchange for providing capital is some financial instrument that promises to pass on to them a portion of the money proceeds resulting from the sale of the output. These instruments can take the form of equity securities (i.e., stocks), which pay out a fixed fraction of the profits, or they can be debt instruments (e.g., bonds), which promise to pay specific amounts of money on a set schedule.
In fact, nowadays there are usually further layers standing between the ultimate supplier of money capital and the physical process of production. Wealth owners today tend not even to directly hold stocks or bonds anymore, let alone the machines and raw materials that subtend them. Instead they own things like mutual fund shares or pension entitlements, in which case it’s the mutual or pension fund that owns the securities. The fund gets the monetary payout from the proceeds of physical production and then passes on that payout to the ultimate wealth owner.
And the chain of intermediation can get even longer and more convoluted than that.
But the important point is that, however long and complicated, such chains always tie together some specific set of physical productive processes at one end and the personal financial wealth of some specific set of households at the other end. Thus, when a particular set of productive activities fails to pan out, some particular group of people take a hit to their wealth.
This fragmentation of ownership, in which separate individuals own separate bits of the productive infrastructure, is an essential feature of capitalism; it’s almost synonymous with the private ownership of the means of production. And at a micro level, of course, it can have a functional logic: an entrepreneur whose wealth is tied up in their company obviously has a great incentive to devote all of their energies to the project.
But at a macro level, the fragmentation of ownership is deeply illogical — and profoundly destabilizing.
It’s illogical because capitalism has evolved far beyond the era of proprietorial management. The kind of business typified by our example of the family-owned restaurant was once the norm in capitalist production. But the nineteenth-century spread of the “joint-stock company” (what we would call the corporation or public company) where top managers are salaried professionals rather than owners, constitutes a profound shift in the nature of the system — far more so, I would argue, than either the system’s apologists or its critics have been willing to admit.
Karl Marx, however, was acutely aware of the importance of the change. He believed the joint-stock company to be such an important innovation, tending in the direction of socialism, that he called it “the implicit latent abolition of capitalist property” and “the abolition of capital as private property within the framework of capitalist production itself.”
One and a half centuries later, the great experiment with the separation of ownership from control in capitalist business has been a historic success. It may one day do as much to vindicate socialist economics (as Marx believed it would) as its failure within the Bolshevik economic model did to discredit socialism.
Creating Crisis
But besides its historical superfluity, the fragmentation of ownership is also profoundly destabilizing: the ultimate cause of much of the macroeconomic dysfunction to which capitalist economies have always been prone.