A Textbook issued by the Economics Institute of the Academy of Sciences of the U.S.S.R




Loan Capital

Just as commodity capital becomes separated off in the form of merchant capital, money capital becomes separated off as loan capital.

In the process of the turnover of capital the industrial capitalist finds himself from time to time with spare capital for which he can discover no application in his business. For instance, when a capitalist accumulates a depreciation fund intended for restoring the worn-out parts of his fixed capital, he temporarily assembles spare sums of money. These sums will be spent on purchasing new equipment and machinery only after the lapse of several years. If the manufacturer sells finished products every month but buys raw material only, once in six months, he has spare money at his disposal for five months. This is inactive capital, i.e., capital which is not bringing in any profit.

At other times the capitalist finds himself in need of money, e.g., when, though he has not yet managed to dispose of his finished goods, he needs to buy raw material. At the very moment when one entrepreneur has a temporary surplus of money capital, another has need of it. In their hunt for profit the capitalists strive to ensure that each particle of their capital brings them in income. The capitalist lets out his spare money on loan, i.e., for temporary use by other capitalists.

Loan capital is money capital which its owner allows another capitalist to use for a period in return for a definite consideration. The distinctive feature of loan capital is that it is used in production not by the capitalist who owns it but by others. When he is able to borrow money, an industrial capitalist is freed from the necessity of keeping substantial reserves of money in an inactive state. A loan of money enables a manufacturer to extend production and increase the number of workers he employs, and, consequently, to increase the amount of surplus-value he obtains.

As consideration for the money capital of which he is allowed to dispose, the manufacturer pays the owner of this capital a certain sum which is called interest. Interest is the part of his profit which the industrial capitalist yields to the lending capitalist in return for being granted a loan by him. Loan capital is capital which brings in interest. The source of interest is surplus-value..

The movement of loan capital is wholly based on the movement of industrial capital. Capital granted on loan is used in production, for the purpose of increasing surplus-value. Loan capital, therefore, like all capital generally, expresses first and foremost the production relations between the capitalists and the workers exploited by them. At the same time loan capital in particular reflects the relations between two groups of capitalists: on one side the money capitalists and on the other the functioning capitalists (manufacturers and merchants)..

The formula of motion of loan capital is: M-M’. Here, not only the stage of productive capital but also of merchant capital is missing. The impression is created that the source of income is not surplus-value, produced by exploiting the workers in the sphere of production, but money by itself. The fact that loan capital brings in income in the form of interest appears to be as natural a property of money as the bearing of fruit is of a fruit tree. Here the fetishism characteristic of capitalist relations attains its farthest limit.

The owner of money capital places his capital for a period at the disposal of the industrial capitalist, who uses it in production in order to obtain surplus-value. Thus there arises a separation between the ownership of capital and its employment in production, a separation between capital as property and capital as function.

Interest and Profit of Enterprise.
The Rate of Interest and its Tendency to Fall

The manufacturer or merchant surrenders part of his profit to the money capitalist in the form of interest. Thus, the average profit is broken down into two parts. The part which remains with the industrialist or merchant, i.e., the functioning capitalists~ is called the profit of enterprise..

Just as the form assumed by interest gives rise to a misleading Impression that interest is a natural product of capital-ownership, so the form assumed by profit of enterprise gives rise to the illusion that this income is the remuneration of the functioning capitalist for managing the enterprise and supervising the labour of his workers. In fact, profit of enterprise, like interest, has no connection with work in the management of production; it is part of the surplus-value which the capitalists appropriate without compensation.

The proportion in which the average profit is divided between profit of enterprise and interest depends on the balance of supply and demand of loan capital, the state of the market for money capital. The higher the demand for money capital, the higher, other things being equal, will the rate of interest be. The rate of interest is the name given to the relationship between the amount of the interest and that of the money capital which is lent. In ordinary circumstances, the upper limit of the rate of interest is the average rate of profit, since interest is a part of profit.

As a rule, the rate of interest is considerably less than the average rate of profit.

As capitalism develops, the rate of interest displays a tendency to fall. This tendency results from two causes: first, the operation of the law of the tendency of the average rate of profit to fall, since the average rate of profit constitutes the upper limit of the fluctuations of the rate of interest; secondly, as capitalism develops, the total mass of loan capital grows faster than the demand for it. One of the causes of the growth of loan capital is the increase among the bourgeoisie of the group of rentiers, i.e., capitalists who are owners of money capital and engage in no activity whatsoever in connection with business. This also reflects the increase of parasitism in bourgeois society. The growth of loan capital is facilitated by the centralisation of spare money in banks and savings banks..

Interest on short-term loans on the U.S. money market ranged in 1866-80 from 3.6 (lowest rate) to 17 (highest rate), in 1881-1900 from 2.63 to 9.75, in 1921-20 from 2.98 to 8, in 1921-35 from 0.75 to 7.81, and in 1945-54 from 0.75 to 2.75.

Forms if Credit. Banks and their operations

Capitalist credit is the form of motion of loan capital. Through the medium of credit, temporarily spare money capital is transformed into loan capital. Under capitalism two forms of credit exist: commercial and bankers’.

Commercial credit means the credit which the functioning capitalists (i.e., the manufacturers and merchants) allow other in connection with the realising of commodities. The manufacturer, endeavouring to hasten the turnover of his capital which is in commodity form, supplies commodities on credit to another manufacturer or wholesale merchant, and the wholesale merchant in his turn sells the commodities on credit to the retailer. Commercial credit is used by capitalists in buying and selling raw material, fuel, equipment, machinery and also consumer goods.

Usually, commercial credit is short-term: it is given for a period not exceeding a few months. The instrument of commercial credit is the bill of exchange. A bill of exchange is a debt obligation by which the debtor undertakes to pay within a definite period of time for the commodities he has bought. When the time for payment comes round a buyer who has given a bill of exchange must honour it in cash. Commercial credit therefore is bound up with trading deals and as a consequence is the foundation of the capitalist credit system.

Bankers’ credit means credit granted by money capitalists (bankers) to the functioning capitalists. Bankers’ credit, unlike commercial credit, is not drawn from capital engaged in production or circulation but from idle and also temporarily spare money capital seeking application. Bankers’ credit is granted; by the banks. A bank is a capitalist concern which trades in money capital and acts as middleman between lenders and borrowers. The bank, on the one hand, collects spare, inactive capital and income, and on the other, places money capital at the disposal of the functioning capitalists-manufacturers and merchants..

The overwhelmingly larger part of the capital at the disposal of the banks is not their own property and is subject to withdrawal. But at any particular moment only a fairly small section of the depositors are applying to take out their deposits. In the majority of cases the withdrawal of money is balanced and exceeded by the inflow of new deposits. Thee situation is radically altered when any emergency occurs-a crisis or a war. Then the depositors demand the return of their deposits all at the same time. In ordinary circumstances a bank need keep in its safes only a comparatively small amount of money to pay those who want to withdraw their deposits. By far the larger amount of the deposits is lent out.

Bank operations are divided into passive and active.

Passive operations are those by which the bank draws money into its safes. The principal means by which these operations are effected is the receipt of deposits. Deposits are made in various forms: some for a definite term, others on current account. The latter must be paid out by the bank on demand, whereas fixed-term deposits may be withdrawn only after the agreed term has elapsed. Thus, fixed-term deposits are advantageous to the bank.

Active operations are those by which the bank places and utilises the means which it has at its disposal. These are, first and foremost, the granting of money on loan. One of these operations is the discounting of bills of exchange. A manufacturer who has sold his goods on credit brings to the bank the bill of exchange he has received from the purchaser, and the bank forthwith pays out to the manufacturer the sum specified in the bill of exchange, less a certain percentage. At the conclusion of the period for which the bill is made out, the drawer of the bill pays not the manufacturer but the bank. Through this operation commercial credit is interwoven with bank credit. Also to the category of the bank’s active operations belong the granting of loans on various kinds of security: goods, gilt-edged securities, shipping documents. The bank also makes direct investments of capital in various enterprises in the form of longterm credit.

Thus, a banker is a trader in money capital. In its passive operations the bank pays interest, in its active operations it receives interest. The bank pays a lower rate of interest on the money lent to it and charges a higher rate on the loans which it makes itself. The source of the bank’s profit is the surplus-value created in production. The bank’s profit comes out of the difference between the interest which the bank draws and the interest which it pays out. Out of this difference the bank covers the expenses arising from its operations; these expenses are net costs of circulation. The sum remaining forms the bank’s profit. The mechanism of capitalist competition by its own action brings down the level of this profit to the average rate of profit on capital in general. The labour of the wageworkers employed in the bank, like the labour of commercial employees in the realisation of commodities, does not create value and surplusvalue; but enables the banker to appropriate part of the surplus-value which is created in production. The bank employees are thus subjected to exploitation by the bankers.

The banks fulfil the function of centres for the settling of accounts. Each business which deposits money with the bank or is in receipt of a loan from it has a current account at the bank. The bank pays out money from current accounts on orders presented in a special form, called cheques. Thus, the bank acts as cashier for a number of businesses. This circumstance makes it possible to develop on an extensive scale the settling of accounts without any actual passing of cash. Capitalist A, who has sold commodities to capitalist B, receives from him a cheque drawn on the bank where both of them have current accounts. The bank adjusts the account, transferring the amount named on the cheque from B’s current account to A’s. Concerns have current accounts in different banks.

In the principal centres the banks set up special clearing houses where cheques drawn on many banks cancel each other out to a considerable extent. The circulation of cheques and bills of exchange reduces the need for cash..

Under capitalism there are three main types of bank: commercial banks, mortgage banks and banks of issue. Commercial banks provide credit for manufacturers and merchants predominantly by way of using short-term loans. To a large extent this is done by discounting bills of exchange. This credit is mainly drawn from deposits.

Mortgage banks are concerned with the issue of long-term loans on the security of real property (landholdings, houses, buildings). The rise and activity of mortgage banks is closely connected with the development of capitalism in agriculture, with the exploitation of the peasants by the bankers. To this category of banks also belong the agricultural banks which grant long-term loans for productive purposes..

Banks of issue have the right to issue money of credit-banknotes. Central banks of issue playa special role. It is in these banks that the country’s gold reserves are concentrated. They enjoy the exclusive right to issue banknotes. Central banks do not usually do business with particular manufacturers or merchants, but make loans to commercial banks, which in their turn do business with entrepreneurs. Thus, the central banks of issue are bankers’ banks..

By concentrating loan and payment transactions, banks help to speed up the turnover of capital and to lower the costs of monetary circulation. At the same time, the activity, of the banks facilitates the centralisation of capital, the squeezing-out of the small and medium capitalists, the intensification of the exploitation of the workers and the plundering of the craftsmen and artisans. Mortgage loans ruin the peasants because the payment of interest on these loans, absorbing as it does the major part of their incomes, leads to the breakdown of their economic activity. The paying off of these debts is often effected by way of selling up the land and other property of the peasants who have fallen into dependence on the banks.

Concentrating all the money capital of society as they do, and acting as middlemen for credit, the banks serve as a special kind of apparatus for the spontaneous distribution of resources between different branches of the economy. This distribution takes place not in the interest of society or in accordance with its needs, but in the interests of the capitalists. Credit facilitates the extension of production, but this extension again and again encounters the narrow framework of effective demand. Credit and the banks contribute to the further growth of the socialisation of labour, but the social character of production comes into ever sharper conflict with the private, capitalist form of appropriation. Thus, the development of credit renders the contradictions of the capitalist mode of production more acute and intensifies its anarchy.

Joint-Stock Companies. Fictitious Capital

In the capitalist countries of today the overwhelming majority of large concerns take the form of joint-stock companies. Joint-stock companies made their appearance as far back as the beginning of the seventeenth century, but they became very widespread only in the second half of the nineteenth century.

A joint-stock company is a form of enterprise the capital which consists of contributions by its members, who own a certain number of shares, commensurate with the amount of money invested by them. A share is a security which gives the holder the right to receive part of the income of the enterprise in accordance with the amount inscribed upon it.

The income received by the shareholder is called a dividend. Shares are bought and sold at definite prices..

A capitalist who buys shares might have deposited his capital in the bank and received, say, 5 per cent on it, However, this income does not satisfy him and he prefers to buy shares. Although this course has some risk attached to it, as against that it offers him a larger income. Let us suppose that a share capital of ten million dollars is divided into 20,000 shares, priced at 500 dollars each, and that the business brings in one million dollars profit. The joint-stock company decides to leave 250,000 dollars of this amount in reserve and to divide the remaining sum of 750,000 dollars as dividend amongst the shareholders. In this case each share will bring its owners an income, in the form of dividend (750,000 dollars divided into 20,000 shares) of 37.5 dollars, which works out at 7.5 per cent..

Shareholders when they sell their shares try to get a price which, if it were paid into a bank, would bring them in as loan-interest the same income which they receive as dividend. If a 500-dollar share brings in 37.S dollars dividend, the holder of such a share will try to sell it for 750 dollars, so that, when he deposits this amount in a bank which pays 5 per cent, he will receive the same 37.5 dollars as interest. Purchasers of shares, however, taking into account the risk involved in investing their capital in a joint-stock enterprise, endeavour to acquire shares for a smaller sum. The price of shares depends on the amount of dividend and the level of loan-interest, The price of shares rises with the rise of dividend or the fall in the interest-rate; conversely; it falls when the dividend is lowered or the interest-rate raised.

The difference between the total amount of the prices of shares issued on the foundation of a joint-stock company and the magnitude of the capital actually invested in the concern, makes up the founder’s profit. Founder’s profit is one of the important means of enrichment of the large-scale capitalists..

If the capital previously invested in a concern amounts to ten million dollars, and the total of the prices of the shares issued amounts to fifteen million dollars, then founder’s profit in this instance will be five million dollars..

As a result of the transformation of an individual business into a joint-stock company, capital obtains as it were a two-fold existence. The actual capital invested in the business to the amount of ten million dollars exists in the form of factory buildings, machinery, raw materials, stores, finished products, and, finally, of definite amounts of money kept in the safes belonging to the business or in a current account at the bank..

Alongside real, capital, however, when the joint-stock company is founded, securities make their appearance-shares, amounting to fifteen million dollars. A share is only a reflection of capital which really exists in the concern. But at the same time, the shares have an existence separate from that of the business; they are bought and sold, the bank issues loans on them, etc.

From the formal standpoint the supreme authority in a joint-stock company is the general meeting of shareholders which elects the governing body, nominates the officials, receives and adopts the accounts of the business and decides the main questions of the activity of the jointstock company.

But the number of votes at a general meeting is allotted in accordance with the number of shares, as represented by their holders. For this reason, the joint-stock company is in reality completely in the grip of a small handful of the biggest shareholders. Since a certain number of the shares are dispersed among small and medium shareholders who are not in a position to exercise any influence whatever on the course of affairs, in practice the big capitalists do not need to possess even so much as half of the shares to dominate a joint-stock company. The number of shares which enables one completely to rule the roost in a joint-stock company, is called the controlling interest.

Thus, the joint-stock company is the form in which big capital subordinates to itself and utilises for its own ends the resources of the small and medium capitalists. The widespread extension of joint-stock companies very greatly facilitates the centralisation of capital and the enlargement of production.

Capital which exists in the form of securities which bring in an income to their owners is called fictitious capital. To the category of fictitious capital belong shares and bonds. A bond is acknowledgment of debt, issued by a bank, by a business or the State and bringing its bearer a fixed annual rate of interest.

Securities (shares, bonds, etc.) are bought and sold on stock exchanges. A stock exchange is a market for securities. The prices at which securities are being bought and sold at any particular moment are registered on the stock exchange; deals in securities are made at these prices outside the exchanges as well (e.g., the banks). The price of securities depends on the level loan-interest and the amount of presumable income from the securities. Speculation in securities takes place on the stock exchange. Inasmuch as all the advantages in the game of speculation lie with the big and very big capitalists, stock exchange speculation contributes to the centralisation of capital, enriching the upper circle of capitalists and ruining the medium and small property owners.

The widespread extent of credit and in particular of joint-stock companies to an ever-increasing extent transforms the capitalist into a receiver of interest and dividends, while the management of production passes into the hands of salaried persons-managers and directors. Thus the parasitic nature of capitalist property becomes ever more marked.

Monetary Circulation in Capitalist Countries

Even before the appearance of capitalism metallic monetary systems had arisen in which metals played the part of money commodity. Metallic monetary systems are divided into bimetallic, where the measure of value and the basis of monetary circulation is furnished by two metals at the same time, silver and gold, and monometallic, where only one of the two metals named plays this role. In the early stage of the development of capitalism (sixteenth to eighteenth centuries), the monetary systems of many countries were bimetallic. Towards the end of the nineteenth century nearly all capitalist countries had gone over to monometallism, with gold as the metal used.

The main features of a system of gold monometallism are: free minting of gold coins, free exchange of other money tokens for gold coins, and free movement of gold from country to country. Free minting of gold coins means the right of private persons to exchange any gold they have for coins at the mint. At the same time the owners of coins have the right to transform their coins into ingots of gold. Thus a direct and very close link is established between gold as a commodity and gold coins. Under a system like this the amount of money in circulation is spontaneously brought into keeping with the amount required for the circulation of commodities. If an excess of money is formed, part of this leaves the sphere of circulation and is transformed into hoards. If a shortage of money arises, then these hoards flow out into the sphere of circulation; money ceases to be hoarded and becomes circulation medium and means of payment. To meet the requirements of small-scale turnovers, where a gold-monometallic system prevails coins are issued which are not of face value, made of a cheaper metal (silver, copper, etc.).

Gold, the world money, serves as the instrument of international settlement in commercial and financial transactions. The exchange of the currency of one country for the currencies of others is carried out in accordance with a rate of exchange. The rate of exchange means the price of the monetary unit of one country expressed in the monetary units of other countries. For example, one pound sterling is equal to suchand- such a quantity of dollars.

Settlements in foreign trade transactions can also be effected without transfers of gold or foreign currency. In some cases this can be done by a clearing settlement, i.e., by the mutual setting-off of debts incurred through the supply of commodities in bi-lateral trade. In other cases, settlements between countries may be effected by means of transfer of bills of exchange from country to country, without the movement of gold.

With the growth of credit-relations and the development money’s function as a means of payment credit money made its appearance and developed widely. Bills of exchange, banknotes and cheques began to function mainly as means of payment. Although the bill of exchange is not money, it can serve as a means of payment through the transfer of a bill of exchange from one capitalist to another.

Banks issue their own bonds, which function as credit money, being used as medium of circulation and as means of payment. The principal form of credit money is bank-notes, which banks, issue in exchange for bills of exchange deposited with them. This means that underlying banknotes in the last analysis are; commodity transactions.

The issue of bank-notes makes it possible to provide circulation media and means of payment adequate for the growing circulation of commodities without increasing the amount of metallic money. Under a gold system of monetary circulation; bank-notes can at any time be exchanged by the banks for gold or other metallic money. In such conditions bank-notes circulate on an equal footing with gold coins and cannot depreciate, since besides the backing of credit they also have al backing of metal. As capitalism develops, a relative reduction takes place in the amount of gold which is in circulation. Gold is to an increasing extent accumulated in the form of reserve funds in the central banks of issue. The capitalist States took the road of building up gold reserves so as to strengthen their position in foreign trade, for the conquest of new markets and in preparing and waging wars. Gold came to be replaced in circulation by bank-notes and later also by paper money. Whereas at first bank-notes were, as a rule, exchangeable for gold, later on inconvertible bank-notes were issued. This has to a considerable extent made banknotes similar to paper money.

As already mentioned, paper money arose on the basis of the development of money’s function as a medium of circulation.

Paper money issued by States as legal tender, are inconvertible into gold and serve to represent metallic money of full value in its function as a medium of circulation.

Since the beginning of the first imperialist world war (1914-18) the majority of capitalist countries have gone over to the system of papermoney circulation. At the present time gold money is not in circulation in any country. The ruling classes of capitalist States utilise the issue of inconvertible banknotes and paper money and the devaluation of currencies as a means of additional exploitation and plundering of the working people.

This is seen with particular clarity in the case of inflation. Inflation is characterised by the presence in the channels of circulation of an excessive amount of paper money, its devaluation, a rise in the prices of commodities, a fall in the real wages of manual and clerical workers and an intensification of the impoverishment of the peasants, with an increase in the profits of the capitalists and the receipts of the landlords. Bourgeois States employ inflation as an instrument of economic war against other countries and conquest of fresh markets. Inflation often enables exporters to make additional profits, through buying goods in their own countries with depreciated money at a low rate and selling these goods abroad for hard currency. At the same time the growth of inflation brings disorder into economic life and arouses indignation among the masses.

This compels the bourgeois States to carry out monetary reforms in order to strengthen their monetary systems and stabilise currencies..

The most widespread kind of monetary reform is devaluation. Devaluation is an official reduction of the rate of exchange of paper money, in relation to the metallic unit of money, carried out by changing old, depreciated paper money for a smaller quantity of new money. Thus, in Germany in 1924 the old depreciated money was exchanged for new, expressed in gold marks, at the rate of one trillion marks for one mark..

In a number of cases devaluation has not been accompanied by exchange of old paper money for new.

Monetary reforms are carried out in capitalist countries at the expense of the working people, through increases in taxes and decreases in wages.


(1) Loan capital is money capital which its owner places temporarily at a capitalist’s disposal in return for a consideration in the form of interest-payments. Interest is a part of the industrial capitalist’s profit which he hands over to the owner of loan capital.

(2) Capitalist credit is the form of movement of loan capital. The main forms of credit are commercial credit and bankers credit. The banks concentrate the monetary resources of society in their hands and make them available as money capital to the functioning capitalistsmanufacturers and merchants. The development of credit leads to the growth of capitalist contradictions. The separation of ownership of capital from the employment of capital in production graphically reveals the parasitic character of capitalist property.

(3) A joint-stock company is a form of enterprise the capital of which consists of contributions by its members, each of whom owns a certain number of shares corresponding to the amount of money he has invested. In joint-stock companies big capital subjects to itself and uses in its own interests the resources of small and medium capitalists. Jointstock companies stimulate the centralisation of capital.

(4) As credit develops, the use of credit money becomes widespreadbank- notes issued by the banks in exchange for bills of exchange. The ruling classes of capitalist society use the issue of paper money as a means of intensifying the exploitation of the working people. By inflation the burden of State expenditure is transferred to the shoulders of the mass of the people. Monetary reforms are carried out by capitalist States at the expense of the interests of the working people.