Fictitious capital, the credit system, and the particular case of government bonds in Marx

ABSTRACT

This paper is a theoretical contribution to the development and update of Marx’s theory of money and credit, given the empirical developments in finance since the 1970s. It expands on the discussion of fictitious capital and government bonds within the Marxian literature. In contrast with most Marxian literature and some of Marx’s own writings on the topic, I argue that fictitious capital does not represent any real capital and then further develop the idea that fictitious capital is the channel through which the dominance of interest-bearing capital over other forms of capital occurs. This interpretation lays the foundation for understanding why government bonds, as titles of fictitious capital, are the keystone of financial markets and an unavoidable source for both financial accumulation and exploitation, rather than being a mere consequence of state spending. For this reason, public debt can neither be avoided nor fully paid off.

KEYWORDS:

• Value
• fictitious capital
• government bonds
• public debt
• credit system
• Marx

JEL:

• Code: B51
• E44
• E69
• G10

Introduction

Recent discussions of forms and effects of financialisation have spurred an interest in fictitious capital, but Marxian debates on the money and the credit system have ‘generally neglected’ this category (Bellofiore 1998, p. xii; see also Perelman 1987, p. 182). That is to say that most of the Marxian literature up to the 2000s did not directly and extensively try and elaborate on the concept of fictitious capital.

The interpretation of fictitious capital within Marxian literature is diverse and polemical. Points of tension are seen in how fictitious capital is thought to be assimilated into interest-bearing capital (IBC), how fictitious capital produces surplus value, whether fictitious capital represents ‘real’ capital, and the very meaning of ‘fictitious’ – to mention a few. The discussion generally occurs on two fronts. First, in the context of theories of money, the credit system, finance and crisis and, second, within the debates on financialisation.¹

This paper falls within the first group but also contributes to the Marxian literature dealing with value within the rise of financial transactions and instruments. I follow the widely accepted definition that fictitious capital is a title representing a claim on property or revenue but with two necessary clarifications. First, this capital results from any stream of potential revenue being capitalised as an asset and further exchanged as IBC. Yet, its existence changes the distribution of surplus value and, thus, it should neither be treated as the same as IBC nor dismissed. Second, representing a claim on property is different from representing underlying real capital, as the market value of these titles follows an independent movement from changes in value seen in the reproduction process.

This interpretation sets the foundation to construct a broad narrative showing how these titles of fictitious capital are crucial to both the development and expansion of the credit system, which in turn offers more insights into the understanding of sources of instability and speculative booms in the economy. To illustrate the significance of this original narrative for understanding the role played by these titles in the credit system, I use the case of government bonds, which is a type of fictitious capital in Marx. As such, in this paper, I both push forward the understanding of fictitious capital and bring government bonds into the discussions of Marx’s theory of money and credit. This latter aspect is particularly important given that most of the studies on fictitious capital tend to focus on shares (inter alia Hilferding 2006 [1910]) and more recently on derivatives (inter alia Bryan and Rafferty 2006, 2007); and that most of the studies of public debt in Marxian economics focus on the macroeconomic dynamics (inter alia Mattick 1969, Michl 2009).

I approach government bonds, and therefore public debt, from a different angle than traditional discussions of public debt in Marxian economics. Government bonds create liabilities for the government and, at the same time, assets for the bondholders, connecting the public and private spheres. Particularly, as with any title of fictitious capital, government bonds draw upon surplus value produced in society as a whole (via the tax system) and are able to move effortlessly across the credit system playing and being used in different and important roles. They guarantee future resources to finance national debt while also providing highly liquid and safe assets to support private financial markets.

The important role played by government bonds in credit and financial markets is recognised by many political economists (see particularly Gabor 2016b, Tymoigne 2016) and international institutions (see IMF & World Bank 2014). Merhling’s Money View, for example, reminds us of the use of government bonds as collateral for borrowing (Mehrling 2010, Mehrling et al. 2013). These authors have pointed out how modalities of provisioning of liquidity have fundamentally changed in the past decades, especially with a focus on changes in institutions and instruments. However, we are still left wanting a satisfactory theoretical framework that can help us understand these changes from the standpoint of production, distribution, determination of incomes and exploitation.

In this sense, the contribution of this article is twofold: 1) it further develops and clarifies the concept of fictitious capital within a Marxian framework, 2) it uses this concept to explain why and how government bonds play such an important role in credit and financial markets, which – due this framework and approach – also allows me to elaborate on distributional implications, including inter-capital distribution. As the theoretical developments and systematisation of this discussion in the Marxian literature are still scant, more research is needed on the increasing functions of government bonds in financial markets in terms of guaranteeing the stability, liquidity and collateral for financial institutions. Marx’s concept of fictitious capital can shed new light on these recent developments, while also providing us with deeper insights into the role of the state in contemporary finance.

Following this introduction, the paper is organised as follows. Section 2 explains the emergence of fictitious capital and further develops and clarifies the concept. Section 3 discusses the role of fictitious capital in the credit system. In section 4, a Marxian account of government bonds is given, focusing on their role in the credit and financial system. Section 5 concludes.

The missing piece: fictitious capital

In Marx, there is a pool of loanable money capital (LMC) available in the economy from where lending and borrowing relationships take place. In the pool of LMC, the source and application of the money lent and borrowed are irrelevant, as the attention is on the guarantee of repayment and on the possession of money assuring the power of drawing interest. However, Marx is also concerned with a particular situation where money is employed, via credit relations, for the specific purpose of producing surplus value (Marx 1991, p. 464–65) and, thus, profit. In this case, money is advanced as capital and can be understood as a special type of commodity because it provides the use value of self-expansion for both lender via interest and borrower via profit simultaneously. The borrower appropriates profit after the payment of interest has been deducted from the surplus value produced. Interest emerges, therefore, as a fraction of profit. This unique commodity is called IBC, and interest expresses the valorisation of IBC and is the price that the lender is paid (Marx 1991, p. 476). Note that it is not the borrowing-relationship per se or the payment of interest that characterises the IBC but the use to which the loan is put, i.e. the loan must purchase means of production, hire workers, and result in the production of profit. The sum lent out is maintained and increased.²

Marx situates the IBC category differently in relation to industrial and merchant capital. For him, IBC is key to accumulation, and a pre-condition for accumulation of capital is IBC appropriating surplus at the expense of other capitals, which happens through the appropriation of a ‘share of surplus produced in the form of interest … before the remaining surplus is distributed to other capitals as profit’ (Fine 2013a, pp. 53). The specific characteristic of IBC is that it flows back in a double sense – it returns to both the functioning capitalist and the lender (its legal starting point) – and that is returned as realised capital (Marx 1991, pp. 462–64). The return of capital to its point of departure characterises the movement of capital in its overall circuit, but in the case of IBC, this return, albeit dependent on the course of the reproduction process and, thus, on the generation of surplus value, is somehow superficial in the sense that it is separated off from the actual cyclical process of capital. With this separation, there is simply the movement of capital between the lender and borrower.³

The characteristics and the circulation of IBC in the economy in its ordinary form show us the financing of capitalist production. However, with the development of the credit system, lending-borrowing relationships increasingly become investments in financial securities, such as bonds, shares or any kind of certificate that entitles the holder to a claim on property or revenue. Curiously, these securities are called fictitious capital, not IBC.⁴ They retain characteristics of IBC in the sense of looking, from the standpoint of the creditor, as being invested in capital because they assure certain revenues and they can also be repaid by their sale, and so transformed back into loanable capital that can be lent out afresh (Marx 1991, p. 608). However, they can circulate independently of the value advanced against them, as in the case of trade of credit or monetised debts, being traded multiple times in financial markets⁵ as commodities themselves, having a different principle of evaluation, and circulating as a form of capital value when their circulation period does not follow the real cyclical movement of capital as seen with IBC in its ordinary form. In the case of fictitious capital, the commodity escapes the cyclical movement of capital altogether – if anything because IBC creates a general movement of lending and borrowing – and we see a different nature of the legal relationship established between lender and borrower.

Fictitious capital enters Marx’s analysis as a category explaining (and representing) the trade of credit or debts where the market value⁶ of these financial securities may neither be directly related to the value of the initial advanced sum nor dependent on the realisation of this advanced sum as money capital. Nevertheless, the particular feature of this capital is that its claim’s payment commands greater value and, therefore, these financial securities are claims on expanded value while not being necessarily advanced as IBC or having their claims’ payment as part of the distribution of profit across competing capitals.

This seems to be a logical issue for Marx’s theory of money and credit. However, I argue that fictitious capital is a category grounding the understanding of financial securities in the production and circulation of capital, allowing for these securities to have a claim on the surplus value produced. I make clear that this happens when from the pool of LMC, there is a form of capital that is defined within circulation but is neither under the umbrella of IBC nor merchant capital, as it has a distinct form of circulation from them, which indicates changes in inter-capital distribution.

The best way to understand my argument and the importance of this category, especially for a radical analysis of credit and finance, is to consider two issues: what underlying value do these titles of fictitious capital represent, if any; and why these titles may or may not generate surplus value. The next two subsections respectively address these issues.

Fictitious capital and the logic of capitalisation

In Marx, from the existence of such a unique commodity like IBC, we have that once any definite and regular monetary revenue appears as the interest on capital whether it actually derives from capital or not, the credit system has the foundation for any regular income to be ‘capitalised by reckoning it up, on the basis of the average rate of interest, as the sum that a capital lent out at this interest rate would yield’ (Marx 1991, p. 597; see also Foley 2005, p. 45). The process of capitalisation is what puts fictitious capital in motion, and the existence of these titles means a backward calculation, i.e. from the money income and the interest, we find the amount that generates it, which seems to be completely independent of the capital valorisation.⁷ For Marx, this reinforces ‘the notion that capital is automatically valorised by its own powers’ (Marx 1991, p. 595 and p. 597; see also Hilferding 2006 [1910], p. 149).

Capitalisation explains the difference between the market value by which the titles are sold in the financial market and the value of the advanced sum of money against the titles; a sum that, in turn, may or may not be realised as capital. It is important to understand that, due to this capitalisation process, one needs to be cautious about the notion that there is a capital or a fundamental or intrinsic value that underpins these financial securities, even if the advanced sum was successfully used in the production and realisation of surplus, as in the case of shares.

The capitalised sum that gives the market value of the fictitious capital is something that can circulate separately from any underlying capital and is subject to other forces than technological advances, changes in wages and working-class management, for example. The determination of the market value by capitalisation implies that, since the future interest rates and returns on fictitious capital cannot be guaranteed ex-ante, the capital value of these titles is intrinsically speculative (Marx 1991, p. 598; also Perelman 1987). Factors interfering in their prices will, of course, vary according to the type of fictitious capital – for example, in the case of shares, expected macroeconomic, sectoral and firm-specific variables and the business cycle in general –, yet their market value is heavily susceptible to fluctuations related to changes in the interest rate and/or interactions and beliefs among the traders and investors in the financial markets.⁸

This is not to say that only titles to fictitious capital are prone to speculation. Overall, anything with a market price can also be subject to speculation – tulips, houses, and so on. The particularity with fictitious capital is that its market value (price) is always simply based on a capitalised yield. ⁹ So fictitious capital makes speculation one of the central aspects of the Marxian theory of money and finance, which reinforces the argument that speculation is a helpful concept for understanding finance (Ferry 2020; Gilbert 2020; Humphrey 2020) and avoids treating ‘gambling as a pathology driven only by emotion’ (Bear 2020, p. 6).

In this sense, my interpretation of Marx (1991) – Capital, vol. 3 – is not that these assets represent any real capital,¹⁰ or that the advanced sum given in exchange for the titles of fictitious capital refers to the capital generating surplus value from which their claims will draw. In fact, Marx does emphasise that these titles cannot represent any capital because their capital value ‘is always simply the capitalised yield, i.e. the yield as reckoned on an illusory capital at the existing rate of interest’ (Marx 1991, p. 598, emphasis added) and for this reason these titles of fictitious capital become ‘nominal representatives of non-existent capital’ (Marx 1991, p. 608, emphasis added), and the returns on them are not the same as for real capital.

Note that the interpretation of fictitious capital as not representing any capital is contentious, as both Marx and the Marxist literature have passages that lead to an opposite interpretation. Marx's (1991) oft-quoted passages, such as ‘[shares] … represent real capital’ (p. 597) and bonds as a sum that ‘no longer has any kind of existence’ (p. 595–96),¹¹ lead to interpretations of fictitious capital that are often caught in a dilemma on whether or not this capital represents real capital.¹² Some interpretations also argue that fictitious capital claims replicates capital deployed elsewhere (as in the case of shares) and that this capital was never intended to be spent as capital (as in the case of government bonds and the idea that capital has gone in smoke, that is, it was spent unproductively).¹³

The point to be careful about here is that while Marx indeed referred to examples such as bonds and shares, there is in Marx a generalisation of the capitalisation process for all types of fictitious capital where these titles’ market value has a valuation different from any underlying capital. Marx was trying to understand the existence of types of capital whose features and links with production were very particular and different from other forms of capital. That is, the adjective fictitious is used not because the capital borrowed no longer exists or the capital borrowed cannot exist twice, or because it is a representation of a debt,¹⁴ or because the debt corresponds to no real capital investment,¹⁵ but because the value of these titles of fictitious capital varies independently of any changes in the process of reproduction of capital in general.¹⁶ The process of capitalisation is the mechanism behind all this. The ‘evolving’ aspect here is so not about fundamental value, as argued by Bryan and Rafferty (2013), but rather about the weakening of the link between the expansion of value within the production process and the calculation of the income the capital lent out would yield (Marx 1991, p. 597).¹⁷

Financial innovations such as collateralised debt obligations (CDOs), which are the claim of wealth on future payment of the debtor in the form of packaged pieces of debts sold in the financial market (for example, the debt of homeowners), have similar features to titles of fictitious capital. CDOs are a promise of a future income that is exchanged in the financial sphere. They are forms of bond, and their nominal (or notional) value is dependent on the valuation of the related bonds. For investors, all that matters (and the object of their concern and evaluation) is the yield these claims will produce and how they get the principal back and the coupon payments. It can be an investment bank or a pension fund controlling huge cash reserves, and the promise form can be either debt payment or dividend; still, the essence is the same, i.e. the capitalisation of future income implies the formation of a capital that does not exist in real terms but functions as if it does.

Marx’s incomplete empirical analysis of fictitious capital regarding shares and bonds should not change the essence of his argument about fictitious capital: ‘all these securities actually represent nothing but accumulated claims, legal titles, to future production’ (p. 599, emphasised added; see also Hilferding 2006 [1910], pp. 130–31). His incipient theoretical discussion of fictitious capital should not lead us to a narrow dichotomy between real and illusory values either. Yes, there is a disassociation of fictitious capital from whatever the use that its advanced sum was put, yet these financial securities do provide the expansion of value to the holder. In this sense, a crucial task becomes to understand how the surplus value produced has been divided and whether this type of capital can generate surplus value.

Fictitious capital and the logical forms of capital in exchanges: the dominance of IBC

Fictitious capital encapsulates the trade and circulation of financial securities and exemplifies the mechanism that any regular income can be capitalised, turned into an asset and then further exchanged in the financial markets. This includes a stream of potential revenues on property and on lending and borrowing of LMC for both the advance of money as capital and credit in general, i.e. money as money.

A key aspect here is that the return on these assets is not equivalent to the general rate of profit, which leads to the interpretation that the return is extracted prior to the distribution of surplus. Therefore, it is neither subject to competitive entry and exit between the industrial and commercial spheres of capitalist production nor the tendency of equalised profitability. A possible interpretation of fictitious capital in this context is that the capitalisation of a stream of revenues as an asset is followed by a further exchange as IBC.

This interpretation pushes forward Fine’s (2013a) argument that fictitious capital becomes the instrument through which IBC monopolises the financial system, which reinforces both Durand’s (2017) argument that fictitious capital is at the centre of capital accumulation in contemporary capitalism, and Norfield’s (2016) analysis of the broad mechanism of value appropriation by the financial powers in the world economy (see also Chesnais 2016). Take, for example, credit transactions such as a bank giving a mortgage which is not part of IBC, but it can be understood as such.

once a portfolio of mortgages are bundled up into an asset and sold, possibly combined with other sets of assets, and sold again, and so on. In this case, those buying the fictitious capital are advancing money capital in the expectation of a surplus even though the origins of this surplus do not lie in such an exchange. (Fine 2013a, p. 55)¹⁸

Although it is not made evident in Fine (2013a), note how it is the capitalisation of revenue and its trade that pull credit relations into what the author calls ‘the orbit of fictitious capital’ (Fine 2013a, p. 56), which then leads to the dominance of IBC over other capitals even when the creation of surplus value does not lie in the exchange of some of these assets. The dominance is because these financial securities, which have proliferated since the 1970s, appropriate a share of surplus value in the same way IBC does. In this sense, the issue is not much about the difference between these two capitals and their individual dynamics, but rather the dominance of IBC over other capitals with the crucial point is that this dominance occurs and is only possible through fictitious capital. Fictitious capital is the instrument, the power, that transforms credit relations, enabling them to appropriate surplus value in the same manner as IBC.

Although this does not mean a qualitative change in the division of surplus value between interest and profit, I argue that it does buttress this division and, thus, the tension around the distribution of new values created. Fictitious capital exacerbates the appropriation of surplus at the expense of other capitals and increases the inequalities among capitals. It transforms M – M’ into M – (M’- M’’), where the total amount of surplus value produced is then reduced by M’’ which represents returns on tradable financial investment contracts.

It follows, then, that the dominance and expansion of IBC, in extension and volume through fictitious capital, sometimes drives the accumulation of real capital and sometimes occurs at its expense. However, although the dynamics of the accumulation of fictitious capital and real capital may potentially diverge from each other, finance – particularly fictitious capital – is not only parasitical or an intrusion, but an integral element of the capitalist economy. It emerges endogenously from the real accumulation and is a necessary outgrowth of accumulation. Yet, the opportunities for financial investments and accumulation through the expansion of financial markets tend to leave industry under-invested and under-performing, thus reinforcing the tendency towards what has been defined as financialisation.

Note that the development of finance does not take us to the transformation of the fundamental value. The detachment from the production of values and the real source of value-generating returns due to the capitalisation process and creation of fictitious capital is much more about capital trying to separate from and undermining its own material basis, i.e. the production of new use-values through labour exploitation (see Paulani 2014, Rotta and Teixeira 2016), than a complete independence from capital valorisation. That is why the expansion and development of financial securities since the 1970s have been accompanied by profound changes in the relationship between labour and capital seen in the production process and sector organisation (see Lazonick and O’Sullivan 2000).

The use to which money raised by fictitious capital is put can be to buy shares, bonds or any type of financial securities, but the common feature among them is that these securities will entitle the buyer to a share of surplus value even if their connection with the underlying production is lost, albeit still existent. Thus, to reinforce the argument I made in the previous section, although fictitious capital guarantees a claim upon value that is produced or realised in society, it cannot be defined by the use to which the sum advanced against it is put, or by the fact that its capital value is different from the value advanced against it. That is why indeed in the case of derivatives,¹⁹ for example, an investor ‘need not price the assets of a corporation lock, stock and barrel in order to take a financial position’. However, this is not due to the idea that ‘the calculation of intrinsic values loses its original meaning’ (Bryan and Rafferty 2013, p. 140). Rather, it is precisely because these derivatives, as titles of fictitious capital, have no ‘intrinsic’ or ‘real’ value in the first place.

Nowadays, given the new techniques of claiming wealth on future payment of the debtor and other financial innovations, operations with fictitious capital are a key part of the financial system. Still, a basic principle holds, i.e. is the credit system mobilises resources, creates securities with the ability to extract surplus value and then supplies bundles of claims and cleverly designed financial contracts (such as derivatives) for trading in the financial markets.

In this sense, fictitious capital is not a logical issue for Marx’s theory of money and credit. This concept links production and finance in Marx. It shows us that the ‘collective illusion about the source of financial revenues’ (Brunhoff and Foley 2006, p. 200) should not obscure the fact that a continuing stream of income offered by titles to fictitious capital will be taken from a surplus value produced in different sectors of society even when any kind of productive investment might have resulted from the money raised from these financial assets. Equally important, this concept is what allows us to understand how IBC, the key capital to accumulation, dominates other types of capital and squeezes their returns while also creating two different but intrinsically connected dynamics of accumulation, a financial and a real one.

Systematising the role of fictitious capital in the credit system

As seen in the previous sections, fictitious capital is not something that can be easily dismissed when it comes to Marx’s theory of credit and money. Understanding both its nature and importance helps us see the credit system in Marx with different eyes. This section discusses and systemises the role of fictitious capital within the credit system considering the transformation of LMC into fictitious capital, the participation of these titles in the banking capital, and the creation of credit.

The transformation of LMC into fictitious capital

On the one hand, the form of credit circulating in a circuit implies its cancellation by repayment. On the other hand, the development of credit and credit instruments leads to the formation of titles of fictitious capital that break out of this form of circulation to the extent that they are themselves commodities negotiable in the financial market. Take, for example, the case of government bonds,

they are not subject to either the movement of the circulation of capital, or the circular movement of the credit financing of productive activities. This kind of asset, animated by ‘its own laws of motion’, can circulate indefinitely despite its ‘fictitious character’, or rather thanks to that character which preserves the public debt as such. (Brunhoff 1976, p. 95)

It is the tradeable feature that gives bonds, stocks, and any new forms of fictitious capital, the ability to have enough mobility to evade the conditions of the circulation of capital while mobilising the LMC available in the economy. The mobilisation of LMC through the formation of fictitious capital is not only one-way. There is also the constant transformation of fictitious capital into LMC, which is also related to capital switching from one sphere to another to another (see Harvey 2007, pp. 265–66). For example, although an investor may buy shares and receive dividends instead of lending money against interest income (Foley 1991, p. 214), he/she may invest productively in another branch or sector using the money received by selling the shares (Hilferding 2006 [1910], p. 140). This transformation is further helped by the process of speculation. According to Hilferding (2006) [1910],

speculation creates an ever ready market for the securities which it controls itself, and thus gives other capitalist groups the opportunity to convert their fictitious capital into real capital, to change from one investment in fictitious capital to another, and to convert fictitious capital back into money capital at any time … . (pp. 137–38)

Both bonds and shares are neither subject to the movement of the circulation of capital nor the circular movement of the credit financing of productive activities. Under the specific conditions of the financial market where these titles are traded, what matter is the title as a commodity, and not the loan that gives origin to it or the borrower. Their circulation represents the past and the future, but never the present of productive capital.

The participation of fictitious capital in banking capital

With the development of capitalism and the emergence of an advanced credit system, the hoarding of money as a durable accumulation of value and as money that could become capital takes the form of bank deposits, company certificates of indebtedness, government bonds and other financial instruments. Here, hoarding becomes claims on future outputs and value, and money hoards lose their metallic substance while becoming a graduated structure of claims on others.

I argue that the above can be understood as hoards taking the form of fictitious capital. The hoarding function based on titles of fictitious capital complements and is intrinsically connected with the banks’ credit practice – to the extent that besides cash in the form of gold or note, Marx makes clear that banking capital consists of securities ranging from bills of exchange to government bonds and stocks of all kinds (Marx 1991, p. 594). Evidently, Marx’s 150-year-old account must be updated, but overall, in countries with developed capitalist production, we can find titles of fictitious capital on both side of the bank’s balance sheet, which then represents an average amount of money existing as a hoard, and a large part of the hoard consisting of mere titles that have no value of their own. These are purely fictitious, consisting of claims on future revenue.

Thus, not only do titles of fictitious capital become an important form of hoarding, but banking capital is also built upon these titles. Indeed, this is not hoarding as usually understood, instead, it is a holding of securities that can be used as collateral for other borrowings, or as a publicly known and certified by accountants back up for the bank’s activities. Furthermore, these titles and their hoarding and trade become an essential feature of the availability of LMC in the economy, which is essential to manage the credit liquidity and price stability of the system. See, for example, the case of the European Central Bank and the Swiss National Bank providing liquidity to the private money market and thereby hoping it leads to more lending/demand in the economy, and engaging in the purchase of corporate securities under the justification of achieving the objective of price stability (Klooster and Fontan 2020).

That is, while government bonds and shares emerge to finance the state and production, respectively, their place and function within the credit system are much wider than this.

Fictitious capital and the creation of credit

Initially, credit money issued by banks develops out of the general conditions of financing, with banks’ action turning the expansion of credit into a multiplication of the means of payments. However, in Marx, the banking system is not merely an intermediary between depositors and borrowers. As these financial institutions develop, they create deposits by the credit they extend, which makes Marx attribute a fictitious nature to this credit creation (Marx 1991, p. 589, pp. 594–95; see also Harvey 2007, p. 279).

Brunhoff (1976) gives a great weight on this fictitious aspect when elaborating on the credit system in Marx. She makes clear that besides monetisation of debt and advances of money capital, banking activity also relies on creating deposits on the basis that the credit granted to borrowers represents a ‘purely banking supply of credit’, which, in turn, ‘rests entirely on banking activity itself and does not correspond to any liquid saving’. In this case, the bank credit for the borrower simultaneously reflects the bank’s assets and liabilities, and the tangible basis for the latter disappears. Credit money here becomes mainly but not only a pure instrument of circulation; its circuit is no longer closed by any compensatory hoarding but is the result of its circular form alone, which then gives this credit a fictitious nature (Brunhoff 1976, pp. 94–5).

Norfield (2016) follows similar reasoning emphasising both that nowadays credit creation outweighs original deposits and that it does not depend directly upon value production. For him,

[A] bank creates money by making a $200,000 mortgage loan to a property buyer, or a $50 million investment loan to a company, and credits their bank account with the funds. These funds in the borrower’s account should be seen as fictitious deposits, since they are created out of thin air by the banks and do not depend upon how much cash the bank has at its disposal at the time. (p. 83)

The bank credit creation plus the format assumed by the bank’s capital discussed previously make, as Brunhoff (1976, pp. 94–5) argued, the credit system to present an altogether different aspect in which a significant part of the banking asset takes on a fictitious character because their circulation ‘becomes independent of that of ‘real capital’ and even of the circular form which reflects, in terms of financing, the cycle of capital’. This is what Brunhoff (1976) calls the third aspect of the credit system, which I argue does not only lead to the accumulation of bank capital becoming ‘a problem of the redistribution of the income created by industrial capital’ (p. 96), but also to the increasing appropriation of surplus value before its division among competing capitals.

Again, the link with the production of value is weakened. In this case, the creation of credit allows for certain flexibility so one can spend money today without having already earned it. However, there is ‘potential reckoning because timing is not pre-determined’, so the link between value production and credit creation is stretched but not broken (Norfield 2016, p. 84). New circuits in the economy may finance the generation of additional value and surplus value and in this sense, the credit system possesses significant power to stretch accumulation and to create conditions for its own repayment (Brunhoff 1976, p. 91), but this stretched elastic can always snap back.

Although the above might not, in principle, reflect any novelty, I want to elaborate and systematise that in Marx not only financial securities are very particular and, therefore, termed fictitious capital, but they are also fundamental to the development of credit and financial system. An aspect rarely highlighted and systematised in a manner above by the Marxian literature, despite exceptions. In most studies, the intrinsic link between fictitious capital and the credit system has led to a silent or marginal inclusion of this category in discussions in this field. ²⁰

The systematisation of the role of fictitious capital in the credit system is, therefore, still necessary for the development of the Marxian theory of money and credit. The above is an initial but crucial step, as it sheds new light on both the fragility of the credit system and the division of surplus value. I argue that what we see the dominance of the IBC by the financial system through fictitious capital, where most of the lending and borrowing relationship, either as money as money or money as capital, is pulled into investments in fictitious capital that in turn go on to play different roles in the financial system. Through these roles, we see the origins of the fragility of the credit system, as the titles can evade the conditions of the circulation of capital and credit money and are no longer closed by any compensatory hoarding, assuming a fictitious nature; and we see that the appropriation of surplus value produced happens systemically through the financial system. That is, the division of surplus value extrapolates both the IBC and merchant capital.

An example of the functionally of fictitious capital in the credit and financial system: the case of government bonds

Within more traditional discussions of public debt in the economic literature, bond-financed public debt is mostly examined via its impact (or not) upon aggregate demand (AD) and consequential effects on output. Within the Marxian tradition, which follows the macroeconomic dynamics debate as well, the public debt analysis is strongly influenced by the idea of an unproductive state, with less emphasis or focus on the role of government bonds within the credit and financial system.²¹ Hager (2014, 2015) offers something different, as he looks at the public debt, social classes, and what Marx called the ‘aristocracy of finance’ (see also Streeck 2014). However, it is rare to find a more direct and detailed discussion of fictitious capital and government bonds, with the exceptions such as Foley (2005), Carcanholo (2017) and Trindade (2012). ²²

Marx (1991) often assumes that the sums advanced by government bonds are spent unproductively. The disputed views around this assumption can be avoided if we take a different starting point from the traditional approach to public debt within the Marxian literature. I argue that the issuance of government bonds means the advancing of LMC by buyers in exchange for fictitious capital. It represents a transfer of money to the issuer and the accumulation of securities in the hands of bondholders. In short, the issuing government debt is indeed borrowing from financial markets, so the money may be used for welfare payments and so on, but it is also a way of mobilising capital via fictitious capital. In this sense, the use to which the advanced money capital is put is, as discussed before, irrelevant.

The more pertinent point for this paper is that as with any title of fictitious capital, government bonds draw upon both available funds or savings (mobilising capital) and the surplus value that is produced by society. In this case, this value is transferred [returned] to the bondholders via the tax system. For Krätke (2005, p. 5), when Marx suggested that tax exploitation of the working class was a basic feature of the modern tax state, he had not clearly developed his analytical concept of exploitation and never really analysed or explained how it works. O’Connor (1973, pp. 210–11) develops Marx’s insights and argues that to guarantee the conditions for capital accumulation, the cost of production should not only be socialised by the state but shifted away from capitalists to another class of taxpayers. In any case, the source of state revenue is taxes, which must come from surplus value. The reason for this goes back to the definition of the value of labour power (see Fine et al. 2004).

The tax system and the state's responsibility over the legal tender allow for the wealth of the entire nation to back the credit of the state, which in turn makes these government bonds highly liquid and secure.²³ The tax liability of a sovereign state ‘is based on the total production of the national economy and its profitability, considered at present and projected into the future’ (Davis 2010, p. 48).²⁴ The substantial financial demands of states also give government bonds a particular status, leading to government bond markets that have a great ability to centralise, organise and control the volume of LMC to be converted into fictitious capital (and vice versa). If anything, these bonds usually have greater liquidity exactly ‘because their markets are usually larger and deeper than are those for corporate bonds’ (Lysandrou 2013, p. 530). It is not a surprise, therefore, that since the 1970s, government bond markets have improved specific functions (especially those related to control and regulation) of the model of mobilisation of IBC used by the stock exchanges (Trindade 2012).

The formation of fictitious capital through government bonds means the creation of liabilities for governments and, at the same time, assets for bondholders. These bondholders range from banks, pension funds and firms to individual investors. Thus, the issuance of government bonds is a form of double-entry bookkeeping that connects the public and the private sphere (Krätke 2005, pp. 5–6). Given their liquidity and security, government bonds are, in fact, ‘a means of intertemporal intermediation, and serve as the ballast for the financial system as a whole’ (Davis 2012, p. 7).

This intermediation is indeed crucial for government management of credit and for its ability to intervene in the country’s macroeconomic stabilisation but is also equally crucial to support private financial markets and their activities, given the power of fictitious capital to appropriate surplus value produced by the economy. That is why, within the Marxian literature, it is possible to argue that.

[the] ‘national wealth’ serves to provide liquidity for private financial markets and to underwrite private credit to firms for the purposes of private profit. This is a form of exploitation of the public for private gain, on a systemic level, by means of the financial system. (Davis 2010, p. 48)

This is the background behind important and somewhat well-known functions of government bonds in the capitalist system, which are not associated with bond-financed deficit expenditure and fiscal stimulus.

Firstly, government bonds are considered top quality assets in financial institutions’ balance sheets, echoing the safe asset argument seen in Gorton (2017). They are used as collateral to create new loans that may fund both real and financial investments, bringing additional income to these institutions. These institutions also gain through fees and interest charged during the process of purchasing and distributing government bonds. The top-quality feature confirms an issue already discussed, namely, the role that these titles of fictitious capital play in the credit system as a means of hoarding by banks and individuals.

Secondly, financial institutions, firms and individual investors holding government bonds have an instrument that allows them to change and regulate their reserves, obtain liquidity and change their investment portfolio to different forms of fictitious capital and branches (see also Saad-Filho 2015, Harvey 2007). This shows that as titles of fictitious capital, government bonds are forms of withdrawing or returning LMC to the economy. Note that it is not a higher yield aspect that makes government bonds to turn up in bond portfolios but the fact that they tend to carry less risk than corporate bonds, which then reinforces their great liquidity (Lysandrou 2013).

Finally, the liquidity and safety of government bonds, its lower credit risk than other market participants and the large volume of issuance make its yield curves to serve as a benchmark in pricing other financial assets (see Davis 2012, Henwood 1998, Trindade 2012).

The trade of government bonds in the secondary market, for example, is often associated with the functions above, which reveals a great deal of speculation with these bonds (see Foley 1988, 2005, for the specific case of open market operations). This shows us that, at a more general level, as put by Davis (2017, p. 553), the regulation of access to credit becomes a state function due to government bond and its features. See also Gabor’s (2016b, 2016a) concept of repo trinity, for example. The concept refers to the connection of financial stability with liquid government bond markets and free (deregulated) repo markets, which then shows the role that the state, as debt issuer, plays in banks’ growing market activities.

Government bonds are a powerful tool through which a government can intervene in and influence financial markets, from liquidity and availability of LMC to portfolio variations, returns on real and financial investments, and price-setting of real and fictitious assets in general. Unsurprisingly, since the 1970s, there have been changes in monetary policy and central banks’ management regarding an increasing reliance on government bonds to manage the proliferation of foreign exchange trading, risk hedging, speculation and cross-border financial activity more generally.²⁵ As aptly put by Gabor (2016a), the state withdrawal from economic life since the 1970s meant that its role in financial life grew in a very specific way:

Sovereign debt evolved into the cornerstone of modern financial systems, used as a benchmark for pricing private assets, for hedging and as base asset for credit creation via shadow banking. The state’s role as debt issuer, passive and systemic at once, has been reliant, beyond the arithmetic of budget deficits, on the intricate workings of the repo trinity. (p. 27, emphasis added)

Such a setting means an unparalleled and unavoidable scope for purely financial accumulation emerging from government bonds. As holders of fictitious capital, the state’s creditors are not exposed to ‘the troubles and risks inseparable from its employment in industry or even in usury’; they ‘give ‘nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would’ (Marx 1990, p. 919).

This has several implications for the dynamics of the economy: for one thing, the distributive impacts. By issuing bonds, the state can distribute surplus value among the bondholders. Thus, claims on surplus value come from industrial capitalists, financiers in the form of interest and dividends and so on, and also government bondholders in the form of debt service. Even if rates of investment and profits themselves decline, government bondholders can still increase their income from returns on their holdings of public debt, and financial intermediator and banks will still be charging fees for transactions.

We can also look, as an example, into different modalities to finance the state, that is, monetisation, taxation and sale of government bonds. The Keynesian Revolution gave the last one a different status in which monetary authorities could manage the mix between currency issuance and government bonds with different maturities in an attempt to keep the cost of government financing and inflation low while trying to use the government bonds to manage an economy that by no means leads spontaneously to full employment. However, it must be noted that government bonds are a convenient modality of state finance for capital, where the requirement to service the public debt at the expense of provision for public goods and human needs shows the private profitability priority. As Davis (2012) writes:

The imperatives of saving the currency and maintaining the credibility of the public debt for private investors serve as the tax for cutting off desperate human needs and subduing democracy … rather than rational planning for long-term growth … Ultimately public resources must serve private profit. (p. 55)

The debate to achieve a balanced budget is one full of ironies here. At stake are the fiscal costs frequently associated with welfare and investment in state-owned enterprises, together with potential tax increases to guarantee more appropriation of the surplus value produced in society, while little is done to intervene on the gains of the ‘brood of bankocrats, financiers, rentiers, brokers, stockjobbers, etc’ (Marx 1990, p. 920) whose fortunes expand via and feed on the holding and trade of government bonds. The argument is somewhat tautological: nothing can be done because the demand for government bonds needs to be guaranteed and stimulated.

Despite their fundamentally different analyses of the capitalist economy, the traditional discussions of bond-financed deficit expenditure within the mainstream and post-Keynesian economics basically have the same concern about how these bonds are perceived as net wealth so that their effects on aggregate demand and real variables can be examined.²⁶ The wealth effect engendered through the financial markets is at the core of these analyses. However, government bonds do not offer equal opportunities for gains for all through financial investments. The state borrows primarily from its wealthiest citizens and pays them interest. This is an option over the policy of taxing capital, which necessarily drains from the mass of surplus value produced in the entire society, as government bonds are titles of fictitious capital.

Intriguingly, the relationship between bond-financed expenditures and their effects on AD, as well as their intensity, i.e. multipliers, are the object of endless dispute in the heterodox and mainstream approaches while the return on government bonds to the bondholders and the followed distributional impacts are less often a reason for dispute and critique. This is not to dismiss these debates. Rather, it is to highlight that government bonds underpin both the capitalist state and the credit system, and both are based on a mode of production predicated on exploitation, social exclusion and inequality. Government bonds support the centralisation of wealth, especially in the hands of large capitalists and speculators who acquire control of public finances. Thus, while these bonds are an important tool through which the government can intervene in the financial market, fiscal and monetary policy are in fact submitted to the financial market’s exploitative imperatives.

The functions played by government bonds as titles of fictitious capital in the financial system give them an active role, which stands at odds with a passive role resulting from a debt security issued to support government spending. They support the institutions and processes that mobilise resources and create and allocate both IBC and titles of fictitious capital, while also being a great source of financial accumulation appropriating part of the surplus value produced in society. In doing this, government bonds [exploitatively] underpin the credit and financial system, and, for these reasons, government financing via bonds, and therefore fiscal deficits, cannot be avoided regardless of the need or not to finance expenditures. Still, only an empirical analysis considering countries’ particularities and their forms of insertion into the international monetary and financial order can concretely show the diverse developments of their functions.

Conclusion

Fictitious capital in Marx is what is known today as financial securities. Its emergence is because in capitalist societies any stream of income can be capitalised. I argue that these titles do not represent any real capital but are termed capital because they guarantee a claim upon the value that is produced in society. They are also termed fictitious because their capital value can be different from whatever are the value-generating processes in society, which in turn gives rise to and supports speculation. Although these titles extend the limits of the credit system, they do not necessarily guarantee a future production of surplus value, which, together with speculation, makes the credit system prone to speculative booms and instability.

I also argue that as titles of fictitious capital, the functionality of government bonds extrapolates the needs of state financing to either cover deficits or stimulate AD. Its functions are not mainly associated with bond-financed deficit expenditure and the fiscal stimulus, but rather more directly related to financial market liquidity, portfolio diversification, returns on real and financial investment, and price-setting of real and fictitious securities in general. Government bonds are at the heart of Marx’s theory of money and the credit system.

Two important consequences emerge from this. Firstly, government bonds are an active tool in the hand of the state and not only a passive consequence of public deficits. For these reasons, government bonds – and, therefore, public debt – can neither be avoided nor paid off in capitalist economies. Secondly, in this context, government bonds offer an unparalleled and unavoidable scope for purely financial accumulation while extracting surplus value from society.

Although the functions played by government bonds vary according to spatial, institutional and historical conditions, the underlying common feature is that, via government bonds, the national wealth serves to provide liquidity for private financial markets. Given that, as a title of fictitious capital, government bonds appropriate part of the surplus value produced in society, this is a form of exploitation of the public for private gain on a systemic level by means of the financial system.

Acknowledgements

I thank Alfredo Saad-Filho, Victoria Stadheim and Serap Saritas for encouraging early discussions in this paper. I am also very grateful to Roberto Veneziani for carefully guiding me in shaping and polishing the paper, Ann E. Davis for insightful suggestions and Tony Lawson, Angus Armstrong, Sara Hughes, Paulo dos Santos, Christian Parenti, Nina Eichacker, Duncan Foley and Ingrid Kvangraven for helping to clarify my ideas. Finally, my special thanks to Tony Norfield for his thorough and much valued feedback and help.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by CNPQ: [Grant Number 200197/2012-6].

Notes

1 For the first front see Boger (1983), Brunhoff (1976, 1998, 2004), Brunhoff and Foley (2006), Carcanholo and Sabadini (2009b), Carchedi (2011), Fine and Saad-Filho (2010), Foley (2005), Harvey (2007), Hilferding (2006 [1910]), Meacci (1998), Mollo (2010), Nelson (2008), Norfield (2016), Paulani (2011, 2014), Perelman (1987), Roberts (2009), Rotta and Teixeira (2016), Saad-Filho (2015), Trindade (2006, 2012). For the second, Brunhoff (2003); Chesnai (Chesnais, 1998b, 1998a, 2001, 2005, 2016), Durand (2017), Fine (Fine, 2009, 2010, 2013b, 2013a), Hudson (2010), Jessop (2015) and Mello and Sabadini (2019). The literature within the cultural studies of finance also explores the concept. See Haiven (2014).

2 The interpretation of IBC is deeply polarised within the literature, which relates to the difficulties to decipher, order and edit Marx’s writings on credit that forms Capital, Part V, Volume III (see Harvey 2007 chapter 9; Lapavitsas 1997, Nelson 1999 chapter 6). If anything, as Harvey notes, while IBC is defined as money lent out to produce surplus value, owners of capital can lend money for a variety of purposes not directly linked with the production of surplus value. For him, this creates some ‘difficulties’ that ‘Marx is aware of but brushes aside for plausible enough reasons’ (Harvey 2007, p. 257).

3 That is to say that with IBC, the contract between lender and borrower may not coincide with the curse of the reproduction process. In this sense, IBC can make the return no longer appears as determined by the reproduction process (Marx 1991, p. 470). Harvey (2007) also highlights this feature brought by IBC. According to him, with IBC ‘a specific time dimension is thereby imposed upon the circulation of capital in general, which opens up all kinds of paths to deal with differential turnover times, circulation times, production periods and so on’ (p. 258).

4 Marx uses financial assets and financial securities interchangeably when referring to fictitious capital. However, there is a difference between financial assets and financial securities. The latter are tradable, which is one important aspect that Marx highlights. For instance, funds in a bank account are financial assets, but they are not tradable – unless they are somehow transformed into a title of ownership such as a certificate of deposit. This paper uses only the term financial security to make clear that titles of fictitious capital must be tradable.

5 Marx uses the term ‘money market’ when discussing the trade of these securities, but nowadays financial markets is the best term to capture the place where these securities are traded.

6 Market value is used interchangeably with monetary value, capital value and asset price.

7 See Bellofiore (2005, p. 137), Brunhoff (1998, p. 176), Brunhoff and Foley (2006, p. 2006), Foley (2005, p. 45), Marx (1991, p. 597), Paulani (2011, p. 791), Perelman (1987, p. 187).

8 In other words, the price of these securities may change due to exclusively market forces, and so the gains and losses due to market value fluctuations become a gamble for the holders of these titles of ownership (Marx 1991, p. 609). Gamble here should not be perceived in a pejorative sense but as a part of the nature of these titles, which then allows for a very peculiar dynamics in the financial markets. Marx (1991) argues, for example, that in times of pressure in the money market, the prices of securities change not only due to interest rate variation but also when they are put up for sale in massive quantities to be converted into money (p. 598). Empirically, leaving the complex details aside, see the case of the US Treasury Bond prices greatly increasing in 1998 and the Long-Term Capital Management hedge fund buying a huge quantity of bonds on the futures market, which caused a significant impact on stock prices (Durand 2017, p. 10). More recently, the COVID-19 pandemic caused severe concern and sent stock markets on a steep downward spiral (Financial Times 2020)

9 Interestingly, Marx also discusses the issue of value and land, arguing that non-produced real assets, such as land, have ‘fictitious value’ because their value does not represent any objectified labour. Where there is no value, there is no price in the sense of values being expressed in money. Hence, in the case of this type of real asset, the price is ‘nothing but capitalised rent’, which is ‘simply the reflection of the surplus profit extracted, in a capitalist reckoning’ (Marx, p. 787). Here we see Marx bringing together his analysis of fictitious capital and theory of rent (Perelman 1987, p. 197). The market value (price) of a piece of land or a waterfall follows the same logic as the price of a financial asset, being prone to speculation in the same way.

10 Real capital is assumed here as the capital invested and functioning in capitalist enterprises (Marx 1991, p. 597).

11 For more examples see Marx (1991), p. 598, p. 599, p. 600 and p. 608.

12 For example, in Fine’s work, I find ‘it [fictitious capital] is distinct from the circulation or performance of the capital it represents’ (Fine 2013a, p. 50, emphasis added) and ‘ … value-generating process (or not) that is supposedly underpinning them’ (Fine 2013b, pp. 10–11, emphasis added). See also Brunhoff and Foley (2006, p. 200), Carcanholo and Sabadini (2009a, p. 44), and Saad-Filho (2015, p. 6).

13 For example, Carcanholo and Sabadini (2009b) argue that Marx is dealing with two types of fictitious capital, bonds and equities. See a similar argument in Meacci (1998).

14 As in Carchedi (2011).

15 As in Foley (2005).

16 See also Norfield (2016, pp. 86–7) who, in the case of shares, argues that the capital does not exist twice. For him, the invested asset and the value of shares in the market have a separate existence. The price of the latter has little to do with the value of the invested capital.

17 One may also contextualise the ambiguities seen in Marx, which might be responsible for the different interpretations of the concept by the literature, within Perelman’s (1987) observation that much of Marx work on fictitious capital had not progressed beyond the stage of inquiry, it remained ‘raw and tentative’ (p. 172).

18 See also the case of how the price of the land is the securitised value of the streams of rents that ‘it (potentially) generates, and which can then be traded as fictitious capital’ (Fine, 2019, p. 454).

19 The range of securities that come under the definition of what Marx termed as fictitious capital is vast. This article neither discusses all types of fictitious capital nor aims to empirically analyse them. For a discussion, for example, of options and futures, see Parsons (1988). On derivatives, see Bryan and Rafferty (2006, 2007), Guttmann (1989, 1994), Lee and LiPuma (2004), Lindo (2013), Norfield (2012a, 2013). See also O’Hara (2009) and Wigan (2010).

20 For exceptions, see, for example, Brunhoff (1976), Foley (2005), Harvey, (2007), Hilferding (2006) [1910], Norfield (2016), and Perelman (1987). For a silent or marginal inclusion, see, for example, Arnon (1984), Itoh and Lapavitsas (1999), Moseley (2015) and Nelson (1999).

21 See Baran and Sweezy (1966), Bin (2015), Brunhoff (1978), Davanzati and Patalano (2017), Davis (2010), Mattick (1969), Michl (2009), O’Connor (1973).

22 It must be mentioned that Marx did not offer a systematic discussion on the role of public debt and public finance in the capitalism system, but there are significant insights in Marx (1963 [1869]), (1963 [1895]) and (Marx, 1991 [1894]). Marxist scholars have not devoted much attention to the role of public debt either, and when they did, the focus was mainly on the macroeconomic dynamics, i.e., on issues around taxation, surplus value, fiscal expropriation, crowing out, public savings and economic growth.

23 From Modigliani and Ando (1976), for example, ‘government bonds typically are backed by the ‘faith and credit’ of the government, not by physical or financial assets’ (pp. 3–4). See also Trindade (2012). Default is, of course, possible, as history has shown us. However, states and their central banks usually hold reserves (in gold, foreign currency and other assets) and the state can tax and print domestic currency.

24 There is a significant difference between what major economies can do in the bond government market and what weaker countries can. The US, for example, does not depend on its ‘tax capacity’ but its hegemonic role in the domination of the world financial system.

25 See Alves (2017), Belluzzo (1997), Braga (1997), Fiori (1997), Gabor (2016b, Gabor and Ban (Gabor & Ban, 2016), Hardie (2012), Lagna (2015, 2016), Miranda (1997), (2003), (2009, 2010).

26 In the case of mainstream economics see Aschauer (2000), Barro & Redlick (2009), Coenen et al. (2012), Hall (2009), Meyer (2001) and Woodford (2011). For post-Keynesian economics, see Arestis & Sawyer (2010), Forges Davanzati, Pacella, & Realfonzo (2009), Godley & Lavoie (2007), Kelton & Wray (2004), Sawyer (2009), and Wray (2006).