Finance Capital, Hilferding 1910


The general conditions of crises

It is an empirical law that capitalist production passes through a cycle of prosperity and depression. The transition from one phase of the cycle to another is marked by a crisis. At a certain point during a period of prosperity sales begin to decline in a number of branches of production, and prices consequently fall; the sluggish market conditions and falling prices become more widespread and production is curtailed. This phase of the cycle, marked by low prices and profits, may be more or less prolonged, but then production gradually begins to expand again, prices and profits rise, and the volume of production becomes greater than ever, until a new turning point is reached. The periodic recurrence of this phenomenon raises a question as to its causes, which can only be discovered by an analysis of the mechanism of capitalist production.

The general possibility of a crisis arises from the dual existence of the commodity, as commodity and as money. This involves the possibility of an interruption in the process of commodity circulation if money is hoarded instead of being used to circulate commodities. The process C1 – M - C2 comes to a halt because M, which had previously realized the value of C1, does not go on to realize the value of C2. C2 cannot be sold and so a glut develops.

But as long as money functions only as a means of circulation, as long as commodities exchange directly for money and money directly for commodities, the hoarding of a sum of money need only be a single isolated occurrence which would make it impossible to sell some particular commodity, but would not involve a general slump in sales. This situation changes, however, when the function of money as a means of payment, and commercial credit, develop. A slump in sales now makes it impossible to meet previously contracted debts. As we have seen, however, such promises to pay have been used as means of circulation or payment in many other transactions. If one person cannot meet his obligations, then others also become unable to pay. The chain of debtors resulting from the use of money as a means of payment is broken, and a slump at one point is transmitted to all the others, so becoming general. Payment credit thus makes the various branches of production interdependent and creates the conditions in which a partial slump may be transformed into a general one.

But the general possibility of a crisis is only a condition of its occurrence. Without the circulation of money, and the development of its function as a means of payment, a crisis would be impossible. But possibility is a long way from being actuality. Under simple commodity production – or more precisely, pre-capitalist commodity production – there are no crises. The breakdowns in the economy are not crises which conform with some economic law, but catastrophes arising from particular natural or historical circumstances such as poor harvests, drought, pestilence and war. What they have in common is a deficiency in reproduction, not any kind of overproduction. This is indeed self-evident if we reflect that this kind of production is still essentially production for the satisfaction of personal needs, that production is related to consumption as means to end, and that the circulation of commodities is relatively unimportant. Only capitalist production generalizes commodity production, allows all possible products to assume the commodity form, and finally – this is the crucial point -- makes the sale of the commodity a precondition for the resumption of reproduction.[1]

This transformation of products into commodities makes the producers dependent on the market, and turns the inherent irregularity of production, which already existed in simple commodity production because the private economic households were independent units, into that anarchy of capitalist production which, as commodity production is generalized- and local isolated markets are expanded into an all-inclusive world market, becomes the second general condition of crises.

Capitalism establishes a third general condition of crises by separating production from consumption. In the first place, it separates the producer from his product and leaves him only that part of the value produced which is equivalent to the value of his labour power. Thus it creates out of its wage labourers a class whose consumption has no direct relation to total production, but only to that part of it which equals wage capital. The output which these wage labourers produce does not, however, belong to them, hence it does not serve their consumption needs. On the contrary, their consumption, and its extent, depends upon production over which they have no influence. The production of the capitalists does not serve needs, but profits. The inherent purpose of capitalist production is the realization and increase of profit.

In other words, it is not consumption and its growth, but the realization of profit, which is the decisive factor in determining the direction that production takes, its volume, and its expansion or contraction. Goods are produced in order to obtain a specific profit and to achieve a specific degree of valorization of capital. Production, therefore, does not depend upon consumption, but upon capital's need for valorization, and there will be a contraction of production whenever the opportunities for the valorization of capital deteriorate.

Even in the capitalist mode of production there is, of course, a general connection between production and consumption. This is a natural condition which is common to all social formations. But whereas, in an economy based upon the satisfaction of needs, consumption determines the expansion of production, the limits of which are set in this case only by the level of technological development, in a capitalist economy, on the contrary, it is the scale of production which determines consumption. Production is restricted by the current opportunities for valorization, by the level at which capital can be valorized, and by the necessity for existing capital, as well as any additions to it, to achieve a certain rate of profit. The expansion of production here encounters a purely social barrier, which originates in, and is specific to, this social structure. The possibility of crises is implicit in unregulated production, that is to say, in commodity production generally, but it only becomes a real possibility in a system of unregulated production which eliminates the direct relationship between production and consumption characterizing other social formations, and interposes between production and consumption the requirement that capital shall be valorized at a particular rate.

Such expressions as 'overproduction of commodities' and `underconsumption' tell us very little. Strictly speaking, one can use the term underconsumption only in a physiological sense; it has no sense in economics except to indicate that society is consuming less than it has produced. It is impossible, however, to conceive how that can happen if production,is carried on in the right proportions. The total product is equal to constant capital, plus variable capital, plus surplus value (C + V + S). Since V and S are consumed, and the elements of the constant capital which have been consumed must be replaced, production can be expanded indefinitely without leading to the overproduction of commodities. In other words, it cannot lead to a condition in which more commodities, that is to say goods (in this context, and for the purpose of this analysis, commodities are regarded as use values), are produced than can be consumed.[2]

One thing is clear; namely, that since the periodic recurrence of crises is a product of capitalist society, the causes must lie in the nature of capital. It must be a matter of a disturbance arising from the specific character of society. The narrow basis provided by the consumption relations of capitalist production constitutes, from that point of view, the general condition of crises, since the impossibility of enlarging this basis is the precondition for the stagnation of the market. If consumption could be readily expanded, overproduction would not be possible. But under capitalist conditions expansion of consumption means a reduction in the rate of profit. For an increase in consumption by the broad masses of the population depends upon a rise in wages, which would reduce the rate of surplus value and hence the rate of profit. Consequently, if the demand for labour, as a result of the accumulation of capital, increases so greatly that the rate of profit is reduced, to a point (at the extreme) where an increased quantity of capital would not produce a larger profit than did the original capital, then accumulation must come to an end, since its essential purpose - the increase of profit - would not be achieved. This is the point at which one necessary precondition of accumulation, the expansion of consumption, enters into contradiction with another precondition, namely the realization of profit. The conditions of realization cannot be reconciled with the expansion of consumption, and since the former are decisive, the contradiction develops into a crisis. That is why the narrow basis of consumption is only a general condition of crises, which cannot be explained simply by 'underconsumption'. Least of all can the periodic character of crises be explained in this way, since no periodic phenomenon can be explained by constant conditions. There is therefore no contradiction between Marx's argument in the following passage and the passage cited previously:

The entire mass of commodities, the total product, which contains a portion which is to reproduce the constant and variable capital, as well as a portion representing the surplus value, must be sold. If this is not done, or only partly accomplished, or only at prices which are below the prices of production, the labourer has been none the less exploited, but his exploitation does not realize as much for the capitalist. It may yield no surplus value at all for him, or only realize a portion of the produced surplus value, or it may mean a partial or complete loss of his capital. The conditions of direct exploitation and those of the realization of surplus value are not identical. They are separated logically as well as by time and space. The first are only limited by the productive power of society, and the last by the proportional relations of the various lines of production and by the consuming power of society. This last named power is not determined either by the absolute productive power or by the absolute consuming power, but by the consuming power based on antagonistic conditions of distribution which reduce the consumption of the great mass of the population to a variable minimum within more or less narrow limits. The consuming power is furthermore restricted by the tendency to accumulate, the greed for an expansion of capital and a production of surplus value on an enlarged scale. This is a law of capitalist production imposed by incessant revolutions in the methods of production themselves, the resulting depreciation of existing capital, the general competitive struggle and the necessity of improving the product and expanding the scale of production, for the sake of self-preservation and on penalty of failure. The market must therefore be continually extended, so that its interrelations and the conditions regulating them assume more and more the form of a natural law independent of the producers and become ever more uncontrollable. This internal contradiction seeks to balance itself by an expansion of the outlying fields of production. But to the extent that the productive power develops, it finds itself at variance with the narrow basis on which the conditions of consumption rest. On this self-contradictory basis, it is no contradiction at all that there should be an excess of capital simultaneously with an excess of population. For while a combination of these two would indeed increase the mass of the produced surplus value, it would at the same time intensify the contradiction between the conditions under which this surplus value is produced and those under which it is realized.[3]

Periodic crises are a distinctive feature of capitalism and can only be deduced from its specific characteristics.[4]

In general, a crisis is a disturbance of circulation. It manifests itself as a massive unsaleability of commodities, as the impossibility of realizing the value of commodities (their price of production) in money. It can only be explained, therefore, in terms of the specific capitalist conditions of commodity circulation, not in terms of simple commodity circulation. The specifically capitalist feature in the circulation of commodities is that commodities are produced by capital, as commodity capital, and must be realized as such. Their realization of based upon conditions peculiar to capital; namely the conditions for the realization of value.

The analysis of these conditions from the standpoint of both individual and (what is more important here) social capital, was provided by Marx in the second volume of Capital, thus continuing an undertaking which only Quesnay had previously attempted. Marx described Quesnay's tableau économique as the most brilliant conception that political economy had so far produced, and we can say that his own analysis of the social process of production is undoubtedly the most outstanding elaboration of that brilliant notion. Indeed, the largely ignored analyses in the second volume of Capital are, from the standpoint of pure economic reasoning, the most brilliant in that whole remarkable work. Above all, an understanding of the causes of crises is quite impossible without taking into account the results of Marx's analysis.[5]

Equilibrium conditions in the process of social reproduction

Let me recapitulate briefly the most important results of Marx's analysis. First, it is assumed in this study that capitalist production remains at the same level of development, and only simple reproduction takes place, while changes in value or price are disregarded.

The total product, that is the total production of society, falls into two major divisions: (1) means of production, being commodities of such a kind that they must, or at least can, enter into productive consumption; and (2) means of consumption, consisting of those commodities which enter into the individual consumption of the capitalist class and the working class.

The capital in each of these departments is again divided into two parts: variable (V) and constant (C) capital. The latter, in turn, is sub-divided into fixed and circulating capital.

The portion of value (C) which represents the constant capital consumed in production is not identical with the value of the constant capital invested in production, because the fixed capital has transferred only a part of its value to the product. In the following example the fixed capital will initially be disregarded.

The total production of commodities is represented in the following schema:

I 4,000 C

+ 1,000 V

+ 1,000 S

= 6,000 means of production

II 2,000 C

+ 500 V

+ 500 S

= 3,000 means of consumption

The total value is 9,000, excluding the fixed capital (disregarded here) which continues to function in its natural form.

If we now examine the necessary exchanges on the basis of simple reproduction, in which the entire surplus value is consumed unproductively, and leave out of account for the time being the circulation of money through which these exchanges are accomplished, then we obtain at once three main points of reference:

1 The 500 V, wages of workers, and the 500 S, surplus value of the capitalists, in department II must be spent for means of consumption. But their value exists in the means of consumption to the value of 1,000, in the hands of the capitalists of department II, which replace the 500 V advanced and represent the 500 S. The wages and surplus value of department II therefore are exchanged within department II against the products of this department. In this way there disappears from the total product the sum of (500 V + 500 S)II, which equals 1,000 means of consumption.

2 The 1,000 V and 1,000 S of department I must likewise be spent on means of consumption, that is, on the product of department II. Hence they must be exchanged against what remains of this product, namely against the amount of the constant capital, 2,000 C. In return, department II receives an equal amount of means of production, the product of department I, in which the value of 1,000 V and 1,000 S of this department is embodied. In this way there now disappears from the calculation 2,000 C from II and (1,000 V + 1,000 S) from I.

3 There now remains the 4,000 C of department I. This comprises means of production which can only be used up in department I. It serves for the replacement of the consumed constant capital, and is disposed of by mutual exchanges among the individual capitalists of department I, just as the (500 V + 500 S) in department II is disposed of by exchanges between workers and capitalists or among individual capitalists in that department.

 The replacement of the fixed capital plays a special role. Part of the value of constant capital is transferred from the instruments of labour to the product of labour. These instruments of labour continue to function as elements of productive capital in their original natural form; it is the wear and tear, the loss of value which they suffer as a result of continuous use over a period of time, which reappears as an element of value in the commodities which they produce.

Money, on the other hand, in so far as it embodies this part of the value of commodities which represents the depreciation of fixed capital, is not reconverted into a component part of the productive capital whose loss of value it replaces. It settles down alongside the productive capital and retains its money form. This precipitation of money is repeated during a period of reproduction, which may be longer or shorter, while the fixed element of constant capital continues to perform its function in the process of production in its old natural form. When the elements of fixed capital – buildings, machinery, etc. – are worn out and can no longer function in the process of production, their value already exists alongside them, fully transformed into money; namely in the sum of money, the values, which were gradually transferred from the fixed capital to the commodities in the production of which it assisted, and through the sale of these commodities converted into the money form. This money then serves to replace the fixed capital (or elements of it, since its various elements have different life spans) in kind, and thus effectively to renew this component of productive capital. It is the money form of a part of the value of constant capital, its fixed part.

The formation of this hoard is therefore itself a factor in the capitalist process of reproduction. It is the reproduction and storage, in the form of money, of the value of fixed capital or its individual elements, until such time as the fixed capital is worn out and has transferred its entire value to the commodities produced, and needs to be replaced in kind. This money, however, only loses its form as a hoard and actively re-enters the reproduction process of capital, mediated through circulation, when it is reconverted into new elements of fixed capital which will replace the worn out elements. But if there is to be no interruption of this process of simple reproduction, that part of the fixed capital which is depreciated annually must equal that which has to be renewed.

Let us consider, for instance, an exchange of (1,000 V + 1,000 S) of I against 2,000 C of II. In this 2,000 C, 200 in fixed capital has to be replaced. The 1,800 C which is to be converted into circulating constant capital is exchanged for 1,800 (V + S) of I. Department II must also obtain the 200 which remains in I in the natural form of fixed capital, but this can only be done if the capitalists of II have 200 on hand in money with which to buy the 200 of their fixed capital and retain it in its money form. In other words, the capitalists who in previous years had hoarded the depreciation of their fixed capital in money reserves will this year renew their fixed capital in kind, by using 200 in money to purchase the balance of 200 (V + S) from I. Department I, in turn, will use another 200 in money to buy the remainder of the means of consumption from the other capitalists of II, who hoard this money as a reserve against the depreciation of their own fixed capital. Thus those capitalists in department II who renew their fixed capital in kind during this year provide the money with which the other capitalists of II create a reserve against depreciation which they retain in money form. We must assume therefore a constant proportion between fixed capital which is depreciating and fixed capital which has to be renewed; and further, that there is a constant proportion between the depreciating fixed capital (which has to be replaced) and the fixed capital which continues to function in its original natural form. For if the depreciating fixed capital increased to 300, then the circulating capital would have declined, and II C, having less circulating capital, would not be able to continue production on the same scale. Moreover, if the fixed capital increased to 300, and II had only 200 in money to spend for the replacement of its capital in kind, 100 of the fixed capital in I would be unsaleable.

Hence, even when the amount of fixed capital is simply maintained, a disproportion in the production of fixed and circulating capital may still occur if – as is indeed always actually the case – the ratio of the annual depreciation of fixed capital to the fixed capital which continues to function in production varies. We have also seen that definite proportional relations must exist if simple reproduction is to be possible. I (V + S) must be equal to II C. The anarchy of capitalist society, however, always interferes with the realization of this proportional relation. In order to ensure continuity of production a certain amount of overproduction is always necessary as a safeguard against unpredictable consumer wants and constant fluctuations in demand. There are always disruptions and irregularities in the reflux of the value of capital which is being turned over. In order to overcome these irregularities, and to cope with the disruptions capitalists must always have at their disposal a reserve supply both of commodities and of money, and this requires additional money, a reserve of money capital, which must necessarily be in liquid form because it is precisely the turnover of commodity capital which may be disrupted, and in that case the capitalist must be able to obtain other commodities as quickly as possible. Only in the form of money is value a universal equivalent, always readily convertible into any other desired commodity. In this case, too, the necessity of money arises from the anarchy of the capitalist mode of production.

Once the capitalist form of reproduction is abolished, the problem resolves itself into the simple proposition that the magnitude of the expiring portion of the fixed capital, which must be reproduced in its natural form every year (which served in our illustration for the production of articles of consumption) varies in successive years. If it is very large in a certain year (in excess of the average mortality, the same as among men), then it is so much smaller in the next year. The quantity of raw materials, half-wrought materials and auxiliary materials required for the annual production of the articles of consumption – other circumstances remaining the same – does not decrease in consequence. Hence, the aggregate production of means of production would have to increase in the one case and decrease in the other. This can be remedied only by a continuous relative overproduction. There must be, on the one hand, a certain quantity of fixed capital in excess of that which is immediately required; on the other hand, there must be above all a supply of raw materials etc. in excess of actual requirements of annual production (this applies particularly to articles of consumption). This sort of reproduction may take place when society controls the material requirements of its own reproduction. But in capitalist society, it is an element of anarchy.[6]

Within certain limits this relative overproduction must also occur constantly in capitalist society, and is represented by the ever present reserve stock of commodities which serves to cushion disturbances, as well as by the reserve of money capital at the disposal of the industrial capitalists which enables them, in case of any disruption, to draw upon the commodity reserve for those items which are necessary in order to carry on their production. But this reserve of money capital which must be available to capitalists as a protection against temporary disruptions even in normal times, should not be confused with the reserve of money capital which is necessary when trade is slack. In times of prosperity production expands rapidly, and on the other hand, the money capital previously kept as a reserve is converted into productive capital. The reserve thus diminishes and this means that one factor which helps to smooth out disturbances is removed. This is, therefore, one of the causes of crises.

On the other hand, it should be emphasized that the necessity of this relative overproduction is grounded not upon capitalist society itself but upon the nature of the reproduction process once those elements of production, which appear as fixed capital in capitalist society, have attained a much greater importance. This 'overproduction', which is made necessary by technical and natural circumstances, is really only a building up of stocks, and as such would also be required by a regulated economy directed to the satisfaction of needs. It should not be confused with the general overproduction which occurs during a crisis. Nevertheless, in a capitalist society, this kind of overproduction may also be a factor which helps to intensify the crisis.

Equilibrium conditions in the capitalist process of accumulation

Simple reproduction -- which does not actually occur in a capitalist society, in which the accumulation of capital is a matter of life and death, though of course this does not exclude the possibility of stagnant or even diminished reproduction in any particular year of the business cycle - already requires certain complicated relations of proportionality; and these become still more complicated if the process of accumulation is to proceed without disruption. Marx gives the following schema :

I Production of means of production

4,000 C

+ 1,000 V

+ 1,000 S

= 6,000

II Production of means of consumption

1,500 C

+ 750 V

+ 750 S

= 3,000


Total value of the social product

= 9,000

Assume that I accumulates half its surplus value ( = 500) and consumes the other half as income. We would then have the following turnovers: (1,000 V + 500 S) of I, which are spent as income, are turned over by I against 1,500 C of II. In this way II replaces its constant capital and supplies I with the required means of consumption, a turnover which is exactly analogous to that which we encountered in the case of simple reproduction. Of the 500 S which remains in I and should be converted into capital, 400 will become constant capital and 100 variable capital if the organic composition remains unchanged. The 500 S exists as means of production, and 400 of these must exist in a form appropriate to the expansion of constant capital in department I, which thus adds this amount to its constant capital. The balance of 100 S must be converted into variable capital, that is to say, into means of subsistence which must be purchased from II. Since the 100 S are actually means of production, II would have to use them to enlarge its own constant capital. For I, then, we have a capital of 4,400 C + 1,100 V = 5,500.

Department II now has 1,600 C as constant capital, and in order to put it to work needs an additional 50 V in money for the purchase of new labour power, so that its variable capital grows from 750 to 800. This expansion of the constant and variable capital of II by a total of 150 is provided out of its surplus value, so that only 600 of the 750 S in II remain for the consumption of the capitalists of this department, whose annual product is now distributed as follows:

II 1,600 C + 800 V + 600 S (consumption fund) = 3,000

Thus we now have the following schema:

I 4,400 C + 1,100 V + 500 (consumption fund) = 6,000

II 1,600 C + 800 V + 600 (consumption fund) = 3,000

Total =9,000 as above


Of these amounts, the following are capital:

I 4,400 C + 1,100 V (money) = 5,500





= 7,900

II 1,600 C + 800 V (money) = 2,400



whereas production began with:

I 4,000 C + 1,000 V = 5,000







= 7,250

II 1,500 C + 750 V = 2,250



We can see here a series of new complications. For one thing, the 500 S in I, which are to be accumulated, must be produced as means of production in such a way that 4/5ths of them are suitable as constant capital for I, and 1/5th as constant capital for II. Hence the scale of accumulation in II depends upon the accumulation in I. In I half the surplus value is accumulated, but in II this is impossible; from the surplus value of 750 only 150, 1/5th, can be accumulated while 4/5ths must be consumed.

Let us now consider the further development of accumulation. If production is actually undertaken with the enlarged capital, we shall have at the end of the following year :

I 4,400 C + 1,100 V + 1,100 S = 6,600







= 9,800

II 1,600 C + 800 V + 800 S = 3,200



If accumulation continues in the same way we shall obtain in the next year:

I 4,840 C + 1,210 V + 1,210 S = 5,500







= 10,780

II 1,760 C + 880 V + 880 S = 3,520



In this example we have assumed that half the surplus value in I is accumulated, and that I (V+½S) = II C. If accumulation is to take place, I (V + S) must always be greater than II C because a part of I S cannot in fact be converted into II C, but must function as means of production. On the other hand, I (V+½S) may be greater or smaller than II C. For present purposes it is unnecessary to examine the matter in greater detail.[7]

Increased production requires a larger quantity of gold for its turnover. Given a constant velocity of circulation, and disregarding credit, this increased amount of gold must be provided by gold production. Capitalist production here encounters a natural barrier, and although the credit system pushes back this limit very considerably it cannot do away with it altogether.

Let us now consider for a moment the necessary preconditions under which the processes of circulation required by accumulation can take place. In our example, we have assumed that 500 S in I is accumulated and that of this amount 400 is converted into constant capital. What circulation processes make this possible, and with what money does I purchase the 400?

Let us look first at accumulation by a single capitalist. He cannot convert the surplus value into capital until it has reached a certain magnitude. The surplus value which is converted into money at the end of each year must therefore be hoarded in the form of money over a number of years. The capitals of the various branches of industry, as well as the individual capitals within each industry, are at different stages in the process of converting surplus value into capital. Hence, while some capitalists are always converting their potential money capital into productive capital, when it has grown large enough for that purpose, others are still engaged in amassing their potential money capital. The capitalists in these two categories therefore face each other, one group as buyers and the other as sellers, each performing one of these roles exclusively.

Suppose, for example, that A sells 600 (400 C + 100 V + 100 S) to B (who may represent more than one buyer). He has sold 600 in commodities for 600 in money, of which 100 represents surplus value which he withdraws from circulation and hoards as money. But this 100 in money is only the money form of the surplus product in which a value of 100 is incorporated. The formation of a hoard is in no way a part of production, or an increment of production. The action of the capitalist consists merely in withdrawing from circulation 100 obtained by the sale of his surplus product, and holding on to it, hoarding it. This operation is carried on not only by A, but at numerous points on the periphery of circulation by other capitalists – A1, A2, A3 – all of whom are just as busily engaged in this sort of hoarding. These numerous points at which money is withdrawn from circulation and accumulated in many individual hoards of potential money capital appear as so many obstacles to circulation, because they stop the movement of money and deprive it of its capacity to circulate for a longer or shorter time.

A can accumulate such a hoard, however, only in so far as he is a seller of his surplus product, not as a buyer. His continuous production of surplus product, embodying his surplus value which is to be converted into money, is a precondition for the formation of his hoard. Hence, although A withdraws money from circulation and hoards it, from another side he throws commodities into circulation, without withdrawing other commodities in return, so that B1, B2, B3 etc., for their part, are enabled to throw money into circulation and only withdraw commodities in return.

Once more we find here, as we did in the case of simple reproduction, that the disposal of the various elements of annual reproduction, that is to say, their circulation which must comprise the reproduction of the capital to the point of replacing its various elements such as constant, variable, fixed, circulating, money, and commodity capital, is not based upon the mere purchase of commodities followed by a corresponding sale, or a mere sale followed by a corresponding purchase, so that there would actually be a bare exchange of commodity for commodity [in which money would be only a means of circulation and therefore relatively superfluous – R.H.] as the political economists assume, especially the free trade school from the time of the physiocrats and Adam Smith [led astray by their own polemical interests in the struggle against the bullionist and mercantilist systems – R.H.]. We know that the fixed capital, once its investment is made, is not replaced during the entire period of its function, but serves in its old form until its value is gradually precipitated in the form of money.[8]

What money here makes possible for the first time is this separation and emancipation of the circulation of value from the constancy of the technical function in the process of production. For society as a whole this separation is not possible, and new fixed capital must be provided whenever the old capital wears out, but in the case of an individual that part of value which is retained for depreciation can be held for years in money form.

Now we have seen that the periodical renewal of the fixed capital of II C – the entire value of the capital of II C being converted into elements of I valued at (V + S) – presupposes on the one hand the mere purchase of the fixed portion of II C, which is reconverted from the form of money into its material form, and to which corresponds the mere sale of I S; and presupposes on the other hand a mere sale on the part of II C, the sale of its fixed (depreciating) value, which is precipitated in money and to which corresponds the mere purchase of I S. In order that the transaction may take place normally in this case it must be assumed that the mere purchase on the part of II C is equal in value to mere sale on the part of II C.. . otherwise simple reproduction is interrupted. The mere sale on one side must be offset by a mere purchase on the other. It must likewise be assumed that the mere sale of that portion of I S which forms the hoards of A1, A2, A3, is balanced by the mere purchase of that portion of I S which converts the hoards of B1, B2, B3, into elements of additional productive capital.

So far as the balance is restored by the fact that the buyer acts later on as a seller to the same amount, and vice versa, the money returns to the side that has advanced it in the first place, which sold first before it bought again. But the actual balance, so far as the exchange of commodities itself is concerned, that is to say, the disposal of the various portions of the annual product, is conditioned on the equal value of the commodities exchanged for one another.

But to the extent that only one-sided purchases are made, a number of mere purchases on the one hand, a number of mere sales on the other – and we have seen that the normal disposal of the annual product on the basis of capitalist production requires such one-sided metamorphoses – the balance can be maintained only on the assumption that the value of the one-sided purchases and one-sided sales is the same.

In all these one-sided transactions money does not function merely as a mediator in the exchange of commodities, but as the initiator or concluder of a process in which there is only the commodity on one side and the value of the commodity in its independent form – money – on the other; so that money is essential to enable these one-sided processes to continue.

The fact that the production of commodities is the general form of capitalist production implies the role which money is playing, not only as a medium of circulation, but also as money capital, and creates conditions peculiar to the normal transaction of exchange under this mode of production, and therefore peculiar to the normal course of reproduction, whether it be on a simple or expanded scale. These conditions become so many causes of abnormal movements, implying the possibility of crisis, since a balance is an accident under the crude conditions of this production.[9]

Through the sale of their surplus product, capitalists A1, A2, A3, form a hoard of additional potential money capital. In the present case, this surplus product consists of means of production which B1, B2, B3 use in the production of means of production. Only in their hands does this surplus product serve as additional constant capital, although it is virtually such while it is in the hands of the accumulators of hoards, A1, A2, A3 in department I, even before it is sold. If we consider simply the volume of values of reproduction on the part of I, then we are still moving within the limits of simple reproduction. The only difference is that other use values have been produced. Within the same sum of value more means of production for means of production, instead of for means of consumption, have been produced.

A part of I S which was previously exchanged for II C under simple reproduction, and had therefore to consist of means of production exchanged for means of consumption, now comprises means of production exchanged for means of production, which can be incorporated as such in the constant capital of I. Considering the matter only from the point of view of the volume of value, it follows that the material basis of expanded reproduction is being produced within simple reproduction, by the surplus labour of the working class in department I, expended directly in the production of means of production, the creation of virtual additional capital for I.

The formation of virtual additional money capital by A1, A2, A3, through the successive sales of their surplus product, which was formed without any capitalist expenditure of money, is in this case the mere money form of the additional means of production produced by I.

The production of virtual additional money capital on a large scale, at numerous points on the periphery of circulation, is therefore only a result and expression of a multifarious production of virtual additional productive capital whose rise does not itself require any additional expenditure of money on the part of industrial capitalists.[10]

The successive transformation of this virtual additional productive capital into virtual money capital (hoard) on the part of A1, A2, A3, etc. (I), conditioned on the successive sale of their surplus product, which is a repeated one-sided sale without a compensating purchase, is accomplished by a repeated withdrawal of money from circulation and a corresponding formation of a hoard. This hoarding, except where the buyer is a gold producer, does not in any way imply additional wealth in precious metals, but only a change of function on the part of money previously circulating. A while ago, it served as a medium of circulation, now it serves as a hoard, as a virtual additional money capital in process of formation. In other words, the formation of additional money capital and the quantity of precious metals existing in a country are not causally related.

Hence it follows further that the greater the productive capital already functioning in a particular country (including the labour power incorporated in it as the producer of the surplus product), the more developed the productive power of labour and at the same time the technical means for the rapid extension of the production of means of production, and the greater therefore the quantity of the surplus product both as to its value and to the quantity of use values in which it is expressed, so much greater is :

1 The virtual additional productive capital in the form of a surplus product in the hands of A1, A2, A3, etc., and

2 The mass of this surplus product transformed into money, in other words, the virtual additional money capital in the hands of A1, A2, A3.

The fact that Fullarton, for instance, will have nothing to do with any overproduction in the ordinary meaning of the term, but only with the overproduction of capital, meaning money capital, shows how pitifully little even the best bourgeois economists understand about the mechanism of their own system.[11]

While the surplus product, directly produced and appropriated by the capitalists, A1, A2, A3 (I), is the real basis of the accumulation of capital, that is to say, of expanded reproduction, although it does not actually serve in this capacity until it reaches the hands of the capitalists, B1, B2, B3, etc. (I), it is on the contrary quite unproductive in its chrysalis stage of money, as a hoard representing virtual money capital in process of formation. It runs parallel with the process of production, but moves outside it. It is a dead weight of capitalist production. The desire to utilize this surplus value, which is accumulating as virtual money capital, for the purpose of deriving profit or revenue from it, finds its consummation in the credit system and paper securities. Money capital thereby gains in another form an enormous influence on the course and the stupendous development of the capitalist system of production.

The surplus product converted into virtual money capital will grow so much more in volume, the greater the aggregate amount of capital already functioning which brought it into existence. With the absolute increase in the volume of the annually reproduced virtual money capital, its segmentation also becomes easier, so that it is more rapidly invested in a particular business, either in the hands of the same capitalist or in those of others (for instance, members of the family in the case of division of inheritances, etc.). By segmentation of money capital is meant here that it is wholly detached from the parent capital in order to be invested as new money capital in a new and independent business.[12]

While the sellers of the surplus product, A, A1, A2 (I), have obtained it as a direct outcome of the process of production, B, B1, B2, can only obtain it through an act of circulation. Having first accumulated the money for this, just as A, A1, A2 are now doing by the sale of their respective surplus products, they have now attained their goal. Their virtual money capital, accumulated as a hoard, now functions effectively as additional money capital.

The money which is necessary for these exchanges of surplus products must be available in the hands of the capitalist class. In simple reproduction money which served only as revenue for expenditure on means of consumption, returned to the capitalists in the same amount as they advanced it in order to turn over their respective commodities; but in this case, although the same money reappears it has a changed function. The As and Bs (I) supply each other alternately with the money for converting their surplus product into additional virtual capital, and alternately throw the newly formed money capital back into circulation as a means of purchase.

All that is presupposed here is that the volume of money existing in the country (assuming a constant velocity of circulation, etc.) is also adequate for the active circulation ; the same presupposition which, as we saw, had to be made in the case of simple commodity circulation. Only the function of the hoard is different here.

This schematic presentation is, of course, greatly simplified. Clearly, the proportional relations between the capital goods and the consumer goods industries as a whole must also prevail in each separate branch of production. These schemas also show, however, that in capitalist production, both simple reproduction and expanded reproduction can proceed without interruption as long as these proportions are maintained. Conversely, a crisis can occur even in the case of simple reproduction if the proportions are violated; for example, that between depreciated capital and capital ready for new investment. It does not follow at all, therefore, that a crisis in capitalist production is caused by the underconsumption of the masses which is inherent in it. A crisis could just as well be brought about by a too rapid expansion of consumption, or by a static or declining production of capital goods. Nor does it follow from these schemas themselves that a general overproduction of commodities is possible; but rather that any expansion of production allowed by the available productive forces appears possible.


[1] Aside from its survival in the peasant economy, domestic production still has a rote in. capitalist society wherever the product of an enterprise itself becomes an element in reproduction (for instance, grain for sowing, coal which is consumed in coal mines, etc.). This type of production for use increases 'with the growth of combination. It is domestic production because the commodity is not intended for the market, but for use as an element of constant capital in the same enterprise which produced it. Nevertheless, it differs toto cælo [as heaven from earth] from the domestic production of previous social formations, directed to the satisfaction of needs, because it serves commodity production, not consumption.

[2] 'It is a pure tautology to say that crises are caused by the lack of effective consumption or effective consumers. The capitalist system does not know any other modes of consumption but paying ones, except that of the pauper or the thief. If any commodities are unsaleable, it means that no solvent purchasers have been found for them; in other words, consumers (whether commodities are bought in the last instance for productive or individual consumption). But if one were to attempt to clothe this tautology with a semblance of profounder justification by saying that the working class receive too small a portion of their own product, and the evil would be remedied by giving them a larger share of it, or raising their wages, we should reply that crises are precisely always preceded by a period in which wages rise generally and the working class actually get a larger share of the annual product intended for consumption. From the point of view of the advocates of healthy, "simple" (!) common sense, such a period should rather remove a crisis. It seems, then, that capitalist production comprises certain conditions which are independent of good or bad will and permit the working class to enjoy that relative prosperity only momentarily, and at that always as a harbinger of a coming crisis.' Capital, vol. II, pp. 475-6 [MECW, 36, pp410-11]. To which Engels adds this comment: 'Advocates of the theory of Rodbertus are requested to take note of this.'

[3] Capital, vol. III, pp. 286-7 [MECW, 37, pp242-3].

[4] 'But the problem is to follow the further development of the potential crisis – and a real crisis can only be explained by the actual movement of capitalist production, competition and credit in so far as it can be derived from the functional characteristics of capital, peculiar to capital as such, rather than to the forms it takes in commodities and money.' Marx, Theories of Surplus Value, chapter xvii, Section 10 [MECW, 32, p143].

[5] M. Tugan-Baranowsky deserves credit for calling attention to the significance of these investigations for the problem of crises in his Studien zur Theorie und Geschichte der Handelskrisen in England. The curious thing is that this needed to be pointed out at all.

[6] Capital, vol. II, p. 546 [MECW, 36, p 468].

[7] For further examples see Capital, vol. II, pp. 596 et seq [MECW, 36, p510ff].

[8] Capital, vol. II, pp. 576-7 [MECW, 36, p493].

[9] ibid., pp. 577 – 8 [ibid, pp 493-4].

[10] ibid., p. 581 [ibid, p 497].

[11] ibid., pp. 581 – 2 [ibid].

[12] ibid., pp. 582 – 3 [ibid, pp 497-8].