It is a basic principle of capitalist production, that the money, as an independent form of value, must stand opposed to commodities, or that exchange-value must assume an in- dependent form in money, and this is possible only by making of one definite commodity the material, whose value measures all other commodities, so that it thus becomes the general com- modity, the commodity par excellence as distinguished from all other commodities. This must become evident in two respects, particularly among capitalistically developed nations, who substitute other things for large masses of money, partly through credit operations, partly through credit money. In times of stringency, when credit shrinks or ceases entirely,, money suddenly becomes the only means of payment and the only true existence of absolute value as opposed to all other commodities. Hence a universal depreciation of commodities, difficulty or even impossibility of transforming them into money, that is, into their own purely phantastic form. In the second place, credit money itself is but money in so far as it absolutely takes the place of actual money to the amount of its nominal value. With the export of gold its own con- vertibility becomes problematical, that is, its identity with Money-Capital and Actual Capital. 607 actual money. Hence forcible measures, raising of the rate of interest, etc., for the purpose of safeguarding the conditions of this convertibility. This may be carried more or loss to excess by mistaken legislation, resting upon false theories of money and enforced upon the nation by the interests of the money dealers, of Overstone and his like. The basis, however, is given with the basis of the mode of production itself. A depreciation.of credit money (not to mention its imaginary depreciation) would unsettle all existing relations. The value of commodities is therefore sacrificed, for tlie purpose of safe- guarding the phantastic and independent existence of tiiis value in money. As money-value it is secured only so long as money itself is secure. For the sake of a few millions of money many millions of commodities must therefore be sacrificed. This is inevitable under capitalist production and constitutes one of its beauties. In former modes of pro- duction this does not occur, because on the narrow basis, upon w^hich they move, neither credit nor credit money can develop to any extent. So long as the social character of labor appears as the money-existence of commodities, and thus as a thing outside of actual production, money crises are inevitable, either independently of crises or intensifying them. On the other hand it is obvious that, so long as the credit of a bank is not shaken, it will alleviate the panic in such cases by in- creasing the credit money, and intensify it by contracting this money. All history of modern industry shows that metal would indeed be required only for the balancing of interna- tional commerce, whenever its equilibrium is disturbed mo- mentarily, if only national production were properly organ- ised. That the inland market does not need any metal even now is shown by the suspension of cash payments of the so- called national banks, that resort to this expedient whenever extreme cases require it as the sole relief.
In the case of two individuals it would be ridiculous to say that both of them have a balance of payment against one another in their mutual transactions. If they are mutually creditors and debtors of one another, it is evident that to the extent that their claims do not balance, one must be the 6o8 Capitalist Production. P creditor and the other the debtor for the remainder. But in the case of nations this is by no means so. And that it is not so is acknowledged by all economists through the statement, that the balance of payment may be for or against a nation, even if its balance of trade must ultimately be settled. The balance of payment differs from the balance of trade in so far as payment is a balance of trade which must be settled at a definite period. What crises accomplish is the crowding of the difference between the balance of payment and the balance of trade into a short time; and the definite conditions, which develop in the nation suffering from a crisis and facing the term when pa^Tnent becomes due, carry with them such a contraction of the time of settlement. These conditions are, first the shipping away of precious metals; then the throwing away of consigned commodities; the exportation of com- modities for the purpose of getting rid of them or of securing loans on them in the home market; the rising of the rate of interest, the calling in of credits, the falling of securities, the selling out of foreign securities, the attraction of foreign cap- ital for investment in these depreciated securities, and finally bankruptcy, which settles a mass of obligations. While this is going on, metal is often sent for some time into the country, where a crisis has broken out, because bills of exchange on it are unsafe and payment is best made in metal. This is furtlier explained by the fact that in the case of a country like Asia all capitalist nations are generally direct or indirect debtors of it at the same time. As soon as these different circumstances exert their full effect upon tlie other involved nation, it likewise begins its export of gold and silver on ac- count of the expiration of the date of payment, and the same phenomena are repeated.
In commercial credit the interest, being the credit price as distinguished from the cash price, enters only in so far into the price of commodities as the bills of exchange have a longer running time than the ordinary. Otherwise it does not. And this is explained by the fact that every one takes credit with one hand and gives it with the other. [This does not agree with my experience. F. E.] But so far as discount Money-Capital and Actual Capital. 609 in this form enters into consideration here, it is not regulated by this commercial credit, but by the money-market.
If the demand and supply of money-capital, which deter- mine the rate of interest, were identical with the demand and supply of actual capital, as Overstone maintains, then the interest would be simultaneously high or low according to dif- lerent commodities, or different phases of the same commodity (raw material, partly finished product, finished product). In 1844 the rate of interest of the Bank of England fluctuated between 4% from January to September to 2-k and 3% from November to the end of the year. In 1845 it was 2^, 2f, 3% from January to October, and between 3 and 5% during the remaining months. The average price of fair Orleans cotton was 6^ d. in 1844 and 4| d. in 1845. On March 3, 1844, the cotton supply in Liverpool was 627,042 bales, and on March 3, 1845, it was 773,800 bales. To judge by the low price of cotton, the rate of interest should have been low in 1845, and it was indeed for the greater part of this time. But to judge by tlie yarn the rate of interest should have been high, for the prices were relatively and the profit absolutely high. From cotton at 4 d. per pound a yarn could be spun in 1845 with a spinning cost of 4 d. (No. 40 good second mule twist), or a total cost of 8 d. to the spinner, which he could sell in September and October 1845 at 10^ or 11^ d. per pound. ( See the testimony of Wylie farther on. ) This whole question may be decided by the following con- siderations: A supply and demand of loan capital would be identical with a demand and supply of capital in general (although this last phrase is absurd; for the industrial or commercial capi- talist a commodity is a form of his capital, yet he never asks for capital as such, but only for this particular commodity as such, buys and sells it as a commodity, corn or cotton, regard- less of the role which it has to play in the rotation of his capital), if there were no money lenders, and if in their stead the lending capitalists were in possession of machinery, raw materials, etc., which they would rent or loan just as bouses are now, to the industrial capitalists, who are them- 2M 6io Capitalist Production.
selves part owners of these things. Under such circumstances the supply of loan capital would be identical wdth the supi)]y of elements of production for the industrial capitalist, and of commodities for the merchant. But it is evident, that then the division of profit between the lender and borrower would depend primarily upon the proportion, in which this capital is loaned and in which it is the property of the one wdio employs it.
According to Mr. Weguelin (B. A. 1857) the rate of interest is determined by " the mass of unemployed capi- tal" (252); it is ''but an index of the mass of unemployixl capital seeking investment" (271); later this unemployed capital becomes a "floating capital" (485) and by this he means " notes of the Bank of England and other means of circulation in the country, for instance the notes of provincial l)anks and the coins existing in the country...I in- clude in the floating capital also the reserves of the banks " (502,503), and later he includes also gold bullion (503). Thus the same Mr. Weguelin says that the Bank of England has a great influence upon the rate of interest in times, when " we" (the Bank of England) actually have the greater por- tion of the unemployed capital in our hands (1198), while according to the above testimony of Mr. Overstone the Bank of England " is no place for capital. " Mr. Weguelin further says: " In my opinion the rate of discount is regulated by the quantity of the unemployed capital in the country. The quantity of unemployed capital is represented by the reserve, of the Bank of England, which is in fact a metal reserve.
Hence when the metal hoard is reduced, it reduces the quantity of unemployed capital in the country and conse- quently raises the value of the remaining quantity. " (1258.) J. Stuart Mill says, 1102: " The Bank is compelled, in order to keep its banking department solvent, to do its utmost to fill the reserve of this department, hence as soon as it finds that a drain begins, it must secure its reserve and either re- duce its discounts or sell securities. " — The reserve, so far as only the banking department is concerned, is a reserve for the deposits only. According to the Overstones the bank- Money-Capital and Actual Capital. 6ii ing department is supposed to act only as a banker, without regard to any ^' automatic " issue of notes. But in times of actual stringency this institution, independently of the reserve of the banking department, which consists only of notes, keeps a sharp eye on the metal reserve, and nmst do so, if it would not fail. For in proportion as the metal reserve dwindles, disappears also the reserve of bank notes, and no one should know this better than Mr. Overstone, who has so wisely ar- ranoed this by his Bank Acts of 1844.
ClTAPTEli XXXIII.
THE CURRENCY UNDER THE CREDIT SYSTEM.
" The great regulator of the velocity of circulation is credit. This explains, why a sharp stringency in the money- market generally coincides with a full circulation." (The Currency Question Reviewed, p. 65.) This is to be taken in a double sense. On one hand all methods, which save cur- rency, are based upon credit. On the other hand, take, for instance, a 500 pound note. A gives it today to B in payment for a bill of exchange; B deposits it on the same day in his bank; his banker discounts with it on the same day a bill of exchange for C; C pays it to his bank, the bank gives it to the bill broker as a loan, etc. The velocity with which this note circulates here in purchases and sales is promoted by the velocity with which it always returns to some one in the form of a deposit and passes over to some one else in the form of a loan. The mere economising of the currency ap- pears most highly developed in the Clearing House, the mere exchange of due bills of exchange, and the function of money preferentially as a means of payment for balancing mere remainders. But the existence of these bills rests itself upon credit, which the industrials and merchants mutually give to each other: If this credit declines, so does the number 6i2 Capitalist Production.
of bills, particularly of long time ones, and consequently also the effectiveness of this method of balancing accounts. And this economy, which consists in the elimination of money from the transactions, and which rests entirely upon the function of money as a means of payment, which in its turn rests again upon credit, can be only of two kinds (aside from the more or less developed technique in the concentration of these pay- ments): Mutual claims of indebtedness, represented by bills of exchange or checks, are balanced either by the same banker, who merely transcribes the claim from the account of one to that of another, or by different bankers squaring accounts against each other. -^^^ The concentration of 8 to 10 million bills of exchange in the hands of one bill broker, such as the firm of Over end, Gurney & Co., was one of the principal means of expanding the scale of these balances locally. By this economy the ef- fectiveness of the currency is increased, so far as a smaller quantity of it is required for the mere balancing of ac- counts. On the other hand the velocity of the money circulat- ing as currency (by which it is likewise economised) depends entirely upon the flow of purchases and sales, or also on the concatenation of payments, so far as they are made suc- cessively in money. But credit promotes and increases the velocity of currency. A single piece of money, for instance, may perform only five rotations, and remains for a certain time in each hand, as a mere medium of circulation, without the intervention of credit, when A, its original o^vner, buys from B, then B from C, then C from D, then D from E, then E from E, that is, when its transition from one hand to another is due only to actual sales and purchases. But when B deposits the money received from A in his bank and his banker issues it in the discounting of bills to C, and he buys ^"'Average number of days, during which a bank note remained in circulation: 1798? 236 209 31 22 1846 79 71 34 12 8 1856 70 58 27 9 7 Tabulation made by Marshall, Cashier of the Bank of England, in Report on Bank Acts, 1857, II, Appendix, p. 301-302.
Currency Under the Credit System. 6i o from J), and D deposits it in his bank, and his banker lends it to E, who buys from F, then even its velocity as a mere medium of circulation (means of purchase) is promoted by several credit operations: the depositing of this money by B in his bank, the discounting of his banker for C, the depositing of D in his bank, and the discounting of this banker for E; four credit operations. Without these credit operations the same piece of money would not have performed five purchases suc- cessively in a given time. The fact that it changed hands without the promotion of actual sales and purchases, by de- posits and discounts, has here accelerated its change of hands in the series of actual transactions.
We have seen previously, that one and the same bank note may be a deposit in different banks. It may also form dif- ferent deposits in the same bank. The banker discounts with the note, which A has deposited, the bill of B, and B pays it over to C, who deposits the same note in the same bank that issued it.
We have already demonstrated in the discussion of the simple circulation of commodities (Volume I, Chapter III, 2), that the mass of the actually circulating money, assuming the velocity of currency and the economy of payments to be given, is determined by the prices of commodities and the mass of transactions. The same law rules the circulation of notes.
In the following table, the annual averages of the notes of the Bank of England are set down, so far as they were in the hands of the public, namely the amounts of 5 and 10 pound notes, those of 20 to 100 pound notes, and those of the larger notes between 200 and 1000 pounds sterling; together with the percentages of the total circulation supplied by each one of these classes. The amounts stand for thousands, the last three figures being left out.
YEAR NOTES % P. NOTES % P. NOTES % TOTALS 6i4 Capitalist Production.
YEAR NOTES % P. NOTES % P. NOTES % TOTALS (B. A. 1858, p. I, TI.) The total mass of circulating bank notes has, therefore, positively decreased from 1844 to 1857, although the commercial business had more than doubled, as indicated by exports and imports. The smaller bank notes of 5 and 10 pounds sterling increased, as the table shows, from 9,263,000 in 1814 to 10,659,000 pounds sterling in 1857. And this took place simultaneously with the very heavy increase in the gold circulation of that time. On the other hand, there was a decrease of the notes of higher de- nominations (200 to 1000 pounds sterling) from 5,856,000 in 1852 to 3,241,000 pounds sterling in 1857, a decrease of more than 2^ millions. This is explained as follows: " On June 8, 1854, the private bankers of London permitted the stock banks to take part in the erection of the Clearing House, and soon after that the final clearing was established in the Bank of England. The daily balances were settled by transcribing them on the accounts, which the different banks ■ keep in the Bank of England. By the introduction of this system the notes of high denomination, which the banks formerly used for balancing their mutual accounts, have become superfluous." (B. A. 1858, p. V.)
To what a small minimum the use of money in wholesale trade has been reduced, may be seen in the table published in Volume I, Chapter III, page 157, footnote 1, which was furnished to the Committee on Bank Acts by Morrison Dillon & Co., one of the largest of those London firms, from whom a small dealer can buy his entire stock of commodities of all kinds.
According: to the testimony of W Xewmarch before the Currency Under the Credit System. 615 B. A. 1857, ISTo. 1741, still other circumstances contributed to the economy in currency: The penny postage, the railroads, the telegraphs, in short, the improved means of communica- tion; so that England can now carry on a five to six times larger business with about the same circulation of bank notes. It is also declared to be due to a marked degree to the withdrawal of the notes of a higher denomination than 10 pounds sterling from the circulation. This appears to him as a natural explanation for the fact that in Scotland and Ireland, where also one pound notes circulate, the circulation of notes has risen by about 31% (1747). The total circulation of bank notes in the United Kingdom, including the one pound notes, is said to be 39 millions (1749). The gold circulation 70 millions (1750). In Scotland the circulation of notes was 3,120,000 pounds sterling in 1834; 3,020,000 pounds sterling in 1844; and 4,050,000 pounds sterling in 1854 From these facts alone it is evident, that it lies by no means with the banks issuing notes to increase the number of circulating notes, so long as these notes are at all times ex- changeable for money. [Inconvertible bank notes are not taken into consideration at all here; inconvertible bank notes can become universal means of circulation only under condi- tions, in which they are actually backed up by national credit, as is the case of Russia at present. In that case they fall under the laws of the inconvertible national paper money, which have been developed already in Volume I, Chapter III, 2, c. Coin and Symbols of Value. — F. E.]
The quantity of circulating notes is regulated by the re- quirements of commerce, and every superfluous note wanders back immediately to the issuing party. Since in England only the notes of the Bank of England circulate universally as the legal means of payment, we may neglect at this point the slight and merely local circulation of the provincial banks.
In B. A. 1858 Mr. Neave, Governor of the Bank of England testifies: No. 947. Question: " Whatever measures you may take, the amount of notes, you say, remains the same, that is, about 20 million pounds sterling? " — Answer: 6i6 Capitalist Production.
" In ordinary times the wants of the public seem to require about 20 million pounds sterling." — At certain periodically recurring times each year this is increased by one or one and half millions. If the public needs more, they can always, as I said, get them from the Bank of England." — 948. "You said that during the panic the public did not want to allow you to reduce the amount of the notes; will you state your reasons? " — " In times of panic the public, it seems to me, has full power to secure notes; and of course, so long as the Bank has any obligation, the public can take notes from the Bank on this obligation." — 949. " It seems, then, that at all times about 20 million notes of the Bank of England are required? " — " 20 million notes in the hands of the public; it changes. It is 18|, 19, 20 millions, etc.; but on an average you may say 19-20 millions."
Testimony of Thomas Tooke before the Committee of Lords on Commercial Distress (C. D. 1818-57) No. 3094: "The Bank has no power to expand the amount of its notes in the hands of the public at its own arbitrary will; it has the power to reduce the amount of notes in the hands of tlie public, but only by means of a very forcible operation."
J. C. Wright, for 30 years a banker in ISTottingham, having explained at length the impossibility, that a provincial bank should be able to set more notes into circulation than the public needs, says of the notes of the Bank of England: (C. D. 1848-57) No. 2844: "I know of no limit" (for the issue of notes) " for the Bank of England, but every surplus of the circulation will pass over into the deposits and thus assume another form."
The sam.e holds good for Scotland, where almost nothing but paper circulates, because there as well as in Ireland one pound notes are also in vogue and " the Scotch hate gold." Kennedy, Director of a Scotch bank, declares that banks can- not even contract their circulation of notes, and is " of opin- ion that, so long as inland transactions require notes or gold in order to be carried on, the bankers must furnish as much cur- rency as these transactions need — either on demand of their depositors or otherwise...The Scotch banks can Currency Under the Credit System. 617 contract their business, but they cannot exert any control over their issue of notes." (Ibidem, Xo. 3446-48.) In like man- ner Anderson, Director of the Union Bank of Scotland, answers question No. 3678, asked ibidem: " Does the system of mutually exchanging notes " [among the Scotch banks] " pre- vent an overissue of notes on the part of the individual bank? " — " Yes; but we have a more effective means than the ex- change of notes " [which has really nothing to do with this, but does indeed guarantee the ability of the notes of each bank to circulate throughout all of Scotland], " and that is the general custom in Scotland of keeping a bank account; every one who has any money at all has also an account in some bank and turns in daily all the money which he does not need immediately for himself, so that at the end of every business day all the money is in the banks, except what each carries in his pockets."
The same applies to Ireland, as shown by the testimony of the Governor of the Bank of Ireland, MacDonnell, and the Director of the Provincial Bank of England, Murray, before the same Committee.
The circulation of notes is just as independent of the state of the gold reserve in the cellars of the bank, which guarantees the convertibility of these notes, as it is of the will of the Bank of England. " On September 18, 1846, the circulation of the notes of the Bank of England was 20,900,000 pounds sterling and its metal reserve was 16,273,000 pounds sterling; on April 5, 1847, the circulation was 20,815,000 pounds sterling and the metal reserve was 10,246,000 pounds sterling. Hence no contraction of the currency took place in spite of the export of 6 million pounds sterling of precious metal." (J. G'. Kinnear, The Crisis and the Currency, London, 1847, p. 5.) Of course, this applies only to the conditions which prevail in England at present, and even there only so far as legislation does not decide differently concerning the re- lation betw^een the issue of notes and the metal reserve.
Hence only the requirements of business itself exert an influence on the quantity of circulating money — notes and gold. In the first instance the periodical fluctuations, which 6i8 Capitalist Production.
repeat themselves every year, should be noted here, regardless of the general condition of business, so that for 20 years " in a certain month the circulation is high, in another low, and in a third definite month a middle point occurs." (New- For instance, in August of every year a few millions, gen- erally in gold, pass from the Bank of England into inland circulation, in order to pay the expenses of the harvest; since the principal payments to be made here are wages, bank notes are less serviceable in England for this purpose. By the close of the year this money has returned to the Bank, In Scotland there are almost nothing but one pound notes instead of Sovereigns; in this case, then, it is the circulation of notes which is expanded during the aforesaid term, and at another, that is, twice a year, in May and November, by about 3 or 4 millions; within fourteen days the reflux begins, and it is almost completed in one month. (Anderson, 1. c. No., The circulation of the notes of the Bank of England also experiences every quarter a momentary fluctuation on account of the quarterly payment of the " dividends, " that is, the interest on the national debt by which bank notes are first withdrawn from circulation and then once more distributed between the public. But they return very soon. Weguelin (B. A. 1857, No. 38) states that this fluctuation of the circula- tion of notes amounts to two and half millions. Mr. Chap- man of the notorious firm of Overend, Gurney & Co., however, calculates the disturbance created by this fluctuation in the money marke-t at a far higher figure. '' If you take 6 or 7 millions for taxes out of the circulation, for the purpose of paying dividends with them, there must be somebody, who places this amount within reach in the meantime." (B. A.
Far more considerable and lasting are the fluctuations in the amount of the currency corresponding to the various phases of the industrial cycle. Let us listen to another member of that firm, the worthy Quaker Samuel Gurney (C. D. 1848-57, No. 2645): "At "the end of October (1847) there were Currency Under the Credit System. 619