We must now take a closer look at what banking capital consists of.
We have just seen how Fullarton and others transform the distinction between money as means of circulation and money as means of payment (also as world money, in so far as a drain of gold is involved) into a distinction between circulation (‘currency’) and capital.
The special role that capital plays here means that the amount of attention enlightened economics devoted to insisting that money was not capital is paralleled by this banker’s economics, which tries just as assiduously to insist that money is actually capital par excellence.
In the further course of our investigations we shall show how money capital is confused in this context with ‘moneyed capital’ in the sense of interest-bearing capital, although money capital in the former sense is never more than a transitional form of capital as distinct from its other forms, i.e. commodity capital and productive capital.
Banking capital consists of (1) cash, in the form of gold or notes; (2) securities. These latter may again be divided into two parts: commercial paper, current bills of exchange that fall due on specified dates, their discounting being the specific business of the banker; and public securities such as government bonds, treasury bills and stocks of all kinds, in short interest-bearing paper, which is essentially different from bills of exchange. Mortgages, too, can be included in this category. The capital which has these as its tangible component parts can also be broken down into the banker’s own invested capital, and the deposits that form his banking or borrowed capital. Notes must also be added here, in the case of banks which have the right to issue them. We shall leave these deposits and notes aside to start with. It is clear enough that the actual components of banker’s capital – money, bills of exchange and interest-bearing paper – are not affected by whether these various elements represent his own capital, or deposits, the capital of other people. The subdivisions remain the same whether he pursues his business simply with his own capital or whether he conducts it entirely with capital which has been deposited with him.
The form of interest-bearing capital makes any definite and regular monetary revenue appear as the interest on a capital, whether it actually derives from a capital or not. The money income is first transformed into interest, and with the interest we then have the capital from which it derives. Likewise, with interest-bearing capital, any sum of value appears as capital as soon as it is not spent as revenue; i.e. as a ‘principal’ in contrast to the possible or actual interest it can bear.
The matter is simple. Say that the average rate of interest is 5 per cent per year. A sum of £500, then, if transformed into interest-bearing capital, would bring in a yearly £25. Hence every fixed annual income of £25 is seen as the interest on a capital of £500. Yet this is and remains a purely illusory notion, except in the case where the source of the £25, whether this is a mere title of ownership or claim, or whether it is an actual element of production, such as a piece of land for example, is directly transferable, or assumes a form in which it is transferable. Let us take the national debt and wages as examples.
The state has to pay its creditors a certain sum of interest each year for the capital it borrows. In this case the creditor cannot recall his capital from the debtor but can only sell the claim, his title of ownership. The capital itself has been consumed, spent by the state. It no longer exists. What the state’s creditor possesses is (1) the state’s promissory note for, say, £100; while (2) this note gives him a claim on the state’s annual revenue, i.e. the proceeds of the year’s taxation, to a certain amount, say £5 or 5 per cent; (3) he is free to sell this promissory note to anyone he likes. If the rate of interest is 5 per cent, and assuming the state’s security is good, owner A can generally sell the note for £100 to B: since it is the same thing for B whether he lends out £100 at 5 per cent per year or assures himself of an annual tribute of £5 from the state by paying out £100. But in all these cases, the capital from which the state’s payment is taken as deriving, as interest, is illusory and fictitious. It is not only that the sum that was lent to the state no longer has any kind of existence. It was never designed to be spent as capital, to be invested, and yet only by being invested as capital could it have been made into a self-maintaining value. As far as the original creditor A is concerned, the share of the annual taxation he receives represents interest on his capital, just as does the share of the wealth of the spendthrift that accrues to the money-lender, but in neither case has the sum of money lent been laid out as capital. The possibility of selling the state’s promissory note represents for A the potential return of his principal. As far as B is concerned, from his own private standpoint his capital is then invested as interest-bearing capital. In actual fact, he has simply taken the place of A, and bought A’s claim on the state. No matter how these transactions are multiplied, the capital of the national debt remains purely fictitious, and the moment these promissory notes become unsaleable, the illusion of this capital disappears. Yet this fictitious capital has its characteristic movement for all that, as we shall see soon.
Moving from the capital of the national debt, where a negative quantity appears as capital – interest-bearing capital always being the mother of every insane form, so that debts, for example, can appear as commodities in the mind of the banker – we shall now consider labour-power. Here wages are conceived as interest, and hence labour-power as capital that yields this interest. If the wage for a year comes to £50, say, and the rate of interest is 5 per cent, one annual labour-power is taken as equal to a capital of £1,000. Here the absurdity of the capitalist’s way of conceiving things reaches its climax, in so far as instead of deriving the valorization of capital from the exploitation of labour-power, they explain the productivity of labour-power by declaring that labour-power itself is this mystical thing, interest-bearing capital. In the second half of the seventeenth century (with Petty, for example) this was a favourite notion, but it is still used today, in all seriousness, by vulgar economists and especially by German statisticians.1 Unfortunately, however, two inconvenient circumstances militate against this unthinking notion: first, the worker has to work in order to receive this interest, and second, he cannot turn the capital value of his labour-power into money by transferring it to someone else. Rather, the annual value of his labour-power is his average annual wage, and his labour has to replace its buyer with this value itself plus the surplus-value that is its valorization. Under the slave system the worker does have a capital value, namely his purchase price. And if he is hired out, the hirer must first pay the interest on this purchase price and on top of this replace the capital’s annual depreciation.
The formation of fictitious capital is known as capitalization. Any regular periodic income can be capitalized by, reckoning it up, on the basis of the average rate of interest, as the sum that a capital lent out at this interest rate would yield. For example, if the annual income in question is £100 and the rate of interest 5 per cent, then £100 is the annual interest on £2,000, and this £2,000 is then taken as the capital value of the legal ownership title to this annual £100. For the person who buys this ownership title, the annual £100 does actually represent the conversion of the capital he has invested into interest. In this way, all connection with the actual process of capital’s valorization is lost, right down to the last trace, confirming the notion that capital is automatically valorized by its own powers.
Even when the promissory note – the security – does not represent a purely illusory capital, as it does in the case of national debts, the capital value of this security is still pure illusion. We have already seen how the credit system produces joint-stock capital. Securities purport to be ownership titles representing this capital. The shares in railway, mining, shipping companies, etc. represent real capital, i.e. capital invested and functioning in these enterprises, or the sum of money that was advanced by the shareholders to be spent in these enterprises as capital. It is in no way ruled out here that these shares may be simply a fraud. But the capital does not exist twice over, once as the capital value of the ownership titles, the shares, and then again as the capital actually invested or to be invested in the enterprises in question. It exists only in the latter form, and the share is nothing but an ownership title, pro rata, to the surplus-value which this capital is to realize. A may sell this title to B, and B to C. These transactions have no essential effect on the matter. A or B has then transformed his title into capital, but C has transformed his capital into a mere ownership title to the surplus-value expected from this share capital.
The independent movement of these ownership titles’ values, not only those of government bonds, but also of shares, strengthens the illusion that they constitute real capital besides the capital or claim to which they may give title. They become commodities, their prices having a specific movement and being specifically set. Their market values receive a determination differing from their nominal values, without any change in the value of the actual capital (even if its valorization does change). On the one hand their market values fluctuate with the level and security of the receipts to which they give a legal title. If the nominal value of a share, i.e. the sum advanced which the share originally represents, is £100, and the enterprise yields 10 per cent instead of 5 per cent, its market value rises, other circumstances being equal, since, when capitalized at 5 per cent, it now represents a fictitious capital of £200. Someone who buys it for £200 gets a revenue of 5 per cent on his capital investment. The opposite is the case when the revenue from the enterprise declines. The market value of these securities is partly speculative, since it is determined not just by the actual revenue but rather by the anticipated revenue as reckoned in advance. But if we take the valorization of the actual capital to be constant, or, where no such capital exists, as in the case of national debts, if we take the annual yield to be fixed by law as well as sufficiently guaranteed, the prices of these securities rise and fall in inverse proportion to the rate of interest. If the interest rate rises from 5 per cent to 10 per cent, a security that ensures a yield of £5 now represents a capital of only £50. If the interest rate falls to 2 1/2 percent, the same security represents a capital of £200. Its value is always simply the capitalized yield, i.e. the yield as reckoned on an illusory capital at the existing rate of interest. In times of pressure on the money market, therefore, these securities fall in price for two reasons: first, because the interest rate rises, and second, because they are put up for sale in massive quantities, to be converted into money. This fall in price occurs irrespective of whether the yield these securities ensure for their owner is constant, as in the case of government bonds, or whether the valorization of the real capital that they represent may be affected by the disturbance in the reproduction process, as in the case of industrial undertakings. In the latter case, we simply have a further devaluation besides that already mentioned. Once the storm is over, these securities rise again to their former level, in so far as the undertakings they represent have not come to grief and are not fraudulent. Their depreciation in a crisis is a powerful means of centralizing money wealth.2
In so far as the rise or fall in value of these securities is independent of the movement in the value of the real capital that they represent, the wealth of a nation is just as great afterwards as before.
‘The public stocks 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’ (Morris, Governor of the Bank of England, evidence in the Report on Commercial Distress, 1847–8).
As long as their depreciation was not the expression of any standstill in production and in railway and canal traffic, or an abandonment of undertakings already begun, or a squandering of capital in positively worthless enterprises, the nation was not a penny poorer by the bursting of these soap bubbles of nominal money capital.
All these securities actually represent nothing but accumulated claims, legal titles, to future production. Their money or capital value either does not represent capital at all, as in the case of national debts, or is determined independently of the real capital value they represent.
In all countries of capitalist production, there is a tremendous amount of so-called interest-bearing capital or ‘moneyed capital’ in this form. And an accumulation of money capital means for the most part nothing more than an accumulation of these claims to production, and an accumulation of the market price of these claims, of their illusory capital value.
One portion of banker’s capital is invested in these so-called interest-bearing securities. This is actually part of the reserve capital and does not function in the banking business proper. The most important portion consists of bills of exchange, i.e.
promises to pay issued by industrial capitalists or merchants. For the money-lender, these bills are interest-bearing paper; i.e. when he buys them, he deducts interest for the period that they still have to run. This is called discounting. The deduction from the face value of the bill thus depends on the rate of interest at the time.
The final portion of the banker’s capital consists of his money reserve in gold or notes. Deposits, unless tied up for a longer period by contract, are always at the depositors’ disposal. They are in a state of perpetual flux. But if some depositors withdraw their deposits, others replace them, so that the overall average fluctuates only a little in times of normal business.
The banks’ reserve funds, in countries of developed capitalist production, always express the average amount of money existing as a hoard, and a part of this hoard itself consists of paper, mere drafts on gold, which have no value of their own. The greater part of banker’s capital is therefore purely fictitious and consists of claims (bills of exchange) and shares (drafts on future revenues). It should not be forgotten here that this capital’s money value, as represented by these papers in the banker’s safe, is completely fictitious even in so far as they are drafts on certain assured revenues (as with government securities) or ownership titles to real capital (as with shares), their money value being determined differently from the value of the actual capital that they at least partially represent; or, where they represent only a claim to revenue and not capital at all, the claim to the same revenue is expressed in a constantly changing fictitious money capital. Added to this is the fact that this fictitious capital of the banker represents to a large extent not his own capital but rather that of the public who deposit with him, whether with interest or without.
Deposits are always made in money, gold or notes, or else in drafts on money. Except for the reserve fund, which contracts or expands according to the needs of actual circulation, these deposits are in fact always either in the hands of industrial capitalists and merchants, serving to discount their bills of exchange and make them advances; or else they are in the hands of dealers in securities (stockbrokers), private persons who have sold securities, or the government (in the case of treasury bills and new loans). The deposits themselves play a double role. On the one hand, as already mentioned, they are lent out as interest-bearing capital and are thus not to be found in the banks’ safes, figuring instead in their books as credits held by the depositors. On the other hand, they function as mere book entries of this kind in so far as the reciprocal credits of the depositors are settled by cheques on their deposits and mutually cancelled; and it is completely immaterial in this connection whether the deposits are with the same banker, so that they can cancel the various accounts against one another, or whether they are with different banks, which exchange their cheques on one another and simply pay the balances.
With the development of interest-bearing capital and the credit system, all capital seems to be duplicated, and at some points triplicated, by the various ways in which the same capital, or even the same claim, appears in various hands in different guises.3 The greater part of this ‘money capital’ is purely fictitious. With the exception of the reserve fund, deposits are never more than credits with the banker, and never exist as real deposits. In so far as they are used in clearing-house transactions, they function as capital for the bankers, after these latter have lent them out. The bankers pay one another reciprocal drafts on these non-existent deposits by balancing these credits against each other.
Adam Smith says of the role that capital plays in the lending of money: ‘Even in the monied interest, however, the money is, as it were, but the deed of assignment, which conveys from one hand to another those capitals which the owners do not care to employ themselves. Those capitals may be greater in almost any proportion than the amount of the money which serves as the instrument of their conveyance; the same pieces of money successively serving for many different loans, as well as for many different purchases. A, for example, lends to W a thousand pounds, with which W immediately purchases of B a thousand pounds’ worth of goods. B, having no occasion for the money himself, lends the identical pieces to X, with which X immediately purchases of C another thousand pounds’ worth of goods. C, in the same manner, and for the same reason, lends them to Y, who again purchases goods with them of D. In this manner the same pieces, either of coin or of paper, may, in the course of a few days, serve as the instrument of three different loans, and of three different purchases, each of which is, in value, equal to the whole amount of those pieces. What the three men, A, B and C, assign to the three borrowers, W, X and Y, is the power of making those purchases. In this power consist both the value and the use of the loans. The stock lent by the three monied men is equal to the value of the goods which can be purchased with it, and is three times greater than that of the money with which the purchases are made. Those loans, however, may be all perfectly well secured, the goods purchased by the different debtors being so employed, as, in due time, to bring back, with a profit, an equal value either of coin or of paper. And as the same pieces of money can thus serve as the instrument of different loans to three, or for the same reason, to thirty times their value, so they may likewise successively serve as the instrument of repayment’ (Book II, Chapter IV [Pelican edition, p. 452]).
Since the same piece of money can make several different purchases, depending on the velocity of its circulation, it can equally be used for various different loans, for purchases move it from one hand to another, and a loan is simply a transfer from one hand to another that is not mediated by any sale. For each seller, the money represents the transformed form of his commodity; nowadays, when every commodity is expressed as a capital value, the money in its various loans successively represents different capitals, which is simply a different way of putting the previous statement that it can successively realize different commodity values. Money also serves, as a means of circulation, to transfer material capitals from one hand to another. In a loan, it is not transferred from one hand to another as a means of circulation. As long as it remains in the lender’s possession, it is not a means of circulation in his hands but the value-existence of his capital. And it is in this form that he transfers it to someone else in a loan. If A had lent money to B, and B to C, without any purchases intervening, the same money would not represent three capitals but only one, just one capital value. How many capitals it actually does represent depends on how often it functions as the value form of various different commodity capitals.
What Adam Smith says about loans in general applies equally to deposits, this being simply a particular name for loans that the public make to the bankers. The same pieces of money can serve as instrument for any number of deposits.
‘It is unquestionably true that the £1,000 which you deposit at A today may be reissued tomorrow, and form a deposit at B. The day after that, reissued from B, it may form a deposit at C… and so on to infinitude; and that the same £1,000 in money may, thus, by a succession of transfers, multiply itself into a sum of deposits absolutely indefinite. It is possible, therefore, that nine-tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers who are respectively accountable for them… Thus in Scotland, for instance, currency has never exceeded £3 million, the deposits in the banks are estimated at £27 million. Unless a run on the banks be made, the same £1,000 would, if sent back upon its travels, cancel with the same facility a sum equally indefinite. As the same £1,000, with which you cancel your debt to a tradesman today, may cancel his debt to the merchant tomorrow, the merchant’s debt to the bank the day following, and so on without end; so the same £1,000 may pass from hand to hand, and bank to bank, and cancel any conceivable sum of deposits’ (The Currency Theory Reviewed, pp. 62–3).
Just as everything in this credit system appears in duplicate and triplicate, and is transformed into a mere phantom of the mind, so this also happens to the ‘reserve fund’, where one might finally expect to lay hold of something solid.
Let us listen once more to Mr Morris, Governor of the Bank of England: ‘The reserves of the private bankers are in the hands of the Bank of England in the shape of deposits… An export of gold acts exclusively, in the first instance, upon the reserve of the Bank of England; but it would also be acting upon the reserves of the bankers, in as much as it is a withdrawal of a portion of the reserves which they have in the Bank of England. It would be acting upon the reserves of all the bankers throughout the country’ (Commercial Distress,1847–8 [Nos. 3639, 3642]).
Ultimately, therefore, what these reserve funds actually boil down to is the reserve fund of the Bank of England.4 But this reserve fund, too, has a double existence. The reserve fund of the Banking Department is equal to the excess of notes that the Bank is authorized to issue over the notes that are actually in circulation. The legal maximum note issue is £14 million (the amount for which no metal reserve is required, this being the approximate sum of the government’s debt to the Bank), plus the Bank’s total reserve of precious metal. So if this reserve is also £14 million, the Bank can issue £28 million in notes, and if £20 million of these are already in circulation, the reserve fund of the Banking Department is £8 million. This £8 million in notes is then the legal banking capital that the Bank has at its disposal and at the same time the reserve fund for its deposits. Should a drain of gold take place, reducing the metal reserve by £6 million – for which an equal sum in notes has to be destroyed – the Banking Department’s reserve falls from £8 million to £2 million. On the one hand, the Bank increases its interest rate very sharply; on the other hand, the banks which have deposited with it, as well as its other depositors, see the reserve fund for their own credits with the Bank take a sharp drop. In 1857, London’s four largest joint-stock banks threatened that if the Bank of England did not obtain a ‘government letter’ suspending the Bank Act of 1844,5 they would call in their deposits and bankrupt the Banking Department. Thus the Banking Department can fail to meet obligations, as in 1847, while there are still several millions in the Issue Department (e.g. £8 million in 1847), as guarantee for the convertibility of notes in circulation. Though this is in turn an illusion.
‘That large portion (of deposits) for which the bankers themselves have no immediate demand passes into the hands of the bill-brokers, who give to the banker in return commercial bills already discounted by them for persons in London and in different parts of the country as a security for the sum advanced by the banker. The billbroker is responsible to the banker for payment of this money at call; and such is the magnitude of these transactions, that Mr Neave, the present Governor of the Bank [of England], stated in evidence, “We know that one broker had 5 million, and we were led to believe that another had between 8 and 10 million; there was one with 4, another with 3 1/2, and a third with above 8.1 speak of deposits with the brokers”’ (Report of Committee on Bank Acts, 1857–8, p. 5, Section 8).
‘The London billbrokers carried on their enormous transactions without any cash reserve, relying on the run off of their bills falling due, or in extremity, on the power of obtaining advances from the Bank of England on the security of bills under discount. Two billbroking houses in London suspended payment in 1847; both afterwards resumed business. In 1857, both suspended again. The liabilities of one house in 1847 were, in round numbers, £2,683,000, with a capital of £180,000; the liabilities of the same house, in 1857, were £5,300,000, the capital probably not more than one-fourth of what it was in 1847. The liabilities of the other firm were between £3,000,000 and £4,000,000 at each period of stoppage, with a capital not exceeding £45,000’ (ibid., p. xxi, section 52).