The distinction between currency and capital, as made by Tooke,89 Wilson* and others (and in this connection the distinctions between means of circulation as money, as money capital in
Kinnear comes much closer to the correct conception, in the following passage: ‘Money… is employed to perform two operations essentially distinct… As a medium of exchange between dealers and dealers, it is the instrument by which transfers of capital are effected; that is, the exchange of a certain amount of capital in money for an equal amount of capital in commodities. But money employed in the payment of wages and in purchase and sale between dealers and consumers is not capital, but income; that portion of the incomes of the community, which is devoted to daily expenditure. It circulates in constant daily use, and is that alone which can, with strict propriety, be termed currency. Advances of capital depend entirely on the will of the Bank and other possessors of capital, for borrowers are always to be found; but the amount of the currency depends on the wants of the community, among whom the money circulates, for the purposes of daily expenditure’ (J. G. Kinnear, The Crisis and the Currency, London, 1847). general, and as interest-bearing or monied capital as the English put it, are simply lumped together haphazardly), comes down to two things.
The means of circulation circulates on the one hand as coin (money), in so far as it mediates the expenditure of revenue, i.e. commerce between individual consumers and retail traders; and in this category we count all merchants who sell to the consumer direct – to individual consumers as distinct from productive consumers or producers. Here money circulates in the function of coin, even though it constantly replaces capital. A certain part of the money of a country is always devoted to this function, even though the particular pieces of which this part consists are constantly changing. On the other hand, however, in so far as money mediates the transfer of capital, whether as means of purchase (means of circulation) or means of payment, it is capital. Thus it is neither the function of means of purchase nor that of means of payment that distinguishes it from coin; for money can function as means of purchase between one dealer and another, if the one buys from the other with cash, and it can even function between dealer and consumer as means of payment if credit is given, the revenue being consumed first and paid for only afterwards. The difference is rather that in the second case this money does not just replace capital for one party, the seller, but is also spent and advanced as capital by the other party, the buyer. The distinction is in fact one between the money form of revenue and the money form of capital, not between currency and capital, for a certain definite quantity of money circulates in the transactions between dealers as well as in the transactions between dealers and consumers, so that it is equally circulation in both functions. Tooke’s conception, therefore, introduces confusion into the question in various ways:
(1) By confusing the functional characteristics;
(2) By bringing in the question of the overall quantity of money circulating, in both functions taken together;
(3) By bringing in the question of the relative proportions of the circulating medium in the two functions, and hence in the two spheres of the reproduction process.
(1) The confusion of the functional characteristics, i.e. the fact that money is currency in the one form and capital in the other. In so far as money serves for one or the other of these functions, for realizing revenue or for transferring capital, it functions either in buying and selling or in payment, as means of purchase or payment, and in the broader sense of the terms as means of circulation. The further characteristic that it may have in the accounts of its spender or receiver, that it represents either capital or revenue for him, alters absolutely nothing here, and this too can be shown in two ways. Although the kinds of money circulating in the two spheres are different, yet the same piece of money, for instance a £5 note, moves from one sphere to the other and performs both functions in turn; this is unavoidable simply because the retail trader can give his capital its money form only in the form of the coin that he receives from his buyers. We can assume that small change proper has the centre of gravity of its circulation in the realm of retail trade. The retailer is constantly using it to give change and receiving it back again from his customers in payment. But he also receives money, i.e. coin, in the metal that is a measure of value, e.g. sovereigns in England, and even banknotes, particularly notes of lower denominations, £5 and £10. These gold coins and notes, as well as some surplus small change, he deposits each day or each week in the bank, and he pays for his purchases with cheques on his bank deposit. But the same gold coins and notes are just as constantly withdrawn from the bank by the public as a whole in their capacity as consumers, as the money form of their revenue, either directly or indirectly (e.g. smaller coins by the manufacturers for payment of wages); they are constantly flowing back to the retail traders, for whom they thus realize a part of their capital afresh and at the same time part of their revenue. This last fact is important and is completely overlooked by Tooke. Only in so far as money is laid out as money capital, at the beginning of the reproduction process (Volume 2, Part One), does capital value exist in its pure form. For the commodity produced contains not only capital but also surplus-value; it is not just inherently capital but capital that has already become such, capital together with the source of revenue incorporated in it. What the retail trader parts with in exchange for the money that flows back to him, i.e. his commodity, is thus for him capital plus profit, capital plus revenue.
Moreover, since the circulating money flows back to the retailer, it restores the money form of his capital.
It is completely mistaken, therefore, to transform the distinction between circulation as circulation of revenue and as circulation of capital into a distinction between currency and capital. In Tooke’s case, this mode of expression arises through his simply taking the point of view of the banker issuing his own banknotes. The amount of his notes that are continuously in the hands of the public (even if this always consists of different particular notes) and function as means of circulation cost him nothing besides paper and printing costs. The notes are circulating certificates of indebtedness (bills of exchange) made out in his own name, even if they bring him in money and thus serve as a means of valorizing his capital. But they are different from capital, whether his own or borrowed. And this is the origin of a special distinction for him between currency and capital, which has nothing to do with defining the concepts as such, let alone Tooke’s suggested definitions.
The particular character of money – whether it functions as the money form of revenue or of capital – does not at first affect its character as a means of circulation. It retains this character whether it performs one function or the other. If the money appears as the money form of revenue, however, it functions more as a means of circulation in the strict sense (coin, means of purchase), on account of the fragmentation of these purchases and sales, and because the majority of revenue spenders, the workers, can buy relatively little on credit; while in the world of trade and commerce, where the circulating medium is the money form of capital, money functions principally as means of payment, partly on account of concentration and partly on account of the prevailing credit system. But the distinction between money as means of payment and money as means of purchase (circulating medium) is a distinction within money itself, not a distinction between money and capital. If more copper and silver circulates in the retail trade, and in the wholesale trade more gold, this does not make the distinction between silver and copper on the one hand and gold on the other into a distinction between currency and capital.
(2) Bringing in the question of the quantity of money circulating in the two functions together. In as much as money circulates, whether as means of purchase or means of payment – irrespective of in which of the two spheres and independently of its function of realizing revenue or capital – the laws developed earlier in considering simple commodity circulation (Volume 1, Chapter 3, 2, b) still apply for the quantity of money circulating. In both cases the amount of money in circulation, the amount of currency, is determined by the same factors: viz. the velocity of circulation, i.e. the number of times the same function of means of purchase and payment is repeated by the same piece of money in a given period of time; the mass of simultaneous sales and purchases, or payments; the sum of the prices of the commodities circulating; and finally the balances of payments that have to be settled at the same time. Whether the money functioning in this way represents capital or revenue for those who pay it and receive it is absolutely without any bearing on the matter. Its quantity is determined simply by its function as means of purchase and payment.
(3) On the question of the relative quantities of the circulating medium in the two functions, and hence in the two spheres of the reproduction process. The two spheres of circulation have an inner connection, since on the one hand the amount of revenue to be spent expresses the scale of consumption, while on the other the amount of capital circulating in production and trade expresses the scale and speed of the reproduction process. Nevertheless, the same factors have different effects, and even work in opposite directions, on the quantity of money circulating in the two functions or spheres, or on the amount of currency, as the English banking term has it. And this gives a new occasion for Tooke’s absurd distinction between currency and capital. The fact that the Currency Principle gentlemen confuse two disparate things is in no way a reason for presenting this as a conceptual distinction.
In times of prosperity, of great expansion, when the reproduction process exhibits a great acceleration and energy, the workers are fully employed. In most cases there is even a rise in wages, which to some extent balances the fall in wages below the average level in the other phases of the commercial cycle. At the same time, the capitalists’ revenues grow significantly. Consumption generally rises. Commodity prices rise just as regularly, at least in certain decisive branches of business. The result of this is that the quantity of money in circulation grows, at least within certain limits, since the greater velocity of circulation places its own barriers on the growth in the quantity of the circulating medium. Since the part of the social revenue that consists of wages is originally advanced by the industrial capitalist in the form of variable capital, and always in the money form, he needs more money for this circulation in times of prosperity. We must not however count this twice: once as money needed to circulate the variable capital, and then again as money needed to circulate the workers’ revenue. The money paid to the workers as wages is spent in the retail trade and returns with the same weekly regularity to the banks in the deposits of the retail trader, after it has mediated all kinds of intermediate transactions in smaller circuits. In times of prosperity the reflux of money proceeds smoothly for the industrial capitalists, and so their need for monetary accommodation is not increased by their having to pay more in wages, more money for the circulation of their variable capital.
The overall result is that in periods of prosperity the mass of the circulating medium that serves for the expenditure of revenue experiences a decisive growth.
As far as concerns the means of circulation needed for transfers of capital, i.e. transfers simply between the capitalists themselves, this period of brisk business is at the same time a period of elastic and easy credit. The velocity of circulation between capitalist and capitalist is regulated directly by credit, and the amount of the circulating medium required to settle payments and make cash purchases undergoes a relative decline. It may expand in absolute terms, but it always decreases relatively, compared with the expansion of the reproduction process. A larger mass of payments, on the one hand, is settled without any intervention of money; on the other hand, given the vigour of the process, there is a quicker movement of the same quantities of money, as both means of purchase and payment. The same amount of money mediates the reflux of a greater number of individual capitals.
On the whole, the monetary circulation appears ‘full’ in such periods, although its division II (transfer of capital) is at least relatively contracted, while division I (expenditure of revenue) undergoes an absolute expansion.
The refluxes express the transformation of commodity capital back into money, M–C–M′, as we have seen in considering the reproduction process (Volume 2, Part One). Credit makes the reflux in the money form independent of the point in time of the actual reflux, whether we are dealing with the industrial capitalist or the merchant. Each of these sells on credit; his commodity is alienated before it is transformed back into money for him, i.e. flows back to him in the money form. On the other hand he buys on credit, and thus the value of his commodity has been transformed back for him either into productive capital or into commodity capital even before this value is actually transformed into money, before the commodity’s price falls due and is paid. In such times of prosperity, the reflux takes place smoothly and easily. The retail trader is certain to pay the wholesaler, the latter the manufacturer, and he the importer of raw material, etc. The appearance of rapid and assured refluxes always persists for a certain time after these are really at an end, by virtue of the credit that has already been given, since the credit refluxes stand in for real ones. The banks begin to scent danger as soon as their clients deposit more bills of exchange with them than money. See the evidence of the Liverpool bank director quoted above, p. 541.
To repeat here what I have already noted earlier: ‘In periods of expanding credit the velocity of currency increases faster than the prices of commodities, whereas in periods of contracting credit the velocity of currency declines faster than the prices of commodities’ (A Contribution to the Critique of Political Economy, p. 105).
In periods of crisis, the opposite is the case. Circulation no. I contracts, prices fall, and so do wages; the number of workers employed is restricted, the amount turned over declines. In circulation no. II, on the other hand, the need for monetary accommodation grows with the decline in credit, a point which we shall immediately go into in more detail.
There can be no doubt at all that with the decline in credit, which goes together with a stagnation in the reproduction process, the amount of currency required for no. I, the expenditure of revenue, declines, whereas that for no. II, the transfer of capital, increases. It remains to be investigated, however, how far this is identical with the assertions of Fullarton and others:
‘A demand for capital on loan and a demand for additional circulation are quite distinct things, and not often found associated’ (Fullarton, op. cit., p. 82; title of Chapter 5).90
It is clear in the first place that in the former of the two above cases, the period of prosperity, when the quantity of the circulating medium must grow, there is a growing demand for it. But it is just as clear that, if a manufacturer draws more out of his bank deposit in gold or banknotes because he has to spend more capital in the money form, it is not his demand for capital that grows on this account but only his demand for this particular form of expending his capital. The demand relates only to the technical form in which he puts his capital into circulation. This is just as, according to the differential development of the credit system, for example, the same variable capital, the same amount of wages, requires a greater quantity of circulating medium in one country than in another; in England, for example, more than in Scotland, in Germany more than in England. In agriculture, too, the same capital active in the reproduction process requires different amounts of money in different seasons to perform its function.
But the opposition that Fullarton makes is incorrect. It is in no way, as he claims, the strong demand for loans that distinguishes the period of stagnation from that of prosperity, but rather the ease with which this demand is satisfied in the time of prosperity and the difficulty of satisfying it once stagnation has set in. It is in fact precisely the tremendous development of the credit system during the period of prosperity, and also therefore the enormous rise in the demand for loan capital and the readiness with which this is made available in such periods, that leads to the shortage of credit in the period of stagnation. Thus it is not a difference in the demand for loans that distinguishes the two periods.
As we have noted before, the two periods are distinguished in the first place by the fact that in the period of prosperity it is the demand for means of circulation between consumers and dealers that is dominant, while in the period of depression it is the demand for means of circulation between capitalists. In the period of stagnation the first declines while the second increases.
What strikes Fullarton and others as decisively important is the phenomenon that, at such times, while securities in the hands of the Bank of England increase, its note circulation declines, and vice versa. The volume of securities, however, expresses the volume of monetary accommodation, of discounted bills of exchange, and of advances against marketable securities. Thus Fullarton says in the passage quoted above (p. 580, note 90) that securities in the hands of the Bank of England generally fluctuate in an opposite direction to its note circulation, and that this confirms the old-established principle of the private banks that no bank can increase its note issue beyond a certain definite amount, determined by the needs of its clientele. If it wants to make further advances above this amount, it must make these out of its own capital, i.e. either realize on securities or utilize deposits which it would otherwise have invested in securities.
We see now what Fullarton means by capital. In his view, capital is involved when the bank can no longer make advances with its own banknotes, its own promises to pay, which of course cost it nothing. But with what does it make these advances? With the proceeds from the sale of ‘securities in reserve’, i.e. government paper, stocks and other interest-bearing paper. And what does it sell these securities for? For money, gold or banknotes, in so far as the latter are legal tender, as those of the Bank of England are. What it advances, therefore, is in all circumstances money. If it advances gold, this is obvious. If notes, then these notes now represent capital, since the bank has parted with a real value in exchange, i.e. interest-bearing securities. In the case of the private banks, the notes that accrue to them by the sale of securities can only be, in the main, either notes of the Bank of England or its own notes, since others are only accepted with reticence in payment for securities. But if it is the Bank of England itself, then those of its own notes that it retains cost it capital, i.e. interest-bearing securities. Besides, it thereby withdraws its own notes from circulation. If it reissues these notes again or issues new notes to the same amount instead, these now represent capital. Moreover, they represent capital just as much when they are used for advances to capitalists as when they are used later, when the demand for this monetary accommodation subsides, for new investments in securities. In all these circumstances, the term capital is used here simply in the banking sense, where it means that the banker is forced to lend more than just his credit.
As is well known, the Bank of England makes all its advances in its own notes. If despite this, then, the Bank’s note circulation normally decreases as the discounted bills and securities in its possession – i.e. the advances it has made – increase, what then becomes of the notes put into circulation, and how do they flow back to the Bank?
To start with, if the demand for monetary accommodation arises from an unfavourable national balance of payments and hence mediates a drain of gold, the matter is very simple. The banknotes are exchanged against gold at the Bank itself, in the Issue Department, and the gold is exported. It is the same as if the Bank paid gold directly, without the mediation of notes, as it does in discounting bills of exchange. A rising demand of this kind – and in certain cases it reaches £7 to £10 million – naturally adds not a single £5 note to the country’s domestic circulation. If it is now said that the Bank advances capital in this case and not currency, this has a double meaning. Firstly, that it does not advance credit but real value, a part of its own capital or the capital deposited with it. Secondly, that it advances money not for domestic circulation but rather for international circulation, world money. And for this purpose the money must always exist in its hoard form, its metallic embodiment; in the form in which it is not only the form of value but itself equal to the value whose money form it is. Even though this gold now represents capital both for the Bank and for the exporting gold dealer, banking capital or commercial capital, the demand does not arise for it as capital but rather as the absolute form of money capital. It arises in the very same moment as the foreign markets are flooded with unrealizable English commodity capital. What is demanded is not capital as capital but rather capital as money, in the form in which money is a commodity on the general world market; and this is its original form as precious metal. The drain of gold is not, as Fullarton, Tooke, etc. say, ‘simply a question of capital’. It is rather a ‘question of money’, even if in a specific function. The fact that it is not a question of domestic circulation, as the Currency Theory people maintain, in no way proves, as Fullarton and others believe, that it is just a ‘question of capital’. It is ‘a question of money’, in the form in which money is an international means of payment.
‘Whether that capital’ (the purchase price for the millions of quarters of foreign wheat imported into the home country after a harvest failure) ‘is transmitted in merchandise or in specie, is a point which in no way affects the nature of the transaction’ (Fullarton, op. cit., p. 131).
But it has a very definite effect on whether there is a drain of gold or not. Capital is converted into the form of precious metal because it cannot be converted at all into the form of commodities, or not without a very major loss. The anxiety that the modern banking system has when faced with a drain of gold goes beyond anything that the Monetary System ever dreamed of, even though for it precious metal was the only true wealth. Let us take for example the following statement of the Governor of the Bank of England, Morris, before the parliamentary committee investigating the crisis of 1847–8.
(3846. Question:) ‘When I spoke of the depreciation of stocks and fixed capital, 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 million 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.’
Here gold is taken as the only true wealth.
Tooke’s discovery as quoted by Fullarton, that ‘with only one or two exceptions, and those admitting of satisfactory explanation, every remarkable fall of exchange, followed by a drain of gold, that has occurred during the last half-century, has been coincident throughout with a comparatively low state of the circulating medium, and vice versa’ (Fullarton, p. 121), shows that these drains of gold take place in most cases after a period of excitement and speculation, as ‘the signal of a collapse already commenced… an indication of overstocked markets, of a cessation of the foreign demand for our productions, of delayed returns, and, as the necessary sequel of all these, of commercial discredit, manufactories shut up, artisans starving, and a general stagnation of industry and enterprise’ (p. 129).
This is also of course the best refutation of the Currency people’s contention that ‘a full circulation drives out bullion and a low circulation attracts it’.
On the other hand, however, although it is generally in periods of prosperity that the Bank of England has a strong gold reserve, this is always formed in the slack and stagnant period that follows the storm.
All this wisdom about the drain of gold, then, amounts to saying that the demand for international means of circulation and payment is different from the demand for domestic means of circulation and payment (which is why it goes without saying that ‘the existence of a drain does not necessarily imply any diminution of the internal demand for circulation’, as Fullarton says on p. 112); and that the export of precious metals abroad is not the same as putting notes or coin into circulation domestically. Moreover, I have already shown earlier that the movement of the hoard that is set aside as a reserve fund for international payments has in and of itself nothing to do with the movement of money as means of circulation.* However, there is a certain complication involved here, in so far as the different functions of the hoard which I developed from the nature of money – its function as a reserve fund of means of payment, for payments that fall due at home; as a reserve fund of circulating medium; finally as a reserve fund for world money – are all imposed upon a single reserve fund. From which it follows that in certain circumstances a drain of gold from the Bank domestically may be combined with a drain abroad. A still further complication arises from the additional function that is quite arbitrarily laid on this hoard, namely to serve as a guarantee for the convertibility of banknotes, in countries where the credit system and credit money are developed. On top of all this, finally, we have (1) the concentration of the national reserve fund in a single principal bank, and (2) its reduction to the minimum possible. Hence Fullarton’s complaint (p. 143):
‘One cannot contemplate the perfect silence and facility with which variations of the exchange usually pass off in continental countries, compared with the state of feverish disquiet and alarm always produced in England whenever the treasure at the Bank seems to be at all approaching to exhaustion, without being struck with the great advantage in this respect which a metallic currency possesses.’
But if we leave aside for now the drain of gold, how then can a bank that issues banknotes, such as the Bank of England, increase the amount of monetary accommodation it provides without increasing its note issue?
All notes outside the walls of the bank, whether they are actually circulating or are dormant in private hoards, are in circulation as far as the bank itself is concerned, i.e. outside its possession. Thus if the bank expands its discounting and money-lending business, its advances against securities, then the banknotes issued must flow back to it again or otherwise the sum in circulation would increase, which is precisely not supposed to be the case. This reflux can take place in two ways.
Firstly, the bank pays notes to A against securities; A uses these to pay B for a bill of exchange that falls due; and B deposits the notes again with the bank. The circulation of these notes is at an end, but the loan remains.
(‘The loan remains, and the currency, if not wanted, finds its way back to the issuer’: Fullarton, p. 97.)
The notes that the bank advanced to A have now returned to it; on the other hand the bank is a creditor to A or whoever has drawn the bill of exchange that A had discounted, while it is a debtor to B for the sum of value expressed in these notes, and B thereby has at his disposal a corresponding part of the bank’s capital.
Secondly, A pays to B, and either B himself or C, the person to whom he again pays these notes, uses the notes to pay bills due to the bank, directly or indirectly. In this case the bank is paid with its own notes. And in this way the transaction is completed (until A’s repayment to the bank).
How far, then, should the bank’s advance to A be considered as an advance of capital, and how far as simply an advance of means of payment?91
(This depends on the nature of the advance itself. There are three cases to be considered.
First case. A obtains the sum advanced by the bank on his personal credit, without giving any security for it. In this case he has received not only an advance of means of payment, but unquestionably also a new capital, which he can use as additional capital in his business, and valorize, until it has to be repaid.
Second case. A has given the bank securities as collateral, whether government bonds or stocks, and received on them, say, a cash advance of up to two-thirds their present value. In this case he has received means of payment that he needed, but no additional capital, for he has given into the bank’s possession a greater capital value than he received from it. But this greater capital value was on the one hand of no use for his immediate need, as means of payment, since it was invested at interest in a specific form; while on the other hand A had his reasons for not transforming it directly into means of payment by selling it. His securities had among other things the property of functioning as reserve capital, and he let them continue to function as such. There has therefore been a temporary mutual transfer of capital between A and the bank, so that A has not received any extra capital (on the contrary!), though he has received the means of payment he needed. For the bank, on the other hand, the transaction involves the temporary tying-up of money capital in a loan, a transformation of money capital from one form to another, and this transformation is precisely the basic function of banking.
Third case. A has a bill of exchange discounted at the bank and receives the amount due for it in cash, after deduction of the discount. In this case, he has sold a non-liquid form of money capital to the bank in exchange for the sum of value in liquid form; the bill of exchange that had not yet expired in return for ready cash. The bill is now the bank’s property. It makes no difference at all that A, as the last endorser of the bill, is responsible for it to the bank in default of payment. He shares this responsibility with the other endorsers and with the drawer of the bill, all of whom are duly responsible to him. In this case, therefore, there is no advance at all, but simply an ordinary purchase and sale. A, therefore, has nothing to repay to the bank. The bank reimburses itself by cashing the bill when it falls due. Here, too, there has been a reciprocal transfer of capital between A and the bank, and this, moreover, is just like the purchase and sale of any other commodity; for this reason A does not receive any additional capital. What he needed and received was means of payment, and he receives this in that the bank transforms the one form of his money capital – the bill of exchange – into the other – money.
It is only in the first case, therefore, that there can be any talk of a genuine capital advance. In the second and third cases, it occurs at most in the sense that every investment of capital implies an ‘advance’. In this sense, the bank advances A money capital; but for A this is money capital at most in the sense that it is a part of his capital in general. And he requires and uses it not especially as capital, but rather especially as means of payment. Otherwise every ordinary sale of commodities, by which means of payment are also obtained, would have to be seen as obtaining an advance of capital. – F. E.)
In the case of private banks with rights of note issue, the distinction is that, if their notes neither remain in local circulation nor return to the banks in the form of deposits or for payment of bills falling due, these notes then fall into the possession of people to whom they must pay gold or Bank of England notes in exchange for them. In this case the advance of their notes actually represents an advance of Bank of England notes, or, what is the same thing for them, of gold, i.e. a part of their banking capital. The same applies when the Bank of England itself, or any other bank which is subject to a legal maximum in its note issue, has to sell securities in order to withdraw its own notes from circulation and to issue them again in advances; here its own notes represent a part of its mobilizable banking capital.
Even if circulation were purely metallic, there could be at the same time (1) a drain of gold (what is meant here is evidently a drain of gold in which at least one part goes abroad – F. E.) that empties the vaults, while, (2) since the bank’s principal requirement for gold is simply to make payments (to settle past transactions), its advances on securities could greatly increase, but return to it in the form of deposits or in repayment of bills falling due. So that on the one hand its overall reserves would decrease with an increase in securities in the bank’s portfolio, while on the other hand the same sum that it formerly had as an owner would now be a sum for which it was in debt to its depositors, and finally the total quantity of circulating medium would decline.
It has so far been assumed that the advances are made in notes and involve at least a temporary increase in the note issue, even if this immediately vanishes again. But this is not necessary. Instead of paper notes, the bank can open a credit account for A, so that A, as its debtor, becomes an imaginary depositor. He pays his creditors with cheques on the bank, and the recipient of these cheques pays them again to his banker, who exchanges them in the clearing house against the cheques drawn on him. In this case there is no intervention of notes, and the entire transaction is confined to one in which the bank settles its own debt with a cheque drawn on itself, its actual compensation consisting in its claim against A. In this case the bank has advanced to A a part of its banking capital, in the form of a part of its own claim as a creditor.
In so far as this demand for monetary accommodation is a demand for capital, it is simply a demand for money capital, capital from the standpoint of the banker; i.e. a demand for gold (in the case of a drain of gold abroad) or for notes on the national bank, which a private bank can obtain only by buying them with an equivalent, so that they represent capital for it. Or finally it might be a question of interest-bearing securities, government bonds, stocks, etc. that have to be sold if gold or notes are to be obtained. These securities, however, if they are in government bonds, are capital only for the person who has bought them, to whom they represent his purchase price, the capital he has invested in them. They are not capital in themselves, but simply creditor’s claims; if they are in mortgages, they are simply claims on future payments of ground-rent; and if they are stocks of some other kind, they are simply property titles which give the holder a claim to future surplus-value. None of these things are genuine capital, they do not constitute any component of capital and are also in themselves not values. By similar transactions, money that belongs to the bank can be transformed into deposits, so that the bank becomes a claimant for this money instead of its owner, and holds it under a different title. Important as this is for the bank itself, it in no way affects the amount of capital stored in the country, or even the money capital. Capital figures here simply as money capital and, if it is not present in the actual money form, as a mere title to capital. This is very important, since the scarcity of, and pressing demand for, banking capital is confused with a restriction of actual capital, which in such cases, on the contrary, is present in excess in the form of means of production and products, and stifles the markets.
It is very simple to explain, therefore, how the amount of securities held by the bank as collateral increases, and the growing demand for monetary accommodation can be satisfied by the bank, at the same time as the total quantity of means of circulation remains the same or declines. In periods of tight money such as these, moreover, this total quantity is kept in check in two ways: (1) by a drain of gold; (2) by the demand for money simply as means of payment, where the notes issued flow back immediately or where the transaction take’s place by way of book credit, without any mediation of notes. In the latter case, payments are effected simply by a credit transaction, the settlement of these payments being the sole object of the exercise. It is money’s peculiar property that where it functions simply in settlement of payments (and in times of crisis an advance is obtained in order to pay, not to buy; to settle past transactions, not to start new ones), its actual circulation is simply a vanishing magnitude, even when this settlement does not take place entirely by credit operations, without any intervention of money; i.e. that when there is a great demand for monetary accommodation, a tremendous mass of these transactions can take place without any expansion in the circulation. The simple fact that the Bank of England’s circulation remains stable or even declines, at the same time as it performs a great deal of monetary accommodation, is in no way prima facie proof, as Fullarton, Tooke and others assume (in consequence of their error in seeing monetary accommodation as identical with the receipt of capital on loan, of additional capital), that the circulation of money (banknotes) in its function as means of payment does not increase and expand. Since the circulation of notes as means of purchase declines in times of business stagnation, where such a great deal of accommodation is required, their circulation as means of payment can increase while the total sum in circulation, the sum of notes functioning as means of purchase and of payment, still remains stable or even declines. Circulation of banknotes as means of payment, these notes immediately flowing back to the bank that issued them, is precisely not circulation in the eyes of these economists.
If circulation as means of payment increases to a higher degree than circulation as means of purchase declines, the total circulation will grow, even though the quantity of money functioning as means of purchase experiences a significant decline. And this actually does happen at certain points in the crisis, i.e. when there is a complete breakdown of credit, when not only are commodities and securities unsaleable, but it has also become impossible to get bills of exchange discounted, and nothing counts any more except money payment, or as the merchant says: cash. Since Fullarton and the others do not understand that the circulation of notes as means of payment is a characteristic of these times of monetary shortage, they treat this phenomenon as accidental.
‘With respect again to those examples of eager competition for the possession of banknotes, which characterize seasons of panic and which may sometimes, as at the close of 1825, lead to a sudden, though only temporary, enlargement of the issues, even while the efflux of bullion is still going on, these, I apprehend, are not to be regarded as among the natural or necessary concomitants of a low exchange; the demand in such cases is not for circulation’ (read circulation as a means of purchase), ‘but for hoarding, a demand on the part of alarmed bankers and capitalists which arises generally in the last act of the crisis’ (hence, for a reserve of means of payment), ‘after a long continuation of the drain, and is the precursor of its termination’ (Fullarton, p. 130).
We have already discussed in connection with our treatment of money as means of payment (Volume 1, Chapter 3, 3, b) how, in the case of a violent interruption in the chain of payments, money reverts from its merely ideal form into the material and also absolute form of value vis-à-vis commodities. A few examples of this were given there, in notes [51 and 52]. This interruption itself is in part the effect, in part the cause, of the collapse of credit and the circumstances that accompany it: flooding of markets, devaluation of commodities, interruption of production, etc.
It is clear, however, that Fullarton transforms the distinction between money as means of purchase and money as means of payment into a false distinction between currency and capital. And at the bottom of this again lies the narrow-minded banker’s conception of circulation.
It might still be asked what is lacking in such difficult times, capital, or money in its capacity as means of payment? And this is a well-known controversy.
At first, in so far as the embarrassment is demonstrated by a drain of gold, it is clear that what is demanded is the international means of payment. But money in its capacity as international means of payment is gold in its metallic reality, as itself a valuable substance, an amount of value. It is also capital, but capital not as commodity capital but rather as money capital, capital not in the form of commodity but rather in the form of money (and moreover of money in the pre-eminent sense of the term, in which it exists on the general world commodity market). There is no opposition here between the demand for money as means of payment and the demand for capital. The opposition is rather between capital in its money form and in its commodity form; and the form in which it is required here, and can alone function, is its money form.
Apart from this demand for gold (or silver), it cannot be said that in such periods of crisis there is in any sense a lack of capital. Under extraordinary circumstances, such as a rise in grain prices, a cotton famine, etc., this can be the case; but these are in no way necessary or regular accompaniments of such periods; and the existence of such a lack of capital, therefore, cannot be immediately inferred from a demand for monetary accommodation. On the contrary. Markets are glutted, swamped with commodity capital. Hence it is in any case not a lack of commodity capital that gives rise to the difficulty. We shall return to this question later.