Capital Vol. III Part V
Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital

Chapter 28. Medium of Circulation and Capital; Views of Tooke and Fullarton


The distinction between currency and capital, as Tooke, Wilson, and others draw it, whereby the differences between medium of circulation as money, as money-capital generally, and as interest-bearing capital (moneyed capital in the English sense) are thrown together pell-mell, comes down to two things.[1]

Currency circulates on the one hand as coin (money), so far as it promotes the expenditure of revenue, hence the traffic between the individual consumers and the retail merchants, to which category belong all merchants who sell to the consumers — to the individual consumers as distinct from productive consumers or producers. Here money circulates in the function of coin, although it continually replaces capital. A certain portion of money in a particular country is continually devoted to this function, although this portion consists of perpetually changing individual coins. In so far as money promotes the transfer of capital, however, either as a means of purchase (medium of circulation) or as a means of payment, it is capital. It is, therefore, neither its function as a means of purchase, nor that as a means of payment, which distinguishes it from coin, for it may also act as a means of purchase between one dealer and another so far as they buy from one another in hard cash, and also as a means of payment between dealer and consumer so far as credit is given and the revenue consumed before it is paid. The difference is, therefore, that in the second case this money not only replaces the capital for one side, the seller, but is expended, advanced, by the other side, the buyer, as capital. The difference, then, is in fact that between the money-form of revenue and the money-form of capital, but not that between currency and capital, for a certain quantity of money circulates in the transactions between dealers as well as in the transactions between consumers and dealers. It is, therefore, equally currency in both functions. Tooke's conception introduces confusion into this question in various ways:

1) By confusing the functional distinctions;

2) By introducing the question of the quantity of money circulating together in both functions;

3) By introducing the question of the relative proportions of the quantities of currency circulating in the two functions and thus in the two spheres of the process of reproduction.

Ad 1) Confusing the functional distinctions that money in one form is currency, and capital in the other. In so far as money serves in one or another function, be it to realise revenue or transfer capital, it functions in buying and selling, or in paying, as a means of purchase or a means of payment, and, in the wider sense of the word, as currency. The further purpose which it has in the calculations of its spender or recipient, of being capital or revenue for him, alters absolutely nothing, and this is doubly demonstrated. Although the kinds of money circulating in the two spheres are different, the same piece of money, for instance a five-pound note, passes from one sphere into the other and alternately performs both functions; which is inevitable, if only because the retail merchant can give his capital the form of money only in the shape of the coin which he receives from his customers. It may be assumed that the actual small change has its circulation centre of gravity in the domain of retail trade; the retail dealer needs it continually to make change and receives it back continually in payment from his customers. But he also receives money, i.e., coin, in that metal which serves as a standard of value, hence in England one-pound coins, or even bank-notes, particularly notes of small denominations, such as five- and ten-pound notes. These gold coins and notes, with whatever small change he has to spare, are deposited by the retail dealer every day, or every week, in his bank, and he pays for his purchases by drawing cheques on his bank deposit. But the same gold coins and hank-notes are just as steadily withdrawn from the bank, directly or indirectly (for instance, small change by manufacturers for the payment of wages), as the money-form of its revenue by the entire public in its capacity of consumer, and flow continually back to the retail dealers, for whom they thus again realise a portion of their capital, but at the same time also a portion of their revenue. This last circumstance is important, and is wholly overlooked by Tooke. Only where money is expended as money-capital, early in the reproduction process (Book II, Part 1), does capital-value exist purely as such. For the produced commodities contain not merely capital, but also surplus-value; they are not only capital in themselves, but already capital realised as capital, capital with the source of revenue incorporated in it. What the retail dealer gives away for the money returning to him, his commodities, therefore, is for him capital plus profit, capital plus revenue.

Furthermore, in returning to the retailer, circulating money restores the money-form of his capital.

To reduce the difference between circulation as circulation of revenue and circulation of capital into a difference between currency and capital is, therefore, altogether wrong. This mode of expression is in Tooke's case due to his simply assuming the standpoint of a banker issuing his own bank-notes. Those of his notes which are continually in the public's hands (even if consisting of ever different notes) and serving as currency cost him nothing, save the cost of the paper and the printing. They are circulating certificates of indebtedness (bills of exchange) made out in his own name, but they bring him money and thus serve as a means of expanding his capital. They differ from his capital, however, whether it be his own or borrowed. That is why there is a special distinction for him between currency and capital, which, however, has nothing to do with the definition of these terms as such, least of all with that made by Tooke.

The distinct attribute — whether it serves as the money-form of revenue or of capital — changes nothing in the character of money as a medium of circulation; it retains this character no matter which of the two functions it performs. True, money serves more as an actual medium of circulation (coin, means of purchase) when acting as the money-form of revenue, due to the dispersion of purchases and sales, and because the majority of disbursers of revenue, the labourers, can buy relatively little on credit; whereas in the traffic of the business world, where the medium of circulation is the money-form of capital, money serves mainly as a means of payment, partly on account of the concentration, and partly on account of the prevailing credit system. But the distinction between money as a means of payment and money as a means of purchase (means of circulation) is a distinction that refers to the money itself. It is not a distinction between money and capital. More copper and silver circulate in the retail business, and more gold in the wholesale business. Yet the distinction between silver and copper on the one hand, and gold on the other, is not the distinction between circulation and capital.

Ad 2) Introducing the question of the quantity of money circulating together in both functions: So far as money circulates, be it as a means of purchase or as a means of payment — no matter in which of the two spheres and independently of its function of realising revenue or capital — the quantity of its circulating mass comes under the laws developed previously in discussing the simple circulation of commodities (Vol. I, Ch. III, 2, b). The velocity of circulation, hence the number of repetitions of the same function as means of purchase and means of payment by the same pieces of money in a given term, the mass of simultaneous purchases and sales, or payments, the sum of the prices of the circulating commodities, and finally the balances of payments to be settled in the same period, determine in either case the mass of circulating money, of currency. Whether money so employed represents capital or revenue for the payer or receiver, is immaterial, and in no way alters the matter. Its mass is simply determined by its function as a medium of purchase and payment.

Ad 3) On the question of the relative proportions of the amounts of currency circulating in both functions and thus in both spheres of the reproduction process. Both spheres of circulation are connected internally, for, on the one hand, the mass of revenues to be spent expresses the volume of consumption, and, on the other, the magnitude of the masses of capital circulating in production and commerce expresses the volume and velocity of the reproduction process. Nevertheless, the same circumstances have a different effect, working even in opposite directions, upon the quantities of money circulating in both functions or spheres, or on the amount of currency, as the English put it in banking parlance. And this gives new cause for Tooke's vulgar distinction between capital and currency. The fact that the gentlemen of the Currency Theory confuse two different things is no reason to present them as two different concepts.

In times of prosperity, intense expansion, acceleration and vigour of the reproduction process, labourers are fully employed. Generally, there is also a rise in wages which makes up in some measure for their fall below average during other periods of the business cycle. At the same time, the revenues of the capitalists grow considerably. Consumption increases generally. Commodity-prices also rise regularly, at least in the various vital branches of business. Consequently, the quantity of circulating money grows at least within definite limits, since the greater velocity of circulation, in turn, sets up certain barriers to the growth of the amount of currency. Since that portion of the social revenue which consists of wages is originally advanced by the industrial capitalist in the form of variable capital, and always in money-form, it requires more money for its circulation in times of prosperity. But we must not count this twice — first as money required for the circulation of variable capital, and then as money required for the circulation of the labourers' revenue. The money paid to the labourers as wages is spent in retail trade and returns about once a week to the banks as the retailers' deposits, after negotiating miscellaneous intermediary transactions in smaller cycles. In times of prosperity the reflux of money proceeds smoothly for the industrial capitalists, and thus the need for money accommodation does not increase because more wages have to be paid and more money is required for the circulation of their variable capital.

The total result is that the mass of circulating media serving the expenditure of revenue grows decidedly in periods of prosperity.

As concerns the circulation required for the transfer of capital, hence required exclusively between capitalists, a period of brisk business is simultaneously a period of the most elastic and easy credit. The velocity of circulation between capitalist and capitalist is regulated directly by credit, and the mass of circulating medium required to settle payments, and even in cash purchases, decreases accordingly. It may increase in absolute terms, but decreases relatively under all circumstances compared to the expansion of the reproduction process. On the one hand, greater mass payments are settled without the mediation of money; on the other, owing to the vigour of the process, there is a quicker movement of the same amounts of money, both as means of purchase and of payment. The same quantity of money promotes the reflux of a greater number of individual capitals.

On the whole, the currency of money in such periods appears full, although its Department II (transfer of capital) is, at least relatively, contracted, while its Department I (expenditure of revenue) expands in absolute terms.

The refluxes express the reconversion of commodity-capital into money, M — C — M', as we have seen in the discussion of the reproduction process, Book II, Part I. Credit renders the reflux in money-form independent of the time of actual reflux both for the industrial capitalist and the merchant. Both of them sell on credit; their commodities are thus alienated before they are reconverted into money for them, hence before they flow back to them in money-form. On the other hand, they buy on credit, and in this way the value of their commodities is reconverted, be it into productive capital or commodity-capital, even before this value has really been transformed into money, i.e., before the commodity-price is due and paid for. In such times of prosperity the reflux passes off smoothly and easily. The retailer securely pays the wholesaler, the wholesaler pays the manufacturer, the manufacturer pays the importer of raw materials, etc. The appearance of rapid and reliable refluxes always keeps up for a longer period after they are over. In reality by virtue of the credit that is under way, since credit refluxes take the place of the real ones. The banks scent danger as soon as their clients deposit more bills of exchange than money. See the testimony of the Liverpool bank director, p. 398. [Present edition: Ch. XXV. — Ed.]

To insert what I have noted earlier: "In periods of predominant credit, the velocity of the circulation of money increases faster than commodity-prices, whereas in times of declining credit commodity-prices drop slower than the velocity of circulation." (Zur Kritik der politischen Oekonomie, 1859, S. 83, 84.)

The reverse is true in a period of crisis. Circulation No. I contracts, prices fall, similarly wages; the number of employed labourers is reduced, the mass of transactions decreases. On the contrary, the need for money accommodation increases in circulation No. II with the contraction of credit. We shall examine this point in greater detail immediately.

There is no doubt that with the decrease of credit which goes hand in hand with stagnation in the reproduction process, the circulation mass required for No. I, the expenditure of revenue, contracts, while that required for No. II, the transfer of capital, expands. But to what extent this statement coincides with what is maintained by Fullarton and others still remains to he analysed:

"A demand for capital on loan and a demand for additional circulation are quite distinct things, and not often found associated." (Fullarton, 1. c., p. 82, title of Chapter 5.) [2]

In the first place it is evident that in the first of the two cases mentioned above, during times of prosperity, when the mass of the circulating medium must increase, the demand for it increases. But it is likewise evident that, when a manufacturer draws more or less of his deposit out of a bank in gold or bank-notes because he has to expend more capital in the form of money, his demand for capital does not thereby increase. What increases is merely his demand for this particular form in which he expends his capital. The demand refers only to the technical form, in which he throws his capital into circulation. Just as in the case of a different development of the credit system, the same variable capital, for example, or the same quantity of wages, requires a greater mass of means of circulation in one country than in another; in England more than in Scotland, for instance, and in Germany more than in England. Likewise in agriculture, the same capital active in the reproduction process requires different quantities of money in different seasons for the performance of its function.

But the contrast drawn by Fullarton is not correct. It is by no means the strong demand for loans as he says, which distinguishes the period of depression from that of prosperity, but the ease with which this demand is satisfied in periods of prosperity, and the difficulties which it meets in periods of depression. It is precisely the enormous development of the credit system during a prosperity period, hence also the enormous increase in the demand for loan capital and the readiness with which the supply meets it in such periods, which brings about a shortage of credit during a period of depression. It is not, therefore, the difference in volume of demand for loans which characterises both periods.

As we have previously remarked, both periods are primarily distinguished by the fact that the demand for currency between consumers and dealers predominates in periods of prosperity, and the demand for currency between capitalists predominates in periods of depression. During a depression the former decreases, and the latter increases.

What strikes Fullarton and others as decisively important is the phenomenon that in such periods when securities in possession of the Bank of England are on the increase, its circulation of notes decreases, and vice versa. The level of the securities, however, expresses the volume of the pecuniary accommodation, the volume of discounted bills of exchange and of advances made against marketable collateral. Thus Fullarton says in the above passage that the securities in the hands of the Bank of England fluctuate mostly in an opposite direction to its circulation, and this corroborates the view long held by private banks that no bank can increase its issue of bank-notes beyond a certain point determined by the needs of its public; but if a bank wants to make advances beyond this limit, it must make them out of its capital, hence it must either realise on securities or utilise deposits which it would otherwise have invested in securities.

This, however, reveals also what Fullarton means by capital. What does capital signify here? That the Bank can no longer make advances with its own bank-notes, or promissory notes, which, of course, cost it nothing. But what does it make advances with in that case? With the sums realised from the sale of securities held in reserve, i.e., government bonds, stocks, and other interest-bearing paper. And what does it get in payment for the sale of such paper? Money-gold or bank-notes, so far as the latter are legal tender, such as those of the Bank of England. What the bank advances, therefore, is under all circumstances money. This money, however, now constitutes a part of its capital. If it advances gold, this is understandable. If it advances notes, then these notes represent capital, because it has given up some actual value for them, such as interest-bearing paper. In the case of private banks the notes secured by them through the sale of securities cannot be anything else, in the main, but Bank of England notes or their own notes, since others would hardly be taken in payment for securities. If it is the Bank of England itself, then its own notes, which it receives in return, cost it capital, that is, interest-bearing paper. Besides, it thereby withdraws its own notes from circulation. Should it reissue these notes, or issue new notes in their stead to the same amount, they now represent capital. And they do so equally well, when used for advances to capitalists, or when used later, when the demand for such pecuniary accommodation decreases, for reinvestment in securities. In all these cases the term capital is employed only from the banker's point of view, and means that the banker is compelled to loan more than his mere credit.

As is known, the Bank of England makes all its advances in its own notes. Now, if despite this, as a rule, the bank-note circulation of the Bank decreases in proportion as the discounted bills of exchange and collateral in its hands, and thus its advances increase — what becomes of the notes thrown into circulation? How do they return to the Bank?

To begin with, if the demand for money accommodation arises from an unfavourable national balance of payments and thereby implies a drain of gold, the matter is very simple. The bills of exchange are discounted in bank-notes. The bank-notes are exchanged for gold by the Bank itself, in its issue department, and this gold is exported. It is as though the Bank paid out gold directly, without the mediation of notes, on discounting bills. Such an increased demand, which may in certain cases be £7 to £10 million, naturally does not add a single five-pound note to the country's domestic circulation. If it is now said that the Bank advances capital, and not currency, this means two things. First, that it does not advance credit, but actual values, a part of its own capital or of capital deposited with it. Secondly, that it does not advance money for inland, but for international circulation, that it advances world-money; and for this purpose money must always exist in its form of a hoard, in its metallic state; in the form in which it is not merely a form of value, but value itself, whose money-form it is. Although this gold now represents capital, both for the Bank and the exporting gold-dealer, i.e., banking or commercial capital, the demand for it is not for capital, but for the absolute form of money-capital. This demand arises precisely at the moment when foreign markets are overcrowded with unsaleable English commodity-capital. What is wanted, therefore, is capital, not as capital, but capital as money, in the form in which money serves as a universal world-market commodity; and this is its original form of precious metal. The drain of gold is not, therefore, as Fullarton, Tooke, etc., claim, "a mere question of capital." Rather, it is a "question of money," even if in a specific function. The fact that it is not a question of inland circulation as the advocates of the Currency Theory maintain, does not prove at all, as Fullarton and others think, that it is merely a question of capital. It is a question of money in the form in which money is an international means of payment.

"Whether that capital" (the purchase price for the million of quarters of foreign wheat after a crop failure in the home country) "is transmitted in merchandise or in specie, is a point which in no way affects the nature of the transaction." (Fullarton, 1. c., p. 131.)

But it significantly affects the question, whether there is a drain of gold, or not. Capital is transferred in the form of precious metal, because it either cannot be transferred at all, or only at a great loss in the shape of commodities. The fear which the modern banking system has of gold drain exceeds anything ever imagined by the monetary system, which considers precious metals as the only true wealth. Take, for instance, the following evidence of the Governor of the Bank of England, Morris, before the Parliamentary Committee on the crisis of 1847-48:

(3846. Question:) "When I spoke of the depreciation of stocks and fixed capital, are you not aware that all property invested in stocks and produce of every description was depreciated in the same way; that raw cotton, raw silk, and unmanufactured wool were sent to the continent at the same depreciated price, and that sugar, coffee and tea were sacrificed as at forced sales? — It was inevitable that the country should make a considerable sacrifice for the purpose of meeting the efflux of bullion which had taken place in consequence of the large importation of food." — "3848. Do not you think it would have been better to trench upon the £8 million lying in the coffers of the Bank, than to have endeavoured to get the gold back again at such a sacrifice? — No, I do not." —

It is gold which here stands for the only true wealth.

Fullarton quotes the discovery by Tooke that

"with only one or two exceptions, and those admitting of satisfactory explanation, every remarkable fall of exchange, followed by a drain of gold, that has occurred during the last half-century, has been coincident throughout with a comparatively low state of the circulating medium, and vice versa." (Fullarton, p. 121.)

This discovery proves that such drains of gold occur generally after a period of animation and speculation, as

"the signal of a collapse already commenced an indication of overstocked markets, of a cessation of the foreign demand for our productions, of delayed returns, and, as the necessary sequel of all these, of commercial discredit, manufactories shut up, artisans starving, and a general stagnation of industry and enterprise" (p. 129).

This, naturally, is at once the best refutation of the claim of the advocates of the Currency Theory, that

"a full circulation drives out bullion and a low circulation attracts it."

On the contrary, while the Bank of England generally carries a strong gold reserve during a period of prosperity, this hoard is generally formed during the slack period, which follows after a storm.

All this sagacity concerning the drain of gold, then, amounts to saying that the demand for international media of circulation and payment differs from the demand for internal media of circulation and payment (and it goes without saying, therefore, that "the existence of a drain does not necessarily imply any diminution of the internal demand for circulation," as Fullarton has it on page 112 of his work) and that the export of precious metal and its being thrown into international circulation is not the same as throwing notes or specie into internal circulation. As for the rest, I have shown on a previous occasion [English edition: Vol. 1. — Ed.] that the movements of a hoard concentrated as a reserve fund for international payments have as such nothing to do with the movements of money as a medium of circulation. At any rate, the question. is complicated by the fact that the different functions of a hoard, which I have developed from the nature of money — such as its function as a reserve fund of means of payment to cover due bills in domestic business; the function of a reserve fund of currency; and finally, the function of a reserve fund of world-money — are here attributed to one sole reserve fund. It also follows from this that under certain circumstances a drain of gold from the Bank to the home market may combine with a drain abroad. The question is further complicated however by the fact that this hoard is arbitrarily burdened with the additional function of serving as a fund guaranteeing the convertibility of bank-notes in countries, in which the credit system and credit-money are developed. And in addition to all this comes 1) the concentration of the national reserve fund in one single central bank, and 2) its reduction to the smallest possible minimum. Hence, also, Fullarton's complaint (p.143):

"One cannot contemplate the perfect silence and facility with which variations of the exchange usually pass off in continental countries, compared with the state of feverish disquiet and alarm always produced in England whenever the treasure at the Bank seems to be at all approaching to exhaustion, without being struck with the great advantage in this respect which a metallic currency possesses."

However, if we now leave aside the drain of gold, how can a bank that issues notes, like the Bank of England, increase the amount of money accommodation granted by it without increasing its issue of bank-notes?

So far as the bank itself is concerned, all the notes outside its walls, whether circulating or in private hoards, are in circulation, i.e., are out of its hands. Hence, if the bank extends its discounting and money-lending business, its advances on securities, all the bank-notes issued by it for that purpose must return, for otherwise they would increase the volume of circulation, something which is not supposed to happen. This return may take place in two ways.

First: The bank pays A notes against securities; A uses them to pay for bills of exchange due to B, and B deposits notes once more in the bank. This brings to a close the circulation of these notes, but the loan remains.

"The loan remains, and the currency, if not wanted, finds its way back to the issuer." (Fullarton, p. 97.)

The notes, which the bank advanced to A, have now returned to it; but it is the creditor of A, or whoever may have been the drawer of the bill discounted by A, and the debtor of B for the amount of value expressed in these notes, and B thus disposes of a corresponding portion of the capital of the bank.

Secondly: A pays to B, and B himself, or C, to whom he pays the notes, uses these notes to pay bills due to the bank, directly or indirectly. In that case the bank is paid in its own notes. This concludes the transaction (pending A's return payment to the bank).

To what extent, now, shall the bank's advance to A be regarded as an advance of capital, or as a mere advance of means of payment?[3]

[This depends on the nature of the loan itself. Three cases must be distinguished.

First case. — A receives from the bank amounts loaned on his own personal credit, without giving any security for them. In this case he does not merely receive means of payment, but also unquestionably a new capital, which he may employ in his business and realise as an additional capital until the maturity date.

Second case. — A has given to the bank securities, national bonds, or stocks as collateral, and received for them, say, up to two-thirds of their momentary value as a cash loan. In this case he has received the means of payment he needed, but no additional capital, for he entrusted to the bank a larger capital-value than he received from it. But this larger capital-value was, on the one hand, unavailable for his momentary needs (means of payment), because invested in a particular interest-bearing form; on the other hand, A had his own reasons for not wanting to convert this capital-value directly into means of payment by selling it. His securities served, among other things, as a reserve capital, and he set them in motion as such. The transaction between A and the bank, therefore, consists in a temporary mutual transfer of capital, so that A does not receive any additional capital (quite the contrary!) although he receives the desired means of payment. For the bank, on the other hand, this transaction constitutes a temporary lodgement of money-capital in the form of a loan, a conversion of money-capital from one form into another, and this conversion is precisely the essential function of the banking business.

Third case. — A had the bank discount a bill of exchange and received its value in cash after the deduction of discount. In this case he sold a non-convertible money-capital to the bank for the amount of value in convertible form. He sold his still running bill for cash money. The bill is now the property of the bank. It does not alter the matter that A as last endorser of the bill is responsible for it to the bank in default of payment. He shares this responsibility with the other endorsers and with the drawer of the bill, all of whom are duly responsible to him. In this case, therefore, we do not have a loan, but only an ordinary purchase and sale. For this reason, A has nothing to pay back to the bank. It reimburses itself by cashing the bill when it becomes due. Here, too, a transfer of capital has taken place between A and the bank, and in exactly the same manner as in the sale and purchase of any other commodity, and for this very reason A did not receive any additional capital. What he needed and received were means of payment, and he received them by having the bank convert one form of his money-capital — his bill — into another — money.

It is therefore only in the first case that there is any question of a real advance of capital; in the second and third cases, the matter can be so regarded only in the sense that every investment of capital implies an "advance of capital." In this sense the bank advances money-capital to A; but for A it is money-capital at best in the sense that it is a portion of his capital in general. And he requires it and uses it not specifically as capital, but rather as specifically a means of payment. Otherwise, every ordinary sale of commodities by which means of payment are secured might be considered as receiving an advance of capital. — F. E.]

In the case of private banks which issue their own notes we have this difference, that if their notes remain neither in local circulation, nor return to them in the form of deposits, or in payment for due bills of exchange, they fall into the hands of persons who compel the private bank to cash these notes in gold or in notes of the Bank of England. In this event, therefore, its loan in fact represents an advance of notes of the Bank of England, or, what amounts to the same thing for the private bank, of gold, hence a portion of its bank capital. The same holds good in case the Bank of England itself, or some other bank, which has a fixed legal maximum for its issue of notes, must sell securities to withdraw its own notes from circulation and then issue them once more in the shape of advances; in that case, the bank's own notes represent a portion of its mobilised bank capital.

Even if the circulation were purely metallic, it would be possible 1) for a drain of gold [Marx evidently refers here to a drain of gold that would, at least partially, go abroad — F. E.] to empty the treasury, and 2) since gold would be chiefly wanted by the bank to make payments (in settlement of erstwhile transactions), the advance against collateral could grow considerably, but would flow back to it in the form of deposits or in payment of due bills of exchange; so that, on one side, the total treasure of the bank would decrease with an increase of the securities in its hands, while on the other, it would now be holding the same amount, which it possessed formerly as owner, as debtor of its depositors, and finally the total quantity of currency would decrease.

Our assumption so far has been that the loans are made in notes, so that they carry with them at least a fleeting, even if instantly disappearing, increase in the issue of notes. But this is not necessary. Instead of a paper note, the bank may open a credit account for A, in which case this A, the bank's debtor, becomes its imaginary depositor. He pays his creditors with cheques on the bank, and the recipient of these cheques passes them on to his own banker, who exchanges them for the cheques outstanding against him in the clearing house. In this case no mediation of notes takes place at all, and the entire transaction is confined to the fact that the bank settles its own debt with a cheque drawn on itself, and its actual recompense consists in its claim on A. In this case the bank has loaned a portion of its own bank capital, because its own debt claims, to A.

In so far as this demand for pecuniary accommodation is a demand for capital, it is so only for money-capital. It is capital only from the standpoint of the banker, namely gold (in the case of gold exports abroad) or notes of the National Bank, which a private bank can obtain only by purchase against an equivalent, and which, therefore, represent capital for it. Or, again, it is a case of interest-bearing papers, government bonds, stocks, etc., which must be sold in order to obtain gold or bank-notes. Such papers, however, if in government bonds, are capital only for the buyer, for whom they represent the purchase price, the capital he invested in them. In themselves they are not capital, but merely debt claims. If mortgages, they are mere titles on future ground-rent. And if they are shares of stock, they are mere titles of ownership, which entitle the holder to a share in future surplus-value. All of these are not real capital. They do not form constituent parts of capital, nor are they values in themselves. By way of similar transactions money belonging to the bank may be transformed into deposits, so that the bank becomes the debtor instead of owner of this money, and holds it under a different title of ownership. However important this may be to the bank, it alters nothing in the mass of reserve capital, or even of money-capital available in a particular country. Capital, therefore, represents here only money-capital, and, if not available in the actual form of money, it represents a mere title on capital. This is very important, since a scarcity of, and pressing demand for, banking capital is confounded with a decrease of actual capital, which conversely is in such cases rather abundant in the form of means of production and products, and swamps the markets.

It is, therefore, easy to explain how the mass of securities held by a bank as collateral increases, hence how the growing demand for pecuniary accommodation can be satisfied by the bank, while the total mass of currency remains the same or decreases. This total mass is held in check during such periods of money stringency in two ways: 1) by a drain of gold; 2) by a demand for money in its capacity as a mere means of payment, when the issued bank-notes return immediately; or when the transactions take place without the mediation of notes by means of book credit; when, therefore, payments are made simply through a credit transaction, the settlement of these payments being the sole purpose of the operation. It is a peculiarity of money, when it serves merely to settle accounts (and in times of crises loans are taken up to pay, rather than to buy; to wind up previous transactions, not to initiate new ones), that its circulation is no more than fleeting, even where balances are not settled by mere credit operations, without the mediation of money, so that, when there is a strong demand for pecuniary accommodation, an enormous quantity of such transactions can take place without expanding the circulation. But the mere fact that the circulation of the Bank of England remains stable or even decreases simultaneously with an extensive accommodation of money on its part, does not prima facie prove, as Fullarton, Tooke and others assume (owing to their erroneous notion that pecuniary accommodation is identical with receiving capital on loan as additional capital), that the circulation of money (of bank-notes) in its function as a means of payment is not increased and extended. Since the circulation of notes as means of purchase decreases during a business depression, when such extensive accommodation is necessary, their circulation as means of payment may increase, and the aggregate amount of the circulation, the sum of notes functioning as means of purchase and payment, may remain stable or may even decrease. The circulation as a means of payment of bank-notes immediately returning to the bank that issues them is simply not circulation in the eyes of those economists.

Should circulation as a means of payment increase at a higher rate than it decreases as a means of purchase, the aggregate circulation would increase, although the money serving as a means of purchase would decrease considerably in quantity. And this actually occurs in certain periods of crisis, namely, when credit collapses completely and when not only commodities and securities are unsaleable but bills of exchange are undiscountable and nothing counts any more but money payment, or, as the merchant puts it, cash. Since Fullarton et al. do not understand that the circulation of notes as means of payment is the characteristic feature of such periods of money shortage, they treat this phenomenon as accidental.

"With respect again to those examples of eager competition for the possession of bank-notes, which characterise seasons of panic and which may sometimes, as at the close of 1825, lead to a sudden, though only temporary, enlargement of the issues, even while the efflux of bullion is still going on, these, I apprehend, are not to be regarded as among the natural or necessary concomitants of a low exchange; the demand in such cases is not for circulation" (read circulation as a means of purchase), "but for hoarding, a demand on the part of alarmed bankers and capitalists which arises generally in the last act of the crisis" (hence, for a reserve of means of payment), "after a long continuation of the drain, and is the precursor of its termination." (Fullarton, p. 130.)

In the discussion of money as a means of payment (Vol. I, Ch. III, 3, b) we have already explained, in what manner, when the chain of payments is suddenly interrupted, money turns from its ideal form into a material and, at the same time, absolute form of value vis-à-vis the commodities. This was illustrated by some examples (footnotes 100 and 101). This interruption itself is partly an effect, partly a cause of the instability of credit and of the circumstances accompanying it, such as overstocking of markets, depreciation of commodities, interruption of production, etc.

It is evident, however, that Fullarton transforms the distinction between money as a means of purchase and money as a means of payment into a false distinction between currency and capital. This is again due to the narrow-minded banker's conception of circulation.

It might yet be asked: which is it, capital or money in its specific function as a means of payment that is in short supply in such periods of stringency? And this is a well-known controversy.

In the first place, so far as the stringency is marked by a drain of gold, it is evidently international means of payment that are demanded. But money in its specific capacity of international means of payment is gold in its metallic actuality, as a valuable substance in itself, as a quantity of value. It is at the same time capital, not capital as commodity-capital, but as money-capital, capital not in the form of commodities but in the form of money (and, at that, of money in the eminent sense of the word, in which it exists as universal world-market commodity). It is not a contradiction here between a demand for money as a means of payment and a demand for capital. The contradiction is rather between capital in its money-form and capital in its commodity-form; and the form which is here demanded and in which alone it can function, is its money-form.

Aside from this demand for gold (or silver) it cannot be said that there is any dearth whatever of capital in such periods of crisis. Under extraordinary circumstances, such as rise in the price of corn, or a cotton famine, etc., this may be the case; but these phenomena are not necessary or regular accompaniments of such periods; and the existence of such a lack of capital cannot be assumed beforehand without further ado from the mere fact that there is a heavy demand for pecuniary accommodation. On the contrary. The markets are overstocked, swamped with commodity-capital. Hence, it is not, in any case, a lack of commodity-capital which causes the stringency. We shall return to this question later.


1. We here give the related passage from Tooke in the original, which was cited in German on p. 390 [present edition: Ch. XXV:] "The business of bankers, setting aside the issue of promissory notes payable on demand, may be divided into two branches, corresponding with the distinction pointed out by Dr. (Adam) Smith of the transactions between dealers and dealers, and between dealers and consumers. One branch of the bankers' business is to collect capital from those who have not immediate employment for it, and to distribute or transfer it to these who have. The other branch is to receive deposits of the incomes of their customers, and to pay out the amount, as it is wanted for expenditure by the latter in the objects of their consumption ... the former being a circulation of capital, the latter of currency."(Tooke, Inquiry into the Currency Principle, London, p. 36.) The first is "the concentration of capital on the one hand and the distribution of it on the other"; the latter is "administering the circulation for local purposes of the district." (Ibid., p. 37.) A far more correct conception is outlined in the following passage by Kinnear: "Money ... is employed to perform two operations essentially distinct.... As a medium of exchange between dealers and dealers, it is the instrument by which transfers of capital are effected; that is, the exchange of a certain amount of capital in money for an equal amount of capital in commodities. But money employed in the payment of wages and in purchase and sale between dealers and consumers is not capital, but income; that portion of the incomes of the community, which is devoted to daily expenditure. It circulates in constant daily use, and is that alone which can, with strict propriety, be termed currency. Advances of capital depend entirely on the will of the Bank and other possessors of capital, for borrowers are always to be found; but the amount of the currency depends on the wants of the community, among whom the money circulates, for the purposes of daily expenditure." (J. G. Kinnear, The Crisis and the Currency, London, 1847 [pp. 3-4].)

2. "It is a great error, indeed, to imagine that the demand for pecuniary accommodation " (that is, for the loan of capital) "is identical with a demand for additional means of circulation, or even that the two are frequently associated. Each demand originates in circumstances peculiarly affecting itself, and very distinct from each other. It is when everything looks prosperous, when wages are high, prices on the rise, and factories busy, that an additional supply of currency is usually required to perform the additional functions inseparable from the necessity of making larger and more numerous payments; whereas it is chiefly in a more advanced stage of the commercial cycle, when difficulties begin to present themselves, when markets are overstocked, and returns delayed, that interest rises, and a pressure comes upon the Bank for advances of capital. It is true that there is no medium through which the Bank is accustomed to advance capital except that of its promissory notes; and that to refuse the notes, therefore, is to refuse the accommodation. But the accommodation once granted, everything adjusts itself in conformity with the necessities of the market; the loan remains, and the currency, if not wanted, finds its way hack to the issuer. Accordingly, a very slight examination of the Parliamentary Returns may convince any one, that the securities in the hands of the Bank of England fluctuate more frequently in an opposite direction to its circulation than in concert with it, and that the example, therefore, of that great establishment furnishes no exception to the doctrine so strongly pressed by the country bankers, to the effect that no hank can enlarge its circulation, if that circulation he already adequate to the purposes to which a bank-note currency is commonly applied; but that every addition to its advances, after that limit is passed, must he made from its capital, and supplied by the sale of some of its securities in reserve, or by abstinence from further investment in such securities. The table compiled from the Parliamentary Returns for the interval between 1833 and 1840, to which I have referred in a preceding page, furnishes continued examples of this truth; but two of these are so remarkable that it will be quite unnecessary for me to go beyond them. On the 3rd of January, 1837, when the resources of the Bank were strained to the uttermost to sustain credit and meet the difficulties of the money-market, we find its advances on loan and discount carried to the enormous sum of £17,022,000, an amount scarcely known since the war, and almost equal to the entire aggregate issues which, in the meanwhile, remain unmoved at so low a point as £17,076,000! On the other hand, we have on the 4th of June, 1833, a circulation of £18,892,000, with a return of private securities in hand, nearly, if not the very lowest on record for the last half-century, amounting to no more than £972,000!" (Fullarton, 1. c., pp. 97, 98.) That a demand for pecuniary accommodation need not be identical by any means with a demand for gold (what Wilson, Tooke and others call capital) is seen from the following testimony of Mr. Weguelin, Governor of the Bank of England: "The discounting of bills to that extent" (one million daily for three successive days) "would not reduce the reserve" (of bank-notes), "unless the public demanded a greater amount of active circulation. The notes issued on the discount of bills would be returned through the medium of the bankers and through deposits. Unless these transactions were for the purpose of exporting bullion, and unless there were an amount of internal panic which induced people to lock up their notes, and not to pay them into the hands of the bankers ... the reserve would not be affected by the magnitude of the transactions." — "The Bank may discount a million and a half a day, and that is done constantly, without its reserve being in the slightest degree affected, the notes coming back again as deposits, and no other alteration taking place than the mere transfer from one account to another." (Report on Bank Acts, 1857, Evidence Nos. 241, 500.) The notes therefore serve here merely as means of transferring credits.

3. The passage that follows in the original is unintelligible in this context and has been rewritten by the editor to the end of the brackets. In another context this point has already been touched upon in Chapter XXVI. — F. E