The People's Marx, Abridged Popular Edition of the the Three Volumes of Capital, Borchardt 1921

Chapter 23


Credit and Banks

(Extracted from vol. III. part 1. ch. 19. 25, 27. vol. III, part 2. ch. 29. German ed.)

The capitalist has constantly to pay money to a large number of persons, and has also constantly to receive money in payment from a large number. The technical operations of paying and receiving money are in themselves labour which produces ho value and which must be reckoned among the costs of circulation. In addition, a definite part of the capital must always be available as treasure: a reserve of means of purchase and payment, unemployed capital awaiting employment in the form of money. This renders - besides receiving and paying money, and bookkeeping - a storing of the treasure necessary; which, in turn, constitutes a special kind of labour.

These purely technical processes of development, through which money has to pass - and the labour and costs which arise therefrom - are shortened by the fact that they are carried out by a particular section of agents or capitalists, on behalf of the whole capitalist class. Through the process of division of labour they become the special function of a section of capitalists, and hence (just as in the case of commercial capital) are concentrated, and take place on a large scale. Within this particular process, again, we find division of labour; which manifests itself alike in the constitution of heterogeneous branches, independent of one another; and also in the development of the workshop within each of these branches: payment and reception of money, balancing of accounts. bookkeeping, deposits, &c.

We have already shown how money originally develops in the process of barter between communities. The money trade, i. e. the trade in the money commodity, develops at first, therefore, out of international intercourse. As soon as different coinages exist in different countries, the merchants who buy abroad must change their local coin for the coin of the country with which they are dealing, and vice versa; or else various coins must be exchanged for uncoined silver and gold, the world money. Hence we may consider exchange as one of the main foundations of the modern trade in money. [1] Out of exchange discount banks develop, in which silver or gold in their capacity as world money now as bank or trade money - function in contradistinction to current coinage.

This exchange business, this trade in money, is one of of the causes that gave rise to the development of credit. The detailed study of credit and of the instruments employed by it (credit money etc.) does not lie within our purpose. Only a few points need here be dwelt on, because they are characteristic of the capitalist system of production. We have to deal only with commercial and banking credit. The connection between their development and that of public credit will not be discussed. In chapter XVI (p. 192) we have already shown how the function of money as medium of payment develops out of the simple circulation of commodities, and how relations as between creditor and debtor are formed between the producers of, and the dealers in, commodities. ?One sort of commodity requires a longer, another a shorter time for its production. Again, the production of different commodities depends on different seasons of the year. One sort of commodity may be born on its own market-place, another has to make a long journey to market.' Commodity-owner No. 1 may therefore be ready to sell, before No. 2 is ready to buy. When the same transactions are continually repeated between the same persons, the conditions of sale are regulated in accordance with the conditions of production. On the other hand, the use of a given commodity, of a house for instance, is sold for a definite period. Here, it is only at the end of the term that the buyer has actually received the use-value of the commodity. He therefore buys it before he pays for it. The vendor becomes a creditor, the purchaser becomes a debtor.?

With the development of trade and of the capitalist system of production, which only produces in view of circulation, the basis of credit is enlarged, elaborated, and universalised. On the whole, money here functions only as means of payment, i. e. the commodity is not sold for cash but for a written promise to pay at a certain date. (For the sake of convenience we shall designate all such promises of payment as bills of exchange). Until maturity, these bills themselves circulate as means of payment and form trade money (or commercial money) properly so-called.

"In every country the majority of credit transactions take place in the sphere of industry itself . . . The producer of the raw material advances the latter to the manufacturer who works it up, and receives from him a promise t on a given day. The manufacturer, having completed his part of the work, advances in its turn the commodity on similar conditions to another manufacturer, who elaborates it further, and thus credit extends over an ever wider area, from one person to another as far as the consumer. The wholesale dealer advances commodities to the retail h man, whereas the former receives advances from the manufacturer or the commissioner. Everyone borrows with the one hand and lends with the other, sometimes money, but more often products. Thus, in the world of industry, an incessant exchange of advances takes place, which combine and clash with one another in all directions. It is precisely in the diversity and growth of these mutual advances that the development of credit resides, and here is the real source of its power." [2]

The other aspect of credit is connected with the development of the trade in money, which in capitalist production naturally keeps pace with the development of the trade in commodities. The storing of the reserve funds of the business world, the technical operations of receiving and paying out money, the international payments, and consequently the bullion trade, become concentrated in the hands of the money dealers.

"The cashier receives from the tradespeople who utilise his services, a certain sum of money, in return for which he opens them a in his books. They send him, further, their claims for the sums due to them, which sums he collects and places to their credit; on the other hand, he makes payments for them conformably with their instructions, and debits their current account for the amount. For these services he demands a small remuneration, which, however, can afford adequate compensation for his work only in the measure of the extent and magnitude of his operations. If payments have to be balanced between two tradesmen working with one and the same cashier, such payments can very easily be effected by reciprocal bookings, whereas the cashiers, from day to day, adjust their reciprocal claims for them." (Vissering, Handboelt van praktische Siaatshuishoudkunde, Amsterdam, 1860, vol. I, p. 247).

In view of 1he need resulting from local conditions in Venice, where the carrying of cash is more inconvenient than it is elsewhere, the wholesale merchants of that city founded ?associations of depositors?. The members of such associations deposited certain sums under the requisite guarantees of security, control and administration; they gave their creditors payment-orders; whereupon the sum paid was debited lo the debtor's account in the book kept for this purpose, and credited to the account of the creditor. The first beginnings of deposit and clearing banks.' (Hüllmann, Städtewejen des Mittelalters, Bonn 182629, vol. I, p. 550.)

The administration of capital bearing interest, or money capital, develops in connection herewith into a special function of the money dealers. Borrowing and lending money becomes their speciality. They serve as intermediaries between the real lender and the borrower of money capital. Expressed in general terms, banking business, from this point of view, consists in concentrating the loanable capital in large quantities in the hands of the bankers, so that instead of the individual moneylender, the bankers appear as the representatives of the totality of moneylenders, on the one hand, facing the industrial and the commercial capitalists, on the other. They become the universal administrators of money capital. Inversely they concentrate the borrowers, in regard to the totality of moneylenders, by borrowing for the entire commercial world. In general their profit consists in borrowing at a lower rate of interest than they lend.

The banks obtain possession of the loanable capital at their disposal in various ways. At first the money capital which every producer and tradesman has in reserve, or which is paid him, is concentrated in their hands by reason of the fact that they are the cashiers of the industrial capitalists. In this way, the reserve fund of the trading world, being concentrated in common, is limited to the necessary minimum; and part of the money capital, which would otherwise lie idly in reserve is paid out in loans. Secondly, the loanable capital at the disposal of the banks is formed by the cash deposits of the money capitalists, who entrust the task of lending to them. Thirdly, as soon as the banks begin paying interest on deposits, the savings of all classes and all the money momentarily unemployed are deposited with them. Small sums, each of which is in itself unable to function as money capital, are gathered together in large quantities and thus constitute a financial power. Fourthly, incomes which are but gradually consumed, are deposited with the banks.

The loans are made by discounting the bills of exchange - i. e. by paying in cash before they are due the amount they represent - and by means of advances in sundry shapes: direct loans on personal credit, loans on the security of papers of all sorts bearing interest, especially of certificates of ownership of commodities, etc.

It is clear that the money capital with which the banks deal is none other than the capital in circulation of merchants and industrial undertakers; and that the operations undertaken by the banks are simply the operations of such merchants and undertakers, for which the banks serve as intermediaries.

It is equally clear that their profit is but a deduction from the surplus-value, since they only deal with values already realised - even if merely in the shape of debt claims. - Part of the technical operations connected with the circulation of money must be carried out by the tradespeople and producers themselves.

The general observations made so far by us in the course of our study of credit were the following:

  1. Credit is necessary in order to create a medium whereby the rate of profit may be equalised.

  2. It reduces the costs of circulation.

    1. Money is saved in three ways by the introduction of credit.

      1. Because it is henceforth not needed in a large number of transactions.

      2. Because its circulation is accelerated. On the one hand, owing to the technical methods adopted by the banks. On the other hand, owing to the acceleration of the turnover of commodities due to credit.

      3. Because paper money is substituted for gold.

    2. Credit shortens the various phases of circulation, hence also the whole process of reproduction. On the other hand, it permits cf the processes of buying and selling being longer separated, and thus serves as basis for speculation.

      It reduces the reserve fund, which phenomenon can be regarded from a twofold point of view: from that of the reduction of the medium of exchange in circulation, and from that of the reduction of the amount of capital necessary in money form.

  3. Formation of joint stock companies. Hereby:

    1. Immense extension of the scale of production, and foundation of undertakings which would have been impossible for any individual capital.

    2. In itself, capital rests on the cooperation of the many. In the joint stock company it directly assumes the form of social capital, in contradiction to private capital. Here we have the suppression of capital as private property within the limits of the capitalist mode of production itself.

    3. The capitalist, who, in reality, is the functioning capitalist, becomes in the joint stock company a mere director, the administrator of the capital of others; and the owners of the capital become mere money capitalists. Even if their dividends include the interest and the profit of undertaking, i. e. the total profit, the latter is none the less obtained henceforth only in the form of interest (for the director's salary is, or is meant to be, a simple labour-wage); that is to say, it is obtained in the form of a mere remuneration due to the owner of capital. Ownership of capital is henceforth entirely separated from the latter's function in the real process of reproduction and vice-versa.

      This phenomenon, the result of the most complete development of capitalist production, constitutes an essential stepping-stone to the re-transformation of capital into the property of the producers - not as the private property of individual producers, but as social property. It is also the stepping-stone to the transformation of all those functions hitherto bound-up with the private ownership of capital, into social functions.

      As profit, in this case, assumes purely and simply the form of interest, such undertakings are still possible if they do but pay interest.

      (Additional Note by Friedrich Engels: Since Marx wrote the above, new forms of industry have been developed, by which the joint stock company has been raised to the second and third power. The time-honoured freedom of competition is at an end, and must itself admit its scandalous bankruptcy. It is bankrupt because, in every country, the magnates in any particular branch of industry unite in view of regulating production. In some cases it even came for a time to international trusts, e. g. between the English and the German iron industries. But even this form of socialisation of production did not suffice. The antagonism of the interests of the individual business firms caused it to be broken through too often. And thus it came about that, in some branches, in which the level attained by the process of production admitted of it, the entire production of the branch was concentrated in one single vast joint stock company under homogeneous management. In these branches, therefore, competition is replaced by monopoly, and the future expropriation by the whole society, the nation, has been most happily prepared.)

      This is equivalent to the abolition of capitalist production within the capitalist system of production - a glaring anomaly which already at first sight appears as a mere transitional stage to a new form of production.

  4. Apart from the joint stock organisations, credit gives the individual capitalist - or him who plays the part of capitalist - an absolute control, within certain limits, over the capital, and consequently over the labour, of others. This capital, which a man really - or according to public opinion - possesses, becomes the basis for the superstructure of credit. This is especially true of the wholesale trade. That, which is risked by the speculating wholesale tradesman is not his own, but social property. The catchword of the origin of capital being found in saving also becomes wholly obsolete; for the tradesman in question demands precisely that others should save for him.

    The cooperative factories of the working-classes are, within the old form of production, the first positive breach of that form; although they naturally manifest everywhere in their organisation the defects of the existing state of things. But, in them, the antagonism between capital and labour has been suppressed, although at first only in so far as the labourers, in their capacity of cooperators, become their own capitalists. The cooperative factories in question show us how a new mode of production develops naturally out of the old one, once a certain degree of development of the productive forces, and of the corresponding forms of production, has been reached.

    The capitalist joint stock undertakings are, just like the cooperative factories, stepping-stones leading from the capitalist to the social system of production; in the former, the antagonism has been negatively, in the latter, positively suppressed.

Bank capital consists of (1) cash, either gold or notes, (2) scrip securities. [3] The latter, in turn, may be divided into two categories, viz:

1. Commercial papers, bills of exchange; the latter are ?floating values?, which become due from time to time; in the discounting of such bills (i. e. their payment in advance, before maturity), banking business properly so-called consists.

2. Public securities, such as treasury notes, shares of all kinds, in short scrip bearing interest, but which differ essentially from bills of exchange. Mortgages can be reckoned among such scrip.

The capital thus composed is subdivided into the invested capital of the banker himself and the deposits. In the case of banks issuing notes, the latter constitute a third subdivision.

For the present we shall leave deposits and notes out of consideration.

The form assumed by capital bearing interest causes every definite and regular income to appear as interest on capital, whether the income in question derives from capital or not. In the same way every value-sum appears as capital as soon as it is not spent as income - i. e. it appears as main sum contrasting with the possible or real interest which it can bear.

The matter is simple. Let us assume the average rale of interest to be 5 per cent yearly. A sum of 500 shillings (or £ 25) would thus yield 25 shillings every year, if transformed into capital bearing interest. Every fixed yearly income of 25 shillings is thus regarded as the interest on a capital of £ 25. But this is a pure illusion, except in the case that the source from which the 25 shillings derive is susceptible of being transferred - whatever that source itself may be, whether a mere right of ownership or debt claim, or a real means of production such as landed estate.

Let us take, for example, the public debt and labour-wages.

The State must pay its creditors every year a certain quantity of interest for the borrowed capital. The creditor cannot, in this case, give notice to his debtor to pay, but he can only sell his claim. The capital itself has been consumed, spent by the State. It exists no longer. What the creditor of the State has in hands is (1) a promissory note signed by the State for, say £ 5; (2) thanks to this promissory note a claim on the yearly State revenue, i. e. on the product of taxation, for a certain amount, say 5 shillings or 5 per cent; (3) he can sell this promissory note, if he wishes, to any other person. But in all these cases the capital, which is supposed to yield the interest paid by the State, is purely illusory and fictitious capital. Not only has the sum originally lent to the State ceased to exist; but it was never intended to invest that sum as capital.

Let us now come to labour power. Labour wages are here regarded as interest, and consequently labour power is considered as the capital which yields this interest. For instance, if a year's wages amount to £ 50 and the rate of interest is 5 per cent, the annual labour power is equal to a capital of £ 1000. The capitalist way of thinking attains here its highest pinnacle of absurdity. This foolish idea is, of course, disproved by two circumstances; firstly, the labourer must work in order to obtain his "interest"; and secondly, he cannot convert the ?capital value? of his labour power into cash by transferring it.

This method of calculation is termed "capitalisation". Every regular income is capitalised by reckoning it - on the basis of the average rate of profit - as the amount which a capital lent at such a rate would yield. The last traces of any connection with the real process of the utilisation of capital are thus lost sight of; and the idea gains ground that capital undergoes, in some mysterious way, a sort of process of self-utilisation.

Even there where the promissory note - in the security - does not, as in the case of the public debt, represent absolutely fictitious capital, its capital value is purely illusory. The shares of railway, mining and shipping companies represent real capital, namely, the capital invested in those undertakings. But such capital has not a double existence - on the one hand as capital value of the shares, on the other as capital effectively invested in the undertakings. It exists only in this latter shape, and the share is nothing but a right of ownership to the surplus-value made by it.

The scrip is saleable, and consequently becomes a commodity; the movement and fixation of the latter's price are peculiar. The price of the shares of an undertaking rises in the measure in which its profits increase. If the nominal value of the share (i. e. the sum invested, which the share originally represented) be £ 5, and if the profit of the undertaking increases from 5 to 10 per cent, the share's value rises to £ 10, other circumstances remaining identical, and the rate of interest being 5 per cent. The contrary is the case if the profit diminishes. But if the utilisation of the effective capital remain the same; or if, as in the case of the public debt, no real capital be available, the price of the scrip rises or falls in inverse ratio to the rate of interest. If the latter rise from 5 to 10 per cent, a security which guarantees 5 shillings interest henceforth represents but a capital of T)0 shillings. If the rate of interest falls to 2 1/2 per cent, the same security represents a capital of £ 10. In times when the money market is depressed, these securities will fall twofold in price; firstly because the rate of ^t rises, and secondly, because they will be thrown in large quantities on the market.

All such scrip represents, in fact, nothing but accumulated claims, rights of ownership to future production.

The greater part of bankers' capital is thus purely fictitious, and consists of debt claims (bills of exchange), State securities (representing former capital) and shares (drafts drawn on future increments).

With the development of the credit system, therefore all capital appears to be doubled, or sometimes even trebled, because the claims for debts and the rights to ownership, which always represent but one and the same capital, are to be found in various hands and under various forms. A large part of the capital alleged to be available is mere phantasmagoria. This holds true, also, of the ?reserve fund?, in which we had thought to grasp at last something solid.

(Illustration furnished by Friedrich Engels: In November 1892 the 15 largest London banks had a reserve fund of nearly £ 28 000 000 all told, of which £ 3 000 000 at the outside was available as cash in their safes. The remainder consisted of their credit balances at the Bank of England. But the latter itself had, in the same month, always less than £ 16 000 000 as cash reserve.)

The bank system is, from the standpoint of formal organisation, the most artificial and highly evolved product which capitalist society is capable of producing. Hence, the immense influence exercised by an institution like the Bank of England on trade and industry, although the real movement of these latter are quite outside the sphere of activity of the former, who maintains a passive attitude towards it. True, the form of a general bookkeeping and of a general distribution of the means of production on a social scale comes hereby into existence; but only the form. We have seen that the average profit of the individual capitalist, or of every particular capital, is not determined by the surplus-labour which this capital appropriates first-hand; but by the quantity of total surplus-value appropriated by the totality of capital, and out of which each particular capital draws its dividend only as a proportional part of that totality. This social character of capital is not completely realised, until the full development of credit and banking. On the other hand, the effects of that development are more far-reaching still. The system of credit and banks places all the momentarily unemployed capital of society at the disposal of the productive and commercial capitalists, so that neither he who lends nor he who utilises that capital are its owner or its creator. The system thus suppresses the private aspect of capital and implies per se - but only per se - the suppression of capital itself. Through the medium of the banks, the repartition of capital is taken out of the hands of private capitalists and usurers, and is transformed into a special social function. But precisely on account of this, credit and banks constitute at the same time the instruments par excellence for impelling the capitalist system of production beyond its own natural limits; and become powerful means for producing crises and promoting fraud.

There is, finally, no doubt that credit will serve as a powerful lever during the transition from capitalist production to the system of production by social labour; but only as an element taken in conjunction with other radical transformations of the mode of production itself. On the other hand, the fallacies regarding the miraculous socialising influence of credit and banks are due to complete ignorance of the laws of capitalist production, and of the credit system which is one of the forms of that mode of production.

Notes

[1] ?The necessity of employing- everywhere the local coinage in commercial transactions, in which a settlement by means of coin was indispensable, arose from the great divergency of the coinages of the numerous princes and towns authorised to coin money, in respect of their standard of value. In order to effect cash payments, the merchants, when travelling to foreign markets, provided themselves with pure, uncoined silver and also with gold. In the same way, on starting on their return journey, they changed the local money paid over to them into uncoined silver or gold. The exchange of uncoined precious metal for local coinage, and vice versa, was thus a widespread and lucrative form of business?. (Hüllmann, Städtewesen des Mittelalters, Bonn 1826-29, vol I, p 437 )

[2] Coquelin, Le credit et les banques dans l'industrie, in Revue des Deux Mondes, 1842.

[3] From here on vol. III, part 2, ch. 29 German ed.

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