Finance Capital, Hilferding 1910


Bank Capital and Bank Profit

The mobilization of capital opens up a new sphere of activity for the banks : share flotation and speculation. From a theoretical standpoint, it makes no difference whether these activities are combined with the payment and credit functions of a bank, or are handled by separate banking institutions. What is important is the economic significance of this differentiation of functions. In any case, the modern trend is increasingly to combine these functions, either in a single enterprise, or else in several different institutions whose activities complement each other, and which are controlled by a single capitalist or group of capitalists. In the final analysis, the factor which leads to the combination of these activities is that capital emerges in all of them as money capital in the strict sense, as loan capital which can be withdrawn at any time, in the form of money, from its current commitment. Even where this combination does not take place in a single enterprise, it is still to some extent the same money capital which performs all the various functions inasmuch as one enterprise makes it available to others. Only after an analysis of these various functions is it possible to investigate the sources from which bank capital draws its profit, and the structure of the relationship, in this sphere, between profit and capital (both the bank's own capital and the other capital which it has at its disposal).

We know that profit originates in production and is realized in circulation; and we also know that additional capital is required for the operations of circulation, the purchase and sale of commodities. A part of these operations is taken over by merchants from the industrialists, and becomes an independent function of one section of social capital, commercial capital. The capital used by merchants yields an average profit, which is simply part of the profit generated by industrialists in the process of production, that is, a pro tanto (proportional) deduction from the profit which would otherwise accrue to industrialists.[1] Circulation also requires a series of financial transactions (the maintenance of reserve funds, prepara­tion and despatch of payments, collection and payment of accounts, etc.). These accounting operations can be concentrated in order to economize labour, representing costs of circulation, and to reduce the amount of capital needed for such work.

The purely technical movements performed by money in the circu­lation process of industrial capital, and, as we may now add, of com­mercial capital, which assumes a part of the circulation movement of industrial capital as its own peculiar movement - these movements, if individualized into an independent function of some particular ca­pital that performs nothing but just this service, convert a capital into financial capital. In that case, one portion of the industrial ca­pital and of commercial capital persists not only in the form of money, of money capital in general, but as money capital which performs only these technical functions. A definite part of the total social capital separates from the rest and individualizes itself in the form of money capital, whose capitalist function consists exclusively in performing the financial operations for the entire class of indus­trial and commercial capitalists. As in the case of the commercial capital, so in that of financial capital, a portion of the industrial ca­pital in process of function in circulation separates from the rest and performs these operations of the process of reproduction for all the other capital. These movements of such money capital, then, are once more merely movements of an individualized part of industrial capital in the process of reproduction.[2]

The money trade in its pure form, which we considered here, that is the money trade not complicated by the credit system, is concerned only with the technique of a certain phase of the circulation of commodities . . . namely with the circulation of money, and the dif­ferent functions of money . . . following from its circulation. . . . It is evident that the mass of money capital with which the money dealers have to operate is the money capital of the merchants and industrial capitalists in the process of circulation, and that the operations of the money dealers are merely those originally performed by the mer­chants and industrial capitalists. It is equally evident that the profit of the money dealers is nothing but a deduction from the surplus value, since they are operating merely with the already realized values (even when they have been realized in the form of creditors' claims).[3]

In the course of development the banks have taken over the business of keeping accounts. The amount of capital required for this work is determined by the technical nature and the scale of the operations. On this capital the banks realize average profit just as merchants do on their commercial capital and industrialists on their productive capital.[4] This is the only part of bank capital, however, on which the profit can be described as average profit in the strict sense. The profit on the rest of bank capital is fundamentally different.

As a provider of credit, the bank works with all the capital at its disposal ; its own and that of others. Its gross profit consists of interest paid on the capital which it has lent. Its net profit - after deduction of expenses - is the difference between the interest paid to it and the interest which it pays on deposits. This profit is not, therefore, profit in the strict sense, and its level is not determined by the average rate of profit. Like that of any other money capitalist it arises from interest. The position of middleman that the bank occupies in credit circulation enables it to profit not only from its own capital, like any other money capitalist, but also from that of its creditors to whom it pays a lower interest than it demands from its debtors. This interest is only part of, or a deduction from, the average social profit prevalent at the moment. But unlike the profit of the merchant or the money-dealing capitalist it has no influence whatsoever in determining the average rate of profit.

The level of interest depends upon supply and demand of loan capital in general, of which bank capital is only a part. This level of interest determines the gross profit. In order to attract the greatest possible amount of money for their use, the banks in turn pay interest on their deposits ; and the amount of such capital at the disposal of any bank depends, ceteris paribus, upon the level of interest which it pays on deposits. Competition for deposits compels the banks to pay the highest possible rate of interest. The difference between the interest which the banks receive as creditors and the interest which they pay as debtors constitutes their net profit.

The process can be summarized as follows: the rate of interest is governed in the first place by supply and demand of loan capital as a whole, and this determines the gross profit of the banks, which they make by lending the money - their own and that which is deposited with them - at their disposal. The ratio between the bank's own assets and its customers' deposits is quite immaterial for the interest rate or the amount of gross profit. Of course, only part of the deposited money is actually at the disposal of the bank, while another part must be kept as a reserve fund, but this reserve, which earns no interest, is very small compared with the total sum. Competition among the banks determines the rate of interest which they have to pay to depositors, and on this rate, given the gross profit and expenses, depends the net profit. It is evident that what is important is not the banks' own capital, since their profits do not depend upon this, but the total loan capital at their disposal. The basic datum is the level of profit, and the amount of their own capital must be adjusted in accordance with it. The banks can convert into their own capital only as much of the total loan capital as their profits allow. For capital, however, banking is a sphere of investment like any other, and it will only flow into this sphere if it can find the same opportunities for realizing profit as in industry or commerce; otherwise it will be withdrawn. The bank's own capital must be reckoned in such a way that the profit on it is equal to the average profit. Let us assume that a bank has at its disposal a loan capital of 100,000,000 marks, and makes a gross profit of 6,000,000 marks and a net profit of 2,000,000 marks. If the prevailing rate of profit is 20 per cent, the bank's own capital can be reckoned at 10,000,000 marks, while the other 90,000,000 marks are available as deposits of its customers. This also explains why, when joint-stock banks are founded, or increase their capital, there is an opportunity to make promoter's profit, even though bank capital does not produce entrepreneurial gains (industrial profit), but only realizes interest. Since the bank's profit is equal to the average rate of profit, while the shareholders need only be paid interest, the possibility of promoter's profit follows, and if the bank has a dominant position on the money market it can take the whole, or part, of the promoter's profit, to strengthen its reserves. The reserves are, of course, the bank's own capital, except that from an accounting standpoint, the profit is attributed to the smaller, nominal capital. In turn, the reserves allow the bank to invest a larger part of its capital in industry.

The fact that the distinction between the bank's own capital and the capital deposited with it is immaterial so far as profit is concerned, and that the ratio of one to the other is not fixed, creates the impression that the amount of the bank's own capital is arbitrary, and allows it to be reckoned in such a way that the profit, although not really average profit itself, none the less becomes equal to it. If the banking system is already highly developed, so, that the available loan capital is at the disposal of the existing banks, it becomes very difficult to found new banks, because there would be insufficient outside capital available to them, or it could be attracted only after a fierce competitive struggle with all the other banks, the outcome of which would be very doubtful.

Bank capital is not only entirely different from industrial capital, but also from commercial and money-dealing capital. In the latter branches of activity the amount of capital is technically determined by the objective conditions of the processes of production and circulation. The magnitude of industrial capital depends upon the general development of the process of production, the extent of the means of production available, including natural resources and the ability to exploit them, and the available working population. The manner in which this capital is used, and the degree of exploitation of the working population, determine the amount of profit which is distributed in similar fashion to industrial, commercial, and money-dealing capital. In the latter two spheres, the amount of capital required is also determined by the technical conditions of the circulation process. Since circulation does not produce a profit, and simply represents costs, there is a tendency to reduce the capital applied in this sphere to a minimum. Bank capital, on the other hand, including both the bank's own capital and deposited capital, is nothing but loan capital and as such it is, in reality, only the money form of productive capital. The important feature is that the greater part of it has a merely formal existence, as a pure unit of account.

The same relation that exists between bank profit and the amount of the bank's own capital, is also to be found in the case of the profit which arises from issuing shares and from speculative activities. Promoter's profit, or the profit from issuing shares, is neither a profit, in the strict sense, nor interest, but capitalized entrepreneurial revenue. It presupposes the conversion of industrial into fictitious capital. The level of gains from issuing shares is determined, first, by the average rate of profit, and second, by the rate of interest. Average profit minus interest determines the entrepreneurial gain which, capitalized at the current rate of interest, constitutes the promoter's profit. The latter does not depend in any way upon the amount of the bank's own capital. The convertibility of industrial into fictitious capital depends solely upon the quantity of loan capital available which, while retaining the form of interest-bearing capital, is ready to be converted into productive capital. There must be enough money available for investment in shares. But a distinction must be made here: the conversion of existing industrial capital into share capital ties up only as much money as is necessary for the circulation of the shares on the stock exchange, and this in turn depends upon the extent to which these shares remain in 'safe hands' as long-term investments, or experience a very rapid turnover as speculative stocks. Alternatively, the issue of share capital may represent the founding of a new enterprise or the expansion of an existing one. In that case enough money capital is needed, first, to complete the turnover

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and second, in order to issue the shares themselves. The amount of loan capital available determines both the rate of interest, which is the crucial factor in capitalization, and hence the size of the profit gained by issuing shares, which is therefore independent of the amount of the bank's own capital. In the long term, nevertheless, the gain from issuing shares must equal the average rate of profit on that capital. On the other hand, the bank will tend to increase its own capital in order to enhance its credit standing and its security. The case of speculative profits is analogous. The participation of the banks in speculation does not depend upon the distinction between their own capital and that of their depositors, but upon the size of the total sum.

As we already know, however, both the provision of credit, and financing and speculation, give rise to a tendency towards concentration, and at the same time, to the endeavour to hold as much of the capital as possible as the bank's own capital. For unlike the borrowed capital, the bank's own capital is not subject to sudden demands for repayment, and it can, therefore, be invested much more safely in industrial enterprises. In particular, the founding of companies involves tying up money capital in industry for a longer or shorter period until such time as it flows back to the bank through the sale of shares. This means that by increasing its own capital the bank is able to participate more fully, and on a more enduring basis, in industrial enterprises, eventually establishing control over them; and can exert a stronger influence upon speculation in commodities and securities. Consequently, when its gains from interest and share issues permit, the bank will tend constantly to enlarge its own capital.

But aside from the fact that the bank must be able to realize the value corresponding to its increased capital, it cannot convert deposited capital into its own capital at will. The bank tries to enlarge its own capital in order to invest it in industry, to make gains by issuing shares, and to acquire control over industry. If the sole function of the bank were to provide payment credit, an increase of its own capital beyond a certain limit would be unnecessary, since in this case disposal over deposited money is the crucial factor, and the bank cannot gain anything but interest on capital which must be immediately available as a means of payment. It is not the case that the bank, once it holds a larger part of the total available loan capital as its own capital, can then invest a larger amount of capital in industry on its own account. cite the contrary. Since only part of the available loan capital is required as means of payment (circulation credit) the remainder is available for industrial investment (capital credit). This division of the total available loan capital between the purposes of circulation credit and capital credit has its own objectively conditioned grounds, which result from the prevailing state of the production and circulation processes; and even though these limits are flexible, the banks cannot ignore them if bank capital is to retain its money form, and the ability of the bank to meet its payments is not to be endangered. On the other hand, this division of the available loan capital does not depend upon how much of the capital at the bank's disposal is its own and how much belongs to its depositors..

The bank wants to increase its own capital in order to invest it in industry; and the limits to the amount of outside capital which a bank can convert into its own capital are set by that part of the total available capital which can be used for capital investment. Within these limits, the trend of development is for the banks to convert an ever increasing proportion of loan capital into their own capital. Thus the magnitude of the bank's own capital does not depend solely upon its own wishes, nor upon investment opportunities for the increased capital.

The increase of bank capital is a purely juridical transaction, not a change in its economic function. The bank can only increase its capital, which must have the form of money capital, by converting deposited money capital into its own. Since in any developed monetary system all the available money is assembled by the banks, an increase in bank capital simply means that a part of the deposits held by the bank has now been converted into bank capital by an issue of shares. This conversion of deposited capital into the bank's own capital, of course, leaves the supply and demand of money capital entirely unaffected, and consequently has no influence upon the rate of interest.[5]

Other things being equal, an increase in industrial capital will result in an increase in the amount of profit because industrial capital generates surplus value in the process of production. An increase in bank capital obviously leaves the total amount of interest received by the banks quite unchanged; for given a constant demand this depends upon the supply of loan capital which is not altered in any way by a change in the distribution of loan capital as between banks and private individuals, by a mere change in ownership. What changes is only the calculation of the net profit of the banks, which is smaller in percentage terms as the bank's own capital has increased.

Industrial, commercial, and money-dealing capital are distinct parts of social capital, which at any given moment must have a definite relation to each other. Abstractly considered, all social capital could also be bank capital. For bank capital, after all, is only capital which is at the disposal of the banks, and there is no inherent reason why all capital should not pass through the banks. Of course, most of this bank capital is fictitious, being merely a monetary expression for genuinely productive, functioning capital, or simply capitalized claims to surplus value. An increase in bank capital, therefore, unlike an increase in industrial capital, is not a precondition for increased profit. On the contrary, for the bank it is the profit which is the given factor. If the profit rises, then the bank will increase its own capital, because the increased capital enables it to convert more of its bank capital into industrial capital without assuming any greater risk. The fact that it is essentially the supply of credit to industry, and participation in industrial enterprises through the issue and ownership of shares, which induce the banks to increase their own capital is de­monstrated by the example of the exclusively deposit banks in England, which are not increasing their capital, despite their vastly increased turnover, but are distributing very high dividends.

It should not be supposed therefore that the influx or outflow of bank capital would affect the profits of the banks in such a way as to change the rate of interest. Only the distribution of the profit changes, in so far as it has to be allotted to either a larger or a smaller amount of the bank's own capital.

There is also a certain significance in the fact that the increase of bank capital takes the form of share capital, that is to say, fictitious capital. We have already seen that the conversion of money into fictitious capital leaves the character of the individual capitalist as a money capitalist, or loan capitalist, quite unchanged. The money which is converted into fictitious capital remains bank capital, and so, in the economic sense, money capital. A part of this bank capital is converted into industrial capital, in one of two ways : either by providing credit to an industrial enterprise (that is, simply lending capital to the enterprise), or by acquiring shares in the enterprise which the bank then owns permanently if the size of its capital permits. In the latter case, the increase of bank capital has taken place by first converting money capital into bank capital, and then converting this in turn into industrial capital. Instead of private money capitalists investing their money directly in industrial shares, they invest it in bank shares, and it is the bank which converts it into industrial capital by buying industrial shares. The difference is that the bank is now not only an intermediary in the operation, but as the owner of bank capital has become co-owner of the industrial enterprise. Furthermore, this property right of the bank has altogether different consequences from that of individual shareholders. A tendency emerges to convert the greatest possible amount of the disposable money capital of individuals into bank capital, and only then to convert the latter into industrial capital. In the process fictitious capital has been doubled. Money capital assumes a fictitious form as shares in bank capital, and thereby becomes in reality the property of the bank; and this bank capital then assumes the fictitious form of industrial shares, and is converted in reality into the elements of productive capital, means of production and labour power.

The dividend policy of the banks, which operate with large amounts of outside capital (deposits), must be more stable than that of industrial enterprises. This is particularly so if the deposits come from sources which can only judge whether the management of the bank is good or bad on the basis of external criteria such as the stability of dividends, and withdraw their deposits when these fluctuate. It is a matter here of deposits from non-capitalist sources. An industrial enterprise can be more independent in its dividend policy; first, because its creditors are generally well informed about its ability to pay, and second, because the payments credit to which it has regular recourse must be covered by the commodities which it produces, while other credit is not required continuously, as in the case of the banks, but only at longer intervals. This greater independence enables it to influence share prices, and gives 'insiders' the opportunity to make speculative gains on the stock exchange. It also facilitates adaptation to market fluctuations and to the needs of accumulation, both of which are more important for the industrial enterprise than for the banks.

On the other hand, the banks can adapt a stable dividend policy more easily than can industrial enterprises, because business fluctuations do not affect bank revenues so strongly or one-sidedly as they affect industrial profit. In the first place, a large part of bank profit depends less upon the absolute level of the interest rate than it does upon the difference between the interest on the capital which they lend and that on the capital which they borrow. This margin, however, is much more stable than the fluctuations in the absolute level of interest, particularly if the con­centration of banking is already well advanced. In the course of the business cycle there are favourable and unfavourable moments which, in part, cancel each other out. The most favourable one is a period of increasing prosperity characterized by a gradual rise in the rate of interest, strong demand for capital in industry, and consequently brisk activity in share issues and larger promoter's profits. At the same time the banks make larger profits from the management of accounts, advances of commercial credit, and stock exchange speculation. At the peak of the boom both the absolute rate of interest and the difference between interest received and interest paid out increase; but, on the other hand, share issues and promoter's profit begin to decline. Bank credit replaces the issue of shares and debentures as a means of meeting the capital requirements of industry, while speculation in securities is usually curbed some time before the onset of the crisis by the high interest rate. The first stage of the depression, when the rate of interest has reached its lowest point, is the most favourable time for issuing fixed-interest obligations. Bank gains from the acquisition of government and municipal bonds, and from the sale of fixed-interest securities in their own possession at the current inflated prices, grow appreciably. A part of the bank debt previously incurred by industry is converted into share and debenture issues, since the money market is fluid, and yields new gains on capital issues. All these factors compensate, to a greater or lesser extent, for the smaller revenue derived from interest on the supply of credit.

The competition among the banks is not conducted only with their own capital but with the entire capital at their disposal. Competition on the money market, however, is essentially different from that on the com­modity market. The most important difference is that on the money market capital has the form of money, whereas on the commodity market it must first be converted from commodity capital into money capital, and this implies that the conversion may miscarry, that the commodity capital may decline in value, resulting in a loss rather than a profit. In commodity competition it is a matter of realizing capital, not only of realizing value. In the competition of money capital the capital itself is secure and it is only a matter of the level of value it attains, the level of interest. But interest is determined in such a way as to leave the individual competitors very little room for manoeuvre. It is primarily the discount policy of the central financial institutions which determines the situation for everyone else and sets rather narrow limits to their freedom of action. This is particularly important in the strictly credit operations of the banks (either lending or borrowing) where there is little competition. The less room for manoeuvre there is, however, the more important is the purely quantitative volume of business. Only if this is very large can the bank reduce its commission charges and increase the interest it pays on deposits. These conditions, however, are more or less the same for all enterprises of the same size. Furthermore, there is no extra profit in credit operations for large enterprises as against small ones, except perhaps in respect of economy of operation, and the greater ease with which losses can be avoided and risks distributed. On the other hand, the extra profit arising from patented technical improvements in industry, which plays such an important part in the competitive struggle, has no counterpart in this sphere.

Competition is more important in the financing of enterprises through share issues than in the provision of credit. Here the size of the promoter's profit leaves scope for competitive underbidding, though even in this case the limits are still rather narrow, and it is the extent to which industry is in a condition of dependence as a result of previous loans, rather than the terms offered by the banks, which is the crucial factor.

In industry, it is necessary to distinguish between the technical and the economic aspects of competition, but in the case of the banks, technical differences play a minor part and banks of the same type use the same technical methods. (Banks of different types do not compete directly with each other at all.) Here there is only an economic, purely quantitative, difference which involves simply the size of their competing capitals. It is this quite distinctive type of competition which makes it possible for the banks alternately to compete and to co-operate with one another in such varied and changing ways. An analogous situation can sometimes be observed among equally large enterprises in industry, which may oc­casionally enter into agreements about particular business matters; for example, in the case of tenders. In industry, however, such an agreement is frequently the precursor of a cartel, that is, of an enduring co-operation which excludes competition.

If the general rate of interest is the barrier to competition in the provision of credit, so the average rate of profit constitutes a limit in the field of payment transactions. Here the volume of business is crucial in determin­ing the amount of commission charged, and it gives a great advantage to the large banks.

The professional banking principle of maximum security makes the banks inherently averse to competition, and predisposed in favour of the elimination of competition in industry through cartels, and its replacement by a 'steady profit'.

Bank revenue is not profit. Nevertheless, the total revenue, calculated on the basis of the bank's own capital, must equal the average rate of profit. If it is lower, capital will be withdrawn from the banking business, while if it is higher new banks will be established. Since bank capital is in the form of money, or to a great extent can easily be converted into money at any time, the equalization of profit can be achieved very quickly. For that reason there is also no 'overproduction' of bank capital. An excessive increase in the bank's own capital leads to a withdrawal of capital, and its investment elsewhere, rather than to a general crash, accompanied by depreciation, etc., as may be seen in industry. A bank crash results only from industrial overproduction or excessive speculation, and manifests itself as a scarcity of bank capital in money form, due to the fact that bank capital is tied up in a form which cannot be immediately realized as money.

With the development of banking, and the increasingly dense network of relations between the banks and industry, there is a growing tendency to eliminate competition among the banks themselves, and on the other side, to concentrate all capital in the form of money capital, and to make it available to producers only through the banks. If this trend were to continue, it would finally result in a single bank or a group of banks establishing control over the entire money capital. Such a 'central bank' would then exercise control over social production as a whole.[6]

In "credit transactions the material, business relationship is always accompanied by a personal relationship, which appears as a direct relationship between members of society in contrast to the material social relations which characterize other economic categories such as money; namely, what is commonly called 'trust'. In this sense a fully developed credit system is the antithesis of capitalism, and represents organization and control as opposed to anarchy. It has its source in socialism, but has been adapted to capitalist society; it is a fraudulent kind of socialism, modified to suit the needs of capitalism. It socializes other people's money for use by the few. At the outset it suddenly opens up for the knights of credit prodigious vistas: the barriers to capitalist production - private property - seem to have fallen, and the entire productive power of society appears to be placed at the disposal of the individual. The prospect intoxicates him, and in turn he intoxicates and swindles others.

The original pioneers of credit were the romanticists of capitalism like Law and Pereire ; it was some time before the sober capitalist gained the upper hand, and Gunderman vanquished Saccard.[7]


[1] For further details, see Capital, vol. III, part IV: 'Conversion of commodity capital and money capital into commercial and financial capital'.

[2] Capital, vol. III, pp. 371-2.  [MECW, 37, p.313]

[3] ibid., pp. 379 - 80. [MECW, 37, p.320]

[4] The following schematic calculation will serve as an illustration. Let us assume that the production capital is 1,000 and produces a profit of 200. The commercial capital amounts to 400 (a somewhat exaggerated proportion) and the money-handling capital to 100. The profit must be distributed over a total capital of 1,500, so that the average rate of profit is 13⅓ per cent. The industrialists will therefore receive 133⅓ from the total of 200, the merchants 53⅓, and the money dealers 13⅓. [Following the indications given by Watnick
I have corrected an arithmetical error contained in the original text - Ed.]

[5] It is therefore a childish fantasy to expect that an increase in the capital belonging to a bank of issue, for example, the Deutsche Reichsbank, will necessarily result in a reduction of the interest rate.

[6] The banking system is 'indeed the form of a universal book-keeping and of a distribution of products on a social scale, but only the form .... It places at the disposal of industrial and commercial capitalists all the available or even potential capital of society, so far as it has not been actively invested, so that neither the lender nor the user of such capital is its real owner or producer. This does away with the private character of capital, and implies in itself, to that extent, the abolition of capital …

'Finally, there can be no doubt that the credit system will serve as a powerful lever during the transition from the capitalist mode of production to production by means of associated labour; but only as one element in connection with other organic revolutions of the mode of production itself. On the other hand, the illusions concerning the miraculous power of the credit and banking system, as nursed by some socialists, arise from a com­plete lack of familiarity with the capitalist mode of production, and the credit system as one of its forms. As soon as the means of production have ceased to be converted into capital (which includes also the abolition of private property in land) credit as such has no longer any meaning .. . . But so long as the capitalist mode of production lasts, interest-bearing capital, as one of its forms, also continues and constitutes actually the basis of the credit system.' Capital, vol. III, pp. 712-3. [MECW, 37, p.602]

[7] The reference is to the two principal characters in Zola's novel, L'Argent. [Ed.]