|
Post by IBDaMann on Sept 20, 2020 21:06:15 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 21. Interest-Bearing Capital In our first discussion of the general, or average, rate of profit (Part II of this book) we did not have this rate before us in its complete form, the equalisation of profit appearing only as equalisation between industrial capitals invested in different spheres. This was supplemented in the preceding part, which dealt with the participation of merchant's capital in this equalisation, and also commercial profit. The general rate of profit and the average profit now appeared in narrower limits than before. It should be remembered in the course of our analysis that in any future reference to the general rate of profit or to average profit we mean this latter connotation, hence only the final form of average rate. And since this rate is the same for mercantile, as well as industrial, capital, it is no longer necessary, so far as this average profit is concerned, to make a distinction between industrial and commercial profit. Whether industrially invested in the sphere of production, or commercially in the sphere of circulation, capital yields the same average annual profit pro rata to its magnitude. Money – here taken as the independent expression of a certain amount of value existing either actually as money or as commodities – may be converted into capital on the basis of capitalist production, and may thereby be transformed from a given value to a self-expanding, or increasing, value. It produces profit, i.e., it enables the capitalist to extract a certain quantity of unpaid labour, surplus-product and surplus-value from the labourers, and to appropriate it. In this way, aside from its use-value as money, it acquires an additional use-value, namely that of serving as capital. Its use-value then consists precisely in the profit it produces when converted into capital. In this capacity of potential capital, as a means of producing profit, it becomes a commodity, but a commoditysui generis. Or, what amounts to the same, capital as capital becomes a commodity.1 Suppose the annual average rate of profit is 20%. In that case a machine valued at £100, employed as capital under average conditions and an average amount of intelligence and purposive effort, would yield a profit of £20. A man in possession of £100, therefore, possesses the power to make £120 out of £100, or to produce a profit of £20. He possesses a potential capital of £100. If he gives these £100 to another for one year, so the latter may use them as real capital, he gives him the power to produce a profit of £20 – a surplus-value which costs this other nothing, and for which he pays no equivalent. If this other should pay, say, £5 at the close of the year to the owner of the £100 out of the profit produced, he would thereby pay the use-value of the £100 – the use-value of its function as capital, the function of producing a profit of £20. The part of the profit paid to the owner is called interest, which is just another name, or special term, for a part of the profit given up by capital in the process of functioning to the owner of the capital, instead of putting it into its own pocket. It is plain that the possession of £100 gives their owner the power to pocket the interest – that certain portion of profit produced by means of his capital. If he had not given the £100 to the other person, the latter could not have produced any profit, and could not at all have acted as a capitalist with reference to these £100.2 To speak here of natural justice, as Gilbart does (see note), is nonsense. The justice of the transactions between agents of production rests on the fact that these arise as natural consequences out of the production relationships. The juristic forms in which these economic transactions appear as wilful acts of the parties concerned, as expressions of their common will and as contracts that may be enforced by law against some individual party, cannot, being mere forms, determine this content. They merely express it. This content is just whenever it corresponds, is appropriate, to the mode of production. It is unjust whenever it contradicts that mode. Slavery on the basis of capitalist production is unjust; likewise fraud in the quality of commodities. The £100 produce the profit of £20 because they function as capital, be it industrial or mercantile. But the sine qua non of this function as capital is that they are expended as capital, i.e., are expended in purchasing means of production (in the case of industrial capital) or commodities (in the case of merchant's capital). But to be expended, they must be available. If A, the owner of the £100, were either to spend them for personal consumption, or to keep them as a hoard, they could not have been invested as capital by B in his capacity of functioning capitalist. B does not expend his own capital, but A's; however, he cannot expend A's capital without A's consent. Therefore, it is really A who originally expends the £100 as capital, albeit his function as capitalist is limited to this outlay of £100 as capital. In respect to these £100, B acts as capitalist only because A lends him the £100, thus expending them as capital. Let us first consider the singular circulation of interest-bearing capital. We shall then secondly have to analyse the peculiar manner in which it is sold as a commodity, namely loaned instead of relinquished once and for all. The point of departure is the money which A advances to B. This may be done with or without security. The first-named form, however, is the more ancient, save advances on commodities or paper, such as bills of exchange, shares, etc. These special forms do not concern us at this point. We are dealing here with interest-bearing capital in its usual form. In B's possession the money is actually converted into capital, passes through M – C – M' and returns to A as M', as M+ΔM, where ΔM represents the interest. For the sake of simplicity we shall not consider here the case, in which capital remains in B's possession for a long term and interest is paid at regular intervals. The movement, therefore, is M – M – C – M' – M'. What appears duplicated here, is 1) the outlay of money as capital, and 2) its reflux as realised capital, as M' or M+ΔM. In the movement of merchant's capital, M – C – M', the same commodity changes hands twice, or more than twice, if merchant sells to merchant. But every such change of place of the same commodity indicates a metamorphosis, a purchase or sale of the commodity, no matter how often the process may be repeated, until it enters consumption. On the other hand, the same money changes hands twice in C – M – C, but this indicates the complete metamorphosis of the commodity, which is first converted into money and then from money back into another commodity. But in interest-bearing capital the first time M changes hands is by no means a phase either of the commodity metamorphosis, or of reproduction of capital. It first becomes one when it is expended a second time, in the hands of the active capitalist who carries on trade with it, or transforms it into productive capital. M's first change of hands does not express anything here, beyond its transfer from A to B – a transfer which usually takes place under certain legal forms and stipulations. This double outlay of money as capital, of which the first is merely a transfer from A to B, is matched by its double reflux. As M', or M + ΔM, it flows back out of the process to B, the person acting as capitalist. The latter then transfers it back to A, but together with a part of the profit, as realised capital, as M + ΔM, in which ΔM is not the entire profit, but only a portion of the profit – the interest. It flows back to B only as what he had expended, as functioning capital, but as the property of A. To make its reflux complete, B must consequently return it to A. But in addition to the capital, B must also turn over to A a portion of the profit, a part which goes under the name of interest, which he had made with this capital since A had given him the money only as a capital, i.e., as value which is not only preserved in its movement, but also creates surplus-value for its owner. It remains in B's hands only so long as it is functioning capital. And with its reflux – on the stipulated date – it ceases to function as capital. When no longer acting as capital, however, it must again be returned to A, who had never ceased being its legal owner. The form of lending, which is peculiar to this commodity, to capital as commodity, and which also occurs in other transactions instead of that of sale, follows from the simple definition that capital obtains here as a commodity, or that money as capital becomes a commodity. A distinction should be made here. We have seen (Book II, Chap. I), and recall briefly at this point, that in the process of circulation capital serves as commodity-capital and money-capital. But in neither form does capital become a commodity as capital. As soon as productive capital turns into commodity-capital it must be placed on the market to be sold as a commodity. There it acts simply as a commodity. The capitalist then appears only as the seller of commodities, just as the buyer is only the buyer of commodities. As a commodity the product must realise its value, must assume its transmuted form of money, in the process of circulation by its sale. It is also quite immaterial for this reason, whether this commodity is bought by a consumer as a necessity of life, or by a capitalist as means of production, i.e., as a component part of his capital. In the act of circulation commodity-capital acts only as a commodity, not as a capital. It is commodity-capital, as distinct from an ordinary commodity, 1) because it is weighted with surplus-value, the realisation of its value, therefore, being simultaneously the realisation of surplus-value; but this alters nothing about its simple existence as a commodity, as a product with a certain price; 2) because its function as a commodity is a phase in its process of reproduction as capital, and therefore its movement as a commodity being only a partial movement of its process, is simultaneously its movement as capital. Yet it does not become that through the sale as such, but only through the connection of the sale with the whole movement of this specific quantity of value in the capacity of capital. In the same way as money-capital it really acts simply as money, i.e., as a means of buying commodities (the elements of production). The fact that this money is simultaneously moneycapital, a form of capital, does not emerge from the act of buying, the actual function which it here performs as money, but from the connection of this act with the total movement of capital, since this act, performed by capital as money, initiates the capitalist production process. But in so far as they actually function, i.e., actually play a role in the process, commodity-capital acts here only as a commodity and money-capital only as money. At no time during the metamorphosis, viewed by itself, does the capitalist sell his commodities as capital to the buyer, although to him they represent capital; nor does he give up money as capital to the seller. In both cases be gives up his commodities simply as commodities, and money simply as money,i.e., as a means of purchasing commodities. It is only in connection with the entire process, at the moment where the point of departure appears simultaneously as the point of return, in M – M' or C – C', that capital in the process of circulation appears as capital (whereas in the process of production it appears as capital through the subordination of the labourer to the capitalist and the production of surplus value). In this moment of return, however, the connection disappears. What we have then is M', or M + ΔM, a sum of money equal to the sum originally advanced plus an increment – the realised surplus- value (regardless of whether the amount of value increased by ΔM exists in the form of money, or commodities, or elements of production). And it is precisely at this point of return where capital exists as realised capital, as an expanded value, that it never enters the circulation in this form – in so far as this point is fixed as a point of rest, whether real or imaginary – but rather appears to have been withdrawn from circulation as a result of the whole process. Whenever it is again expended, it is never given up to another as capital, but is sold to him as an ordinary commodity, or given to him as ordinary money in exchange for commodities. It never appears as capital in its process of circulation, only as commodity or money, and at this point this is the only form of its existence for others. Commodities and money are here capital not because commodities change into money, or money into commodities, not in their actual relations to sellers or buyers, but only in their ideal relations to the capitalist himself (subjectively speaking), or as phases in the process of reproduction (objectively speaking). Capital exists as capital in actual movement, not in the process of circulation, but only in the process of production, in the process by which labourpower is exploited. The matter is different with interest-bearing capital, however, and it is precisely this difference which lends it its specific character. The owner of money who desires to enhance his money as interest-bearing capital, turns it over to a third person, throws it into circulation, turns it into a commodity as capital; not just capital for himself, but also for others. It is not capital merely for the man who gives it up, but is from the very first given to the third person as capital, as a value endowed with the use-value of creating surplus-value, of creating profit; a value which preserves itself in its movement and returns to its original owner, in this case the owner of money, after performing its function. Hence it leaves him only for a specified time, passes but temporarily out of the possession of its owner into the possession of a functioning capitalist, is therefore neither given up in payment nor sold, but merely loaned, merely relinquished with the understanding that, first, it shall return to its point of departure after a definite time interval, and, second, that it shall return as realised capital – a capital having realised its use-value, its power of creating surplus-value. Commodities loaned out as capital are loaned either as fixed or as circulating capital, depending on their properties. Money may be loaned out in either form. It may be loaned as fixed capital, for instance, if it is paid back in the form of an annuity, whereby a portion of the capital flows back together with the interest. Certain commodities, such as houses, ships, machines, etc., can be loaned out only as fixed capital by the nature of their use-values. Yet all loaned capital, whatever its form, and no matter how the nature of its use-value may modify its return, is always only a specific form of money-capital. Because what is loaned out is always a definite sum of money, and it is this sum on which interest is calculated. Should whatever is loaned out be neither money nor circulating capital, it is also paid back in the way fixed capital returns. The lender periodically receives interest and a portion of the consumed value of the fixed capital itself, this being an equivalent for the periodic wear and tear. And at the end of the stipulated term the unconsumed portion of the loaned fixed capital is returned in kind. If the loaned capital is circulating capital, it is likewise returned in the manner peculiar to circulating capital. The manner of reflux is, therefore, always determined by the actual circuit described by capital in the act of reproduction and by its specific varieties. But as for loaned capital, its reflux assumes the form of return payments, because its advance, by which it is transferred, possesses the form of a loan. In this chapter we treat only of actual money-capital, from which the other forms of loaned capital are derived. The loaned capital flows back in two ways. In the process of reproduction it returns to the functioning capitalist, and then its return repeats itself once more as transfer to the lender, the money-capitalist, as return payment to the real owner, its legal point of departure. In the actual process of circulation, capital appears always as a commodity or as money, and its movement always is broken up into a series of purchases and sales. In short, the process of circulation resolves itself into the metamorphosis of commodities. It is different, when we consider the process of reproduction as a whole. If we start out with money (and the same is true if we start out with commodities, since we begin with their value, hence view themsub specie as money), we shall see that a certain sum of money is expended and returns after a certain period with an increment. The advanced sum of money returns together with a surplus-value. It has remained intact and increased in making a certain cycle. But now, being loaned out as capital, money is loaned as just the sum of money which preserves and expands itself, which returns after a certain period with an increment, and is always ready to perform the same process over again. It is expended neither as money nor as a commodity, thus, neither exchanged against a commodity when advanced in the form of money, nor sold in exchange for money when advanced as a commodity; rather, it is expended as capital. This relation to itself, in which capital presents itself when the capitalist production process is viewed as a whole and as a single unity, and in which capital appears as money that begets money, is here imparted to it as its character, its designation, without any intermediary movement. And it is relinquished with this designation when loaned out as money-capital. A queer conception of the role of money-capital is hold by Proudhon (Gratuité du Crédit. Discussion entre M. F. Bastiat et M. Proudhon, Paris, 1850). Loaning seems an evil to Proudhon because it is not selling. Loaning for an interest is “the faculty of selling the same article over and over again, and of receiving its price again and again, without once relinquishing ownership of the object which is being sold” (p. 9). [The cited words belong to Cheve, one of the editors of the newspaper La Voix du peuple, and the author of the “first letter” in the book Gratuité du Crédit. Discussion entre M. F. Bastiat et M. Proudhon, Paris, 1850. – Ed] The object – money, a house, etc. – does not change owners as in selling and buying. But Proudhon does not see that no equivalent is received in return for money given away in the form of interest-bearing capital. True, the object is given away in every act of buying and selling, so far as there are processes of exchange at all. Ownership of the sold article is always relinquished. But its value is not given up. In a sale the commodity is given away, but not its value, which is returned in the form of money, or in what is here just another form of it – promissory notes, or titles of payment. When purchasing, the money is given away, but not its value, which is replaced in the form of commodities. The industrial capitalist retains the same value in his hands throughout the process of reproduction (excluding surplus-value), but in different forms. Inasmuch as there is an exchange, i.e., an exchange of articles, there is no change in the value. The same capitalist always retains the same value. But so long as surplus-value is produced by the capitalist, there is no exchange. As soon as an exchange occurs, the surplus-value is already incorporated in the commodities. If we view the entire circuit made by capital, M – C – M', rather than individual acts of exchange, we shall see that a definite amount of value is continually advanced, and that this same amount plus surplus-value, or profit, is withdrawn from circulation. The actual acts of exchange do not, at any rate, reveal how this process is promoted. And it is precisely this process of M as capital, on which the interest of the money-lending capitalist rests, and from which it is derived. “In fact,” says Proudhon, “the hat-maker, who sells hats, receives their value, neither more nor less. But the money-lending capitalist ... does not recover just his capital, he recovers more than his capital, more than he throws into the exchange; he receives an interest over and above his capital” (p. 69). Here the hatter represents the productive capitalist as distinct from the loan capitalist. Proudhon has obviously failed to grasp the secret of how the productive capitalist can sell commodities at their value (equalisation through prices of production is here immaterial to his conception) and receive a profit over and above the capital he flings into exchange. Suppose the price of production of 100 hats = £115, and that this price of production happens to coincide with the value of the hats, which means that the capital producing the hats is of the same composition as the average social capital. Should the profit = 15%, the hatter makes a profit of £15 by selling his commodities at their value of £115. They cost him only £100. If he produced them with his own capital, he pockets the entire surplus of £15 but if with borrowed capital, he may have to give up £5 as interest. This alters nothing in the value of the hats, only in the distribution among different persons of the surplus-value already contained in this value. Since, therefore, the value of the hats is not affected by the payment of interest, it is nonsense on Proudhon's part to say: “As in commerce the interest on capital is added to the wages of labourers in making up the price of commodities, it is impossible for the labourer to buy back the product of his own labour. Vivre en travaillant is a principle which contains a contradiction under the rule of interest” (p. 105). 3 How little Proudhon understood the nature of capital is shown in the following statement, in which he describes the movement of capital in general as a movement peculiar to interest-bearing capital: “Since money-capital returns to its source from exchange through the accumulation of interest, it follows that reinvestment always made by the same individual continually brings profit to the same person,” p. 154. What is it that still puzzles him in the peculiar movement of interest-bearing capital? The categories: buying, price, giving up articles, and the immediate form in which surplus-value appears here; in short, the phenomenon that capital as such has become a commodity, that selling, consequently, has turned into lending and price into a share of the profit. The return of capital to its point of departure is generally the characteristic movement of capital in its total circuit. This is by no means a feature of interest-bearing capital alone. What singles it out is rather the external form of its return without the intervention of any circuit. The loaning capitalist gives away his capital, transfers it to the industrial capitalist, without receiving any equivalent. His transfer is not an act belonging to the real circulation process of capital at all. It serves merely to introduce this circuit, which is effected by the industrial capitalist. This first change of position of money does not express any act of the metamorphosis – neither buying nor selling. Ownership is not relinquished, because there is no exchange and no equivalent is received. The return of the money from the hands of the industrial capitalist to those of the loaning capitalist merely supplements the first act of giving away the capital. Advanced in the form of money, the capital again returns to the industrial capitalist through the circular process in the form of money. But since it did not belong to him when he invested it, it cannot belong to him on its return. Passing through the process of reproduction cannot by any means turn the capital into his property. He must therefore restore it to the lender. The first expenditure, which transfers the capital from the lender to the borrower, is a legal transaction which has nothing to do with the actual process of reproduction. It is merely a prelude to this process. The return payment, which again transfers the capital that has flowed back from the borrower to the lender is another legal transaction, a supplement of the first. One introduces the actual process, the other is an act supplementary to this process. Point of departure and point of return, the giving away and the recovery of the loaned capital, thus appear as arbitrary movements promoted by legal transactions, which take place before and after the actual movement of capital and have nothing to do with it as such. It would have been all the same as concerns this actual movement if the capital had from the first belonged to the industrial capitalist and had returned to him, therefore, as his own. In the first introductory act the lender gives his capital to the borrower. In the supplemental and closing act the borrower returns the capital to the lender. As concerns the transaction between these two – and aside from the interest for the present – as concerns the movement of the loaned capital between lender and borrower, therefore, the two acts (separated by a longer or shorter time interval, during which the actual reproduction process of the capital takes place) embrace the entire movement. And this movement, disposing on condition of returning, constitutes per se the movement of lending and borrowing, that specific form of conditionally alienating money or commodities. The characteristic movement of capital in general, the return of the money to the capitalist, i.e., the return of capital to its point of departure, assumes in the case of interest-bearing capital a wholly external appearance, separated from the actual movement, of which it is a form. A gives away his money not as money, but as capital. No transformation occurs in the capital. It merely changes hands. Its real transformation into capital does not take place until it is in the hands of B. But for A it becomes capital as soon as he gives it to B. The actual reflux of capital from the processes of production and circulation takes place only for B. But for A the reflux assumes the same form as the alienation. The capital returns from B to A. Giving away, i.e., loaning money for a certain time and receiving it back with interest (surplus-value) is the complete form of the movement peculiar to interest-bearing capital as such. The actual movement of loaned money as capital is an operation lying outside the transactions between lender and borrower. In these the intermediate act is obliterated, invisible, not directly included. A special sort of commodity, capital has its own peculiar mode of alienation. Neither does its return, therefore, express itself as the consequence and result, of some definite series of economic processes, but as the effect of a specific legal agreement between buyer and seller. The time of return depends on the progress of the process of reproduction; in the case of interest-bearing capital, its return as capital seems to depend on the mere agreement between lender and borrower. So that in regard to this transaction the return of capital no longer appears as a result arising out of the process of reproduction; it appears as if the loaned capital never lost the form of money. To be sure, these transactions are really determined by the actual reproductive returns. But this is not evident in the transaction itself. Nor is it by any means always the case in practice. If the actual return does not take place in due time, the borrower must look for other resources to meet his obligations vis-à-vis the lender. The bare form of capital – money expended as a certain sum, A, which returns as sum A + 1/x A after a given lapse of time without any other intermediate act save this lapse of time – is only a meaningless form of the actual movement of capital. In the actual movement of capital its return is a phase in the process of circulation. The money is first converted into means of production; production transforms them into commodities; through sale of the commodities they are reconverted into money and return in this form into the hands of the capitalist who had originally advanced the capital in the form of money. But in the case of interest-bearing capital, the return, like alienation, is the result of a legal transaction between the owner of the capital and a second party. We see only the alienation and the return payment. Whatever passes in the interim is obliterated. But since money advanced as capital has the property of returning to the person who advanced it, to the one who expended it as capital, and since M – C – M' is the immanent form of the movement of capital, the owner of the money can, for this very reason, loan it out as capital, as something that has the property of returning to its point of departure, of preserving, and increasing, its value in the course of its movement. He gives it away as capital, because it returns to its point of departure after having been employed as capital, hence can be restored by the borrower after a certain period precisely because it has come back to him. Loaning money as capital – its alienation on the condition of it being returned after a certain timepresupposes, therefore, that it will be actually employed as capital, and that it actually flows back to its starting-point. The real cycle made by money as capital is, therefore, the premise for the legal transaction by which the borrower must return the money to the lender. If the borrower does not use the money as capital, that is his own business. The lender loans it as capital, and as such it is supposed to perform the functions of capital, which include the circuit of money-capital until it returns to its starting-point in the form of money. The acts of circulation, M – C and C – M', in which a certain amount of value functions as money or commodities, are but intermediate processes, mere phases of the total movement. As capital, it performs the entire movement M – M'. It is advanced as money or a sum of values in one form or another, and returns as a sum of values. The lender of money does not expend it in purchasing commodities, or, if this sum of values is in commodity-form, does not sell it for money. He advances it as capital, as M – M', as a value, which returns to its point of departure after a certain term. He lends instead of buying or selling. This lending, therefore, is the appropriate form of alienating value as capital, instead of alienating it as money or commodities. It does not follow, however, that lending cannot also take the form of transactions which have nothing to do with the capitalist process of reproduction. We have so far only considered the movements of loaned capital between its owner and the industrial capitalist. Now we must inquire into interest. The lender expends his money as capital; the amount of value, which he relinquishes to another, is capital, and consequently returns to him. But the mere return of it would not be the reflux of the loaned sum of value as capital, but merely the return of a loaned sum of value. To return as capital, the advanced sum of value must not only be preserved in the movement but must also expand, must increase in value, i.e., must return with a surplus-value, as M + ΔM, the latter being interest or a portion of the average profit, which does not remain in the hands of the operating capitalist, but falls to the share of the money-capitalist. The fact that the latter has relinquished it as capital implies that it must be restored to him as M + ΔM. Later, we shall also have to turn our attention to the form in which interest is paid in the meantime at fixed intervals, but without the capital, whose return follows at the end of a lengthy period. What does the money-capitalist give to the borrower, the industrial capitalist? What does he really turn over to him? It is only this act of handing over money which changes lending money into alienation of money as capital, i.e., alienation of capital as a commodity. It is only by this act of alienating that capital is loaned by the money-lender as a commodity, or that the commodity at his disposal is given to another as capital. What is alienated in an ordinary sale? Not the value of the sold commodity, for this merely changes its form. The value exists ideally in a commodity as its price before it actually passes as money into the hands of the seller. The same value and the same amount of value merely change their form. In the one instance they exist in commodity-form, in the other in the form of money. What is really alienated by the seller, and, therefore, passes into the individual or productive consumption of the buyer, is the use-value of the commodity – the commodity as a use-value. What, now, is the use-value which the money-capitalist gives up for the period of the loan and relinquishes to the productive capitalist – the borrower? It is the use-value which the money acquires by being capable of becoming capital, of performing the functions of capital, and creating a definite surplus-value, the average profit (whatever is above or below it appears here as a mere accident) during its process, besides preserving its original magnitude of value. In the case of the other commodities the use-value is ultimately consumed. Their substance disappears, and with it their value. In contrast, the commodity-capital is peculiar in that its value and use-value not only remain intact but also increase, through consumption of its use-value. It is this use-value of money as capital – this faculty of producing an average profit – which the money-capitalist relinquishes to the industrial capitalist for the period, during which he places the loaned capital at the latter's disposal. Money thus loaned has in this respect a certain similarity with labour-power in its relation to the industrial capitalist. With the difference that the latter pays for the value of labour-power, whereas he simply pays back the value of the loaned capital. The use-value of labour-power for the industrial capitalist is that labour-power creates more value (profit) in its consumption than it possesses itself, and than it costs. This additional value is use-value for the industrial capitalist. And in like manner the use-value of loaned capital appears as its faculty of begetting and increasing value. The money-capitalist, in fact, alienates a use-value, and thus whatever he gives away is given as a commodity. It is to this extent that the analogy with a commodity per se is complete. In the first place, it is a value which passes from one hand to another. In the case of an ordinary commodity, a commodity as such, the same value remains in the hands of the buyer and seller, only in different forms; both have the same value which they had before the transaction, and which they had alienated – the one in the form of a commodity, the other in the form of money. The difference is that in a loan the money-capitalist is the only one in the transaction who gives away value; but he preserves it through the prospective return. In the loan transaction just one party receives value, since only one party relinquishes value. – In the second place, a real use-value is relinquished on the one side, and received and consumed on the other. But in contrast to ordinary commodities this use-value is value in itself, namely the excess over the original value realised through the use of money as capital. The profit is this use-value. The use-value of the loaned money lies in its being able to serve as capital and, as such, to produce the average profit under average conditions.4 What, now, does the industrial capitalist pay, and what is, therefore, the price of the loaned capital? “That which men pay as interest for the use of what they borrow” is, according to Massie, “a part of the profit it is capable of producing,” 1. c., p. 49. 5 What the buyer of an ordinary commodity buys is its use-value; what he pays for is its value. What the borrower of money buys is likewise its use-value as capital; but what does he pay for? Surely not its price, or value, as in the case of ordinary commodities. No change of form occurs in the value passing between borrower and lender, as occurs between buyer and seller when it exists in one instance in the form of money, and in another in the form of a commodity. The sameness of the alienated and returned value is revealed here in an entirely different way. The sum of value, i.e., the money, is given away without an equivalent, and is returned after a certain period. The lender always remains the owner of the same value, even after it passes from his hands into those of the borrower. In an ordinary exchange of commodities money always comes from the buyer's side; but in a loan it comes from the side of the seller. He is the one who gives away money for a certain period, and the buyer of capital is the one who receives it as a commodity. But this is only possible as long as the money acts as capital and is therefore advanced. The borrower borrows money as capital, as a value producing more value. But at the moment when it is advanced it is still only potential capital, like any other capital at its starting-point, the moment it is advanced. It is only through its employment that it expands its value and realises itself as capital. However, it has to be returned by the borrower as realised capital, hence as value plus surplus-value (interest). And the latter can only be a portion of the realised profit. Only a portion, not all of it. For the usevalue of the loaned capital to the borrower consists in producing profit for him. Otherwise there would not have been any alienation of use-value on the lender's part. On the other hand, not all the profit can fall to the borrower's share. Otherwise he would pay nothing for the alienated usevalue, and would return the advanced money to the lender as ordinary money, not as capital, as realised capital, for it is realised capital only as M + ΔM. Both of them, lender and borrower, expend the same sum of money as capital. But it is only in the hands of the latter that it serves as capital. The profit is not doubled by the double existence of the same sum of money as capital for two persons. It can serve as capital for both of them only by dividing the profit. The portion which falls to the lender is called interest. The entire transaction, as assumed, takes place between two kinds of capitalists – the moneycapitalist and the industrial or merchant capitalist. It must always be borne in mind that here capital as capital is a commodity, or that the commodity here discussed is capital. All the relations in evidence here would therefore be irrational from the standpoint of an ordinary commodity, or from that of capital in so far as it acts as a commodity-capital in the process of reproduction. Lending and borrowing, instead of selling and buying, is a distinction which here springs from the specific nature of the commodity-capital. Similarly, the fact that it is interest, not the price of the commodity, which is paid here. If we want to call interest the price of money-capital, then it is an irrational form of price quite at variance with the conception of the price of commodities.6 The price is here reduced to its purely abstract and meaningless form, signifying that it is a certain sum of money paid for something serving in one way or another as a use-value; whereas the conception of price really signifies the value of some use-value expressed in money. Interest, signifying the price of capital, is from the outset quite an irrational expression. The commodity in question has a double value, first a value, and then a price different from this value, while price represents the expression of value in money. Money-capital is nothing but a sum of money, or the value of a certain quantity of commodities fixed in a sum of money. If a commodity is loaned out as capital, it is only a disguised form of a sum of money. Because what is loaned out as capital is not so and so many pounds of cotton, but so much and so much money existing in the form of cotton as its value. The price of capital, therefore, refers to it as to a sum of money, even if not currency, as Mr. Torrens thinks (see Footnote 59). How, then, can a sum of value have a price besides its own price, besides the price expressed in its own money-form? Price, after all, is the value of a commodity (this is also true of the market-price, whose difference from value is not one of quality, but only one of quantity, referring only to the magnitude of value) as distinct from its use-value. A price which differs from value in quality is an absurd contradiction.7 Capital manifests itself as capital through self-expansion. The degree of its self-expansion expresses the quantitative degree in which it realises itself as capital. The surplus-value or profit produced by it – its rate or magnitude – is measurable only by comparison with the value of the advanced capital. The greater or lesser self-expansion of interest-bearing capital is, therefore, likewise only measurable by comparing the amount of interest, its share in the total profits, with the value of the advanced capital. If, therefore, price expresses the value of the commodity, then interest expresses the self-expansion of money-capital and thus appears as the price paid for it to the lender. This shows how absurd it is from the very first to apply hereto the simple relations of exchange through the medium of money in buying and selling, as Proudhon does. The basic premise is precisely that money functions as capital and may thus be transferred as such, i.e., as potential capital, to a third person. Capital, however, appears here as a commodity, inasmuch as it is offered on the market, and the use-value of money is actually alienated as capital. Its use-value, however, lies in producing profit. The value of money or of commodities employed as capital does not depend on their value as money or as commodities, but on the quantity of surplus-value they produce for their owner. The product of capital is profit. On the basis of capitalist production it is merely a different use of money – whether it is expended as money; or advanced as capital. Money, or commodities, are in themselves potentially capital, just as labour-power is potential capital. Because, 1) money may be converted into elements of production and is, as is, merely an abstract expression of them – their existence as value; 2) the material elements of wealth have the property of potentially becoming capital, because their supplementary opposite, which makes them into capital, namely wage-labour, is available on the basis of capitalist production. The contradictory social features of material wealth – its antagonism to labour as wage-labour – are expressed in capitalist property as such independently of the production process. This particular fact, set apart from the process of capitalist production itself, from which it constantly results and as whose constant result it serves as a constant prerequisite, expresses itself in that money and commodities alike are latent, potential, capital, so that they may be sold as capital, and in that they can in this form command the labour of others bestowing a claim to appropriate the labour of others, and therefore represent self-expanding values. It also becomes clearly apparent that this relationship, and not the labour offered as an equivalent on the part of the capitalist, supplies the title and the means to appropriate the labour of others. Furthermore, capital appears as a commodity, inasmuch as the division of profit into interest and profit proper is regulated by supply and demand, that is, by competition, just as the market-prices of commodities. But the difference here is just as apparent as the analogy. If supply and demand coincide, the market-price of commodities corresponds to their price of production, i.e., their price then appears to be regulated by the immanent laws of capitalist production, independently of competition, since the fluctuations of supply and demand explain nothing but deviations of market-prices from prices of production. These deviations mutually balance one another, so that in the course of certain longer periods the average market-prices equal the prices of production. As soon as supply and demand coincide, these forces cease to operate, i.e., compensate one another, and the general law determining prices then also comes to apply to individual cases. The market-price then corresponds even in its immediate form, and not only as the average of marketprice movements, to the price of production, which is regulated by the immanent laws of the mode of production itself. The same applies to wages. If supply and demand coincide, they neutralise each other's effect, and wages equal the value of labour-power. But it is different with the interest on money-capital. Competition does not, in this case, determine the deviations from the rule. There is rather no law of division except that enforced by competition, because, as we shall later see, no such thing as a “natural” rate of interest exists. By the natural rate of interest people merely mean the rate fixed by free competition. There are no “natural” limits for the rate of interest. Whenever competition does not merely determine the deviations and fluctuations, whenever, therefore, the neutralisation of opposing forces puts a stop to any and all determination, the thing to be determined becomes something arbitrary and lawless. More on this in the next chapter. In the case of interest-bearing capital everything appears superficial: the advance of capital as mere transfer from lender to borrower; the reflux of realised capital as mere transfer back, as a return payment with interest, by borrower to lender. The same is true of the fact, immanent in the capitalist mode of production, that the rate of profit is not only determined by the relation of profit made in one single turnover to advanced capital-value, but also by the length of this period of turnover, hence determined as profit yielded by industrial capital within definite spans of time. In the case of interest-bearing capital this likewise appears on the surface to mean that a definite interest is paid to the lender for a definite time span. With his usual insight into the internal connection of things, the romantic Adam Müller says (Elemente der Staatskunst, Berlin, 1809, Dritter Theil, S. 138); “In determining the prices of things, time is not considered; while in determining interest, time is the principal factor.” He does not see how the time of production and the time of circulation enter into the determination of commodity-prices, and how this is just what determines the rate of profit for a given period of turnover of capital, whereas interest is determined by precisely this determination of profit for a given period. His sagacity here, as elsewhere, consists in observing the clouds of dust on the surface and presumptuously declaring this dust to be something mysterious and important. 1 At this point certain passages may be quoted, in which the economists so conceive the matter. – “You (the Bank of England) are very large dealers in the commodity of capital?” is the question posed to a director of this bank when he was interrogated for the Report on Bank Acts on the witness stand. (H. of C. 1857, p. 404.) 2 “That a man who borrows money with a view of making a profit by it, should give some portion of his profit to the lender, is a self-evident principle of natural justice.” (Gilbart, The History and Principles of Banking, London, 1834, p.463.) 3 “A house,” “money,” etc., are not to be loaned as “capital” if Proudhon is to have his way, but are to be sold as “commodities ... cost-price” (p. 44). Luther stood somewhat above Proudhon. He knew that profit-making does not depend on the manner of lending or buying: “They turn buying also into usury. But this is really too much to bite off at once. We must first confine ourselves to one thing, usury in lending, and after we have stopped that (after judgement-day), we shall not fail to preach against usury in buying.” (Martin Luther, An die Pfarherrn wider den Wucher zu predigen, Wittenberg, 1540.) 4 “The equitableness of taking interest depends not upon a man's making or not making profit, but upon its” (the borrowed) “being capable of producing profit if rightly employed”. (An Essay on the Governing Causes of the Natural Rate of Interest, wherein the sentiments of Sir W. Petty and Mr. Locke, on that head, are considered, London, 1750, p. 49. The author of this anonymous work is J. Massie.) 5 “Rich people, instead of employing their money themselves ... let it out to other people for them to make profit of, reserving for the owners a proportion of the profits so made” (l. c., pp. 23-24). 6 “The term 'value,' when applied to currency, has three several meanings ... 2) currency, actually in hand... compared with the same amount of currency to be received upon a future day. In this case the value of currency is measured by the rate of interest, and the rate of interest being determined by the ratio between the amount of liable capital and the demand for it.” (Colonel R. Torrens, On the Operation of the Bank Charter Act of 1844, etc., 2nd ed., 1847, pp. 5, 6.) 7 “The ambiguity of the term 'value of money' or of the currency, when employed indiscriminately as it is, to signify both value in exchange for commodities and value in use of capital, is a constant source of confusion.” (Tooke, Inquiry into the Currency Principle, p. 77.) The main confusion (implied in the matter itself) that value as such (interest) becomes the use-value of capital, has escaped Tooke.
|
|
|
Post by IBDaMann on Sept 20, 2020 21:09:39 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 22. Division of Profit. Rate of Interest. Natural Rate of Interest. The subject of this chapter, like all the other phenomena of credit we shall come across later on, cannot be analysed here in detail. The competition between lenders and borrowers and the resultant minor fluctuations of the money-market fall outside the scope of our inquiry. The circuit described by the rate of interest during the industrial cycle requires for its presentation the analysis of this cycle itself, but this likewise cannot be given here. The same applies to the greater or lesser approximate equalisation of the rate of interest in the world-market. We are here concerned with the independent form of interest-bearing capital and the individualisation of interest, as distinct from profit. Since interest is merely a part of profit paid, according to our earlier assumption, by the industrial capitalist to the money-capitalist, the maximum limit of interest is the profit itself, in which case the portion pocketed by the productive capitalist would = 0. Aside from exceptional cases, in which interest might actually be larger than profit, but then could not be paid out of the profit, one might consider as the maximum limit of interest the total profit minus the portion (to be subsequently analysed) which resolves itself into wages of superintendence. The minimum limit of interest is altogether indeterminable. It may fall to any low. Yet in that case there will always be counteracting influences to raise it again above this relative minimum. “The relation between the sum paid for the use of capital and the capital expresses the rate of interest as measured in money.” “The rate of interest depends 1) on the rate of profit; 2) on the proportion in which the entire profit is divided between the lender and borrower.” (Economist, January 22, 1853.) “If that which men pay as interest for the use of what they borrow, be a part of the profits it is capable of producing, this interest must always be governed by those profits.” (Massie, 1.c., p.49.) Let us first assume that there is a fixed relation between the total profit and that part of it which has to be paid as interest to the money-capitalist. It is then clear that the interest will rise or fall with the total profit, and the latter is determined by the general rate of profit and its fluctuations. For instance, if the average rate of profit were = 20% and the interest = ¼ of the profit, the rate of interest would = 5%; if the average rate of profit were = 16%, the rate of interest would = 4%. With the rate of profit at 20%, the rate of interest might rise to 8%, and the industrial capitalist would still make the same profit as he would at a rate of profit = 16% and a rate of interest = 4%, namely 12%. Should interest rise only to 6% or 7%, he would still keep a larger share of the profit. If the interest amounted to a constant quota of the average profit, it would follow that the higher the general rate of profit, the greater the absolute difference between the total profit and the interest, and the greater the portion of the total profit pocketed by the productive capitalist, and vice versa. Take it that interest = 1/5 of the average profit. One-fifth of 10 is 2; the difference between total profit and interest = 8. One-fifth of 20 = 4; difference = 20 - 4 = 16; 1/5 of 25 = 5; difference = 25 - 5 = 20; 1/5 of 30 = 6; difference = 30 - 6 = 24; 1/5 of 35 = 7; difference = 35 - 7 = 28. The different rates of interest of 4, 5, 6, 7% would here always represent no more than 1/5, or 20% of the total profit. If the rates of profit are different, therefore, different rates of interest may represent the same aliquot parts of the total profit, or the same percentage of the total profit. With such constant proportions of interest, the industrial profit (the difference between the total profit and the interest) would rise proportionately to the general rate of profit, and conversely. All other conditions taken as equal, i.e., assuming the proportion between interest and total profit to be more or less constant, the functioning capitalist is able and willing to pay a higher or lower interest directly proportional to the level of the rate of profit.1 Since we have seen that the rate of profit is inversely proportional to the development of capitalist production, it follows that the higher or lower rate of interest in a country is in the same inverse proportion to the degree of industrial development, at least in so far as the difference in the rate of interest actually expresses the difference in the rates of profit. It shall later develop that this need not always be the case. In this sense it may be said that interest is regulated through profit, or, more precisely, the general rate of profit. And this mode of regulating interest applies even to its average. In any event the average rate of profit is to be regarded as the ultimate determinant of the maximum limit of interest. The fact that interest is to be related to average profit will be considered presently at greater length. Whenever a specified entity, such as profit, is to be divided between two parties, the matter naturally hinges above all on the magnitude of the entity which is to be divided, and this, the magnitude of the profit, is determined by its average rate. Suppose the general rate of profit, hence the magnitude of profit, for a capital of given size, say, = 100, is assumed as given. Then the variations of interest will obviously be inversely proportional to those of the part of profit remaining in the hands of the producing capitalist, working with a borrowed capital. And the circumstances determining the amount of profit to be distributed, of the value produced by unpaid labour, differ widely from those which determine its distribution between these two kinds of capitalists, and frequently produce entirely opposite effects.2 If we observe the cycles in which modern industry moves – state of inactivity, mounting revival, prosperity, over-production, crisis, stagnation, state of inactivity, etc., which fall beyond the scope of our analysis – we shall find that a low rate of interest generally corresponds to periods of prosperity or extra profit, a rise in interest separates prosperity and its reverse, and a maximum of interest up to a point of extreme usury corresponds to the period of crisis.3 The summer of 1843 ushered in a period of remarkable prosperity; the rate of interest, still 4½% in the spring of 1842, fell to 2% in the spring and summer of 1843;4 in September it fell as low as 1½% (Gilbart, I, p. 166); whereupon it rose to 8% and higher during the crisis of 1847. It is possible, however, for low interest to go along with stagnation, and for moderately rising interest to go along with revived activity. The rate of interest reaches its peak during crises, when money is borrowed at any cost to meet payments. Since a rise in interest implies a fall in the price of securities, this simultaneously offers a fine opportunity to people with available money-capital, to acquire at ridiculously low prices such interest-bearing securities as must, in the course of things, at least regain their average price as soon as the rate of interest falls again.5 However, the rate of interest also has a tendency to fall quite independently of the fluctuations in the rate of profit. And, indeed, due to two main causes: I. “Were we even to suppose that capital was never borrowed with any view but to productive employment, I think it very possible that interest might vary without any change in the rate of gross profits. For, as a nation advances in the career of wealth, a class of men springs up and increases more and more, who by the labours of their ancestors find themselves in the possession of funds sufficiently ample to afford a handsome maintenance from the interest alone. Very many also who during youth and middle age were actively engaged in business, retire in their latter days' to live quietly on the interest of the sums they have themselves accumulated. This class, as well as the former, has a tendency to increase with the increasing riches of the country, for those who begin with a tolerable stock are likely to make an independence sooner than they who commence with little. Thus it comes to pass, that in old and rich countries, the amount of national capital belonging to those who are unwilling to take the trouble of employing it themselves, bears a larger proportion to the whole productive stock of the society, than in newly settled and poorer districts. How much more numerous in proportion to the population is the class of rentiers ... in England! As the class of rentiers increases, so also does that of lenders of capital, for they are one and the same.” (Ramsay, An Essay on the Distribution of Wealth, pp. 201-02.) II. The development of the credit system and the attendant ever-growing control of industrialists and merchants over the money savings of all classes of society that is effected through the bankers, and the progressive concentration of these savings in amounts which can serve as money-capital, must also depress the rate of interest. More about this later. With reference to the determination of the rate of interest, Ramsay says that it “depends partly upon the rate of gross profits, partly on the proportion in which these are separated into profits of capital and those of enterprise. This proportion again depends upon the competition between the lenders of capital and the borrowers; which competition is influenced, though by no means entirely regulated, by the rate of gross profit expected to be realised.6 And the reason why competition is not exclusively regulated by this cause, is, because on the one hand many borrow without any view to productive employment; and, on the other, because the proportion of the whole capital to be lent, varies with the riches of the country independently of any change in gross profits.” (Ramsay, 1. c., pp. 206-07.) To determine the average rate of interest we must 1) calculate the average rate of interest during its variations in the major industrial cycles; and 2) find the rate of interest for investments which require long-term loans of capital. The average rate of interest prevailing in a certain country – as distinct from the continually fluctuating market rates – cannot be determined by any law. In this sphere there is no such thing as a natural rate of interest in the sense in which economists speak of a natural rate of profit and a natural rate of wages. Massie has rightly said in this respect (p.49): “The only thing which any man can be in doubt about on this occasion, is, what proportion of these profits do of right belong to the borrower, and what to the lender; and this there is no other method of determining than by the opinions of borrowers and lenders in general; for right and wrong, in this respect, are only what common consent makes so.” Equating supply and demand – assuming the average rate of profit as given – means nothing. Wherever else this formula is resorted to (and this is then practically correct), it serves as a formula to find the fundamental rule (the regulating limits or limiting magnitudes) which is independent of, and rather determines, competition; notably as a formula for those who are held captive by the practice of competition, and by its phenomena and the conceptions arising out of them, to arrive at what is again but a superficial idea of the inner connection of economic relations obtaining within competition. It is a method to pass from the variations that go with competition to the limits of these variations. This is not the case with the average rate of interest. There is no good reason why average conditions of competition, the balance between lender and borrower, should give the lender an interest rate of 3, 4, 5%, etc., or else a certain percentage of the gross profits, say 20% or 50%, on his capital. Wherever it is competition as such which determines anything, the determination is accidental, purely empirical, and only pedantry or fantasy would seek to represent this accident as a necessity.7 Nothing is more amusing in the reports of Parliament for 1857 and 1858 concerning bank legislation and commercial crises than to hear of “the real rate produced” as the directors of the Bank of England, London bankers, country bankers, and professional theorists chatter back and forth, never getting beyond such commonplaces as that “the price paid for the use of loanable capital should vary with the supply of such capital,” that “a high rate and a low profit cannot permanently exist,” and similar specious platitudes.8 Customs, juristic tradition, etc., have as much to do with determining the average rate of interest as competition itself, in so far as it exists not merely as an average, but rather as actual magnitude. In many law disputes, where interest has to be calculated, an average rate of interest has to be assumed as the legal rate. If we inquire further as to why the limits of a mean rate of interest cannot be deduced from general laws, we find the answer lies simply in the nature of interest. It is merely a part of the average profit. The same capital appears in two roles – as loanable capital in the lender's hands and as industrial, or commercial, capital in the hands of the functioning capitalist. But it functions just once, and produces profit just once. In the production process itself the nature of capital as loanable capital plays no role. How the two parties who have claim to it divide the profit is in itself just as purely empirical a matter belonging to the realm of accident as the distribution of percentage shares of a common profit in a business partnership. Two entirely different elements – labour-power and capital – act as determinants in the division between surplus-value and wages, which division essentially determines the rate of profit; these are functions of two independent variables, which limit one another; and it is their qualitative difference that is the source of thequantitative division of the produced value. We shall see later that the same occurs in the splitting of surplus-value into rent and profit. Nothing of the kind occurs in the case of interest. Here the qualitative differentiation as we shall presently see, proceeds rather from the purely quantitative division of the same sum of surplus-value. It follows from the aforesaid that there is no such thing as a “natural” rate of interest. But if, unlike the general rate of profit, there is on the one hand no general law to determine the limits of the average interest, or average rate of interest as distinct from the continually fluctuating market rates of interest, because it is merely a question of dividing the gross profit between two owners of capital under different title; on the other hand, the rate of interest – be it the average or the market rate prevalent in each particular case – appears as a uniform, definite and tangible magnitude in a quite different way from the general rate of profit. 9 The rate of interest is similarly related to the rate of profit as the market-price of a commodity is to its value. In so far as the rate of interest is determined by the rate of profit, this is always the general rate of profit and not any specific rate of profit prevailing in some particular branch of industry, and still less any extra profit which an individual capitalist may make in a particular sphere of business.10 It is a fact, therefore, that the general rate of profit appears as an empirical, given reality in the average rate of interest, although the latter is not a pure or reliable expression of the former. It is indeed true that the rate of interest itself varies in accordance with the different classes of securities offered by borrowers, and in accordance with the length of time for which the money is borrowed; but it is uniform in each of these classes at a given moment. This distinction, then, does not militate against a fixed and uniform appearance of the rate of interest. 11 The average rate of interest appears in every country over fairly long periods as a constant magnitude, because the general rate of profit varies only at longer intervals – in spite of constant variations in specific rates of profit, in which a change in one sphere is offset by an opposite change in another. And its relative constancy is revealed precisely in this more or less constant nature of the average, or common, rate of interest. As concerns the perpetually fluctuating market rate of interest, however, it exists at any moment as a fixed magnitude, just as the market-price of commodities, because in the money-market all loanable capital continually faces functioning capital as an aggregate mass, so that the relation between the supply of loanable capital on one side, and the demand for it on the other, decides the market level of interest at any given time. This is all the more so, the more the development, and the attendant concentration, of the credit system gives to loanable capital a general social character and throws it all at once on the money-market. On the other hand, the general rate of profit is never anything more than a tendency, a movement to equalise specific rates of profit. The competition between capitalists – which is itself this movement toward equilibrium – consists here of their gradually withdrawing capital from spheres in which profit is for an appreciable length of time below average, and gradually investing capital into spheres in which profit is above average. Or it may also consist in additional capital distributing itself gradually and in varying proportions among these spheres. It is continual variation in supply and withdrawal of capital in regard to these different spheres, and never a simultaneous mass effect, as in the determination of the rate of interest. We have seen that interest-bearing capital, although a category which differs absolutely from a commodity, becomes a commodity sui generis, so that interest becomes its price, fixed at all times by supply and demand like the market-price of an ordinary commodity. The market rate of interest, while fluctuating continually, appears therefore at any given moment just as constantly fixed and uniform as the market-price of a commodity prevailing in each individual case. Moneycapitalists supply this commodity, and functioning capitalists buy it, creating the demand for it. This does not occur when equalisation creates a general rate of profit. If prices of commodities in one sphere are below or above the price of production (wherein we deliberately leave aside the fluctuations attendant upon the various phases of the industrial cycle in each and every enterprise) the balance is effected through the expansion or curtailment of production, i.e., the expansion or curtailment of the masses of commodities thrown on the market by industrial capitals – caused by inflow or outflow of capital to and from individual spheres of production. It is by this equalisation of the average market-prices of commodities to prices of production that deviations of specific rates of profit from the general, or average, rate of profit are corrected. It cannot be that in this process industrial or mercantile capitalas such should ever assume the appearance of commodities vis-à-vis the buyer, as in the case of interest-bearing capital. If perceptible at all, this process is so only in the fluctuations and equalisations of market-prices of commodities to prices of production, not as a direct fixation of the average profit. The general rate of profit is, indeed, determined 1) by the surplus-value produced by the total capital, 2) by the proportion of this surplus-value to the value of the total capital, and 3) by competition, but only in so far as this is a movement whereby capitals invested in particular production spheres seek to draw equal dividends out of this surplus-value in proportion to their relative magnitudes. The general rate of profit, therefore, derives actually from causes far different and far more complicated than the market rate of interest, which is directly and immediately determined by the proportion between supply and demand, and hence is not as tangible and obvious a fact as the rate of interest. The individual rates of profit in various spheres of production are themselves more or less uncertain; but in so far as they appear, it is not their uniformity but their differences which are perceptible. The general rate of profit, however, appears only as the lowest limit of profit, not as an empirical, directly visible form of the actual rate of profit. In emphasising this difference between the rate of interest and the rate of profit, we still omit the following two points, which favour consolidation of the rate of interest: 1) the historical preexistence of interest-bearing capital and the existence of a traditional general rate of interest; 2) the far greater direct influence exerted by the world-market on establishing the rate of interest, irrespective of the economic conditions of a country, as compared with its influence on the rate of profit. The average profit does not obtain as a directly established fact, but rather is to be determined as an end result of the equalisation of opposite fluctuations. Not so with the rate of interest. It is a thing fixed daily in its general, at least local, validity – a thing which serves industrial and mercantile capitals even as a prerequisite and a factor in the calculation of their operation. It becomes the general endowment of every sum of money of £100 to yield £2, 3, 4, 5. Meteorological reports never denote the readings of the barometer and thermometer with greater accuracy than stock exchange reports denote the rate of interest, not for one or another capital, but for capital in the money-market, i.e., for loanable capital generally. In the money-market only lenders and borrowers face one another. The commodity has the same form-money. All specific forms of capital in accordance with its investment in particular spheres of production or circulation are here obliterated. It exists in the undifferentiated homogeneous form of independent value-money. The competition of individual spheres does not affect it. They are all thrown together as borrowers of money, and capital confronts them all in a form, in which it is as yet indifferent to the prospective manner of its investment. It obtains most emphatically in the supply and demand of capital asessentially the common capital of a class – something industrial capital does only in the movement and competition of capital between the various individual spheres. On the other hand, money-capital in the money-market actually possesses the form, in which, indifferent to its specific employment, it is divided as a common element among the various spheres, among the capitalist class, as the requirements of production in each individual sphere may dictate. Moreover, with the development of large-scale industry moneycapital, so far as it appears on the market, is not represented by some individual capitalist, not the owner of one or another fraction of the capital in the market, but assumes the nature of a concentrated, organised mass, which, quite different from actual production, is subject to the control of bankers, i.e., the representatives of social capital. So that, as concerns the form of demand, loanable capital is confronted by the class as a whole, whereas in the province of supply it is loanable capital which obtains en masse. These are some of the reasons why the general rate of profit appears blurred and hazy alongside the definite interest rate, which may fluctuate in magnitude, but always confronts borrowers as given and fixed because it varies uniformly for all of them. Just as variations in the value of money do not prevent it from having the same value vis-à-vis all commodities. Just as the daily fluctuations in market-prices of commodities do not prevent them from being daily reported in the papers. So the rate of interest is regularly reported as “the price of money.” It is so, because capital itself is being offered here in the form of money as a commodity. The fixation of its price is thus a fixation of its market-price, as with all other commodities. The rate of interest, therefore, always appears as the general rate of interest, as so much money for so much money, as a definite quantity. The rate of profit, on the other hand, may vary even within the same sphere for commodities with the same price, depending on different conditions under which different capitals produce the same commodity, because the rate of profit of an individual capital is not determined by the market-price of a commodity, but rather by the difference between marketprice and cost-price. And these different rates of profit can strike a balance – first within the same sphere and then between different spheres – only through continual fluctuation. (Note for later elaboration.) A specific form of credit: It is known that when money serves as a means of payment instead of a means of purchase, the commodity is alienated, but its value is realised only later. If payment is not made until after the commodity has again been sold, this sale does not appear as the result of the purchase; rather it is through this sale that the purchase is realised. In other words, the sale becomes a means of purchase. Secondly: titles to debts, bills of exchange, etc., become means of payment for the creditor. Thirdly: the compensation of titles to debts replaces money. 1 “The natural rate of interest is governed by the profits of trade to particulars.” (Massie, l. c., p. 51.) 2 At this point the manuscript contains the following remark: “The course of this chapter shows that it is preferable, before analysing the laws of the distribution of profits, to ascertain first the way in which the division of quantity becomes one of quality. To make a transition from the previous chapter, we need but assume that interest is a certain indefinite portion of profit.” 3 “In the first period, immediately after pressure, money is abundant without speculation; in the second period, money is abundant and speculations abound; in the third period, speculation begins to decline and money is in demand, in the fourth period, money is scarce and a pressure arrives.” (Gilbart, A Practical Treatise on Banking, 5th ed., Vol. I, London, 1849, p. 149.) 4 Tooke explains this “by the accumulation of surplus-capital necessarily accompanying the scarcity of profitable employment for it in previous years, by the release of hoards, and by the revival of confidence in commercial prospects.” (History of Prices from 1839 till 1847, London, 1848, p. 54. 5 “An old customer of a banker was refused a loan upon a £200,000 bond; when about to leave to make known his suspension of payment, he was told there was no necessity for the step, under the circumstances the banker would buy the bond at £50,000.” ([H. Roy] The Theory of the Exchanges. The Bank Charter Act of 1844, etc., London, 1869, p. 50.) 6 Since the rate of interest is on the whole determined by the average rate of profit, inordinate swindling is often bound up with a low rate of interest. For instance, the railway swindle in the summer of 1844. The rate of interest of the Bank of England was not raised to 3% until 16th October, 1844. 7 J G. Opdyke, for instance, in his Treatise on Political Economy (New York, 1851) makes a very unsuccessful attempt to explain the universality of a 5% rate of interest by eternal laws. Mr. Karl Arnd is still more naive in Die naturgemässe Volkswirtschaft gegenüber dem Monopoltengeist und dem Kommunismus, etc., Hanau, 1845. It is stated there: “In the natural course of goods production there is just one phenomenon, which, in the fully settled countries, seems in some measure to regulate the rate of interest; this is the proportion, in which the timber in European forests is augmented through their annual growth. This new growth occurs quite independently of their exchange-value, at the rate of 3 or 4 to 100.” (How queer that trees should see to their new growth independently of their exchange-value!) “According to this a drop in the rate of interest below its present level in the richest countries cannot be expected” (p. 124). (He means, because the new growth of the trees is independent of their exchange-value, however much their exchange-value may depend on their new growth.) This deserves to be called “the primordial forest rate of interest.” Its discoverer makes a further laudable contribution in this work to “our science” as the “philosopher of the dog tax.” [Marx ironically calls K. Arnd the “philosopher of the dog tax” because in a special paragraph in his book (§ 88, 5.420-24) he advocated that tax. – Ed.] 8 The Bank of England raises and lowers the rate of its discount, always, of course, with due consideration of the rate prevailing in the open market, in accordance with imports and exports of gold. “By which gambling in discounts, by anticipation of the alterations in the bank-rate, has now become half the trade of the great heads of the money centre” – i.e., of the London money-market. ([H. Roy] The Theory of the Exchanges, etc. , p. 113.) 9 “'The price of commodities fluctuates' continually; they are all made for different uses; the money serves for all purposes. The commodities, even those of the same kind, differ according to quality; cash money is always of the same value, or at least is assumed to be so. Thus it is that the price of money, which we designate by the term interest, has a greater stability and uniformity than that of any other thing.” (J. Steuart, Principles of Political Economy, French translation, 1789, IV, p. 27.) 1 0 “This rule of dividing profits is not, however, to be applied particularly to every lender and borrower, but to lenders and borrowers in general ... remarkably great and small gains are the reward of skill and the want of understanding, which lenders have nothing at all to do with; for as they will not suffer by the one, they ought not to benefit by the other. What has been said of particular men in the same business is applicable to particular sorts of business; if the merchants and tradesmen employed in any one branch of trade get more by what they borrow than the common profits made by other merchants and tradesmen of the same country, the extraordinary gain is theirs, though it required only common skill and understanding to get it; and not the lenders', who supplied them with money ... for the lenders would not have lent their money to carry on any branch of trade up on lower terms than would admit of paying so much as the common rate of interest; and therefore they ought not to receive more than that, whatever advantages may be made by their money.” (Massie, 1. c., pp. 50, 51.) 1 1 Bank-rate 5% Market rate of discount, 60 days' drafts 3 5/8% Ditto, 8 months' 3½% Ditto, 6 months' 3 5/16% Loans to bill-brokers, day to day 1 to 2% Ditto, for one week 3% Last rate for fortnight, loans to stockbrokers 4¾ to 5% Deposit allowance (banks) 3½% Ditto (discount houses) 3 to 3¼ % How large this difference may be for one and the same day is shown in the preceding figures of the rate of interest of the London money-market on December 9, 1889, taken from the City article of the Daily News of December 10. The minimum is 1%, the maximum 5%. [F.E.]
|
|
|
Post by IBDaMann on Sept 20, 2020 21:12:38 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 23. Interest and Profit of Enterprise Interest, as we have seen in the two preceding chapters, appears originally, is originally, and remains in fact merely a portion of the profit, i.e., of the surplus-value, which the functioning capitalist, industrialist or merchant has to pay to the owner and lender of money-capital whenever he uses loaned capital instead of his own. If he employs only his own capital, no such division of profit takes place; the latter is then entirely his. Indeed, as long as the owners of the capital employ it on their own in the reproduction process, they do not compete in determining the rate of interest. This alone shows that the category of interest – impossible without determining the rate of interest – is alien to the movements of industrial capital as such. “The rate of interest may be defined to be that proportional sum which the lender is content to receive, and the borrower to pay, annually, or for any longer or shorter period, for the use of a certain amount of moneyed capital.... When the owner of a capital employs it actively in reproduction, he does not come under the head of those capitalists, the proportion of whom, to the number of borrowers, determines the rate of interest.”; (Th. Tooke, History of Prices, London, 1838, II, pp. 355-56.) It is indeed only the separation of capitalists into money-capitalists and industrial capitalists that transforms a portion of the profit into interest, that generally creates the category of interest; and it is only the competition between these two kinds of capitalists which creates the rate of interest. As long as capital functions in the process of reproduction – assuming that it even belongs to the industrial capitalist and he has no need of paying it back to a lender – the capitalist, as a private individual, does not have at his disposal this capital itself, but only the profit, which he may spend as revenue. As long as his capital functions as capital, it belongs to the process of reproduction, is tied up in it. He is, indeed, its owner, but this ownership does not enable him to dispose of it in any other way, so long as he uses it as capital for the exploitation of labour. The same is true of the money-capitalist. So long as his capital is loaned out and thereby serves as money-capital, it brings him interest, a portion of the profit, but he cannot dispose of the principal. This is evident whenever he loans out his capital for, say, a year, or more, and receives interest at certain stipulated times without the return of his principal. But even the return of the principal makes no difference here. If he gets it back, he must always loan it out again, so long as it is to function for him as capital – here as money-capital. As long as he keeps it in his own hands, it does not collect interest and does not act as capital; and as long as it does gather interest and serve as capital, it is out of his hands. Hence the possibility of loaning out capital for all time. The following remarks by Tooke directed against Bosanquet are, therefore, entirely wrong. He quotes Bosanquet (Metallic, Paper and Credit Currency, London, 1842, p. 73): “Were the rate of interest reduced as low as 1%, capital borrowed would be placed nearly on a par with capital possessed.”; To this Tooke adds the following marginal note: “That a capital borrowed at that, or even a lower rate, should be considered nearly on a par with capital possessed, is a proposition so strange as hardly to warrant serious notice were it not advanced by a writer so intelligent, and, on some points of the subject, so well informed. Has he overlooked the circumstance, or does he consider it of little consequence, that there must, by the supposition, be a condition of repayment?”; (Th. Tooke, An Inquiry into the Currency Principle , 2nd ed., London, 1844, p. 80.) If interest were = 0, the industrial capitalist operating on borrowed capital would stand on a par with a capitalist using his own capital. Both would pocket the same average profit, and capital, whether borrowed or owned, serves as capital only as long as it produces profit. The condition of return payment would alter nothing. The nearer the rate of interest approaches zero, falling, for instance, to 1%, the nearer borrowed capital is to being on a par with owner's capital. So long as money-capital is to exist as money-capital, it must always be loaned out, and indeed at the prevailing rate of interest, say of 1%, and always to the same class of industrial and commercial capitalists. So long as these function as capitalists, the sole difference between the one working with borrowed capital and the other with his own is that the former must pay interest and the latter must not; the one pockets the entire profit p, and the other p - i, the profit minus the interest. The nearer interest approaches zero, the nearer p - i approaches p, and hence the nearer the two capitals are to being on a par. The one must pay back the capital and borrow anew; yet the other must likewise advance it again and again to the production process, so long as his capital is to function, and cannot dispose of it freely, independent of this process. The sole remaining difference between the two is the obvious difference that one is the owner of his capital, and the other is not. The question which now arises is this. How does this purely quantitative division of profit into net profit and interest turn into a qualitative one? In other words, how is it that a capitalist who employs solely his own, not borrowed capital, classifies a portion of his gross profit under the specific category of interest and as such calculates it separately? And, furthermore, how is it that all capital, whether borrowed or not, is differentiated as interest-bearing capital from itself as capital producing a net profit? It is understood that not every accidental quantitative division of profit turns in this manner into a qualitative one. For instance, some industrial capitalists join hands to operate a business and then divide the profit among themselves in accordance with some legal agreement. Others do their business, each on his own, without any partners. These last do not calculate their profit under two heads – one part as individual profit, and the other as company profit for their non-existent partners. In this case the quantitative division therefore does not become a qualitative one. This occurs whenever ownership happens to be vested in several juridical persons. It does not occur whenever this is not the case. In order to answer this question, we must dwell somewhat longer on the actual point of departure in the formation of interest; that is, we must proceed from the assumption that the moneycapitalist and industrial capitalist really confront one another not just as legally different persons, but as persons playing entirely different roles in the reproduction process, or as persons in whose hands the same capital really performs a two-fold and wholly different movement. The one merely loans it, the other employs it productively. For the productive capitalist who works on borrowed capital, the gross profit falls into two parts – the interest, which he is to pay the lender, and the surplus over and above the interest, which makes up his own share of the profit. If the general rate of profit is given, this latter portion is determined by the rate of interest; and if the rate of interest is given, then by the general rate of profit. And furthermore: however the gross profit, the actual value of the total profit, may diverge in each individual case from the average profit, the portion belonging to the functioning capitalist is determined by the interest, since this is fixed by the general rate of interest (leaving aside any special legal stipulations) and assumed to be given beforehand, before the process of production begins, hence before its result, the gross profit, is achieved. We have seen that the actual specific product of capital is surplus-value, or, more precisely, profit. But for the capitalist working on borrowed capital it is not profit, but profit minus interest, that portion of profit which remains to him after paying interest. This portion of the profit, therefore, necessarily appears to him to be the product of a capital as long as it is operative; and this it is, as far as he is concerned, because he represents capital only as functioning capital. He is its personification as long as it functions, and it functions as long as it is profitably invested in industry or commerce and such operations are undertaken with it through its employer as are prescribed by the branch of industry concerned. As distinct from interest, which he has to pay to the lender out of the gross profit, the portion of profit which falls to his share necessarily assumes the form of industrial or commercial profit, or, to use a German term embracing both, the form of Unternehmergewinn (profit of enterprise). If the gross profit equals the average profit, the size of the profit of enterprise is determined exclusively by the rate of interest. If the gross profit deviates from the average profit, its difference from the average profit (after interest is deducted from both) is determined by all the circumstances which cause a temporary deviation, be it of the rate of profit in any particular sphere from the general rate of profit, or the profit of some individual capitalist in a certain sphere from the average profit of this sphere. We have seen however that the rate of profit within the production process itself does not depend on surplus-value alone, but also on many other circumstances, such as purchase prices of means of production, methods more productive than the average, on savings of constant capital, etc. And aside from the price of production, it depends on special circumstances, and in every single business transaction on the greater or lesser shrewdness and industry of the capitalist, whether, and to what extent, he buys or sells above or below the price of production and thus appropriates a greater or smaller portion of the total surplus-value in the process of circulation. In any case, the quantitative division of the gross profit turns here into a qualitative one, and all the more so because the quantitative division itself depends on what is to be divided, the manner in which the active capitalist manages his capital, and what gross profit it yields to him as a functioning capital, i.e., in consequence of his functions as an active capitalist. The functioning capitalist is here assumed as a non-owner of capital. Ownership of the capital is represented in relation to him by the money-capitalist, the lender. The interest he pays to the latter thus appears as that portion of gross profit which is due to the ownership of capital as such. As distinct from this, that portion of profit which falls to the active capitalist appears now as profit of enterprise, deriving solely from the operations, or functions, which he performs with the capital in the process of reproduction, hence particularly those functions which he performs as entrepreneur in industry or commerce. In relation to him interest appears therefore as the mere fruit of owning capital, of capital as such abstracted from the reproduction process of capital, inasmuch as it does not “work,”; does not function; while profit of enterprise appears to him as the exclusive fruit of the functions which he performs with the capital, as the fruit of the movement and performance of capital, of a performance which appears to him as his own activity, as opposed to the inactivity, the non-participation of the money-capitalist in the production process. This qualitative distinction between the two portions of gross profit that interest is the fruit of capital as such, of the ownership of capital irrespective of the production process, and that profit of enterprise is the fruit of performing capital, of capital functioning in the production process, and hence of the active role played by the employer of the capital in the reproduction process – this qualitative distinction is by no means merely a subjective notion of the money-capitalist, on the one hand, and the industrial capitalist, on the other. It rests upon an objective fact, for interest flows to the money-capitalist, to the lender, who is the mere owner of capital, hence represents only ownership of capital before the production process and outside of it; while the profit of enterprise flows to the functioning capitalist alone, who is non-owner of the capital. The merely quantitative division of the gross profit between two different persons who both have different legal claims to the same capital, and hence to the profit produced by it, thus turns into a qualitative division for both the industrial capitalist in so far as he is operating on borrowed capital, and for the money-capitalist, in so far as he does not himself apply his capital. One portion of the profit appears now as fruit due as such to capital in one form, as interest; the other portion appears as a specific fruit of capital in an opposite form, and thus as profit of enterprise. One appears exclusively as the fruit of operating with the capital, the fruit of performing capital, or of the functions performed by the active capitalist. And this ossification and individualisation of the two parts of the gross profit in respect to one another, as though they originated from two essentially different sources, now takes firm shape for the entire capitalist class and the total capital. And, indeed, regardless of whether the capital employed by the active capitalist is borrowed or not, and whether the capital belonging to the money-capitalist is employed by himself or not. The profit of every capital, and consequently also the average profit established by the equalisation of capitals, splits, or is separated, into two qualitatively different, mutually independent and separately individualised parts, to wit – interest and profit of enterprise – both of which are determined by separate laws. The capitalist operating on his own capital, like the one operating on borrowed capital, divides the gross profit into interest due to himself as owner, as his own lender, and into profit of enterprise due to him as to an active capitalist performing his function. As concerns this division, therefore, as a qualitative one, it is immaterial whether the capitalist really has to share with another, or not. The employer of capital, even when working with his own capital, splits into two personalities – the owner of capital and the employer of capital; with reference to the categories of profit which it yields, his capital also splits into capital-property, capital outside the production process, and yielding interest of itself, and capital in the production process which yields a profit of enterprise through its function. Interest, therefore, becomes firmly established in a way that it no longer appears as a division of gross profit of indifference to production, which occurs occasionally when the industrial capitalist happens to operate with someone else's capital. His profit splits into interest and profit of enterprise even when he operates on his own capital. A merely quantitative division thus turns into a qualitative one. It occurs regardless of the fortuitous circumstance whether the industrial capitalist is, or is not, the owner of his capital. It is not only a matter of different quotas of profit assigned to different persons, but two different categories of profit which are differently related to the capital, hence related to different aspects of the capital. Now that this division of gross profit into interest and profit of enterprise has become a qualitative one, it is easy to discover the reasons why it acquires this character of a qualitative division for the total capital and the entire class of capitalists. Firstly, this follows from the simple empirical circumstance that the majority of industrial capitalists, even if in different numerical proportions, work with their own and with borrowed capital, and that at different times the proportion between one's own and borrowed capital changes. Secondly, the transformation of a portion of the gross profit into the form of interest converts its other portion into profit of enterprise. The latter is, indeed, but the opposite form assumed by the excess of gross profit over interest as soon as this exists as an independent category. The entire analysis of the problem how gross profit is differentiated into interest and profit of enterprise, resolves itself into the inquiry of how a portion of the gross profit becomes universally ossified and individualised as interest. Yet historically interest-bearing capital existed as a completed traditional form, and hence interest as a completed sub-division of surplus-value produced by capital, long before the capitalist mode of production and its attendant conceptions of capital and profit. Thus it is that to the popular mind money-capital, or interest-bearing capital, is still capital as such, as capital par excellence. Thus it is, on the other hand, that up to the time of Massie the notion prevailed that it is money as such which is paid in interest. The fact that loaned capital yields interest whether actually employed as capital or not – even when borrowed only for consumption – lends strength to the idea that this form of capital exists independently. The best proof of the independence which interest possessed during the early periods of the capitalist mode of production in reference to profit, and which interest-bearing capital possessed in reference to industrial capital, is that it was discovered (by Massie [[J. Massie] An Essay on the Governing Causes of the Natural Rate of Interest, London, 1750. – Ed.] and after him by Hume [D. Hume, “On Interest.” In: “Essays and Treatises on Several Subjects,” Vol. I, London, 1764. – Ed.] ) as late as the middle of the 18th century, that interest is but a portion of the gross profit, and that such a discovery was at all necessary. Thirdly, whether the industrial capitalist operates on his own or on borrowed capital does not alter the fact that the class of money-capitalists confronts him as a special kind of capitalists, moneycapital as an independent kind of capital, and interest as an independent form of surplus-value peculiar to this specific capital. Qualitatively speaking, interest is surplus-value yielded by the mere ownership of capital; it is yielded by capital as such, even though its owner remains outside the reproduction process. Hence it is surplus-value realised by capital outside of its process. Quantitatively speaking, that portion of profit which forms interest does not seem to be related to industrial or commercial capital as such, but to money-capital, and the rate of this portion of surplus-value, the rate of interest, reinforces this relation. Because, in the first place, the rate of interest is independently determined despite its dependence upon the general rate of profit, and, in the second place, like the market-price of commodities, it appears in contrast to the intangible rate of profit as a fixed, uniform, tangible and always given relation for all its variations. If all capital were in the hands of the industrial capitalists there would be no such thing as interest and rate of interest. The independent form assumed by the quantitative division of gross profit creates the qualitative one. If the industrial capitalist were to compare himself with the money-capitalist, it would be his profit of enterprise alone, the excess of his gross profit over the average interest – the latter appearing to be empirically given by virtue of the rate of interest – that would distinguish him from the other person. If, on the other hand, he compares himself with the industrial capitalist working with his own, instead of borrowed, capital, the latter differs from him only as a money-capitalist in pocketing the interest instead of paying it to someone else. The portion of gross profit distinguished from interest appears to him in either case as profit of enterprise, and interest itself as a surplus-value yielded by capital as such, which it would yield even if not applied productively. This is correct in the practical sense for the individual capitalist. He has the choice of making use of his capital by lending it out as interest-bearing capital, or of expanding its value on his own by using it as productive capital, regardless of whether it exists as money-capital from the very first, or whether it still has to be converted into money-capital. But to apply it to the total capital of society, as some vulgar economists do, and to go so far as to define it as the cause of profit, is, of course, preposterous. The idea of converting all the capital into money-capital, without there being people who buy and put to use means of production, which make up the total capital outside of a relatively small portion of it existing in money, is, of course, sheer nonsense. It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists. But we repeat that it is a fact for the individual capitalist. For this reason, even when operating with his own capital, he necessarily considers the part of his average profit which equals the average interest as fruit of his capital as such, set apart from the process of production; and as distinct from this portion singled out as interest, he considers the surplus of the gross profit as mere profit of enterprise. Fourthly, we have seen, therefore, that the portion of profit which the functioning capitalist has to pay to the owner of borrowed capital is transformed into an independent form for a portion of the profit, which all capital as such, whether borrowed or not, yields under the name of interest. How large this portion is depends on the average rate of interest. Its origin is only still revealed in the fact that the functioning capitalist, when owner of his capital, does not compete – at least not actively – in determining the interest rate. The purely quantitative division of the profit between two persons who have different legal titles to it has turned into a qualitative division, which seems to spring from the very nature of capital and profit. Because, as we have seen, as soon as a portion of profit universally assumes the form of interest, the difference between average profit and interest, or the portion of profit over and above the interest, assumes a form opposite to interest – the form of profit of enterprise. These two forms, interest and profit of enterprise, exist only as opposites. Hence, they are not related to surplus-value, of which they are but parts placed under different categories, heads or names, but rather to one another. It is because one portion of profit turns into interest, that the other appears as profit of enterprise. By profit we here always mean average profit, since variations do not concern us in this analysis, be they of individual profits or of profits in different spheres – hence variations caused by the competitive struggle and other circumstances affecting the distribution of the average profit, or surplus-value. This applies generally to this entire inquiry. Interest is then net profit, as Ramsay calls it, which the ownership of capital yields as such, either simply to the lender, who remains outside the reproduction process, or to the owner who employs his capital productively. But in the latter's case, too, capital yields this net profit to him not in his capacity of productive capitalist, but of money-capitalist, of lender of his own capital as interestbearing capital to himself as to a functioning capitalist. Just as the conversion of money, and of value in general, into capital is the constant result of capitalist production, so is its existence as capital its constant precondition. By its ability to be transformed into means of production it continually commands unpaid labour and thereby transforms the processes of production and circulation of commodities into the production of surplus-value for its owner. Interest is, therefore, the expression of the fact that value in general-materialised labour in its general social form-value which assumes the form of means of production in the actual process of production, confronts living labour-power as an independent power, and is a means of appropriating unpaid labour; and that it is such a power because it confronts the labourer as the property of another. But on the other hand, this antithesis to wage-labour is obliterated in the form of interest, because interest-bearing capital as such has not wage-labour, but productive capital for its opposite. The lending capitalist as such faces the capitalist performing his actual function in the process of reproduction, not the wage-worker, who, precisely under capitalist production, is expropriated of the means of production. Interest-bearing capital is capital as propertyas distinct from capital as a function. But so long as capital does not perform its function, it does not exploit labourers and does not come into opposition to labour. On the other hand, profit of enterprise is not related as an opposite to wage-labour, but only to interest. Firstly, assuming the average profit to be given, the rate of the profit of enterprise is not determined by wages, but by the rate of interest. It is high or low in inverse proportion to it 1 Secondly, the functioning capitalist derives his claim to profits of enterprise, hence the profit of enterprise itself, not from his ownership of capital, but from the function of capital, as distinct from the definite form in which it is only inert property. This stands out as an immediately apparent contrast whenever he operates with borrowed capital, and interest and profit of enterprise therefore go to different persons. The profit of enterprise springs from the function of capital in the reproduction process, hence as a result of the operations, the acts by which the functioning capitalist promotes this function of industrial and commercial capital. But to represent functioning capital is not a sinecure, like representing interest-bearing capital. On the basis of capitalist production, the capitalist directs the process of production and circulation. Exploiting productive labour entails exertion, whether he exploits it himself or has it exploited by someone else on his behalf. Therefore, his profit of enterprise appears to him as distinct from interest, as independent of the ownership of capital, but rather as the result of his function as a non-proprietor – a labourer. He necessarily conceives the idea for this reason that his profit of enterprise, far from being counterposed to wage-labour and far from being the unpaid labour of others, is itself rather a wage or wages of superintendence of labour, higher than a common labourer's, 1) because the work is far more complicated, and 2) because he pays them to himself. The fact that his function as a capitalist consists in creating surplus-value, i.e., unpaid labour, and creating it under the most economical conditions, is entirely lost sight of in the contrast that interest falls to the share of the capitalist even when he does not perform the function of a capitalist and is merely the owner of capital; and that, on the other hand, profit of enterprise does fall to the share of the functioning capitalist even when he is not the owner of the capital on which he operates. He forgets, due to the antithetical form of the two parts into which profit, hence surplus-value, is divided, that both are merely parts of the surplus-value, and that this division alters nothing in the nature, origin, and way of existence of surplus-value. In the process of reproduction the functioning capitalist represents capital as the property of another vis-à-vis the wage-labourers, and the money-capitalist, represented by the functioning capitalist, takes a hand in exploiting labour. The fact that the investing capitalist can perform his function of making the labourers work for him, or of employing means of production as capital, only as the personification of the means of production vis-à-vis the labourers, is forgotten in the contradiction between the function of capital in the reproduction process and the mere ownership of capital outside of the reproduction process. In fact, the form of interest and profit of enterprise assumed by the two parts of profit, i.e., of surplus-value, expresses no relation to labour, because this relation exists only between labour and profit, or rather the surplus-value as a sum, a whole, the unity of these two parts. The proportion in which the profit is divided, and the different legal titles by which this division is sanctioned, are based on the assumption that profit is already in existence. If, therefore, the capitalist is the owner of the capital on which he operates, he pockets the whole profit, or surplusvalue. It is absolutely immaterial to the labourer whether the capitalist does this, or whether he has to pay a part of it to a third person as its legal proprietor. The reasons for dividing the profit among two kinds of capitalists thus turn imperceptibly into the reasons for the existence of the profit, the surplus-value, that is to be divided, and which capital as such derives from the reproduction process regardless of any subsequent division. Since interest is opposed to profit of enterprise, and profit of enterprise to interest, and since they are both counterposed to one another, but not to labour, it follows that profit of enterprise plus interest, i.e., profit, and further surplus-value, are derived – from what? From the antithetical form of its two parts! But profit is produced before its division is undertaken, and before there can be any thought of it. Interest-bearing capital remains as such only so long as the loaned money is actually converted into capital and a surplus is produced with it, of which interest is a part. But this does not rule out that drawing interest, regardless of the process of production, is its organic property. So does labour-power preserve its property of producing value only so long as it is employed and materialised in the labour-process; yet this does not argue against the fact that it is potentially, as a power, an activity which creates value, and that as such it does not spring from the process of production, but rather antecedes it. It is bought as such a capacity for creating value. One might also buy it without setting it to work productively; for purely personal ends, for instance, for personal services, etc. The same applies to capital. It is the borrower's affair whether he employs it as capital, hence actually sets in motion its inherent property of producing surplus-value. What he pays for, is in either case the potential surplus-value inherently contained in capital as a commodity. Let us now consider profit of enterprise in greater detail. Since the specific social attribute of capital under capitalist production – that of being property commanding the labour-power of another – becomes fixed, so that interest appears as a part of surplus-value produced by capital in this interrelation, the other part of surplus-value – profit of enterprise – must necessarily appear as coming not from capital as such, but from the process of production, separated from its specific social attribute, whose distinct mode of existence is already expressed by the term interest on capital. But the process of production, separated from capital, is simply a labour-process. Therefore, the industrial capitalist, as distinct from the owner of capital, does not appear as operating capital, but rather as a functionary irrespective of capital, or, as a simple agent of the labour-process in general, as a labourer, and indeed as a wagelabourer. Interest as such expresses precisely the existence of the conditions of labour as capital, in their social antithesis to labour, and in their transformation into personal power vis-à-vis and over labour. It represents the ownership of capital as a means of appropriating the products of the labour of others. But it represents this characteristic of capital as something which belongs to it outside the production process and by no means is the result of the specifically capitalist attribute of this production process itself. Interest represents this characteristic not as directly counterposed to labour, but rather as unrelated to labour, and simply as a relationship of one capitalist to another. Hence, as an attribute outside of and irrelevant to the relation of capital to labour. In interest, therefore, in that specific form of profit in which the antithetical character of capital assumes an independent form, this is done in such a way that the antithesis is completely obliterated and abstracted. Interest is a relationship between two capitalists, not between capitalist and labourer. On the other hand, this form of interest lends the other portion of profit the qualitative form of profit of enterprise, and further of wages of superintendence. The specific functions which the capitalist as such has to perform, and which fall to him as distinct from and opposed to the labourer, are presented as mere functions of labour. He creates surplus-value not because he works as a capitalist, but because he also works, regardless of his capacity of capitalist. This portion of surplus-value is thus no longer surplus-value, but its opposite, an equivalent for labour performed. Due to the alienated character of capital, its antithesis to labour, being relegated to a place outside the actual process of exploitation, namely to the interest-bearing capital, this process of exploitation itself appears as a simple labour-process in which the functioning capitalist merely performs a different kind of labour than the labourer. So that the labour of exploiting and the exploited labour both appear identical as labour. The labour of exploiting is just as much labour as exploited labour. The social form of capital falls to interest, but expressed in a neutral and indifferent form. The economic function of capital falls to profit of enterprise, but abstracted from the specific capitalist character of this function. The same thing passes through the mind of the capitalist in this case as in the case of the reasons indicated in Part II of this book for compensation in the equalisation to average profit. These reasons for compensation which enter the distribution of surplus-value as determinants are distorted in a capitalist's mind to appear as bases of origin and the (subjective) justifications of profit itself. The conception of profit of enterprise as the wages of supervising labour, arising from the antithesis of profit of enterprise to interest, is further strengthened by the fact that a portion of profit may, indeed, be separated, and is separated in reality, as wages, or rather the reverse, that a portion of wages appears under capitalist production as integral part of profit. This portion, as Adam Smith correctly deduced, presents itself in pure form, independently and wholly separated from profit (as the sum of interest and profit of enterprise), on the one hand, and on the other, from that portion of profit which remains, after interest is deducted, as profit of enterprise in the salary of management of those branches of business whose size, etc., permits of a sufficient division of labour to justify a special salary for a manager. The labour of supervision and management is naturally required wherever the direct process of production assumes the form of a combined social process, and not of the isolated labour of independent producers.2 However, it has a double nature. On the one hand, all labour in which many individuals co-operate necessarily requires a commanding will to co-ordinate and unify the process, and functions which apply not to partial operations but to the total activity of the workshop, much as that of an orchestra conductor. This is a productive job, which must be performed in every combined mode of production. On the other hand – quite apart from any commercial department – this supervision work necessarily arises in all modes of production based on the antithesis between the labourer, as the direct producer, and the owner of the means of production. The greater this antagonism, the greater the role played by supervision. Hence it reaches its peak in the slave system.3 But it is indispensable also in the capitalist mode of production, since the production process in it is simultaneously a process by which the capitalist consumes labour-power. Just as in despotic states, supervision and all-round interference by the government involves both the performance of common activities arising from the nature of all communities, and the specific functions arising from the antithesis between the government and the mass of the people. In the works of ancient writers, who had the slave system before them, both sides of the work of supervision are as inseparably combined in theory as they were in practice. Likewise in the works of modern economists, who regard the capitalist mode of production as absolute. On the other hand, as I shall presently illustrate with an example, the apologists of the modern slave system utilise the work of supervision quite as much as a justification of slavery, as the other economists do to justify the wage system. The villicus in Cato's time: “At the head of the estate with slave economy (familia rustica) stands the manager (villicus, derived from villa), who receives and expends, buys and sells, takes instructions from the master, in whose absence he gives orders and metes out punishment.... The manager naturally had more freedom of action than the other slaves; the Magonian books advise that he be permitted to marry, raise children, and have his own funds, and Cato recommends that he be married to the female manager; he alone probably had the prospect of winning his freedom from the master in the event of good behaviour. As for the rest, all formed a common household.... Every slave, including the manager himself, was supplied his necessities at his master's expense at definite intervals and fixed rates, and had to get along on them... The quantity varied in accordance with labour, which is why the manager, for example, whose work was lighter than the other slaves', received a smaller ration than they.”; (Mommsen, Römische Geschichte, 2nd ed., 1856, 1, pp. 809-10.) Aristotle: “Ο γαρ δεσποτηζ ουχ εν κτασθαι τουζ δουλουζ, αλλεν τω χρηθαιυ ουλουζ.” (“For the master” – the capitalist – “proves himself such not by obtaining slaves” – ownership of capital which gives him power to buy labour-power – “but in employing slaves” – using labourers, nowadays wage-labourers, in the production process.) “Εστι δε αυτη η επιστηµη ουδεν µεγα εχουσα ου δε σεµνον.” (“But there is nothing great or sublime about this science.”) “α γαρ τον δουλον επιστασθαι δει ποιειν εχεινον δει ταυτα επιστασθ αι επιταττειν.” “But whatever the slave must be able to perform, the master must be able to order.”) “∆ιο οσοιζ εξουσια µη αυτουζ χαχοπαθειν επιστ οποζ λαµβανει ταυ− την την τιµην, αυτοι δε πολ ιτευονται η φιλοσοφοσιν.” (“Whenever the masters are not compelled to plague themselves with supervision, the manager assumes this honour, while the masters attend to affairs of state or study philosophy.”) (Aristotle, De republica, Bekker edition, Book I, 7.) Aristotle says in just so many words that supremacy in the political and economic fields imposes the functions of government upon the ruling powers, and hence that they must, in the economic field, know the art of consuming labour-power. And he adds that this supervisory work is not a matter of great moment and that for this reason the master leaves the “honour” of this drudgery to an overseer as soon as he can afford it. The work of management and supervision – so far as it is not a special function determined by the nature of all combined social labour, but rather by the antithesis between the owner of means of production and the owner of mere labour-power, regardless of whether this labour-power is purchased by buying the labourer himself, as it is under the slave system, or whether the labourer himself sells his labour-power, so that the production process also appears as a process by which capital consumes his labour – this function arising out of the servitude of the direct producers has all too often been quoted to justify this relationship. And exploitation, the appropriation of the unpaid labour of others, has quite as often been represented as the reward justly due to the owner of capital for his work; but never better than by a champion of slavery in the United States, a lawyer named O'Connor, at a meeting held in New York on December 19, 1859, under the slogan of “Justice for the South.” “Now, gentlemen,” he said amid thunderous applause, “to that condition of bondage the Negro is assigned by Nature... He has strength, and has the power to labour; but the Nature which created the power denied to him either the intellect to govern, or willingness to work.” (Applause.) “Both were denied to him. And that Nature which deprived him of the will to labour, gave him a master to coerce that will, and to make him a useful... servant in the clime in which he was capable of living useful for himself and for the master who governs him... I maintain that it is not injustice to leave the Negro in the condition in which Nature placed him, to give him a master to govern him ... nor is it depriving him of any of his rights to compel him to labour in return, and afford to that master just compensation for the labour and talent employed in governing him and rendering him useful to himself and to the society.” [New York Daily Tribune,November 20, 1859, pp. 7-8. – Ed] Now, the wage-labourer, like the slave, must have a master who puts him to work and rules over him. And assuming the existence of this relationship of lordship and servitude, it is quite proper to compel the wage-labourer to produce his own wages and also the wages of supervision, as compensation for the labour of ruling and supervising him, or “just compensation for the labour and talent employed in governing him and rendering him useful to himself and to the society.” The labour of supervision and management, arising as it does out of an antithesis, out of the supremacy of capital over labour, and being therefore common to all modes of production based on class contradictions like the capitalist mode, is directly and inseparably connected, also under the capitalist system, with productive functions which all combined social labour assigns to individuals as their special tasks. The wages of an epitropos, or régisseur, as he was called in feudal France, are entirely divorced from profit and assume the form of wages for skilled labour whenever the business is operated on a sufficiently large scale to warrant paying for such a manager, although, for all that, our industrial capitalists are far from “attending to affairs of state or studying philosophy.” It has already been remarked by Mr. Ure4 that it is not the industrial capitalists, but the industrial managers who are “the soul of our industrial system.” Whatever concerns the commercial part of an establishment we have already said all that is necessary in the preceding part. The capitalist mode of production has brought matters to a point where the work of supervision, entirely divorced from the ownership of capital, is always readily obtainable. It has, therefore, come to be useless for the capitalist to perform it himself. An orchestra conductor need not own the instruments of his orchestra, nor is it within the scope of his duties as conductor to have anything to do with the “wages” of the other musicians. Co-operative factories furnish proof that the capitalist has become no less redundant as a functionary in production as he himself, looking down from his high perch, finds the big landowner redundant. Inasmuch as the capitalist's work does not originate in the purely capitalistic process of production, and hence does not cease on its own when capital ceases; inasmuch as it does not confine itself solely to the function of exploiting the labour of others; inasmuch as it therefore originates from the social form of the labour-process, from combination and co-operation of many in pursuance of a common result, it is just as independent of capital as that form itself as soon as it has burst its capitalistic shell. To say that this labour is necessary as capitalistic labour, or as a function of the capitalist, only means that thevulgus is unable to conceive the forms developed in the lap of capitalist production, separate and free from their antithetical capitalist character. The industrial capitalist is a worker, compared to the money-capitalist, but a worker in the sense of capitalist, i.e., an exploiter of the labour of others. The wage which he claims and pockets for this labour is exactly equal to the appropriated quantity of another's labour and depends directly upon the rate of exploitation of this labour, in so far as he undertakes the effort required for exploitation; it does not, however, depend on the degree of exertion that such exploitation demands, and which he can shift to a manager for moderate pay. After every crisis there are enough ex-manufacturers in the English factory districts who will supervise, for low wages, what were formerly their own factories in the capacity of managers of the new owners, who are frequently their creditors.5 The wages of management both for the commercial and industrial manager are completely isolated from the profits of enterprise in the co-operative factories of labourers, as well as in capitalist stock companies. The separation of wages of management from profits of enterprise, purely accidental at other times, is here constant. In a co-operative factory the antagonistic nature of the labour of supervision disappears, because the manager is paid by the labourers instead of representing capital counterposed to them. Stock companies in general – developed with the credit system – have an increasing tendency to separate this work of management as a function from the ownership of capital, be it self-owned or borrowed. Just as the development of bourgeois society witnessed a separation of the functions of judges and administrators from land-ownership, whose attributes they were in feudal times. But since, on the one hand, the mere owner of capital, the money-capitalist, has to face the functioning capitalist, while money-capital itself assumes a social character with the advance of credit, being concentrated in banks and loaned out by them instead of its original owners, and since, on the other hand, the mere manager who has no title whatever to the capital, whether through borrowing it or otherwise, performs all the real functions pertaining to the functioning capitalist as such, only the functionary remains and the capitalist disappears as superfluous from the production process. It is manifest from the public accounts of the co-operative factories in England 6 that – after deducting the manager's wages, which form a part of the invested variable capital much the same as wages of other labourers – the profit was higher than the average profit, although at times they paid a much higher interest than did private manufacturers. The source of greater profits in all these cases was greater economy in the application of constant capital. What interests us in this, however, is the fact that here the average profit ( = interest + profit of enterprise) presents itself actually and palpably as a magnitude wholly independent of the wages of management. Since the profit was higher here than average profit, the profit of enterprise was also higher than usual. The same situation is observed in relation to some capitalist stock companies, such as joint-stock banks. The London and Westminster Bank paid an annual dividend of 30% in 1863, while the Union Bank of London and others paid 15%. Aside from the directors' salary the interest paid for deposits is here deducted from gross profit. The high profit is to be explained here by the moderate proportion of paid-in capital to deposits. For instance, in the case of the London and Westminster Bank, in 1863: paid-in capital, £1,000,000; deposits, £14,540,275. As for the Union Bank of London, in 1863: paid-in capital, £600,000; deposits, £12,384,173. Profit of enterprise and wages of supervision, or management, were confused originally due to the antagonistic form assumed in respect to interest by the surplus of profit. This was further promoted by the apologetic aim of representing profit not as a surplus-value derived from unpaid labour, but as the capitalist's wages for work performed by him. This was met on the part of socialists by a demand to reduce profit actually to what it pretended to be theoretically, namely, mere wages of supervision. And this demand was all the more obnoxious to theoretical embellishment, the more these wages of supervision, like any other wage, found their definite level and definite market-price, on the one hand, with the development of a numerous class of industrial and commercial managers,7 and the more they fell, on the other, like all wages for skilled labour, with the general development which reduces the cost of production of specially trained labour-power.8 With the development of co-operation on the part of the labourers, and of stock enterprises on the part of the bourgeoisie, even the last pretext for the confusion of profit of enterprise and wages of management was removed, and profit appeared also in practice as it undeniably appeared in theory, as mere surplus-value, a value for which no equivalent was paid, as realised unpaid labour. It was then seen that the functioning capitalist really exploits labour, and that the fruit of his exploitation, when working with borrowed capital, was divided into interest and profit of enterprise, a surplus of profit over interest. On the basis of capitalist production a new swindle develops in stock enterprises with respect to wages of management, in that boards of numerous managers or directors are placed above the actual director, for whom supervision and management serve only as a pretext to plunder the stockholders and amass wealth. Very curious details concerning this are to be found in The City or the Physiology of London Business; with Sketches on Change, and the Coffee Houses, London, 1845. “What bankers and merchants gain by the direction of eight or nine different companies, may be seen from the following illustration: The private balance sheet of Mr. Timothy Abraham Curtis, presented to the Court of Bankruptcy when that gentleman failed, exhibited a sample of the income netted from directorship ... between £800 and £900 a year. Mr. Curtis having been associated with the Courts of the Bank of England, and the East India House, it was considered quite a plum for a public company to acquire his services in the boardroom” (pp. 81, 82). The remuneration of the directors of such companies for each weekly meeting is at least one guinea. The proceedings of the Court of Bankruptcy show that these wages of supervision were, as a rule, inversely proportional to the actual supervision performed by these nominal directors. 1 “The profits of enterprise depend upon the net profits of capital, not the latter upon the former.” (Ramsay, Essay on the Distribution of Wealth, p. 214. For Ramsay net profits always mean interest.) 2 “Superintendence is here” (in the case of the farm owner) “completely dispensed with.” (J. E. Cairnes, The Slave Power, London, 1862, p. 48.) 3 “If the nature of the work requires that the workmen” (viz., the slaves) “should be dispersed over an extended area, the number of overseers, and, therefore, the cost of the labour which requires this supervision, will be proportionately increased.” (Cairnes, 1. c., p. 44.) 4 A. Ure, Philosophy of Manufactures, French translation, 1836, I, p. 67, where this Pindar of the manufacturers at the same time testifies that most manufacturers have not the slightest understanding of the mechanism which they set in motion. 5 In a case known to me, following the crisis of 1868, a bankrupt manufacturer became the paid wage-labourer of his own former labourers. The factory was operated after the bankruptcy of its owner by a labourers' co-operative, and its former owner was employed as manager. – F. E. 6 The accounts quoted here go no further than 1864, since the above was written in 1865. – F. E. 7 “Masters are labourers as well as their journeymen. In this character their interest is precisely the same as that of their men. But they are also either capitalists, or the agents of the capitalists, and in this respect their interest is decidedly opposed to the interests of the workmen.” (p. 27). “The wide spread of education among the journeymen mechanics of this country diminishes daily the value of the labour and skill of almost all masters and employers by increasing the number of persons who possess their peculiar knowledge” (p. 30, Hodgskin, Labour Defended Against the Claims of Capital, etc., London, 1825). 8 “The general relaxation of conventional barriers, the increased facilities of education tend to bring down the wages of skilled labour instead of raising those of the unskilled.” (J. St. Mill, Principles of Political Economy, 2nd ed., London, 1849, I, p. 479.)
|
|
|
Post by IBDaMann on Sept 20, 2020 21:14:08 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 24. Externalization of the Relations of Capital in the Form of Interest-Bearing Capital The relations of capital assume their most externalised and most fetish-like form in interestbearing capital. We have here M – M', money creating more money, self-expanding value, without the process that effectuates these two extremes. In merchant's capital, M – C – M', there is at least the general form of the capitalistic movement, although it confines itself solely to the sphere of circulation, so that profit appears merely as profit derived from alienation; but it is at least seen to be the product of a social relation, not the product of a mere thing. The form of merchant's capital at least presents a process, a unity of opposing phases, a movement that breaks up into two opposite actions – the purchase and the sale of commodities. This is obliterated in M – M', the form of interest-bearing capital. For instance, if £1,000 are loaned out by a capitalist at a rate of interest of 5%, the value of £1,000 as a capital for one year = C + Ci', where C is the capital and i' the rate of interest. Hence, 5% = 5/100 = 1/20, and 1,000 + 1,000 × 1/20 = £1,050. The value of £1,000 as capital = £1,050, i.e., capital is not a simple magnitude. It is a relationship of magnitudes, a relationship of the principal sum as a given value to itself as a self-expanding value, as a principal sum which has produced a surplus-value. And capital as such, as we have seen, assumes this form of a directly self-expanding value for all active capitalists, whether they operate on their own or borrowed capital. M – M'. We have here the original starting-point of capital, money in the formula M – C – M' reduced to its two extremes M – M', in which M' = M + ∆M, money creating more money. It is the primary and general formula of capital reduced to a meaningless condensation. It is ready capital, a unity of the process of production and the process of circulation, and hence capital yielding a definite surplus-value in a particular period of time. In the form of interest-bearing capital this appears directly, unassisted by the processes of production and circulation. Capital appears as a mysterious and self-creating source of interest – the source of its own increase. The thing (money, commodity, value) is now capital even as a mere thing, and capital appears as a mere thing. The result of the entire process of reproduction appears as a property inherent in the thing itself. It depends on the owner of the money, i.e., of the commodity in its continually exchangeable form, whether he wants to spend it as money or loan it out as capital. In interestbearing capital, therefore, this automatic fetish, self-expanding value, money generating money, are brought out in their pure state and in this form it no longer bears the birth-marks of its origin. The social relation is consummated in the relation of a thing, of money, to itself. Instead of the actual transformation of money into capital, we see here only form without content. As in the case of labour-power, the use-value of money here is its capacity of creating value – a value greater than it contains. Money as money is potentially self-expanding value and is loaned out as such – which is the form of sale for this singular commodity. It becomes a property of money to generate value and yield interest, much as it is an attribute of pear-trees to bear pears. And the moneylender sells his money as just such an interest-bearing thing. But that is not all. The actually functioning capital, as we have seen, presents itself in such a light, that it seems to yield interest not as a functioning capital, but as capital in itself, as money-capital. This, too, becomes distorted. While interest is only a portion of the profit, i.e., of the surplusvalue, which the functioning capitalist squeezes out of the labourer, it appears now, on the contrary, as though interest were the typical product of capital, the primary matter, and profit, in the shape of profit of enterprise, were a mere accessory and by-product of the process of reproduction. Thus we get the fetish form of capital and the conception of fetish capital. In M – M' we have the meaningless form of capital, the perversion and objectification of production relations in their highest degree, the interest-bearing form, the simple form of capital, in which it antecedes its own process of reproduction. It is the capacity of money, or of a commodity, to expand its own value independently of reproduction – which is a mystification of capital in its most flagrant form. For vulgar political economy, which seeks to represent capital as an independent source of value, of value creation, this form is naturally a veritable find, a form in which the source of profit is no longer discernible, and in which the result of the capitalist process of production – divorced from the process – acquires an independent existence. It is not until capital is money-capital that it becomes a commodity, whose capacity for selfexpansion has a definite price quoted every time in every prevailing rate of interest. As interest-bearing capital, and particularly in its direct form of interest-bearing money-capital (the other forms of interest-bearing capital, which do not concern us here, are derivatives of this form and presuppose its existence), capital assumes its pure fetish form, M – M' being the subject, the saleable thing.Firstly, through its continual existence as money, a form, in which all its specific attributes are obliterated and its real elements invisible. For money is precisely that form in which the distinctive features of commodities as use-values are obscured, and hence also the distinctive features of the industrial capitals which consist of these commodities and conditions of their production. It is that form, in which value – in this case capital – exists as an independent exchange-value. In the reproduction process of capital, the money-form is but transient – a mere point of transit. But in the money-market capital always exists in this form. Secondly, the surplusvalue produced by it, here again in the form of money, appears as an inherent part of it. As the growing process is to trees, so generating money (τοχοζ) appears innate in capital in its form of money-capital. In interest-bearing capital the movement of capital is contracted. The intervening process is omitted. In this way, a capital = 1,000 is fixed as a thing, which in itself = 1,400, and which is transformed after a certain period into 1,100 just as wine stored in a cellar improves its use-value after a certain period. Capital is now a thing, but as a thing it is capital. Money is now pregnant. [Goethe, Faust, Part I, Scene 5. – Ed] As soon as it is loaned out, or invested in the reproduction process (inasmuch as it yields interest to the functioning capitalist as its owner, separate from profit of enterprise), interest on it grows, no matter whether it is awake or asleep, is at home or abroad, by day or by night. Thus interest-bearing money-capital (and all capital is money-capital in terms of its value, or is considered as the expression of money-capital) fulfils the most fervent wish of the hoarder. It is this ingrown existence of interest in money-capital as in a thing (this is how the production of surplus-value through capital appears here), which occupies Luther's attention so thoroughly in his naive onslaught against usury. After demonstrating that interest may be demanded if the failure to repay a loan on a definite date to a lender who himself required it to make some payment, caused a loss to him, or resulted in his missing an opportunity to make a profit on a bargain, for instance, in buying a garden, Luther continues: “Now that I have loaned you them (100 gulden), you cause me a double loss due to my not being able to pay on the one hand nor buy on the other, so that I have to lose on both sides, and this is called duplex interesse, damni emergentis et lucri cessantis.... On hearing that John sustained losses on his loan of 100 gulden and demands just damages, they rush in and charge double on every 100 gulden, such double reimbursement, namely, for the loss due to nonpayment and to inability to make a profit on a bargain, just as though these 100 gulden had the double loss grown on to them, so that whenever they have 100 gulden, they loan them out and charge for two losses, which they have not at all sustained... Therefore you are a usurer, who takes damages out of his neighbour's money for an imaginary loss that you did not sustain at all, and which you can neither prove nor calculate. This sort of loss is called by the jurists non verum, sed phantasticum interesse. It is a loss which each conjures up for himself... It will not do to say, therefore, that there could have been losses because I could not have been able to pay or buy. Else it would mean ex contingente necessarium, which is making something out of a thing that is not, and a thing that is uncertain into a thing that is absolutely sure. Would not such usury devour the world in a few years? ... If an unhappy accident befalls him against his will, and he must recover from it, he may demand damages for it, but it is different in trade and just the reverse. There they scheme to profit at the expense of their needy neighbours, how to amass wealth and get rich, to be lazy and idle and live in luxury on the labour of others, without any care, danger, and loss. To sit by the stove and let my 100 gulden gather wealth for me in the country and yet keep them in my pocket, because they are only loaned, without any danger or risk; my friend, who would not like that?” (Martin Luther, An die Pfarherrn wider den Wucher zu predigen, etc., Wittenberg, 1540.) The conception of capital as a self-reproducing and self-expanding value, lasting and growing eternally by virtue of its innate properties – hence by virtue of the hidden quality of scholasticists – has led to the fabulous fancies of Dr. Price, which outdo by far the fantasies of the alchemists; fancies, in which Pitt believed in all earnest, and which he used as pillars of his financial administration in his laws concerning the sinking fund. “Money bearing compound interest increases at first slowly. But, the rate of increase being continually accelerated, it becomes in some time so rapid, as to mock all the powers of the imagination. One penny, put out at our Saviour's birth to 5 per cent compound interest, would, before this time, have increased to a greater sum, than would be contained in a hundred and fifty millions of earths, all solid gold. But if put out to simple interest, it would, in the same time, have amounted to no more than seven shillings and four pence half-penny. Our government has hitherto chosen to improve money in the last, rather than the first of these ways.”i His fancy flies still higher in his Observations on Reversionary Payments, etc., London, 1772. There we read: “A shilling put out to 6% compound interest at our Saviour's birth” (presumably in the Temple of Jerusalem) “would ... have increased to a greater sum than the whole solar system could hold, supposing it a sphere equal in diameter to the diameter of Saturn's orbit.” “A state need never therefore be under any difficulties; for with the smallest savings it may in as little time as its interest can require pay off the largest debts” (pp. XIII, XIV). What a pretty theoretical introduction to the national debt of England! Price was simply dazzled by the gargantuan dimensions obtained in a geometrical progression. Since he took no note of the conditions of reproduction and labour, and regarded capital as a selfregulating automaton, as a mere number that increases itself just as Malthus [An Essay on the Principle of Population, London, 1798, pp. 25-26. – Ed] did with respect to population in his geometrical progression, he was struck by the thought that he had found the law of its growth in the formula s = c(1 + i)n, in which s = the sum of capital + compound interest, c = advanced capital, i = rate of interest (expressed in aliquot parts of 100) and n stands for the number of years in which this process takes place. Pitt takes Dr. Price's mystification quite seriously. In 1786 the House of Commons had resolved to raise £1 million for the public weal. According to Price, in whom Pitt believed, there was, of course, no better way than to tax the people, so as to “accumulate” this sum after raising it, and thus to spirit away the national debt through the mystery of compound interest. The above resolution of the House of Commons was soon followed up by Pitt with a law which ordered the accumulation of £250,000, “until, with the expired annuities, the fund should have grown to £4,000,000 annually.” (Act 26, George III, Chap. 3l.) [“An Act for vesting certain sums in Commissioners, at the End of every Quarter of a Year, to be by them applied to the Reduction of the National Debt” (Anno 26 Georgii III, Regis, cap. 31). – Ed.] In his speech of 1792, in which Pitt proposed that the amount devoted to the sinking fund be increased, he mentioned machines, credit, etc., among the causes of England's commercial supremacy, but as “the most wide-spread and enduring cause, that of accumulation. This principle, he said, was completely developed in the work of Smith, that genius ... and this accumulation, he continued, was accomplished by laying aside at least a portion of the annual profit for the purpose of increasing the principal, which was to be employed in the same manner the following year, and which thus yielded a continual profit.” With Dr. Price's aid Pitt thus converts Smith's theory of accumulation into enrichment of a nation by means of accumulating debts, and thus arrives at the pleasant progression of an infinity of loans – loans to pay loans. It had already been noted by Josiah Child, the father of modern banking, that £100 at 10% would produce in 70 years by compound interest £102,400. (Traité sur le commerce, etc., par J. Child, traduit, etc., Amsterdam et Berlin, 1754, p. 115. Written in 1669.) How thoughtlessly Dr. Price's conception is applied by modern economists, is shown in the following passage from the Economist: “Capital, with compound interest on every portion of capital saved, is so all-engrossing that all the wealth in the world from which income is derived, has long ago become the interest of capital... All rent is now the payment of interest on capital previously invested in the land.” (Economist, July 49, 1851.) In its capacity of interest-bearing capital, capital claims the ownership of all wealth which can ever be produced, and everything it has received so far is but an instalment for its all-engrossing appetite. By its innate laws, all surplus-labour which the human race can ever perform belongs to it. Moloch. In conclusion, the following hodge-podge by the romantic Müller: “Dr. Price's immense increase of compound interest, or of the self-accelerating forces of man, presupposes an undivided, or uninterrupted, uniform application for several centuries, if they are to produce such enormous effects. As soon as capital is divided, cut up into several independently growing shoots, the total process of accumulating forces begins anew. Nature has distributed over a span of about 20 to 25 years the progression of energy which falls on an average to the share of every labourer (!). After the lapse of this time the labourer leaves his career and must transfer the capital accumulated by the compound interest of labour to a new labourer, mostly distributing it among several labourers or children. These must first learn to activate and apply their share of capital, before they can draw any actual compound interest on it. Furthermore, an enormous quantity of capital gained by civil society even in the most restless communities, is gradually accumulated over many years and not employed for any immediate expansion of labour. Instead, as soon as an appreciable sum is gathered together, it is transferred to another individual, a labourer, bank or state, under the head of a loan. And the receiver then sets the capital into actual motion and draws compound interest on it, so that he can easily pledge to pay simple interest to the lender. Finally, the law of consumption, greed, and waste opposes those huge progressions, in which man's powers and their products would multiply if the law of production, or thrift, were alone effective.” (A. Müller, Elemente der Staatskunst, III, pp. 147-49.) It is impossible to concoct a more hair-raising absurdity in so few lines. Leaving aside the droll confusion of labourer and capitalist, value of labour-power and interest on capital, etc., the charging of compound interest is supposed to be explained by the fact that capital is loaned out to bring in compound interest. The method employed by our Müller is thoroughly characteristic of the romanticism in all walks of life. It is made up of current prejudices, skimmed from the most superficial semblance of things. This incorrect and trite content should then be “exalted” and rendered sublime through a mystifying mode of expression. The process of accumulation of capital may be conceived as an accumulation of compound interest in the sense that the portion of profit (surplus-value) which is reconverted into capital, i.e., serves to absorb more surplus-labour, may be called interest. But: 1) Aside from all incidental interference, a large part of available capital is constantly more or less depreciated in the course of the reproduction process, because the value of commodities is not determined by the labour-time originally expended in their production, but by the labour-time expended in their reproduction, and this decreases continually owing to the development of the social productivity of labour. On a higher level of social productivity, all available capital appears, for this reason, to be the result of a relatively short period of reproduction, instead of a long process of accumulation of capital.i 2) As demonstrated in Part III of this book, the rate of profit decreases in proportion to the mounting accumulation of capital and the correspondingly increasing productivity of social labour, which is expressed precisely in the relative and progressive decrease of the variable as compared to the constant portion of capital. To produce the same rate of profit after the constant capital set in motion by one labourer increases ten-fold, the surplus labour-time would have to increase ten-fold, and soon the total labour-time, and finally the entire 24 hours of a day, would not suffice, even if wholly appropriated by capital. The idea that the rate of profit does not shrink is, however, the basis of Price's progression and in general the basis of “all-engrossing capital with compound interest.”iii The identity of surplus-value and surplus-labour imposes a qualitative limit upon the accumulation of capital. This consists of the total working-day, and the prevailing development of the productive forces and of the population, which limits the number of simultaneously exploitable working-days. But if one conceives of surplus-value in the meaningless form of interest, the limit is merely quantitative and defies all fantasy. Now, the concept of capital as a fetish reaches its height in interest-bearing capital, being a conception which attributes to the accumulated product of labour, and at that in the fixed form of money, the inherent secret power, as an automaton, of creating surplus-value in geometrical progression, so that the accumulated product of labour, as the Economist thinks, has long discounted all the wealth of the world for all time as belonging to it and rightfully coming to it. The product of past labour, the past labour itself, is here pregnant in itself with a portion of present or future living surplus-labour. We know, however, that in reality the preservation, and to that extent also the reproduction of the value of products of past labour is only the result of their contact with living labour; and secondly, that the domination of the products of past labour over living surplus-labour lasts only as long as the relations of capital, which rest on those particular social relations in which past labour independently and overwhelmingly dominates over living labour. capitalise 5%. In this case, 15% is the precondition for paying continually 5% interest. If this process continues, the rate of profit, for the reasons indicated in former chapters, will fall from 15% to, say, 10%. But Price entirely forgets that the interest of 5% presupposes a rate of profit of 15%, and assumes it to continue with the accumulation of capital. He has nothing whatsoever to do with the actual process of accumulation, but rather only with lending money and getting it back with compound interest. How that is accomplished is immaterial to him, since it is the innate property of interest-bearing capital. ii See Mill and Carey, and Roscher's mistaken commentary on this score. [Marx refers to the following works: J. St. Mill, Principles of Political Economy, Second edition, Vol. I, London, 1849, pp. 91-92; H. Ch. Carey, Principles of Social Science, Vol. III, Philadelphia, 1859, pp. 71.73; W. Roscher, Die Grundlagen der Nationalökonomie, 3 Auflage, Stuttgart und Augsburg, 1858, § 45. – Ed.] iii “It is clear, that no labour, no productive power, no ingenuity, and no art, can answer the overwhelming demand of compound interest. But all saving is made from the revenue of the capitalist, so that actually these demands are constantly made and as constantly the productive power of labour refuses to satisfy them. A sort of balance is, therefore, constantly struck.” (Labour Defended Against the Claims of Capital, p. 23. By Hodgskin.)
|
|
|
Post by IBDaMann on Sept 20, 2020 21:57:19 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 25. Credit and Fictitious Capital An exhaustive analysis of the credit system and of the instruments which it creates for its own use (credit-money, etc.) lies beyond our plan. We merely wish to dwell here upon a few particular points, which are required to characterise the capitalist mode of production in general. We shall deal only with commercial and bank credit. The connection between the development of this form of credit and that of public credit will not be considered here. I have shown earlier (Buch I, Kap. III, 3, b [English edition: Ch. III, 3, b. – Ed.]) how the function of money as a means of payment, and therewith a relation of creditor and debtor between the producer and trader of commodities, develop from the simple circulation of commodities. With the development of commerce and of the capitalist mode of production, which produces solely with an eye to circulation, this natural basis of the credit system is extended, generalised, and worked out. Money serves here, by and large, merely as a means of payment, i.e., commodities are not sold for money, but for a written promise to pay for them at a certain date. For brevity's sake, we may put all these promissory notes under the general head of bills of exchange. Such bills of exchange, in their turn, circulate as means of payment until the day on which they fall due; and they form the actual commercial money. Inasmuch as they ultimately neutralise one another through the balancing of claims and debts, they act absolutely as money, although there is no eventual transformation into actual money. Just as these mutual advances of producers and merchants make up the real foundation of credit, so does the instrument of their circulation, the bill of exchange, form the basis of credit-money proper, of bank-notes, etc. These do not rest upon the circulation of money, be it metallic or government-issued paper money, but rather upon the circulation of bills of exchange. W. Leatham (banker of Yorkshire) writes in his Letters on the Currency, 2nd ed., London, 1840: “I find, then, the amount for the whole of the year of 1839 ... to be £528,493,842” (he assumed that the foreign bills of exchange made up about one-fifth of the total) “and the amount of bills out at one time in the above year, to be £132,123,460” (p. 56). The bills of exchange make up “one component part greater in amount than all the rest put together” (p. 3). “This enormous superstructure of bills of exchange rests (!) upon the base formed by the amount of bank-notes and gold, and when, by events, this base becomes too much narrowed, its solidity and very existence is endangered” (p. 8). “If I estimate the whole currency” (he means of the bank-notes) “and the amount of the liabilities of the Bank and country bankers, payable on demand, I find a sum of 153 million, which, by law, can be converted into gold ... and the amount of gold to meet this demand” only 14 million (p.11). “The bills of exchange are not ... placed under any control, except by preventing the abundance of money, excessive and low rates of interest or discount, which create a part of them, and encourage their great and dangerous expansion. It is impossible to decide what part arises out of real bonâ fide transactions, such as actual bargain and sale, or what part is fictitious and mere accommodation paper, that is, where one bill of exchange is drawn to take up another running, in order to raise a fictitious capital, by creating so much currency. In times of abundance and cheap money this I know reaches an enormous amount” (pp. 43-44). J.W. Bosanquet, Metallic, Paper and Credit Currency, London, 1842: “An average amount of payments to the extent of upwards of £3,000,000 is settled through the Clearing House (where the London bankers exchange due bills and filed cheques) every day of business in the year, and the daily amount of money required for the purpose is little more than £200,000” (p. 86). (In 1889, the total turnover of the Clearing House amounted to £7,618.75 million, which, in roughly 300 business days, averages £25½ million daily. –F. E.] “Bills of exchange act undoubtedly as currency, independent of money, inasmuch as they transfer property from hand to hand by endorsement” (p. 92). “It may be assumed that upon an average there are two endorsements upon every bill in circulation, and ... each bill performs two payments before it becomes due. Upon this assumption it would appear, that by endorsement alone property changed hands, by means of bills of exchange, to the value of twice five hundred and twenty-eight million, or £1,056,000,000, being at the rate of more than £3,000,000 per day, in the course of the year 1839. We may safely therefore conclude, that deposits and bills of exchange together, perform the functions of money, by transferring property from hand and to hand without the aid of money, to an extent daily of not less than £18,000,000” (p. 93). Tooke says the following about credit in general: “Credit, in its most simple expression, is the confidence which, well, or ill-founded, leads a person to entrust another with a certain amount of capital, in money, or in goods computed at a value in money agreed upon, and in each case payable at the expiration of a fixed term. In the case where the capital is lent in money, that is, whether in banknotes, or in a cash credit, or in an order upon a correspondent, an addition for the use of the capital of so much upon every £100 is made to the amount to be repaid. In the case of goods the value of which is agreed in terms of money, constituting a sale, the sum stipulated to be repaid includes a consideration for the use of the capital and for the risk, till the expiration of the period fixed for payment. Written obligations of payment at fixed dates mostly accompany these credits, and the obligations or promissory notes after date being transferable, form the means by which the lenders, if they have occasion for the use of their capital, in the shape whether of money or goods, before the expiration of the term of the bills they hold, are mostly enabled to borrow or to buy on lower terms, by having their own credit strengthened by the names on the bills in addition to their own.” (Inquiry into the Currency Principle, p. 87.) Ch. Coquelin, Du Crédit et des Banques dans L'Industrie, Revue des Deux Mondes, 1842, Tome 31: “In every country the majority of credit transactions takes place within the circle of industrial relations... The producer of the raw material advances it to the processing manufacturer, and receives from the latter a promise to pay on a certain day. The manufacturer, having completed his share of the work, in his turn advances his product on similar terms to another manufacturer, who has to process it further, and in this way credit stretches on and on, from one to the other, right up to the consumer. The wholesale dealer gives the retailer commodities on credit, while receiving credit from a manufacturer or commission agent. All borrow with one hand and lend with the other, sometimes money, but more frequently products. In this manner an incessant exchange of advances, which combine and intersect in all directions, takes place in industrial relations. The development of credit consists precisely in this multiplication and growth of mutual advances, and therein is the real seat of its power.” The other side of the credit system is connected with the development of money-dealing, which, of course, keeps step under capitalist production with the development of dealing in commodity. We have seen in the preceding part (Chap. XIX) how the care of the reserve funds of businessmen, the technical operations of receiving and disbursing money, of international payments, and thus of the bullion trade, are concentrated in the hands of the money-dealers. The other side of the credit system – the management of interest-bearing capital, or money-capital, develops alongside this money-dealing as a special function of the money-dealers. Borrowing and lending money becomes their particular business. They act as middlemen between the actual lender and the borrower of money-capital. Generally speaking, this aspect of the banking business consists of concentrating large amounts of the loanable money-capital in the bankers' hands, so that, in place of the individual money-lender, the bankers confront the industrial capitalists and commercial capitalists as representatives of all moneylenders. They become the general managers of money-capital. On the other hand by borrowing for the entire world of commerce, they concentrate all the borrowers vis-à-vis all the lenders. A bank represents a centralisation of money-capital, of the lenders, on the one hand, and on the other a centralisation of the borrowers. Its profit is generally made by borrowing at a lower rate of interest than it receives in loaning. The loanable capital which the banks have at their disposal streams to them in various ways. In the first place, being the cashiers of the industrial capitalists, all the money-capital which every producer and merchant must have as a reserve fund, or receives in payment, is concentrated in their hands. These funds are thus converted into loanable money-capital. In this way, the reserve fund of the commercial world, because it is concentrated in a common treasury, is reduced to its necessary minimum, and a portion of the money-capital which would otherwise have to lie slumbering as a reserve fund, is loaned out and serves as interest-bearing capital. In the second place, the loanable capital of the banks is formed by the deposits of money-capitalists who entrust them with the business of loaning them out. Furthermore, with the development of the banking system, and particularly as soon as banks came to pay interest on deposits, money savings and the temporarily idle money of all classes were deposited with them. Small amounts, each in itself incapable of acting in the capacity of money-capital, merge together into large masses and thus form a money power. This aggregation of small amounts must be distinguished as a specific function of the banking system from its go-between activities between the money-capitalists proper and the borrowers. In the final analysis, the revenues, which are usually but gradually consumed, are also deposited with the banks. The loan is made (we refer here strictly to commercial credit) by discounting bills of exchange – by converting bills of exchange into money before they come due – and by advances of various kinds: direct advances on personal credit, loans against securities, such as interest-bearing paper, government paper, stocks of all sorts, and, notably, overdrafts against bills of lading, dock warrants, and other certified titles of ownership of commodities and overdrawing deposits, etc. The credit given by a banker may assume various forms, such as bills of exchange on other banks, cheques on them, credit accounts of the same kind, and finally, if the bank is entitled to issue notes – bank-notes of the bank itself. A bank-note is nothing but a draft upon a banker, payable at any time to the bearer, and given by the banker in place of private drafts. This last form of credit appears particularly important and striking to the layman, first, because this form of credit-money breaks out of the confines of mere commercial circulation into general circulation, and serves there as money; and because in most countries the principal banks issuing notes, being a peculiar mixture of national and private banks, actually have the national credit to back them, and their notes are more or less legal tender; because it is apparent here that the banker deals in credit itself, a bank-note being merely a circulating token of credit. But the banker also has to do with credit in all its other forms, even when he advances the cash money deposited with him. In fact, a bank-note simply represents the coin of wholesale trade, and it is always the deposit which carries the most weight with banks. The best proof of this is furnished by the Scottish banks. Special credit institutions, like special forms of banks, need no further consideration for our purpose. “The business of bankers ... may be divided into two branches... One branch of the banker's business is to collect capital from those who have not immediate employment for it, and to distribute or transfer it to those who have. The other branch is to receive deposits of the incomes of their customers, and to pay out the amount, as it is wanted for expenditure by the latter in the objects of their consumption... The former being a circulation of capital, the latter of currency... “ – “One relates to the concentration of capital on the one hand and the distribution of it on the other, the other is employed in administering the circulation for local purposes of the district.” Tooke, Inquiry into the Currency Principle, pp. 36, 37. We shall revert to this passage later, in Chapter XXVIII. Reports of Committees, Vol. VIII. Commercial Distress, Vol. 11, Part I, 1847-48, Minutes of Evidence. (Further quoted as Commercial Distress, 1847-48.) In the forties, when discounting bills of exchange in London, 21-day drafts of one bank on another were often accepted in lieu of banknotes. (Testimony of J. Pease, country banker, Nos. 4638 and 4645.) According to the same report, bankers were in the habit of giving such bills of exchange regularly in payment to their customers whenever money was tight. If the receiver wanted bank-notes, he had to rediscount this bill. For the banks this amounted to a privilege of coining money. Messrs. Jones, Lloyd and Co. made payments in this way “from time immemorial,” as soon as money was scarce and the rate of interest rose above 5%. The customer was glad to get such banker's bills because bills from Jones, Loyd and Co. were easier discounted than his own; besides, they often passed through twenty to thirty hands. (Ibid., Nos. 901 to 904, 905, 992.) All these forms serve to make the payments claim transferable. “There is scarcely any shape into which credit can be cast, in which it will not at times be called to perform the functions of money; and whether that shape be a bank-note, or a bill of exchange, or a banker's cheque, the process is in every essential particular the same, and the result is the same.” Fullarton, On the Regulation of Currencies, 2nd ed., London, 1845, p. 38. – “Bank-notes are the small change of credit” (p. 51). The following from J. W. Gilbart's The History and Principle of Banking, London, 1834: “The trading capital of a bank may be divided into two parts: the invested capital, and the borrowed banking capital” (p. 117). “There are three ways of raising a banking or borrowed capital. First, by receiving; secondly, by the issuing of notes; thirdly, by the drawing of bills. If a person will lend me £100 for nothing, and I lend that £100 to another person at four per cent interest, then, in the course of a year, I shall gain £4 by the transaction. Again, if a person will take my 'promise to pay'“ (“I promise to pay” is the usual formula for English bank-notes) “and bring it back to me at the end of the year, and pay me four per cent for it, just the same as though I had lent him 100 sovereigns, then I shall gain £4 by that transaction; and again, if a person in a country town brings me £100 on condition that, twenty-one days afterwards, I shall pay the same amount to a person in London, then whatever interest I can make of the money during the twenty-one days, will be my profit. This is a fair representation of the operations of banking, and of the way in which a banking capital is created by means of deposits, notes, and bills” (p. 117). “The profits of a banker are generally in proportion to the amount of his banking or borrowed capital... To ascertain the real profit of a bank, the interest upon the invested capital should be deducted from the gross profit, and what remains is the banking profit” (p. 118). ”The advances of bankers to their customers are made with other people's money” (p. 146). “Precisely those bankers who do not issue notes, create a banking capital by the discounting of bills. They render their discounts subservient to the increase of their deposits. The London bankers will not discount except for those houses who have deposit accounts with them” (p. 119). “A party who has had bills discounted, and has paid interest on the whole amount, must leave some portion of that amount in the hands of the banker without interest. By this means the banker obtains more than the current rate of interest on the money actually advanced, and raises a banking capital to the amount of the balance left in his hands” (pp. 119- 20). Economising on reserve funds, deposits, cheques: “Banks of deposit serve to economise the use of the circulating medium. This is done upon the principle of transfer of titles.... Thus it is that banks of deposit ... are enabled to settle a large amount of transactions with a small amount of money. The money thus liberated, is employed by the banker in making advances, by discount or otherwise, to his customers. Hence the principle of transfer gives additional efficiency to the deposit system...” (p. 123). “It matters not whether the two parties, who have dealings with each other, keep their accounts with the same banker or with different bankers; for, as the bankers exchange their cheques with each other at the clearing house.... The deposit system might thus, by means of transfers, be carried to such an extent as wholly to supersede the use of a metallic currency. Were every man to keep a deposit account at a bank, and make all his payments by cheques, money might be superseded, and cheques become the sole circulating medium. In this case, however, it must be supposed that the banker has the money in his hands, or the cheques would have no value” (p. 124). Centralisation of local transactions in the hands of the banks is effected 1) through branch banks. Country banks have branch establishments in the smaller towns of their district, and London banks in different districts of the city. 2) Through agencies. “Each country banker employs a London agent to pay his notes or bills ... and to receive sums that may be lodged by parties residing in London for the use of parties residing in the country” (p.127). “Each banker accepts the notes of others, but does not reissue them. In all larger cities they come together once or twice a week and exchange their notes. The balance is paid by a draft on London” (p.134). “It is the object of banking to give facilities to trade, and whatever gives facilities to trade gives facilities to speculation. Trade and speculation are in some cases so nearly allied, that it is impossible to say at what precise point trade ends and speculation begins.... Wherever there are banks, capital is more readily obtained, and at a cheaper rate. The cheapness of capital gives facilities to speculation, just in the same way as the cheapness of beef and of beer gives facilities to gluttony and drunkenness” (pp. 137, 438). “As banks of circulation always issue their own notes, it would seem that their discounting business was carried on exclusively with this last description of capital, but it is not so. It is very possible for a banker to issue his own notes for all the bills he discounts, and yet nine-tenths of the bills in his possession shall represent real capital. For, although in the first instance, the banker's notes are given for the bill, yet these notes may not stay in circulation until the bill becomes due – the bill may have three months to run, the notes may return in three days” (p. 172). “The overdrawing of a cash credit account is a regular matter of business; it is, in fact, the purpose for which the cash credit has been granted.... Cash credits are granted not only upon personal security, but also upon the security of the Public Funds” (pp. 174, 175). “Capital advanced, by way of loan, on the securities of merchandise, would produce the same effects as if advanced in the discounting of bills. If a party borrows 1400 on the security of his merchandise, it is the same as though he had sold his merchandise for a 8100 bill, and got it discounted with the banker. By obtaining this advance he is enabled to hold over this merchandise for a better market, and avoids a sacrifice which, otherwise, be might be induced to make, in order to raise the money for urgent purposes” (pp. 180-81). The Currency Theory Reviewed, etc., pp. 62-63: “It is unquestionably true that the £1,000 which you deposit at A today may be reissued tomorrow, and form a deposit at B. The day after that, reissued from B, it may form a deposit at C ... and so on to infinitude; and that the same £1,000 in money may thus, by a succession of transfers, multiply itself into a sum of deposits absolutely indefinite. It is possible, therefore, that nine-tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers who are respectively accountable for them ... Thus in Scotland, for instance, currency (mostly paper money at that) has never exceeded 13 million, the deposits in the banks are estimated at £27 million.... Unless a run on the banks be made, the same £1,000 would, if sent back upon its travels, cancel with the same facility a sum equally indefinite. As the same £1,000 with which you cancel your debt to a tradesman today, may cancel his debt to the merchant tomorrow, the merchant's debt to the bank the day following, and so on without end; so the same £1,000 may pass from hand to hand, and bank to bank, and cancel any conceivable sum of deposits.” [We have seen that Gilbart knew even in 1834 that “whatever gives facilities to trade gives facilities to speculation. Trade and speculation are in some cases so nearly allied, that it is impossible to say at what precise point trade ends and speculation begins.” The easier it is to obtain advances on unsold commodities, the more such advances are taken, and the greater the temptation to manufacture commodities, or dump already manufactured commodities in distant markets, just to obtain advances of money on them. To what extent the entire business world of a country may be seized by such swindling, and what it finally comes to, is amply illustrated by the history of English business during 1845-47. It shows us what credit can accomplish. Before passing on to the following examples, a few preliminary remarks. At the close of 1842 the pressure which English industry suffered almost uninterruptedly since 1837, began to lift. During the following two years foreign demand for English manufactured goods increased still more; 1845 and 1846 marked a period of greatest prosperity. In 1843 the Opium War had opened China to English commerce. The new market gave a new impetus to the further expansion of an expanding industry, particularly the cotton industry. “How can we ever produce too much? We have to clothe 300 million people,” a Manchester manufacturer said to this writer at the time. But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire. With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844. Stock was fully underwritten, i.e., so far as there was money to cover the initial payments. As for the rest, time would show! But when further payments were due – Question 1059, C. D. 1848/57, indicates that the capital invested in railways in 1846-47 amounted to £75 million – recourse had to be taken to credit, and in most cases the basic enterprises of the firm had also to bleed. And in most cases these basic enterprises were already over-burdened. The enticingly high profits had led to far more extensive operations than justified by the available liquid resources. Yet there was credit-easy to obtain and cheap. The bank discount rate stood low: 1¾ to 2¾% in 1844, less than 3% until October 1845, rising to 5% for a while (February 1846), then dropping again to 3¼% in December 1846. The Bank of England had an unheard-of supply of gold in its vaults. All inland quotations were higher than ever before. Why then allow this splendid opportunity to escape? Why not go in for all one was worth? Why not send all one could manufacture to foreign markets which pined for English goods? And why should not the manufacturer himself pocket the double gain arising from selling yarn and fabrics in the Far East, and the return cargo in England? Thus arose the system of mass consignments to India and China against advance payments, and this soon developed into a system of consignments purely for the sake of getting advances, as described in greater detail in the following notes, which led inevitably to over-flooding the markets and a crash. The crash was precipitated by the crop failure of 1846. England, and particularly Ireland, required enormous imports of foodstuffs, notably corn and potatoes. But the countries which supplied them could be paid with the products of English industry only to a very limited extent. Precious metals had to be given out. Gold worth at least nine million was sent abroad. Of this amount no less than seven and a half million came from the treasury of the Bank of England, whose freedom of action on the money-market was thereby considerably impaired. Other banks, whose reserves were deposited with the Bank of England and were practically identical with those of that Bank, were thus also compelled to curtail accommodation of money. The rapid and easy flow of payments was obstructed, first here and there, then generally. The banking discount rate, still 3 to 3½% in January 1847, rose to 7% in April, when the first panic broke out. The situation eased somewhat in the summer (6½%, 6%), but when the new crop failed as well panic broke out afresh and even more violently. The official minimum bank discount rose in October to 7 and in November to 10%; i.e., the overwhelming mass of bills of exchange was discountable only at outrageous rates of interest, or no longer discountable at all. The general cessation of payments caused the failure of several leading and very many medium-sized and small firms. The Bank itself was in danger due to the limitations imposed by the artful Bank Act of 4844. The government yielded to the general clamour and suspended the Bank Act on October 25, thereby eliminating the absurd legal fetters imposed on the Bank. Now it could throw its supply of banknotes into circulation without hindrance. The credit of these bank-notes being in practice guaranteed by the credit of the nation, and thus unimpaired, the money stringency was thus instantly and decisively relieved. Naturally, quite a number of hopelessly enmeshed large and small firms failed nevertheless, but the peak of the crisis was overcome, the banking discount dropped to 5% in December, and in the course of 1848 a new wave of business activity began which took the edge off the revolutionary movements on the continent in 1849, and which inaugurated in the fifties an unprecedented industrial prosperity, but then ended again – in the crash of 1857. – F. E.] I. A document issued by the House of Lords in 1848 deals with the colossal depreciation of government paper and bonds during the 1847 crisis. According to it the depreciation of October 23, 1847, compared with the level in February of the same year, amounted to: On English government bonds £93,824,217 On dock and canal stock £1,358,288 On railway stock £19,579,820 Total £114,762,325 II. With reference to the swindle in East Indian trade, in which drafts were no longer drawn because commodities were being bought, but rather commodities were bought to be able to make out discountable drafts convertible into money, the Manchester Guardian of November 24, 1847, remarks: Mr. A in London instructs a Mr. B to buy from the manufacturer C in Manchester commodities for shipment to a Mr. D in East India. B pays C in six months' drafts to be made out by C on B. B secures himself by six months' drafts on A. As soon as the goods are shipped A makes out six months' drafts on D against the mailed bill of lading. “The shipper and the co-signee were thus both put in possession of funds – months before they actually paid for the goods; and, very commonly, these bills were renewed at maturity, on pretence of affording time for the returns in a 'long trade'. Unfortunately, losses by such a trade, instead of leading to its contraction, led directly to its increase. The poorer men became, the greater need they had to purchase, in order to make up, by new advances, the capital they had lost on the past adventures. Purchases thus became, not a question of supply and demand, but the most important part of the finance operations of a firm labouring under difficulties. But this is only one side of the picture. What took place in reference to the export of goods at home, was taking place in the purchase and shipment of produce abroad. Houses in India, who had credit to pass their bills, were purchasers of sugar, indigo, silk, or cotton – not because the prices advised from London by the last overland mail promised a profit on the prices current in India, but because former drafts upon the London house would soon fall due, and must be provided for. What was so simple as to purchase a cargo of sugar, pay for it in bills upon the London house at ten months' date, transmit the shipping documents by the overland mail; and, in less than two months, the goods on the high seas, or perhaps not yet passed the mouth of the Hoogly, were pawned in Lombard Street – putting the London house in funds eight months before the drafts against those goods fell due. And all this went on without interruption or difficulty, as long as bill-brokers had abundance of money 'at call,'; to advance on bills of lading and dock warrants, and to discount, without limit, the bills of India houses drawn upon the eminent firms in Mincing Lane.” [This fraudulent procedure remained in vogue so long as goods to and from India had to round the Cape in sailing vessels. But ever since they are being shipped in steamboats via the Suez Canal this method of fabricating fictitious capital has been deprived of its basis – the long freight voyage. And ever since the telegraph informs the English businessman about the Indian market and the Indian merchant about the English market, on the same day this method has become totally impracticable. – F.E.] III. The following is taken from the quoted Report on Commercial Distress, 1847-48: “In the last week of April 1847, the Bank of England advised the Royal Bank of Liverpool that it would thereafter reduce its discount business with the latter bank by one-half. The announcement operated with peculiar hardship on this account, that the payments into Liverpool had latterly been much more in bills than in cash; and the merchants who generally brought to the Bank a large proportion of cash with which to pay their acceptances, had latterly been able to bring only bills which they had received for their cotton and other produce, and that increased very rapidly as the difficulties increased.... The acceptances ... which the Bank had to pay for the merchants, were acceptances drawn chiefly upon them from abroad, and they have been accustomed to meet those acceptances by whatever payment they received for their produce.... The bills that the merchants brought... in lieu of cash, which they usually brought ... were of various dates, and of various descriptions; a considerable number of them were bankers' bills, of three months' date, the large bulk being cotton bills. These bills of exchange, when bankers' bills, were accepted by London bankers, and by merchants in every trade that we could mention – the Brazilian, the American, the Canadian, the West Indian.... The merchants did not draw upon each other; but the parties in the interior, who had purchased produce from the merchants, remitted to the merchants bills on London bankers, or bills on various parties in London, or bills upon anybody. The announcement of the Bank of England caused a reduction of the maturity terms of bills drawn against sales of foreign products, frequently extending to over three months” (pp. 26, 27). The period of prosperity in England from 1844 to 1847, was, as described above, connected with the first great railway swindle. The above-named report makes the following reference to the effect of this swindle on business in general: In April 1847 “almost all mercantile houses had begun to starve their business more or less ... by taking part of their commercial capital for railways” (p.42). “Loans were made on railway shares at a high rate of interest, say, 8%, by private individuals, by bankers and by fire-offices” (p. 66). “Loans to so great an extent by commercial houses to railways induced them to lean too much upon banks by the discount of paper, whereby to carry on their commercial operations” (p. 67). (Question:) “Should you say that the railway calls had had a great effect in producing the pressure which there was” (on the money-market) “in April and October” (1847)? – (Answer:) “I should say that they had had hardly any effect at all in producing the pressure in April; I should imagine that up to April, and up, perhaps, to the summer, they had increased the power of bankers in some respects rather than diminished it; for the expenditure had not been nearly so rapid as the calls; the consequence was, that most of the banks had rather a large amount of railway money in their hands in the beginning of the year.” (This is corroborated in numerous statements made by bankers in C. D. 1848-57.) “In the summer that melted gradually away, and on the 31st of December it was materially less. One cause ... of the pressure in October was the gradual diminution of the railway money in the bankers' hands; between the 22nd of April and the 31st of December the railway balances in our hands were reduced one- third; and the railway calls have also had this effect throughout the Kingdom; they have been gradually draining the deposits of bankers” (pp. 43, 44). Samuel Gurney (head of the ill-famed firm of Overend, Gurney and Co.) similarly says: “During the year 1846 ... there had been a considerable demand for capital, for the establishment of rail-ways ... but it did not increase the value of money.... There was a condensation of small sums into large masses, and those large masses were used in our market; so that, upon the whole, the effect was to throw more money into the money-market of the City than to take it out” [p. 159]. A. Hodgson, Director of the Liverpool Joint-Stock Bank, shows how much bills of exchange may constitute a reserve for bankers: “It has been our habit to keep at least nine-tenths of all our deposits, and all money we have of other persons, in our bill case, in bills that are falling due from day to day ... so much so, that during the time of the run, the bills falling due were almost equal to the amount of the ran upon us day by day” (p. 53). Speculative bills. “5092. Who were those bills (against sold cotton) generally accepted by?” – (R. Gardner, the cotton manufacturer repeatedly mentioned in this work:) “Produce brokers: a person buys cotton, and places it in the hands of a broker, and draws upon that broker, and gets the bills discounted.” – “5094. And they are taken to the banks at Liverpool, and discounted? – Yes, and in other parts besides.... I believe if it had not been for the accommodation thus granted, and principally by the Liverpool banks, cotton would never have been so high last year as it was by 1½ d. or 2d. a pound.” – “600. You have stated that a vast amount of bills were put in circulation, drawn by speculators upon cotton brokers in Liverpool; does that system extend to your advance on acceptances upon colonial and foreign produce as well as on cotton?” (A. Hodgson, a Liverpool banker:) “It refers to all kinds of colonial produce, but to cotton most especially.” – “601. Do you, as a banker, disencourage as far as you can that description of paper? – We do not; we consider it a very legitimate description of paper, when kept in moderation. This description of paper is frequently renewed.” Swindling in the East Indian and Chinese Market, 1847. – Charles Turner (head of one of the leading East Indian houses in Liverpool): “We are all aware of the events which have taken place as regards the Mauritius trade, and other trades of that kind. The brokers have been in the habit ... not only of advancing upon goods after their arrival to meet the bills drawn against those goods, which is perfectly legitimate, and upon the bills of lading ... but ... they have advanced upon produce before it was shipped, and in some cases before it was manufactured. Now, to speak of my own individual instance: I have bought bills in Calcutta to the extent of six or seven thousand pounds in one particular instance; the proceeds of the bills went down to the Mauritius, to help in the growth of sugar; those bills came to England, and above half of them were protested; for when the shipments of sugar came forward, instead of being held to pay those bills, it had been mortgaged to third parties ... before it was shipped, in fact almost before it was boiled” (p.78). “Now manufacturers are insisting upon cash but it does not amount to much, because if a buyer has any credit in London, he can draw upon the house, and get the bill discounted; he goes to London, where discounts now are cheap; he gets the bill discounted, and pays cash to the manufacturer.... It takes twelve months, at least, for the shipper of goods to get his return from India ... a man with ten or fifteen thousand pounds would go into the Indian trade; he would open a credit with a house in London, to a considerable extent, giving that house one per cent; he, drawing upon the house in London, on the understanding that the proceeds of the goods that go out are to be returned to the house in London, but it being perfectly understood by both parties that the man in London is to be kept out of a cash advance; that is to say, in other words, the bills are to be renewed till the proceeds come home. The bills were discounted at Liverpool, Manchester ... or in London ... many of them lie in the Scotch banks” (p. 79). – “786. There is one house which failed in London the other day, and in examining their affairs, a transaction of this sort was proved to have taken place; there is a house of business at Manchester, and another at Calcutta; they opened a credit account with a house in London to the extent of £200,000; that is to say, the friends of this house in Manchester, who consigned goods to the East India House from Glasgow and from Manchester, had the power of drawing upon the house in London to the extent of £200,000; at the same time, there was an understanding that the corresponding house in Calcutta were to draw upon the London house to the extent of £200,000; with the proceeds of those bills sold in Calcutta, they were to buy other bills, and remit them to the house in London, to take up the first bills drawn from Glasgow... There would have been £600,000 of bills created upon that transaction.” – “971. At present, if a house in Calcutta purchase a cargo” (for England), “and give their own bills upon their correspondent in London in payment, and they send the bills of lading home to this country, those bills of lading ... immediately become available to them in Lombard Street for advances, and they have eight months' use of the money before their correspondents are called upon to pay.” IV. In 1848 a secret committee of the House of Lords investigated the causes of the 1847 crisis. The evidence given to the committee was not published, however, until 1857 (Minutes of Evidence, taken before the Secret Committee of the H. of L. appointed to inquire into the Causes of Distress, etc., 1857; quoted as C.D. 1848/57). Here Mr. Lister, Director of the Union Bank of Liverpool, testified, among other things, to the following: “2444. In the spring of 1844 there was an undue extension of credit... because a man transferred property from business into railways and was still anxious to carry on the same extent of business. He probably first thought that he could sell the railway shares at a profit and replace the money in his business. Perhaps he found that could not be done, and he then got credit in his business where formerly he paid in cash. There was an extension of credit from that circumstance.” “2500. Were those bills ... upon which the banks had sustained a loss by holding them, principally bills upon corn or bills upon cotton?” – “They were bills upon all kinds of produce, corn and cotton and sugar, all foreign produce of all descriptions. There was scarcely any thing perhaps with the exception of oil, that did not go down.” – “2506. A broker who accepts a bill will not accept it without a good margin as to the value.” “2512. There are two kinds of bills drawn against produce; the first is the original bill drawn abroad upon the merchant, who imports it.... The bills which are drawn against produce frequently fall due before the produce arrives. The merchant, therefore, when it arrives, if he has not sufficient capital, has to pledge that produce with the broker till he has time to sell that produce. Then a new species of bill is immediately drawn by the merchant in Liverpool upon the broker, on the security of that produce.... Then it is the business of the banker to ascertain from the broker whether he has the produce, and to what extent he has advanced upon it. It is his business to see that the broker has property to protect himself if he makes a loss.” “2516. We also receive bills from abroad.... A man buys a bill abroad on England, and sends it to a house in England; we cannot tell whether that bill is drawn prudently or imprudently, whether it is drawn for produce or for wind.” “2533. You said that almost every kind of foreign produce was sold at a great loss. Do you think that that was in consequence of undue speculation in that produce? – It arose from a very large import, and there not being an equal consumption to take it off. It appears that consumption fell off a great deal.” – “2534. In October produce was almost unsaleable.” How a general sauve qui peut develops at the height of a crisis is revealed in the same report by a first-rate expert, the esteemed crafty Quaker, Samuel Gurney, of Overend, Gurney and Co.: “1262 ... When a panic exists a man does not ask himself what he can get for his bank-notes, or whether he shall lose one or two per cent by selling his exchequer bills, or three per cent. If he is under the influence of alarm he does not care for the profit or loss, but makes himself safe and allows the rest of the world to do as they please.” V. Concerning the mutual satiation of the two markets Mr. Alexander, a merchant in the East India trade, testifies before the Committee of the, Lower House on the Bank Act of 1857 (quoted as B.C. 1857): “4330. At the present moment, if I lay out 6s. in Manchester, I get 5s. back in India; if I lay out 6s. in India, I get 5s. back in London.” So that the Indian market is, therefore, drugged by England, and the English by India. This was, indeed, the case in the summer of 1857, barely ten years after the bitter experience of 1847!
|
|
|
Post by IBDaMann on Sept 20, 2020 21:59:50 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 26. Accumulation of Money-Capital. Its Influence on the Interest Rate “In England there takes place a steady accumulation of additional wealth, which has a tendency ultimately to assume the form of money. Now next in urgency, perhaps, to the desire to acquire money, is the wish to part with it again for some species of investment that shall yield either interest or profit; for money itself, as money, yields neither. Unless, therefore, concurrently with this ceaseless influx of surplus-capital, there is a gradual and sufficient extension of the field for its employment, we must be subject to periodical accumulations of money seeking investment, of more or less volume, according to the movement of events. For a long series of years, the grand absorbent of the surplus wealth of England was our public debt.... As soon as in 1816 the debt reached its maximum, and operated no longer as an absorbent, a sum of at least seven-and-twenty million per annum was necessarily driven to seek other channels of investment. What was more, various return payments of capital were made.... Enterprises which entail a large capital and create an opening from time to time for the excess of unemployed capital ... are absolutely necessary, at least in our country, so as to take care of the periodical accumulations of the superfluous wealth of society, which is unable to find room in the usual fields of application.” (The Currency Theory Reviewed, London, 1845, pp. 32-34.) Of 1845 the same work says: “Within a very recent period prices have sprung upwards from the lowest point of depression.... Consols touch par.... The bullion in the vaults of the Bank of England has ... exceeded in amount the treasure held by that establishment since its institution. Shares of every description range at prices on the average wholly unprecedented, and interest has declined to rates which are all but nominal. If these be not evidences that another heavy accumulation of unemployed wealth exists at this hour in England, that another period of speculative excitement is at hand.” (Ibid., p. 36.) “Although ... the import of bullion is no sure sign of gain upon the foreign trade, yet, in the absence of any explanatory cause, it doesprima facie represent a portion of it.” (J. G. Hubbard, The Currency and the Country, London, 1843, pp. 40-411.) “Suppose ... that at a period of steady trade, fair prices ... and full, but not redundant circulation, a deficient harvest should give occasion for an import of corn, and an export of gold to the value of five million. The circulation” [meaning, as we shall presently see, idle money-capital rather than means of circulation – F.E.] “would of course be reduced by the same amount. An equal quantity of the circulation might still be held by individuals, but the deposits of merchants at their bankers, the balances of bankers with their moneybroker, and the reserve in their till, will all be diminished, and the immediate result of this reduction in the amount of unemployed capital will be a rise in the rate of interest. I will assume from 4 per cent to 6. Trade being in a sound state, confidence will not be shaken, but credit will be more highly valued.” (Ibid., p. 42.) “But imagine ... that all prices fall.... The superfluous currency returns to the bankers in increased deposits-the abundance of unemployed capital lowers the rate of interest to a minimum, and this state of things lasts until either a return of higher prices or a more active trade call the dormant currency into service, or until it is absorbed by investments in foreign stocks or foreign goods” (p. 68). The following extracts are also taken from the parliamentary Report on Commercial Distress, 1847-48. – Owing to the crop failure and famine of 1846-47 large-scale imports of foodstuffs became necessary. “These circumstances caused the imports of the country to be very largely in excess over ... exports ... a considerable drain upon the banks, and an increased application to the discount brokers ... for the discount of bills.... They began to scrutinise the bills ... The facilities of houses then began to be very seriously curtailed, and the weak houses began to fail. Those houses which ... relied upon their credit... went down. This increased the alarm that had been previously felt; and the bankers and others finding that they would not rely with the same degree of confidence that they had previously done upon turning their bills and other money securities into bank-notes, for the purpose of meeting their engagements, still further curtailed their facilities, and in many cases refused them altogether; they locked up their bank-notes, in many instances to meet their own engagements; they were afraid of parting with them.... The alarm and confusion were increased daily; and unless Lord John Russell .... had issued the letter to the Bank ... universal bankruptcy would have been the issue” (pp. 74-75). Russell's letter suspended the Bank Act. – The previously mentioned Charles Turner testifies: “Some houses had large means, but not available. The whole of their capital was locked up in estates in the Mauritius, or indigo factories, or sugar factories. Having incurred liabilities to the extent of £500,000 or £600,000 they had no available assets to pay their bills, and eventually it proved that to pay their bills they were entirely dependent upon their credit” (p. 81). The aforementioned S. Gurney said [1664]: “At present (1848) there is a limitation of transaction and a great superabundance of money.” – “1763. I do not think it was owing to the want of capital; it was owing to the alarm that existed that the rate of interest got so high.” In 1847 England paid at least £9 million gold to foreign countries for imported foodstuffs. Of this amount £7½ million came from the Bank of England and 1½ million from other sources (p. 245). – Morris, Governor of the Bank of England: “The public stocks in the country and canal and railway shares had already by the 23rd of October 1847 been depreciated in the aggregate to the amount of £114,752,225” (p. 312). Again Morris, when questioned by Lord G. Bentinck: “Are you not aware that all property invested in stocks and produce of every description was depreciated in the same way; that raw cotton, raw silk and unmanufactured wool were sent to the continent at the same depreciated price... and that sugar, coffee and tea were sacrificed as at forced sales? – It was ... inevitable that the country should make a considerable sacrifice for the purpose of meeting the efflux of bullion which had taken place in consequence of the large importation of food.” – [3848] “Do not you think it would have been better to trench upon the £8,000,000 lying in the coffers of the Bank than to have endeavoured to get the gold back again at such a sacrifice? – No, I do not.” – Now to the commentaries on such heroism. Disraeli questions Mr. W. Cotton, a Director and former Governor of the Bank of England: “What was the rate of dividend paid to the Bank proprietors in 1844? – It was 7 per cent for the year.” – “What is the dividend ... for 1847? – Nine per cent.” – “Does the Bank pay the income tax for its proprietors in this year? – It does.” – “Did it do so in 1844? – It did not.” 1 – “Then this Bank Act” (of 1844) “has worked very well for the proprietors?... The result is, that since the passing of the Act, the dividend to the proprietors has been raised from 7 per cent to 9 per cent, and the income tax, that previously to the Act was paid by the proprietors, is now paid by the Bank? – It is so.” (Nos. 4356-61.) Mr. Pease, a country banker, had the following to say concerning hoarding in banks during the crisis of 1847: “4605. As the Bank was obliged still to raise its rate of interest, every one seemed apprehensive; country bankers increased the amount of bullion in their hands, and increased their reserve of notes, and many of us who were in the habit of keeping, perhaps, a few hundred pounds of gold and bank-notes, immediately laid up thousands in our desks and drawers, as there was an uncertainty about discounts, and about our bills being current in the market, a general hoarding ensued.” A member of the Committee remarks: “4691. Then, whatever may have been the cause during the last 12 years, the result has been rather in favour of the Jew and money-dealer, than the productive classes generally.” How much a money-dealer takes advantage of times of crisis is revealed by Tooke: “In the hardware districts of Warwickshire and Staffordshire, a great many orders for goods were declined to be accepted in 1847, because the rate of interest which the manufacturer had to pay for discounting his bills more than absorbed all his profit” (No. 5451). Let us now take another parliamentary report cited earlier: Report of Select Committee on Bank Acts, communicated from the Commons to the Lords, 1857 (quoted further as B. C. 1857). In it Mr. Norman, Director of the Bank of England and a leading figure among the champions of the Currency Principle, is interrogated as follows: “3635. You stated, that you consider that the rate of interest depends, not upon the amount of notes, but upon the supply and demand of capital. Will you state what you include in 'capital,' besides notes and coin? – I believe that the ordinary definition of 'capital' is commodities or services used in production.” – “3636. Do you mean to include all commodities in the word 'capital' when you speak of the rate of interest? – All commodities used in production.” – “3637. You include all that in the word 'capital,' when you speak of what regulates the rate of interest? – Yes. Supposing a cotton manufacturer to want cotton for his factory, the way in which he goes to work to obtain it is, probably, by getting an advance from his banker, and with the notes so obtained he goes to Liverpool, and makes a purchase. What he really wants is the cotton; he does not want the notes or the gold, except as a means of getting the cotton. Or he may want the means of paying his workmen; then again, he borrows the notes, and he pays the wages of the workmen with the notes; and the workmen, again, require food and lodging, and the money is the means of paying for those.” – “3638. But interest is paid for the money? – It is, in the first instance; but take another case. Supposing he buys the cotton on credit, without going to the bank for an advance, then the difference between the ready-money price and the credit price at the time at which he is to pay for it is the measure of the interest. Interest would exist if there was no money at all.” This self-complacent rubbish is quite fitting for this pillar of the Currency Principle. First, the brilliant discovery that bank-notes or gold are means of buying something, and that they are not borrowed for their own sake. And this is advanced to explain that the rate of interest is regulated – but by what? By the demand and supply of commodities, which heretofore was known to regulate only the market-prices of commodities. However, very different rates of interest are compatible with the same market-prices of commodities. – But now this cunning. He is confronted with the correct remark: “But interest is paid for the money,” which, of course, contains the implication: “What has interest received by the banker, who does not deal in commodities at all, to do with these commodities? And do not manufacturers receive money at the same rate of interest, although they invest it in widely different markets, hence in markets with widely different conditions of demand and supply for the commodities used in production?” All that this celebrated genius has to say in reply to these questions is that if the manufacturer buys cotton on credit “the difference between the ready-money price and the credit price at the time at which he is to pay for it is the measure of the interest.” Quite the contrary. The prevailing rate of interest whose regulation the great intellect Norman was asked to explain is the measure of the difference between the cash price and the credit price until payment is due. First the cotton is to be sold at its cash price, and this is determined by the market-price, itself regulated by the state of supply and demand. Say the price £1,000. This concludes the transaction between the manufacturer and the cotton broker so far as buying and selling is concerned. Now comes a second transaction. This is one between lender and borrower. The value of £1,000 is advanced to the manufacturer in cotton, and he has to repay it in money, say, in three months. And three months' interest for £1000, determined by the market rate of interest, makes up the extra charge over and above the cash price. The price of cotton is determined by supply and demand. But the price of the advanced value of cotton, of £1,000 advanced for three months, is determined by the rate of interest. And this fact, that cotton is thus transformed into money-capital, proves to Mr. Norman that interest would exist even if there had been no money. If there were no money at all, there would certainly be no general rate of interest. There is, to begin with, a vulgar conception of capital as “commodities used in production.” In so far as these commodities serve as capital, their value ascapital, as distinct from their value as commodities, is expressed in the profit which is derived from their productive or mercantile employment. And the rate of profit under all circumstances has something to do with the marketprice of the purchased commodities and with their supply and demand, but is determined by entirely different circumstances. And there is no doubt that the interest rate is generally limited by the rate of profit. But Mr. Norman should tell us just how this limit is determined. And it is determined by the supply and demand of money-capital as distinguished from the other forms of capital. It could be further asked: How are demand and supply of money-capital determined? It is doubtlessly true that a tacit connection exists between the supply of material capital and the supply of money-capital; and, likewise, that the demand of industrial capitalists for money-capital is determined by conditions of actual production. Instead of enlightening us on this point, Norman offers us the sage opinion that the demand for money-capital is not identical with the demand for money as such; and this sagacity alone, because he, Overstone, and the other Currency prophets, constantly have pricks of conscience since they are striving to make capital out of means of circulation as such through the artificial intervention of legislation, and to raise the interest rate. Now to Lord Overstone, alias Samuel Jones Loyd, as he is asked to explain why he takes 10% for his “money” because “capital” is so scarce in his country. “3653. The fluctuations in the rate of interest arise from one of two causes: an alteration in the value of capital” (excellent! Value of capital, generally speaking, signifies precisely the rate of interest! A change in the rate of interest is thus made to spring from a change in the rate of interest. “Value of capital,” as we have shown elsewhere, is never conceived otherwise in theory. Or else, if Lord Overstone means the rate of profit by the phrase “value of capital”, then the profound thinker returns to the notion that the interest rate is regulated by the rate of profit!) “or an alteration in the amount of money in the country. All great fluctuations of interest, great either in their duration or in the extent of the fluctuation, may be distinctly traced to alterations in the value of capital. Two more striking practical illustrations of that fact cannot be furnished than the rise in the rate of interest in 1847 and during the last two years (1855-56); the minor fluctuations in the rate of interest, which arise from an alteration in the quantity of money, are small both in extent and in duration. They are frequent, and the more rapid and frequent they are, the more effectual they are for accomplishing their destined purpose”, which is to enrich bankers like Overstone. Friend Samuel Gurney expresses it very naively before the Committee of Lords, C. D. 1848 [1857]: “1324. Do you think that the great fluctuations in the rate of interest which have taken place in the last year are advantageous or not to bankers or dealers in money? – I think they are advantageous to dealers in money. All fluctuations in trade are advantageous to the knowing man.” “1325. May not the banker suffer eventually from the high rates of interest, by impoverishing his best customers? – No; I do not think it has that effect perceptibly.” – Voilà ce que parler veut dire. [This is what had to be said. – Ed.] We shall eventually return to the influence of the quantity of available money on the rate of interest. But it is to be noted right here that Overstone again makes a quid pro quo. The demand for money-capital in 1847 (before October there was no anxiety over money stringency, or the “quantity of money,” as he called it) increased for various reasons, such as rising prices for corn and cotton, lack of buyers of sugar due to over-production, railway speculation and the crash, overcrowding of foreign markets with cotton goods, and the forced export to, and import from, India for the purpose of speculation in bills of exchange, which was described above. All these things, over-production in industry and underproduction in agriculture – in other words, greatly differing causes – gave rise to an increased demand for money-capital, i.e., for credit and money. The increased demand for money-capital had its origin in the course of the productive process itself. But whatever may have been the cause, it was the demand for money-capital which made the interest rate, the value of money-capital, climb. If Overstone means to say that the value of money-capital rose because it rose, then it is tautology. But if, by “value of capital,” he means a rise in the rate of profit as the cause of the rise in the rate of interest, we shall immediately see that this is wrong. The demand for money-capital, and consequently the “value of capital,” may rise even though the profit may decrease; as soon as the relative supply of money-capital shrinks, its “value” increases. What Overstone wished to prove is that the crisis of 1847, and the attendant high interest rate, had nothing to do with the “quantity of money,” i.e.,with the regulations of the Bank Act of 1844 which he had inspired; although it was, indeed, connected with them, inasmuch as the fear of exhausting the bank reserve – a creation of Overstone – contributed a money panic to the crisis of 1847-48. But this is not the issue here. There was a dearth of money-capital, caused by the excessive volume of operations compared to the available means and precipitated by the disturbance in the reproduction process due to a crop failure, over-investment in railways, over-production, particularly of cotton goods, swindling operations in trade with India and China, speculation, superfluous sugar imports, etc. What the people, who had bought corn at 120 shillings per quarter, lacked when it fell to 60 shillings, were the 60 shillings which they had overpaid and the corresponding credit for that amount in Lombard Street advances on the corn. It was by no means a lack of bank-notes that prevented them from converting their corn into money at its old price of 120 shillings. The same applied to those who had imported an excess of sugar, which became almost unsaleable. It applied likewise to the gentlemen who had tied up their floating capital in railways and relied on credit to replace it in their “legitimate” business. To Overstone all this signifies a “moral sense of the enhanced value of his money.” But this enhanced value of money-capital corresponded directly on the other hand to the depreciated money-value of real capital (commodity-capital and productive capital). The value of capital in the one form rose because the value of capital in the other fell. Overstone, however, seeks to identify these two values of different sorts of capital in a single value of capital in general, and he tries to do so by opposing both of them to a scarcity of the medium of circulation, of available money. But the same amount of money-capital may be loaned with very different quantities of the circulation medium. Take his example of 1847. The official bank-rate stood at 3 to 3½% in January; 4 to 4½% in February. In March it was generally 4%. April (panic) 4 to 7½%. May 5 to 5½%, June, on the whole, 5%. July 5%. August 5 to 5½%. September 5% with trifling variations of 5¼, 5½, 6%. October 5, 5½, 7%. November 7-10%. December 7 to 5%. – In this case the interest rose because profits decreased and the money-values of commodities fell enormously. If, therefore, Overstone says here that the rate of interest rose in 1847 because the value of capital rose, he cannot mean anything by value of capital but the value of money-capital, and the value of money-capital is the rate of interest, and nothing else. But later he showed the cloven hoof and identified the value of capital with the rate of profit. As for the high rate of interest paid in 1856, Overstone was indeed ignorant of the fact that this was partially a symptom that the credit jobbers were coming to the fore, who paid interest not from their profit, but with the capital of others; he maintained just a few months before the crisis of 1857 that “business is quite sound.” He testified furthermore: [B.C. 1857] “3722. That idea of the profits of trade being destroyed by a rise in the rate of interest is most erroneous. In the first place, a rise in the rate of interest is seldom of any long duration; in the second place, if it is of long duration, and of great extent, it is really a rise in the value of capital, and why does value of capital rise? Because the rate of profit is increased.” Here, then, we learn, at last, what the meaning of “value of capital” is. Furthermore, the rate of profit may be high for a lengthy period, and yet the profit of enterprise may fall and the rate of interest rise to a point where it swallows the greater portion of the profit. “3724. The rise in the rate of interest has been in consequence of the great increase in the trade of the country, and the great rise in the rate of profits; and to complain of the rise in the rate of interest as being destructive of the two things, which have been its own cause, is a sort of logical absurdity, which one does not know how to deal with.” This is just as logical as if he were to say: The rise in the rate of profit has been in consequence of the rise in commodity-prices by speculation, and to complain that the rise in prices destroys its own cause, namely, speculation, is a logical absurdity, etc. That anything can ultimately destroy its own cause is a logical absurdity only for the usurer enamoured of the high interest rate. The greatness of the Romans was the cause of their conquests, and their conquests destroyed their greatness. Wealth is the cause of luxury and luxury has a destructive effect on wealth. The wiseacre! The idiocy of the present-day bourgeois world cannot be better described than by the respect, which the “logic” of the millionaire – the dunghill aristocrat – inspired in all England. Furthermore, if a high rate of profit and an expansion of business may be causes of a high interest rate, a high rate of interest is by no means therefore a cause of high profit. The question is precisely whether such a high interest (as was actually discovered during the crisis) continued or, what is more, reached its climax after the high rate of profit had long gone the way of all flesh. “3718. With regard to a great rise in the rate of discount, that is a circumstance entirely arising from the increased value of capital, and the cause of that increased value of capital I think any person may discover with perfect clearness. I have already alluded to the fact that during the 13 years this Act has been in operation, the trade of this country has increased from £45,000,000 to £120,000,000. Let any person reflect upon all the events which are involved in that short statement; let him consider the enormous demand upon capital for the purpose of carrying on such a gigantic increase of trade, and let him consider at the same time that the natural source from which that great demand should be supplied, namely, the annual savings of this country, has for the last three or four years been consumed in the unprofitable expenditure of war. I confess that my surprise is, that the rate of interest is not much higher than it is; or, in other words, my surprise is, that the pressure for capital to carry on these gigantic operations, is not far more stringent than you have found it to be.” What an amazing jumble of words by our logician of usury! Here he comes again with his increased value of capital! He seems to think that this enormous expansion of the reproduction process, hence accumulation of real capital, took place on one side, and that on the other there existed a “capital”, for which there arose an “enormous demand”, in order to accomplish this gigantic increase of commerce! Was not this enormous increase of production an increase of capital itself, and if it created a demand, did it not also create the supply, and, simultaneously, an increased supply of money-capital? If the interest rate rose very high, then merely because the demand for money-capital increased still more rapidly than its supply, which implies, in other words, that with the expansion of industrial production its operation on a credit basis expanded as well. That is to say, the actual industrial expansion caused an increased demand for “accommodation,” and the latter demand is evidently what our banker means by the “enormous demand for capital.” It was surely not the expansion of this demand for capital alone, which raised the export business from £45 to £120 million. And furthermore, what does Overstone mean when he says that the country's annual savings swallowed by the Crimean War form the natural source of supply for this big demand? in the first place, how did England achieve accumulation in 1792-1815, which was a far different war from the little Crimean one? In the second place, if the natural source was dry, from what source did capital flow at all? It is well known that England did not request loans from foreign countries. Yet if there is an artificial source besides the natural one, it would have been best for a nation to utilise the natural source in war and the artificial one in business. But if only the old money-capital was available, could it double its effectiveness through a high rate of interest? Mr. Overstone evidently thinks that the country's annual savings (which, however, were supposed to have been consumed in this case) are converted only into money-capital. But if no real accumulation, i.e., expansion of production and augmentation of the means of production, had taken place, what good would there be from the accumulation of debtor's money claims on this production? The increase in the “value of capital” springing from a high rate of profit is identified by Overstone with an increase caused by a greater demand for money-capital. This demand may climb for reasons quite independent of the rate of profit. He himself cites the example of its rise in 1847 as a result of the depreciation of real capital. Depending on what suits his purpose, he ascribes the value of capital to real capital or money-capital. The dishonesty of our banking lord, and his narrow-minded banker's point of view with its didactic flavouring are further revealed in the following: (3728. Question:) “You have stated that the rate of discount is of no material moment you think to the merchant; will you be kind enough to state what you consider the ordinary rate of profit?” Mr. Overstone declares that it is “impossible” to answer this question. “3729. Supposing the average rate of profit to be, say, from 7 to 10%, a variation of from 2 to 7 or 8% in the rate of discount must materially affect the rate of profit, must it not? “ (This question itself lumps together the rate of profit of enterprise with the rate of profit, and. passes over the fact that the rate of profit is the common source of interest and profit of enterprise. The interest rate may leave the rate of profit untouched, but not the profit of enterprise. Overstone replied:) “In the first place parties will not pay a rate of discount which seriously interrupts their profits; they will discontinue their business rather than do that.” (Yes, if they can do so without ruining themselves. So long as their profit is high, they pay the discount because they wish to, and when it is low, because they have to.) “What is the meaning of discount? Why does a person discount a bill? ... Because he wants to obtain the command of a greater quantity of capital.” (Halte-là! because he wants to anticipate the return in money of his tied-up capital and to prevent his business from stopping; because he must meet payments due. He demands more capital only when business is good, or when he speculates on another's capital, though business may be bad. The discount is by no means simply a device to expand business.) “And why does he want to obtain the command of a greater quantity of capital? Because he wants to employ that capital; and why does he want to employ that capital? Because it is profitable to him to do so; it would not be profitable to him to do so if the discount destroyed his profit.” This smug logician assumes that bills of exchange are discounted only for the purpose of expanding business, and that business is expanded because it is profitable. The first assumption is wrong. The ordinary businessman discounts, in order to anticipate the money-form of his capital and thereby to keep his process of reproduction in flow; not in order to expand his business or secure additional capital, but in order to balance the credit he gives by the credit he receives. And if he wants to expand his business on credit, discounting bills will do him little good because it is merely conversion of the money-capital which he already has in his hands from one form into another; he will rather take a direct loan for a longer period. The credit swindler will get his accommodation bills discounted to expand his business activity, to cover one squalid business deal by another; not to make profits but to obtain possession of another's capital. After Mr. Overstone has thus identified discounting with borrowing additional capital (instead of with converting bills representing capital into hard cash), he beats an instant retreat as soon as the screws are applied to him. (3730. Question:) “Merchants being engaged in business, must they not for a certain period carry on their operations in despite of any temporary increase in the rate of discount?” – (Overstone:) “There is no doubt that in any particular transaction, if a person can get his command of capital at a low rate of interest rather than at a high rate of interest, taken in that limited view of the matter, that is convenient to him.” But it is a very unlimited point of view, on the other hand, which enables Mr. Overstone quite suddenly to understand only his, banker's capital, as “capital,” and to assume that the man who discounts a bill of exchange with him is a man without capital, just because his capital exists in the form of commodities, or because the money-form of his capital is a bill of exchange, which Mr. Overstone converts into another money-form. 3732. “With reference to the Act of 1844, can you state what has been about the average rate of interest in proportion to the amount of bullion in the Bank; would it be a fact that when the amount of bullion has been about £9,000,000 or £10,000,000 the rate of interest has been 6 or 7 per cent, and that when it has been £16,000,000, the rate of interest has been, say, from 3 to 4 per cent?” (The examiner wishes to press him to explain the rate of interest, so far as it is influenced by the amount of bullion in the Bank, on the basis of the rate of interest, so far as it is influenced by the value of capital.) “I do not apprehend that that is so... but if it is, then I think we must take still more stringent measures than those adopted by the Act of 1844, because if it be true that the greater the store of bullion, the lower the rate of interest, we ought to set to work, according to that view of the matter, to increase the store of bullion to an indefinite amount, and then we should get the interest down to nothing.” The examiner, Cayley, unmoved by this poor joke, continues: “3733. If that be so, supposing that £5,000,000 of bullion was to be restored to the Bank, in the course of the next six months the bullion then would amount, say, to £16,000,000, and supposing that the rate of interest was thus to fall to 3 or 4 per cent, how could it be stated that that fall in the rate of interest arose from a great decrease of the trade of the country? – I said that the recent rise in the rate of interest, not that the fall in the rate of interest, was closely connected with the great increase in the trade of the country.” But what Cayley says is this: If a rise of interest rate together with a contraction of the gold reserve, is an indication of an expansion in business, then a fall of the interest rate together with an expansion of the gold reserve, must be an indication of a contraction of business. Overstone has no answer to this. (3736. Question:) “I observed you” (in the text always “Your Lordship”) “to say that money was the instrument for obtaining capital.” (Precisely this is the mistake, to conceive money as an instrument; it is a form of capital.) “Under a drain of bullion (of the Bank of England) is not the great strain, on the contrary, for capitalists to obtain money?” – (Overstone:) “No, it is not the capitalists, it is those who are not capitalists, who want to obtain money and why do they want to obtain money? ... Because through the money they obtain the command of the capital of the capitalist to carry on the business of the persons who are not capitalists.” Here he declares point-blank that manufacturers and merchants are not capitalists, and that the capitalist's capital is only money-capital. “3737. Are not the parties who draw bills of exchange capitalists? – The parties who draw bills of exchange may be, and may not be, capitalists.” Here he is stuck. He is then asked whether merchants' bills of exchange represent commodities which have been sold or shipped. He denies that these bills represent the value of commodities in the same way that a bank-note represents gold. (3740, 3741.) This is somewhat insolent. “3742. Is it not the merchant's object to get money? – No; getting money is not the object in drawing the bill; getting money is the object in discounting the bill.” Drawing bills of exchange is converting commodities into a form of credit-money, just as discounting bills of exchange is converting this credit-money into another, namely bank-notes. At any rate, Mr. Overstone admits here that the purpose of discounting is to obtain money. A while ago he said that discounting was a way not of converting capital from one form into another, but of obtaining additional capital. “3743. What is the great desire of the mercantile community under pressure of panic, such as you state to have occurred in 1825, 1837 and 1839; is their object to get possession of capital or the legal tender? – Their object is to get the command of capital to support their business.” Their purpose is to obtain means of payment for due bills of exchange on themselves, on account of the prevailing lack of credit, so that they will not have to let their commodities go below price. If they have no capital at all themselves, they receive it along with the means of payment, because they receive value without an equivalent. The urge to obtain money as such consists always in the wish to convert value from the form of commodities or creditor's claims into the form of money. Hence, even aside from the crises, the great difference between borrowing capital and discount, the latter being a mere conversion of money claims from one form into another, or into real money. [I take the liberty at this point in my capacity of editor to interpolate a few remarks. With respect to Norman, as well as Loyd-Overstone, the banker is always the one who “advances capital” to others, and his customers are those who demand “capital” from him. Thus, Overstone says that people have bills of exchange discounted through him, “because they wish to obtain the command ofcapital” (3729), and that it is pleasant for such people if they can “get command of capital at a low rate of interest” (3730). “Money is the instrument for obtaining capital” (3736), and during a panic the great desire of the mercantile community is to “get the command of capital” (3743). For all of Loyd-Overstone's confusion over what capital is, it is at least clear that he designates what the banker gives to his client as capital, as a capital which the client did not formerly possess, but which was advanced to him to supplement what he already possessed. The banker has become so accustomed to act as distributor (through loans) of the social capital available in money-form that he considers every function whereby he hands out money, as loaning. All the money he pays out appears to him as a loan. If the money is directly loaned, this is literally true. If it is invested in the bill-discounting business, it is in fact advanced by himself until the bill becomes due. The notion thus grows on him that all the payments he makes are advances; furthermore, that they are advances not merely in the sense that every investment of money with the object of deriving interest or profit, is economically considered an advance of money which the owner of money concerned, in his capacity of private individual, makes to himself in his capacity as entrepreneur, but advances in the definite sense that the banker lends his client a sum of money which augments the capital already at the latter's disposal. It is this conception, which, transferred from the banker's office to political economy, has created the confusing controversy, whether that which the banker places at his client's disposal in hard cash is capital or mere money, a medium of circulation, or currency. To decide this – fundamentally simple – controversy, we must put ourselves in the place of a bank client. It all depends on what this customer requests and receives. If the bank allows its client a loan simply on his personal credit, without any security on his part, then the matter is clear. He then certainly receives an advance of definite value as a supplement to the capital he has already invested. He receives it in the form of money; hence, not merely money, but also money-capital. If, on the other hand, he receives the advance against securities, etc., then it is an advance in the sense of money paid to him on condition that he pay it back. But it is not an advance of capital. For the securities also represent capital, and a larger amount at that than the advance. The recipient therefore receives less capital-value than he deposits as security; this represents for him no acquisition of additional capital. He does not enter into the transaction because he needs capital – he has that in his securities – but because he needs money. Here we, therefore, have an advance of money, not of capital. If the loan is granted by discounting bills, then even the form of an advance disappears. Then it is purely a matter of buying and selling. The bill passes by endorsement into the possession of the bank, while the money passes into the possession of the client. There is no question of any return payment on his part. If the client buys hard cash with a bill of exchange or some similar instrument of credit, it is no more and no less an advance than were he to buy cash money with his other commodities, such as cotton, iron, or corn. Still less can this be called an advance of capital. Every purchase and sale between one merchant and another is a transfer of capital. But an advance of capital occurs only when the transfer of capital is not reciprocal, but unilateral and for a period of time. An advance of capital through discount can, therefore, only occur when a bill is a speculative one, which does not represent any sold commodities, and no banker will take such a bill if he is aware of its nature. In the regular discounting business the bank client does not, therefore, receive an advance, either of capital or of money. What he receives is money for sold commodities. The cases in which the customer demands and receives capital from a bank are thus clearly distinguished from those, in which he merely receives an advance of money, or buys money from the bank. And since least of all Mr. Loyd-Overstone ever advanced his funds without collateral except on the rarest occasions (he was the banker of my firm in Manchester), it is likewise evident that his lyric descriptions of the great quantities of capital loaned by generous bankers to manufacturers in need of capital are gross inventions. By the way, in Chapter XXXII Marx says essentially the same thing: “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.” – And again in Chapter XXXIII: “Under a developed system of credit, with the money concentrated in the hands of bankers, it is they, at least nominally,who advance it. This advance refers only to money in circulation. It is an advance of circulation, not an advance of capitals which it circulates.” Mr. Chapman, who should know, likewise corroborates this conception of the discounting business: B. C. 1857: “The banker has the bill, the banker has bought the bill.”Evid. Question 5139. We shall, however, return to this subject in Chapter XXVIII. – F. E.] “3744. Will you be good enough to describe what you actually mean by the term ‘capital’?” – (Overstone:) “Capital consists of various commodities, by means of which trade is carried on; there is fixed capital and there is circulating capital. Your ships, your docks, your wharves ... are fixed capital; your provisions, your clothes, etc., are circulating capital.” “3745. Is the country oppressed under a drain of bullion? – Not in the rational sense of the word.” (Then comes the old Ricardian theory of money.) “In the natural state of things the money of the world is distributed amongst the different countries of the world in certain proportions, those proportions being such that under that distribution (of money) the intercourse between any one country and all the other countries of the world jointly will be an intercourse of barter; but disturbing circumstances will arise to affect that distribution, and when those arise, a certain portion of the money of any given country passes to other countries.” – “3746. Your Lordship now uses the term ‘money.’ I understood you before to say that it was a loss of capital. – That what was a loss of capital?” – “3747. The export of bullion? – No, I did not say so. If you treat bullion as capital, no doubt it is a loss of capital; it is parting with a certain proportion of those precious metals which constitute the money of the world.” – “3748. I understood Your Lordship to say that an alteration in the rate of discount was a mere sign of an alteration in the value of capital? – I did.” – “3749. And that the rate of discount generally alters with the state of the store of bullion in the Bank of England? – Yes, but I have already stated that the fluctuations in the rate of interest, which arise from an alteration in the quantity of money” (what he therefore means here is the quantity of actually existing gold) “in a country, are very small.” “3750. Then, does Your Lordship mean that there is a less capital than there was, when there is a more continuous yet temporary increase in the rate of discount than usual? – Less, in one sense of the word. The proportion between capital and the demand for it is altered; it may be by an increased demand, not by a diminution of the quantity of capital.” (But a moment ago it was capital = money or gold, and a little before that he had explained the rise in interest rate by a high rate of profit, due to an expansion rather than a contraction of business or capital.) “3751. What is the capital which you particularly allude to? – That depends entirely upon what the capital is which each person wants. It is the capital which the country has at its command for conducting its business, and when that business is doubled, there must be a great increase in the demand for the capital with which it is to be carried on.” (This shrewd banker doubles first the business activity and then the demand for capital with which it is to be doubled. All he sees is his client, who asks Mr. Loyd for more capital by which to double the volume of his business.) “Capital is like any other commodity” (but according to Mr. Loyd capital is nothing but the totality of commodities), “it will vary in its price” (hence, commodities change their price twice, one time as commodities and the second as capital), “according to the supply and demand.” “3752. The changes in the rate of discount are generally connected with the changes in the amount of gold which there is in the coffers of the Bank. Is it that capital to which Your Lordship refers? – No.” – “3753. Can Your Lordship point to any instance in which there has been a large store of capital in the Bank of England connected with a high rate of discount? – The Bank of England is not a place for the deposit of capital, it is a place for the deposit of money.” – “3754. Your Lordship has stated that the rate of interest depends upon the amount of capital; will you be kind enough to state what capital you mean, and whether you can point to any instance in which there has been a large store of bullion in the Bank and at the same time a high rate of interest? – It is very probable (aha!) that the accumulation of bullion in the Bank may be coincident with a low rate of interest, because a period in which there is a diminished demand for capital” (namely, money-capital; the period to which reference is made here, 1844 and 1845, was a period of prosperity) “is a period, during which, of course, the means or instrument through which you command capital may accumulate.” – “3755. Then you think that there is no connection between the rate of discount and the amount of bullion in the coffers of the Bank? – There may be a connection, but it is not a connection of principle” (his Bank Act of 1844, however, made it a principle of the Bank of England to regulate the interest rate by the quantity of bullion in its possession), “there may be a coincidence of time.” – “3758. Do I rightly understand you to say, that the difficulty of merchants in this country, under a state of pressure, in consequence of a high rate of discount, is in getting capital, and not in getting money? – You are putting two things together which I do not join in that form; their difficulty is in getting capital, and their difficulty also is in getting money.... The difficulty of getting money and the difficulty of getting capital is the same difficulty taken in two successive stages of its progress.” Here the fish is caught in the net again. The first difficulty is to discount a bill of exchange, or to obtain a loan against the security of commodities. It is the difficulty of converting capital, or a commercial token of capital into money. And this difficulty is manifested, among other things, in a high rate of interest. But as soon as the money is obtained, what is the second difficulty? Does anyone ever find any difficulty in getting rid of his money when it is merely a matter of paying? And if it is a matter of buying, has anyone ever had any difficulty in purchasing during times of crisis? And, for the sake of argument, should this refer to a specific dearth in corn, cotton, etc., this difficulty could only appear in the price of these commodities, not in the value of money-capital, i.e., not in the rate of interest; and this difficulty is overcome, in the final analysis, by the fact that our man now has the money to buy them. “3760. But a higher rate of discount is an increased difficulty of getting money? – It is an increased difficulty of getting money, but it is not because you want to have the money; it is only the form” (and this form brings profit into the banker's pocket) “in which the increased difficulty of getting capital presents itself according to the complicated relations of a civilised state.” “3763. (Overstone's reply:) The banker is the gobetween who receives deposits on the one side, and on the other applies those deposits, entrusting them, in the form of capital, to the hands of persons, who, etc.” At last we have what he means by capital. He converts money into capital by “entrusting” it, less euphemistically, by loaning it at interest. After Mr. Overstone has stated that a change in the rate of discount is not essentially connected with a change in quantity of the gold reserve in a bank, or in the quantity of available money, but that there is at best only a coincidence in time, he repeats: “3805. When the money in the country is diminished by a drain, its value increases, and the Bank of England must conform to that alteration in the value of money” (hence, the value of money as capital; in other words, the rate of interest, for the value of money as money, compared with commodities, remains the same), “which is meant by the technical term of raising the rate of interest.” “3819. I never confound those two.” Meaning money and capital, and for the simple reason that he never differentiated between them. “3834. The very large sum, which had to be paid” (for corn in 1847), “which was in point of fact capital, for the supply of the necessary provisions of the country.” “3841. The variations in the rate of discount have no doubt a very close relation to the state of the reserve “ (of the Bank of England), “because the state of the reserve is the indicator of the increase or the decrease of the quantity of money in the country; and in proportion as the money in the country increases or decreases, the value of that money will increase or decrease, and the bank-rate of discount will conform to that change.” Thus, Overstone admits here what he emphatically denied in No. 3755. “3842. There is an intimate connection between them.” Meaning the quantity of bullion in the issue department, on the one hand, and the reserve of notes in the banking department, on the other. Here he explains the change in the rate of interest by the change in the quantity of money. But this statement is wrong. The reserve may shrink because the circulating money in the country increases. This is the case when the public takes more notes and the hoard of metal does not decrease. But in such case the interest rate rises, because then the banking capital of the Bank of England is limited by the Act of 1844. But he dare not mention this, because due to this law the two departments have nothing to do with one another. “3859. A high rate of profit will always create a great demand for capital; a great demand for capital will raise the value of it.” Here, at last, we have the connection between a high rate of profit and a demand for capital as Overstone conceives it. Now, a high rate of profit prevailed in, for example, 1844-45 in the cotton industry, because raw cotton was cheap, and remained so, whereas the demand for cotton goods was strong. The value of capital (and in an earlier statement Overstone calls capital that which everyone needs in his business), in this case therefore the value of raw cotton, was not increased for the manufacturer. The high rate of profit may have induced some cotton manufacturer to obtain money on credit for the purpose of expanding his business. Thereby his demand rose for money-capital, but for nothing else. “3889. Bullion may or may not be money, just as paper may or may not be a bank-note.” “3896. Do I correctly understand Your Lordship that you give up the argument, which you used in 1840, that the fluctuations in the notes out of the Bank of England ought to conform to the fluctuations in the amount of bullion? – I give it up so far as this... that now with the means of information which we possess, the notes out of the Bank of England must have added to them the notes which are in the banking reserve of the Bank of England.” This is superlative. The arbitrary provision that the Bank may make out as many paper notes as it has gold in the treasury and 14 million more, implies, of course, that its issue of notes fluctuates with the fluctuations of the gold reserve. But since the present “means of information which we possess” clearly showed that the mass of notes, which the Bank can thus manufacture (and which the issue department transfers to the banking department) – that this circulation between the two departments of the Bank of England, fluctuating with the fluctuations of the gold reserve, does not determine the fluctuations in the circulation of bank-notes outside the Bank of England, then the latter – the real circulation – becomes a matter of indifference to the bank administration, and the circulation between the two departments of the Bank, whose difference from the real circulation is mirrored in the reserve, alone becomes decisive. To the outside world this internal circulation is significant only because the reserve indicates how close the Bank is approaching the legal maximum of its note issue, and how much its clients can still receive from the banking department. The following is a brilliant example of Overstone's mala fides: “4243. Does the quantity of capital, do you think, oscillate from month to month to such a degree as to alter its value in the way exhibited of late years in the oscillations in the rate of discount? – The relation between the demand and the supply of capital may undoubtedly fluctuate even within short periods.... If France tomorrow put out a notice that she wishes to borrow a very large loan, there is no doubt that it would immediately cause a great alteration in the value of money, that is to say, in the value of capital, in this country.” “4245. If France announces, that she wants suddenly, for any purpose, 30 million's worth of commodities there will be a great demand for capital, to use the more scientific and the simpler term.” “4246. The capital, which France would wish to buy with her loan, is one thing, and the money with which she buys it is another, is it the money, which alters in value, or not? – We seem to be reviving the old question, which I think is more fit for the chamber of a student than for this committee room.” And with this he retires, but not into the chamber of a student. 2 1 In other words, formerly they first fixed the dividend, and then deducted the income tax as the dividend was paid to the individual stockholder; after 1844, however, the Bank first paid the income tax on its total profit, and then paid the dividend “free of income tax.” The same nominal percentages are, therefore, higher in the latter case by the amount of the tax. – F. E. 2 More on Overstone's confusion of terms in matters concerning capital at the close of Chapter XXXII. – [F.E.]
|
|
|
Post by IBDaMann on Sept 20, 2020 22:03:22 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 27. The Role of Credit in Capitalist Production The general remarks, which the credit system so far elicited from us, were the following: I. Its necessary development to effect the equalisation of the rate of profit, or the movements of this equalisation, upon which the entire capitalist production rests. II. Reduction of the costs of circulation. 1) One of the principal costs of circulation is money itself, being value in itself. It is economised through credit in three ways. A. By dropping away entirely in a great many transactions. B. By the accelerated circulation of the circulating medium.iv This corresponds in part with what is to be said under 2). On the one hand, the acceleration is technical; i.e., with the same magnitude and number of actual turnovers of commodities for consumption, a smaller quantity of money or money tokens performs the same service. This is bound up with the technique of banking. On the other hand, credit accelerates the velocity of the metamorphoses of commodities and thereby the velocity of money circulation. C. Substitution of paper for gold money. 2) Acceleration, by means of credit, of the individual phases of circulation or of the metamorphosis of commodities, later the metamorphosis of capital, and with it an acceleration of the process of reproduction in general. (On the other hand, credit helps to keep the acts of buying and selling longer apart and serves thereby as a basis for speculation.) Contraction of reserve funds, which may be viewed in two ways: as a reduction of the circulating medium, on the one hand, and, on the other, as a reduction of that part of capital which must always exist in the form of money.v III. Formation of stock companies. Thereby: 1) An enormous expansion of the scale of production and of enterprises, that was impossible for individual capitals. At the same time, enterprises that were formerly government enterprises, become public. 2) The capital, which in itself rests on a social mode of production and presupposes a social concentration of means of production and labour-power, is here directly endowed with the form of social capital (capital of directly associated individuals) as distinct from private capital, and its undertakings assume the form of social undertakings as distinct from private undertakings. It is the abolition of capital as private property within the framework of capitalist production itself. 3) Transformation of the actually functioning capitalist into a mere manager, administrator of other people's capital, and of the owner of capital into a mere owner, a mere money-capitalist. Even if the dividends which they receive include the interest and the profit of enterprise, i.e., the total profit (for the salary of the manager is, or should be, simply the wage of a specific type of skilled labour, whose price is regulated in the labour-market like that of any other labour), this total profit is henceforth received only in the form of interest, i.e., as mere compensation for owning capital that now is entirely divorced from the function in the actual process of reproduction, just as this function in the person of the manager is divorced from ownership of capital. Profit thus appears (no longer only that portion of it, the interest, which derives its justification from the profit of the borrower) as a mere appropriation of the surplus-labour of others, arising from the conversion of means of production into capital, i.e., from their alienation vis-à-vis the actual producer, from their antithesis as another's property to every individual actually at work in production, from manager down to the last day-labourer. In stock companies the function is divorced from capital ownership, hence also labour is entirely divorced from ownership of means of production and surplus-labour. This result of the ultimate development of capitalist production is a necessary transitional phase towards the reconversion of capital into the property of producers, although no longer as the private property of the individual producers, but rather as the property of associated producers, as outright social property. On the other hand, the stock company is a transition toward the conversion of all functions in the reproduction process which still remain linked with capitalist property, into mere functions of associated producers, into social functions. Before we go any further, there is still the following economically important fact to be noted: Since profit here assumes the pure form of interest, undertakings of this sort are still possible if they yield bare interest, and this is one of the causes, stemming the fall of the general rate of profit, since such undertakings, in which the ratio of constant capital to the variable is so enormous, do not necessarily enter into the equalisation of the general rate of profit. [Since Marx wrote the above, new forms of industrial enterprises have developed, as we know, representing the second and third degree of stock companies. The daily growing speed with which production may be enlarged in all fields of large-scale industry today, is offset by the evergreater slowness with which the market for these increased products expands. What the former turns out in months, can scarcely be absorbed by the latter in years. Add to this the protective tariff policy, by which every industrial country shuts itself off from all others, particularly from England, and also artificially increases domestic production capacity. The results are a general chronic over-production, depressed prices, falling and even wholly disappearing profits; in short, the old boasted freedom of competition has reached the end of its tether and must itself announce its obvious, scandalous bankruptcy. And in every country this is taking place through the big industrialists of a certain branch joining in a cartel for the regulation of production. A committee fixes the quantity to be produced by each establishment and is the final authority for distributing the incoming orders. Occasionally even international cartels were established, as between the English and German iron industries. But even this form of association in production did not suffice. The antagonism of interests between the individual firms broke through it only too often, restoring competition. This led in some branches, where the scale of production permitted, to the concentration of the entire production of that branch of industry in one big joint-stock company under single management. This has been repeatedly effected in America; in Europe the biggest example so far is the United Alkali Trust, which has brought all British alkali production into the hands of a single business firm. The former owners of the more than thirty individual plants have received shares for the appraised value of their entire establishments, totalling about £5 million, which represent the fixed capital of the trust. The technical management remains in the same hands as before, but business control is concentrated in the hands of the general management. The floating capital, totalling about £1 million, was offered to the public for subscription. The total capital is, therefore, £6 million. Thus, in this branch, which forms the basis of the whole chemical industry, competition has been replaced by monopoly in England, and the road has been paved, most gratifyingly, for future expropriation by the whole of society, the nation. – F.E.] This is the abolition of the capitalist mode of production within the capitalist mode of production itself, and hence a self-dissolving contradiction, whichprima facie represents a mere phase of transition to a new form of production. It manifests itself as such a contradiction in its effects. It establishes a monopoly in certain spheres and thereby requires state interference. It reproduces a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation. It is private production without the control of private property. IV. Aside from the stock-company business, which represents the abolition of capitalist private industry on the basis of the capitalist system itself and destroys private industry as it expands and invades new spheres of production, credit offers to the individual capitalist; or to one who is regarded a capitalist, absolute control within certain limits over the capital and property of others, and thereby over the labour of others.vi The control over social capital, not the individual capital of his own, gives him control of social labour. The capital itself, which a man really owns or is supposed to own in the opinion of the public, becomes purely a basis for the superstructure of credit. This is particularly true of wholesale commerce, through which the greatest portion of the social product passes. All standards of measurement, all excuses more or less still justified under capitalist production, disappear here. What the speculating wholesale merchant risks is social property, not his own. Equally sordid becomes the phrase relating the origin of capital to savings, for what he demands is that others should save for him. [Just as all France recently saved up one and a half billion francs for the Panama Canal swindlers. In fact, a description of the entire Panama swindle is here correctly anticipated, fully twenty years before it occurred. – F.E.] The other phrase concerning abstention is squarely refuted by his luxury, which is now itself a means of credit. Conceptions which have some meaning on a less developed stage of capitalist production, become quite meaningless here. Success and failure both lead here to a centralisation of capital, and thus to expropriation on the most enormous scale. Expropriation extends here from the direct producers to the smaller and the medium-sized capitalists themselves. It is the point of departure for the capitalist mode of production; its accomplishment is the goal of this production. In the last instance, it aims at the expropriation of the means of production from all individuals. With the development of social production the means of production cease to be means of private production and products of private production, and can thereafter be only means of production in the hands of associated producers, i.e., the latter's social property, much as they are their social products. However, this expropriation appears within the capitalist system in a contradictory form, as appropriation of social property by a few; and credit lends the latter more and more the aspect of pure adventurers. Since property here exists in the form of stock, its movement and transfer become purely a result of gambling on the stock exchange, where the little fish are swallowed by the sharks and the lambs by the stock-exchange wolves. There is antagonism against the old form in the stock companies, in which social means of production appear as private property; but the conversion to the form of stock still remains ensnared in the trammels of capitalism; hence, instead of overcoming the antithesis between the character of wealth as social and as private wealth, the stock companies merely develop it in a new form. The co-operative factories of the labourers themselves represent within the old form the first sprouts of the new, although they naturally reproduce, and must reproduce, everywhere in their actual organisation all the shortcomings of the prevailing system. But the antithesis between capital and labour is overcome within them, if at first only by way of making the associated labourers into their own capitalist, i.e., by enabling them to use the means of production for the employment of their own labour. They show how a new mode of production naturally grows out of an old one, when the development of the material forces of production and of the corresponding forms of social production have reached a particular stage. Without the factory system arising out of the capitalist mode of production there could have been no co-operative factories. Nor could these have developed without the credit system arising out of the same mode of production. The credit system is not only the principal basis for the gradual transformation of capitalist private enterprises into capitalist stock companies, but equally offers the means for the gradual extension of co-operative enterprises on a more or less national scale. The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other. So far we have considered the development of the credit system – and the implicit latent abolition of capitalist property – mainly with reference to industrial capital. In the following chapters we shall consider credit with reference to interest-bearing capital as such, and to its effect on this capital, and the form it thereby assumes; and there are generally a few more specifically economic remarks still to be made. But first this: The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced because a large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner, who anxiously weighs the limitations of his private capital in so far as he handles it himself. This simply demonstrates the fact that the self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system.vii Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection. At the same time credit accelerates the violent eruptions of this contradiction – crises – and thereby the elements of disintegration of the old mode of production. The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to a new mode of production. It is this ambiguous nature, which endows the principal spokesmen of credit from Law to Isaac Péreire with the pleasant character mixture of swindler and prophet. iv “The average of notes in circulation during the year was, in 1812, 106,538,000 francs; in 1818, 101,205,000 francs; whereas the movement of the currency, or the annual aggregate of disbursements and upon all accounts, was, in 1812, 2,837,712,000 francs; in 1818, 9,665,030,000 francs. The activity of the currency in France, therefore, during the year 1818, as compared with its activity in 1812, was in the proportion of three to one. The great regulator of the velocity of circulation is credit.... This explains, why a severe pressure upon the money-market is generally coincident with a full circulation.” (The Currency Theory Reviewed, etc., p. 65) – “Between September 1833 and September 1843 nearly 300 banks were added to the various issuers of notes throughout the United Kingdom; the result was a reduction in the circulation to the extent of two million and a half; it was £36,035,244 at the close of September 1833, and £33,518,554 at the close of September 1843.” (L. c., p. 53) – “The prodigious activity of Scottish circulation enables it, with £100, to effect the same quantity of monetary transactions, which in England it requires £420 to accomplish.” (L. c., p. 55. This last refers only to the technical side of the operation.) v Before the establishment of the banks ... the amount of capital withdrawn for the purposes of currency was greater, at all times, than the actual circulation of commodities required.” (Economist, 1845, p. 238.) vi See, for instance, in the Times the list of business bankruptcies in a crisis year such as 1857 and compare the private property of those bankrupt with the amount of their debts. “The truth is that the power of purchase by persons having capital and credit is much beyond anything that those who are unacquainted practically with speculative markets have any idea of.” (Tooke, Inquiry into the Currency Principle, p. 79.) “A person having the reputation of capital enough for his regular business, and enjoying good credit in his trade, if he takes a sanguine view of the prospect of a rise of price of the article in which he deals, and is favoured by circumstances in the outset and progress of his speculation, may effect purchases to an extent perfectly enormous compared with his capital” (Ibid., p. 136). “Merchants, manufacturers, etc., carry on operations much beyond those which the use of their own capital alone would enable them to do.... Capital is rather the foundation upon which a good credit is built than the limit of the transactions of any commercial establishment.” (Economist, 1847, p. 333.) vii Th. Chalmers [On Political Economy, etc., Glasgow, 1832. – Ed.].
|
|
|
Post by IBDaMann on Sept 20, 2020 22:04:33 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 28. Medium of Circulation and Capital; Views of Tooke and Fullarton The distinction between currency and capital, as Tooke, Wilson, and others draw it, whereby the differences between medium of circulation as money, as money-capital generally, and as interestbearing capital (moneyed capital in the English sense) are thrown together pell-mell, comes down to two things.viii Currency circulates on the one hand as coin (money), so far as it promotes the expenditure of revenue, hence the traffic between the individual consumers and the retail merchants, to which category belong all merchants who sell to the consumers – to the individual consumers as distinct from productive consumers or producers. Here money circulates in the function of coin, although it continually replaces capital. A certain portion of money in a particular country is continually devoted to this function, although this portion consists of perpetually changing individual coins. In so far as money promotes the transfer of capital, however, either as a means of purchase (medium of circulation) or as a means of payment, it is capital. It is, therefore, neither its function as a means of purchase, nor that as a means of payment, which distinguishes it from coin, for it may also act as a means of purchase between one dealer and another so far as they buy from one another in hard cash, and also as a means of payment between dealer and consumer so far as credit is given and the revenue consumed before it is paid. The difference is, therefore, that in the second case this money not only replaces the capital for one side, the seller, but is expended, advanced, by the other side, the buyer, as capital. The difference, then, is in fact that between the money-form of revenue and the money-form of capital, but not that between currency and capital, for a certain quantity of money circulates in the transactions between dealers as well as in the transactions between consumers and dealers. It is, therefore, equally currency in both functions. Tooke's conception introduces confusion into this question in various ways: 1) By confusing the functional distinctions; 2) By introducing the question of the quantity of money circulating together in both functions; 3) By introducing the question of the relative proportions of the quantities of currency circulating in the two functions and thus in the two spheres of the process of reproduction. Ad 1) Confusing the functional distinctions that money in one form is currency, and capital in the other. In so far as money serves in one or another function, be it to realise revenue or transfer capital, it functions in buying and selling, or in paying, as a means of purchase or a means of payment, and, in the wider sense of the word, as currency. The further purpose which it has in the calculations of its spender or recipient, of being capital or revenue for him, alters absolutely nothing, and this is doubly demonstrated. Although the kinds of money circulating in the two spheres are different, the same piece of money, for instance a five-pound note, passes from one sphere into the other and alternately performs both functions; which is inevitable, if only because the retail merchant can give his capital the form of money only in the shape of the coin which he receives from his customers. It may be assumed that the actual small change has its circulation centre of gravity in the domain of retail trade; the retail dealer needs it continually to make change and receives it back continually in payment from his customers. But he also receives money, i.e., coin, in that metal which serves as a standard of value, hence in England one-pound coins, or even bank-notes, particularly notes of small denominations, such as five- and ten-pound notes. These gold coins and notes, with whatever small change he has to spare, are deposited by the retail dealer every day, or every week, in his bank, and he pays for his purchases by drawing cheques on his bank deposit. But the same gold coins and hank-notes are just as steadily withdrawn from the bank, directly or indirectly (for instance, small change by manufacturers for the payment of wages), as the money-form of its revenue by the entire public in its capacity of consumer, and flow continually back to the retail dealers, for whom they thus again realise a portion of their capital, but at the same time also a portion of their revenue. This last circumstance is important, and is wholly overlooked by Tooke. Only where money is expended as moneycapital, early in the reproduction process (Book II, Part 1), does capital-value exist purely as such. For the produced commodities contain not merely capital, but also surplus-value; they are not only capital in themselves, but already capital realised as capital, capital with the source of revenue incorporated in it. What the retail dealer gives away for the money returning to him, his commodities, therefore, is for him capital plus profit, capital plus revenue. Furthermore, in returning to the retailer, circulating money restores the money-form of his capital. To reduce the difference between circulation as circulation of revenue and circulation of capital into a difference between currency and capital is, therefore, altogether wrong. This mode of expression is in Tooke's case due to his simply assuming the standpoint of a banker issuing his own bank-notes. Those of his notes which are continually in the public's hands (even if consisting of ever different notes) and serving as currency cost him nothing, save the cost of the paper and the printing. They are circulating certificates of indebtedness (bills of exchange) made out in his own name, but they bring him money and thus serve as a means of expanding his capital. They differ from his capital, however, whether it be his own or borrowed. That is why there is a special distinction for him between currency and capital, which, however, has nothing to do with the definition of these terms as such, least of all with that made by Tooke. The distinct attribute – whether it serves as the money-form of revenue or of capital – changes nothing in the character of money as a medium of circulation; it retains this character no matter which of the two functions it performs. True, money serves more as an actual medium of circulation (coin, means of purchase) when acting as the money-form of revenue, due to the dispersion of purchases and sales, and because the majority of disbursers of revenue, the labourers, can buy relatively little on credit; whereas in the traffic of the business world, where the medium of circulation is the money-form of capital, money serves mainly as a means of payment, partly on account of the concentration, and partly on account of the prevailing credit system. But the distinction between money as a means of payment and money as a means of purchase (means of circulation) is a distinction that refers to the money itself. It is not a distinction between money and capital. More copper and silver circulate in the retail business, and more gold in the wholesale business. Yet the distinction between silver and copper on the one hand, and gold on the other, is not the distinction between circulation and capital. Ad 2) Introducing the question of the quantity of money circulating together in both functions: So far as money circulates, be it as a means of purchase or as a means of payment – no matter in which of the two spheres and independently of its function of realising revenue or capital – the quantity of its circulating mass comes under the laws developed previously in discussing the simple circulation of commodities (Vol. I, Ch. III, 2, b). The velocity of circulation, hence the number of repetitions of the same function as means of purchase and means of payment by the same pieces of money in a given term, the mass of simultaneous purchases and sales, or payments, the sum of the prices of the circulating commodities, and finally the balances of payments to be settled in the same period, determine in either case the mass of circulating money, of currency. Whether money so employed represents capital or revenue for the payer or receiver, is immaterial, and in no way alters the matter. Its mass is simply determined by its function as a medium of purchase and payment. Ad 3) On the question of the relative proportions of the amounts of currency circulating in both functions and thus in both spheres of the reproduction process. Both spheres of circulation are connected internally, for, on the one hand, the mass of revenues to be spent expresses the volume of consumption, and, on the other, the magnitude of the masses of capital circulating in production and commerce expresses the volume and velocity of the reproduction process. Nevertheless, the same circumstances have a different effect, working even in opposite directions, upon the quantities of money circulating in both functions or spheres, or on the amount of currency, as the English put it in banking parlance. And this gives new cause for Tooke's vulgar distinction between capital and currency. The fact that the gentlemen of the Currency Theory confuse two different things is no reason to present them as two different concepts. In times of prosperity, intense expansion, acceleration and vigour of the reproduction process, labourers are fully employed. Generally, there is also a rise in wages which makes up in some measure for their fall below average during other periods of the business cycle. At the same time, the revenues of the capitalists grow considerably. Consumption increases generally. Commodityprices also rise regularly, at least in the various vital branches of business. Consequently, the quantity of circulating money grows at least within definite limits, since the greater velocity of circulation, in turn, sets up certain barriers to the growth of the amount of currency. Since that portion of the social revenue which consists of wages is originally advanced by the industrial capitalist in the form of variable capital, and always in money-form, it requires more money for its circulation in times of prosperity. But we must not count this twice – first as money required for the circulation of variable capital, and then as money required for the circulation of the labourers' revenue. The money paid to the labourers as wages is spent in retail trade and returns about once a week to the banks as the retailers' deposits, after negotiating miscellaneous intermediary transactions in smaller cycles. In times of prosperity the reflux of money proceeds smoothly for the industrial capitalists, and thus the need for money accommodation does not increase because more wages have to be paid and more money is required for the circulation of their variable capital. The total result is that the mass of circulating media serving the expenditure of revenue grows decidedly in periods of prosperity. As concerns the circulation required for the transfer of capital, hence required exclusively between capitalists, a period of brisk business is simultaneously a period of the most elastic and easy credit. The velocity of circulation between capitalist and capitalist is regulated directly by credit, and the mass of circulating medium required to settle payments, and even in cash purchases, decreases accordingly. It may increase in absolute terms, but decreases relatively under all circumstances compared to the expansion of the reproduction process. On the one hand, greater mass payments are settled without the mediation of money; on the other, owing to the vigour of the process, there is a quicker movement of the same amounts of money, both as means of purchase and of payment. The same quantity of money promotes the reflux of a greater number of individual capitals. On the whole, the currency of money in such periods appears full, although its Department II (transfer of capital) is, at least relatively, contracted, while its Department I (expenditure of revenue) expands in absolute terms. The refluxes express the reconversion of commodity-capital into money, M – C – M', as we have seen in the discussion of the reproduction process, Book II, Part I. Credit renders the reflux in money-form independent of the time of actual reflux both for the industrial capitalist and the merchant. Both of them sell on credit; their commodities are thus alienated before they are reconverted into money for them, hence before they flow back to them in money-form. On the other hand, they buy on credit, and in this way the value of their commodities is reconverted, be it into productive capital or commodity-capital, even before this value has really been transformed into money, i.e., before the commodity-price is due and paid for. In such times of prosperity the reflux passes off smoothly and easily. The retailer securely pays the wholesaler, the wholesaler pays the manufacturer, the manufacturer pays the importer of raw materials, etc. The appearance of rapid and reliable refluxes always keeps up for a longer period after they are over. In reality by virtue of the credit that is under way, since credit refluxes take the place of the real ones. The banks scent danger as soon as their clients deposit more bills of exchange than money. See the testimony of the Liverpool bank director, p. 398. [Present edition: Ch. XXV. – Ed.] To insert what I have noted earlier: “In periods of predominant credit, the velocity of the circulation of money increases faster than commodity-prices, whereas in times of declining credit commodity-prices drop slower than the velocity of circulation.” (Zur Kritik der politischen Oekonomie, 1859, S. 83, 84.) The reverse is true in a period of crisis. Circulation No. I contracts, prices fall, similarly wages; the number of employed labourers is reduced, the mass of transactions decreases. On the contrary, the need for money accommodation increases in circulation No. II with the contraction of credit. We shall examine this point in greater detail immediately. There is no doubt that with the decrease of credit which goes hand in hand with stagnation in the reproduction process, the circulation mass required for No. I, the expenditure of revenue, contracts, while that required for No. II, the transfer of capital, expands. But to what extent this statement coincides with what is maintained by Fullarton and others still remains to he analysed: “A demand for capital on loan and a demand for additional circulation are quite distinct things, and not often found associated.” (Fullarton, 1. c., p. 82, title of Chapter 5.) ix In the first place it is evident that in the first of the two cases mentioned above, during times of prosperity, when the mass of the circulating medium must increase, the demand for it increases. But it is likewise evident that, when a manufacturer draws more or less of his deposit out of a bank in gold or bank-notes because he has to expend more capital in the form of money, his demand for capital does not thereby increase. What increases is merely his demand for this particular form in which he expends his capital. The demand refers only to the technical form, in which he throws his capital into circulation. Just as in the case of a different development of the credit system, the same variable capital, for example, or the same quantity of wages, requires a greater mass of means of circulation in one country than in another; in England more than in Scotland, for instance, and in Germany more than in England. Likewise in agriculture, the same capital active in the reproduction process requires different quantities of money in different seasons for the performance of its function. But the contrast drawn by Fullarton is not correct. It is by no means the strong demand for loans as he says, which distinguishes the period of depression from that of prosperity, but the ease with which this demand is satisfied in periods of prosperity, and the difficulties which it meets in periods of depression. It is precisely the enormous development of the credit system during a prosperity period, hence also the enormous increase in the demand for loan capital and the readiness with which the supply meets it in such periods, which brings about a shortage of credit during a period of depression. It is not, therefore, the difference in volume of demand for loans which characterises both periods. As we have previously remarked, both periods are primarily distinguished by the fact that the demand for currency between consumers and dealers predominates in periods of prosperity, and the demand for currency between capitalists predominates in periods of depression. During a depression the former decreases, and the latter increases. What strikes Fullarton and others as decisively important is the phenomenon that in such periods when securities in possession of the Bank of England are on the increase, its circulation of notes decreases, and vice versa. The level of the securities, however, expresses the volume of the pecuniary accommodation, the volume of discounted bills of exchange and of advances made against marketable collateral. Thus Fullarton says in the above passage that the securities in the hands of the Bank of England fluctuate mostly in an opposite direction to its circulation, and this corroborates the view long held by private banks that no bank can increase its issue of bank-notes beyond a certain point determined by the needs of its public; but if a bank wants to make advances beyond this limit, it must make them out of its capital, hence it must either realise on securities or utilise deposits which it would otherwise have invested in securities. This, however, reveals also what Fullarton means by capital. What does capital signify here? That the Bank can no longer make advances with its own bank-notes, or promissory notes, which, of course, cost it nothing. But what does it make advances with in that case? With the sums realised from the sale of securities held in reserve, i.e., government bonds, stocks, and other interestbearing paper. And what does it get in payment for the sale of such paper? Money-gold or banknotes, so far as the latter are legal tender, such as those of the Bank of England. What the bank advances, therefore, is under all circumstances money. This money, however, now constitutes a part of its capital. If it advances gold, this is understandable. If it advances notes, then these notes represent capital, because it has given up some actual value for them, such as interest-bearing paper. In the case of private banks the notes secured by them through the sale of securities cannot be anything else, in the main, but Bank of England notes or their own notes, since others would hardly be taken in payment for securities. If it is the Bank of England itself, then its own notes, which it receives in return, cost it capital, that is, interest-bearing paper. Besides, it thereby withdraws its own notes from circulation. Should it reissue these notes, or issue new notes in their stead to the same amount, they now represent capital. And they do so equally well, when used for advances to capitalists, or when used later, when the demand for such pecuniary accommodation decreases, for reinvestment in securities. In all these cases the term capital is employed only from the banker's point of view, and means that the banker is compelled to loan more than his mere credit. As is known, the Bank of England makes all its advances in its own notes. Now, if despite this, as a rule, the bank-note circulation of the Bank decreases in proportion as the discounted bills of exchange and collateral in its hands, and thus its advances increase – what becomes of the notes thrown into circulation? How do they return to the Bank? To begin with, if the demand for money accommodation arises from an unfavourable national balance of payments and thereby implies a drain of gold, the matter is very simple. The bills of exchange are discounted in bank-notes. The bank-notes are exchanged for gold by the Bank itself, in its issue department, and this gold is exported. It is as though the Bank paid out gold directly, without the mediation of notes, on discounting bills. Such an increased demand, which may in certain cases be £7 to £10 million, naturally does not add a single five-pound note to the country's domestic circulation. If it is now said that the Bank advances capital, and not currency, this means two things. First, that it does not advance credit, but actual values, a part of its own capital or of capital deposited with it. Secondly, that it does not advance money for inland, but for international circulation, that it advances world-money; and for this purpose money must always exist in its form of a hoard, in its metallic state; in the form in which it is not merely a form of value, but value itself, whose money-form it is. Although this gold now represents capital, both for the Bank and the exporting gold-dealer, i.e., banking or commercial capital, the demand for it is not for capital, but for the absolute form of money-capital. This demand arises precisely at the moment when foreign markets are overcrowded with unsaleable English commodity-capital. What is wanted, therefore, is capital, not as capital, but capital as money, in the form in which money serves as a universal world-market commodity; and this is its original form of precious metal. The drain of gold is not, therefore, as Fullarton, Tooke, etc., claim, “a mere question of capital.” Rather, it is a “question of money,” even if in a specific function. The fact that it is not a question of inland circulation as the advocates of the Currency Theory maintain, does not prove at all, as Fullarton and others think, that it is merely a question of capital. It is a question of money in the form in which money is an international means of payment. “Whether that capital” (the purchase price for the million of quarters of foreign wheat after a crop failure in the home country) “is transmitted in merchandise or in specie, is a point which in no way affects the nature of the transaction.” (Fullarton, 1. c., p. 131.) But it significantly affects the question, whether there is a drain of gold, or not. Capital is transferred in the form of precious metal, because it either cannot be transferred at all, or only at a great loss in the shape of commodities. The fear which the modern banking system has of gold drain exceeds anything ever imagined by the monetary system, which considers precious metals as the only true wealth. Take, for instance, the following evidence of the Governor of the Bank of England, Morris, before the Parliamentary Committee on the crisis of 1847-48: (3846. Question:) “When I spoke of the depreciation of stocks and fixed capital, are you not aware that all property invested in stocks and produce of every description was depreciated in the same way; that raw cotton, raw silk, and unmanufactured wool were sent to the continent at the same depreciated price, and that sugar, coffee and tea were sacrificed as at forced sales? – It was inevitable that the country should make a considerable sacrifice for the purpose of meeting the efflux of bullion which had taken place in consequence of the large importation of food.” – “3848. Do not you think it would have been better to trench upon the £8 million lying in the coffers of the Bank, than to have endeavoured to get the gold back again at such a sacrifice? – No, I do not.” – It is gold which here stands for the only true wealth. Fullarton quotes the discovery by Tooke that “with only one or two exceptions, and those admitting of satisfactory explanation, every remarkable fall of exchange, followed by a drain of gold, that has occurred during the last half-century, has been coincident throughout with a comparatively low state of the circulating medium, and vice versa.” (Fullarton, p. 121.) This discovery proves that such drains of gold occur generally after a period of animation and speculation, as “the signal of a collapse already commenced an indication of overstocked markets, of a cessation of the foreign demand for our productions, of delayed returns, and, as the necessary sequel of all these, of commercial discredit, manufactories shut up, artisans starving, and a general stagnation of industry and enterprise” (p. 129). This, naturally, is at once the best refutation of the claim of the advocates of the Currency Theory, that “a full circulation drives out bullion and a low circulation attracts it.” On the contrary, while the Bank of England generally carries a strong gold reserve during a period of prosperity, this hoard is generally formed during the slack period, which follows after a storm. All this sagacity concerning the drain of gold, then, amounts to saying that the demand for international media of circulation and payment differs from the demand for internal media of circulation and payment (and it goes without saying, therefore, that “the existence of a drain does not necessarily imply any diminution of the internal demand for circulation,” as Fullarton has it on page 112 of his work) and that the export of precious metal and its being thrown into international circulation is not the same as throwing notes or specie into internal circulation. As for the rest, I have shown on a previous occasion [English edition: Vol. 1. – Ed.] that the movements of a hoard concentrated as a reserve fund for international payments have as such nothing to do with the movements of money as a medium of circulation. At any rate, the question. is complicated by the fact that the different functions of a hoard, which I have developed from the nature of money – such as its function as a reserve fund of means of payment to cover due bills in domestic business; the function of a reserve fund of currency; and finally, the function of a reserve fund of world-money – are here attributed to one sole reserve fund. It also follows from this that under certain circumstances a drain of gold from the Bank to the home market may combine with a drain abroad. The question is further complicated however by the fact that this hoard is arbitrarily burdened with the additional function of serving as a fund guaranteeing the convertibility of bank-notes in countries, in which the credit system and credit-money are developed. And in addition to all this comes 1) the concentration of the national reserve fund in one single central bank, and 2) its reduction to the smallest possible minimum. Hence, also, Fullarton's complaint (p.143): “One cannot contemplate the perfect silence and facility with which variations of the exchange usually pass off in continental countries, compared with the state of feverish disquiet and alarm always produced in England whenever the treasure at the Bank seems to be at all approaching to exhaustion, without being struck with the great advantage in this respect which a metallic currency possesses.” However, if we now leave aside the drain of gold, how can a bank that issues notes, like the Bank of England, increase the amount of money accommodation granted by it without increasing its issue of bank-notes? So far as the bank itself is concerned, all the notes outside its walls, whether circulating or in private hoards, are in circulation, i.e., are out of its hands. Hence, if the bank extends its discounting and money-lending business, its advances on securities, all the bank-notes issued by it for that purpose must return, for otherwise they would increase the volume of circulation, something which is not supposed to happen. This return may take place in two ways. First: The bank pays A notes against securities; A uses them to pay for bills of exchange due to B, and B deposits notes once more in the bank. This brings to a close the circulation of these notes, but the loan remains. “The loan remains, and the currency, if not wanted, finds its way back to the issuer.” (Fullarton, p. 97.) The notes, which the bank advanced to A, have now returned to it; but it is the creditor of A, or whoever may have been the drawer of the bill discounted by A, and the debtor of B for the amount of value expressed in these notes, and B thus disposes of a corresponding portion of the capital of the bank. Secondly: A pays to B, and B himself, or C, to whom he pays the notes, uses these notes to pay bills due to the bank, directly or indirectly. In that case the bank is paid in its own notes. This concludes the transaction (pending A's return payment to the bank). To what extent, now, shall the bank's advance to A be regarded as an advance of capital, or as a mere advance of means of payment?x [This depends on the nature of the loan itself. Three cases must be distinguished. First case. – A receives from the bank amounts loaned on his own personal credit, without giving any security for them. In this case he does not merely receive means of payment, but also unquestionably a new capital, which he may employ in his business and realise as an additional capital until the maturity date. Second case. – A has given to the bank securities, national bonds, or stocks as collateral, and received for them, say, up to two-thirds of their momentary value as a cash loan. In this case he has received the means of payment he needed, but no additional capital, for he entrusted to the bank a larger capital-value than he received from it. But this larger capital-value was, on the one hand, unavailable for his momentary needs (means of payment), because invested in a particular interest-bearing form; on the other hand, A had his own reasons for not wanting to convert this capital-value directly into means of payment by selling it. His securities served, among other things, as a reserve capital, and he set them in motion as such. The transaction between A and the bank, therefore, consists in a temporary mutual transfer of capital, so that A does not receive any additional capital (quite the contrary!) although he receives the desired means of payment. For the bank, on the other hand, this transaction constitutes a temporary lodgement of money-capital in the form of a loan, a conversion of money-capital from one form into another, and this conversion is precisely the essential function of the banking business. Third case. – A had the bank discount a bill of exchange and received its value in cash after the deduction of discount. In this case he sold a non-convertible money-capital to the bank for the amount of value in convertible form. He sold his still running bill for cash money. The bill is now the property of the bank. It does not alter the matter that A as last endorser of the bill is responsible for it to the bank in default of payment. He shares this responsibility with the other endorsers and with the drawer of the bill, all of whom are duly responsible to him. In this case, therefore, we do not have a loan, but only an ordinary purchase and sale. For this reason, A has nothing to pay back to the bank. It reimburses itself by cashing the bill when it becomes due. Here, too, a transfer of capital has taken place between A and the bank, and in exactly the same manner as in the sale and purchase of any other commodity, and for this very reason A did not receive any additional capital. What he needed and received were means of payment, and he received them by having the bank convert one form of his money-capital – his bill – into another – money. It is therefore only in the first case that there is any question of a real advance of capital; in the second and third cases, the matter can be so regarded only in the sense that every investment of capital implies an “advance of capital.” In this sense the bank advances money-capital to A; but for A it is money-capital at best in the sense that it is a portion of his capital in general. And he requires it and uses it not specifically as capital, but rather as specifically a means of payment. Otherwise, every ordinary sale of commodities by which means of payment are secured might be considered as receiving an advance of capital. – F. E.] In the case of private banks which issue their own notes we have this difference, that if their notes remain neither in local circulation, nor return to them in the form of deposits, or in payment for due bills of exchange, they fall into the hands of persons who compel the private bank to cash these notes in gold or in notes of the Bank of England. In this event, therefore, its loan in fact represents an advance of notes of the Bank of England, or, what amounts to the same thing for the private bank, of gold, hence a portion of its bank capital. The same holds good in case the Bank of England itself, or some other bank, which has a fixed legal maximum for its issue of notes, must sell securities to withdraw its own notes from circulation and then issue them once more in the shape of advances; in that case, the bank's own notes represent a portion of its mobilised bank capital. Even if the circulation were purely metallic, it would be possible 1) for a drain of gold [Marx evidently refers here to a drain of gold that would, at least partially, go abroad – F. E.] to empty the treasury, and 2) since gold would be chiefly wanted by the bank to make payments (in settlement of erstwhile transactions), the advance against collateral could grow considerably, but would flow back to it in the form of deposits or in payment of due bills of exchange; so that, on one side, the total treasure of the bank would decrease with an increase of the securities in its hands, while on the other, it would now be holding the same amount, which it possessed formerly as owner, as debtor of its depositors, and finally the total quantity of currency would decrease. Our assumption so far has been that the loans are made in notes, so that they carry with them at least a fleeting, even if instantly disappearing, increase in the issue of notes. But this is not necessary. Instead of a paper note, the bank may open a credit account for A, in which case this A, the bank's debtor, becomes its imaginary depositor. He pays his creditors with cheques on the bank, and the recipient of these cheques passes them on to his own banker, who exchanges them for the cheques outstanding against him in the clearing house. In this case no mediation of notes takes place at all, and the entire transaction is confined to the fact that the bank settles its own debt with a cheque drawn on itself, and its actual recompense consists in its claim on A. In this case the bank has loaned a portion of its own bank capital, because its own debt claims, to A. In so far as this demand for pecuniary accommodation is a demand for capital, it is so only for money-capital. It is capital only from the standpoint of the banker, namely gold (in the case of gold exports abroad) or notes of the National Bank, which a private bank can obtain only by purchase against an equivalent, and which, therefore, represent capital for it. Or, again, it is a case of interest-bearing papers, government bonds, stocks, etc., which must be sold in order to obtain gold or bank-notes. Such papers, however, if in government bonds, are capital only for the buyer, for whom they represent the purchase price, the capital he invested in them. In themselves they are not capital, but merely debt claims. If mortgages, they are mere titles on future ground-rent. And if they are shares of stock, they are mere titles of ownership, which entitle the holder to a share in future surplus-value. All of these are not real capital. They do not form constituent parts of capital, nor are they values in themselves. By way of similar transactions money belonging to the bank may be transformed into deposits, so that the bank becomes the debtor instead of owner of this money, and holds it under a different title of ownership. However important this may be to the bank, it alters nothing in the mass of reserve capital, or even of money-capital available in a particular country. Capital, therefore, represents here only money-capital, and, if not available in the actual form of money, it represents a mere title on capital. This is very important, since a scarcity of, and pressing demand for, banking capital is confounded with a decrease of actual capital, which conversely is in such cases rather abundant in the form of means of production and products, and swamps the markets. It is, therefore, easy to explain how the mass of securities held by a bank as collateral increases, hence how the growing demand for pecuniary accommodation can be satisfied by the bank, while the total mass of currency remains the same or decreases. This total mass is held in check during such periods of money stringency in two ways: 1) by a drain of gold; 2) by a demand for money in its capacity as a mere means of payment, when the issued bank-notes return immediately; or when the transactions take place without the mediation of notes by means of book credit; when, therefore, payments are made simply through a credit transaction, the settlement of these payments being the sole purpose of the operation. It is a peculiarity of money, when it serves merely to settle accounts (and in times of crises loans are taken up to pay, rather than to buy; to wind up previous transactions, not to initiate new ones), that its circulation is no more than fleeting, even where balances are not settled by mere credit operations, without the mediation of money, so that, when there is a strong demand for pecuniary accommodation, an enormous quantity of such transactions can take place without expanding the circulation. But the mere fact that the circulation of the Bank of England remains stable or even decreases simultaneously with an extensive accommodation of money on its part, does notprima facie prove, as Fullarton, Tooke and others assume (owing to their erroneous notion that pecuniary accommodation is identical with receiving capital on loan as additional capital), that the circulation of money (of bank-notes) in its function as a means of payment is not increased and extended. Since the circulation of notes as means of purchase decreases during a business depression, when such extensive accommodation is necessary, their circulation as means of payment may increase, and the aggregate amount of the circulation, the sum of notes functioning as means of purchase and payment, may remain stable or may even decrease. The circulation as a means of payment of bank-notes immediately returning to the bank that issues them is simply not circulation in the eyes of those economists. Should circulation as a means of payment increase at a higher rate than it decreases as a means of purchase, the aggregate circulation would increase, although the money serving as a means of purchase would decrease considerably in quantity. And this actually occurs in certain periods of crisis, namely, when credit collapses completely and when not only commodities and securities are unsaleable but bills of exchange are undiscountable and nothing counts any more but money payment, or, as the merchant puts it, cash. Since Fullarton et al. do not understand that the circulation of notes as means of payment is the characteristic feature of such periods of money shortage, they treat this phenomenon as accidental. “With respect again to those examples of eager competition for the possession of bank-notes, which characterise seasons of panic and which may sometimes, as at the close of 1825, lead to a sudden, though only temporary, enlargement of the issues, even while the efflux of bullion is still going on, these, I apprehend, are not to be regarded as among the natural or necessary concomitants of a low exchange; the demand in such cases is not for circulation” (read circulation as a means of purchase), “but for hoarding, a demand on the part of alarmed bankers and capitalists which arises generally in the last act of the crisis” (hence, for a reserve of means of payment), “after a long continuation of the drain, and is the precursor of its termination.” (Fullarton, p. 130.) In the discussion of money as a means of payment (Vol. I, Ch. III, 3, b) we have already explained, in what manner, when the chain of payments is suddenly interrupted, money turns from its ideal form into a material and, at the same time, absolute form of value vis-à-vis the commodities. This was illustrated by some examples (footnotes 100 and 101). This interruption itself is partly an effect, partly a cause of the instability of credit and of the circumstances accompanying it, such as overstocking of markets, depreciation of commodities, interruption of production, etc. It is evident, however, that Fullarton transforms the distinction between money as a means of purchase and money as a means of payment into a false distinction between currency and capital. This is again due to the narrow-minded banker's conception of circulation. It might yet be asked: which is it, capital or money in its specific function as a means of payment that is in short supply in such periods of stringency? And this is a well-known controversy. In the first place, so far as the stringency is marked by a drain of gold, it is evidently international means of payment that are demanded. But money in its specific capacity of international means of payment is gold in its metallic actuality, as a valuable substance in itself, as a quantity of value. It is at the same time capital, not capital as commodity-capital, but as money-capital, capital not in the form of commodities but in the form of money (and, at that, of money in the eminent sense of the word, in which it exists as universal world-market commodity). It is not a contradiction here between a demand for money as a means of payment and a demand for capital. The contradiction is rather between capital in its money-form and capital in its commodity-form; and the form which is here demanded and in which alone it can function, is its money-form. Aside from this demand for gold (or silver) it cannot be said that there is any dearth whatever of capital in such periods of crisis. Under extraordinary circumstances, such as rise in the price of corn, or a cotton famine, etc., this may be the case; but these phenomena are not necessary or regular accompaniments of such periods; and the existence of such a lack of capital cannot be assumed beforehand without further ado from the mere fact that there is a heavy demand for pecuniary accommodation. On the contrary. The markets are overstocked, swamped with commodity-capital. Hence, it is not, in any case, a lack of commodity-capital which causes the stringency. We shall return to this question later. viii We here give the related passage from Tooke in the original, which was cited in German on p. 390 [present edition: Ch. XXV:] “The business of bankers, setting aside the issue of promissory notes payable on demand, may be divided into two branches, corresponding with the distinction pointed out by Dr. (Adam) Smith of the transactions between dealers and dealers, and between dealers and consumers. One branch of the bankers' business is to collect capital from those who have not immediate employment for it, and to distribute or transfer it to these who have. The other branch is to receive deposits of the incomes of their customers, and to pay out the amount, as it is wanted for expenditure by the latter in the objects of their consumption ... the former being a circulation of capital, the latter of currency.”(Tooke, Inquiry into the Currency Principle, London, p. 36.) The first is “the concentration of capital on the one hand and the distribution of it on the other”; the latter is “administering the circulation for local purposes of the district.” (Ibid., p. 37.) A far more correct conception is outlined in the following passage by Kinnear: “Money ... is employed to perform two operations essentially distinct.... As a medium of exchange between dealers and dealers, it is the instrument by which transfers of capital are effected; that is, the exchange of a certain amount of capital in money for an equal amount of capital in commodities. But money employed in the payment of wages and in purchase and sale between dealers and consumers is not capital, but income; that portion of the incomes of the community, which is devoted to daily expenditure. It circulates in constant daily use, and is that alone which can, with strict propriety, be termed currency. Advances of capital depend entirely on the will of the Bank and other possessors of capital, for borrowers are always to be found; but the amount of the currency depends on the wants of the community, among whom the money circulates, for the purposes of daily expenditure.” (J. G. Kinnear, The Crisis and the Currency, London, 1847 [pp. 3-4].) ix “It is a great error, indeed, to imagine that the demand for pecuniary accommodation “ (that is, for the loan of capital) “is identical with a demand for additional means of circulation, or even that the two are frequently associated. Each demand originates in circumstances peculiarly affecting itself, and very distinct from each other. It is when everything looks prosperous, when wages are high, prices on the rise, and factories busy, that an additional supply of currency is usually required to perform the additional functions inseparable from the necessity of making larger and more numerous payments; whereas it is chiefly in a more advanced stage of the commercial cycle, when difficulties begin to present themselves, when markets are overstocked, and returns delayed, that interest rises, and a pressure comes upon the Bank for advances of capital. It is true that there is no medium through which the Bank is accustomed to advance capital except that of its promissory notes; and that to refuse the notes, therefore, is to refuse the accommodation. But the accommodation once granted, everything adjusts itself in conformity with the necessities of the market; the loan remains, and the currency, if not wanted, finds its way hack to the issuer. Accordingly, a very slight examination of the Parliamentary Returns may convince any one, that the securities in the hands of the Bank of England fluctuate more frequently in an opposite direction to its circulation than in concert with it, and that the example, therefore, of that great establishment furnishes no exception to the doctrine so strongly pressed by the country bankers, to the effect that no hank can enlarge its circulation, if that circulation he already adequate to the purposes to which a bank-note currency is commonly applied; but that every addition to its advances, after that limit is passed, must he made from its capital, and supplied by the sale of some of its securities in reserve, or by abstinence from further investment in such securities. The table compiled from the Parliamentary Returns for the interval between 1833 and 1840, to which I have referred in a preceding page, furnishes continued examples of this truth; but two of these are so remarkable that it will be quite unnecessary for me to go beyond them. On the 3rd of January, 1837, when the resources of the Bank were strained to the uttermost to sustain credit and meet the difficulties of the money-market, we find its advances on loan and discount carried to the enormous sum of £17,022,000, an amount scarcely known since the war, and almost equal to the entire aggregate issues which, in the meanwhile, remain unmoved at so low a point as £17,076,000! On the other hand, we have on the 4th of June, 1833, a circulation of £18,892,000, with a return of private securities in hand, nearly, if not the very lowest on record for the last half-century, amounting to no more than £972,000!” (Fullarton, 1. c., pp. 97, 98.) That a demand for pecuniary accommodation need not be identical by any means with a demand for gold (what Wilson, Tooke and others call capital) is seen from the following testimony of Mr. Weguelin, Governor of the Bank of England: “The discounting of bills to that extent” (one million daily for three successive days) “would not reduce the reserve” (of bank-notes), “unless the public demanded a greater amount of active circulation. The notes issued on the discount of bills would be returned through the medium of the bankers and through deposits. Unless these transactions were for the purpose of exporting bullion, and unless there were an amount of internal panic which induced people to lock up their notes, and not to pay them into the hands of the bankers ... the reserve would not be affected by the magnitude of the transactions.” – “The Bank may discount a million and a half a day, and that is done constantly, without its reserve being in the slightest degree affected, the notes coming back again as deposits, and no other alteration taking place than the mere transfer from one account to another.” (Report on Bank Acts, 1857, Evidence Nos. 241, 500.) The notes therefore serve here merely as means of transferring credits. x The passage that follows in the original is unintelligible in this context and has been rewritten by the editor to the end of the brackets. In another context this point has already been touched upon in Chapter XXVI. – F. E
|
|
|
Post by IBDaMann on Sept 20, 2020 22:05:55 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 29. Component Parts of Bank Capital It is now necessary to examine the component parts of bank capital in greater detail. We have just seen that Fullarton and others transform the distinction between money as a medium of circulation and money as a means of payment – also universal money in so far as it concerns a drain of gold – into a distinction between currency and capital. The peculiar role played by capital in this instance is the reason why bankers' economics teaches that money is indeed capital par excellence as insistently as enlightened economics taught that money is not capital. In subsequent analyses, we shall demonstrate that money-capital is being confused here with moneyed capital in the sense of interest-bearing capital, while in the former sense, money-capital is always merely a transient form of capital – in contradistinction to the other forms of capital, namely, commodity-capital and productive capital. Bank capital consists of 1) cash money, gold or notes; 2) securities. The latter can be subdivided into two parts: commercial paper or bills of exchange, which run for a period, become due from time to time, and whose discounting constitutes the essential business of the banker; and public securities, such as government bonds, treasury notes, stocks of all kinds, in short, interest-bearing paper which is however significantly different from bills of exchange. Mortgages may also be included here. The capital composed of these tangible component parts can again be divided into the banker's invested capital and into deposits, which constitute his banking capital, or borrowed capital. In the case of banks which issue notes, these must be included. We shall leave the deposits and notes out of consideration for the present. It is evident at any rate that the actual component parts of the banker's capital (money, bills of exchange, deposit currency) remain unaffected whether the various elements represent the banker's own capital or deposits, i.e., the capital of other people. The same division would remain, whether he were to carry on his business with only his own capital or only with deposited capital. The form of interest-bearing capital is responsible for the fact that every definite and regular money revenue appears as interest on some capital, whether it arises from some capital or not. The money income is first converted into interest, and from the interest one can determine the capital from which it arises. In like manner, in the case of interest-bearing capital, every sum of value appears as capital as long as it is not expended as revenue; that is, it appears as principal in contrast to possible or actual interest which it may yield. The matter is simple. Let the average rate of interest be 5% annually. A sum of £500 would then yield £25 annually if converted into interest-bearing capital. Every fixed annual income of £25 may then be considered as interest on a capital of £500. This, however, is and remains a purely illusory conception, except in the case where the source of the £25, whether it be a mere title of ownership or claim, or an actual element of production such as real estate, is directly transferable or assumes a form in which it becomes transferable. Let us take the national debt and wages as illustrations. The state has to annually pay its creditors a certain amount of interest for the capital borrowed from them. In this case, the creditor cannot recall his investment from his debtor, but can only sell his claim, or his title of ownership. The capital itself has been consumed, i.e., expended by the state. It no longer exists. What the creditor of the state possesses is 1) the state's promissory note, amounting to, say, £100; 2) this promissory note gives the creditor a claim upon the annual revenue of the state, that is, the annual tax proceeds, for a certain amount, e.g., £5 or 5%; 3) the creditor can sell this promissory note of £100 at his discretion to some other person. If the rate of interest is 5%, and the security given by the state is good, the owner A can sell this promissory note, as a rule, to B for £100; for it is the same to B whether he lends £100 at 5% annually, or whether he secures for himself by the payment of £100 an annual tribute from the state amounting to £5. But in all these cases, the capital, as whose offshoot (interest) state payments are considered, is illusory, fictitious capital. Not only that the amount loaned to the state no longer exists, but it was never intended that it be expended as capital, and only by investment as capital could it have been transformed into a self-preserving value. To the original creditor A, the share of annual taxes accruing to him represents interest on his capital, just as the share of the spendthrift's fortune accruing to the usurer appears to the latter, although in both cases the loaned amount was not invested as capital. The possibility of selling the state's promissory note represents for A the potential means of regaining his principal. As for B, his capital is invested, from his individual point of view, as interest-bearing capital. So far as the transaction is concerned, B has simply taken the place of A by buying the latter's claim on the state's revenue. No matter how often this transaction is repeated, the capital of the state debt remains purely fictitious, and, as soon as the promissory notes become unsaleable, the illusion of this capital disappears. Nevertheless, this fictitious capital has its own laws of motion, as we shall presently see. We shall now consider labour-power in contrast to the capital of the national debt, where a negative quantity appears as capital – just as interest-bearing capital, in general, is the fountainhead of all manner of insane forms, so that debts, for instance, can appear to the banker as commodities. Wages are conceived here as interest, and therefore labour-power as the capital yielding this interest. For example, if the wage for one year amounts to £50 and the rate of interest is 5%, the annual labour-power is equal to a capital of £1,000. The insanity of the capitalist mode of conception reaches its climax here, for instead of explaining the expansion of capital on the basis of the exploitation of labour-power, the matter is reversed and the productivity of labour power is explained by attributing this mystical quality of interest-bearing capital to labour-power itself. In the second half of the 17th century, this used to be a favourite conception (for example, of Petty), but it is used even nowadays in all seriousness by some vulgar economists and more particularly by some German statisticians.xi Unfortunately two disagreeably frustrating facts mar this thoughtless conception. In the first place, the labourer must work in order to obtain this interest. In the second place, he cannot transform the capital-value of his labour-power into cash by transferring it. Rather, the annual value of his labour-power is equal to his average annual wage, and what he has to give the buyer in return through his labour is this same value plus a surplus-value, i.e., the increment added by his labour. In a slave society, the labourer has a capital-value, namely, his purchase price. And when he is hired out, the hirer must pay, in the first place, the interest on this purchase price, and, in addition, replace the annual wear and tear on the capital. The formation of a fictitious capital is called capitalisation. Every periodic income is capitalised by calculating it on the basis of the average rate of interest, as an income which would be realised by a capital loaned at this rate of interest. For example, if the annual income is £100 and the rate of interest 5%, then the £100 would represent the annual interest on £2,000, and the £2,000 is regarded as the capital-value of the legal title of ownership on the £100 annually. For the person who buys this title of ownership, the annual income of £100 represents indeed the interest on his capital invested at 5%. All connection with the actual expansion process of capital is thus completely lost, and the conception of capital as something with automatic self-expansion properties is thereby strengthened. Even when the promissory note – the security – does not represent a purely fictitious capital, as it does in the case of state debts, the capital-value of such paper is nevertheless wholly illusory. We have previously seen in what manner the credit system creates associated capital. The paper serves as title of ownership which represents this capital. The stocks of railways, mines, navigation companies, and the like, represent actual capital, namely, the capital invested and functioning in such enterprises, or the amount of money advanced by the stockholders for the purpose of being used as capital in such enterprises. This does not preclude the possibility that these may represent pure swindle. But this capital does not exist twice, once as the capital-value of titles of ownership (stocks) on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises. It exists only in the latter form, and a share of stock is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it. A may sell this title to B, and B may sell it to C. These transactions do not alter anything in the nature of the problem. A or B then has his title in the form of capital, but C has transformed his capital into a mere title of ownership to the anticipated surplus-value from the stock capital. The independent movement of the value of these titles of ownership, not only of government bonds but also of stocks, adds weight to the illusion that they constitute real capital alongside of the capital or claim to which they may have title. For they become commodities, whose price has its own characteristic movements and is established in its own way. Their market-value is determined differently from their nominal value, without any change in the value (even though the expansion may change) of the actual capital. On the one hand, their market-value fluctuates with the amount and reliability of the proceeds to which they afford legal title. If the nominal value of a share of stock, that is, the invested sum originally represented by this share, is £100, and the enterprise pays 10% instead of 5%, then its market-value, everything else remaining equal, rises to £200, as long as the rate of interest is 5%, for when capitalised at 5%, it now represents a fictitious capital of £200. Whoever buys it for £200 receives a revenue of 5% on this investment of capital. The converse is true when the proceeds from the enterprise diminish. The market-value of this paper is in part speculative, since it is determined not only by the actual income, but also by the anticipated income, which is calculated in advance. But assuming the expansion of the actual capital as constant, or where no capital exists, as in the case of state debts, the annual income to be fixed by law and otherwise sufficiently secured, the price of these securities rises and falls inversely as the rate of interest. If the rate of interest rises from 5% to 10%, then securities guaranteeing an income of £5 will now represent a capital of only £50. Conversely, if the rate of interest falls to 2½%; the same securities will represent a capital of £200. Their value is always merely capitalised income, that is, the income calculated on the basis of a fictitious capital at the prevailing rate of interest. Therefore, when the money-market is tight these securities will fall in price for two reasons: first, because the rate of interest rises, and secondly, because they are thrown on the market in large quantities in order to convert them into cash. This drop in price takes place regardless of whether the income that this paper guarantees its owner is constant, as is the case with government bonds, or whether the expansion of the actual capital, which it represents, as in industrial enterprises, is possibly affected by disturbances in the reproduction process. In the latter event, there is only still another depreciation added to that mentioned above. As soon as the storm is over, this paper again rises to its former level, in so far as it does not represent a business failure or swindle. Its depreciation in times of crisis serves as a potent means of centralising fortunes.xii To the extent that the depreciation or increase in value of this paper is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value. “The public stocks and canal and railway shares had already by the 23rd of October, 1847, been depreciated in the aggregate to the amount of £114,752,225.” (Morris, Governor of the Bank of England, testimony in the Report on Commercial Distress, 1847-48 [No. 3800].) Unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital. All this paper actually represents nothing more than accumulated claims, or legal titles, to future production whose money or capital value represents either no capital at all, as in the case of state debts, or is regulated independently of the value of real capital which it represents. In all countries based on capitalist production, there exists in this form an enormous quantity of so-called interest-bearing capital, or moneyed capital. And by accumulation of money-capital nothing more, in the main, is connoted than an accumulation of these claims on production, an accumulation of the market-price, the illusory capital-value of these claims. A part of the banker's capital is now invested in this so-called interest-bearing paper. This is itself a portion of the reserve capital, which does not perform any function in the actual business of banking. The most important portion of this paper consists of bills of exchange, that is, promises to pay made by industrial capitalists or merchants. For the money-lender these bills of exchange are interest-bearing, in other words, when he buys them, he deducts interest for the time which they still have to run. This is called discounting. It depends on the prevailing rate of interest, how much of a deduction is made from the sum represented by the bill of exchange. Finally, the last part of the capital of a banker consists of his money reserve in gold and notes. The deposits, unless tied up by agreement for a certain time, are always at the disposal of the depositors. They are in a state of continual fluctuation. But while one depositor draws on his account, another deposits, so that the general average sum total of deposits fluctuates little during periods of normal business. The reserve funds of the banks, in countries with developed capitalist production, always express on the average the quantity of money existing in the form of a hoard, and a portion of this hoard in turn consists of paper, mere drafts upon gold, which have no value in themselves. The greater portion of banker's capital is, therefore, purely fictitious and consists of claims (bills of exchange), government securities (which represent spent capital), and stocks (drafts on future revenue). And it should not be forgotten that the money-value of the capital represented by this paper in the safes of the banker is itself fictitious, in so far as the paper consists of drafts on guaranteed revenue (e.g., government securities), or titles of ownership to real capital (e.g., stocks), and that this value is regulated differently from that of the real capital, which the paper represents at least in part; or, when it represents mere claims on revenue and no capital, the claim on the same revenue is expressed in continually changing fictitious money-capital. In addition to this, it must be noted that this fictitious banker's capital represents largely, not his own capital, but that of the public, which makes deposits with him, either interest-bearing or not. Deposits are always made in money, in gold or notes, or in drafts upon these. With the exception of the reserve fund, which contracts or expands in accordance with the requirements of actual circulation, these deposits are in fact always in the hands of the industrial capitalists and merchants, on the one hand, whose bills of exchange are thereby discounted and who thus receive advances; on the other hand, they are in the hands of dealers in securities (exchange brokers), or in the hands of private parties who have sold their securities, or in the hands of the government (in the case of treasury notes and new loans). The deposits themselves play a double role. On the one hand, as we have just mentioned, they are loaned out as interest-bearing capital and are, therefore, not in the safes of the banks, but figure merely on their books as credits of the depositors. On the other hand, they function merely as such book entries, in so far as the mutual claims of the depositors are balanced by cheques on their deposits and can be written off against each other. In this connection, it is immaterial whether these deposits are entrusted to the same banker, who can thus balance the various accounts against each other, or whether this is done in different banks, which mutually exchange cheques and pay only the balances to one another. With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands.xiii The greater portion of this “money-capital” is purely fictitious. All the deposits, with the exception of the reserve fund, are merely claims on the banker, which, however, never exist as deposits. To the extent that they serve in clearing-house transactions, they perform the function of capital for the bankers – after the latter have loaned them out. They pay one another their mutual drafts upon the non-existing deposits by balancing their mutual accounts. Adam Smith says with regard to the role played by capital in the loaning of money: “Even in the moneyed interest, however, the money is, as it were, but the deed of assignment which conveys from one hand to another those capitals which the owners do not care to employ themselves. Those capitals may be greater in almost any proportion than the amount of the money, which serves as the instrument of their conveyance, the same pieces of money successively serving for many different loans, as well as for many different purchases. A, for example, lends to W £1,000, with which W immediately purchases of B £1,000 worth of goods. B, having no occasion for the money himself, lends the identical pieces to X, with which X immediately purchases of C another £1,000 worth of goods. C, in the same manner, and for the same reason, lends them to Y, who again purchases goods with them of D. In this manner the same pieces, either of coin or of paper, may, in the course of a few days, serve as the instrument of three different loans, and of three different purchases, each of which is, in value, equal to the whole amount of those pieces. What the three moneyed men, A, B and C, assign to the three borrowers, W, X and Y, is the power of making those purchases. In this power consist both the value and the use of the loans. The stock lent by the three moneyed men is equal to the value of the goods which can be purchased with it, and is three times greater than that of the money with which the purchases are made. Those loans, however, may be all perfectly well secured, the goods purchased by the different debtors being so employed, as, in due time, to bring back, with a profit, an equal value either of coin or of paper. And as the same pieces of money can thus serve as the instrument of different loans to three, or for the same reason, to thirty times their value, so they may likewise successively serve as the instrument of repayment. ([An Inquiry into the Nature and Causes o/ the Wealth of Nations, Aberdeen, London, 1848, p.236. – Ed.] Book II, Chap. IV.) Since the same piece of money can be used for various purchases, corresponding to its velocity of circulation, it can similarly be used for various loans, since the purchases take it from one person to another, and a loan is but a transfer from one person to another without the mediation of a purchase. To every seller, money represents the transformed shape of his commodities. Nowadays, when every value is expressed as capital-value, it represents in the various loans various capitals in succession. This is simply another way of expressing the earlier statement that it can successively realise various commodity-values. At the same time it serves as a medium of circulation, in order to transfer the real capitals from person to person. In the case of loans, it does not pass from person to person as a medium of circulation. As long as it remains in the hands of the lender, it is in his hands not a medium of circulation, but the value existence of his capital. And in this form he transfers it when lending it to another. If A had lent the money to B, and B to C, without the mediation of purchases, the same money would not represent three capitals, but only one – a single capital-value. The number of capitals which it actually represents depends on the number of times that it functions as the value-form of various commodity-capitals. The same thing that Adam Smith says about loans in general also applies to deposits, which are merely another name for the loans which the public makes to the bankers. The same pieces of money may serve as the instruments for any number of deposits. “It is unquestionably true that the £1,000 which you deposit at A today may be reissued tomorrow, and form a deposit at B. The day after that, reissued from B, it may form a deposit at C... and so on to infinitude; and that the same £1,000 in money may, thus, by a succession of transfers, multiply itself into a sum of deposits absolutely indefinite. It is possible, therefore, that nine-tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers who are respectively accountable for them.... Thus in Scotland, for instance, currency has never exceeded £3 million, the deposits in the banks are estimated at £27 million. Unless a run on the banks be made, the same £1,000 would, if sent back upon its travels, cancel with the same facility a sum equally indefinite. As the same £1,000, with which you cancel your debt to a tradesman today, may cancel his debt to the merchant tomorrow, the merchant's debt to the bank the day following, and so on without end; so the same £1,000 may pass from hand to hand, and bank to bank, and cancel any conceivable sum of deposits.” (The Currency Theory Reviewed, pp. 62-63.) Just as everything in this credit system is doubled and trebled and transformed into a mere phantom of the imagination, so it is with the “reserve fund,” where one would at last hope to grasp on to something solid. Let us listen once more to Mr. Morris, Governor of the Bank of England: “The reserves of the private bankers are in the hands of the Bank of England in the shape of deposits.... An export of gold acts exclusively, in the first instance, upon the reserve of the Bank of England; but it would also be acting upon the reserves of the bankers, inasmuch as it is a withdrawal of a portion of the reserves which they have in the Bank of England. It would be acting upon the reserves of all the bankers throughout the country.” (Commercial Distress, 1847- 48, Nos. 3639, 3642.) Ultimately, then, the reserve funds actually merge with the reserve fund of the Bank of England.xiv However, this reserve fund also has a double existence. The reserve fund of the banking department is equal to the surplus of notes which the Bank is authorised to issue over and above the notes in circulation. The legal maximum of the note issue is £14 million (for which no bullion reserve is required; it is the approximate amount owed by the state to the Bank) plus the amount of the Bank's supply of precious metal. If the supply of precious metal in the Bank amounts to £14 million, the Bank can thus issue £28 million in notes, and if £20 million of these are in circulation, the reserve fund of the banking department is £8 million. These £8 million's worth of notes are then legally the banker's capital at the disposal of the Bank, and at the same time the reserve fund for its deposits. Now, if a drain of gold takes place, whereby the supply of precious metal in the Bank is reduced by £6 million – requiring the destruction of an equivalent number of notes – the reserve of the banking department would fall from £8 million to £2 million. On the one hand, the Bank would raise its rate of interest considerably; on the other hand, the banks having deposits with it, and the other depositors, would observe a large decrease in the reserve fund covering their own credits in the Bank. In 1857, the four largest stock banks of London threatened to call in their deposits, and thereby bankrupt the banking department, unless the Bank of England would secure a “government letter” suspending the Bank Act of 1844.xv In this way the banking department could fail, as in 1847, while any number of millions (e.g., 8 million in 1847) are held in its issue department to guarantee the convertibility of the circulating notes. But this is again illusory. “That large portion (of deposits) 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. The bill-broker is responsible to the banker for payment of this money at call; and such is the magnitude of these transactions, that Mr. Neave, the present Governor of the Bank [of England], stated in evidence, 'We know that one broker had 5 million, and we were led to believe that another had between 8 and 10 million; there was one with 4, another with 3½, and a third with above 8. I speak of deposits with the brokers.'“ (Report of Committee on Bank Acts, 1857-58, p. 5, Section 8.) “The London bill-brokers carried on their enormous transactions without any cash reserve, relying on the run off of their bills falling due, or in extremity, on the power of obtaining advances from the Bank of England on the security of bills under discount.” Ibid., p. VIII, Section 17. “Two bill-broking houses in London suspended payment in 1847; both afterwards resumed business. In 1857, both suspended again. The liabilities of one house in 1847 were, in round numbers, £2,683,000, with a capital of £180,000; the liabilities of the same house, in 1857, were £5,300,000, the capital probably not more than onefourth of what it was in 1847. The liabilities of the other firm were between £3,000,000 and £4,000,000 at each period of stoppage, with a capital not exceeding £45,000.” (Ibid., p. XXI, Section 52.) xi “The labourer possesses capital-value, which is arrived at by considering the money-value or his annual wage as income from interest.... Capitalising ... the average daily wage at 4%, we obtain the average value of a male agricultural labourer to be: German Austria, 4,500 taler; Prussia, 4,500; England, 3,750; France, 2,000; inner Russia, 750 taler.” (Von Reden,Vergleichende Kultur-Statistik, Berlin, 1848, p. 434.) xii [Immediately after the February Revolution, when commodities and securities were extremely depreciated and utterly unsaleable, a Swiss merchant in Liverpool, Mr. B. Zwilchenbart – who told this to my father – cashed all his belongings, travelled with cash in hand to Paris and sought out Rothschild, offering to participate in a joint enterprise with him. Rothschild looked at him fixedly, rushed towards him, grabbed him by his shoulders and asked: “Avez-vous de l'argent sur vous?” – “Oui, M. le baron.” – “Alors vous êtes mon homme!” (“Have you money in your possession?” – “Yes, Baron.” – “Then you are my man!”) – And they did a thriving business together. – F.E.] xiii [This doubling and trebling of capital has developed considerably further in recent years, for instance, through financial trusts, which already occupy a heading of their own in the report of the London Stock Exchange. A company is organised for the purchase of a certain class of interestbearing of foreign government securities, English municipal or American public bonds, railway stocks, etc. The capital, for example, £2 million, is raised by stock subscriptions. The Board of Directors buys up the values in question or speculates more or less actively therein, and after deducting the expenses distributes among the stockholders the annual interest as dividends. Furthermore, some stock companies have adopted the custom of dividing the common stock into two classes, preferred and deferred. The preferred receive a fixed rate of interest, say, 5%, provided that the total profit permits it; if there is anything left after that, the deferred receive it. In this manner, the “solid” investment of capital in preferred shares is more or less separated from actual speculation – with deferred shares. Since a few large enterprises have been unwilling to adopt this new custom, the expedient has been resorted to of organising new companies which invest a million or several million pounds sterling in shares of the former companies and then issue new shares amounting to the nominal value of the purchased shares, but half of them are issued as preferred and the other half as deferred. In such cases the original shares are doubled, since they serve as a basis for a new issue of shares. – F.E.] xiv [To what extent this has intensified since then is shown by the following official tabulation of the bank reserves of the fifteen largest London banks in November 1892, taken from the Daily News of December 15, 1892: Name of BankLiabilitiesCash ReservesPercentagesCity£9,317,629£746,5518.01Capital and Counties11,392,7441,307,48311.47Imperial3,987,400447,15711.22Lloyds23,800,9372,9 66,80612.46Lon. And Westminster24,671,5593,818,88515.50Lon. And S. Western5,570,268812,35314.58London Joint Stock12,127,9931,288,97710.62London and Midland8,814,4991,127,28012.79London and County37,111,0353,600,3749.70National11,163,8291,426,22512.77National Provincial.41,907,3844,614,78041.01Parrs and the Alliance12,794,4891,532,70711.98Prescott & Co4,041,058538,51713.07Union of London.,15,502,6182,300,08414.84Williams, Deacon & Manchester & Co.10,452,3811,317,62812.60Total£232,655,823£27,845,80711.97Of this total reserve of almost 28 million, at least 25 million are deposited in the Bank of England, and at most 3 million are in cash in the safes of the 15 banks themselves. But the cash reserve of the banking department of the Bank of England amounted to less than 16 million during that same month of November 1892! – F. E.] xv The suspension of the Bank Act of 1844 permits the Bank to issue any quantity of bank-notes regardless of the gold reserve backing in its possession; thus, to create an arbitrary quantity of fictitious paper money-capital, and to use it for the purpose of making loans to banks, exchange brokers, and through them to commerce. – F. E.]
|
|
|
Post by IBDaMann on Sept 20, 2020 22:07:04 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 30. Money-Capital and Real Capital. I. The only difficult questions, which we are now approaching in connection with the credit system, are the following: First: The accumulation of the actual money-capital. To what extent is it, and to what extent is it not, an indication of an actual accumulation of capital, i.e., of reproduction on an extended scale? Is the so-called plethora of capital – an expression used only with reference to the interest-bearing capital, i.e., moneyed capital – only a special way of expressing industrial over-production, or does it constitute a separate phenomenon alongside of it? Does this plethora, or excessive supply of money-capital, coincide with the existence of stagnating masses of money (bullion, gold coin and bank-notes), so that this superabundance of actual money is the expression and external form of that plethora of loan capital? Secondly: To what extent does a scarcity of money, i.e., a shortage of loan capital, express a shortage of real capital (commodity-capital and productive capital)? To what extent does it coincide, on the other hand, with a shortage of money as such, a shortage of the medium of circulation? In so far as we have hitherto considered the peculiar form of accumulation of money-capital and of money wealth in general, it has resolved itself into an accumulation of claims of ownership upon labour. The accumulation of the capital of the national debt has been revealed to mean merely an increase in a class of state creditors, who have the privilege of a firm claim upon a certain portion of the tax revenue.xvi By means of these facts, whereby even an accumulation of debts may appear as an accumulation of capital, the height of distortion taking place in the credit system becomes apparent. These promissory notes, which are issued for the originally loaned capital long since spent, these paper duplicates of consumed capital, serve for their owners as capital to the extent that they are saleable commodities and may, therefore, be reconverted into capital. Titles of ownership to public works, railways, mines, etc., are indeed, as we have also seen, titles to real capital. But they do not place this capital at one's disposal. It is not subject to withdrawal. They merely convey legal claims to a portion of the surplus-value to be produced by it. But these titles likewise become paper duplicates of the real capital; it is as though a bill of lading were to acquire a value separate from the cargo, both concomitantly and simultaneously with it. They come to nominally represent non-existent capital. For the real capital exists side by side with them and does not change hands as a result of the transfer of these duplicates from one person to another. They assume the form of interest-bearing capital, not only because they guarantee a certain income, but also because, through their sale, their repayment as capital-values can be obtained. To the extent that the accumulation of this paper expresses the accumulation of railways, mines, steamships, etc., to that extent does it express the extension of the actual reproduction process – just as the extension of, for example, a tax list on movable property indicates the expansion of this property. But as duplicates which are themselves objects of transactions as commodities, and thus able to circulate as capital-values, they are illusory, and their value may fall or rise quite independently of the movement of value of the real capital for which they are titles. Their value, that is, their quotation on the Stock Exchange, necessarily has a tendency to rise with a fall in the rate of interest – in so far as this fall, independent of the characteristic movements of money-capital, is due merely to the tendency for the rate of profit to fall; therefore, this imaginary wealth expands, if for this reason alone, in the course of capitalist production in accordance with the expressed value for each of its aliquot parts of specific original nominal value.xvii Gain and loss through fluctuations in the price of these titles of ownership, and their centralisation in the hands of railway kings, etc., become, by their very nature, more and more a matter of gamble, which appears to take the place of labour as the original method of acquiring capital wealth and also replaces naked force. This type of imaginary money wealth not only constitutes a very considerable part of the money wealth of private people, but also of banker’s capital, as we have already indicated. In order to quickly settle this question, let us point out that one could also mean by the accumulation of money-capital the accumulation of wealth in the hands of bankers (moneylenders by profession), acting as middlemen between private money-capitalists on the one hand, and the state, communities, and reproducing borrowers on the other. For the entire vast extension of the credit system, and all credit in general, is exploited by them as their private capital. These fellows always possess capital and incomes in money-form or in direct claims on money. The accumulation of the wealth of this class may take place completely differently than actual accumulation, but it proves at any rate that this class pockets a good deal of the real accumulation. Let us reduce the scope of the problem before us. Government securities, like stocks and other securities of all kinds, are spheres of investment for loanable capital – capital intended for bearing interest. They are forms of loaning such capital. But they themselves are not the loan capital, which is invested in them. On the other hand, in so far as credit plays a direct role in the reproduction process, what the industrialist or merchant needs when he wishes to have a bill discounted or a loan granted is neither stocks nor government securities. What he needs is money. He, therefore, pledges or sells those securities if he cannot secure money in any other way. It is the accumulation of this loan capital with which we have to deal here, and more particularly accumulation of loanable money-capital. We are not concerned here with loans of houses, machines, or other fixed capital. Nor are we concerned with the advances industrialists and merchants make to one another in commodities and within the compass of the reproduction process; although we must also investigate this point beforehand in more detail. We are concerned exclusively with money loans, which are made by bankers, as middlemen, to industrialists and merchants. Let us then, to begin with, analyse commercial credit, that is, the credit which the capitalists engaged in reproduction give to one another. It forms the basis of the credit system. It is represented by the bill of exchange, a promissory note with a definite term of payment, i.e., a document of deferred payment. Everyone gives credit with one hand and receives credit with the other. Let us completely disregard, for the present, banker’s credit, which constitutes an entirely different sphere. To the extent that these bills of exchange circulate among the merchants themselves as means of payment again, by endorsement from one to another – without, however, the mediation of discounting – it is merely a transfer of the claim from A to B and does not change the picture in the least. It merely replaces one person by another. And even in this case, the liquidation can take place without the intervention of money. Spinner A, for example, has to pay a bill to cotton broker B, and the latter to importer C. Now, if C also exports yarn, which happens often enough, he may buy yarn from A on a bill of exchange and the spinner A may pay the broker B with the broker’s own bill which was received in payment from C. At most, a balance will have to be paid in money. The entire transaction then consists merely in the exchange of cotton and yarn. The exporter represents only the spinner, and the cotton broker, the cotton planter. Two things are now to be noted in the circuit of this purely commercial credit. First: The settlement of these mutual claims depends upon the return flow of capital, that is, on C – M, which is merely deferred. If the spinner has received a bill of exchange from a cotton goods manufacturer, then manufacturer can pay if the cotton goods which he has on the market have been sold in the interim. If the corn speculator has a bill of exchange drawn upon his agent, the agent can pay the money if the corn has been sold in the interim at the expected price. These payments, therefore, depend on the fluidity of reproduction, that is, the production and consumption processes. But since the credits are mutual, the solvency of one depends upon the solvency of another; for in drawing his bill of exchange, one may have counted either on the return flow of the capital in his own business or on the return flow of the capital in a third party’s business whose bill of exchange is due in the meantime. Aside from the prospect of return flow of capital, payment can only be possible by means of reserve capital at the disposal of the person drawing the bill of exchange, in order to meet his obligations in case the return flow of capital should be delayed. Secondly: This credit system does not do away with the necessity for cash payments. For one thing, a large portion of expenses must always be paid in cash, e.g., wages, taxes, etc. Furthermore, capitalist B, who has received from C a bill of exchange in place of cash payment, may have to pay a bill of his own which has fallen due to D before C’s bill becomes due, and so he must have ready cash. A complete circuit of reproduction as that assumed above, i.e., from cotton planter to cotton spinner and back again, can only constitute an exception; it will be constantly interrupted at many points. We have seen in the discussion of the reproduction process (Vol II, Part III) that the producers of constant capital exchange, in part, constant capital among themselves. As a result, the bills of exchange can, more or less, balance each other out. Similarly, in the ascending line of production, where the cotton broker draws on the cotton spinner, the spinner on the manufacturer of cotton goods, the manufacturer on the exporter, the exporter on the importer (perhaps of cotton again). But the circuit of transactions, and, therefore, the turn about of the series of claims, does not take place at the same time. For example, the claim of the spinner on the weaver is not settled by the claim of the coal-dealer on the machine-builder. The spinner never has any counter-claims on the machine-builder, in his business, because his product, yarn, never enters as an element in the machine-builder’s reproduction process. Such claims must, therefore, be settled by money. The limits of this commercial credit, considered by themselves, are 1) the wealth of the industrialists and merchants, that is, their command of reserve capital in case of delayed returns; 2) these returns themselves. These returns may be delayed, or the prices of commodities may fall in the meantime or the commodities may become momentarily unsaleable due to a stagnant market. The longer the bills of exchange run, the larger must be the reserve capital, and the greater the possibility of a diminution or delay of the returns through a fall in prices or a glut on the market. And, furthermore, the returns are so much less secure, the more the original transaction was conditioned upon speculation on the rise or fall of commodity-prices. But it is evident that with the development of the productive power of labour, and thus of production on a large scale: 1) the markets expand and become more distant from the place of production; 2) credits must, therefore, be prolonged; 3) the speculative element must thus more and more dominate the transactions. Production on a large scale and for distant markets throws the total product into the hands of commerce; but it is impossible that the capital of a nation should double itself in such a manner that commerce should itself be able to buy up the entire national product with its own capital and to sell it again. Credit is, therefore, indispensable here; credit, whose volume grows with the growing volume of value of production and whose time duration grows with the increasing distance of the markets. A mutual interaction takes place here. The development of the production process extends the credit, and credit leads to an extension of industrial and commercial operations. When we examine this credit detached from banker’s credit, it is evident that it grows with an increasing volume of industrial capital itself. Loan capital and industrial capital are identical here. The loaned capital is commodity-capital which is intended either for ultimate individual consumption or for the replacement of the constant elements of productive capital. What appears here as loan capital is always capital existing in some definite phase of the reproduction process, but which by means of purchase and sale passes from one person to another, while its equivalent is not paid by the buyer until some later stipulated time. For example, cotton is transferred to the spinner for a bill of exchange, yarn to the manufacturer of cotton goods for a bill of exchange, cotton goods to the merchant for a bill, from whose hands they go to the exporter for a bill, and then, for a bill to some merchant in India, who sells the goods and buys indigo instead, etc. During this transfer from hand to hand the transformation of cotton into cotton goods is effected, and the cotton goods are finally transported to India and exchanged for indigo, which is shipped to Europe and there enters into the reproduction process again. The various phases of the reproduction process are promoted here by credit, without any payment on the part of the spinner for the cotton, the manufacturer of cotton goods for the yarn, the merchant for the cotton goods, etc. In the first stages of the process, the commodity, cotton, goes through its various production phases, and this transition is promoted by credit. But as soon as the cotton has received in production its ultimate form as a commodity, the same commodity-capital passes only through the hands of various merchants who promote its transportation to distant markets, and the last of whom finally sells these commodities to the consumer and buys other commodities in their stead, which either become consumed or go into the reproduction process. It is necessary, then, to differentiate between two stages here: In the first stage, credit promotes the actual successive phases in the production of the same article; in the second, credit merely promotes the transfer of the article, including its transportation, from one merchant to another, in other words, the process C – M. But here also the commodity is at least in the process of circulation, that is, in a phase of the reproduction process. It follows, then, that it is never idle capital which is loaned here, but capital which must change its form in the hands of its owner; it exists in a form that for him is merely commodity-capital, i.e., capital which must be retransformed, and, to begin with, at least converted into money. It is, therefore, the metamorphosis of commodities that is here promoted by credit; not merely C – M, but also M – C and the actual production process. A large quantity of credit within the reproductive circuit (banker’s credit excepted) does not signify a large quantity of idle capital, which is being offered for loan and is seeking profitable investment. It means rather a large employment of capital in the reproduction process. Credit, then, promotes here 1) as far as the industrial capitalists are concerned, the transition of industrial capital from one phase into another, the connection of related and dovetailing spheres of production; 2) as far as the merchants are concerned, the transportation and transition of commodities from one person to another until their definite sale for money or their exchange for other commodities. The maximum of credit is here identical with the fullest employment of industrial capital, that is, the utmost exertion of its reproductive power without regard to the limits of consumption. These limits of consumption are extended by the exertions of the reproduction process itself. On the one hand, this increases the consumption of revenue on the part of labourers and capitalists, on the other hand, it is identical with an exertion of productive consumption. As long as the reproduction process is continuous and, therefore, the return flow assured, this credit exists and expands, and its expansion is based upon the expansion of the reproduction process itself. As soon as a stoppage takes place, as a result of delayed returns, glutted markets, or fallen prices, a superabundance of industrial capital becomes available, but in a form in which it cannot perform its functions. Huge quantities of commodity-capital, but unsaleable. Huge quantities of fixed capital, but largely idle due to stagnant reproduction. Credit is contracted 1) because this capital is idle, i.e., blocked in one of its phases of reproduction because it cannot complete its metamorphosis; 2) because confidence in the continuity of the reproduction process has been shaken; 3) because the demand for this commercial credit diminishes. The spinner, who curtails his production and has a large quantity of unsold yarn in stock, does not need to buy any cotton on credit; the merchant does not need to buy any commodities on credit because he has more than enough of them. Hence, if there is a disturbance in this expansion or even in the normal flow of the reproduction process, credit also becomes scarce; it is more difficult to obtain commodities on credit. However, the demand for cash payment and the caution observed toward sales on credit are particularly characteristic of the phase of the industrial cycle following a crash. During the crisis itself, since everyone has products to sell, cannot sell them, and yet must sell them in order to meet payments, it is not the mass of idle and investment-seeking capital, but rather the mass of capital impeded in its reproduction process, that is greatest just when the shortage of credit is most acute (and therefore the rate of discount highest for banker’s credit). The capital already invested is then, indeed, idle in large quantities because the reproduction process is stagnant. Factories are closed, raw materials accumulate, finished products flood the market as commodities. Nothing is more erroneous, therefore, than to blame a scarcity of productive capital for such a condition. It is precisely at such times that there is a superabundance of productive capital, partly in relation to the normal, but temporarily reduced scale of reproduction, and partly in relation to the paralysed consumption. Let us suppose that the whole of society is composed only of industrial capitalists and wageworkers. Let us furthermore disregard price fluctuations, which prevent large portions of the total capital from replacing themselves in their average proportions and which, owing to the general interrelations of the entire reproduction process as developed in particular by credit, must always call forth general stoppages of a transient nature. Let us also disregard the sham transactions and speculations, which the credit system favours. Then, a crisis could only be explained as the result of a disproportion of production in various branches of the economy, and as a result of a disproportion between the consumption of the capitalists and their accumulation. But as matters stand, the replacement of the capital invested in production depends largely upon the consuming power of the non-producing classes; while the consuming power of the workers is limited partly by the laws of wages, partly by the fact that they are used only as long as they can be profitably employed by the capitalist class. The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit. A real lack of productive capital, at least among capitalistically developed nations, can be said to exist only in times of general crop failures, either in the principal foodstuffs or in the principal industrial raw materials. However, in addition to this commercial credit we have actual money credit. The advances of the industrialists and merchants among one another are amalgamated with the money advances made to them by the bankers and money-lenders. In discounting bills of exchange the advance is only nominal. A manufacturer sells his product for a bill of exchange and gets this bill discounted by some bill-broker. In reality, the latter advances only the credit of his banker, who in turn advances to the broker the money-capital of his depositors. The depositors consist of the industrial capitalists and merchants themselves and also of workers (through savings-banks) – as well as ground-rent recipients and other unproductive classes. In this way every individual industrial manufacturer and merchant gets around the necessity of keeping a large reserve fund and being dependent upon his actual returns. On the other hand, the whole process becomes so complicated, partly by simply manipulating bills of exchange, partly by commodity transactions for the sole purpose of manufacturing bills of exchange, that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash. The best proof of this is furnished, for instance, by the Reports on Bank Acts of 1857 and 1858, in which all bank directors, merchants, in short all the invited experts with Lord Overstone at their head, congratulated one another on the prosperity and soundness of business – just one month before the outbreak of the crisis in August 1857. And, strangely enough, Tooke in his History of Prices succumbs to this illusion once again as historian for each crisis. Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place. We revert now to the accumulation of money-capital. Not every augmentation of loanable money-capital indicates a real accumulation of capital or expansion of the reproduction process. This becomes most evident in the phase of the industrial cycle immediately following a crisis, when loan capital lies around idle in great quantities. At such times, when the production process is curtailed (production in the English industrial districts was reduced by one-third after the crisis of 1847), when the prices of commodities are at their lowest level, when the spirit of enterprise is paralysed, the rate of interest is low, which in this case indicates nothing more than an increase in loanable capital precisely as a result of contraction and paralysation of industrial capital. It is quite obvious that a smaller quantity of a circulation medium is required when the prices of commodities have fallen, the number of transactions decreased, and the capital laid out for wages reduced; that, on the other hand, no additional money is required to function as world-money after foreign debts have been liquidated either by the export of gold or as a result of bankruptcies; that, finally, the volume of business connected with discounting bills of exchange diminishes in proportion with the reduced number and magnitudes of the bills of exchange them-selves. Hence the demand for loanable moneycapital, either to act as a medium of circulation or as a means of payment (the investment of new capital is still out of the question), decreases and this capital, therefore, becomes relatively abundant. Under such circumstances, however, the supply of loanable money-capital also increases, as we shall later see. Thus, the situation after the crisis of 1847 was characterised by “a limitation of transaction and a great superabundance of money.” (Commercial Distress, 1847-48, Evidence No. 1664.) The rate of interest was very low because of the “almost perfect destruction of commerce and the almost total want of means of employing money” (loc. cit., p. 45, testimony of Hodgson, Director of the Royal Bank of Liverpool). What nonsense these gentlemen concocted (and Hodgson is, moreover, one of the best of them) in order to explain these facts, can be seen from the following remark: “The pressure” (1847) “arose from the real diminution of the moneyed capital of the country, caused partly by the necessity of paying in gold for imports from all parts of the world, and partly by the absorption of floating into fixed capital.” [1. c., p. 39.] How the conversion of floating capital into fixed capital reduces the money-capital of a country is unintelligible. For, in the case of railways, e.g., in which capital was mainly invested at that time, neither gold nor paper is used for viaducts and rails, and the money for the railway stocks, to the extent that it had been deposited solely in payment, performed exactly the same functions as any other money deposited in banks and even increased the loanable money-capital temporarily, as already shown above; but to the extent that it had actually been spent for construction, it circulated in the country as a medium of purchase and of payment. Only in so far as fixed capital cannot be exported, so that with the impossibility of its export the available capital secured from returns for exported articles also drops out of the picture – including the returns in cash or bullion – only to that extent could the money-capital be affected. But at that time English export articles were also piled up in huge quantities on the foreign markets without being able to be sold. It is true, the floating capital of the merchants and manufacturers of Manchester, etc., who had a portion of their normal business capital tied up in railway stocks and were therefore dependent upon borrowed capital for running their business, had become fixed, and they, therefore, had to suffer the consequences. But it would have been the same, if the capital belonging to their business, but withdrawn from it, had been invested, say, in mines instead of railways-mining products like iron, coal, copper being themselves in turn floating capital. The actual reduction of available money-capital through crop failures, corn imports, and gold exports constituted, naturally, an event that had nothing to do with the railway swindle. “Almost all mercantile houses had begun to starve their business more or less ... by taking part of their commercial capital for railways.” – “Loans to so great an extent by commercial houses to railways [loc. cit., p. 42] induced them to lean too much upon... banks by the discount of paper, whereby to carry on their commercial operations” (the same Hodgson, loc. cit., p. 67). “In Manchester there have been immense losses in consequence of the speculation in railways” (R. Gardner, previously cited in Vol. I, Ch. XIII, 3, c, and in several other places; Evidence No. 4884, loc. cit.). One of the principal causes of the crisis of 1847 was the colossal flooding of the market and the fabulous swindle in the East Indian trade with commodities. But there were also other circumstances which bankrupted very rich firms in this line: “They had large means, but not available. The whole of their capital was locked up in estates in the Mauritius, or indigo factories, or sugar factories. Having incurred liabilities to the extent of £500,000600,000, they had no available assets to pay their bills, and eventually it proved that to pay their bills they were entirely dependent upon their credit.” (Ch. Turner, big East Indian merchant in Liverpool, No. 730, loc. cit.) See also Gardner (No. 4872, loc. cit.): “Immediately after the China treaty, so great a prospect was held out to the country of a great extension of our commerce with China, that there were many large mills built with a view to that trade exclusively, in order to manufacture that class of cloth which is principally taken for the China market, and our previous manufactures had the addition of all those.” – “4874. How has that trade turned out? – Most ruinous, almost beyond description; I do not believe, that of the whole of the shipments that were made in 1844 and 1845 to China, above two-thirds of the amount have ever been returned; in consequence of tea being the principal article of repayment and of the expectation that was held out, we, as manufacturers, fully calculated upon a great reduction in the duty on tea.” And now, naively expressed, comes the characteristic credo of the English manufacturer: “Our commerce with no foreign market is limited by their power to purchase the commodity, but it is limited in this country by our capability of consuming that which we receive in return for our manufactures.” (The relatively poor countries, with whom England trades, are, of course, able to pay for and consume any amount of English products, but unfortunately wealthy England cannot assimilate the products sent in return.) “4876. I sent out some goods in the first instance, and the goods sold at about 45 per cent loss, from the full conviction that the price, at which my agents could purchase tea, would leave so great a profit in this country as to make up the deficiency... but instead of profit, I lost in some instances 25 and up to 50 per cent.” – “4877. Did the manufacturers generally export on their own account? – Principally; the merchants, I think, very soon saw that the thing would not answer, and they rather encouraged the manufacturers to consign than take a direct interest themselves.” In 1857, on the other hand, the losses and failures fell mainly upon the merchants, since the manufacturers left them the task of flooding the foreign markets “on their own account.” An expansion of money-capital, which arises out of the fact that, in view of the expansion of banking (see, below, the example of Ipswich, where in the course of a few years immediately preceding 1857 the deposits of the capitalist farmers quadrupled), what was formerly a private hoard or coin reserve is always converted into loanable capital for a definite time, does not indicate a growth in productive capital any more than the increasing deposits with the London stock banks when the latter began to pay interest on deposits. As long as the scale of production remains the same, this expansion leads only to an abundance of loanable money-capital as compared with the productive. Hence the low rate of interest. After the reproduction process has again reached that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended; this forms, indeed, the “sound” basis again for a ready flow of returns and extended production. In this state the rate of interest is still low, although it rises above its minimum. This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. On the other hand, those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers. To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level. It reaches its maximum again as soon as the new crisis sets in. Credit suddenly stops then, payments are suspended, the reproduction process is paralysed, and with the previously mentioned exceptions, a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital. On the whole, then, the movement of loan capital, as expressed in the rate of interest, is in the opposite direction to that of industrial capital. The phase wherein a low rate of interest, but above the minimum, coincides with the “improvement” and growing confidence after a crisis, and particularly the phase wherein the rate of interest reaches its average level, exactly midway between its minimum and maximum, are the only two periods during which an abundance of loan capital is available simultaneously with a great expansion of industrial capital. But at the beginning of the industrial cycle, a low rate of interest coincides with a contraction, and at the end of the industrial cycle, a high rate of interest coincides with a superabundance of industrial capital. The low rate of interest that accompanies the “improvement” shows that the commercial credit requires bank credit only to a slight extent because it is still self-supporting. The industrial cycle is of such a nature that the same circuit must periodically reproduce itself, once the first impulse has been given.xviii During a period of slack, production sinks below the level, which it had attained in the preceding cycle and for which the technical basis has now been laid. During prosperity – the middle period – it continues to develop on this basis. In the period of over-production and swindle, it strains the productive forces to the utmost, until it exceeds the capitalistic limits of the production process. It is clear that there is a shortage of means of payment during a period of crisis. The convertibility of bills of exchange replaces the metamorphosis of commodities themselves, and so much more so exactly at such times the more a portion of the firms operates on pure credit. Ignorant and mistaken bank legislation, such as that of 1844-45, can intensify this money crisis. But no kind of bank legislation can eliminate a crisis. In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur – a tremendous rush for means of payment – when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realised again. The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production. Incidentally in connection with the superabundance of industrial capital which appears during crises the following should be noted: commodity-capital is in itself simultaneously money-capital, that is, a definite amount of value expressed in the price of the commodities. As use-value it is a definite quantum of objects of utility, and there is a surplus of these available in times of crises. But as money-capital as such, as potential money-capital, it is subject to continual expansion and contraction. On the eve of a crisis, and during it, commodity-capital in its capacity as potential money-capital is contracted. It represents less money-capital for its owner and his creditors (as well as security for bills of exchange and loans) than it did at the time when it was bought and when the discounts and mortgages based on it were transacted. If this is the meaning of the contention that the money-capital of a country is reduced in times of stringency, this is identical with saying that the prices of commodities have fallen. Such a collapse in prices merely balances out their earlier inflation. The incomes of the unproductive classes and of those who live on fixed incomes remain in the main stationary during the inflation of prices which goes hand in hand with over-production and over-speculation. Hence their consuming capacity diminishes relatively, and with it their ability to replace that portion of the total reproduction which would normally enter into their consumption. Even when their demand remains nominally the same, it decreases in reality. It should be noted in regard to imports and exports, that, one after another, all countries become involved in a crisis and that it then becomes evident that all of them, with few exceptions, have exported and imported too much, so that they all have an unfavourable balance of payments. The trouble, therefore, does not actually lie with the balance of payments. For example, England suffers from a drain of gold. It has imported too much. But at the same time all other countries are over-supplied with English goods. They have thus also imported too much, or have been made to import too much. (There is, indeed, a difference between a country which exports on credit and those which export little or nothing on credit. But the latter then import on credit; and this is only then not the case when commodities are sent to them on consignment.) The crisis may first break out in England, the country which advances most of the credit and takes the least, because the balance of payments, the balance of payments due, which must be settled immediately, is unfavourable, even though the general balance of trade is favourable. This is explained partly as a result of the credit which it has granted, and partly as a result of the huge quantity of capital loaned to foreign countries, so that a large quantity of returns flow back to it in commodities, in addition to the actual trade returns. (However, the crisis has at times first broken out in America, which takes most of the commercial and capital credit from England.) The crash in England, initiated and accompanied by a gold drain, settles England’s balance of payments, partly by a bankruptcy of its importers (about which more below), partly by disposing of a portion of its commodity-capital at low prices abroad, and partly by the sale of foreign securities, the purchase of English securities, etc. Now comes the turn of some other country. The balance of payments was momentarily in its favour; but now the time lapse normally existing between the balance of payments and balance of trade has been eliminated or at least reduced by the crisis: all payments are now suddenly supposed to be made at once. The same thing is now repeated here. England now has a return flow of gold, the other country a gold drain. What appears in one country as excessive imports, appears in the other as excessive exports, and vice versa. But over-imports and over-exports have taken place in all countries (we are not speaking here about crop failures, etc., but about a general crisis); that is over-production promoted by credit and the general inflation of prices that goes with it. In 1857, the crisis broke out in the United States. A flow of gold from England to America followed. But as soon as the bubble in America burst, the crisis broke out in England and the gold flowed from America to England. The same took place between England and the continent. The balance of payments is in times of general crisis unfavourable to every nation, at least to every commercially developed nation, but always to each country in succession, as in volley firing, i.e., as soon as each one’s turn comes for making payments; and once the crisis has broken out, e.g., in England, it compresses the series of these terms into a very short period. It then becomes evident that all these nations have simultaneously over-exported (thus over-produced) and over-imported (thus over-traded), that prices were inflated in all of them, and credit stretched too far. And the same break-down takes place in all of them. The phenomenon of a gold drain then takes place successively in all of them and proves precisely by its general character 1) that gold drain is just a phenomenon of a crisis, not its cause; 2) that the sequence in which it hits the various countries indicates only when their judgement-day has come, i.e., when the crisis started and its latent elements come to the fore there. It is characteristic of the English economic writers – and the economic literature worth mentioning since 1830 resolves itself mainly into a literature on currency, credit, and crises – that they look upon the export of precious metals in times of crisis, in spite of the turn in the rates of exchange, only from the standpoint of England, as a purely national phenomenon, and resolutely close their eyes to the fact that all other European banks raise their rate of interest when their bank raises its own in times of crisis, and that, when the cry of distress over the drain of gold is raised in their country today, it is taken up in America tomorrow and in Germany and France the day after. In 1847, “the engagements running upon this country had to be met” [mostly for corn]. “Unfortunately, they were met to a great extent by failures” [wealthy England secured relief by bankruptcies in its obligations toward the continent and America], “but to the extent to which they were not met by failures, they were met by the exportation of bullion.” (Report of Committee on Bank Acts, 1857.) In other words, in so far as a crisis in England is intensified by bank legislation, this legislation is a means of cheating the corn-exporting countries in periods of famine, first on their corn and then on the money for the corn. A prohibition on the export of corn during such periods for countries which are themselves labouring more or less under scarcities, is, therefore, a very rational measure to thwart this plan of the Bank of England to “meet obligations” for corn imports “by bankruptcies.” It is after all much better that the corn producers and speculators lose a portion of their profit for the good of their own country than their capital for the good of England. It follows from the above that commodity-capital, during crises and during periods of business depression in general, loses to a large extent its capacity to represent potential money-capital. The same is true of fictitious capital, interest-bearing paper, in so far as it circulates on the stock exchange as money-capital. Its price falls with rising interest. It falls, furthermore, as a result of the general shortage of credit, which compels its owners to dump it in large quantities on the market in order to secure money. It falls, finally, in the case of stocks, partly as a result of the decrease in revenues for which it constitutes drafts and partly as a result of the spurious character of the enterprises which it often enough represents. This fictitious money-capital is enormously reduced in times of crisis, and with it the ability of its owners to borrow money on it on the market. However, the reduction of the money equivalents of these securities on the stock exchange list has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners. xvi The public fund is nothing but imaginary capital, which represents that portion of the annual revenue, which is set aside to pay the debt. An equivalent amount of capital has been spent; it is this which serves as a denominator for the loan, but it is not this which is represented by the public fund; for the capital no longer exists. New wealth must be created by the work of industry; a portion of this wealth is annually set aside in advance for those who have loaned that wealth which has been spent; this portion is taken by means of taxes from those who produce it, and is given to the creditors of the state, and, according to the customary proportion between capital and interest in the country, an imaginary capital is assumed equivalent to that which could give rise to the annual income which these creditors are to receive. (Sismondi, Nouveaux principes [Seconde édition, Paris, 1827], II, p. 230.) xvii A portion of the accumulated loanable money-capital is indeed merely an expression of industrial capital. For instance, when England, in 1857, had invested 180 million in American railways and other enterprises, this investment was transacted almost completely by the export of English commodities for which the Americans did not have to make payment in return. The English exporter drew bills of exchange for these commodities on America, which the English stock subscribers bought up and which were sent to America for purchasing the stock subscriptions. xviii [As I have already stated elsewhere [English edition: Vol. I. – Ed.], a change has taken place here since the last major general crisis. The acute form of the periodic process with its former ten-year cycle, appears to have given way to a more chronic, long drawn out, alternation between a relatively short and slight business improvement and a relatively long, indecisive depression-taking place in the various industrial countries at different times. But perhaps it is only a matter of a prolongation of the duration of the cycle. In the early years of world commerce, 1845-47, it can be shown that these cycles lasted about five years; from 1847 to 1867 the cycle is clearly ten years; is it possible that we are now in the preparatory stage of a new world crash of unparalleled vehemence? Many things seem to point in this direction. Since the last general crisis of 1867 many profound changes have taken place. The colossal expansion of the means of transportation and communication – ocean liners, railways, electrical telegraphy, the Suez Canal – has made a real world-market a fact. The former monopoly of England in industry has been challenged by a number of competing industrial countries; infinitely greater and varied fields have been opened in all parts of the world for the investment of surplus European capital, so that it is far more widely distributed and local over-speculation may be more easily overcome. By means of all this, most of the old breeding-grounds of crises and opportunities for their development have been eliminated or strongly reduced. At the same time, competition in the domestic market recedes before the cartels and trusts, while in the foreign market it is restricted by protective tariffs, with which all major industrial countries, England excepted, surround themselves. But these protective tariffs are nothing but preparations for the ultimate general industrial war, which shall decide who has supremacy on the world-market. Thus every factor, which works against a repetition of the old crises, carries within itself the germ of a far more powerful future crisis. – F. E.]
|
|
|
Post by IBDaMann on Sept 20, 2020 22:10:56 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital 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 shortterm 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 billbrokers, 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 banker 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 moneyform, 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 moneycapitalists 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, end 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.
|
|
|
Post by IBDaMann on Sept 20, 2020 22:13:17 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital 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 moneycapital 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 moneycapital 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, overproduction, 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,xix 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.xx 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, moneylenders, 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 isprima 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 socalled 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/ . 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 . 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 moneylenders, 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. xix B. A. 1857. Testimony of Twells, banker: “4516. As a banker, do you deal in capital or in money? – We deal in money.” – “4517. How are the deposits paid into your bank? – In money.” – “4518. How are they paid out? – In money.” – “4519. Then can they be called anything else but money? – No.” Overstone (see Chapter XXVI) confuses continually “capital” and “money.” “Value of money” also means interest to him, but in so far as it is determined by the mass of money, “value of capital” is supposed to be interest, in so far as it is determined by the demand for productive capital and the profit made by it. He says: “4140. The use of the word ‘capital’ is very dangerous.” – “4148. The export of bullion from this country is a diminution of the quantity of money in this country, and a diminution of the quantity of money in this country must of course create a pressure upon the moneymarket generally” [but not in the capital-market, according to this]. – “4112. As the money goes out of the country, the quantity in the country is diminished. That diminution of the quantity remaining in the country produces an increased value of that money” [this originally means in his theory an increase in the value of money as such through a contraction of circulation, as compared to the values of commodities; in other words, an increase in the value of money is the same as a fall in the value of commodities. But since in the meantime even he has been convinced beyond peradventure that the mass of circulating money does not determine prices, it is now the diminution in money as a medium of circulation which is supposed to raise its value as interest-bearing capital, and thus the rate of interest]. “And that increased value of what remains stops the exit of money, and is kept up until it has brought back that quantity of money which is necessary to restore the equilibrium.” – More of Overstone’s contradictions later on. xx At this point the confusion starts: both of these things are supposed to be “money”, namely, the deposit as a claim to payment from the banker, and the deposited money in the hands of the banker. Banker Twells, before the Banking Committee of 1857, offers the following example: “If I begin business with £10,000, I buy with £5,000 commodities and put them into warehouse. I deposit the other £5,000 with a banker, to draw upon it and use it as I require it. I consider it still £10,000 capital to me, though £5,000 is in the shape of deposits or money” (4528). – This now gives rise to the following peculiar debate. – “4531. You have parted with your £5,000 of notes to somebody else? – Yes.” – “4532. Then he has £5,000 of deposits?-Yes.” – “4533. And you have £5,000 of deposits left? – Exactly.” – “4534. He has £5,000 in money, and you have £5,000 in money? – Yes.” – “4535. But it is nothing but money at last? – No.” This confusion is due partly to the circumstance that A, who has deposited £5,000, can draw on it and dispose of it as though he still had it. To that extent it serves him as potential money. However, in all cases in which he draws on it he destroys his deposit pro tanto. If he draws out real money, and his own money has already been lent to someone else, he is not paid with his own money, but with that of some other depositor. If he pays a debt to B with a cheque on his banker, and B deposits this cheque with his banker, and the banker of A also has a cheque on the banker of B, so that the two bankers merely exchange cheques, the money deposited by A has performed the function of money twice; first, in the hands of the one who has received the money deposited by A; secondly, in the hands of A himself. In the second function, it is a balancing of claims (the claim of A on his banker, and the claim of the latter on the banker of B) without using money. Here the deposit acts twice as money, namely, as real money and then as a claim on money. Mere claims to money can take the place of money only by a balancing of claims.
|
|
|
Post by IBDaMann on Sept 20, 2020 22:17:59 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 33. The Medium of Circulation in the Credit System “The great regulator of the velocity of the currency is credit. This explains why a severe pressure upon the money-market is generally coincident with a full circulation.” (The Currency Theory Reviewed, p. 65.) This is to be taken in a double sense. On the one hand, all methods which save on medium of circulation are based upon credit. On the other hand, however, take, for example, a 500-pound note. A gives it to B on a certain day in payment for a bill of exchange; B deposits it on the same day with his banker; the latter discounts a bill of exchange with it on the very same day for C; C pays it to his bank, the bank gives it to the bill-broker as an advance, etc. The velocity with which the note circulates here, to serve for purchases and payments, is effected by the velocity with which it repeatedly returns to someone in the form of a deposit and passes over to someone else again in the form of a loan. The pure economy in medium of circulation appears most highly developed in the clearing house – in the simple exchange of bills of exchange that are due – and in the preponderant function of money as a means of payment for merely settling balances. But the very existence of these bills of exchange depends in turn on credit, which the industrialists and merchants mutually give one another. If this credit declines, so does the number of bills, particularly long-term ones, and consequently also the effectiveness of this method of balancing accounts. And this economy, which consists in eliminating money from transactions and rests entirely upon the function of money as a means of payment, which in turn is based upon credit, can only be of two kinds (aside from the more or less developed technique in the concentration of these payments): mutual claims, represented by bills of exchange or cheques, are balanced out either by the same banker, who merely transcribes the claim from the account of one to that of another, or by the various bankers among themselves.xxi The concentration of 8 to 40 million bills of exchange in the hands of one bill-broker, such as the firm of Overend, Gurney & Co., was one of the principal means of expanding the scale of such balancing locally. The effectiveness of the medium of circulation is increased through this economy in so far as a smaller quantity of it is required simply to balance accounts. On the other hand the velocity of the money flowing as medium of circulation (by which it is also economised) depends entirely upon the flow of purchases and sales, and on the chain of payments, in so far as they occur successively in money. But credit effects and thereby increases the velocity of circulation. A single piece of money, for instance, can effect only five moves, and remains longer in the hands of each individual as mere medium of circulation without credit mediating – when A, its original owner, buys from B, B from C, C from D, D from E, and E from F, that is, when its transition from one hand to another is due only to actual purchases and sales. But when B deposits the money received in payment from A with his banker and the latter uses it in discounting bills of exchange for C, C in turn buys from D, D deposits it with his banker and the latter lends it to E, who buys from F, then even its velocity as mere medium of circulation (means of purchase) is effected by several credit operations: B's depositing with his banker and the latter's discounting for C, D's depositing with his banker, and the latter's discounting for E; in other words through four credit operations. Without these credit operations, the same piece of money would not have performed five purchases successively in the given period of time. The fact that it changed bands without mediation of actual sales and purchases, through depositing and discounting, has here accelerated its change of hands in the series of actual transactions. We have seen previously that one and the same bank-note can constitute deposits in several banks. Similarly, it can also constitute various deposits in the same bank. The banker discounts, with the note which A has deposited, B's bill of exchange, B pays C, and C deposits the same note in the same bank that issued it. We have already demonstrated in the discussion of simple money circulation (Vol I, Ch. III, 2) that the mass of actual circulating money, assuming the velocity of circulation and economy of payments as given, is determined by the prices of commodities and the quantity of transactions. The same law governs the circulation of notes. In the following table, the annual average number of notes of the Bank of England, in so far as they were in the hands of the public, are recorded, namely, the 5- and 10-pound notes, the 20- to 100-pound notes, and the larger denominations between 200 and 1,000 pounds sterling; also the percentages of the total circulation that each one of these groupings constitutes. The amounts are in thousands, i.e., the last three figures are omitted. Year £5-10 Notes % £20-100 % £200- Notes 1,000 % Total Notes 1844 9,263 45.7 5,735 28.3 5,253 26.0 20,241 1845 9,698 46.9 6,082 29.3 4,942 23.8 20,722 1846 9,918 48.9 5,778 28.5 4,590 22.6 20,286 1847 9,591 50.1 5,498 28.7 4,066 21.2 19,155 1848 8,732 48.3 5,046 27.9 4,307 23.8 18,085 1849 8,692 47.2 5,234 28.5 4,477 24.3 18,403 1850 9,164 47.2 5,587 28.8 4,646 24.0 19,398 1851 9,362 48.1 5,554 28.5 4,557 23.4 19,473 1852 9,839 45.0 6,161 28.2 5,856 26.8 21,856 1853 10,699 47.3 6,393 28.2 5,541 24.5 22,653 1854 10,565 51.0 5,910 28.5 4,234 20.5 20,709 1855 10,628 53.6 5,706 28.9 3,459 17.5 19,793 1856 10,680 54.4 5,645 28.7 3,323 16.9 19,648 1857 10,659 54.7 5,567 28.6 3,241 16.7 19,467 (B. A. 1858, p. XXVI.) The total sum of circulating bank-notes, therefore, positively decreased from 1844 to 1857, although commercial business, as indicated by exports and imports, had more than doubled. The smaller bank-notes of £5 and £10 increased, as the table shows, from £9,263,000 in 1844 to £10,659,000 in 1857. And this took place simultaneously with the particularly heavy increase in gold circulation at that time. On the other hand, there was a decrease in the notes of higher denominations (£200 to £1,000) from £5,856,000 in 1852 to £3,241,000 in 1857, i.e., a decrease of more than £2½ million. This is explained as follows: “On the 8th June 1854, the private bankers of London admitted the joint-stock banks to the arrangements of the clearing house, and shortly afterwards the final clearing was adjusted in the Bank of England. The daily clearances are now effected by transfers in the accounts which the several banks keep in that establishment. In consequence of the adoption of this system, the large notes which the bankers formerly employed for the purpose of adjusting their accounts are no longer necessary.” (B. A. 1858, p. V.) To what small minimum the use of money in wholesale trade has been reduced, can be deduced from the table reprinted in Book I (Ch. III, Footnote), which was presented to the Bank Committee by Morrison, Dillon & Co., one of the largest of those London firms from which a small dealer can buy his entire assortment of commodities. According to the testimony of W. Newmarch before the Bank Committee 1857, No. 1741, other circumstances also contributed to economy in the circulating medium: penny postage, railways, telegraphy, in short, the improved means of communication; thus England can now carry on five to six times more business with about the same circulation of bank-notes. This is also essentially due to the withdrawal from circulation of notes of higher denomination than £10. Here Newmarch sees a natural explanation for the phenomenon that in Scotland and Ireland, where one-pound notes also circulate, note circulation has risen by about 31% (1747). The total circulation of bank-notes in the United Kingdom, including one-pound notes, is said to be £39 million (1749). The gold circulation, £70 million (1750). In Scotland, the circulation of notes was £3,120,000 in 1834; £3,020,000 in 1844; and £4,050,000 in 1854 (1752). From these figures alone, it is evident that banks issuing notes can by no means increase the number of circulating notes at will, as long as these notes are at all times exchangeable for money. [Inconvertible paper money is not considered here at all; inconvertible bank-notes can become a universal medium of circulation only where they are actually backed by state credit, as is the case in Russia at present. They then fall under the laws of inconvertible paper money issued by the state, which have already been developed in Book I (Ch. III, 2, c) “Coin and Symbols of Value.” – F.E.] The quantity of circulating notes is regulated by the turnover requirements, and every superfluous note wends its way back immediately to the issuer. Since in England only the notes of the Bank of England circulate universally as legal means of payment, we can disregard at this point the insignificant, and merely local, note circulation of the country banks. Before the Bank Committee 1858, Mr. Neave, Governor of the Bank of England, testifies: “No. 947. (Question:) Whatever measures you resort to, the amount of notes with the public, you say, remains the same; that is somewhere about £20,000,000? – In ordinary times, the uses of the public seem to want about £20,000,000. There are special periodical moments when, through the year, they rise to another £1,000,000 or £1,500,000. I stated that, if the public wanted more, they could always take it from the Bank of England.” – “948. You stated that during the panic the public would not allow you to diminish the amount of notes; I want you to account for that. – In moments of panic, the public have, as I believe, the full power of helping themselves as to notes; and of course, as long as the Bank has a liability, they may use that liability to take the notes from the Bank.” – “949. Then there seems to be required, at all times, somewhere about £20,000,000 of legal tender? – £20,000,000 of notes with the public; it varies. It is £18,500,000, £19,000,000, £20,000,000, and so on; but taking the average, you may call it from £19,000,000 to £20,000,000.” Testimony of Thomas Tooke before the Committee of Lords on Commercial Distress (C. D. 1848/57), No. 3094: “The Bank has no power of its own volition to extend the amount of its circulation in the hands of the public; but it has the power of reducing the amount of the notes in the hands of the public, not however without a very violent operation.” J. C. Wright, a banker for 30 years in Nottingham, having explained at length the impossibility for a country bank to be able to keep more notes in circulation than the public needs and wants, says about notes of the Bank of England (C. D. 1848/57), No. 2844: “I am not aware that there is any check” (for note issue) “upon the Bank of England, but any excess of circulation will go into the deposits and thus assume a different name.” The same holds true for Scotland, where almost nothing but paper circulates, because there as well as in Ireland one-pound notes are also in use and “the Scotch hate gold.” Kennedy, Director of a Scottish bank, declares that banks could not even contract their circulation of notes and “conceives that so long as there are internal transactions requiring notes or gold to perform them, bankers must, either through the demands of their depositors or in one shape or another, furnish as much currency as those transactions require.... The Scottish banks can restrict their transactions, but they cannot control their currency.” (Ibid., Nos. 3446, 3448.) Similarly, Anderson, Director of the Union Bank of Scotland, states (ibid., No. 3578): “The system of exchanges between yourselves “ [among the Scottish banks] “prevents any over-issue on the part of any one bank? – Yes; there is a more powerful preventive than the system of exchanges” [which has really nothing to do with this, but does indeed guarantee the ability of the notes of each bank to circulate throughout Scotland], “the universal practice in Scotland of keeping a bank account; everybody who has any money at all has a bank account and puts in every day the money which he does not immediately want, so that at the close of the business of the day there is no money scarcely out of the banks except what people have in their pockets.” The same applies to Ireland, as indicated in the testimony of the Governor of the Bank of Ireland, MacDonnell, and the Director of the Provincial Bank of Ireland, Murray, before the same Committee. Note circulation is just as independent of the state of the gold reserve in the vaults of the bank which guarantees the convertibility of these notes, as it is of the will of the Bank of England. “On September 18, 1846, the circulation of the Bank of England was £20,900,000 and the bullion in the Bank £16,273,000; and on April 5, 1847, the notes in circulation were £20,815,000 and the bullion £10,246,000.... It is evident that six million of gold were exported, without any contraction of the currency of the country.” (J. G. Kinnear, The Crisis and the Currency, London, 1847, p. 5.) Of course, this applies only under present conditions prevailing in England, and even here only in so far as legislation does not decree a different relationship between the note issue and metal reserve. Hence only the requirements of business itself exert an influence on the quantity of circulating money-notes and gold. To be noted here, in the first instance, are the periodic fluctuations, which repeat themselves annually regardless of the general condition of business, so that for the past 20 years “the circulation is high in one month, and it is low in another month, and in a certain other month occurs a medium point.” (Newmarch, B. A. 1857, No. 1650.) Thus, in August of every year a few millions, generally in gold, pass from the Bank of England into domestic circulation to pay the harvest expenses; since wages are the principal payments to be made here, bank-notes are less serviceable in England for this purpose. By the close of the year this money has streamed back to the Bank. In Scotland, there are almost nothing but onepound notes instead of sovereigns; here, then, the note circulation is expanded in the corresponding situation, namely, twice a year – in May and November – from 3 million to 4 million; after a fortnight the return flow begins, and is almost completed in one month. (Anderson, C. D. 1848/57, Nos. 3595-3600.) The note circulation of the Bank of England also experiences a momentary fluctuation every three months because of the quarter]y payment of “dividends,” that is, interest on the national debt, whereby bank-notes are first withdrawn from circulation and then again released to the public; but they flow back very soon again. Weguelin (B. A. 1857, No. 38) states that this fluctuation in the note circulation amounts to 2½. Mr. Chapman of the notorious firm of Overend, Gurney & Co., however, estimates the amount of disturbance thus created in the money-market as being much higher. “When you abstract from the circulation £6,000,000 or £7,000,000 of revenue in anticipation of dividends, somebody must be the medium of supplying that in the intermediate times.” (B. A. 1857, No. 5196.) Far more significant and enduring are the fluctuations in quantity of circulating medium corresponding to the various phases of the industrial cycle. Let us listen to another associe of that firm on this question, the esteemed Quaker Samuel Gurney (C. D. 1848/57, No. 2645): “At the end of October (1847) the amount of banknotes in the hands of the public was £20,800,000. At that period there was great difficulty in getting possession of bank-notes in the money-market. This arose from the alarm of not being able to get them in consequence of the restriction of the Act of 1844. At present [March 1848] the amount of bank-notes in the hands of the public is ... £17,700,000, but there being now no commercial alarm whatsoever, it is much beyond what is required. There is no banking house or money-dealer in London, but what has a larger amount of bank-notes than they can use.” – “2650. The amount of bank-notes ... out of the custody of the Bank of England affords a totally insufficient exponent of the active state of the circulation, without taking into consideration likewise ... the state of the commercial world and the state of credit.” – “2651. The feeling of surplus that we have under the present amount of circulation in the hands of the public arises in a large degree from our present state of great stagnation. In a state of high prices and excitement of transaction £17,700,000 would give us a feeling of restriction.” [As long as the state of business is such that returns of loans made come in regularly and credit thus remains unshaken, the expansion and contraction of circulation depend simply upon the requirements of industrialists and merchants. Since gold, at least in England, does not come into question in the wholesale trade and the circulation of gold, aside from seasonal fluctuations, may be regarded as rather constant over a long period of time, the note circulation of the Bank of England constitutes a sufficiently accurate measure of these changes. In the period of stagnation following a crisis, circulation is smallest; with the renewed demand, a greater need for circulating medium develops, which increases with rising prosperity; the quantity of circulating medium reaches its apex in the period of over-tension and over-speculation – the crisis precipitously breaks out and overnight bank-notes which yesterday were still so plentiful disappear from the market and with them the discounters of bills, lenders of money on securities, and buyers of commodities. The Bank of England is called upon for help – but even its powers are soon exhausted, for the Bank Act of 1844 compels it to contract its note circulation at the very moment when the whole world cries out for notes; when owners of commodities cannot sell, yet are called upon to pay and are prepared for any sacrifice, if only they can secure bank-notes. “During an alarm,” says the earlier mentioned banker Wright (loc. cit., No. 2930), “the country requires twice as much circulation as in ordinary times, because the circulation is hoarded by bankers and others.” Once the crisis has broken out, it becomes from then on only a question of means of payment. But since every one is dependent upon someone else for the receipt of these means of payment, and no one knows whether the next one will be able to meet his payments when due, a regular stampede ensues for those means of payment available on the market, that is, for bank-notes. Everyone hoards as many of them as he can lay hand on, and thus the notes disappear from circulation on the very day when they are most needed. Samuel Gurney (C. D. 1848/57, No. 1116) estimates the amount of bank notes brought under lock and key in October 1847, at a time of such alarm, to have reached £4 to £5 million. – F.E.) In this connection, the cross-examination of Chapman, Gurney's associate who has been previously mentioned, before the Bank Committee of 1857 is especially interesting. I present here its principal contents in context, although certain points are touched upon which we shall not examine until later. Mr. Chapman has the following to say: “4963. I have also no hesitation in saying that I do not think it is a proper condition of things that the moneymarket should be under the power of any individual capitalist (such as does exist in London), to create a tremendous scarcity and pressure, when we have a very low state of circulation out. That is possible ... there is more than one capitalist, who can withdraw from the circulating medium £1,000,000 or £2,000,000 of notes, if they have an object to attain by it.” – 4965. [In the German 1894 edition this reads: 4995. –Ed. ] A big speculator can sell £1,000,000 or £2,000,000 of consols and thus take the money out of the market. Something similar to this has happened quite recently, “it creates a very violent pressure.” 4967. The notes are then indeed unproductive. “But that is nothing, if it effects his great object; his great object is to knock down the funds, to create a scarcity, and he has it perfectly in his power to do so.” An illustration: One morning there was a great demand for money in the Stock Exchange; nobody knew its cause; somebody asked Chapman to lend him £50,000 at 7%. Chapman was astonished, for his rate of interest was much lower; he accepted. Soon after that the man returned, borrowed another £50,000 at 7½%, then £100,000 at 8%, and wanted still more at 8½%. Then even Chapman became uneasy. Later it turned out that a considerable sum of money had been suddenly withdrawn from the market. But, says Chapman, “I did lend a large sum at 8%; I was afraid to go beyond; I did not know what was coming.” It must never be forgotten that, although £19 to £20 million in notes are almost constantly supposed to be in the hands of the public, nevertheless, the portion of these notes which actually circulates, and, on the other hand, the portion which is held idle by the banks as a reserve, continually and significantly vary with respect to each other. If this reserve is large, and therefore the actual circulation small, it means, from the point of view of the money-market, that the circulation is full, money is plentiful; if the reserve is small, and therefore the actual circulation full, in the language of the money-market the circulation is low, money is scarce – in other words, the portion representing idle loan capital is small. A real expansion or contraction of the circulation, that is independent of the phases of the industrial cycle – with the amount needed by the public, however, remaining the same – occurs only for technical reasons, for instance, on the dates when taxes or the interest on the national debt are due. When taxes are paid, more notes and gold than usual flow into the Bank of England and, in effect, contract the circulation without regard to its needs. The reverse takes place when the dividends on the national debt are paid out. In the former case, loans are made from the Bank in order to obtain circulating medium. In the latter case, the rate of interest falls in private banks because of the momentary growth of their reserves. This has nothing to do with the absolute quantity of circulating medium; it does, however, concern the banking firm which sets this circulating medium in motion and for which this process consists in the alienation of loan capital and for which it pockets the profits thereby. In the one case, there is merely a temporary displacement of circulating medium, which the Bank of England balances by short-term loans at low interest shortly before the quarterly taxes and also before the quarterly dividends on the national debt become due; the issue of these supernumerary notes first fills up the gap caused by the payment of taxes, while their return payment to the Bank soon thereafter brings back the excess of notes obtained by the public through the payment of dividends. In the other case, low or full circulation is always simply a matter of different distribution of the same quantity of circulating medium into active circulation and deposits, i.e., an instrument of loans. On the other hand, if, for example, the number of notes issued is increased on the basis of a flow of gold into the Bank of England, these notes assist in discounting bills outside of the Bank and return to it through the repayment of loans, so that the absolute quantity of circulating notes is only momentarily increased. If the circulation is full because of business expansion (which may take place even though prices are relatively low), then the rate of interest can be relatively high because of the demand for loan capital as a result of rising profits and increased new investments. If it is low, because of business contraction, or perhaps because credit is very plentiful, the rate of interest can be low even though prices are high. (See Hubbard. Present edition: Ch. XXXIII. – Ed) The absolute amount of circulation has a determining influence on the rate of interest only in times of stringency. The demand for full circulation can either reflect merely a demand for a hoarding medium (disregarding the reduced velocity of the money circulation and the continuous conversion of the same identical pieces of money into loan capital) owing to lack of credit, as was the case in 1847 when the suspension of the Bank Act did not cause any expansion of the circulation, but sufficed to draw forth the hoarded notes and to channel them into circulation; or it may be that more means of circulation are actually required under the circumstances, as was the case in 1857 when the circulation actually expanded for some time after the suspension of the Bank Act. Otherwise, the absolute quantity of circulation has no influence whatever upon the rate of interest, since – assuming the economy and velocity of currency to be constant – it is determined in the first place by commodity-prices and the quantity of transactions (whereby one of these generally neutralises the effect of the other), and finally by the state of credit, whereas it by no means exerts the reverse effect upon the latter; and, secondly, since commodity-prices and interest do not necessarily stand in any direct correlation to each other. During the life of the Bank Restriction Act (1797-1819) a surplus of currency existed and the rate of interest was always much higher than after the resumption of cash payments. Later, it fell rapidly with the restriction of the note issue and rising bill quotations. In 1822, 1823, and 1832, the general circulation was low, and so was the rate of interest. In 1824, 1825, and 1836, the circulation was full and the rate of interest rose. In the summer of 1830 the circulation was full and the rate of interest low. Since the gold discoveries, money circulation throughout Europe has expanded, and the rate of interest risen. Therefore, the rate of interest does not depend upon the quantity of circulating money. The difference between the issue of circulating medium and the lending of capital is best demonstrated in the actual reproduction process. We have seen (Vol. II, Part III) in what manner the different component parts of production are exchanged for one another. For example, variable capital consists materially of the means of subsistence of the labourers, a portion of their own product. But this is paid out to them piecemeal in money. The capitalist has to advance this, and it is very greatly dependent on the credit system organisation whether he can pay out the new variable capital the following week with the old money which he paid out in the previous week. The same holds for exchange among various component parts of the total social capital, for instance, between means of consumption and means of production of means of consumption. The money for their circulation, as we have seen, must be advanced by one or both of the exchanging parties. It remains thereupon in circulation, but returns after the exchange has been completed to the one who advanced it, since it had been advanced by him over and above his actually employed industrial capital (Vol. II, Ch. XX). Under a developed system of credit, with the money concentrated in the hands of bankers, it is they, at least nominally, who advance it. This advance refers only to money in circulation. It is an advance of circulation, not an advance of capitals which it circulates. Chapman: “5062. There may be times, when the notes in the hands of the public, though they may be large, are not to be had. Money also exists during a panic; but everyone takes good care not to convert it into loanable capital, i.e., loanable money; everyone holds on to it for the purpose of meeting real payment needs. “5099. The country bankers in rural districts send up their unemployed balances to yourselves and other houses? – Yes.” – “5100. On the other hand, the Lancashire and Yorkshire districts require discounts from you for the use of their trades? – Yes.” – “5101. Then by that means the surplus money of one part of the country is made available for the demands of another part of the country? – Precisely so.” Chapman states that the custom of banks to invest their surplus money-capital for short periods in consols and treasury notes has decreased considerably of late, ever since it has become customary to lend this money at call, i.e., payable on demand. He personally considers the purchase of such paper for his business very impractical. He, therefore, invests his money in reliable bills of exchange, some of which become due every day, so that he always knows how much ready money he can count on from day to day. [5101 to 5105.] Even the growth of exports expresses itself more or less for every country, but particularly for the country granting credit, as an increasing demand on the domestic money-market, which is not felt, however, until a period of stringency. When exports increase, British manufacturers usually draw long-term bills of exchange on the export merchants against consignments of British goods (5126). “5127. Is it not frequently the case that an understanding exists that those bills are to be redrawn from time to time? – [Chapman:] That is a thing which they keep from us; we should not admit any bill of that sort. ... I dare say it is done, but I cannot speak to a thing of the kind.” [The innocent Chapman.] “5129. If there is a large increase of the exports of the country, as there was last year, of £20 million, will not that naturally lead to a great demand for capital for the discount of bills representing those exports? – No doubt.” – “5130. Inasmuch as this country gives credit, as a general rule, to foreign countries for all exports, it would be an absorption of a corresponding increase of capital for the time being? – This country gives an immense credit; but then it takes credit for its raw material. We are drawn upon from America always at 60 days, and from other parts at 90 days. On the other hand we give credit; if we send goods to Germany, we give two or three months.” Wilson inquires of Chapman (5131), whether bills of exchange on England are not drawn simultaneously with the loading of these imported raw materials and colonial goods and whether these bills of exchange do not arrive simultaneously with the bills of lading. Chapman believes so, but does not profess to know anything about such “commercial” transactions and suggests that experts in this field be questioned. – In exporting to America, remarks Chapman, “the goods are symbolised in transit” 5133; this gibberish is supposed to mean that the English export merchant draws against his commodities bills of exchange with a four-month term on one of the big American banking houses in London and this firm receives collateral from America. “5136. As a general rule, are not the more remote transactions conducted by the merchant, who waits for his capital until the goods are sold? – There may be houses of great private wealth, who can afford to lay out their own capital and not take any advance upon the goods; but the most part are converted into advances by the acceptances of some well-known established houses.” – “5137. Those houses are resident in ... London, or Liverpool, or elsewhere.” – “5138. Therefore, it makes no difference, whether the manufacturer lays out his money, or whether he gets a merchant in London or Liverpool to advance it; it is still an advance in this country? – Precisely. The manufacturer in few cases has anything to do with it” [but in 1847 in almost every case]. “A man dealing in manufactured goods, for instance, at Manchester, will buy his goods and ship them through a house of respectability in London; when the London house is satisfied that they are all packed according to the understanding, he draws upon this London house for six months against these goods to India or China, or wherever they are going; then the banking world comes in and discounts that bill for him; so that, by the time he has to pay for those goods, he has the money all ready by the discount of that bill.” – “5139. Although he has the money, the banker is laying out of his money? – The banker has the bill; the banker has bought the bill; he uses his banking capital in that form, namely, in discounting commercial bills.” [Hence even Chapman does not regard the discounting of bills as an advance of money, but as a purchase of commodities. – F.E.] “5140. Still that forms part of the demand upon the money-market in London? – No doubt; it is a substantial occupation of the money-market and of the Bank of England. The Bank of England are as glad to get these bills as we are, because they know them to be good property.” – “5141. In that way, as the export trade increases, the demand upon the money-market increases also? – As the prosperity of the country increases, we” [the Chapmans] “partake of it.” – “5142. Then when these various fields for the employment of capital increase suddenly, of course, the natural consequence is that the rate of interest is higher? – No doubt about it.” In 5143 Chapman cannot “quite understand, that under our large exports we have had such occasion for bullion.” In 5144 the esteemed Wilson asks: “May it not be that we give larger credits upon our exports than we take credits upon our imports? – I rather doubt that point myself. If a man accepts against his Manchester goods sent to India, you cannot accept for less than ten months. We have had to pay America for her cotton (that is perfectly true) some time before India pays us; but still it is rather refined in its operation.” – “5145. If we have had an increase, as we had last year, of £20 million in our exports of manufactures we must have had a very large increase of imports of raw material previously to that” [and in this way over-exports are already identified with over-imports, and over-production with over-trading], “in order to make up that increased quantity of goods? – No doubt.” – “5146. We should have to pay a very considerable balance, that is to say, the balance, no doubt, would run against us during that time, but in the long run, with America ... the exchanges are in our favour, and we have been receiving for some time past large supplies of bullion from America.” 5148. Wilson asks the arch-usurer Chapman, whether he does not regard his high rate of interest as a sign of great prosperity and a high rate of profit. Chapman, evidently surprised at the naïveté of this sycophant, affirms this, of course, but has enough integrity to add the following: “There are some, who cannot help themselves; they have engagements to meet, and they must fulfil them, whether it is profitable or not; but, for a continuance” [of the high rate of interest], “it would indicate prosperity.” Both forget that a high rate of interest can also indicate, as it did in 1857, that the country is undermined by the roving cavaliers of credit who can afford to pay a high interest because they pay it out of other people's pockets (whereby, however, they help to determine the rate of interest for all), and meanwhile they live in grand style on anticipated profits. Simultaneously, precisely this can incidentally provide a very profitable business for manufacturers and others. Returns become wholly deceptive as a result of the loan system. This also explains the following, which should require no explanation so far as the Bank of England is concerned, since it discounts at a lower rate than others when the interest rate is high. “5156. I should say,” says Chapman, “that our discounts, taking the present moment, when we have had for so long a high rate of interest, are at their maximum.” [Chapman made this statement on July 21, 1857, a couple of months before the crash.] “5157. In 1852” [when the interest rate was low] “they were not nearly so large.” For business was indeed a great deal sounder then. “5159. If there was a great flood of money in the market ... and the bank-rate low, we should get a decrease of bills ... In 1852 there was a totally different phase of things. The exports and imports of the country were as nothing then compared to the present.” – “5161. Under this high rate of discount our discounts are as large as they were in 1854.” [When the rate of interest was between 5 and 5½%.] A very amusing part of Chapman's testimony reveals how these people really regard public money as their own and assume for themselves the right to constant convertibility of the bills of exchange discounted by them. The questions and replies show great naïveté. It becomes the obligation of legislation to make those bills which are accepted by large firms convertible at all time; to ensure that the Bank of England should under all circumstances continue to rediscount them for bill-brokers. And yet three of such bill-brokers went bankrupt in 1857, owing about 8 million and their own infinitesimally small capital compared with these debts. “5177. Do you mean by that that you think that they” [that is bills accepted by Barings or Loyds] “ought to be discountable on compulsion, in the same way that a Bank of England note is now exchangeable against gold by compulsion? – I think it would be a very lamentable thing, that they should not be discountable; a most extraordinary position, that a man should stop payment, who had the acceptances of Smith, Payne & Co., or Jones, Loyd & Co. in his hands, because he could not get them discounted.” – “5178. Is not the engagement of Messrs. Baring an engagement to pay a certain sum of money when the bill is due? – That is perfectly true; but Messrs. Baring, when they contract that engagement, and every other merchant who contracts an engagement, never dream that they are going to pay it in sovereigns; they expect that they are going to pay it at the Clearing House.” – “5180. Do you think that there should be any machinery contrived by which the public would have a right to claim money before that bill was due by calling upon somebody to discount it? – No, not from the acceptor; but if you mean by that that we are not to have the possibility of getting commercial bills discounted, we must alter the whole constitution of things.” – “5182. Then you think that it” [commercial bill] “ought to be convertible into money, exactly in the same way that a Bank of England note ought to be convertible into gold? – Most decidedly so, under certain circumstances.” – “5184. Then you think that the provisions of the currency should be so shaped that a bill of exchange of undoubted character ought at all times to be as readily exchangeable against money as a bank-note? – I do.” – “5185. You do not mean to say that either the Bank of England or any individual should, by law, be compelled to exchange it? – I mean to say this, that in framing a bill for the currency, we should make provision to prevent the possibility of an inconvertibility of the bills of exchange of the country arising, assuming them to be undoubtedly solid and legitimate.” This is the convertibility of the commercial bill as compared with the convertibility of banknotes. “5190. The money-dealers of the country only, in point of fact, represent the public.” As did Mr. Chapman later before the court of assizes in the Davidson case. See the Great City Frauds. [S. Laing, New Series of the Great City Frauds of Cole, Davison, and Cordon, London. – Ed.] “5196. During the quarters” [when the dividends are paid] “it is ... absolutely necessary that we should go to the Bank of England. When you abstract from the circulation £6,000,000 or £7,000,000 of revenue in anticipation of the dividends, somebody must be the medium of supplying that in the intermediate time.” [In this case it is then a question of a supply of money, not of capital or loan capital.] “5169. Everybody acquainted with our commercial circle must know that when we are in such a state that we find it impossible to sell Exchequer bills, when India bonds are perfectly useless, when you cannot discount the first commercial bills, there must be great anxiety on the part of those whose business renders them liable to pay the circulating medium of the realm on demand, which is the case with all bankers. Then the effect of that is to make every man double his reserve. Just see what the result of that is throughout the country, that every country banker, of whom there are about 500, has to send up to his London correspondent to remit him £5,000 in bank-notes. Taking such a limited sum as that as the average, which is quite absurd, you come to £2,500,000 taken out of the circulation. How is that to be supplied?” On the other hand, the private capitalists, etc., who have money do not let go of it at any interest, for they say after the manner of Chapman, “5195. We would rather have no interest at all, than have a doubt about our getting the money in case we require it.” “5173. Our system is this: That we have £300,000,000 of liabilities which may be called for at a single moment to be paid in the coin of the realm, and that coin of the realm, if the whole of it is substituted, amounts to £23,000,000, or whatever it may be; is not that a state which may throw us into convulsions at any moment?” Hence the sudden change of the credit system into a monetary system during crises. Aside from the domestic panic during crises, one can speak of the quantity of money only in so far as it concerns bullion, universal money. And this is precisely what Chapman excludes; he speaks only of 23 million in bank-notes. The same Chapman: “5218. The primary cause of the derangement of the money-market” [in April and later in October 1847] “no doubt was in the quantity of money which was required to regulate our exchanges, in consequence of the extraordinary importations of the year.” In the first place, this reserve of world-market money had then been reduced to its minimum. Secondly, it served at the same time as security for the convertibility of credit-money, bank-notes. It combined in this manner two quite different functions, both of which, however, stem from the nature of money, since real money is always world-market money, and credit-money always rests upon world-market money. In 1847, without the suspension of the Bank Act of 1844, “the clearing houses could not have been settled.” (5221.) That Chapman had an inkling of the imminent crisis, after all: “5236. There are certain conditions of the moneymarket (and the present is not very far from it), where money is exceedingly difficult, and recourse must he had to the Bank.” “5239. With reference to the sums which we took from the Bank on the Friday, Saturday and Monday, the 19th, 20th, and 22nd of October, 1847, we should only have been too thankful to have got the bills back on the Wednesday following; the money reflowed to us directly the panic was over.” On Tuesday, October 23, the Bank Act was suspended and the crisis was thus broken. Chapman believes (5274) that the bills of exchange running simultaneously on London amount to £100 or £120 million. This does not include local bills made on provincial firms. “5287. Whereas in October 1856, the amount of the notes in the hands of the public ran up to £21,155,000, there was an extraordinary difficulty in obtaining money; notwithstanding that the public held so much, we could not touch it.” This was due to the fear caused by the squeeze in which the Eastern Bank found itself for a period of time (March 1856). 5290-92. As soon as the panic is over, “all bankers deriving their profit from interest begin to employ the money immediately.” 5302. Chapman does not explain the uneasiness that exists when the bank reserve decreases as being due to apprehension concerning deposits, but rather that all those who suddenly may be compelled to pay large sums of money are well aware they may be driven to seek their last refuge in the bank when there is a stringency in the money-market; and “if the banks have a very small reserve, they are not glad to receive us; but on the contrary.” It is pretty, incidentally, to observe how the reserve as a real magnitude dwindles away. Bankers hold a minimum for current business needs either in their own hands or the Bank of England. Bill-brokers hold the “loose bank money of the country” without any reserve. And the Bank of England has nothing to offset its liabilities for deposits but the reserves of bankers and others, together with some public deposits, etc., which it permits to drop to a very low level, for instance, to £2 million. Aside from these £2 million in paper, then, this whole swindle has absolutely no other reserve but the bullion reserve in times of stringency (and this reduces the reserve, because the notes which come in to replace outgoing bullion must be cancelled), and thus every reduction of this reserve by drain on gold increases the crisis. “5306. If there should not be currency to settle the transactions at the clearing house, the only next alternative which I can see is to meet together, and to make our payments in first-class bills, bills upon the Treasury, and Messrs. Smith, Payne, and so forth.” – “5307. Then, if the government failed to supply you with a circulating medium, you would create one for yourselves? – What can we do? The public come in, and take the circulating medium out of our hands; it does not exist.” – “5308. You would only then do in London what they do in Manchester every day of the week? – Yes.” Particularly clever is Chapman's reply to a question posed by Cayley (a Birmingham man of the Attwood school) regarding Overstone's conception of capital: “5315. It has been stated before this Committee, that in a pressure like that of 1847, men are not looking for money, but are looking for capital; what is your opinion in that respect? – I do not understand it; we only deal in money; I do not understand what you mean by it.” – “5316. If you mean thereby” [commercial capital] “the quantity of money which a man has of his own in his business, if you call that capital, it forms, in most cases, a very small proportion of the money which he wields in his affairs through the credit which is given him by the public” – through the mediation of the Chapmans. “5339. Is it the want of property that makes us give up our specie payments? – Not at all.... It is not that we want property, but it is that we are moving under a highly artificial system; and if we have an immense superincumbent demand upon our currency, circumstances may arise to prevent our obtaining that currency. Is the whole commercial industry of the country to be paralysed? Shall we shut up all the avenues of employment?” – “5338. If the question should arise whether we should maintain specie payments, or whether we should maintain the industry of the country, I have no hesitation in saying which I should drop.” Concerning the hoarding of bank-notes “with a view to aggravate the pressure and to take advantage of the consequences” he says that this can very easily occur. Three large banks would be sufficient. “5383. Must it not be within your knowledge, as a man conversant with the great transactions of this metropolis, that capitalists do avail themselves of these crises to make enormous profit out of the ruin of the people who fall victims to them? – There can be no doubt about it.” And we may well believe Mr. Chapman on this score, although he finally broke his own neck, commercially speaking, in an attempt at making “enormous profit out of the ruin of victims.” For while his associate Gurney says: Every change in business is advantageous for one who is well informed, Chapman says: “The one section of the community knows nothing of the other; one is the manufacturer, for instance; who exports to the continent, or imports his raw commodity; he knows nothing of the man who deals in bullion.” (5046.) And thus it happened that one fine day Gurney and Chapman themselves “were not well informed” and went into ill-famed bankruptcy. We have previously seen that note issue does not in all cases signify an advance of capital. The following testimony by Tooke before the C. D. Committee of Lords, 1848, indicates merely that an advance of capital, even if accomplished by the bank through an issue of new notes, does not unqualifiedly signify an increase in the number of circulating notes: “3099. Do you think that the Bank of England for instance might enlarge its advances greatly, and yet lead to no additional issue of notes? – There are facts in abundance to prove it; one of the most striking instances was in 1835, when the Bank made use of the West India deposits and of the loan from the East India Company in extended advances to the public. At that time the amount of notes in the hands of the public was actually rather diminished. And something like the same discrepancy is observable in 1846 at the time of the payment of the railway deposits into the Bank; the securities [in discount and deposits] were increased to about thirty million, while there was no perceptible effect upon the amount of notes in the hands of the public.” Aside from bank-notes, wholesale trade has another medium of circulation, which is far more important to it, namely, bills of exchange. Mr. Chapman showed us how essential it is for the regular flow of business that good hills of exchange be accepted in payment everywhere and under all conditions. “Gilt nicht mehr der Tausves Jontof, was soll gelten, Zeter, Zeter!” [“If the Tausves-Jontof's nothing, What is left? O vile detractor!” – Heine, Disputation. – Ed.] How are these two media of circulation related to one another? Gilbart writes on this score: “The reduction of the amount of the note circulation uniformly increases the amount of the bill circulation. These bills are of two classes – commercial bills and bankers' bills ... when money becomes scarce, the money-lenders say, 'draw upon us and we will accept'. And when a country banker discounts a bill for his customer, instead of giving him the cash, he will give him his own draft at twenty-one days upon his London agent. These bills serve the purpose of a currency.” (J. W. Gilbart, An Inquiry into the Causes of the Pressure, etc., p. 31.) This is corroborated in somewhat modified form by Newmarch, B. A. 1857, No. 1426: “There is no connection between the variations in the amount of bill circulation and the variations in the bank-note circulation ... the only pretty uniform result is ...that whenever there is any pressure upon the money-market, as indicated by a rise in the rate of discount, then the volume of the bill circulation is very much increased, and vice versa.” However, the bills of exchange drawn at such times are by no means only the short-term bankbills mentioned by Gilbart. On the contrary, they are largely bills of accommodation, which represent no real transaction at all, or simply transactions made for the sole purpose of drawing bills of exchange on them; we have presented sufficient illustrations of both. Hence the Economist (Wilson) says in comparing the security of such bills with that of bank-notes: “Notes payable on demand can never be kept out in excess, because the excess would always return to the bank for payment, while bills at two months may be issued in great excess, there being no means of checking the issue till they have arrived at maturity, when they may have been replaced by others. For a people to admit the safety of the circulation of bills payable only on a distant day, and to object to the safety of a circulation of paper payable on demand, is, to us, perfectly unaccountable.” (Economist, May 22, 1847, p. 575.) The quantity of circulating bills of exchange, therefore, like that of bank-notes, is determined solely by the requirements of commerce; in ordinary times, there circulated in the fifties in the United Kingdom, in addition to 39 million in bank-notes, about 300 million in bills of exchange – of which 100-120 million were made out on London alone. The volume of circulating bills of exchange has no influence on note circulation and is influenced by the latter only in times of money tightness, when the quantity of hills increases and their quality deteriorates. Finally, in a period of crisis, the circulation of bills collapses completely; nobody can make use of a promise to pay since everyone will accept only cash payment; only the bank-note retains, at least thus far in England, its ability to circulate, because the nation with its total wealth backs up the Bank of England. We have seen that even Mr. Chapman, who after all was himself a magnate on the money-market in 1857, complains bitterly that there were several large money-capitalists in London strong enough to disrupt the whole money-market at any given moment and thereby bleed white the smaller money-dealers. There were several such money sharks, he said, who could considerably intensify a stringency by selling one or two million's worth of consols and thereby withdrawing an equal amount of bank-notes (and simultaneously available loan capital) from the market. The joint action of three large banks would suffice to transform a stringency into a panic by a similar manoeuvre. The largest capital power in London is, of course, the Bank of England, which, however, is prevented by its status as a semi-government institution from showing its domination in such a brutal manner. Nevertheless it also knows enough about ways and means of feathering its nest, particularly since the Bank Act of 1844. The Bank of England has a capital of £14,553,000, and in addition has at its disposal about £3 million “balance,” that is, undistributed profits, as well as all money collected by the government for taxes, etc., which must be deposited with the Bank until it is needed. If we add to this the sum of other deposits, about £30 million in ordinary times, and the bank-notes issued without reserve backing, we shall find that Newmarch made a rather conservative estimate in stating (B. A. 1857, No. 4889): “I satisfied myself that the amount of funds constantly employed in the [London] money-market may be described as something like £420,000,000; and of that £120,000,000 a very considerable proportion, something like 15 or 20 per cent, is wielded by the Bank of England.” In so far as the Bank issues notes which are not covered by the bullion reserve in its vaults, it creates symbols of value that constitute for it not only circulating medium, but also additional – even if fictitious – capital to the nominal amount of these unbacked notes. And this additional capital yields additional profit. – In B. A. 1857, Wilson questions Newmarch: “1563. The circulation of a banker, so far as it is kept out upon the average, is an addition to the effective capital of that banker, is it not? – Certainly.” – “1564. Then whatever profit he derives from that circulation is a profit derived from credit, and not from a capital which he actually possesses? – Certainly.” The same is true, of course, for private banks issuing notes. In his replies Nos. 1866 to 1868, Newmarch considers two-thirds of all bank-notes issued by them (the last third has to be covered by bullion reserve in these banks) as “the creation of so much capital”, because this amount of coin is saved. The profit of the banker as a result of this may not be larger than that of other capitalists. The fact remains that he draws the profit out of this national saving of coin. The fact that a national saving becomes a private profit does not shock the bourgeois economist in the least, since profit is generally the appropriation of national labour. Is there anything more absurd, for instance, than the Bank of England (1797 to 1817) – whose notes have credit only thanks to the state – taking payment from the state, i.e., from the public, in the form of interest on government loans, for the power granted it by the state to transform these same notes from paper into money and then to lend it back to the state? The banks, incidentally, have still other means of creating capital. Again according to Newmarch, the country banks, as mentioned above, are accustomed to send their superfluous funds (that is, Bank of England notes) to London bill-brokers, in return for discounted bills of exchange. With these bills of exchange, the bank serves its customers, since it follows a rule not to reissue bills of exchange received from its local customers, in order to prevent their business transactions from becoming known in their own neighbourhood. These bills received from London not only serve the purpose of being issued to customers who have to make direct payments in London, in the event they do not prefer to get the bank's own draft on London; they also serve to settle payments locally, since the banker's endorsement secures local credit for them. Thus, in Lancashire, for instance, all the local banks' own notes and a large portion of Bank of England notes have been pushed out of circulation by such bills. (Ibid.,1568 to 1574.) Thus we see here how banks create credit and capital by 1) issuing their own notes, 2) writing out drafts on London running up to 21 days, but paid in cash to them immediately on issue and 3) paying out discounted bills of exchange, which are endowed with credit primarily and essentially by endorsement through the bank – at least as far as concerns the local district. The power of the Bank of England is revealed by its regulation of the market rate of interest. In times of normal activity, it may happen that the Bank cannot prevent a moderate drain of gold from its bullion reserve by raising the discount rate xxii because the demand for means of payment is satisfied by private banks, stock banks and bill-brokers, who have gained considerably in capital power during the last thirty years. In such case, the Bank of England must have recourse to other means. But the statement made by banker Glyn (of Glyn, Mills, Currie & Co.) before the C. D. 1848/57 still holds good for critical periods: “1709. Under circumstances of great pressure upon the country the Bank of England commands the rate of interest.” – “1740. In times of extraordinary pressure ... whenever the discounts of the private bankers or brokers become comparatively limited, they fall upon the Bank of England, and then it is that the Bank of England has the power of commanding the market rate.” Nevertheless, the Bank of England, being a public institution under government protection and enjoying corresponding privileges, cannot exploit its power as ruthlessly as does private business. For this reason Hubbard remarks before the Banking Committee (B. A. 1857): “2844. [Question:] Is not it the case that when the rate of discount is highest, the Bank is the cheapest place to go, and that when it is the lowest, the bill-brokers are the cheapest parties? – [Hubbard:] That will always be the case, because the Bank of England never goes quite so low as its competitors, and when the rate is highest, it is never quite as high.” But it is a serious event in business life nevertheless when, in time of stringency, the Bank of England puts on the screw, as the saying goes, that is, when it raises still higher the interest rate which is already above average. “As soon as the Bank puts on the screw, all purchases for foreign exportation immediately cease ... the exporters wait until prices have reached the lowest point of depression; and then, and not till then, they make their purchases. But when this point has arrived, the exchanges have been rectified – gold ceases to be exported before the lowest point of depression has arrived. Purchases of goods for exportation may have the effect of bringing back some of the gold which has been sent abroad, but they come too late to prevent the drain.” (J. W. Gilbart, An Inquiry into the Causes of the Pressure on the Money-Market, London, 1840, p. 35.) “Another effect of regulating the currency by the foreign exchanges is that it leads in seasons of pressure to an enormous rate of interest.” (Loc. cit., p. 40.) “The cost of rectifying the exchanges falls upon the productive industry of the country, while during the process the profits of the Bank of England are actually augmented in consequence of carrying on her business with a less amount of treasure.” (Loc. cit., p. 52.) But, says friend Samuel Gurney, “The great fluctuations in the rate of interest are advantageous to bankers and dealers in money – all fluctuations in trade are advantageous to the knowing man.” And even though the Gurneys skim off the cream by ruthlessly exploiting the precarious state of business, whereas the Bank of England cannot do so with the same liberty, nevertheless it also makes a very pretty profit – not to mention the personal profits falling into the laps of its directors, as a result of their exceptional opportunity for ascertaining the general state of business. According to data submitted to the Lords' Committee of 1817 when cash payments were resumed, these profits accruing to the Bank of England for the entire period from 1797 to 1817 were as follows: Bonuses and increased 7,451,136 dividends New stock divided among 7,276,500 proprietors Increased value of capital 14,553,000 Total 29,280,636 This, on a capital of £11,642,400 over a period of 19 years. (D. Hardcastle, Banks and Bankers, 2nd ed., London, 1843, p. 120.) If we estimate the total gain of the Bank of Ireland, which also suspended cash payments in 1797, by the same method, we obtain the following result: Dividends as by returns 4,736,085 due 1821 Declared bonus 1,225,000 Increased assets 1,214,800 Increased value of capital 4,185,000 Total 11,360,885 This, on a capital of £3 million. (Ibid., pp. 363-64.) Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner – and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers. Should anyone still doubt that these esteemed bandits exploit the national and world production solely in the interests of production and the exploited themselves, he will surely learn better from the following homily on the high moral worth of bankers: “Banking establishments are ... moral and religious Institutions.... How often has the fear of being seen by the watchful and reproving eye of his banker deterred the young tradesman from joining the company of riotous and extravagant friends? ... What has been his anxiety to stand well in the estimation of his banker? ... Has not the frown of his banker been of more influence with him than the jeers and discouragements of his friends? Has he not trembled to be supposed guilty of deceit or the slightest misstatement, lest it should give rise to suspicion, and his accommodation be in consequence restricted or discontinued? ... And has not that friendly advice been of more value to him than that of priest?” (G. M. Bell, a Scottish bank director, in The Philosophy of Joint Stock Banking, London, 1840, pp. 46, 47.) xxi Average number of days during which a bank-note remained in circulation: Year£5 Note£10 Note£20-100£200500£1,0001792?2362093122181814813712118131846797134128185670582797(Compila tion by Marshall, Cashier of the Bank of England, in Report on Bank Act, 1857. Appendix II, pp. 300- 01.) xxii At the general meeting of stockholders of the Union Bank of London on January 17, 1894, President Ritchie relates that the Bank of England raised the discount in 1893 from 2½% in July to 3 and 4% in August, and since it lost within four weeks fully £4½ million in gold despite this, it raised the bank-rate to 5%, whereupon gold flowed back to it and the bank rate was reduced to 4% in September and then to 3% in October. But this bank-rate was not recognised in the market. “When the bank-rate was 5%, the discount rate was 3½%, and the rate for money 2½%; when the bank-rate fell to 4%, the discount rate was 2 3/8% and the money rate 1¾%; when the bank-rate was 3%, the discount rate fell to 1½% and the money rate to something below that.” (Daily News, January 18, 1894.) – F.E.
|
|
|
Post by IBDaMann on Sept 20, 2020 22:21:12 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 34. The Currency Principle and the English Bank Legislation of 1844 [In a former work, Ricardo's theory on the value of money as related to commodity-prices has been analysed; we can, therefore, confine ourselves here to the indispensable. According to Ricardo, the value of metallic money is determined by the labour-time incorporated in it, but only as long as the quantity of money stands in correct relationship to the amount and price of commodities to be exchanged. If the quantity of money rises above this ratio, its value falls and commodity-prices rise; if it fails below the correct ratio, its value rises and commodity-prices fall – assuming all other conditions equal. In the first case, the country in which this excess gold exists will export the gold whose value has depreciated and import commodities; in the second case, gold will flow to those countries in which it is assessed above its value, while the underassessed commodities flow from these countries to other markets, where they command normal prices. Since under these circumstances “gold itself may become, either as coin or bullion, a token of metallic value of greater or smaller magnitude than its own value, it is self-evident that convertible bank-notes in circulation must share the same fate. Although bank-notes are convertible, and therefore their real value corresponds to their nominal value, the aggregate currency consisting of metal and of convertible notes may appreciate or depreciate in accordance with its aggregate quantity, for reasons already stated, rising above or falling below the level determined by the exchange-value of circulating commodities and the metallic value of gold.... This depreciation, not of paper as compared with gold, but of gold and paper taken together, or of the aggregate currency of a country, is one of Ricardo's principal discoveries which Lord Overstone and Co. pressed into their service and made a fundamental principle of Sir Robert Peel's bank legislation of 1844 and 1845.” (Zur Kritik der Politischen Ökonomie, p.155.) We need not here repeat a demonstration of the incorrectness of this Ricardian theory which is given in the cited work. We are merely interested in the way Ricardo's theses were elaborated by that school of bank theorists who dictated Peel's above-mentioned Bank Acts. “The commercial crises of the 19th century, especially the great crises of 1825 and 1836, did not result in any new developments in the Ricardian theory of money, but they did furnish new applications for it. These were no longer isolated economic phenomena, such as the depreciation of precious metals in the 16th and 17th centuries according to Hume, or the depreciation of paper money in the 18th and early 19th centuries according to Ricardo; these were instead the violent storms in the world-market wherein the conflict of all elements of the capitalist production process discharges itself, and whose origin and cure were sought in the most superficial and abstract sphere of this process, the sphere of money circulation. The actual theoretical assumption from which the school of economic weather prophets proceeds, is actually reduced to the dogma that Ricardo discovered the laws governing the purely metallic currency. The only thing remaining for them to do was to subordinate credit and bank-note circulation to these laws. “The most general and palpable phenomenon in commercial crises is the sudden general decline in prices following a prolonged overall rise. The general decline in commodity-prices may be expressed as a rise in the relative value of money with respect to all commodities, and the general price rise as a decline in the relative value of money. In either expression the phenomenon is described but not explained.... The different wording leaves the problem as little changed as would its translation from German into English. Ricardo's theory of money was therefore exceedingly opportune, because it lends to a tautology the semblance of a statement of causal relationship. Whence comes the periodic general fall in commodity-prices? From the periodic rise of the relative value of money. Whence the general periodic rise in prices? From the periodic decline in the relative value of money. It might have been stated with equal truth that the periodic rise and fall of prices is due to their periodic rise and fall. ...Once the tautology is admitted as a causal relationship, the rest follows easily. A rise in commodity-prices is caused by a decline in the value of money and a decline in the value of money is caused, as we know from Ricardo, by an over-supply of currency, i.e., a rise in the volume of currency over the level determined by its own intrinsic value and the intrinsic value of commodities. Similarly, a general decline in commodity-prices is explained by a rise in the value of money above its intrinsic value in consequence of under-supply of currency. Thus, prices rise and fall periodically, because there is periodically too much or too little money in circulation. Should a price rise happen to coincide with contracted money circulation, and a fall in prices with expanded circulation, it may be asserted despite this that the quantity of money in circulation has, though not absolutely, yet relatively increased or declined in consequence of a contraction or expansion of the volume of commodities in the market, even if this cannot be statistically proved. We have seen that according to Ricardo these general price fluctuations must take place even with a purely metallic currency, but that they alternatively balance one another; thus, e.g., an under-supply of currency causes a fall in prices, the export of commodities abroad, but this export causes an import of gold from abroad, which in turn brings about a price rise; the opposite movement taking place in the case of an over-supply of currency, when commodities are imported and gold is exported. But, since despite these general price fluctuations which are in perfect accord with Ricardo's metallic currency, their turbulent and violent form, their crisis form, belongs to the period of developed credit system, it is crystal clear that the issue of bank-notes is not exactly regulated by the laws of metallic currency. Metallic currency has its remedy in the import and export of precious metal, which immediately enters circulation as coin and thus, by its inflow or outflow, causes commodity-prices to fall or rise. The same effect on prices must now be exerted artificially by banks through imitating the laws of metallic currency. If gold is coming in from abroad it proves that currency is in under-supply, that the value of money is too high and commodity-prices too low, and, consequently, that bank-notes must be put into circulation in proportion to the newly imported gold. On the other hand, notes must be withdrawn from circulation in proportion to the gold exported from the country. The issue of bank-notes, in other words, must be regulated by the import and export of precious metal or by the rate of exchange. Ricardo's false assumption that gold is only coin, and, therefore, all imported gold swells the currency, causing prices to rise, while all exported gold reduces the currency, leading to a fall in prices – this theoretical assumption is here turned into the practical experiment of putting an amount of coin in circulation equal in every case to the amount of gold available. Lord Overstone (banker of Jones Loyd), Colonel Torrens, Norman, Clay, Arbuthnot and a host of other writers, known in England as advocates of the 'Currency Principle', have not only preached this doctrine, but succeeded in 1844 and 1845 with the aid of Sir Robert Peel's Bank Acts in making it the basis of English and Scottish bank legislation. Its ignominious failure, both theoretical as well as practical, following upon experiments on the broadest national scale, can be treated only in connection with the theory of credit.” (Loc. cit., pp. 165-68.) The critique of this school was furnished by Thomas Tooke, James Wilson (in the Economist of 1844 to 1847) and John Fullarton. But we have seen on several occasions, particularly in Chapter XXVIII of this book, how incompletely they, too, saw through the nature of gold, and how unclear they were about the relationship of money and capital. We quote here merely a few instances in connection with the transactions of the Committee of the Lower House of 1857 concerning Peel's Bank Acts (B. C. 1857). – F.E.] J. G. Hubbard, former Governor of the Bank of England, testifies: “2400. The effect of the export of bullion ... has no reference whatever to the prices of commodities. It has an effect, and a very important one, upon the price of interest-bearing securities, because, as the rate of interest varies, the value of commodities which embodied that interest is necessarily powerfully affected.” He presents two tables covering the years 1834 to 1843, and 1845 to 1853, which show that the price variations of fifteen major commercial articles were quite independent of the export and import of gold and the interest rate. On the other hand, they show a close connection between the export and import of gold, which is, indeed, the “representative of our uninvested capital,” and the interest rate. “[2402] In 1847, a very large amount of American securities were retransferred to America, and Russian securities to Russia, and other continental securities were transferred to those places from which we drew our supplies of grain.” The fifteen major articles on which the following tables of Hubbard are based include cotton, cotton yarn, cotton fabrics, wool, woollen cloth, flax, linen, indigo, pig-iron, tin, copper, tallow, sugar, coffee, and silk. I. 1834-1843 Date Bullion Market Price Price Reserve of Rate of increase Decrease Unchanged Bank £ Discount * 1834, 9,104,000 2¾% March 1 - - - 1835, 6,274,000 3¾% March 1 7 7 1 1836, 7,918,000 3¼% March 1 11 3 1 1837, 4,077,000 5% March 1 5 9 1 1838, 10,471,000 2¾% March 1 4 11 - 1839, 2,684,000 6% Sept. 1 8 5 2 1840, 4,571,000 4¾% June 1 5 9 1 1840, 3,642,000 5¾% Dec. 1 7 6 2 1841, 4,873,000 5% Dec. 1 3 2 - 1842, 10,603,000 2½% Dec. 1 2 13 - 1843, 11,566,000 2¼% 1 14 - June 1 Price changes on 15 major items II. 1844-1853 Date Bullion Market Price Price Reserve of Rate of Increase Decrease Unchanged Bank £ Discount 1844, 16,162,000 2¼% March 1 - - - 1845, 13,237,000 4½% Dec 1 11 4 - 1846, 16,366,000 3% Sept. 1 7 8 - 1847, 9,140,000 6% Sept. 1 6 6 3 1850, 17,126,000 2½% March 1 5 9 1 1851, 13,705,000 3% June 1 2 11 2 1852, 21,853,000 1¾% Sept. 1 9 5 1 1853, 15,093,000 5% 14 - 1 Dec. 1 Price changes on 15 major items Hubbard comments in this regard: “As in the 10 years 1834-43, so in 1844-53, movements in the bullion of the Bank were invariably accompanied by a decrease or increase in the loanable value of money advanced on discount; and the variations in the prices of commodities in this country exhibit an entire independence of the amount of circulation as shown in the fluctuations in bullion at the Bank of England” (Bank Acts Report, 1857, II, pp. 290, 291). Since the demand and supply of commodities regulate their market-prices, it becomes evident here how wrong Overstone is in identifying the demand for loanable money-capital (or rather the deviations of supply therefrom), as expressed by the discount rate, with the demand for actual “capital.” The contention that commodity-prices are regulated by fluctuations in the quantity of currency is now concealed by the phrase that discount rate fluctuations express fluctuations in the demand for actual material capital, as distinct from money-capital. We have seen that before the same Committee both Norman and Overstone actually contended this, and that the latter especially was compelled to resort to very lame subterfuges, until he was finally cornered (Chap. XXVI). It is indeed an old humbug that changes in the existing quantity of gold in a particular country must raise or lower commodity-prices within this country by increasing or decreasing the quantity of the medium of circulation. If gold is exported, then, according to this Currency Theory, commodity-prices must rise in the country importing this gold, and thereby the value of exports from the gold-exporting country on the gold-importing country's market; on the other hand, the value of the gold-importing country's exports would fall on the gold-exporting country's market while it would rise on the domestic market,i.e., the country receiving the gold. But, in fact, a decrease in the quantity of gold raises only the interest rate, whereas an increase in the quantity of gold lowers the interest rate; and if not for the fact that the fluctuations in the interest rate enter into the determination of cost-prices, or in the determination of demand and supply, commodity prices would be wholly unaffected by them. In the same report, N. Alexander, head of a large firm doing business with India, expresses the following views on the heavy drain of silver to India and China in the mid-fifties. This was partly due to the Chinese Civil War, which checked the sale of English fabrics in China, and partly due to the disease among silkworms in Europe, which sharply reduced silkworm breeding in Italy and France: “4337. Is the drain for China or for India? – You send the silver to India, and you buy opium with a great deal of it, all of which goes on to China to lay down funds for the purchase of the silk; and the state of the markets in India” (in spite of the accumulation of silver there) “makes it a more profitable investment for the merchant to lay down silver than to send piece-goods or English manufactures.” – “4338. In order to obtain the silver, has there not been a great drain from France? – Yes, very large.” – “4344. Instead of bringing in silk from France and Italy, we are sending it there in large quantities, both from Bengal and from China.” In other words, silver, the money metal of that continent, was sent to Asia instead of commodities, not because commodity-prices had risen in the country which produced them (England), but because prices had fallen, as a result of over-imports in the country which imported them; and this despite the fact that the silver was received by England from France and had to be paid for partly in gold. According to the Currency Theory, prices should have fallen in England and risen in India and China as a result of such imports. Another illustration. Before the Lords' Committee (C. D. 1848/57), Wylie, one of the first Liverpool merchants, testifies as follows: “1994. At the close of 1845 there was no trade that was more remunerating, and in which there were such large profits [than cotton spinning]. The stock of cotton was large and good, useful cotton could be bought at 4d. per pound, and from such cotton good secunda mule twist No. 40 was made at an expense not exceeding a like amount, say at a cost of . per pound in all to the spinner. This yarn was largely sold and contracted for in September and October 1845 at 10½ and 11½d. per pound, and in some instances the spinners realised a profit equal to the first cost of the cotton.” – “1996. The trade continued to be remunerative until the beginning of 1846.” – “2000. On March 3, 1844, the stock of cotton [627,042 bales] was more than double what it is this day [on March 3, 1848, when it was 301,070 bales] and yet the price then was 1¼d. per pound dearer.” [6¼d. as against 5d.] – At the same time yarn, good secunda mule twist No. 40, had fallen from 11½-12d. to 9½d. per lb. in October, and to 7¾d. at the end of December 1847; yarn was sold at the purchase price of the cotton from which it had been spun (ibid., Nos. 2021 and 2022). This shows the self-interest of Overstone's sagacity according to which money should be “dear” because capital is “scarce.” On March 3, 1844, the bank interest rate stood at 3%; in October and November of 1847 it rose to 8 and 9%, and was still 4% on March 3, 1848. The prices of cotton were depressed far below the price which corresponded to the state of supply by the complete stoppage of sales and the panic with its ensuing high rate of interest. As a result, there was an enormous decrease in imports in 1848, on the one hand, and, on the other, a decrease in production in America; hence a new rise in cotton prices in 1849. According to Overstone, the commodities were too dear because there was too much money in the country. “2002. The late decline in the condition of the cotton manufactories is not to be ascribed to the want of the raw material, as the price seems to have been lower, though the stock of the raw material is very much diminished.” How nicely Overstone confuses prices, or the value of commodities, with the value of money, that is, the interest rate. In his reply to Question 2026, Wylie sums up his general judgement of the Currency Theory, based on which Cardwell and Sir Charles Wood, in May 1847, “asserted the necessity of carrying out the Bank Act of 1844 in its full and entire integrity.” – “These principles seemed to me to be of a nature that would give an artificial high value to money and an artificial and ruinously low value to all commodities and produce.” He says, furthermore, concerning the effects of this Bank Act on business in general: “As bills at four months, which is the regular course of drafts, from manufacturing towns on merchants and bankers for the purchase of goods going to the United States, could not be discounted except at great sacrifices, the execution of orders was checked to a great extent, until after the Government Letter of October 25 (suspension of the Bank Act), when those four months' bills became discountable” (2097). We see, then, that the suspension of this Bank Act was received with relief in the provinces as well. “2102. Last October [1847] there was scarcely an American buyer purchasing goods here who did not at once curtail his orders as much as he possibly could; and when our advices of the dearness of money reached America, all fresh orders ceased.” – “2134. Corn and sugar were special. The corn market was affected by the prospects of the harvest, and sugar was affected by the immense stocks and imports.” – “2463. Of our indebtedness to America ... much was liquidated by forced sales of consigned goods, and I fear that much was cancelled by the failures here.” – “2196. If I recollect rightly, 70 per cent was paid on our Stock Exchange in October 1847.” [The crisis of 1837 with its protracted aftermath, followed in 1842 by a regular post-crisis, and the self-interested blindness of industrialists and merchants, who absolutely refused to see any over-production – for such a thing was absurd and impossible according to vulgar economy – had ultimately achieved that confusion of thought which enabled the Currency School to put its dogma into practice on a national scale. The bank legislation of 1844 and 1845 was passed. The Bank Act of 1844 divides the Bank of England into an issue department and a banking department. The former receives securities – principally government obligations – amounting to 14 million, and the entire metal hoard, of which not more than one-quarter is to consist of silver, and issues notes to the full amount of the total. In so far as these notes are not in the hands of the public, they are held in the banking department and, together with the small amount of coin required for daily use (about one million), constitute its ever ready reserve. The issue department gives the public gold for notes and notes for gold; the remaining transactions with the public are carried on by the banking department. Private banks in England and Wales authorised in 1844 to issue their own notes retained this privilege, but their note issue was fixed; if one of these banks ceases to issue its own notes, the Bank of England can increase its unbacked notes by two-thirds of the quota thus made available; in this way its issue was increased by 1892 from £14 to £16½ million (to be exact, £16,450,000). Thus, for every five pounds in gold which leave the bank treasury, a five-pound note returns to the issue department and is destroyed; for every five sovereigns going into the treasury a new five-pound note comes into circulation. In this manner, Overstone's ideal paper circulation, which strictly follows the laws of metallic circulation, is carried out in practice, and by this means, according to the advocates of the Currency Theory, crises are made impossible for all time. But in reality the separation of the Bank into two independent departments deprived its management of the possibility of freely utilising its entire available means at critical times, so that situations could arise in which the banking department might be on the verge of bankruptcy while the issue department still had intact several millions in gold and, in addition, its entire 14 million in securities. And this could take place so much more easily since there is a period in almost every crisis when heavy exports of gold take place which must be covered in the main by the metal reserve of the bank. But for every five pounds in gold which then go abroad, the domestic circulation is deprived of a five-pound note, so that the quantity of circulating medium is reduced precisely at a time when the largest quantity is most needed. The Bank Act of 1844 thus directly induces the entire commercial world forthwith to hoard a reserve fund of bank-notes at the outbreak of a crisis; in other words, to accelerate and intensify the crisis. By such artificial intensification of demand for money accommodation, that is, for means of payment at the decisive moment, and the simultaneous restriction of the supply the Bank Act drives the rate of interest to a hitherto unknown height during a crisis. Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis. In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time. It should also be mentioned that the 1844 legislation still shows traces recalling the first twenty years of the 19th century, the period when specie payments were suspended and notes devaluated. The fear that notes may lose their credit is still plainly in evidence. But this fear is quite groundless, since even in 1825 the issue of a discovered old supply of one-pound notes, which had been taken out of circulation, broke the crisis and proved thereby that the credit of the notes remained unshaken even in times of the most general and deepest mistrust. And this is quite understandable; for, after all, the entire nation backs up these symbols of value with its credit. – F.E.] Let us now turn to a few comments on the effect of the Bank Act. John Stuart Mill believes that the Bank Act of 1844 [In the German 1894 edition this reads: 1847. – Ed] kept down overspeculation. Happily this sage spoke on June 12, 1857. Four months later the crisis broke out. He literally congratulated the “bank directors and the commercial public generally” on the fact that they “understand much better than they did the nature of a commercial crisis, and the extreme mischief which they do both to themselves and to the public by upholding over-speculation.” (B.C. 1857, No. 2031.) The sagacious Mr. Mill thinks that if one-pound notes are issued “as advances to manufacturers and others, who pay wages ... the notes may get into the hands of others who expend them for consumption, and in that case the notes do constitute in themselves a demand for commodities and may for some time tend to promote a rise of prices” [2066]. Does Mr. Mill assume, then, that manufacturers will pay higher wages because they pay them in paper instead of gold? Or does he believe that if a manufacturer receives his loan in £100 notes and exchanges them for gold, these wages would constitute less demand than if paid immediately in one-pound notes? And does he not know that, for instance, in certain mining districts wages were paid in the notes of local banks, so that several labourers together received one five-pound note? Does this increase their demand? Or will bankers advance money to manufacturers more easily and in larger quantities in small notes than in large ones? [This singular fear which Mill has for one-pound notes would be inexplicable if his whole work on political economy did not reveal an eclecticism which shows no hesitation in the face of any contradiction. On the one hand, he agrees on many points with Tooke as opposed to Overstone; on the other, he believes that commodity-prices are determined by the quantity of available money. He is thus by no means convinced that, all other conditions being equal, a sovereign will find its way into the coffers of the Bank for every one-pound note issued. He fears that the quantity of circulating medium could be increased and thereby devaluated, that is, commodityprices might rise. This and nothing more is concealed behind the above-mentioned apprehension. – F.E.) Tooke expresses the following views before the C. D. 1848/57 concerning the division of the Bank into two departments and the excessive precautions taken to safeguard the cashing of notes: The greater fluctuations of the interest rate in 1847, as compared with 1837 and 1839, are due solely to the separation of the Bank into two departments (3010). – The safety of bank-notes was affected neither in 1825 nor in 1837 and 1839 (3015). – The demand for gold in 1825 was aimed only at filling the vacuum created by the complete discredit of the one-pound notes of country banks; this vacuum could be filled only by gold, until such time as the Bank of England also issued one-pound notes (3022). – In November and December 1825 not the slightest demand existed for gold for export purposes (3023). “In point of discredit at home as well as abroad, a failure in paying the dividends and the deposits would be of far greater consequence than the suspending of the payment of the bank-notes (3028).” “3035. Would you not say that any circumstance, which had the effect of ultimately endangering the convertibility of the note, would be one likely to add serious difficulty in a moment of commercial pressure? – Not at all.” “In the course of 1847 ... an increased issue from the circulating department might have contributed to replenish the coffers of the Bank, as it did in 1825” (3058). Before the Committee on B. A. 1857, Newmarch testifies: “1357. The first mischievous effect ... of that separation of departments” (of the Bank) “ and ... a necessary consequence from the cutting in two of the reserve of bullion has been that the banking business of the Bank of England, that is to say, the whole of that part of the operation of the Bank of England which brings it more immediately into contact with the commerce of the country, has been carried on upon a moiety only of its former amounts of reserve. Out of that division of the reserve has arisen, therefore, this state of things, that whenever the reserve of the banking department has been diminished, even to a small extent, it has rendered necessary an action by the Bank upon its rate of discount. That diminished reserve, therefore, has produced a frequent succession of changes and jerks in the rate of discount.” – “1358. The alterations since 1844” [until June 1857] “have been some 60 in number, whereas the alterations prior to 1844 in the same space of time certainly did not amount to a dozen.” Of special interest is the testimony of Palmer, a Director of the Bank of England since 1811 and for a while its Governor, before the Lords' Committee on C. D. 1848/57: “828. In December 1825, there was about £1,100,000 of bullion remaining in the Bank. At that period it must undoubtedly have failedin toto, if this Act had been in existence” [meaning the Act of 1844]. “The issue in December, I think, was 5 or 6 millions of notes in a week, which relieved the panic that existed at that period.” “825. The first period” [since July 1, 1825] “when the present Act would have failed, if the Bank had attempted to carry out the transactions then undertaken, was on the 28th of February 1837; at that period there were £3,900,000 to £4,000,000 of bullion in the possession of the Bank, and then the Bank would have been left with £650,000 only in the reserve. Another period is in the year 1839, which continued from the 9th of July to the 5th of December.” – “826. What was the amount of the reserve in that case? – The reserve was minus altogether £200,000 upon the 5th of September. On the 5th of November it rose to about a million or a million and a half.” – “830. The Act of 1844 would have prevented the Bank giving assistance to the American trade in 1837.” – “831. There were three of the principal American houses that failed. ... Almost every house connected with America was in a state of discredit, and unless the Bank had come forward at that period, I do not believe that there would have been more than one or two houses that could have sustained themselves.” – “836. The pressure in 1837 is not to be compared with that of 1847. The pressure in the former year was chiefly confined to the American trade.” – 838. (Early in June 1837 the management of the Bank discussed the question of overcoming the pressure.) “Some gentlemen advocated the opinion ... that the correct principle was to raise the rate of interest, by which the price of commodities would be lowered; in short, to make money dear and commodities cheap, by which the foreign payment would be accomplished.” – “906. The establishment of an artificial limitation of the powers of the Bank under the Act of 1844, instead of the ancient and natural limitation of the Bank's powers, namely, the actual amount of its specie, tends to create artificial difficulty, and therefore an operation upon the prices of merchandise that would have been unnecessary but for the provisions of the Act.” – “968. You cannot, by the working of the Act of 1844, materially reduce the bullion, under ordinary circumstances, below nine million and a half. It would then cause a pressure upon prices and credit which would occasion such an advance in the exchange with foreign countries as 10 increase the import of bullion, and to that extent add to the amount in the issue department.” – “996. Under the limitation that you” [the Bank] “are now subject to, you have not the command of silver to an extent that you require at a time when silver would be required for an action upon the foreign exchanges.” – “999. What was the object of the regulation restricting the Bank as to the amount of silver to one-fifth? – I cannot answer that question.” The purpose was to make money dear; aside from the Currency Theory, the separation of the two bank departments and the requirement for Scottish and Irish banks to hold gold in reserve for backing notes issued beyond a certain amount had the same purpose. This brought about a decentralisation of the national metal reserve, which decreased its capability of correcting unfavourable exchange rates. All the following stipulations aim to raise the interest rate: that the Bank of England shall not issue notes exceeding 14 million except against gold reserve; that the banking department shall be administered as an ordinary bank, forcing the interest rate down when money is plentiful and driving it, up when money is scarce; limiting the silver reserve, the principal means of rectifying the rates of exchange with the continent and Asia; the regulations concerning the Scottish and Irish banks, which never require gold for export but must now keep it under the pretence of ensuring an actually illusory convertibility of their notes. The fact is that the Act of 1844 caused a run on the Scottish banks for gold in 1857 for the first time. Nor does the new bank legislation make any distinction between a drain of gold abroad or for domestic purposes, although it goes without saying that their effects are quite different. Hence the continual large fluctuations in the market rate of interest. With reference to silver, Palmer says on two separate occasions, 992 and 994, that the Bank can buy silver for notes only when the rate of exchange is favourable for England, i.e., silver is superfluous; for: “1003. The only object in holding a considerable amount of bullion in silver is to facilitate making the foreign payment so long as the exchanges are against the country.” – “1004. Silver is ... a commodity which, being money in every other part of the world, is therefore the most direct commodity for the purpose” [payments abroad]. “The United States latterly have taken gold alone.” In his opinion, the Bank did not have to raise the interest rate above its old level of 5% in times of stringency, so long as unfavourable exchange rates do not drain gold to foreign countries. Were it not for the Act of 1844, the Bank would be able to discount all first-class bills presented to it without difficulty. [1018-20.] But under the Act of 1844 and in the state in which the Bank found itself in October 1847, “there was no rate of interest which the Bank could have charged to houses of credit, which they would not have been willing to pay to carry on their payments” [1022]. And this high interest rate was precisely the purpose of the Act. “1029. ... Great distinction which I wish to draw between the action of the rate of interest upon a foreign demand” [for precious metal] “and an advance in the rate for the object of checking a demand upon the Bank during a period of internal discredit.” – “4023. Previously to the Act of 1844 ... when the exchanges were in favour of the country, and positive panic and alarm existed through the country, there was no limit put upon the issue, by which alone that state of distress could be relieved.” So speaks a man who has occupied a post for 39 years in the administration of the Bank of England. Let us now listen to a private banker, Twells, an associate of Spooner, Attwood & Co. since 1801. He is alone among the witnesses before the B. C. 4857 who provides us with an insight into the country's actual state of affairs and who sees the crisis approaching. In other respects, however, he is a sort of little-shilling man from Birmingham, like his associates, the Attwood brothers, who are the founders of this school. (See Zur Kritik der pol. Oek., S. 59.) He testifies: “4488. How do you think that the Act of 1844 has operated? – If I were to answer you as a banker, I should say that it has operated exceedingly well, for it has afforded a rich harvest to bankers and [money]capitalists of all kinds. But it has operated very badly to the honest industrious trades-man who requires steadiness in the rate of discount, that he may be enabled to make his arrangements with confidence.... It has made money-lending a most profitable pursuit.” – “4489. It [the Bank Act,] enables the London jointstock banks to return from 20 to 22% to their proprietors? – The other day one of them was paying 18% and I think another 20%; they ought to support the Act of 1844 very strongly.” – “4490. The little tradesmen and respectable merchants, who have not a large capital ... it pinches them very much indeed ... The only means that I have of knowing is that I observe such an amazing quantity of their acceptances unpaid. They are always small, perhaps ranging from £20 to £400, a great many of them are unpaid and go back unpaid to all parts of the country, which is always an indication of suffering amongst ... little shopkeepers.” 4494. He declares that business is not profitable now. The following remarks of his are important because they show that he saw the latent existence of the crisis when none of the others had even an inkling of it. “4494. Things keep their prices in Mincing Lane, but we sell nothing, we cannot sell upon any terms; we keep the nominal price.” 4495. He relates the following case: A Frenchman sends a broker in Mincing Lane commodities for £3,000 to be sold at a certain price. The broker cannot obtain the requested price, and the Frenchman cannot sell below this price. The commodities remain unsold, but the Frenchman needs money. The broker therefore makes him an advance of £1,000 and has the French man draw a bill of exchange of £1,000 for three months on the broker against his commodities as security. At the end of the three months the bill becomes due, but the commodities still remain unsold. The broker must then pay the bill, and although he possesses security for £3,000, he cannot convert it into cash and as a result faces difficulties. In this manner, one person drags another down with him. “4496. With regard to the large exports ... where there is a depressed state of trade at home, it necessarily forces large exportation.” – “4497. Do you think that the home consumption has been diminished? – Very much indeed ... immensely ... the shopkeepers are the best authorities.” – “4498. Still the importations are very large; does not that indicate a large consumption? – It does, if you can sell; but many of the warehouses are full of these things; in this very instance which I have been relating, there is £3,000 worth imported, which cannot be sold.” “4514. When money is dear, would you say that capital would be cheap? – Yes. This man, then, is by no means of Overstone's opinion that a high rate of interest is the same as dear capital. The following shows how business is now conducted: “4616. Others are going to a very great extent, carrying on a prodigious trade in exports and imports, to an extent far beyond what their capital justifies them in doing; there can be no doubt of all of that. These men may succeed; they may by some lucky venture get large fortunes, and put themselves right. That is very much the system in which a great deal of trade is now carried on. Persons will consent to lose 20, 30, and 40 per cent upon a shipment; the next venture may bring it back to them. If they fail in one after another, then they are broken up; and that is just the case which we have often seen recently; mercantile houses have broken up, without one shilling of property being left.” “4791. The low rate of interest” [during the last ten years] “operates against bankers, it is true, but I should have very great difficulty in explaining to you, unless I could show you the books, how much higher the profits” [his own] “ are now than they used to be formerly. When interest is low, from excessive issues, we have large deposits; when interest is high, we get the advantage in that way.” – “4794. When money is at a moderate rate, we have more demand for it; we lend more; it operates in that way” [for us, the bankers]. “When it gets higher, we get more than a fair proportion for it; we get more than we ought to do.” We have seen that the credit of Bank of England notes is considered beyond question by all experts. Nevertheless, the Bank Act completely ties up nine to ten million in gold for the convertibility of these notes. The sacredness and inviolability of this reserve is thereby carried much farther than among hoarders of olden times. Mr. Brown (Liverpool) testifies, C. D. 1847/57: “2311: This money” [the metal reserve in the issue department] “might as well have been thrown into the sea from any use that it was of at that time, there being no power to employ any of it without violating the Act of Parliament.” The building contractor E. Capps, already cited earlier, whose testimony is also used to illustrate the modern building system in London (Vol. II, Ch. XII), sums up his opinion of the Bank Act of 1844 as follows [B. A. 1857]: “5508. Then upon the whole ... you think that the present system” [of bank legislation] “is a somewhat adroit scheme for bringing the profits of industry periodically into the usurer's bag? – I think so. I know that it has operated so in the building trade.” As mentioned before, the Scottish banks were forced by the Bank Act of 1845 into a system resembling that of the English. They were obliged to hold gold in reserve for their note issue beyond the limit fixed for each bank. The effect of this may be seen from the following testimony before the C. D. 1848/57. Kennedy, Director of a Scottish bank: “3375. Was there anything that you can call a circulation of gold in Scotland previously to the passing of the Act of 1845? – None whatever.” – “3376. Has there been any additional circulation of gold since? – None whatever; the people dislike gold.” – 3450. The sum of about £900,000 in gold, which the Scottish banks are compelled to keep since 1845, can only be injurious in his opinion and “absorbs unprofitably so much of the capital of Scotland.” Furthermore, Anderson, Director of the Union Bank of Scotland: “3588. The only pressure upon the Bank of England by the banks in Scotland for gold was for foreign exchanges? – It was; and that is not to be relieved by holding gold in Edinburgh.” – “3590. Having the same amount of securities in the Bank of England” [or in the private banks of England] “we have the same power that we had before of making a drain upon the Bank of England.” Finally, we quote an article from the Economist (Wilson): “The Scotch banks keep unemployed amounts of cash with their London agents; these keep them in the Bank of England. This gives to the Scotch banks, within the limits of these amounts, command over the metal reserve of the Bank, and here it is always in the place where it is needed, when foreign payments are to be made.” This system was disturbed by the Act of 1845: “In consequence of the Act of 1845 for Scotland of late a large drain of the coin of the Bank has taken place, to supply a mere contingent demand in Scotland, which may never occur... Since that period there has been a large sum uniformly locked up in Scotland, and another considerable sum constantly travelling back and forward between London and Scotland. If a period arrives when a Scotch bank expects an increased demand for its notes, a box of gold is brought down from London; when this period is past, the same box, generally unopened, is sent back to London.” (Economist, October 23, 1847 [pp. 1214-1215].) [And what does the father of the Bank Act, banker Samuel Jones Loyd, alias Lord Overstone, say to all this? Already in 1848 he repeated before the Lords' Committee on Commercial Distress that “pressure, and a high rate of interest caused by the want of sufficient capital, cannot be relieved by an extra issue of bank-notes” (1514), in spite of the fact that the mere authority to increase the note issue, given by the Government's Letter of October 25, 1847, had sufficed to take the edge off the crisis. He holds to the view that “the high rate of interest and the depression of the manufacturing interests was the necessary result of the diminution of the materialcapital applicable to manufacturing and trading purposes” (1604). And yet the depressed condition of the manufacturing industry had for months consisted in material commodity-capital filling the warehouses to overflowing and being actually unsaleable; so that for precisely this reason, material productive capital lay wholly or partly idle, in order not to produce still more unsaleable commodity-capital. And before the Bank Committee of 1857 he says: “By strict and prompt adherence to the principles of the Act of 1844, everything has passed off with regularity and ease, the monetary system is safe and unshaken, the prosperity of the country is undisputed, the public confidence in the wisdom of the Act of 1844 is daily gaining strength, and if the Committee wish for further practical illustration of the soundness of the principles on which it rests, or of the beneficial results which it has ensured, the true and sufficient answer to the Committee is, look around you, look at the present state of the trade of this country, ... look at the contentment of the people, look at the wealth and prosperity which pervades every class of the community, and then having done so, the Committee may be fairly called upon to decide whether they will interfere with the continuance of an Act under which those results have been developed.” (B. C. 1857, No. 4189.) To this song of praise by Overstone before the Committee on July 14, the antistrophe was given on November 12 of the same year in the shape of a letter to the Bank's management, in which the government suspended the miracle-working law of 1844 to save what could still be saved. – F. E.]
|
|
|
Post by IBDaMann on Sept 20, 2020 22:25:10 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 35. Precious Metal and Rate of Exchange I. Movement Of The Gold Reserve It should be noted in regard to the accumulation of notes in times of stringency, that it is a repetition of the hoarding of precious metal as used to take place in troubled times in the most primitive conditions of society. The Act of 1844 is interesting in its operation because it seeks to transform all precious metal existing in the country into a circulating medium; it seeks to equate a drain of gold with a contraction of the circulating medium and a return flow of gold with an expansion of the circulating medium. As a result, the experiment proved the contrary to be the case. With a single exception, which we shall mention shortly, the quantity of circulating notes of the Bank of England has never, since 1844, reached the maximum which it was authorised to issue. The crisis of 1857 proved on the other hand that this maximum does not suffice under certain circumstances. From November 13 to 30, 1857, a daily average of £488,830 above this maximum was circulating (B. A. 1858, p. XI). The legal maximum was at that time £14,475,000, plus the amount of metal reserve in the vaults of the Bank. Concerning the outflow and inflow of precious metal, the following is to be noted: First, a distinction should be made between the back and forth movement of metal within a region which does not produce any gold and silver, on the one hand, and, on the other, the flow of gold and silver from their sources of production to various other countries and the distribution of this additional metal among them. Before the gold mines of Russia, California and Australia made Their influence felt, the supply since the beginning of the 19th century sufficed only for the replacement of worn-out coins, for general use in articles of luxury, and for the export of silver to Asia. However, in the first place, silver exports to Asia have since increased extraordinarily, owing to the Asiatic trade of America and Europe. The silver exported from Europe was largely replaced by the additional supply of gold. Secondly, a portion of the newly imported gold was absorbed by internal money circulation. It is estimated that up to 1857 about 30 million in gold were added to England's internal circulation.xxiii Furthermore, the average level of metal reserves in all the central banks of Europe and America increased since 1844. The expansion of domestic money circulation resulted at the same time in bank reserves growing more rapidly in the period of stagnation following upon the panic, because of the larger quantity of gold coins thrust out of domestic circulation and immobilised. Finally, the consumption of precious metal for luxury articles increased since the discovery of new gold deposits as a consequence of the increased wealth. Secondly, precious metal flows back and forth between countries which do not produce any gold or silver, the same country continually importing, and also exporting. It is only the preponderance of this movement in one or another direction which, in the final analysis, determines whether a drain or an augmentation has taken place, since the mere oscillations and frequently parallel movements largely neutralise one another. But for this reason, in so far as the result is concerned, the continuity and, in the main, the parallel course of both movements is overlooked. A greater import or a greater export of precious metal is always interpreted to be solely the effect and expression of the relation between the imports and exports of commodities, whereas it is simultaneously indicative of the relation between exports and imports of precious metal itself, quite independent of commodity trade. Thirdly, the preponderance of imports over exports, and vice versa, is measured on the whole by the increase or decrease in metal reserves of the central banks. The greater or lesser precision of this criterion naturally depends primarily on the degree of centralisation of the banking business in general. For on this depends the extent that precious metal in general accumulated in the socalled national banks represents the national metal reserve. But assuming this to be the case, the criterion is not accurate because an additional import may be absorbed under certain circumstances by domestic circulation and the growing consumption of gold and silver in producing luxury articles; furthermore, because without additional import, a withdrawal of gold coin for domestic circulation could take place, and thus the metal reserve could decrease even without a simultaneous increase in exports. Fourthly, an export of metal assumes the aspect of a drain when the movement of decrease continues for a long time, so that the decrease represents a tendency of movement and depresses the metal reserve of the bank considerably below its average level, down to approximately its average minimum. This minimum is more or less arbitrarily fixed, in so far as it is differently determined in every individual case by legislation concerning backing for the cashing of notes, etc. Concerning the quantitative limits which such a drain can reach in England, Newmarch testified before the Committee on B. A. 1857, Evidence No. 1494: “Judging from experience, it is very unlikely that the efflux of treasure arising from any oscillation in the foreign trade will proceed beyond £3,000,000 or £4,000,000.” In 1847, the lowest gold reserve level of the Bank of England, occurring on October 23, showed a decrease of £5,198,156 as compared with that of December 26, 1846, and a decrease of £6,453,748 as compared with the highest level of 1846 (August 29). Fifthly, the determination of the metal reserve of the so-called national banks, a determination, however, which does not by itself regulate the magnitude of this metal hoard, for it can grow solely by the paralysis of domestic and foreign trade, is threefold: 1) reserve fund for international payments, in other words, reserve fund of world-money; 2) reserve fund for alternately expanding and contracting domestic metal circulation; 3) reserve fund for the payment of deposits and for the convertibility of notes (this is connected with the function of the bank and has nothing to do with the functions of money as such). The reserve fund can, therefore, also be influenced by conditions which affect every one of these three functions. Thus, as an international fund it can be influenced by the balance of payments, no matter by what factors the latter may be determined and whatever its relation to the balance of trade may be. As a reserve fund for domestic metal circulation it can be influenced by the latter's expansion or contraction. The third function – that of a security fund – does not, admittedly, determine the independent movement of the metal reserve, but has a two-fold effect. If notes are issued which replace metallic money (also including silver coins in countries where silver is a measure of value) in domestic circulation, the function of the reserve fund under 2) drops away. And a portion of the precious metal, which served to perform this function, will for a long time find its way abroad. In this case metallic coins are not withdrawn for domestic circulation, and thus the temporary augmentation of the metal reserve by immobilising a part of the circulating coined metal simultaneously falls away. Furthermore, if a minimum metal reserve must be maintained under all circumstances for the payment of deposits and for the convertibility of notes, this affects in its own way the results of a drain or return flow of gold; it affects that part of the reserve which the bank is obliged to maintain under all circumstances, or that part which it seeks to get rid of as useless at certain times. If the circulation were purely metallic and the banking system concentrated, the bank would likewise have to consider its metal reserve as security for the payment of its deposits, and a drain of metal could cause a panic such as was witnessed in Hamburg in 1857. Sixthly, with the exception of perhaps 1837, the real crisis always broke out only after a change in the rates of exchange, that is, as soon as the import of precious metal had again gained preponderance over its export. In 1825, the real crash came after the drain on gold had ceased. In 1839, there was a drain on gold, but it did not bring about a crash. In 1847, the drain on gold ceased in April and the crash came in October. In 1857, the drain on gold to foreign countries had ceased in early November, and the crash did not come until later that same month. This is particularly evident in the crisis of 1847, when the drain on gold ceased in April after causing a slight preliminary crisis, and the real business crisis did not come until October. The following testimony was presented at the Secret Committee of the House of Lords on Commercial Distress, 1848. This evidence was not printed until 1857 (also cited as C. D. 1848/57). Evidence of Tooke: In April 1847, a stringency arose, which, strictly speaking, equalled a panic, but was of relatively short duration and not accompanied by any commercial failures of importance. In October the stringency was far more intensive than at any time during April, an almost unheard-of number of commercial failures taking place (2996). – In April the rates of exchange, particularly with America, compelled us to export a considerable amount of gold in payment for unusually large imports; only by an extreme effort did the Bank stop the drain and drive the rates higher (2997). – In October the rates of exchange favoured England (2998). – The change in the rates of exchange had begun in the third week of April (3000). – They fluctuated in July and August; since the beginning of August they always favoured England (3001). – The drain on gold in August arose from a demand for internal circulation [3003]. J. Morris, Governor of the Bank of England: Although the rate of exchange favoured England since August 1847, and an import of gold had taken place in consequence, the bullion reserve of the Bank decreased. “£2,200,000 went out into the country in consequence of the internal demand” (137). – This is explained on the one hand by an increased employment of labourers in railway construction, and on the other by the “circumstance of the bankers wishing to provide themselves with gold in times of distress” (147). Palmer, ex-governor and a Director of the Bank of England since 1811: “684. During the whole period from the middle of April 1847 to the day of withdrawing the restrictive clause in the Act of 1844 the foreign exchanges were in favour of this country.” The drain of bullion, which created an independent money panic in April 1847 was here therefore, as always, but a precursor of the crisis, and a turn had already taken place before it broke out. In 1839, a heavy drain of bullion took place for grain, etc., while business was strongly depressed, but there was no crisis or money panic. Seventhly, as soon as general crises have spent themselves, gold and silver – leaving aside the inflow of new precious metal from the producing countries – distribute themselves once more in the proportions in which they existed in a state of equilibrium as individual hoards of the various countries. Other conditions being equal, the relative magnitude of a hoard in each country will be determined by the role of that country in the world-market. They flow from the country which had more than its normal share to those with less than a normal amount. These movements of outgoing and incoming metal merely restore the original distribution among the various national reserves. This redistribution, however, is brought about by the effects of various circumstances, which will be taken up in our treatment of rates of exchange. As soon as the normal distribution is once more restored – beginning with this moment – a stage of growth sets in and then again a drain. [This last statement applies, of course, only to England, as the centre of the world moneymarket. – F.E.] Eighthly, a drain of metal is generally the symptom of a change in the state of foreign trade, and this change in turn is a premonition that conditions are again approaching a crisis.xxiv Ninthly, the balance of payments can favour Asia against Europe and America.xxv An import of precious metal takes place mainly during two periods. On the one hand, it takes place in the first phase of a low interest rate, which follows upon a crisis and reflects a restriction of production; and then in the second phase, when the interest rate rises, but before it attains its average level. This is the phase during which returns come quickly, commercial credit is abundant, and therefore the demand for loan capital does not grow in proportion to the expansion of production. In both phases, with loan capital relatively abundant, the superfluous addition of capital existing in the form of gold and silver, i.e., a form in which it can primarily serve only as loan capital, must seriously affect the rate of interest and concomitantly the atmosphere of business in general. On the other hand, a drain, a continued and heavy export of precious metal, takes place as soon as returns no longer flow, markets are overstocked, and an illusory prosperity is maintained only by means of credit; in other words, as soon as a greatly increased demand for loan capital exists and the interest rate, therefore, has reached at least its average level. Under such circumstances, which are reflected precisely in a drain of precious metal, the effect of continued withdrawal of capital, in a form in which it exists directly as loanable money-capital, is considerably intensified. This must have a direct influence on the interest rate. But instead of restricting credit transactions, the rise in interest rate extends them and leads to an over-straining of all their resources. This period, therefore, precedes the crash. Newmarch is asked, B. A. 1857: “1520. But then the volume of bills in circulation increases with the rate of discount? – It seems to do so.” – “1522. In quiet ordinary times the ledger is the real instrument of exchange; but when any difficulty arises; when, for example, under such circumstances as I have suggested, there is a rise in the bank-rate of discount ... then the transactions naturally resolve themselves into drawing bills of exchange, those bills of exchange being not only more convenient as regards legal proof of the transaction which has taken place, but also being more convenient in order to effect purchases elsewhere, and being pre-eminently convenient as a means of credit by which capital can be raised.” Furthermore, as soon as somewhat threatening conditions induce the bank to raise its discount rate – whereby the probability exists at the same time that the bank will cut down the running time of the bills to be discounted by it – the general apprehension spreads that this will rise in crescendo. Everyone, and above all the credit swindler, will therefore strive to discount the future and have as many means of credit as possible at his command at the given time. These reasons, then, amount to this: it is not that the mere quantity of imported or exported precious metal as such which makes its influence felt, but that it exerts its effect, firstly, by virtue of the specific character of precious metal as capital in money-form, and secondly, by acting like a feather which, when added to the weight on the scales, suffices to tip the oscillating balance definitely to one side; it acts because it arises under conditions when any addition decides in favour of one or the other side. Without these grounds, it would be quite inexplicable why a drain of gold amounting to, say, £5,000,000 to £8,000,000 – and this is the limit of experience to date – should have any appreciable effect. This small decrease or increase of capital, which seems insignificant even compared to the £70 million in gold which circulate on an average in England, is really a negligibly small magnitude when compared to production of such volume as that of the English.xxvi But it is precisely the development of the credit and banking system, which tends, on the one hand, to press all money-capital into the service of production (or what amounts to the same thing, to transform all money income into capital), and which, on the other hand, reduces the metal reserve to a minimum in a certain phase of the cycle, so that it can no longer perform the functions for which it is intended – it is the developed credit and banking system which creates this over-sensitiveness of the whole organism. At less developed stages of production, the decrease or increase of the hoard below or above its average level is a relatively insignificant matter. Similarly, on the other hand, even a very considerable drain of gold is relatively ineffective if it does not occur in the critical period of the industrial cycle. In the given explanation we have not considered cases in which a drain of gold takes place as a result of crop failures, etc. In such cases the large and sudden disturbance of the equilibrium of production, which is expressed by this drain, requires no further explanation as to its effect. This effect is that much greater the more such a disturbance occurs in a period when production is in full swing. We have also omitted from consideration the function of the metal reserve as a security for banknote convertibility and as the pivot of the entire credit system. The central bank is the pivot of the credit system. And the metal reserve, in turn, is the pivot of the bank.xxvii The change-over from the credit system to the monetary system is necessary, as I have already shown in Vol. I (Ch. III) in discussing means of payment. That the greatest sacrifices of real wealth are necessary to maintain the metallic basis in a critical moment has been admitted by both Tooke and LoydOverstone. The controversy revolves merely round a plus or a minus, and round the more or less rational treatment of the inevitable.xxviii A certain quantity of metal, insignificant compared with the total production, is admitted to be the pivotal point of the system. Hence the superb theoretical dualism, aside from the appalling manifestation of this characteristic that it possesses as the pivotal point during crises. So long as enlightened economy treats “of capital” ex professo, it looks down upon gold and silver with the greatest disdain, considering them as the most indifferent and useless form of capital. But as soon as it treats of the banking system, everything is reversed, and gold and silver become capital par excellence, for whose preservation every other form of capital and labour is to be sacrificed. But how are gold and silver distinguished from other forms of wealth? Not by the magnitude of their value, for this is determined by the quantity of labour incorporated in them; but by the fact that they represent independent incarnations, expressions of the social character of wealth. [The wealth of society exists only as the wealth of private individuals, who are its private owners. It preserves its social character only in that these individuals mutually exchange qualitatively different use-values for the satisfaction of their wants. Under capitalist production they can do so only by means of money. Thus the wealth of the individual is realised as social wealth only through the medium of money. It is in money, in this thing, that the social nature of this wealth is incarnated. – F.E.] This social existence of wealth therefore assumes the aspect of a world beyond, of a thing, matter, commodity, alongside of and external to the real elements of social wealth. So long as production is in a state of flux this is forgotten. Credit, likewise a social form of wealth, crowds out money and usurps its place. It is faith in the social character of production which allows the money-form of products to assume the aspect of something that is only evanescent and ideal, something merely imaginative. But as soon as credit is shaken – and this phase of necessity always appears in the modern industrial cycle – all the real wealth is to be actually and suddenly transformed into money, into gold and silver – a mad demand, which, however, grows necessarily out of the system itself. And all the gold and silver which is supposed to satisfy these enormous demands amounts to but a few millions in the vaults of the Bank. xxix Among the effects of the gold drain, then, the fact that production as social production is not really subject to social control, is strikingly emphasised by the existence of the social form of wealth as a thing external to it. The capitalist system of production, in fact, has this feature in common with former systems of production, in so far as they are based on trade in commodities and private exchange. But only in the capitalist system of production does this become apparent in the most striking and grotesque form of absurd contradiction and paradox, because, in the first place, production for direct use-value, for consumption by the producers themselves, is most completely eliminated under the capitalist system, so that wealth exists only as a social process expressed as the intertwining of production and circulation; and secondly, with the development of the credit system, capitalist production continually strives to overcome the metal barrier, which is simultaneously a material and imaginative barrier of wealth and its movement, but again and again it breaks its back on this barrier. In the crisis, the demand is made that all bills of exchange, securities and commodities shall be simultaneously convertible into bank money, and all this bank money, in turn, into gold. II. The Rate Of Exchange [The rate of exchange is known to be the barometer for the international movement of money metals. If England has more payments to make to Germany than Germany to England, the price of marks, expressed in sterling, rises in London, and the price of sterling, expressed in marks, falls in Hamburg and Berlin. If this preponderance of England's payment obligations towards Germany is not balanced again, for instance, by a preponderance of purchases by Germany in England, the sterling price of bills of exchange in marks on Germany must rise to the point where it will pay to send metal (gold coin or bullion) from England to Germany in payment of obligations, instead of sending bills of exchange. This is the typical course of events. If this export of precious metal assumes a larger scope and lasts for a longer period, then the English bank reserve is affected, and the English money-market, particularly the Bank of England, must take protective measures. These consist mainly, as we have already seen, in raising the interest rate. When the drain on gold is considerable, the money-market as a rule becomes tight, that is, the demand for loan capital in the form of money significantly exceeds the supply and the higher interest rate follows quite naturally from this; the discount rate fixed by the Bank of England corresponds to this situation and asserts itself on the market. However there are cases when the drain on bullion is due to other than ordinary combinations of business transactions (for instance, loans to foreign states, investment of capital in foreign countries, etc.), and the London money-market as such does not justify an effective rise in the interest rate; the Bank of England must then first “make money scarce,” as the phrase goes, through heavy loans in the “open market” and thus artificially create a situation which justifies, or renders necessary, a rise in the interest rate; such a manoeuvre becomes more difficult from year to year. – F.E.] How this raising of the interest rate affects the rates of exchange is shown by the following testimony before the Committee of the Lower House concerning bank legislation in 1857 (quoted as B. A. or B. C. 1857). John Stuart Mill: “2176. When there is a state of commercial difficulty there is always ... a considerable fall in the price of securities ... foreigners send over to buy railway shares in this country, or English holders of foreign railway shares sell their foreign railway shares abroad ... there is so much transfer of bullion prevented.” – “2182. A large and rich class of bankers and dealers in securities, through whom the equalisation of the rate of interest and the equalisation of commercial pressure between different countries usually takes place ... are always on the look out to buy securities which are likely to rise.... The place for them to buy securities will be the country which is sending bullion away.” – “2184. These investments of capital took place to a very considerable extent in 1847, to a sufficient extent to have relieved the drain considerably.” J. G. Hubbard, ex-Governor, and a Director of the Bank of England since 1838: “2545. There are great quantities of European securities ... which have a European currency in all the different money-markets, and those bonds, as soon as their value is reduced by 1 or 2 per cent in one market, are immediately purchased for transmission to those markets where their value is still unimpaired.” – “2565. Are not foreign countries considerably in debt to the merchants of this country? – Very largely.” – “2566. Therefore, the cashment of those debts might be sufficient to account for a very large accumulation of capital in this country? – In 1847, the ultimate restoration of our position was effected by our striking off so many millions previously due by America, and so many millions due by Russia to this country.” [At the same time, England owed these same countries “so and so many millions” for grain and also did not fail to “draw a line” through the greater portion of these millions via the bankruptcy of the English debtors. See the report on Bank Acts, 1857, Chapter XXX above. – F.E.] “2572. In 1847, the exchange between this country and St. Petersburg was very high. When the Government Letter came out authorising the Bank to issue irrespectively of the limitation of £14,000,000 [above and beyond the gold reserve – F.E.], the stipulation was that the rate of discount should be 8%. At that moment, with the then rate of discount, it was a profitable operation to order gold to be shipped from St. Petersburg to London and on its arrival to lend it at 8% up to the maturity of the three months' bills drawn against the purchase of gold.” – “2573. In all bullion operations there are many points to be taken into consideration; there is the rate of exchange and the rate of interest, which is available for the investment during the period of the maturity of the bill [drawn against it – F.E.].” Rate Of Exchange With Asia The following points are important because, on the one hand, they show how England recoups its losses when its rate of exchange with Asia is unfavourable, at the expense of other countries, whose imports from Asia are paid through English middlemen. On the other hand, they are important because Mr. Wilson once again makes the foolish attempt here to identify the effects of the export of precious metal on the rates of exchange with the effect of the export of capital in general upon these rates; the export being in both cases not as a means of paying or buying, but for capital investment. In the first place, it goes without saying that whether so many millions of pounds sterling are sent to India in precious metal or iron rails, to be invested in railways there, these are merely two different forms of transferring the same amount of capital to another country; namely, a transfer which does not enter the calculation of ordinary mercantile business, and for which the exporting country expects no other return than the future annual revenue from the income of these railways. If this export is made in the form of precious metal, it will exert a direct influence upon the money-market and with it upon the interest rate of the country exporting this precious metal; if not necessarily under all circumstances, then under the previously outlined conditions, since it is precious metal and as such is directly loanable money-capital and the basis of the entire money system. Similarly, this export also directly affects the rate of exchange. Precious metal is exported only for the reason, and to the extent, that bills of exchange, say on India, which are offered in the London money-market, do not suffice to make these extra remittances. In other words, there is a demand for Indian bills of exchange which exceeds their supply, and so the rates turn for a time against England, not because it is in debt to India, but because it has to send extraordinary sums to India. In the long run, such a shipment of precious metal to India must have the effect of increasing the Indian demand for English commodities, because it indirectly increases the consuming power of India for European goods. But, if the capital is shipped in the form of rails, etc., it cannot have any influence on the rates of exchange, since India has no return payment to make for it. Precisely for this reason, it need not have any influence on the money-market. Wilson seeks to establish the existence of such an influence by declaring that such an extra expenditure would bring about an additional demand for money accommodation and would thus influence the interest rate. This may be the case; but to maintain that it must take place under all circumstances is totally wrong. No matter where the rails are shipped and whether laid on English or Indian soil, they represent nothing but a definite expansion of English production in a particular sphere. To contend that an expansion of production, even within very broad limits, cannot take place without driving up the interest rate, is absurd. Money accommodation, i.e., the amount of business transacted which includes credit operations, may grow; but these credit operations can increase while the interest rate remains unchanged. This was actually the case during the railway mania in England in the forties. The interest rate did not rise. And it is evident that, so far as actual capital is concerned, in this case commodities, the effect on the money-market will he just the same, whether these commodities are destined for foreign countries or for domestic consumption. It could only make a difference when capital investments by England in foreign countries exerted a restraining influence upon its commercial exports, i.e., exports for which payment must be made, thus giving rise to a return flow, or to the extent that these capital investments are already general symptoms indicating the over-expansion of credit and the initiation of swindling operations. In the following, Wilson puts the questions and Newmarch replies. “1786. On a former day you stated, with reference to the demand for silver for the East, that you believed that the exchanges with India were in favour of this country, notwithstanding the large amount of bullion that is continually transmitted to the East; have you any ground for supposing the exchanges to be in favour of this country? – Yes, I have.... I find that the real value of the exports from the United Kingdom to India in 1851 was £7,420,000; to that is to be added the amount of India House drafts, that is, the funds drawn from India by the East India Company for the purpose of their own expenditure. Those drafts in that year amounted to £3,200,000, making, therefore, the total export from the United Kingdom to India £10,620,000. In 1855... the actual value of the export of goods from the United Kingdom had risen to £10,350,000 and the India House drafts were £3,700,000, making, therefore, the total export from this country £14,050,000. Now as regards 1851, I believe there are no means of stating what was the real value of the import of goods from India to this country, but in 1854 and 1855 we have a statement of the real value; in 1855, the total real value of the imports of goods from India to this country was £12,670,000 and that sum, compared with the £14,050,000 I have mentioned, left a balance in favour of the United Kingdom, as regards the direct trade between the two countries, of £1,380,000” [B. A. 1857]. Thereupon Wilson remarks that the rates of exchange are also affected by indirect commerce. For instance, exports from India to Australia and North America are covered by drafts on London, and therefore affect the rate of exchange just as though the commodities had gone directly from India to England. Furthermore, when India and China are considered together, the balance is against England, since China has constantly to make heavy payments to India for opium, and England has to make payments to China, so that the sums go by this circuitous route to India (1787, 1788). 1791. Wilson now asks if the effect on the rates of exchange will not be the same whether capital “went in the form of iron rails and locomotives, or whether it went in the form of coin.” Newmarch correctly answers: “The £12 million which have been sent during the last few years to India for railway construction served to purchase an annuity which India has to pay at regular intervals to England. “But as far as regards the immediate operation on the bullion market, the investments of the £12 million would only be operative as far as bullion was required to be sent out for actual money disbursements.” 1797. [Weguelin asks:) “If no return is made for this iron (rails), how can it be said to affect the exchanges? – I do not think that that part of the expenditure which is sent out in the form of commodities affects the computation of the exchange.... The computation of the exchange between two countries is affected, one might say, solely by the quantity of obligations or bills offering in one country, as compared with the quantity offering in the other country against it; that is the rationale of the exchange. Now, as regards the transmission of those £12,000,000, the money in the first place is subscribed in this country ... now, if the nature of the transaction was such that the whole of that £12,000,000 was required to be laid down in Calcutta, Bombay, and Madras in treasure ... a sudden demand would very violently operate upon the price of silver, and upon the exchange, just the same as if the India Company were to give notice tomorrow that their drafts were to be raised from £3,000,000 to £12,000,000. But half of those £12,000,000 is spent ... in buying commodities in this country ... iron rails and timber, and other materials it is an expenditure in this country of the capital of this country for a particular kind of commodity to be sent out to India, and there is an end of it.” – “1798. [Weguelin:] But the production of those articles of iron and timber necessary for the railways produces a large consumption of foreign articles, which might affect the exchange? – Certainly.” Wilson now thinks that iron represents labour to a large extent, and that the wage paid for this labour largely represents imported goods (1799), and then questions further: “1801. But speaking quite generally, it would have the effect of turning the exchanges against this country if you sent abroad the articles which were produced by the consumption of the imported articles without receiving any remittance for them either in the shape of produce or otherwise? – That principle is exactly what took place in this country during the time of the great railway expenditure [1845]. For three or four or five years, you spent upon railways £30,000,000, nearly the whole of which went in the payment of wages. You sustained in three years a larger population employed in constructing railways, and locomotives, and carriages, and stations than you employed in the whole of the factory districts. The people ... spent those wages in buying tea and sugar and spirits and other foreign commodities; those commodities were imported; but it was a fact, that during the time this great expenditure was going on the foreign exchanges between this country and other countries were not materially deranged. There was no efflux of bullion, on the contrary, there was rather an influx.” 1802. Wilson insists that with an equalised trade balance and par rates between England and India the extra shipment of iron and locomotives “would affect the exchanges with India.” Newmarch cannot see it that way so long as the rails are sent out as capital investment and India has no payment to make for them in one form or another; he adds: “I agree with the principle that no one country can have permanently against itself an adverse state of exchange with all the other countries, with which it deals; an adverse exchange with one country necessarily produces a favourable exchange with another.” Wilson retorts with this triviality: “1803. But would not a transfer of capital be the same whether it was sent in one form or another? – As regards the obligation it would.” – “1804. The effect therefore of making railways in India, whether you send bullion or whether you send materials, would be the same upon the capital-market here in increasing the value of capital as if the whole was sent out in bullion? If iron prices did not rise, it was in any case proof that the “value” of “capital” contained in the rails had not been increased. What we are here concerned with is the value of money-capital, i.e., the interest rate. Wilson would like to identify money-capital with capital in general. The simple fact is essentially that 12 million were subscribed in England for Indian railways. This is a matter which has nothing directly to do with the rates of exchange, and the designation of the £12 million is also the same to the money-market. If the money-market is in good shape, it need not produce any effect at all on it, just as the English railway subscriptions in 1844 and 1845 left the money-market unaffected. If the money-market is already in somewhat difficult straits, the interest rate might indeed be affected by it, but certainly only in an upward direction, and this, according to Wilson's theory, would favourably affect the rates of exchange for England, that is, it would work against the tendency to export precious metal; if not to India, then to some other country. Mr. Wilson jumps from one thing to another. In Question 1802 it is the rates of exchange that are supposed to be affected, and In Question 1804 the “value of capital” – which are two very different things. The interest rate may affect the rates of exchange, and the rates of exchange may affect the interest rate, but the latter can be stable while the rates of exchange fluctuate, and the rates of exchange can be stable while the interest rate fluctuates. Wilson cannot get it through his head that the mere form in which capital is shipped abroad makes such a difference in the effect, i.e., that the difference in the form of capital is of such importance, and particularly its moneyform, which runs very much counter to enlightened economy. Newmarch replies to Wilson onesidedly in that he does not indicate that he has jumped so suddenly and without reason from rate of exchange to interest rate. Newmarch answers Question 1804 with uncertainty and equivocation: “No doubt, if there is a demand for £12,000,000 to be raised, it is immaterial, as regards the general rate of interest, whether that £12 million is required to be sent in bullion or in materials. I think, however” (a fine transition, this “however,” when he intends to say the exact opposite) “it is not quite immaterial” [it is immaterial, but, nevertheless, it is not immaterial] “because in the one case the £6 million would be returned immediately; in the other case it would not be returned so rapidly. Therefore it would make some” [what definiteness!] “difference, whether the £6 million was expended in this country or sent wholly out of it.” What does he mean when he says six million would return immediately? In so far as the £6 million have been expended in England, they exist in rails, locomotives, etc., which are shipped to India, whence they do not return; their value returns very slowly through amortisation, whereas the six million in precious metal may perhaps return very quickly in kind. In so far as the six million have been expended in wages, they have been consumed; but the money used for payment circulates in the country the same as ever, or forms a reserve. The same holds true for the profits of rail producers and that portion of the six million which replaces their constant capital. Thus, this ambiguous statement about returns is used by Newmarch only to avoid saying directly: The money has remained in the country, and in so far as it serves as loanable money-capital the difference for the money-market (aside from the possibility that circulation could have absorbed more coin) is only that it is charged to the account of A instead of B. An investment of this kind, where capital is transferred to other countries in commodities, not in precious metal, can affect the rate of exchange (but not the rate of exchange with the country in which the exported capital is invested) only in so far as the production of these exported commodities requires an additional import of other foreign commodities. This production then cannot balance out the additional import. However, the same thing happens with every export on credit, no matter whether intended for capital investment or ordinary commercial purposes. Moreover, this additional import can also call forth by way of reaction an additional demand for English goods, for instance, on the part of the colonies or the United States. Previously (1786), Newmarch stated that, owing to drafts of the East India Company, exports from England to India were larger than imports. Sir Charles Wood cross-examines him on this score. This preponderance of English exports to India over imports from India is actually brought about by imports from India for which England does not pay any equivalent. The drafts of the East India Company (now the East India government) reserve themselves into a tribute levied on India. For instance, in 1855, imports from India to England amounted to £12,670,000; English exports to India amounted to £10,350,000; balance in India's favour £2,250,000. [i.e, approximately 2¼ million: more precisely, £2,320,000. – Ed.] “If that was the whole state of the case, that £2,250,000 would have to be remitted in some form to India. But then come in the advertisements from the India House. The India House advertise to this effect that they are prepared to grant drafts on the various presidencies in India to the extent of £3,250,000.” [This amount was levied for the London expenses of the East India Company and for the dividends to be paid to stockholders.] “And that not merely liquidates the £2,250,000 which arose out of the course of trade, but it presents £1,000,000 of surplus” (1917) [B. A. 1857]. “1922. [Wood:] Then the effect of those India House drafts is not to increase the exports to India, but pro tanto to diminish them?” [This should read: to reduce the necessity of covering the imports from India by exports to that country to the same amount.] Mr. Newmarch explains this by saying that the British import “good government” into India for these £3,700,000 (1925). Wood, as a former Minister for India, knows full well the kind of “good government” which the British import to India, and correctly replies with irony: “1926. Then the export, which, you state, is caused by the East India drafts, is an export of good government, and not of produce.” Since England exports a good deal “in this way” for “good government” and as capital investment in foreign countries – thus obtaining imports which are completely independent of the ordinary run of business, tribute partly for exported “good government” and partly in the form of revenues from capital invested in the colonies or elsewhere, i.e., tribute for which it does not have to pay any equivalent – it is evident that the rates of exchange are not affected when England simply consumes this tribute without exporting anything in return. Hence, it is also evident that the rates of exchange are not affected when it reinvests this tribute, not in England, but productively or unproductively in foreign countries; for instance, when it sends munitions for it to the Crimea. Moreover, to the extent that imports from abroad enter into the revenue of England – of course, they must be paid for in the form of tribute, for which no equivalent return is necessary, or by exchange for this unpaid tribute or in the ordinary course of commerce – England can either consume them or reinvest them as capital. In neither case are the rates of exchange affected, and this is overlooked by the sage Wilson. Whether a domestic or a foreign product constitutes a part of the revenue – whereby the latter case merely requires an exchange of domestic for foreign products – the consumption of this revenue, be it productive or unproductive, alters nothing in the rates of exchange, even though it may alter the scale of production. The following should be read with the foregoing in mind: 1934. Wood asks Newmarch how the shipment of war supplies to the Crimea would affect the rate of exchange with Turkey. Newmarch replies: “I do not see that the mere transmission of warlike stores would necessarily affect the exchange, but certainly the transmission of treasure would affect the exchange.” In this case he thus distinguishes capital in the form of money from capital in other forms. But now Wilson asks: “1935. If you make an export of any article to a great extent, for which there is to be no corresponding import” [Mr. Wilson forgets that there are very considerable imports into England for which corresponding exports have never taken place, except in the form of “good government” or of previously exported investment capital; in any case imports which do not enter into normal commercial movement. But these imports are again exchanged, for instance, for American products, and the circumstance that American goods are exported without corresponding imports does not alter the fact that the value of these imports can be consumed without an equivalent flow abroad; they have been received without reciprocal exports and can therefore be consumed without entering into the balance of trade], “you do not discharge the foreign debt you have created by your imports” [but, if you have previously paid for these imports, for instance, by credit given abroad, then no debt is contracted thereby, and the question has nothing to do with the international balance; it resolves itself into productive and unproductive expenditures, no matter whether the products so consumed are domestic or foreign], “and therefore you must by that transaction affect the exchanges by not discharging the foreign debt, by reason of your export having no corresponding imports? – That is true as regards countries generally.” This lecture by Wilson amounts to saying that every export with no corresponding import is simultaneously an import with no corresponding export, because foreign, i.e., imported, commodities enter into the production of the exported article. The assumption is that every export of this kind is based on, or creates, an unpaid import and thus presupposes a debt abroad. This is wrong, even when the following two circumstances are disregarded: 1) England receives certain imports free of charge for which it pays no equivalent, e.g., a portion of its Indian imports. It can exchange these for American imports and export the latter without importing in return; in any case, so far as the value is concerned, it has only exported something that has cost it nothing. 2) England may have paid for imports, for instance, American imports, which constitute additional capital; if it consumes these unproductively, for instance, as war materials, this does not constitute any debt towards America and does not affect the rate of exchange with America. Newmarch contradicts himself in Nos. 1934 and 1935, and Wood calls this to his attention in No. 1938: “If no portion of the goods which are employed in the manufacture of the articles exported without return [war materials], came from the country to which those articles are sent, how is the exchange with that country affected; supposing the trade with Turkey to be in an ordinary state of equilibrium, how is the exchange between this country and Turkey affected by the export of warlike stores to the Crimea?” Here Newmarch loses his equanimity; he forgets that he has answered the same simple question correctly in No. 1934, and says: “We seem, I think, to have exhausted the practical question, and to have now attained a very elevated region of metaphysical discussion.” [Wilson has still another version of his claim that the rate of exchange is affected by every transfer of capital from one country to another, no matter whether in the form of precious metal or commodities. Wilson knows, of course, that the rate of exchange is affected by the interest rate, particularly by the relation of the rates of interest prevailing in the two countries whose mutual rates of exchange are under discussion. If he can now demonstrate that surpluses of capital in general, i.e., in the first place, commodities of all kinds including precious metal, have a hand in influencing the interest rate, then he is a step closer to his goal; a transfer of any considerable portion of this capital to some other country must then change the interest rate in both countries, with the change taking place in opposite directions. Thereby, in a secondary way, the rate of exchange between both countries is also altered. – F. E.] He then says in the Economist, May 22, 1847, page 574, which he edited at the time: “No doubt, however, such abundance of capital as is indicated by large stocks of commodities of all kinds, including bullion, would necessarily lead, not only to low prices of commodities in general, but also to a lower rate of interest for the use of capital. If we have a stock of commodities on hand, which is sufficient to serve the country for two years to come, a command over those commodities would be obtained for a given period, at a much lower rate than if the stocks were barely sufficient to last us two months. All loans of money, in whatever shape they are made, are simply a transfer of a command over commodities from one to another. Whenever, therefore, commodities are abundant, the interest of money must be low, and when they are scarce, the interest of money must be high. As commodities become abundant, the number of sellers, in proportion to the number of buyers, increases, and, in proportion as the quantity is more than is required for immediate consumption, so must a larger portion be kept for future use. Under these circumstances, the terms on which a holder becomes willing to sell for a future payment, or on credit, become lower than if he were certain that his whole stock would be required within a few weeks”. In regard to the statement, it is to be noted that a large influx in precious metal can take place simultaneously with a contraction in production, as is always the case in the period following a crisis. In the subsequent phase, precious metal may come in from countries which mainly produce precious metal; imports of other commodities are generally balanced by exports during this period. In these two phases, the interest rate is low and rises but slowly; we have already discussed the reason for this. This low interest rate could always be explained without recourse to the influence of any “large stocks of commodities of all kinds.” And how is this influence to take place? The low price of cotton, for instance, renders possible the high profits of the spinners, etc. Now why is the interest rate low? Surely not because the profit, which may be made on borrowed capital, is high. But simply and solely because, under existing conditions, the demand for loan capital does not grow in proportion to this profit; in other words, because loan capital has a movement different from industrial capital. What the Economist wants to prove is exactly the reverse, namely, that the movements of loan capital are identical with those of industrial capital. In regard to the statement, if we reduce the absurd assumption of stocks for two years in advance to the point where it begins to take on some meaning, it signifies that the market is overstocked. This would cause a fall in prices. Less would have to be paid for a bale of cotton. This would by no means justify the conclusion that money for the purchase of this cotton is more easily borrowed. This depends on the state of the money-market. If money can be borrowed more easily, it is only because commercial credit is in a state requiring it to make less use than usual of bank credit. The commodities glutting the market are either means of subsistence or means of production. The low price of both increases the industrial capitalist's profit. Why should it depress the interest rate, unless it be through the antithesis, rather than the identity, between the abundance of industrial capital and the demand for money accommodation? Circumstances are such that the merchant and industrial capitalist can more easily advance credit to one another; owing to this facilitation of commercial credit, both industrialist as well as merchant need less bank credit; hence the interest rate can be low. This low interest rate has nothing to do with the influx in precious metal, although both may run parallel to each other, and the same causes bringing about low prices of imported articles may also produce a surplus of imported precious metal. If the import market were really glutted, it would prove that a decrease in the demand for imported articles had taken place, and this would be inexplicable at low prices, unless it were attributed to a contraction of domestic industrial production; but this, again, would be inexplicable, so long as there is excessive importing at low prices. A mass of absurdities – in order to prove that a fall in prices = a fall in the interest rate. Both may simultaneously exist side by side. But if they do, it will be a reflection of the opposition in the directions of the movement of industrial capital and the movement of loanable money-capital. It will not be a reflection of their identity. In regard to the statement, it is hard to understand even after this exposition why money interest should be low when commodities are available in abundance. If commodities are cheap, then I may need only £1,000 instead of the previous £2,000 to buy a definite quantity. But perhaps I nevertheless invest £2,000, and thus buy twice the quantity which I could have bought formerly. In this way, I expand my business by advancing the same capital, which I may have to borrow. I buy £2,000 worth of commodities, the same as before. My demand on the money-market therefore remains the same, even though my demand on the commodity-market rises with the fall in commodity-prices. But if this demand for commodities should decrease, that is, if production should not expand with the fall in commodity-prices, an event which would contradict all the laws of the Economist, then the demand for loanable money-capital would decrease, although the profit would increase. But this increasing profit would create a demand for loan capital. Incidentally, a low level of commodity-prices may be due to three causes. First, to lack of demand. In such a case, the interest rate is low because production is paralysed and not because commodities are cheap, for the low prices are but a rejection of that paralysis. Second, it may be due to supply exceeding demand. This may be the result of a glut on the market, etc., which may lead to a crisis and coincide with a high interest rate during the crisis itself; or, it may be the result of a fall in the value of commodities, so that the same demand can be satisfied at lower prices. Why should the interest rate fall in the last case? Because profits increase? If this were due to less money-capital being required for obtaining the same productive or commodity-capital, it would merely prove that profit and interest are inversely proportional to each other. In any case, the general statement of the Economist is false. Low money-prices for commodities and a low interest rate do not necessarily go together. Otherwise, the interest rate would be lowest in the poorest countries, where money-prices for produce are lowest, and highest in the richest countries, where money-prices for agricultural products are highest. In general, the Economist admits: If the value of money falls, it exerts no influence on the interest rate. £100 bring £105 the same as ever. If the £100 are worth less, so are the £5 interest. This relation is not affected by the appreciation or depreciation of the original sum. Considered from the point of view of value, a definite quantity of commodities is equal to a definite sum of money. If this value increases, it is equal to a larger sum of money. The opposite is true when it falls. If the value is equal to 2,000, then 5% = 100; if it is equal to 1,000, then 5% = 50. But this does not alter the interest rate in any way. The rational part of this matter is merely that greater money accommodation is required when it takes £2,000 to sell the same quantity of commodities than when only £1,000 are required. But this merely shows that profit and interest are here inversely proportional to each other. For the lower the prices of the components of constant and variable capital, the higher the profit and the lower the interest. But the opposite can also be and is often the case. For instance, cotton may be cheap because no demand exists for yarn and fabrics; and cotton may be relatively expensive because a large profit in the cotton industry creates a great demand for it. On the other hand, the profits of industrialists may be high precisely because the price of cotton is low. Hubbard's table proves that the interest rate and the prices of commodities execute completely independent movements, whereas the movements of the interest rate adhere closely to those of the metal reserve and the rates of exchange. The Economist states: “Whenever, therefore, commodities are abundant, the interest of money must be low.” Precisely the opposite obtains during crises. Commodities are superabundant, inconvertible into money, and therefore the interest rate is high; in another phase of the cycle the demand for commodities is great and therefore quick returns are made, but at the same time, prices are rising and because of the quick returns the interest rate is low. “When they [the commodities] are scarce, the interest of money must be high.” The opposite is again true in the slack period following a crisis. Commodities are scarce, absolutely speaking, not with reference to demand; and the interest rate is low. In regard to the statement, it is pretty evident that an owner of commodities, provided he can sell the latter at all, will get rid of them at a lower price when the market is glutted than he would when there is a prospect of the existing supply becoming rapidly exhausted. But why the interest rate should fall because of that is not so clear. If the market is glutted with imported commodities, the interest rate may rise as a result of an increased demand on the part of the owners for loan capital, in order to avoid dumping their commodities on the market. The interest rate may fall, because the fluidity of commercial credit may keep the demand for bank credit relatively low. The Economist mentions the rapid effect on rates of exchange in 1847 of the raising of the interest rate and other circumstances exerting pressure on the money-market. But it should be borne in mind that the gold drain continued until the end of April in spite of the change in the rates of exchange; a turn did not take place here until early May. On January 1, 1847, the metal reserve of the Bank was £15,066,691; the interest rate 3½%; three months' rates of exchange on Paris 25.75; on Hamburg 13.10; on Amsterdam 12.3¼. On March 5, the metal reserve had fallen to £11,595,535; the discount had risen to 4%; the rate of exchange fell to 25.67½ on Paris; 13.9¼ on Hamburg; and 12.2½ on Amsterdam. The drain of gold continued. See the following table: 1847 Bullion Reserve of Money-Market the Bank of England Highest Three-Month Rates Paris Hamburg Amsterdam March 20 11,231,630 Bank disc. 4% 25.67½ 13.9¾ 12.2½ April 3 10,246,410 ,, ,, 5% 25.80 13.10 12.3½ April 10 9,867,053 Money very scarce 25.90 13.10½ 12.4½ April 17 9,329,841 Bank disc. 5.5% 26.02½ 13.40¾ 12.5½ April 24 9,213,890 Pressure 26.05 13.12 12.6 May 4 9,337,746 Increasing pressure 26.45 13.12¾ 12.6½ May 8 9,588,759 Highest pressure 26.27½ 13.15½ 12.7¾ In 1847, the total export of precious metal from England amounted to £8,602,597. Of this to the United States £3,226,411 France £2,479,892 Hanse towns £958,781 Holland £247,743 In spite of the change in the rates at the end of March, the drain of gold continued for another full month, probably to the United States. “We thus see” [says the Economist, August 2, 1847, p. 954] “how rapid and striking was the effect of a rise in the rate of interest, and the pressure which ensued in correcting an adverse exchange, and in turning the tide of bullion back to this country. This effect was produced entirely independent of the balance of trade. A higher rate of interest caused a lower price of securities, both foreign and English, and induced large purchases to be made on foreign account, which increased the amount of bills to be drawn from this country, while, on the other hand, the high rate of interest and the difficulty of obtaining money was such that the demand of those bills fell off, while their amount increased.... For the same cause orders for imports were countermanded, and investments of English funds abroad were realised and brought home for employment here. Thus, for example, we read in the Rio de Janeiro Price Current of the 10th May, 'Exchange [on England] has experienced a further decline, principally caused by a pressure on the market for remittance of the proceeds of large sales of [Brazilian] government stock, on English account. Capital belonging to this country, which has been invested in public and other securities abroad, when the interest was very low here, was thus again brought back when the interest became high.” England's Balance Of Trade India alone has to pay 5 million in tribute for “good government,” interest and dividends on British capital, etc., not counting the sums sent home annually by officials as savings from their salaries, or by English merchants as part of their profit to be invested in England. Every British colony continually has to make large remittances for the same reason. Most of the banks in Australia, the West Indies, and Canada, have been founded with English capital, and the dividends are payable in England. In the same way, England owns many foreign securities – European, North American and South American – on which it draws interest. In addition to this it has interests in foreign railways, canals, mines, etc., with corresponding dividends. Remittance on all these items is made almost exclusively in products over and above the amount of English exports. On the other hand what is sent from England to owners of English securities abroad and for consumption by Englishmen abroad, is insignificant in comparison. The question, so far as it concerns the balance of trade and the rates of exchange, is “at any particular moment one of time.” “Practically speaking ... England gives long credits upon her exports, while the imports are paid for in ready money. At particular moments this difference of practice has a considerable effect upon the exchanges. At a time when our exports are very considerably increasing, e.g., 1850, a continual increase of investment of British capital must be going on ... in this way remittances of 1850 may be made against goods exported in 1849. But if the exports of 1850 exceed those of 1849 by more than 6 million, the practical effect must he that more money is sent abroad, to this amount, than returned in the same year. And in this way an effect is produced on the rates of exchange and the rate of interest. When, on the contrary, our trade is depressed after a commercial crisis, and when our exports are much reduced, the remittances due for the past years of larger exports greatly exceed the value of our imports; the exchanges become correspondingly in our favour, capital rapidly accumulates at home, and the rate of interest becomes less.” (Economist, January 11, 1851 [p. 30].) The foreign rates of exchange can change: 1) In consequence of the immediate balance of payments, no matter what the cause – a purely mercantile one, or capital investment abroad, or government expenditures for wars, etc., in so far as cash payments thereby are made to foreign countries. 2) In consequence of money depreciation – whether metal or paper – in a particular country. This is purely nominal. If £1 should represent only half as much money as formerly, it would naturally be counted as 12.5 francs instead of 25 francs. 3) When it is a matter of a rate of exchange between countries, of which one uses silver and the other gold as “money,” the rate of exchange depends upon the relative fluctuations of the value of these two metals, since these necessarily alter the parity between them. This is illustrated by the rates of exchange in 1850; they were unfavourable to England, although that country's export rose enormously. Yet no drain of gold took place. This was a result of a momentary rise in the value of silver as against gold. (See Economist, November 30, 1850 [pp. 1319-1320].) Parity for the rate of exchange of £1 is: Paris, 25 francs 20 cent.; Hamburg, 13 marks banko 10.5 shillings; Amsterdam, 11 florins 97 cent. To the extent that the Paris rate of exchange exceeds 25.20 francs, it becomes more favourable to the English debtor of France, or the buyer of French commodities. In both cases he needs fewer pounds sterling in order to accomplish his purpose. – In remoter countries, where precious metal is not easily obtained when bills of exchange are scarce and insufficient for remittances to be made to England, the natural effect is to drive up the prices of such products as are generally shipped to England since a greater demand arises for them, in order to send them to England in place of bills of exchange; this is often the case in India. An unfavourable rate of exchange, or even a drain on gold, can take place when there is a great abundance of money in England, the interest rate is low and the price for securities is high. In the course of 1848 England received large quantities of silver from India, since good bills of exchange were rare and mediocre ones were not readily accepted in consequence of the crisis of 1847 and the general lack of credit in business with India. All this silver had barely arrived before it found its way to the continent, where the revolution led to the formation of many hoards. The bulk of the same silver made the trip back to India in 1850, since the rate of exchange now made this profitable. The monetary system is essentially a Catholic institution, the credit system essentially Protestant. “The Scotch hate gold.” In the form of paper the monetary existence of commodities is only a social one. It is Faith that brings salvation. Faith in money-value as the immanent spirit of commodities, faith in the mode of production and its predestined order, faith in the individual agents of production as mere personifications of self-expanding capital. But the credit system does not emancipate itself from the basis of the monetary system any more than Protestantism has emancipated itself from the foundations of Catholicism. xxiii The effect this had on the money-market is indicated by the following testimony of Newmarch: “1509. At the close of 1853, there was a considerable apprehension in the public mind, and in September of that year the Bank of England raised its discount on three occasions... In the early part of October there was a considerable degree of apprehension and alarm in the public mind. That apprehension and alarm was relieved to a very great extent before the end of November, and was almost wholly removed, in consequence of the arrival of nearly £5,000,000 of treasure from Australia... The same thing happened in the autumn of 1854, by the arrival in the months of October and November of nearly £6,000,000 of treasure. The same thing happened again in the autumn of 1855, which we know was a period of excitement and alarm, by the arrivals, in the three months of September, October and November, of nearly £8,000,000 of treasure; and then at the close of last year, 1856, we find exactly the same occurrence. In truth, I might appeal to the observation almost of any member of the Committee, whether the natural and complete solvent to which we have got into the habit of looking for any financial pressure, is not the arrival of a gold ship” [B. A. 1857]. xxiv According to Newmarch, a drain of gold to foreign countries can arise from three causes: 1) from purely commercial conditions, that is, if imports have exceeded exports, as was the case in 1836 to 1844, and again in 1847 – principally a heavy import of grain; 2) in order to secure the means for investing English capital in foreign countries, as in 1857 for railways in India, and 3) for definite expenditures abroad, as in 1853 and 1854 for war purposes in the Orient. xxv 1918. Newmarch. “When you combine India and China, when you bring into account the transactions between India and Australia, and the still more important transactions between China and the United States, the trade being a triangular one, and the adjustment taking place through us ... then it is true that the balance of trade was not merely against this country, but against France, and against the United States.” – (B. A. 1857.) xxvi See, for instance, the ridiculous reply of Weguelin [B.A. 1857] where he states that a drain of five million in gold is so much capital less, and thus attempts to explain certain phenomena which do not take place when there is an infinitely greater increase in prices or depreciation, expansion or contraction of real industrial capital. On the other hand, it is just as ridiculous to attempt to explain these phenomena directly as symptoms of an expansion or contraction of the mass of real capital (considered from the viewpoint of its material elements). xxvii Newmarch (B. A. 1857): “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 made to turn; all the other banks in the country look to the Bank of England as the central hoard or reservoir from which they are to draw their reserve of coin; and it is upon that hoard or reservoir that the action of the foreign exchanges always falls.” xxviii “Practically, then, both Mr. Tooke and Mr. Loyd would meet an additional demand for gold ... by an early ... contraction of credit by raising the rate of interest, and restricting advances of capital.... But the principles of Mr. Loyd lead to certain [legal] restrictions and regulations which produce the most serious inconvenience.” (Economist [December 11], 1847, p. 1418.) xxix “You quite agree that there is no mode by which you can modify the demand for bullion except by raising the rate of interest?” – Chapman [associate member of the great bill-brokers' firm of Overend, Gurney & Co.]: “I should say so.... When our bullion falls to a certain point, we had better sound the tocsin at once and say we are drooping, and every man sending money abroad must do it at his own peril.” (B. A. 1857, Evidence No. 5057.)
|
|
|
Post by IBDaMann on Sept 20, 2020 22:28:38 GMT
Volume III Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 36. Pre-Capitalist Relationships Interest-bearing capital, or, as we may call it in its antiquated form, usurer's capital, belongs together with its twin brother, merchant's capital, to the antediluvian forms of capital, which long precede the capitalist mode of production and are to be found in the most diverse economic formations of society. The existence of usurer's capital merely requires that at least a portion of products should be transformed into commodities, and that money should have developed in its various functions along with trade in commodities. The development of usurer's capital is bound up with the development of merchant's capital and especially that of money-dealing capital. In ancient Rome, beginning with the last years of the Republic, when manufacturing stood far below its average level of development in the ancient world, merchant's capital, money-dealing capital, and usurer's capital developed to their highest point within the ancient form. We have seen (English edition: Vol. I, pp. 130-34. – Ed.) that hoarding necessarily appears along with money. But the professional hoarder does not become important until he is transformed into a usurer. The merchant borrows money in order to make a profit with it, in order to use it as capital, that is, to expend it. Hence in earlier forms of society the money-lender stands in the same relation to him as to the modern capitalist. This specific relation was also experienced by the Catholic universities. “The universities of Alcalá, Salamanca, Ingolstadt, Freiburg in Breisgau, Mayence, Cologne, Trèves, one after another recognized the legality of interest for commercial loans. The first five of these approbations were deposited in the archives of the Consulate of the city of Lyons and published in the appendix to the Traitè de l'usure et des intérêts, by Bruyset-Ponthus, Lyons.” (M. Augier, Le Crèdit public, etc., Paris, 1842, p. 206.) In all the forms in which slave economy (not the patriarchal kind, but that of later Grecian and Roman times) serves as a means of amassing wealth, where money therefore is a means of appropriating the labour of others through the purchase of slaves, land, etc., money can be expanded as capital, i.e., bear interest, for the very reason that it can be so invested. The characteristic forms, however, in which usurer's capital exists in periods antedating capitalist production are of two kinds. I purposely say characteristic forms. The same forms repeat themselves on the basis of capitalist production, but as mere subordinate forms. They are then no longer the forms which determine the character of interest-bearing capital. These two forms are: first, usury by lending money to extravagant members of the upper classes, particularly landowners; secondly, usury by lending money to small producers who possess their own conditions of labour – this includes the artisan, but mainly the peasant, since particularly under pre-capitalist conditions, in so far as they permit of small independent individual producers, the peasant class necessarily constitutes the overwhelming majority of them. Both the ruin of rich landowners through usury and the impoverishment of the small producers lead to the formation and concentration of large amounts of money-capital. But to what extent this process does away with the old mode of production, as happened in modern Europe, and whether it puts the capitalist mode of production in its stead, depends entirely upon the stage of historical development and the attendant circumstances. Usurer's capital as the characteristic form of interest-bearing capital corresponds to the predominance of small-scale production of the self-employed peasant and small master craftsman. When the labourer is confronted by the conditions of labour and by the product of labour in the shape of capital, as under the developed capitalist mode of production, he has no occasion to borrow any money as a producer. When he does any money borrowing, he does so, for instance, at the pawnshop to secure personal necessities. But wherever the labourer is the owner, whether actual or nominal, of his conditions of labour and his product, he stands as a producer in relation to the money-lender's capital, which confronts him as usurer's capital. Newman expresses the matter insipidly when he says the banker is respected, while the usurer is hated and despised, because the banker lends to the rich, whereas the usurer lends to the poor. (F. W. Newman, Lectures on Political Economy, London, 1851, p. 44.) He overlooks the fact that a difference between two modes of social production and their corresponding social orders lies at the heart of the matter and that the situation cannot be explained by the distinction between rich and poor. Moreover, the usury which sucks dry the small producer goes hand in hand with the usury which sucks dry the rich owner of a large estate. As soon as the usury of the Roman patricians had completely ruined the Roman plebeians, the small peasants, this form of exploitation came to an end and a pure slave economy replaced the small-peasant economy. In the form of interest, the entire surplus above the barest means of subsistence (the amount that later becomes wages of the producers) can be consumed by usury (this later assumes the form of profit and ground-rent), and hence it is highly absurd to compare the level of this interest, which assimilates all the surplus-value excepting the share claimed by the state, with the level of the modern interest rate, where interest constitutes at least normally only a part of the surplus-value. Such a comparison overlooks that the wage-worker produces and gives to the capitalist who employs him, profit, interest and ground-rent, i.e., the entire surplus-value. Carey makes this absurd comparison in order to show how advantageous the development of capital, and the fall in the interest rate that accompanies it, are for the labourer. Furthermore, while the usurer, not content with squeezing the surplus-labour out of his victim, gradually acquires possession even of his very conditions of labour, land, house, etc., and is continually engaged in thus expropriating him, it is again forgotten that, on the other hand, this complete expropriation of the labourer from his conditions of labour is not a result which the capitalist mode of production seeks to achieve, but rather the established condition for its point of departure. The wage-slave, just like the real slave, cannot become a creditor's slave due to his position – at least in his capacity as producer; the wage-slave, it is true, can become a creditor's slave in his capacity as consumer. Usurer's capital in the form whereby it indeed appropriates all of the surplus-labour of the direct producers, without altering the mode of production; whereby the ownership or possession by the producers of the conditions of labour and small-scale production corresponding to this – is its essential prerequisite; whereby, in other words, capital does not directly subordinate labour to itself, and does not, therefore, confront it as industrial capital – this usurer's capital impoverishes the mode of production, paralyses the productive forces instead of developing them, and at the same time perpetuates the miserable conditions in which the social productivity of labour is not developed at the expense of labour itself, as in the capitalist mode of production. Usury thus exerts, on the one hand, an undermining and destructive influence on ancient and feudal wealth and ancient and feudal property. On the other hand, it undermines and ruins smallpeasant and small-burgher production, in short, all forms in which the producer still appears as the owner of his means of production. Under the developed capitalist mode of production, the labourer is not the owner of the means of production, i.e., the field which he cultivates, the raw materials which he processes, etc. But under this system separation of the producer from the means of production reflects an actual revolution in the mode of production itself. The isolated labourers are brought together in large workshops for the purpose of carrying out separate but interconnected activities; the tool becomes a machine. The mode of production itself no longer permits the dispersion of the instruments of production associated with small property; nor does it permit the isolation of the labourer himself. Under the capitalist mode of production usury can no longer separate the producer from his means of production, for they have already been separated. Usury centralizes money wealth where the means of production are dispersed. It does not alter the mode of production, but attaches itself firmly to it like a parasite and makes it wretched. It sucks out its blood, enervates it and compels reproduction to proceed under ever more pitiable conditions. Hence the popular hatred against usurers, which was most pronounced in the ancient world where ownership of means of production by the producer himself was at the same time the basis for political status, the independence of the citizen. To the extent that slavery prevails, or in so far as the surplus product is consumed by the feudal lord and his retinue, while either the slave-owner or the feudal lord fall into the clutches of the usurer, the mode of production still remains the same; it only becomes harder on the labourer. The indebted slave holder or feudal lord becomes more oppressive because he is himself more oppressed. Or he finally makes way for the usurer, who becomes a landed proprietor or a slaveholder himself, like the knights in ancient Rome. The place of the old exploiter, whose exploitation was more or less patriarchal because it was largely a means of political power, is taken by a hard, money mad parvenu. But the mode of production itself is not altered thereby. Usury has a revolutionary effect in all pre-capitalist modes of production only in so far as it destroys and dissolves those forms of property on whose solid foundation and continual reproduction in the same form the political organization is based. Under Asian forms, usury can continue a long time, without producing anything more than economic decay and political corruption. Only where and when the other prerequisites of capitalist production are present does usury become one of the means assisting in establishment of the new mode of production by ruining the feudal lord and small-scale producer, on the one hand, and centralizing the conditions of labour into capital, on the other. In the Middle Ages no country had a general rate of interest. The Church forbade, from the outset, all lending at interest. Laws and courts offered little protection for loans. Interest was so much the higher in individual cases. The limited circulation of money, the need to make most payments in cash, compelled people to borrow money, and all the more so when the exchange business has still undeveloped. Therefore large divergences both in interest rates and the conceptions of usury. In the time of Charlemagne it was considered usurious to charge 100%. In Lindau on Lake Constance, some local burghers took 216⅔% in 1348. In Zurich, the City Council decreed that 43⅓% should be the legal interest rate. In Italy 40% had to be paid sometimes, although the usual rate from the 12th to the 14th century did not exceed 20%. Verona ordered that 12½% be the legal rate. Emperor Friedrich II fixed the rate at 10%, but only for Jews. He did not deign to speak for Christians. In the German Rhine provinces, 10% was the rule as early as the 13th century. (Hullmann, Geschichte des Städtewesens, II, S. 55-57.) Usurer's capital employs the method of exploitation characteristic of capital yet without the latter's mode of production. This condition also repeats itself within bourgeois economy, in backward branches of industry or in those branches which resist the transition to the modern mode of production. For instance, if we wish to compare the English interest rate with the Indian, we should not take the interest rate of the Bank of England, but rather, e.g., that charged by lenders of small machinery to small producers in domestic industry. Usury, in contradistinction to consuming wealth, is historically important, inasmuch as it is in itself a process generating capital. Usurer's capital and merchant's wealth promote the formation of moneyed wealth independent of landed property. The less products assume the character of commodities, and the less intensively and extensively exchange-value has taken hold of production, the more does money appear as actual wealth as such, as wealth in general – in contrast to its limited representation in use-values. This is the basis of hoarding. Aside from money as world-money and as hoard, it is, in particular, the form of means of payment whereby it appears as the absolute form of commodities. And it is especially its function as a means of payment which develops interest and thereby money-capital. What squandering and corrupting wealth desires is money as such, money as a means of buying everything (also as a means of paying debts). The small producer needs money above all for making payments. (The transformation of services and taxes in kind to landlords and the state into money-rent and money-taxes plays a great role here.) In either case, money is needed as such. On the other hand, it is in usury that hoarding first becomes reality and that the hoarder fulfills his dream. What is sought from the owner of a hoard is not capital, but money as such; but by means of interest he transforms this hoard of money into capital, that is, into a means of appropriating surplus labour in part or in its entirety, and similarly securing a hold on a part of the means of production themselves, even though they may nominally remain the property of others. Usury lives in the pores of production, as it were, just as the gods of Epicurus lived in the space between worlds. Money is so much harder to obtain, the less the commodity-form constitutes the general form of products. Hence the usurer knows no other barrier but the capacity of those who need money to pay or to resist. In small-peasant and small-burgher production money serves as a means of purchase, mainly, whenever the means of production of the labourer (who is still predominantly their owner under these modes of production) are lost to him either by accident or through extraordinary upheavals, or at least are not replaced in the normal course of reproduction. Means of subsistence and raw materials constitute an essential part of these requirements of production. If these become more expensive, it may make it impossible to replace them out of the returns for the product, just as ordinary crop failures may prevent the peasant from replacing his seed in kind. The same wars through which the Roman patricians ruined the plebe jails by compelling them to serve as soldiers and which prevented them from reproducing their conditions of labour, and therefore made paupers of them (and pauperization, the crippling or loss of the prerequisites of reproduction is here the predominant form) these same wars filled the store-rooms and coffers of the patricians with looted copper, the money of that time. Instead of directly giving plebeians the necessary commodities, i.e., grain, horses, and cattle, they loaned them this copper for which they had no use themselves, and took advantage of this situation to exact enormous usurious interest, thereby turning the plebeians into their debtor slaves. During the reign of Charlemagne, the Frankish peasants were likewise ruined by wars, so that they faced no choice but to become serfs instead of debtors. In the Roman Empire, as is known, extreme hunger frequently resulted in the sale of children and also in free men selling themselves as slaves to the rich. So much for general turning-points. In individual cases the maintenance or loss of the means of production on the part of small producers depends on a thousand contingencies, and every one of these contingencies or losses signifies impoverishment and becomes a crevice into which a parasitic usurer may creep. The mere death of his cow may render the small peasant incapable of renewing his reproduction on its former scale. He then falls into the clutches of the usurer, and once in the usurer's power he can never extricate himself. The really important and characteristic domain of the usurer, however, is the function of money as a means of payment. Every payment of money, ground-rent, tribute, tax, etc., which becomes due on a certain date, carries with it the need to secure money for such a purpose. Hence from the days of ancient Rome to those of modern times, wholesale usury relies upon tax-collectors, fermiers gènèraux, receveurs gènèraux. Then, there develops with commerce and the generalization of commodity- production the separation, in time, of purchase and payment. The money has to be paid on a definite date. How this can lead to circumstances in which the moneycapitalist and usurer, even nowadays, merge into one is shown by modern money crises. This same usury, however, becomes one of the principal means of further developing the necessity for money as a means of payment – by driving the producer ever more deeply into debt and destroying his usual means of payment, since the burden of interest alone makes his normal reproduction impossible. At this point, usury sprouts up out of money as a means of payment and extends this function of money as its very own domain. The credit system develops as a reaction against usury. But this should not be misunderstood, nor by any means interpreted in the manner of the ancient writers, the church fathers, Luther or the early socialists. It signifies no more and no less than the subordination of interest-bearing capital to the conditions and requirements of the capitalist mode of production. On the whole, interest-bearing capital under the modern credit system is adapted to the conditions of the capitalist mode of production. Usury as such does not only continue to exist, but is even freed, among nations with a developed capitalist production, from the fetters imposed upon it by all previous legislation. Interest-bearing capital retains the form of usurer's capital in relation to persons or classes, or in circumstances where borrowing does not, nor can, take place in the sense corresponding to the capitalist mode of production; where borrowing takes place as a result of individual need, as at the pawnshop; where money is borrowed by wealthy spendthrifts for the purpose of squandering; or where the producer is a non-capitalist producer, such as a small farmer or craftsman, who is thus still, as the immediate producer, the owner of his own means of production; finally where the capitalist producer himself operates on such a small scale that he resembles those self-employed producers. What distinguishes interest-bearing capital – in so far as it is an essential element of the capitalist mode of production – from usurer's capital is by no means the nature or character of this capital itself. It is merely the altered conditions under which it operates, and consequently also the totally transformed character of the borrower who confronts the money-lender. Even when a man without fortune receives credit in his capacity of industrialist or merchant, it occurs with the expectation that he will function as capitalist and appropriate unpaid labour with the borrowed capital. He receives credit in his capacity of potential capitalist. The circumstance that a man without fortune but possessing energy, solidity, ability and business acumen may become a capitalist in this manner – and the commercial value of each individual is pretty accurately estimated under the capitalist mode of production – is greatly admired by apologists of the capitalist system. Although this circumstance continually brings an unwelcome number of new soldiers of fortune into the field and into competition with the already existing individual capitalists, it also reinforces the supremacy of capital itself, expands its base and enables it to recruit ever new forces for itself out of the substratum of society. In a similar way, the circumstance that the Catholic Church in the Middle Ages formed its hierarchy out of the best brains in the land, regardless of their estate, birth or fortune, was one of the principal means of consolidating ecclesiastical rule and suppressing the laity. The more a ruling class is able to assimilate the foremost minds of a ruled class, the more stable and dangerous becomes its rule. The initiators of the modern credit system take as their point of departure not an anathema against interest-bearing capital in general, but on the contrary, its explicit recognition. We are not referring here to such reactions against usury which attempted to protect the poor against it, like the Monts-de-piètè (1350 in Sarlins in Franche-Comté, later in Perugia and Savona in Italy, 1400 and 1479). These are noteworthy mainly because they reveal the irony of history, which turns pious wishes into their very opposite during the process of realization. According to a moderate estimate, the English working-class pays 100% to the pawnshops, the modern successors of Monts-de-piètè xxx We are also not referring to the credit fantasies of such men as Dr. Hugh Chamberleyne or John Briscoe, who attempted during the last decade of the 17th century to emancipate the English aristocracy from usury by means of a farmers' bank using paper money based on real estate. xxxi The credit associations established in the 12th and 14th centuries in Venice and Genoa arose from the need for marine commerce and the wholesale trade associated with it to emancipate themselves from the domination of outmoded usury and the monopolization of the money business. While the actual banks founded in those city-republics assumed simultaneously the shape of public credit institutions from which the state received loans on future tax revenues, it should not be forgotten that the merchants founding those associations were themselves prominent citizens of those states and as much interested in emancipating their government as they were in emancipating themselves from the exactions of usurers, xxxii and at the same time in getting tighter and more secure control over the state. Hence, when the Bank of England was to be established, the Tories also protested: “Banks are republican institutions. Flourishing banks existed in Venice, Genoa, Amsterdam, and Hamburg. But who ever heard of a Bank of France or Spain?” The Bank of Amsterdam, in 1609, was not epoch-making in the development of the modern credit system any more than that of Hamburg in 1619. It was purely a bank for deposits. The checks issued by the bank were indeed merely receipts for the deposited coined and uncoined precious metal, and circulated only with the endorsement of the acceptors. But in Holland commercial credit and dealing in money developed hand in hand with commerce and manufacture, and interest-bearing capital was subordinated to industrial and commercial capital by the course of development itself. This could already be seen in the low interest rate. Holland, however, was considered in the 17th century the model of economic development, as England is now. The monopoly of old-style usury, based on poverty, collapsed in that country of its own weight. During the entire 18th century there is the cry, with Holland referred to as an example, for a compulsory reduction of the rate of interest (and legislation acts accordingly), in order to subordinate interest-bearing capital to commercial and industrial capital, instead of the reverse. The main spokesman for this movement is Sir Josiah Child, the father of ordinary English private banking. He declaims against the monopoly of usurers in much the same way as the wholesale clothing manufacturers, Moses & Son, do when leading the light against the monopoly of “private tailors.” This same Josiah Child is simultaneously the father of English stock-jobbing. Thus, this autocrat of the East India Company defends its monopoly in the name of free trade. Versus Thomas Manley(Interest of Money Mistaken – Thomas Manley was not the author of this book. It was published anonymously in London in 1668. – Ed.) he says: “As the champion of the timid and trembling band of usurers he erects his main batteries at that point which I have declared to be the weakest he denies pointblank that the low rate of interest is the cause of wealth and vows that it is merely its effect.” (Traitès sur le Commerce, etc., 1669, trad. Amsterdam et Berlin, 1754.) “If it is commerce that enriches a country, and if a lowering of interest increases commerce, then a lowering of interest or a restriction of usury is doubtless a fruitful primary cause of the wealth of a nation. It is not at all absurd to say that the same thing may be simultaneously a cause under certain circumstances, and an effect under others” (l. c., p. 155). “The egg is the cause of the hen, and the hen is the cause of the egg. The lowering of interest may cause an increase of wealth, and the increase of wealth may cause a still greater reduction of interest” (l. c., p. 156). “I am the defender of industry and my opponent defends laziness and sloth” (p. 179). This violent battle against usury, this demand for the subordination of interest-bearing capital to industrial capital, is but the herald of the organic creations that establish these prerequisites of capitalist production in the modern banking system, which on the one hand robs usurer's capital of its monopoly by concentrating all idle money reserves and throwing them on the money market, and on the other hand limits the monopoly of the precious metal itself by creating creditmoney. The same opposition to usury, the demand for the emancipation of commerce, industry and the state from usury, which are observed here in the case of Child, will be found in all writings on banking in England during the last third of the 17th and the early 18th centuries. We also find colossal illusions about the miraculous effects of credit, abolition of the monopoly of precious metal, its displacement by paper, etc. The Scotsman William Paterson, founder of the Bank of England and the Bank of Scotland, is by all odds Law the First. Against the Bank of England “all goldsmiths and pawnbrokers set up a howl of rage.” (Macaulay, History of England, IV, p.499.) “During the first ten years the Bank had to struggle with great difficulties; great foreign feuds; its notes were only accepted far below their nominal value ... the goldsmiths” (in whose hands the trade in precious metals served as a basis of a primitive banking business) “were jealous of the Bank, because their business was diminished, their discounts were lowered, their transactions with the government had passed to their opponents.” (3. Francis, l. c., p. 73.) Even before the establishment of the Bank of England a plan was proposed in 1683 for a National Bank of Credit, which had for its purpose, among others, “that tradesmen, when they have a considerable quantity of goods, may, by the help of this bank, deposit their goods, by raising a credit on their own dead stock, employ their servants, and increase their trade, till they get a good market instead of selling them at a loss” [J. Francis, l. c., pp. 39-40]. After many endeavors this Bank of Credit was established in Devonshire House on Bishopsgate Street. It made loans to industrialists and merchants on the security of deposited goods to the amount of three-quarters of their value, in the form of bills of exchange. In order to make these bills of exchange capable of circulating, a number of people in each branch of business were organized into a society, from which every possessor of such bills would be able to obtain goods with the same facility as if he were to offer them cash payment. This bank's business did not flourish. Its machinery was too complicated, and the risk too great in case of a commodity depreciation. If we go by the actual content of those records which accompany and theoretically promote the formation of the modern credit system in England, we shall not find anything in them but – as one of its conditions – the demand for a subordination of interest-bearing capital and of loanable means of production in general to the capitalist mode of production. On the other hand, if we simply cling to the phraseology, we shall be frequently surprised by the agreement – including the mode of expression with the illusions of the followers of Saint-Simon about banking and credit. Just as in the writings of the physiocrats the cultivateur does not stand for the actual tiller of the soil, but for the big farmer, so the travailleur with Saint-Simon, and continuing on through his disciples, does not stand for the labourer, but for the industrial and commercial capitalist. “Un travailleur a besoin d'aides, de seconds, d'ouvriers; il les cherche intelligents, habiles, dèvouès: il les met a l'oeuvre, et leurs travaux sont productifs.” ( [Enfantin] A travailleur (worker) needs helpers, supporters, labourers; he looks for such as are intelligent, able, devoted; he puts them to work, and their labour is productive.” (Religion saintsimonienne, Economie politique et Politique, Paris, 1831, p. 104.). In fact, one should bear in mind that only in his last work, Le Nouveau Christianisme, SaintSimon speaks directly for the working-class and declares their emancipation to be the goal of his efforts. All his former writings are, indeed, mere encomiums of modern bourgeois society in contrast to the feudal order, or of industrialists and bankers in contrast to marshals and juristic law-manufacturers of the Napoleonic era. What a difference compared with the contemporaneous writings of Owen! xxxiii For the followers of Saint-Simon, the industrial capitalist likewise remains the travailleur par excellence, as the above-quoted passage indicates. After reading their writings critically, one will not be surprised that their credit and bank fantasies materialized in the credit mobilier, founded by an ex-follower of Saint-Simon, Emile Péreire. This form, incidentally, could become dominant only in a country like France, where neither the credit system nor large-scale industry had reached the modern level of development. This was not at all possible in England and America. The embryo of Crédit mobilizer is already contained in the following passages from Doctrine de Saint-Simon. Exposition. Premiere annèe, 1828-29, 3me ed., Paris, 1831. It is understandable that bankers can lend money more cheaply than the capitalists and private usurers. These bankers are, therefore, “able to supply tools to the industrialists far more cheaply, that is, at lower interest, than the real estate owners and capitalists, who may be more easily mistaken in their choice of borrowers” (p. 202). But the authors themselves add in a footnote: “The advantage that would accrue from the mediation of bankers between the idle rich and the travailleurs is often counterbalanced, or even canceled, by the opportunities offered in our disorganized society to egoism, which may manifest itself in various forms of fraud and charlatanism. The bankers often worm their way between the travailleurs and idle rich for the purpose of exploiting both to the detriment of society.” Travailleur here means capitaliste industriel. Incidentally, it is wrong to regard the means at the command of the modern banking system merely as the means of idle people. In the first place, it is the portion of capital which industrialists and merchants temporarily hold in the form of idle money, as a money reserve or as capital to be invested. Hence it is idle capital, but not capital of the idle. In the second place, it is the portion of all revenue and savings in general which is to be temporarily or permanently accumulated. Both are essential to the nature of the banking system. But it should always be borne in mind that, in the first place, money – in the form of precious metal – remains the foundation from which the credit system, by its very nature, can never detach itself. Secondly, that the credit system presupposes the monopoly of social means of production by private persons (in the form of capital and landed property), that it is itself, on the one hand, an immanent form of the capitalist mode of production, and on the other, a driving force in its development to its highest and ultimate form. The banking system, so far as its formal organization and centralization is concerned, is the most artificial and most developed product turned out by the capitalist mode of production, a fact already expressed in 1697 in Some Thoughts of the Interests of England. This accounts for the immense power of an institution such as the Bank of England over commerce and industry, although their actual movements remain completely beyond its province and it is passive toward them. The banking system possesses indeed the form of universal book-keeping and distribution of means of production on a social scale, but solely the form. We have seen that the average profit of the individual capitalist, or of every individual capital, is determined not by the surplus-labour appropriated at first hand by each capital, but by the quantity of total surplus-labour appropriated by the total capital, from which each individual capital receives its dividend only proportional to its aliquot part of the total capital. This social character of capital is first promoted and wholly realized through the full development of the credit and banking system. On the other hand this goes farther. It places all the available and even potential capital of society that is not already actively employed at the disposal of the industrial and commercial capitalists so that neither the lenders nor users of this capital are its real owners or producers. It thus does away with the private character of capital and thus contains in itself, but only in itself, the abolition of capital itself. By means of the banking system the distribution of capital as a special business, a social function, is taken out of the hands of the private capitalists and usurers. But at the same time, banking and credit thus become the most potent means of driving capitalist production beyond its own limits, and one of the most effective vehicles of crises and swindle. The banking system shows, furthermore, by substituting various forms of circulating credit in place of money, that money is in reality nothing but a particular expression of the social character of labour and its products, which, however, as antithetical to the basis of private production, must always appear in the last analysis as a thing, a special commodity, alongside other commodities. Finally, there is no doubt that the credit system will serve as a powerful lever during the transition from the capitalist mode of production to the mode of production of associated labour; but only as one element in connection with other great organic revolutions of the mode of production itself. On the other hand, the illusions concerning the miraculous power of the credit and banking system, in the socialist sense, arise from a complete lack of familiarity with the capitalist mode of production and the credit system as one of its forms. As soon as the means of production cease being transformed into capital (which also includes the abolition of private property in land), credit as such no longer has any meaning. This, incidentally, was even understood by the followers of Saint-Simon. On the other hand, as long as the capitalist mode of production continues to exist, interest-bearing capital, as one of its forms, also continues to exist and constitutes in fact the basis of its credit system. Only that sensational writer, Proudhon, who wanted to perpetuate commodity-production and abolish money, xxxiv was capable of dreaming up the monstrous crèdit gratuit, the ostensible realization of the pious wish of the petty-bourgeois estate. In Religion saint-simonienne, èconomie politique et Politique, we read on page 45: “Credit serves the purpose, in a society in which some own the instruments of industry without the ability or will to employ them, and where other industrious people have no instruments of labour, of transferring these instruments in the easiest manner possible from the hands of the former, their owners, to the hands of the others who know how to use them. Note that this definition regards credit as a result of the way in which property is constituted.” Therefore, credit disappears with this constitution of property. We read, furthermore, on page 98, that the present banks “consider it their business to follow the movement initiated by transactions taking place outside of their domain, but not themselves to provide an impulse to this movement; in other words, the banks perform the role of capitalists in relation to the travailleurs, whom they loan money.” The notion that the banks themselves should take over the management and distinguish themselves “through the number and usefulness of their managed establishments and of promoted works” (p. 101) contains the Crédit mobilier in embryo. In the same way, Charles Pecqueur demands that the banks (which the followers of Saint-Simon call a Système general des banques) “should rule production.” Pecqueur is essentially a follower of Saint-Simon, but much more radical. He wants “the credit institution ... to control the entire movement of national production.” – “Try to create a national credit institution, which shall advance the wherewithal to needy people of talent and merit, without, however, forcibly tying these borrowers together through close solidarity in production and consumption, but on the contrary enabling them to determine their own exchange and production. In this way, you will only accomplish what the private banks already accomplish now, that is, anarchy, disproportion between production and consumption, the sudden ruin of one person, and the sudden enrichment of another; so that your institution will never get any farther than producing a certain amount of benefits for one person, corresponding to an equivalent amount of misfortune to be endured by another ... and you will have only provided the wagelabourers assisted by you with the means to compete with one another just as their capitalist masters now do.” (Ch. Pecqueur, Thèorie Nouvelle èconomie sociale et Politique, Paris, 1842, p. 434.) We have seen that merchant's capital and interest-bearing capital are the oldest forms of capital. But it is in the nature of things that interest-bearing capital assumes in popular conception the form of capital par excellence. In merchant's capital there takes place the work of the middleman, no matter whether considered as cheating, labour, or anything else. But in the case of interestbearing capital the self-reproducing character of capital, the self-expanding value, the production of surplus value, appears purely as an occult property. This accounts for the fact that even some political economists, particularly in countries where industrial capital is not yet fully developed, as in France, cling to interest-bearing capital as the fundamental form of capital and regard ground-rent, for example, merely as a modified form of it, since the loan-form also predominates here. In this way, the internal organisation of the capitalist mode of production is completely misunderstood, and the fact is entirely overlooked that land, like capital, is loaned only to capitalists. Of course, means of production in kind, such as machines and business offices, can also be loaned instead of money. But they then represent a definite sum of money, and the fact that in addition to interest a part is paid for wear and tear is due to their use-value, i.e., the specific natural form of these elements of capital. The decisive factor here is again whether they are loaned to direct producers, which would presuppose the non-existence of the capitalist mode of production-at least in the sphere in which this occurs – or whether they are loaned to industrial capitalists, which is precisely the assumption based upon the capitalist mode of production. It is still more irrelevant and meaningless to drag the lending of houses, etc., for individual use into this discussion. That the working-class is also swindled in this form, and to an enormous extent, is self evident; but this is also done by the retail dealer, who sells means of subsistence to the worker. This is secondary exploitation, which runs parallel to the primary exploitation taking place in the production process itself. The distinction between selling and loaning is quite immaterial in this case and merely formal, and, as already indicated, (Present edition: pp. 345-50. – Ed.) cannot appear as essential to anyone, unless he be wholly unfamiliar with the actual nature of the problem. Usury, like commerce, exploits a given mode of production. It does not create it, but is related to it outwardly. Usury tries to maintain it directly, so as to exploit it ever anew; it is conservative and makes this mode of production only more pitiable. The less elements of production enter into the production process as commodities, and emerge from it as commodities, the more does their origination from money appear as a separate act. The more insignificant the role played by circulation in the social reproduction, the more usury flourishes. That money wealth develops as a special kind of wealth, means in respect to usurer's capital that it possesses all its claims in the form of money claims. It develops that much more in a given country, the more the main body of production is limited to natural services, etc., that is, to usevalues. Usury is a powerful lever in developing the preconditions for industrial capital in so far as it plays the following double role, first, building up, in general, an independent money wealth alongside that of the merchant, and, secondly, appropriating the conditions of labour, that is, ruining the owners of the old conditions of labour. Interest In The Middle Ages “In the Middle Ages the population was purely agricultural. Under such a government as was the feudal system there can be but little traffic, and hence but little profit. Hence the laws against usury were justified in the Middle Ages. Besides, in an agricultural country a person seldom wants to borrow money except he be reduced to poverty or distress.... In the reign of Henry VIII, interest was limited to 10 per cent. James I reduced it to 8 per cent ... Charles II reduced it to 6 per cent; in the reign of Queen Anne, it was reduced to 5 per cent.... In those times, the lenders ... had, in fact, though not a legal, yet an actual monopoly, and hence it was necessary that they, like other monopolists, should be placed under restraint. In our times, it is the rate of profit which regulates the rate of interest. In those times, it was the rate of interest which regulated the rate of profit. If the money-lender charged a high rate of interest to the merchant, the merchant must have charged a higher rate of profit on his goods. Hence, a large sum of money would be taken from the pockets of the purchasers to be put into the pockets of the moneylenders.” (Gilbart, History and Principles of Banking, pp. 163, 164, 165.) “I have been told that 10 gulden are now taken annually at every Leipzig Fair, (The author has in mind the loan of 100 gulden with interest payable in three installments at the Leipzig Fair, held three times annually: Easter and St. Michael's Day) that is, 30 on each hundred, some add the Neuenburg Fair, thus making 40 per hundred; whether that is so, I don't know. For shame! What will be the infernal outcome of this? ... Whoever now has 100 florins at Leipzig takes 40 annually, which is the same as devouring one peasant or burgher each year. If one has 1,000 florins, he takes 400 annually which means devouring a knight or a rich nobleman per year. If one has 10,000 florins, he takes 4,000 per year, which means devouring a rich count each year. If one has 100,000 florins, as the big merchants must possess, he takes 40,000 annually, which means devouring one affluent prince each year. If one has 1,000,000 florins, he takes 400,000 annually, which means devouring one mighty king every year. And he does not risk either his person or his wares, does not work, sits near his fire-place and roasts apples; so might a lowly robber sit at home and devour a whole world in ten years.” (Quoted from Bücher vom Kaufhandel und Wucher vom Jahre 1524, Luther's Werke, Wittenberg, 1589, Teil 6, S. 312.) “Fifteen years ago I took pen in hand against usury when it had spread so alarmingly that I could scarcely hope for any improvement. Since then it has become so arrogant that it deigns not to be classed as vice, sin, or shame, but achieves praise as pure virtue and honour, as though it were performing a great favour and Christian service for the people. What will help deliver us now that shame has turned into honour and vice into virtue?” (Martin Luther, An die Pfarherrn wider den Wucher zu predigen, Wittenberg, 1540.) “Jews, Lombards, usurers and extortioners were our first bankers, our primitive traffickers in money, their character little short of infamous... They were joined by London goldsmiths. As a body ... our primitive bankers ... were a very bad set, they were gripping usurers, iron-hearted extortioners.” (D. Hardcastle, Banks and Bankers, 2nd ed., London, 1843, pp. 19, 20.) “The example shown by Venice” (in establishing a bank) “was thus quickly imitated; all sea-coast towns, and in general all towns which had earned fame through their independence and commerce, founded their first banks. The return voyage of their ships, which often was of long duration, inevitably led to the custom of lending on credit. This was further intensified by the discovery of America and the ensuing trade with that continent.” (This is the main point.) “The chartering of ships made large loans necessary-a procedure already obtaining in ancient Athens and Greece. In 1308, the Hanse town of Bruges possessed an insurance company. (M. Augier, l. c., pp. 202, 203.) To what extent the granting of loans to landowners, and thus to the pleasure-seeking wealthy in general, still prevailed in the last third of the 17th century, even in England, before the development of modern credit, may be seen, among others, in the works of Sir Dudley North. He was not only one of the first English merchants, but also one of the most prominent theoretical economists of his time: “The moneys employed at interest in this nation, are not near the tenth part, disposed to trading people, wherewith to manage their trades; but are for the most part lent for the supplying of luxury, and to support the expense of persons, who though great owners of lands, yet spend faster than their lands bring in; and being loath to sell, choose rather to mortgage their estates.” (Discourses upon Trade, London, 1691, pp.6-7.) Poland in the 18th century: “Warsaw carried on a large bustling business in bills of exchange which, however, had as its principal basis and aim the usury of its bankers. In order to secure money, which they could lend to spendthrift gentry at 8% and more, they sought and obtained abroad open exchange credit, that is, credit that had no commodity trade as its basis, but which the foreign drawee continued to accept as long as the returns from these manipulations did not fail to come in. However, they paid heavily for this through bankruptcies of men like Tapper and other highly respected Warsaw bankers.” (J. G. Büsch, Theoretisch-praktische Darstellung der Handlung, etc., 3rd ed., Hamburg, 1808, Vol. II, pp. 232, 233.) Advantages Derived By The Church From The Prohibition Of Interest “Taking interest had been interdicted by the Church. But selling property for the purpose of finding succour in distress had not been forbidden. It had not even been prohibited to transfer property to the money-lender as security for a certain term, until a debtor repaid his loan, leaving the money-lender free to enjoy the usufruct of the property as a reward for his abstinence from his money.... The Church itself, and its associated communes and pia corpora, derived much profit from this practice, particularly during the crusades. This brought a very large portion of national wealth into possession of the so-called 'dead hand,' all the more so because the Jews were barred from engaging in such usury, the possession of such fixed liens not being concealable.... Without the ban on interest churches and cloisters would never have become so affluent” (l. c., p. 55). xxx “It is by frequent fluctuations within the month, and by pawning one article to relieve another, where a small sum is obtained, that the premium for money becomes so excessive. There are about 240 licensed pawnbrokers in the metropolis, and nearly 1,450 in the country. The capital employed is supposed somewhat to exceed a million pounds sterling; and this capital is turned round thrice in the course of the year, and yields each time about 33½ per cent on an average; according to which calculation, the inferior orders of society in England pay about one million a year for the use of a temporary loan, exclusive of what they lose by goods being forfeited.” (J. D. Tuckett, A History of the Past and Present State of the Labouring Population, London, 1846, 1, p. 114.) xxxi Even in the titles of their works they state as their principal purpose “the general good of the landed men, the great increase of the value of land, the exemption of the nobility, gentry, etc., from taxes, enlarging their yearly estates, etc.” Only the usurers would stand to lose, those worst enemies of the nation who had done more injury to the nobility and yeomanry than an army of invasion from France could have done. xxxii “The rich goldsmith” (the precursor of the banker), “for example, made Charles II of England pay twenty and thirty per cent for accommodation. A business so profitable, induced the goldsmith 'more and more to become lender to the King, to anticipate all the revenue, to take every grant of Parliament into pawn as soon as it was given; also to outvie each other in buying and taking to pawn bills, orders, and tallies, so that, in effect, all the revenue passed through their hands'.” (John Francis, History of the Bank of England, London, 1848, I, p.31.) “The erection of a bank had been suggested several times before that. It was at last a necessity” (l. c., p. 38). “The bank was a necessity for the government itself, sucked dry by usurers, in order to obtain money at a reasonable rate, on the security of parliamentary grants” (l. c., pp. 59, 60). xxxiii Marx would surely have modified this passage considerably, had he reworked his manuscript. It was inspired by the role of the ex-followers of Saint-Simon under France's Second Empire where just at the time that Marx wrote the above, the world redeeming credit fantasies of this school through the irony of history were being realised in the form of a tremendous swindle on a scale never seen before. Later Marx spoke only with admiration of the genius and encyclopaedic mind of Saint Simon. When in his earlier works the latter ignores the antithesis between the bourgeoisie and the proletariat which was just then coming into existence in France when he includes among the travailleurs that part of the bourgeoisie which was active in production, this corresponds to Fourier's conception of attempting to reconcile capital and labour and is explained by the economic and political situation of France in those days. The fact that Owen was more far sighted in this respect is due to his different environment, for he lived in a period of industrial revolution and of acutely sharpening class antagonisms. – F. E. xxxiv Karl Marx, Misère de la Philosophie, Bruxelles et Paris, 1847. – Karl Marx, Zur Kritik der politischen Oekonomie, S. 64.
|
|