Tooke says the following about credit in general: " Credit, in its simplest expression, is the well or ill-founded con- fidence, which induces one man to entrust to another a certain amount of capital, in money or in commodities estimated at a certain value, which amount is always payable after the lapse of a definite time. Where the capital is loaned in money, that is, in bank notes, or in a cash credit, or in a check upon some correspondent, an addition of so and so many per cent, upon the returnable amount is made for the use of the capital. With commodities, whose money value has been agreed upon by the parties concerned, and whose transfer constitutes a sale, the stipulated sum, which is to be paid, includes a compensation for the use of the capital 472 Capitalist Production.
and for the risk assumed until the time of payment. Writ- ten agreements to pay on definite days are generally given for such credits. And these transferable obligations, or prom- ises, form the means by which the lenders, when they find an opportunity to use their capital, either in the shape of money or commodities, are generally enabled to borrow or buy more cheaply, their own credit being strengthened by that of the second name upon the bill of exchange." Inquiry into the Currency Principle, (p. 87.)
Ch. Coquelin, Du Credit et des Banques dans V Industrie. Revue des deux Mondes, 1842, tome 31: "In every country the majority of the credit transactions takes place in the circle of the industrial relations themselves...the pro- ducer of the raw material advances it to the capitalist, who works it up, and receives from him a promise to pay on a certain day. The manufacturer, having completed his share of the work, in his turn advances his product on similar con- ditions to another manufacturer, who has to manipulate it farther, and in this way credit extends more and more, from one to the other, down to the consumer. The wholesale dealer gives to the retail dealer commodities on credit, while he re- ceives himself credit from a manufacturer or commission agent. All borrow with one hand and lend with the other, sometimes money, but more frequently products. In this manner an incessant exchange of credits, combining and crossing in all directions, takes place in the industrial rela- tions. The development of credit consists precisely in the multiplication and growth of these mutual credits, and here is the real seat of its power."
The other side of the credit system is connected with the development of the money trade, which, of course, keeps step under capitalist production with the development of the trade in commodities. We have seen in the preceding part (chapter XIX), how the care of reserve funds of business jnen, the technical operations of receiving and issuing money, of international payments, and thus of the bullion trade, are concentrated in the hands of the money traders. Borrow- ing and lending money becomes their particular business.
Credit and Fictitious Cap-ital. 473 They step as middlemen between the actual lender and the borrower of capital. Generally speaking, the banking busi- ness on this side consists of concentrating the loanable money- capital in the banker's hands in large masses, so that in place of the individual money lender the bankers face the industrial capitalists and commercial caj)italists in the capacity of rep- resentatives of all money lenders. They become the general managers of the money-capital. On the other hand, they con- centrate tlie borrowers against all lenders, and borrow for the entire world of commerce. A bank represents on one hand the centralisation of money-capital, of the lenders, and on the other the centralisation of the borrowers. Its profit is generally made by borrowing at a lower rate of interest than it loans.
The loanable capital, of which the banks dispose, flows to them in various ways. In the first place, since they are the cashiers of the industrial capitalists, there is concentrated into their hands the money-capital, which every producer and merchant must have as a reserve fund, or which he receives in payment. These funds are thus converted into loanable capital. In this way the reserve fund of the commercial world, being concentrated into a common treasury, is reduced to its necessary minimum, and a portion of the money-capital, .which would otherwise slumber as a reserve fund, is loaned and serves as interest-bearing capital. In the second place, the loanable capital of the banks is formed by the deposits of the money-capitalists, who entrust tliem with the business cf loaning it. Furthermore, with the development of the bank system, and particularly as soon as they pay interest on de- posits, the money savings and the temporarily unemployed money of all classes are deposited wnth them. Small amounts, each by itself incapable of acting in the capacity of money- capital, are combined into large masses and thus form a money power. This aggregation of small amounts must be distin- guished as a specific effect of the bank system from its intermediate position between the money-capitalists proper and the borrowers. Finally, the revenues, which are but grad- ually consumed, are also deposited with the banks.
474 Capitalist Production.
The loan is made (we refer here only to the commercial credit in the strict meaning of the term) by discounting bills of exchange, that is, by converting them into money before they come due, and by advances in various forms: direct ad- vances on personal credit, Lombard loans on interest-bearing papers, government papers, stocks of all kinds, furthermore advances on bills of lading, dock warrants, and other certified titles of ownership in commodities, and by overdrawing on their deposits, etc.
The credit given by a banker may assume various forms, for instance, that of exchanges on other banks, checks on them, opening of credit in the same way, finally, in the case of banks entitled to issue notes, the bank notes of the bank itself. A bank note is nothing but a draft upon the banker, payable at any time to the bearer, and substituted by the banker for private drafts. This last form of credit appears particularly important and striking to the layman, first, be- cause this form of credit money steps from the mere com- mercial circulation into the general circulation and serves as money there, and in tlie second place, because in most coun- tries the principal banks issuing notes represent a queer mix- ture of national and private banks and thus have actually the national credit to back them up and give to their notes the character of a more or less legal tender, for in this case it is apparent, that the thing which the banker handles is credit itself, since a bank note stands only for a circulating token of credit. But the banker also deals in all other forms of credit, even when he advances cash money deposited with him. In fact, a bank note simply represents the coin of wholesale trade, and it is always the deposit, which carries the most weight with banks. The best proof of this is furnished by the Scotch banks.
The special credit institutions, and the particular forms of banks, do not require any further consideration for our pur- poses.
The banks have a twofold business...1) To col- lect capital from those, who have no immediate use for it, and Credit and Fictitious Capital. 475 to distribute it and transfer it to otherSj who can use it. 2) To receive deposits from the incomes of their customers and to pay them whatever amount they may require of this deposit for the expenses of consumption. The former is circulation of capital^ the latter circulation of currency. — The one is a concentration of capital on one side, and its distribution on the other; the other is a management of the circulation for the local needs of the vicinity. — Tooke, Inquiry into the Cur- rency Principle, p. 36, 37. — We shall revert to this passage later, in chapter XXVIII.
Reports of Committees. Vol. VIII., Commercial Distress. Vol. II., Part I., 1847-48, Minutes of Evidence. (Sub- sequently quoted as Commercial Distress, 1847-48.) In the forties, when discounting bills of exchange in London, bills of exchange of one bank were often drawn on another instead of bank notes. (Testimony of J. Pease, provincial banker, Xo. 4036 and 4656.) According to the same report, the bankers were in the habit of giving such bills of exchange in payment to their customers, as soon as money grew tight. If the party receiving them demanded bank notes, he had to dis- count this bill of exchange once more. This amounted to a privilege of making money for the banks. Messieurs Jones, Lloyd and Co., made payments in this way " since time im- memorial," as soon as money was scarce and the rate of interest above 5%. The customer was glad to get such banker's bills, because bills of Jones, Lloyd and Co. could be easier dis- counted than his own; these bills often passed through twenty to thirty hanxis. (Ibidem, Xo. 901 to 904, 905.)
All these forms serve to make a claim to payments transfer- able.— There is scarcely one form, which credit may assume, in which it has not at times performed the functions of money; W'hether this form is that of a bank note, or of a bill, or of a check, the process is essentially the same and the result is es- sentially the same. Fullarton, On the Regulation of Cur- rencies, 2d edition, London, 1845, p. 38. — Bank notes are the small currency of credit, p. 51. — The following is from J. W. Gilbart. The History and Principles of Banking, London, 1834: The capital of a bank consists of two parts, the invested capital and the bank- ing capital, which is borrowed (p. 11 et seq.). The banking capital, or borrow^ed capital, is maintained in three ways: 1) 476 Capitalist Production.
through the acceptance of deposits; 2) through the issuing of the bank's own notes; 3) through the drawing of bills. If some one is willing to loan me 100 p.st. for nothing, and I loan these 100 p.st. to some one else at 4%, I shall make 4 p.st. by this transaction in the course of one year. Likewise if some one is willing to accept my promise to pay and to re- turn it to me at the end of the year and to pay me 4% for it, just as though I had given him 100 p.st. by this transaction, I make 4 p.st. by it; and again, if a man in a country town brings me 100 p.st. on the condition that I shall pay this amount to some third person in London after the lapse of 21 days, all the interest I may draw in the meantime on this money will be my profit. This is an objective summary of the operations of a bank and of the way in which a banking capital is created by deposits, bank notes and bills of ex- change (p. 117). The profits of a banker are generally pro- portionate to the amount of his borrowed or banking capital. In order to determine the actual profit of a bank, the interest on the first investment of capital must be deducted from the gross profits. The remainder is the banking profit (p. 118).
The advances of a banker to his customers are made with flic money of other people (p. lJf.6). Precisely those bankers, who do not issue any bank notes, create a banking capital by discounting bills of exchange. They increase their deposits by their discounting operations. The London banks discount only for those firms, that keep a deposit in account with them (p. 119). A firm discounting bills of exchange in its bank and having paid interest upon the whole amount of these bills must leave at least a portion of this amount in the hands of the bank without receiving any interest on it. In this way the banker receives a higher rate of interest than the current one on the advanced money and creates for himself a banking capital by means of the surplus remaining in his hands, (p. 120.) — Economising of reserve funds, deposits, checks: The deposit banks economise by a transfer of credit accounts the use of the circulating medium and transact business of a large volume with a small amount of actual money. The money thus released is employed by the banker in making advances to his customers by means of discounts, etc. Hence tlie trans- fer of credit enhances the effectiveness of the deposit system (p. 123). It is immaterial, whether the two customers, that 1 Credit and Fictitious Capital. 477 deal with one another, keep their accounts with the same or with dilferent bankers. For the bankers exchange their checks among themselves in the Clearing House. By means of trans- fers the deposit system might be extended to such a degi-ee that it would do away entirely with the use of metal money. If every one were to keep a deposit account in the bank and to make payments by means of checks then such checks would be the only circulating medium. In this case the assumption would have to be that the bankers hold the money in their hands, otherwise the checks would have no value (p. 124). The centralisation of the local transactions in the hands of the banks is promoted, 1 ) by branch banks. The provincial banks have branch establishments in the smaller towns of their dis- trict the London banks in the different quarters of the city. 2) By agencies. Every provincial bank has its agent in London, in order to pay its notes or bills there and to re- ceive money, which is paid down by inhabitants of London for the account of people living in the provinces, (p. 127.) Every banker gathers in the notes of the others and holds them. In every large city they meet once or twice a week and exchange their notes. ■ The balance is paid by a check on London, (p. 13-1.) The purpose of banks is to facilitate busi- ness. Whatever facilitates business, facilitates also specula- tion. Business and speculation are so closely linked in some cases, that it is difficult to tell where business stops and spec- ulation begins. AVherever there are banks, capital can be ob- tained more easily and cheaply. The cheapness of capital promotes speculation, just as the cheapness of beer and meat promotes gluttony and drunkenness (p. 137, 138). Since the banks issuing their own notes always pay in these notes, it may seem as though their discount business were transacted exclu- sively with the capital made in this way, but this is not so. A banker may very well pay all the bills discounted by him with his own notes, and yet nine-tenths of the bills in his posses- sion may represent actual capital. For while he may have given only his owti paper money for these bills, it need not stay in the circulation until these bills become due. The bills may be running for three months, while the notes may return in three days. (p. 172.) The overdrawing of accounts by customers a regular business practice. This is indeed the purpose, for which cash credit is granted. Cash credits are 47^ Capitalist Production.
not granted on personal security, but on deposit of collateral papers (p. 174, 175). A capital advanced on bonded wares has the same effect as though it had been advanced in dis- counting bills. If a man borrows 100 p.st on his goods as a security, it is the same as though he had sold them for a bill of exchange of 100 p.st. and discounted this bill with his banker. But this advance enables him to hold his goods over for a better condition of the market and to avoid sacrifices, which he would have had to make, in order to obtain money for urgent purposes (p. 180, 181).
The Cun'ency Question Reviewed, etc., p. 62, 63: It is here indisputably true that the 1,000 p.st. which I deposit to-day with A are issued to-morrow and deposited with B. The day after to-morrow it may be issued once more by B and form a deposit with C, and so forth infinitely. The same 1,000 p.st. of money may, therefore, multiply themselves into an absolutely indeterminable sum of deposits by a series of transfers. Ilence it is possible that nine-tenths of all de- posits in England may have no other existence hut that in the entries of the banker's boohs, of whom every one stands good for his part of them. In Scotland, for instance, the money in circulation (and mostly paper money at that) never exceeds 3 million p.st., while the deposits amount to 27 millions. So long as no general and sudden demand is made for the return of the deposits (a run on the bank), the same 1,000 p.st., traveling backward, may balance an equally indeterminable sum with the same facility. Since the same 1,000 p.st., with which I balance to-day my debt with some business man, may balance to-morrow his debt with some otlier business man, and the day after to-morrow balance this man's account, and so forth infinitely, it follows that the same 1,000 p.st. may pass from hand to hand and from bank to bank and balance any imaginable sum of deposits.
[We have seen, that Gilbart knew even in 1834 that " what- ever 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 mere, then more and more of such advances are taken, and Credit and Fictitious Capital. 479 in tlie same proportion increases the temj)tation to manufac- ture 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, Avhich had crushed English industry almost without interruption since 1837, be- gan 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 in- dustry. " 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 weav- ing 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 build- ing of railroads was undertaken. Here the longing of manu- facturers 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.
480 Capitalist Production.
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 If to 2|%, 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 3^% 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? Antl why should not the manufacturer himself pocket the doubla 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 ad- vances, 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 Ijankin^ discount, which had Credit and Fictitious CaHtal. 481 still been 3 to 3^% 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 6^ 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 1%, 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 sev-~ eral 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 1814. In tliis 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 re- sumed, 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.]