Pitt takes this mystification of Price quite seriously. In 1788 the House of Commons had resolved to raise one million pounds sterling for the public benefit. According to Price, in whom Pitt believed, there was, of course, nothing better than to tax the people, in order to " accumulate " this sum after raising it, and thus to spirit the national debt away by the mystery of compound interest. '' The above resolution of the House of Commons was soon followed up by Pitt with a law, which ordered the accumulation of 250,000 pounds sterling, until, with the expired annuities, the fund should have grown to 4,000,000 pounds sterling annually." (Act 26, George III, chap. 22.) In his speech of 1792, in which Pitt proposed that the amount devoted to the sinking fund be increased, he mentioned among the causes of the commercial supremacy of England machines, credit, etc., as " the most wide-spread and enduring cause of accumulation." This principle, he said, was completely developed in the work of Smith, that genius, etc...And this accumulation, he continued, was accomplished by laying aside at least a portion of the annual profit for the purpose of increasing the principal, which was to be employed in the same manner next year, and which thus yielded a continual profit. By the help of Dr. Price, Pitt thus converted Smith's theory of accumulation in an increase of popular wealth by means of the accumulation of debts, and in this way he gets into the pleas- 2D 2D 466 Capitalist Production.
aut progress of infinite loans, made for the purpose of payingloans.
Already Josiali Child, the father of modern banking, tells ns that 100 pounds sterling at 10% will produce in TO years by compound interest 102,400 pounds sterling. Traite sur le commerce, etc., par J. Child, traduit, etc., Amsterdam et Berlin, 1754, p. 115. Written in 1C69.)
How thoughtlessly the conception of Dr. Price is applied by modern economists, is shown by the following passage of the ''Economist": "Capital, with compound interest on every portion of capital saved, is so all-engrossing that all the wealth in the world from which income is derived, has long ago become interest of capital...all rent is now the payment of interest on capital previously invested in the land." {Economist, July 19th, 1859.) In its capacity of interest-bearing capital capital claims the ownership of all wealth which can ever be produced, and everything it has received so far is but an instalment for its all-engrossing appetite. By its innate laws, all surplus-labor belongs to it, which the human race can ever perform. Moloch.
In conclusion we present the following hodge-podge of the romantic Miiller: " Dr. Price's immense increase of compound interest, or of the self-accelerating forces of man, presuppose an undivided or unbroken order for several centuries, if they are to produce such enormous effects. As soon as capital is divided, cut up into several independently growing slips, the total process of accumulating forces begins anew. Xature has distributed the progression of power over a course of about 20 to 25 years, which fall on an average to the share of every laborer (!). After the lapse of this time the laborer leaves his track and must transfer the capital accumulated by the compound interest of labor to a new laborer, having to distribute it as a rule among several laborers or children. These must first learn to vitalise and employ their share of capital, before they can draw any actual compound interest out of it. Purthermore, an enormous quantity of capital gained by bourgeois society is accumulated for many years, even in the* most restless communities, and is not employed Relations of Capital. 467 for any immediate expansion of labor, but rather entrusted to another individual, a laborer, a bank, a state, under the term of a loan, whenever a considerable amount has been gathered together. And in that case the one who receives it sets the capital into actual motion and draws compound interest out of it, so that he can easily agree to pay simple interest to the lender. Finally the laws of consumption, greed, waste, oppose those immense progressions, in which the forces of man and their products might increase, if the law of production or thrift were alone effective." (A Miiller, 1. c, II, p.
It is impossible to concoct a more hair-raising nonsense in a few lines. Leaving aside the droll confusion of laborer and capitalist, of value of labor-power and interest of capital, etc., the decrease of compound interest is supposed to be explained by lending capital at compound interest. This procedure of our Miiller is characteristic of romanticism in all fields. It is made up of current prejudices, skimmed from the most superficial semblance of things. This false and trivial substance is tlien supposed to be " uplifted " and rendered poetical by a mystifying mode of expression.
The process of accumulation of capital may be conceived as an accumulation of compound interest in the sense that that portion of the profit (surplus-value), which is reconverted into capital, and serves to absorb more surplus-value, may be called interest. But 1) Aside from all accidental irregularities, a large part of the available capital is continually depreciated in the course of the process of reproduction, because the value of the commodities is not determined by the labor-time originally spent in their production, but by the labor-time spent in their reproduction, and this decreases continually in consequence of the development of the productivity of social labor. On a higher stage of development of the social productivity all available capital appears therefore as the result of a relatively short time of reproduction, instead of as the result of a long process of saving capital.^^ *^ See Mill and Carey, and Roscher's mistaken commentary on them.
468 Capitalist Production.
2) As we have proven in Part III of this volume, the rate of profit decreases in proportion as the accumulation of capital and the productivity of social labor corresponding to it increase, since these two express themselves precisely in a relative and progressive decrease of tlie variable portion of capital as compared to the constant. In order to produce the same rate of profit, when the constant capital set in motion by one laborer increases tenfold, the surplus labor time would have to increase tenfold, and soon the total labor time, and finally the full 24 hours of a day, would not suffice, even if wholly appropriated by capital. The idea that the rate of profit does not decrease is, on the other hand, the basis of the progression of Price, as it is in general the basis of " all-engrossing capital with compound interest." ^^ By the identity of surplus-value with surplus-labor a qualitative limit is imposed upon the accumulation of capital. This is formed by the total working day, the prevailing development of the productive forces and of the population, which limit the number of the simultaneously exploitable working days. But if surplus value is conceived of in the meaningless form of interest, then the limit is merely quantitative and defies all fantasy.
ISTow, in the interest-bearing capital the idea of a capitalist fetish is perfected, the idea, which attributes to the accumulated product of labor, and at that in the fixed form of money, the power of creating surj^lus-value by its inherent secret qualities, in a purely automatic manner, and in geometrical progression, so that the accumulated product of labor, as the " Economist " thinks, has long discounted all the w^ealth of the world for all times as belonging to it and coming to it by right. The product of past labor, the past labor itself, is here pregnant in itself with a portion of present or future living surplus-labor. We know, on the contrary, that as a matter of fact the preservation, and to that extent ^ " It IS clear, that no labor, no productive power, no ingenuity, and no art, can answer the overwhelming demands of compound interest. But all saving is made from the revenue of the capitalist, so that actually these demands are constantly made and as constantly the productive power of labor refuses to satisfy them. A sort of balance is, therefore, constantly struck." {.Labour defended against the Claims of Capital, p. 23. By Hodgskin.)
Relations of Capital. 469 the reproduction, of the value of the products of past labor is only the result of their contact with living labor; and secondly, that the control exerted by the products of past labor over living surplus-labor lasts only as long as the relations of capital, which rest on the definite social relation, in which past labor dominates independently over living labor.
CHAPTER XXV.
CREDIT AND FICTITIOUS CAPITAL.
An exhaustive analysis of the credit system and of the instruments created by it for its own use (credit money, etc.) is beyond the scope of our plan. We merely wish to dwell here upon a few particular points, which are necessary for a characterisation of the capitalist mode of production in general. To this end we shall deal only wutli commercial and bank credit. The connection between the development of this form of credit and that of public credit is not considered here.
I have shown previously (in volume I, chapter III, 3b.), in what manner the function of money as a medium of payment, and consequently a relation of creditors and debtors, is formed among the producers of commodities and the traders, as the outcome of the simple circulation of commodities. With the development of commerce and of the capitalist mode of production, which has an eye only to the circulation, this natural basis of the credit system is extended, generalised, elaborated. Money serves here on the whole merely as a means of payment, that is to say, commodities are not sold for money, but for a written promise to pay for them at a certain date. We may comprise all these promises to pay for brevity's sake under the general category of bills of exchange. Such bills of exchange in their turn circulate as means of payment until the day on which they fall due; and they form commercial money in the strict meaning of the term. To the extent that they ultimately balance one another by the compensation of credits and debts, they serve abso- 470 Capitalist Production.
hitelj as money, since no transformation into actnal moneytakes place. Just as these mutual advances of the producers and merchants to one another form the real foundation of credit, so their instrument of circulation, the bill of exchange, forms the basis of credit money proper, of bank notes, etc. These do not rest upon the circulation of money, whether it be metallic money or government paper money, but upon the circulation of bills of exchange.
W. Leatham, a banker of Yorkshire, writes in his "^ Letters on the Currency/' 2nd edition, London, 1840: " I find, that the total amount in bills of exchange for the entire year 1839 was 528,493,842 pounds sterling" (he assumed that the foreign bills of exchange composed about one-fifth of the whole) " and the amount of bills of exchange simultaneously current in the same year to 132,123,460 pounds sterling" (p. 56). " The bills of exchange make up a greater part of the amount in circulation than all the rest together" (p. 3).
" This enormous superstructure of bills of exchange rests (!) upon a basis formed by the amount of bank notes and gold; and if in the course of events this basis is too much contracted, its solidity, and even its existence, become endangered " (p. 8). " Estimating the entire circulation " (he means of the bank notes) " and the amount of the obligations of all banks for which immediate payment may be demanded, I find a sum of 153 millions, whose conversion into gold might be demanded according to law, and to offset it only 14 millions in gold to satisfy this demand " (p. 11). The bills of exchange cannot be placed under control, unless the superfluity of money and the low rate of interest, or discount, can be prevented, which create a part of them and encourage this dangerous expansion. It is impossible to decide, how much of them is due to actual business, for instance, to real purchases and sales, and what part of them is fictitious and consists only of prolonged bills, that is, when a bill of exchangg is drawn for the purpose of taking up a current one before it becomes due, and thus of creating fictitious capital by the manufacture of mere means of circulation. In times of superfluous and cheap money I know this is done to an enor- Credit and Fictitious Capital. 471 mous degree" (p. 43, 44). J. W. Bosanquet, Metallic, Paper, and Credit Currency, London, 1842: The average amount of the payments settled on every business day in the Clearing House (where the London bankers mutually exchange the due bills and filed checks) exceeds 3 millions of pounds sterling, and the daily supply of money required for this purpose is little more than 200,000 pounds sterling (p. S(S). [In the year 1889, the total turn-over of the Clearing House amounted to 7,618 and f millions of pounds sterling, which, in 300 business days, averages 25 and \ millions of pounds sterling daily. — F.E.] "Bills of exchange are undoubtedly currency, independent of money, inasmuch as they transfer property from hand to hand by endorsement " (p. 92). " On an average it may he assumed that every circulating bill of exchange bears two endorsements, and that on an average every bill thus performs two payments, before it becomes due. Accordingly it seems that alone by endorsement the bills of exchange promoted a transfer of property to the amount of twice 528 millions, or 1,056 millions of pounds sterling, more than 3 millions daily, in the course of the year 1839. It is, therefore, certain the bills of exchange and deposits together, by transferring property from hand to hand and without the assistance of money, perform the functions of money to a daily amount of at least 18 millions of pounds sterling" (p. 93).
Tooke says the following about credit in general: " Credit, in its simplest expression, is the well or ill-founded confidence, 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. Written agreements to pay on definite days are generally given for such credits. And these transferable obligations, or promises, 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 producer 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 conditions 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 receives 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 relations. 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. Borrowing 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 business on this side consists of concentrating the loanable moneycapital 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 representatives of all money lenders. They become the general managers of the money-capital. On the other hand, they concentrate 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 deposits, 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 moneycapital, are combined into large masses and thus form a money power. This aggregation of small amounts must be distinguished 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 gradually 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 advances 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, because this form of credit money steps from the mere commercial circulation into the general circulation and serves as money there, and in tlie second place, because in most countries the principal banks issuing notes represent a queer mixture 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 purposes.
The banks have a twofold business...1) To collect 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 Currency 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. (Subsequently 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 discount 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 immemorial," 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 discounted 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 transferable.— 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 essentially the same. Fullarton, On the Regulation of Currencies, 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 banking 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 return 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 exchange (p. 117). The profits of a banker are generally proportionate 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 transfer of credit enhances the effectiveness of the deposit system (p. 123). It is immaterial, whether the two customers, that 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 transfers 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 district 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 receive 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 business. Whatever facilitates business, facilitates also speculation. Business and speculation are so closely linked in some cases, that it is difficult to tell where business stops and speculation begins. AVherever there are banks, capital can be obtained 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 exclusively 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 possession 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 discounting 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 deposits 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 " whatever facilitates business facilitates speculation, both being so intimately linked in many cases, that it is difficult to tell, where business stops and speculation begins." If the securing of advances on unsold commodities is facilitated more and 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 manufacture commodities, or throw already manufactured ones upon distant markets, for no other immediate purpose than that of obtaining advances of money on them. To what extent the entire business world of a country may be seized by such a swindle, and what it finally comes to, may be studied in the history of English business during the years 1845 to 1847, which furnishes a flagrant example. There we can see what credit can accomplish. Before we mention some of the most conspicuous cases, we must make a few preliminary remarks.