Economic Manuscripts: Capital, Vol.3, Chapter 26

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Capital Vol. III Part V
Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital

Chapter 26. Accumulation of Money-Capital. Its Influence on the Interest Rate


"In England there takes place a steady accumulation of additional wealth, which has a tendency ultimately to assume the form of money. Now next in urgency, perhaps, to the desire to acquire money, is the wish to part with it again for some species of investment that shall yield either interest or profit; for money itself, as money, yields neither. Unless, therefore, concurrently with this ceaseless influx of surplus-capital, there is a gradual and sufficient extension of the field for its employment, we must be subject to periodical accumulations of money seeking investment, of more or less volume, according to the movement of events. For a long series of years, the grand absorbent of the surplus wealth of England was our public debt.... As soon as in 1816 the debt reached its maximum, and operated no longer as an absorbent, a sum of at least seven-and-twenty million per annum was necessarily driven to seek other channels of investment. What was more, various return payments of capital were made.... Enterprises which entail a large capital and create an opening from time to time for the excess of unemployed capital ... are absolutely necessary, at least in our country, so as to take care of the periodical accumulations of the superfluous wealth of society, which is unable to find room in the usual fields of application." (The Currency Theory Reviewed, London, 1845, pp. 32-34.)

Of 1845 the same work says:

"Within a very recent period prices have sprung upwards from the lowest point of depression.... Consols touch par.... The bullion in the vaults of the Bank of England has ... exceeded in amount the treasure held by that establishment since its institution. Shares of every description range at prices on the average wholly unprecedented, and interest has declined to rates which are all but nominal. If these be not evidences that another heavy accumulation of unemployed wealth exists at this hour in England, that another period of speculative excitement is at hand." (Ibid., p. 36.)

"Although ... the import of bullion is no sure sign of gain upon the foreign trade, yet, in the absence of any explanatory cause, it does prima facie represent a portion of it." (J. G. Hubbard, The Currency and the Country, London, 1843, pp. 40-411.) "Suppose ... that at a period of steady trade, fair prices ... and full, but not redundant circulation, a deficient harvest should give occasion for an import of corn, and an export of gold to the value of five million. The circulation"

[meaning, as we shall presently see, idle money-capital rather than means of circulation — F.E.]

"would of course be reduced by the same amount. An equal quantity of the circulation might still be held by individuals, but the deposits of merchants at their bankers, the balances of bankers with their money-broker, and the reserve in their till, will all be diminished, and the immediate result of this reduction in the amount of unemployed capital will be a rise in the rate of interest. I will assume from 4 per cent to 6. Trade being in a sound state, confidence will not be shaken, but credit will be more highly valued." (Ibid., p. 42.) "But imagine ... that all prices fall.... The superfluous currency returns to the bankers in increased deposits-the abundance of unemployed capital lowers the rate of interest to a minimum, and this state of things lasts until either a return of higher prices or a more active trade call the dormant currency into service, or until it is absorbed by investments in foreign stocks or foreign goods" (p. 68).

The following extracts are also taken from the parliamentary Report on Commercial Distress, 1847-48. — Owing to the crop failure and famine of 1846-47 large-scale imports of foodstuffs became necessary.

"These circumstances caused the imports of the country to be very largely in excess over ... exports ... a considerable drain upon the banks, and an increased application to the discount brokers ... for the discount of bills.... They began to scrutinise the bills ... The facilities of houses then began to be very seriously curtailed, and the weak houses began to fail. Those houses which ... relied upon their credit... went down. This increased the alarm that had been previously felt; and the bankers and others finding that they would not rely with the same degree of confidence that they had previously done upon turning their bills and other money securities into bank-notes, for the purpose of meeting their engagements, still further curtailed their facilities, and in many cases refused them altogether; they locked up their bank-notes, in many instances to meet their own engagements; they were afraid of parting with them.... The alarm and confusion were increased daily; and unless Lord John Russell .... had issued the letter to the Bank ... universal bankruptcy would have been the issue" (pp. 74-75).

Russell's letter suspended the Bank Act. — The previously mentioned Charles Turner testifies:

"Some houses had large means, but not available. The whole of their capital was locked up in estates in the Mauritius, or indigo factories, or sugar factories. Having incurred liabilities to the extent of £500,000 or £600,000 they had no available assets to pay their bills, and eventually it proved that to pay their bills they were entirely dependent upon their credit" (p. 81).

The aforementioned S. Gurney said [1664]:

"At present (1848) there is a limitation of transaction and a great superabundance of money." — "1763. I do not think it was owing to the want of capital; it was owing to the alarm that existed that the rate of interest got so high."

In 1847 England paid at least £9 million gold to foreign countries for imported foodstuffs. Of this amount £7½ million came from the Bank of England and 1½ million from other sources (p. 245). — Morris, Governor of the Bank of England:

"The public stocks in the country and canal and railway shares had already by the 23rd of October 1847 been depreciated in the aggregate to the amount of £114,752,225" (p. 312).

Again Morris, when questioned by Lord G. Bentinck:

"Are you not aware that all property invested in stocks and produce of every description was depreciated in the same way; that raw cotton, raw silk and unmanufactured wool were sent to the continent at the same depreciated price... and that sugar, coffee and tea were sacrificed as at forced sales? — It was ... inevitable that the country should make a considerable sacrifice for the purpose of meeting the efflux of bullion which had taken place in consequence of the large importation of food." — [3848] "Do not you think it would have been better to trench upon the £8,000,000 lying in the coffers of the Bank than to have endeavoured to get the gold back again at such a sacrifice? — No, I do not." —

Now to the commentaries on such heroism. Disraeli questions Mr. W. Cotton, a Director and former Governor of the Bank of England:

"What was the rate of dividend paid to the Bank proprietors in 1844? — It was 7 per cent for the year." — "What is the dividend ... for 1847? — Nine per cent." — "Does the Bank pay the income tax for its proprietors in this year? — It does." — "Did it do so in 1844? — It did not." [1] — "Then this Bank Act" (of 1844) "has worked very well for the proprietors?... The result is, that since the passing of the Act, the dividend to the proprietors has been raised from 7 per cent to 9 per cent, and the income tax, that previously to the Act was paid by the proprietors, is now paid by the Bank? — It is so." (Nos. 4356-61.)

Mr. Pease, a country banker, had the following to say concerning hoarding in banks during the crisis of 1847:

"4605. As the Bank was obliged still to raise its rate of interest, every one seemed apprehensive; country bankers increased the amount of bullion in their hands, and increased their reserve of notes, and many of us who were in the habit of keeping, perhaps, a few hundred pounds of gold and bank-notes, immediately laid up thousands in our desks and drawers, as there was an uncertainty about discounts, and about our bills being current in the market, a general hoarding ensued."

A member of the Committee remarks:

"4691. Then, whatever may have been the cause during the last 12 years, the result has been rather in favour of the Jew and money-dealer, than the productive classes generally."

How much a money-dealer takes advantage of times of crisis is revealed by Tooke:

"In the hardware districts of Warwickshire and Staffordshire, a great many orders for goods were declined to be accepted in 1847, because the rate of interest which the manufacturer had to pay for discounting his bills more than absorbed all his profit" (No. 5451).

Let us now take another parliamentary report cited earlier: Report of Select Committee on Bank Acts, communicated from the Commons to the Lords, 1857 (quoted further as B. C. 1857). In it Mr. Norman, Director of the Bank of England and a leading figure among the champions of the Currency Principle, is interrogated as follows:

"3635. You stated, that you consider that the rate of interest depends, not upon the amount of notes, but upon the supply and demand of capital. Will you state what you include in 'capital,' besides notes and coin? — I believe that the ordinary definition of 'capital' is commodities or services used in production." — "3636. Do you mean to include all commodities in the word 'capital' when you speak of the rate of interest? — All commodities used in production." — "3637. You include all that in the word 'capital,' when you speak of what regulates the rate of interest? — Yes. Supposing a cotton manufacturer to want cotton for his factory, the way in which he goes to work to obtain it is, probably, by getting an advance from his banker, and with the notes so obtained he goes to Liverpool, and makes a purchase. What he really wants is the cotton; he does not want the notes or the gold, except as a means of getting the cotton. Or he may want the means of paying his workmen; then again, he borrows the notes, and he pays the wages of the workmen with the notes; and the workmen, again, require food and lodging, and the money is the means of paying for those." — "3638. But interest is paid for the money? — It is, in the first instance; but take another case. Supposing he buys the cotton on credit, without going to the bank for an advance, then the difference between the ready-money price and the credit price at the time at which he is to pay for it is the measure of the interest. Interest would exist if there was no money at all."

This self-complacent rubbish is quite fitting for this pillar of the Currency Principle. First, the brilliant discovery that bank-notes or gold are means of buying something, and that they are not borrowed for their own sake. And this is advanced to explain that the rate of interest is regulated — but by what? By the demand and supply of commodities, which heretofore was known to regulate only the market-prices of commodities. However, very different rates of interest are compatible with the same market-prices of commodities. — But now this cunning. He is confronted with the correct remark: "But interest is paid for the money," which, of course, contains the implication: "What has interest received by the banker, who does not deal in commodities at all, to do with these commodities? And do not manufacturers receive money at the same rate of interest, although they invest it in widely different markets, hence in markets with widely different conditions of demand and supply for the commodities used in production?" All that this celebrated genius has to say in reply to these questions is that if the manufacturer buys cotton on credit "the difference between the ready-money price and the credit price at the time at which he is to pay for it is the measure of the interest." Quite the contrary. The prevailing rate of interest whose regulation the great intellect Norman was asked to explain is the measure of the difference between the cash price and the credit price until payment is due. First the cotton is to be sold at its cash price, and this is determined by the market-price, itself regulated by the state of supply and demand. Say the price £1,000. This concludes the transaction between the manufacturer and the cotton broker so far as buying and selling is concerned. Now comes a second transaction. This is one between lender and borrower. The value of £1,000 is advanced to the manufacturer in cotton, and he has to repay it in money, say, in three months. And three months' interest for £1000, determined by the market rate of interest, makes up the extra charge over and above the cash price. The price of cotton is determined by supply and demand. But the price of the advanced value of cotton, of £1,000 advanced for three months, is determined by the rate of interest. And this fact, that cotton is thus transformed into money-capital, proves to Mr. Norman that interest would exist even if there had been no money. If there were no money at all, there would certainly be no general rate of interest.

There is, to begin with, a vulgar conception of capital as "commodities used in production." In so far as these commodities serve as capital, their value as capital, as distinct from their value as commodities, is expressed in the profit which is derived from their productive or mercantile employment. And the rate of profit under all circumstances has something to do with the market-price of the purchased commodities and with their supply and demand, but is determined by entirely different circumstances. And there is no doubt that the interest rate is generally limited by the rate of profit. But Mr. Norman should tell us just how this limit is determined. And it is determined by the supply and demand of money-capital as distinguished from the other forms of capital. It could be further asked: How are demand and supply of money-capital determined? It is doubtlessly true that a tacit connection exists between the supply of material capital and the supply of money-capital; and, likewise, that the demand of industrial capitalists for money-capital is determined by conditions of actual production. Instead of enlightening us on this point, Norman offers us the sage opinion that the demand for money-capital is not identical with the demand for money as such; and this sagacity alone, because he, Overstone, and the other Currency prophets, constantly have pricks of conscience since they are striving to make capital out of means of circulation as such through the artificial intervention of legislation, and to raise the interest rate.

Now to Lord Overstone, alias Samuel Jones Loyd, as he is asked to explain why he takes 10% for his "money" because "capital" is so scarce in his country.

"3653. The fluctuations in the rate of interest arise from one of two causes: an alteration in the value of capital"

(excellent! Value of capital, generally speaking, signifies precisely the rate of interest! A change in the rate of interest is thus made to spring from a change in the rate of interest. "Value of capital," as we have shown elsewhere, is never conceived otherwise in theory. Or else, if Lord Overstone means the rate of profit by the phrase "value of capital", then the profound thinker returns to the notion that the interest rate is regulated by the rate of profit!)

"or an alteration in the amount of money in the country. All great fluctuations of interest, great either in their duration or in the extent of the fluctuation, may be distinctly traced to alterations in the value of capital. Two more striking practical illustrations of that fact cannot be furnished than the rise in the rate of interest in 1847 and during the last two years (1855-56); the minor fluctuations in the rate of interest, which arise from an alteration in the quantity of money, are small both in extent and in duration. They are frequent, and the more rapid and frequent they are, the more effectual they are for accomplishing their destined purpose",

which is to enrich bankers like Overstone. Friend Samuel Gurney expresses it very naively before the Committee of Lords, C. D. 1848 [1857]:

"1324. Do you think that the great fluctuations in the rate of interest which have taken place in the last year are advantageous or not to bankers or dealers in money? — I think they are advantageous to dealers in money. All fluctuations in trade are advantageous to the knowing man."

"1325. May not the banker suffer eventually from the high rates of interest, by impoverishing his best customers? — No; I do not think it has that effect perceptibly." —

Voilà ce que parler veut dire. [This is what had to be said. — Ed.]

We shall eventually return to the influence of the quantity of available money on the rate of interest. But it is to be noted right here that Overstone again makes a quid pro quo. The demand for money-capital in 1847 (before October there was no anxiety over money stringency, or the "quantity of money," as he called it) increased for various reasons, such as rising prices for corn and cotton, lack of buyers of sugar due to over-production, railway speculation and the crash, overcrowding of foreign markets with cotton goods, and the forced export to, and import from, India for the purpose of speculation in bills of exchange, which was described above. All these things, over-production in industry and underproduction in agriculture — in other words, greatly differing causes — gave rise to an increased demand for money-capital, i.e., for credit and money. The increased demand for money-capital had its origin in the course of the productive process itself. But whatever may have been the cause, it was the demand for money-capital which made the interest rate, the value of money-capital, climb. If Overstone means to say that the value of money-capital rose because it rose, then it is tautology. But if, by "value of capital," he means a rise in the rate of profit as the cause of the rise in the rate of interest, we shall immediately see that this is wrong. The demand for money-capital, and consequently the "value of capital," may rise even though the profit may decrease; as soon as the relative supply of money-capital shrinks, its "value" increases. What Overstone wished to prove is that the crisis of 1847, and the attendant high interest rate, had nothing to do with the "quantity of money," i.e., with the regulations of the Bank Act of 1844 which he had inspired; although it was, indeed, connected with them, inasmuch as the fear of exhausting the bank reserve — a creation of Overstone — contributed a money panic to the crisis of 1847-48. But this is not the issue here. There was a dearth of money-capital, caused by the excessive volume of operations compared to the available means and precipitated by the disturbance in the reproduction process due to a crop failure, over-investment in railways, over-production, particularly of cotton goods, swindling operations in trade with India and China, speculation, superfluous sugar imports, etc. What the people, who had bought corn at 120 shillings per quarter, lacked when it fell to 60 shillings, were the 60 shillings which they had overpaid and the corresponding credit for that amount in Lombard Street advances on the corn. It was by no means a lack of bank-notes that prevented them from converting their corn into money at its old price of 120 shillings. The same applied to those who had imported an excess of sugar, which became almost unsaleable. It applied likewise to the gentlemen who had tied up their floating capital in railways and relied on credit to replace it in their "legitimate" business. To Overstone all this signifies a "moral sense of the enhanced value of his money." But this enhanced value of money-capital corresponded directly on the other hand to the depreciated money-value of real capital (commodity-capital and productive capital). The value of capital in the one form rose because the value of capital in the other fell. Overstone, however, seeks to identify these two values of different sorts of capital in a single value of capital in general, and he tries to do so by opposing both of them to a scarcity of the medium of circulation, of available money. But the same amount of money-capital may be loaned with very different quantities of the circulation medium.

Take his example of 1847. The official bank-rate stood at 3 to 3½% in January; 4 to 4½% in February. In March it was generally 4%. April (panic) 4 to 7½%. May 5 to 5½%, June, on the whole, 5%. July 5%. August 5 to 5½%. September 5% with trifling variations of 5¼, 5½, 6%. October 5, 5½, 7%. November 7-10%. December 7 to 5%. — In this case the interest rose because profits decreased and the money-values of commodities fell enormously. If, therefore, Overstone says here that the rate of interest rose in 1847 because the value of capital rose, he cannot mean anything by value of capital but the value of money-capital, and the value of money-capital is the rate of interest, and nothing else. But later he showed the cloven hoof and identified the value of capital with the rate of profit.

As for the high rate of interest paid in 1856, Overstone was indeed ignorant of the fact that this was partially a symptom that the credit jobbers were coming to the fore, who paid interest not from their profit, but with the capital of others; he maintained just a few months before the crisis of 1857 that "business is quite sound."

He testified furthermore: [B.C. 1857]

"3722. That idea of the profits of trade being destroyed by a rise in the rate of interest is most erroneous. In the first place, a rise in the rate of interest is seldom of any long duration; in the second place, if it is of long duration, and of great extent, it is really a rise in the value of capital, and why does value of capital rise? Because the rate of profit is increased."

Here, then, we learn, at last, what the meaning of "value of capital" is. Furthermore, the rate of profit may be high for a lengthy period, and yet the profit of enterprise may fall and the rate of interest rise to a point where it swallows the greater portion of the profit.

"3724. The rise in the rate of interest has been in consequence of the great increase in the trade of the country, and the great rise in the rate of profits; and to complain of the rise in the rate of interest as being destructive of the two things, which have been its own cause, is a sort of logical absurdity, which one does not know how to deal with."

This is just as logical as if he were to say: The rise in the rate of profit has been in consequence of the rise in commodity-prices by speculation, and to complain that the rise in prices destroys its own cause, namely, speculation, is a logical absurdity, etc. That anything can ultimately destroy its own cause is a logical absurdity only for the usurer enamoured of the high interest rate. The greatness of the Romans was the cause of their conquests, and their conquests destroyed their greatness. Wealth is the cause of luxury and luxury has a destructive effect on wealth. The wiseacre! The idiocy of the present-day bourgeois world cannot be better described than by the respect, which the "logic" of the millionaire — the dunghill aristocrat — inspired in all England. Furthermore, if a high rate of profit and an expansion of business may be causes of a high interest rate, a high rate of interest is by no means therefore a cause of high profit. The question is precisely whether such a high interest (as was actually discovered during the crisis) continued or, what is more, reached its climax after the high rate of profit had long gone the way of all flesh.

"3718. With regard to a great rise in the rate of discount, that is a circumstance entirely arising from the increased value of capital, and the cause of that increased value of capital I think any person may discover with perfect clearness. I have already alluded to the fact that during the 13 years this Act has been in operation, the trade of this country has increased from £45,000,000 to £120,000,000. Let any person reflect upon all the events which are involved in that short statement; let him consider the enormous demand upon capital for the purpose of carrying on such a gigantic increase of trade, and let him consider at the same time that the natural source from which that great demand should be supplied, namely, the annual savings of this country, has for the last three or four years been consumed in the unprofitable expenditure of war. I confess that my surprise is, that the rate of interest is not much higher than it is; or, in other words, my surprise is, that the pressure for capital to carry on these gigantic operations, is not far more stringent than you have found it to be."

What an amazing jumble of words by our logician of usury! Here he comes again with his increased value of capital! He seems to think that this enormous expansion of the reproduction process, hence accumulation of real capital, took place on one side, and that on the other there existed a "capital", for which there arose an "enormous demand", in order to accomplish this gigantic increase of commerce! Was not this enormous increase of production an increase of capital itself, and if it created a demand, did it not also create the supply, and, simultaneously, an increased supply of money-capital? If the interest rate rose very high, then merely because the demand for money-capital increased still more rapidly than its supply, which implies, in other words, that with the expansion of industrial production its operation on a credit basis expanded as well. That is to say, the actual industrial expansion caused an increased demand for "accommodation," and the latter demand is evidently what our banker means by the "enormous demand for capital." It was surely not the expansion of this demand for capital alone, which raised the export business from £45 to £120 million. And furthermore, what does Overstone mean when he says that the country's annual savings swallowed by the Crimean War form the natural source of supply for this big demand? in the first place, how did England achieve accumulation in 1792-1815, which was a far different war from the little Crimean one? In the second place, if the natural source was dry, from what source did capital flow at all? It is well known that England did not request loans from foreign countries. Yet if there is an artificial source besides the natural one, it would have been best for a nation to utilise the natural source in war and the artificial one in business. But if only the old money-capital was available, could it double its effectiveness through a high rate of interest? Mr. Overstone evidently thinks that the country's annual savings (which, however, were supposed to have been consumed in this case) are converted only into money-capital. But if no real accumulation, i.e., expansion of production and augmentation of the means of production, had taken place, what good would there be from the accumulation of debtor's money claims on this production?

The increase in the "value of capital" springing from a high rate of profit is identified by Overstone with an increase caused by a greater demand for money-capital. This demand may climb for reasons quite independent of the rate of profit. He himself cites the example of its rise in 1847 as a result of the depreciation of real capital. Depending on what suits his purpose, he ascribes the value of capital to real capital or money-capital.

The dishonesty of our banking lord, and his narrow-minded banker's point of view with its didactic flavouring are further revealed in the following:

(3728. Question:) "You have stated that the rate of discount is of no material moment you think to the merchant; will you be kind enough to state what you consider the ordinary rate of profit?"

Mr. Overstone declares that it is "impossible" to answer this question.

"3729. Supposing the average rate of profit to be, say, from 7 to 10%, a variation of from 2 to 7 or 8% in the rate of discount must materially affect the rate of profit, must it not? "

(This question itself lumps together the rate of profit of enterprise with the rate of profit, and. passes over the fact that the rate of profit is the common source of interest and profit of enterprise. The interest rate may leave the rate of profit untouched, but not the profit of enterprise. Overstone replied:)

"In the first place parties will not pay a rate of discount which seriously interrupts their profits; they will discontinue their business rather than do that."

(Yes, if they can do so without ruining themselves. So long as their profit is high, they pay the discount because they wish to, and when it is low, because they have to.)

"What is the meaning of discount? Why does a person discount a bill? ... Because he wants to obtain the command of a greater quantity of capital."

(Halte-là! because he wants to anticipate the return in money of his tied-up capital and to prevent his business from stopping; because he must meet payments due. He demands more capital only when business is good, or when he speculates on another's capital, though business may be bad. The discount is by no means simply a device to expand business.)

"And why does he want to obtain the command of a greater quantity of capital? Because he wants to employ that capital; and why does he want to employ that capital? Because it is profitable to him to do so; it would not be profitable to him to do so if the discount destroyed his profit."

This smug logician assumes that bills of exchange are discounted only for the purpose of expanding business, and that business is expanded because it is profitable. The first assumption is wrong. The ordinary businessman discounts, in order to anticipate the money-form of his capital and thereby to keep his process of reproduction in flow; not in order to expand his business or secure additional capital, but in order to balance the credit he gives by the credit he receives. And if he wants to expand his business on credit, discounting bills will do him little good because it is merely conversion of the money-capital which he already has in his hands from one form into another; he will rather take a direct loan for a longer period. The credit swindler will get his accommodation bills discounted to expand his business activity, to cover one squalid business deal by another; not to make profits but to obtain possession of another's capital.

After Mr. Overstone has thus identified discounting with borrowing additional capital (instead of with converting bills representing capital into hard cash), he beats an instant retreat as soon as the screws are applied to him.

(3730. Question:) "Merchants being engaged in business, must they not for a certain period carry on their operations in despite of any temporary increase in the rate of discount?" — (Overstone:) "There is no doubt that in any particular transaction, if a person can get his command of capital at a low rate of interest rather than at a high rate of interest, taken in that limited view of the matter, that is convenient to him."

But it is a very unlimited point of view, on the other hand, which enables Mr. Overstone quite suddenly to understand only his, banker's capital, as "capital," and to assume that the man who discounts a bill of exchange with him is a man without capital, just because his capital exists in the form of commodities, or because the money-form of his capital is a bill of exchange, which Mr. Overstone converts into another money-form.

3732. "With reference to the Act of 1844, can you state what has been about the average rate of interest in proportion to the amount of bullion in the Bank; would it be a fact that when the amount of bullion has been about £9,000,000 or £10,000,000 the rate of interest has been 6 or 7 per cent, and that when it has been £16,000,000, the rate of interest has been, say, from 3 to 4 per cent?"

(The examiner wishes to press him to explain the rate of interest, so far as it is influenced by the amount of bullion in the Bank, on the basis of the rate of interest, so far as it is influenced by the value of capital.)

"I do not apprehend that that is so... but if it is, then I think we must take still more stringent measures than those adopted by the Act of 1844, because if it be true that the greater the store of bullion, the lower the rate of interest, we ought to set to work, according to that view of the matter, to increase the store of bullion to an indefinite amount, and then we should get the interest down to nothing."

The examiner, Cayley, unmoved by this poor joke, continues:

"3733. If that be so, supposing that £5,000,000 of bullion was to be restored to the Bank, in the course of the next six months the bullion then would amount, say, to £16,000,000, and supposing that the rate of interest was thus to fall to 3 or 4 per cent, how could it be stated that that fall in the rate of interest arose from a great decrease of the trade of the country? — I said that the recent rise in the rate of interest, not that the fall in the rate of interest, was closely connected with the great increase in the trade of the country."

But what Cayley says is this: If a rise of interest rate together with a contraction of the gold reserve, is an indication of an expansion in business, then a fall of the interest rate together with an expansion of the gold reserve, must be an indication of a contraction of business. Overstone has no answer to this.

(3736. Question:) "I observed you" (in the text always "Your Lordship") "to say that money was the instrument for obtaining capital."

(Precisely this is the mistake, to conceive money as an instrument; it is a form of capital.)

"Under a drain of bullion (of the Bank of England) is not the great strain, on the contrary, for capitalists to obtain money?" — (Overstone:) "No, it is not the capitalists, it is those who are not capitalists, who want to obtain money and why do they want to obtain money? ... Because through the money they obtain the command of the capital of the capitalist to carry on the business of the persons who are not capitalists."

Here he declares point-blank that manufacturers and merchants are not capitalists, and that the capitalist's capital is only money-capital.

"3737. Are not the parties who draw bills of exchange capitalists? — The parties who draw bills of exchange may be, and may not be, capitalists."

Here he is stuck.

He is then asked whether merchants' bills of exchange represent commodities which have been sold or shipped. He denies that these bills represent the value of commodities in the same way that a bank-note represents gold. (3740, 3741.) This is somewhat insolent.

"3742. Is it not the merchant's object to get money? — No; getting money is not the object in drawing the bill; getting money is the object in discounting the bill."

Drawing bills of exchange is converting commodities into a form of credit-money, just as discounting bills of exchange is converting this credit-money into another, namely bank-notes. At any rate, Mr. Overstone admits here that the purpose of discounting is to obtain money. A while ago he said that discounting was a way not of converting capital from one form into another, but of obtaining additional capital.

"3743. What is the great desire of the mercantile community under pressure of panic, such as you state to have occurred in 1825, 1837 and 1839; is their object to get possession of capital or the legal tender? — Their object is to get the command of capital to support their business."

Their purpose is to obtain means of payment for due bills of exchange on themselves, on account of the prevailing lack of credit, so that they will not have to let their commodities go below price. If they have no capital at all themselves, they receive it along with the means of payment, because they receive value without an equivalent. The urge to obtain money as such consists always in the wish to convert value from the form of commodities or creditor's claims into the form of money. Hence, even aside from the crises, the great difference between borrowing capital and discount, the latter being a mere conversion of money claims from one form into another, or into real money.

[I take the liberty at this point in my capacity of editor to interpolate a few remarks.

With respect to Norman, as well as Loyd-Overstone, the banker is always the one who "advances capital" to others, and his customers are those who demand "capital" from him. Thus, Overstone says that people have bills of exchange discounted through him, "because they wish to obtain the command of capital" (3729), and that it is pleasant for such people if they can "get command of capital at a low rate of interest" (3730). "Money is the instrument for obtaining capital" (3736), and during a panic the great desire of the mercantile community is to "get the command of capital" (3743). For all of Loyd-Overstone's confusion over what capital is, it is at least clear that he designates what the banker gives to his client as capital, as a capital which the client did not formerly possess, but which was advanced to him to supplement what he already possessed.

The banker has become so accustomed to act as distributor (through loans) of the social capital available in money-form that he considers every function whereby he hands out money, as loaning. All the money he pays out appears to him as a loan. If the money is directly loaned, this is literally true. If it is invested in the bill-discounting business, it is in fact advanced by himself until the bill becomes due. The notion thus grows on him that all the payments he makes are advances; furthermore, that they are advances not merely in the sense that every investment of money with the object of deriving interest or profit, is economically considered an advance of money which the owner of money concerned, in his capacity of private individual, makes to himself in his capacity as entrepreneur, but advances in the definite sense that the banker lends his client a sum of money which augments the capital already at the latter's disposal.

It is this conception, which, transferred from the banker's office to political economy, has created the confusing controversy, whether that which the banker places at his client's disposal in hard cash is capital or mere money, a medium of circulation, or currency. To decide this — fundamentally simple — controversy, we must put ourselves in the place of a bank client. It all depends on what this customer requests and receives.

If the bank allows its client a loan simply on his personal credit, without any security on his part, then the matter is clear. He then certainly receives an advance of definite value as a supplement to the capital he has already invested. He receives it in the form of money; hence, not merely money, but also money-capital.

If, on the other hand, he receives the advance against securities, etc., then it is an advance in the sense of money paid to him on condition that he pay it back. But it is not an advance of capital. For the securities also represent capital, and a larger amount at that than the advance. The recipient therefore receives less capital-value than he deposits as security; this represents for him no acquisition of additional capital. He does not enter into the transaction because he needs capital — he has that in his securities-but because he needs money. Here we, therefore, have an advance of money, not of capital.

If the loan is granted by discounting bills, then even the form of an advance disappears. Then it is purely a matter of buying and selling. The bill passes by endorsement into the possession of the bank, while the money passes into the possession of the client. There is no question of any return payment on his part. If the client buys hard cash with a bill of exchange or some similar instrument of credit, it is no more and no less an advance than were he to buy cash money with his other commodities, such as cotton, iron, or corn. Still less can this be called an advance of capital. Every purchase and sale between one merchant and another is a transfer of capital. But an advance of capital occurs only when the transfer of capital is not reciprocal, but unilateral and for a period of time. An advance of capital through discount can, therefore, only occur when a bill is a speculative one, which does not represent any sold commodities, and no banker will take such a bill if he is aware of its nature. In the regular discounting business the bank client does not, therefore, receive an advance, either of capital or of money. What he receives is money for sold commodities.

The cases in which the customer demands and receives capital from a bank are thus clearly distinguished from those, in which he merely receives an advance of money, or buys money from the bank. And since least of all Mr. Loyd-Overstone ever advanced his funds without collateral except on the rarest occasions (he was the banker of my firm in Manchester), it is likewise evident that his lyric descriptions of the great quantities of capital loaned by generous bankers to manufacturers in need of capital are gross inventions.

By the way, in Chapter XXXII Marx says essentially the same thing: "The demand for means of payment is a mere demand for convertibility into money, so far as merchants and producers have good securities to offer; it is a demand for money-capital whenever there is no collateral, so that an advance of means of payment gives them not only the form of money but also the equivalent they lack, whatever its form, with which to make payment." — And again in Chapter XXXIII: "Under a developed system of credit, with the money concentrated in the hands of bankers, it is they, at least nominally, who advance it. This advance refers only to money in circulation. It is an advance of circulation, not an advance of capitals which it circulates." Mr. Chapman, who should know, likewise corroborates this conception of the discounting business: B. C. 1857:

"The banker has the bill, the banker has bought the bill."Evid. Question 5139.

We shall, however, return to this subject in Chapter XXVIII. — F. E.]

"3744. Will you be good enough to describe what you actually mean by the term ‘capital’?" — (Overstone:) "Capital consists of various commodities, by means of which trade is carried on; there is fixed capital and there is circulating capital. Your ships, your docks, your wharves ... are fixed capital; your provisions, your clothes, etc., are circulating capital."

"3745. Is the country oppressed under a drain of bullion? — Not in the rational sense of the word."

(Then comes the old Ricardian theory of money.)

"In the natural state of things the money of the world is distributed amongst the different countries of the world in certain proportions, those proportions being such that under that distribution (of money) the intercourse between any one country and all the other countries of the world jointly will be an intercourse of barter; but disturbing circumstances will arise to affect that distribution, and when those arise, a certain portion of the money of any given country passes to other countries." — "3746. Your Lordship now uses the term ‘money.’ I understood you before to say that it was a loss of capital. — That what was a loss of capital?" — "3747. The export of bullion? — No, I did not say so. If you treat bullion as capital, no doubt it is a loss of capital; it is parting with a certain proportion of those precious metals which constitute the money of the world." — "3748. I understood Your Lordship to say that an alteration in the rate of discount was a mere sign of an alteration in the value of capital? — I did." — "3749. And that the rate of discount generally alters with the state of the store of bullion in the Bank of England? — Yes, but I have already stated that the fluctuations in the rate of interest, which arise from an alteration in the quantity of money" (what he therefore means here is the quantity of actually existing gold) "in a country, are very small."

"3750. Then, does Your Lordship mean that there is a less capital than there was, when there is a more continuous yet temporary increase in the rate of discount than usual? — Less, in one sense of the word. The proportion between capital and the demand for it is altered; it may be by an increased demand, not by a diminution of the quantity of capital."

(But a moment ago it was capital = money or gold, and a little before that he had explained the rise in interest rate by a high rate of profit, due to an expansion rather than a contraction of business or capital.)

"3751. What is the capital which you particularly allude to? — That depends entirely upon what the capital is which each person wants. It is the capital which the country has at its command for conducting its business, and when that business is doubled, there must be a great increase in the demand for the capital with which it is to be carried on."

(This shrewd banker doubles first the business activity and then the demand for capital with which it is to be doubled. All he sees is his client, who asks Mr. Loyd for more capital by which to double the volume of his business.)

"Capital is like any other commodity" (but according to Mr. Loyd capital is nothing but the totality of commodities), "it will vary in its price" (hence, commodities change their price twice, one time as commodities and the second as capital), "according to the supply and demand."

"3752. The changes in the rate of discount are generally connected with the changes in the amount of gold which there is in the coffers of the Bank. Is it that capital to which Your Lordship refers? — No." — "3753. Can Your Lordship point to any instance in which there has been a large store of capital in the Bank of England connected with a high rate of discount? — The Bank of England is not a place for the deposit of capital, it is a place for the deposit of money." — "3754. Your Lordship has stated that the rate of interest depends upon the amount of capital; will you be kind enough to state what capital you mean, and whether you can point to any instance in which there has been a large store of bullion in the Bank and at the same time a high rate of interest? — It is very probable (aha!) that the accumulation of bullion in the Bank may be coincident with a low rate of interest, because a period in which there is a diminished demand for capital"

(namely, money-capital; the period to which reference is made here, 1844 and 1845, was a period of prosperity)

"is a period, during which, of course, the means or instrument through which you command capital may accumulate." — "3755. Then you think that there is no connection between the rate of discount and the amount of bullion in the coffers of the Bank? — There may be a connection, but it is not a connection of principle" (his Bank Act of 1844, however, made it a principle of the Bank of England to regulate the interest rate by the quantity of bullion ill its possession), "there may be a coincidence of time." — "3758. Do I rightly understand you to say, that the difficulty of merchants in this country, under a state of pressure, in consequence of a high rate of discount, is in getting capital, and not in getting money? — You are putting two things together which I do not join in that form; their difficulty is in getting capital, and their difficulty also is in getting money.... The difficulty of getting money and the difficulty of getting capital is the same difficulty taken in two successive stages of its progress."

Here the fish is caught in the net again. The first difficulty is to discount a bill of exchange, or to obtain a loan against the security of commodities. It is the difficulty of converting capital, or a commercial token of capital into money. And this difficulty is manifested, among other things, in a high rate of interest. But as soon as the money is obtained, what is the second difficulty? Does anyone ever find any difficulty in getting rid of his money when it is merely a matter of paying? And if it is a matter of buying, has anyone ever had any difficulty in purchasing during times of crisis? And, for the sake of argument, should this refer to a specific dearth in corn, cotton, etc., this difficulty could only appear in the price of these commodities, not in the value of money-capital, i.e., not in the rate of interest; and this difficulty is overcome, in the final analysis, by the fact that our man now has the money to buy them."

money to buy them.""3760. But a higher rate of discount is an increased difficulty of getting money? — It is an increased difficulty of getting money, but it is not because you want to have the money; it is only the form" (and this form brings profit into the banker's pocket) "in which the increased difficulty of getting capital presents itself according to the complicated relations of a civilised state."

"3763. (Overstone's reply:) The banker is the go-between who receives deposits on the one side, and on the other applies those deposits, entrusting them, in the form of capital, to the hands of persons, who, etc."

At last we have what he means by capital. He converts money into capital by "entrusting" it, less euphemistically, by loaning it at interest.

After Mr. Overstone has stated that a change in the rate of discount is not essentially connected with a change in quantity of the gold reserve in a bank, or in the quantity of available money, but that there is at best only a coincidence in time, he repeats:

"3805. When the money in the country is diminished by a drain, its value increases, and the Bank of England must conform to that alteration in the value of money"

(hence, the value of money as capital; in other words, the rate of interest, for the value of money as money, compared with commodities, remains the same),

"which is meant by the technical term of raising the rate of interest."

"3819. I never confound those two."

Meaning money and capital, and for the simple reason that he never differentiated between them.

"3834. The very large sum, which had to be paid" (for corn in 1847), "which was in point of fact capital, for the supply of the necessary provisions of the country."

"3841. The variations in the rate of discount have no doubt a very close relation to the state of the reserve " (of the Bank of England), "because the state of the reserve is the indicator of the increase or the decrease of the quantity of money in the country; and in proportion as the money in the country increases or decreases, the value of that money will increase or decrease, and the bank-rate of discount will conform to that change."

Thus, Overstone admits here what he emphatically denied in No. 3755.

"3842. There is an intimate connection between them."

Meaning the quantity of bullion in the issue department, on the one hand, and the reserve of notes in the banking department, on the other. Here he explains the change in the rate of interest by the change in the quantity of money. But this statement is wrong. The reserve may shrink because the circulating money in the country increases. This is the case when the public takes more notes and the hoard of metal does not decrease. But in such case the interest rate rises, because then the banking capital of the Bank of England is limited by the Act of 1844. But he dare not mention this, because due to this law the two departments have nothing to do with one another.

"3859. A high rate of profit will always create a great demand for capital; a great demand for capital will raise the value of it."

Here, at last, we have the connection between a high rate of profit and a demand for capital as Overstone conceives it. Now, a high rate of profit prevailed in, for example, 1844-45 in the cotton industry, because raw cotton was cheap, and remained so, whereas the demand for cotton goods was strong. The value of capital (and in an earlier statement Overstone calls capital that which everyone needs in his business), in this case therefore the value of raw cotton, was not increased for the manufacturer. The high rate of profit may have induced some cotton manufacturer to obtain money on credit for the purpose of expanding his business. Thereby his demand rose for money-capital, but for nothing else.

"3889. Bullion may or may not be money, just as paper may or may not be a bank-note."

"3896. Do I correctly understand Your Lordship that you give up the argument, which you used in 1840, that the fluctuations in the notes out of the Bank of England ought to conform to the fluctuations in the amount of bullion? — I give it up so far as this... that now with the means of information which we possess, the notes out of the Bank of England must have added to them the notes which are in the banking reserve of the Bank of England."

This is superlative. The arbitrary provision that the Bank may make out as many paper notes as it has gold in the treasury and 14 million more, implies, of course, that its issue of notes fluctuates with the fluctuations of the gold reserve. But since the present "means of information which we possess" clearly showed that the mass of notes, which the Bank can thus manufacture (and which the issue department transfers to the banking department) — that this circulation between the two departments of the Bank of England, fluctuating with the fluctuations of the gold reserve, does not determine the fluctuations in the circulation of bank-notes outside the Bank of England, then the latter — the real circulation — becomes a matter of indifference to the bank administration, and the circulation between the two departments of the Bank, whose difference from the real circulation is mirrored in the reserve, alone becomes decisive. To the outside world this internal circulation is significant only because the reserve indicates how close the Bank is approaching the legal maximum of its note issue, and how much its clients can still receive from the banking department.

The following is a brilliant example of Overstone's mala fides:

"4243. Does the quantity of capital, do you think, oscillate from month to month to such a degree as to alter its value in the way exhibited of late years in the oscillations in the rate of discount? — The relation between the demand and the supply of capital may undoubtedly fluctuate even within short periods.... If France tomorrow put out a notice that she wishes to borrow a very large loan, there is no doubt that it would immediately cause a great alteration in the value of money, that is to say, in the value of capital, in this country."

"4245. If France announces, that she wants suddenly, for any purpose, 30 million's worth of commodities there will be a great demand for capital, to use the more scientific and the simpler term."

"4246. The capital, which France would wish to buy with her loan, is one thing, and the money with which she buys it is another, is it the money, which alters in value, or not? — We seem to be reviving the old question, which I think is more fit for the chamber of a student than for this committee room."

And with this he retires, but not into the chamber of a student. [2]


<"n1" href="#r1">1. In other words, formerly they first fixed the dividend, and then deducted the income tax as the dividend was paid to the individual stockholder; after 1844, however, the Bank first paid the income tax on its total profit, and then p aid the dividend "free of income tax."

The same nominal percentages are, therefore, higher in the latter case by the amount of the tax. — F. E.

<"n2" href="#r2">2. More on Overstone's confusion of terms in matters concerning capital at the close of Chapter XXXII. — [F.E.]