Capital: A Critique of Political Economy, Vol. III. The Process of Capitalist Production as a Whole
IT is now necessary to find out more accurately, what are the constituent elements of banking capital.
We have just seen, that Fullarton and others transform the distinction between money as a means of circulation and money as a means of payment (or eventually as world money, whenever it is a question of gold drains) into a distinction between currency and capital.
The peculiar role played by capital in this instance brought it about, that this banker's economics taught as insistently that money is indeed capital par excellence as the enlightened economics taught that money is not capital.
In subsequent analysis we shall demonstrate, that in such cases money-capital is confounded with moneyed capital in the sense of interest-bearing capital, while in the first named sense money-capital is but a transient form of capital as distinguished from the other forms of capital, commodity-capital and productive capital.
The banking capital consists 1) of cash money, gold or notes; 2) securities. These again may be divided into two parts: Commercial bills, bills of exchange, which run for some time, become due, and the cashing (discounting) of which is the essentially profitable business of the banker; and public securities, such as government bonds, treasury notes, stocks of all kinds, in brief, interest-bearing papers, which are essentially different from bills of exchange. Mortgages may also be classed with this part. The capital composed of these various constituents is again divided into the banker's business capital, and into the deposits, which form his banking capital, or borrowed capital. In the case of banks with an issue of notes these must be counted also. We leave the deposits and notes out of consideration for the present. It is evident, that nothing is altered in the actual constituents of banking capital (money, bills of exchange, deposits), whether these different elements represent the banker's own capital or deposits, the capital of other people. The same division would remain, whether he were to carry on his business with his own capital alone or with no other but deposited capital.
The form of the interest-bearing capital is responsible for the fact, that every determined and regular revenue of money appears as interest on some capital, whether it be due to some capital or not. The money revenue is first converted into interest, and with the interest comes also the capital, from which it is drawn. In like manner every sum of money appears as capital in connection with the interest-bearing capital, as long as it is not spent as revenue; that is, it appears as principal compared to the possible or actual interest which it may yield.
The matter is simple. Let the average rate of interest be 5% annually. A sum of 500 pounds sterling would then yield 25 pounds sterling, if converted into interest-bearing capital. Every fixed annual income of 25 pounds sterling may then be considered as interest on a capital of 500 pounds sterling. This, however, is and remains a purely illusory conception, except the case in which the source of the 25 pounds sterling, whether it be a mere title of ownership or claim of indebtedness, or an actual element of production, such as real estate, is directly transferable or assumes a form, in which it becomes transferable. Let us choose a government debt and wages for an illustration.
The state has to pay to his creditors annually a certain amount of interest for the money loaned from them. In this case the creditor cannot call on the state to give up the principal. He can merely sell his claim, his title of ownership. The capital itself has been consumed, spent by the state. It does not exist any longer. What the creditor of the state possesses is 1) a certificate of indebtedness from the state, amounting, say, to 100 pounds sterling; 2) this certificate gives to the creditor a claim upon the annual revenues of the state, that is, the annual tax revenue, to a certain amount, say, 5 pounds, or 5% ; 3) the creditor may sell this certificate at his discretion to some other person. If the rate of interest is 5 %, and the security given by the state is good, the owner A of this certificate can sell it, as a rule, at its value of 100 pounds sterling to B; for it is the same to B, whether he loans 100 pounds sterling at 5 % annually, or whether he secures for himself by the payment of 100 pounds sterling an annual tribute from the state to the amount of 5 pounds sterling. But in all these cases the capital, the progeny of which (interest) is paid by the state, is illusory, fictitious capital. Not only does the amount loaned to the state exist no longer, but it was never intended at all to be invested as capital, and only by investment as capital could it have been transformed into a self-preserving value. For the original creditor A, the share of interest from taxes falling to him annually represents so much interest on his capital, just as a certain share of the spendthrift's fortune does for the usurer, although in either case the loaned amount was not invested as capital. The possibility of selling his claim on the revenues of the state represents for A the possible return of his principal. As for B, his capital, from his own private point of view, is invested as interest-bearing capital. So far as the transaction is concerned, B has simply taken the place of A by buying the latter's claim on the state's revenue. This transaction may be multiplied ever so often, the capital of the state debt remains a purely fictitious one, and from the moment that the certificates would become unsalable, the fiction of this capital would disappear. Nevertheless this fictitious capital has its own movements, as we shall see presently.
The capital of the national debt appears as a minus, and interest-bearing capital generally is the mother of all crazy forms, so that, for instance, debts may appear in the eyes of the banker as commodities. Now let us look at wages. Wages are here conceived as interest, so that labor-power stands for capital, which yields this interest. For instance, if the wages for one year amount to 50 pounds sterling, and the rate of interest is 5%, the annual labor-power is equal to a capital of 1,000 pounds sterling. The insanity of the capitalist mode of conception reaches its climax here. For instead of explaining the self-expansion of capital out of the exploitation of labor-power, the matter is reversed and the productivity of labor-power itself is this mystic thing, interest-bearing capital. In the second half of the 17th century this used to be a favorite conception (for instance with Petty) but it is used even nowadays in good earnest by vulgar economists and more particularly by German statisticians.*93
Unfortunately two disagreeable facts mar this conception. In the first place, the laborer must work, in order to secure this interest. In the second place, he cannot transform the capital-value of his labor-power into cash by transferring it. On the contrary, the annual value of his labor-power is equal to his average annual wages, and his labor has to make good to the seller of his labor-power this same value plus a surplus-value, the increment added by his labor. Under a slave system the laborer has a capital-value, namely his purchase price. And when he is rented out, the renter has to pay, in the first place, the interest on this purchase price, and must furthermore make good the annual wear and tear of the capital.
The forming of a fictitious capital is called capitalising. Every periodically repeated income is capitalised by calculating it on the average rate of interest, as an income which would be realised by a capital at this rate of interest. For instance, if the annual income is 100 pounds sterling and the rate of interest 5%, then these 100 pounds sterling would represent the annual interest on 2,000 pounds sterling, and these 2,000 pounds sterling are regarded as the capital-value of the legal title of ownership upon these 100 pounds sterling annually. For him who buys this title of ownership these 100 pounds sterling of annual income represent indeed the interest on his capital at 5%. All connection with the actual process of self-expansion of capital is thus lost to the last vestige, and the conception of capital as something which expands itself automatically is thereby strengthened.
Even when the certificate of indebtedness—the security—does not represent a purely fictitious capital, as it does in the case of state debts, the capital-value of such papers is nevertheless wholly illusory. We have seen previously in what manner the credit system creates associated capital. The papers are considered as titles of ownership, which represent this capital. The stocks of railroads, mines, navigation companies, and the like, represent actual capital, namely the capital invested and used in such ventures, or the amount of money advanced by the stockholders for the purpose of being used as capital in such ventures. This does not exclude the possibility that they may become victims of swindle. But this capital does not exist twofold, it does not exist as the capital-value of titles of ownership on one side and as the actual capital invested, or to be invested, in those ventures on the other side. It exists only in this last form, and a share of stock is merely a title of ownership on a certain portion of the surplus-value to be realised by it. A may sell this title to B, and B may sell it to C. These transactions do not alter anything in the nature of the case. A or B then have their title in the shape of capital, but C has his capital merely in the shape of a title on the surplus-value to be realised by the stock capital.
The independent movement of the value of these titles of ownership, not only of government bonds but also of stocks, adds weight to the illusion that they constitute a real capital by the side of that capital, or that title, upon which they may have a claim. For they become commodities, whose price has its own peculiar movements and is fixed in its own way. Their market value is determined differently from their nominal value, without any change in the value of the actual capital, which expands, of course. On the one hand their market value fluctuates with the amount and security of the yields, on which they have a claim. If the nominal value of a share of stock, that is, the invested sum originally represented by this share, is 100 pounds sterling, and the enterprise pays 10%, instead of 5%, then their market-value, other circumstances remaining the same, rises to 200 pounds sterling, so long as the rate of interest is 5%, for when capitalised at 5%, it now represents a fictitious capital of 200 pounds sterling. He who buys it for 200 pounds sterling receives a revenue of 5% on this investment of capital. If the success of the venture is such as to diminish the income from it, the reverse takes place. The market value of these papers is in part fictitious, as it is not determined merely by the actual income, but also by the expected income, which is calculated in advance. But assuming the self-expansion of the actual capital to proceed at a constant rate, or, where no capital exists, as in the case of state debts, the annual income to be fixed by law and otherwise sufficiently secured, the price of such securities rises and falls inversely as the rate of interest. If the rate of interest rises from 5% to 10%, then a security guaranteeing an income of 5 pounds sterling will represent only a capital of 50 pounds sterling. If the rate of interest falls from 5% to 2½%, then the same security will represent a capital of 200 pounds sterling. Its value is always but its capitalised income, that is, its income calculated on a fictitious capital of so many pounds sterling at the prevailing rate of interest. In times when there is a stringency of money on the market these securities will, therefore, fall in price for two reasons: First, because the rate of interest rises, and secondly, because they are thrown in large quantities upon the market for the purpose of getting ready cash. This drop in their price takes place independently of the fact, whether the income guaranteed to their owner by these papers is constant, as it is in the case of government bonds, or whether the self-expansion of the actual capital, which they represent, for instance in industrial enterprises, is subject to interruptions such as interfere with the process of reproduction. In this last eventuality the two causes of depreciation mentioned above are joined by a third one. As soon as the storm is over, the papers rise once more to their former level, unless they represent failures or swindles. Their depreciation in times of crisis serves as a potent means of centralising money.*94
To the extent that the depreciation or appreciation of such papers is independent of the movements of the value of actual capital represented by them, the wealth of the nation is just as great before as after their depreciation. "On October 23, 1847, the public funds and the canal and railroad stocks were already depreciated by 114,752,225 pounds sterling." So said Morris, the Governor of the Bank of England, in his testimony before the Committee on Commercial Distress, 1847-48. Unless this depreciation implied an actual stopping of production and of traffic on canals and rails, or a suspension of pending enterprises in the beginning stages, or a throwing away of capital in positively worthless ventures, the nation did not grow poorer by one cent through the bursting of this bubble of fictitious capital.
In all countries of capitalist production, there exists an enormous quantity of so-called interest-bearing capital, or moneyed capital, in this form. And accumulation of money-capital signifies to a large extent nothing else but an accumulation of such claims on production, an accumulation of the market-price, the illusory capital-value, of these claims.
A part of the banking capital is invested in these so-called interest-bearing papers. This is itself a portion of the reserve capital, which does not perform any function in the actual business of banking. The greater portion of these papers consists of bills of exchange, that is, promises to pay made by industrial capitalists or merchants. For the money lender these papers are interest-bearing, in other words, when he buys them, he deducts interest for the time which they still have to run. This is called discounting. It depends on the prevailing rate of interest, how much of a deduction is made from the sum for which the bill calls.
The last part of the capital of a banker consists of his money reserve in gold and notes. The deposits, unless tied up by agreement for a certain time, are always at the disposal of the depositors. They are in a state of continual fluctuation. But while one depositor withdraws his, another brings his in, so that the general average amount of deposits fluctuates little during periods of normal business.
The reserve funds of the banks, in countries with capitalist production, always express on an average the magnitude of the money existing in the shape of a hoard, and a portion of this hoard in its turn consists of papers, mere drafts upon gold, which have no value in themselves. The greater portion of the banking capital is, therefore, purely fictitious and consists of certificates of indebtedness (bills of exchange), government securities (which represent spent capital), and stocks (claims on future yields of production). And it should not be forgotten, that the money-value of capital represented by these papers in the strongboxes of the banker is itself fictitious, even of those which are checks for guaranteed incomes, such as public bonds, or titles on actual capital, like industrial stocks, and that this value is regulated differently than that of the actual capital, which they represent at least in part; or, when they stand for mere claims on the output of production, and not for capital, that the claim on the same amount is expressed in a continually changing fictitious money-capital. In addition to this it must be noted, that this fictitious capital represents largely, not his own capital, but that of the public, which makes deposits with him, either with or without interest.
Deposits are always made in money, in gold or notes, or in checks upon these. With the exception of the reserve fund, which is contracted or expanded in proportion to the requirements of actual circulation, these deposits are in fact always in the hands, on one side, of the industrial capitalists and merchants, whose bills of exchange are discounted with them, and who receive advances out of them; on the other side, they are in the hands of dealers in securities (exchange brokers), or in the hands of private parties, who have sold their securities, or in the hands of the government (in the case of treasury notes and new loans). The deposits themselves play a double role. On the one hand, as we have just mentioned, they are loaned out as interest-bearing capital and are not found in the cash boxes of the banks, but figure merely in their books as credits of the depositors. On the other hand they figure as such book entries to the extent that the mutual credits of the depositors in the shape of checks on their deposits are balanced against one another and so recorded. In this procedure it is immaterial, whether these deposits are entrusted to the same banker, who can thus balance the various credits against each other, or whether this is done in different banks, who mutually exchange checks and pay only the balances to one another.
With the development of the credit system and of interest-bearing capital all capital seems to double, or even treble, itself by the various modes, in which the same capital, or perhaps the same claim on a debt, appears in different forms in different hands.*95
The greater portion of this "money-capital" is purely fictitious. All the deposits, with the exception of the reserve fund, are merely credits placed with the banker, which however, never exist in deposit. To the extent that they serve in the Giro business, they perform the function of capital for the bankers, after these have loaned them out. They pay to one another their mutual checks upon the nonexisting deposits by balancing their mutual accounts.
Adam Smith says justly with regard to the role played by capital in the loaning of money: "Even in the money business the money is merely a check transferring from one hand to another such capitals as are not used by the owners. These capitals may be almost to any amount larger than the amount of money, which serves as an instrument of their transfer. The same pieces of money serve successively in many different loans, likewise in many different purchases. For instance, A lends to W 1,000 pounds sterling, with which W immediately buys from B 1,000 pounds sterling worth of commodities. Since B himself has no immediate use for this money, he lends the identical pieces of money to X, who immediately buys from C commodities worth 1,000 pounds sterling. In the same way and for the same reason C lends this money to Y, who again buys with it commodities from D. In this way the same pieces of gold or paper may serve in the course of a few days in the promotion of three different loans and three different purchases, each one of which has a value equal to the full amount of these pieces. What the three moneyed men, A, B and C have transferred to the three borrowers, W, X and Y, is the power to make these purchases. In this power consists both the value and the usefulness of these loans. The capital loaned out by these three moneyed men is equal to the value of the commodities that can be bought with it, and it is three times greater than the value of the money with which these purchases are made. Nevertheless all these loans may be perfectly safe, since the commodities bought with them by the different debtors are employed in such a way, that they will in time bring an equal value in gold or paper money with a profit to boot. And just as the same pieces of money may serve in the promotion of different loans to an amount exceeding their own value three times, or even thirty times, just so may they serve successively as means of return payment." (Book II, chapter IV.)
Since the same piece of money may perform different purchases, according to the velocity of its circulation, it may just as well perform the service of different loans, for the purchases take it from one hand to another, and a loan is but a transfer from one hand to another without the intervention of a purchase. To every seller his money represents the changed form of his commodities. Nowadays, when every value is expressed as the value of capital, it represents in the various loans different capitals, and this is but another way of saying that it can realise different commodity-values successively. At the same time it serves as a medium of circulation, in order to transfer the material capitals from hand to hand. In the transaction of loaning it does not pass from hand to hand as a medium of circulation. So long as it remains in the hands of the lender, it is in his hands not a medium of circulation, but the existing value of his capital. And in this form he transfers it when loaning it to another. If A had loaned the money to B, and B to C; without the intervention of purchases, then the same money would not represent three capitals, but only one, only one capital-value. How many capitals it actually represents depends on the number of times in which it performs the service of the embodied value of different commodity-capitals.
The same thing which Adam Smith says of loans in general applies also to deposits, since these are merely another name for loans, which the public gives to the bankers. The same pieces of money may serve as instruments for any number of deposits.
"It is undoubtedly true, that the 1,000 pounds sterling, which some one deposits today with A, are again issued tomorrow and become a deposit with B. The day after, paid away by B, they may form a deposit with C, and so forth infinitely. The same 1,000 pounds sterling may, therefore, by a number of transfers, multiply themselves into an absolutely indeterminable sum of deposits. It is, therefore, possible, that nine-tenths of all the deposits in the United Kingdom have no existence, save for the entries in the books of bankers registering them, who have to square accounts in due time....Such was the case in Scotland, where the currency of money never exceeded 3 million pounds sterling, while the deposits amounted to 27 millions. Unless a general run be made on the banks on account of these deposits, the same 1,000 pounds sterling, traveling backwards, might easily balance an equally indeterminable sum. Since the same 1,000 pounds sterling, with which some one pays today his debt to some dealer, may tomorrow settle this dealer's debt to some merchant, and next day the debt of the merchant to his bank, and so forth without end, the same 1,000 pounds sterling may also wander from hand to hand and from bank to bank, and balance any conceivable amount of deposits." (The Currency Question Reviewed, pp. 162, 163.)
Just as everything is duplicated and triplicated in this credit system and commuted into a mere fiction, so the same applies to the "reserve fund," where one would at last hope to grasp something solid.
Listen once more to Mr. Morris, the Governor of the Bank of England: "The reserves of the private banks are in the hands of the Bank of England in the form of deposits. The first effects of an export of gold seem to strike only the Bank of England; but it would just as well influence the reserves of the other banks, since it means an export of a part of the reserves, which they have deposited in our bank. In the same way it would influence the reserves of all provincial banks." (Commercial Distress 1847-48.) Ultimately, then, the reserve funds actually dissolve themselves into the reserve fund of the Bank of England.*96
However, this reserve fund again has a double existence. The reserve fund of the banking department of the Bank of England is equal to the excess of the notes, which the Bank is authorised to issue, over the notes in circulation. The legal maximum of the note issue is 14 million pounds sterling (for which no metallic reserve is required; it is the approximate amount owed by the state to the Bank) plus the amount of the precious metals in the Bank. If the supply of precious metals in the Bank amounts to 14 million pounds sterling, the Bank can issue 28 millions in notes, and if 20 millions of these are in circulation, the reserve fund of the banking department is 8 million pounds sterling. These 8 million pounds sterling are, in that case, legally the banking capital at the disposal of the Bank, and at the same time the reserve fund for its deposits. If an exportation of gold takes place now, by which the supply of precious metals in the Bank is reduced by 6 millions—notes to this amount must be destroyed at the same time—then the reserve of the banking department would fall from 8 millions to 2 millions. On the one hand, the Bank would raise its rate of interest considerably; on the other hand, the banks having deposits with it, and the other depositors, would observe a large decrease of the reserve fund covering their own credits in the Bank. In 1857 four of the largest stock banks of London threatened to call in their deposits, and thereby bankrupt the banking department, unless the Bank of England would secure a "government script" suspending the Bank Acts of 1844.*97
In this way the banking department might fail, while a certain number of millions (for instance, 8 millions in 1847) are held in its issue department to secure the convertibility of its circulating notes. But this security is once more illusory.
"The greater portion of the deposits, for which the bankers themselves have no immediate demand, passes into the hands of the bill brokers, who in return give to the banker security for his loan by means of commercial bills, which they have already discounted for people in London or in the provinces. The bill broker is responsible to the banker for the return payment of this money at call; and these transactions are of such an enormous volume, that Mr. Neave, the present Governor of the Bank of England, said in his testimony: We know that one broker had 5 millions, and we have reason to assume, that another had between 8 and 10 millions; another had 4, another 3½, a third more than 8. I speak of deposits with the brokers." (Report of Committee on Bank Acts, 1857-58, p. 5, section 8.)
"The London bill brokers...carried on their enormous business without any reserve in cash; they relied upon the incomes from the successively due bills, or when it came to the worst, upon their power to secure from the Bank of England loans on depositing bills discounted by them."—Two firms of bill brokers in London suspended payments in 1847; both resumed business later. In 1857 they suspended again. The liabilities of one of these firms amounted in 1847 in round figures to 2,683,000 pounds sterling with a capital of 180,000 pounds sterling; its liabilities in 1857 were 5,300,000 pounds sterling, while its capital apparently was not more than one-quarter of what it had been in 1847. The liabilities of the other firm were both times between 3 or 4 millions, while its capital amounted to no more than 45,000 pounds sterling. (Ibidem, p. XXI, section 52.)
Notes for this chapter
"The laborer has a value as capital, which is found by considering the money-value of his annual wages as income from interest...By capitalising the average daily wages at 4% we find the average value of an agricultural laborer of the male sex to be: German Austria, 1500 Thalers; Prussia, 1500; England, 3750; France, 2000; Interior Russia, 750 Thalers." Von Reden, Vergleichende Kulturstatistik. Berlin, 1848, p. 134.
[Immediately after the February Revolution, when commodities and securities were extremely depreciated and utterly unsaleable, a Swiss merchant in Liverpool, Mr. R. Zwilchenbart—who told my father about it—cashed all his belongings traveled with his cash to Paris and went to Rothschild, offering to do a joint business with him. Rothschild looked at him fixedly, rushed towards him, caught both his shoulders in his hands and asked: "Have you money in your possession?" "Yes, Baron." "Then you are my man." And both of them made a great haul.—F. E.]
[This duplication and triplication of capital has developed considerably further in recent years, for instance through financial trusts, which already occupy a column of their own in the London bank reports. A society is organised for the purchase of a certain class of interest-bearing papers, say, of foreign government bonds, English municipal or American public bonds, railroad stocks, etc. The capital, for instance, 2 million pounds sterling, is secured by stock subscriptions. The Board of Directors buys the desired values up, or speculates more or less actively in them, and distributes the annual amounts of interest as dividends among the stockholders, after deducting the expenses. Furthermore, some stock companies have adopted the custom of dividing the ordinary shares into two classes, preferred and deferred. The preferred receive a fixed rate of interest, say 5%, provided that the total profit permits it; if there is anything left after that, the deferred get it. In this way the "solid" investment of capital is more or less separated by preferred shares from the speculation with the deferred shares. Since a few large enterprises have been unwilling to adopt this new mode, the expedient has been resorted to of organising new companies, that invest one or several millions of pounds sterling in shares of the first company and then issue new shares to the amount of the nominal value of the first shares, but make half of them preferred and the other half deferred. In this case the original shares are doubled, by serving as a basis for a new issue of shares.—F. E.]
To what extent this has since increased is proved by the following official tabulation of the bank reserves of the fifteen largest London banks in November, 1892, taken from the Daily News of December 15, 1892:
Of this sum of almost 28 millions of reserve, at least 25 millions are deposited in the Bank of England, and at most 3 millions of cash in the strongboxes of the 15 banks themselves. But the cash reserve of the banking department of the Bank of England never exceeded 16 millions during that same November of 1892.—F. E.]
The suspension of the Bank Acts of 1844 permitted to the Bank to issue any quantity of bank notes regardless of any backing by the gold reserve in its possession; to create, in this way, an arbitrary quantity of fictitious money-capital made of paper, and use it for the purpose of making loans to banks, exchange brokers, and through them to commerce.
Part V, Chapter XXX.
End of Notes
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