The loanable capital, of which the banks dispose, flows to them in various ways. In the first place, since they are the cashiers of the industrial capitalists, there is concentrated into their hands the money-capital, which every producer and merchant must have as a reserve fund, or which he receives in payment. These funds are thus converted into loanable capital. In this way the reserve fund of the commercial world, being concentrated into a common treasury, is reduced to its necessary minimum, and a portion of the money-capital, which would otherwise slumber as a reserve fund, is loaned and serves as interest-bearing capital. In the second place, the loanable capital of the banks is formed by the deposits of the money-capitalists, who entrust them with the business of loaning it. Furthermore, with the development of the bank system, and particularly as soon as they pay interest on deposits, the money savings and the temporarily unemployed money of all classes are deposited with them. Small amounts, each by itself incapable of acting in the capacity of money-capital, are combined into large masses and thus form a money power. This aggregation of small amounts must be distinguished as a specific effect of the bank system from its intermediate position between the money-capitalists proper and the borrowers. Finally, the revenues, which are but gradually consumed, are also deposited with the banks.

The loan is made (we refer here only to the commercial credit in the strict meaning of the term) by discounting bills of exchange, that is, by converting them into money before they come due, and by advances in various forms: direct advances on personal credit, Lombard loans on interest-bearing papers, government papers, stocks of all kinds, furthermore advances on bills of lading, dock warrants, and other certified titles of ownership in commodities, and by overdrawing on their deposits, etc.

The credit given by a banker may assume various forms, for instance, that of exchanges on other banks, checks on them, opening of credit in the same way, finally, in the case of banks entitled to issue notes, the bank notes of the bank itself. A bank note is nothing but a draft upon the banker, payable at any time to the bearer, and substituted by the banker for private drafts. This last form of credit appears particularly important and striking to the layman, first, because this form of credit money steps from the mere commercial circulation into the general circulation and serves as money there, and in the second place, because in most countries the principal banks issuing notes represent a queer mixture of national and private banks and thus have actually the national credit to back them up and give to their notes the character of a more or less legal tender, for in this case it is apparent, that the thing which the banker handles is credit itself, since a bank note stands only for a circulating token of credit. But the banker also deals in all other forms of credit, even when he advances 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 Scotch banks.

The special credit institutions, and the particular forms of banks, do not require any further consideration for our purposes.

The banks have a twofold business.... 1) To collect capital from those, who have no immediate use for it, and to distribute it and transfer it to others, who can use it. 2) To receive deposits from the incomes of their customers and to pay them whatever amount they may require of this deposit for the expenses of consumption. The former is circulation of capital, the latter circulation of currency. —The one is a concentration of capital on one side, and its distribution on the other; the other is a management of the circulation for the local needs of the vicinity.—Tooke, Inquiry into the Currency Principle, p. 36, 37.—We shall revert to this passage later, in chapter XXVIII.

Reports of Committees. Vol. VIII., Commercial Distress. Vol. II., Part I., 1847-48, Minutes of Evidence. (Subsequently quoted as Commercial Distress, 1847-48.) In the forties, when discounting bills of exchange in London, bills of exchange of one bank were often drawn on another instead of bank notes. (Testimony of J. Pease, provincial banker, No. 4636 and 4656.) According to the same report, the bankers were in the habit of giving such bills of exchange in payment to their customers, as soon as money grew tight. If the party receiving them demanded bank notes, he had to discount this bill of exchange once more. This amounted to a privilege of making money for the banks. Messieurs Jones, Lloyd and Co., made payments in this way "since time immemorial," as soon as money was scarce and the rate of interest above 5%. The customer was glad to get such banker's bills, because bills of Jones, Lloyd and Co. could be easier discounted than his own; these bills often passed through twenty to thirty hands. ( Ibidem, No. 901 to 904, 905.)

All these forms serve to make a claim to payments transferable.—There is scarcely one form, which credit may assume, in which it has not at times performed the functions of money; whether this form is that of a bank note, or of a bill, or of a check, the process is essentially the same and the result is essentially the same. Fullarton, On the Regulation of Currencies, 2d edition, London, 1845, p. 38.—Bank notes are the small currency of credit. p. 51.—

The following is from J. W. Gilbart The History and Principles of Banking, London, 1834: The capital of a bank consists of two parts, the invested capital and the banking capital, which is borrowed (p. 11 et seq.). The banking capital, or borrowed capital, is maintained in three ways: 1) through the acceptance of deposits; 2) through the issuing of the bank's own notes; 3) through the drawing of bills. If some one is willing to loan me 100 p.st. for nothing, and I loan these 100 p.st. to some one else at 4%, I shall make 4 p.st. by this transaction in the course of one year. Likewise if some one is willing to accept my promise to pay and to return it to me at the end of the year and to pay me 4% for it, just as though I had given him 100 p.st. by this transaction, I make 4 p.st. by it; and again, if a man in a country town brings me 100 p.st. on the condition that I shall pay this amount to some third person in London after the lapse of 21 days, all the interest I may draw in the meantime on this money will be my profit. This is an objective summary of the operations of a bank and of the way in which a banking capital is created by deposits, bank notes and bills of exchange (p. 117). The profits of a banker are generally proportionate to the amount of his borrowed or banking capital. In order to determine the actual profit of a bank, the interest on the first investment of capital must be deducted from the gross profits. The remainder is the banking profit (p. 118). The advances of a banker to his customers are made with the money of other people (p. 146). Precisely those bankers, who do not issue any bank notes, create a banking capital by discounting bills of exchange. They increase their deposits by their discounting operations. The London banks discount only for those firms, that keep a deposit in account with them (p. 119). A firm discounting bills of exchange in its bank and having paid interest upon the whole amount of these bills must leave at least a portion of this amount in the hands of the bank without receiving any interest on it. In this way the banker receives a higher rate of interest than the current one on the advanced money and creates for himself a banking capital by means of the surplus remaining in his hands. (p. 120.)—Economising of reserve funds, deposits, checks: The deposit banks economise by a transfer of credit accounts the use of the circulating medium and transact business of a large volume with a small amount of actual money. The money thus released is employed by the banker in making advances to his customers by means of discounts, etc. Hence the transfer of credit enhances the effectiveness of the deposit system (p. 123). It is immaterial, whether the two customers, that deal with one another, keep their accounts with the same or with different bankers. For the bankers exchange their checks among themselves in the Clearing House. By means of transfers the deposit system might be extended to such a degree that it would do away entirely with the use of metal money. If every one were to keep a deposit account in the bank and to make payments by means of checks then such checks would be the only circulating medium. In this case the assumption would have to be that the bankers hold the money in their hands, otherwise the checks would have no value (p. 124). The centralisation of the local transactions in the hands of the banks is promoted, 1) by branch banks. The provincial banks have branch establishments in the smaller towns of their district the London banks in the different quarters of the city. 2) By agencies. Every provincial bank has its agent in London, in order to pay its notes or bills there and to receive money, which is paid down by inhabitants of London for the account of people living in the provinces. (p. 127.) Every banker gathers in the notes of the others and holds them. In every large city they meet once or twice a week and exchange their notes. The balance is paid by a check on London. (p. 134.) The purpose of banks is to facilitate business. Whatever facilitates business, facilitates also speculation. Business and speculation are so closely linked in some cases, that it is difficult to tell where business stops and speculation begins. Wherever there are banks, capital can be obtained more easily and cheaply. The cheapness of capital promotes speculation, just as the cheapness of beer and meat promotes gluttony and drunkenness (p. 137, 138). Since the banks issuing their own notes always pay in these notes, it may seem as though their discount business were transacted exclusively with the capital made in this way, but this is not so. A banker may very well pay all the bills discounted by him with his own notes, and yet nine-tenths of the bills in his possession may represent actual capital. For while he may have given only his own paper money for these bills, it need not stay in the circulation until these bills become due. The bills may be running for three months, while the notes may return in three days. (p. 172.) The overdrawing of accounts by customers is a regular business practice. This is indeed the purpose, for which cash credit is granted. Cash credits are not granted on personal security, but on deposit of collateral papers (p. 174, 175). A capital advanced on bonded wares has the same effect as though it had been advanced in discounting bills. If a man borrows 100 p.st on his goods as a security, it is the same as though he had sold them for a bill of exchange of 100 p.st. and discounted this bill with his banker. But this advance enables him to hold his goods over for a better condition of the market and to avoid sacrifices, which he would have had to make, in order to obtain money for urgent purposes (p. 180, 181).

The Currency Question Reviewed, etc., p. 62, 63: It is here indisputably true that the 1,000 p.st. which I deposit to-day with A are issued to-morrow and deposited with B. The day after to-morrow it may be issued once more by B and form a deposit with C, and so forth infinitely. The same 1,000 p.st. of money may, therefore, multiply themselves into an absolutely indeterminable sum of deposits by a series of transfers. Hence it is possible that nine-tenths of all deposits in England may have no other existence but that in the entries of the banker's books, of whom every one stands good for his part of them. In Scotland, for instance, the money in circulation (and mostly paper money at that) never exceeds 3 million p.st., while the deposits amount to 27 millions. So long as no general and sudden demand is made for the return of the deposits (a run on the bank), the same 1,000 p.st., traveling backward, may balance an equally indeterminable sum with the same facility. Since the same 1,000 p.st., with which I balance to-day my debt with some business man, may balance to-morrow his debt with some other business man, and the day after to-morrow balance this man's account, and so forth infinitely, it follows that the same 1,000 p.st. may pass from hand to hand and from bank to bank and balance any imaginable sum of deposits.

I. A document issued by the House of Lords in 1848 gives information concerning the depreciation of government papers and bonds during the crisis of 1847. According to it the depreciation of October 23, 1847, compared to the stand of values in February of the same year, amounted to 93,824,217 pounds sterling in English government bonds, 1,358,288 pounds sterling in dock and canal stock, and to 19,579,820 pounds sterling in railroad stocks, a total of 114,762,325 pounds sterling.

II. With reference to the swindle in East Indian business, in which it was no longer a question of making drafts, because commodities had been bought, but rather of buying commodities in order to be able to make out discountable drafts which should be convertible into money, the "Manchester Guardian" of November 24, 1848, remarks that 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 by C on B. B secures himself by six-months-drafts on A. As soon as the goods are shipped, and the bill of lading mailed, A makes out six-months-drafts on D. The buyer and shipper thus get possession of funds many months before the goods are actually paid for. And it was a common custom to renew the drafts when due under the pretense of allowing time for turn-over in such a protracted business. Unfortunately the losses in this business did not lead to its restriction, but to its extension. In proportion as the interested parties grew poor their need of making purchases increased, in order to find in new advances a compensation for capital lost in previous speculations. Purchases were then no longer regulated by supply and demand, but became the most important feature in the financial operations of a shaky firm. But this is only one side of the picture. What happened in the export of manufacturing goods here, occurred in the purchase and shipment of goods on the other side. Firms in India, which had credit enough to get their checks discounted, bought sugar, indigo, silk or cotton, not because the purchase prices as compared with the latest London quotations promised a profit, but because previous drafts on a London firm would soon be due and would have to be covered. What was simpler than to buy a cargo of sugar, to pay for it in ten-months-drafts on the London firm, and to send the bills of lading by overland mail to London? Less than two months later the bills of lading of these barely shipped goods, and thus the goods themselves, were pawned in Lombard Street, and the London house came into the possession of money eight months before the bills of exchange made out for these goods were due. And all this passed off smoothly, without interruption or difficulties, so long as the discounting firms found enough money to advance on bills of lading and dock warrants, and to discount the drafts of Indian firms on select firms of Mincing Lane to unlimited amounts.

III. The following is from the previously quoted report on Commercial Distress, 1847-48: In the last week of April, 1847, the Bank of England informed the Royal Bank of Liverpool, that it would henceforth reduce its discount business with the latter bank by one-half. This communication had a very disastrous effect, because the payments in Liverpool had lately been made far more in bills of exchange than in cash, and because the merchants, who ordinarily carried much cash money to the bank for the purpose of squaring their notes, had been able to bring only checks of late, which they had received themselves for their cotton and other products. This had assumed large proportions and caused the business difficulty. The endorsed checks, which the bank had to turn into cash for the merchants, had mostly been made out by outsiders, and had so far been balanced generally by the payments received for the products. The checks which the merchants now brought in place of the former cash were bills of exchange for different lengths of time and of different kinds, a considerable number being bank checks for three months from date, the majority being checks for cotton. These bills of exchange, when bank checks, had been endorsed by London bankers, the others were endorsed by merchants in Brasilian, American, Canadian, West Indian, etc., business... The merchants did not draw on one another, but the customers in the home country, who had bought products in Liverpool, covered them by drafts on London banks, or drafts on other firms in London, or on drafts of some one else. The communication of the Bank of England caused a shortening of the running time of checks drawn against sales of foreign products, which used to run frequently longer than three months. (p. 26, 27.)

The period of prosperity in England, from 1844 to 1847 was, as described above, connected with the first great railroad swindle. The above-named report makes the following statements concerning the influence of this swindle on business in general: In April, 1847, nearly all commercial firms had begun to starve their business more or less, by investing a part of their commercial capital in railroads (p. 41.)—Loans were also made by private parties, bankers and insurance companies at a high rate of interest, for instance, at 8% (p. 66). These large advances of these business firms to railroads caused them to take up in their turn too much capital from banks on discount checks, by which to carry on their own business (p. 67.—(Question): Would you say that the payments on railroad stocks contributed much to the pressure which burdened the money market in April and October 1847? (Answer): I believe that they hardly contributed anything to the pressure in April. In my opinion they had rather strengthened than weakened the bankers going on into April, and perhaps even into the summer. For the actual employment of the money followed by no means as rapidly as the deposits; as a result most of the banks had a rather large amount of railroad stocks in their hands in the beginning of the year. [This is corroborated by numerous statements of bankers in C. D. 1848-57.] This gradually melted away in summer and was considerably smaller on December 31. One cause of the pressure in October was the gradual decrease of the railroad funds in the hands of bankers; between April 22, and December 31, the balances of railroads in our hands were reduced by one-third. This effect was produced by railroad deposits in all of Great Britain; they have gradually stripped the banks of deposits (p. 43, 44).—Samuel Gurney (Chief of the ill-famed firm of Overend Gurney 8 Co.) says likewise: In 1846 there was a much greater demand for capital for railways, but it did not raise the rate of interest. There was a condensation of small sums into larger masses, and these larger masses were consumed in our market; so that on the whole the effect was to throw more money on the money market of the city, not so much to take it out.

A. Hodgson, Director of the Liverpool Joint Stock Bank, shows to what extent bills of exchange may form a reserve for bankers: It was our custom to hold at least nine-tenths of all our deposits, and all money received from our customers, in our bill books in the shape of bills of exchange, which fell due from day to day...so much so, that the amount of bills due daily during the time of the crisis almost equaled the amount of demands for payment made on us every day (p. 53).

Speculative Bills.—No. 5092. "By whom were the bills of exchange (against sold cotton) mainly endorsed?"—(R. Gardner, the cotton manufacturer mentioned several times in this work): "By produce jobbers; one trader buys cotton, transfers it to some jobber, draws checks on this jobber, and gets these bills discounted."—No. 5094. "And these bills of exchange go to the Liverpool banks and are discounted by them?"—"Yes, and also by others....Had not this accommodation existed, which was mainly allowed by the Liverpool banks, cotton would have been, in my opinion, from 1½ d to 2 d per pound cheaper last year."—No. 600. "You said that an enormous number of bills of exchange was in circulation, drawn by speculators upon cotton jobbers in Liverpool; does the same apply to your advances on bills of exchange for other colonial products than cotton?"—(A. Hodgson, banker in Liverpool): "It refers to all kinds of colonial products, but most particularly to cotton."—No. 601. "Do you, as a banker, try to keep away from bills of exchange of this sort?"—"Not at all; we regard them as legitimate bills when kept within moderate bounds....This sort of bills is often prolongued."

Swindle in the East Indian and Chinese Market, 1847.—Charles Turner (Chief of one of the first East Indian firms in Liverpool): "We all know the occurrences, which have taken place in the matter of business to Mauritius and similar businesses. The jobbers were accustomed to make advances on goods, not only after their arrival, for the covering of the bills of exchange drawn for these goods, which is quite in order, and advances on bills of lading...they have also made advances on the product before it had been shipped, and in some cases before it had been manufactured. For instance, I had, in one case in Calcutta, bought bills of exchange amounting to 6-7,000 pounds sterling; the proceeds of these goods went to Mauritius in order to assist in planting sugar there; the bills came to England, and more than half of them were protested; then, when the shipments of sugar finally arrived, by which these bills were to have been paid, it was found that this sugar had already been pawned to third parties, before it had been shipped, or even before it had been boiled (p. 78). Now the goods for the East Indian market must be paid to the manufacturer in cash; but this does not mean much, for if the buyer has some credit in London, he draws on London and discounts the drafts in London, where the discount is now low; he pays the manufacturer with the money so obtained...it takes at least twelve months before a shipper of goods to India receives his return shipment...a man with ten or fifteen thousand pounds sterling going into Indian business would secure credit from some London house to a considerable amount; he would give to this house 1% and draw on it with the understanding, that the proceeds of the goods sent to India are to be sent to this London house; but the tacit understanding on both sides is that the London house shall not have to make any advances of cash; in other words, the drafts are prolongued until the return shipments arrive. The bills of exchange are discounted in Liverpool, Manchester, London, some of them are held by Scotch banks" (p. 79).—No. 730. "There is a firm, which recently failed in London; the examination of its books revealed the following condition of affairs: Here is one firm in Manchester, and another in Calcutta; they opened a credit with the London firm for 200,000 pounds sterling; that is, the business friends of this Manchester firm, who sent consignments of goods from Glasgow and Manchester to the firm in Calcutta, drew on the London house up to the sum of 200,000 pounds sterling; at the same time the understanding was, that the Calcutta firm would also draw on the London firm up to the sum of 200,000 pounds sterling; these bills of exchange were sold in Calcutta, other bills of exchange were bought with the proceeds, and these were sent to London in order to enable the firm there to pay the first drafts made by the Glasgow or Manchester firm. In this way this firm sent bills of exchange amounting to 600,000 pounds sterling into the world."—No. 971. "At present, when a firm in Calcutta buys a ship's cargo (for England) and pays for it with its own drafts on its London correspondent, and when the bills of lading are sent here, these bills of lading are used immediately for the purpose of securing advances in Lombard Street; hence they have eight months time in which to make use of the money before their correspondents have to pay the drafts."—

IV. In the year 1848 a secret committee of the Upper House was in session on an investigation of the causes of the crisis of 1847. The testimony of the witnesses before this 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, the Director of the Union Bank of Liverpool, testified among other things to the following: 2444. "There was, in the spring of 1847, an unwarranted extension of credit...because business men transferred their capital from their business to railroads and nevertheless wanted to continue their business on the old scale. Every one thought probably at first that he could sell the railroad stocks at a profit and thus replace the money in the business. He found, perhaps, that this was impossible, and then secured credit in his business where he paid cash formerly. This gave rise to an extension of credit."

2500. "These bills of exchange, on which the banks that had accepted them incurred losses, were they bills mainly for corn or for cotton?...They were bills for products of all kinds, corn, cotton and sugar, and products of all sorts. There was at that time nothing, with the exception of oil, perhaps, that did not fall in price."—2506. "A jobber, who accepts a bill of exchange, does not do so without being sufficiently secured, also against a fall in the price of the commodity which serves as a security."

2512. "Two kinds of bills of exchange are drawn for products. To the first kind belongs the original draft, which is made out on the other side on the importer....The drafts which are made out in this way for products are frequently due before the goods arrive. For this reason the merchant who has not enough money when the products arrive, must pawn them to some broker until he can sell them. Then a draft of the other kind is immediately drawn on the broker by the Liverpool merchant, on the strength of those products...it then becomes the business of the banker to ascertain, whether he has those goods and to what extent he has made advances on them. He must convince himself, that the broker has security, in order to make good eventual losses."

2516. "We receive also bills of exchange from foreign countries....Some one buys on the other side a bill of exchange on England, and sends it to some firm in England; we cannot tell by looking at this bill, whether it has been drawn reasonably or unreasonably, whether it represents products or wind."

2533. "You said that foreign products of nearly all kinds are sold at a heavy loss. Do you believe, that this was due to unwarranted speculations in these products?"—"It arose from a very large import, while no adequate consumption existed to take care of it. From all indications the consumption fell off considerably."—2537. "In October...products were almost unsaleable."

How it is that a general scramble for safety is made at the critical stage of a crisis is explained in the same report by an expert of the first order, the worthy and crafty Quaker, Samuel Gurney of Overend Gurney 8 Co.: 1262. "When a panic reigns, a business man does not ask himself, how profitably he can invest his bank notes, or whether he will lose 1 or 2% in the sale of his treasury notes or 3% bonds. Once that he is under the suggestions of fright, he cares nothing about gain or loss; he gets himself into a safe place, the rest of the world may do what it pleases."

V. Concerning the mutual unmasking of two markets Mr. Alexander, a merchant in the East Indian trade, testifies before the Committee of the Lower House on the Bank Acts of 1857 (quoted as B. C. 1857): 4330. "At present, if I invest 6 shillings in Manchester, I get 5 shillings back in India; if I invest 6 shillings in India, I get 5 shillings back in London." In this way the Indian market is exposed by England, and the English by India. And this took place in the summer of 1857, barely ten years after the bitter experience of 1847!

CHAPTER XXVI.: ACCUMULATION OF MONEY-CAPITAL. ITS INFLUENCE ON THE RATE OF INTEREST.

"IN England, a steady accumulation of additional wealth takes place, which has a tendency to assume ultimately the form of money. But next to the desire to acquire money, the most insistent desire is that of disposing of it by some kind of investment bringing interest or profit; for money as money does not bring wealth. Unless, therefore, a gradual and adequate extension of the field of investment takes place simultaneously with this steady accession of additional capital, we must be exposed to periodical accumulations of money seeking investment, which will be of greater or smaller importance according to circumstances. For a long series of years the national debt was the great means of absorbing the superfluous wealth of England. Since it reached its maximum in 1816 and no longer acts as an absorbent, every year a sum of at least 27 millions has been seeking other fields of investment. Moreover, various return payments of capital were made....Enterprises which require a large capital for their execution and make an opening from time to time for the excess of unemployed capital...are absolutely necessary, at least in our country, in order to take care of the periodical accumulations of the superfluous wealth of society, which cannot find room in the ordinary fields of investment." ( The Currency Question Reviewed, London, 1845, p. 32.) Of the year 1845 the same work says: "Within a very short period the prices have leaped upward from the lowest point of depression....The 3% national debt stands almost at par....The gold in the vaults of the Bank of England exceeds all former amounts stored away there. Stocks of all kinds are quoted at prices, which are unheard of in almost every case, and the rate of interest has fallen so much, that it is nearly nominal....All these are proofs that another heavy accumulation of unemployed wealth exists in England, that another period of speculative overheating is imminent." ( Ibidem, p 35.)

"Although the import of gold is not a reliable indication of profit in foreign commerce, nevertheless a part of this import of gold, in the absence of any other explanation, represents on its face such a profit." (J. G. Hubbard, The Currency and the Country, London, 1843, p. 41.) Take it that in a period of good steady business, profitable prices, and well supplied circulation of money, a crop failure gives rise to an export of 5 millions of gold and to an import of corn to the same amount. The circulation" (meaning, as we shall see immediately, the unemployed money-capital, not the medium of circulation. F. E.) "is reduced by the same amount. The private individuals may still possess means of circulation to the same amount, but the deposits of the merchants in the banks, the outstanding balances of the banks with their money brokers, and the reserves in their treasuries will all be reduced, and the immediate result of this reduction to the amount of the unemployed capital will be a rise in the rate of interest, say from 4% to 5%. Since business is sound, confidence is not shaken, but credit will be valued more highly." ( Ibidem, p. 42.) "If the prices of commodities fall universally, the superfluous money flows back to the banks in the form of increased deposits, the plethora of unemployed capital reduces the rate of interest to a minimum, and this condition of affairs lasts until either higher prices or a brisker business call the slumbering money into service, or until it has been absorbed by investment in foreign securities or foreign commodities." (P. 68.)

The following extracts are once more taken from the parliamentarian report on Commercial Distress, 1847-57.—In consequence of the crop failure and famine of 1846-47 a heavy import of means of subsistence was necessary. "Hence a great excess of imports over exports....Hence a considerable drain of money from banks, and an increased demand upon the discount brokers from people who had bills of exchange to discount; the brokers began to inspect the bills of exchange more closely. The accommodation hitherto granted was seriously restricted, and weak houses failed. Those who relied wholly upon credit went to the wall. This increased the already marked unrest; bankers and others found, that they could not be as certain as formerly of transforming their bills of exchange and other securities into bank notes, in order to fulfill their obligations; they restricted the accommodation still more and frequently refused it altogether; they locked their bank notes up in many instances, in order to meet their own future obligations; they preferred not to let go of them at all. The unrest and confusion increased daily, and without the letter of Lord John Russel the general bankruptcy was imminent." (P. 74-75.) The letter of Russel suspended the Bank Acts.—The previously mentioned Charles Turner testifies: "Some firms had large means, but they were not available. Their entire capital was tied up in real estate in Mauritius, or in indigo or sugar factories. Once that they had contracted obligations for 5 or 600,000 pounds sterling, they had no means free for the payment of bills of exchange, and finally it was seen, that they could pay their bills of exchange only by means of credit, and so far as that went." (P. 81.)—The aforesaid S. Gurney said: "At present (1848) there prevails a contraction of business and a great plethora of money.—No. 1763. I do not believe that it was a lack of capital, which drove the rate of interest so high; it was the alarm, the difficulty of obtaining bank notes."

In 1847 England paid at least nine million pounds sterling in gold to foreign countries for imported means of subsistence. Of this amount seven and a half millions came from the bank of England and one and a half million from other sources. (P. 245.)—Morris, the Governor of the Bank of England: "On October 23, 1847, the public funds and the canal and railroad stocks were already depreciated by 114,752,225 million pounds sterling." (P. 312.) The same Morris, when questioned by Lord G. Bentinck: "Is it not known to you that all capital invested in papers and products of all kinds was depreciated in the same way, that raw materials, cotton, silk, wool were sent to the continent at the same cut prices, and that sugar, coffee and tea were auctioned off in forced sales?"—"It was inevitable that the nation should make considerable sacrifices, in order to counteract the drain of gold caused by the enormous imports of means of subsistence."—"Don't you believe that it would have been better to touch the eight million pounds sterling stored in the vaults of the bank, instead of trying to recover the gold with such sacrifices?"—"I do not believe that."—Now to the commentaries on this heroism. Disraeli questions Mr. W. Cotton, the Director and former Governor of the Bank of England. "What was the dividend received by the stockholders of the bank in 1844?"—"It was 7% for that year."—"And the dividend for 1847?"—"Nine per cent."—"Does the bank pay the income tax for its stockholders in the current year?"—"Yes, Sir."—"Did it do so in 1844?"—"No, Sir." 84 —"Then this Bank Act (of 1844) worked very much to the advantage of the stockholders....The result is, then, that since the introduction of the new Act the dividend of the stockholders has risen from 7% to 9%, and that the income tax is now also paid by the bank, while formerly it had to be paid by the stockholders?"—"That is quite right."—(No. 4356-4361.)

Concerning the formation of hoards in banks during the crisis of 1847, Mr. Pease, a provincial banker, has the following to say: 4605. "As the bank was compelled to raise its rate of interest more and more, the apprehension grew universally; the rural banks increased the quantities of money in their possession and likewise the amounts of their notes; and many of us, who would ordinarily carry only a few hundred pounds in gold or bank notes, stored up at once thousands in cash boxes and desks, since there was great uncertainty concerning the discount and the possibility of circulating bills of exchange on the market; and consequently a universal accumulation of hoards ensued."—A member of the Committee remarks: 4691. "Accordingly, whatever may have been the cause during the last 12 years, the result was certainly more in favor of the Jew and the money broker than in favor of the productive class in general."

To what extent a money broker exploits times of crisis, is revealed by Tooke: "In the metal ware business of Warwickshire and Staffordshire very many orders were rejected in 1847, because the rate of interest, which the manufacturer had to pay for discounting his bills of exchange, would have more than swallowed his entire profit." (No. 5451.)

Let us now take another report of Parliament, the Report of the Select Committee on Bank Acts, communicated from the Commons to the Lords, 1857 (quoted further along as B. C. 1857). In it Mr. Norman, Director of the Bank of England and a leading light among the champions of the Currency Principle, is questioned as follows:

3635. "You said you were of the opinion, that the rate of interest depends, not on the mass of bank notes, but on the demand and supply of capital. Would you state, what you comprise under the head of capital, outside of bank notes and hard cash?"—"I believe the general definition of capital is: Commodities or services used in production.—3636. "Do you include all commodities in the term capital, when you speak of the rate of interest?"—"All commodities used in production."—3637. "You include all that in the term capital, when you speak of the rate of interest?"—"Yes, Sir. Let us assume that a cotton manufacturer needs cotton for his factory, then he will probably secure it by obtaining an advance from his banker, and with the money so obtained he will go to Liverpool and buy. What he really needs is cotton; he does not need the bank notes or the money except as means of getting the cotton. Or he may need the means to pay his laborers; then he again borrows notes and pays the wages of his laborers with them; and the laborers on their part need food and shelter, and the money is a means of paying for them."—3638. "But interest is paid for this money?"—"Yes, Sir, in the first instance; but take another case. Take it that he buys the cotton on credit, without getting any advance from the bank; then the difference between the price for cash payment and the price on credit at the time when payment is due is the measure of the interest. There would be interest even if no money existed."

This self-complacent rubbish is quite worthy of 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 supposed to explain, that the rate of interest is regulated, by what? By the demand and supply of commodities, that were so far known to regulate only the market prices of commodities. But very different rates of interest are compatible with the same market prices of commodities.—But now take another look at this slyness. He hears the correct remark: "But interest is paid for this money?" and this, of course, implies the question: "What has the interest, which the banker receives, 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, that is, in markets, in which widely different conditions of demand and supply prevail, so far as the commodities used in production are concerned?" And all that this solemn genius has to say in reply to these questions, is that the manufacturer, who buys cotton on credit, pays interest, the measure of which is "The difference between the price for cash payment and the price on credit at the time when payment is due." Vice versa. The prevailing rate of interest, whose regulation the genius Norman is asked to explain, is the measure of the difference between the cash price and the credit price to the time of due payment. First the cotton is to be sold to its cash price, and this is determined by the market price, which is itself regulated by the condition of supply and demand. Say that the price is 1,000 pounds sterling. This concludes the transaction between the manufacturer and the cotton broker, so far as buying and selling is concerned. Now a second transaction is added. This takes place between the lender and the borrower. The value of 1,000 pounds sterling is advanced to the manufacturer in the shape of cotton, and he has to repay it in money, say, in three months. And the interest for 1,000 pounds sterling, determined by the market rate of interest, forms the addition over and above the cash price. The price of cotton is determined by supply and demand. But the price of the advance of the value of cotton, of 1,000 pounds sterling for three months, is determined by the rate of interest. And this fact, that the cotton itself is thus transformed into money-capital, proves to Mr. Norman that interest would exist, even if no money existed. If there were no money at all, there would certainly be no general rate of interest.

There is, in the first place, the vulgar conception of capital as "commodities used in production." So far as these commodities serve as capital, their value as capital compared to their value as commodities is expressed in the profit, which is made out of their productive or mercantile employment. And the rate of profit has under all circumstances something to do with the market price of the bought commodities and their supply and demand, although it is determined besides by circumstances of quite a different kind. And there is no doubt that the rate of interest is generally limited by the rate of profit. But Mr. Norman is precisely asked to tell us how this limit is determined. It is determined by the supply and demand of money-capital as distinguished from the other forms of capital. Now one might ask furthermore: How are the demand and supply of money-capital determined? It is doubtless true, that a tacit connection exists between the supply of commodity-capital and the supply of money-capital, and also that the demand of the industrial capitalist for money-capital is determined by the actual conditions of real production. Instead of giving us information 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 wisdom is advanced for no other reason than that behind him. Above Overstone and other Currency prophets always stands the bad conscience, which makes them aware that they are trying to make capital of the mere medium of circulation by the artificial method of legislative interference and to raise the rate of interest.

Now to Lord Overstone, alias Samuel Jones Loyd, who is asked to explain, why he takes 10% for his "money," because the "capital" in the country is so scarce.

3653. "The fluctuations in the rate of interest arise from one of two causes: From a change 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 arise from a change in the rate of interest. The phrase 'value of capital' never signifies anything else theoretically, as we have shown in another place. Or, if Lord Overstone means the rate of profit by the phrase 'value of capital,' then this deep thinker comes back to the position that the rate of interest is regulated by the rate of profit!]" or from a change in the sum of money available in the country. All great fluctuations of the rate of interest, great either in duration or in the extent of the fluctuations, may be clearly traced to changes in the value of capital. There can be no more striking illustration of this fact than the rise of the rate of interest in 1847 and again in the two last years (1855-56); the lesser fluctuations of the rate of interest, which arise from a change in the quantity of the available money, are small in duration and extension. They are frequent, and the more frequent they are, the more effectively they accomplish their purpose." This purpose is no other than that of making bankers like Overstone rich. Friend Samuel Gurney expresses himself very naively on this point before the Committee of Lords, C. D. 1848. "Are you of the opinion, that the great fluctuations of the rate of interest, which took place last year, were advantageous to the bankers and money brokers, or not?"—"I believe they were advantageous to the money brokers. All fluctuations of business are advantageous to the knowing men."—1325. "Should not the banker ultimately lose through the high rate of interest owing to the pauperisation of his best customers?"—"No, Sir, I do not think that this result prevails to any appreciable degree."—There you can see what talk will do.

We shall recur to the question of the influence of the quantity of available money on the rate of interest later on. But we must note right here that Overstone once again takes one thing for another in this case. The demand for money-capital in 1847 (there was no worry on account of scarcity of money, or the "quantity of available money," as he called it, before October) increased for various reasons, such as the dearness of corn, rising cotton prices, unsaleable sugars through overproduction, railroad speculation and slumps, overcrowding of foreign markets with cotton goods, the above described forced export to and import from India for the purpose of mere swindling with bills of exchange. All these things, the over-production in industries as well as the underproduction in agriculture, in other words, widely different causes, led to an increased demand for money-capital in the shape of credit and money. The increased demand for money-capital had its causes in the course of the productive process itself. But whatever may have been the causes, it was the demand for money -capital which brought about the rise in the rate of interest, in the value of money-capital. If Overstone means to say that the value of money-capital rose because it rose, he is simply repeating himself. But if he means by "value of capital" a rise in the rate of profit which caused a rise in the rate of interest, we shall see immediately that this was not the case here. 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 decreases, its "value" increases. Overstone wants to establish the fact that the crisis of 1847, and the high rate of interest going with it, had nothing to do with the "quantity of available money," that is, with the regulations of the Bank Acts of 1844 which he had inspired; but as a matter of fact this crisis had something to do with these things, so far as the fear of exhausting the bank reserve—a creation of Overstone—added a money panic to the crisis of 1847-48, But this is not the main point here. There was a dearth of money-capital, caused by the excessive volume of operations compared to the available means and brought to an eruption by disturbances in the process of production due to a crop failure, overcapitalisation of railroads, over-production, particularly of cotton goods, swindling practices in the Indian and Chinese business, speculation, superfluous imports of sugar, 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 paid too much and the corresponding credit for that amount in the Lombard advance on corn. It was by no means the lack of bank notes that prevented them from transforming their corn into money at its old price of 120 shillings. The same things applied to those who had bought sugar to such an excess that it became almost unsaleable. It applies likewise to the gentlemen who had tied up their floating capital in railroads and relied on credit to make up for it in their "legitimate" business. To Overstone all this is expressed in "a moral sense of the enhanced value of his money." But this enhanced value of money-capital had its direct counterpart on the other side in the shape of the depreciated money-value of the real capital (commodity-capital and productive capital). The value of capital in one form rose, because the value of capital in the other forms fell. Overstone, however, seeks to identify these two kinds of value of different sorts of capital in one sole value of capital in general, and he does it 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 medium of circulation.

Take, for instance, his example of the year 1847. The official bank rate of interest 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 to 10%. December 7 to 5%.—In this case the interest rose, because the profits decreased and the money-values of commodities fell enormously. If Overstone says here that the rate of interest rose in 1847, because the value of capital rose, he cannot mean anything else by "value of capital" but the value of money-capital, and this is precisely the rate of interest and nothing else. But later the cloven hoof appears and the value of capital is identified with the rate of profit.

As for the high rate of interest in 1856, Overstone was indeed ignorant of the fact that this was partially a symptom of the supremacy of credit jobbers, who paid interest, not from their profit, but with the capital of others; he maintained even a few months before the crisis of 1857 that "business is quite sound."

He testifies furthermore: 3722. "The conception that the business profit is destroyed by raising the rate of interest is highly erroneous. In the first place, a rise in the rate of interest is rarely of long duration; in the second place, if it is of long duration and considerable, it is in the nature of things a rise in the value of capital, and why does the value of capital rise? Because the rate of profit has risen."—Here, then, we learn at last, what the meaning of "value of capital" is. We remark, by the way, that the rate of profit may hold itself at a high level for a long time, and yet the industrial capitalist's profit may fall and the rate of interest rise to a point where it swallows the greater portion of the profit.

3724. "The raise of the rate of interest was a result of the enormous expansion of business in our country, and of the great rise in the rate of profit; and if complaint is made, that the raised rate of interest destroys these two things, which were its own cause, it is a logical absurdity, which one does not know how to characterise."—This is just as logical as though he had said: The increased rate of profit was the result of the raise of prices by speculation, and if complaint is made, that the raise of prices destroys its own cause, namely speculation, it is a logical absurdity, etc. That anything can ultimately destroy its own cause, is a logical absurdity only for the usurer, who is in love with the high rate of interest. 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 influence upon wealth. The wiseacre! The idiocy of the present bourgeois world cannot be characterised more markedly than by the respect, which the "logic" of the millionaire, of this dunghill aristocrat, commanded in all England. By the way, even if high profits and an expansion of business may be the cause of a high rate of interest, a high rate of interest is for that reason by no means a cause of high profit. The question is precisely, whether such a high rate of interest (as was seen actually during the crisis) did not continue, or even reach its climax, after the high rate of profit had long gone the way of the flesh.

3718. "As for a great increase of the rate of discount, it is a circumstance, which arises entirely from the increased value of capital, and the cause of this increased value of capital, I believe, may be discovered by every one with perfect clearness. I have already mentioned the fact, that during the 13 years, which this Bank Act was in force, the commerce of England grew from 45 to 120 million pounds. Consider all the events implied by this brief statement in figures, consider the enormous demand for capital, which such a gigantic increase of commerce carries with it, and consider at the same time, the natural source of this great demand, namely the annual savings of the country, have been consumed during the last three or four years by unprofitable expenditures for purposes of war. I confess, I am surprised, that the rate of interest is not much higher; or in other words, I am surprised, that the shortage of capital in consequence of these gigantic operations is not much more stringent, than you have found it to be."

What a wonderful mixture of words on the part of our logician of usury! Here he is again with his increased value of capital! He seems to imagine, that on one side this enormous expansion of the process of reproduction took place, an accumulation of real capital, and that on the other side a "capital" existed, for which an "enormous demand" arose, in order to accomplish this gigantic increase of commerce! Was not this enormous increase of production itself this increase of capital, and if it created a demand, did it not also create the supply, including an increased supply of money-capital? If the rate of interest rose so high, it did so merely because the demand for money-capital increased still more rapidly than its supply, which means, in other words, that the expansion of industrial production carried with it a greater volume of its transactions on a credit basis. That is to say, the actual industrial expansion caused an increased demand for "accommodation," and this last demand is evidently what our banker means by the "enormous demand for capital." It was surely not the expansion of this mere demand for capital, which raised the export business from 45 to 120 million pounds sterling. And again, what does Overstone mean when he says, that the annual savings of the country swallowed by the Crimean War form the natural source of the supply for this great demand? In the first place, how did England get its accumulations from 1792 to 1815, which was a far greater war than the little Crimean War? In the second place, if the natural source dries up, from what source did capital flow then? It is well known that England did not ask for any loans from foreign countries. But if there is an artificial source aside from the natural one, it would be a very peculiar method 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 thinks evidently that the annual savings of the country (which were supposed to have been consumed in this case) are converted only into money-capital. But if no real accumulation, that is, no real expansion of production and augmentation of the means of production, took place, what good would the accumulation of debtor's claims in money on this production do?

The increase in the "value of capital," which follows from a high rate of profit, is mistaken by Overstone for an increase, which follows from a greater demand for money-capital. This demand may increase for reasons, which are quite independent of the rate of profit. He quotes himself some examples, which show that it rose in 1847 as a result of the depreciation of real capital. He means by the value of capital now real capital now money-capital, just as it may suit his purpose.

The dishonesty of our banking lord, and his narrow minded banker's point of view, which he aggravates by posing as a schoolmaster, are further revealed by the following: 3728. "You said, that in your opinion the rate of discount is of no particular significance for the merchant; will you kindly state what you regard as an ordinary rate of profit?"—Mr. Overstone declares that it is "impossible" to answer this question.—3729. "Suppose the average rate of profit to be from 7 to 10%; in that case, a change in the rate of discount from 2% to 7 or 8% must appreciably affect the rate of profit, must it not?" [This question confounds the rate of industrial profit with the average rate of profit and overlooks the fact, that this last rate of profit is the common source of interest and industrial profit. The rate of interest may leave the average rate of profit untouched, but not the industrial profit.] Overstone replied: "In the first place, business men will not pay a rate of discount, which takes away most of their profits beforehand; they will rather close up their business." [Yes, if they can do so without ruining themselves. So long as their profit is large, they pay the discount, because they are willing, and when profit is low, they pay the discount because they must.] "What does discount mean? Why does a man discount a bill of exchange?...Because he desires to obtain a larger capital." [Hold on! Because he desires to anticipate the return of his tied-up capital in the form of money and to avoid the stopping of business; because he must meet due payments. He demands additional capital only when business is good, or when he speculates on another man's capital, though business may be bad. The discount is by no means a mere device to expand business.] "And why does he wish to obtain command of a greater capital? Because he wants to invest this capital; and why does he want to invest this capital? Because it is profitable; but it would not be profitable for him, if the discount were to swallow his profit."

This self-complacent 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 business man 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 which he gives by the credit which he takes. And if he wants to expand his business on credit, the discounting of bills will do him little good, because it is merely the transformation of capital, which he has already in his hands, from one form into another; he will rather take up a direct loan for a long time. Only the credit swindler will get his fraudulent bills of exchange discounted for the purpose of expanding his business, in order to cover one rotten business by another; not for the purpose of making profits, but of getting possession of the capital of another man.

After Mr. Overstone has thus identified discount with the borrowing of additional capital [instead of identifying it with the transformation of bills of exchange representing capital into money], he beats at once a retreat, when the thumbscrews are applied to him.—3730. "Must not merchants, once that they are engaged in business, continue their operations for a certain period of time in spite of a temporary increase in the rate of interest?"—Overstone: "There is no doubt, that in any single transaction, if a man can get hold of capital at a low rate of interest instead of a high rate of interest, taking the matter from this narrow point of view, that it is pleasant for him."—But it is a very wide point of view, which enables Mr. Overstone now to understand by "capital" all of a sudden only his banker's 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 Bank Act of 1844, can you state what was the approximate relation of the rate of interest to the gold reserve of the bank; is it true, that, if the gold in the bank amounted to 9 or 10 millions, the rate of interest was 6 or 7%, and when it amounted to 16 millions, the rate of interest was about 3 or 4%?" [The cross-examiner wants to compel him to explain the rate of interest, so far as it is influenced by the amount of gold in the bank, by the rate of interest, so far as it is influenced by the value of capital.]—"I do not say, that this is the case...but if it is, then we should in my opinion resort to still more stringent measures than those of 1844; for if it should be true, that the greater the quantity of gold the lower the rate of interest, then we should go to work, according to this view of the matter, and increase the gold reserve to an unlimited amount, and then we should reduce the rate of interest to zero."—The cross-examiner Cayley, unmoved by this poor joke, continues: 3733. "If this were so, assuming that 5 millions in gold were returned to the bank, then in the course of the next six months the gold reserve would amount to 16 millions, and assuming that the rate of interest should fall thus to 3 or 4%, how could one maintain, that the fall in the rate of profit was due to a great slump in business?"—"I said the recent great increase in the rate of interest, not the fall in the rate of interest, is intimately connected with the great expansion of business."—But what Cayley says is this: If a rise of the rate of interest together with a contraction of the gold reserve, is an indication of an expansion of business, then a fall of the rate of interest 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 note that Your Lordship said that money is an instrument for securing capital." [This is precisely a mistake, this conception of money as an instrument; it is a form of capital.] "During a decrease of the gold reserve (of the Bank of England) does not the difficulty consist rather in the fact that capitalists cannot get any money?"—Overstone: "No, it is not the capitalists, it is the non-capitalists, who seek to obtain money, in order to carry on the business of people, who are not capitalists."—Here he declares point blank, that manufacturers and merchants are not capitalists, and that the capital of the capitalist is only money-capital.—3737. "Are the people who draw bills of exchange no capitalists?"—"The people who draw bills of exchange are probable capitalists and probably not."—Here he is stuck.

He is then asked, whether the bills of exchange of merchants do not represent the commodities, which they have sold or shipped. He denies, that these bills represent the value of the commodities just exactly as a bank note represents gold. (3740 and 41.) This is a little insolent.

3742. "Is not the purpose of the merchant that of obtaining money?"—"No; to obtain money is not the purpose of drawing a bill of exchange; to obtain money is the purpose of discounting the bill."—The drawing of bills of exchange is a conversion of commodities into a form of credit-money, just as the discounting of bills of exchange is the conversion of credit-money into other money, 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 means, not of transforming capital from one form into another, but of obtaining additional capital.

3742. "What is the great desire of the business world under the pressure of a panic, such as occurred according to your testimony in 1825, 1837 and 1839; do they want to secure possession of capital or of legal tender money?"—"They want to obtain command of capital, in order to continue 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 may not have to get rid of their commodities below price. If they have no capital at all themselves, then they receive with the means of payment at the same time capital, because they receive value without giving an equivalent. The desire to obtain money as such consists always in the wish to transform value from the form of commodities or creditor's claims into money. Hence also, aside from crisis, the great difference between the borrowing of capital and discount, the last being a mere transformation of money claims from one shape into another, or into real money.

[I take the liberty, in my capacity of editor, to interpolate a few remarks here.]

With Norman as well as Loyd-Overstone the banker always figures as a man, who advances "capital" to others, and his customers appear as people, who demand "capital" from him. Thus Overstone says, that people have bills of exchange discounted through him, "because they wish to obtain capital" [3729], and that it is pleasant for such people to "obtain command of capital" at a "low rate of interest" [3730]. "Money is an instrument for obtaining capital" [3736], and during a panic the great desire of the business world is to "obtain command of capital" [3743]. All the confusion of Loyd and Overstone notwithstanding they reveal at least the fact that they call the thing, which the banker gives to his customer, capital, and that this is a thing formerly not in the possession of the customer, but advanced to him in addition to the one already in his hands.

The banker has become so well accustomed to figure as the distributor [through loans] of the social capital available in the form of money, that he considers every function, by which he hands out money, as loaning. All the money which he pays out appears to him as a loan. If the money is directly loaned, it is literally true. If it is invested in the discounting of bills, then it is in fact advanced by himself until the bill becomes due. In this way the conception grows upon him that he cannot make any payments without loaning money to somebody. And these are loans, not merely in the sense that every investment of money, which has for its object the taking of interest or profit, is economically considered an advance of money, which the owner of money in his capacity as a private individual makes to himself in his capacity as an entrepreneur. They are loans in the definite sense that the banker loans to his customer a sum of money, which constitutes an addition to the capital already held by him.

It is this conception, which, transferred from the banker's office to political economy, has created the confusing controversy, whether the thing, which the banker loans to his customer in the shape of cash money, is capital or mere money, medium of circulation or currency. In order to decide this fundamentally simple controversy, we must place ourselves in the position of a customer of a bank. It depends what this customer wants and receives.

If the bank allows to its customer a loan on his own private credit, without any security on his part, then the matter is clear. He certainly receives in that case an advance of a definite amount in addition to the capital so far invested by him. He receives this advance in the form of money; it is not merely money, but money-capital.

If on the other hand, he receives an advance on depositing securities, etc., then this is money paid to him on condition that he pay it back, but it is not capital. For the securities also represent capital, and at that of a larger amount than the money advance upon them. The recipient of the advance receives less capital-value than he deposits as a security; hence the advance is not additional capital for him. He does not agree to this transaction, because he needs capital—for he has this in his securities—but because he needs money. Therefore we have in this case an advance of money, not of capital.

If the loan is granted by discounting bills, then even the form of an advance disappears. The transaction is then purely one of buying and selling. The bill passes by endorsement into the possession of the bank, while the money passes into the possession of the customer. There is no question of any return payment on either side. If a customer buys with a bill of exchange or some similar instrument of credit cash money, it is no more an advance than it is if he buys cash money with other commodities, such as cotton, iron, corn. Still less can this be called an advance of capital. Every purchase and sale between merchant and merchant transfers capital. But an advance of capital takes place only then, when a bill is a fraudulent one, which does not represent any commodities at all, and no banker will take such a bill, if he is aware of its nature. In the regular discounting business the customer of the bank does not, therefore, receive any advance, either of capital or of money, but he receives money for sold commodities.

The cases, in which the customer demands capital from a bank and receives it are thus very plainly distinguished from those, in which he merely receives an advance of money or buys it from the bank. And since particularly Mr. Loyd Overstone very rarely advanced any funds without collateral [he was the banker of my firm in Manchester] it is very evident that his beautiful descriptions of the great quantities of capital loaned by the generous bankers to the manufacturers in need of capital are gross inventions.

In chapter XXXII Marx says practically 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 to them not only the form of money, but also the equivalent, whatever be its form, with which to make payment."—And again in chapter XXXIII: "Under a developed system of credit, when the money is concentrated in the hands of the bankers, it is they, at least nominally, who make advances of money. This advance does not refer to the money already in circulation. It is an advance made to circulation, not an advance of capital circulated by it."—Likewise Mr. Chapman, who ought to know, 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 return to this subject in chapter XXVIII.—F. E.] 3744. "Will you kindly describe, what you really mean by the term capital?"—Overstone: "Capital consists of various commodities, by means of which trade is carried on; there is a fixed capital and there is a circulating capital. Your ships, your docks, your wharves are fixed capital, your means of subsistence, your clothes, etc. are circulating capital."

3745. "Has the drain of gold to foreign countries injurious consequences of England?"—"Not so long as one combines this term with a rational meaning." [Then follows the old Ricardian theory of money]..."in the natural condition of things the money of the world distributes itself among the various countries of the world in certain proportions; these proportions are such, that with such a distribution [of money] the commerce between any one country on one side and all other countries on the other side is one of mere exchanges; but there are disturbing influences, which affect this distribution from time to time, and when these influences arise, a portion of the money of a given country flows off to other countries." 3746. "You are now using the term 'money'. If I understood you correctly on former occasions, you called this a loss of capital."—"What was it that I called a loss of capital?"—3747. "The export of gold."—"No, I did not say that. If you treat gold as capital, then it is doubtless a loss of capital; it is a giving away of a certain portion of precious metal, of which the world money consists."—3748. "Did you not say before that a change in the rate of discount is a mere indication of a change in the value of capital?"—"Yes."—3749. "And that the rate of discount in general changes with the gold reserve in the Bank of England?"—"Yes, but I have already stated that the fluctuations of the rate of interest, which arise from a change in the quantity of money" [so this is what he calls the quantity of gold actually existing] "are very significant...."

3750. "Then do you mean to say that a decrease of capital has taken place, when a longer, but still temporary, raise of the discount above the ordinary quotation has taken place?"—"A decrease in a certain sense of the word. The relation between capital and the demand for it has changed; but it may be only through an increased demand, not through a decrease in the quantity of capital."—

[But capital was for him precisely money or gold, and a little before that he had explained the rise of the rate of interest by a rise of the rate of profit, which was due to an expansion, not to a contraction of business or capital.]

3751. "What kind of capital is it that you have particularly in mind here?"—"That depends entirely on what sort of a capital that every one needs. It is the capital which a nation has at its disposal in order to carry on its business, and if this business is doubled, a great increase must occur in the demand for that capital with which it is to be carried on." [This shrewd banker doubles first the business and then the demand for capital with which it is to be doubled. He never sees anything else but his customer, 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. Lloyd capital is nothing else but the totality of commodities] "it changes its price" [that is, the commodities change their price twice, one as commodities and the second time as capital] "according to supply and demand."

3752. "The fluctuations in the rate of discount are in a general way connected with the fluctuations of the gold reserve in the vaults of the bank. Is this the capital to which you refer?"—"No."—3753. "Can you give an example, showing when a great supply of capital was accumulated in the Bank of England and at the same time the rate of discount stood high?"—"In the Bank of England it is not capital that is accumulated, but money."—3754. "You testified that the rate of interest depends on the quantity of capital; will you kindly state, what kind of capital you mean, and whether you can quote an example, where a great supply of gold was held in the bank and at the same time the rate of interest was high?"—"It is very probable" [aha!] "that the accumulation of gold in a bank may coincide with a low rate of interest, because a period of low demand for capital" [namely money-capital; the time to which reference is made here, 1844 and 1845, was a period of prosperity] "is a period, in which naturally the means or instrument, by which capital is commanded, can accumulate."—3755. "You think, then, that no connection exists between the rate of discount and the quantity of gold in the bank vaults?"—"A connection may exist, but it is not a connection on principle;" [but his Bank Act of 1844 made it precisely a principle of the Bank of England to regulate the rate of interest by the quantity of gold in its possession] "there may be a coincidence of time,"—3758. "Do you intend to say that the difficulty of the merchants in this country, during times of scarcity of money due to a high rate of interest consists of obtaining capital, and not in obtaining money?"—"You are throwing together two things, which I do not bring together in this form; the difficulty consists in getting capital, and it also consists in getting money....The difficulty of obtaining money, and the difficulty of obtaining capital, is the same difficulty considered at two different stages of its development."—Here the fish is caught once more. The first difficulty is to discount a bill of exchange, or to obtain a loan on security of commodities. It is the difficulty of converting capital, or a commercial equivalent for capital, into money. And this difficulty expresses itself, among other things, in a high rate of interest. But after the money has been obtained, in what does the second difficulty consist if it is merely a question of paying, has any one any difficulty in getting rid of his money? And if it is a question of buying, where has any one ever had any difficulty in times of crisis in buying anything? Supposing, for the sake of argument, that this should refer to the specific case of a dearth in corn, cotton, etc., this difficulty should become apparent only in the price of these commodities, not in that of money-capital, that is, not in the rate of interest; but the difficulty, so far as it refers to the price of commodities, is overcome 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 obtaining money, is it not?"—"It is an increased difficulty of obtaining money, but it is not the money, the possession of which is essential; it is only the form" [and this form brings profits into the pockets of the banker] "in which the increased difficulty of obtaining capital presents itself under the complicated relations of a civilised condition."

3763. Overstone's reply: "The banker is the middle man, who receives on one side deposits, and on the other side uses these deposits by entrusting them, in the form of capital, to the hand of persons, who etc."

Here we have at last what he calls capital. He converts money into capital by "entrusting" it, or, less euphemistically, by loaning it out at interest.

After Mr. Overstone has stated, that a change in the rate of discount is not essentially connected with a change in the quantity of gold reserve in the bank, or in the quantity of available money, but that there is at best only a coincidence in time, he repeats:

3804. "If the money in the country is reduced by export, its value rises, and the Bank of England must adapt itself to this change in the value of money;" [that is, 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] "this is technically expressed by the words, that it raises the rate of interest."

3819. "I never throw the two together." Meaning money and capital, for the simple reason, that he never distinguishes them.

3834. "The very large sum, which had to be paid out for the necessary subsistence of the country [for corn in 1847] and which was, indeed, capital. "

3841. "The fluctuations in the rate of discount have doubtless a very close connection to the condition of the gold reserve [of the Bank of England], for the condition of the gold reserve is the indicator of the increase or decrease of the quantity of money existing in a country; and in proportion as the money in a country increases or decreases, the value of money falls or rises, and the bank rate of discount will adapt itself to that."—Here, then, he admits what he denied once for all in No. 3755-3842. "There is a close connection between the two." Meaning between the quantity of gold in the issue department and the reserve of notes in the banking department. Here he explains the change in the rate of interest by the change in the quantity of money. But what he says is wrong. The reserve may decrease, because the circulating money in the country may increase. This is the case, when the public takes more notes and the metal reserve does not decrease. But in that case the rate of interest rises, because then the banking capital of the Bank of England is limited by the Acts of 1844. But he dare not mention this, since this law provides, that these two departments shall not have anything in common.

3859. "A high rate of profit will always create a great demand for capital; a great demand for capital will raise its value."—Here, we have at last 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 1844-45, for instance, in the cotton industry, because raw cotton was and remained cheap while the demand for cotton goods was strong. The value of capital [and according to a previous statement Overstone calls capital that which every one needs in his business], in the present case the value of raw cotton, was not increased for the manufacturer. Now the high rate of profit may have induced some cotton manufacturer to take up money for the expansion of his business. Thereby the demand for money-capital rose, and nothing else.

3889. "Gold may be money or not, just as paper may be a bank note or not."

3896. "Do I understand you correctly, then, that you abandon the statement, which you applied in 1840, to the effect that fluctuations in the circulating notes of the Bank of England should be governed by the fluctuations in the quantity of the gold reserve?"—"I abandon it in so far...that according to the present condition of our knowledge we must add to the circulating notes those other notes, which are deposited in the bank 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 millions more, implies, of course, that its issue of notes fluctuates with the fluctuations of the gold reserve. But since "the present condition of our knowledge" shows clearly, that the mass of notes, which the bank can manufacture according to this (and which the issue department transfers to the banking department), and which circulating between the two departments of the Bank of England and fluctuate with the fluctuations of its gold reserve, does not determine the circulation of bank notes outside of the walls of the Bank of England, and this last circulation becomes a matter of indifference for the administration of the bank, and the circulation between the two departments of the bank, which shows its difference from the real circulation in the reserve, becomes alone essential. For the outside world this internal circulation is significant only, because the reserve indicates, how close the bank is getting to the legal maximum of its issue of notes, and how much the customers of the bank can still receive from the banking department.

The following is a brilliant example of Overstone's bad faith:

4243. "Does the quantity of capital fluctuate, in your own opinion, to such an extent from one month to another, that its value is changed thereby in the way that we have observed during the last years in the fluctuations of the rate of discount?"—"The proportion between demand and supply of capital may undoubtedly fluctuate even in short intervals....If France announces to-morrow, that it will take up a very large loan, it will undoubtedly cause at once a great change in the value of money, that is, the value of capital, in England."

4245. "If France announces, that it will suddenly need 30 millions worth of commodities for some purpose or other, a great demand will arise for capital, to use the more scientific and simpler expression,"

4246. " The capital, which France might want to buy with its loan, is one thing; the money, with which France buys this, is another thing; is it the money, which changes its value, or not?"—"We are coming back to the old question, and that, I believe, is better suited for the study room of a scientist than for this committee room."—And with this he retires, but not into the study room. 85

CHAPTER XXVII.: 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, for the purpose of procuring the compensation of the rate of profit, or the movements of this compensation, upon which the entire capitalist production rests.

II. Reduction of the cost of circulation.

III. Formation of stock companies. By means of these:

In the stock companies the function is separated from the ownership of capital, and labor, of course, is entirely separated from the ownership of means of production and of surplus-labor. This result of the highest development of capitalist production is a necessary transition to the reconversion of capital into the property of the producers, no longer as the private property of individual producers, but as the common property of associates, as social property outright. On the other hand it is a transition to the conversion of all functions in the process of reproduction, which still remain connected with capitalist private property, into mere functions of the associated producers, into social functions.

Before we proceed any further, we call attention to the following fact, which is economically important: Since profit here assumes purely the form of interest, enterprises of this sort may still be successful, if they yield only interest, and this is one of the causes, which stem the fall of the rate of profit, since these enterprises, in which the constant capital is so enormous compared to the variable, do not necessarily come under the regulation of the average rate of profit.

This is the abolition of the capitalist mode of production within capitalist production itself, a self-destructive contradiction, which represents on its face a mere phase of transition to a new form of production. It manifests its contradictory nature by its effects. It establishes a monopoly in certain spheres and thereby challenges the interference of the state. It reproduces a new aristocracy of finance, a new sort of parasites in the shape of promoters, speculators and merely nominal directors; a whole system of swindling and cheating by means of corporation juggling, stock jobbing, and stock speculation. It is private production without the control of private property.

IV. Aside from the stock company business, which represents an abolition of capitalist private industry on the basis of the capitalist system itself and destroys private industry in proportion as it expands and seizes new spheres of production, credit offers to the individual capitalist, or to him who is regarded as a capitalist, absolute command of the capital of others and the property of others, within certain limits, and thereby of the labor of others. 88 A command of social capital, not individual capital of his own gives him command of social labor. The capital itself, which a man really owns, or is supposed to own by public opinion, becomes purely a basis for the superstructure of credit. This is true particularly of wholesale commerce, through whose hands the greatest portion of the social product passes. All standards of measurement, all excuses which are more or less justified under capitalist production, disappear here. What the speculating wholesale merchant risks is social property, not his own. Equally stale becomes the phrase concerning the origin of capital from saving, for what he demands is precisely that others shall save for him. [In this way all France saved recently one and a half billion francs for the Panama Canal swindlers. In fact the entire Panama swindle is here correctly described, fully twenty years before it happened.—F. E.] The other phrase of the abstention is slapped in the face by his luxury, which now becomes a means of credit by itself. Conceptions, which still have some meaning on a less developed stage of capitalist production, become quite meaningless here. Both success and failure lead now simultaneously to a centralisation of capital, and thus to an expropriation on the most enormous scale. This expropriation extends here from the direct producers to the smaller and smallest capitalists themselves. It is first the point of departure of the capitalist mode of production; its complete accomplishment is the aim of this production. In the last instance it aims at the expropriation of all individuals from the means of production, which cease with the development of social production to be means of private production and products of private production, and which can henceforth be only means of production in the hands of associated producers, their social property, just as they are social products. However, this expropriation appears under the capitalist system in a contradictory form, as an appropriation of social property by a few; and credit gives to these few more and more the character of pure adventurers. Since property here exists in the form of shares of stock, its movements and transfer become purely a result of gambling at the stock exchange, where the little fish are swallowed by the sharks and the lambs by the wolves. In the stock companies the antagonism against the old form becomes apparent, in which social means of production are private property; but the conversion to the form of shares of stock still remains ensnared in the boundaries of capitalism; hence, instead of overcoming the antagonism between the character of wealth as a social one and as private wealth, the stock companies merely develop it in a new form.

The co-operative factories of the laborers themselves represent within the old form the first beginnings of the new, although they naturally reproduce, and must reproduce, everywhere in their actual organisation all the shortcomings of the prevailing system. But the antagonism between capital and labor is overcome within them, although only in the form of making the associated laborers their own capitalists, that is, enabling them to use the means of production for the employment of their own labor. They show the way, in which a new mode of production may naturally grow out of an old one, when the development of the material forces of production and of the corresponding forms of social production has reached a certain stage. Without the factory system arising out of the capitalist mode of production the co-operative factory could not develop, nor 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 also a means for the gradual extension of co-operative enterprises on a more or less natural scale. The capitalist stock companies as well as the co-operative factories may be considered as forms of transition from the capitalist mode of production to the associated one, with this distinction, that the antagonism is met negatively in the one, positively in the other.

So far we have considered the development of the credit system, and the latent abolition of capitalist property implied by it, mainly with reference to industrial capital. In the following chapters we shall consider credit with reference to interest-bearing capital as such, both the effect of interest on this capital and the form which it assumes thereby; and on this point we shall have to make a few more specific remarks of economic significance.

For the present we have this to say:

The credit system appears as the main lever of overproduction and overspeculation in commerce solely because the process of reproduction, which is elastic in its nature, is here forced to its extreme limits, and is so forced for the reason that a large part of the social capital is employed by people who do not own it and who push things with far less caution than the owner, who carefully weighs the possibilities of his private capital, which he handles himself. This simply demonstrates the fact, that the production of values by capital based on the antagonistic nature of the capitalist system permits an actual, free, development only up to a certain point, so that it constitutes an immanent fetter and barrier of production, which are continually overstepped by the credit system. 89 Hence the credit system accelerates the material development of the forces of production and the establishment of the world market. To bring these material foundations of the new mode of production to a certain degree of perfection, is the historical mission of the capitalist system of production. At the same time credit accelerates the violent eruptions of this antagonism, the crises, and thereby the development of the elements of disintegration of the old mode of production.

Two natures, then, are immanent in the credit system. On one side, it develops the incentive of capitalist production, the accumulation of wealth by the appropriation and exploitation of the labor of others, to the purest and most colossal form of gambling and swindling, and reduces more and more the number of those, who exploit the social wealth. On the other side, it constitutes a transition to a new mode of production . It is this ambiguous nature, which endows the principal spokesmen of credit from Law to Isaac Pereire with the pleasant character of swindlers and prophets.

CHAPTER XXVIII.: THE MEDIUM OF CIRCULATION (CURRENCY) AND CAPITAL. TOOKE'S AND FULLARTON'S CONCEPTION.

THE distinction between currency and capital, drawn by Tooke, 90 Wilson, and others, which indiscriminately confounds the differences between the medium of circulation as money, as money-capital, and as interest-bearing capital (moneyed capital in English parlance), refers to two things.

The currency circulates on the one hand as coin (money), so far as it promotes the expenditure of revenue, in the transactions between the individual consumers and the retail merchants. In this category belong all merchants, who sell to the consumers, that is, the individual consumers as distinguished from the productive consumers or producers. Here money circulates in the function of coin, although it continually replaces capital. A certain portion of the money in a certain country is continually devoted to this function, although this portion consists of perpetually varying pieces of individual coin. On the other hand, so far as money promotes the transfer of capital, either as a means of purchase (means 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 act as a means of purchase also between dealer and dealer, so far as they buy on cash terms one another, and it may serve as a means of payment also between dealer and consumer, so far as credit is given and the revenue consumed before it is paid. 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 those between consumers and dealers. It is, therefore, equally a currency (circulation) in both functions. In Tooke's conception, confusion is introduced into this question in various ways.

CHAPTER XXIX.: THE COMPOSITION OF BANKING CAPITAL.

IT is now necessary to find out more accurately, what are the constituent elements of banking capital.

We have just seen, that Fullarton and others transform the distinction between money as a means of circulation and money as a means of payment (or eventually as world money, whenever it is a question of gold drains) into a distinction between currency and capital.

The peculiar role played by capital in this instance brought it about, that this banker's economics taught as insistently that money is indeed capital par excellence as the enlightened economics taught that money is not capital.

In subsequent analysis we shall demonstrate, that in such cases money-capital is confounded with moneyed capital in the sense of interest-bearing capital, while in the first named sense money-capital is but a transient form of capital as distinguished from the other forms of capital, commodity-capital and productive capital.

The banking capital consists 1) of cash money, gold or notes; 2) securities. These again may be divided into two parts: Commercial bills, bills of exchange, which run for some time, become due, and the cashing (discounting) of which is the essentially profitable business of the banker; and public securities, such as government bonds, treasury notes, stocks of all kinds, in brief, interest-bearing papers, which are essentially different from bills of exchange. Mortgages may also be classed with this part. The capital composed of these various constituents is again divided into the banker's business capital, and into the deposits, which form his banking capital, or borrowed capital. In the case of banks with an issue of notes these must be counted also. We leave the deposits and notes out of consideration for the present. It is evident, that nothing is altered in the actual constituents of banking capital (money, bills of exchange, deposits), whether these different elements represent the banker's own capital or deposits, the capital of other people. The same division would remain, whether he were to carry on his business with his own capital alone or with no other but deposited capital.

The form of the interest-bearing capital is responsible for the fact, that every determined and regular revenue of money appears as interest on some capital, whether it be due to some capital or not. The money revenue is first converted into interest, and with the interest comes also the capital, from which it is drawn. In like manner every sum of money appears as capital in connection with the interest-bearing capital, as long as it is not spent as revenue; that is, it appears as principal compared to the 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 pounds sterling would then yield 25 pounds sterling, if converted into interest-bearing capital. Every fixed annual income of 25 pounds sterling may then be considered as interest on a capital of 500 pounds sterling. This, however, is and remains a purely illusory conception, except the case in which the source of the 25 pounds sterling, whether it be a mere title of ownership or claim of indebtedness, or an actual element of production, such as real estate, is directly transferable or assumes a form, in which it becomes transferable. Let us choose a government debt and wages for an illustration.

The state has to pay to his creditors annually a certain amount of interest for the money loaned from them. In this case the creditor cannot call on the state to give up the principal. He can merely sell his claim, his title of ownership. The capital itself has been consumed, spent by the state. It does not exist any longer. What the creditor of the state possesses is 1) a certificate of indebtedness from the state, amounting, say, to 100 pounds sterling; 2) this certificate gives to the creditor a claim upon the annual revenues of the state, that is, the annual tax revenue, to a certain amount, say, 5 pounds, or 5%; 3) the creditor may sell this certificate 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 of this certificate can sell it, as a rule, at its value of 100 pounds sterling to B; for it is the same to B, whether he loans 100 pounds sterling at 5 % annually, or whether he secures for himself by the payment of 100 pounds sterling an annual tribute from the state to the amount of 5 pounds sterling. But in all these cases the capital, the progeny of which (interest) is paid by the state, is illusory, fictitious capital. Not only does the amount loaned to the state exist no longer, but it was never intended at all to be invested as capital, and only by investment as capital could it have been transformed into a self-preserving value. For the original creditor A, the share of interest from taxes falling to him annually represents so much interest on his capital, just as a certain share of the spendthrift's fortune does for the usurer, although in either case the loaned amount was not invested as capital. The possibility of selling his claim on the revenues of the state represents for A the possible return of his principal. As for B, his capital, from his own private point of view, is invested 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. This transaction may be multiplied ever so often, the capital of the state debt remains a purely fictitious one, and from the moment that the certificates would become unsalable, the fiction of this capital would disappear. Nevertheless this fictitious capital has its own movements, as we shall see presently.

The capital of the national debt appears as a minus, and interest-bearing capital generally is the mother of all crazy forms, so that, for instance, debts may appear in the eyes of the banker as commodities. Now let us look at wages. Wages are here conceived as interest, so that labor-power stands for capital, which yields this interest. For instance, if the wages for one year amount to 50 pounds sterling, and the rate of interest is 5%, the annual labor-power is equal to a capital of 1,000 pounds sterling. The insanity of the capitalist mode of conception reaches its climax here. For instead of explaining the self-expansion of capital out of the exploitation of labor-power, the matter is reversed and the productivity of labor-power itself is this mystic thing, interest-bearing capital. In the second half of the 17th century this used to be a favorite conception (for instance with Petty) but it is used even nowadays in good earnest by vulgar economists and more particularly by German statisticians. 93

Unfortunately two disagreeable facts mar this conception. In the first place, the laborer must work, in order to secure this interest. In the second place, he cannot transform the capital-value of his labor-power into cash by transferring it. On the contrary, the annual value of his labor-power is equal to his average annual wages, and his labor has to make good to the seller of his labor-power this same value plus a surplus-value, the increment added by his labor. Under a slave system the laborer has a capital-value, namely his purchase price. And when he is rented out, the renter has to pay, in the first place, the interest on this purchase price, and must furthermore make good the annual wear and tear of the capital.

The forming of a fictitious capital is called capitalising. Every periodically repeated income is capitalised by calculating it on the average rate of interest, as an income which would be realised by a capital at this rate of interest. For instance, if the annual income is 100 pounds sterling and the rate of interest 5%, then these 100 pounds sterling would represent the annual interest on 2,000 pounds sterling, and these 2,000 pounds sterling are regarded as the capital-value of the legal title of ownership upon these 100 pounds sterling annually. For him who buys this title of ownership these 100 pounds sterling of annual income represent indeed the interest on his capital at 5%. All connection with the actual process of self-expansion of capital is thus lost to the last vestige, and the conception of capital as something which expands itself automatically is thereby strengthened.

Even when the certificate of indebtedness—the security—does not represent a purely fictitious capital, as it does in the case of state debts, the capital-value of such papers is nevertheless wholly illusory. We have seen previously in what manner the credit system creates associated capital. The papers are considered as titles of ownership, which represent this capital. The stocks of railroads, mines, navigation companies, and the like, represent actual capital, namely the capital invested and used in such ventures, or the amount of money advanced by the stockholders for the purpose of being used as capital in such ventures. This does not exclude the possibility that they may become victims of swindle. But this capital does not exist twofold, it does not exist as the capital-value of titles of ownership on one side and as the actual capital invested, or to be invested, in those ventures on the other side. It exists only in this last form, and a share of stock is merely a title of ownership on a certain 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 case. A or B then have their title in the shape of capital, but C has his capital merely in the shape of a title on the surplus-value to be realised by 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 a real capital by the side of that capital, or that title, upon which they may have a claim. For they become commodities, whose price has its own peculiar movements and is fixed in its own way. Their market value is determined differently from their nominal value, without any change in the value of the actual capital, which expands, of course. On the one hand their market value fluctuates with the amount and security of the yields, on which they have a claim. If the nominal value of a share of stock, that is, the invested sum originally represented by this share, is 100 pounds sterling, and the enterprise pays 10%, instead of 5%, then their market-value, other circumstances remaining the same, rises to 200 pounds sterling, so long as the rate of interest is 5%, for when capitalised at 5%, it now represents a fictitious capital of 200 pounds sterling. He who buys it for 200 pounds sterling receives a revenue of 5% on this investment of capital. If the success of the venture is such as to diminish the income from it, the reverse takes place. The market value of these papers is in part fictitious, as it is not determined merely by the actual income, but also by the expected income, which is calculated in advance. But assuming the self-expansion of the actual capital to proceed at a constant rate, 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 such securities rises and falls inversely as the rate of interest. If the rate of interest rises from 5% to 10%, then a security guaranteeing an income of 5 pounds sterling will represent only a capital of 50 pounds sterling. If the rate of interest falls from 5% to 2½%, then the same security will represent a capital of 200 pounds sterling. Its value is always but its capitalised income, that is, its income calculated on a fictitious capital of so many pounds sterling at the prevailing rate of interest. In times when there is a stringency of money on the market these securities will, therefore, fall in price for two reasons: First, because the rate of interest rises, and secondly, because they are thrown in large quantities upon the market for the purpose of getting ready cash. This drop in their price takes place independently of the fact, whether the income guaranteed to their owner by these papers is constant, as it is in the case of government bonds, or whether the self-expansion of the actual capital, which they represent, for instance in industrial enterprises, is subject to interruptions such as interfere with the process of reproduction. In this last eventuality the two causes of depreciation mentioned above are joined by a third one. As soon as the storm is over, the papers rise once more to their former level, unless they represent failures or swindles. Their depreciation in times of crisis serves as a potent means of centralising money. 94

To the extent that the depreciation or appreciation of such papers is independent of the movements of the value of actual capital represented by them, the wealth of the nation is just as great before as after their depreciation. "On October 23, 1847, the public funds and the canal and railroad stocks were already depreciated by 114,752,225 pounds sterling." So said Morris, the Governor of the Bank of England, in his testimony before the Committee on Commercial Distress, 1847-48. Unless this depreciation implied an actual stopping of production and of traffic on canals and rails, or a suspension of pending enterprises in the beginning stages, or a throwing away of capital in positively worthless ventures, the nation did not grow poorer by one cent through the bursting of this bubble of fictitious capital.

In all countries of capitalist production, there exists an enormous quantity of so-called interest-bearing capital, or moneyed capital, in this form. And accumulation of money-capital signifies to a large extent nothing else but an accumulation of such claims on production, an accumulation of the market-price, the illusory capital-value, of these claims.

A part of the banking capital is invested in these so-called interest-bearing papers. This is itself a portion of the reserve capital, which does not perform any function in the actual business of banking. The greater portion of these papers consists of bills of exchange, that is, promises to pay made by industrial capitalists or merchants. For the money lender these papers 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 for which the bill calls.

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 withdraws his, another brings his in, so that the general average amount of deposits fluctuates little during periods of normal business.

The reserve funds of the banks, in countries with capitalist production, always express on an average the magnitude of the money existing in the shape of a hoard, and a portion of this hoard in its turn consists of papers, mere drafts upon gold, which have no value in themselves. The greater portion of the banking capital is, therefore, purely fictitious and consists of certificates of indebtedness (bills of exchange), government securities (which represent spent capital), and stocks (claims on future yields of production). And it should not be forgotten, that the money-value of capital represented by these papers in the strongboxes of the banker is itself fictitious, even of those which are checks for guaranteed incomes, such as public bonds, or titles on actual capital, like industrial stocks, and that this value is regulated differently than that of the actual capital, which they represent at least in part; or, when they stand for mere claims on the output of production, and not for capital, that the claim on the same amount is expressed in a continually changing fictitious money-capital. In addition to this it must be noted, that this fictitious capital represents largely, not his own capital, but that of the public, which makes deposits with him, either with or without interest.

Deposits are always made in money, in gold or notes, or in checks upon these. With the exception of the reserve fund, which is contracted or expanded in proportion to the requirements of actual circulation, these deposits are in fact always in the hands, on one side, of the industrial capitalists and merchants, whose bills of exchange are discounted with them, and who receive advances out of them; on the other side, 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 not found in the cash boxes of the banks, but figure merely in their books as credits of the depositors. On the other hand they figure as such book entries to the extent that the mutual credits of the depositors in the shape of checks on their deposits are balanced against one another and so recorded. In this procedure it is immaterial, whether these deposits are entrusted to the same banker, who can thus balance the various credits against each other, or whether this is done in different banks, who mutually exchange checks and pay only the balances to one another.

With the development of the credit system and of interest-bearing capital all capital seems to double, or even treble, itself by the various modes, in which the same capital, or perhaps the same claim on a debt, appears in different forms in different hands. 95

The greater portion of this "money-capital" is purely fictitious. All the deposits, with the exception of the reserve fund, are merely credits placed with the banker, which however, never exist in deposit. To the extent that they serve in the Giro business, they perform the function of capital for the bankers, after these have loaned them out. They pay to one another their mutual checks upon the nonexisting deposits by balancing their mutual accounts.

Adam Smith says justly with regard to the role played by capital in the loaning of money: "Even in the money business the money is merely a check transferring from one hand to another such capitals as are not used by the owners. These capitals may be almost to any amount larger than the amount of money, which serves as an instrument of their transfer. The same pieces of money serve successively in many different loans, likewise in many different purchases. For instance, A lends to W 1,000 pounds sterling, with which W immediately buys from B 1,000 pounds sterling worth of commodities. Since B himself has no immediate use for this money, he lends the identical pieces of money to X, who immediately buys from C commodities worth 1,000 pounds sterling. In the same way and for the same reason C lends this money to Y, who again buys with it commodities from D. In this way the same pieces of gold or paper may serve in the course of a few days in the promotion of three different loans and three different purchases, each one of which has a value equal to the full amount of these pieces. What the three moneyed men, A, B and C have transferred to the three borrowers, W, X and Y, is the power to make these purchases. In this power consists both the value and the usefulness of these loans. The capital loaned out by these three moneyed men is equal to the value of the commodities that can be bought with it, and it is three times greater than the value of the money with which these purchases are made. Nevertheless all these loans may be perfectly safe, since the commodities bought with them by the different debtors are employed in such a way, that they will in time bring an equal value in gold or paper money with a profit to boot. And just as the same pieces of money may serve in the promotion of different loans to an amount exceeding their own value three times, or even thirty times, just so may they serve successively as means of return payment." (Book II, chapter IV.)

Since the same piece of money may perform different purchases, according to the velocity of its circulation, it may just as well perform the service of different loans, for the purchases take it from one hand to another, and a loan is but a transfer from one hand to another without the intervention of a purchase. To every seller his money represents the changed form of his commodities. Nowadays, when every value is expressed as the value of capital, it represents in the various loans different capitals, and this is but another way of saying that it can realise different commodity-values successively. At the same time it serves as a medium of circulation, in order to transfer the material capitals from hand to hand. In the transaction of loaning it does not pass from hand to hand as a medium of circulation. So long as it remains in the hands of the lender, it is in his hands not a medium of circulation, but the existing value of his capital. And in this form he transfers it when loaning it to another. If A had loaned the money to B, and B to C; without the intervention of purchases, then the same money would not represent three capitals, but only one, only one capital-value. How many capitals it actually represents depends on the number of times in which it performs the service of the embodied value of different commodity-capitals.

The same thing which Adam Smith says of loans in general applies also to deposits, since these are merely another name for loans, which the public gives to the bankers. The same pieces of money may serve as instruments for any number of deposits.

"It is undoubtedly true, that the 1,000 pounds sterling, which some one deposits today with A, are again issued tomorrow and become a deposit with B. The day after, paid away by B, they may form a deposit with C, and so forth infinitely. The same 1,000 pounds sterling may, therefore, by a number of transfers, multiply themselves into an absolutely indeterminable sum of deposits. It is, therefore, possible, that nine-tenths of all the deposits in the United Kingdom have no existence, save for the entries in the books of bankers registering them, who have to square accounts in due time....Such was the case in Scotland, where the currency of money never exceeded 3 million pounds sterling, while the deposits amounted to 27 millions. Unless a general run be made on the banks on account of these deposits, the same 1,000 pounds sterling, traveling backwards, might easily balance an equally indeterminable sum. Since the same 1,000 pounds sterling, with which some one pays today his debt to some dealer, may tomorrow settle this dealer's debt to some merchant, and next day the debt of the merchant to his bank, and so forth without end, the same 1,000 pounds sterling may also wander from hand to hand and from bank to bank, and balance any conceivable amount of deposits." ( The Currency Question Reviewed, pp. 162, 163.)

Just as everything is duplicated and triplicated in this credit system and commuted into a mere fiction, so the same applies to the "reserve fund," where one would at last hope to grasp something solid.

Listen once more to Mr. Morris, the Governor of the Bank of England: "The reserves of the private banks are in the hands of the Bank of England in the form of deposits. The first effects of an export of gold seem to strike only the Bank of England; but it would just as well influence the reserves of the other banks, since it means an export of a part of the reserves, which they have deposited in our bank. In the same way it would influence the reserves of all provincial banks." ( Commercial Distress 1847-48.) Ultimately, then, the reserve funds actually dissolve themselves into the reserve fund of the Bank of England. 96

However, this reserve fund again has a double existence. The reserve fund of the banking department of the Bank of England is equal to the excess of the notes, which the Bank is authorised to issue, over the notes in circulation. The legal maximum of the note issue is 14 million pounds sterling (for which no metallic reserve is required; it is the approximate amount owed by the state to the Bank) plus the amount of the precious metals in the Bank. If the supply of precious metals in the Bank amounts to 14 million pounds sterling, the Bank can issue 28 millions in notes, and if 20 millions of these are in circulation, the reserve fund of the banking department is 8 million pounds sterling. These 8 million pounds sterling are, in that case, legally the banking capital at the disposal of the Bank, and at the same time the reserve fund for its deposits. If an exportation of gold takes place now, by which the supply of precious metals in the Bank is reduced by 6 millions—notes to this amount must be destroyed at the same time—then the reserve of the banking department would fall from 8 millions to 2 millions. 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 of the reserve fund covering their own credits in the Bank. In 1857 four of the 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 script" suspending the Bank Acts of 1844. 97

In this way the banking department might fail, while a certain number of millions (for instance, 8 millions in 1847) are held in its issue department to secure the convertibility of its circulating notes. But this security is once more illusory.

"The greater portion of the deposits, for which the bankers themselves have no immediate demand, passes into the hands of the bill brokers, who in return give to the banker security for his loan by means of commercial bills, which they have already discounted for people in London or in the provinces. The bill broker is responsible to the banker for the return payment of this money at call; and these transactions are of such an enormous volume, that Mr. Neave, the present Governor of the Bank of England, said in his testimony: We know that one broker had 5 millions, and we have reason to assume, that another had between 8 and 10 millions; another had 4, another 3½, a third more than 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 business without any reserve in cash; they relied upon the incomes from the successively due bills, or when it came to the worst, upon their power to secure from the Bank of England loans on depositing bills discounted by them."—Two firms of bill brokers in London suspended payments in 1847; both resumed business later. In 1857 they suspended again. The liabilities of one of these firms amounted in 1847 in round figures to 2,683,000 pounds sterling with a capital of 180,000 pounds sterling; its liabilities in 1857 were 5,300,000 pounds sterling, while its capital apparently was not more than one-quarter of what it had been in 1847. The liabilities of the other firm were both times between 3 or 4 millions, while its capital amounted to no more than 45,000 pounds sterling. ( Ibidem, p. XXI, section 52.)

CHAPTER XXX.: MONEY-CAPITAL AND ACTUAL CAPITAL, I.

THE only difficult questions, which we are now approaching in the matter of the credit system, are the following:

First: The accumulation of the money-capital strictly so-called. To what extent is it, and is it not, an indication of an actual accumulation of capital, that is, of reproduction on an enlarged scale? The so-called plethora of capital, an expression used only with reference to the interest-bearing capital, is it only a peculiar way of expressing industrial overproduction, or does it constitute a separate phenomenon alongside of it? Does this plethora, or this excessive supply of money-capital, coincide with the existence of stagnating masses of money (bullion, gold coin and bank notes), so that this superfluity of actual money is an expression and phenomenon of that plethora of loan capital?

Secondly: To what extent does a stringency of money, that is, a scarcity of loan capital, express a real lack of actual capital (commodity-capital and productive capital)? To what extent does it coincide, on the other hand, with a lack of money as such, a lack of currency?

So far as we have hitherto considered the peculiar form of accumulation of money-capital and of money wealth in general, it resolved itself into an accumulation of claims of ownership upon labor. The accumulation of the capital of the national debt has been revealed to mean merely an increase of a class of state creditors, who have the privilege of a first claim upon the revenues. 98

In these facts, by which even an accumulation of debts may appear as an accumulation of capital, the perfection of the reversal accomplished by the credit system becomes apparent. These certificates of indebtedness, which are issued in place of the originally loaned and long spent capital, these paper duplicates of destroyed capital, serve for their owners as capital to the extent that they are salable commodities and may, therefore, be reconverted into capital.

The titles of ownership upon company business, railroads, mines, etc., are indeed, as we have seen, titles on actual capital. But they do not imply any control of this capital. It cannot be called in. They merely convey legal titles to a portion of the surplus-value to be produced by it. But these titles become likewise paper duplicates of the actual capital, as though a bill of lading were to acquire a value separate from the cargo and simultaneously with it. They become nominal representatives of a capital that does not exist. For the actual capital exists simultaneously and does not change hands by the transfer of those duplicates. They assume the form of interest-bearing capital, because they not only safeguard a certain income, but also make it possible to secure possession of their capital-value in the shape of a return-payment when sold. To the extent that the accumulation of these papers expresses the accumulation of railroads, mines, steamships, etc., it indicates the expansion of the actual process of reproduction, just as the expansion, say, of a tax list indicates the expansion of the taxed objects, for instance, of movable property. But as duplicates serving themselves as commodities for sale and this circulating as capital-values they are illusory, and their value may fall or rise independently of the value of the actual capital, upon which they represent a claim. Their value, that is, their quotation at the Stock Exchange, necessarily has a tendency to rise with a fall in the rate of interest, so far as this fall, independently of the peculiar movements of money-capital, is due merely to the tendency of the rate of profit to fall; so that this imaginary wealth, which has originally a nominal value for each of its aliquot parts, expands for this reason alone in the course of capitalist production. 99

Gain and loss through fluctuations in the price of these titles of ownership, and their centralisation in the hands of railroad kings, etc., naturally becomes more and more a matter of gambling, which takes the place of labor as the original method of acquiring capital and also assumes the place of direct force. This sort of imaginary money wealth does not merely constitute a very considerable part of the money wealth of private people, but also of banking capital, as we have already indicated.

In order to settle this point without delay, we mention the idea, that one might also mean by the accumulation of money-capital the accumulation of wealth in the hands of bankers (money lenders by profession), acting as middle men between private money-capitalists on one side and the state, communities, and reproducing borrowers on the other. For the entire vast extension of the credit system, and of all credit in general, is exploited by them as though it were their private capital. These fellows possess capital and incomes always in the form of money or of direct claims upon money. The accumulation of the wealth of this class may proceed in a direction very different from actual accumulation, but it proves at any rate, that this class pockets a good deal of the real accumulation.

Let us reduce the inquiry to narrower limits. Government bonds, like stocks and other securities of all kinds, are spheres of investment for loanable capital, for capital intended to bear interest. They are forms of loaning such capital. But they are not the loan capital itself, which is invested in them. On the other hand, so far as credit plays a direct role in the process of reproduction: what the industrial capitalist or the merchant need when wishing to have a bill discounted or a loan granted is neither stocks nor government bonds. What they need is money. They pawn or sell those securities, when they 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 of the loanable money-capital. We are not here concerned in the loans of houses, machines, or other fixed capital. Nor are we concerned in loans, which industrials and merchants make to one another in the shape of commodities and within the circle of the process of reproduction. We must, indeed, investigate this point still farther before we proceed. But we are concerned exclusively in loans of money, which are made by bankers, as middle men, to industrials and merchants.

Let us, then, analyse first the commercial credit, that is, the credit which the capitalists engaged in reproduction give to one another. It forms the basis of the credit system. Its representative is the bill of exchange, a certificate of indebtedness whose payment is due at a certain date, a document of deferred payment. Every one gives credit with one hand and takes it with the other. Let us leave aside, for the present, the banking credit, which constitutes another, quite different, element. To the extent that these bills in their turn circulate among the merchants as means of payment, by endorsement from one to another, without the intervention of discount, it is merely a transfer of a claim of indebtedness from A to B, and does not alter anything in the general connection. It merely places one man into the position of another. And even in this case the liquidation may take place without the intervention of money. The spinner A, for instance, has to pay a bill of exchange to the cotton broker B, and he has to pay a bill to the 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 guarantee the broker B with the broker's own bill paid by C to A, whereby at best a balance may have to be settled. The entire transaction then promotes merely the exchange of cotton and yarn. The exporter represents but the spinner, the cotton broker the cotton planter.

In the cycle of this commercial credit we must note two things:

First: The settlement of these mutual claims of indebtedness depends upon the reflux of capital, that is, of C—M, which is merely deferred. If the spinner has received a bill of exchange from a cotton goods manufacturer, then this manufacturer can pay, when he has sold the cotton goods, which he has on the market. If the corn speculator has made out a bill of exchange on his dealer, then the dealer can pay the money, if the corn has meanwhile been sold at the expected price. These payments, then, depend upon the smooth run of the reproduction, that is, the process of production and consumption. But since the credits are mutual, the solvency of one depends upon the solvency of another; for in making out his bill of exchange every one may have counted either on the reflux of the capital in his own business or on the reflux of the capital in anothers business, who has to pay him for a bill of exchange drawn in the meantime. Aside from the prospect of returns, the payment is possible only by means of reserve capital, which the writer of the bill has at his command, in order to meet his obligations in case the returns should be delayed.

Secondly: This credit system does not do away with the necessity of cash payments. For a large portion of the expenses must always be paid in cash, such as wages, taxes etc. Furthermore, capitalist B, who has received from C a bill of exchange in place of cash payment, may have to pay his own due bill to D before the bill of C becomes due, and so he must have ready cash. A rotation of such completeness as that assumed above in the reproduction from cotton planter to cotton spinner and vice versa will be an exception; as a rule reproduction will be infringed at many points. We have seen in the discussion of the process of reproduction, volume II, Part III, that the producers of constant capital exchange partly constant capital among each other. In such a case the bills of exchange may be balanced against one another more or less. The same may be the case 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 (who may be an importer of cotton). But the cycle of these transactions is not completed simultaneously, and the series of claims is not turned around backward in the same way. For instance, 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 counterclaims in his business on the machine manufacturer, because his product, yarn, never enters as an element into the process of reproduction of the machine maker. Such claims must, therefore, be settled by money.

The limits of this commercial credit, considered by itself, are 1), the wealth of the industrials and merchants, that is, their command of reserve capital in case of delayed returns; 2) these returns themselves. These may be delayed in time or the prices of commodities may fall in the meantime or the commodities may become momentarily unsalable through a clogging of the markets. The longer the bill runs, the larger must be the reserve capital, and the greater is the possibility of an infringement or retardation of the returns through a fall of prices or an overstocking of markets. And, furthermore, the returns are so much less secure, the more the original transaction was conditioned upon speculation on the rise or fall of the prices of commodities. But it is evident, that with the development of the productive power of labor, and thus of production on a large scale, 1) the markets expand and move a greater distance from the place of production; 2) that credits must be prolonged in consequence; 3) that 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 be doubled in such a way, that commerce by itself would be able to buy up the entire national product with its own capital and to sell it again. Credit is, therefore, indispensable here. Credit must grow in volume with the growing volume of value in production, and it must grow in the matter of time with the increasing distance of the markets. A mutual interaction takes place here. The development of the process of production extends the credit, and credit leads to an extension of industrial and commercial operations.

Looking upon this credit separate from banking credit, it is evident that it grows with an increasing volume of industrial capital itself. Loan capital and industrial capital are here identical. The loaned capitals are commodity-capitals, intended either for ultimate individual consumption, or for the replacement of the constant elements of productive capital. What appears as loan capital in this case is always capital existing in some definite phase of the process of reproduction, but passing through sale and purchase from one hand to the other, while its equivalent is not paid to the buyer until later at some stipulated time. For instance, the cotton passes into the hands of the spinner in exchange for a bill of exchange, the yarn into the hands of the manufacturer of cotton goods in exchange for another bill, the cotton goods into the hands of the merchant for another bill, from the hands of the merchant into those of the exporter for another bill, from the hands of the exporter for another bill into those of some merchant in India, who sells the goods and buys indigo instead, etc. During this passage from hand to hand the cotton accomplishes its metamorphosis into cotton goods, and the cotton goods are finally transported to India and exchanged for indigo, which is shipped to Europe and enters there into the reproductive process. The various phases of the process of reproduction are here promoted by the credit, without any payment on the part of the spinner for the cotton, on the part of the manufacturer of cotton goods for the yarn, on the part of the merchant for the cotton goods, etc. In the first acts of this process the commodity, cotton, goes through its different phases of production, and this transition is promoted by credit. But as soon as the cotton has received its ultimate form as a commodity, the same commodity-capital passes on through the hands of different merchants, who promote its transportation to distant markets, and the last of the merchants finally sells these commodities to the consumer and buys other commodities in their stead, which passes either into consumption or into the process of reproduction. Here, then, we have to distinguish two sections: In the first, credit promotes the actual successive phases in the production of the same article; in the second, it promotes merely the passage of the finished article from the hands of one merchant into those of another, including its transportation, in other words, the act C—M. Yet the commodity is even here at least in a process of circulation, that is, in a phase of the process of reproduction.

It follows, then, that it is never unemployed capital, which is loaned here, but capital, which must change its form in the hands of its owner and which exists in such a form, that it is merely commodity-capital for him, that is, capital which must be reconverted into its original form, and for the present, at least, into money. It is, therefore, the metamorphosis of the commodity, which is here promoted by credit; not merely C—M, but also M—C and the actual process of reproduction. Much credit within the reproductive cycle does not signify (banker's credit excepted) much unemployed capital, which is offered for loans and looking for profitable investment. It means rather much employment for capital in the process of reproduction. Credit promotes here, 1) so far as the industrial capitalists are concerned, the transition of industrial capital from one phase into another, the connection of the related and dove-tailing spheres of production; 2) so far as the merchants are concerned, it promotes the transportation and the passage of commodities from one hand 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 process of reproduction itself. On one hand this increases the consumption of revenue on the part of laborers and capitalists, on the other it is identical with an exertion of productive consumption.

So long as the process of reproduction is in flow and the reflux assured, this credit lasts and extends, and its extension is based upon the extension of the process of reproduction itself. As soon as a stoppage takes place, in consequence of delayed returns, overstocked markets, fallen prices, there is a superfluity of industrial capital, but it is in a form, in which it cannot perform its functions. It is a mass of commodity-capital, but it is unsalable. It is a mass of fixed capital, but largely unemployed through the clogging of reproduction. Credit is contracted, 1) because this capital is unemployed, that is, stops in one of its phases of reproduction, not being able to complete its metamorphosis; 2) because confidence in the continuity of the process of reproduction has been shaken; 3) because the demand for this commercial credit decreases. The spinner, who restricts his production and has a mass 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.