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Capital: A Critique of Political Economy, Vol. III. The Process of Capitalist Production as a Whole; Marx, Karl
80 paragraphs found.
Part I, Chapter 6
I.VI.5

Since the rate of profit is represented by s/C, or s/(c+v), it is evident that everything which causes a variation of the magnitude of c, and thereby of C, must also bring about a variation in the rate of profit, even if s and v, and their mutual proportions, remain unaltered. Now, raw materials constitute one of the principal portions of constant capital. Even in industries which consume no raw material, in the strict meaning, it enters as auxiliary material, or as a component part of machinery, etc., and fluctuations in its price influence to that extent the rate of profit. If the price of raw material falls by the amount d, then s/C, or s/(c+v), become s/(C-d), or s/((c-d)+v), in other words, the rate of profit rises. On the other hand, if the price of raw material rises, then s/C, or s/(c+v), become s/(C+d), or s/((c+d)+v), in other words, the rate of profit falls. Other circumstances remaining unchanged, the rate of profit falls and rises, therefore, inversely as the price of raw material. This shows, among other things, how important the low price of raw material is for industrial countries, even if fluctuations in the price of raw materials were not accompanied by variations in the selling sphere of the product, that is to say, quite aside from the relation of demand to supply. It follows furthermore that foreign trade influences the rate of profit, even aside from its influence on wages through the cheapening of the necessities of life, for it affects the prices of raw or auxiliary materials consumed in industry or agriculture. It is due to the imperfect understanding of the nature of the rate of profit and its specific difference from the rate of surplus-value that economists (like Torrens) give a wrong explanation of the marked influence of the prices of raw material on the rate of profit, as demonstrated by experience, and that on the other hand economists like Ricardo, who cling to general principles, misapprehend the influence of such factors as the world's trade on the rate of profit.

I.VI.38

We have seen in volume II that once that the commodities have been converted into money, sold, a certain portion of this money must be reconverted into the material elements of constant capital, and this in proportion to the technical nature of any given sphere of production. In this respect, the most important element in all lines—aside from wages, or variable capital—is the raw material, including the auxiliary substances, which are particularly important, in all lines of production that do not use any raw materials in the strict meaning of the term, for instance in mining and extractive industries in general. That portion of the price which has to make good the wear and tear of machinery plays mainly an ideal role in calculation, so long as the machine is at all in workable condition. It does not matter greatly whether it is paid and replaced by money to-day or to-morrow, or in any other section of the period of turn-over of the capital. It is different with the raw material. If the price of raw material rises, it may be impossible to make it good fully out of the price of the commodities after deducting the wages. Violent fluctuations of price therefore cause interruptions, great collisions, or even catastrophies in the process of reproduction. It is especially the products of agriculture, raw materials taken from organic nature, which are subject to such fluctuations of value in consequence of changing yields, etc., leaving aside altogether the question of the credit-system, for the present. The same quantity of labor may, in consequence of uncontrollable natural conditions, the favor or disfavor of seasons, etc., be incorporated in very different quantities of use-values, and a definite quantity of these use-values may have very different prices. If the value x is represented by 100 lbs. of the commodity a, then the price of one lb. of a equals x/100. If it is represented by 1,000 lbs., the price of one lb. is x/1000, etc. This is one of the elements in the fluctuations of the price of raw materials. A second element, which is mentioned at this point only for the sake of completeness, since competition and the credit-system are still outside of the scope of our analysis, is this: It is in the nature of the thing that vegetable and animal substances, which are dependent on certain laws of time for their growth and production, cannot be suddenly augmented in the same degree as, for instance, machines and other fixed capital, or coal, ore, etc., whose augmentation, assuming the natural requirements to be present, can be accomplished in a very short time in an industrial country. It is therefore impossible, and under a developed system of capitalist production even inevitable, that the production and augmentation of that portion of the constant capital which consists of fixed capital, machinery, etc., should run ahead of that portion which consists of organic raw materials, so that the demand for these last materials grows more rapidly than their supply, and their price rises in consequence. This rising of prices carries with it the following results: 1) A shipping of raw materials from great distances, seeing that the rising price covers greater freight rates; 2) an increase in their production, which, however, for natural reasons, will not be felt until the following year; 3) a using up of various hitherto unused accessories, and a better economising of waste. If this rise of prices begins to exert a marked influence on production and supply, the turning point has generally arrived at which the demand lets up on account of the protracted rise of the raw material and of all commodities made up of it, so that a reaction in the price of raw material takes place. Aside from convulsions due to the depreciation of capital in various forms, this reaction is also accompanied by other circumstances which will be mentioned immediately.

I.VI.40

Now, if these high prices collapse, because their rise had caused partly a falling off in the demand, partly an extension of production here, an importation of goods from remote and hitherto little noted or neglected regions of production in another place, and with them an excess of the supply over the demand, especially if this excess comes in with the old prices, then we have a result which offers various points of view. The sudden collapse of the price of raw materials checks their reproduction, and consequently the monopoly of the original producing countries, which are favored by the best conditions, is restored. It may be restored with certain limitations but still it is restored. The reproduction of the raw materials proceeds indeed, after the first impulse has been given, on an enlarged scale, especially in countries which have more or less of a monopoly of this production. But the basis on which production takes place after the extension of machinery, etc., and which, after some fluctuations, has to serve as the new point of departure, is very much enlarged by the occurrences of the last cycle of turn-over. At the same time the barely increased reproduction has been considerably checked in the secondary countries of supply. For instance, it can be easily shown by a reference to the export tables that, during the last thirty years (up to 1865) the production of cotton grows in India, whenever there has been a falling off in the American, and that there is after awhile a sudden drop and falling off in the Indian. During the period in which raw materials are high, the industrial capitalists get together in associations for the purpose of regulating production. So they did, for instance, after the rise of cotton prices in 1848, in Manchester, and a similar move was made in the production of flax in Ireland. But as soon as the immediate impulse has worn off, and the principle of competition reigns once more supreme, according to which one must "buy in the cheapest market" (instead of stimulating production in the most favored countries, as those associations attempt to do, without regard to the monetary price at which those countries may just happen to supply their product), the regulation of the supply is left once more to "prices." All thought of a common, far-reaching, circumspect control of the production of raw materials gives way once more to the belief that demand and supply will mutually regulate one another. And it must be admitted that such a control is on the whole irreconcilable with the laws of capitalist production, and remains for ever a platonic desire, or is limited to exceptional co-operation in times of great stress and helplessness. *16 The superstition of the capitalists in this respect is so crude that even the factory inspectors lift their hands in surprise, in their reports. The variation of good and bad years, of course, leads at times to the production of cheaper raw materials. Aside from the direct effect of this on the extension of the demand, an added stimulant is found in the previously mentioned influence on the rate of profit. Thereupon the aforesaid process of a gradual overtaking of the production of raw materials by that of machinery, etc., is repeated on a larger scale. An actual improvement of raw materials in such a way that not only their quantity, but also their quality would come up to expectations, for instance supplying cotton of American quality from Indian fields, would necessitate a long continued, progressively growing, and steady European demand (quite aside from the economic conditions under which the Indian producer labors in his country). As it is, the sphere of production of raw materials is extended only convulsively, being now suddenly enlarged, and then violently contracted. All this, and the spirit of capitalist production in general, may be very well studied in the cotton crisis of 1861-65, which was further aggravated by the fact that raw materials were at times entirely missing which are one of the principal factors of reproduction. The price may also rise while there is an abundant supply, namely in the case that this abundance takes place under difficult conditions. Or, there may be an actual shortage of raw material. It was the last condition which originally prevailed in the cotton crisis.

I.VI.44

According to R. Baker, factory reports for October, 1858, pages 56-61, the condition of business was then better. But the cycle of good and bad times was shortened with the increase of machinery, and to the extent that the demand for raw materials increases, the fluctuation in the conditions of business occur more frequently. For the time being confidence had been restored after the panic of 1857, and the panic itself seemed almost forgotten. Whether this improvement would be lasting, depended, in Baker's opinion, to a large extent on the price of raw materials. He saw indications that the maximum had already been reached, beyond which manufacture becomes less and less profitable, and finally ceases altogether to yield any profits. Taking the prosperous years in the worsted business, 1849 and 1850, it will be seen that the price of English carded wool was 13 d., and of Australian, 14 to 17 d. per lb., and that the average price of English wool, for the decade from 1841 to 1850, never exceeded 14 d., nor that of Australian 17 d. But at the beginning of the disastrous year 1857, Australian wool was quoted at 23 d. It fell in December, at the time of the worst panic, to 18 d., but rose once more in the course of the year 1858 to 21 d. English wool likewise began in 1857 with 20 d., rose in April and September to 21 d., fell in January, 1858 to 14 d., and rose subsequently to 17 d., so that it stood 3 d. per lb. higher than the average of the aforementioned 10 years. This shows, in Mr. Baker's opinion, that either the failures of 1857, which were due to similar prices, have been forgotten, or that barely enough wool is produced to keep the existing spindles running. Or the prices of fabrics may experience a lasting rise. But he has seen in his experience that spindles and frames multiplied in an incredibly short time, not only in numbers, but also in speed; that the English wool export to France rose at almost the same rate, while the average age of sheep in England and other countries was steadily reduced, since the population was rapidly increasing and breeders were trying to turn their stock into money as quickly as possible. He often was seriously alarmed, when he saw people, ignorant of these facts, invest their ability and their capital in enterprises whose success depended on the supply of a product which can be increased only according to certain organic laws. The conditions of supply and demand of all raw materials seems to explain to Mr. Baker many fluctuations in the cotton business as well as the condition of the English wool market in the fall of 1857 and the subsequent commercial crisis. *17

I.VI.47

The inspector says that according to the calculations of Mr. Payns the total number of cotton spindles in the United Kingdom would be 28,800,000, and it would require 1,432,080,000 lbs. of cotton to keep them going at full speed. But the cotton imports, after deducting the exports, amounted in 1856 and 1857 only to 1,022,576,832 lbs. so that there must have been a shortage of 409,503,168 lbs. Mr. Payns, who had the kindness to discuss this point with the inspector, held that a computation of the annual consumption of cotton, based on the consumption of the Blackburn district, would total up too high, on account of the difference, not only of the numbers spun, but also of the excellence of the machinery. He estimated the total consumption of cotton per year in the United Kingdom at 1,000 million lbs. But if he is correct, and there is actually a surplus-import of 22½ million lbs., then the inspector thinks that demand and supply are nearly balanced, without taking into account the additional spindles and looms which are about to be erected in Mr. Payns' own district, according to him, and the same applies probably to other districts as well. (Pages 59, 60.)

I.VI.49

1845. The complaints are beginning. For some time the inspector hears general complaints among the manufacturers over the depressed state of their business. During the last six weeks, he says, various factories have begun working short time, generally 8 hours instead of 12. This seemed to become general. There had been a great rise in the price of cotton, while the price of the products had not alone not risen, but fallen to a lower figure than that before the rise in cotton. The great increase in the number of cotton factories during the preceding four years must have caused a strong increase in the demand for raw material and a large supply of products on the market. Both of these things must have operated to depress profits, so long as the supply of raw material and the demand for the product remained unchanged. But they actually had a far stronger influence, because the supply of cotton had recently been insufficient, and the demand for the product had let up in various inland and foreign markets. (Factory Reports, December, 1846, page 10.)

I.VI.52

The factory report for October, 1847, page 30, states that Mr. Baker presented very interesting details concerning the rise in the demand for cotton, wool, and flax, in recent years, caused by the expansion of these industries. He held that the increased demand for these raw materials, particularly at a time when their supply had fallen far below the average, was sufficient to explain the prevailing depression in those lines of business, without reference to the insecurity of the money-market. This view was fully supported by the personal experience of the writer of the report, and by statements made to him by experts in business. All these various lines of business had been very much depressed, when discounts were still practicable at 5% and less. On the other hand, the supply of raw silk was abundant, prices reasonable, and the business correspondingly brisk until a few weeks previously, when doubtless the money-panic affected not only the dealers in raw silk, but still more their principal customers, the manufacturers of custom made goods. A glance at the published official reports showed that the cotton industry had increased by almost 27% during the preceding three years. As a result, cotton had risen in round figures from 4 d. to 6 d. per lb., while yarn, thanks to the increased supply, stood only a trifle above its former price. The wool industry commenced to expand in 1836. Since then it had grown by 40% in Yorkshire, and still more in Scotland. The increase in the worsted industry was still larger. *18 The calculations showed in its case, for the same length of time, an expansion of more than 74%. The consumption of raw wool had, therefore, been very large. The linen industry showed since 1839 an increase of about 25% in England, 22% in Scotland, and almost 90% in Ireland, *19 the consequence of this, and of the failure of flax crops, was that the price of the raw material rose by 10 p.st. per ton, while the price of yarn had fallen by 6 d. per bundle.

Part II, Chapter 10
II.X.14

In order that the prices at which commodities are exchanged with one another may correspond approximately to their values, no other conditions are required but the following: 1) The exchange of the various commodities must no longer be accidental or occasional, 2) So far as the direct exchange of commodities is concerned, these commodities must be produced on both sides in sufficient quantities to meet mutual requirements, a thing easily learned by experience in trading, and therefore a natural outgrowth of continued trading, 3) So far as selling is concerned, there must be no accidental or artificial monopoly which may enable either of the contracting sides to sell commodities above their value or compel others to sell below value. An accidental monopoly is one which a buyer or seller acquires by an accidental proportion of supply to demand.

II.X.15

The assumption that the commodities of the various spheres of production are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium. We shall also have to note a market value, which must be distinguished from the individual value of the commodities produced by the various producers. Of this more anon. The individual value of some of these commodities will be below the market-value, that is to say, they require less labor-time for their production than is expressed in the market-value, while that of others will be above the market-value. We shall have to regard the market-value on one side as the average value of the commodities produced in a certain sphere, and on the other side as the individual value of commodities produced under the average conditions of their respective sphere of production and constituting the bulk of the products of that sphere. It is only extraordinary combinations of circumstances under which commodities produced under the least or most favorable conditions regulate the market-value, which forms the center of fluctuation for the market-prices, which are the same, however, for the same kind of commodities. If the ordinary demand is satisfied by the supply of commodities of average value, that is to say, of a value midway between the two extremes, then those commodities, whose individual value stands below the market-value, realise an extra surplus-value, or surplus-profit, while those, whose individual value stands above the market-value cannot realise a portion of the surplus-value contained in them.

II.X.16

It does not do any good to say that the sale of the commodities produced under the most unfavorable conditions proves that they are required for keeping up the supply. If the price in the assumed case were higher than the average market-value, the demand would be greater. At a certain price, any kind of commodities may occupy so much room on the market. This room does not remain the same in the case of a change of prices, unless a higher price is accompanied by a smaller quantity of commodities, and a lower prices by a larger quantity of commodities. But if the demand is so strong that it does not let up when the price is regulated by the value of commodities produced under the most unfavorable conditions, then these commodities determine the market-value. This is not possible unless the demand exceeds the ordinary, or the supply falls below it. Finally, if the mass of the produced commodities exceeds the quantity which is ordinarily disposed of at average market-values, then the commodities produced under the most favorable conditions regulate the market value. These commodities may be sold exactly or approximately at their individual values, and in that case it may happen that the commodities produced under the least favorable conditions do not realise even their cost prices, while those produced under average conditions realise only a portion of the surplus-value contained in them. The statements referring to market-value apply also to the price of production, if it takes the place of market-value. The price of production is regulated in each sphere, and this regulation depends on special circumstances. And this price of production is in its turn the center of gravity around which the daily market-prices fluctuate and tend to balance one another within definite periods. (See Ricardo on the determination of the price of production by those who produce under the least favorable conditions.)

II.X.22

1) The different individual values must have been averaged into one social value, the above-named market-value, and this implies a competition between the producers of the same kind of commodities, and also the existence of a common market, on which they offer their articles for sale. In order that the market-price of identical commodities, which however are produced under different individual circumstances, may correspond to the market-value, may not differ from it by exceeding it or falling below it, it is necessary that the different sellers should exert sufficient pressure upon one another to bring that quantity of commodities on the market which social requirements demand, in other words, that quantity of commodities whose market-value society can pay. If the quantity of products exceeds this demand, then the commodities must be sold below their market-value; vice versa, if the quantity of products is not large enough to meet this demand, or, what amounts to the same, if the pressure of competition among the sellers is not strong enough to bring this quantity of products to market, then the commodities are sold above their market-value. If the market-value is changed, then there will also be a change in the conditions under which the total quantity of commodities can be sold. If the market-value falls, then the average social demand increases (always referring to the solvent demand) and can absorb a larger quantity of commodities within certain limits. If the market-value rises, then the solvent social demand for commodities is reduced and smaller quantities of them are absorbed. Hence if supply and demand regulate the market-price, or rather the deviations of market-prices from market-values, it is true, on the other hand, that the market-value regulates the proportions of supply and demand, or the center around which supply and demand cause the market-prices to fluctuate.

II.X.24

We remark by the way that the "social demand," in other words, that which regulates the principle of demand, is essentially conditioned on the mutual relations of the different economic classes and their relative economic positions, that is to say, first, on the proportion of the total surplus-value to the wages, and secondly, on the proportion of the various parts into which surplus-value is divided (profit, interest, ground-rent, taxes, etc.). And this shows once more that absolutely nothing can be explained by the relation of supply and demand, unless the basis has first been ascertained, on which this relation rests.

II.X.31

In the second case, the two lots of commodities produced as the two extremes do not balance one another. The lot produced under the worst conditions decides the question. Strictly speaking, the average price, or the market-value, of every individual commodity, or of every aliquot part of the total mass, would now be determined by the total value of the mass as ascertained by the addition of the values of the commodities produced under different conditions, and by the aliquot part of this total value falling to the share of the individual commodity. The market-value thus ascertained would be above the individual value, not only of the commodities belonging to the most favorable extreme, but also of those belonging to the average lot. But still it would be below the individual value of the commodities produced at the most unfavorable extreme. The extent to which this market-value would approach the individual value of this extreme, or coincide with it, would depend entirely on the volume occupied in that sphere of commodities by the lot of commodities produced at the unfavorable extreme. If the demand exceeds the supply but slightly, then the individual value of the unfavorably produced commodities regulates the market-price.

II.X.32

Finally, if the lot of commodities produced at the most favorable extreme occupies the greatest space, as it does in the third case, compared not only to the other extreme, but also to the average lot, then the market-value falls below the average value. The average value, computed by the addition of the sum of values of the two extremes and of the middle, stands here below that of the middle, and approaches it or recedes from it, according to the relative space occupied by the favorable extreme. If the demand is weak compared to the supply, then the favorably situated part, whatever may be its size, makes room for itself forcibly by contracting its price down to its individual value. The market-value cannot coincide with this individual value of the commodities produced under the most favorable conditions, except when the supply far exceeds the demand.

II.X.35

In the foregoing statements referring to market-value, the assumption was that the mass of the produced commodities remains the same given quantity, and that a change takes place only in the proportions of the elements constituting this mass and produced under different conditions, so that the market-value of the same mass of commodities is differently regulated. Let us suppose that this mass is of a quantity equal to the ordinary supply, leaving aside the possibility that a portion of the produced commodities may be temporarily withdrawn from the market. Now, if the demand for this mass also remains the same, then this commodity will be sold at its market-value; no matter which one of the three aforementioned cases may regulate this market-value. This mass of commodities does not only satisfy a demand, but satisfies it to its full social extent. On the other hand, if the quantity is smaller than the demand for it, then the market-prices differ from the market-values. And the first differentiation is that the market-value is always regulated by the commodity produced under the least favorable circumstances, if the supply is too small, and by the commodity produced under the most favorable conditions, if the supply is too large. In other words, one of the extremes determines the market-value, in spite of the fact that the proportion of the masses produced under different conditions ought to bring about a different result. If the difference between demand and supply of the product is very considerable, then the market-price will likewise differ considerably from the market-value in either direction. Now, the difference between the quantity of the produced commodities and the quantity of commodities which fixes their sale at their market-value may be due to two reasons. Either the quantity itself varies, by decreasing or increasing, so that there would be a reproduction on a different scale than the one which regulated a certain market-value. If so, then the supply changes while the demand remains unchanged, and we have a relative overproduction or underproduction. Or, the reproduction, and the supply, remain the same, while the demand is reduced or increased, which may take place for several reasons. If so, then the absolute magnitude of the supply is unchanged, while its relative magnitude, compared to the demand, has changed. The effect is the same as in the first case, only it acts in the opposite direction. Finally, if changes take place on both sides, either in opposite directions, or, if in the same direction, not to the same extent, in other words, if changes take place on both sides which alter the former proportion between these sides, then the final result must always lead to one of the two above mentioned cases.

II.X.36

The real difficulty in determining the meaning of the concepts supply and demand is that they seem to amount to a tautology. Consider first the supply, either the product on the market, or the product which can be supplied to the market. In order to avoid useless details, we shall consider only the mass annually reproduced in every given line of production and leave out of the question the varying faculty of some commodities to withdraw from the market and go into storage for consumption at a later time, for instance next year. This annual reproduction is expressed in a certain quantity, in weight or numbers, according to whether this mass of commodities is measured continuously or discontinuously. They represent not only use-value satisfying human wants, but these use-values are on the market in definite quantities. In the second place, this quantity of commodities has a definite market-value, which may be expressed by a multiple of the market-value of the individual commodity, or of the measure, which serve as units. There is, then, no necessary connection between the quantitative volume of the commodities on the market and their market-value, since many commodities have, for instance, a high specific value, others a low specific value, so that a given sum of values may be represented by a very large quantity of some, and a very small quantity of other commodities. There is only this connection between the quantity of articles on the market and the market-value of these articles: Given a certain basis for the productivity of labor in every particular sphere of production, the production of a certain quantity of articles requires a definite quantity of social labor time; but this proportion differs in different spheres of production and stands in no internal relation to the usefulness of these articles or the particular nature of their use-values. Assuming all other circumstances to be equal, and a certain quantity a of some commodity to cost b labor time, a quantity na of the same commodity will cost nb labor-time. Furthermore, if society wants to satisfy some demand and have articles produced for this purpose, it must pay for them. Since the production of commodities is accompanied by a division of labor, society buys these articles by devoting to their production a portion of its available labor-time. Society buys them by spending a definite quantity of the labor-time over which it disposes. That part of society, to which the division of labor assigns the task of employing its labor in the production of the desired article, must be given an equivalent for it by other social labor incorporated in articles which it wants. There is, however, no necessary, but only an accidental, connection between the volume of society's demand for a certain article and the volume represented by the production of this article in the total production, or the quantity of social labor spent on this article, the aliquot part of the total labor-power spent by society in the production of this article. True, every individual article, or every definite quantity of any kind of commodities, contains, perhaps, only the social labor required for its production, and from this point of view the market-value of this entire mass of commodities of a certain kind represents only necessary labor. Nevertheless, if this commodity has been produced in excess of the temporary demand of society for it, so much of the social labor has been wasted, and in that case this mass of commodities represents a much smaller quantity of labor on the market than is actually incorporated in it. (Only when production will be under the conscious and prearranged control of society, will society establish a direct relation between the quantity of social labor time employed in the production of definite articles and the quantity of the demand of society for them.) The commodities must then be sold below their market-value, and a portion of them may even become unsaleable. The opposite takes place, if the quantity of social labor employed in the production of a certain kind of commodities is too small to meet the social demand for them. But if the quantity of social labor spent in the production of a certain article corresponds to the social demand for it, so that the quantity produced is that which is the ordinary on that scale of production and for that same demand, then the article is sold at its market-value. The exchange, or sale, of commodities at their value is the rational way, the natural law of their equilibrium. It must be the point of departure for the explanation of deviations from it, not vice versa the deviations the basis on which this law is explained.

II.X.40

Nothing is easier than to realise the inequalities of demand and supply, and the resulting deviation of market-prices from market-values. The real difficulty consists in determining what is meant by balancing supply and demand.

II.X.41

Demand and supply balance one another, when their mutual proportions are such that the mass of commodities of a definite line of production can be sold at their market-value, neither above nor below it. That is the first thing we hear.

II.X.42

The second is this: If the commodities are sold at their market-values, then supply and demand balance.

II.X.43

If demand and supply balance, then they cease to have any effect, and for this very reason commodities are sold at their market-values. If two forces exert themselves equally in opposite directions, they balance one another, they have no influence at all on the outside, and any phenomena taking place at the same time must be explained by other causes than the influence of these forces. If demand and supply balance one another, they cease to explain anything, they do not affect market-values, and therefore leave us even more in the dark than before concerning the reasons for the expression of the market-value in just a certain sum of money and no other. It is evident that the essential fundamental laws of production cannot be explained by the interaction of supply and demand (quite aside from a deeper analysis of these two motive forces of social production, which would be out of place here). For these laws cannot be observed in their pure state, until the effects of supply and demand are suspended, are balanced. As a matter of fact supply and demand never balance, or, if they do, it is by mere accident, it is scientifically rated at zero, it is considered as not happening. But political economy assumes that supply and demand balance one another. Why? For no other reason, primarily, than to be able to study phenomena in their fundamental relations, in that elementary form which corresponds to their conception, that is to say, to study them unhampered by the disturbing interference of supply and demand. The other reason is to find the actual tendencies of economic movements and to fix them, as it were. For the inequalities are of an antagonistic nature, and since they continually follow one after another, they balance one another by their opposite movements, by their opposition. Since supply and demand never balance each other in any given case, their differences follow one another in such a way that supply and demand are always balanced only when looking at them from the point of view of a greater or smaller period of time. For the result of a deviation in one direction is a deviation in the opposite direction. Such a balance is only an average of past movements, a result of a continual movement in contradictions. By this means the market-prices differing from the market-values reduce one another to the average of market-values and balance the different plus and minus in their divergencies. And this average figure has not merely a theoretical, but also a practical, value for capital, since its investment is calculated on the fluctuations and compensations of more or less fixed periods of time.

II.X.44

The relation of demand and supply explains, therefore, on the one hand only the deviations of market-prices from market-values, and on the other the tendency to balance these deviations, in other words, to suspend the effect of the relation of demand and supply. (Such exceptions as commodities having prices without having any value are not considered here.) Demand and supply may bring about a balance in the effect caused by their inequalities in many different ways. For instance, if the demand, and consequently the market-price, fall, capital may be withdrawn and the supply reduced. But instead it may happen that the market-value itself is reduced and balanced with the market-price through inventions, which reduce the necessary labor time. Vice versa, if the demand increases, and consequently the market-price rises above the market-value, too much capital may flow into this line of production and production may be increased to such an extent, that the market-price finally falls below the market-value. Or, it may lead to a rise of prices which cuts down the demand. It may also bring about a rise in the market-value itself for a shorter or longer time, in some lines of production, in which a portion of the desired products must be produced under more unfavorable conditions during this period.

II.X.45

If demand and supply determine the market-price, so does the market-price, and in the further analysis the market-value determine demand and supply. This is obvious in the case of demand, which moves in opposition to price, rising when prices fall, and falling when prices rise. But it may also be noted in the case of supply. For the prices of the means of production which are incorporated in the supplied commodities determine the demand for these means of production, and thus the supply of the commodities whose supply implies the demand for these means of production. The prices of cotton are determining elements for the supply of cotton goods.

II.X.46

This confusion of a determination of prices by demand and supply, and at the same time a determination of supply and demand by prices, is worse confounded by the determination of the supply by the demand, and the demand by supply, of the market by production, and of production by the market. *31

II.X.47

Even the ordinary economist (see our foot-note) recognizes that the proportion between supply and demand may vary in consequence of a change in the market-value of commodities, without a change in the demand of supply by external circumstances. The author of the Observations continues after the passage quoted in the foot-note: "This proportion" (between demand and supply) "however, if we still mean by 'demand' and 'natural price' what we meant just now, when referring to Adam Smith, must always be a proportion of equality; for it is only when the supply is equal to the effectual demand, that is, to that demand, which will pay neither more nor less than the natural price, that the natural price is in fact paid; consequently there may be two very different natural prices, at different times, for the same commodity, and yet the proportion which the supply bears to the demand, be in both cases the same, namely the proportion of equality." It is admitted, then, that with two different natural prices of the same commodity at different times demand and supply may balance one another and must balance one another, if the commodity is to be sold at its natural price in both instances. Since there is no difference in the proportion of supply and demand in either case, but only a difference in the magnitude of the natural price itself, it follows that this price is determined independently of demand and supply, and cannot very well be determined by them.

II.X.48

In order that a commodity may be sold at its market-value, that is to say, in proportion to the necessary social labor contained in it, the total quantity of social labor devoted to the total mass of this kind of commodities must correspond to the quantity of the social demand for them, meaning the solvent social demand. Competition, the fluctuations of market-prices which correspond to the fluctuations of demand and supply, tend continually to reduce the total quantity of labor devoted to each kind of commodities to this scale.

II.X.49

The proportion of supply and demand repeats, in the first place, the relation of the use-value and exchange-value of commodities, of commodity and money, of buyer and seller; in the second place, the relation of producer and consumer, although both of them may be represented by third merchants. In studying buyers and sellers, it is sufficient to confront them individually, in order to set forth their relations. Three individuals suffice for the complete metamorphosis of commodities, and therefore for the complete transactions of sale and purchase. A converts his commodity into the money of B, to whom he sells his commodity, and he reconverts his money into commodities which he buys for it from C. The whole transaction takes place between these three. Furthermore: In the study of money it had been assumed that the commodities are sold at their values, because there was no reason to take into consideration any divergence of prices from values, it being a question of changes of form experienced by the commodities in their transformation into money and their reconversion from money into commodities. As soon as a commodity has been sold and a new commodity bought with the receipts, we have the entire metamorphosis before us, and for the consideration of this process it is immaterial whether the price of the commodity stands above or below its value. The value of the commodity is essential as a basis, because the concept of money cannot be developed on any other foundation but this one, and because price, in its general meaning, is but value in the form of money. Of course, it is assumed in the study of money as a medium of circulation that more than one metamorphosis of a certain commodity takes place. It is the social interrelation of these metamorphoses which is studied. Only by this means do we arrive at the circulation of money and at the development of its function as a medium of circulation. While this connection of the matter is very important for the transition of money into its function of a circulating medium, and for its resulting change of form, it is of no moment for the transaction between the individual buyer and seller.

II.X.50

In a question of supply and demand, however, the supply means the sum of the sellers, or producers, of a certain kind of commodities, and the demand the sum of the buyers, or consumers, of the same kind of commodities (both productive and individual consumers). There two bodies react on one another as units, as aggregate forces. The individual counts here only as a part of a social power, as an atom of some mass, and it is in this form that competition enforces the social character of production and consumption.

II.X.51

That side of competition, which is momentarily the weaker, is also that in which the individual acts independently of the mass of his competitors and often works against them, whereby the dependence of one upon the other is impressed upon them, while the stronger side always acts more or less unitedly against its antagonist. If the demand for this particular kind of commodities is larger than the supply, then one buyer outbids another, within certain limits, and thereby raises the price of the commodity for all of them above the market-price, while on the other hand the sellers unite in trying to sell at a high price. If, vice versa, the supply exceeds the demand, some one begins to dispose of his goods at a cheaper rate and the others must follow, while the buyers unite in their efforts to depress the market-price as much as possible below the market-value. The common interest is appreciated only so long as each gains more by it than without it. And common action ceases, as soon as this or that side becomes the weaker, when each one tries to get out of it by his own devices with as little loss as possible. Again, if some one produces more cheaply and can sell more goods, thus assuming more room on the market by selling below the current market-price, or market-value, he does it, and thereby he begins an action which gradually compels the others to introduce the cheaper mode of production and which reduces the socially necessary labor to a new, and lower, level. If one side has the advantage, every one belonging to it gains. It is as though they had exerted their common monopoly. If one side is the weaker, then every one may try on his own hook to be the stronger (for instance, any one working with lower costs of production), or at least to get off as easily as possible, and in that case he does not care in the least for his neighbor, although his actions affect not only himself, but also all his fellow strugglers. *32

II.X.52

Demand and supply imply the transformation of values into market-prices, and to the extent that they proceed on a capitalist basis, to the extent that the commodities are products of capital, they are based on capitalist processes, that is, on quite different and more complicated conditions than the mere purchase and sale of goods. In these capitalist processes it is not a question of the formal conversion of the value of commodities, into prices, not a question of a mere change of form. It is a matter of definite differences in quantity between market-prices and market-values, and, further, prices of production. In simple purchases and sales, it is enough to consider merely the producers of articles as such. But supply and demand, in a wider analysis, imply the existence of different classes and sections of classes which divide the total revenue of society among themselves and consume it as revenue among themselves, which, therefore, constitute the demand in the form of revenue. On the other hand, the attempt to grasp the question of the supply and demand among the producers as such requires an analysis of the total conformation of the capitalist process of production.

II.X.56

Now, if the commodities are sold at their values, then, as we have shown, considerably different rates of profit arise in the various spheres of production, according to the different organic composition of the masses of capital invested in them. But capital withdraws from spheres with low rates of profit and invades others which yield a higher rate. By means of this incessant emigration and immigration, in one word, by its distribution among the various spheres in accord with a rise of the rate of profit here, and its fall there, it brings about such a proportion of supply to demand that the average profit in the various spheres of production becomes the same, so that values are converted into prices of production. This equilibration is accomplished by capital in a more or less perfect degree to the extent that capitalist development is advanced in a certain nation, in other words, to the extent that conditions in the respective countries are adapted to the capitalist mode of production. As capitalist development proceeds, it develops also its own peculiar conditions and subjects to its specific character and its immanent laws all the social requirements on which the process of production is based.

Note:
The following sagacious statements are great nonsense: "Where the quantity of wages, capital, and land, required to produce an article, have become different from what they were, that which Adam Smith calls the natural price of it, is also different, and that price which was previously its natural price, becomes, with reference to this alteration, its market-price; because, though neither the supply, nor the quantity wanted may have changed"—both of them change here, just because the market-value, or, in the case of Adam Smith, the price of production, changes in consequence of a change of value—"that supply is not now exactly enough for those persons who are able and willing to pay what is now the cost of production, but is either greater or less than that; so that the proportion between the supply, and what is, with reference to the new cost of production, the effectual demand, is different from what it was. An alteration in the rate of supply will then take place, if there is no obstacle in the way of it, and at last bring the commodity to its new natural price. It may then seem good to some persons to say that, as the commodity gets to its natural price by an alteration in its supply, the natural price is as much owing to one proportion between the demand and supply, as the market-price is to another; and consequently, that the natural price, just as much as the market-price, depends on the proportion that demand and supply bear to each other. (The great principle of demand and supply is called into action to determine what A. Smith calls natural prices as well as market-prices, Malthus.)"—Observations on certain verbal disputes, etc., London, 1821, pages 60 and 61.—The good man does not grasp the fact that it is precisely the change in the cost of production, and thus in the value, which caused a change in the demand, in the present case, and thus in the proportion between demand and supply, and that this change in the demand may bring about a change in the supply. This would prove just the reverse of what our good thinker wants to prove. It would prove that the change in the cost of production is by no means due to the proportion of demand and supply, but rather regulates this proportion.
Note:
"If each man of a class could never have more than a given share, or aliquot part of the gains and possessions of the whole, he would readily combine to raise the gains" (he does it as soon as the proportion of demand to supply permits it); "this is monopoly. But where each man thinks that he may any way increase the absolute amount of his own share, though by a process which lessens the whole amount, he will often do it; this is competition." An Inquiry into those Principles respecting the Nature of Demand, etc. London, page 105.
Part IV, Chapter 18
IV.XVIII.13

The following circumstances, among others, help to maintain that popular prejudice, which, like all wrong conceptions of profit, etc., arise out of the views of pure commerce:

1) Phenomena of competition, which, however, concern merely the distribution of mercantile profit among the individual merchants in their capacity as shareholders in the total merchant's capital; such as the underselling of other merchants by one of them for the purpose of beating his competitors.
2) An economist of the caliber of Professor Roscher of Leipsic may still imagine that a change in the selling prices may be brought about by considerations of "prudence and humanity," instead of being due to a revolution in the mode of production itself.
3) If the prices of production fall on account of an increased productivity of labor, and if consequently the selling prices also fall, then the demand, and with it the market prices, often rise even faster than the supply, so that the selling prices yield more than the average profit.
4) A merchant may reduce his selling price (which amounts after all to no more than a reduction of the current profit which he adds to the price) in order to turn over a large capital more rapidly in his business.
Part V, Chapter 21
V.XXI.62

Capital appears furthermore as a commodity, inasmuch as the division of profit into interest and profit proper is regulated by demand and supply, that is, by competition, just as are the market-prices of commodities. But in the present case the difference becomes quite as apparent as the analogy. If demand and supply balance, the market-price of commodities corresponds to their price of production. In other words, their price is then seen to be regulated by the internal laws of capitalist production, independently of competition, since the fluctuations of supply and demand do not explain anything but the deviations of market-prices from the prices of production. These deviations balance mutually, so that in the course of long periods the average market-prices correspond to the prices of production. As soon as these prices coincide, these forces cease to operate, they compensate one another, and the general law determining prices then applies also to individual cases. The market-price then corresponds even in its immediate form, and without the help of averages drawn from the movements of market-prices, to the price of production, which is regulated by the immanent laws of the mode of production itself. The same is then true of wages. If supply and demand balance, they neutralise each other's effects, and wages are then equal to the value of labor-power. But it is different with the interest on money-capital. Competition does not, in this case, determine the deviations from the rule, but there is rather no law of division except that enforced by competition, because no such thing as a "natural" rate of interest exists, as we shall see presently. By the natural rate of interest people merely mean the rate fixed by free competition. There are no "natural" limits for the rate of interest. Whenever competition does not merely determine the deviations and fluctuations, in other words, whenever a neutralisation of the opposing forces of competition puts a stop to all determination, the thing to be determined becomes a matter of arbitrary and lawless estimation. We shall dwell on this further in the next chapter.

Part V, Chapter 22
V.XXII.16

The average rate of interest prevailing in a certain country—as differentiated from the continually fluctuating market rates—cannot be determined by any law. In this sense there is no such thing as a natural rate of interest, such as economists speak of when mentioning a natural rate of profit and a natural rate of wages. Massie has justly said with reference to this (p. 49): "The only thing which any man can be in doubt about on this occasion, is, what proportion of these profits do of right belong to the borrower, and what to the lender; and this there is no other method of determining than by the opinions of borrowers and lenders in general; for right and wrong, in this respect, are only what common consent makes so." The balancing of demand and supply—assuming the average rate of profit to be a fact—does not signify anything here. Wherever else this formula serves as an excuse (and is then practically correct) it is used to find the fundamental rule, which is independent of competition and rather determines it, this rule indicating the regulating limits, or the limiting magnitudes, of competition; this formula serves particularly as a help to those, who are bounded by the horizon of practical competition, its phenomena, and the conceptions arising from them, and who try thereby to get a rather shallow grasp of the internal connections of economic conditions within the sphere of competition. It is a method by which to pass from the variations that go with competition to the limits of these variations. This is not so in the case of the average rate of interest. There is no reason by which the idea could be justified, that the average conditions of competition, a balance between lenders and borrowers, should secure for the lender a rate of interest of 3, 4, 5%, etc., on his capital, or a certain percentage of the gross profits, say 20% or 50%. Whenever competition as such determines anything in this matter, its determination is a matter of accident, purely empirical, and only pedantry or fantasticalness can attempt to represent this accidental character as something necessary. *68 Nothing is more amusing than to listen in the reports of Parliament of 1857 and 1858 concerning bank legislation and commercial crises to the rambling twaddle of directors of the Bank of England, London bankers, provincial bankers, and theoretical professionals, when referring to "the real rate produced." They never get beyond such commonplaces as that "the price paid by loanable capital probably varies with the supply of such capital," that "a high rate of interest and a low rate of profit cannot exist together in the long run," and similar specious platitudes. *69 Custom, legal tradition, etc., have as much to do with the determination of the average rate of interest as competition itself, so far as this rate exists not merely as an average figure, but as an actual magnitude. An average rate of profit has to be assumed as a legal rate even in many law disputes, in which interest has to be calculated. Now, if we press the inquiry, why the limits of an average rate of interest cannot be deduced from general laws, we find the answer simply in the nature of interest. It is merely a portion of the average profit. The same capital appears in two roles, as a loanable capital in the hands of the lender, and as an industrial capital, or commercial capital, in the hands of the investing capitalist. But it performs its function as capital only once, and produces profit only once. In the process of production itself, the loanable nature of this capital does not play any role. To what extent the two parties divide the profit, in which they both share, is in itself as much a purely empirical fact belonging to the realm of accident as the division of the shares of common profit of some corporative business among different share holders by percentages. In the division between surplus-value and wages, on which the determination of the rate of profit essentially rests, the decision is made by two very different elements, labor-power and capital; these are functions of two independent variables, which limit one another; and their qualitative difference is the source of the quantitative division of the produced value. We shall see later that the same takes place in the division of surplus-value between rent and profit. But nothing of the kind occurs in the case of interest. In this case the qualitative differentiation, as we shall see immediately, proceeds rather from the purely quantitative division of the same lot of surplus-value.

V.XXII.21

As concerns the continually fluctuating market rate of interest, it exists at any moment as a fixed magnitude, the same as the market price of commodities, because all the loanable capital as an aggregate mass is continually facing the invested capital, so that the relation between the supply of loanable capital on one side, and the demand for it on the other, decide at any time the market level of interest. This is so much more the case, the more the development and simultaneous concentration of the credit system impregnates the loanable capital with a general social character, and throws it all at one time on the market. On the other hand, the general rate of profit always exists as a mere tendency, as a movement to compensate specific rates of profit. The competition between capitalists—which is itself this movement toward an equilibrium—consists in this case in their activity of gradually withdrawing capital from spheres, in which the profit stays for a long time below the average, and in the same way taking capital into spheres, in which the profit is above the average. Or it may also consist in their distributing additional capital gradually and in varying proportions between these spheres. It is always a matter of a continual variation between supply and demand of capital with reference to different spheres, never a simultaneous mass effect, as it is in the determination of the rate of interest.

V.XXII.22

We have seen that interest-bearing capital, although a category absolutely different from a commodity, becomes a peculiar commodity, so that interest becomes its price, which is fixed at any time by supply and demand, just as the market price of an ordinary commodity is fixed. The market rate of interest, while continually oscillating, appears therefore at any moment just as constantly fixed and uniform as the prevailing market price of commodities. The money-capitalists offer this commodity, and the investing capitalists buy it and make a demand for it. This does not take place in the equalisation of profits toward a general rate of profit. If the prices of commodities in a certain sphere are below or above the price of production (leaving aside any oscillations, which are found in every business and are due to fluctuations of the industrial cycles), a balance is effected by an expansion or restriction of production. This signifies an expansion or restriction of the quantities of commodities thrown on the market by industrial capitalists, by means of immigration or emigration of capital to and from particular spheres. It is by such a compensation of the average market prices of commodities to prices of production that the deviations of specific rates of profit from the general, or average, rate of profit are corrected. This process does not, and cannot, at any time assume the appearance as though the industrial or mercantile capital as such were commodities seeking a buyer, but it does in the case of interest-bearing capital. To the extent that this process is perceptible, it is so only in the oscillations and compensations of the market prices of commodities to prices of production, not in any direct fixation of the average profit. The general rate of profit is actually determined, 1), by the surplus-value produced by the capital; 2), by the proportion of this surplus-value to the value of the total capital; and, 3), by competition, but only to the extent that this is a movement, by which capitals invested in particular spheres seek to draw equal dividends out of this surplus-value in proportion to their relative magnitudes. The general rate of profit, then, derives its determination actually from causes, which are quite different and far more profound than those of the market rate of interest, which is directly and immediately determined by the proportion between supply and demand. It is, therefore, not such a tangible and obvious fact as the rate of interest. The particular rates of interest in the different spheres of production are themselves more or less unsettled; but so far as they are perceptible, it is not their uniformity, but their differences, which appear. The general rate of profit itself appears only as the minimum limit of profit, not as the empirical and directly visible shape of the actual rate of profit.

V.XXII.25

On the money market only lenders and borrowers face one another. The commodity has the same form, money. All specific forms of capital according to its investment in particular spheres of production or circulation are here blotted out. It exists here in the undifferentiated, homogenous, form of independent value, money. The competition of the individual spheres ceases here. They are all thrown together as borrowers of money, and capital likewise faces all of them in a form, in which it is as yet indifferent to its definite investment in this or that specific manner. The character worn by industrial capital only in its movement and competition between individual spheres, the character of a common capital of a class comes into evidence here in full force by the demand and supply of capital. On the other hand, money-capital on the money market has actually that form, in which it may be distributed as a common element among the capitalists in the various spheres, regardless of its specific employment, as the requirements of production in each individual sphere may dictate. Add to this that with the development of large scale industry money-capital, so far as it appears on the market, is not represented by some individual capitalist, not by the owner of this or that fraction of the capital on the market, but assumes more and more the character of an organised mass, which is far more directly subject to the control of the representatives of social capital, the bankers, than actual production is. Under these circumstances, not only the demand for loanable capital is expressed with the full force of a class, but also its supply appears as loanable capital in masses.

Part V, Chapter 25
V.XXV.3

W. Leatham, a banker of Yorkshire, writes in his "Letters on the Currency," 2nd edition, London, 1840: "I find, that the total amount in bills of exchange for the entire year 1839 was 528,493,842 pounds sterling" (he assumed that the foreign bills of exchange composed about one-fifth of the whole) "and the amount of bills of exchange simultaneously current in the same year to 132,123,460 pounds sterling" (p. 56). "The bills of exchange make up a greater part of the amount in circulation than all the rest together" (p. 3). "This enormous superstructure of bills of exchange rests (!) upon a basis formed by the amount of bank notes and gold; and if in the course of events this basis is too much contracted, its solidity, and even its existence, become endangered" (p. 8). "Estimating the entire circulation" (he means of the bank notes) "and the amount of the obligations of all banks for which immediate payment may be demanded, I find a sum of 153 millions, whose conversion into gold might be demanded according to law, and to offset it only 14 millions in gold to satisfy this demand" (p. 11). The bills of exchange cannot be placed under control, unless the superfluity of money and the low rate of interest, or discount, can be prevented, which create a part of them and encourage this dangerous expansion. It is impossible to decide, how much of them is due to actual business, for instance, to real purchases and sales, and what part of them is fictitious and consists only of prolonged bills, that is, when a bill of exchange is drawn for the purpose of taking up a current one before it becomes due, and thus of creating fictitious capital by the manufacture of mere means of circulation. In times of superfluous and cheap money I know this is done to an enormous degree" (p. 43, 44). J. W. Bosanquet, Metallic, Paper, and Credit Currency, London, 1842: The average amount of the payments settled on every business day in the Clearing House (where the London bankers mutually exchange the due bills and filed checks) exceeds 3 millions of pounds sterling, and the daily supply of money required for this purpose is little more than 200,000 pounds sterling (p. 86). [In the year 1889, the total turn-over of the Clearing House amounted to 7,618 and ¾ millions of pounds sterling, which, in 300 business days, averages 25 and ½ millions of pounds sterling daily.—F. E.] "Bills of exchange are undoubtedly currency, independent of money, inasmuch as they transfer property from hand to hand by endorsement" (p. 92). "On an average it may be assumed that every circulating bill of exchange bears two endorsements, and that on an average every bill thus performs two payments, before it becomes due. Accordingly it seems that alone by endorsement the bills of exchange promoted a transfer of property to the amount of twice 528 millions, or 1,056 millions of pounds sterling, more than 3 millions daily, in the course of the year 1839. It is, therefore, certain the bills of exchange and deposits together, by transferring property from hand to hand and without the assistance of money, perform the functions of money to a daily amount of at least 18 millions of pounds sterling" (p. 93).

V.XXV.16

[We have seen, that Gilbart knew even in 1834 that "whatever facilitates business facilitates speculation, both being so intimately linked in many cases, that it is difficult to tell, where business stops and speculation begins." If the securing of advances on unsold commodities is facilitated more and more, then more and more of such advances are taken, and in the same proportion increases the temptation to manufacture commodities, or throw already manufactured ones upon distant markets, for no other immediate purpose than that of obtaining advances of money on them. To what extent the entire business world of a country may be seized by such a swindle, and what it finally comes to, may be studied in the history of English business during the years 1845 to 1847, which furnishes a flagrant example. There we can see what credit can accomplish. Before we mention some of the most conspicuous cases, we must make a few preliminary remarks.
About the close of 1842 the pressure, which had crushed English industry almost without interruption since 1837, began to weaken. During the following two years the demand of the foreign countries for products of English industry increased still more. The year 1845 to 1846 marked the period of greatest prosperity. In 1843 the opium war had opened the doors of China to English commerce. The new market offered a convenient excuse for the further expansion of already extended industries, particularly of the cotton industry. "How can we ever produce too much? We have to clothe 300 millions of people." Thus spoke a Manchester manufacturer to the writer in those days. But all the newly erected factory buildings, steam engines, spinning and weaving machines did not suffice to absorb the surplus-value, which poured into them from Lancashire. With the same passion, which was exhibited in the expansion of production, the building of railroads was undertaken. Here the longing of manufacturers and merchants for speculation found its first satisfaction, as early as the summer of 1844. Stock was underwritten to the full extent possible, that is, so far as the money went to cover the first payments. The idea was that a way would be found in due time to get the missing amount. But when further payments were due (Question 1059, C. D. 1848-57, indicates that the capital invested in railroads in 1846-47 amounted to 75 million p.st.), it was necessary to resort to credit, and as a rule the actual business of the firm itself had to add its drop of blood.
In most cases the actual business was already overburdened. The enticing and high prices had misled people into far greater operations than the available cash justified. It was so easy, and cheap besides, to get credit. The bank discount was low. In 1844 it was 1¾ to 2¾%, in 1845 until October it was less than 3%, then it rose for a little while to 5% (until February 1846), then it fell once more to 3¼% in December 1846. The bank had in its cellars a supply of gold of unusual dimensions. All inland quotations stood higher than ever before. Why should a man let this fine opportunity pass by? Why shouldn't he go in for all he was worth? Why not send to the foreign markets, that longed for English goods, all the commodities that could be manufactured? And why should not the manufacturer himself pocket the double gain arising from the sale of yarn and fabrics to the Far East, and from the sale, in England, of the back freight received in their stead?
Thus arose the system of mass consignments, by virtue of advances, to India and China, and this soon developed into a system of consignments purely for the sake of getting advances, as described more at length in the following notes. This had to lead inevitably to an overcrowding of the markets and to a crash.
This crash came as the aftermath of a crop failure in 1846. England, and still more, Ireland, required enormous imports of means of subsistence, particularly of corn and potatoes. But the countries that supplied these things could be paid only to a very small degree in products of English industry. They had to be paid in precious metals. This took at least nine millions of gold to foreign countries. Of this amount of gold fully seven and a half millions came out of the cash treasury of the Bank of England, whose freedom of action on the money market was seriously impaired thereby. The other banks, whose reserves are deposited with the Bank of England, which reserves are practically identical with those of the Bank of England, were thus compelled to cut down their own money accommodations. The rapidly and easily flowing stream of payments became clogged, first here and there, then universally. The banking discount, which had still been 3 to 3½% in January of 1847, rose to 7% in April, when the first panic broke out. Then a temporary lull came in summer, lowering this discount to 6½ and 6 %. But when the new crop failed likewise, the panic broke out afresh and more violently. The official minimum discount of the Bank rose in October to 7%, in November to 10%, in other words, the overwhelming mass of checks could be discounted only at outrageous rates of interest, or not at all. The general stopping of payments brought about the bankruptcy of several of the first firms and of very many medium-sized and small firms. The Bank itself was in danger of ruin from the shrewd Bank Acts imposing the limitations of 1844. In this emergency the government yielded to the universal demand and suspended these Bank Acts on October 25, thereby taking off the absurd legal fetters thrown around the Bank. Now the Bank was enabled to throw its supply of bank notes into circulation without any interference. The credit of these bank notes being practically guaranteed by the credit of the nation, and thus unimpaired, the shortness of money was immediately relieved in the most effective manner. Of course, quite a number of hopelessly caught large and small firms failed nevertheless even then, but the climax of the crisis had passed, the banking discount fell once more to 5% in September, and in the course of 1848 that renewed business activity was resumed, which took the edge off the revolutionary movements on the continent in 1849, and which inaugurated in the fifties a formerly unknown industrial prosperity and ended—in the crash of 1857.—F. E.]
V.XXV.18

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.

Part V, Chapter 26
V.XXVI.8

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."

V.XXVI.9

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.

V.XXVI.10

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.

V.XXVI.13

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.

V.XXVI.19

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?

V.XXVI.41

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."

V.XXVI.42

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.

V.XXVI.55

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."

Part V, Chapter 28
V.XXVIII.18

But the contrast drawn by Fullarton is not correct. It is by no means the strong demand for loans, as he says, which distinguishes the period of depression from that of prosperity, but the ease with which this demand is satisfied in periods of prosperity, and the difficulties which it meets after a depression has become a fact. It is precisely the enormous development of the credit system during a period of prosperity, hence also the enormous development of the demand for loan capital and the readiness with which the supply meets it in such periods, which brings about a shortage of credit during the period of depression. It is not, therefore, the difference in the size of the demand for loans which characterises both periods.

Note:
"It is a great error, indeed, to imagine that the demand for pecuniary accommodation (i.e. for the loan of capital) is identical with a demand for additional means of circulation, or even that the two are frequently associated. Each demand originates in circumstances peculiarly affecting itself, and very distinct from one another. It is when everything looks prosperous, when wages are high, prices on the rise, and factories busy, that an additional supply of currency is usually required to perform the additional functions inseparable from the necessity of making larger and more numerous payments: whereas it is chiefly in a more advanced stage of the commercial cycle, when difficulties begin to present themselves, when markets are overstocked, and returns delayed, that interest rises, and a pressure comes upon the Bank for advances of capital. It is true that there is no medium through which the Bank is accustomed to advance capital except that of promissory notes; and that, to refuse the notes, therefore, is to refuse the accommodation. But the accommodation once granted, everything adjusts itself in conformity with the necessities of the market; the loan remains, and the currency, if not wanted, finds its way back to the issuer. Accordingly, a very slight examination of the Parliamentary Returns may convince any one, that the securities in the hand of the Bank of England fluctuate more frequently in an opposite direction to its circulation than in concert with it, and the example, therefore, of that great establishment furnishes no exception to the doctrine so strongly pressed by the country bankers, to the effect that no bank can enlarge its circulation, if that circulation be already adequate to the purposes to which a banknote currency is commonly applied; but that every addition to its advances, after that limit is passed, must be made from its capital, and supplied by the sale of some of its securities in reserve, or by abstinence from further investment of such securities. The table compiled from the Parliamentary Returns for the interval between 1833 and 1840, to which I have referred in a preceding page, furnishes continued examples of this truth; but two of these are so remarkable that it will be quite unnecessary for me to go beyond them. On the third of January, 1837, when the resources of the Bank were strained to the uttermost to sustain credit and meet the difficulties of the money-market, we find its advances on loan and discount carried to the enormous sum of 17,022,000 pounds sterling, an amount scarcely known since the war, and almost equal to the entire aggregate issues which, in the meanwhile, remain unmoved at so low a point as 17,076,000 pounds sterling! On the other hand, we have, on the fourth of June, 1833, a circulation of 18,892,000 pounds sterling, with a return of private securities in hand, nearly, if not the very lowest on record for the last half-century, amounting to no more than 972,000 pounds sterling!" (Fullarton, l. c., pages 97 and 98.) That a demand for pecuniary accommodation need not be identical by any means with a demand for gold (what Wilson, Tooke and others call capital) may be seen by the following testimony of Mr. Weguelin, Governor of the Bank of England): "The discounting of bills to this amount" (one million per day for three successive days) "would not reduce the reserve" (of banknotes), unless the public should demand a greater amount of active circulation. The notes issued in the discounting of bills would flow back by way of banks and by means of deposits. Unless such transactions have for their purpose the export of gold, or unless a panic reigns in the inland market, of such character as to cause the public to hold on to the notes instead of depositing them in the banks, the reserve would not be touched by such tremendous transactions. "The Bank can discount one and a half millions daily, and this takes place continually, without touching its reserve in the least. The notes come back as deposits, and the only change that takes place is the mere transfer from one account to the other." ( Report on Bank Acts, 1857.) Evidence No. 241,500. The notes serve here merely as means of transferring credit accounts
Part V, Chapter 30
V.XXX.24

Not every augmentation of loanable capital indicates a real accumulation of capital or expansion of the process of reproduction. This becomes most evident in the phase of the industrial cycle following immediately after a crisis, when loanable capital lies fallow in masses. In such moments, in which the process of production is restricted (production in the English industrial districts was reduced by one-third after the crisis of 1847), prices of commodities at their lowest level, the spirit of enterprise paralysed, the rat of interest is low, and it indicates then merely an increase of loanable capital precisely because the industrial capital has been laid lame. It is quite obvious, that less currency is required, when the prices of commodities have fallen, the number of transactions decreased, and the capital invested in wages contracted; that, on the other hand, additional money is required for the function of world money after the debts to foreign countries have been settled either by the exportation of gold or by bankruptcies; that, finally, the volume of the business of discounting bills diminishes with the number and amounts of bills of exchange. Hence the demand for loanable capital, either in the form of means of circulation or of means of payment (the investment of new capital being out of the question for a while), decreases and it becomes relatively abundant. At the same time, the supply of loanable capital increases also positively under such circumstances, as we shall see later.

V.XXX.29

After the process of reproduction has again reached that state of prosperity, which precedes that of overexertion, the commercial credit once more arrives at a great expansion, which has then indeed for its "sound" basis a flow of easy returns and more extended production. In this state the rate of interest is still low, although it rises above its minimum. This is in fact the only time, of which it may be said, that a low rate of interest, and consequently a relative abundance, of loanable capital, coincide with a real expansion of industrial capital. The facility and regularity of the returns, together with an extensive commercial credit, secures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. Moreover, those knights now appear in large numbers, who work without any reserve capital, or even without any capital at all and operate wholly on a credit basis. To this is added the great expansion of the fixed capital of all forms, and the inauguration of vast masses of new enterprises of wide scope. The interest now rises to its average level. It arrives once more at its maximum, as soon as the new crisis comes in, when credit suddenly stops, payments are suspended, the process of reproduction is delayed, and a superabundance of industrial capital is unemployed, with the above-mentioned exceptions, while there is an almost absolute lack of loan capital.

Part V, Chapter 31
V.XXXI.9

Concerning this rediscounting and the help which these purely technical increase of loanable capital lends to credit swindlers, the following extract from the " Economist" is instructive: "During many years capital" [namely loanable money-capital] "accumulated in some districts of the country more rapidly then it could be employed, while in others the means of its investment grew faster than the capital itself. While the bankers in the agricultural districts thus found no opportunity to invest their deposits profitably and safely in their own region, those in the industrial districts and the commercial cities had more demand for capital than they could supply. The effect of these different conditions in the various districts has led in recent years to the rise and startlingly rapid extension of a new class of firms engaged in the distribution of capital, who, although generally called bill brokers, are in reality bankers on the very largest scale. The business of these firms is to assume, for definitely agreed periods and at definitely fixed interest, the surplus-capital of the banks in districts in which it could not be employed, just like the temporarily idle funds of stock companies and great commercial firms, and to loan this money at a higher rate of interest to the banks in districts where capital is more in demand; as a rule by rediscounting the bills of their customers....In this way Lombard Street became the great center, in which the transfer of unemployed capital takes place from one part of the country, where it cannot be usefully employed, to another where it is in demand; and this applies to the different parts of the country as well as to similarly situated individuals. Originally these transactions were almost exclusively limited to borrowing and lending on collateral acceptable to banks. But in proportion as the capital of the country increased rapidly and was more and more economised by the erection of banks, the funds at the disposal of discounting firms became so large that they undertook to make advances, first on dock warrants (storage bills on commodities in docks) and then also on bills of lading representing products that had not even arrived, although sometimes, if not regularly, bills of exchange had already been drawn against them at the produce brokers. This practice soon changed the entire character of the English business. The facilities thus offered by Lombard Street gave to the produce brokers in Mincing Lane a greatly enforced position; these gave in turn the entire advantage to the importing merchants; these last took so much advantage of it that, whereas 25 years previous a taking of credit on his bills of lading or even his dock warrants would have ruined the credit of a merchant, this practice became so general, that it may be considered as the rule, and no longer, as 25 years ago, as a rare exception. Yea, this system has been extended so far, that large sums have been taken up in Lombard Street on bills of exchange drawn against the still growing crops of distant colonies. The result of such accommodations was, that the import merchants expanded their foreign transactions and tied up their floating capital, with which they had hitherto carried on their business, in the most execrable of investments, colonial estates, over which they could exert little or no control. Thus we see the direct concatenation of credits. The capital of the country, which is collected in our agricultural districts, is laid down in small amounts as deposits in country banks, and centralised for investment in Lombard Street. But it has been utilised, first, for the extension of business in our mining and industrial districts by rediscounting bills on banks there; furthermore also for granting greater accommodations to importers of foreign products by loans on warrants and bills of lading, whereby the 'legitimate' merchants' capital of firms in foreign and colonial business was released and made available for the most abominable kinds of investment in transmarine estates." ( Economist, 1847, p. 1334.)

Part V, Chapter 32
V.XXXII.24

Leaving the question of labor aside, the thing called "demand for capital" by Overstone consists only in a demand for commodities. The demand for commodities raises their price, either because it may rise above the average, or because the supply of commodities may fall below the average. If the industrial capitalist or the merchant must now pay 150 pounds sterling for the same mass of commodities for which he used to pay 100 pounds sterling, he would have to borrow 150 pounds sterling whereas he had to borrow but 100 pounds sterling formerly, and if the rate of interest were 5%, he would now have to pay 7½ pounds sterling of interest as against 5 pounds sterling of former times. The mass of the interest to be paid by him would rise because he now has to borrow more capital.

V.XXXII.26

It is possible, that the demand for commodities, in case their supply has fallen below average, does not absorb any more money-capital than formerly. The same sum, or perhaps a smaller one, has to be paid for their total value, but a smaller quantity of use-values is received for the same sum. In this case the demand for loanable money-capital will remain the same, and the rate of interest will not rise, although the demand for commodities would have risen as compared to their supply, and consequently the price of commodities would have become higher. The rate of interest cannot be touched, unless the total demand for loan capital increases, and this is not the case under the above assumption.

V.XXXII.27

The supply of an article may also fall below average, as it does in case of crop failures of corn, cotton, etc., and the demand for loan capital may increase, because the speculation in these commodities calculates on a rise in their prices and the first means of making them rise is to curtail for a while a portion of their supply on the market. But in order to pay for the bought commodities without selling them, money is secured by means of the commercial bill system. In this case the demand for loan capital increases, and the rate of interest may rise in consequence of this attempt to prevent by artificial means the supply of this commodity to the market. The higher rate of interest expresses in that case an artificial reduction of the supply of commodity-capital.

V.XXXII.28

On the other hand the demand for an article may rise, because its supply has increased and the article stands below its average price.

V.XXXII.29

In this case the demand for loan-capital may remain the same or may even fall, because more commodities can be had for the same sum of money. A speculative formation of a supply might also occur, either for the purpose of taking advantage of a favorable moment for the ends of production, or in expectation of a future rise in prices. In this case the demand for loan capital might grow, and the rise in the rate of interest would then be an expression of an investment of capital in the formation of an extra supply of elements of productive capital. We consider here merely that demand for loan capital, which is influenced by the demand and supply of commodity-capital. We have explained on a previous occasion, that the changing condition of the process of reproduction in the phases of the industrial cycle has its effect upon the supply of loan capital. The trivial statement to the effect that the market rate of interest is determined by the supply and demand of (loan) capital, is shrewdly mixed up by Overstone with his own assumption, according to which loan capital is identical with capital in general, and in this way he tries to transform the usurer into the only capitalist and his capital into the only capital.

V.XXXII.34

If the demand and supply of money-capital, which determine the rate of interest, were identical with the demand and supply of actual capital, as Overstone maintains, then the interest would be simultaneously high or low according to different commodities, or different phases of the same commodity (raw material, partly finished product, finished product). In 1844 the rate of interest of the Bank of England fluctuated between 4% from January to September to 2½ and 3% from November to the end of the year. In 1845 it was 2½, 2¾, 3% from January to October, and between 3 and 5% during the remaining months. The average price of fair Orleans cotton was 6¼ d. in 1844 and 4 7/8 d. in 1845. On March 3, 1844, the cotton supply in Liverpool was 627,042 bales, and on March 3, 1845, it was 773,800 bales. To judge by the low price of cotton, the rate of interest should have been low in 1845, and it was indeed for the greater part of this time. But to judge by the yarn the rate of interest should have been high, for the prices were relatively and the profit absolutely high. From cotton at 4 d. per pound a yarn could be spun in 1845 with a spinning cost of 4 d. (No. 40 good second mule twist), or a total cost of 8 d. to the spinner, which he could sell in September and October 1845 at 10½ or 11½ d. per pound. (See the testimony of Wylie farther on.)

V.XXXII.36

A supply and demand of loan capital would be identical with a demand and supply of capital in general (although this last phrase is absurd; for the industrial or commercial capitalist a commodity is a form of his capital, yet he never asks for capital as such, but only for this particular commodity as such, buys and sells it as a commodity, corn or cotton, regardless of the role which it has to play in the rotation of his capital), if there were no money lenders, and if in their stead the lending capitalists were in possession of machinery, raw materials, etc., which they would rent or loan just as houses are now, to the industrial capitalists, who are themselves part owners of these things. Under such circumstances the supply of loan capital would be identical with the supply of elements of production for the industrial capitalist, and of commodities for the merchant. But it is evident, that then the division of profit between the lender and borrower would depend primarily upon the proportion, in which this capital is loaned and in which it is the property of the one who employs it.

Part V, Chapter 34
V.XXXIV.5

Since the demand and supply of commodities regulates their market-prices, it becomes evident here, that Overstone is wrong when he identifies the demand for loanable capital (or rather the discrepancies of its supply from demand), as expressed by the rate of discount, with the demand for actual "capital." The contention that the prices of commodities are regulated by the fluctuations in the quantity of the currency is now concealed under the phrase that the fluctuations in the rate of discount express fluctuations in the demand for actual material capital, as distinguished from money-capital. We have seen that both Norman and Overstone actually made this contention before the same Committee, and that especially the latter was compelled to take refuge in very lame subterfuges, until he was finally cornered. (Chapter XXVI.) It is indeed the old fib that changes in the quantity of gold existing in a certain country, by increasing or reducing the quantity of the medium of circulation in that country, must raise or lower the prices of commodities in this country. If gold is exported, then, according to this currency theory, the prices of commodities must rise in the country importing this gold, and this must enhance the value of the exports of the gold exporting country on the market of the gold importing country; on the other hand, the value of the exports of the gold importing country would fall on the markets of the gold exporting country, while it would rise in the home country, which receives the gold. But in fact the reduction of the quantity of gold raises only the rate of interest, whereas an increase in the quantity of gold lowers the rate of interest; and were it not for the fact that the fluctuations of the rate of interest are taken into account in the determination of cost-prices, or in the determination of demand and supply, the prices of commodities would be wholly unaffected by them.

V.XXXIV.14

But in reality the separation of the Bank into two independent departments robbed the management of the possibility of disposing freely of its entire available means in critical moments, so that cases might occur, in which the banking department might be confronted with a bankruptcy, while the issue department still possessed several millions in gold and its entire 14 millions of securities untouched. And this could take place so much more easily, as there is one period in almost every crisis, when heavy exports of gold flow to foreign countries, which must be covered in the main by the metal reserve of the bank. But for every five pounds in gold, which then go to foreign countries, the circulation of the home country is deprived of one five pound note, so that the quantity of the currency is reduced precisely at a time, when the largest quantity of it is most needed. The Bank Act of 1844 thus directly challenges the commercial world to think betimes of laying up a reserve fund of bank notes on the eve of a crisis, in other words, to hasten and intensify the crisis; by this artificial intensification of the demand for money accommodation, that is for means of payment, and its simultaneous restriction of the supply, which take effect at the decisive moment, this Bank Act drives the rate of interest to a hitherto unknown hight; hence, instead of doing away with crises, the Act rather intensifies them to a point, where either the entire commercial world must go to pieces, or the Bank Act. Twice, on October 25, 1847, and on November 12, 1857, the crisis had risen to this culmination; then the government released the Bank from its limitation in the matter of issuing notes, by suspending the Act of 1844, and this sufficed in both cases to break the crisis. In 1847 the assurance sufficed, that bank notes would again be issued for first class securities, in order to bring to light the 4 to 5 millions of hoarded notes and throw them back into circulation; in 1857 the issue of notes exceeding the legal amount did not quite reach one million, and this was out for a very short time.

Part V, Chapter 35
V.XXXV.4

Before the gold mines of Russia, California and Australia exerted their influence, the supply since the beginning of the nineteenth century sufficed only to replace the wornout coins, to satisfy the demand for articles of luxury, and to promote the exports of silver to Asia.

V.XXXV.30

[The barometer for the international movement of the money metals is the rate of exchange. If England has more payments to make to Germany than Germany to England, the price of marks, expressed in sterling, rises in London, and the price of sterling, expressed in marks, falls in Hamburg and Berlin. If this overbalance of monetary obligations of England toward Germany is not equalised, for instance, by over purchases of Germany in England, the sterling price for marks on bills of exchange on Germany must rise to a point, where it will pay to send metal (gold coin or bullion) from England to Germany in payment of obligations, instead of sending bills of exchange. This is the typical course of things.
If this export of precious metals assumes a larger scope and lasts longer, then the English bank reserve is touched, and the English money market, with the bank of England at the head, must take precautionary measures. These consist mainly, as we have already seen, in the raising of the rate of interest. When the drain of gold is considerable, the money market is always difficult, that is, the demand for loan capital in the form of money exceeds the supply by far, and the raising of the rate of interest follows quite naturally from this; the rate of discount fixed by the Bank of England corresponds to this condition and asserts itself on the market. However, there are cases, when the drain of metal is due to other than the ordinary combinations of business (for instance, to loans of foreign states, investment of capital in foreign countries, etc.), when the London money market in that respect does not justify such an effective raise of the rate of interest; in that case the Bank of England must first make money "scarce" by heavy loans in the "open market" and thus create artificially a condition, which justifies a raise of the rate of interest, or renders it necessary; a maneuver, which becomes from year to year more difficult for it.—F. E.]
V.XXXV.34

The following points are important, partly because they show that England must take refuge to other countries, when its rate of exchange with Asia is unfavorable. These are countries, whose imports from Asia are paid by way of England. On the other part they are important, because Mr. Wilson makes once more the silly attempt here, to identify the effect of an export of precious metal on the rates of exchange with the effect of an export of capital in general upon these rates; the export being in either case not for the purpose of paying or buying, but of investing capital. In the first place it goes without saying, that whether so and so many millions of pounds sterling are sent to India in precious metals or railroad rails, in order to be invested in railroads there, these are merely two different forms of transferring the same amount of capital to another country. And this is a form of transfer, which does not enter into accounts of the ordinary mercantile businesses, and for which the exporting country expects no other returns than later on the annual revenue from the income of these railroads. If this export is made in the form of precious metal, it will exert a direct influence upon the money market and with it upon the rate of interest of the country exporting this precious metal, at least under the previously outlined conditions, if not necessarily under all circumstances, since precious metal is directly loanable money-capital and the basis of the entire money-system. This export also affects directly the rate of exchange. For precious metal is exported only for the reason and to the extent that the bills of exchange, say, on India, which are offered in the London money market, do not suffice for the making of these extra payments. In other words, there is a demand for Indian bills of exchange which exceeds their supply, and so the rates turn for a time against England, not because it is in debt to India, but because it has to send extraordinary sums to India. In the long run such a shipment of precious metal to India must have the effect of increasing the Indian demand for British goods, because it indirectly increases the consuming power of India for European goods. But if the capital is shipped in the shape of rails, etc., it cannot have any influence on the rates of exchange, since India has no return payment to make for it. For the same reason this need not have any influence on the money market. Wilson seeks to establish the fact of such an influence by declaring that such an extra expenditure will bring about an extra demand for money accommodation and will thus influence the rate of interest. This may be the case; but to maintain that it must take place under all circumstances is totally wrong. No matter whether the rails are shipped and laid on English or Indian soil, they represent nothing else but a definite expansion of English production in a definite sphere. To contend that an expansion of production, even to a large volume, cannot take place without driving the rate of interest higher, is absurd. The money accommodation may grow, that is, the amount of business transacted by operations of credit; but these operations may increase also while the rate of interest remains unchanged. This was actually the case during the railroad mania in England during the forties. The rate of interest did not rise. And it is evident, that, so far as actual capital, in this case commodities, are concerned, the effect on the money market will be just the same, whether these commodities are intended for foreign countries or for inland consumption. A difference could be discovered only in the case that the investment of capital on the part of England in foreign countries would have a restraining influence upon its commercial exports, that is, exports for which payment must be made in return, or to the extent that these investments of capital are general symptoms indicating the overstraining of credit and the beginning of swindling operations.

V.XXXV.53

Comment on sentence No. 3). Why money interest should be low, when commodities exist in abundance, is hard to understand, even after the foregoing remarks. If commodities are cheap, then I need, say, only 1,000 pounds sterling instead of 2,000 pounds sterling for a definite quantity which I may want to buy. But perhaps I might invest 2,000 pounds sterling nevertheless, and thus buy twice the quantity which I could have bought formerly. In this way I expand my business by advancing the same capital, which I may have to borrow. I buy 2,000 pounds sterling's worth of commodities, the same as before. My demand on the money market therefore remains the same, even though my demand on the commodity-market rises with the fall of the prices of commodities. But if this demand for commodities should decrease, that is, if production should not expand with the fall of the prices of commodities, a thing contrary to all laws of the " Economist," then the demand for loanable money-capital would be decreasing, although the profit would be increasing. But this increasing profit would create a demand for loan capital. For the rest, the low stand of the prices of commodities may be due to three causes. First, to a lack of demand. In that case the rate of interest is low, because production is paralyzed, not because commodities are cheap, since this cheapness is but an expression of that paralysis. In the second place, it may be due to a supply which is excessive compared to the demand. This may be the result of an overcrowding of markets, etc., which may lead to a crisis, and may go hand in hand with a high rate of interest during a crisis; or it may be the result of a fall in the value of commodities, so that the same demand may be satisfied at lower prices. Why should the rate of interest fall in the last case? Because the profits increase? If this should be due to the fact that less money-capital is required for the purpose of obtaining the same productive or commodity-capital, it would merely prove that profit and interest stand in an inverse proportion to one another. Certainly this general statement of the " Economist" is wrong. Low money prices of commodities and a low rate of interest do not necessarily go together. Otherwise the rate of interest would be lowest in the poorest countries, in which the money prices of commodities are lowest, and highest in the richest countries, in which the money prices of products of agriculture are highest. In a general way the " Economist" admits: If the value of money falls, it exerts no influence on the rate of interest. 100 pounds sterling bring 105 pounds sterling the same as ever. If the 100 pounds sterling are worth less, so are the 105 pounds sterling or the 5 pounds interest. This relation is not affected by the appreciation or depreciation of the original sum. Considered as a value, a definite quantity of commodities is equal to a definite sum of money. If this value rises, it is equal to a larger sum of money; the reverse takes place when it falls. If the value is 2,000, then 5% of it is 100; if it is 1,000, then 5% of it is 50. This does not alter anything in the rate of interest. The rational part of this matter is merely that a greater pecuniary accommodation is required, when it takes 2,000 pounds sterling to buy the same quantity of commodities, which may be bought for 1,000 pounds sterling at some other time. But this shows at this point merely that profit and interest are inversely proportionate to one another. For profit rises with the cheapness of the elements of constant and variable capital, whereas interest falls. But the reverse may also take place, and does often take place. For instance, cotton may be cheap, because no demand exists for yarn and fabrics; and cotton may be relatively dear, because a large profit in the cotton industry creates a great demand for it. On the other hand the profits of the industrials may be high, just because the price of cotton is low. That list of Hubbard's proves that the rate of interest and the prices of commodities pass through mutually independent movements, whereas the movements of the rate of interest adapt themselves closely to those of the metal reserve and the rates of exchange.

Part VI, Chapter 37
VI.XXXVII.23

A much more general and important fact, however, is the depression of the wages of the actual farm laborers below their normal average, so that a portion of the wages is deducted in order to become a part of the lease money and thus flowing into the pockets of the landlord instead of the laborer under the disguise of ground-rent. This is the case quite generally in England and Scotland, with the exception of a few favorably situated counties. The inquiries of the Parliamentarian Committees into the scale of wages made before the passing of the corn laws in England—so far the most valuable and almost unexploited contributions to a history of wages in the 19th century, and at the same time a monument of disgrace erected for themselves by the English aristocracy and bourgeoisie—proved convincingly and beyond a doubt that the high rates of rent and the corresponding raise in the land prices during the anti-Jacobin wars, were due in part to no other cause but the deductions from wages and the depression of wages even below the physical minimum. In other words, a part of the wages had been paid over to the landlords. Various circumstances such as the depreciation of money, the handling of the poor laws in the agricultural districts, etc., had made these operations possible, at a time when the incomes of the tenants were rising enormously and the landlords amassed fabulous riches. Yes, one of the main arguments for the introduction of the corn laws, used by both tenants and landlords, was that it was physically impossible to depress the wages of the farm laborers still more. This condition of things has not been materially altered, and in England as well as in all European countries a portion of the normal wages is absorbed by the ground-rent the same as ever. When Count Shaftsbury, then Lord Ashley, one of the philanthropic aristocrats, was so extraordinarily moved by the condition of the English factory laborers and acted as their spokesman in Parliament during the agitation for a ten hour day, the spokesmen of the industrials got their revenge by publishing statistics on the wages of the agricultural laborers in the villages belonging to him (see Volume I, chapter XXV, 5e, The British Agricultural Proletariat), which showed clearly, that a portion of the ground-rent of this philanthropist consisted of the loot, which his agents filched for him out of the wages of the agricultural laborers. This publication is also interesting for the reason, that the facts exposed by it may rank in the same class with the worst exposures made by the Committees in 1814 and 1815. As soon as circumstances permit of a temporary raise in the wages of the agricultural laborers, a cry goes up from the capitalist tenants to the effect that a raising of the wages to their normal level, as customary in other lines of industry, would be impossible and would ruin them, unless ground-rent were reduced at the same time. This is a confession, that the tenants deduct a portion from the wages of the laborers under the name of ground-rent and pay it over to the landlords. For instance, from 1849 to 1859 the wages of the agricultural laborers rose in England through a combination of overwhelming circumstances, such as the exodus from Ireland, which cut off the supply of agricultural laborers coming from that country; an extraordinary absorption of the agricultural population by the factories; a demand for soldiers to go to war; an exceptional emigration to Australia and the United States (California), and other causes which need not be mentioned here. At the same time the average prices of grain fell by more than 16% during this period, with the exception of the poor agricultural years from 1854 to 1856. The tenant capitalists shouted for a reduction of their rents. They succeeded in single cases. But on the whole they failed to get what they wanted. They sought refuge in a reduction of the cost of production, among other things by introducing steam engines and new machinery in abundance, which partly replaced horses and crowded them out of the business, but partly also created an artificial overpopulation by throwing agricultural laborers out of work and thereby causing a fall in wages. And this took place in spite of the general relative decrease of the agricultural population during that decade, compared to the growth of the total population, and in spite of the absolute decrease of the agricultural population in some purely agricultural districts. *125 In the same way Fawcett, then professor of political economy at Cambridge, who died in 1884 as Postmaster General, said at the Social Science Congress, October 12, 1865: "The agricultural laborers began to emigrate and the tenants began to complain, that they would not be able to pay such high rents as they had been accustomed to pay, because labor became dearer in consequence of emigration." Here, then, the high ground-rent is directly identified with low wages. And so far as the level of the prices of land is determined by this circumstance increasing the rent, a rise in the value of the land is identical with a depreciation of labor, a high price of land with a low price of labor.

Part VI, Chapter 39
VI.XXXIX.21

On the other hand, if the succession went the opposite way, that is, if the movement started from A, then the price of wheat at first rose above 60 shillings, when new land had to be taken under cultivation. But when the necessary supply was raised by B, a supply of 2 quarters, the price fell once more to 60 shillings. B raised wheat at a cost of 30 shillings per quarter, but sold it at 60 shillings, because its supply sufficed just to cover the demand. In this way a rent was formed, first of 60 shillings for B, and in the same way for C and D; always assuming that the market price remained at 60 shillings, although C and D relatively raised wheat having a value of 20 and 15 shillings respectively, because the supply of the one-quarter raised by A was as much needed as ever to satisfy the total demand. In this case the rising of the demand above the supply first raised by A, then by A and B, would not have made it possible to cultivate successively B, C and D, but would merely have caused a general extension of the sphere of cultivation, by which the more fertile lands came under its control later.

VI.XXXIX.26

But now let us assume that the demand for grain rises from its original figure of 10 to 17 quarters; furthermore, that the worst soil A is displaced by another soil A', which raises 1 1/3 quarters at a price of production of 60 shillings (50 sh. cost plus 10 sh. for 20% profit), so that its price of production for one-quarter is 45 shillings; or, perhaps, the old soil A may have become improved through a continued rational cultivation, or may be cultivated more productively at the same cost, for instance, by the introduction of clover, etc., so that its product with the same investment of capital rises to 1 1/3 quarters. Let us also assume that the classes B, C and D of soil supply the same product as ever, but that new classes of soil have been introduced, for instance, A' of a fertility between A and B, furthermore B' and B'' of a fertility between B and C. In that case we should witness the following phenomena:

Part VI, Chapter 40
VI.XL.22

Only in the case in which the demand for cereals would increase to such an extent, that the market price would rise above the price of production of A, so that for this reason the surplus product of A, B, or any other class of soil could be supplied only at a higher price than 3 pounds sterling, would the decrease of the results of an additional investment of capital in A, B, C and D be accompanied by a rise of the price of production and of the regulating market price. To the extent that this would last for a certain length of time without calling forth the cultivation of additional soil (which should be at least of the quality of A), or without bringing on a cheaper supply through other circumstances, wages would rise in consequence of the dearness of bread, other circumstances remaining the same, and the rate of profit would fall accordingly. In this case it would be immaterial, whether the increased demand would be satisfied by drawing upon inferior soil than A, or by additional investments of capital, no matter upon which of the four classes of soil. Differential rent would then rise in connection with a falling rate of profit.

Part VI, Chapter 42
VI.XLII.3

But under these conditions the regulating price of production can fall only, because instead of the price of production of A that of the next best soil B, or of any better soil than A, becomes the regulator; so that the capital is withdrawn from A, or perhaps from B and A, in case the price of production of C should become the regulating one and all inferior soil should be eliminated from the competition of the wheat raising soils. The prerequisite for this would be, under the assumed conditions, that the additional product of the additional investments of capital should satisfy the demand, so that the product of the inferior soils A, etc., would become superfluous for the formation of a full supply.

Part VI, Chapter 44
VI.XLIV.1

Part VI, Chapter XLIV.
DIFFERENTIAL RENT EVEN UPON THE WORST SOIL UNDER CULTIVATION.

LET us assume that the demand for grain is rising, and that the supply cannot be made to cover the demand, unless successive investments of capital with deficient productivity are made upon the rent-paying soils, or by an additional investment of capital, likewise with a decreasing productivity, upon soil A, or by the investment of capital in new lands of a lesser quality than A.

Part VI, Chapter 45
VI.XLV.8

It should be noted here that in case, likewise, the market price must be higher than the price of production of A. For as soon as the additional supply has been created, the relation between supply and demand has been altered. Formerly the supply was insufficient, now it is sufficient. So the price must fall . In order to fall, it must have been higher than the price of production of A. But the lesser fertility of the newly added soils of class A brings it about that the price does not fall quite as low as it was at the time when the price of production of the class B regulated the market. The price of production of A forms the limit, not for the temporary, but for the relatively permanent rise of market price.

VI.XLV.28

Private property in land is then the barrier which does not permit any new investment of capital upon hitherto uncultivated or unrented land without levying a tax, in other words, without demanding a rent, although the land to be taken under new cultivation may belong to a class which does not produce any differential rent, and which, were it not for the intervention of private property in land, might have been cultivated at a small increase in the market price, so that the regulating market price would have netted to the cultivator of this worst soil nothing but his price of production. But on account of the barrier raised by private property in land, the market price must rise to a point, where the land can pay a surplus over the price of production, in other words, where it can pay a rent. Now, since the value of the commodities produced by agricultural capital is higher than their price of production, as we have assumed, this rent (with the exception of one case which we shall discuss immediately) forms the excess of the value over the price of production, or a part of it. Whether the rent consumes the entire difference between the value and the price of production, or only a greater or smaller part of it, will depend wholly upon the relation between supply and demand and upon the area of the new land taken in cultivation. So long as the rent is not equal to the excess of the value of agricultural products over their price of production, a portion of this excess would always enter into the general equalization and proportional distribution of all surplus-value among the various individual capitals. As soon as the rent is equal to the excess of the value over the price of production, this entire portion of the surplus-value over and above the average profit would be withdrawn from the equalization. But whether this absolute rent is equal to the whole surplus of value over the price of production, or only equal to a part of it, the agricultural products would always be sold at a monopoly price, not because their price would exceed their value, but because their price would be equal to their value, or because their price would be lower than their value but higher than their price of production. Their monopoly would consist in the fact that they are not, like other products of industry whose value is higher than the general price of production, leveled to the plane of the price of production. Since one portion of the value and of the price of production is an actually existing constant element, namely the cost price, representing the capital k consumed in production, their difference consists in the other, the variable, portion, the surplus-value, which amounts to p in the price of production, that is, to the profit which is equal to the total surplus-value calculated on the social capital and on every individual capital as an aliquot part of the social capital. This profit equals in the value of commodities the actual surplus-value created by this particular capital, and forms an integral part of the value of commodities created by this capital. If the value of commodities is higher than their price of production, then the price of production is k+p, the value k+p+d, so that p+d represents the surplus-value contained in it. The difference between the value and the price of production is, therefore, equal to d, the excess of the surplus-value created by this capital over the surplus-value assigned to it by the average rate of profit. It follows from this that the price of agricultural products may stand higher than their price of production, without reaching up to their value. It follows, furthermore, that up to a certain point a permanent increase in the price of agricultural products may take place, before their price reaches their value. It follows also that the excess in the value of agricultural products over their price of production can become a determining element of their general market price only because there is a monopoly in private ownership of land. If follows, finally, that in this case the increase in the price of the product is not the cause of the rent, but rather the rent is the cause of the increase in the price of the product. If the price of the product of the unit of the worst soil is equal to P+r, then all differential rents will rise by the corresponding multiples of r, since the assumption is that P+r becomes the regulating market price.

VI.XLV.40

Adam Smith says in Book I, Chapter XI, Part I, of his Wealth of Nations, that in consequence of the extension of cultivation the uncultivated fallow land no longer suffices to supply the demand for cattle. A large portion of the cultivated lands must be used for breeding and fattening cattle, the price of which must be high enough to pay not merely for the labor spent upon them, but also for the rent which the landlord and the profit which the tenant might have drawn out of this land, had it been cultivated as a field. The cattle raised upon the least tilled peat bogs are sold according to their weight and quality in the same market and at the same price as those raised upon the best cultivated land. The owners of peat bogs profit thereby and raise the rent of their lands in proportion to the prices of cattle.

Part VI, Chapter 47
VI.XLVII.51

We have seen that the price of land is regulated by the rate of interest, if the ground-rent is a given magnitude. If the rate of interest is low, then the price of land is high, and vice versa. Normally, then, a high price of land and a low rate of interest would have to go hand in hand, so that if the farmer paid a high price for the land in consequence of a low rate of interest, the same low rate of interest should also secure for him his running capital on easy terms of credit. But in reality, things turn out differently under small peasants' property, as the prevailing form. In the first place, the general laws of credit do not apply to the farmer, since these laws rest upon the capitalist as a producer. In the second place, where small peasants' property predominates—we are not speaking of colonies here—and the small peasant forms the foundation of the nation, the formation of capital, that is social reproduction, is relatively weak, and the formation of loanable money-capital, in the sense in which we have previously analyzed this term, is still weaker. For this is conditioned upon concentration and the existence of a class of rich and idle capitalists (Massie). In the third place, where the ownership of the land is a necessary condition for the existence of the greater part of the producers, as it is here, and an indispensable field of investment for their capital, the price of land is raised independently of the rate of interest, and often in an inverse ratio to it, by the preponderance of the demand for land over its supply. If sold in small lots, the land in this case brings a far higher price than it does by its sale in large estates, because the number of small buyers is large and that of the large buyers small ( Bandes Noires, Rubichon; Newman). For all these reasons the price of land rises here while the rate of interest is relatively high. The relatively low interest, which the farmer here derives from the capital invested in the purchase of land (Mounier), corresponds on the other hand to the high rate of interest exacted by usury, which he himself has to pay to his mortgage creditors. The Irish system shows the same thing, only in another form.

Part VII, Chapter 50
VII.L.19

Just as the division of the newly added value of commodities into necessary and surplus labor, wages and surplus-value, and its general division between revenues, finds its given and regulating limits, so the division of the surplus-value itself into profit and ground-rent finds its limit in the laws regulating the equalization of the rate of profit. In the division into interest and profits of enterprise the average profit itself forms the limit for both of them. It furnishes the given magnitude of value, which they may divide among themselves and which is the only one that they can so divide. The definite proportion of this division is here accidental, that is, it is determined exclusively by conditions of competition. Whereas in other cases the balancing of supply and demand implies the cessation of the deviation of market prices from their regulating average prices, that is, the cessation of the influence of competition, it is here the only determinant. But why? Because the same factor in production, the capital, has to divide its share of the surplus-value between two owners of the same factor in production. But the fact that no definite, lawful, limit for the division of the average profit is found, does not do away with its limit as a part of the value of commodities, any more than the fact that two partners in a certain business, being under the influence of different circumstances, divide their profit unequally, affects the limits of this profit in any way.

VII.L.24

Let us reply that it is determined by the demand and supply of labor-power. But what sort of a demand is this? It is a demand made by capital. The demand for labor is therefore at the same time a supply of capital. In order to speak of a supply of capital, we should know above all what capital is. What is capital made of? If we select its simplest forms, it consists of money and commodities. But money is merely a form of commodities. Capital, then, consists of commodities. But the value of commodities, according to our assumption, is first determined by the price of the labor producing them, by wages. The existence of wages is here a prerequisite and is considered as a constituting element of the price of commodities. Now this price is to be determined by the proportion of the supplied labor to capital. The price of the capital itself is equal to the price of the commodities of which it is composed. The demand of capital for labor is equal to the supply of capital. And the supply of capital is equal to the supply of a quantity of commodities of a given price, and this price is regulated in the first place by the price of labor, and the price of labor in its turn is equal to that portion of the price of commodities, which makes up the variable capital, which is transferred to the laborer in exchange for his labor; and the price of the commodities, of which this variable capital is composed, is in its turn primarily determined by the price of labor; for it is determined by the prices of wages, profit and rent. In order to determine wages, we cannot, therefore, assume the previous existence of capital, for the value of the capital is itself determined in part by wages.

VII.L.25

Besides, the dragging of competition into this problem does not help any. Competition makes the market prices of labor rise and fall. But suppose that the demand and supply of labor are balanced. What determines wages in that case? Competition. But we have just assumed that competition ceases to act as a determinant, that it abolishes its effects by the equilibrium of its two opposing forces. We are precisely trying to find the natural price of wages, that is, the price of labor not regulated by competition, but which, on the contrary, regulates it.