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CHAPTER XXVIII.: THE MEDIUM OF CIRCULATION (CURRENCY) AND CAPITAL. TOOKE'S AND FULLARTON'S CONCEPTION. - Karl Marx, Capital: A Critique of Political Economy. Volume III: The Process of Capitalist Production as a Whole 
Capital: A Critique of Political Economy. Volume III: The Process of Capitalist Production as a Whole, by Karl Marx. Ed. Federick Engels. Trans. from the 1st German edition by Ernest Untermann (Chicago: Charles H. Kerr and Co. Cooperative, 1909).
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THE MEDIUM OF CIRCULATION (CURRENCY) AND CAPITAL. TOOKE'S AND FULLARTON'S CONCEPTION.
THE distinction between currency and capital, drawn by Tooke,90 Wilson, and others, which indiscriminately confounds the differences between the medium of circulation as money, as money-capital, and as interest-bearing capital (moneyed capital in English parlance), refers to two things.
The currency circulates on the one hand as coin (money), so far as it promotes the expenditure of revenue, in the transactions between the individual consumers and the retail merchants. In this category belong all merchants, who sell to the consumers, that is, the individual consumers as distinguished from the productive consumers or producers. Here money circulates in the function of coin, although it continually replaces capital. A certain portion of the money in a certain country is continually devoted to this function, although this portion consists of perpetually varying pieces of individual coin. On the other hand, so far as money promotes the transfer of capital, either as a means of purchase (means 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 act as a means of purchase also between dealer and dealer, so far as they buy on cash terms one another, and it may serve as a means of payment also between dealer and consumer, so far as credit is given and the revenue consumed before it is paid. 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 those between consumers and dealers. It is, therefore, equally a currency (circulation) in both functions. In Tooke's conception, confusion is introduced into this question in various ways.
1) By confounding the definite distinctions of the two functions;
I. Confounding the Definite Distinctions.
Money is said to be currency in the one form, and capital in the other. To the extent that money serves in the one or the other function, be it for the realisation of revenue or the transfer of capital, it performs its duty in buying and selling or in paying, as a means of purchase or payment, and in the wider meaning of the word as currency. The further purposes, to which it is devoted in the accounts of its spender or recipient, who may use it as capital or revenue, do not alter anything in this matter, and this is demonstrated by two facts. Although the kinds of money circulating in the two spheres are different, yet the same price of money, for instance a five pound note, passes from one sphere to the other and performs alternately both functions; this is inevitable for the simple reason, that the retail merchant can give to his capital the form of money which he receives from customers. It may be assumed, that the small change has its center of gravitation in the domain of retail trade; the retail dealer needs it continually to give change and receives it back continually in the payments of his customers. But he also receives money, that is, coin in that metal, which serves as a standard of value, for instance, 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 checks on his deposits. But the same gold coins and bank notes are continually withdrawn from the bank, indirectly or directly (for instance, small change by manufacturers for the payment of wages), by the entire public in its capacity as consumer, and flow continually back to the retail dealers, for whom they realise in this way a portion of their capital, and at the same time their revenue, again and again. This last circumstance is important, and it is wholly overlooked by Tooke. Only where money is expended as money-capital, in the beginning of the process of reproduction (Book II, Part I), does capital-value exist purely as such. For in the produced commodities there is contained not merely capital, but also surplus-value; they are not capital alone, but also newly produced capital, capital pregnant with the source of revenue. What the retail dealer gives away for the money returning to him, his commodities, constitutes for him capital plus profit, capital plus revenue.
Furthermore, the circulating small change, when returning to the retail dealer, rehabilitates for him the money-form of his capital.
The difference between circulation as a circulation of revenue and a circulation of capital cannot, therefore, be presented as a difference between currency and capital without creating confusion. This mode of expression is due in the case of Tooke to the fact, that he simply places himself in the position of a banker issuing his own bank notes. The amount of his notes, which is continually in the hands of the public and serves as currency (even if consisting of ever different notes) costs him nothing but paper and printing. They are circulating certificates of indebtedness made out in his own name (bills of exchange), but they bring him money and thus serve as a means of expanding his capital. But they differ from his capital, whether this be his own or borrowed capital. This implies for him a specific distinction between currency and capital, which, however, has nothing to do with the definite definition of terms as such, least of all with those made by Tooke in this case.
The different terms denoting specific functions—whether it be the money form of revenue or of capital—do not change anything in the primal character of money as a medium of circulation; it retains this character, no matter whether it performs the one function or the other. It is true, that money serves more as a medium of circulation in the strict meaning of the term (coin, means of purchase) in its character as the money-form of revenue, on account of the incoherency of the purchases and sales, and because the majority of the spenders of revenue, the laborers, can buy relatively little on credit, while in the transactions of the business world, where the medium of circulation constitutes the money-form of capital, money serves mainly as a means of payment, partly on account of the concentration, partly on account of the prevailing credit system. But the distinction between money as a means of payment and a means of purchase (currency) refers to money itself; it is not a distinction between money and capital. The distinction is not one between currency and capital, merely because more copper and silver circulates in the retail business, and more gold in wholesale business, so that there is a difference between copper and silver on one side, and gold on the other.
II. Introducing the Question of the Quantity of Money Circulating Together in Both Functions.
To the extent that money circulates, either as a means of purchase or as a means of payment, no matter in which one of the two spheres and independently of its function of realising revenue or capital, the quantity of its circulating mass is regulated by the laws developed previously in the discussion of the simple circulation of commodities, Book I, Chapter III, 2 b. The degree of the velocity of circulation, in other words, the number of repetitions of the same function as means of purchase and payment by the same pieces of money in a given period of time, the mass of simultaneous purchases and sales, or payments, the sum of the prices of the circulating commodities, finally the balances of payments to be spared in the same period, determine in either case the mass of the circulating money, of currency. Whether the money so serving represents capital or revenue for the paying or receiving party, is immaterial, and does not alter the matter in any way. Its mass is simply determined by its function as a medium of purchase and payment.
III. Introduction of the Question of the Relative Proportions of the Quantities of Currency Circulating in Both Functions and Thus in Both Spheres of the Process of Reproduction.
Both spheres of circulation are connected internally, for on the one hand the mass of the revenues to be spent expresses the volume of consumption, and on the other hand the magnitude of the masses of capital circulating in production and commerce express the volume and velocity of the process of reproduction. Nevertheless the same circumstances have a different effect, working even in opposite directions, upon the quantities of the money circulating in both spheres or functions, or on the quantities of currency, as the English express it in banking parlance. And this gives a new justification for the absurd distinction of Tooke between capital and currency. The fact, that the gentlemen of the Currency Theory confound two different things, is by no means a good reason for making two different conceptions out of this confusion.
In times of prosperity, great expansion, acceleration and intensity of the process of reproduction, the laborers are fully employed. Generally there is also a rise of wages which makes in a slight measure for their fall below the average level in the other periods of the commercial cycle. At the same time the revenue of the capitalists grow considerably. Consumption increases universally. The prices of commodities also rise regularly, at least in various essential lines of business. Consequently the quantity of the circulating money grows at least within certain limits, since the increasing velocity draws certain barriers around the quantity of the 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 the form of money, he requires more money in times of prosperity for his circulation. But we must not take this into account twice. We must not count it first as money required for the circulation of the variable capital, and a second time as money required for the circulation of the revenue of the laborers. The money paid to the laborers as wages is spent in retail trade and returns about once a week as a deposit of the retail dealers to the banks, after it has negotiated various intermediary deals in smaller cycles. In times of prosperity the reflux of money proceeds smoothly for the industrial capitalists, and thus the need of money facilities does not increase for the reason that they have to pay more wages, but rather require more money for the circulation of their variable capital.
The final result is, that the mass of currency required for the expenditure of revenue increases decidedly in periods of prosperity.
As for the currency, which is necessary for the transfer of capital for the exclusive use of the capitalists, a period of brisk business is at the same time a period of most elastic and easy credit. The velocity of currency between capitalist and capitalist is regulated directly by credit, and the mass of the currency required for the making of payments and even for cash purchases decreases proportionately. It may increase absolutely, but it decreases under these circumstances relatively, compared to the expansion of the process of reproduction. On the one hand greater amounts of payments are handled without the intervention of any money at all; on the other hand, owing to the great vivacity of the process, the same quantities of money have a greater velocity, both as means of purchase and 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 second portion (the transfer of capital) is at least relatively contracted, while its first portion (the expenditure of revenue) is absolutely expanded.
The refluxes express the reconversion of commodity-capital into money, M—C—M', as we have seen in the discussion of the process of reproduction in Volume II, Part I. Credit renders the reflux in the form of money independent of the time of actual reflux, both for the industrial capitalist and the merchant. Both of them sell on credit; their commodities are gotten rid of, before they resume for them the form of money by returning them really in this form. On the other hand they buy on credit, and in this way the value of their commodities is reconverted either into productive capital or commodity-capital even before this value has been transformed into real money, before the price of commodities is due and paid for. In such periods of prosperity the reflux passes off smoothly and easily. The retail dealer pays the wholesale dealer in collateral, the wholesaler pays the manufacturer in the same way, the manufacturer in like manner the importer of the raw material, and so forth. The appearance of rapid and more secure turn-overs maintains itself always for a certain period after they are past in reality, since the turn-overs of credit take the place of the real ones as soon as credit is well under way. The banks begin to scent danger, as soon as their customers deposit more bills of exchange than money. See the above testimony of the Liverpool bank director.
On a previous occasion I have remarked: "In periods of prevailing credit, the rapidity of circulation of money grows faster than the prices of commodities, while in times of declining credit the prices of commodities fall slower than the rapidity of circulation." (Critique of Political Economy, 1859, p. 135-136.)
In a period of crisis the condition is reversed. Circulation No. I contracts, prices fall, likewise wages of labor; the number of employed laborers is reduced, the mass of transactions decreases. On the other hand, the need of accommodation in the matter of money increases in circulation No. II in proportion as credit decreases. We shall return to this point immediately.
There is no doubt that, with the decrease of credit which goes with the clogging of the process of reproduction, the mass of circulation No. I required for the expenditure of revenue is contracted, while that of No. II required for the transfer of capital is expanded. But it remains to be analysed, to what extent this statement coincides with the following maintained by Fullarton and others: "A demand for capital on loan and a demand for additional circulation are quite distinct things, and not often found associated." (Fullarton, l. c. p. 82, title of chapter 5.)91
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 increases, the demand for it must also increase. But it is likewise evident, that a manufacturer, who draws more or less of his deposit out of a bank in gold or banknotes, because he has more capital to expand in the form of money, does not increase his demand for capital, but merely his demand for this particular form, in which his capital is expended. The demand refers only to the technical form, in which his capital is thrown into circulation. It is well known that a different development of the credit system implies for the same variable capital, or the same quantity of wages, a greater mass of means of circulation (currency) in one country than in another, for instance, more in England than in Scotland, more in Germany than in England. In like manner the same capital invested in agriculture, in the process of reproduction, 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 after a depression has become a fact. It is precisely the enormous development of the credit system during a period of prosperity, hence also the enormous development of 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 the period of depression. It is not, therefore, the difference in the size of the demand for loans which characterises both periods.
As we have remarked previously, both periods are primarily distinguished by the fact that in periods of prosperity the demand for currency between consumers and dealers pre-dominates, and in periods of depression that for currency between capitalists. In a period of depression the former decreases, the latter increases.
What appears as the essential mark to Fullarton and others is the phenomenon, that in such periods, in which the securities in the hand of the Bank of England are on the increase, its circulation of notes is decreasing, and vice versa. Now the level of the securities expresses the volume of the pecuniary accommodation, the volume of the discounted bills of exchange and of the advances on marketable collateral. Thus Fullarton says in the above passage (footnote 91) that the securities in the hands of the Bank of England vary generally in the opposite direction from its circulation of banknotes, and this corroborates the doctrine long held by private banks to the effect that no bank can increase its issue of banknotes beyond a certain point determined by the needs of the public; but if a bank wants to make advances beyond this limit, it must take them out of its capital, that is, it must either realise on securities or utilise deposits which it would otherwise have invested in securities.
This reveals at the same time what Fullarton means by capital. What does capital signify here? It means that the bank can no longer make advances with its own banknotes, promissory notes that cost it nothing, of course. But what does it make payments with in that case? With the sums realised by the sale of securities in reserve, that is, government bonds, stocks, and other interest-bearing papers. And what is this money that it gets in return for the sale of such papers? Gold or banknotes, so far as the last named are legal tender, such as those of the Bank of England. What the bank advances, is under all circumstances money. This money now constitutes a part of its capital. This is evident in the case that it advances gold. If it advances notes, then these notes represent capital, because it has given up some actual value, interest-bearing papers, for them. In the case of private banks the notes secured by them through the sale of securities cannot be anything else, in the main, but notes of the Bank of England or their own notes, since others would hardly be taken in payment for securities. If it is the Bank of England itself, its own notes, which it receives in return, cost it capital, that is, interest-bearing papers. By this means it withdraws its own notes from the circulation. If it reissues these notes, or issues new ones in their stead to the same amount, they represent capital. And they do so equally well, when such notes are used for advances to capitalists, or when they are used later on for investment in securities, as soon as the demand for such pecuniary accommodation decreases. In all these cases the term capital is employed only from the banker's point of view, and it means that the banker is compelled to loan more than his mere credit.
It is well known that the Bank of England makes all its advances in its own notes. Now, if the bank note circulation of this Bank decreases nevertheless 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 by it, how do they return to the Bank?
If the demand for money accommodation arises from an unfavorable national balance of trade and implies an export of gold, the matter is very clear. The bills of exchange are discounted in banknotes. The banknotes are exchanged by the bank itself, in its issue department, which issues gold for them, and this gold is exported. It is as though it were to pay out gold directly, without the intervention of notes, on discounting the bills. Such an increased demand, which may amount to from seven to ten million pounds sterling, naturally does not add a single five-pound note to the inland circulation of the country. Now, if it is said, that the Bank of England advances capital in this case, but not currency, it may mean two things. In the first place it may mean, that the bank does not advance credit, but actual values, a part of its own capital, or of capital deposited with it. In the second place it may mean that it does not advance money for inland, but for international circulation. It advances world money, and money for this purpose must always assume the form of a hoard in its metallic body. In this shape money does not merely represent the form of value, but value itself, whose money-form it is. Although this gold represents capital, both for the bank and the exporting money dealer, both financial and commercial capital, yet the demand for it does not come as a demand for capital, but as a demand for the absolute form of money-capital. This demand arises precisely at the moment, when the foreign markets are overcrowded with unsalable English commodity-capital. What is wanted, then, is capital, but not in its capital as capital. What is wanted is capital in the shape of money, in the shape in which money serves as international world money; and this is its original form of precious metal. The exports of gold are not, as Fullarton, Tooke, etc., claim, a mere question of capital. They are a question of money, even if this be money in one specific function. This fact that it is not a question of inland currency, as the advocates of the Currency Theory maintain, does not prove, as Fullarton and others think, that it is a question of mere capital. It is a question of money in the form in which money is an international means of payment. "Whether that capital" (that is, the purchase price for the one million quarters of foreign wheat required 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 affects essentially the question, whether an export of gold takes place or not. Capital is transferred in the form of precious metals, because it either cannot be transferred at all in the shape of commodities, or only at a great loss. The fear, which the modern banking system has of gold exports, exceeds anything ever dreamt by the monetary system, which considered precious metals as the only true wealth. Take, for instance, the following cross-examination of the Governor of the Bank of England, Morris, before the Parliamentary Committee on the crisis of 1847-48: Question 3846. "When I speak of the depreciation of stocks and fixed capital, is it not known to you that all capital invested in papers and products of all kinds was depreciated in the same way, that raw materials, cotton, silk, wool, were sent to the continent at the same cut prices, and that sugar, coffee and tea were auctioned off in forced sales."—"It was inevitable that the nation should make considerable sacrifices, in order to counteract the drain of gold caused by the enormous imports of means of subsistence,"—3848. "Don't you believe that it would have been better to touch the eight million pounds sterling stored in the vaults of the bank, instead of trying to recover the gold with such sacrifices?"—"I do not believe that,"—It is gold which here stands for the only true wealth.
Fullarton quotes the discovery of Tooke, that "with only one or two exceptions, and those admitting of satisfactory explanation, every remarkable fall of the 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 excitement and speculation, as "a 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 is at the same time the best rebuttal 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 other hand, while the Bank of England generally carries a strong gold reserve during a period of prosperity, this hoard is generally formed during the spiritless and stagnating period, which follows after a storm.
All this wisdom concerning the drains of gold, then, amounts to saying that the demand for international media of circulation and payment differs from the demand for national media of circulation and payment (and this implies the self-evident fact that "the existence of a drain does not necessarily imply any diminution of the internal demand for circulation," as Fullarton says on page 112 of his work); and that the sending abroad of precious metals and their throwing into international circulation is not identical with the throwing of notes or specie into the internal circulation. For the rest I have shown on a previous occasion, that the movements of a hoard in the shape of a reserve fund for international payments has nothing to do as such with the movements of money as a medium of circulation. It is true that the question is complicated by the fact that the different functions of a hoard, which I have developed from the nature of money, are here placed upon the shoulders of one sole reserve fund, that is, the function of money as a reserve fund for payments of due bills in the interior business; the function of a reserve fund of currency; finally, the function of a reserve fund of world money. It follows from this that under certain circumstances a drain of gold from the Bank to the internal market may be combined with a like drain to the international market. The question is further complicated by the fact that this reserve fund has been loaded with the additional function of serving as a fund for guaranteeing the convertibility of bank notes in countries, in which the credit system and credit money are developed. And on top of all this comes the concentration of the national reserve fund in one single central bank, and, secondly, its reduction to the smallest possible minimum. This explains Fullarton's plaint (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 in 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 leave aside the question of the drain of gold, how can a bank issuing notes, like the Bank of England, increase the amount of the money accommodation granted by it without increasing its issue of bank notes?
So far as the bank itself is concerned, all the notes outside of its walls, whether they circulate or rest in private treasures, are in circulation, that is, not held in its own possession. Hence, if the bank extends its discounting and lombarding business, its advances on securities, all the bank notes issued for that purpose must flow back to it, for otherwise they would increase the volume of circulation, a thing which is not supposed to happen. This return of notes may take place in two ways.
First: The bank pays to A notes for securities; A pays with these notes for bills of exchange due to B, and B deposits these notes once more in this bank. This closes 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 loaned to A, have now returned to it; but it still remains the creditor of A, or whoever may have been drawn upon by A in discounting his bills, and it remains the debtor of B for the amount of values expressed in these notes, and B thus has a claim upon a corresponding portion of the capital of the bank.
Secondly: A pays to B, and B himself, or C who receives them from B, pays with these notes bills due to the bank, directly or indirectly. In that case the bank is paid in its own notes. This concludes the transaction (excepting the return of this payment by A to the bank).
In what respect, now, shall the loan of the bank to A be regarded as a loan of capital, or as a loan of mere currency?92
[This depends on the nature of the loan itself. Three cases must be distinguished.
First Case.—A receives from the bank the 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 without a doubt some new capital, which he may invest and employ as an additional capital in his business until the day of settlement.
Second Case.—A has given to the bank securities, national bonds, or stocks as collateral, and received for them, say, two-thirds of their value in the shape of a cash loan. In this case he has received means of payment needed by him, 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 the momentary needs of A, because it was invested as interest-bearing capital in a certain form and could not serve as means of payment; on the other hand, A had reasons of his own for not wanting to convert this capital-value directly into means of payment by selling it. His securities served, among other ends, as a reserve capital, and to that end he set them in motion. The transaction between A and the bank, therefore, consists in a mutual transfer of capital, but in such a way, that A does not receive any additional capital (on the contrary, less capital!) although he receives means of payment which he needs. For the bank, on the other hand, this transaction constitutes a temporary fixation 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 has had a bill of exchange discounted by the bank, and received its value in cash after the deduction of the discount. In this case he has sold to the bank a money-capital which does not represent ready cash for the same amount in the shape of ready cash. He has sold his running bill for cash money. The bill is now the property of the bank. It does not alter the matter that the last endorser of the bill, A, is responsible to the bank for it in default of payment. He shares this responsibility with the other endorsers and with the first writer of the bill, all of whom are responsible to him. In this case, then, we have not any loan to deal with, but only an ordinary sale and purchase. For this reason A has not to make any return payments to the bank. It covers itself by cashing the bill when it becomes due. Here, also, a transfer of capital has taken place between A and the bank, in exactly the same way, which holds good 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 only the first case, in which there can be any question of a real loan 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 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 does not want and use it as a capital specifically. It is specifically a means of payment for him. Otherwise every ordinary sale of commodities, by which means of payment are secured, might be considered as a loan received.—F. E.]
In the case of private banks issuing notes we have this difference: If its notes remain neither in the local circulation, nor return to it in the form of deposits, or in payment for due bills of exchange, then these notes fall into the hands of people, who compel the private bank to cash these notes in gold or in notes of the Bank of England. In that event its loan represents indeed an advance of notes of the Bank of England, or, what amounts to the same thing for the private bank, of gold, in other words, of a portion of its banking capital. The same holds good in the case that the Bank of England itself, or some other bank, which has a fixed legal maximum for its issue of notes, must sell securities for the purpose of withdrawing its own notes from circulation and giving them out once more in the shape of loans; in that case the bank's own notes represent a portion of its mobilised banking capital.
Even if the circulation were purely metallic, it would be possible, first, that the drain of gold [Marx evidently refers here to a drain of gold that would, at least partially, go to foreign countries.—F.E.] might empty the treasury, while, secondly, its loans on securities might grow considerably, but flow back to it in the form of deposits, or of payments on due bills of exchange (since the gold is principally demanded from the bank for the payment of balances in the settlement of previous transactions); so that, on one side, the total treasure of the bank would be decreasing with an increase of securities in its hands, while it would be holding the same amount, which it possessed formerly as owner, in the capacity of debtor of its customers, who made deposits, and the total quantity of currency would be decreasing.
Our assumption so far has been, that the loans are made in notes, so that they carry with them a momentary, but immediately disappearing, increase of the issue of notes. But this is not necessary. Instead of paper note, the bank may open a credit account for A, in which case this A, a debtor of the bank, appears in the role of an imaginary depositor. He satisfies his creditors with checks on the bank, and the recipient of these checks passes them on to his own banker, who exchanges them for the checks running against him in the clearing house. In this case no intervention of notes takes place at all, and the entire transaction is confined to the fact that the bank collects its own debt in a check drawn on itself, since its actual recompense consists in its claim on A. In this case the bank has loaned to A a portion of its own banking capital, its own credit to him.
To the extent that this demand for pecuniary accommodation is a demand for capital, it is so only for money-capital. It is capital only from the point of view of the banker, namely gold (in the case of gold exports to foreign countries) or notes of the National Bank, which a private bank can obtain only by purchase against securities, 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 banknotes. Such papers, however, if they are government bonds, are capital only for the buyer, for whom their purchase price represents a capital invested in them. By themselves they are not capital, but merely claims on loans. If they are mortgages, they are mere claims on future ground rent. And if they are shares of stocks, they are mere titles of ownership, which entitle the holder to a share in future surplus-values. All these things are no real capital, they form no constituent parts of capital, nor are they values in themselves. By similar transactions money belonging to the bank may be transformed into deposits, so that the bank, instead of being the owner of this money, owes it to some customer and holds it under a different title of ownership. While this is important as a phenomenon for the bank, yet it does not alter anything in the mass of capital existing in a certain country, or even of money-capital. Capital stands here only for money-capital, and if it is not available in the actual form of money, it stands for a mere title on capital. This is a very important fact, since a scarcity of, and urgent demand for, banking capital is confounded with a decrease of actual capital, which 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 it is that the mass of securities received by a bank as collateral increases, so that 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 of a mere means of payment, when the issued bank notes return immediately, or when the transactions pass off without the intervention of notes by means of book credit; the payments are thus made wholly by a transaction of credit, and the settlement of these payments was the only purpose of this transaction. It is a peculiarity of money, when it serves merely to square balances of payments (and in times of crises loans are taken up for the purpose of paying, not of buying; for the purpose of winding up previous transactions, not of beginning new ones), that its circulation is but small, even where balances are not squared by mere operations of credit, without any intervention of money, so that, when there is a heavy 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 decreases simultaneously with a heavy satisfaction of money-accommodation on its part, does not prove without further ceremony, as Fullarton, Tooke and others assume (owing to their mistake to the effect that pecuniary accommodation is identical with taking up capital on loan as additional capital), that the circulation of money (of banknotes) in its function as a means of payment does not increase and extend. While the circulation of notes as means of purchase is decreasing in periods of business depression, when such a heavy accommodation is necessary, their circulation as means of payment may increase, and the aggregate amount of the circulation, the sum of the notes functioning as means of purchase and payment, may remain stable or may even decrease. The currency in its capacity as a means of payment, of banknotes immediately returning to the bank issuing them, is not a currency in the eyes of those economists.
If the circulation as a means of payment were to increase at a higher rate than it decreases as a means of purchase, the aggregate currency would increase, although the money serving in the capacity of a means of purchase would have decreased considerably in quantity. And this actually happens in periods of crisis, when credit collapses completely, so that commodities and securities are unsalable and bills of exchange cannot be discounted, and nothing goes any more but cash money. Since Fullarton and others do not understand, that the circulation of notes as means of payment is the characteristic mark of such periods of money stringency, they treat this phenomenon as accidental. "With respect again to those examples of eager competition for the possession of banknotes, 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, 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" (he should say 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" (that is, 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 (Volume I, chapter 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 as compared to the commodities. This was illustrated by some examples (footnotes on pages 156 and 157). This interruption itself is partly an effect, partly a cause of the insecurity of credit and of the circumstances accompanying it, such as overcrowding of markets, depreciation of commodities, interruption of production, etc.
But it is evident, that Fullarton transforms the difference between money as a means of purchase and money as a means of payment into the mistaken conception of a difference between currency and capital. This is due to the narrow minded banker's conception of circulation.
It might be asked, finally: What is it that is missing in such periods of stringency, capital or money in its function as a means of payment? 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 evident that what is demanded is the international means of payment. But money in its character of international means of payment is gold in its metallic actuality, as a quantity of values in itself, as a mass of values. It is at the same time capital, capital not 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 meaning of the term, in which it exists as a universal world market commodity). It is not a question of a contrast between a demand for money as a means of payment and a demand for capital. The contrast is rather between capital in its money-form and its commodity-form; and the form which is here demanded and which can alone perform any function here, is its money-form.
Aside from this demand for gold (or silver) it cannot be said that there is a dearth of capital in such periods of crisis. Under extraordinary circumstances, such as a corn famine or a cotton famine, etc., this may be the case; but these are not necessary or regular companions of such periods; and the existence of such a lack of capital cannot be assumed, without further ceremony, from the mere fact, that there is a heavy demand for pecuniary accommodation. On the contrary. The markets are overcrowded and swamped with commodities. Evidently it is not the lack of commodity-capital which causes the stringency. We shall return to this question later.
[90.] The business of bankers, setting aside the issue of promissory notes payable on demand, may be decided 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 no immediate employment for it, and to distribute or transfer it to those 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, p. 36. The former 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." Ibidem, p. 37. The correct conception is far more approached in the following passage from Kinnear: "Money is used to accomplish two essentially different operations. As a medium of exchange between dealer and dealer it is the instrument, by which transfers of capital are accomplished; that is, the exchange of a certain amount of capital in money for an equal amount of capital in commodities. But money expended in the payment of wages and in the purchase and sale between dealer and consumer is not capital, but revenue; that portion of the revenue of the community, which is used for daily expenditures. This money circulates continually in daily use, and it is this alone, which is strictly called currency. Advances of capital depend exclusively on the will of the bank or other capitalists, for there are always borrowers to be found; but the amount of currency depends on the needs of the community, within which the money circulates for the purpose of daily expenditure." (J. G. Kinnear, The Crisis and Currency. London, 1847.)
[91.] "It is a great error, indeed, to imagine that the demand for pecuniary accommodation (i.e. 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 one another. 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 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 back to the issuer. Accordingly, a very slight examination of the Parliamentary Returns may convince any one, that the securities in the hand of the Bank of England fluctuate more frequently in an opposite direction to its circulation than in concert with it, and 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 bank can enlarge its circulation, if that circulation be already adequate to the purposes to which a banknote currency is commonly applied; but that every addition to its advances, after that limit is passed, must be made from its capital, and supplied by the sale of some of its securities in reserve, or by abstinence from further investment of 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 third 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 pounds sterling, 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 pounds sterling! On the other hand, we have, on the fourth of June, 1833, a circulation of 18,892,000 pounds sterling, 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 pounds sterling!" (Fullarton, l. c., pages 97 and 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) may be seen by the following testimony of Mr. Weguelin, Governor of the Bank of England): "The discounting of bills to this amount" (one million per day for three successive days) "would not reduce the reserve" (of banknotes), unless the public should demand a greater amount of active circulation. The notes issued in the discounting of bills would flow back by way of banks and by means of deposits. Unless such transactions have for their purpose the export of gold, or unless a panic reigns in the inland market, of such character as to cause the public to hold on to the notes instead of depositing them in the banks, the reserve would not be touched by such tremendous transactions. "The Bank can discount one and a half millions daily, and this takes place continually, without touching its reserve in the least. The notes come back as deposits, and the only change that takes place is the mere transfer from one account to the other." (Report on Bank Acts, 1857.) Evidence No. 241,500. The notes serve here merely as means of transferring credit accounts
[92.] The passage following here is unintelligible in the original in this connection, and it has been worked over by the editor and inclosed in brackets. In another connection this point has already been touched upon in chapter XXVI.—F. E.