Capital: A Critique of Political Economy, Vol. III. The Process of Capitalist Production as a Whole

Karl Marx
Marx, Karl
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Frederick Engels, ed. Ernest Untermann, trans.
First Pub. Date
Chicago: Charles H. Kerr and Co.
Pub. Date
Das Kapital, based on the 1st edition.
29 of 55

Part V, Chapter XXVI


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


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


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


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


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


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


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


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


This self-complacent rubbish is quite worthy of this pillar of the Currency Principle. First the brilliant discovery, that bank notes or gold are means of buying something, and that they are not borrowed for their own sake. And this is supposed to explain, that the rate of interest is regulated, by what? By the demand and supply of commodities, that were so far known to regulate only the market prices of commodities. But very different rates of interest are compatible with the same market prices of commodities.—But now take another look at this slyness. He hears the correct remark: "But interest is paid for this money?" and this, of course, implies the question: "What has the interest, which the banker receives, who does not deal in commodities at all, to do with these commodities? And do not manufacturers receive money at the same rate of interest, although they invest it in widely different markets, that is, in markets, in which widely different conditions of demand and supply prevail, so far as the commodities used in production are concerned?" And all that this solemn genius has to say in reply to these questions, is that the manufacturer, who buys cotton on credit, pays interest, the measure of which is "The difference between the price for cash payment and the price on credit at the time when payment is due." Vice versa. The prevailing rate of interest, whose regulation the genius Norman is asked to explain, is the measure of the difference between the cash price and the credit price to the time of due payment. First the cotton is to be sold to its cash price, and this is determined by the market price, which is itself regulated by the condition of supply and demand. Say that the price is 1,000 pounds sterling. This concludes the transaction between the manufacturer and the cotton broker, so far as buying and selling is concerned. Now a second transaction is added. This takes place between the lender and the borrower. The value of 1,000 pounds sterling is advanced to the manufacturer in the shape of cotton, and he has to repay it in money, say, in three months. And the interest for 1,000 pounds sterling, determined by the market rate of interest, forms the addition over and above the cash price. The price of cotton is determined by supply and demand. But the price of the advance of the value of cotton, of 1,000 pounds sterling for three months, is determined by the rate of interest. And this fact, that the cotton itself is thus transformed into money-capital, proves to Mr. Norman that interest would exist, even if no money existed. If there were no money at all, there would certainly be no general rate of interest.


There is, in the first place, the vulgar conception of capital as "commodities used in production." So far as these commodities serve as capital, their value as capital compared to their value as commodities is expressed in the profit, which is made out of their productive or mercantile employment. And the rate of profit has under all circumstances something to do with the market price of the bought commodities and their supply and demand, although it is determined besides by circumstances of quite a different kind. And there is no doubt that the rate of interest is generally limited by the rate of profit. But Mr. Norman is precisely asked to tell us how this limit is determined. It is determined by the supply and demand of money-capital as distinguished from the other forms of capital. Now one might ask furthermore: How are the demand and supply of money-capital determined? It is doubtless true, that a tacit connection exists between the supply of commodity-capital and the supply of money-capital, and also that the demand of the industrial capitalist for money-capital is determined by the actual conditions of real production. Instead of giving us information on this point, Norman offers us the sage opinion, that the demand for money-capital is not identical with the demand for money as such, and this wisdom is advanced for no other reason than that behind him. Above Overstone and other Currency prophets always stands the bad conscience, which makes them aware that they are trying to make capital of the mere medium of circulation by the artificial method of legislative interference and to raise the rate of interest.


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


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


We shall recur to the question of the influence of the quantity of available money on the rate of interest later on. But we must note right here that Overstone once again takes one thing for another in this case. The demand for money-capital in 1847 (there was no worry on account of scarcity of money, or the "quantity of available money," as he called it, before October) increased for various reasons, such as the dearness of corn, rising cotton prices, unsaleable sugars through overproduction, railroad speculation and slumps, overcrowding of foreign markets with cotton goods, the above described forced export to and import from India for the purpose of mere swindling with bills of exchange. All these things, the over-production in industries as well as the underproduction in agriculture, in other words, widely different causes, led to an increased demand for money-capital in the shape of credit and money. The increased demand for money-capital had its causes in the course of the productive process itself. But whatever may have been the causes, it was the demand for money-capital which brought about the rise in the rate of interest, in the value of money-capital. If Overstone means to say that the value of money-capital rose because it rose, he is simply repeating himself. But if he means by "value of capital" a rise in the rate of profit which caused a rise in the rate of interest, we shall see immediately that this was not the case here. The demand for money-capital, and consequently the "value of capital," may rise even though the profit may decrease; as soon as the relative supply of money-capital decreases, its "value" increases. Overstone wants to establish the fact that the crisis of 1847, and the high rate of interest going with it, had nothing to do with the "quantity of available money," that is, with the regulations of the Bank Acts of 1844 which he had inspired; but as a matter of fact this crisis had something to do with these things, so far as the fear of exhausting the bank reserve—a creation of Overstone—added a money panic to the crisis of 1847-48, But this is not the main point here. There was a dearth of money-capital, caused by the excessive volume of operations compared to the available means and brought to an eruption by disturbances in the process of production due to a crop failure, overcapitalisation of railroads, over-production, particularly of cotton goods, swindling practices in the Indian and Chinese business, speculation, superfluous imports of sugar, etc. What the people, who had bought corn at 120 shillings per quarter, lacked when it fell to 60 shillings, were the 60 shillings which they had paid too much and the corresponding credit for that amount in the Lombard advance on corn. It was by no means the lack of bank notes that prevented them from transforming their corn into money at its old price of 120 shillings. The same things applied to those who had bought sugar to such an excess that it became almost unsaleable. It applies likewise to the gentlemen who had tied up their floating capital in railroads and relied on credit to make up for it in their "legitimate" business. To Overstone all this is expressed in "a moral sense of the enhanced value of his money." But this enhanced value of money-capital had its direct counterpart on the other side in the shape of the depreciated money-value of the real capital (commodity-capital and productive capital). The value of capital in one form rose, because the value of capital in the other forms fell. Overstone, however, seeks to identify these two kinds of value of different sorts of capital in one sole value of capital in general, and he does it by opposing both of them to a scarcity of the medium of circulation, of available money. But the same amount of money-capital may be loaned with very different quantities of medium of circulation.


Take, for instance, his example of the year 1847. The official bank rate of interest stood at 3 to 3½% in January; 4 to 4½% in February. In March it was generally 4%. April (panic) 4 to 7½%. May 5 to 5½%. June on the whole 5%. July 5%. August 5 to 5½%. September 5% with trifling variations of 5¼, 5½, 6%. October 5, 5½, 7%. November 7 to 10%. December 7 to 5%.—In this case the interest rose, because the profits decreased and the money-values of commodities fell enormously. If Overstone says here that the rate of interest rose in 1847, because the value of capital rose, he cannot mean anything else by "value of capital" but the value of money-capital, and this is precisely the rate of interest and nothing else. But later the cloven hoof appears and the value of capital is identified with the rate of profit.


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


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


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


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


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


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


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


This self-complacent logician assumes that bills of exchange are discounted only for the purpose of expanding business, and that business is expanded, because it is profitable. The first assumption is wrong. The ordinary business man discounts, in order to anticipate the money-form of his capital and thereby to keep his process of reproduction in flow; not in order to expand his business or secure additional capital, but in order to balance the credit which he gives by the credit which he takes. And if he wants to expand his business on credit, the discounting of bills will do him little good, because it is merely the transformation of capital, which he has already in his hands, from one form into another; he will rather take up a direct loan for a long time. Only the credit swindler will get his fraudulent bills of exchange discounted for the purpose of expanding his business, in order to cover one rotten business by another; not for the purpose of making profits, but of getting possession of the capital of another man.


After Mr. Overstone has thus identified discount with the borrowing of additional capital [instead of identifying it with the transformation of bills of exchange representing capital into money], he beats at once a retreat, when the thumbscrews are applied to him.—3730. "Must not merchants, once that they are engaged in business, continue their operations for a certain period of time in spite of a temporary increase in the rate of interest?"—Overstone: "There is no doubt, that in any single transaction, if a man can get hold of capital at a low rate of interest instead of a high rate of interest, taking the matter from this narrow point of view, that it is pleasant for him."—But it is a very wide point of view, which enables Mr. Overstone now to understand by "capital" all of a sudden only his banker's capital, and to assume that the man, who discounts a bill of exchange with him, is a man without capital, just because his capital exists in the form of commodities, or because the money-form of his capital is a bill of exchange, which Mr. Overstone converts into another money-form.


3732. "With reference to the Bank Act of 1844, can you state what was the approximate relation of the rate of interest to the gold reserve of the bank; is it true, that, if the gold in the bank amounted to 9 or 10 millions, the rate of interest was 6 or 7%, and when it amounted to 16 millions, the rate of interest was about 3 or 4%?" [The cross-examiner wants to compel him to explain the rate of interest, so far as it is influenced by the amount of gold in the bank, by the rate of interest, so far as it is influenced by the value of capital.]—"I do not say, that this is the case...but if it is, then we should in my opinion resort to still more stringent measures than those of 1844; for if it should be true, that the greater the quantity of gold the lower the rate of interest, then we should go to work, according to this view of the matter, and increase the gold reserve to an unlimited amount, and then we should reduce the rate of interest to zero."—The cross-examiner Cayley, unmoved by this poor joke, continues: 3733. "If this were so, assuming that 5 millions in gold were returned to the bank, then in the course of the next six months the gold reserve would amount to 16 millions, and assuming that the rate of interest should fall thus to 3 or 4%, how could one maintain, that the fall in the rate of profit was due to a great slump in business?"—"I said the recent great increase in the rate of interest, not the fall in the rate of interest, is intimately connected with the great expansion of business."—But what Cayley says is this: If a rise of the rate of interest together with a contraction of the gold reserve, is an indication of an expansion of business, then a fall of the rate of interest together with an expansion of the gold reserve, must be an indication of a contraction of business. Overstone has no answer to this.—3736. Question: "I note that Your Lordship said that money is an instrument for securing capital." [This is precisely a mistake, this conception of money as an instrument; it is a form of capital.] "During a decrease of the gold reserve (of the Bank of England) does not the difficulty consist rather in the fact that capitalists cannot get any money?"—Overstone: "No, it is not the capitalists, it is the non-capitalists, who seek to obtain money, in order to carry on the business of people, who are not capitalists."—Here he declares point blank, that manufacturers and merchants are not capitalists, and that the capital of the capitalist is only money-capital.—3737. "Are the people who draw bills of exchange no capitalists?"—"The people who draw bills of exchange are probable capitalists and probably not."—Here he is stuck.


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


3742. "Is not the purpose of the merchant that of obtaining money?"—"No; to obtain money is not the purpose of drawing a bill of exchange; to obtain money is the purpose of discounting the bill."—The drawing of bills of exchange is a conversion of commodities into a form of credit-money, just as the discounting of bills of exchange is the conversion of credit-money into other money, namely bank notes. At any rate Mr. Overstone admits here, that the purpose of discounting is to obtain money. A while ago he said that discounting was a means, not of transforming capital from one form into another, but of obtaining additional capital.


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


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


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


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


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


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


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


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


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


In chapter XXXII Marx says practically the same thing: "The demand for means of payment is a mere demand for convertibility into money, so far as merchants and producers have good securities to offer; it is a demand for money-capital whenever there is no collateral, so that an advance of means of payment gives to them not only the form of money, but also the equivalent, whatever be its form, with which to make payment."—And again in chapter XXXIII: "Under a developed system of credit, when the money is concentrated in the hands of the bankers, it is they, at least nominally, who make advances of money. This advance does not refer to the money already in circulation. It is an advance made to circulation, not an advance of capital circulated by it."—Likewise Mr. Chapman, who ought to know, corroborates this conception of the discounting business: B. C. 1857: "The banker has the bill, the banker has bought the bill." Evid. Question 5139.


We shall return to this subject in chapter XXVIII.—F. E.] 3744. "Will you kindly describe, what you really mean by the term capital?"—Overstone: "Capital consists of various commodities, by means of which trade is carried on; there is a fixed capital and there is a circulating capital. Your ships, your docks, your wharves are fixed capital, your means of subsistence, your clothes, etc. are circulating capital."


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


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


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


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


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


3760. "But a higher rate of discount is an increased difficulty of obtaining money, is it not?"—"It is an increased difficulty of obtaining money, but it is not the money, the possession of which is essential; it is only the form" [and this form brings profits into the pockets of the banker] "in which the increased difficulty of obtaining capital presents itself under the complicated relations of a civilised condition."


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


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


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


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


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


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


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


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


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


3896. "Do I understand you correctly, then, that you abandon the statement, which you applied in 1840, to the effect that fluctuations in the circulating notes of the Bank of England should be governed by the fluctuations in the quantity of the gold reserve?"—"I abandon it in so far...that according to the present condition of our knowledge we must add to the circulating notes those other notes, which are deposited in the bank reserve of the Bank of England."—This is superlative. The arbitrary provision, that the bank may make out as many paper notes as it has gold in the treasury and 14 millions more, implies, of course, that its issue of notes fluctuates with the fluctuations of the gold reserve. But since "the present condition of our knowledge" shows clearly, that the mass of notes, which the bank can manufacture according to this (and which the issue department transfers to the banking department), and which circulating between the two departments of the Bank of England and fluctuate with the fluctuations of its gold reserve, does not determine the circulation of bank notes outside of the walls of the Bank of England, and this last circulation becomes a matter of indifference for the administration of the bank, and the circulation between the two departments of the bank, which shows its difference from the real circulation in the reserve, becomes alone essential. For the outside world this internal circulation is significant only, because the reserve indicates, how close the bank is getting to the legal maximum of its issue of notes, and how much the customers of the bank can still receive from the banking department.


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


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


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


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

Notes for this chapter

In other words, formerly the dividend was first determined and then the income tax deducted on payment of the dividend to the individual stockholder; but after 1844 the income tax was first paid out of the total profit of the bank, and then the dividend paid "free of income tax." The same nominal percentages are therefore higher in the latter case by the amount of the tax.—F. E.
Further remarks on Overstone's confusion of terms in the matter of capital will be found at the close of chapter XXXII.

Part V, Chapter XXVII.

End of Notes

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