The final result is, that the mass of currency required for the expenditure of revenue increases decidedly in periods of prosperity.
As for the currency, which is necessary for the transfer The Medium of Circulation. 529 of capital for the exclusive use of the capitalists^ a period of brisk business is at the same time a period of most elastic and easy credit. The velocity of currency between capitalist and capitalist is regulated directly by credit, and the mass of the currency required for the making of payments and even for cash purchases decreases proportionately. It may increase absolutely, but it decreases under these circumstances relatively, compared to the expansion of the process of reproduction. On the one hand greater amounts of payments are handled without the intervention of any money at all; on the other hand, owing to the great vivacity of tie process, the same quantities of money have a greater velocity, both as means of purchase and payment. The same quantity of money promotes the reflux of a greater number of individual capitals.
On the whole, the currency of money in such periods appears full, although its second portion (the transfer of capital) is at least relatively contracted, while its first portion (the expenditure of revenue) is absolutely expanded.
The refluxes express the reconversion of commodity-capital into money, M — C — M", as we have seen in the discussion of the process of reproduction in Volume II, Part I. Credit renders the reflux in the form of money independent of the time of actual reflux, both for the industrial capitalist and the merchant. Both of them sell on credit; their commodities are gotten rid of, before they resume for them the form of money by returning them really in this form. On the other hand they buy on credit, and in this way the value of their commodities is reconverted either into productive capital or commodity-capital even before this value has been transformed into real money, before the price of commodities is due and paid for. In such periods of prosperity the reflux passes off smoothly and easily. The retail dealer pays the wholesale dealer in collateral, the wholesaler pays the manufacturer in the same way, the manufacturer in like manner the importer of the raw material, and so forth. The appearance of rapid and more secure turn-overs maintains itself always for a certain period after they are past in reality, since the turn- 3H 530 Capitalist Production.
overs of credit take the place of the real ones as soon as credit is well under way. The banks begin to scent danger, as soon as their customers deposit more bills of exchange than money. See the above testimony of the Liverpool bank director.
On a previous occasion I have remarked: " In periods of prevailing credit, the rapidity of circulation of money grows faster than the prices of commodities, while in times of declining credit the prices of commodities fall slower than the rapidity of circulation." (Critique of Political Economy, In a period of crisis the condition is reversed. Circulation 'No. I contracts, prices fall, likewise wages of labor; the number of employed laborers is reduced, the mass of transactions decreases. On the other hand, the need of accommodation in the matter of money increases in circulation No. II in pro- ■ portion as credit decreases. We shall return to this point immediately.
There is no doubt that, with the decrease of credit which goes with the clogging of the process of reproduction, the mass of circulation No. I required for the expenditure of revenue is contracted, while that of No. II required for the transfer of capital is expanded. But it remains to be analysed, to what extent this statement coincides with the following maintained by Fullarton and others: " A demand for capital on loan and a demand for additional circulation are quite distinct things, and not often found associated." (Ful- g larton, 1. c. p. 82, title of chapter 5.) ^^ a ^* " It is a great error, indeed, to imagine that the demand for pecuniary accom- ^ modation (i.e. for the loan of capital) is identical with a demand for additional means of circulation, or even that the two are frequently associated. Each demand originates in circumstances peculiarly affecting itself, and very distinct from one another. It is when everything looks prosperous, when wages are high, prices on the rise, and factories busy, that an additional supply of currency is usually required to perform the additional functions inseparable from the necessity of making larger and more numerous payments; whereas it is chiefly in a more advanced stage of the commercial cycle, when difficulties begin to present themselves, when markets are overstocked, and returns delayed, that interest rises, and a pressure comes upon the Bank for advances of capital. It is true that there is no medium through which the Bank is accustomed to advance capital except that of promissory notes; and that, to refuse the notes, therefore, is to refuse the accommodation. But the accommodation once granted, everything adjusts itself in conformity with the necessities of the market; the loan remains, and the currency, if not wanted, finds its way back to the issuer. Accordingly, a very slight The Medium of Circulation. 531 In the first place it is evident, that in the first of the two cases mentioned above, during times of prosperity, when the mass of the circulating medium increases, the demand for it must also increase. But it is likewise evident, that a manufacturer, who draws more or less of his deposit out of a bank in gold or banknotes, because he has more capital to expand in the form of money, does not increase his demand for capital, but merely his demand for this particular form, in which his capital is exj)ended. The demand refers only to the technical form, in which his capital is thrown into circulation. It is well known that a different development of the credit system implies for the same variable capital, or the same examination of the Parliamentary Returns may convince any one, that the securities in the hand of the Bank of England fluctuate more frequently in an opposite direction to its circulation than in concert with it, and the example, therefore, of that great establishment furnishes no exception to the doctrine so strongly pressed by the country bankers, to the effect that no bank can enlarge its circulation, if that circulation be already adequate to the purposes to which a banknote currency is commonly applied; but that every addition to its advances, after that limit is passed, must be made from its capital, and supplied by the sale of some of its securities in reserve, or by abstinence from further investment of such securities. The table compiled from the Parliamentary Returns for the interval between 1833 and 1840, to which I have referred in a preceding page, furnishes continued examples of this truth; but two of these are so remarkable that it will be quite unnecessary for me to go beyond them. On the third of January, 1837, when the resources of the Bank were strained to the uttermost to sustain credit and meet the difficulties of the money-market, we find its advances on loan and discount carried to the enormous sum of 17,023,000 pounds sterling, an amount scarcely known since the war, and almost equal to the entire aggregate issues which, in the meanwhile, remain unmoved at so low a point as 17,070,000 pounds sterling! On the other hand, we have, on the fourth of June, 1833, a circulation of 18,892,000 pounds sterling, with a return of private securities in hand, nearly, if not the very lowest on record for the last half-century, amounting to no more than 972,000 pounds sterling! " (Fullarton, 1. c, pages 97 and 98.) That a demand for pecuniary accommodation need not be identical by any means with a demand for gold (what Wilson, Tooke and others call capital) may be seen by the following testimony of Mr. Weguelin, Governor of the Bank of England): " The discounting of bills to this amount " (one million per day for three successive days) " would not reduce the reserve " (of banknotes), unless the public should demand a greater amount of active circulation. The notes issued in the discounting of bills would flow back by way of banks and by means of deposits. Unless such transactions have for their purpose the export of gold, or unless a panic reigns in the inland market, of such character as to cause the public to hold on to the notes instead of depositing them in the banks, the reserve would not be touched by such tremendous transactions. " The Bank can discount one and a half millions daily, and this takes place continually, without touching its reserve in the least. The notes come back as deposits, and the only change that takes place is the mere transfer from one account to the other." (Report on Bank Acts, 1857.) Evidence No. 241,500. The notes serve here merely as means of transferring credit accounts.
532 Capitalist Production. ^i quantity of wages, a greater mass of means of circulation (currency) in one country than in another, for instance, more in England than in Scotland, more in Germany than in England. In like manner the same capital invested in agriculture, in the process of reproduction, requires different quantities of money in different seasons for the performance of its function.
But the contrast drawn by Fullarton is not correct. It is by no means the strong demand for loans, as he says, which distinguishes the period of depression from that of prosperity, but the ease with which this demand is satisfied in periods of prosperity, and the difficulties which it meets after a depression has become a fact. It is precisely the enormous development of the credit system during a period of prosperity, hence also the enormous development of the demand for loan capital and the readiness with which the supply meets it in such periods, which brings about a shortage of credit during the period of depression. It is not, therefore, the difference in the size of the demand for loans which characterises both periods.
As we have remarked previously, both periods are primarily distinguished by the fact that in periods of prosperity the demand for currency between consumers and dealers predominates, and in periods of depression that for currency between capitalists. In a period of depression the former decreases, the latter increases.
What appears as the essential mark to Fullarton and others is the phenomenon, that in such periods, in which the securities in the hand of the Bank of England are on the increase, its circulation of notes is decreasing, and vice versa. Now the level of the securities expresses the volume of the pecuniary accommodation, the volume of the discounted bills of exchange and of the advances on marketable collateral. Thus Fullarton says in the above passage (footnote 91) that the securities in the hands of the Bank of England vary generally in the opposite direction from its circulation of banknotes, and this corroborates the doctrine long held by private banks to the effect that no bank can increase its issue of banknotes The Medium of Circulation. 533 bnyondf % ceitain point determined by the needs of the public; but if a bank wants to make advances beyond this limit, it must take them out of its capital, that is, it must either realise on securities or utilise deposits which it would otherwise have invested in securities.
This reveals at the same time what Fullarton means by capital. What does capital signify here? It means that the bank can no longer make advances with its own banknotes, promissory notes that cost it nothing, of course. But what does it make payments with in that case? With the sums realised by the sale of securities in reserve, that is, government bonds, stocks, and other interest-bearing papers. And what is this money that it gets in return for the sale of such papers? Gold or banknotes, so far as the last named are legal tender, such as those of the Bank of England. What the bank advances, is under all circumstances money. This money now constitutes a part of its capital. This is evident in the case that it advances gold. If it advances notes, then these notes represent capital, because it has given up some actual value, interest-bearing papers, for them. In the case of private banks the notes secured by them through the sale of securities cannot be anything else, in the main, but notes of the Bank of England or their own notes, since others would hardly be taken in payment for securities. If it is the Bank of England itself, its own notes, which it receives in return, cost it capital, that is, interest-bearing papers. By this means it withdraws its own notes from the circulation. If it reissues these notes, or issues new ones in their stead to the same amount, they represent capital. And they do so, equally well, when such notes are used for advances to capitalists, or when they are used later on for investment in securities, as soon as the demand for such pecuniary accommodation decreases. In all these cases the term capital is employed only from the banker's point of view, and it means that the banker is compelled to loan more than his mere credit.
It is well known that the Bank of England makes all its advances in its own notes. ISTow, if the bank note circula- 534 Capitalist Production.
tion of this Bank decreases nevertheless in proportion as the discounted bills of exchange and collateral in its hands, and thus its advances, increase — what becomes of the notes thrown into circulation by it, how do they return to the Bank?
If the demand for money accommodation arises from an unfavorable national balance of trade and implies an export of gold, the matter is very clear. The bills of exchange are discounted in banknotes. The banknotes are exchanged by the bank itself, in its issue department, which issues gold for them, and this gold is exported. It is as though it were to pay out gold directly, without the intervention of notes, on discounting the bills. Such an increased demand, which may amount to from seven to ten million pounds sterling, naturally does not add a single five-pound note to the inland circulation of the country. Xow, if it is said, that the Bank of England advances capital in this case, but not currency, it may mean two things. In the first place it may mean, that the bank does not advance credit, but actual values, a part of its own capital, or of capital deposited with it. In the second place it may mean that it does not advance money for inland, but for international circulation. It advances world money, and money for this purpose must always assume the form of a hoard in its metallic body. In this shape money does not merely represent the form of value, but value itself, whose money-form it is. Although this gold represents capital, both for the bank and the exporting money dealer, both financial and commercial capital, yet the demand for it does not come as a demand for capital, but as a demand for the absolute form of money-capital. This demand arises precisely at the moment, Avhen the foreign markets are overcrowded with unsalable English commodity-capital. What is wanted, then, is capital, but not in its capacity as capital.
What is wanted is capital in the shape of money, in the shape in which money serves as international world money; and this is its original form of precious metal. The exports of gold are not, as Fullarton, Tooke, etc., claim, a mere question of capital. They are a question of money, even if this be The Medium of Circulation. 535 money in one specific function. The fact that it is not a question of inland currency, as the advocates of the Currency Theory maintain, does not prove, as Fullarton and others think, that it is a question of mere capital. It is a question of money in the form in which money is an international means of payment. " Whether that capital " (that is, the purchase price for the one million quarters of foreign v^heat required after a crop failure in the home country) " is transmitted in merchandise or in specie, is a point which in no way affects the nature of the transaction," (Fullarton, 1. c, p. 131) but affects essentially the question, whether an export of gold takes place or not. Capital is transferred in the form of i^recious metals, because it either cannot be transferred at all in the shape of commodities, or only at a great loss. The fear, which the modern banking system has of gold exports, exceeds anything ever dreamt by the monetary system, which considered precious metals as the only true wealth. Take, for instance, the following cross-examination of the Governor of the Bank of England, Morris, before the Parliamentary Committee on the crisis of 1847-48: Question 3846. " When I speak of the depreciation of stocks and fixed capital, is it not known to you that all capital invested in papers and products of all kinds was depreciated in the same way, that raw materials, cotton, silk, wool, were sent to the continent at the same cut prices, and that sugar, coffee and tea were auctioned off in forced sales." — " It was inevitable that the nation should make considerable sacrifices, in order to counteract the drain of gold caused by the enormous imports of means of subsistence," — 3848. " Don't you believe that it would have been better to touch the eight million pounds sterling stored in the vaults of the bank, instead of trying to recover the gold with such sacrifices? " — '^ I do not believe that." — It is gold which here stands for the only true wealth.
Fullarton quotes the discovery of Tooke, that " with only one or two exceptions, and those admitting of satisfactory explanation, every remarkable fall of the exchange, followed by a drain of gold, that has occurred during the last half 536 Capitalist Production.
century, Las been coincident throughout with a comparatively low state of the circulating medium, and vice versa." (Fullarton, p. 121). This discovery proves that such drains of gold occur generally after a period of excitement and speculation, as " a signal of a collapse already commenced. an indication of overstocked markets, of a cessation of the foreign demand for our productions, of delayed returns, and, as the necessary sequel of all these, of commercial discredit, manufactories shut up, artisans starving, and a general stagnation of industry and enterprise." (P. 120.) This is at the same time the best rebuttal of the claim of the advocates of the Currency Theory, that a full circulation drives out bullion and a low circulation attracts it. On the otlier hand, while the Bank of England generally carries a strong gold reserve during a period of prosperity, this hoard is generally formed during the spiritless and stagiiating period, which follows after a storm.
All this wisdom concerning the drains of gold, then, amounts to saying that the demand for international media of circulation and payment differs from the demand for 7iational media of circulation and payment (and this implies the self-evident fact that " the existence of a drain does not necessarily imply any diminution of the internal demand for circulation," as rullarton says on page 112 of his work); and that the sending abroad of precious metals and their throwing into international circulation is not identical with the throwing of notes or specie into the internal circulation. For the rest I have shown on a previous occasion, that the movements of a hoard in the shape of a reserv^e fund for international payments has nothing to do as such with the movements of money as a medium of circulation. It is true that the question is complicated by the fact that the different functions of a hoard, which I have developed from the nature of money, are here placed upon the shoulders of one sole reserve fund, that is, the function of money as a reserve fund for payments of due bills in the interior business; the function of a reserve fund of currency; finally, the function of a reser^'e fund of world money. It follows from this that The Medium of Circulation. 537 under certain circumstances a drain of gold from the Bank to the internal market may be combined with a like drain to the international market. The question is further complicated by the fact that this reserve fund has been loaded with the additional function of serving as a fund for guaranteeing the convertibility of bank notes in countries, in which the credit system and credit money are developed. And on top of all this comes the concentration of the national reserve fund in one single central bank, and, secondly, its reduction to the smallest possible minimum. This explains Fullarton's plaint (p. 143): " One cannot contemplate the perfect silence and facility with which variations of the exchange usually pass off in continental countries, compared with the state of feverish disquiet and alarm always produced in England whenever the treasure in the bank seems to be at all approaching to exhaustion, without being struck with the great advantage in this respect which a metallic currency possesses."
However, if we leave aside the question of the drain of gold, how can a bank issuing notes, like the Bank of England, increase the amount of the money accommodation granted by it without increasing its issue of bank notes?
So far as the bank itself is concerned, all the notes outside of its walls, whether they circulate or rest in private treasures, are in circulation, that is, not held in its own possession. Hence, if the bank extends its discounting and lombarding business, its advances on securities, all the bank notes issued for that purpose must flow back to it, for otherwise they would increase the volume of circulation, a thing which is not supposed to happen. This return of notes may take place in two ways.
First: The bank pays to A notes for securities; A pays with these notes for bills of exchange due to B, and B deposits these notes once more in this bank. This closes the circulation of these notes, but the loan remains. (" The loan remains, and the currency, if not wanted, finds its way back to the issuer." Fullarton, p. 97.) The notes, which the bank loaned to A, have now returned to it; but it still remains the creditor of A, or whoever may have been drawn 538 Capitalist Production.
upon by A in discouuting his bills, and it remains the debtor of B for the amount of values expressed in these notes, and B thus has a claim upon a corresponding portion of the capital of the bank.
Secondly: A pays to B, and B himself, or C who receives them from B, pays with these notes bills due to the bank, directly or indirectly. In that case the bank is paid in its own notes. This concludes the transaction (excepting the return of this payment by A to the bank).
In what respect, now, shall the loan of the bank to A be regarded as a loan of capital, or as a loan of mere currency? ^^ [This depends on the nature of the loan itself. Three cases must be distinguished.
First Case, — A receives from the bank the amounts loaned on his own personal credit, without giving any security for them. In this case he does not merely receive means of payment, but also without a doubt some new capital, which he may invest and employ as an additional capital in his business until the day of settlement.
Second Case. — A has given to the bank securities, national bonds, or stocks as collateral, and received for them, say, twothirds of their value in the shape of a cash loan. In this case he has received means of payment needed by him, but no additional capital, for he entrusted to the bank a larger capital-value than he received from it. But this larger capital-value was, on the one hand, unavailable for the momentary needs of A, because it was invested as interest-bearing capital in a certain form and could not serve as means of payment; on the other hand, A had reasons of his own for not wanting to convert this capital-value directly into means of payment by selling it. His securities served, among other ends, as a reserve capital, and to that end he set them in motion. The transaction between A and the bank, therefore, consists in a mutual transfer of capital, but in such a way, that A does not receive any additional capital (on the eon- °^ The passage following here is unintelligible in the original in this connection, and it has been worked over by the editor and inclosed in brackets. In another connection this point has already been touched upon in chapter XXVI. — F. E.
The Medium of Circulation. 539 trary, less capital!) although he receives means of payment Avhich he needs. For the bank, on the other hand, this transaction constitutes a temporary fixation of money-capital in the form of a loan, a conversion of money-capital from one form into another, and this conversion is precisely the essential function of the banking business.
Third Case. — A has had a bill of exchange discounted by the bank, and received its value in cash after the deduction tif the discount. In this case he has sold to the bank a moneycapital which does not represent ready cash for the same amount in the shape of ready cash. lie has sold his running bill for cash money. The bill is now the property of tlie bank. It does not alter the matter that the last endorser of the bill. A, is responsible to the bank for it in default of payment. He shares this responsibility with the other endorsers and with the first writer of the bill, all of whom are responsible to him. In this case, then, we have not any loan to deal with, but only an ordinary sale and purchase. For this reason A has not to make any return payments to the bank. It covers itself by cashing the bill when it becomes due. Here, also, a transfer of capital has taken place between A and the bank, in exactly the same way, which holds good in the sale and purchase of any other commodity, and for this very reason A did not receive any additional capital. What he needed and received were means of payment, and he received them by having the bank convert one form of his money-capital, his bill, into another, money.
It is only the first case, in which there can be any question of a real loan of capital; in the second and third cases the matter can be so regarded only in the sense that every investment of capital implies an advance of capital. In this sense the bank advances capital to A; but for A it is money-capital at best in the sense that it is a portion of his capital in genoral. And he does not want and use it as a capital specifically. It is specifically a means of payment for him. Otherwise every ordinary sale of commodities, by which means of pavment are secured, might be considered as a loan received.
540 Capitalist Production.