Finance Capital, Hilferding 1910


Money in the circulation of industrial capital

We turn now to the role which money plays in the circulation of industrial capital. Our path does not lead to the capitalist factory, with its marvels of technology, but to the monotony of the recurrent market process, in which money changes into commodity and commodity into money, in the same endlessly repeated way. Only the hope that by this means we can discover the secret of how the processes of circulation themselves endow capitalist credit with the power eventually to dominate the whole social process, can give the reader courage to traverse patiently the 'stations of the cross' in the present chapter.

Money would be superfluous in circulation if aggregate prices were always constant; that is to say, if the volume and prices of commodities never changed and all commodities exchanged at their respective values. But this is an unattainable condition in an unregulated, anarchic method of production. On the other hand, consciously directed social production would make impossible the appearance of value as exchange value, as a social relationship between two things, and the use of money. Claims to the social product issued by society are no more money than is a theatre ticket which is a claim to a reserved seat. It is the nature of commodity production which makes money necessary as a measure of value and a medium of circulation.[1]

Once money is used as a means of payment a complete mutual cancellation of payments at any given time must be seen as a sheer accident, which will never occur in reality. Money concludes independently the process of moving commodities from place to place. It is entirely arbitrary when the money received in payment for a commodity is itself transformed into a commodity, and the value of the first commodity is replaced by another. The link in the sequence C — M — C is broken. Money must necessarily intervene in the process in order to satisfy the requirements of the seller who does not necessarily intend to buy another commodity.

This disruption of the circulation process, which would seem to us arbitrary and accidental in a system of simple commodity circulation, becomes absolutely necessary in the sphere of capitalist commodity circulation. An analysis of the circulation of capital will demonstrate this.

Value becomes capital when it is used to produce surplus value. This is what takes place in the process of capitalist production based on the monopolization of the means of production by the capitalists and the existence of a free wage-earning class. The wage-labourers sell to the capitalist their labour power whose value equals the value of the means necessary for the subsistence and reproduction of the working class. Their labour creates new value, one part of which replaces the capital advanced by the capitalist for the purchase of labour power (Marx calls it variable capital) and the other accrues to the capitalist in the form of surplus value. Since the value of the means of production (constant capital) is simply transferred to the product in the course of the labour process, the value which the capitalist advanced for production has increased, has become value-breeding value, has confirmed itself as capital.

All industrial capital goes through a circular flow, but the only thing which is of interest to us in the present context is the change in form which it undergoes. The creation of surplus value, the valorization of capital, is of course the rationale of the process. This is accomplished in the process of production, which has a double function in capitalist society: (1) as in every form of society, it is a labour process which produces use values; (2) but at the same time it is a value-creating process, characteristic of capitalist society, in which the means of production are employed as capital to produce surplus value. Marx has given us an exhaustive analysis of this process in the first volume of Capital. Our present inquiry, however, need concern itself only with the transformation of the form of value rather than with its origin. This transformation does not affect the magnitude of value, the increase of which occurs in production, but concerns the sphere of circulation. There are only two forms which value can assume in a commodity-producing society: the commodity form and the money form.

If we examine the cycle of the capitalist process we find that every capital makes its debut as money capital. Money intended for use as capital is converted into commodities of various kinds (C), comprising means of production (Mp) and labour power (L). These are then put to use in production (P) which, as such, does not involve any transformation in the form of value. The value remains a commodity. But in the production process, first, the use value of the commodity is changed (which does not affect value at all), and second, the value is increased by the expenditure of labour. The original value of the commodity is increased by the addition of surplus value, and it is in this expanded form (C1) that it emerges from the place of production to experience its second and last change of form, when it is converted into money (M1).

The cycle of capital, then, consists of two phases of circulation, M–C and C1–M1, and one phase of production. In circulation, it appears as money capital and commodity capital; in production, as productive capital. The capital which passes through all these metamorphoses is industrial capital.

Money capital, commodity capital, and productive capital are not distinct types of capital, but merely particular functional forms of industrial capital. Thus we get the following schema: M–C–P . . . . C1–M1.

The original form of every new capital is money capital. Money does not bear a label announcing it as capital. What makes it capital is the fact that it is intended for conversion into the elements of productive capital.[2] Otherwise it is only money and can only fulfil money functions, as a means of circulation or payment.

We have already seen that the function of money as a means of payment may also include credit relationships. M–C, the first stage of the circulation process of capital is divided into two parts : M–Mp and M–L. Since the wage-labourer lives only by the sale of his labour power, the maintenance of which requires daily consumption, he must be paid at relatively short intervals, so that he can make the purchases necessary for his sustenance. Consequently, in dealing with him the capitalist must be in the position of a money capitalist and his capital must consist of money.[3] Credit plays no role here.

The same is not true, however, of the process M–Mp ; in this case, credit can play a greater part. Means of production are purchased in order to realize value. The money spent for them has only been advanced by the capitalist. It is intended to return to him at the end of the period of circulation, and in the normal course of events it will return increased in amount. Since money, therefore, is only advanced by the capitalist, and returns to him, it can also be advanced to him, i.e. lent. This, in general, is the basis of production credit : money is loaned only on condition that it is used by the borrower in such a way that in normal circumstances it will return to him. The security for the loan consists of the commodities for the purchase of which the money has been advanced.

We are concerned at this point only with credit which arises from commodity circulation itself, from the change in the function of money, and its transformation into a means of payment after being a medium of circulation. For the present, therefore, I shall not consider the type of credit which arises from the division of the functions of the capitalist between the pure money owner and the entrepreneur. When money is advanced by the money capitalist to the entrepreneur, the advance is only a transfer; there is no change in its amount. Such a change may well take place, however, in the case which concerns us at the moment. The seller of the means of production credits the customer with commodities, and in return receives a promise to pay in the form of a note. When the note falls due, the capitalist may perhaps be able to repay the capital advanced to him from the proceeds of its circulation. Under these circumstances, his total capital can be smaller than it would have to be if credit were not available. Credit, then, has increased the power of his own capital.

But the existence of credit in no way changes the fact that capital must have the form of money in order to be able to buy commodities. It merely reduces the quantity of metallic money that would otherwise be required for exchange, in so far as payments cancel each other out. But this quantity does not depend at all upon the fact that money is being used as capital in this transaction; it is determined by the laws of commodity circulation. Other things being equal, the quantity of money advanced is determined by the aggregate price of the commodities which have to be bought. Thus, an increase in the quantity of capital advanced simply denotes an increase in the purchase of commodities intended for use as productive capital (Mp + L) ; that is, an increased volume of media of circulation and payment.

Two opposed tendencies are at work in the case of an increase of this kind. During a period of prosperity, a rapid accumulation of capital is accompanied by an increased demand for certain commodities and consequently by an increase in their prices, which makes necessary an increase in the quantity of money. On the other hand, credit also grows in such a period, since regular returns seem to assure the valorization of capital, and there is a greater readiness and opportunity to make credit available. The expansion of credit makes possible a rapid growth of circulation beyond what would be possible on the basis of metallic money.

This is true, naturally, only of the process M–Mp ; not of the process M–L. With the growth of variable capital there is a corresponding increase in the amount of extra money which serves consumers' purchases and flows into circulation. It is evident that as capitalist production develops there constantly takes place an absolute, and even more a relative, increase in the use of credit. The latter is accounted for by the progress toward a higher organic composition of capital, in which the growth of M–Mp outpaces the growth of M–L, with the resulting more rapid increase in the use of credit as compared with the use of cash.

Thus far, in our examination of the cycle, we have not observed credit performing any new function. This changes, however, when we consider the influence of the rate of turnover upon the magnitude of money capital. For we shall soon see that sums of money are periodically set free during the cycle. Since idle money can yield no profit, the attempt is constantly being made to prevent such idleness; and this task can be accomplished only by credit, which thereby acquires a new function. It is to this new function of credit that we must now direct our inquiry.

The periodic release and idleness of money capital

The movement of capital through the sphere of production and the two phases of circulation takes place in a sequence of time. The duration of its sojourn in the sphere of production constitutes its production time, that of its stay in the sphere of circulation its time of circulation. The entire time of rotation is therefore equal to the time of production plus time of circulation.[4]

The rotation of capital, considered as a periodical process, not as an individual event, constitutes its turnover. The duration of this turnover is determined by the sum of its time of production plus its time of circulation. This sum constitutes its time of turnover.[5]
In our schema, the time necessary to complete the process M–M, therefore, constitutes the turnover time, which is equal to the time required by the transactions M–L and M–Mp plus the time required by C1–M1; while production time proper is equal to the time in which capital as productive capital (P) engages in the process of generating value.

Let us assume that the turnover time of a given capital is nine weeks, of which production takes six weeks, and circulation three weeks, and that 1,000 marks are required for production each week. If production is not to be interrupted for three weeks (the period of circulation) at the end of the period of production, the capitalist must advance a new capital of 3,000 marks (capital II), for during the three weeks in which the capital is in circulation it does not exist at all so far as production is concerned.[6]

The period of circulation therefore calls for additional capital, and this additional capital stands in the same ratio to the total capital as the circulation time stands to the turnover time; in our example, a ratio of 3 :9. The additional capital would therefore amount to one-third of the total capital.

The capitalist, then, must have at his disposal 9,000 marks, rather than 6,000, in order to avoid the suspension of production for three weeks. But the additional 3,000 marks first begins to function at the beginning of the circulation time, in the seventh week, and hence must lie idle for the first six weeks. This periodic release and idleness of 3,000 marks goes on unceasingly. The 6,000 marks which were transformed into commodity capital in the first working period are sold at the end of the ninth week. The capitalist now has 6,000 marks in hand. By this time, however, the second working period, which began in the seventh week, is half completed. During this time the additional capital of 3,000 marks has gone to work, and to complete this second period, only 3,000 marks are required, and this sum is provided by releasing again half of the original 6,000 marks. The process now repeats itself again and again.

Additional capital, money capital used to purchase means of production and labour power, has become necessary in order to maintain the continuity of production, and to prevent its interruption by the circulation of capital. The additional capital itself does not generate surplus value continuously and to that extent does not really function as capital. The mechanism of rotation has simply set it free for a time so that it can function during the rest of the time.

Looking at it from the point of view of the aggregate social capital, there will always be a more or less considerable part of this additional capital for a prolonged time in the form of money capital.[7]

And this released capital is equal to that portion of capital which has to fill out the excess of the circulating period over the working period or over a multiple of working periods.[8]

The advent of the additional capital [3,000 marks] required for the transformation of the circulation time of capital I [6,000 marks] into a time of production increases not only the magnitude of the advanced capital and the length of time for which the aggregate capital must necessarily be advanced, but it also increases specifically that portion of the advanced capital which exists in the form of a money supply, which persists in the condition of money capital, and has the form of potential capital.[9]

These 3000 marks are not necessarily the entire amount of money capital lying idle at any given moment.[10] Assume that our capitalist divides the 6,000 marks required at the beginning of the period of production into 3,000 marks for the purchase of means of production and 3,000 marks for wages. He pays his workers weekly, which means that once a week, until the end of the sixth week, the sum is reduced by 500 marks, the balance remaining idle during the interim. Similarly, it is possible that he will not pin-chase some of the means of production (say, coal) in bulk at the beginning of the period of production, but will buy it in successive instalments during production. Conversely, it may happen that market conditions or delivery practices dictate purchases in excess of the requirements of a single period of production, in which case it would be necessary to convert a larger part of money capital into commodity capital.
In so far as process Money purchaes labour-power and means of productiondoes not require that money be immediately transformed into labour power and means of production, idle money capital comes into existence, quite apart from the additional capital II. One part of this money concludes that act M–C, while another part remains in monetary form in order to be used for simultaneous or successive acts of M–C when conditions require it. This second part is only temporarily withdrawn from circulation, in order to become active at an appropriate time. This hoarding is, therefore, a state in which money continues to exercise one of its functions as money capital. Although it is temporarily inactive it still forms part of the money capital (M) which is equal to the value of the productive capital from which the cycle began. On the other hand, all the money which has been withdrawn from circulation exists in the form of a hoard.

In the form of a hoard, money is thus likewise a function of money capital, just as the function of money in M–C as a medium of purchase or payment becomes a function of money capital. For capital value here exists in the form of money, and the money form is a condition of industrial capital in one of its stages, prescribed by the interrelations of processes within the cycle. At the same time, it is here once more obvious that money capital performs no other functions than those of money within the cycle of industrial capital, and that these functions assume the significance of capital functions only by virtue of their interrelations with the other stages of this cycle.[11]

A third very important reason for money capital lying idle arises from the manner in which capital flows back from the process of realization. Here two principal causes should be distinguished. Looked at from the point of view of its turnover, industrial capital may be divided into two parts.. One is completely consumed during a single turnover period and its value is transferred in toto to the product. In a spinning mill, for example, in which 10,000 pounds of yarn are produced monthly and sold at the end of the month, a corresponding value of cotton, lubricants, lighting gas, coal, and labour power is consumed during the month and their value returns to the capitalist when the yarn is sold. This portion of capital which is replaced during a single turnover period is circulating capital. On the other hand, installations, machinery, etc., are also needed for production, and these continue their productive service over many periods of turnover. Hence, only a part of their value, equal to _the average depreciation for a single turnover period, is transferred to the product. If their value is, say, 100,000 marks, and their functional life 100 months, then 1,000 marks will be taken from the sale of the yarn for replacement of installations and machinery. The part of the total capital which thus functions over a series of turnover periods is fixed capital.

The owner of the spinning mill therefore, receives a steady flow of money from circulation which he uses for the replacement of his fixed capital. He must hold it in the form of money until 100 months have elapsed, at which time it will amount to the 100,000 marks required for the purchase of new machinery, etc. The process, therefore, constitutes still another occasion for the formation of a hoard, which is itself

a factor in the capitalist process of reproduction; it is the reproduction and storage, in the form of money, of the value of its fixed capital, or its individual elements, until such time as the fixed capital, shall be worn out, until it shall have transferred its entire value to the commodities produced, and must be reproduced in its natural form.[12]

Obviously, then, some capitalists are always withdrawing money from circulation as replacement for the consumed value of the fixed capital. The essential thing here is the money form. The value of the fixed capital can be replaced in money form only because the fixed capital itself can continue to function in production without having to be replaced in kind. It is thus the particular form of the reproduction of fixed capital which makes money necessary in this connection.[13] In the absence of money, it would not be possible to separate the circulation of the value of fixed capital from its technical continuity in production. The manner in which fixed capital is renewed thus requires periodic hoarding, and hence also the periodic idleness of money capital.

The capitalist mode of accumulation supplies the final cause of the release of money capital which is of interest to us here. Surplus value must attain a certain volume, depending upon the prevailing technical and economic conditions of an enterprise, before it can begin to function as capital, either in the expansion of existing enterprises or the formation of new ones. Every cycle ends with surplus value in money form. As a rule, a whole series of cycles is required before the realized surplus value is large enough to be converted into productive capital. The result is idle money capital which originates in production and must remain in money form until such time as it can be put to productive use.

Hoarding can occur even in simple commodity circulation. All that is  required is that in the sequence C – M – C, the second part, M – C, should fail to take place; that the seller of the commodity refrains from buying other commodities and hoards his money instead. But this kind of action seems quite accidental and arbitrary, whereas in the circulation of capital such hoarding is essential and ensues from the nature of the process itself. Another difference between the two types of circulation is that in the circulation of capital not only are means of circulation set free and hoarded, but also money capital which was a stage in the valorization process and a potential starting point for a new cycle of production. In this way pressure is exerted on the money market.

Thus there arises from the very mechanism of capital circulation the necessity for a larger or smaller amount of money capital to remain idle for longer or shorter periods. During these periods of inactivity, of course, it can earn no profit – a mortal sin from the standpoint of capitalists. As inmost cases of sinning, however, the extent to which capital commits this sin depends upon objective factors, which we must now consider.

The changing volume of idle capital and its causes

As we already know, additional money capital which periodically lies idle is required in order to continue production during the turnover period. In our first example, if the period of turnover were reduced from three to two weeks, 1,000 marks would become superfluous and would therefore be withdrawn in the form of money capital. It would then enter the money market as an addition to the capital already there. Prior to its release, only part of the 1,000 marks was in money form, namely the 500 marks which served to purchase labour power. The balance of 500 marks had been used to purchase means of production and therefore existed in commodity form. The entire sum, in the form of money, is now disengaged from this cycle.

The 1,000 marks thus withdrawn in money now form a new money capital seeking investment, a new constituent part of the money market. True, they were previously periodically in the form of released money capital, and of additional productive capital, but these latent forms were the conditions for the promotion and continuity of the process of production. Now they are no longer needed for this purpose, and for this reason they form a new money capital and a constituent part of the money market, although they are neither an additional element of the existing social money supply (for they existed at the beginning of the business and were  thrown by it into circulation) nor a newly accumulated hoard.[14]

This shows how, given a constant money reserve, any increase in the supply of money capital must be the result of an abbreviation of the turnover period. Money, having once served as capital, is fated to return to that role.

Conversely, if the turnover period were prolonged, say for another two weeks, an additional capital of 2,000 marks would be required. This sum would have to be obtained from the money market in order to re-enter the cycle of productive capital (including its circulation). Of this sum, half would be gradually converted into labour power,- and the other half, perhaps all at once, would be invested in means of production. Any prolongation of the turnover period therefore produces an increased demand in the money market.

The most important factors which affect the turnover period itself are the following :

To the extent that the greater or smaller length of the period of turnover depends on the working period, strictly so called, that is to say, on the period which is required to get the product ready for the market, it rests on the existing material conditions of production of the various investments of capital. In agriculture, they partake more of the character of natural conditions of production; in manufacture and in the greater part of extractive industry they vary with the social development of the process of production itself.[15]

Two tendencies are at work here. The development of technology shortens the working period and makes it possible to finish a product and bring it to the market with greater speed. In the case of particular products, the scale of production is enlarged and a larger capital is turned over more rapidly. Technological progress thus shortens the working period and accelerates the turnover of circulating capital and of surplus value. At the same time, however, this progress also means an increase of fixed capital, which has a longer turnover period, spanning many turnover periods of circulating capital. Since fixed capital tends to increase more rapidly than circulating capital, the result is that a growing proportion of the total capital has a slower rate of turnover. Leaving aside credit, this slowing down of the rate of turnover provides another reason – in addition to the expansion of the scale of production itself – for an increased advance of money capital, of which a larger proportion, however, would remain unoccupied and available.

To the extent that the length of the working period is conditioned on the size of the orders (the quantitative volume in which the product is generally thrown upon the market), this point depends on conventions. But convention itself depends for its material basis on the scale of production, and it is accidental only when considered individually.[16]

In this connection, too, the quantity produced generally increases and with it the requirements for money capital. Nevertheless, it should be observed that technological progress makes it possible to produce a larger volume of commodities at lower prices, and this may reduce the capital outlay required.

Finally, so far as the length of the period of turnover depends on that of the period of circulation, the latter is indeed conditioned on the incessant change of market conditions, the greater or lesser ease of selling, and the resulting necessity to throw a part of the product on to more or less remote markets. Apart from the volume of general demand, the movement of prices plays here a principal role, since sales are deliberately restricted when prices are falling, while production continues; and conversely, production and sales keep in step when prices are rising, or sales may even be made in advance. But we must consider the actual distance of the place of production from the market as the real material basis.[17]

Since profit originates in production and is only realized in circulation, there is a never-ending search for ways and means of converting the greatest possible amount of capital into production capital. This accounts for the tendency to reduce the costs of circulation to a minimum, first by substituting credit money for metallic money, and second by reducing the circulation time itself, by improving commercial methods and selling products as quickly as possible. There is also a counter-tendency resulting from the expansion of markets and the development of the international division of labour, but the effect of these factors is moderated in turn by the development of transport facilities.

Finally, it should be emphasized that the length of the period of capital turnover is the decisive factor which determines the rapidity with which surplus value is reconverted into capital and accumulated. The shorter the turnover period the more rapidly can surplus value be realized in the form of money and converted into capital.

The factors mentioned above – the organic composition of capital (especially the ratio of fixed to circulating capital), the development of commercial methods which reduce the turnover time, the improvement of means of transportation which achieves the same result (though it also has the opposite effect when it opens up distant markets), periodic business fluctuations which change the rate at which money flows back, and finally, changes in the speed of productive accumulation – all play some part in determining the quantity of idle capital and the period of its inactivity.

Still another important factor is the influence exerted by changes in commodity prices. If the price of raw materials falls, the capitalist (in our example) need not advance the weekly sum of 1,000 marks, but only, say, 900 marks, in order to continue production on the same scale. His capital for the whole turnover period would then be 8,100 marks rather than 9,000 marks, leaving 900 marks free.

This eliminated, and now unemployed, capital which seeks investment in the money market, is nothing but a portion of the originally advanced capital [of 9,000 marks]. This portion has become superfluous by the fall in the price of the materials of production so long as the business is carried along on the same scale and not expanded. If this fall in prices is not due to accidental circumstances such as a rich harvest, oversupply, etc., but to an increase of productive power in the line which supplies the raw materials, then this money capital is an absolute addition to the money market, or in general to the capital available in the form of money capital because it no longer constitutes an integral portion of the capital already invested.[18]

Conversely, a rise in the price of raw materials would necessitate additional money capital and would increase the demand on the money market.

It is evident that the factors we have just considered are of great importance for the development of the money market during the periodic fluctuations caused by the business cycle. At the beginning of a period of prosperity, prices are low, the turnover of capital is very rapid and the time of circulation is short. As the upswing approaches its peak, prices rise and the circulation time is extended. There is a stronger demand for credit in circulation, while at the same time the demand for capital credit has increased as a result of the expansion of production. The extended circulation time and the rise in prices make additional capital necessary, and this must be obtained from the money market, thus reducing the amount of loan capital available.

Along with its progress toward a higher organic composition, the general turnover time of the capital generally increases. Both the quantity of capital and the period of time during which it is engaged in production increase. A longer time elapses before the capital which has been advanced returns to its starting point again. For example, if the turnover time is ten weeks, the capitalist must advance 10,000 marks. If he introduces a new method of production which requires an advance of 60,000 marks and has a turnover time of thirty weeks, he would need to draw 60,000 marks from the money market. The capital, increased sixfold, would have to be advanced for thrice the length of time.

The longer the turnover time of the capital the longer it takes for the equivalent value of the commodities (means of production and means of subsistence for the workers) withdrawn from the market, to return to the market in the form of commodities. Thus commodities are withdrawn from the market and money takes their place. Money is now not an ephemeral but an enduring value form for the commodities withdrawn from the market. Its value has become independent of the commodity. The commodity value must now be replaced absolutely by money, since its replacement by another commodity can only follow at an entirely different point of time.

If we assume that society were not capitalist but communist, then money capital would be entirely eliminated, and with it, the disguises which it carries into the transactions. The question is then simply reduced to the problem that society must calculate beforehand how much labour, means of production, and means of subsistence it can utilize without injury for such lines of activity as, for instance, the building of railways, which do not furnish any means of production or subsistence, or any useful thing, for a long time, a year or more, while they require labour and means of production or subsistence out of the annual social production. But in capitalist society, where social intelligence does not act until after the fact, great disturbances will and must occur under these circumstances. On the one hand there is pressure on the money market, while on the other an easy money market creates just such enterprises in mass that bring about the very circumstances by which a pressure is subsequently exerted on the market. A pressure is exerted on the money market, since an advance of money for long terms is always required on a large scale. And this is so quite apart from the fact that industrialists and merchants invest the money capital needed for carrying on their business in railway speculation, etc., and reimburse themselves by borrowing on the money market. On the other hand, there is a pressure on the available productive capital of society. Since elements of productive capital are continually withdrawn from the market and only an equivalent in money is thrown on the market in their place, the demand of cash payers for products increases without providing any elements of supply. Hence a rise in prices of means of production and of subsistence: To make matters worse, swindling operations are always carried on at this time, involving the transfer of large sums of capital.. . . [19]

In such circumstances, variations in the rate of turnover constitute a disturbing factor in the proportionality of reproduction, and thereby, as will be shown later, an element in crises.

Our investigation so far has therefore yielded the following conclusions : (1) a portion of the total social capital devoted to production is always lying idle in the form of money capital; (2) the magnitude of this idle money capital is subject to great variations which exert an immediate influence on the demand for and supply of money capital in the money market. But the existence of idle money is in contradiction with the very function of capital, which is to produce profit. Hence every effort is made to reduce this idleness to a minimum, and this task constitutes yet another function of credit.

The transformation of idle money into active money capital by means of credit

It is easy to see how credit can perform this function. We have seen already that money capital is periodically released in the cycle of capital. Once released from the cycle of any one individual capital, it can function as money in the cycle of another capital if it is made available to other capitalists in the form of credit. In other words, this periodic release of capital is an important basis for the development of the credit system. All the factors, therefore, which have led to the idleness of capital now become so many causes for the emergence of credit relations, and all the factors which affect the quantity of idle capital also determine the expansion and contraction of credit.

If, for example, there are interruptions in the cycle of any capital which cause it to remain in the form of money capital, a potential supply of money capital comes into existence and can be made available to other capitalists through the medium of credit. Such is the case in discontinuous processes of production, like those which prevail in the seasonal industries, whether as a result of natural causes (in agriculture, the herring catch, sugar production, etc.) or of conventional arrangements (where there is, for example, so-called seasonal work). Every release of money capital involves the possibility of applying this capital, by means of credit, to other productive purposes beyond those of the individual capital which released it.[20]

If, on the contrary, the interruption occurs at a point in the cycle where no money capital is released, then the reverse holds true. The continuity of the process can only be maintained if recourse can be had to liquid reserves, or, where a developed credit system exists, to credit.

On the one hand, the nature of the cycle creates the possibility of granting loans for use as capital. But since money is always needed to defray the cost of circulation, and capitalist production has a tendency to expand more rapidly than the supply of money capital, the resort to credit becomes a necessity. On the other hand, every disturbance in the process of circulation, every prolongation of the process C–M or M–C, makes an additional reserve capital essential to maintain the continuity of the production process.

I have already noted that the quantity of money depends, ceteris paribus, on the aggregate price of commodities in circulation. Any changes in value which occur while capital is going through its cycle will therefore affect the quantity of money capital. If prices rise, the additional money capital is tied up; if they fall, money capital is released.

But to the extent that these disturbances increase in volume, the industrial capitalist must have at his disposal a greater money capital in order to tide himself over the period of compensation ; and as the scale of each individual process of production, and thus the minimum size of the capital to be advanced, increase in the process of capitalist production, we have here another circumstance in addition to those others which transform the functions of the industrial capitalist more and more into a monopoly of great money capitalists, who may be individuals or associations.[21]

Credit which is thus based upon the release of money capital is radically different from the commercial credit which originates only from the changed function of money in simple commodity circulation. This subject requires a closer examination.


[1]. In a letter to Rudolf Meyer, Rodbertus says: 'Metallic money is not merely a measure of value and a means of payment. These are characteristics associated with the general idea of money. They do not require that the receipt or claim for commodity value has to be written upon such a valuable material as a precious metal. Money today is also a regulator of production, thanks to the high value of its content. If you want to introduce commodity notes, you must also be able to tell every entrepreneur how much he shall produce. The idea of the commodity note touches the most interesting point in political economy, but as a permanent medium of circulation (and not merely a temporary loan certificate) it is feasible only if the value of commodities is constituted by labour, and the commodity note is inscribed with the value of a commodity measured in terms of labour. I do not doubt the possibility of such money, but if it were made the only medium of circulation, property in land and capital would have to be abolished.' Rudolf Meyer (ed.), Briefe and sozialpolitische Aufsatze von Dr Rodbertus-Jagetzow, vol. II, p. 441.

This and other passages show that Engels did Rodbertus an injustice when he put him together with the petty bourgeois labour-money Utopians such as Gray, Bray, et al., who believed that labour money is possible without the social control of production.

[2] The difficulty in understanding the concept of 'capital', and economic concepts generally, is due to the appearance they give of inhering in things themselves, whereas they are only definite social relationships in which the same thing may assume quite diverse roles. Thus gold as money, in one sense, only reflects the state of affairs during a certain period in the development of commodity exchange; it is a medium of circulation. In a different context, it becomes capital. To ask whether gold, or money, is capital is a misleading question. In many circumstances, it is money, in others, also capital. But as capital, it can only perform the functions of money; it is the money form of capital as distinct from the commodity form. Thus, to endow particular things with the attributes of capital is just, as incorrect as to regard space as adhering to things. It is only our perception which gives objects their spatial form, just as it is only certain stages of social development which endow things with the form of money or capital.

[3] Capital, vol. II, pp. 42-3. [MECW 36, p41]

[4] Capital, vol. II, p. 138. [MECW 36, p125]

[5] ibid., p. 176. [MECW 36, p158]

[6] ibid., p. 297. [MECW 36, p259]

[7] ibid., p. 303. [MECW 36, p264]

[8] ibid., p. 317. [MECW 36, p278]

[9] ibid., p. 303. [MECW 36, p264] Marx's numerical examples differ from those given in the text. I have interposed my own numbers in Marx's statement for the sake of simplicity.

[10] I can only indicate the most important factors here. In the second volume of Capital, Marx examined the problem in detail, and its further elaboration may be left to pedants. Yet the fundamental significance of these investigations for understanding the credit system has previously been overlooked.

[11] ibid., pp. 87-8. [MECW 36, p83]

[12] ibid., p. 524. [MECW 36, p450]

[13] 'The transactions disposing of the annual product in commodities can no more be dissolved into a mere direct exchange of its individual elements than the simple circulation of commodities can be regarded as identical with a simple exchange of commodities. Money plays a specific role in this circulation, which is particularly marked by the manner in which the value of the fixed capital is reproduced' (ibid., p. 525 [MECW 36, p450]).

[14] ibid., p. 330. [MECW 36, p288]

[15] ibid., p. 363. [MECW 36, p315-316]

[16] ibid., pp. 363-4. [MECW 36, p316]

[17] ibid., p. 364. [MECW 36, p316]

[18] ibid., p. 334. [MECW 36, p291-2]

[19] ibid., pp. 361-2. [MECW 36, p314]

[20] The activities of those banks which transfer to industrial districts the money capital which is released by agricultural districts with their sharp seasonal variations in the demand for money are based on this fact. On the other hand, the following illustration taken from modern shoe manufacturing shows the extent of the influence of traditions. The fact that the circulating capital does not turn over more than twice a year, although the manufacture of a shoe only takes, on the average, three to four weeks, can be explained by the circumstance that the main orders during the year require delivery before Easter or Whitsuntide. The product is finished in the interim but it remains in stock because it cannot be sold to the shoe merchant before that time, or at least his obligation to pay begins only with the delivery date.

At the same time, these circumstances have a definite effect on the use of credit. 'The peculiarity of the seasonal business in the shoe industry also obliges the shoe factories to co-operate with the banks. The large sums flowing in after the season is over are transferred to the banks, which in turn make available to factories the sums they require for wages and other production costs and also take responsibility for the payments for raw materials through endorsements or cheques.' (See Karl Rehe, Die deutsche Schuhgrossindustrie, pp. 55, 57.)

[21] Capital, vol. II, p. 122. [MECW 36, p112] Here we have a prevision of the dominance of the banks over industry, the most important phenomenon of recent times, written when even the germ of this development was scarcely visible.