Finance Capital, Hilferding 1910


Money as a means of payment. Credit money

Up to this point we have considered money only as a medium of circulation. We have shown that it is necessary for it to have objective value, that this necessity has limits, and that it can be replaced by money tokens. In the process of circulation, C — M — C, value appears in a double guise: as money and as a commodity. Now a commodity can be sold and paid for later. It can be transferred to another owner before its value is converted into money. The seller thereby becomes a creditor, and the buyer a debtor. As a result of this hiatus between sale and payment money acquires still another function; it becomes a means of payment. When this happens commodity and money do not necessarily have to appear simultaneously as the two parties to a sales transaction. In fact, the means of payment first begins to circulate when the commodity itself drops out of circulation. Money ceases to be an intermediary in the process but concludes it independently. If the debtor (buyer) has no money he must sell commodities to pay his debt, and if he cannot do this his property can be compulsorily sold. The value form of the commodity, money, thus becomes the essential purpose of the sale, through a necessity which itself arises from the relations of the circulation process. When money is used as a medium of circulation it facilitates the dealings between buyer and seller, and mediates their interdependence as members of society. But when it is used as a means of payment it expresses a social relationship which arose before it began to be used. The commodity is handed over and perhaps even consumed long before its value is realized in the form of money. The contraction of a debt and its repayment are separated by a period of time. This means that the money which is turned over in payment can no longer be regarded as a mere link in the chain of commodity exchanges or as a transitory economic form for which something else may be substituted. On the contrary, when money is used as a means of payment it is an essential part of the process. Thus, when M becomes a debt in the process C — M — C the seller of the first commodity can proceed with the second part of the cycle M — C only after debt M has been repaid. What was previously a simple transaction is now divided into two component parts, separated in time.

Needless to say, the seller has an alternative course. He can proceed with the purchase M — C by contracting, in turn, a debt for the M in anticipation of repayment for the original sale of his commodity. Should this payment fail to materialize, however, he may be forced into bankruptcy and drive his creditors into bankruptcy too. When money is used as a means of payment, therefore, it must continue to flow back to prevent the cancellation of the entire series of exchanges which has already been completed. The creditor has parted with a commodity even if the debtor does not pay the money. The social relationship, once brought into being by this transaction, cannot be undone. Nevertheless, it is rendered null and void for the individual owner of the commodity. He does not recover the value which he previously advanced, and in consequence he cannot acquire any new values, nor pay for those already acquired.

The function of money as a means of payment, therefore, presupposes a mutual agreement between buyer and seller to defer payment. The economic relation arises in this case from a private act. Purchase and sale have their counterpart in a second relationship between creditor and debtor, an obligation between two private individuals.

From another aspect, money used as a means of payment represents only a completed purchase and sale. In that case money functions only nominally as a measure of value, and payment is made later. When purchases and sales take place among the same people they can be cancelled out, and only the balance need be paid in money. When this happens money is only a symbol of value and can be replaced. But as a medium of circulation money simply mediated the exchange of commodities; the value of one was replaced by the value of the other. With this, the whole process was completed. This was a social process, an act by which the social exchange of objects is completed, and therefore unconditionally necessary in a particular context. Since gold money only mediated in this process it could be replaced by tokens which have the sanction of society (the state). When money functions as a means of payment, the direct substitution of one value for another is abolished. The seller has parted with his commodity without acquiring the socially valid equivalent, money, or another commodity of equal value which would have made the use of money in this act of exchange superfluous. All he has received is a promise to pay from the buyer, which is not backed by a social guarantee but only by the private guarantee of the purchaser.[1] That he delivers a commodity against a promise is a private matter. What such a-promise is really worth can only be determined when it falls due and must be translated into cash. In the meantime, however, he has parted with a commodity in return for a promise of payment, that is a 'promissory note'. If others, in turn, are sure that the note will be redeemed, they may accept it in exchange for commodities. The note therefore serves as a medium of circulation, or means of payment, within the circle of those who accept such promises of payment at their face value, and who are bound together only by their personal, though for the most part well-founded, judgments. In short it functions as money, credit money. All these acts of exchange are finally and definitively concluded, in this circle, only when credit money is converted into real money.

In contrast to legal tender paper money which emerges from circulation as a social product, credit money is a private affair, not guaranteed by society; consequently, it must always be convertible into money. If its convertibility becomes doubtful it loses all its value as a substitute for the means of payment. Money, as a means of payment, can be replaced only by promises to pay, and these have to be redeemed to the extent that they do not balance out.

This accounts for the difference between the circulation of promissory notes and that of legal tender paper money. The latter is based upon the minimum social requirements of circulation. All requirements over and above this minimum are served by the circulation of notes which, since they depend on the sale of commodities at definite prices, are simply personal instruments of indebtedness, either cancelled against other notes or redeemed in money. The note is a private obligation which becomes transformed into a socially recognized valid equivalent. It has arisen from the use of money as a means of payment, replaces money by credit, by a private relation between contracting parties based upon a mutual confidence in each other's social standing and ability to pay. Such business transactions among individuals are not a prerequisite for state paper money. In fact, the opposite is true: where paper money is in use, an exchange is possible only with its help. When notes do not cancel each other out, the balance must be paid in cash if the exchange is to be socially valid, but there is no such requirement when an exchange is made with the use of state paper money. It is completely misleading to characterize paper money as a state debt, or as credit money, because it is not based upon a credit relationship.

If notes and state paper money are not subject to the same type of depreciation, it is because notes rest upon private obligation while paper money rests upon a social obligation. The sum total of state paper is an entity in which each element is, as it were, equally and uniformly responsible for the other. It can depreciate or appreciate only as a whole, with the same effect on all members of society. The endorsement of society stands behind the entire sum and is therefore uniform for all its component parts. Society, acting through its conscious organ, the state, establishes money as a medium of circulation. Credit money, on the other hand, is created by individuals in their business transactions, and functions as money only so long as it is convertible into money at all times. It is therefore possible for a single note to depreciate (notes do not appreciate) when such private transactions are not concluded in a socially valid manner and the note is not redeemed on the due date. Indeed, in that event, it may become entirely worthless, but only the individual note becomes worthless, and the depreciation affects only one other person, whose own obligations, moreover, remain unaffected.

Inconvertible paper money cannot be issued in excess of the minimum of circulation. The quantity of credit money depends only on the aggregate price of those commodities for which money functions as a means of payment. At given prices, its magnitude depends upon the volume of credit transactions, which is extremely variable. Since it must always be convertible, however, it can never depreciate in or through its relations with commodities. Convertible credit money (unlike inconvertible paper money) can never be depreciated merely because a large volume of it has been put into circulation, but only when it cannot be redeemed in money. The crucial test, therefore, is its convertibility. When that test comes, the owners of commodities, who had forgotten all about gold amidst their delightful `pieces of paper' now, as one man, make a mad rush for gold. 'On revient toujours a ses premiers amours!'

The number of promissory notes due for payment at any given time represents the total price of the commodities for which they were issued. The quantity of money necessary to pay this sum depends upon the velocity of circulation of the means of payment, and this is affected by two factors : (a) the chain of obligations between creditors and debtors, in which a payment to A from B will enable him to pay C and so on; and (b) the length of time between the dates when the various notes fall due. The closer together these dates are, the more often can the same piece of gold be used to make the various payments.

If the process C – M – C takes place in such a way that sales occur simultaneously and in the same place, the effect is to curtail the rate of turnover of the means of circulation, and thus to limit the possibility of substituting velocity for quantity. On the other hand, when payments are made simultaneously and in the same place they can offset one another, so that the quantity of money required as a means of payment is reduced. When these, payments are concentrated in one place, specialized institutions and methods for settling them come into existence spontaneously. The virements of medieval Lyons were one example of this. All that is required is that the various claims to payment be collated, in order to cancel each other out, up to a certain point, leaving only a residue to be settled in cash. The larger the volume of payments which are thus concentrated the smaller, relatively speaking, is the balance which must be paid in cash and the smaller too, therefore, is the required quantity of means of payment in circulation.

We have found that the volume of money in circulation, in the process C – M – C (including the gold which covers the minimum of circulation and which can be replaced by gold certificates), is equal to the sum of commodity prices divided by the average number of turnovers of a unit of money. Similarly, the volume of means of payment is equal to the sum of obligations incurred (which in turn is equal to the aggregate price of all the commodities from the sale of which the promissory notes arose) divided by the average number of turnovers of a unit of money used as a means of payment, minus the sum of payments which are offset against each other. Assuming the velocity of circulation at a certain time to be given, say 1, then the quantity of money to be used for all purposes is equal to the aggregate price of commodities entering into circulation, plus the sum of payments falling due, minus the payments which cancel out, and finally, minus the units of money which functioned first as a means of payment and then as a medium of circulation. If the volume of commodities turned over amounts to 1,000 million marks altogether, and payments due are the same; if 200 million marks serve first for payments and then for circulation; and if 500 million marks cancel out, then 1,300 million marks represent the necessary money which is required at that particular time. This is the amount which I call the socially necessary value in circulation.

The greater part of all purchases and sales takes place through this private credit money, through debit notes and promises to pay which cancel each other out.[2] The reason why means of payment outweigh in importance the media of circulation is that the development of capitalist production has vastly complicated the circulation process, separated purchases and sales, and generally dissolved the old connection which used to tie purchases closely to sales.

Credit money originates in circulation, that is, in purchases and sales by capitalists. Its importance consists in making the circulation of commodities independent of the amount of gold available. In other words, credit money makes gold unnecessary as a medium of circulation for commodities which has to be physically present, and limits its function to that of settling the final balances.. These balances are immense in comparison with the amount of gold, and their final settlement is a function of special institutions. But as we have already noted, circulation is both a precondition and an outcome of capitalist production, which can be undertaken only after the capitalist has acquired the elements of production through an act of circulation. To the extent that circulation is independent of real money, it is also independent of the quantity of gold. Finally, since this gold costs labour and represents a large item of faux frais, it follows that the replacement of money constitutes a direct saving of unnecessary costs in the circulation process.

Because of its origin, the quantity of credit money is limited by the level of production and circulation. Its purpose is to turn over commodities, and in the final analysis, it is covered by the value of the commodities the purchase and sale of which it has made possible. But unlike state paper money, credit money has no inflexible minimum which cannot be increased. On the contrary, it grows along with the quantity of commodities and their prices. But credit money is nothing but a promise to pay. When a commodity is sold for gold, the payment of gold is the end of the transaction, value is exchanged against value, and further disturbances are excluded ; but in the case of credit money, the settlement is only a promise to pay. Whether promises of this kind can be honoured depends on whether or not debtors who have purchased commodities can resell them or sell other commodities of equal value. If an exchange act does not correspond to social conditions, or if these conditions have undergone a change in the interim, the debtor cannot meet his obligation and the promise to pay becomes worthless. Real money must now take its place.

It follows, therefore, that during a crisis the decline in commodity prices is always accompanied by a contraction in the volume of credit money. Since credit money consists of obligations assumed during a period of higher prices, this contraction is tantamount to a depreciation of credit money. As prices fall sales become increasingly difficult, and the obligations fall due at a time when the commodities remain unsold. Their payment becomes doubtful. The decline in prices and the stagnation of the market mean a reduction in the value of the credit money drawn against these commodities. This depreciation of credit instruments is always the essential element of the credit crisis which accompanies every business crisis.

The function of money as the means of payment implies a contradiction without a terminus medius. In so far as the payments balance one another, money functions only ideally as money of account, as a measure of value. In so far as actual payments have to be made, money does not serve as a circulating medium, as a mere transient agent in the interchange of products, but as the individual incarnation of social labour, as the independent form of existence of exchange value, as the universal commodity. This contradiction comes to a head in those phases of industrial and commercial crises which are known as monetary crises. Such a crisis occurs only where the ever-lengthening chain of payments, and an artificial system of settling them, has been fully developed. Whenever there is a general and extensive disturbance of this mechanism, no matter what its cause, money becomes suddenly and immediately transformed from its merely ideal shape of money of account into hard cash.[3]

Legal tender paper money registers its greatest success when this devaluation of credit money has run its full course. Like gold coin, it is a legally established means of payment. The failure of credit money creates a gap in circulation, and the horror vacui requires that it be filled at all costs. When this happens it is a perfectly rational policy to expand the circulation of state paper money or the bank notes of the central bank, the credit of which has not been impaired. As we shall see in due course, these bank notes, thanks to legal regulation, enjoy an intermediate position between state paper money and credit money. In the event that such a policy is not followed, money (bullion or paper money) acquires a premium, as gold and greenbacks did in the recent American crisis.

In order to perform its task properly credit money requires special institutions where obligations can be cancelled out and the residual balances settled ; and as such institutions develop so is a greater economy achieved in the use of cash. This work becomes one of the important functions of any developed banking system.[4]

In the course of capitalist development there has been a rapid increase in the total volume of commodities in circulation, and consequently of the socially necessary value in circulation. Along with this, the importance of the place occupied by legal tender state paper money has increased. Further, the expansion of production, the conversion of all obligations into monetary obligations, and especially the growth of fictitious capital, have been accompanied by an increase in the extent to which transactions are concluded with credit money. State paper money and credit money together bring about a great reduction in the use of metallic money in relation to the volume of circulation and payments. 


[1].  I refer to the intrinsic economic guarantee. The formal, legal guarantee that contracts shall be honoured is, of course, always taken for granted.

[2].  In the clearing business of the German Reichsbank, 1 pfennig of cash supported, in 1894, a turnover of 4 marks 35 pfennigs; and in 1900 a turnover of 8 marks 30 pfennigs.

[3]Capital, vol. I, pp. 154-5. [MECW 35, p148-149]

[4].  Germany requires from nine to fifteen times as much cash as England to transact all its business. Cheque transactions save about 140,000,000 in sterling notes. Given present legal regulations the current money reserve of about 35,000,000 would have to be increased fourfold in order to provide coverage for that sum. See E. Jaffe, Das englische Bankwesen, p. 121..