Finance Capital, Hilferding 1910


The Commodity Exchange

The stock exchange is the birthplace of the trade in securities. As it develops, so also do the investment banks, which compete with it, and at the same time use it as an intermediary. The futures business, while it facilitates the trade in securities, is not essential to it, and has no decisive influence upon prices. The situation is different in the case of commodity trading which follows stock exchange procedures.[1]

The turnover of securities on the stock exchange has the function of mobilizing capital. By the sale of shares the fictitious capital of individual capitalists (which had previously been converted into industrial capital) is reconverted into money capital. Such turnovers are unique, having nothing in common with the trade in commodities except the formal character of purchase and sale, which is the universal economic form in which values and property are transferred. Trade in commodities is entirely different ; for it is in the circulation of commodities that the metabolism of society takes place. From the outset, the commodity exchange and the stock exchange are differentiated from each other just as commodities are from securities. Putting them in the same category as 'exchanges' is bound to create confusion if this fundamental distinction is disregarded, and especially if speculation is identified with trade. The concept of trade in commodities according to stock exchange procedures - that is, the specific characteristics of the commodity exchange which distinguish it from other types of trade - therefore requires closer examination.

We generally say that trade is exchange trading if it takes place on an exchange; that is, at a place in which numerous merchants gather. But it is obvious that whether merchants do business over their own counters or in another place, on the exchange, is a purely technical distinction, not an economic one. On the exchange, deals may be concluded more quickly, and traders may have a better view of the market as a whole, but these are still technical, not economic, differences.

The difference remains merely technical even if one important function of the individual merchant, namely the testing and confirmation of the quality of goods, becomes redundant when only commodities of a standard quality can be supplied to the market. Whether these conditions of delivery are met or not is decided, in disputed cases, by expert bodies of the exchange itself. The elimination of this function, for the individual merchant, is a precondition for commodity exchange trading, which also requires, however, other economic circumstances.

Only commodities of a standard quality are traded on the commodity exchange. For this purpose, each commodity has to be a fixed use value, a standard commodity, any unit of which can be replaced by any other. It is as a quantum of equal use value that the commodity has become an exchangeable good. The mass of commodities is distinguishable only quantitatively on the commodity exchange. According to the nature of the commodity, and the exchange regulations, a given quantity - so many kilograms, so many sacks - is taken as the unit in concluding a deal. Hence only those commodities are suited to commodity exchange trading which are by their nature readily interchangeable, or can be made so by relatively simple and inexpensive regulations.

The interchangeability of commodities is a natural attribute of their use value, which some commodities have and others lack. But more than this is required for commodity exchange trading. In an ordinary commercial transaction the manufacturer sells his commodity to the merchant at its price of production, and the latter then sells it to the consumer with his trading profit added. Such a transaction becomes feasible as a commodity exchange operation only if a marginal profit in the form of a speculative gain can be added to the commercial profit. The precondition for speculation, however, is frequent variations of price; and the commodities most suitable for trading on the exchange are those which undergo considerable price fluctuations over relatively short periods of time. These are primarily agricultural products (wheat, cotton), and those semi-finished or finished goods, the prices of which are strongly influenced by sharp fluctuations in the price of the raw materials from which they are produced, e.g. sugar.

According to Robinow, futures trading in England developed first in metals, talc, etc.[2] With the introduction of the telegraph and steamship lines it was extended to overseas products which are only produced seasonally, and are then thrown on to the market all at once, while consumption is spread over the whole year. The reason for futures trading is therefore the short period of production as against the long circulation time resulting from continuous consumption. The introduction of futures operations in the securities business was stimulated by the interchangeability of the objects dealt in, which themselves, as capitalized claims to income and thus representatives of money, are interchangeable. In commodity trading, however, the introduction of futures operations resulted from specific circumstances in the turnover of commodities, such as the difference between their time of production and their period of circulation. Only the requirements of futures trading lead to the creation, often by artificial means, of fully interchangeable commodities; that is to say, commodities of which every unit has the same use value as every other.[3] When price fluctuations cease, as a result of the formation of cartels, as for example in oil, then commodity exchange transactions in such products also cease, or become purely nominal.

A third important factor, directly related to those already noted, is that it is seldom possible to control price fluctuations by adjusting supply to demand. This is particularly difficult in the case of agricultural products. The supply of such products is more or less fixed, once the crops are harvested, and it can only be adjusted to the demand for them over a long period of time. And finally, it should be noted that the supply of such commodities as are traded on the commodity exchange must be large enough to preclude the danger of a 'ring' being formed, or the market 'cornered' for the establishment of a monopoly price would eliminate price fluctuations and hence speculation.

The distinctive feature of commodity exchange trading is that by standardizing the use value of a commodity it makes the commodity, for everyone, a pure embodiment of exchange value, a mere bearer of price. Any money capital is now in a position to be converted into such a commodity, with the result that people outside the circle of professional, expert merchants hitherto engaged in the trade can be drawn into buying and selling these commodities. The commodities are equivalent to money; the buyer is spared the trouble of investigating their use value, and they are subject only to slight fluctuations in price.[4] Their marketability and hence their convertibility into money at any time is assured because they have a world market; all that need be considered is whether the price differences will result in a profit or a loss. Thus they have become just as suitable objects of speculation as any other claims to money; for instance, securities. In futures trading, therefore, the commodity is simply an exchange value. It becomes a mere representative of money, whereas money is usually a representative of the value of a commodity. The essential meaning of trade - the circulation of commodities - is lost, and along with it the characteristics of, and the contrast between, commodity and money. This contrast reappears only when speculation ceases, because the market has been cornered, and suddenly money has to take the place of the profane commodity which is no longer available. Just as money plays an evanescent role in the circulation process, so does the commodity in commodity speculation, Similarly, speculation turns over much larger quantities of commodities than really exist, just as more money is turned over on paper than is actually available.[5]

Eventually, of course, all futures trading in commodities must be followed by a real transfer of commodities from producers to consumers ; there must be real trading operations rather than speculation, and indeed these operations are a precondition for speculation. A series of futures operations has to begin with a producer (or his agent, the merchant), and terminate with a consumer (for example, the miller). We can regard the matter in the following way : some part of the stock of commodities always remains at the disposal of the speculators, serving merely as a reserve stock whose composition naturally varies, which would otherwise be stored elsewhere and would be at the disposal of other capitalist agents, not the speculators but producers and merchants, and would eventually reach the consumers. This stockpile must always be of a certain minimum size, to avert the danger of the market being cornered and rings being formed.

When speculators get their hands on these commodities, a whole new wave of buying and selling begins. This sequence of purchase and sale transactions is purely speculative; its object is to reap a marginal profit. These are not commercial operations, but speculative dealings. The categories of purchase and sale do not have the function, in this case, of circulating commodities, or moving them from producers to consumers, but have taken on an imaginary character. Their object is the acquisition of a marginal profit. The price of a commodity which a merchant sells on the exchange already includes the normal trading profit. If the manufacturer had sold it directly, he would simply have acted as his own dealer and pocketed the trading profit himself. The exchange, however, buys and sells in a purely speculative fashion, and speculators make a marginal gain, not a profit. If one gains, another loses. Nevertheless, this continuous chain of transactions ensures that it is always possible to convert a commodity on the exchange into money, and thus permits, to a certain extent, the investment of money in the commodity, and its reconversion into money at any time. Hence, a commodity which is dealt in on the exchange becomes suitable as a security for money which is temporarily idle. The banks, therefore, can use their capital in a new way by underwriting such commodities, or carrying them on a time basis, up to a certain proportion of their price. But when bank capital is used to participate in trading operations, it is used in the appropriate form, as interest-bearing capital. The commodities into which it has converted its money can be reconverted at any time into money. A well-managed bank will never tie up more money in these commodities than it can reconvert even under the most unfavourable conditions. The bank can be sure of recovering its money because there exists a commodity exchange in which a continuous round of buying and selling, which constitutes speculation, goes on. Consequently, the bank's money is not tied up, but remains money capital which has been invested in accordance with banking practice only in interest-bearing investments. Nevertheless, the entry of bank capital into this field provides both speculators and merchants with opportunities for expanding their operations. They can now purchase commodities without paying the full price in cash. Instead, they only need that amount of money which will cover any possible marginal differences, the balance being supplied by the bank. For speculators, this is tantamount to an expansion of their operations. Speculation is thus encouraged even if the price differentials are slight, provided the volume of trading grows; and so indeed the number of transactions steadily increases, while price differentials diminish.

An entirely different, and much more interesting, question concerns the effect which bank capital has on trade. Traders too can now have commodities underwritten, and need only pay interest on the borrowed capital. But, profit is not produced in trading. Trade only realizes the average profit corresponding to the size of the capital employed. Since the trader now has access to a larger volume of credit, he need only use a small capital of his own to turn over the same volume of commodities as before. The trading profit on his own capital is consequently spread over a larger quantity of commodities, thus reducing the commercial mark-up on the price of these commodities. Since trading profit is only a deduction from industrial profit, the latter will increase proportionately, while the price of the commodity for the consumer remains the same. The incursion of bank capital thus has three consequences : (1) it increases industrial profit; (2) it reduces commercial profit, both in the aggregate and per unit of commodity; and (3) it converts a part of the commercial profit into interest. This last is a necessary consequence of the substitution of bank capital for a part of commercial capital, which has been made possible by commodity exchange trading.

It should be noted here that, with the exception of consumer credit, interest is always a portion of profit or ground rent. Nevertheless, it is also important to observe that borrowed capital which is employed in production serves as industrial capital, and therefore produces a profit. Since it only receives interest, it increases the industrial capitalist's profit by the difference between the average profit and the interest paid on the borrowed capital. In trade, where no profit is produced, but commercial capital has to be paid the average rate of profit out of the general fund of profit, bank capital works in a different way. It receives interest, but produces no profit for the merchant, who receives the average profit on his capital, excluding the capital borrowed from the bank, plus the interest on the latter, which he then pays over to the bank. Trade now requires less commercial capital and consequently a smaller amount of profit. The profit thus saved remains with its producer, industrial capital. Bank capital functions here like any other progressive measure which reduces commercial costs. The different effect is due simply to the fact that industrial capital produces surplus value while commercial capital does not.

This tendency is reinforced by another circumstance. Futures operations on the exchange create a stable market for those commodities in which they deal. The producer or importer can always sell his commodities, and so the circulation time of his capital is reduced. As we know already, however, every such contraction of circulation time releases capital. Hence, in this way too, the futures trade reduces the amount of capital required to carry out purely commercial operations, the circulation of commodities, which served only to realize profit, not to produce it.

The futures trade is the most satisfactory form for all speculation, since every kind of speculation is a way of taking advantage of price differences which occur over periods of time. Speculation is not production, and since time represents a sheer loss to a speculator unless he is engaged in buying or selling, he must be able to exploit immediately all price differences, including those which will occur in the future. He must therefore be able to buy or sell at any moment, for any future moment of time, and this is precisely the essential characteristic of futures trading. In this way speculation creates a price for every instant of the year. It thus gives manufacturers and merchants the possibility of avoiding the unforeseen consequences of price movements, of protecting themselves against price fluctuations, and of passing on the risks of price changes to the speculators. The manufacturer of unrefined sugar is willing to pay 100,000 marks for beets today, when he can sell the unrefined sugar on the exchange for 130,000,000 marks, for delivery on a stipulated future date. If he sells unrefined sugar at this price today, he will not be affected by any ensuing price fluctuations and will have secured his own profit. Futures trading is thus a means by which industrialists and merchants can confine themselves to their proper function. A part of the reserve capital which would otherwise be needed as an insurance against such price fluctuations, and thus tied up in industry or commerce, is thereby set free. Part of it is now used for speculation on the exchange, but since such capital is more concentrated on the exchange, it may be smaller in total than the capital which was dispersed in small units among individual industrialists and merchants.

Capitalist profit originates in production and is realized in circulation. It is natural that both producers and merchants should try to insure their profits against fortuitous price fluctuations occurring during circulation, when production has long since ended, and the amount of profit for the producer, and for the merchant who has already bought the commodity, is settled. At a certain stage of development, and for those commodities which are liable to particularly large and unpredictable price fluctuations because the output of them is governed by natural (for example, climatic) conditions, futures trading serves this aim. It smoothes out, so far as possible, the price fluctuations resulting from speculation, but can only do so by creating smaller and more frequent oscillations. This speculation, which is completely senseless from the standpoint of society, appears necessary because it brings about the required volume of participation by buyers and sellers, so that the necessary quantity of commodities is always being traded. This insurance against price fluctuations brings the market price increasingly close to the price of production. A specific class of capitalists, the speculators, is formed, who assume the burden of these price fluctuations. The question is: how does their capital realize its value?

In dealing with speculation in securities, we saw that this capital produces a marginal gain. The profit of one speculator is the loss of another. As a rule it is the large speculators, who can afford to wait, and can themselves influence the trend of prices, and the knowledgeable insiders, who profit at the expense of small speculators and outsiders.[6] The only problem which remains is whether speculators also get a risk premium. The risk premium is frequently alluded to, but very little studied. The first thing to establish is that the risk premium is not the source of profit and cannot explain it. Profit originates in production and is equivalent to the surplus value incorporated in the surplus product of the worker, which has cost the capitalist class nothing. Varying degrees of risk, or to put it another way, varying degrees of certainty that the profit which originates in production will actually be realized in circulation, can only bring about variations in the distribution of profit. Those branches of industry which have a higher risk, which must express itself in greater losses, seek higher prices so that in the end the rate of profit on their capital will be equal to the average rate of profit. It is clear that in so far as the special circumstances prevailing in any branch of production tend to reduce its yield, these circumstances must be offset by a level of prices high enough to assure the equality of the rate of profit. Thus, the price of optical lenses must include the cost of the glass which is spoilt during the pouring process. They form part of the cost of production. Similarly the average amount of damage and wastage which occurs while commodities are in transit to the market must be included in their price. The position is entirely different in the case of risk arising from fortuitous events in the course of circulation, which alter the costs of production themselves. For example, if there is a product still on the market, which was manufactured with old machines, while new ones allow it to be produced in half the time, there is no compensation for such a 'risk'. The sellers of this product will have to bear the loss.

The same conditions apply in the case of products which are most frequently dealt in on the futures market. The uncertainty may arise, for example, from the fact that the price of German grain is determined not only by the outcome of the German harvest, that is, by the German costs of production which would be directly expressed in the price, but also by American, Indian, Russian, etc. costs of production. For these price factors, there is no adjustment in the price of German grain.[7]

In so far as large, unforeseen fluctuations occur in circulation, the capitalists in such a branch of production must maintain reserves which will enable them to cover losses arising from price fluctuations, and to continue their production without interruption. This reserve fund is a part of the necessary circulation capital, and an average rate of profit is calculated for it. The profit imputed to it may therefore be regarded as the risk premium. Productive capitalists may still need such a reserve fund even when the futures trade has developed, for the latter cannot eliminate in any way those price fluctuations which result from a change in the conditions of production. The impact of the world market upon domestic prices must be borne by the producer.

The commodity market can insure only against those fluctuations which arise in the course of circulation. The miller insures the price at which he sells flour on a given day by buying grain on the same day. The grain dealer insures his profit by selling the grain which he has bought today, on the commodity exchange, for delivery on an agreed future date. The insurance consists in the fact that he ensures a definite current price for a later date when he will actually have to meet his obligation. In other words, purchase and sale have taken place concurrently, rather than independently and unilaterally, for the merchant or producer. This presupposes, however, that there is a large and constantly receptive market such as the futures trade creates, and along with that, agents who do not seek insurance for themselves, but anticipate the later state of the market; in short, speculators who take over the risk from the merchant who has insured himself. Their profit, therefore, is not a risk premium, but a marginal profit, which must be compensated by a corresponding loss. This characteristic of speculative gains has as its consequence that professional speculators only thrive when large numbers of outsiders participate in speculation and bear the losses. Speculation cannot flourish without the participation of the `public'.[8]

Increasing concentration gradually makes this kind of insurance unnecessary. For a commercial enterprise which has become sufficiently large the favourable and unfavourable circumstances tend to balance out. The large commercial firm provides its own 'insurance' and does without the futures market. Furthermore, the small speculators are gradually forced out because they have to foot the bill more and more frequently.[9] The development of shares, and of speculation in securities, draws them away from the commodity exchange. Finally, the syndicates and trusts bring to an abrupt end speculation in those commodities which they control.

If we ask which business circles find the futures market necessary the answer is that the medium-size merchant has the most pressing need of it. It also has a certain utility for the producer to the extent that he would otherwise be obliged to undertake these important commercial functions himself. This will be the case if the processing of goods is already done by large capitalist enterprises, while the production of raw materials remains fragmented. In these circumstances the commodity exchange provides the necessary concentration of the products. A good example is to be found in the period when modern commercial milling was developing. The commodity exchange brings about this kind of concentration more quickly and more thoroughly than would be the case if a wholesale trade had first to be developed. The futures market is particularly desirable for commerce in those products which have a long circulation time, are produced by widely scattered plants which are difficult to supervise, with a variable yield which is difficult to _ anticipate, and hence are characterized by considerable, irregular price fluctuations during circulation.

Once futures trading is well established, participation becomes increasingly necessary for both merchants and producers, because the futures market is a major factor in price formation. On the other hand, if the futures trade were limited to the professional traders, it would be deprived of its most important function; namely the possibility of insuring oneself by unloading the losses due to price fluctuations upon the speculators.

Since speculators have no desire to hold on to speculative objects for any length of time, it is evident that every speculator is always a seller as well as a buyer. The bearish speculator, selling a commodity, will become a buyer of it in order to cover himself. But he buys and sells at different times and takes advantage of price fluctuations within this period of time, whereas the security of real trading consists precisely in avoiding such fluctuations, thus allowing sale and purchase to take place at the prices which prevail at a given time.

The speculator takes advantage of price fluctuations which are produced, not by him, but by the actual trade in goods. Such fluctuations may arise either from a fortuitous relation between supply and demand, or from more profound changes in the cost of production of a commodity. Supply and demand by the speculators then change the price level further, and produce fluctuations which must in the end cancel each other out just because every speculator is a buyer as well as seller. Naturally, this does not prevent one speculative trend - for example, a 'bullish' trend - from becoming dominant for a time, and so long as this trend persists the price will be higher than the actual trading in goods would dictate. Thus speculation causes more frequent, and therefore, in many cases, smaller price fluctuations, which cancel each other out in the long run.

The futures trade concentrates all business in one place, and gives the wholesale merchants in the vicinity of the exchange a preponderance over the provincial merchants, who are gradually disappearing.[10] But it also makes possible, on the commodity exchange itself, the entry of previous. outsiders, who now compete with the old established houses. That is why the introduction of the futures trade frequently meets with opposition from the old professional merchants. The futures traders, by and large, are less qualified than the traditional professional merchants, and the participation of bank capital enables people who have little capital of their own to become involved. Yet even here concentration occurs, on a new basis, and in general one has the impression that the participation of mere speculators, and of outsiders, in the futures markets is declining.[11] Conversely, the abolition of the futures trade would strengthen the position of the large merchants who can do without this insurance.

One of the dangers of futures trading lies in the possibility of 'cornering'. If the seller does not deliver the commodity on the specified date, the buyer has the right to buy it on the market itself, on the seller's account. If the available supply of the commodity does not meet the demand, because the buyer has previously had the available stock bought up, very high fictitious prices will result, determined entirely by the decisions of buyers, and the sellers are then at their mercy. Cornering is all the easier the smaller the available stocks of the commodity. This situation can also be contrived artificially if the terms of delivery in futures trading specify a very high standard of quality for the commodity. Conversely, if the standard is lowered cornering is made more difficult. Cornering is usually possible only in special circumstances and for brief periods; for example, when grain stocks are low just before the harvest, and most of the old supply has already been sold. But unusually high prices generally cause supplies to appear on the market which were thought to have been long since consumed. If these new supplies exceed the demand from the buyers, the `corner' collapses. In general, even successful 'corners' only involve the expropriation of groups of speculators who are outsiders, and they have only a slight effect on the actual commerce and the real prices.

As is well known, the German Stock Exchange law of 22 June 1896 has partly abolished the futures trade, and partly made it more difficult. The grain trade has greatly declined, especially since court decisions jeopardized delivery contracts regulated by commercial law. Hence 'the circle of people taking part in the delivery business has grown even smaller until it scarcely suffices to carry on the trade'. This has also increased the difficulties of the insurance business. What have the consequences been?

Already there are some large firms which believe that, because of the difficulties involved, they can get along better without insurance on the futures market, and these firms, helped by several years of stable and even rising prices, have achieved quite satisfactory profits. But, generally speaking, the more reliable firms regard such procedures as dangerous speculation and prefer to content themselves with a smaller but more certain profit. . . . In the present situation it is quite evident that the two or three large firms referred to are capturing an increasing share of the whole business. In this case, as in the case of banking, legislation has favoured concentration. But it is very doubtful whether the trend in this direction will, in the long run, really satisfy those who praise the success of this legislation so highly today. Widespread competition would provide far better guarantees of more favourable prices to farmers than do prices dictated by giant firms.[12]

The provincial merchants are all the more interested in the delivery business because the sale of futures enables them to offer their goods as collateral on more favourable terms. Since these commodities have already been sold at a firm price, they cannot lose in value, should prices fall. The merchant can thus once again obtain capital and is in a position to buy new lots of grain from the producers at good prices.[13]

By reducing the circulation time for productive capitalists, and assuming the risks, speculators can have an effect upon production itself. Before trading in futures was introduced it was mainly the partial producer who had to bear the risk. When this is no longer necessary, and there is no further need to hold stocks of the commodity, which are now concentrated at the location of the commodity exchange, this restricted productive function ceases to be enough. By combining his business with another one the partial producer becomes a full-fledged entrepreneur. He can do this all the more easily because a part of his circulation and reserve capital has been set free. It is in this way that independent wool carders have become superfluous, because the risk which they had to carry previously has now been transferred to the futures trade. They now become spinners themselves; or conversely, spinners merge with wool-carding firms.[14]

Futures trading saves the producers circulation capital, first by reducing the circulation time, and second by reducing their self-insurance (reserve fund) against price fluctuations. This strengthens the capital resources of the large enterprises, which are the principal beneficiaries of the futures market. The capital which is thus set free becomes productive capital.

The division of labour within enterprises is not determined solely by technological considerations, but also by commercial factors. Many partial processes, especially the conversion of raw materials into semi-manufactured goods, remain independent simply because the partial producers also perform important commercial functions. They take over the raw materials from the producers or importers, with whom they share the risks involved in price fluctuations. This independence becomes superfluous if the manufacturer can protect himself against risk without their help by resorting to the futures market. He then processes the raw material in his own plant. The elimination of the commercial function renders the technological independence superfluous. There is also a tendency here to eliminate the middleman. It is true that commodity markets give the appearance of multiplying trading operations, but as we have seen, such purchases and sales are forms of speculation, not trading operations.

We have seen that the futures trade is a means of enabling bank capital to participate in commodity trading by the provision of credit, either against collateral, or through contango operations. But the bank can also use its great capital resources and its general overview of the market to engage in speculation on its own account with comparative safety. Its numerous connections, extending over a wide range of futures markets, and its knowledge of the market, give it the opportunity to engage in safe arbitrage dealings, which bring considerable profits because of the large scale on which they are conducted. The bank can carry on such speculative dealings all the more safely the larger the quantity of the commodity that it controls and the greater its influence over the supply. That is why the bank tries to extend its control over the commodities which are dealt in on the futures market. The bank tries to obtain the commodity directly from the producer and to exclude other dealers. It either buys the commodity outright, or operates on a commission basis; and in the latter case it can afford to accept a much smaller profit, in competition with other dealers, because it is also able to gain speculative profits, and to employ a far larger volume of credit. The bank uses the influence it possesses through its other business connections with industry, in order to take the place of the merchant in relation to the industrialist. Once the bank has control of the marketing, the mutual relations between the bank and industry become closer. The bank's interest in the price of the commodity is no longer exclusively that of a speculator; it desires a high price in the interest of the enterprise with which it has all kinds of credit connections. At the same time, since the bank wants to acquire the greatest possible control over the commodity, it seeks connections with as many enterprises as possible, and so acquires an interest in an entire branch of industry. The bank's interest, therefore, is to protect this branch of industry as much as possible against the impact of a depression, and so it will use its influence to accelerate the process of cartelization, which will, to be sure, make the bank's speculative activity on the domestic market (though not on the world market) superfluous, but will amply compensate it by participation, in various ways, in the cartel's profits. This is a development which has occurred whenever historical factors have prevented the emergence of a strong and effective wholesale trade, either generally or in a specific branch of production. In Austria, for example, the banks penetrated the sugar industry, and with somewhat less success, the oil industry, through commerce, and became the animators of the trend towards cartelization in these industries, which are now heavily dependent upon them. Thus the futures trade encourages a development, which is in any case a general trend, that culminates in the elimination of the futures trade itself.

Monopolistic combines are completely eliminating the commodity exchanges. This is self-evident, because they establish long-term prices and thus make it impossible to take advantage of price fluctuations. The `division over time', of course, continues as before, which would only surprise someone like Professor Ehrenberg! The German coal syndicate and the steel combine have made exchange quotations at Essen and Düsseldorf purely nominal.

Thus the Essen coal exchange is nothing more than a folder containing a list of coal quotations which is carried regularly from the coal syndicate building to the hall of the exchange, while the whole so-called Düsseldorf commodity exchange consists of an epistle which an industrialist conveys at regular intervals to the governing body of the exchange.[15]

The same is true of the futures trade in alcohol:

It has been noted quite correctly that a part of the trade through the central office (for the regulation of alcohol sales) had become insignificant, and that a part of the wholesale trade no longer found a place in the syndicate. This is the part which is mainly concerned with commodity exchange business. The commission and brokerage business, and all the merchants who had no direct dealings with producers, have become superfluous with the creation of the syndicate and have been eliminated.[16]

The actual traders have been transformed into agents of the syndicate, working on a fixed commission (30 to 40 pfennigs), and it seems that their number has been kept more or less constant. In 1906 there were 202 such agents, selling about 40 per cent of the output.

To the extent that the profits of the commodity exchange derive, from commercial profit, they accrue to producers if the exchange is eliminated. This is also the case with those profits which arise from differences between the time of production (the 'working season') and the time of consumption. For example, the price of alcohol is higher in summer than in winter. At the end of the working season, the output is turned over to dealers. Summer prices are higher because they must cover storage costs, loss of interest, etc. But the distillers must sell as soon as possible after the end of the season, and the supply becomes excessive. Conversely, there is no production during the summer, the supply cannot be increased, and the dealers have enough capital not to be obliged to release the commodity at an unfavourable time. The difference between the capital resources of the dealers (who also have at their disposal bank capital against collateral or on a contango basis) and the capital resources of the often small-scale producers plays a role in determining the price; not, of course, the price which consumers pay but that which is paid by the dealer to the producer. These conditions can be changed by a cartel of producers in their own favour and to the detriment of merchants. Mr Stern, the managing director of the Zentrale für Spiritusverwertung, expresses this concisely when he says : `The syndicate allows the price to rise after the end of the distilling season to the advantage of the distillers; the free market, to the advantage of speculators.'

Cartelization is particularly advantageous in agricultural production - and the agricultural producers' 'co-operatives' are often nothing but embryonic or small-scale cartels - for it is precisely here that capitalist regulation by the price mechanism is least appropriate, and the anarchy of capitalist society is least compatible with the natural and technical conditions of agricultural production. By contrast with its success in industry, capitalism cannot realize the ideal of a rational system of production in agriculture. This contradiction between capitalist price formation and the natural and technical conditions of agricultural production is brought to a head by the existence of a futures market, which makes price fluctuations continuous. Hence there is a tendency to blame the futures trade, with its frequently dramatic changes in the movement of prices - brought about, or at least exaggerated, by speculation - for a situation which is the fault of the whole capitalist mode of production. If this is demagogically exploited it can easily lead to a vigorous movement against the futures trade among agricultural producers.[17]

In so far as a cartel is able to diminish economic anarchy it is particularly effective in the domain of agriculture. Agriculture is inherently subject to extreme variations of output from year to year, in accordance with natural conditions, and the volume of products directly affects prices. An abundant yield exerts a strong deflationary pressure on prices, and increases consumption for that year. The depressed prices will result in production being restricted in the following year. If there is, in addition, a poor harvest, shortages will occur, driving up prices sharply and reducing consumption drastically. Small-scale, fragmented production is more or less helpless in the face of such phenomena. A cartel, on the other hand, has a much greater influence upon price formation, because it is able to stockpile in good time, and this, together with the regulation of production, enables it to prevent excessive price fluctuations. It is true, of course, that the capitalist cartel uses this power in order to maintain high prices over the long term by reducing output, but none the less it creates more stable conditions for agricultural producers.

Mr Stern, the managing director mentioned earlier, observes :

The syndicate can store a very considerable, though not unlimited, surplus. In a free market, an excessive surplus causes a fall in prices, which only stops when they have fallen below the cost of production. The syndicate can separate the export price from the domestic price. If the available surplus is directed abroad, the price level for the entire output on the free market depends upon the income from exports. For example: in 1893-4 there was a surplus of 20,000,000 litres [of alcohol], by no means a dangerous surplus, but enough to depress the average price for that year to 31 marks. Had the syndicate exported an extra 10,000,000 litres that year, sustaining a loss of 5 to 8 marks per 100 litres, or a total of 500,000 to 800,000 marks, on these exports, then the whole distillery trade would have been spared a very considerable loss, for if I assume that the price would have been 5 marks higher for the output as a whole, then taking into account the loss of 500,000 to 800,000 marks on exports, the value of the entire output of some 300,000,000 litres would have been increased by some 15,000,000 marks.

The exchange did not allow stocks to increase substantially, and very quickly offset any surplus by a decline in production. The surplus stocks of alcohol at the end of the season (30 September) during the period when a free market prevailed was regularly about 30 million litres. In several years the stocks were smaller, falling on one occasion by 9 million litres, but only once, in 1893-4, were they larger, by some 15 million litres. These fluctuations of 10 million litres or so, up or down, amount to only 3 to 5 per cent of total output, but they are enough to put an intense pressure on prices. Even small surpluses make the speculator nervous, and he gets rid of them when he anticipates a good harvest. The apparent equilibrium of the exchange was fundamentally nothing but a state of anxiety and nervousness.

He continues by explaining why he does not like equalization through the exchange: 'The exchange achieves equilibrium at low prices' - whereas his employers, the cartelized distillers and alcohol producers only desire equilibrium at high prices.

Many advocates of the futures trade also argue that it is an instrument for the more precise determination of prices. The futures market embraces a larger number of expert participants and the outcome of so many expert opinions must generally be more accurate than those of a smaller number. But the quality of being a good grain dealer does not endow a person with the mystical ability to foresee the size of the coming harvest. Such an ability is possessed neither by a single grain dealer, nor by any number of them, however great. Perhaps the saying 'Understanding has always been confined to the few' does not apply to the gentry of the commodity exchange, but whatever other Old Testament qualities they may possess, they are certainly not endowed with the gift of prophecy. In reality, futures prices are purely speculative. Even a syndicate like the alcohol syndicate, which undoubtedly has a direct influence upon domestic price formation, and would therefore be in a position to make tenders for futures, does so with extreme reluctance. The managing director of the alcohol syndicate, Untucht, declares :

We have always had certain difficulties with futures tenders. If it had been up to us we would have been more cautious about them. . . . When someone offers a product, he must know in advance how much of it he will have in order to fix a price. Naturally, we can determine this only after several months of the season have passed. Even then, we cannot be sure of avoiding mistakes, for it is the output of the spring months which determines whether the output for the entire season will be large or small; and this is especially the case when the overall situation is not too clear. One must concede, however, that the head office of the syndicate, which has an overall view of production, and controls about 80 per cent of the output, has more reliable information than is available to the commodity ex change operators.

The reason for wishing to know futures prices is that the processing industry must know the price of its raw materials when it has to make tenders. If the raw materials season does not coincide with the time when the processing industry orders materials, it will need to know futures prices, especially in the case of commodities subject to sharp price fluctuations. In this way the processor transfers the risk to the supplier of his raw materials. But syndicates also use their power to free themselves of this risk, either by maintaining stable prices, or by setting futures prices so high that in that way too they avoid all risk. Herr Untucht is quite frank about it: 'Since we face uncertain conditions, we have been very prudent [sic !] and set our prices too high rather than too low.' And in a memorandum by the syndicate, it is noted :

In the first four years of the syndicate's existence, futures tenders were issued promptly at the beginning of each business year, but since 1904-5 we have adopted the practice of not quoting general supply prices until we have formed some idea of how production is developing.

In the German stock exchange inquiry, those members of the commission who were not businessmen themselves (like Privy Counsellor Wiener, and the Independent Conservative deputy, von Gamp) took the view that the securities business was legitimate, but market transactions based on marginal price differences were not, whereas the businessmen consistently rejected this distinction. The former simply could not understand that in all capitalist transactions the use value of a commodity is a matter of complete indifference, and at most a regrettable necessity (a conditio sine qua non). The pure margin business is actually the most complete expression of the fact that for the capitalist only exchange value is essential. The margin business is indeed the most legitimate offspring of the basic capitalist spirit. It is business-in-itself, from which the profane phenomenal form of value - the use value - has been abstracted. It is only natural that this economic thing-in-itself should appear as something transcendental to non-capitalist epistemologists who, in their anger, describe it as a swindle.[18] They do not see that behind the empirical reality of every capitalist transaction there stands the transcendental business-in-itself, which alone explains the empirical reality. The remarkable thing is that the protagonists of use value themselves forget the concept of use value as soon as they .come into contact with the exchange. All transactions are then regarded as equally real, whether they concern titles to income or commodities, provided the titles or commodities are actually delivered. They ignore completely the fact that the circulation of securities is quite immaterial to the metabolism of society, whereas the circulation of commodities is its lifeblood.

An example will show the idiocies which result from this indifference to use value. In order to be exchangeable a commodity must conform to certain fixed and definite standards; a specific weight for a given volume, a particular colour, aroma, etc. Only then does it constitute the 'type' or brand suitable for delivery. The 'type' used in the coffee futures trade in Hamburg was of inferior quality. Accordingly, all superior brands of coffee were adulterated by adding black beans, kernels, etc. In Berlin the type was superior, so that the additives incorporated in Hamburg had to be carefully removed in order to make the coffee fit for delivery. A most remarkable instance of unproductive capitalist costs ![19]But there is still better to come. In Hamburg, the market was cornered, and supplies of coffee became scarce. The only coffee available was that mixed with kernels, etc. Superior brands, because they did not conform to the quality required, had to pay a premium. In other words, a fine had to be paid for supplying the better grades of coffee! But this is a consistent application of capitalist logic; for the buyer, the member of the combine, is not at all concerned with use value, but exclusively with exchange value. Exchange value determines the whole of economic action, the aim of which is not the production or supply of use values, but the achievement of profit.[20]

The apologists of the capitalist mode of production attempt to demonstrate the necessity of all its particular features by identifying the specific economic, and therefore historical, form which results from capitalist production with its technological content, which is always necessary and permanent, whereas the form is transitory; and on the basis of this erroneous identification they then infer the necessity of the form. Thus they insist strongly that every social labour process must be managed and supervised from above, in order to demonstrate the necessity of capitalist management, which arises from private ownership of the means of production, and hence the necessity of this private ownership itself. They regard commerce not as a specific act of circulation but as a way of distributing goods among consumers. Ehrenberg, for example, explains trade as distribution through space and speculation as distribution through time.[21] And since distribution, naturally, is always necessary at a certain level of technological development, so trade and speculation are always necessary, their elimination an impossibility, a Utopia. If 'necessary' is then identified with 'productive', one arrives with Ehrenberg at the grotesque conclusion that speculation is just as much a branch of production as agriculture. And why not, when land and shares alike yield money? Commerce is simply confused with transportation, packing, sorting, etc., and speculation is identified with storage; operations which are, of course, essential in any technologically developed mode of production. Even a sagacious person like Professor Lexis, who certainly deserves to be taken more seriously than Ehrenberg, becomes confused in his testimony concerning the futures trade[22] because he too fails to see that, unlike real trade in commodities, market trading in commodity futures is a specific form of economic activity. He ignores the role of speculation, and tries to demonstrate that the futures trade is a necessity, by attempting to depict it as genuine trade.

His opponent, Gamp, then has no difficulty in showing that the futures trade creates an enormous number of commodity turnovers which contribute nothing whatsoever to the distribution of commodities from the producer to the consumer. Lexis points out that futures trading makes it easier to find buyers. That is correct; only this 'buyer' is not usually the consumer, but another 'seller', namely a speculator. It is quite mistaken to attempt to derive trade, especially the futures 'trade' and speculation in futures, from some absolute requirement of distribution. Trade only meets distribution needs in a capitalist society, and even within capitalist society it is only a transitory necessity, as its elimination by syndicates and trusts demonstrates. Anyone who regards trade as 'productive', that is, as not merely realizing profit but producing it, faces an insoluble dilemma; he lauds the saving in trading costs as one of the advantages of cartelization, but then implicity admits that this is only an advantage if commercial operations produce a deficit, or in other words, are unproductive.

In fact, the futures trade is only a necessity in so far as: (1) it allows the productive capitalists (industrialists and merchants) to reduce their circulation time to zero, and thereby to protect themselves against price fluctuations during the period of circulation by transferring the burden to the speculators whose specific function it is to cope with them; (2) it permits money (bank) capital to replace commercial capital in carrying out a part of the commercial functions, the return on this part of the operating being interest, rather than average profit, with the difference between them going to increase industrial (entrepreneurial) profit; and (3) futures trading allows money capital - and this is closely related to the second point - to be converted into commercial capital while retaining its character as money capital, which opens the way for bank capital to extend its domination over trade and industry, and to impose upon an ever larger part of productive capital' the character of money capital which is under the control of the bank.


[1] Mr Russel of the Diskontogesellschaft offers the following definition: The essence of mercantile speculation consists in anticipating changes in business conditions in order to take advantage of them when they occur, through futures trading' (Börsenenquete, vol. I, p. 417).

[2] Börsenenquete, vol. II, p. 2072.

[3] The use of such artificial methods has been the source of many abuses and difficulties, which disappear when there exists a real and easily verifiable interchangeability, as for example in the case of spirits (alcoholic content) or, to some extent, sugar (degree of polarization).

[4] 'This special form of the futures trade is not only designed to facilitate actual trading but also serves, in the final analysis, to give the capitalist or speculator who possesses capital which is available for the time being, the opportunity to invest it temporarily or for a longer term, in a given branch of trade, even if he is completely ignorant of the commodity concerned or of the procedures, of that trade. This capitalist ... differs from the grain merchant mainly in the motive for his activity.' The latter wants to deal in grain, the former to make a profit out of price fluctuations. The capitalist here assumes the risk. (See Fuchs, 'Der Warenterminhandel', in Schmollers Jahrbuch für Gesetzgebung, 1, 1891, p. 71.) It should be added that the profit motive is common to all capitalist activities; only the means by which profit is acquired differs.

[5] Thus Offermann reports that in 1892, 2,000 bales of wool were actually sold on the Le Havre Wool Exchange, whereas 16,300 bales were sold on the futures markets. Similarly, futures trading in cotton was ten times greater than the actual trade. The harvest yielded 8 to 9 million bales, but some 100,000,000 bales were turned over on the futures market (Deutsche Börsenenquete, vol. III, p. 3368).

[6] Nevertheless, the power of insiders in commodity futures trading should not be exaggerated: 'If it were possible to foresee the future state of the market, or the appropriate prices, by reading market reports, that would be a splendid thing. From long experience I can only say; intuition is everything. It is admirable to be well-informed, but that is just a catchword, it doesn't lead anywhere, and merchants frequently make mistakes . . . . The merchant is as ignorant of these things as the farmer, and if he studies all the reports, he becomes more confused than ever, and things usually turn out differently', the dealer Domme frankly admits (Deutsche Börsenenquete, vol. II, p. 2858).

[7] The protective tariff does not equalize the price, but simply raises the German price above the world price by an amount which brings the grain producer a profit even when the price on the world market is low.

[8] Mr Kampf, chairman of the Berlin Chamber of Commerce, has this to say about participation in the futures trade generally: 'When the waves are high everyone takes part, but when they are not very high, it is only the wealthier people who do business of this kind' (Deutsche Börsenenquete, vol. III, p. 2459).

[9] There is a delightful dialogue between Mr von Gamp and Mr Horwitz concerning the pain that a businessman is morally obliged to feel at the thought of the losses suffered by small speculators. But that is not in the nature of the businessman. Either do away with him altogether, or let him retain his proper nature (Deutsche Börsenenquete, vol. III, p. 2459). For the ethical school of political economy the exchange has above all the function of a moral public lavatory. Its other functions remain concealed from them.

[10] See Deutsche Börsenenquete, Report of the Commission, p. 90.

[11] 'The small non-professional dealers have withdrawn from the coffee trade, which is now dominated by large syndicates' (Deutsche Börsenenquete, p. 2065). The expert, van Gülpen, explains this as follows: 'Much can be achieved with large capital resources if they are directed to trade in single articles.'

The big London grain firms oppose the introduction of futures trading because it would democratize the trade and they would lose their dominant position (ibid., p. 3542).

[12] H. Ruesch, 'Der Berliner Getreidehandel unter dem deutschen Börsengesetz', in Conrads Jahrbuch far Nationalökonomie und Statistik, Third Series, XXXIII, 1, 1907, p. 53.

[13] ibid., p. 87. Cf. also Landesberger's prediction of this development: `Significantly, the very largest grain merchants do not participate in futures trading, but arrange their own insurance. The abolition of futures trading is thus bound to result in a concentration of the grain trade in the hands of the firms with the largest capital resources, with the same necessity as the prohibition of futures trading in certain types of securities delivered this branch of securities trading into the hands of the large German banks.' op. cit., p. 45.

[14] Deutsche Börsenenquete, vol. III, pp. 3373 et seq. Testimony of Offermann.

[15] Berliner Tageblatt, 19 October 1907.

[16] Kontradiktorische Verhandlungen der deutschen Kartellenquete über die Verbände in der deutschen Spiritusindustrie. Testimony of the managing director of the central office for regulating the sale of alcohol, Bourzutschky.

[17] Landesberger is quite right when he says: 'Some important economic facts explain the farmers' opposition to the futures trade. Agriculture, more than any other branch of production, depends upon seasonal and geographical conditions of production. Hence its costs of production are less variable than in other sectors of the economy. This is also connected with the fact that capital is immobilized in agriculture, with the considerable mortgage burden on land, and with the difficulty, arising from natural conditions, of employing so extensively or successfully such important defensive measures as are used by other branches of production (specialization of production, temporary expansion or contraction of output) in order to counter the effects of a depression. In no other branch of production does the impersonal movement of the business cycle override to the same extent personal factors, namely, costs of production. For many decades now Central European agriculture has encountered extremely adverse business conditions . . . . The business cycle, however, is expressed in the futures trade. Commerce, which cannot avoid business fluctuations at both poles of its economic activity, in procurement and in distribution, is obliged to respond by developing a specific new function. The organ which performs this function is the futures trade, and its task is to depict as clearly as possible world market conditions, rendering them intelligible from an economic point of view. Purged of all errors and abuses, it would be a perfect mirror of business conditions. But in that kind of mirror agricultural producers would see mainly unfavourable market conditions; which explains the natural desire to smash the mirror.' Landesberger, op. cit., pp. 44 et seq.

It is well known that when any country prohibits trading in futures, the ban is circumvented by the merchants with large capital resources, and by speculators, who resort to futures trading in another country. Thus the cotton manufacturer, Dr Kuffler, tells us: 'In Bremen, where almost all the cotton importing business for central Europe is done, there is no trading in futures, yet each and every deal is based upon futures, that is, in Liverpool or New York.' (See the conference report of the Association of Austrian Economists, in Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. XI, p. 83.) Similarly, the ban on futures trading in grain in Austria has only led to the transfer of speculation to Budapest.

[18] The expert, Mr Simon, is therefore quite right in saying: 'The desire for marginal gain is the real basis of every business enterprise.' On the other hand, when the president of the Reichsbank, Koch, retorts that mercantile transactions differ from marginal transactions in that their object is to transfer a commodity from one hand to another, the rejoinder is altogether beside the point, and even Simon does not understand it. The only difference between these two types of transaction is that, in the one case, the profit is constituted by the average profit, while in the other, it is a marginal gain in the absolute sense of the term (Deutsche Börsenenquete, vol. II, p. 1584).

Bourgeois economics always confuses the social functions of economic actions with the motives of the actors, and ascribes the performance of these functions to the actors' motives even though they are, naturally, unconscious of them. Hence it fails to see the specific problem of economics: namely, to reveal the functional interdependence of economic actions which makes social life possible as the outcome of quite different motives, and then to understand the motivation of the capitalist agents of production in terms of these necessary functions themselves.

[19] Deutsche Börsenenquete, vol. II, p. 2079.

[20] Deutsche Börsenenquete, vol. II, p. 2135. In the following pages, similar examples are given for grain and alcohol; in the latter case rectified alcohol cannot be supplied in place of crude alcohol.

[21] 'Like primitive production and manufacturing industry, commerce and speculation are particular kinds of production. Commerce is that kind of production which has the task of overcoming local scarcity of any of nature's economic goods. Speculation, on the other hand, has the same task with regard to the scarcity of goods in time. From the economic standpoint of private industry, commerce makes use of geographical price differences, speculation of temporal price differences.

`Stock exchange opinion influences prices on the basis of all kinds of reports which stream into the exchange, some true, others false, some regarding what has already happened, others concerned with what will happen. The latter are discounted by stock exchange opinion in advance, according to their importance. If it takes advantage of low prices to build up stocks for the future, and high prices to make possible disposal over present and future stocks, it is operating productively, otherwise not.' R. Ehrenberg, `Börsenwesen', in Handwörterbuch der Staatswissenschaften, 2nd edn.

[22] Deutsche Börsenenquete, vol. II, pp. 3523 et seq.