The increase in the " value of capital," which follows from a high rate of profit, is mistaken by Overstone for an increase, which follows from a greater demand for money-capital. This demand may increase for reasons, which are quite independent of the rate of profit. He quotes himself some exam- 502 Capitalist Production.
pies, which show that it rose in 1847 as a result of the depreciation of real capital. He means by the value of capital now real capital now money-capital, just as it may suit his purpose.
The dishonesty of our banking lord, and his narrow minded banker's point of view, which he aggravates by posing as a schoolmaster, are further revealed by the following: 3728. " You said, that in your opinion the rate of discount is of no particular significance for the merchant; will you kindly state what you regard as an ordinary rate of profit? " — Mr. Overstone declares that it is " impossible " to answer this question.— 3729. " Suppose the average rate of profit to be from 7 to 10%; in that case, a change in the rate of discount from 2% to 7 or 8% must appreciably affect the rate of profit, must it not? " [This question confounds the rate of industrial profit with the average rate of profit and overlooks the fact, that this last rate of profit is the common source of interest and industrial profit. The rate of interest may leave the average rate of profit untouched, but not the industrial profit.] Overstone replied: "In the first place, business men will not pay a rate of discount, which takes away most of their profits beforehand; they will rather close up their business." [Yes, if they can do so without ruining themselves. So long as their profit is large, they pay the discount, because they are willing, and when profit is low, they pay the discount because they must.] " What does discount mean? Why does a man discount a bill of exchange? Because he desires to obtain a larger capital.''
[Hold on! Because he desires to anticipate the return of his tied-up capital in the form of money and to avoid the stopping of business; because he must meet due payments. He demands additional capital only when business is good, or when he speculates on another man's capital, though business may be bad. The discount is by no means a mere device to expand business.] "And why does he wish to obtain command of a greater capital? Because he wants to invest this capital; and why does he want to invest this capital?
Accumulation of Money-Capital. 503 Because it is profitable; but it Avould not be profitable for him, if the discount were to swallow his profit."
This self-complacent logician assumes that bills of exchange are discounted only for the purpose of expanding business, and that business is expanded, because it is profitable. The first assumption is wrong. The ordinary business man discounts, in order to anticipate the money-form of his capital and thereby to keep his process of reproduction in flow; not in order to expand his business or secure additional capital, but in order to balance the credit which he gives by the credit which he takes. And if he wants to expand his business on credit, the discounting of bills will do him little good, because it is merely the transformation of capital, which he has already in his hands, from one form into another; he will rather take up a direct loan for a long time. Only the credit swindler will get his fraudulent bills of exchange discounted for the pui']:)ose of expanding his business, in order to cover one rotten business by another; not for the purpose of making profits, but of getting possession of the capital of another man.
After Mr. Overstone has thus identified discount with the borrowing of additional capital [instead of identifying it with the transformation of bills of exchange representing capital into money], he beats at once a retreat, when the thumbscrews are applied to him. — 3730. " Must not merchants, once that they are engaged in business, continue their operations for a certain period of time in spite of a temporary increase in the rate of interest? " — Overstone: " There is no doubt, that in any single transaction, if a man can get hold of capital at a low rate of interest instead of a high rate of interest, taking the matter from this narrow point of view, that it is pleasant for him." — But it is a very wide point of view, which enables Mr. Overstone now to understand by " capital " all of a sudden only his banker's capital, and to assume that the man, who discoimts a bill of exchange wdth him, is a man without capital, just because his capital exists in the form of commodities, or because the money-form of his capital is a bill of exchange, which Mr. Overstone converts into another moneyform.
504 Capitalist Production.
3732. " With reference to the Bank Act of 1844, can you state what was the approximate relation of the rate of interest to the gold reserve of the bank; is it true, that, if the gold in the bank amounted to 9 or 10 millions, the rate of interest was 6 or 7%, and when it amounted to 16 millions, the rate of interest was about 3 or 4%? " [The cross-examiner wants to compel him to explain the rate of interest, so far as it is influenced by the amount of gold in the bank, by the rate o± interest, so far as it is influenced by the value of capital.] — " I do not say, that this is the case.,. but if it is, then we should in my opinion resort to still more stringent measures than those of 1844; for if it should be true, that the r^reater the quantity of gold the lower the rate of interest, then we should go to work, according to this view of the matter, and increase the gold reserve to an unlimited amount, and then we should reduce the rate of interest to zero." — The cross-examiner Cayley, unmoved by this poor joke, continues: 3733. " If this were so, assuming that 5 millions in gold were returned to the bank, then in the course of the next six months the gold reserve would amount to 16 millions, and assuming that the rate of interest should fall thus to 3 or 4%, how could one maintain, that the fall in the rate of profit was due to z great slump in business? " — " I said the recent great increase in the rate of interest, not the fall in the rate of interest, is intimately connected with the great expansion of business." — But what Cayley says is this: If a rise of the rate of interest together with a contraction of the gold reserve, is an indication of an expansion of business, then a fall of the rate of interest together with an expansion of the gold reserve, must be an indication of a contraction of business. Overstone has no answer to this. — 3736. Question: " I note that Your Lordship said that money is an in strument for securing capital." [This is precisely a mistake, this conception of money as an instrument; it is a form of capital.] "During a decrease of the gold reserve (of the Bank of England) does not the difficulty consist rather in the fact that capitalists cannot get any money? " — Overstone: " No, it is not the capitalists, it is the non-capitalists, who Accumulation of Money-Capital. 505 seek to obtain money, in order to carry on the business of people, who are not capitalists." — Here he declares point blank, that manufacturers and merchants are not capitalists, and that the capital of the capitalist is only money-capital. — 3737. '^ Are the people who draw bills of exchange no capitalists? " — " The people who draw bills of exchange are probable capitalists and probably not." — Here he is stuck.
He is then asked, whether the bills of exchange of merchants do not represent the commodities, which they have sold or shipped. He denies, that these bills represent the value of the commodities just exactly as a bank note represents gold. (3740 and 41.) This is a little insolent, 3742. " Is not the purpose of the merchant that of obtaining money? " — '' Xo; to obtain money is not the purpose of drawing a bill of exchange; to obtain money is the purpose of discounting the bill." — The drawing of bills of exchange is a conversion of commodities into a form of credit-money, just as the discounting of bills of exchange is the conversion of credit-money into other money, namely bank notes. At any rate Mr. Overstone admits here, that the purpose of discounting is to obtain money. A while ago he said that discounting was a means, not of transforming capital from one form into another, but of obtaining additional capital.
3742. " What is the great desire of the business world under the pressure of a panic, such as occurred according to your testimony in 1825, 1837 and 1839; do they want to secure possession of capital or of legal tender money? " — " They want to obtain command of capital, in order to continue their business." — Their purpose is to obtain means of payment for due bills of exchange on themselves, on account of the prevailing lack of credit, so that they may not have to get rid of their commodities below price. If they have no capital at all themselves, then they receive with the means of payment at the same time capital, because they receive value without giving an equivalent. The desire to obtain money as such consists always in the wish to transform value from the form of commodities or creditor's claims into money. Hence also, aside from crisis, the great difference between the borrowing 5o6 Capitalist Production.
of capital and discount, the last being a mere transformation of money claims from one shape into another, or into real money, [I take the liberty, in my capacity of editor, to interpolate a few remarks here.]
With Norman as well as Loyd-Overstone the banker always figures as a man, who advances " capital " to others, and his customers appear as people, who demand " capital " from him. Thus Overstone says, that people have bills of exchange discounted through him, " because they wish to obtain capital " [3729], and that it is pleasant for such people to "obtain command of capital" at a "low rate of interest" [3730]. "Money is an instrument for obtaining capital" [3736], and during a panic the great desire of the business world is to "obtain command of capital" [3743]. All the confusion of Loyd and Overstone notwithstanding they reveal at least the fact that they call the thing, which the banker gives to his customer, capital, and that this is a thing formerly not in the possession of tlie customer, but advanced to him in addition to the one already in his hands.
The banker has become so Avell accustomed to figure as the distributor [through loans] of the social capital available in the form of money, that he considers every function, by which he hands out money, as loaning. All the money which he pays out appears to him as a loan. If the money is directly loaned, it is literally true. If it is invested in the discounting of bills, then it is in fact advanced by himself until the bill becomes due. In this way the conception grows npon him that he cannot make any payments without loaning money to somebody. And these are loans, not merely in the sense that every investment of money, Avhich has for its object the taking of interest or profit, is economically considered an advance of money, which the owner of money in his capacity as a private individual makes to himself in his capacity as an entrepreneur. They are loans in the definite sense that the banker loans to his customer a sum of money, which constitutes an addition to the capital already held by him.
It is this conception, which, transferred from the banker's Accumulation of Money-Capital. 507 office to political economy, has created the confusing controversy, whether the thing, which the banker loans to his customer in the shape of cash money, is capital or mere money, medium of circulation or currency. In order to decide this fundamentally simple controversy, we must place ourselves in the position of a customer of a bank. It depends what this customer wants and receives.
If the bank allows to its customer a loan on his own private credit, without any security on his part, then the matter is clear. He certainly receives in that case an advance of a definite amount in addition to the capital so far invested by him. He receives this advance in the form of money; it is not merely money, but money-capital.
If on the other hand, he receives an advance on depositing securities, etc., then this is money paid to him on condition that he pay it back, but it is not capital. For the securities also represent capital, and at that of a larger amount than the money advance upon them. The receipient of the advance receives less capital-value than he deposits as a security; hence the advance is not additional capital for him. He does not agree to this transaction, because he needs capital — for he has this in his securities — but because he needs money. Therefore we have in this case an advance of money, not of capital.
If the loan is granted by discounting bills, then even the form of an advance disappears. The transaction is then purely one of buying and selling. The bill passes by endorsement into the possession of the bank, while the money passes into the possession of the customer. There is no question of any return payment on either side. If a customer buys with a bill of exchange or some similar instrument of credit cash money, it is no more an advance than it is if he buys cash money with other commodities, such as cotton, iron, com. Still less can this be called an advance of capital. Every purchase and sale between merchant and merchant transfers capital. But an advance of capital takes place only then, when a bill is a fraudulent one, which does not represent any commodities at all, and no banker will take such a bill, if he 5o8 Capitalist Production.
is aware of its nature. In the regular discounting business the customer of the bank does not, therefore, receive any advance, either of capital or of money, but he receives money for sold commodities.
The cases, in which the customer demands capital from a bank and receives it are thus very plainly distinguished from those, in which he merely receives an advance of money or buys it from the bank. And since particularly Mr. Loyd-Overstone very rarely advanced any funds without collateral [he was the banker of my firm in Manchester] it is very evident that his beautiful descriptions of the great quantities of capital loaned by the generous bankers to the manufacturers in need of capital are gross inventions.
In chapter XXXII Marx says practically the same thing: " The demand for means of payment is a mere demand for convertihility into money, so far as merchants and producers have good securities to offer; it is a demand for money-capital whenever there is no collateral, so that an advance of means of payment gives to them not only the form of money, but also the e([uivalent, whatever be its form, with which to make paym(;nt." — And again in chapter XXXIII: " Under a developed system of credit, Avhen the money is concentrated in the hands of the bankers, it is they, at least nominally, who make advances of money. This advance does not refer to the money already in circulation. It is an advance made to circulation, not an advance of capital circulated by it." — Likewise Mr. Chapman, who ought to know, corroborates this conception of the discounting business: B. C. 1857: "The banker has the bill, the banker has bought the hill.", Evid. Question 5139.
We shall return to this subject in chapter XXVIII. — F. E.] 3744. " Will you kindly describe, what you really mean by the term capital?" — Overstone: "Capital consists of various commodities, by means of which trade is carried on; there is a fixed capital and there is a circulating capital. Your ships, your docks, your wharves are fixed capital, your means of subsistence, your clothes, etc. are circulating capital."
Accumulation of Money-Capital. 509 3745. " Has the drain of gold to foreign countries injurious consequences for England? " — " Not so long as one combines this term with a rational meaning." [Then follows the old Eicardian theory of money]..."in the natural condition of things the money of the world distributes itself among the various countries of the world in certain proportons; these proportions are such, that with such a distribution [of money] the commerce between any one country on one side and all other countries on the other side is one of mere exchanges; but there are disturbing influences, which affect this distribution from time to time^ and when these influences arise, a portion of the money of a given country flows off to other countries." 3746. " You are now using the term ' money '. If I understood you correctly on former occasions, you called this a loss of capital." — " What was it that I called a loss of capital? " — 3747. " The export of gold." — " ]^o, I did not say that. If you treat gold as capital, then it is doubtless a loss of capital; it is a giving away of a certain portion of precious metal, of which the world money consists." — 3748. " Did you not say before that a change in the rate of discount is a mere indication of a change in the value of capital? " — " Yes. " — 3749., " And that the rate of discount in general changes with the gold reserve in the Bank of England? " — " Yes, but I have already stated that the fluctuations of the rate of interest, which arise from a change in the quantity of money " [so this is what he calls the quantity of gold actually existing] " are very significant..."
3750. " Then do you mean to say that a decrease of capital has taken place, when a longer, but still temporary, raise of the discount above the ordinary quotation has taken place? " — " A decrease in a certain sense of the word. The relation between capital and the demand for it has changed; but it may be only through an increased demand, not through a decrease in the quantity of capital." — [But capital was for him precisely money or gold, and a little before that he had explained the rise of the rate of 5IO Capitalist Production.
interest by a rise of the rate of profit, which was due to an expansion, not to a contraction of business or capital.]
3751. '' What kind of capital is it that you have particularly in mind here? " — " That depends entirely on what sort of a capital that every one needs. It is the capital which a nation has at its disposal in order to carry on its business, and if this business is doubled, a great increase must occur in the demand for that capital with which it is to be carried on." [This shrewd banker doubles first the business and then the demand for capital with which it is to be doubled. He never sees anything else but his customer, who asks Mr. Loyd for more capital by which to double the volume of his business.] — "Capital is like any other commodity;" [but according to Mr. Lloyd capital is nothing else but the totality of commodities] " it changes its price " [that is, the commodities change their price twice, one as commodities and the second time as capital] " according to supply and demand."
3752. " The fluctuations in tlie rate of discount are in a general way connected with the fluctuations of the gold reserve in the vaults of the bank. Is this the capital to which you refer? " — " No." — 3753. " Can you give an example, showing when a great supply of capital was accumulated in the Bank of England and at the same time the rate of discount stood high? " — " In the Bank of England it is not capital that is accumulated^ but money." — 3754. " You testified that the rate of interest depends on the quantity of capital; will you kindly state, what kind of capital you mean, and whether you can quote an example, where a great supply of gold was held in the bank and at the same time the rate of interest was high?" — "It is very probable" [aha!] " that the accumulation of gold in a bank may coincide with a low rate of interest, because a period of low demand for capital " [namely money-capital; the time to which reference is made here, 1844 and 1845, was a period of prosperity] " is a period, in which naturally the means or instrument, by which capital is commanded, can accumulate." — 3755. " You think, then, that no connection exists between the rate Accumulation of Money-Capital. 511 of discount and the quantity of gold in the bank vaults? " — " A connection may exist, but it is not a connection on principle;" [but his Bank Act of 1844 made it precisely a principle of the Bank of England to regulate the rate of interest by the quantity of gold in its possession] " there may be a coincidence of time." — 3758. " Do you intend to say that the difficulty of the merchants in this country, during times of scarcity of money due to a high rate of interest consists of obtaining capital, and not in obtaining money? " • — " You are throwing together two things, which I do not bring together in this form; the difficulty consists in getting capital, and it also consists in getting money...The difficulty of obtaining money, and the difficulty of obtaining capital, is the same difficulty considered at two different stages of its development." — Here the fish is caught once more. The first difficulty is to discount a bill of exchange, or to obtain a loan on security of commodities.
It is the difficulty of converting capital, or a commercial equivalent for capital, into money. And this difficulty expresses itself, among other things, in a high rate of interest. But after the money has been obtained, in what does the second difficulty consist if it is merely a question of paying, has any one any difficulty in getting rid of his money? And if it is a question of buying, where has any one ever had any difficulty in times of crisis in buying anything? Supposing, for the sake of argument, that this should refer to the specific case of a dearth in corn, cotton, etc., this difficulty should become apparent only in the price of these commodities, not in that of money-capital, that is, not in the rate of interest; but the difficulty, so far as it refers to the price of commodities, is overcome by the fact that our man now has the money to buy them.
3760. " But a higher rate of discount is an increased difficulty of obtaining money, is it not? " — " It is an increased difficulty of obtaining money, but it is not the money, the possession of which is essential; it is only the form " [and this form brings profits into the pockets of the banker] " in which the increased difficulty of obtaining capital presents 512 Capitalist Production.
itself under the complicated relations of a civilised condition."
3763. Overstone's reply: ^^ The banker is the middle man, who receives on one side deposits, and on the other side uses these deposits by entrusting them, in the form of capital, to the hands of persons, who etc."
Here we have at last what he calls capital. He converts money into capital by " entrusting " it, or, less euphemistically, by loaning it out at interest.
After Mr. Overstone has stated, that a change in the rate of discount is not essentially connected with a change in the quantity of gold reserve in the bank, or in the quantity of available money, but that there is at best only a coincidence in time, he repeats: 3804. " If the money in the country is reduced by export, its value rises, and the Bank of England must adapt itself to this change in the value of money;" [that is, the value of money as capital, in other words, the rate of interest, for the value of money as money, compared with commodities, remains the same] " this is technically expressed by the words, that it raises the rate of interest."
3819. " I never throw the two together." Meaning money and capital, for the simple reason, that he never distinguishes them.
3834. " The very large sum, Avhich had to be paid out for the necessary subsistence of the country [for corn in 1847] and which was, indeed, capital/' 3841. " The fluctuations in the rate of discount have doubtless a very close connection to the condition of the gold reserve [of the Bank of England], for the condition of the gold reserve is the indicator of the increase or decrease of the quantity of money existing in a country; and in proportion as the money in a country increases or decreases, the value of money falls or rises, and the bank rate of discount will adapt itself to that." — Here, then, he admits what he denied once for all in ]^o. 3755 — 3842. " There is a close connection between the two." Meaning between the quantity of gold in the issue department and the reserve of notes in Accumulation of Money-Capital. 513 the banking department. Here he explains the change in the rate of interest bj the change in the quantity of money. But what he says is wrong. The reserve may decrease, because the circulating money in the country may increase. This is the case, when the public takes more notes and the metal reserve does not decrease. But in that case the rate of interest rises, because then the banking capital of the Bank of England is limited by the Acts of 1844. But he dare not mention this, since this law provides, that these two departments shall not have anything in common.
3859. " A high rate of profit will always create a great demand for capital; a great demand for capital will raise its value." — Here, we have at last the connection between a high rate of profit and a demand for capital, as Overstone conceives it, Now, a high rate of profit prevailed in 1844-45, for instance, in the cotton industry, because raw cotton was and remained cheap while the demand for cotton goods was strong. The value of capital [and according to a previous statement Overstone calls capital that which every one needs in his business], in the present case the value of raw cotton, was not increased for the manufacturer. Now the high rate of profit may have induced some cotton manufacturer to take up money for the expansion of his business. Thereby the demand for money-capital rose, and nothing else.
3889. " Gold may be money or not, just as paper may be a bank note or not."
3896. "Do I understand you correctly, then, that you abandon the statement, which you applied in 1840, to the effect that fluctuations in the circulating notes of the Bank of England should be governed by the fluctuations in the quantity of the gold reserve? " — "I abandon it in so far...that according to the present condition of our knowledge we must add to the circulating notes those other notes, which are deposited in the bank reserve of the Bank of England." — This is superlative. The arbitrary provision, that the bank may make out as many paper notes as it has gold in the treasury and 14 millions more, implies, of course, that its issue of notes fluctuates with the fluctuations of the gold 2G 514 Capitalist Production.
reserve. But since " the present condition of our knowledge " shows clearly, that the mass of notes, which the bank can manufacture according to this (and which the issue department transfers to the banking department), and which circulating between the two departments of the Bank of England and fluctuate with the fluctuations of its gold reserve, does not determine the circulation of bank notes outside of the walls of the Bank of England, and this last circulation becomes a matter of indifference for the administration of the bank, and the circulation between the two departments of the bank, which shows its difference from the real circulation in the reserve, becomes alone essential. For the outside world this internal circulation is significant only, because the reserve indicates, how close the bank is getting to the legal maximum of its issue of notes, and how much the customers of the bank can still receive from the banking department.
The following is a brilliant example of Overstone's bad faith: 4243. " Does the quantity of capital fluctuate, in your own opinion, to such an extent from one month to another, that its value is changed thereby in the way that we have observed during the last years in the fluctuations of the rate of discount? " — " The proportion between demand and supply of capital may undoubtedly fluctuate even in short intervals...If France announces to-morrow, that it will take up a very large loan, it will undoubtedly cause at once a great change in the value of money, that is, the value of capital, in England."
4245. " If France announces, that it wdll suddenly need 30 millions worth of commodities for some purpose or other, a great demand will arise for capital, to use the more scientific and simpler expression," 4246. '' The capital, which France might want to buy with its loan, is one thing; the money, with w^hich France buys this, is another thing; is it the money, which changes its value, or not? " — " We are coming back to the old question, and that, I believe, is better suited for the study The Role of Credit. 515 room of a scientist than for this committee room." — And with this he retires, but not into the study room.*^ CHAPTEK XXVII.
THE EOLE OF CKEDIT IN CAPITALIST PRODUCTION.
The general remarks, which the credit system so far elicited from us, were the following: I. Its necessary development, for tlie purpose of procuring the compensation of the rate of profit, or the movements of this compensation, upon which the entire capitalist production rests.
II. Reduction of the cost of circulation.
1) One of the principal expenses of the circulation is money itself, so far as its represents value itself. It is economized by credit in three ways, A. It is entirely eliminated in a large portion of the transactions.
B. The circulation of the circulating medium is accelerated.^^ This coincides partly with the statements to be '*'' Further remarks on Overstone's confusion of terms in the matter of capital will be found at the close of chapter XXXII.