The difference between circulation and capital, as Tooke, Wilson and others draw it, comes down to two things. And in drawing it they throw three quite separate things into one heap: means of circulation as money, money capital in general, and interest-bearing capital (moneyed capital, as the English call it).
Money circulates in one way as coin, where it mediates the spending of revenue — the dealings between individual consumers and retail traders, and by retail traders we mean every trader who sells to consumers, that is to individual consumers as opposed to productive consumers or producers. Here money circulates in the function of coin, even though it is constantly standing in for capital. A certain part of a country's money is always tied up in this function, though the individual coins making it up are always changing.
In the other direction, where money mediates the transfer of capital — whether as means of purchase (means of circulation) or as means of payment — it is capital. So it is neither the means-of-purchase function nor the means-of-payment function that sets it off from coin: money can act as means of purchase between one dealer and another, where they buy from each other for cash, and it can even act as means of payment between dealer and consumer, where credit is given and the revenue is consumed first and paid for afterwards. So the difference is this: in the second case the money does not merely stand in for capital on one side, the seller's; the other side, the buyer, also spends it and advances it as capital. The distinction really is that between the money form of revenue and the money form of capital, and not between circulation and capital, since between dealers, just as between consumers and dealers, a definite quantity of money circulates, so that it is equally circulation in both functions. Tooke's way of seeing the matter now brings in confusion of several kinds:
(1) By mixing up the functional roles;
(2) by dragging in the question of the quantity of money circulating, in both functions taken together;
(3) by dragging in the question of how the quantities of circulating medium at work in the two functions — and therefore in the two spheres of the reproduction process — stand in relation to one another.
On the first point: the mixing up of the functional roles — the idea that money is circulation (currency) in one form and capital in the other. Wherever money serves one function or the other, whether realizing revenue or transferring capital, it acts in buying and selling or in paying, as means of purchase or means of payment, and in the wider sense of the word as means of circulation. The further label it carries in the accounts of whoever spends or receives it — that it stands for capital or for revenue to him — changes absolutely nothing in this; and this shows itself in two ways.
The kinds of money circulating in the two spheres are different, but the same coin, a £5 note for instance, passes from one sphere into the other and performs both functions by turns. That is unavoidable, simply because the retail trader can give his capital its money form only in the form of the coin he gets from his customers. We can take it that small change proper has the centre of gravity of its circulation in retail trade; the retail trader constantly needs it for giving change and constantly gets it back from his customers in payment. But he also receives money, that is coin in the metal that serves as measure of value — sovereigns in England — and even banknotes, particularly notes of low denomination, £5 and £10. These gold pieces and notes, along with any surplus small change, he deposits every day or every week with his bank, and pays for his purchases by a claim on that deposit.
But the same gold pieces and notes are just as constantly drawn out of the banks by the public in its capacity as consumer, as the money form of its revenue, directly or indirectly (small change, for instance, going to manufacturers to pay wages), and they flow constantly back to the retail traders, realizing for them afresh a part of their capital and at the same time a part of their revenue. This last point matters, and Tooke completely overlooks it. Only where money is laid out as money capital — at the start of the reproduction process (Volume 2, Part One) — does capital value exist purely as such. For the commodity produced contains not only capital but surplus-value already; it is not merely capital in itself but capital that has come to be, capital with the source of revenue built into it. So what the retail trader parts with for the money flowing back to him, his commodity, is for him capital plus profit, capital plus revenue.
And further: as the circulating money flows back to the retail trader, it restores the money form of his capital.
So to turn the difference between circulation as circulation of revenue and circulation of capital into a difference between circulation and capital is thoroughly wrong-headed. In Tooke's case this way of speaking comes from his simply taking the standpoint of the banker who issues his own banknotes. The amount of his notes that is permanently in the hands of the public — always different notes, but always the same amount — and functioning there as a means of circulation costs him nothing but paper and printing. They are circulating certificates of debt, bills of exchange drawn on himself, yet they bring him in money and so serve him as a means of valorizing his capital. They are different, though, from his capital, whether that is his own or borrowed. So there arises for him a special distinction between circulation and capital — one that has nothing to do with defining the concepts as such, and least of all with the definitions Tooke has just given.
The particular character of the money — whether it serves as the money form of revenue or of capital — does not, to begin with, change anything in money's character as a means of circulation. It keeps that character whichever of the two functions it performs. All the same, when money turns up as the money form of revenue it functions more as means of circulation in the strict sense (coin, means of purchase), because these purchases and sales are so fragmented, and because most of those who spend revenue, the workers, can buy relatively little on credit; whereas in the dealings of the commercial world, where the circulating medium is the money form of capital, money functions mainly as means of payment, partly because business is concentrated and partly because the credit system prevails. But the difference between money as means of payment and money as means of purchase (means of circulation) is a distinction belonging to money itself, not a distinction between money and capital. Because more copper and silver circulate in retail trade and more gold in large-scale trade, the difference between silver and copper on the one side and gold on the other is not the difference between circulation and capital.
Now bring in the question of how much money circulates in both functions together. Wherever money circulates — as a means of purchase or as a means of payment, in either of the two spheres, and no matter whether it is realizing revenue or capital — the same laws govern the size of its circulating mass that were set out earlier, when we looked at simple commodity circulation (Volume 1, Chapter 3, 2, b). In both cases the same things fix the amount of money in circulation, the currency: how fast it moves, that is how many times the same coins repeat the same job as means of purchase and payment in a given stretch of time; the mass of purchases and sales, or payments, going on at the same moment; the sum of prices of the commodities in circulation; and finally the balances of payments to be settled over that time. Whether the money doing this work stands for capital or for revenue, for the one who pays or the one who receives, is a matter of indifference and changes absolutely nothing. Its quantity is determined simply by its function as means of purchase and payment.
Now the question of the relative quantities of circulating medium required in the two functions, and therefore in the two spheres of the reproduction process. The two spheres of circulation are inwardly connected, since on one side the mass of revenue to be spent expresses the scale of consumption, and on the other the size of the capital masses circulating in production and trade expresses the scale and speed of the reproduction process. All the same, the same circumstances act differently, and even in opposite directions, on the quantities of money circulating in the two functions or spheres — or on the amounts of currency, as the English banking term has it. And this gives a fresh occasion for Tooke's absurd distinction between currency and capital. That the gentlemen of the Currency Theory confuse two things that do not belong together is no reason at all to present them as a conceptual distinction.
When business is booming — a big expansion, with the reproduction process speeding up and running at full energy — the workers all have jobs. Usually pay rises too, and that goes some way towards cancelling out the drop below the average level in the other stages of the commercial cycle. The capitalists' revenues grow noticeably at the same time. Consumption goes up all round. Prices for commodities climb steadily as well, at least in a number of branches that matter. So the amount of money in circulation increases, at least within certain bounds, because the faster turnover of money for its part puts a brake on how much the mass of means of circulation can grow. Part of society's revenue is wages, and the industrial capitalist advances that part from the start as variable capital, always in the money form; so when times are good he needs more money to keep it circulating. But we should not reckon it in twice: once as money the variable capital needs in order to circulate, and then once more as money the workers' revenue needs in order to circulate. The money handed to the workers as wages gets spent in small-scale trade, and it comes back to the banks more or less every week as deposits made by the small traders, after it has smoothed the way for all kinds of intermediate dealings in smaller circuits. When times are good the money flows back to the industrial capitalists without friction, so their need for monetary accommodation does not rise because they have a bigger wage bill and need more money to circulate their variable capital.
The upshot is that in periods of prosperity the mass of circulating medium that serves the spending of revenue grows decisively.
Now for the circulation that transfers capital, which is needed only between the capitalists themselves. This brisk period of business is at the same time the period of the most elastic and easiest credit. The velocity of circulation between capitalist and capitalist is regulated directly by credit, so the mass of circulating medium required to settle payments and even to make cash purchases falls relatively. It may expand in absolute terms, but it always declines relatively, measured against the expansion of the reproduction process. For one thing, larger masses of payments are settled without money stepping in at all; for another, given how lively the process is, the same sums of money move faster, as both means of purchase and means of payment. The same mass of money mediates the reflux of a greater number of individual capitals.
Taken as a whole, the money circulation in such periods appears 'full', even though part II (the transfer of capital) is at least relatively contracted, while part I (the spending of revenue) expands absolutely.
The refluxes express commodity capital turning back into money, M-C-M', as we saw when considering the reproduction process in Volume 2, Part One. Credit makes the return in the money form independent of the point in time of the actual return, whether for the industrial capitalist or for the merchant. Each of the two sells on credit, so his commodity is parted with before it has turned back into money for him, that is, before it has flowed back to him in the money form.
On the other hand he buys on credit, and so the value of his commodity has already turned back for him — into productive capital or into commodity capital — before that value is really turned into money, before the price of the commodity falls due and is paid. In such times of prosperity the reflux runs easily and smoothly. The small trader pays the wholesaler for certain, the wholesaler the manufacturer, and the manufacturer the importer of the raw material, and so on. The appearance of rapid and assured returns holds up for a good while after the returns themselves are over, through the credit that is already running, since credit returns stand in for the real ones. The banks begin to scent danger as soon as their customers deposit more bills of exchange than money. See the evidence of the Liverpool bank director quoted above.
Here I should insert what I noted earlier: in periods of expanding credit, the velocity of money in circulation grows faster than the prices of commodities, whereas when credit declines the prices of commodities fall more slowly than the velocity of circulation. (A Contribution to the Critique of Political Economy, 1859.)
In a period of crisis it is the other way round. Circulation no. I contracts; prices fall, and so do wages; the number of workers employed is cut back; the volume of transactions declines. In circulation no. II, by contrast, as credit declines the need for monetary accommodation grows — a point we shall go into more closely in a moment.
There is no doubt at all that as credit declines, in step with a stagnation of the reproduction process, the amount of circulation required for no. I, the spending of revenue, falls, while the amount required for no. II, the transfer of capital, rises. But it remains to be examined how far this is identical with what Fullarton and others assert:
'A demand for capital on loan and a demand for additional circulation are quite distinct things, and not often found associated.'
First it is clear that in the first of the two cases above, in the time of prosperity, when the quantity of circulating medium has to grow, the demand for it grows. But it is just as clear that when a manufacturer draws more gold or banknotes out of his bank deposit because he has more capital to spend in the money form, his demand for capital does not grow on that account — only his demand for this particular form in which he spends his capital. The demand concerns only the technical form in which he throws his capital into circulation. Just as, with credit systems developed to different degrees, the same variable capital, the same amount of wages, requires a larger mass of circulating medium in one country than in another — in England more than in Scotland, in Germany more than in England. In agriculture too the same capital at work in the reproduction process requires different amounts of money in different seasons to perform its function.
But the contrast as Fullarton draws it is not correct. It is not, as he says, a strong demand for loans that distinguishes the period of stagnation from prosperity; what distinguishes them is how easily that demand is met in prosperity and how hard it is to meet once stagnation has set in. It is precisely the enormous development of the credit system during prosperity — hence also the huge rise in the demand for loan capital, and the readiness with which supply makes itself available in such periods — that brings on the credit squeeze in the time of stagnation. So it is not a difference in the size of the demand for loans that characterizes the two periods.
As noted earlier, the two periods differ first of all in this: in prosperity the demand for circulating medium between consumers and dealers predominates, while in the period of the downturn the demand for circulating medium between capitalists predominates. In the period of stagnation the first declines and the second increases.
What strikes Fullarton and others as the decisive point is a phenomenon: at times when the securities in the Bank of England's hands rise — the loans on security and the bills it holds — its note circulation falls, and the other way round. But the size of the securities shows how much monetary accommodation is being given, in discounted bills and advances against marketable securities.
Fullarton himself says, in the passage quoted earlier, that the securities held by the Bank of England usually move in the opposite direction to its note circulation. That, on Fullarton's showing, confirms what private banks have long known in practice: no bank can raise its note issue beyond a certain amount, fixed by the needs of its customers. If it wants to make advances above that amount, it has to make them out of its capital — either by turning securities into cash, or by using money coming in that it would otherwise have invested in securities.
We also see here what Fullarton means by capital. What is capital in this case? It means that the Bank can no longer make its advances with its own banknotes — promises to pay which of course cost it nothing. So what does it make its advances with? With the proceeds from selling 'securities in reserve': government paper, stocks and other interest-bearing paper. And what does it sell those papers for? For money — gold or banknotes, in so far as these are legal tender, as the Bank of England's notes are. So whatever it advances is money, in every case.
This money now forms a part of its capital. If it advances gold, that is plain enough. If it advances notes, then these notes now represent capital, because the Bank has given up a real value for them: the interest-bearing paper. With private banks, the notes that come to them from the sale of securities can for the most part only be notes of the Bank of England or their own, since other notes are hardly accepted in payment for securities. But where it is the Bank of England itself, its own notes coming back to it in this way cost it capital, that is, interest-bearing paper; and it also withdraws these notes of its own from circulation. If it puts them out again, or issues new notes for the same amount in their place, then these now represent capital.
The reissued notes represent capital just as much when they go into advances to capitalists as when they are used later, once the demand for this kind of monetary accommodation falls off, for fresh investment in securities. In all these cases the word capital is used here only in the banker's sense, where it means that the banker is forced to lend out more than his bare credit.
Everyone knows that the Bank of England makes all its advances in its own notes. If, all the same, the Bank's note circulation normally falls as the discounted bills and the loans on security in its hands — the advances it has made — rise, then what becomes of the notes it has put into circulation? How do they flow back to the Bank?
To start with, when the demand for monetary accommodation springs from an unfavourable national balance of payments and so brings about a drain of gold, the matter is very simple. The bills are discounted in banknotes. The banknotes are exchanged for gold at the Bank itself, in the Issue Department, and the gold is exported. It comes to the same thing as if the Bank paid out gold directly, with no notes in between, right away when it discounted the bills. A rising demand of this kind — in some cases it comes to between £7 and £10 million — naturally adds not a single £5 note to the country's domestic circulation.
Now, if it is said that the Bank here advances capital and not currency, this has a double sense. First, that it advances not credit but real value, a part of its own capital or of the capital deposited with it. Second, that it advances money not for domestic circulation but for international circulation, world money; and for that purpose money must always exist in its form as a hoard, in its metallic body — in the form in which it is not merely the form of value but is itself equal to the value whose money form it is. Although this gold represents capital for the Bank and for the exporting gold dealer alike — banking capital or commercial capital — the demand does not arise for it as capital, but as the absolute form of money capital. It arises at the very moment when foreign markets are stuffed full of English commodity capital that cannot be realized. So what is demanded is capital not as capital but as money, in the form in which money is the general commodity of the world market; and that is its original form, as precious metal. The drain of gold is therefore not, as Fullarton, Tooke and others say, 'a mere question of capital'.
The drain is a question of money instead, even if in one specific function. That it is not a question of domestic circulation — contrary to what the Currency Theory people maintain — by no means proves, as Fullarton and others believe, that it is merely a question of capital. It is a question of money, in the form in which money serves as an international means of payment.
Fullarton allows that it makes no difference to the nature of the transaction whether that capital — the purchase price of the millions of quarters of foreign wheat after a poor harvest at home — is transmitted in goods or in coin (Fullarton, p. 131).
But the form of transmission matters a great deal to whether a drain of gold takes place or not. The capital is transmitted in the form of precious metal because it cannot be transmitted in the form of goods at all, or not without the greatest losses. The fear the modern banking system has of a drain of gold exceeds anything the Monetary System, for which precious metal is the only true wealth, ever dreamed of. Take for example the following examination of the Governor of the Bank of England, Morris, before the parliamentary committee on the crisis of 1847–48:
3846. The question is put to him: when one speaks of the depreciation of stocks and fixed capital, is he not aware that all capital invested in stocks and produce of every kind was depreciated in the same way; that raw cotton, raw silk and raw wool were sent to the Continent at the same giveaway prices, and that sugar, coffee and tea were sold at great sacrifice, as in forced sales? Morris answers that it was unavoidable that the country should make a considerable sacrifice in order to meet the drain of gold that had occurred as a result of the massive import of food.
3848. He is asked whether it would not have been better to break into the £8 million lying in the Bank's coffers than to try to recover the gold at such a sacrifice. Morris replies: no, that is not his view.
Here gold counts as the only real wealth.
The discovery of Tooke's, quoted by Fullarton — that, with only one or two exceptions that admit of a satisfactory explanation, every notable fall in the exchange rate followed by a drain of gold over the last half-century has coincided throughout with a comparatively low level of the circulating medium, and the other way round (Fullarton, p. 121) — shows that these drains of gold mostly set in after a period of excitement and speculation, as the signal of a collapse already begun: an indication of overstocked markets, of a foreign demand for our products that has ceased, of delayed returns, and, as the necessary sequel of all this, of commercial discredit, factories shut up, workers starving and a general stagnation of industry and business (p. 129).
Tooke's discovery is, of course, at the same time the best refutation of the claim made by the Currency people that 'a full circulation drives out bullion and a low circulation attracts it'.
On the other hand, although the Bank of England usually has a strong gold reserve in times of prosperity, this hoard is always formed in the listless, stagnant time that follows the storm.
All this wisdom about the drain of gold comes down to this: the demand for international means of circulation and payment is a different thing from the demand for domestic means of circulation and payment — which is why it follows of itself that 'the existence of a drain does not necessarily imply any diminution of the internal demand for circulation', as Fullarton says (p. 112) — and: sending precious metals out of the country, throwing them into international circulation, is not the same as throwing notes or coin into domestic circulation.
I have shown earlier, too, that the movement of the hoard set aside as a reserve fund for international payments has in and of itself nothing to do with the movement of money as a means of circulation. A complication does enter, though, because the hoard's various functions — those I developed from the nature of money: as a reserve fund for means of payment, for payments falling due at home; as a reserve fund of the circulating medium; finally as a reserve fund of world money — are all loaded onto a single reserve fund. From this it also follows that under certain circumstances a drain of gold from the Bank into the domestic economy can combine with a drain abroad.
One more complication comes in with the further function arbitrarily laid upon this hoard: to serve as a guarantee fund for the convertibility of banknotes, in countries where the credit system and credit money are developed. On top of all this there are, finally, (1) the concentration of the national reserve fund in a single principal bank, and (2) its reduction to the smallest possible minimum. Hence Fullarton's complaint (p. 143):
Fullarton's complaint is that one cannot watch the perfect calm and ease with which changes in the exchange rate usually pass off in continental countries, set beside the state of feverish unease and alarm always produced in England whenever the treasure in the Bank seems at all close to exhaustion, without being struck by the great advantage a metallic currency has in this respect.
Leave the drain of gold out of it for now. Then how can a bank that issues its own banknotes — the Bank of England, say — increase the monetary accommodation it provides without putting out more notes?
The bank's own point of view comes first. Every note outside its walls counts as being in circulation — whether it is really passing from hand to hand, or lying asleep in somebody's private hoard. All that matters to the bank is that the note is no longer in its own possession.
So if the bank expands its discounting and its advances against securities, the notes it pays out for those have to flow back to it. Otherwise they would swell the amount in circulation, and that is exactly what is not supposed to happen. The notes can come back in two different ways.
First way. The bank pays notes out to A against securities. A uses those notes to pay B a bill that has fallen due, and B deposits the notes with the bank again. That is the end of the circulation of those notes — but the loan stands.
Fullarton wrote this in his book, at p. 97: the loan stays where it is, and the currency, if nobody needs it, finds its way back to the person who issued it.
The notes the bank advanced to A have now come back to it. But the bank is now the creditor of A, or of the party drawn on in the bill A had discounted, and the debtor of B for the sum of value those notes stand for. And B has a corresponding part of the bank's capital at his disposal.
Second way. A pays B, and then either B himself or C, the next man B passes the notes on to, uses those notes to pay the bank the bills he owes it, directly or through somebody else. Here the bank has been paid with its own notes. And with that the transaction is finished — apart from A's repayment to the bank.
So how far is the bank's advance to A to be seen as an advance of capital, and how far as a mere advance of means of payment?
That depends on the nature of the advance itself. Three cases have to be looked at.
First case. A gets the sums advanced by the bank on his personal credit, giving no security for them at all. Here he has received not only an advance of means of payment, but beyond question a new capital as well, and until he pays it back he can use it in his business as additional capital and put it to work.
Second case. A has pledged securities with the bank, government bonds or shares, and received a cash advance on them, say up to two-thirds of their value that day. Here he has got the means of payment he needed, but no additional capital — he has put a greater capital value into the bank's hands than he got back from it.
But that greater capital value was, on the one hand, no use for his immediate need, means of payment, because it was invested at interest in a particular form; and on the other hand A had his reasons for not turning it straight into means of payment by selling it. His securities had, among other things, the job of serving as reserve capital, and he let them go on functioning as such. So there has been a temporary, two-way transfer of capital between A and the bank: A has not received any additional capital (quite the contrary!), though he has received the means of payment he needed. For the bank, on the other hand, the transaction was a temporary tying-up of money capital in the form of a loan, a transformation of money capital out of one form into another — and this transformation is precisely the essential function of the banking business.
Third case. A has a bill discounted at the bank and gets the amount in cash, with the discount deducted. Here he has sold a non-liquid form of money capital to the bank for the value in liquid form: the bill, not yet due, for ready money. The bill is now the bank's property. It makes no difference that, if payment fails, A as the last endorser is liable to the bank for the amount — he shares that liability with the other endorsers and with the drawer of the bill, to whom he in turn has a right of recourse. So here there is no advance at all, but a perfectly ordinary purchase and sale. A has nothing to pay back to the bank; the bank covers itself by collecting the bill when it falls due. Here too there has been a mutual transfer of capital between A and the bank, exactly as in the purchase and sale of any other commodity, and for that very reason A has received no additional capital. What he needed and got was means of payment, and he got it because the bank turned one form of his money capital — the bill — into the other — money.
So a genuine advance of capital can be spoken of only in the first case. In the second and third it holds at most in the sense in which, with every investment of capital, one 'advances' capital. In that sense the bank advances money capital to A; but for A it is money capital at most in the sense that it is a part of his capital in general. And what he asks for and uses is not specifically capital, but specifically means of payment. Otherwise every ordinary sale of commodities, by which a man gets hold of means of payment, would have to be seen as an advance of capital received.
A private bank that issues its own notes is in a different position. If its notes neither stay in local circulation nor come back to the bank as deposits or in payment of bills that have fallen due, they end up in the hands of people to whom the bank has to pay out gold or Bank of England notes in exchange for them. So in this case the advance of its own notes really amounts to an advance of Bank of England notes, or — the same thing for the bank — of gold: a part of its banking capital. The same holds when the Bank of England itself, or any other bank bound by a legal maximum on its note issue, has to sell securities in order to pull its own notes out of circulation and then put them out again in advances. Its own notes then stand for a part of its mobilizable banking capital.
Suppose circulation were purely metallic. Even then two things could happen at once. First, a drain of gold (what is meant here is evidently a drain of gold, one that at least in part goes abroad) could empty the vaults. Second, since the bank wants gold mainly only to settle payments, to finish off past transactions, its advances on securities could grow a great deal — and come back to it as deposits, or in repayment of bills falling due. The outcome: as securities in the bank's portfolio increase, its total reserves decrease; the same sum it once held as owner it now holds as a debtor to its depositors; and finally the total amount of circulating medium declines.
So far we have assumed that the advances are made in notes, which means at least a momentary increase in the note issue, even if it disappears again immediately. But that is not necessary. Instead of a paper note, the bank can open a book credit for A, so that A, its debtor, becomes an imaginary depositor with the bank. He pays his creditors with cheques on the bank, and whoever receives those cheques pays them on to his own banker, who clears them at the clearing house against the cheques drawn on him. Here notes play no part at all. The whole transaction comes down to this: a claim the bank has to make is settled with a cheque on the bank itself, and the bank's real compensation is the claim it holds as creditor against A. In this case it has advanced him a part of its banking capital, namely its own claims as a creditor.
In so far as this demand for monetary accommodation is a demand for capital, it is a demand only for money capital: capital from the banker's standpoint. That means gold (when gold is flowing abroad), or notes of the national bank, which a private bank can get only by buying them with an equivalent, so that they represent capital for it. Or, finally, it might be a matter of interest-bearing securities - government stock, shares and the like - that have to be sold in order to draw gold or notes to itself. These, however, if they are government securities, are capital only for the person who bought them, for whom they represent his purchase price, the capital he has invested in them. In themselves they are no capital, only creditor's claims. If they are mortgages, they are mere claims on future ground-rent; if they are shares of another kind, mere property titles that entitle the holder to receive future surplus-value. None of these things is real capital, none forms a component of capital, and in themselves they are no values either. Similar transactions can also turn money belonging to the bank into a deposit, so that the bank becomes a debtor instead of the owner of it and holds it under another title. Important as this is for the bank itself, it changes nothing in the mass of capital stocked in the country, not even of money capital. Capital figures here, then, only as money capital, and where it is not present in actual money form, as a mere title to capital. This matters greatly, because scarcity of, and pressing demand for, bank capital is confused with a shrinking of real capital — which in such cases is on the contrary present in excess, in the form of means of production and products, and stifles the markets.
So it is quite easy to see how the pile of securities a bank keeps as collateral can swell, and so how a rising clamour for monetary accommodation can be met by the bank, while the total quantity of means of circulation holds level or falls. And in a squeeze like that this total is fenced in two ways. First, gold drains away. Second, money is wanted purely as a means of payment: the notes handed out come straight back, or book credit carries the deal through with no notes issued at all, so that a credit transaction alone settles the payments — and settling them was the whole purpose of the business. Money has this odd property: where it serves only to clear payments (and in a crisis one takes up an advance in order to pay, not to buy; to wind up old business, not to open new), its circulation is next to nothing — and that holds even where the clearing is not done by a credit operation alone, with no money stepping in at all. So a huge number of such transactions can go through, with a heavy demand for monetary accommodation, without the circulation widening at all.
But the bare fact that the Bank of England's circulation stays level, or even falls, while it grants a great deal of monetary accommodation, proves nothing at first sight — contrary to what Fullarton, Tooke and others assume (led astray by their mistake that monetary accommodation is the same thing as taking up capital on loan, additional capital). It does not prove that the circulation of money (banknotes) in its function as means of payment fails to grow and expand. Notes circulate less as means of purchase in times of business stagnation, when so much accommodation is needed; so their circulation as means of payment can rise, while the total in circulation — the sum of notes acting as means of purchase and as means of payment — still holds level or even falls. And where banknotes circulate as means of payment but stream straight back to the bank that issued them, then in the eyes of those economists this is precisely not circulation at all.
If circulation as means of payment grew to a greater degree than circulation as means of purchase declines, total circulation would rise, even though the money working as means of purchase had fallen a great deal in quantity. And that really does happen at certain moments of the crisis: when credit breaks down completely, when not only commodities and securities can no longer be sold but bills have become impossible to discount, and nothing counts any longer but bare payment, or, as the merchant puts it, cash. Because Fullarton and others do not grasp that the circulation of notes as means of payment is the characteristic thing in such times of monetary shortage, they treat this phenomenon as accidental.
Fullarton writes that those eager scrambles to get hold of banknotes which mark seasons of panic — scrambles that can sometimes, as at the close of 1825, lead to a sudden though only temporary enlargement of the issues, even while the outflow of bullion is still going on — are, he thinks, not to be counted among the natural or necessary accompaniments of a low exchange rate. In such cases the demand, he says, is not for circulation (meaning circulation as a means of purchase) but for hoarding (that is, for a reserve of means of payment): a demand on the part of frightened bankers and capitalists that generally arises in the last act of the crisis, after the drain has long continued, and is the precursor of its end. (Fullarton, p. 130.)
When we looked at money as a means of payment (Volume 1, Chapter 3, 3, b), we saw how, when the chain of payments is violently interrupted, money flips over from a merely ideal form into the material and at the same time absolute form of value, as against commodities. A few examples of this were given there, in notes 51 and 52. The interruption itself is in part an effect, in part a cause, of the collapse of credit and of the circumstances that go with it: markets glutted, commodities devalued, production interrupted, and so on.
But one thing is clear: Fullarton turns the distinction between money as means of purchase and money as means of payment into the false distinction between currency and capital. And lying behind this again is the narrow-minded banker's idea of what circulation is.
One might still ask: what is actually missing in such times of tight money — capital, or money in its determination as a means of payment? And this, as is well known, is a controversy.
To begin with, in so far as the tightness shows itself in a drain of gold, it is clear that what is demanded is the international means of payment. But money in its determination as international means of payment is gold in its metallic reality, as a substance that is itself valuable, a mass of value. It is at the same time capital — but capital not as commodity capital, rather as money capital; capital not in the form of the commodity but in the form of money (and of money in the pre-eminent sense of the word, in which it exists as the general world-market commodity). There is no opposition here between the demand for money as means of payment and the demand for capital. The opposition lies between capital in its form as money and capital in its form as commodity; and the form in which it is demanded here, and in which alone it can function, is its money form.
Leaving aside this demand for gold (or silver), one cannot say that capital is lacking in any way in such times of crisis. Under extraordinary circumstances — a rise in grain prices, a cotton famine and so on — this can be the case; but such things are in no way necessary or regular companions of these periods. So the existence of such a capital shortage cannot be inferred straight off from the fact that a rush for monetary accommodation exists. Quite the opposite. The markets are glutted, swamped with commodity capital. So what causes the tightness is in any case not a shortage of commodity capital. We shall come back to this question later.
The difference between circulation and capital, as Tooke, Wilson and others draw it, comes down to two things. And in drawing it they throw three quite separate things into one heap: means of circulation as money, money capital in general, and interest-bearing capital (moneyed capital, as the English call it).
Money circulates in one way as coin, where it mediates the spending of revenue — the dealings between individual consumers and retail traders, and by retail traders we mean every trader who sells to consumers, that is to individual consumers as opposed to productive consumers or producers. Here money circulates in the function of coin, even though it is constantly standing in for capital. A certain part of a country's money is always tied up in this function, though the individual coins making it up are always changing.
In the other direction, where money mediates the transfer of capital — whether as means of purchase (means of circulation) or as means of payment — it is capital. So it is neither the means-of-purchase function nor the means-of-payment function that sets it off from coin: money can act as means of purchase between one dealer and another, where they buy from each other for cash, and it can even act as means of payment between dealer and consumer, where credit is given and the revenue is consumed first and paid for afterwards. So the difference is this: in the second case the money does not merely stand in for capital on one side, the seller's; the other side, the buyer, also spends it and advances it as capital. The distinction really is that between the money form of revenue and the money form of capital, and not between circulation and capital, since between dealers, just as between consumers and dealers, a definite quantity of money circulates, so that it is equally circulation in both functions. Tooke's way of seeing the matter now brings in confusion of several kinds:
(1) By mixing up the functional roles;
(2) by dragging in the question of the quantity of money circulating, in both functions taken together;
(3) by dragging in the question of how the quantities of circulating medium at work in the two functions — and therefore in the two spheres of the reproduction process — stand in relation to one another.
On the first point: the mixing up of the functional roles — the idea that money is circulation (currency) in one form and capital in the other. Wherever money serves one function or the other, whether realizing revenue or transferring capital, it acts in buying and selling or in paying, as means of purchase or means of payment, and in the wider sense of the word as means of circulation. The further label it carries in the accounts of whoever spends or receives it — that it stands for capital or for revenue to him — changes absolutely nothing in this; and this shows itself in two ways.
The kinds of money circulating in the two spheres are different, but the same coin, a £5 note for instance, passes from one sphere into the other and performs both functions by turns. That is unavoidable, simply because the retail trader can give his capital its money form only in the form of the coin he gets from his customers. We can take it that small change proper has the centre of gravity of its circulation in retail trade; the retail trader constantly needs it for giving change and constantly gets it back from his customers in payment. But he also receives money, that is coin in the metal that serves as measure of value — sovereigns in England — and even banknotes, particularly notes of low denomination, £5 and £10. These gold pieces and notes, along with any surplus small change, he deposits every day or every week with his bank, and pays for his purchases by a claim on that deposit.
But the same gold pieces and notes are just as constantly drawn out of the banks by the public in its capacity as consumer, as the money form of its revenue, directly or indirectly (small change, for instance, going to manufacturers to pay wages), and they flow constantly back to the retail traders, realizing for them afresh a part of their capital and at the same time a part of their revenue. This last point matters, and Tooke completely overlooks it. Only where money is laid out as money capital — at the start of the reproduction process (Volume 2, Part One) — does capital value exist purely as such. For the commodity produced contains not only capital but surplus-value already; it is not merely capital in itself but capital that has come to be, capital with the source of revenue built into it. So what the retail trader parts with for the money flowing back to him, his commodity, is for him capital plus profit, capital plus revenue.
And further: as the circulating money flows back to the retail trader, it restores the money form of his capital.
So to turn the difference between circulation as circulation of revenue and circulation of capital into a difference between circulation and capital is thoroughly wrong-headed. In Tooke's case this way of speaking comes from his simply taking the standpoint of the banker who issues his own banknotes. The amount of his notes that is permanently in the hands of the public — always different notes, but always the same amount — and functioning there as a means of circulation costs him nothing but paper and printing. They are circulating certificates of debt, bills of exchange drawn on himself, yet they bring him in money and so serve him as a means of valorizing his capital. They are different, though, from his capital, whether that is his own or borrowed. So there arises for him a special distinction between circulation and capital — one that has nothing to do with defining the concepts as such, and least of all with the definitions Tooke has just given.
The particular character of the money — whether it serves as the money form of revenue or of capital — does not, to begin with, change anything in money's character as a means of circulation. It keeps that character whichever of the two functions it performs. All the same, when money turns up as the money form of revenue it functions more as means of circulation in the strict sense (coin, means of purchase), because these purchases and sales are so fragmented, and because most of those who spend revenue, the workers, can buy relatively little on credit; whereas in the dealings of the commercial world, where the circulating medium is the money form of capital, money functions mainly as means of payment, partly because business is concentrated and partly because the credit system prevails. But the difference between money as means of payment and money as means of purchase (means of circulation) is a distinction belonging to money itself, not a distinction between money and capital. Because more copper and silver circulate in retail trade and more gold in large-scale trade, the difference between silver and copper on the one side and gold on the other is not the difference between circulation and capital.
Now bring in the question of how much money circulates in both functions together. Wherever money circulates — as a means of purchase or as a means of payment, in either of the two spheres, and no matter whether it is realizing revenue or capital — the same laws govern the size of its circulating mass that were set out earlier, when we looked at simple commodity circulation (Volume 1, Chapter 3, 2, b). In both cases the same things fix the amount of money in circulation, the currency: how fast it moves, that is how many times the same coins repeat the same job as means of purchase and payment in a given stretch of time; the mass of purchases and sales, or payments, going on at the same moment; the sum of prices of the commodities in circulation; and finally the balances of payments to be settled over that time. Whether the money doing this work stands for capital or for revenue, for the one who pays or the one who receives, is a matter of indifference and changes absolutely nothing. Its quantity is determined simply by its function as means of purchase and payment.
Now the question of the relative quantities of circulating medium required in the two functions, and therefore in the two spheres of the reproduction process. The two spheres of circulation are inwardly connected, since on one side the mass of revenue to be spent expresses the scale of consumption, and on the other the size of the capital masses circulating in production and trade expresses the scale and speed of the reproduction process. All the same, the same circumstances act differently, and even in opposite directions, on the quantities of money circulating in the two functions or spheres — or on the amounts of currency, as the English banking term has it. And this gives a fresh occasion for Tooke's absurd distinction between currency and capital. That the gentlemen of the Currency Theory confuse two things that do not belong together is no reason at all to present them as a conceptual distinction.
When business is booming — a big expansion, with the reproduction process speeding up and running at full energy — the workers all have jobs. Usually pay rises too, and that goes some way towards cancelling out the drop below the average level in the other stages of the commercial cycle. The capitalists' revenues grow noticeably at the same time. Consumption goes up all round. Prices for commodities climb steadily as well, at least in a number of branches that matter. So the amount of money in circulation increases, at least within certain bounds, because the faster turnover of money for its part puts a brake on how much the mass of means of circulation can grow. Part of society's revenue is wages, and the industrial capitalist advances that part from the start as variable capital, always in the money form; so when times are good he needs more money to keep it circulating. But we should not reckon it in twice: once as money the variable capital needs in order to circulate, and then once more as money the workers' revenue needs in order to circulate. The money handed to the workers as wages gets spent in small-scale trade, and it comes back to the banks more or less every week as deposits made by the small traders, after it has smoothed the way for all kinds of intermediate dealings in smaller circuits. When times are good the money flows back to the industrial capitalists without friction, so their need for monetary accommodation does not rise because they have a bigger wage bill and need more money to circulate their variable capital.
The upshot is that in periods of prosperity the mass of circulating medium that serves the spending of revenue grows decisively.
Now for the circulation that transfers capital, which is needed only between the capitalists themselves. This brisk period of business is at the same time the period of the most elastic and easiest credit. The velocity of circulation between capitalist and capitalist is regulated directly by credit, so the mass of circulating medium required to settle payments and even to make cash purchases falls relatively. It may expand in absolute terms, but it always declines relatively, measured against the expansion of the reproduction process. For one thing, larger masses of payments are settled without money stepping in at all; for another, given how lively the process is, the same sums of money move faster, as both means of purchase and means of payment. The same mass of money mediates the reflux of a greater number of individual capitals.
Taken as a whole, the money circulation in such periods appears 'full', even though part II (the transfer of capital) is at least relatively contracted, while part I (the spending of revenue) expands absolutely.
The refluxes express commodity capital turning back into money, M-C-M', as we saw when considering the reproduction process in Volume 2, Part One. Credit makes the return in the money form independent of the point in time of the actual return, whether for the industrial capitalist or for the merchant. Each of the two sells on credit, so his commodity is parted with before it has turned back into money for him, that is, before it has flowed back to him in the money form.
On the other hand he buys on credit, and so the value of his commodity has already turned back for him — into productive capital or into commodity capital — before that value is really turned into money, before the price of the commodity falls due and is paid. In such times of prosperity the reflux runs easily and smoothly. The small trader pays the wholesaler for certain, the wholesaler the manufacturer, and the manufacturer the importer of the raw material, and so on. The appearance of rapid and assured returns holds up for a good while after the returns themselves are over, through the credit that is already running, since credit returns stand in for the real ones. The banks begin to scent danger as soon as their customers deposit more bills of exchange than money. See the evidence of the Liverpool bank director quoted above.
Here I should insert what I noted earlier: in periods of expanding credit, the velocity of money in circulation grows faster than the prices of commodities, whereas when credit declines the prices of commodities fall more slowly than the velocity of circulation. (A Contribution to the Critique of Political Economy, 1859.)
In a period of crisis it is the other way round. Circulation no. I contracts; prices fall, and so do wages; the number of workers employed is cut back; the volume of transactions declines. In circulation no. II, by contrast, as credit declines the need for monetary accommodation grows — a point we shall go into more closely in a moment.
There is no doubt at all that as credit declines, in step with a stagnation of the reproduction process, the amount of circulation required for no. I, the spending of revenue, falls, while the amount required for no. II, the transfer of capital, rises. But it remains to be examined how far this is identical with what Fullarton and others assert:
'A demand for capital on loan and a demand for additional circulation are quite distinct things, and not often found associated.'
First it is clear that in the first of the two cases above, in the time of prosperity, when the quantity of circulating medium has to grow, the demand for it grows. But it is just as clear that when a manufacturer draws more gold or banknotes out of his bank deposit because he has more capital to spend in the money form, his demand for capital does not grow on that account — only his demand for this particular form in which he spends his capital. The demand concerns only the technical form in which he throws his capital into circulation. Just as, with credit systems developed to different degrees, the same variable capital, the same amount of wages, requires a larger mass of circulating medium in one country than in another — in England more than in Scotland, in Germany more than in England. In agriculture too the same capital at work in the reproduction process requires different amounts of money in different seasons to perform its function.
But the contrast as Fullarton draws it is not correct. It is not, as he says, a strong demand for loans that distinguishes the period of stagnation from prosperity; what distinguishes them is how easily that demand is met in prosperity and how hard it is to meet once stagnation has set in. It is precisely the enormous development of the credit system during prosperity — hence also the huge rise in the demand for loan capital, and the readiness with which supply makes itself available in such periods — that brings on the credit squeeze in the time of stagnation. So it is not a difference in the size of the demand for loans that characterizes the two periods.
As noted earlier, the two periods differ first of all in this: in prosperity the demand for circulating medium between consumers and dealers predominates, while in the period of the downturn the demand for circulating medium between capitalists predominates. In the period of stagnation the first declines and the second increases.
What strikes Fullarton and others as the decisive point is a phenomenon: at times when the securities in the Bank of England's hands rise — the loans on security and the bills it holds — its note circulation falls, and the other way round. But the size of the securities shows how much monetary accommodation is being given, in discounted bills and advances against marketable securities.
Fullarton himself says, in the passage quoted earlier, that the securities held by the Bank of England usually move in the opposite direction to its note circulation. That, on Fullarton's showing, confirms what private banks have long known in practice: no bank can raise its note issue beyond a certain amount, fixed by the needs of its customers. If it wants to make advances above that amount, it has to make them out of its capital — either by turning securities into cash, or by using money coming in that it would otherwise have invested in securities.
We also see here what Fullarton means by capital. What is capital in this case? It means that the Bank can no longer make its advances with its own banknotes — promises to pay which of course cost it nothing. So what does it make its advances with? With the proceeds from selling 'securities in reserve': government paper, stocks and other interest-bearing paper. And what does it sell those papers for? For money — gold or banknotes, in so far as these are legal tender, as the Bank of England's notes are. So whatever it advances is money, in every case.
This money now forms a part of its capital. If it advances gold, that is plain enough. If it advances notes, then these notes now represent capital, because the Bank has given up a real value for them: the interest-bearing paper. With private banks, the notes that come to them from the sale of securities can for the most part only be notes of the Bank of England or their own, since other notes are hardly accepted in payment for securities. But where it is the Bank of England itself, its own notes coming back to it in this way cost it capital, that is, interest-bearing paper; and it also withdraws these notes of its own from circulation. If it puts them out again, or issues new notes for the same amount in their place, then these now represent capital.
The reissued notes represent capital just as much when they go into advances to capitalists as when they are used later, once the demand for this kind of monetary accommodation falls off, for fresh investment in securities. In all these cases the word capital is used here only in the banker's sense, where it means that the banker is forced to lend out more than his bare credit.
Everyone knows that the Bank of England makes all its advances in its own notes. If, all the same, the Bank's note circulation normally falls as the discounted bills and the loans on security in its hands — the advances it has made — rise, then what becomes of the notes it has put into circulation? How do they flow back to the Bank?
To start with, when the demand for monetary accommodation springs from an unfavourable national balance of payments and so brings about a drain of gold, the matter is very simple. The bills are discounted in banknotes. The banknotes are exchanged for gold at the Bank itself, in the Issue Department, and the gold is exported. It comes to the same thing as if the Bank paid out gold directly, with no notes in between, right away when it discounted the bills. A rising demand of this kind — in some cases it comes to between £7 and £10 million — naturally adds not a single £5 note to the country's domestic circulation.
Now, if it is said that the Bank here advances capital and not currency, this has a double sense. First, that it advances not credit but real value, a part of its own capital or of the capital deposited with it. Second, that it advances money not for domestic circulation but for international circulation, world money; and for that purpose money must always exist in its form as a hoard, in its metallic body — in the form in which it is not merely the form of value but is itself equal to the value whose money form it is. Although this gold represents capital for the Bank and for the exporting gold dealer alike — banking capital or commercial capital — the demand does not arise for it as capital, but as the absolute form of money capital. It arises at the very moment when foreign markets are stuffed full of English commodity capital that cannot be realized. So what is demanded is capital not as capital but as money, in the form in which money is the general commodity of the world market; and that is its original form, as precious metal. The drain of gold is therefore not, as Fullarton, Tooke and others say, 'a mere question of capital'.
The drain is a question of money instead, even if in one specific function. That it is not a question of domestic circulation — contrary to what the Currency Theory people maintain — by no means proves, as Fullarton and others believe, that it is merely a question of capital. It is a question of money, in the form in which money serves as an international means of payment.
Fullarton allows that it makes no difference to the nature of the transaction whether that capital — the purchase price of the millions of quarters of foreign wheat after a poor harvest at home — is transmitted in goods or in coin (Fullarton, p. 131).
But the form of transmission matters a great deal to whether a drain of gold takes place or not. The capital is transmitted in the form of precious metal because it cannot be transmitted in the form of goods at all, or not without the greatest losses. The fear the modern banking system has of a drain of gold exceeds anything the Monetary System, for which precious metal is the only true wealth, ever dreamed of. Take for example the following examination of the Governor of the Bank of England, Morris, before the parliamentary committee on the crisis of 1847–48:
3846. The question is put to him: when one speaks of the depreciation of stocks and fixed capital, is he not aware that all capital invested in stocks and produce of every kind was depreciated in the same way; that raw cotton, raw silk and raw wool were sent to the Continent at the same giveaway prices, and that sugar, coffee and tea were sold at great sacrifice, as in forced sales? Morris answers that it was unavoidable that the country should make a considerable sacrifice in order to meet the drain of gold that had occurred as a result of the massive import of food.
3848. He is asked whether it would not have been better to break into the £8 million lying in the Bank's coffers than to try to recover the gold at such a sacrifice. Morris replies: no, that is not his view.
Here gold counts as the only real wealth.
The discovery of Tooke's, quoted by Fullarton — that, with only one or two exceptions that admit of a satisfactory explanation, every notable fall in the exchange rate followed by a drain of gold over the last half-century has coincided throughout with a comparatively low level of the circulating medium, and the other way round (Fullarton, p. 121) — shows that these drains of gold mostly set in after a period of excitement and speculation, as the signal of a collapse already begun: an indication of overstocked markets, of a foreign demand for our products that has ceased, of delayed returns, and, as the necessary sequel of all this, of commercial discredit, factories shut up, workers starving and a general stagnation of industry and business (p. 129).
Tooke's discovery is, of course, at the same time the best refutation of the claim made by the Currency people that 'a full circulation drives out bullion and a low circulation attracts it'.
On the other hand, although the Bank of England usually has a strong gold reserve in times of prosperity, this hoard is always formed in the listless, stagnant time that follows the storm.
All this wisdom about the drain of gold comes down to this: the demand for international means of circulation and payment is a different thing from the demand for domestic means of circulation and payment — which is why it follows of itself that 'the existence of a drain does not necessarily imply any diminution of the internal demand for circulation', as Fullarton says (p. 112) — and: sending precious metals out of the country, throwing them into international circulation, is not the same as throwing notes or coin into domestic circulation.
I have shown earlier, too, that the movement of the hoard set aside as a reserve fund for international payments has in and of itself nothing to do with the movement of money as a means of circulation. A complication does enter, though, because the hoard's various functions — those I developed from the nature of money: as a reserve fund for means of payment, for payments falling due at home; as a reserve fund of the circulating medium; finally as a reserve fund of world money — are all loaded onto a single reserve fund. From this it also follows that under certain circumstances a drain of gold from the Bank into the domestic economy can combine with a drain abroad.
One more complication comes in with the further function arbitrarily laid upon this hoard: to serve as a guarantee fund for the convertibility of banknotes, in countries where the credit system and credit money are developed. On top of all this there are, finally, (1) the concentration of the national reserve fund in a single principal bank, and (2) its reduction to the smallest possible minimum. Hence Fullarton's complaint (p. 143):
Fullarton's complaint is that one cannot watch the perfect calm and ease with which changes in the exchange rate usually pass off in continental countries, set beside the state of feverish unease and alarm always produced in England whenever the treasure in the Bank seems at all close to exhaustion, without being struck by the great advantage a metallic currency has in this respect.
Leave the drain of gold out of it for now. Then how can a bank that issues its own banknotes — the Bank of England, say — increase the monetary accommodation it provides without putting out more notes?
The bank's own point of view comes first. Every note outside its walls counts as being in circulation — whether it is really passing from hand to hand, or lying asleep in somebody's private hoard. All that matters to the bank is that the note is no longer in its own possession.
So if the bank expands its discounting and its advances against securities, the notes it pays out for those have to flow back to it. Otherwise they would swell the amount in circulation, and that is exactly what is not supposed to happen. The notes can come back in two different ways.
First way. The bank pays notes out to A against securities. A uses those notes to pay B a bill that has fallen due, and B deposits the notes with the bank again. That is the end of the circulation of those notes — but the loan stands.
Fullarton wrote this in his book, at p. 97: the loan stays where it is, and the currency, if nobody needs it, finds its way back to the person who issued it.
The notes the bank advanced to A have now come back to it. But the bank is now the creditor of A, or of the party drawn on in the bill A had discounted, and the debtor of B for the sum of value those notes stand for. And B has a corresponding part of the bank's capital at his disposal.
Second way. A pays B, and then either B himself or C, the next man B passes the notes on to, uses those notes to pay the bank the bills he owes it, directly or through somebody else. Here the bank has been paid with its own notes. And with that the transaction is finished — apart from A's repayment to the bank.
So how far is the bank's advance to A to be seen as an advance of capital, and how far as a mere advance of means of payment?
That depends on the nature of the advance itself. Three cases have to be looked at.
First case. A gets the sums advanced by the bank on his personal credit, giving no security for them at all. Here he has received not only an advance of means of payment, but beyond question a new capital as well, and until he pays it back he can use it in his business as additional capital and put it to work.
Second case. A has pledged securities with the bank, government bonds or shares, and received a cash advance on them, say up to two-thirds of their value that day. Here he has got the means of payment he needed, but no additional capital — he has put a greater capital value into the bank's hands than he got back from it.
But that greater capital value was, on the one hand, no use for his immediate need, means of payment, because it was invested at interest in a particular form; and on the other hand A had his reasons for not turning it straight into means of payment by selling it. His securities had, among other things, the job of serving as reserve capital, and he let them go on functioning as such. So there has been a temporary, two-way transfer of capital between A and the bank: A has not received any additional capital (quite the contrary!), though he has received the means of payment he needed. For the bank, on the other hand, the transaction was a temporary tying-up of money capital in the form of a loan, a transformation of money capital out of one form into another — and this transformation is precisely the essential function of the banking business.
Third case. A has a bill discounted at the bank and gets the amount in cash, with the discount deducted. Here he has sold a non-liquid form of money capital to the bank for the value in liquid form: the bill, not yet due, for ready money. The bill is now the bank's property. It makes no difference that, if payment fails, A as the last endorser is liable to the bank for the amount — he shares that liability with the other endorsers and with the drawer of the bill, to whom he in turn has a right of recourse. So here there is no advance at all, but a perfectly ordinary purchase and sale. A has nothing to pay back to the bank; the bank covers itself by collecting the bill when it falls due. Here too there has been a mutual transfer of capital between A and the bank, exactly as in the purchase and sale of any other commodity, and for that very reason A has received no additional capital. What he needed and got was means of payment, and he got it because the bank turned one form of his money capital — the bill — into the other — money.
So a genuine advance of capital can be spoken of only in the first case. In the second and third it holds at most in the sense in which, with every investment of capital, one 'advances' capital. In that sense the bank advances money capital to A; but for A it is money capital at most in the sense that it is a part of his capital in general. And what he asks for and uses is not specifically capital, but specifically means of payment. Otherwise every ordinary sale of commodities, by which a man gets hold of means of payment, would have to be seen as an advance of capital received.
A private bank that issues its own notes is in a different position. If its notes neither stay in local circulation nor come back to the bank as deposits or in payment of bills that have fallen due, they end up in the hands of people to whom the bank has to pay out gold or Bank of England notes in exchange for them. So in this case the advance of its own notes really amounts to an advance of Bank of England notes, or — the same thing for the bank — of gold: a part of its banking capital. The same holds when the Bank of England itself, or any other bank bound by a legal maximum on its note issue, has to sell securities in order to pull its own notes out of circulation and then put them out again in advances. Its own notes then stand for a part of its mobilizable banking capital.
Suppose circulation were purely metallic. Even then two things could happen at once. First, a drain of gold (what is meant here is evidently a drain of gold, one that at least in part goes abroad) could empty the vaults. Second, since the bank wants gold mainly only to settle payments, to finish off past transactions, its advances on securities could grow a great deal — and come back to it as deposits, or in repayment of bills falling due. The outcome: as securities in the bank's portfolio increase, its total reserves decrease; the same sum it once held as owner it now holds as a debtor to its depositors; and finally the total amount of circulating medium declines.
So far we have assumed that the advances are made in notes, which means at least a momentary increase in the note issue, even if it disappears again immediately. But that is not necessary. Instead of a paper note, the bank can open a book credit for A, so that A, its debtor, becomes an imaginary depositor with the bank. He pays his creditors with cheques on the bank, and whoever receives those cheques pays them on to his own banker, who clears them at the clearing house against the cheques drawn on him. Here notes play no part at all. The whole transaction comes down to this: a claim the bank has to make is settled with a cheque on the bank itself, and the bank's real compensation is the claim it holds as creditor against A. In this case it has advanced him a part of its banking capital, namely its own claims as a creditor.
In so far as this demand for monetary accommodation is a demand for capital, it is a demand only for money capital: capital from the banker's standpoint. That means gold (when gold is flowing abroad), or notes of the national bank, which a private bank can get only by buying them with an equivalent, so that they represent capital for it. Or, finally, it might be a matter of interest-bearing securities - government stock, shares and the like - that have to be sold in order to draw gold or notes to itself. These, however, if they are government securities, are capital only for the person who bought them, for whom they represent his purchase price, the capital he has invested in them. In themselves they are no capital, only creditor's claims. If they are mortgages, they are mere claims on future ground-rent; if they are shares of another kind, mere property titles that entitle the holder to receive future surplus-value. None of these things is real capital, none forms a component of capital, and in themselves they are no values either. Similar transactions can also turn money belonging to the bank into a deposit, so that the bank becomes a debtor instead of the owner of it and holds it under another title. Important as this is for the bank itself, it changes nothing in the mass of capital stocked in the country, not even of money capital. Capital figures here, then, only as money capital, and where it is not present in actual money form, as a mere title to capital. This matters greatly, because scarcity of, and pressing demand for, bank capital is confused with a shrinking of real capital — which in such cases is on the contrary present in excess, in the form of means of production and products, and stifles the markets.
So it is quite easy to see how the pile of securities a bank keeps as collateral can swell, and so how a rising clamour for monetary accommodation can be met by the bank, while the total quantity of means of circulation holds level or falls. And in a squeeze like that this total is fenced in two ways. First, gold drains away. Second, money is wanted purely as a means of payment: the notes handed out come straight back, or book credit carries the deal through with no notes issued at all, so that a credit transaction alone settles the payments — and settling them was the whole purpose of the business. Money has this odd property: where it serves only to clear payments (and in a crisis one takes up an advance in order to pay, not to buy; to wind up old business, not to open new), its circulation is next to nothing — and that holds even where the clearing is not done by a credit operation alone, with no money stepping in at all. So a huge number of such transactions can go through, with a heavy demand for monetary accommodation, without the circulation widening at all.
But the bare fact that the Bank of England's circulation stays level, or even falls, while it grants a great deal of monetary accommodation, proves nothing at first sight — contrary to what Fullarton, Tooke and others assume (led astray by their mistake that monetary accommodation is the same thing as taking up capital on loan, additional capital). It does not prove that the circulation of money (banknotes) in its function as means of payment fails to grow and expand. Notes circulate less as means of purchase in times of business stagnation, when so much accommodation is needed; so their circulation as means of payment can rise, while the total in circulation — the sum of notes acting as means of purchase and as means of payment — still holds level or even falls. And where banknotes circulate as means of payment but stream straight back to the bank that issued them, then in the eyes of those economists this is precisely not circulation at all.
If circulation as means of payment grew to a greater degree than circulation as means of purchase declines, total circulation would rise, even though the money working as means of purchase had fallen a great deal in quantity. And that really does happen at certain moments of the crisis: when credit breaks down completely, when not only commodities and securities can no longer be sold but bills have become impossible to discount, and nothing counts any longer but bare payment, or, as the merchant puts it, cash. Because Fullarton and others do not grasp that the circulation of notes as means of payment is the characteristic thing in such times of monetary shortage, they treat this phenomenon as accidental.
Fullarton writes that those eager scrambles to get hold of banknotes which mark seasons of panic — scrambles that can sometimes, as at the close of 1825, lead to a sudden though only temporary enlargement of the issues, even while the outflow of bullion is still going on — are, he thinks, not to be counted among the natural or necessary accompaniments of a low exchange rate. In such cases the demand, he says, is not for circulation (meaning circulation as a means of purchase) but for hoarding (that is, for a reserve of means of payment): a demand on the part of frightened bankers and capitalists that generally arises in the last act of the crisis, after the drain has long continued, and is the precursor of its end. (Fullarton, p. 130.)
When we looked at money as a means of payment (Volume 1, Chapter 3, 3, b), we saw how, when the chain of payments is violently interrupted, money flips over from a merely ideal form into the material and at the same time absolute form of value, as against commodities. A few examples of this were given there, in notes 51 and 52. The interruption itself is in part an effect, in part a cause, of the collapse of credit and of the circumstances that go with it: markets glutted, commodities devalued, production interrupted, and so on.
But one thing is clear: Fullarton turns the distinction between money as means of purchase and money as means of payment into the false distinction between currency and capital. And lying behind this again is the narrow-minded banker's idea of what circulation is.
One might still ask: what is actually missing in such times of tight money — capital, or money in its determination as a means of payment? And this, as is well known, is a controversy.
To begin with, in so far as the tightness shows itself in a drain of gold, it is clear that what is demanded is the international means of payment. But money in its determination as international means of payment is gold in its metallic reality, as a substance that is itself valuable, a mass of value. It is at the same time capital — but capital not as commodity capital, rather as money capital; capital not in the form of the commodity but in the form of money (and of money in the pre-eminent sense of the word, in which it exists as the general world-market commodity). There is no opposition here between the demand for money as means of payment and the demand for capital. The opposition lies between capital in its form as money and capital in its form as commodity; and the form in which it is demanded here, and in which alone it can function, is its money form.
Leaving aside this demand for gold (or silver), one cannot say that capital is lacking in any way in such times of crisis. Under extraordinary circumstances — a rise in grain prices, a cotton famine and so on — this can be the case; but such things are in no way necessary or regular companions of these periods. So the existence of such a capital shortage cannot be inferred straight off from the fact that a rush for monetary accommodation exists. Quite the opposite. The markets are glutted, swamped with commodity capital. So what causes the tightness is in any case not a shortage of commodity capital. We shall come back to this question later.