We now come to the only questions about the credit system that are genuinely hard. They are the following.
First: the accumulation of money capital in the strict sense. How far is it a sign of real capital accumulation — that is, of reproduction on an expanded scale — and how far is it not?
Then there is the so-called 'plethora' of capital, a term used only of interest-bearing, that is money, capital. Is it merely one particular way of expressing industrial overproduction, or does it form a phenomenon in its own right, alongside that overproduction?
And does this plethora, this over-supply of money capital, coincide with the presence of stagnant heaps of money (bullion, gold coin and banknotes), so that this surplus of actual money is the expression of that plethora of loan capital and its form of appearance?
And second: how far does monetary scarcity — that is, a shortage of loan capital — express a shortage of real capital, in both its forms, commodity capital and productive capital? And how far, on the other hand, does it coincide with a shortage of money as such, a shortage of means of circulation?
As far as we have so far looked at the peculiar form in which money capital, and money wealth in general, accumulates, it has come down to this: an accumulation of ownership claims on labour. The accumulation of the capital of the national debt means, as we saw, nothing more than a growing class of state creditors who have the right to take certain sums off the top of the tax revenue. And in this — that even an accumulation of debts can appear as an accumulation of capital — the distortion at work in the credit system shows itself complete.
These promissory notes, issued for a capital that was originally borrowed and long since spent, these paper duplicates of a destroyed capital, serve their owners as capital in so far as they are saleable commodities and can therefore be turned back into capital.
The ownership titles to joint-stock companies, railways, mines and the like really are titles to real capital, as we have also seen. But they give no control over that capital. It cannot be withdrawn. All they give is a legal claim to a share of the surplus-value that this capital is to produce.
These titles too, however, become paper duplicates of the real capital — as if a bill of lading got a value of its own alongside the cargo it refers to, and at the same time as the cargo. They turn into nominal representatives of capitals that do not exist. For the real capital is there all along, beside them, and does not change hands in the least when these duplicates change hands. They become forms of interest-bearing capital not only because they secure certain revenues, but also because their repayment as capital values can be got back by selling them.
In so far as the accumulation of these papers expresses the accumulation of railways, mines, steamships and so on, it expresses an expansion of the real reproduction process — just as a longer tax list, say for personal property, shows that this property itself has expanded. But as duplicates that can themselves be traded as commodities, and therefore circulate as capital values, they are illusory; and their value can fall and rise quite independently of the value movement of the real capital they are titles to. Their value — that is, their quotation on the stock exchange — necessarily has a tendency to rise when the rate of interest falls, in so far as that fall, apart from the peculiar movements of money capital, is simply a consequence of the tendential fall in the rate of profit. So this imaginary wealth — every piece of it carrying a fixed original nominal value — expands in the value quoted for it, for this reason alone, as capitalist production develops.
Gains and losses from price swings in these ownership titles, and the way those titles get concentrated in the hands of railway kings and the like, become by the nature of the thing more and more the result of gambling — and gambling now appears in the place of labour as the original way of acquiring capital ownership, and takes the place of direct force too. This sort of imaginary money wealth makes up a very considerable part not only of the money wealth of private individuals but of bankers' capital as well, as already mentioned.
One point — we mention it only to get it quickly out of the way — is that by accumulation of money capital one might also mean the piling up of wealth in the hands of bankers (money-lenders by profession), who stand as intermediaries between the private money capitalists on one side and the state, the local authorities and the borrowers engaged in reproduction on the other, the whole enormous reach of the credit system, credit as a whole, being exploited by them as their private capital. These fellows always hold their capital and their income in money form or in direct claims on money. The wealth of this class may accumulate in a very different direction from real accumulation, but it proves in any case that this class pockets a good part of that real accumulation.
To bring the question in hand within narrower limits: government bonds, shares and other securities of every kind are spheres in which loanable capital can be placed, capital that is meant to be interest-bearing. They are forms for lending it out. But they are not themselves the loan capital that gets invested in them.
On the other hand, in so far as credit plays a direct part in the reproduction process: when the industrialist or the merchant wants bills discounted, or wants to take up a loan, what he needs is neither shares nor government stock. What he needs is money. So if he cannot get hold of the money in any other way, he pawns or sells those securities. It is the accumulation of this loan capital that we have to deal with here, and specifically the accumulation of loanable money capital. It is not a matter of loans of houses, machines or other fixed capital. Nor is it a matter of the advances that industrialists and merchants make to one another in commodities, within the circle of the reproduction process, although we shall have to examine that point more closely later on. It is exclusively the money loans that the bankers, as intermediaries, make to the industrialists and merchants.
Let us start then by analysing commercial credit — the credit that the capitalists engaged in reproduction give to one another. It forms the basis of the credit system. Its representative is the bill of exchange, a written promise to pay on a fixed date, a 'document of deferred payment'. Everyone gives credit with one hand and receives credit with the other.
For now let us leave banker's credit entirely out of account; it is a quite different element, essentially distinct. In so far as these bills circulate again among the merchants themselves as means of payment, passed by endorsement from one to another, with no discounting coming in between, it is nothing but a transfer of the claim from A to B, and absolutely nothing in the relationship is changed. It only puts one person in another's place. And even in that case the settling up can take place without money coming into it at all. Spinner A, say, has a bill to pay to cotton-broker B, and B one to importer C. If C also exports yarn, which happens often enough, he can buy yarn from A against a bill, and spinner A can cover broker B with B's own bill, the one C paid him with. At most a balance is left to be paid in money. The whole transaction then only mediates the exchange of cotton and yarn. The exporter stands in for the spinner, the cotton-broker for the cotton planter.
Two things are to be noted about the circuit of this purely commercial credit:
First. Offsetting one another's debts like this depends on capital coming back in — on C-M, which has merely been put off to a later date. If a spinner has taken a bill from the cotton-goods manufacturer, the manufacturer can pay once the goods he is holding on the market have been sold in the interval. If the corn speculator has drawn a bill on his factor — the agent who sells for him — the factor can find the money provided the corn has meanwhile gone at the price that was expected. So these payments turn on reproduction running smoothly, that is, on the process of production and of consumption. And because credit runs in both directions at once, one person's ability to pay rests at the same moment on another person's ability to pay; for when he draws his bill, he may have reckoned either on capital coming back in his own business or on it coming back in some third party's business, that third party owing him a bill in the interval. Setting aside any such prospect of money returning, the only way he can pay is out of reserve capital at his disposal, so that he can meet what he owes if the returns come late.
Second: this credit system does not do away with the need for cash payments. For one thing, a large part of expenses must always be paid in cash — wages, taxes and so on. And then, for example: B, who has accepted a bill from C in place of payment, has himself to pay a bill that falls due to D before that bill falls due to him, and for this he must have cash. A complete circuit of reproduction such as was assumed above, from the cotton planter to the cotton spinner and back again, can only be an exception, and must always be broken at many points. In the reproduction process (Volume 2, Part Three) we saw that the producers of constant capital partly exchange constant capital with one another. For that the bills can more or less cancel out. The same on a rising line of production, where the cotton-broker has to draw on the spinner, the spinner on the cotton-goods manufacturer, this one on the exporter, and the exporter on the importer — perhaps again an importer of cotton. But the circuit of the transactions and the folding-back of the series of claims do not happen at the same time — the claims do not bend back on themselves into counter-claims just because the transactions run in a round. The spinner's claim on the weaver, for example, is not cancelled by the coal supplier's claim on the machine-builder; the spinner never has a counter-claim on the machine-builder in his business, because his product, yarn, never enters the machine-builder's reproduction process as an element. Claims like these must therefore be settled in money.
The limits of this commercial credit, considered by itself, are: (1) the wealth of the industrialists and merchants, that is, their command of reserve capital in case returns are delayed; (2) those returns themselves. They can be delayed in time; commodity prices can fall in the meantime; or the goods can become temporarily unsaleable when the markets are glutted. The longer the bills run, the greater the reserve capital must be, and the greater the possibility that a fall in price or an oversupply of the markets will shrink the return or hold it up. And returns are all the less certain the more the original transaction was conditioned by speculation on commodity prices rising or falling. But it is clear that with the development of the productive power of labour, and hence of production on a large scale: (1) the markets expand and move away from the place of production; (2) credit must therefore be prolonged; and so (3) the speculative element must come more and more to dominate the transactions. Large-scale production for distant markets throws the whole product into the hands of trade; but it is impossible for the nation's capital to double, so that trade could buy up the entire national product with its own capital and then sell it again. So credit is indispensable here — credit that grows in volume with the growing value of production and in duration with the growing distance of the markets. A reciprocal effect takes place here. The development of the production process widens credit, and credit leads to the expansion of industrial and commercial operations.
If we consider this credit apart from banker's credit, it is clear that it grows with the scale of industrial capital itself. Loan capital and industrial capital are identical here; the capitals loaned are commodity capitals, destined either for final individual consumption or to replace the constant elements of productive capital. So what appears here as loaned capital is always capital that is in a definite phase of the reproduction process, but passes from one hand to another through purchase and sale, while the buyer pays the equivalent for it only later, at the agreed date. Cotton, for instance, passes into the spinner's hands against a bill, the yarn into the cotton-goods manufacturer's against a bill, the cotton goods into the merchant's against a bill, out of his hands into the exporter's against a bill, out of the exporter's hands into those of a merchant in India against a bill, who sells it and takes indigo in exchange, and so on. While it passes from hand to hand, the cotton completes its transformation into cotton goods, and the goods are finally transported to India and exchanged for indigo, which is shipped to Europe and enters reproduction there once again. The different phases of the reproduction process are mediated here by credit, without the spinner having paid for the cotton, the cotton-goods manufacturer for the yarn, the merchant for the cotton goods, and so on. In the first acts of the process the commodity, cotton, goes through its various production phases, and this passage is mediated by credit. But as soon as the cotton has taken its final form as a commodity in production, the same commodity capital only passes through the hands of various merchants who arrange its transport to a distant market, the last of whom finally sells it to the consumer and buys other goods in exchange, which either go into consumption or into the reproduction process. So two sections are to be distinguished here: in the first, credit mediates the real successive phases in the production of the same article; in the second, it only mediates the transfer from one merchant's hands into another's, which includes transport — the act C-M. But even here, at least, the commodity is always in the act of circulation, that is, in a phase of the reproduction process.
So what gets lent here is never capital lying idle. It is capital that its owner has to put into a different form, capital sitting in a shape in which, for him, it is nothing but commodity capital — which means it has to be turned back and, at least to begin with, converted into money. What credit mediates here, then, is the metamorphosis the commodity goes through; and that takes in not just C-M but M-C as well, plus the real production process. Plenty of credit inside the reproductive circuit — banker's credit aside — does not mean plenty of idle capital on offer for loan and hunting for a profitable home. It means capital being heavily employed in the reproduction process. So credit here mediates: (1) so far as the industrial capitalists go, the move of industrial capital out of one phase and into the next, and the linkage between spheres of production that go together and dovetail into one another; (2) so far as the merchants go, the carrying and the passing of commodities from one pair of hands to the next, right up to the point where they are finally sold for money or exchanged for a different commodity.
Credit here reaches its maximum when industrial capital is employed as fully as it can be — that is, when its power to reproduce is strained to the utmost, with no regard for the limits of consumption. And those limits are not fixed. The very straining of the reproduction process pushes them outward: on the one hand it increases the revenue that workers and capitalists consume, and on the other it is the same thing as straining productive consumption.
As long as the reproduction process runs smoothly, so that returns are assured, this credit holds up and grows, and its growth rests on the growth of the reproduction process itself.
Then a hitch sets in — returns delayed, markets overstocked, prices fallen — and there is a surplus of industrial capital, but in a form in which it cannot do its job. A mass of commodity capital, and it cannot be sold. A mass of fixed capital, and the stalled reproduction leaves most of it idle. Credit contracts, for three reasons. First, this capital is unoccupied: it is stuck in one of its phases of reproduction, because it cannot complete its metamorphosis. Second, confidence that the reproduction process will keep running smoothly is broken. Third, the demand for this commercial credit falls off. The spinner who cuts back production and has a pile of unsold yarn in store has no need to buy cotton on credit; the merchant has no need to buy goods on credit, because he already has more than enough.
So if this expansion is disturbed — or even if the normal exertion of the reproduction process is disturbed — credit dries up too, and goods become harder to obtain on credit. And in the phase of the industrial cycle that follows the crash, what is especially characteristic is the demand for cash payment and the caution about selling on credit.
In the crisis itself, everyone has to sell and cannot sell, yet must sell in order to pay; and the mass of capital blocked in its own reproduction process — not idle capital looking for somewhere to go — is at its greatest just when the lack of credit is at its greatest (which is why, so far as bank credit goes, the discount rate is highest). Capital already laid out is then indeed idled wholesale, because the reproduction process has stalled. Factories stand still, raw materials pile up, finished products flood the market as commodities.
So nothing could be more wrong than to put such a state down to a lack of productive capital. It is exactly then that there is a surplus of productive capital — in part in relation to the normal scale of reproduction, which is momentarily contracted, and in part in relation to the crippled consumption.
Suppose the whole society were made up of nothing but industrial capitalists and wage-labourers. Suppose further that we disregard the price changes that stop large parts of the total capital from being replaced in their average proportions — changes which, given how the whole reproduction process interconnects, particularly as credit develops it, are bound to keep bringing about temporary general stoppages. Leave out of account as well the sham transactions and speculative deals that credit fosters. A crisis would then be explicable only from a disproportion between the various branches of production, and from a disproportion between what the capitalists themselves consume and what they accumulate. As things actually stand, however, whether the capitals sunk into production get replaced depends for the most part on the consumption capacity of the non-productive classes; while the workers' own capacity to consume is hemmed in partly by the laws of wages, partly by the fact that they stay in work only so long as profit can be squeezed from them for the capitalist class. The ultimate ground of every real crisis always stays the poverty and the restricted consumption of the masses, set against capitalist production's drive to develop the productive forces as though the only limit were society's absolute capacity to consume.
Of a genuine lack of productive capital — at least in countries with developed capitalism — we can speak only in the case of general harvest failures, whether of the staple foodstuffs or of the principal industrial raw materials.
But alongside commercial credit there now comes monetary credit in the proper sense. The advances industrialists and merchants make to one another get tangled up with money advanced to them by bankers and money-lenders. When bills of exchange are discounted, the advance is only nominal. A manufacturer sells his product in return for a bill and discounts that bill with a bill-broker. In reality the broker advances only the credit of his bank, and the bank advances the money capital of its depositors — depositors made up of the industrialists and merchants themselves, but also of workers (through savings banks), of landlords, and of the other unproductive classes. So for every individual manufacturer or merchant, the need for a strong reserve capital is avoided, and so is any dependence on actual returns. On the other hand, however — partly through simple bill-jobbing, partly through commodity deals undertaken purely to fabricate bills — the whole process becomes so complicated that the appearance of a very solid business with brisk returns can calmly persist even after those returns have in fact long been produced only at the cost of money-lenders who have been cheated and producers who have been cheated. That is why business always seems almost exaggeratedly healthy just before the crash. The best proof comes, for instance, from the "Reports on Bank Acts" of 1857 and 1858, where all the bank directors and merchants — in short, all the experts summoned to give evidence, with Lord Overstone at their head — congratulated one another on how healthy and flourishing business was, exactly one month before the crisis broke out in August 1857. And strangely enough, Tooke, in his "History of Prices", goes through this illusion once more, as the historian of every crisis. Business is always perfectly sound and the campaign at its most thriving, until all at once the collapse comes.
We come back now to the accumulation of money capital.
Not every increase in money capital available for loan is proof that real capital is accumulating or that the reproduction process is expanding. This shows up most clearly in that stage of the industrial cycle which comes right after a crisis has been lived through, when loan capital lies idle in great masses. At such moments, when production is held back (after the crisis of 1847, output in the English industrial districts was reduced by a third), when commodity prices stand at their lowest point, when the spirit of enterprise is paralysed, the rate of interest is at a low level — and here it indicates nothing beyond an increase in loanable capital brought about precisely by the contraction and paralysis of industrial capital. All of this is evident: that fewer means of circulation are called for when commodity prices have fallen, dealings have shrunk and the capital laid out in wages has been cut back; that on the other hand, once the debts owed abroad have been settled — partly by an outflow of gold, partly through bankruptcies — no further money is needed for the function of world money; and finally that the extent of the bill-discounting business declines along with the number and the amounts of those bills themselves. Demand for loanable money capital therefore falls away, whether it is for means of circulation or for means of payment (new capital investment is not yet in question), and so this capital becomes relatively abundant. But under circumstances such as these the supply of loanable money capital also positively increases, as will be shown later.
So after the 1847 crisis there was, as the evidence has it, a narrowing of dealings together with a very great oversupply of money (Commercial Distress, 1847-8, Evidence, no. 1664). The rate of interest stood very low, the reason given being the almost complete destruction of trade and the almost total absence of any way of putting money to work (ibid., p. 45: evidence of Hodgson, Director of the Royal Bank of Liverpool). The nonsense these gentlemen cobble together by way of explanation — and Hodgson is among the best of them — will be plain from the sentence that follows:
The pressure of 1847 arose, he says, from a real diminution of the moneyed capital of the country, caused partly by the necessity of paying for imports from every part of the world in gold, and partly by the conversion of floating capital into fixed capital.
How the conversion of floating capital into fixed is supposed to reduce the money capital of the country is impossible to see. Railways, for instance — the main thing capital was sunk in at the time — consume no gold or paper for their viaducts and rails; and the money paid for railway shares, so far as it was merely deposited for payments, worked exactly like all other money deposited with the banks, and even, as was shown earlier, temporarily increased the loanable money capital. So far as it was really spent on construction, it circulated in the country as means of purchase and payment. Only in so far as fixed capital is not an exportable article — so that, with export impossible, the available capital that returns for exported goods would bring in, including returns in cash or in bullion, drops away as well — only to that extent could the money capital be affected. But English export goods too were lying unsaleable in great masses on foreign markets at that time. For the merchants and manufacturers in Manchester and elsewhere who had ridden part of their normal business capital into railway shares and were therefore dependent on borrowed capital to run their business, their floating capital really had been fixed, and they had to bear the consequences. It would have been the same if they had put the capital that belonged to their business, but was withdrawn from it, into mines instead of railways — mines whose product is itself floating capital again: iron, coal, copper. The genuine reduction in available money capital brought about by the harvest failure, the corn imports and the gold exports was of course an event that had nothing to do with the railway swindle.
Hodgson again on what the railway money did to the mercantile houses: almost all of them had begun to starve their business, more or less, in order to put the money into railways. And the advances the commercial houses made to railways on so great a scale led them to lean far too heavily on the banks by discounting bills, and to carry on their trading that way (the same Hodgson, p. 67). R. Gardner, whose evidence is cited more than once, adds (no. 4884): in Manchester there were immense losses through speculation in railways.
The colossal glutting of the market, and the boundless swindle in the East Indian trade, were a chief reason for the 1847 crisis. But other circumstances too brought very rich houses in that branch to their fall:
These houses had ample means, but the means could not be made liquid. Their whole capital lay locked up in landed estates in Mauritius, or in indigo and sugar factories. Once they had entered into commitments of £500,000–600,000, they had no liquid funds with which to pay their bills, and in the end it turned out that, in order to pay their bills, they had to rely entirely on their credit. (Charles Turner, a big East India merchant in Liverpool, no. 730.)
Further, Gardner (no. 4872):
Immediately after the Chinese treaty such great prospects were held out to this country of a huge expansion of our trade with China that many large mills were built expressly for that trade, to manufacture the kind of cotton cloth that is mainly taken by the China market, and these were added on to all the mills we already had. And when he was asked how that trade had turned out (no. 4874): ruinous in the highest degree, almost beyond description; he did not believe that of the whole of the shipments made to China in 1844 and 1845 more than two-thirds of the amount ever came back, since tea was the main return article, and because such great expectations had been held out to them, they as manufacturers counted with certainty on a large reduction of the tea duty.
And now the characteristic credo of the English manufacturer, expressed naïvely:
Our trade with a foreign market is not limited by that market's power to buy the goods; it is limited here at home by our power to consume the products we get back in return for our manufactured goods.
(The relatively poor countries England trades with can of course pay for and consume any conceivable amount of English manufactured goods. Unfortunately, rich England cannot digest the products sent back in return.)
No. 4876: he sent out some goods at first, and they were sold at a loss of about 15 per cent, in the full conviction that the price at which his agents could buy tea would leave so large a profit on resale here as to cover that loss; but instead of a profit he sometimes lost 25 and up to 50 per cent. And when asked (no. 4877) whether the manufacturers exported on their own account, he said: mainly they did; the merchants, it seems, saw very soon that nothing was to be made out of the business, and they encouraged the manufacturers to send goods on consignment rather than take a direct interest in it themselves.
In 1857, by contrast, the losses and bankruptcies fell mainly on the merchants, since this time the manufacturers left the flooding of the foreign markets to them, on the merchants' own account.
Money capital can expand for a reason that has nothing to do with more production. As banking spreads, what used to sit idle — a private hoard, a reserve of coin — gets turned, again and again, into loanable capital for a period of time (see the Ipswich example below: in the few years just before 1857 the farmers' deposits there rose four times over). That expresses no growth of productive capital at all, any more than the growing deposits in the London joint-stock banks did once those banks started paying interest on deposits. As long as the scale of production stays the same, all this expansion does is make loanable money capital plentiful as against productive capital. Hence a low rate of interest.
Once the reproduction process is flourishing again — the stage just before over-exertion — commercial credit spreads very wide, and this time it really does have the 'healthy' basis of easy returns and expanding production. At this point the rate of interest is still low, even though it has climbed above its minimum. This is in fact the only moment at which one can say that a low rate of interest, and with it a relative abundance of loanable capital, coincides with a real expansion of industrial capital. Returns come in easily and regularly, and with commercial credit so widely extended that keeps the supply of loan capital coming in spite of the greater demand, so the interest level does not rise.
On the other side, it is now that the knights ride in on a noticeable scale — the people who work with no reserve capital, or with no capital at all, and so depend entirely on money credit. Add to that the great expansion of fixed capital in every form and the mass opening of new, far-reaching undertakings. Interest now rises to its average level. It reaches its maximum once the new crisis breaks out: credit is suddenly cut off, payments congeal, the reproduction process is paralysed, and — the exceptions mentioned earlier aside — an almost absolute lack of loan capital stands beside an over-abundance of unoccupied industrial capital.
Taken as a whole, then, loan capital moves — so far as the rate of interest expresses it — in the opposite direction from industrial capital. The phase in which the low rate, though above its minimum, coincides with the 'improvement' and growing confidence after the crisis, and above all the phase in which it reaches its average level, the mid-point standing equally far from its minimum and its maximum: only these two moments show plentiful loan capital going together with a big expansion of industrial capital. But at the start of the industrial cycle a low rate of interest coincides with a contraction, and at the end of the cycle a high rate of interest coincides with an over-abundance of industrial capital. The low rate that goes with the 'improvement' means that commercial credit needs only a small amount of bank credit, because it is still standing on its own two feet.
The industrial cycle works like this: once the first push has been given, the same circuit has to reproduce itself at regular intervals. In the slack phase production falls below the level it reached in the previous cycle, and for which the technical basis is now in place. In prosperity — the middle period — it develops further on that basis. In the period of overproduction and swindling it strains the productive forces to the utmost, and past the capitalist barriers of the production process.
That means of payment are lacking in the crisis period is self-evident. The convertibility of bills has taken the place of the metamorphosis of the commodities themselves — and at such a time all the more so, the more a part of the business houses works on credit alone. Ignorant and wrong-headed bank legislation, such as that of 1844-5, can make this money crisis worse. But no kind of bank legislation can do away with crises.
In a system of production where the whole interconnection of the reproduction process rests on credit, if credit is suddenly cut off and nothing but cash payment will do, a crisis must obviously break out — a violent scramble for means of payment. At first glance, then, the whole crisis presents itself as nothing but a credit crisis and a money crisis. And in fact what is at issue is only the convertibility of bills into money. But most of those bills represent real purchases and sales, and the fact that these were stretched far beyond what society needed is ultimately what the whole crisis rests on. Beside that, though, an enormous mass of these bills represent sheer swindle deals, which now come to light and burst; then failed speculations carried on with borrowed capital; finally commodity capitals that are devalued or even unsaleable, or returns that are never going to come in. The whole artificial system that forces the reproduction process wider cannot, of course, be cured by letting a bank — the Bank of England, say — hand all the swindlers the capital they lack in its paper, and buy up every devalued commodity at its old nominal value. Besides, everything here appears upside down: in this paper world the real price and its real elements are nowhere to be seen, only bullion, hard coin, notes, bills, securities. In the centres where a country's whole money business is crowded together, like London, this inversion is especially visible; there the whole process becomes incomprehensible. It is less so in the centres of production.
One more thing, about the over-abundance of industrial capital that shows up in crises. Commodity capital is in itself also money capital, that is, a definite sum of value expressed in the price of the commodity. As a use-value it is a definite quantity of particular useful things, and at the moment of crisis these are there in over-abundance. But as money capital in itself, as potential money capital, it is constantly expanding and contracting. On the eve of the crisis and during it, commodity capital is contracted in its capacity as potential money capital. For its owner and his creditors — and also as security for bills and loans — it represents less money capital than it did when it was bought and when the discounts and pledge deals made on it were concluded. If that is what is meant by the claim that a country's money capital is diminished in times of pressure, then it comes to the same thing as commodity prices having fallen. Such a collapse of prices, incidentally, only evens out their earlier inflation.
The incomes of the unproductive classes, and of those who live on fixed incomes, stay for the most part where they were while prices inflate — and that inflation goes hand in hand with overproduction and over-speculation. So their power to consume falls relatively, and with it their ability to take up the share of total reproduction that would normally go into their consumption. Even if their demand stays nominally the same, in reality it shrinks.
On imports and exports, one thing to note first: a general crisis pulls every country in, one after another, and then it turns out that they have all, with a few exceptions, exported too much and imported too much at the same time. So the balance of payments is against every one of them — and that is just how we know that the trouble really does not lie with the balance of payments at all. England, for instance, is labouring under a drain of gold. It has imported too much. But at the very same moment every other country is overburdened with English goods. So they have imported too much as well, or have had too much imported into them. (There is a difference, all the same, between the country that exports on credit and those that export on credit not at all, or only a little. The latter then import on credit; and even that is not the case only when the goods are sent out to them on consignment.)
The crisis may break out first in England, the country that gives the most credit and takes the least, because the balance of payments — the balance of payments that have fallen due, and must be settled at once — is against it, even though its general trade balance is in its favour. That last fact is explained partly by the credit England gives, partly by the sheer mass of capital it has lent abroad: a great quantity of returns then streams back to it in goods, over and above the ordinary trade returns. (Sometimes, though, the crisis broke out first in America — the country that takes the most trade and capital credit from England.)
The crash in England, introduced and accompanied by a drain of gold, settles England's balance of payments: partly by bankrupting its importers (more on that further on), partly by driving part of its commodity capital abroad at low prices, partly by selling foreign securities and buying English ones, and so on. Then it is another country's turn. Its balance of payments had been momentarily in its favour; but the interval that normally holds between the settling of payments and the settling of trade has now been abolished by the crisis, or at least cut short — every payment is to be settled at once. The same thing now repeats itself there. England has a reflux of gold, the other country a drain. What appears in one country as over-import appears in the other as over-export, and the other way round. But over-import and over-export have taken place in every country (we are not speaking here of harvest failures and the like, but of a general crisis). That means overproduction, fostered by credit and by the general inflation of prices that goes with it.
In 1857 the crisis broke out in the United States. Gold drained from England to America. But as soon as the balloon burst in America, the crisis arrived in England and gold drained from America back to England. The same happened between England and the Continent. In times of general crisis the balance of payments is against every nation — at least against every commercially developed nation — but always against one after another, like volley firing, as soon as the line of payment reaches it. And once the crisis has broken out somewhere, in England for instance, it squeezes all these due dates together into a very short stretch of time. It then becomes evident that all these nations have at the same time over-exported (that is, overproduced) and over-imported (that is, over-traded), that prices had been driven up in all of them and credit stretched too far. And in all of them the same collapse follows. The phenomenon of the drain of gold then reaches each of them in turn, and by its very generality it shows two things: first, that the drain of gold is a mere phenomenon of the crisis, not its ground; second, that the order in which it arrives at the different nations only shows when their turn has come to settle their account with heaven, when the date of the crisis has arrived for them and its latent elements break out in their case.
It is characteristic of the English economic writers — and the economic literature worth mentioning since 1830 comes down mainly to writing about currency, credit and crises — that in times of crisis they look at the export of precious metal, despite the turn in the exchange rates, purely from England's standpoint, as a purely national phenomenon, and resolutely shut their eyes to the fact that when their bank raises the interest rate in a crisis, every other European bank does the same, and that when the cry of distress over the drain of gold goes up with them today, it echoes tomorrow in America and the day after that in Germany and France.
In 1847 the obligations running on England — mostly for corn — had to be met. Unfortunately they were met to a great extent by bankruptcies. (Wealthy England won itself breathing space by defaulting on the Continent and in America.) But in so far as they were not settled by bankruptcy, they were met by exporting precious metals. So reports the Report of the Committee on Bank Acts, 1857.
So in so far as the crisis in England is made worse by the banking legislation, that legislation is a means of cheating the corn-exporting nations in times of famine — first of their corn, and then of the money for their corn. A ban on the export of corn in such times, for countries that are themselves suffering, more or less, from high prices, is therefore a thoroughly rational defence against this plan of the Bank of England to 'meet engagements' for corn imports 'by failures'. It is then much better that the corn producers and speculators should lose a part of their profit for the good of their country than their capital for the good of England.
From what has been said it follows that commodity capital loses, to a great extent, its capacity to represent potential money capital — in a crisis, and in business stagnation generally. The same goes for fictitious capital, interest-bearing paper, in so far as this itself circulates as money capital on the exchange. As the interest rate rises, its price falls. It falls further because of the general lack of credit, which forces its owners to dump it on the market in masses in order to get money. With shares it falls, finally, partly because the revenues they are claims on decline, partly because of the swindling character of the undertakings they very often represent. This fictitious money capital is enormously reduced in a crisis — and with it the power of its owners to raise money on it in the market. But the fall in the money names of these securities on the exchange list has nothing to do with the real capital they represent; it has a great deal to do with the solvency of their owners.
We now come to the only questions about the credit system that are genuinely hard. They are the following.
First: the accumulation of money capital in the strict sense. How far is it a sign of real capital accumulation — that is, of reproduction on an expanded scale — and how far is it not?
Then there is the so-called 'plethora' of capital, a term used only of interest-bearing, that is money, capital. Is it merely one particular way of expressing industrial overproduction, or does it form a phenomenon in its own right, alongside that overproduction?
And does this plethora, this over-supply of money capital, coincide with the presence of stagnant heaps of money (bullion, gold coin and banknotes), so that this surplus of actual money is the expression of that plethora of loan capital and its form of appearance?
And second: how far does monetary scarcity — that is, a shortage of loan capital — express a shortage of real capital, in both its forms, commodity capital and productive capital? And how far, on the other hand, does it coincide with a shortage of money as such, a shortage of means of circulation?
As far as we have so far looked at the peculiar form in which money capital, and money wealth in general, accumulates, it has come down to this: an accumulation of ownership claims on labour. The accumulation of the capital of the national debt means, as we saw, nothing more than a growing class of state creditors who have the right to take certain sums off the top of the tax revenue. And in this — that even an accumulation of debts can appear as an accumulation of capital — the distortion at work in the credit system shows itself complete.
These promissory notes, issued for a capital that was originally borrowed and long since spent, these paper duplicates of a destroyed capital, serve their owners as capital in so far as they are saleable commodities and can therefore be turned back into capital.
The ownership titles to joint-stock companies, railways, mines and the like really are titles to real capital, as we have also seen. But they give no control over that capital. It cannot be withdrawn. All they give is a legal claim to a share of the surplus-value that this capital is to produce.
These titles too, however, become paper duplicates of the real capital — as if a bill of lading got a value of its own alongside the cargo it refers to, and at the same time as the cargo. They turn into nominal representatives of capitals that do not exist. For the real capital is there all along, beside them, and does not change hands in the least when these duplicates change hands. They become forms of interest-bearing capital not only because they secure certain revenues, but also because their repayment as capital values can be got back by selling them.
In so far as the accumulation of these papers expresses the accumulation of railways, mines, steamships and so on, it expresses an expansion of the real reproduction process — just as a longer tax list, say for personal property, shows that this property itself has expanded. But as duplicates that can themselves be traded as commodities, and therefore circulate as capital values, they are illusory; and their value can fall and rise quite independently of the value movement of the real capital they are titles to. Their value — that is, their quotation on the stock exchange — necessarily has a tendency to rise when the rate of interest falls, in so far as that fall, apart from the peculiar movements of money capital, is simply a consequence of the tendential fall in the rate of profit. So this imaginary wealth — every piece of it carrying a fixed original nominal value — expands in the value quoted for it, for this reason alone, as capitalist production develops.
Gains and losses from price swings in these ownership titles, and the way those titles get concentrated in the hands of railway kings and the like, become by the nature of the thing more and more the result of gambling — and gambling now appears in the place of labour as the original way of acquiring capital ownership, and takes the place of direct force too. This sort of imaginary money wealth makes up a very considerable part not only of the money wealth of private individuals but of bankers' capital as well, as already mentioned.
One point — we mention it only to get it quickly out of the way — is that by accumulation of money capital one might also mean the piling up of wealth in the hands of bankers (money-lenders by profession), who stand as intermediaries between the private money capitalists on one side and the state, the local authorities and the borrowers engaged in reproduction on the other, the whole enormous reach of the credit system, credit as a whole, being exploited by them as their private capital. These fellows always hold their capital and their income in money form or in direct claims on money. The wealth of this class may accumulate in a very different direction from real accumulation, but it proves in any case that this class pockets a good part of that real accumulation.
To bring the question in hand within narrower limits: government bonds, shares and other securities of every kind are spheres in which loanable capital can be placed, capital that is meant to be interest-bearing. They are forms for lending it out. But they are not themselves the loan capital that gets invested in them.
On the other hand, in so far as credit plays a direct part in the reproduction process: when the industrialist or the merchant wants bills discounted, or wants to take up a loan, what he needs is neither shares nor government stock. What he needs is money. So if he cannot get hold of the money in any other way, he pawns or sells those securities. It is the accumulation of this loan capital that we have to deal with here, and specifically the accumulation of loanable money capital. It is not a matter of loans of houses, machines or other fixed capital. Nor is it a matter of the advances that industrialists and merchants make to one another in commodities, within the circle of the reproduction process, although we shall have to examine that point more closely later on. It is exclusively the money loans that the bankers, as intermediaries, make to the industrialists and merchants.
Let us start then by analysing commercial credit — the credit that the capitalists engaged in reproduction give to one another. It forms the basis of the credit system. Its representative is the bill of exchange, a written promise to pay on a fixed date, a 'document of deferred payment'. Everyone gives credit with one hand and receives credit with the other.
For now let us leave banker's credit entirely out of account; it is a quite different element, essentially distinct. In so far as these bills circulate again among the merchants themselves as means of payment, passed by endorsement from one to another, with no discounting coming in between, it is nothing but a transfer of the claim from A to B, and absolutely nothing in the relationship is changed. It only puts one person in another's place. And even in that case the settling up can take place without money coming into it at all. Spinner A, say, has a bill to pay to cotton-broker B, and B one to importer C. If C also exports yarn, which happens often enough, he can buy yarn from A against a bill, and spinner A can cover broker B with B's own bill, the one C paid him with. At most a balance is left to be paid in money. The whole transaction then only mediates the exchange of cotton and yarn. The exporter stands in for the spinner, the cotton-broker for the cotton planter.
Two things are to be noted about the circuit of this purely commercial credit:
First. Offsetting one another's debts like this depends on capital coming back in — on C-M, which has merely been put off to a later date. If a spinner has taken a bill from the cotton-goods manufacturer, the manufacturer can pay once the goods he is holding on the market have been sold in the interval. If the corn speculator has drawn a bill on his factor — the agent who sells for him — the factor can find the money provided the corn has meanwhile gone at the price that was expected. So these payments turn on reproduction running smoothly, that is, on the process of production and of consumption. And because credit runs in both directions at once, one person's ability to pay rests at the same moment on another person's ability to pay; for when he draws his bill, he may have reckoned either on capital coming back in his own business or on it coming back in some third party's business, that third party owing him a bill in the interval. Setting aside any such prospect of money returning, the only way he can pay is out of reserve capital at his disposal, so that he can meet what he owes if the returns come late.
Second: this credit system does not do away with the need for cash payments. For one thing, a large part of expenses must always be paid in cash — wages, taxes and so on. And then, for example: B, who has accepted a bill from C in place of payment, has himself to pay a bill that falls due to D before that bill falls due to him, and for this he must have cash. A complete circuit of reproduction such as was assumed above, from the cotton planter to the cotton spinner and back again, can only be an exception, and must always be broken at many points. In the reproduction process (Volume 2, Part Three) we saw that the producers of constant capital partly exchange constant capital with one another. For that the bills can more or less cancel out. The same on a rising line of production, where the cotton-broker has to draw on the spinner, the spinner on the cotton-goods manufacturer, this one on the exporter, and the exporter on the importer — perhaps again an importer of cotton. But the circuit of the transactions and the folding-back of the series of claims do not happen at the same time — the claims do not bend back on themselves into counter-claims just because the transactions run in a round. The spinner's claim on the weaver, for example, is not cancelled by the coal supplier's claim on the machine-builder; the spinner never has a counter-claim on the machine-builder in his business, because his product, yarn, never enters the machine-builder's reproduction process as an element. Claims like these must therefore be settled in money.
The limits of this commercial credit, considered by itself, are: (1) the wealth of the industrialists and merchants, that is, their command of reserve capital in case returns are delayed; (2) those returns themselves. They can be delayed in time; commodity prices can fall in the meantime; or the goods can become temporarily unsaleable when the markets are glutted. The longer the bills run, the greater the reserve capital must be, and the greater the possibility that a fall in price or an oversupply of the markets will shrink the return or hold it up. And returns are all the less certain the more the original transaction was conditioned by speculation on commodity prices rising or falling. But it is clear that with the development of the productive power of labour, and hence of production on a large scale: (1) the markets expand and move away from the place of production; (2) credit must therefore be prolonged; and so (3) the speculative element must come more and more to dominate the transactions. Large-scale production for distant markets throws the whole product into the hands of trade; but it is impossible for the nation's capital to double, so that trade could buy up the entire national product with its own capital and then sell it again. So credit is indispensable here — credit that grows in volume with the growing value of production and in duration with the growing distance of the markets. A reciprocal effect takes place here. The development of the production process widens credit, and credit leads to the expansion of industrial and commercial operations.
If we consider this credit apart from banker's credit, it is clear that it grows with the scale of industrial capital itself. Loan capital and industrial capital are identical here; the capitals loaned are commodity capitals, destined either for final individual consumption or to replace the constant elements of productive capital. So what appears here as loaned capital is always capital that is in a definite phase of the reproduction process, but passes from one hand to another through purchase and sale, while the buyer pays the equivalent for it only later, at the agreed date. Cotton, for instance, passes into the spinner's hands against a bill, the yarn into the cotton-goods manufacturer's against a bill, the cotton goods into the merchant's against a bill, out of his hands into the exporter's against a bill, out of the exporter's hands into those of a merchant in India against a bill, who sells it and takes indigo in exchange, and so on. While it passes from hand to hand, the cotton completes its transformation into cotton goods, and the goods are finally transported to India and exchanged for indigo, which is shipped to Europe and enters reproduction there once again. The different phases of the reproduction process are mediated here by credit, without the spinner having paid for the cotton, the cotton-goods manufacturer for the yarn, the merchant for the cotton goods, and so on. In the first acts of the process the commodity, cotton, goes through its various production phases, and this passage is mediated by credit. But as soon as the cotton has taken its final form as a commodity in production, the same commodity capital only passes through the hands of various merchants who arrange its transport to a distant market, the last of whom finally sells it to the consumer and buys other goods in exchange, which either go into consumption or into the reproduction process. So two sections are to be distinguished here: in the first, credit mediates the real successive phases in the production of the same article; in the second, it only mediates the transfer from one merchant's hands into another's, which includes transport — the act C-M. But even here, at least, the commodity is always in the act of circulation, that is, in a phase of the reproduction process.
So what gets lent here is never capital lying idle. It is capital that its owner has to put into a different form, capital sitting in a shape in which, for him, it is nothing but commodity capital — which means it has to be turned back and, at least to begin with, converted into money. What credit mediates here, then, is the metamorphosis the commodity goes through; and that takes in not just C-M but M-C as well, plus the real production process. Plenty of credit inside the reproductive circuit — banker's credit aside — does not mean plenty of idle capital on offer for loan and hunting for a profitable home. It means capital being heavily employed in the reproduction process. So credit here mediates: (1) so far as the industrial capitalists go, the move of industrial capital out of one phase and into the next, and the linkage between spheres of production that go together and dovetail into one another; (2) so far as the merchants go, the carrying and the passing of commodities from one pair of hands to the next, right up to the point where they are finally sold for money or exchanged for a different commodity.
Credit here reaches its maximum when industrial capital is employed as fully as it can be — that is, when its power to reproduce is strained to the utmost, with no regard for the limits of consumption. And those limits are not fixed. The very straining of the reproduction process pushes them outward: on the one hand it increases the revenue that workers and capitalists consume, and on the other it is the same thing as straining productive consumption.
As long as the reproduction process runs smoothly, so that returns are assured, this credit holds up and grows, and its growth rests on the growth of the reproduction process itself.
Then a hitch sets in — returns delayed, markets overstocked, prices fallen — and there is a surplus of industrial capital, but in a form in which it cannot do its job. A mass of commodity capital, and it cannot be sold. A mass of fixed capital, and the stalled reproduction leaves most of it idle. Credit contracts, for three reasons. First, this capital is unoccupied: it is stuck in one of its phases of reproduction, because it cannot complete its metamorphosis. Second, confidence that the reproduction process will keep running smoothly is broken. Third, the demand for this commercial credit falls off. The spinner who cuts back production and has a pile of unsold yarn in store has no need to buy cotton on credit; the merchant has no need to buy goods on credit, because he already has more than enough.
So if this expansion is disturbed — or even if the normal exertion of the reproduction process is disturbed — credit dries up too, and goods become harder to obtain on credit. And in the phase of the industrial cycle that follows the crash, what is especially characteristic is the demand for cash payment and the caution about selling on credit.
In the crisis itself, everyone has to sell and cannot sell, yet must sell in order to pay; and the mass of capital blocked in its own reproduction process — not idle capital looking for somewhere to go — is at its greatest just when the lack of credit is at its greatest (which is why, so far as bank credit goes, the discount rate is highest). Capital already laid out is then indeed idled wholesale, because the reproduction process has stalled. Factories stand still, raw materials pile up, finished products flood the market as commodities.
So nothing could be more wrong than to put such a state down to a lack of productive capital. It is exactly then that there is a surplus of productive capital — in part in relation to the normal scale of reproduction, which is momentarily contracted, and in part in relation to the crippled consumption.
Suppose the whole society were made up of nothing but industrial capitalists and wage-labourers. Suppose further that we disregard the price changes that stop large parts of the total capital from being replaced in their average proportions — changes which, given how the whole reproduction process interconnects, particularly as credit develops it, are bound to keep bringing about temporary general stoppages. Leave out of account as well the sham transactions and speculative deals that credit fosters. A crisis would then be explicable only from a disproportion between the various branches of production, and from a disproportion between what the capitalists themselves consume and what they accumulate. As things actually stand, however, whether the capitals sunk into production get replaced depends for the most part on the consumption capacity of the non-productive classes; while the workers' own capacity to consume is hemmed in partly by the laws of wages, partly by the fact that they stay in work only so long as profit can be squeezed from them for the capitalist class. The ultimate ground of every real crisis always stays the poverty and the restricted consumption of the masses, set against capitalist production's drive to develop the productive forces as though the only limit were society's absolute capacity to consume.
Of a genuine lack of productive capital — at least in countries with developed capitalism — we can speak only in the case of general harvest failures, whether of the staple foodstuffs or of the principal industrial raw materials.
But alongside commercial credit there now comes monetary credit in the proper sense. The advances industrialists and merchants make to one another get tangled up with money advanced to them by bankers and money-lenders. When bills of exchange are discounted, the advance is only nominal. A manufacturer sells his product in return for a bill and discounts that bill with a bill-broker. In reality the broker advances only the credit of his bank, and the bank advances the money capital of its depositors — depositors made up of the industrialists and merchants themselves, but also of workers (through savings banks), of landlords, and of the other unproductive classes. So for every individual manufacturer or merchant, the need for a strong reserve capital is avoided, and so is any dependence on actual returns. On the other hand, however — partly through simple bill-jobbing, partly through commodity deals undertaken purely to fabricate bills — the whole process becomes so complicated that the appearance of a very solid business with brisk returns can calmly persist even after those returns have in fact long been produced only at the cost of money-lenders who have been cheated and producers who have been cheated. That is why business always seems almost exaggeratedly healthy just before the crash. The best proof comes, for instance, from the "Reports on Bank Acts" of 1857 and 1858, where all the bank directors and merchants — in short, all the experts summoned to give evidence, with Lord Overstone at their head — congratulated one another on how healthy and flourishing business was, exactly one month before the crisis broke out in August 1857. And strangely enough, Tooke, in his "History of Prices", goes through this illusion once more, as the historian of every crisis. Business is always perfectly sound and the campaign at its most thriving, until all at once the collapse comes.
We come back now to the accumulation of money capital.
Not every increase in money capital available for loan is proof that real capital is accumulating or that the reproduction process is expanding. This shows up most clearly in that stage of the industrial cycle which comes right after a crisis has been lived through, when loan capital lies idle in great masses. At such moments, when production is held back (after the crisis of 1847, output in the English industrial districts was reduced by a third), when commodity prices stand at their lowest point, when the spirit of enterprise is paralysed, the rate of interest is at a low level — and here it indicates nothing beyond an increase in loanable capital brought about precisely by the contraction and paralysis of industrial capital. All of this is evident: that fewer means of circulation are called for when commodity prices have fallen, dealings have shrunk and the capital laid out in wages has been cut back; that on the other hand, once the debts owed abroad have been settled — partly by an outflow of gold, partly through bankruptcies — no further money is needed for the function of world money; and finally that the extent of the bill-discounting business declines along with the number and the amounts of those bills themselves. Demand for loanable money capital therefore falls away, whether it is for means of circulation or for means of payment (new capital investment is not yet in question), and so this capital becomes relatively abundant. But under circumstances such as these the supply of loanable money capital also positively increases, as will be shown later.
So after the 1847 crisis there was, as the evidence has it, a narrowing of dealings together with a very great oversupply of money (Commercial Distress, 1847-8, Evidence, no. 1664). The rate of interest stood very low, the reason given being the almost complete destruction of trade and the almost total absence of any way of putting money to work (ibid., p. 45: evidence of Hodgson, Director of the Royal Bank of Liverpool). The nonsense these gentlemen cobble together by way of explanation — and Hodgson is among the best of them — will be plain from the sentence that follows:
The pressure of 1847 arose, he says, from a real diminution of the moneyed capital of the country, caused partly by the necessity of paying for imports from every part of the world in gold, and partly by the conversion of floating capital into fixed capital.
How the conversion of floating capital into fixed is supposed to reduce the money capital of the country is impossible to see. Railways, for instance — the main thing capital was sunk in at the time — consume no gold or paper for their viaducts and rails; and the money paid for railway shares, so far as it was merely deposited for payments, worked exactly like all other money deposited with the banks, and even, as was shown earlier, temporarily increased the loanable money capital. So far as it was really spent on construction, it circulated in the country as means of purchase and payment. Only in so far as fixed capital is not an exportable article — so that, with export impossible, the available capital that returns for exported goods would bring in, including returns in cash or in bullion, drops away as well — only to that extent could the money capital be affected. But English export goods too were lying unsaleable in great masses on foreign markets at that time. For the merchants and manufacturers in Manchester and elsewhere who had ridden part of their normal business capital into railway shares and were therefore dependent on borrowed capital to run their business, their floating capital really had been fixed, and they had to bear the consequences. It would have been the same if they had put the capital that belonged to their business, but was withdrawn from it, into mines instead of railways — mines whose product is itself floating capital again: iron, coal, copper. The genuine reduction in available money capital brought about by the harvest failure, the corn imports and the gold exports was of course an event that had nothing to do with the railway swindle.
Hodgson again on what the railway money did to the mercantile houses: almost all of them had begun to starve their business, more or less, in order to put the money into railways. And the advances the commercial houses made to railways on so great a scale led them to lean far too heavily on the banks by discounting bills, and to carry on their trading that way (the same Hodgson, p. 67). R. Gardner, whose evidence is cited more than once, adds (no. 4884): in Manchester there were immense losses through speculation in railways.
The colossal glutting of the market, and the boundless swindle in the East Indian trade, were a chief reason for the 1847 crisis. But other circumstances too brought very rich houses in that branch to their fall:
These houses had ample means, but the means could not be made liquid. Their whole capital lay locked up in landed estates in Mauritius, or in indigo and sugar factories. Once they had entered into commitments of £500,000–600,000, they had no liquid funds with which to pay their bills, and in the end it turned out that, in order to pay their bills, they had to rely entirely on their credit. (Charles Turner, a big East India merchant in Liverpool, no. 730.)
Further, Gardner (no. 4872):
Immediately after the Chinese treaty such great prospects were held out to this country of a huge expansion of our trade with China that many large mills were built expressly for that trade, to manufacture the kind of cotton cloth that is mainly taken by the China market, and these were added on to all the mills we already had. And when he was asked how that trade had turned out (no. 4874): ruinous in the highest degree, almost beyond description; he did not believe that of the whole of the shipments made to China in 1844 and 1845 more than two-thirds of the amount ever came back, since tea was the main return article, and because such great expectations had been held out to them, they as manufacturers counted with certainty on a large reduction of the tea duty.
And now the characteristic credo of the English manufacturer, expressed naïvely:
Our trade with a foreign market is not limited by that market's power to buy the goods; it is limited here at home by our power to consume the products we get back in return for our manufactured goods.
(The relatively poor countries England trades with can of course pay for and consume any conceivable amount of English manufactured goods. Unfortunately, rich England cannot digest the products sent back in return.)
No. 4876: he sent out some goods at first, and they were sold at a loss of about 15 per cent, in the full conviction that the price at which his agents could buy tea would leave so large a profit on resale here as to cover that loss; but instead of a profit he sometimes lost 25 and up to 50 per cent. And when asked (no. 4877) whether the manufacturers exported on their own account, he said: mainly they did; the merchants, it seems, saw very soon that nothing was to be made out of the business, and they encouraged the manufacturers to send goods on consignment rather than take a direct interest in it themselves.
In 1857, by contrast, the losses and bankruptcies fell mainly on the merchants, since this time the manufacturers left the flooding of the foreign markets to them, on the merchants' own account.
Money capital can expand for a reason that has nothing to do with more production. As banking spreads, what used to sit idle — a private hoard, a reserve of coin — gets turned, again and again, into loanable capital for a period of time (see the Ipswich example below: in the few years just before 1857 the farmers' deposits there rose four times over). That expresses no growth of productive capital at all, any more than the growing deposits in the London joint-stock banks did once those banks started paying interest on deposits. As long as the scale of production stays the same, all this expansion does is make loanable money capital plentiful as against productive capital. Hence a low rate of interest.
Once the reproduction process is flourishing again — the stage just before over-exertion — commercial credit spreads very wide, and this time it really does have the 'healthy' basis of easy returns and expanding production. At this point the rate of interest is still low, even though it has climbed above its minimum. This is in fact the only moment at which one can say that a low rate of interest, and with it a relative abundance of loanable capital, coincides with a real expansion of industrial capital. Returns come in easily and regularly, and with commercial credit so widely extended that keeps the supply of loan capital coming in spite of the greater demand, so the interest level does not rise.
On the other side, it is now that the knights ride in on a noticeable scale — the people who work with no reserve capital, or with no capital at all, and so depend entirely on money credit. Add to that the great expansion of fixed capital in every form and the mass opening of new, far-reaching undertakings. Interest now rises to its average level. It reaches its maximum once the new crisis breaks out: credit is suddenly cut off, payments congeal, the reproduction process is paralysed, and — the exceptions mentioned earlier aside — an almost absolute lack of loan capital stands beside an over-abundance of unoccupied industrial capital.
Taken as a whole, then, loan capital moves — so far as the rate of interest expresses it — in the opposite direction from industrial capital. The phase in which the low rate, though above its minimum, coincides with the 'improvement' and growing confidence after the crisis, and above all the phase in which it reaches its average level, the mid-point standing equally far from its minimum and its maximum: only these two moments show plentiful loan capital going together with a big expansion of industrial capital. But at the start of the industrial cycle a low rate of interest coincides with a contraction, and at the end of the cycle a high rate of interest coincides with an over-abundance of industrial capital. The low rate that goes with the 'improvement' means that commercial credit needs only a small amount of bank credit, because it is still standing on its own two feet.
The industrial cycle works like this: once the first push has been given, the same circuit has to reproduce itself at regular intervals. In the slack phase production falls below the level it reached in the previous cycle, and for which the technical basis is now in place. In prosperity — the middle period — it develops further on that basis. In the period of overproduction and swindling it strains the productive forces to the utmost, and past the capitalist barriers of the production process.
That means of payment are lacking in the crisis period is self-evident. The convertibility of bills has taken the place of the metamorphosis of the commodities themselves — and at such a time all the more so, the more a part of the business houses works on credit alone. Ignorant and wrong-headed bank legislation, such as that of 1844-5, can make this money crisis worse. But no kind of bank legislation can do away with crises.
In a system of production where the whole interconnection of the reproduction process rests on credit, if credit is suddenly cut off and nothing but cash payment will do, a crisis must obviously break out — a violent scramble for means of payment. At first glance, then, the whole crisis presents itself as nothing but a credit crisis and a money crisis. And in fact what is at issue is only the convertibility of bills into money. But most of those bills represent real purchases and sales, and the fact that these were stretched far beyond what society needed is ultimately what the whole crisis rests on. Beside that, though, an enormous mass of these bills represent sheer swindle deals, which now come to light and burst; then failed speculations carried on with borrowed capital; finally commodity capitals that are devalued or even unsaleable, or returns that are never going to come in. The whole artificial system that forces the reproduction process wider cannot, of course, be cured by letting a bank — the Bank of England, say — hand all the swindlers the capital they lack in its paper, and buy up every devalued commodity at its old nominal value. Besides, everything here appears upside down: in this paper world the real price and its real elements are nowhere to be seen, only bullion, hard coin, notes, bills, securities. In the centres where a country's whole money business is crowded together, like London, this inversion is especially visible; there the whole process becomes incomprehensible. It is less so in the centres of production.
One more thing, about the over-abundance of industrial capital that shows up in crises. Commodity capital is in itself also money capital, that is, a definite sum of value expressed in the price of the commodity. As a use-value it is a definite quantity of particular useful things, and at the moment of crisis these are there in over-abundance. But as money capital in itself, as potential money capital, it is constantly expanding and contracting. On the eve of the crisis and during it, commodity capital is contracted in its capacity as potential money capital. For its owner and his creditors — and also as security for bills and loans — it represents less money capital than it did when it was bought and when the discounts and pledge deals made on it were concluded. If that is what is meant by the claim that a country's money capital is diminished in times of pressure, then it comes to the same thing as commodity prices having fallen. Such a collapse of prices, incidentally, only evens out their earlier inflation.
The incomes of the unproductive classes, and of those who live on fixed incomes, stay for the most part where they were while prices inflate — and that inflation goes hand in hand with overproduction and over-speculation. So their power to consume falls relatively, and with it their ability to take up the share of total reproduction that would normally go into their consumption. Even if their demand stays nominally the same, in reality it shrinks.
On imports and exports, one thing to note first: a general crisis pulls every country in, one after another, and then it turns out that they have all, with a few exceptions, exported too much and imported too much at the same time. So the balance of payments is against every one of them — and that is just how we know that the trouble really does not lie with the balance of payments at all. England, for instance, is labouring under a drain of gold. It has imported too much. But at the very same moment every other country is overburdened with English goods. So they have imported too much as well, or have had too much imported into them. (There is a difference, all the same, between the country that exports on credit and those that export on credit not at all, or only a little. The latter then import on credit; and even that is not the case only when the goods are sent out to them on consignment.)
The crisis may break out first in England, the country that gives the most credit and takes the least, because the balance of payments — the balance of payments that have fallen due, and must be settled at once — is against it, even though its general trade balance is in its favour. That last fact is explained partly by the credit England gives, partly by the sheer mass of capital it has lent abroad: a great quantity of returns then streams back to it in goods, over and above the ordinary trade returns. (Sometimes, though, the crisis broke out first in America — the country that takes the most trade and capital credit from England.)
The crash in England, introduced and accompanied by a drain of gold, settles England's balance of payments: partly by bankrupting its importers (more on that further on), partly by driving part of its commodity capital abroad at low prices, partly by selling foreign securities and buying English ones, and so on. Then it is another country's turn. Its balance of payments had been momentarily in its favour; but the interval that normally holds between the settling of payments and the settling of trade has now been abolished by the crisis, or at least cut short — every payment is to be settled at once. The same thing now repeats itself there. England has a reflux of gold, the other country a drain. What appears in one country as over-import appears in the other as over-export, and the other way round. But over-import and over-export have taken place in every country (we are not speaking here of harvest failures and the like, but of a general crisis). That means overproduction, fostered by credit and by the general inflation of prices that goes with it.
In 1857 the crisis broke out in the United States. Gold drained from England to America. But as soon as the balloon burst in America, the crisis arrived in England and gold drained from America back to England. The same happened between England and the Continent. In times of general crisis the balance of payments is against every nation — at least against every commercially developed nation — but always against one after another, like volley firing, as soon as the line of payment reaches it. And once the crisis has broken out somewhere, in England for instance, it squeezes all these due dates together into a very short stretch of time. It then becomes evident that all these nations have at the same time over-exported (that is, overproduced) and over-imported (that is, over-traded), that prices had been driven up in all of them and credit stretched too far. And in all of them the same collapse follows. The phenomenon of the drain of gold then reaches each of them in turn, and by its very generality it shows two things: first, that the drain of gold is a mere phenomenon of the crisis, not its ground; second, that the order in which it arrives at the different nations only shows when their turn has come to settle their account with heaven, when the date of the crisis has arrived for them and its latent elements break out in their case.
It is characteristic of the English economic writers — and the economic literature worth mentioning since 1830 comes down mainly to writing about currency, credit and crises — that in times of crisis they look at the export of precious metal, despite the turn in the exchange rates, purely from England's standpoint, as a purely national phenomenon, and resolutely shut their eyes to the fact that when their bank raises the interest rate in a crisis, every other European bank does the same, and that when the cry of distress over the drain of gold goes up with them today, it echoes tomorrow in America and the day after that in Germany and France.
In 1847 the obligations running on England — mostly for corn — had to be met. Unfortunately they were met to a great extent by bankruptcies. (Wealthy England won itself breathing space by defaulting on the Continent and in America.) But in so far as they were not settled by bankruptcy, they were met by exporting precious metals. So reports the Report of the Committee on Bank Acts, 1857.
So in so far as the crisis in England is made worse by the banking legislation, that legislation is a means of cheating the corn-exporting nations in times of famine — first of their corn, and then of the money for their corn. A ban on the export of corn in such times, for countries that are themselves suffering, more or less, from high prices, is therefore a thoroughly rational defence against this plan of the Bank of England to 'meet engagements' for corn imports 'by failures'. It is then much better that the corn producers and speculators should lose a part of their profit for the good of their country than their capital for the good of England.
From what has been said it follows that commodity capital loses, to a great extent, its capacity to represent potential money capital — in a crisis, and in business stagnation generally. The same goes for fictitious capital, interest-bearing paper, in so far as this itself circulates as money capital on the exchange. As the interest rate rises, its price falls. It falls further because of the general lack of credit, which forces its owners to dump it on the market in masses in order to get money. With shares it falls, finally, partly because the revenues they are claims on decline, partly because of the swindling character of the undertakings they very often represent. This fictitious money capital is enormously reduced in a crisis — and with it the power of its owners to raise money on it in the market. But the fall in the money names of these securities on the exchange list has nothing to do with the real capital they represent; it has a great deal to do with the solvency of their owners.