Finance Capital, Hilferding 1910
Credit first appears as a consequence of the changed function of money as a means of payment. When payment is made some time after the sale has taken place, the money due is credited for the intervening period. Naturally, this form of credit presupposes commodity owners and, in a developed capitalist society, productive capitalists. Assuming that we are dealing with a single isolated example of this practice this simply means that capitalist A has enough reserve capital to wait for payment from B who did not have the necessary cash at the time of the purchase. In this kind of unilateral advance of credit, A must have available the sum of money which B will have to pay when the debt falls due. Money is not economized thereby; it is merely transferred. Things are different if the promissory note itself functions as a means of payment. To take an example; if A not only advances credit to B, but also receives credit from C by giving him B's note, C can use that note to make any payments he owes to B. Sales and purchases between A and B, A and C, C and B have taken place without the intervention of money. Money is therefore saved, and since this money must have been in the possession of productive capitalists as money capital for the circulation of their commodity capital, it follows that for them money capital has been saved, The promissory note, in other words, has replaced money by performing the work of money, by functioning as credit money. A large part of the circulation processes, including the largest and most concentrated operations, take place among the productive capitalists, and all these transactions can, in principle, be accomplished by promissory notes or bills of exchange.* The majority of such bills cancel out and hence only a small amount of cash is required to settle the balances. In this case productive capitalists are mutually providing each other with credit. What the capitalists lend each other is commodities, which constitute for them commodity capital. At the same time, however, these commodities are looked upon as mere bearers of a given amount of value, which is assumed to have been realized in its socially valid form at the time of sale. In other words, they are regarded as the bearers of a specific sum of money represented by the bill. The circulation of bills, therefore, is based upon the circulation of commodities, but of commodities which have been sold and converted into money, even if the conversion is one which society has not yet accepted as valid, but which only exists as a private act in the buyers' promises to pay.
This type of credit, advanced by productive capitalists to one another, I shall call circulation credit. I have already noted that it is used as a substitute for money and that, by facilitating the transfer of commodities without the use of money, it helps to conserve precious bullion. The expansion of this type of credit is based on the increased use of this method , of transferring commodities, and since commodity capital is involved here - transactions between productive capitalists - it depends also upon the expansion of the reproduction process. Whenever the scale of reproduction increases, there is also an increased demand for productive capital (machinery, raw materials, labour power).
An increase in production means a simultaneous increase in circulation; and the enlarged circulation process is made possible through an increase in the quantity of credit money. The circulation of bills expands, and can expand, because the quantity of commodities entering circulation is larger. This growth of circulation can proceed without any rise in the demand for gold money. Equally, the relation between the supply of and demand for money capital need not change, because the greater need for means of payment can be met simultaneously, and in the same proportion, by a larger supply of credit money based upon the increased volume of commodities.
What increases in this case is the circulation of bills of exchange. This increased credit need not in any way affect the relation between the demand for and supply of the elements of real productive capital. Rather, both are likely to increase at the same rate. The process of production is expanded, and commodities are thus produced which are required to carry on production on an enlarged scale. We therefore have an increase in credit as well as an increase in productive capital, both of which are reflected in an increased circulation of commercial bills. But this does not entail any variation in the relation of the supply to the demand for capital in money form. Yet it is only this demand which affects the rate of interest. It is therefore possible for the supply of credit to increase without any change in the rate of interest, provided that the additional credit consists exclusively of circulation credit.
The circulation of bills is limited only by the number of business transactions actually concluded. An over issue of state paper money will depress the value of each individual money unit without changing the value of the total supply of paper money, but commercial bills can in principle only be issued when a business transaction has been concluded, and for this reason bills cannot be over issued. If a particular transaction is fraudulent, the bill of course will become worthless. But the worthlessness of one bill has no effect on all the others.
The impossibility of an over issue of bills does not, however, preclude the possibility that capitalists may assume excessive monetary obligations in the form of credit instruments of this type. During a crisis, for instance. the prices of commodities fall and obligations cannot be redeemed in Market stagnation makes the conversion of commodities into money impossible. The manufacturer of machines who issued bills in payment for coal and iron, hoping to redeem them through the sale of his product, now finds himself unable to liquidate his obligation or to satisfy his creditor by giving him a bill drawn on a purchaser of his own machines. If he has no reserves his bills become worthless, notwithstanding the fact that they represented commodity capital at the date of issue (coal and iron converted into machines).
In providing credit for the period of circulation bills are a substitute for the additional capital that would otherwise have been required to bridge over that period. These bills are normally issued by productive capitalists to one another. But if returns fail to materialize the money has to be obtained from a third party, the banks. The banks are also involved whenever the normal conditions of bill circulation are disturbed ; for instance, when commodities become temporarily unsaleable or are withheld for speculative or other purposes. In this case the banks merely extend and supplement the credit provided by bills.
Circulation credit thus extends the scale of production far beyond the capacity of the money capital in the hands of the capitalists. Their own capital simply serves as the basis for a credit superstructure and provides a fund for the settlement of balances, as well as a reserve against losses when bills depreciate.
The saving in cash money tends to increase to the extent that bills cancel each other out. Special institutions are required for this purpose. The collection and clearance of credit instruments is a task performed by the banks. At the same time, more money can be saved the more frequently a single bill can be used as a means of payment. Bills will circulate in this more extensive way only if there is certainty that they will be' redeemed ; that is, if their security as a medium of circulation and means of payment is publicly recognized. This, too, is one of the tasks of the banks. Banks perform both functions by buying bills. In so doing, the banker becomes a guarantor of credit and substitutes his own bank credit for commercial craft in so far as he issues a bank note in place of industrial and commercial bills. The bank note is simply a draft on the banker which is more readily acceptable than the notes of the industrialist or Thus the bank note rests upon the circulation of bills. The state note is backed by the socially necessary minimum of commodity transactions, and the bill of exchange by the completed commodity transaction as a private act of the capitalist. The bank note, on the other hand, is secured by the bill, or promissory note, which is backed by the total assets of all the drawers who were parties to the exchange. At the same time, the issue of bank notes is limited by the volume of discounted bills and hence by the number of completed acts of exchange.
Originally, therefore, the bank note was simply a bank draft which replaced bills issued by productive capitalists. Prior to the use of bank notes bills often circulated with a hundred or more signatures before they fell due. On the other hand, the first bank notes resembled ordinary commercial bills in being issued for the most varied amounts rather than in round sums. Nor were they always payable on demand.
In past times, it was not uncommon for banks to issue notes, payable on demand, or at a distant day from that of presentation, at the option of the issuer, but in such case, the notes bearing interest till the day of payment.
A change (which, however, does not affect the economic laws involved)was first introduced when the state intervened. The purpose of its legislation was to guarantee the convertibility of the bank note by limiting,directly or indirectly, the quantity that might be issued, and by making the issue of bank notes a monopoly of a bank operating under state control. In countries where there is no state paper money, or where its volume is far below the socially required minimum, the bank note takes its place. Where such notes are made legal tender during certain periods of crisis they become in effect state paper money.
The artificial regulation of the issue of bank notes fails as soon as circumstances require an increased issue. For instance, when the credit structure collapses during a crisis, the credit money (bills) of many individual capitalists is impaired, and the place it occupied in circulation has to be filled by additional means of circulation. The law becomes impotent and is either disregarded (as recently occurred in the United States) or suspended (as in the case of the Peel Act in England). People will accept bank notes while they reject many other bills simply because the credit of the bank has not been impaired. If it were impaired the notes would have to be made legal tender, or state paper money would have to be issued. If this were not done, purely private means of circulation would be contrived, as they were in the recent American crisis. But this is a much less effective method of combating a money crisis, especially when such a crisis is aggravated by unsound legislation with respect to the issue of banknotes.
Like the bill of exchange the convertible note cannot be issued in excess quantities. (The inconvertible note is really identical with legal tender state paper money.)A bank note which is not required in circulation is returned to the bank. Since it can be used in lieu of the bill of exchange,the issue of notes is subject to the same laws as is the circulation of bills, and expands along with the latter so long as credit remains undisturbed. The credit behind a bank note can hold its own even during a crisis and consequently, when the circulation of bills contracts during a crisis, bank notes and cash are used in their place.
With the development of the banking system, as unemployed money flows into the banks, bank credit is substituted for commercial credit, so that increasingly all bills serve as means of payment not in the original form in which they circulate among productive capitalists, but in their converted form as bank notes. Banks become the institutions for clearing and settling balances, a technical improvement which extends the range of possible mutual cancellation and reduces the amount of cash required for settling balances. The money which productive capitalists had previously been obliged to keep on hand for settling the bills they had drawn now becomes superfluous, and flows as deposits to the banks who can use it to settle the balances.
Since the banker substitutes his own credit for the commercial bills, he requires credit, but only a relatively small money capital of his own, in order to guarantee his ability to pay. What the banks do is to replace unknown credit by their own better known credit. thus enhancing the capacity of credit money to circulate. In this way they make possible the extension of local balances of payment to a far wider region, and also spread them over a longer time period as a consequence, thus developing the credit superstructure to a much higher degree than was attainable through the circulation of bills limited to the productive capitalists.
Nevertheless, we should be on guard against the error of double counting with regard to the capital which banks supply to producers by discounting their bills. The greater part of bank deposits belong to the productive capitalists who, as the banking system evolves, keep the whole of their liquid money capital in the banks. This money capital, as we have seen, is the basis for the circulation of bills. But it is that class's own capital, and the class does not receive any new capital through the discounting of bills. All that has happened is that capital in one money form (as a private promise to pay) has been replaced by capital in another money form (as a promise to pay by the bank, ultimately in cash). Money capital is involved only to the extent that it replaces the realized commodity capital. In other words, money is regarded here from a generic point of view. In a functional sense,however, money is always involved, either as a means of payment or of purchase.
The substitution of bank credit for the credit of the productive capitalist can, of course, take place in other forms than the issue of bank notes. For instance, in countries where the note issue is a monopoly, private banks may supply bank credit to producers by 'accepting' their bills; that is by endorsing them, and thus guaranteeing their redemption. By this means,the bill benefits from the credit of the bank, and its ability to circulate is increased as if it had been replaced by a note of that particular bank. It is well known that a large part of international commercial transactions,in particular, are carried on by means of such bills. In principle, there is no difference between such 'acceptances' and the notes of private banks.
Circulation credit, in the sense in which I have used the term, simply consists in the creation of credit money. Thanks to the service it performs,production is not limited by the volume of available cash which is part of the socially necessary minimum of circulation (full value metallic money,standard currency, gold and silver coins, plus legal tender state paper money and small change).
But circulation credit as such does not transfer money capital from one productive capitalist to another; nor does it transfer money from other(unproductive) classes to the capitalist class, for transformation into capital by the latter. If circulation credit is merely a substitute for cash, that credit which converts idle money of whatever kind (whether cash or credit money) into active money capital is called capital (or investment) credit,because it is always a transfer of money to those who use it, through the purchase of the various elements of productive capital, as money capital.
We saw in the last chapter how hoards of idle money accumulate in the course of capitalist production which can be used as money capital. It is these sums, which are sometimes involved in the circulation process and are sometimes idle, which are hoarded either for the replacement of fixed capital or as saved-up surplus value until they are large enough for accumulation. Three aspects need to be distinguished here: (1) the individual sums must be collected until, through centralization, they are sufficiently large to be used in production ; (2) they must be made available to the right people ; and (3) they must be available for use at the right time.
We have seen earlier how credit money originates in circulation. We are now dealing with money which lies idle. But money can only perform the functions of money, and can do so only in circulation. Credit, therefore,can do no more than put non-circulating money into circulation. As capitalist credit, however, it puts money into circulation only in order to withdraw more money. It puts money into circulation as money capital in order to convert it into productive capital. Thus it expands the scale of production, and this expansion presupposes the expansion of circulation. The scale of circulation is enlarged not by the injection of new money, but simply by the utilization of old, previously idle money for the purposes of circulation.
There is thus a need for an economic function which consists of collecting idle money capital and then distributing it. But credit assumes here an entirely different character from ordinary circulation credit. Circulation credit merely makes it possible for money to serve as a means of payment. Payment for a commodity which has been sold is credited, and the money which would otherwise have had to enter circulation is saved because it is replaced by credit money. Actual money which might otherwise be required thus becomes superfluous. On the other hand, no new capital is made available to the capitalist. Circulation credit merely gives his commodity capital the form of money capital.
Capital (investment) credit, however, involves the transfer of a sum ofmoney from the owner, who cannot employ it as capital, to another person who intends to use it for that purpose. This is the purpose of the money. For if it were not employed as capital, its value would not be maintained or recovered. From the standpoint of society as a whole, however, the borrower must always repay his debt if lending is to take place with any degree of security. In this case, therefore, there is a transfer of money which already exists, and no money is economized. Investment credit thus transfers money and converts it from idle into active money capital. Unlike ordinary commercial credit, it does not reduce the costs of circulation. Its primary purpose is to enable production to expand on the basis of a given supply of money. The possibility of investment credit arises from the conditions of circulation of money capital, from the fact that in the cycle of capital money periodically falls idle. Some capitalists are always paying such funds into the banks which, in turn, make them available to others.
If, therefore, we view the matter from the standpoint of the capitalist class as a whole, the money is not idle. No sooner is it hoarded at any point in circulation, than it is immediately converted by the use of credit into an active money capital in another process of circulation. The class as a whole can economize in its advances of money capital, because the transferability of money available during intervals of circulation obviates the formation of idle money hoards. The relatively small part of the money supply which the capitalist class needs to lay by as a hoard, is required only to cope with irregularities and interruptions in circulation.
Previously we were dealing with productive capitalists (producers and merchants) who conducted their business (for instance, the purchase of means of production) by means of credit money. Now the productive capitalist has become a money capitalist or a loan capitalist. This new guise,however, is temporary, lasting only for the period during which his money capital lies idle, anxious to be turned into productive capital. And just as he is a lender at one moment, so he is a borrower from some other productive capitalist at another. The character of loan capitalist is at first only transitory, but with the development of the banking system it becomes the specialized function of the banks.
Credit causes the available supply of money capital to do a larger volume of work than would be possible in the absence of Credit. It reduces idle capital to the minimum which is necessary to avoid interruptions and unforeseen changes in the capitalist cycle. It thus tries to eliminate, for the benefit of the whole social capital, the idleness of money capital which an individual capital experiences for a certain period of time in the course of the cycle.
It follows that deposits and withdrawals by productive capitalists take place in accordance with definite laws, which can be inferred from the nature of the circulation process of productive capital and the length of its cycle. Experience has familiarized the banks with these regularities, which indicate the minimum amount of deposits under normal conditions, and hence the amount which they can make available to productive capitalists.
The cheque is a direct order upon a deposit, while the commercial bill draws upon it only indirectly. The cheque draws upon an individual deposit, while the bill is based upon the aggregate deposit of the whole class. For it is essentially their own deposits which are made available to the capitalist class for discounting bills, and when the bills which fall due are paid the money, which has accrued in fact from the sale of commodities,returns to the banks as deposits. Should this reflux of money diminish. and the repayment of these bills be reduced, capitalists would have to secure additional capital. They would then draw upon their deposits, and thus reduce the fund which is available for discounting their bills. The bank now has to intervene and discount bills with its own credit, but since the deposits which provide the basis for the circulation of bills have been reduced, and the bank's liquidity has declined, it is dangerous for the bank to expand it sown credit. The retarded reflux of money, in this case, has increased the demand for bank credit and thus - since credit cannot be expanded - for bank (i.e. loan) capital. This is expressed by a rise in the rate of interest. The functioning of the bill as credit money has declined in importance, and actual money obtained from the bank has had to take its place, as is revealed by the increased demand for money capital. Thus we see a reduction of deposits, while the circulation of commercial bills remains constant or even increases, and the interest rate rises.
It is obvious that the total volume of deposits is many times greater than the available supply of cash. Metallic money circulates rapidly and is also the basis for the circulation of credit money. Any transfer of either metallic money or credit money may result in a deposit with the banker, and the fact that the volume of deposits can thus greatly exceed the stock of cash is shown by the rate of circulation (including credit money).
A deposits 1,000 marks in a bank. The bank lends these 1000 marks to B who, in turn, uses them to pay his debt to C. C then again deposits the 1,000marks in the bank. The bank lends them out again and receives them once again as a deposit, and so on.
The deposits . . . play a double role. On the one hand . . . they are loaned out as interest-bearing capital, and are not found in the cash boxes of the banks, but figure merely in their books as credits of the depositors. On the other hand, they figure as such book entries to the extent that the mutual credits of the depositors in the shape of cheques on their deposits are balanced against one another and so recorded. In this procedure, it is immaterial whether these deposits are entrusted to the same banker who can thus balance the various credits against each other, or whether this is done in different banks,which mutually exchange cheques and pay only the balances to one another.
In terms of the preceding account the bank has performed two functions(1) it has facilitated the process of making payments, and by concentrating them and eliminating regional disparities, it has enlarged the scale of this process ; (2) it has taken charge of the conversion of idle capital into active money capital by assembling, concentrating and distributing it, and in this way has reduced to a minimum the amount of idle capital which is required at any given time in order to rotate the social capital. The bank assumes a third function when it collects the money income of all other classes and makes it available to the capitalist class as money capital. Capitalists thus receive not only their own money capital, which is managed by the banks,but also the idle money of all other classes, for use in production.
In order to perform this function the banks must be able to assemble,concentrate, and lend out as much of the available idle money as possible. Their principal means of doing so are the payment of interest on deposits and the establishment of branch banks where such deposits can be made. This 'decentralization' - a misnomer perhaps, because the decentralization is purely geographical rather than economic - is essential to the bank's job of transferring idle money to productive capitalists.
The money capital which is thus supplied by the banks to industrial capitalists can be used to expand production in two different ways : by increasing either fixed capital or circulating capital. The distinction is a very important one because it determines the way in which the money capital flows back. Money capital which is advanced for the purchase of circulating capital flows back in the same manner; that is, its value is fully reproduced during a single turnover period and reconverted to the money form. This is not the case, however, when the advance is made for investment in fixed capital. Invested in this way, the money returns in piecemeal fashion, in the course of a long series of turnovers, during which time it remains tied up. This difference in the reflux of money is responsible for a difference in the way in which the bank invests its money. When it invests its capital in a capitalist enterprise the bank becomes a participant in the fortunes of the enterprise; and this participation is all the more intimate the more the bank capital is used as fixed capital. The bank enjoys far more freedom of action in its dealings with a merchant than with an industrial entrepreneur. In the case of merchant capital, only credit for payments is involved, and as we shall see, this explains why bank capital stands in an altogether different relationship to merchant capital than it does to industrial capital.
Bank capital (including other funds, as mentioned above) is supplied to industrial capitalists in a number of ways; by allowing them to overdraw their own deposit accounts, by establishing open credit accounts, or by current account operations. There is no difference in principle between these three methods. What really counts is the purpose for which the funds are applied, that is, whether they are used as fixed or circulating capital.
To the extent that banks tie up their funds, they are obliged to keep a comparatively large capital of their own, as a reserve fund, and as security for the uninterrupted convertibility of deposits. Thus banks which are engaged in supplying long-term credit, in contrast to pure deposit banks,must have at their disposal a substantial capital. In England the ratio of paid-up share capital to liabilities is extraordinarily small : 'In the excellently managed London and County Bank, the ratio in 1900 was 4.38to 100.' On the other hand, this ratio also explains why the dividends of the English deposit banks are so high.
Originally, the principal credit instrument was the bill of exchange used as payment credit by productive capitalists - industrial and commercial - in their dealings with one another; its outcome is credit money. When credit is concentrated in the hands of the banks, investment credit becomes increasingly important in comparison with payment credit. At the same time the credit which industrialists extend to one another may change its form. Since all their money capital is held in liquid form in the banks, it becomes a matter of indifference to them whether they extend credit to one another by means of commercial bills or by claims upon their bank credit. Bank credit can therefore be substituted for bills, and the circulation of the latter begins to diminish. Industrial and commercial bills are replaced by bank drafts, which are based upon an obligation of the industrialist to the bank.
The transition from commercial to investment credit is also apparent in international markets. In the early stages of development England (and Dutch policy was similar in the early period of capitalism) extended commercial credit to countries which bought English products, while paying for a larger proportion of her own imports in cash. The situation is different today: credit is not provided exclusively or mainly in the form of commercial credit, but for capital investment, the object of which is to gain control of foreign production. The principal international bankers today are not so much the industrial countries like the United States and Germany; it is primarily France, and then Holland and Belgium, which were already financing English capitalism in the seventeenth and eighteenth centuries, which are the main providers of investment credit. England, in this regard, occupies an intermediate position. This accounts for the differences in the gold movements in and out of the central banks of these countries. For a long time London has been the only genuinely free market for gold and hence the centre of the trade in gold, so that the movement of gold through the Bank of England has served as an index of international credit relations. The free movement of gold has been impeded in France by the gold premium policy, and in Germany by various policies of the Reichsbank management. Since the credit extended by England to this very day is still largely commercial credit, the fluctuations of England's gold reserve depend, in the main, on the state of industry and trade, and the balance of payments. The Bank of France, on the other hand, enjoys a far greater degree of freedom in making its dispositions, thanks to its enormous gold reserve and relatively small commercial obligations. Whenever there is any disturbance in the market for commercial credit, it is the Bank of France which comes to the assistance of the Bank of England.
The important thing about this relative independence of bank credit from ordinary commercial credit is that it gives the banker certain advantages. Every merchant and industrialist has commitments which must be honoured on a specified date, but his ability to meet these obligations now depends upon the decisions of his banker, who can make it impossible for him to meet them by restricting credit. This was not the case when the bulk of credit was commercial credit and banks were only dealers in bills. In such circumstances, the banker himself was dependent upon the state of business and the payment of bills, and had to avoid so far as possible any restrictions of the credit required by business, since otherwise he might destroy the whole commercial credit structure. Hence the expansion of his own credit to the full, even to the point of overextending himself and inviting bankruptcy. Today, when commercial credit is far less important than investment credit, the bank is able to dominate and control the situation much more effectively.
Once the credit system has attained a certain degree of development, the utilization of credit by the capitalist enterprise becomes a necessity,imposed upon it by the competitive struggle. The use of credit by an individual capitalist means an increase in his rate of profit. If the average rate of profit is 30 per cent and the rate of interest 5 per cent, a capital of1,000,000 marks will produce a profit of 300,000 marks. (This will appear in the accounts of the capitalist as 250,000 marks entrepreneurial profit and 50,000 marks interest on capital.) If the capitalist succeeds in obtaining a loan of another 1,000,000 marks, he will make a profit of 600,000 marks, less 50,000 marks interest on his loan, leaving him a net profit of 550,000marks. If this is calculated on his own capital of 1,000,000 marks it amounts to an entrepreneurial rate of profit of 50 per cent as compared with the original 25 per cent. And if the larger capital also makes it possible for him to increase his output, and so produce more cheaply, his profit might well be even larger. If other capitalists do not have access to credit on the same scale, or on equal terms, the favoured capitalist can make an extra profit.
Under unfavourable market conditions the use of credit has other advantages. A capitalist who uses borrowed capital under these circumstances can reduce his prices, for that proportion of his output produced with borrowed capital, below production prices (cost price plus average profit) to the point where they equal cost price plus interest, and can therefore sell his whole output below the production price without diminishing the profit on his own capital. All that he sacrifices is the entrepreneurial profit on the borrowed capital, not the profit on his own capital. In periods of economic depression, therefore, the use of credit bestows an advantage in price competition, which is all the greater the larger the amount of credit. For productive capitalists, therefore, their own productive capital becomes only the basis of an enterprise which is expanded far beyond the limits of the original capital with the aid of borrowed capital.
The increase of entrepreneurial profit through the use of credit accrues to the individual capitalist and to his own capital. It leaves unchanged, at first,the average social rate of profit, but it does, of course, increase the total sum of profit and accelerate the pace of accumulation. Those capitalists who use credit before others do so, or more extensively, are able to enlarge their scale of production, increase the productivity of labour, and thus gain initially an extra profit; but as this process continues the rate of profit tends to fall, because the expansion of production is usually associated with a tendency toward a higher organic composition of capital. The increase in the entrepreneurial profit of individual capitalists stimulates their demand for further credit, and the supply of such credit is made possible by the increasing concentration of money capital from all sources in the banks. This tendency arising in industry is bound to react upon the banks' methods of providing credit.
One of the first results of this intensified demand is that credit is sought for use as circulating capital. An increasing proportion of the entrepreneur's own capital is transformed into fixed capital while the bulk of circulating capital comes from the borrowed funds. But as the scale of production expands, and fixed capital becomes much more important, so this limitation of credit to circulating capital is felt to be too restrictive. If credit is then required for fixed capital, however, the terms on which credit is made available undergo a fundamental change. Circulating capital is reconverted into money at the end of a period of turnover, whereas fixed capital is converted into money very gradually, over a long period of time, as it is slowly used up. Consequently, money capital which is turned into fixed capital must be advanced on a long-term basis because it will remain tied up in production for a long time. The loan capital available to the bank, however, is usually repayable at short notice to its owners. For this reason the bank can only lend for fixed capital investment that amount which remains in its own possession for a sufficiently long time. This does not apply, of course, to any particular unit of loan capital but there always remains in the hands of the bank a large proportion of the total loan capital, the composition of which will naturally change, while a certain minimum amount will always be available, and can therefore be lent for fixed capital investment. While individual capital is not suitable for fixed investment in the form of loan capital - for it ceases then to be loan capital and becomes industrial capital, and the loan capitalist is turned into an industrial capitalist - the minimum which the banks always have available is appropriate for fixed investment. The larger the aggregate capital at the disposal of the bank, the larger and more constant will be the portion which it can lend in this way. Hence a bank cannot lend funds for investment in fixed capital until it has attained a certain size ; and it must expand as rapidly, or more rapidly, than industrial enterprises themselves. Moreover,a bank cannot limit its participation to a single enterprise, but must distribute the risks by participating in many different enterprises. This policy will in any case be adopted to ensure a regular flow of repayments on its loans.
This way of providing credit has changed the relation of the banks to industry. So long as the banks merely serve as intermediaries in payment transactions, their only interest is the condition of an enterprise, its solvency, at a particular time. They accept bills in which they have confidence, advance money on commodities, and accept as collateral shares which can be sold in the market at prevailing prices. Their particular sphere of action is not that of industrial capital, but rather that of commercial capital, and additionally that of meeting the needs of the stock exchange. Their relation to industry too is concerned less with the production process than with the sales made by industrialists to wholesalers. This changes when the bank begins to provide the industrialist with capital for production. When it does this, it can no longer limit its interest to the condition of the enterprise and the market at a specific time, but must necessarily concern itself with the long-range prospects of the enterprise and the future state of the market. What had once been a momentary interest becomes an enduring one; and the larger the amount of credit supplied and, above all, the larger the proportion of the loan capital turned into fixed capital, the stronger and more abiding will that interest be.
At the same time the bank's influence over the enterprise increases. So long as credit was granted only for a short time. and only as circulating capital, it was relatively easy to terminate the relationship. The enterprise could repay the loan at the end of the turnover period, and then look for another source of credit. This ceases to be the case when a part of the fixed capital is also obtained through a loan. The obligation can now only be liquidated over a long period of time, and in consequence the enterprise becomes tied to the bank. In this relationship the bank is the more powerful party. The bank always disposes over capital in its liquid,readily available, form : money capital. The enterprise, on the other hand,has to depend upon reconverting commodities into money. Should the circulation process come to a halt, or prices fall, the enterprise will require additional capital which can only be obtained in the form of credit. Under a developed credit system, an enterprise maintains its own capital at a minimum; any sudden need for additional liquid funds involves obtaining credit, and failure to do so may lead to bankruptcy. It is the bank's control of money capital which gives it a dominant position in its dealings with enterprises whose capital is tied up in production or in commodities. The bank enjoys an additional advantage by virtue of the fact that its capital is relatively independent of the outcome of any single transaction, whereas the fate of the entire enterprise may depend entirely upon a single transaction. There may, of course, be cases in which a bank is so deeply committed to one particular enterprise that its own success or failure is synonymous with that of the enterprise, and it must then meet all the latter's requirements. In general, however, it is always the superiority of capital resources, and particularly disposal over freely available money capital, which determines economic dependency within a credit relationship.
The changed relationship of the banks to industry intensifies all the tendencies toward concentration which are already implicit in the technical conditions of the banking system. A consideration of these tendencies must again distinguish the three main functions of the banks : the supply of commercial credit (circulation of bills), the supply of capital credit, and, anticipating somewhat, investment banking.
As regards commercial credit, the paramount factor is the development of international connections, which requires an elaborate network of relations. Foreign bills take longer to circulate and therefore immobilize a larger volume of resources. Furthermore, the balancing of payments through the mutual cancellation of bills is seldom so complete. Dealings in foreign exchange thus require a large and efficient organization.
The important thing is that the banks tend to concentrate because of certain technical banking operations which are extremely important to growing industries. Foreign and domestic bills which industrial producers use to pay for raw materials and finished goods require an organization of the banking system sufficiently ramified to enable it to handle all transactions - especially foreign exchange operations -on a large scale, and also to guarantee their collateral. It requires, in other words, large banks with numerous foreign and domestic branches. It is true, of course, that industries use bills as a means of payment or to secure commercial credit. Institutions which furnish the credit do not thereby get a chance to intervene deliberately in the affairs of their debtor enterprises. In such a relationship between the bank and the enterprise, the bank's jurisdiction is limited to the reliability of the borrower and the discount return.
In order to be profitable foreign exchange transactions must be closely linked with arbitrage operations. This requires extensive connections, and a large volume of liquid resources, because arbitrage must be carried out quickly and on a large scale to be profitable at all. Arbitrage transactions in bills are based on the fact that whenever, say, the London demand for Paris bills exceeds their supply and their price rises accordingly, firms which have deposits or credits in Paris will take advantage of the situation by drawing bills on Paris. The Paris firm, on the other hand, on which the bills have been drawn, waits for a similar favourable opportunity in that market to transfer the sums again to England.
The fostering of capital credit can best be seen in the growing importance of current account operations.
These transactions play a significant part in the relationship of the banks to industry for three reasons : (1) Since they are so indispensable to the smooth expansion of an enterprise, they make it dependent on the creditor. (2) The technical complexities of bank credit
for industry have a far greater influence on the organization of the banking system than any of the credit operations we have discussed previously. They create a tendency toward concentration in banking. . . . The unique relation (of the banks) to industry . . . requires new principles and an entirely new knowledge of industry on the part of bankers. (3) Finally, current account transactions for industry are the keystone for all other banking activities in industry, such as promotion and the flotation of shares, direct participation in industrial enterprises, participation in management through membership of the board of directors. In a large number of cases such activities are related to bank credit as effect to cause. [At the same time current account work] is an excellent means of judging the soundness of an industrial enterprise and of obtaining control over it; regularity of turnover means that the business is going well.
The exact knowledge which a bank obtains as a result of this continuous relationship can also serve it in good stead in many other ways ; for example, in its business on the stock exchange. On the other hand, the danger of over-extending credit makes it necessary for the bank to exercise a high degree of control over the industrial enterprise, and this presupposes that the enterprise works in association with a single bank.
If the concentration of bank capital tends to increase along with the expansion of industry when the banks simply provide credit, it reaches its zenith when they take over the job of floating shares. The large bank enjoys an unmistakable superiority in this activity because it can undertake the most profitable operations. Its transactions are more numerous, on a larger scale, and more efficient. Its flotations are more secure, and it can sell a large part of the issue to its own customers. On the other hand, the large bank must be able to provide the even greater sums of capital which may be required; and for this purpose, it needs a large capital of its own and a great deal of influence on the market.
The large bank is able to choose the appropriate time for issuing shares, to prepare the stock market, thanks to the large capital at its command, and to control the price of shares after they have been issued, thus protecting the credit position of the enterprise. As industry develops, it makes increasing demands on the flotation services of the banks. Once the mobilization of capital is assured, only one condition governs the expansion of industry; namely, the technical possibilities. The expansion of enterprises also ceases to depend upon their own surpluses resulting from production, and indeed during periods of prosperity an industry may grow rapidly, often by leaps and bounds. The sudden increase in the demand for capital which such expansion involves can only be satisfied by the large, concentrated funds of the banks. The banks alone can obtain the capital without disrupting the money market. This operation can be carried out only if the capital which the bank provides is recovered quickly, or if the issue is performed as a simple book-keeping transaction,which will more probably be the case if the bank sells the issue to its own customers and receives the proceeds of the sale by deducting them from deposits, thus reducing its liabilities.
The technique of banking itself generates tendencies which affect the concentration of the banks and of industry alike, but the concentration of industry is the ultimate cause of concentration in the banking system.
* Throughout his study Hilferding uses the term Wechsel to denote a variety of credit instruments which are usually given distinct names in the English-speaking world. I have therefore translated the term in different ways according to the context. [Ed.]
 Anyone who sees only that bills are based on the exchange of commodities, and overlooks the fact that the exchange does not have the sanction of society until the bills have been cancelled against each other, the balances settled in cash, and the unredeemed bills replaced by money, is simply dreaming of a utopia of commodity-notes, labour money, etc.; in other words, of credit certificates divorced from bullion which are supposed to represent the value of commodities directly and independently.
 The volume of bills put into circulation annually has been (in thousands of marks) as follows: 1885, 12,060; 1895, 15,241; 1905, 25,506. Of these, bank acceptances amounted to 1,965 or 16 per cent, 3,530 or 23 per cent and 8,000 or 31 per cent respectively, although these figures also include bills which do not circulate, such as bills deposited as security, warehouse receipts, etc. See W. Prion, Das deutsche Wechseldiskontgeschäft, p. 51.
 If, however, the normal circulation of commodities is interrupted by unusual non-economic, accidental events, such as revolutions or wars, etc., it is reasonable not to count the period of interruption as part of the normal circulation time, and to wait until such events have passed. This happens when the law decrees a moratorium on bills
 By productive capitalists, I mean those capitalists who realize an average profit, that is, industrialists and merchants, in contrast to loan capitalists who receive interest, and property owners who receive rent.
 J. Wilson, Capital, Currency and Banking, p. 44.
 Naturally, the banks will continue to do a discount business with these notes, and in so far as they are issued against bills of exchange and other forms of collateral they will fulfil the function of credit money as before. But that does not alter their status as state paper money. The proof that they constitute paper money is that they begin to depreciate when they are issued in excess of the requirements of the social minimum of circulation. Where there is no excessive issue, there will not be any depreciation. Since the advances made to the state in England, which increased the quantity of paper in circulation in excess of the needs of trade and industry, even during the period of bank restrictions, remained small, there was only a slight depreciation. Diehl is mistaken, however, when he writes: 'But we cannot even go so far as to call non-negotiable bank notes which are actually legal tender "paper money"; for however disquieting the absence of a redemption requirement may be [a disquiet which Diehl, ignoring the experience of the Austrian currency, exaggerates-R.H.] even under this system banknotes are not issued in order to put money into circulation, but as loans to the state or to merchants on the basis of claims which the bank secures. It depends therefore on the way the bank is managed, not on the quantity of notes, whether and to what extent, under these conditions, the issue of bank notes serves only the legitimate credit needs of the state and business,or whether it leads beyond this to a paper money economy which endangers the whole credit system.' Karl Diehl, Sozialwissenschaftliche Erläuterungen zu Ricardos Grundgesetezen der Volkswirtschaft part II, p. 235. Diehl overlooks the essential difference between the issue of notes,based on the discounting of bills of exchange, as credit to facilitate the circulation of commodities, and the issue of notes as loans to the state. In the former case, the bank note replaces the bill of exchange; one form of credit money takes the place of another, and the bill represents real commodity value. But in the latter case, the notes are issued in return for the state's promise to pay, and they make it possible for the state to buy commodities for which it cannot pay cash. If the state contracts a debt on the money market, it receives money already in circulation, and when this money is spent it simply returns to the money market. There is no reason in this case why there should be any change in the quantity of money in circulation. But the state has recourse to the bank precisely because it has no other source of credit, and it makes the notes legal tender to protect the bank from bankruptcy. The notes thus issued as a loan to the state are an addition to circulation and can depreciate. It is exactly as if the state itself were to issue directly the paper money it required to make its payments, rather than doing so indirectly through the bank. The only difference is, of course, that the indirect procedure is profitable to the bank, since it receives interest on the 'loan' for which it has incurred only printing costs. This is precisely what aroused Ricardo's ire against the Bank of England and prompted him to demand that the issue of paper money be made a monopoly of the state, though he confused state paper with bank notes. It is also interesting to observe that Ricardo's well known suggestions in his Proposals for an Economical and Secure Currency, were actually realized, in many respects, in Austria's 'pure paper currency', and it was this very experience in Austria which clearly revealed the errors in Ricardo's theoretical argument.
 In currency legislation capitalist society' faces a purely social problem. But this society is not aware of its own essential characteristics. Its own laws of motion remain hidden from it and must be laboriously discovered by theory. The self-interest of its leading strata, moreover, prevents acceptance of the theoretical conclusions. Ignoring, for the moment, the narrow and selfish interests of money capitalists, who are commonly regarded as the outstanding experts in matters of banking legislation, the insuperable obstacle to a knowledge of the laws of money and note circulation has been the hostility to the labour theory of value. This accounts for the triumph of the Currency School in English banking legislation, notwithstanding its reduction to historical and theoretical absurdity in the works of Tooke,Fullarton and Wilson. It is a fine irony of history that this theory could,with some justification, find support in Ricardo; that same Ricardo who otherwise spared no effort to apply the labour theory of value in a consistent way, but in this case, influenced by the practical experience of English paper money, abandoned his own theory.
It is the anarchic character of capitalist society which makes it so difficult to establish any conscious and rational way of dealing with a social problem. Capitalism may learn more adequate principles, slowly and laboriously, from the bitter and costly experiences of diverse countries and periods, but it cannot find the power within itself to generalize them; as the maintenance of American, English, and to a lesser extent, German legislation and policies with regard to banks of issue demonstrates. Still less is capitalism capable of evolving a consistent theory which would provide an understanding of recent monetary history. In fact, the capitalist world is shocked even by the boldness of a Knapp, who neither evaluates nor explains away the recent data, but at least creates a systematic terminology for them.
Since the management of money and credit circulation is a purely social task there arises a demand to assign this task to the state. But as the capitalist state is riven by class interests, such a proposal at once arouses suspicions among those who have reason to fear an increase in the power of the strata dominating the state. The struggle usually ends in a compromise,with the state exercising extensive supervision over a privileged private corporation. The private interest of the capitalist, which is supposed to be indispensable, must nevertheless be eliminated or at least curtailed. The significance of the power wielded by the directors of the national banks is unrelated to their private interests; and indeed, if the free reign of the profit motive led them to use the national credit for their private ends untold harm would result. The social character of the task makes absolutely indispensable the elimination or rigorous curtailment of the profit motive.
 'I have no hesitation in professing my own adhesion to the decried doctrine of the old Bank Directors of 1810, "that so long as a bank issues its notes in the discount of good bills, at not more than sixty days' date, it can never go far wrong". In that maxim, simple as it is, I very strongly believe, there is a nearer approach to the truth, and a more profound view of the principles which govern circulation, than in any rule on the subject, which since that time has been promulgated.' J. Fullarton. On the Regulation of Currencies, p. 198
 'The bill of exchange is the most important means of settling accounts in international commerce. In the past, settlements between different states were made by commercial bills, but the bank draft has come increasingly to the fore in the past century. Behind the bank note stands the commercial bill as well as obligations arising from other sources, for example, from stock exchange transactions. The commercial bill of exchange deprives the act of purchase of its unique character. And, in harmony with the trend of the times, the bank draft has carried the process of abstraction still further, so that it is no longer possible to say today that it is based upon the exchange of commodities. The most that can be said is that it is required to meet money claims arising from some sort of economic transaction. International credit can now readily make use of this method of payment.' A. Sartorius von Waltershausen, Das volkwirtschaftliche System der Kapitalanlage im Ausland, pp. 258 et seq.
 Money loaned out always earns interest and therefore represents a capital to its lender; and conversely it is always regarded as capital after it has been loaned out, regardless of what use is made of it, whether as a starting point for new productive capital or as a means of circulation for capital already in existence. Hence the demand for money as a means of payment is confused with the demand for money capital.
 Capital, vol. III, p. 553. [MECW, 37, p470.]
 When economists undertake an analysis of commodities, they always confine themselves to the content of the exchange act and overlook its specific form. When dealing with the more developed forms of credit and with stock exchange operations, however, they follow the opposite procedure of ignoring their content, and instead, spend untold hours brooding upon their various forms. In my opinion, even Jeidels, in his otherwise excellent study, Die Verhaltnisse der deutschen Grossbanken zur Industrie, attaches exaggerated importance to the various forms of credit operations.
 E. Jaffe, Das englische Bankwesen, p. 200.
 'In almost all branches of business the same trend can be observed which had already become characteristic of transactions in raw materials and semi-finished goods; namely, the increased substitution of cash payment [in which, however, Prion also included bank payments - R.H.] for commercial bills. With the aid of bank credit, especially in the form of acceptances, the merchant pays in cash by making a giro transfer or by writing a cheque, with the result that the use of pure commodity bills is increasingly restricted. This was bound to affect the largest and best commodity bills most, since capital wealth has already grown considerably by absorption in the upper levels of commerce. Even in large scale overseas commerce, which has given rise to the best bills to date (for example, in the wheat trade) it is customary to pay by sight drafts, if bank acceptances are not used, rather than by 2 or 3 month notes. This new trend arises from the fact that, by paying in cash, a buyer can always buy on better terms, which remain more favourable even if the buyer is obliged to have greater recourse to bank credit. Since some commodity bills still actually enter circulation, there is great competition for them between the Reichsbank and the credit banks, as well as among the different groups of credit banks. The enormous amounts of capital accumulated in the large banks seek suitable investment in bills, and the competition for these commodity bills depresses the price of the good ones far below the discount rates of the Reichsbank to the discount level of the private banks.' Prion, op. cit., p. 120.
 A specific example of the size of such credits can be seen from a notice which appeared in 1902 in the Aktionar, according to which it has become usual in many instances for industrialists to have to pay bank interest on 20 per cent to 40 per cent of their capital. At a shareholders' meeting of the Neusser Eisenwerke (previously Rudolf Daelen), a shareholder estimated that the debts of this firm in the years 1900 to 1903 amounted to 26, 85, 105 and 115 per cent of its liquid assets. Out of a debt of 718,000 marks in 1903, 500,000 marks were bank debts as compared with a share capital of 1,000,000 marks. See Jeidels, op. cit., p. 42.
 Jeidels, op. cit., p. 32.
 E. Jaffe, Das englische Bankwesen, p. 60.
 'The essential feature of credit on current account is that it permits the debtor to make use of the credit agreed upon, either wholly or in part, or to pay back the credited sum at all times in the same way. This feature of credit granted on current account is of great advantage to the debtor because he can use the funds in such a way as to adjust them to the needs of his business and thus economize on their costs. On the other hand, by extending funds through credit on current account, the banks are investing their funds with sufficient security because, although the time of payment is not limited, the debtor is nevertheless enabled to repay the loan at all times.' Prion, op. cit., p. 102.
Concerning the level of interest charges on such credit in Germany, we are told that 'the rate of interest on current account credit is usually adjusted to the lending rate of the Reichsbank, although when the bank rate falls, it does not fall below a certain minimum which usually amounts to 5 per cent. Besides, although interest rates are generally calculated uniformly, in actual practice they depend, in the case of this particular form of credit, on the character and quality of the collateral and the type of bank. They also include a commission based on the quality of the business connections, and in most cases, the commission depends on the amount of credit used and on the speed of turnover. In any case, this commission changes the level of the true interest to the disadvantage of the credit-receiver to such an extent that, in practice, it is sometimes necessary, depending on the terms of the agreement, to pay 2 per cent or 3 per cent more than the normal current rate of interest' (ibid.).
 Jeidels, op. cit., p. 32.