Capital, Volume III
Chapter 31. Money Capital and Real Capital. II.
We are still not finished with this question: to what extent does the accumulation of capital in the form of loanable money-capital coincide with actual accumulation, i.e., the expansion of the reproduction process.
The transformation of money into loanable money-capital is a much simpler matter than the transformation of money into productive capital. But two things should be distinguished here:
1) the mere transformation of money into loan capital;
2) the transformation of capital or revenue into money, which is transformed into loan capital.
It is only the latter point which can involve a positive accumulation of loan capital connected with an actual accumulation of industrial capital.
1. TRANSFORMATION OF MONEY INTO LOAN CAPITAL
We have already seen that a large build-up or surplus of loan capital can occur, which is connected with productive accumulation only to the extent that it is inversely proportional to it. This is the case in two phases of the industrial cycle, namely, first, when industrial capital in both its forms of productive and commodity-capital is contracted, i.e., at the beginning of the cycle after the crisis; and, secondly, when the improvement begins, but when commercial credit still does not use bank credit to a great extent. In the first case, money-capital, which was formerly employed in production and commerce, appears as idle loan capital; in the second case, it appears used to an increasing extent, but at a very low rate of interest, because the industrial and commercial capitalists now prescribe terms to the money-capitalist. The surplus of loan capital expresses, in the first case, a stagnation of industrial capital, and in the second, a relative independence of commercial credit from banking credit — based on the fluidity of the returns, short-term credit, and a preponderance of operations with one's own capital. The speculators, who count on the credit capital of other people, have not yet appeared on the field; the people who work with their own capital are still far removed from approximately pure credit operations. In the former phase, the surplus of loan capital is directly opposite to expressing actual accumulation. In the second phase, it coincides with a renewed expansion of the reproduction process — it accompanies it, but is not its cause. The surplus of loan capital is already decreasing, i.e., it is still only relative compared to the demand. In both cases, the expansion of the actual process of accumulation is promoted by the fact that the low interest — which coincides in the first case with low prices and in the second, with slowly rising prices — increases that portion of the profit which is transformed into profit of enterprise. This takes place to an even greater extent when interest rises to its average level during the height of the period of prosperity, when it has indeed grown, but not relative to profit.
We have seen, on the other hand, that an accumulation of loan capital can take place without any actual accumulation, i.e., by mere technical means such as an expansion and concentration of the banking system; and a saving in the circulation reserve, or in the reserve fund of private means of payment, which are then always transformed into loan capital for a short time. Although this loan capital, which, for this reason, is also called floating capital, always retains the form of loan capital only for short periods of time (and should indeed also be used for discounting only for short periods of time), there is a continual ebb and flow of it. If one draws some away, another adds to it. The mass of loanable money-capital thus grows quite independently of the actual accumulation (we are not speaking here at all about loans for a number of years but only of short-term ones on bills of exchange and deposits).
Bank Committee, 1857. Question 501. "What do you mean by 'floating capital'?"-[Answer of Mr. Weguelin, Governor of the Bank of England:] "It is capital applicable to loans of money for short periods.... (502) The Bank of England notes ... the country banks circulation, and the amount of coin which is in the country." [Question:] "It does not appear from the returns before the Committee, if by floating capital you mean the active circulation" [of the notes of the Bank of England], "that there is any very great variation in the active circulation?" [But there is a very great difference whether this active circulation is advanced by the money-lender or by the reproductive capitalist himself. Weguelin's answer:] "I include in floating capital the reserves of the bankers, in which there is a considerable fluctuation."
That is to say, there is considerable fluctuation in that portion of the deposits which the bankers have not loaned out again, but which figures as their reserve and for the greater part also as the reserve of the Bank of England, where they are deposited. Finally, the same gentleman says: floating capital may be bullion, that is, bar and coin (503). It is truly wonderful how in this credit gibberish of the money-market all categories of political economy receive a different meaning and a different form. Floating capital is the expression there for circulating capital, which is, of course, something quite different, and money is capital, and bullion is capital, and bank-notes are circulation, and capital is a commodity, and debts are commodities, and fixed capital is money invested in hard-to-sell paper!
"The joint-stock banks of London ... have increased their deposits from £8,850,774 in 1847 to £43,100,724 in 1857.... The evidence given to your Committee leads to the inference that of this vast amount, a large part has been derived from sources not heretofore made available for this purpose; and that the practice of opening accounts and depositing money with bankers has extended to numerous classes who did not formerly employ their capital (!) in that way. It is stated by Mr. Rodwell, the Chairman of the Association of the Private Country Bankers" [distinguished from joint-stock banks], "and delegated by them to give evidence to your Committee, that in the neighbourhood of Ipswich this practice has lately increased four-fold among the farmers and shopkeepers of that district; that almost every farmer, even those paying only £50 per annum rent, now keeps deposits with bankers. The aggregate of these deposits of course finds its way to the employments of trade, and especially gravitates to London, the centre of commercial activity, where it is employed first in the discount of bills, or in other advances to the customers of the London bankers. That large portion, however, for which the bankers themselves have no immediate demand passes into the hands of the bill-brokers, who give to the banker in return commercial bills already discounted by them for persons in London and in different parts of the country, as a security for the sum advanced by the banker." (Bank Committee, 1858, p. V.)
By making advances to the bill-broker on bills of exchange which this broker has already discounted once, the banker does, in fact, rediscount them; but in reality, very many of these bills have already been rediscounted by the bill-broker, and with the same money that the banker uses to rediscount the bills of the bill-broker, the latter rediscounts new bills. What this leads to is shown by the following:
"Extensive fictitious credits have been created by means of accommodation bills, and open credits, great facilities for which have been afforded by the practice of joint-stock country banks discounting such bills, and rediscounting them with the bill-brokers in the London market, upon the credit of the bank alone, without reference to the quality of the bills otherwise" (loc. cit., p. XXI).
Concerning this rediscounting and the assistance which this purely technical increase of loanable money-capital gives to credit swindles, the following extract from the Economist is of interest:
"For some years past capital" [namely, loanable money-capital] "has accumulated in some districts of the country more rapidly than it could be used, while, in others, the means of employing capital have increased more rapidly than the capital itself. While the bankers in the purely agricultural districts throughout the kingdom found no sufficient means of profitably and safely employing their deposits in their own districts, those in the large mercantile towns, and in the manufacturing and mining districts, have found a larger demand for capital than their own means could supply. The effect of this relative state of different districts has led, of late years, to the establishment and rapid extension of a new class of houses in the distribution of capital, who, though usually called bill-brokers, are in reality bankers upon an immense scale. The business of these houses has been to receive, for such periods, and at such rates of interest as were agreed upon, the surplus-capital of bankers in those districts where it could not be employed, as well as the temporary unemployed moneys of public companies and extensive mercantile establishments, and advance them at higher rates of interest to bankers in those districts where capital was more in demand, generally by rediscounting the bills taken from their customers ... and in this way Lombard Street has become the great centre in which the transfer of spare capital has been made from one part of the country, where it could not be profitably employed, to another, where a demand existed for it, as well as between individuals similarly circumstanced. At first these transactions were confined almost exclusively to borrowing and lending on banking securities. But as the capital of the country rapidly accumulated, and became more economised by the establishment of banks, the funds at the disposal of these 'discount houses' became so large that they were induced to make advances first on dock warrants of merchandise (storage bills on commodities in docks), and next on bills of lading, representing produce not even arrived in this country, though sometimes, if not generally, secured by bills drawn by the merchant upon his broker. This practice rapidly changed the whole character of English commerce. The facilities thus afforded in Lombard Street gave extensive powers to the brokers in Mincing Lane, who on their part ... offered the full advantage of them to the importing merchant; who so far took advantage of them, that, whereas 25 years ago, the fact that a merchant received advances on his bills of lading, or even his dock warrants, would have been fatal to his credit, the practice has become so common of late years that it may be said to be now the general rule, and not the rare exception, as it was 25 years ago. Nay, so much further has this system been carried, that large sums have been raised in Lombard Street on bills drawn against the forthcoming crops of distant colonies. The consequence of such facilities being thus granted to the importing merchants led them to extend their transactions abroad, and to invest their floating capital with which their business has hitherto been conducted, in the most objectionable of all fixed securities-foreign plantations — over which they could exercise little or no control. And thus we see the direct change of credit through which the capital of the country, collected in our rural districts, and in small amounts in the shape of deposits in country banks, and centres in Lombard Street for employment, has been, first, made available for the extending operations in our mining and manufacturing districts, by the rediscount of bills to banks in those localities; next, for granting greater facilities for the importation of foreign produce by advances upon dock warrants and bills of lading, and thus liberating the 'legitimate' mercantile capital of houses engaged in foreign and colonial trade, and inducing to its most objectionable advances on foreign plantations." (Economist,November 20, 1847, p. 1334.)
This is how credits are "nicely" devoured. The rural depositor fancies that he deposits only with his banker, and fancies furthermore that when his banker lends to others, it is done to private persons whom he knows. He has not the slightest suspicion that this banker places his deposit at the disposal of some London bill-broker, over whose operations neither of them have the slightest control.
We have already seen how large public enterprises, such as railways, may momentarily increase loan capital, owing to the circumstance that the deposited amounts always remain at the disposal of the bankers for a certain length of time until they are really used.
Incidentally, the mass of loan capital is quite different from the quantity of circulation. By the quantity of circulation we mean here the sum of all the bank-notes and coin, including bars of precious metals, existing and circulating in a country. A portion of this quantity constitutes the reserve of the banks which continuously vary in magnitude.
"On November 12, 1857" [the date of the suspension of the Bank Act of 1844], "the entire reserve of the Bank of England was only £580,751 (including London and all its branches); their deposits at the same time amounting to £22,500,000; of which near six and a half million belonged to London bankers. " (Bank Acts, 1858, p. LVII.)
The variations in the interest rate (aside from those occurring over longer periods or the variation in the interest rate among various countries; the former are dependent upon variations in the general rate of profit, the latter on differences in the rates of profit and in the development of credit) depend upon the supply of loan capital (all other circumstances, state of confidence, etc. being equal), that is, of capital loaned in the form of money, coin and notes; in contradistinction to industrial capital, which, as such — in commodity-form — is loaned by means of commercial credit among the agents of reproduction themselves.
However, the mass of this loanable money-capital is different from, and independent of, the mass of circulating money.
For example, if £20 were loaned five times per day, a money-capital of £100 would be loaned, and this would imply at the same time that this £20 would have served, moreover, at least four times as a means of purchase or payment; for, if no purchase and payment intervened — so that it would not have represented at least four times the converted form of capital (commodities, including labour-power) — it would not constitute a capital of £100, but only five claims of £20 each.
In countries with a developed credit, we can assume that all money-capital available for lending exists in the form of deposits with banks and money-lenders. This is at least true for business as a whole. Moreover, in times of flourishing business, before the real speculation gets underway — when credit is easy and confidence is growing — most of the functions of circulation are settled by a simple transfer of credit, without the help of coin or paper money.
The mere possibility of large sums of deposits existing when a relatively small quantum of a medium of circulation is available, depends solely on:
1) the number of purchases and payments which the same coin performs;
2) the number of return excursions, whereby it goes back to the banks as deposits, so that its repeated function as a means of purchase and payment is promoted through its renewed transformation into deposits. For example, a small dealer deposits weekly with his banker £100 in money; the banker pays out a portion of the deposit of a manufacturer with this; the latter pays it to his workers; and the workers use it to pay the small dealer, who deposits it in the bank again. The £100 deposited by this small dealer have served, therefore, first, to pay the manufacturer a deposit of his; secondly, to pay the workers; thirdly, to pay the dealer himself; fourthly, to deposit another portion of the money-capital of the same small dealer; thus at the end of twenty weeks, if he himself did not have to draw against this money, he would have deposited £2,000 in the bank by means of the same £100.
To what extent this money-capital is idle, is shown only by the ebb and flow in the reserve fund of the banks. Therefore, Mr. Weguelin, Governor of the Bank of England in 1857, concludes that the gold of the Bank of England is the "only" reserve capital:
"1258. Practically, I think, the rate of discount is governed by the amount of unemployed capital which there is in the country. The amount of unemployed capital is represented by the reserve of the Bank of England, which is practically a reserve of bullion. When, therefore, the bullion is drawn upon, it diminishes the amount of unemployed capital in the country, and consequently raises the value of that which remains." — [Newmarch] "1364. The reserve of bullion in the Bank of England is, in truth, the central reserve, or hoard of treasure, upon which the whole trade of the country is carried on... And it is upon that hoard or reservoir that the action of the foreign exchanges always falls." (Report on Bank Acts, 1857 [PP. 108, 119].)
The statistics of exports and imports furnish a measure of the accumulation of real, i.e., productive and commodity-capital. These always show that, during the ten-year cyclical periods of development of British industry (1815 to 1870), the maximum of the last prosperity before the crisis always reappears as the minimum of the following prosperity, whereupon it rises to a new and far higher peak.
The actual or declared value of the exported products from Great Britain and Ireland in the prosperity year of 1824 was £40,396,300. With the crisis of 1825, the amount of exports then falls below this sum and fluctuates between 35 and 39 million annually. With the return of prosperity in 1834, it rises above the former maximum to £41,649,191, and reaches in 1836 the new maximum of £53,368,571. Beginning with 1837, it falls again to 42 million, so that the new minimum is already higher than the old maximum, and then fluctuates between 50 and 53 million. The return of prosperity lifts the amount of exports in 1844 to £58,500,000, whereby the peak of 1836 is again already far exceeded. In 1845, it reaches £60,111,082; it then falls to something over 57 million in 1846, reaches in 1847 almost 59 million, in 1848 almost 53 million, rises in 1849 to 63,500,000, in 1853 to nearly 99 million, in 1854 to 97 million, in 1855 to 94,500,000, in 1856 almost 116 million and reaches a peak of 122 million in 1857. It falls in 1858 to 116 million, rises already in 1859 to 130 million, in 1860 to nearly 136 million, in 1861 only 125 million (the new low is here again higher than the former peak), in 1863 to 146,500,000.
Of course, the same thing could be demonstrated in the case of imports, which shows the expansion of the market; here it is only a matter of the scale of production. [Of course, this holds true of England only for the time of its actual industrial monopoly; but it applies in general to the whole complex of countries with modern large-scale industries, as long as the world-market is still expanding. — F. E.]
2. TRANSFORMATION OF CAPITAL OR REVENUE INTO MONEY THAT IS TRANSFORMED INTO LOAN CAPITAL
We will consider here the accumulation of money-capital, in so far as it is not an expression either of a stoppage in the flow of commercial credit or of an economy — whether it be an economy in the actual circulating medium or in the reserve capital of the agents engaged in reproduction.
Aside from these two cases, an accumulation of money-capital can arise through an unusual inflow of gold, as in 1852 and 1853 as a result of the new Australian and Californian gold mines. This gold was deposited in the Bank of England. The depositors received notes for it, which they did not directly redeposit with bankers. By this means the circulating medium was unusually increased. (Testimony of Weguelin, Bank Committee, 1857, No. 1329.) The Bank strove to utilise these deposits by lowering its discount to 2%. The mass of gold accumulated in the Bank rose during six months of 1853 to 22-23 million.
The accumulation of all money-lending capitalists naturally always takes place directly in money-form, whereas we have seen that the actual accumulation of industrial capitalists is accomplished, as a rule, by an increase in the elements of reproductive capital itself. Hence, the development of the credit system and the enormous concentration of the money-lending business in the hands of large banks must, by themselves alone, accelerate the accumulation of loanable capital, as a form distinct from actual accumulation. This rapid development of loan capital is, therefore, a result of actual accumulation, for it is a consequence of the development of the reproduction process, and the profit which forms the source of accumulation for these money-capitalists is only a deduction from the surplus-value which the reproductive ones filch (and it is at the same time the appropriation of a portion of the interest from the savings of others). Loan capital accumulates at the expense of both the industrial and commercial capitalists. We have seen that in the unfavourable phases of the industrial cycle the rate of interest may rise so high that it temporarily consumes the whole profit of some lines of business which are particularly handicapped. At the same time, prices of government and other securities fall. It is at such times that the money-capitalists buy this depreciated paper in huge quantities which in the later phases soon regains its former level and rises above it. It is then sold again and a portion of the money-capital of the public is thus appropriated. That portion which is not sold yields a higher interest because it was bought below par. But the money-capitalists convert all profits made, and reconverted by them into capital, first into loanable money-capital. The accumulation of the latter — as distinct from the actual accumulation, although its offshoot — thus takes place, even when we consider only the money-capitalists, bankers, etc., by themselves, as an accumulation of this particular class of capitalists. And it must grow with every expansion of the credit system which accompanies the actual expansion of the reproduction process.
If the interest rate is low, this depreciation of the money-capital falls principally upon the depositors, not upon the banks. Before the development of stock banks, ¾ of all the deposits in England lay in the banks without yielding interest. While interest is now paid on them, it amounts to at least 1% less than the current rate of interest.
As for the money accumulation of the other classes of capitalists, we disregard that portion of it which is invested in interest-bearing paper and accumulates in this form. We consider only that portion which is thrown upon the market as loanable money-capital.
In the first place, we have here that portion of the profit which is not spent as revenue, but is set aside for accumulation — for which, however, the industrial capitalists have no use in their own business at the moment. This profit exists directly in commodity-capital, a part of whose value it constitutes, and along with which it is realised in money. Now, if it is not reconverted into the production elements of commodity-capital (we leave out of consideration for the present the merchant, whom we shall discuss separately), it must remain for a length of time in the form of money. This amount increases with the amount of capital itself, even when the rate of profit declines. That portion which is to be spent as revenue is gradually consumed, but, in the meantime, as deposits, it constitutes loan capital with the banker. Thus, even the growth of that portion of profit which is spent as revenue expresses itself as a gradual and continually repeated accumulation of loan capital. The same is true of the other portion, which is intended for accumulation. Therefore, with the development of the credit system and its organisation, even an increase in revenue, i.e., the consumption of the industrial and commercial capitalists, expresses itself as an accumulation of loan capital. And this holds true for all revenues so far as they are consumed gradually, in other words, for ground-rent, wages in their higher form, incomes of unproductive classes, etc. All of them assume for a certain time the form of money revenue and are, therefore, convertible into deposits and thus into loan capital. All revenue — whether it be intended for consumption or accumulation — as long as it exists in some form of money, is a part of the value of commodity-capital transformed into money, and is, for this reason, an expression and result of actual accumulation, but is not productive capital itself. When a spinner has exchanged his yarn for cotton — that portion which constitutes revenue however for money, the real existence of his industrial capital is the yarn, which has passed into the hands of the weaver or, perhaps, of some private consumer, and the yarn is, in fact, the existence — whether it is for reproduction or consumption — of the capital-value as well as the surplus-value contained in it. The magnitude of the surplus-value transformed into money depends upon the magnitude of the surplus-value contained in the yarn. But as soon as it has been transformed into money, this money is only the value existence of this surplus-value. And as such it becomes a moment of loan capital. For this purpose, nothing more is required than that it be transformed into a deposit, if it has not already been loaned out by its owner. But in order to be retransformed into productive capital, it must, on the other hand, already have reached a certain minimum limit.
Money-Capital and Real Capital. III
Chapter 32. Money Capital and Real Capital. III.
The mass of money to be transformed back into capital in this manner is a result of the enormous reproduction process, but considered by itself, as loanable money-capital, it is not itself a mass of reproductive capital.
The most important point of our presentation so far is that the expansion of the part of the revenue intended for consumption (leaving out of consideration the worker, because his revenue is equal to the variable capital) shows itself at first as an accumulation of money-capital. A factor, therefore, enters into the accumulation of money-capital that is essentially different from the actual accumulation of industrial capital; for the portion of the annual product which is intended for consumption does not by any means become capital. A portion of it replaces capital, i.e., the constant capital of the producers of means of consumption, but to the extent that it is actually transformed into capital, it exists in the natural form of the revenue of the producers of this constant capital. The same money, which represents the revenue and serves merely for the promotion of consumption, is regularly transformed into loanable money-capital for a period of time. In so far as this money represents wages, it is at the same time the money-form of the variable capital; and in so far as it replaces the constant capital of the producers of means of consumption, it is the money-form temporarily assumed by their constant capital and serves to purchase the components of their constant capital to be replaced in kind. Neither in the one nor in the other form does it express in itself accumulation, although its quantity increases with the growth of the reproduction process. But it performs temporarily the function of loanable money, i.e., of money-capital. In this respect, therefore, the accumulation of money-capital must always reflect a greater accumulation of capital than actually exists, owing to the fact that the extension of individual consumption, because it is promoted by means of money, appears as an accumulation of money-capital, since it furnishes the money-form for actual accumulation, i.e., for money which permits new investments of capital.
Thus, the accumulation of loanable money-capital expresses in part only the fact that all money into which industrial capital is transformed in the course of its circuit assumes the form not of money advanced by the reproductive capitalists, but of money borrowed by them; so that indeed the advance of money that must take place in the reproduction process appears as an advance of borrowed money. In fact, on the basis of commercial credit, one person lends to another the money required for the reproduction process. But this now assumes the following form: the banker, who receives the money as a loan from one group of the reproductive capitalists, lends it to another group of reproductive capitalists, so that the banker appears in the role of a supreme benefactor; and at the same time, the control over this capital falls completely into the hands of the banker in his capacity as middleman.
A few special forms of accumulation of money-capital still remain to be mentioned. For example, capital is released by a fall in the price of the elements of production, raw materials, etc. If the industrial capitalist cannot expand his reproduction process immediately, a portion of his money-capital is expelled from the circuit as superfluous and is transformed into loanable money-capital. Secondly, however, capital in the form of money is released especially by the merchant, whenever interruptions in his business take place. If the merchant has completed a series of transactions and cannot begin a new series because of such interruptions until later, the money realised represents for him only a hoard, surplus-capital. But at the same time, it represents a direct accumulation of loanable money-capital. In the first case, the accumulation of money-capital expresses a repetition of the reproduction process under more favourable conditions, an actual release of a portion of formerly tied-up capital; in other words, an opportunity for expanding the reproduction process with the same amount of money. But in the other case, it expresses merely an interruption in the flow of transactions. However, in both cases it is converted into loanable money-capital, represents its accumulation, influences equally the money-market and the rate of interest — although it expresses a promotion of the actual accumulation process in one case and its obstruction in the other. Finally, accumulation of money-capital is influenced by the number of people who have feathered their nests and have withdrawn from reproduction. Their number increases as more profits are made in the course of the industrial cycle. In this case, the accumulation of loanable money-capital expresses, on the one hand, an actual accumulation (in accordance with its relative extent), and, on the other hand, only the extent of the transformation of the industrial capitalists into mere money-capitalists.
As for the other portion of profit, which is not intended to be consumed as revenue, it is converted into money-capital only when it is not immediately able to find a place for investment in the expansion of business in the productive sphere in which it has been made. This may be due to two causes. Either because this sphere of production is saturated with capital, or because accumulation must first reach a certain volume before it can serve as capital, depending on the investment magnitudes of new capital required in this particular sphere. Hence it is converted for a while into loanable money-capital and serves in the expansion of production in other spheres. Assuming all other conditions being equal, the quantity of profits intended for transformation back into capital will depend on the quantity of profits made and thus on the extension of the reproduction process itself. But if this new accumulation meets with difficulties in its employment, through a lack of spheres for investment, i.e., due to a surplus in the branches of production and an over-supply of loan capital, this plethora of loanable money-capital merely shows the limitations of capitalist production. The subsequent credit swindle proves that no real obstacle stands in the way of the employment of this surplus-capital. However, an obstacle is indeed immanent in its laws of expansion, i.e., in the limits in which capital can realise itself as capital. A plethora of money-capital as such does not necessarily indicate over-production, not even a shortage of spheres of investment for capital.
The accumulation of loan capital consists simply in the fact that money is precipitated as loanable money. This process is very different from an actual transformation into capital; it is merely the accumulation of money in a form in which it can be transformed into capital. But this accumulation can reflect, as we have shown, events which are greatly different from actual accumulation. As long as actual accumulation is continually expanding, this extended accumulation of money-capital may be partly its result, partly the result of circumstances which accompany it but are quite different from it, and, finally, even partly the result of impediments to actual accumulation. If for no other reason than that accumulation of loan capital is inflated by such circumstances, which are independent of actual accumulation but nevertheless accompany it, there must be a continuous plethora of money-capital in definite phases of the cycle and this plethora must develop with the expansion of credit. And simultaneously with it, the necessity of driving the production process beyond its capitalistic limits must also develop: over-trade, over-production, and excessive credit. At the same time, this must always take place in forms that call forth a reaction.
As far as accumulation of money-capital from ground-rent, wages, etc., is concerned, it is not necessary to discuss that matter here. Only one aspect should be emphasised and that is that the business of actual saving and abstinence (by hoarders), to the extent that it furnishes elements of accumulation, is left by the division of labour, which comes with the progress of capitalist production, to those who receive the minimum of such elements, and who frequently enough lose even their savings, as do the labourers when banks fail. On the one hand, the capital of the industrial capitalist is not "saved" by himself, but he has command of the savings of others in proportion to the magnitude of his capital; on the other hand, the money-capitalist makes of the savings of others his own capital, and of the credit, which the reproductive capitalists give to one another and which the public gives to them, a private source for enriching himself. The last illusion of the capitalist system, that capital is the fruit of one’s own labour and savings, is thereby destroyed. Not only does profit consist in the appropriation of other people’s labour, but the capital, with which this labour of others is set in motion and exploited, consists of other people’s property, which the money-capitalist places at the disposal of the industrial capitalists, and for which he in turn exploits the latter.
A few remarks remain to be made about credit capital.
How often the same piece of money can figure as loan capital, wholly depends, as we have already previously shown, on:
1) how often it realises commodity-values in sale or payment, thus transfers capital, and furthermore how often it realises revenue. How often it gets into other hands as realised value, either of capital or of revenue, obviously depends, therefore, on the extent and magnitude of the actual transactions;
2) this depends on the economy of payments and the development and organisation of the credit system;
3) finally, the concatenation and velocity of action of credits, so that when a deposit is made at one point it immediately starts off as a loan at another.
Even assuming that the form in which loan capital exists is exclusively that of real money, gold or silver — the commodity whose substance serves as a measure of value — a large portion of this money-capital is always necessarily purely fictitious, that is, a title to value — just as paper money. In so far as money functions in the circuit of capital, it constitutes indeed, for a moment, money-capital; but it does not transform itself into loanable money-capital; it is rather exchanged for the elements of productive capital, or paid out as a medium of circulation in the realisation of revenue, and cannot, therefore, transform itself into loan capital for its owner. But in so far as it is transformed into loan capital, and the same money repeatedly represents loan capital, it is evident that it exists only at one point in the form of metallic money; at all other points it exists only in the form of claims to capital. With the assumption made, the accumulation of these claims arises from actual accumulation, that is, from the transformation of the value of commodity-capital, etc., into money; but nevertheless the accumulation of these claims or titles as such differs from the actual accumulation from which it arises, as well as from the future accumulation (the new production process), which is promoted by the lending of this money.
Prima facie loan capital always exists in the form of money,[9] later as a claim to money, since the money in which it originally exists is now in the hands of the borrower in actual money-form. For the lender it has been transformed into a claim to money, into a title of ownership. The same mass of actual money can, therefore, represent very different masses of money-capital. Mere money, whether it represents realised capital or realised revenue, becomes loan capital through the simple act of lending, through its transformation into a deposit, if we consider the general form in a developed credit system. The deposit is money-capital for the depositor. But in the hands of the banker it may be only potential money-capital, which lies idle in his safe instead of in its owner’s.[10]
With the growth of material wealth the class of money-capitalists grows; on the one hand, the number and the wealth of retiring capitalists, rentiers, increases; and on the other hand, the development of the credit system is promoted, thereby increasing the number of bankers, money-lenders, financiers, etc. With the development of the available money-capital, the quantity of interest-bearing paper, government securities, stocks, etc., also grows as we have previously shown. However, at the same time the demand for available money-capital also grows, the jobbers, who speculate with this paper, playing a prominent role on the money-market. If all the purchases and sales of this paper were only an expression of actual investments of capital, it would be correct to say that they could have no influence on the demand for loan capital, since when A sells his paper, he draws exactly as much money as B puts into the paper. But even if the paper itself exists though not the capital (at least not as money-capital) originally represented by it, it always creates pro tanto a new demand for such money-capital. But at any rate it is then money-capital, which was previously at the disposal of B but is now at the disposal of A.
B. A. 1857. No. 4886. "Do you consider that it is a correct description of the causes which determined the rate of discount, to say that it is fixed by the quantity of capital on the market, which is applicable to the discount of mercantile bills, as distinguished from other classes of securities?" — [Chapman:] "No, I think that the question of interest is affected by all convertible securities of a current character; it would be wrong to limit it simply to the discount of bills, because it would be absurd to say that when there is a great demand for money upon [the deposit of] consols, or even upon Exchequer bills, as has ruled very much of late, at a rate much higher than the commercial rate, our commercial world is not affected by it; it is very materially affected by it." — "4890. When sound and current securities, such as bankers acknowledge to be so, are on the market, and people want to borrow money upon them, it certainly has its effect upon commercial bills; for instance, I can hardly expect a man to let me have money at 5% upon commercial bills, if he can lend his money at the same moment at 6% upon consols, or whatever it may be; it affects us in the same manner; a man can hardly expect me to discount bills at 5½%, if I can lend my money at 6%." — "4892. We do not talk of investors who buy their £2,000, or £5,000, or £40,000, as affecting the money-market materially. If you ask me as to the rate of interest upon [a deposit of] consols, I allude to people, who deal in hundreds of thousands of pounds, who are what are called jobbers, who take large portions of loans, or make purchases on the market, and have to hold that stock till the public take it off their hands at a profit; these men, therefore, want money."
With the development of the credit system; great concentrated money-markets are created, such as London, which are at the same time the main seats of trade in this paper. The bankers place huge quantities of the public’s money-capital at the disposal of this unsavoury crowd of dealers, and thus this brood of gamblers multiplies.
"Money upon the Stock Exchange is, generally speaking, cheaper than it is elsewhere," says James Morris the incumbent of the Governor’s chair of the Bank of England in 1848 before the Secret Committee of Lords (C. D. 1848, printed 1857, No. 219).
In the discussion on interest-bearing capital, we have already shown that the average interest over a long period of years, other conditions remaining equal, is determined by the average rate of profit; not profit of enterprise, which is nothing more than profit minus interest. [Present edition: Ch. XXII. — Ed.]
It has also been mentioned, and will be further analysed in another place, that also for the variations in commercial interest, that is, interest calculated by the money-lenders for discounts and loans within the commercial world, a phase is reached, in the course of the industrial cycle, in which the rate of interest exceeds its minimum and reaches its mean level (which it exceeds later) and that this movement is a result of a rise in profits.
In the meantime, two things are to be noted here.
First: When the rate of interest stays up for a long time (we are speaking here of the rate of interest in a given country like England, where the average rate of interest is given over a lengthy period of time, and also shows itself in the interest paid on long-term loans — what could be called private interest), it is prima facie proof that the rate of profit is high during this period, but it does not prove necessarily that the rate of profit of enterprise is high. This latter distinction is more or less removed for capitalists, who operate mainly with their own capital; they realise the high rate of profit, since they pay the interest to themselves. The possibility of a high rate of interest of long duration is present when the rate of profit is high; this does not refer, however, to the phase of actual squeeze. But it is possible that this high rate of profit may leave only a low rate of profit of enterprise, after the high rate of interest has been deducted. The rate of profit of enterprise may shrink, while the high rate of profit continues. This is possible because the enterprises must be continued, once they have been started. During this phase, operations are carried on to a large extent with pure credit capital (capital of other people); and the high rate of profit may be partly speculative and prospective. A high rate of interest can be paid with a high rate of profit but decreasing profit of enterprise. It can be paid (and this is done in part during times of speculation), not out of the profit, but out of the borrowed capital itself, and this can continue for a while.
Secondly: The statement that the demand for money-capital, and therefore the rate of interest, grows, because the rate of profit is high, is not identical with the statement that the demand for industrial capital grows and therefore the rate of interest is high.
In times of crisis, the demand for loan capital, and therefore the rate of interest, reaches its maximum; the rate of profit, and with it the demand for industrial capital, has to all intents and purposes disappeared. During such times, everyone borrows only for the purpose of paying, in order to settle previously contracted obligations. On the other hand, in times of renewed activity after a crisis, loan capital is demanded for the purpose of buying and for the purpose of transforming money-capital into productive or commercial capital. And then it is demanded either by the industrial capitalist or the merchant. The industrial capitalist invests it in means of production and in labour-power.
The rising demand for labour-power can never by itself be a cause for a rising rate of interest, in so far as the latter is determined by the rate of profit. Higher wages are never a cause for higher profits, although they may be one of the consequences of higher profits during some particular phases of the industrial cycle.
The demand for labour-power can increase because the exploitation of labour takes place under especially favourable circumstances, but the rising demand for labour-power, and thus for variable capital, does not in itself increase the profit; it, on the contrary, lowers it pro tanto. But the demand for variable capital can nevertheless increase at the same time, thus also the demand for money-capital — which can raise the rate of interest. The market-price of labour-power then rises above its average, more than the average number of labourers are employed, and the rate of interest rises at the same time because under such circumstances the demand for money-capital rises. The rising demand for labour-power raises the price of this commodity, as every other, increases its price; but not the profit, which depends mainly upon the relative cheapness of this commodity in particular. But it raises at the same time — under the assumed conditions — the rate of interest, because it increases the demand for money-capital. If the money-capitalist, instead of lending the money, should transform himself into an industrial capitalist, the fact that he has to pay more for labour-power would not increase his profit but would rather decrease it correspondingly. The state of business may be such that his profit may nevertheless rise, but it would never be so because he pays more for labour. The latter circumstance, in so far as it increases the demand for money-capital, is, however, sufficient to raise the rate of interest. If wages should rise for some reason during an otherwise unfavourable state of business, the rise in wages would lower the rate of profit, but raise the rate of interest to the extent that it increased the demand for money-capital.
Leaving labour aside, the thing called "demand for capital" by Overstone consists only in a demand for commodities. The demand for commodities raises their price, either because it rises above average, or because the supply of commodities falls below average. If the industrial capitalist or merchant must now pay, e.g., £150 for the same amount of commodities for which he used to pay £100, he would now have to borrow £150 instead of the former £100, and if the rate of interest were 5%, he would now have to pay an interest of £7½ as compared with £5 formerly. The amount of interest to be paid by him would rise because he now has to borrow more capital.
The whole endeavour of Mr. Overstone consists in representing the interests of loan capital and industrial capital as being identical, whereas his Bank Act is precisely calculated to exploit this very difference of interests to the advantage of money-capital.
It is possible that the demand for commodities, in case their supply has fallen below average, does not absorb any more money-capital than formerly. The same sum, or perhaps a smaller one, has to be paid for their total value, but a smaller quantity of use-values is received for the same sum. In this case, the demand for loanable capital will be unchanged and therefore rate of interest will not rise, although the demand for commodities would have risen as compared to their supply and consequently the price of commodities would have become higher. The rate of interest cannot be affected, unless the total demand for loan capital increases, and this is not the case under the above assumptions.
The supply of an article can also fall below average, as it does when crop failures in corn, cotton, etc., occur; and the demand for loan capital can increase because speculation in these commodities counts on further rise in prices and the easiest way to make them rise is to temporarily withdraw a portion of the supply from the market. But in order to pay for the purchased commodities without selling them, money is secured by means of the commercial "bill of exchange operations." In this case, the demand for loan capital increases, and the rate of interest can rise as a result of this attempt to artificially prevent the supply of this commodity from reaching the market. The higher rate of interest then reflects an artificial reduction in the supply of commodity-capital. On the other hand, the demand for an article can grow because its supply has increased and the article sells below its average price.
In this case, the demand for loan capital can remain the same, or even fall, because more commodities can be had for the same sum of money. Speculative stock-piling could also occur, either for the purpose of taking advantage of the most favourable moment for production purposes, or in expectation of a future rise in prices. In this case, the demand for loan capital could grow, and the rise in the rate of interest would then be a reflection of capital investment in surplus stock-piling of elements of productive capital. We are only considering here the demand for loan capital as it is influenced by the demand for, and supply of, commodity-capital. We have already discussed how the varying state of the reproduction process in the phases of the industrial cycle influences the supply of loan capital. The trivial proposition that the market rate of interest is determined by the supply and demand of (loan) capital is shrewdly jumbled up by Overstone with his own postulate, namely, that loan capital is identical with capital in general; and in this way he tries to transform the usurer into the only capitalist and his capital into the only capital.
In times of stringency, the demand for loan capital is a demand for means of payment and nothing else; it is by no means a demand for money as a means of purchase. At the same time, the rate of interest may rise very high, regardless whether real capital, i.e., productive and commodity capital, exists in abundance or is scarce. The demand for means of payment is a mere demand for convertibility into money, so far as merchants and producers have good securities to offer; it is a demand for money-capital whenever there is no collateral, so that an advance of means of payment gives them not only the form of money but also the equivalent they lack, whatever its form, with which to make payment. This is the point where both sides of the controversy on the prevalent theory of crises are at the same time right and wrong. Those who say that there is merely a lack of means of payment, either have only the owners of bona fide securities in mind, or they are fools who believe that it is the duty and power of banks to transform all bankrupt swindlers into solvent and respectable capitalists by means of pieces of paper. Those who say that there is merely a lack of capital, are either just quibbling about words, since precisely at such times there is a mass of inconvertible capital as a result of over-imports and over-production, or they are referring only to such cavaliers of credit who are now, indeed, placed in the position where they can no longer obtain other people’s capital for their operations and now demand that the bank should not only help them to pay for the lost capital, but also enable them to continue with their swindles.
It is a basic principle of capitalist production that money, as an independent form of value, stands in opposition to commodities, or that exchange-value must assume an independent form in money; and this is only possible when a definite commodity becomes the material whose value becomes a measure of all other commodities, so that it thus becomes the general commodity, the commodity par excellence — as distinguished from all other commodities. This must manifest itself in two respects, particularly among capitalistically developed nations, which to a large extent replace money, on the one hand, by credit operations, and on the other by credit-money. In times of a squeeze, when credit contracts or ceases entirely, money suddenly stands as the only means of payment and true existence of value in absolute opposition to all other commodities. Hence the universal depreciation of commodities, the difficulty or even impossibility of transforming them into money, i.e., into their own purely fantastic form. Secondly, however, credit-money itself is only money to the extent that it absolutely takes the place of actual money to the amount of its nominal value. With a drain on gold its convertibility, i.e., its identity with actual gold becomes problematic. Hence coercive measures, raising the rate of interest, etc., for the purpose of safeguarding the conditions of this convertibility. This can be carried more or less to extremes by mistaken legislation, based on false theories of money and enforced upon the nation by the interests of the money-dealers, the Overstones and their ilk. The basis, however, is given with the basis of the mode of production itself. A depreciation of credit-money (not to mention, incidentally, a purely imaginary loss of its character as money) would unsettle all existing relations. Therefore, the value of commodities is sacrificed for the purpose of safeguarding the fantastic and independent existence of this value in money. As money-value, it is secure only as long as money is secure. For a few millions in money, many millions in commodities must therefore be sacrificed. This is inevitable under capitalist production and constitutes one of its beauties. In former modes of production, this does not occur because, on the narrow basis upon which they stand, neither credit nor credit-money can develop greatly. As long as the social character of labour appears as the money-existence of commodities, and thus as a thing external to actual production, money crises — independent of or as an intensification of actual crises — are inevitable. On the other hand, it is clear that as long as the credit of a bank is not shaken, it will alleviate the panic in such cases by increasing credit-money and intensify it by contracting the latter. The entire history of modern industry shows that metal would indeed be required only for the balancing of international commerce, whenever its equilibrium is momentarily disturbed, if only domestic production were organised. That the domestic market does not need any metal even now is shown by the suspension of the cash payments of the so-called national banks, which resort to this expedient in all extreme cases as the sole relief.
In the case of two individuals, it would be ridiculous to say that in their transactions with one another both have an unfavourable balance of payments. If they are reciprocally creditor and debtor of one another, it is evident that when their claims do not balance, one must be the creditor and the other the debtor for the balance. With nations this is by no means the case. And that this is not the case is acknowledged by all economists when they admit that the balance of payments can be favourable or unfavourable for a nation, though its trade balance must ultimately be settled. The balance of payments differs from the balance of trade in that it is a balance of trade which must be settled at a definite time. What the crises now accomplish is to narrow the difference between the balance of payments and the balance of trade to a short interval; and the specific conditions which develop in the nation suffering from a crisis and, therefore, having its payments become due — these conditions already lead to such a contraction of the time of settlement. First, shipping away precious metals; then selling consigned commodities at low prices; exporting commodities to dispose of them or to obtain money advances on them at home; increasing the rate of interest, recalling credit, depreciating securities, disposing of foreign securities, attracting foreign capital for investment in these depreciated securities, and finally bankruptcy, which settles a mass of claims. At the same time, metal is still often sent to the country where a crisis has broken out, because the drafts drawn on it are insecure and payment in specie is most trustworthy. Furthermore, in regard to Asia, all capitalist nations are usually simultaneously — directly or indirectly — its debtors. As soon as these various circumstances exert their full effect upon the other involved nation, it likewise begins to export gold and silver, in short, its payments become due and the same phenomena are repeated.
In commercial credit, the interest — as the difference between credit price and cash price — enters into the price of commodities only in so far as the bills of exchange have a longer than ordinary running time. Otherwise it does not. And this is explained by the fact that everyone takes credit with one hand and gives it with the other. [This does not agree with my experience. — F.E.] But in so far as discount in this form enters here, it is not regulated by this commercial credit, but by the money-market.
If supply and demand of money-capital, which determine the rate of interest, were identical with supply and demand of actual capital, as Overstone maintains, the interest would be simultaneously low and high, depending on whether various commodities or various phases (raw material, semi-finished product, finished product) of the same commodity were being considered. In 1844, the rate of interest of the Bank of England fluctuated between 4% (from January to September) and 2½ and 3% (from November to the end of the year). In 1845, it was 2½, 2¾, and 3% from January to October, and between 3 and 5% during the remaining months. The average price of fair Orleans cotton was 6¼d. in 1844 and 4 7/8d. in 1845. On March 3, 1844, the cotton supply in Liverpool was 627,042 bales, and on March 3, 1845, it was 773,800 bales. To judge by the low price of cotton, the rate of interest should have been low in 1845, and it was indeed for the greater part of this time. But to judge by the yarn, the rate of interest should have been high, for the prices were relatively high and the profits absolutely high. From cotton at 4d. per pound, yarn could be spun, in 1845 with a spinning cost of 4d. (good secunda mule twist No. 40), or a total cost of 8d. to the spinner, which he could sell in September and October 1845 at 10½ or 11½d. per pound. (See the testimony of Wylie below.)
The entire matter can be resolved as follows:
Supply and demand of loan capital would be identical with supply and demand of capital generally (although this last statement is absurd; for the industrial or commercial capitalist a commodity is a form of his capital, yet he never asks for capital as such, but only for the particular commodity as such, he buys and pays for it as a commodity, e.g., corn or cotton, regardless of the role that it has to play in the circuit of his capital), if there were no money-lenders, and if in their stead the lending capitalists were in possession of machinery, raw materials, etc., which they would lend or hire out, as houses are rented out now, to the industrial capitalists, who are themselves owners of some of these objects. Under such circumstances, the supply of loan capital would be identical with the supply of elements of production for the industrial capitalist and commodities for the merchant. But it is clear that the division of profit between the lender and borrower would then, to begin with, completely depend on the relation of the capital which is lent to that which is the property of the one who employs it.
According to Mr. Weguelin (B. A. 1857), the rate of interest is determined by "the amount of unemployed capital" (252); it is "but an indication of a large amount of capital seeking employment" (271); later this unemployed capital becomes "floating capital" (485) and by this he means "the Bank of England notes and other kinds of circulation in the country, for instance, the country banks circulation and the amount of coin which is in the country. I include in floating capital the reserves of the bankers" (502, 503), and later also gold bullion (503). Thus the same Mr. Weguelin says that the Bank of England exerts great influence upon the rate of interest in times, when "we" [the Bank of England] "are holders of the greater portion of the unemployed capital" (1198), while, according to the above testimony of Mr. Overstone, the Bank of England "is no place for capital." Mr. Weguelin further says:
"I think the rate of discount is governed by the amount of unemployed capital which there is in the country. The amount of unemployed capital is represented by the reserve of the Bank of England, which is practically a reserve of bullion. When, therefore, the bullion is drawn upon, it diminishes the amount of unemployed capital in the country and consequently raises the value of that which remains" (1258).
J. Stuart Mill says (2102):
"The Bank is obliged to depend for the solvency of its banking department upon what it can do to replenish the reserve in that department; and therefore as soon as it finds that there is any drain in progress, it is obliged to look to the safety of its reserve, and to commence contracting its discounts or selling securities."
The reserve, in so far as only the banking department is considered, is a reserve for the deposits only. According to the Overstones, the banking department is supposed to act only as a banker, without regard to the "automatic" issue of notes. But in times of actual stringency the Bank, independently of the reserve of the banking department which consists only of notes, keeps a sharp eye on the bullion reserve, and must do so if it does not wish to fail. For, to the extent that the bullion reserve dwindles, so the reserve of bank-notes also dwindles, and no one should be better informed of this than Mr. Overstone, who precisely by his Bank Act of 1844 has so sagaciously arranged this.