II. The mobilization of capital. Fictitious capital

• • Preface
  • I. Money and credit
  • II. The mobilization of capital. Fictitious capital
  • III. Finance capital and the restriction of free competition
  • IV. Finance capital and crises
  • V. The economic policy of finance capital

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7. The Joint Stock Company

1. Dividends and promoter's profit

Up to the present, economics has sought to distinguish between the individually owned enterprise and the joint-stock company (or corporation) only in terms of differences in their organizational forms and of the consequences which flow directly from them. It has indicated the !good' and the 'bad' features of the two forms of enterprise, emphasizing partly subjective factors such as the greater or lesser degree of interest and responsibility of their managers, and the relative ease or difficulty of exercising a general supervision over the enterprise, and partly objective factors such as the ease of access to capital, and their relative capacity for accumulation. But it has neglected to investigate the fundamental economic differences between the two forms of enterprise, even though these differences are crucial to any understanding of modern capitalist development, which can only be comprehended in terms of the ascendancy of the corporation and its causes.

The industrial corporation, our first object of inquiry, involves above all a change in the function of the industrial capitalist. For it converts what had been an occasional, accidental occurrence in the individual enterprise into a fundamental principle; namely, the liberation of the industrial capitalist from his function as industrial entrepreneur. As a result of this change the capital invested in a corporation becomes pure money capital so far as the capitalist is concerned. The money capitalist as creditor has nothing to do with the use which is made of his capital in production, despite the fact that this utilization is a necessary condition of the loan relationship. His only function is to lend his capital and, after a period of time, to get it back with interest; a function which is accomplished in a legal transaction. So also the shareholder functions simply as a money capitalist. He advances money in order to get a return (to use a very general expression at this stage). Like any money capitalist who risks only such sums of money as he sees fit, the shareholder makes the decision as to how much money he will advance and be held liable for. Nevertheless, a distinction already emerges here. The rate of interest paid on money capital which is provided in the form of shares is not fixed in advance; it is only a claim on the yield (profit) of an enterprise. A second difference as against loan capital is that the return of capital to the money capitalists is not guaranteed. Neither the contract which defines their relationship to the enterprise, nor the relationship itself, gives them any such assurance.

Let us consider the first point. To begin with, it should be realized that the return on money capital offered in the form of shares is by no means completely indeterminate. A capitalist enterprise is founded in order to make a profit, and its creation is undertaken on the assumption that it will achieve a profit; in normal circumstances, the prevailing average rate of profit. In any case, the shareholder is in a situation similar to that of the money capitalist, who counts on the realization of his capital in production so long as the debtor remains solvent. Generally speaking, the somewhat greater insecurity of the shareholder by comparison with the money capitalist will bring him a certain risk premium. But one should not suppose that this premium is somehow fixed and known in advance to the shareholder as a definite measurable claim. The risk premium is simply a result of the fact that the supply of free money capital, which the founders of companies are seeking, which is available for investment in shares, will normally be smaller, other things being equal, than that for particularly safe, fixed interest investments. It is just this difference in supply which explains the variations in interest rates and in the market quotations of interest-bearing securities. Greater security or insecurity is the reason for a larger or smaller supply, and from the variations in this relation between supply and demand results the diversity of interest yields. The probable profit yield on a share is therefore determined by industrial profit and this profit, other things being equal, is determined by the average rate of profit.

The shareholder, however, is not an industrial entrepreneur (capitalist). He is primarily a money capitalist, and one of the essential characteristics which differentiates the loan capitalist from the industrial capitalist is that he holds his capital - money capital - in an entirely different way, available for use just as he pleases. The industrial capitalist invests his entire capital in a particular enterprise. Unlike the shareholder, who need have only a negligible amount of capital available, the industrial capitalist must command a capital which is large enough to function independently in the given branch of industry. The industrial entrepreneur has, tied up his capital in his enterprise, he works productively only in that enterprise, and his interests are bound up with it over a long period. He cannot withdraw his capital unless he sells the enterprise, and this means only that the person of the capitalist changes, that one industrialist is replaced by another. He is not a money capitalist but an industrial (productive, functioning) capitalist, who draws a return from his enterprise in the form of industrial profit. The shareholder, on the other hand, if we consider him only as a money capitalist, will make his capital available to anyone so long as he gets interest on it.

For the shareholder to become a money capitalist, however, he must be able to regain possession of his capital as money capital at all times. But his capital, like that of an individual capitalist, seems to be tied up in the enterprise, as indeed it is. His money has gone to buy machines and raw materials, to pay workers etc. ; in short it has been converted from money capital into productive capital (M e^lP)and enters into the cycle of industrial capital. Once the shareholder has parted with this capital, he cannot recover it. He has no claim upon it, but only a claim to a pro-rata share of its yield. In capitalist society, however, every sum of money has the capacity to bear interest; and conversely every regularly recurring income which is transferable (as is usually the case, so far as it is not tied to a purely personal, and therefore transitory and indeterminate condition, such as wages, etc.) is regarded as interest on capital and has a price which is equal to the yield capitalized at the current rate of interest. This is easily explained by the fact that large sums of money are always available for realization and find such realization in a claim upon the profit. Consequently, the shareholder is in a position to recover his capital at any time by selling his shares or claims to profit, and to that extent he is in the same position as the money capitalist. This possibility of selling is created by a special market, the stock exchange. The establishment of this market endows share capital, which the individual can now always realize, completely with the character of money capital. Conversely, the money capitalist retains his character even when he invests in shares. Liquid money capital competes, as interest-bearing capital, for investment in shares, in the same way as it competes in its real function as loan capital for investment in fixed interest loans. The competition for these various investment opportunities brings the price of shares closer to the price of investments with a fixed interest, and reduces the shareholders' yield from the level of industrial profit to that of interest.

This reduction of the share yield to the level of the rate of interest is a historical process which accompanies the development of stocks and the stock exchange. When the joint-stock company is not the dominant form, and the negotiability of shares is not fully developed, dividends will include an element of entrepreneurial profit as well as interest.

To the extent that the corporation is prevalent, industry is now operated with money capital which, when converted into industrial capital, need not yield the average rate of profit, but only the average rate of interest. This appears to be a patent contradiction. The money capital which is provided in the form of share capital is transformed into industrial capital. The fact that in the minds of its owners it functions in exactly the same way as does loan capital, certainly cannot affect the yield of the industrial enterprise. Just as before, the enterprise will yield, under normal conditions, an average profit. We cannot possibly assume that the corporation will sell its commodities at below the average profit, and voluntarily sacrifice a part of the profit, simply in order to distribute among its shareholders a return no higher than the rate of interest. After all, every capitalist enterprise seeks to maximize its profit, which it can succeed in doing if it sells its output at prices of production (cost price plus average profit). Apparently, then, the factors previously mentioned which make money capital, invested in shares appear subjectively as simple loan capital yielding interest, are not adequate to explain the reduction of the yield from shares to the level of interest. What they would leave unexplained is where the other part of the profit (average profit minus interest), in other words the actual entrepreneurial profit, had gone. Let us examine the matter more closely.

With the transformation of an individually owned enterprise into a corporation a doubling of the capital seems to have occurred. The original capital advanced by the shareholders has been definitively converted into industrial capital, and actually exists only in that form. The money was used to purchase means of production, and thus disappeared definitively from the circulation process of money capital. When these means of production are converted into commodities in production, and the commodities are then sold, money - quite different money - can flow back from circulation. Thus the money which is acquired from subsequent sales of shares is not the same money which was originally supplied by the shareholders and then used in production. It is not a constituent part of the corporation's capital, but rather an additional quantity of money required for the circulation of the capitalized claims to income. Similarly, the price of a share is not determined as if it were part of the capital of the enterprise, but rather as a capitalized claim to a share in the yield of the enterprise. In other words, the price of a share is not determined as an aliquot part of the total capital invested in the enterprise and therefore a relatively fixed sum, but only by the yield capitalized at the current rate of interest. Since the share is not a claim to a part of the capital in active use in the enterprise, its price does not depend upon the value, or price, of the industrial capital which is actually being used. It is a claim to a part of the profit, and therefore its price depends, first, on the volume of profit (which makes it far more variable than it would be if it were part of the price of the elements of production of the industrial capital itself), and second, on the prevailing rate of interest.

The share, then, may be defined as a title to income, a creditor's claim upon future production, or claim upon profit. Since the profit is capitalized, and the capitalized sum constitutes the price of the share, the price of the share seems to contain a second capital. But this is an illusion. What really exists is the industrial capital and its profit. But this does not prevent the fictitious 'capital' from existing in an accounting sense and from being treated as 'share capital'. In reality it is not capital, but only the price of a revenue; a price which is possible only because in capitalist society every sum of money yields an income and therefore every income appears to be the product of a sum of money. If this deception is assisted in the case of industrial shares by the existence of genuinely functioning industrial capital, the fictitious and purely accounting nature of this paper capital becomes unmistakable in the case of other claims to revenue. State bonds need not in any way represent existing capital. The money lent by the state's creditors could long ago have gone up in smoke. State bonds are nothing but the price of a share in the annual tax yield, which is the product of a quite different capital than that which was, in its time, expended unproductively.

The turnover of shares is not a turnover of capital, but a sale and purchase of titles to income. The fluctuations in their price leave the actually functioning industrial capital, whose yield, not value, they represent, quite unaffected. Aside from the yield their price depends upon the rate of interest at which they are capitalized. The movements of the rate of interest, however, are quite independent of the fate of any particular industrial capital. These considerations make it obvious that it is misleading to regard the price of a share as an aliquot part of industrial capital.

If this is so, then the total sum of 'share capital', that is, the aggregate price of capitalized claims to profit, need not coincide with the total money capital, which was originally converted into industrial capital. The question then arises how this discrepancy comes about and how large it is. Let us take, for example, an industrial enterprise with a capital of 1,000,000 marks, and assume that the average profit is 15 per cent and the prevailing rate of interest 5 per cent. The enterprise makes a profit of 150,000 marks. The sum of 150,000 marks capitalized as annual income at 5 per cent, will have a price of 3,000,000 marks. Usually, at a rate of 5 per cent money capital would seek out only absolutely secure paper at a fixed rate of interest. But if we add a high risk premium, say of 2 per cent, and take into account various costs of administration, directors' fees, etc., which would have to be deducted from the profit of the corporation (and which an individually owned enterprise would be spared), and assume that this results in the available profit being reduced by 20,000 marks, then 130,000 marks can be distributed giving shareholders a return of 7 per cent. The price of the shares would then be 1,857,143 marks, or in round figures, 1,900,000 marks. But only 1,000,000 marks are needed to produce a profit of 150,000 marks, and 900,000 marks are left free. This balance of 900,000 marks arises from the conversion of profit-bearing capital into interest- (or dividend-) bearing capital. If we disregard the higher administrative costs of a corporation, which reduce the total profit, the 900,000 marks represent the difference between the yield capitalized at 15 per cent and the same yield capitalized at 7 per cent; or in other words, the difference between capital which earns the average rate of profit and capital which earns the average rate of interest. This is the difference which appears as 'promoter's profit', a source of gain which arises only from the conversion of profit-bearing into interest-bearing capital.

The prevalent view, which emphasizes so strongly the higher administrative costs of the corporation as compared with an individually owned enterprise, has neither recognized nor explained the remarkable problem of how a profit arises with the change from a cheaper to a more expensive form of productive enterprise, but has been content with mere phrases about costs and risks. But promoter's profit is neither a swindle, nor some kind of indemnity or wage. It is an economic category sui generis.

In so far as they make any distinction at all between interest and entrepreneurial profit, economists conceive dividends simply as interest plus entrepreneurial profit, or in other words, the equivalent of profit for an individual entrepreneur. It is evident that such a view overlooks the distinctive features of the corporation. Rodbertus, for example, says :

For the sake of agreement on terminology, I wish at this point merely to remark that while the dividend on a stock contains not only interest but also an entrepreneurial profit, the interest on a loan is without any trace of entrepreneurial profit.

This of course, makes it impossible to explain promoter's profit.

The technical form of the corporate enterprise makes it possible for the owner of capital (who would receive only the current rate of interest had he loaned it to an individual entrepreneur) to receive entrepreneurial profit as well, with the same ease as he would get the interest. This is why the corporate form of enterprise is so attractive to our capitalists, and may be expected increasingly to dominate the industrial field. The so-called swindle of company promotion is merely foam, or rather dross, on the surface of genuine business.

Beyond the moral judgment, there is no attempt to explain promoter's profit, which is not itself a swindle, although it certainly makes swindles possible. Rodbertus's view is one-sided and thus misleading:

In short, what was once ordinary loan capital ceases to be loan capital when it is converted into shares, and becomes in the hands of its owners something which creates its own value, and indeed in a form which allows them, in their godlike existence as loan capitalists, to pocket almost the entire capital income. [By income from capital, Rodbertus means entrepreneurial profit plus interest - R.H.]

Rodbertus sees only the content of the process; the transformation of money capital into industrial capital. He fails to notice that what is essential is the form in which it is done, which enables the money capital to become fictitious capital and at the same time to retain for its owners the form of money capital.

Turning now to the peculiar form which the circulation of fictitious capital takes, we find the following: The shares (S) are issued; that is, sold for money (M). One part of this money (m₁) constitutes the promoter's profit, accrues to the promoter (say, the issuing bank) and drops out of circulation in this cycle. The other part (M₁) is converted into productive capital and enters the cycle of industrial capital which is already familiar to us. The shares have been sold ; if they are to circulate again then additional money (M₂) is needed as a medium of circulation. This circulation (S-M₂-S) takes, place in its own specific market, the stock exchange. Hence, the scheme of circulation in Figure1.

Once a share has been issued it has nothing more to do with the real cycle of the industrial capital which it represents. None of the developments or misfortunes which it may encounter in its circulation have any direct effect on the cycle of the productive capital.

The commerce in shares, and in all certificates of fictitious capital, requires new money, both cash and credit money (for instance, bills of exchange). But whereas bills were previously covered by the value of commodities, they are now covered by the 'capital value' of the shares, which in turn depends upon the yield. Since the yield depends upon the realization of the commodities which the corporation produces, that is upon the sale of the commodities at their values or prices of production, so this credit money is only indirectly covered by the value of commodities. Furthermore, while the volume of payments in trade is determined by the value of commodities, in the commerce in shares it is determined by the capitalized amount of the net yield. But the amount of money needed in this case is greatly reduced by the negotiability of these papers.

If we remember that capital is equal to one hundred times the interest, divided by the rate of interest, the formula for promoter's profit is:

P = 100 Y - 100 Y

d p

where P is the promoter's profit, p the average profit, d the dividend, and Y the yield of the enterprise. If the gross yield of the enterprise is considered to be reduced by the costs of administration, Y - e may be substituted for the first Yin the formula. It is evident that the separation of the entrepreneurial function, which economics has so far dealt with only in a descriptive manner, involves at the same time a transformation of the industrial capitalist into a shareholder, into a particular kind of money capitalist, so that there emerges a tendency for shareholders to become increasingly pure money capitalists. This tendency is reinforced by the fact that shares are always readily saleable on the stock exchange.

My analysis of the economics of the corporation goes considerably beyond that provided by Marx. In his brilliant sketch of the role of credit in capitalist production, which he was unfortunately denied the opportunity to elaborate, Marx conceives the corporation as a consequence of the credit system, and describes its effects as follows :

1 An enormous expansion of the scale of production and enterprises which were impossible for individual capitals. At the same time, such enterprises as were formerly carried on by governments are socialized.

2 Capital, which rests on a socialized mode of production, and presupposes a social concentration of means of production and labour-power is here directly endowed with the form of social capital ( a capital of directly associated individuals) as distinguished from private capital, and its enterprises assume the form of social enterprises as distinguished from individual enterprises. It is the abolition of capital as private property within the boundaries of capitalist production itself.

3 Transformation of the actually functioning capitalist into a mere manager, an administrator of other people's capital, and of the owners of capital into mere owners, mere money capitalists. Even if the dividends which they receive include the interest and profits of the enterprise, that is, the total profit (for the salary of the manager is, or is supposed to be, a mere wage of a certain kind of skilled labour, the price of which is regulated in the labour market like that of any other labour), this total profit is henceforth received only in the form of interest, that is, in the form of a mere compensation of the ownership of capital, which is now separated from its function in the actual process of reproduction, in the same way in which this function, in the person of the manager, is separated from the ownership of capital. The profit now presents itself (and not merely that portion of it which derives its justification as interest from the profit of the borrower) as a mere appropriation of the surplus labour of others, arising from the transformation of means of production into capital, that is, from its alienation from its actual producer, from its antagonism as another's property opposed to the individuals actually at work in production, from the manager down to the last day labourer.

In the joint stock companies, the function is separated from the ownership of capital, and labour, of course, is entirely separated from ownership of the means of production and of surplus labour. This result of the highest development of capitalist production is a necessary transition to the reconversion of capital into the property of the producers, no longer as the private property of individual producers, but as the common property of associates, as social property outright. On the other hand, it is a transition to the conversion of all functions in the process of reproduction, which still remain connected with capitalist private property, into mere functions of the associated producers, into social functions.

Before we proceed any further, we call attention to the following fact which is economically important; since profit here assumes purely the form of interest, enterprises of this sort may still be successful, if they yield only interest, and this is one of the causes which stem the fall of the rate of profit since these enterprises, in which the constant capital is so enormous, compared to the variable, do not necessarily come under the regulation of the average rate of profit.

What Marx considers here are primarily the economic and political effects of the corporations. He does not yet conceive dividends as a distinct economic category and hence fails to analyse promoter's profit. As regards the concluding remarks concerning the influence upon the formation of the average rate of profit, and the tendency of the rate of profit to fall, it is clear that with the spread of the corporation its profit, just like that of an individually owned enterprise, must contribute to the equalization of the general rate of profit. We have seen already that the output of the corporation, under normal conditions, is subject to exactly the same price laws as is that of the individually owned enterprise. Marx was thinking of the railway corporations of his day, and in this connection his comments were perhaps partly justified. I say 'partly' because even then promoter's profit had already absorbed some part of the profit, and this was bound to be reflected in railway prices.

2. The financing of corporations. Corporations and banks

When a corporation is founded its share capital is calculated so that the profit of the enterprise will be adequate to distribute a dividend on the capital which will provide each individual shareholder with interest on his investment. Should an economic boom, or other favourable circumstances, make it possible later on to distribute a larger dividend, the price of the shares will rise. If we assume that the shares of a corporation yielding a dividend of 6 per cent stand at 100, then they will rise to 150 if the dividend is raised to 9 per cent. These variations in dividends reflect the varying fortunes of individual enterprises. Such variations, however, are overridden, in the case of new purchasers of shares, by the rise or fall of the general level of share prices.

The difference between the value of the capital in actual use and the (fictitious) share capital can increase during the lifetime of a corporation. If the enterprise yields dividends much higher than the average, and if the necessity, or opportunity, of increasing its capital then arises, this higher yield becomes the basis of the new capitalization, and the nominal share capital is increased far beyond the extent of the capital in actual use. Conversely, it is also possible to increase the functioning capital without any increase in the nominal share capital. This is the case, for example, when the net profit is ploughed back into the operations of the enterprise rather than being distributed as dividends to the shareholders. But as such a use of profit encourages the expectation of an increased future yield, there is a simultaneous rise in the market quotation of the shares.

Share prices will fluctuate not only as a result of changes in the yield, or of increases and decreases in the amount of capital in active use, but also because of changes in the general rate of interest. A low rate of interest over a long period will make it possible, ceteris paribus, for share prices to rise, while a high rate of interest will have the opposite effect.

From the nature of dividends it is obvious that there are no average dividends in the sense in which there is an average rate of interest or an average rate of profit. A dividend is originally equal to interest plus a risk premium, but it may either increase or decrease, and then remain at this level, in the course of time, because in this case competition does not equalize the yield, as it does with the interest rate or the rate of profit, but only the price of shares.

The market price of share capital is therefore always higher, under normal conditions, than the value of productive capital ; that is, of capital which yields an average profit. On the other hand, given the yield of the enterprise and the rate of interest, the market price of the share capital depends upon the number of shares issued. Thus, if the interest rate is 5 per cent the shares of an enterprise which has a productive capital of 1,000,000 marks and yields a profit of 200,000 marks will have a market price of 4,000,000 marks. If 1,000,000 marks of shares are issued, a share with a nominal value of 1,000 marks will sell for 4,000 marks; if 2,000,000 marks of shares are issued, it will sell for 2,000 marks ; if 4,000,000 marks of shares are issued, it will sell for 1,000 marks., etc.

The issue of shares in such a quantity as to depress the price below the nominal value, below par, is referred to as 'stock watering'. It is clear that this is purely a matter of accounting. The yield is given, and this determines the price of the shares as a whole. Naturally, the larger the number of shares, the lower the price of each individual share. The practice of 'watering' stock has nothing to do with promoter's profit, which arises whenever a corporation is formed, through the transformation of productive, profit yielding capital into fictitious, interest-yielding capital. In fact the watering of stock is not at all essential, and unlike promoter's profit it can as a rule be prevented by law. The provision in the German law relating to shares which requires that any premium on shares must be credited to the reserves has simply had the effect that shares are turned over at par, or at a small premium, to a bank consortium which then sells them to the public at a profit (promoter's profit).

Under certain conditions, however, stock watering is a convenient financial device for increasing the share of the founders of a corporation beyond the normal promoter's profit. In the United States, for example, two distinct kinds of shares are usually issued when large corporations are formed; preferred and ordinary shares. Preferred shares have a limited rate of interest, usually between 5 per cent and 7 per cent. They are also frequently cumulative, in the sense that if in any year the whole dividend to which they are entitled has not been paid they have a right to have it made up from the yield of subsequent years. Only after the claims of the preferred shares have been met can dividends be paid on the ordinary shares. The volume of preferred shares is usually calculated when the corporation is founded, so that it exceeds the capital actually required for the conduct of the business. The greater part of the promoter's profit is embodied in the preferred shares. The ordinary shares are usually issued for a similar amount. In most cases, the price of ordinary shares is at first very low, but preferred and ordinary shares together stand somewhat above par. A large part of the ordinary shares is usually retained by the promoters, and this makes it easier for them to ensure their majority control. Moreover, in the more important flotations the preferred shares earn the equivalent of a fixed interest rate, whereas ordinary shares do not have a fixed dividend. Their yield depends upon general business conditions ; and since the yield is subject to extremely sharp fluctuations, ordinary shares are a favourite with speculators. Well-informed large shareholders, who paid nothing for the shares anyway, can use them for lucrative speculation. Furthermore, this method of financing guarantees to the founders, who own the ordinary shares, the extra profit which accrues from the foundation of the corporation and the return from all future progress and favourable market conditions. The public, on the other hand, which owns the preferred shares, must content itself with a fixed rate of return which is little higher than the current rate of interest. To some extent, finally, the real situation of the enterprise can be concealed, and this concealment makes possible various fraudulent activities. Nevertheless, overcapitalization has no effect whatsoever on prices. It is a curious notion that the inflation of the nominal value of fictitious capital can alter in any way the laws of price. Of course, it is self-evident that holders of large blocks of share capital will desire high prices so that they can be assured of a return. But even if the capital were written down to zero, no capitalist will sell more cheaply than he has to, whether he directs an individually owned enterprise, a joint-stock company, or a trust.

The corporation is an association of capitalists. It is formed by each capitalist contributing his share of capital, and the extent of his participation, his voting rights, and the degree of his influence, are determined by the amount of capital he contributes. The capitalist is a capitalist only in so far as he owns capital, and he is differentiated from other capitalists only in a quantitative way. Hence the control of the enterprise as a whole is in the hands of those who own a majority of the shares. This also means that a corporation can be controlled by those who own half the capital, whereas in an individually owned enterprise it is necessary to own the whole capital. This doubles the power of the large capitalists. Disregarding here the role of credit, a capitalist who decides to turn his enterprise into a joint-stock company needs only half his capital in order to retain complete control. The other half becomes disposable and can be withdrawn from the enterprise. It is true, of course, that he would then lose the dividends on this half. Nevertheless, the control of outside capital is extremely important, and his domination of the enterprise is, aside from everything else, a crucial means of influencing the sale and purchase of shares on the stock exchange.

In practice, the amount of capital necessary to ensure control of a corporation is usually less than this, amounting to a third or a quarter, or even less. Whoever controls the corporation also has control over the outside capital as if it were his own. But this kind of control is by no means synonymous with control over outside capital in general. With the development of the credit system in an advanced capitalist society every unit of owned capital is at the same time the exponent [in the mathematical sense - Ed.] of outside loan capital; and other things being equal, the amount of credit depends upon the size of one's own capital, although the former increases more rapidly than the latter. The capital of the large shareholder is such an exponent in two senses. His own capital controls that of the other shareholders, and in turn the total capital of the enterprise serves to attract outside capital in the shape of loan capital which is made available to the enterprise.

The large capital dominating a corporation has an even greater impact when it is no longer a question of a single corporation, but of a system of interdependent companies. Suppose that capitalist X controls, with 5,000,000 shares, corporation A whose share capital is 9,000,000. This corporation now establishes a subsidiary company, B, with a share capital of 30,000,000, and retains 16,000,000 of these shares in its own portfolio. In order to pay for these 16,000,000 shares, A issues 16,000,000 fixed-interest debentures without voting rights. With his 5,000,000 capitalist X now controls both corporations, or a total capital of 39,000,000. Following the same procedure, A and B can now create other new companies, so that X, with a relatively small capital, acquires control over an exceptionally large amount of outside capital. With the development of the joint-stock system there emerges a distinctive financial technique, the aim of which is to ensure control over the largest possible amount of outside capital with the smallest possible amount of one's own capital. This technique has reached its peak of perfection in the financing of the American railway system.

Along with the development of the corporations on one side, and the increasing concentration of property on the other, the number of large capitalists who have distributed their capital among diverse corporations also increases. Substantial ownership of shares gives access to the management of the company. As a member of the board of directors, the large shareholder first of all receives a share of the profit in the form of bonuses; then he also has the opportunity to influence the conduct of the enterprise, and to use his inside knowledge of its affairs for speculation in shares, or for other business transactions. A circle of people emerges who, thanks to their own capital resources or to the concentrated power of outside capital which they represent (in the case of bank directors), become members of the boards of directors of numerous corporations. There develops in this way a kind of personal union, on one side among the various corporations themselves, and on the other, between the corporations and the bank; and the common ownership interest which is thus formed among the various companies must necessarily exert a powerful influence upon their policies.

In order to achieve the concentration of capital in an enterprise the corporation assembles its capital from individual particles of capital, each of which is too small, taken separately, to function as industrial capital, either generally or in the branch of industry where the corporation is located. It should be borne in mind that initially the corporations assembled their capital by direct appeals to individual capitalists, but this changed at a later stage, when the individual sums of capital were already accumulated and concentrated in the banks. In these conditions, the appeal to the money market is mediated by the banks.

No bank can think of raising the capital for an individually owned enterprise. The most it can do as a rule is to provide it with commercial credit. With the corporation it is an entirely different matter. To provide the capital in this case, the bank need only advance it, divide the sum into parts, and then sell these parts in order to recover the capital, thus performing a purely monetary transaction (M--M1). It is the transferability and negotiability of these capital certificates, constituting the very essence of the joint-stock company, which makes it possible for the bank to 'promote', and finally gain control of, the corporation. Similarly, a corporation can obtain bank loans far more readily than the individually owned enterprise. The latter, generally speaking, must be able to cover such loans out of its earnings, and their extent is consequently restricted. But precisely for this reason, because the debts are small, they leave the private entrepreneur relatively independent. The corporation, on the other hand, is able to repay these bank loans not only out of its current earnings, but also by increasing its capital through the issue of shares and bonds, by issuing which the bank also gains an additional promoter's profit. The bank can therefore provide more credit, with much greater security, to a corporation than to an individually owned enterprise, and above all a different type of credit; not only credit as a means of payment, commercial credit, but also credit for the expansion of the enterprise's productive capital, that is, capital credit. For if it seems necessary, the bank can always curtail this credit and insist that the enterprise should obtain fresh capital by a new issue of shares or bonds.

The bank can not only extend more credit to a corporation than to an individual entrepreneur, but can also invest a part of its money capital in shares for a longer or shorter period. In any event, the bank acquires a permanent interest in the corporation, which must now be closely watched to ensure that credit is used for the appropriate purpose, and so far as possible controlled by the bank in order to make the latter's profitable financial transaction secure.

The interests of the banks in the corporations give rise to a desire to establish a permanent supervision of the companies' affairs, which is best done by securing representation on the board of directors. This ensures, first, that the corporation will conduct all its other financial transactions, associated with the issue of shares, through the bank. Second, in order to spread its risks and to widen its business connections, the bank tries to work with as many companies as possible, and at the same time, to be represented on their boards of directors. Ownership of shares enables the bank to impose its representatives even upon corporations which initially resisted. In this way there arises a tendency for the banks to accumulate such directorships.

Industrialists who serve on the boards of directors of other corporations have a different role, namely to establish business relations between the companies involved. Thus, the representative of an iron firm who sits on the board of directors of a colliery aims to ensure that his firm obtains its coal from this colliery. This type of personal union, which also involves an accumulation of positions on boards of directors in the hands of a small group of big capitalists, becomes important when it is the precursor or promoter of closer organizational links between corporations which had previously been independent of one another.

3. The corporation and the individually owned enterprise

At its foundation the corporation does not have recourse to the relatively small stratum of working capitalists who must combine ownership with the entrepreneurial function. From the beginning, and throughout its life, the corporation is quite independent of these personal qualities. Death, inheritance, etc., among its owners, have absolutely no effect upon it. But this is not the decisive difference between the corporation and the individually owned enterprise, since the latter can also replace the personal qualities of its owners, at a certain stage of development, by those of paid employees. Equally unimportant in practice is another distinction made in the literature on the subject: naively, that on one side there is the individual entrepreneur, who is an independent and responsible agent with a stake in his enterprise, and on the other side a crowd of uninformed, powerless entrepreneurs (shareholders) who have only a minor interest in their enterprise, and understand nothing about its management. In fact the corporations - especially the most important, profitable and pioneering ones - are governed by an oligarchy, or by a single big capitalist (or a bank) who are, in reality, vitally interested in their operations and quite independent of the mass of small shareholders. Furthermore, the managers who are at the top of the industrial bureaucracy have a stake in the enterprise, not only because of the bonuses they earn, but, still more important, because of their generally substantial shareholdings.

The objective difference between the two kinds of enterprise is much more important. Recourse to the money market is a recourse to all those who have money (including the credit at their disposal). The corporation is independent of the size of individual amounts of capital, which must first be brought together in a single hand if they are to function as the industrial capital of a privately owned enterprise. Not only does it broaden the circle of people involved (anyone who has money can be a money capitalist), but every sum of money above a certain minimum (which need only amount to a few schillings) is capable of being combined with other sums in a joint-stock company and used as industrial capital. It is therefore much easier to establish, or to expand, a corporation than a privately owned enterprise.

In their capacity to assemble capital the corporations have a similar function to that of the banks. The difference is that the banks retain the accumulated capital in its original form as money capital, and make it available as credit for production after it has been assembled, whereas the corporations combine the atomized money capital in the form of fictitious capital. But this should not lead us to identify the combination of small capitals into a large capital with the participation of small capitalists. These small amounts of capital may belong to very big capitalists. The small sums of the petty capitalists are more likely to be assembled by the banks than by the corporations.

The corporations can accumulate capital just as easily as they acquire it in the first place. The privately owned enterprise has to accumulate capital out of its profits. Assuming that it has reached a certain size, that part of its profit which is not consumed is brought together as potential money capital until it becomes large enough for new investment and expansion. The corporation, on the other hand, usually distributes dividends to its shareholders, but in this case, too, a part of the profit can be accumulated, especially during periods when the dividends are well above the average rate of interest. The main point, however, is that the expansion of the corporation does not depend upon its own accumulation out of earnings, but can take place directly through an increase of its capital. The limitation which the amount of profit produced by the enterprise places upon the growth of the privately owned firm is thus removed, giving the corporation a much greater capacity for growth. The corporation can draw upon the whole supply of free money capital, both at the time of its creation and for its later expansion. It does not grow simply by the accumulation of its own profits. The entire fund of accumulated capital which is seeking to realize value provides grist for its mill. The obstacles which arise from the fragmentation of capital among a host of indifferent and casual owners are removed. The corporation can draw directly upon the combined capital of the capitalist class.

The size of an enterprise which does not have to depend upon individual capital is independent of the amount of wealth already accumulated by an individual, and it can expand without regard to the degree of concentration of property. Hence it is through the joint-stock company that enterprises first become possible, or possible on a scale which, because of the magnitude of their capital requirements, could never have been achieved by an individual entrepreneur, and were, therefore, either not undertaken at all, or else had to be undertaken by the state, in which case they were removed from the direct control of capital. The outstanding example is evidently the railways, which provided such a powerful stimulus to the growth of corporations. The significance of the corporation in breaking through the personal limits of property, and thus being constrained not by the extent of personal capital, but only by the aggregate social capital, was greatest in the early stages.

The expansion of the capitalist enterprise which has been converted into a corporation, freed from the bonds of individual property, can now conform simply with the demands of technology. The introduction of new machinery, the assimilation of related branches of production, the exploitation of patents, now takes place only from the standpoint of their technical and economic suitability. The preoccupation with raising the necessary capital, which plays a major role in the privately owned enterprise, limiting its power of expansion and diminishing its readiness for battle, now recedes into the background. Business opportunities can be exploited more effectively, more thoroughly, and more quickly, and this is an important consideration when periods of prosperity become shorter.

All these factors play an important part in the competitive struggle. As we have seen, a corporation can procure capital more easily than can a privately owned enterprise, and is able, therefore, to organize its plant according to purely technical considerations, whereas the individual entrepreneur is always restricted by the size of his own capital. This applies even when he uses credit, since the amount of credit is limited by the size of his own capital. No such limitation of personal property hampers the corporation, either when it is founded or when it later expands and makes new investments. It can, therefore, acquire the best and most modern equipment and is free to install it whenever it chooses, unlike the private entrepreneur who must wait until his profit has reached a level sufficient for accumulation. The corporation can thus be equipped in a technically superior fashion, and what is just as important, can maintain this technical superiority. This also means that the corporation can install new technology and labour-saving processes before they come into general use, and hence produce on a larger scale, and with improved, modern techniques, thus gaining an extra profit, as compared with the individually owned enterprise.

In addition, the corporation has a great superiority in the use of credit, which deserves attention at this point. The private entrepreneur, as a rule, can obtain loans only up to the amount of his circulating capital. Anything beyond this would turn the borrowed capital into fixed industrial capital, and would de facto deprive it of its character as loan capital so far as the loan capitalist is concerned. The loan capitalist would, in effect, be transformed into an industrial capitalist. Consequently, credit can only be extended to private entrepreneurs by people who are thoroughly familiar with all their circumstances and ways of running their business. This being so, credit for the private entrepreneur is provided by small local banks, or private bankers, who have a detailed knowledge of the business affairs of their customers.

The corporation can obtain credit more easily, because its structure greatly facilitates supervision. One of the bank's employees can be delegated for this purpose, and the private banker is thus replaced by a bank official. The bank will also provide large amounts of credit more readily to a corporation, because the corporation itself can easily raise capital. There is no danger that the credit which has been provided will be immobilized. Even if the corporation were to use the credit for the creation of fixed capital, it could, under favourable conditions, mobilize capital by issuing shares, and repay its bank debts, without having to wait for the fixed capital to return from circulation. In fact, this is a daily occurrence. Both these factors - easier supervision, and the possibility of using credit for purposes other than circulation - enable the corporation to obtain more credit and so enhance its competitive advantage.

Thus, from the economic advantages attributable to the greater accessibility of credit when the corporation is formed, and its greater capacity to expand, there also results a technical superiority. Thanks to its structure the corporation also has an advantage in price competition. As we have seen, the shareholder is, in a sense, a money capitalist who does not expect more than interest on his invested capital. In favourable circumstances, however, the earnings of a corporation may well exceed considerably the rate of interest, in spite of deductions from total profit in the form of promoter's profit, high administrative costs, bonuses, etc.

But as we have already noted, the increasing yield does not always benefit the shareholders. A part of it may be used to strengthen the enterprise, or to build up reserves, which enable the corporation to face a period of crisis more successfully than an individually owned enterprise. These large reserves also make possible a more stable dividend policy and thus raise the market price of the shares. Alternatively, the corporation can accumulate a part of its profit, and so increase its productive, profit-yielding capital, without increasing its nominal capital. This also increases, even more than does the growth of reserves, the real value of the shares. This rise in value, which perhaps only becomes manifest at a later stage, benefits the large, permanent shareholders, while the small, temporary owners of shares contribute by being deprived of a part of their profit.

If business conditions deteriorate, and competition becomes keener, a corporation which has followed the dividend policy just outlined, thereby reducing or eliminating the original difference between its share capital and its actually functioning capital, can reduce its prices below the price of production c + p (cost price plus average profit) to a price equal to c + i (cost price plus interest), and will still be able to distribute a dividend equal to, or a little below, the average interest.

The power of resistance of the corporation is thus much greater. The individual entrepreneur strives to realize the average profit, and if he realizes less, he must consider withdrawing his capital. This motive, however, is not present with the same degree of urgency in the corporation, certainly not among its directors and probably not among its shareholders. The private entrepreneur must make his living from the yield of his business, and if his profit falls below a certain level, his working capital will dwindle, since he has to use part of it for his own sustenance. Eventually he goes bankrupt. The corporation does not face this problem, because it seeks only to earn interest on its shares. It can generally continue in business so long as it does not operate at an actual loss. There is no pressure upon it to operate at a net profit, the kind of pressure which threatens the individual capitalist with immediate disaster if he eats into his capital. Such pressure might perhaps affect the shareholder and oblige him to sell his shares, but this would have no effect on the functioning capital. If the net profit has not been eliminated, but only reduced, the corporation can continue in business indefinitely. If the net profit has fallen below the average rate of dividend, the share prices will fall, and new buyers as well as the existing owners will now calculate their yield on a lower capital value. In spite of the lower share price, and even though an industrial capitalist would pronounce the enterprise unprofitable because it no longer produces the average rate of profit, it remains quite profitable for the new purchasers of shares, and even the existing shareholders would lose more by disposing of all their shares. Even when it is operating at a loss- the corporation still has greater powers of resistance. The individual entrepreneur, in such a case, is usually lost, and bankruptcy is inevitable, but the corporation can be 'reorganized' with comparative ease. The facility with which it can raise capital makes it possible to assemble the amounts of money which are necessary in order to maintain and reorganize production. As a general rule, the shareholders must give their approval, because the price of their shares expresses the condition of the enterprise and reflects, if only nominally, the real losses it has sustained.

The usual procedure is to deflate share values so that the total profit can be calculated on a smaller capital. If there is no profit at all, new capital is obtained which, together with the existing deflated capital, will then produce an adequate profit. In passing, it is worth mentioning that these reorganizations are important in two ways for the banks ; first as profitable business, and second as an opportunity to bring the companies concerned under bank control.

The separation of capital ownership from its function also affects the management of the enterprise. The interest which its owners have in obtaining the largest possible profit as quickly as possible, their lust for booty, which slumbers in every capitalist soul, can be subordinated to a certain extent, by the managers of the corporation, to the purely technical requirements of production. More energetically than the private entrepreneur they will develop the firm's plant, modernize obsolete installations, and engage in competition to open up new markets, even if the attainment of these goals entails sacrifices for the shareholders. Those who manage capital drawn from outside pursue a more vigorous, bold, and rational policy, less influenced by personal considerations, especially when this policy meets with the approval of the large, influential shareholders, who can very easily sustain temporary reductions in their profits, since in the long run they are rewarded by higher share prices and larger profits, resulting from the sacrifices made by small shareholders who have long since had to dispose of their property. The corporation, then, is superior to the individually owned enterprise because it gives priority to purely economic conditions and requirements, even in opposition to the conditions of individual property, which in some circumstances may come into conflict with technological-economic needs.

The concentration of capital is always accompanied by the detachment of units of capital which then function as new and independent capitals :

the division of property within capitalist families plays a great part . . . Accumulation and concentration accompanying it are, therefore, not only scattered over many points, but the increase of each functioning capital is thwarted by the formation of new and the subdivision of the old capitals. Accumulation, therefore, presents itself, on the one hand, as an increasing concentration of the means of production, and of the command over labour; on the other, as repulsion of many individual capitals one from another.

The growth of the corporate form of enterprise has made the course of economic development independent of contingent events in the movement of property, the latter being now reflected in the fate of shares on the market, not in the fate of the corporation itself. Consequently the concentration of enterprises can take place more rapidly than the centralization of property. Each of these processes follows its own laws, although the tendency towards concentration is common to both; it seems, however, to be more fortuitous and less powerful in the movement of property, and in practice is frequently interrupted by accidental factors. It is this surface appearance which leads some people to speak of a democratization of property through shareholding. The separation of the tendency towards industrial concentration from the movement of property is important because it allows enterprises to be guided only by technological and economic laws, regardless of the limits set by individual property. This type of concentration, which is not simultaneously a concentration of property, must be distinguished from the concentration and centralization which ensue from, and accompany, the movement of property.

As a result of the transformation of property into share ownership the rights of the property owner are curtailed. The individual, as a shareholder, is dependent upon the decision made by all other shareholders; he is only a member of a larger body, and not always an active one. With the extension of the corporate form of enterprise, capitalist property becomes increasingly a limited form of property which simply gives the capitalist a claim to surplus value, without allowing him to exercise any important influence on the process of production. At the same time, this limitation of property gives the majority shareholders unlimited powers over the minority, and in this way, the property rights and unrestricted control over production of most of the small capitalists are set aside, and the group of those who control production becomes ever smaller. The capitalists form an association in the direction of which most of them have no say. The real control of productive capital rests with people who have actually contributed only a part of it. The owners of the means of production no longer exist as individuals, but form an association in which the individual has only a claim to his proportionate share of the total return.

4. The flotation of shares

As intermediaries in the circulation of bills and notes, the banks substitute their own bank credit for commercial credit, and as intermediaries in the conversion of idle funds into money capital, they furnish new capital to producers. They also perform a third function in supplying productive capital, not by lending it, but by converting money capital into industrial capital and fictitious capital, and taking charge of this process themselves. On the one side, this development causes all funds to flow into the banks, so that only through their mediation can they be transformed into money capital. On the other side, when bank capital is converted into industrial capital it ceases to exist in the form of money and hence ceases to be part of bank capital. This contradiction is resolved by the mobilization of capital, by its conversion into fictitious capital or capitalized claims to profit. Since this conversion process is accompanied by the growth of a market for such claims, in which they become convertible into money at any time, they can again become components of bank capital. In all this the bank does not enter into a credit relationship, nor does it receive any interest. It merely supplies the market with a certain amount of money capital in the form of fictitious capital which can then be transformed into industrial capital. The fictitious capital is sold on the market and the bank realizes the promoter's profit which arises from the conversion of the industrial capital into fictitious capital. The expression 'flotation credit', therefore, does not describe a credit relationship, but simply indicates the more or less well founded confidence of the public that it will not be defrauded by the bank.

This function of the bank, to carry out the mobilization of capital, arises from its disposal over the whole money stock of society, although at the same time it requires that the bank should have a substantial capital of its own. Fictitious capital, a certificate of indebtedness, is a commodity sui generis which can only be reconverted into money by being sold. But a certain period of circulation is required before this can happen, during which the bank's capital is tied up in this commodity. Furthermore, the commodity cannot always be sold at a particular time, whereas the bank must always be prepared to meet its obligations in money. Hence it must always have capital of its own, not committed elsewhere, available for such transactions. Moreover, the bank is compelled to increase its own capital to meet the increasing demands which the growth of industry makes upon it.

The more powerful the banks become, the more successful they are in reducing dividends to the level of interest and in appropriating the promoter's profit. Conversely, powerful and well-established enterprises may also succeed in acquiring part of the promoter's profit for themselves when they increase their capital. Thus there emerges a kind of competitive struggle between banks and corporations over the division of the promoter's profit, and hence a further motive for the bank to ensure its domination over the enterprise.

It is self-evident that promoter's profit is not only produced by founding corporations in the strict sense, whether this involves the creation of completely new enterprises or the transformation of existing privately owned enterprises into joint-stock companies. Promoter's profit, in the economic sense, can be obtained just as readily by increasing the capital of existing corporations, provided its yield exceeds the average interest.

To some extent what appears as a decline in the rate of interest is only a consequence of the progressive reduction of dividends to the level of interest, while an ever increasing share of the total profits of the enterprise is incorporated, in a capitalized form, in the promoter's profit. This process has as its premise a relatively high level of development of the banks, and of their connections with industry, and a correspondingly developed market for fictitious capital, the stock exchange. In the 1870s, for example, the interest on railway bonds in the United States stood at 7 per cent, as against 3.5 per cent today and this reduction is due to the fact that the part of the 7 per cent which once constituted the entrepreneurial profit has been capitalized by the founders. The importance of these figures lies in the fact that promoter's profit is on the increase because the yield on stocks and bonds is being continuously depressed to the level of simple interest. This upward trend in promoter's profit runs counter to the falling rate of profit, but it may be assumed that this fall, which is frequently interrupted or even checked by counter tendencies, will not in the long run put an end to the rising trend of promoter's profit. The latter has shown a continuous increase in recent times, especially in those countries where there has been a very rapid development of banks and stock exchanges, and where the influence of the banks on industry has been most marked.

While the money capitalist receives interest on the money he lends, the bank which issues shares lends nothing and therefore does not receive interest. Instead, the interest goes to the shareholders in the form of dividends. The bank receives a flow of entrepreneurial profit, not in the form of an annual revenue, but as capitalized promoter's profit. Entrepreneurial profit is a continuous stream of income, but it is paid to the bank as a lump sum in the form of promoter's profit. The bank assumes that the capitalist distribution of property is eternal and unchangeable, and it discounts this eternity in the promoter's profit. The bank is thus compensated once and for all, and it has no claim to further compensation if this distribution of property is abolished. It already has its reward.

8. The Stock Exchange

1. Securities and speculation

The stock exchange is the market for securities. By 'securities' I mean here every kind of scrip which represents sums of money. They fall into two main groups : (1) certificates of indebtedness, or credit certificates, which bear a statement of the amount of money for which they are issued, the principal example being the bill of exchange; (2) certificates which do not represent a sum of money but its yield. The latter may be further subdivided into two groups : (a) fixed-interest paper, such as debentures and government bonds; and (b) dividend certificates (shares). As we know, in a capitalist society, every regular (annual) return is regarded as the revenue on a capital, the amount of which is equal to the capitalized yield at the current rate of interest. Thus these securities also represent sums of money, but they differ from those in the first group in the following way. The prime consideration in the case of credit certificates is the amount of money they represent; money, or value of equal magnitude, has actually been lent and now bears interest. The certificates circulate for a specified period of time and are withdrawn when the capital is repaid. The bill has fallen due. Bills are always falling due and the capital which has been lent then flows back to the lender. The latter now has the money in his hands once more and can proceed to lend it again. The cycle in which bills fall due and the capital flows back continually to its owner, is a condition for the constant renewal of the process.

The situation is different with the second group of securities, since here the money is definitively surrendered. In the case of government bonds it may have been withdrawn from productive uses for a long time, and thus ceased to exist; or if it was put into industrial shares, it has been used to buy constant and variable capital, has served as a means of purchase, and its value is now incorporated in the elements of productive capital. The money is in the hands of the sellers of this productive capital and will never return to its starting point. It follows, therefore, that shares cannot represent this money, because it has now passed to the sellers of commodities (of the elements of productive capital) and has become their property. But neither do they in any way represent the productive capital itself. In, the first place, the shareholders have no claim to any part of the productive capital, but only to the yield; and second, the share, unlike vouchers or bills of lading, does not represent any specific use value, as it would have to do if it were really a share in the capital actually used in production, but is only a claim to a certain amount of money. It is this which constitutes the 'mobilization' of industrial capital. This money is, however, nothing more than the yield capitalized at the current rate of interest. Hence the yield, or annual income, is the basis on which the certificates are valued, and only after the yield is known is the amount of money calculated.

Fixed-interest certificates have some resemblance to those in the first group, in the sense that a fixed return at a given point of time always represents a definite sum of money. Nevertheless, they really fall into the second category, because the money which they originally represented has been definitively given up and does not have to return to its starting point. The capital which they represent is fictitious, and its magnitude is calculated on the basis of its yield. The difference between fixed-interest certificates and other titles to income seems to be (if we disregard fortuitous influences) that the price of the former depends only upon the rate of interest, while the price of the latter depends upon both the rate of interest and the current yield on capital. The former group, therefore, is subject to only comparatively minor fluctuations in price ; and when such fluctuations occur, they are gradual and follow the more easily predictable fluctuations in the rate of interest. By contrast, the rate of return in the second group is indeterminate, and subject to countless changes which cannot always be foreseen; and this produces considerable fluctuations in the price of these certificates. As a result, they are a favoured target of speculation.

It follows from what has been said that the customary description of the stock exchange as the 'capital market' misses the essential nature of that institution. The certificates in the first group are certificates of indebtedness. The vast majority of them originate in circulation, in the transfer of commodities without the intervention of money except as a means of final settlement. They are a form of credit money which replaces cash. When they are traded on the stock exchange, a grant of credit is simply transferred from one person to another. The circulation of credit money, as we have seen, requires as its premise and complement the circulation of real money. Since credit money is used in foreign as well as domestic payments, the stock exchange must be able to supply both domestic credit money and foreign credit money as well as metallic money. Hence, in order to complement the traffic in credit money the stock exchange also becomes the centre of dealings in foreign exchange, both credit and cash. Into the stock exchange streams the ever available money capital seeking investment, which it finds in the various types of credit certificates. In this activity the stock exchange competes with the credit institutions proper, the banks. Nevertheless, there is a quantitative as well as a qualitative difference between the two institutions. From a quantitative standpoint, the stock exchange differs in its activities from the banks because it is not mainly concerned with collecting small savings, but attracts large amounts of already accumulated capital which are seeking investment. The concentration of funds, which is such an important function of the banks, is here an accomplished fact. The qualitative difference between the two institutions turns on the fact that the stock exchange is not concerned with the diverse ways of making credit available. It simply provides the money which is necessary to sustain the circulation of credit money. The money is supplied in large amounts, in the form of first-class bills. Both demand and supply involve large, concentrated sums of money, and it is on the stock exchange that the market price of loan capital (the rate of interest) is established. It is pure interest, devoid of any risk premium, for these are the best certificates that can be had in this wicked capitalist world, and their excellence is even less open to doubt than is the goodness of the Almighty. The interest which is paid on these finest of all bills (finest, of course, not in terms of their lowly use value, for even first-class bills are not written on handmade paper) seems to stem directly from the mere possession of money capital. It is as though the money had not been given away at all, since it can always be recovered simply by transferring the bill again. In any case, the money is only temporarily invested and is always available for some other use. The absolute security and short term of repayment make for a low rate of interest on such investments, which are suitable only for very large, temporarily available, capital sums. The interest rate on such investments is the basis for calculating the interest rate on other types of investment, and it also determines the movement of available floating money capital from one exchange to another. These funds, in ever-varying amount, flow in and out of the circulation of world money.

The stock exchange constitutes the market for the traffic in money among the banks and the big capitalists. Bills usually bear the signature of one or other of the leading banks. Both domestic and foreign banks, or other big capitalists, put their funds in these bills, which bear interest and are absolutely secure. On the other side, the large credit institutions can sell such bills on the exchange to obtain whatever funds they may need to meet obligations in excess of their freely available capital.

Although the sums of money required for such operations vary from time to time, a certain minimum amount is always available, which is used to purchase the bills and then returns to its starting point when they fall due. This continual reflux of money, and its function as a mere intermediary in the credit process, at once distinguishes the circulation of money which belongs to the first category of stock exchange securities from the circulation of money in the second category; for example, that which is invested in shares. In the latter case the money is definitively relinquished, converted into productive capital, and comes into the hands of those who sell commodities. It does not return to the stock exchange. In place of money there are now capitalized claims to interest. Money is here actually withdrawn from the money market.

The stock exchange and the banks are competitors in the bill market, and the development of the latter has actually cut into this business of the stock exchange. The banks have even taken over the major part of the business of supplying payment credit to industrial capitalists, which was initially the principal function of the stock exchange, and all that is left to the latter is the function of an intermediary between the banks themselves and the foreign exchange market, where foreign payments are dealt with and foreign exchange rates are determined. Even here a considerable part of the business is handled directly by the banks, which maintain foreign branches for this purpose. The development of the banks has reduced this part of the business of the stock exchange in two ways : first directly, inasmuch as the banks invest their ever growing funds in bills, to an increasing extent without involving the stock exchange ; and second, by substituting, in part, other forms of credit for bills.

The bill of exchange represents a credit given by one productive capitalist (understood as any capitalist who produces profit, thus including the merchant) to another in lieu of cash payment. The capitalist who receives it discounts it at the bank, which now becomes the creditor. If, however, both the capitalists have deposits or open credits at the bank, they can make their payments by cheque or by a transfer on the books of the bank. The bill has become superfluous. Its place has been taken by a book-keeping transaction in the bank, and this, in contrast to the bill which can be circulated, is a private affair. The increasing involvement of the banks in making payments for their clients has brought about a contraction of the traffic in bills, which has further affected that part of stock exchange business. Furthermore, in those countries where the note issue is a monopoly, the note-issuing bank has a dominant position on the foreign exchange market, and if that position is weakened the change benefits the large banks rather than the stock exchange. There is, therefore, no specific and exclusive stock exchange activity in the sphere of credit money circulation, except speculation in foreign exchange. The stock exchange is only a concentrated market for the sums of money which are made available for credit transactions.

The true sphere of stock exchange activity is as a market for titles to interest, or fictitious capital. Here the investment of capital as money capital, which is to be converted into productive capital, takes place. The money is committed definitively in the purchase of these titles, and does not return. Only the interest yield flows back annually to the stock exchange, whereas in the case of money invested in credit instruments the capital itself is also returned. Hence, new money, serving stock exchange circulation itself, is required for the sale and purchase of titles to interest. The amount of new money is small in relation to the aggregate sums turned over. Since the interest titles represent claims to money, they can be cancelled out against one another, and there is never more than a small balance to be settled. The balances are calculated by specialized institutions which ensure that cash is used only for settling these. Nevertheless, the absolute amount of means of circulation required on the stock exchange is quite considerable, especially during periods of heavy speculation, when speculative activity is usually oriented in one direction, and the balance for cash settlement tends to grow appreciably.

The question now arises whether the activities and functions of the stock exchange have any distinctive features. We have already seen that its activity in the bill market overlaps with that of the banks. Equally, the purchase of securities for investment is not a specific function of the stock exchange, for they can be bought just as easily from the banks, and indeed it is increasingly common for them to be bought there. The specific activity of the stock exchange is really speculation.

At first sight, speculation looks like any other purchase and sale. What is purchased, however, is not commodities but titles to interest. A productive capitalist must convert his commodity capital into money - that is, sell it - before he can realize a profit. If another capitalist assumes the task of selling, the industrialist must assign him part of the profit.

The entire profit contained in the commodity is definitively realized only when it is sold to the consumer. The commodity is thus transferred from the producer to the consumer, but it would be absurd to regard this as a change in location (just think of the sale of a house) and to confuse trade with transport. Buying and selling do not consist in changes of location, but in economic events, transfers of property ; although in all processes which are not purely intensional a change of position in space is also involved. But who would conceive the essential element in visiting the theatre as being to find the theatre building itself?

The commodity is finally consumed and disappears from the market. The title to interest, however, is by its very nature eternal. It never disappears from circulation in the way a commodity does. Even when it is temporarily withdrawn from the market for investment purposes, it can return at any time, and in fact such titles do return sooner or later, in larger or smaller quantities. But the withdrawal of interest titles from the market is neither the aim nor the consequence of speculation. Speculative stock is constantly circulating on the stock exchange. Its movement is always back and forth, or circular, not straight ahead.

The purchase and sale of commodities is a socially necessary process, through which the essential conditions of social life in a capitalist economy are met. It is the conditio sine qua non of this society. Speculation, on the other hand, is nothing of the sort: It does not affect the capitalist enterprise ; neither the plant nor the product. An established enterprise is not affected by a change of ownership or by the constant circulation of shares. Production and its yield is not affected by the fact that claims to the yield change hands; nor is the value of the yield changed in any way by changes in share prices. On the contrary, it is the value of the yield, other things being equal, which determines these changes in share prices. The purchase and sale of these claims to interest is a purely economic phenomenon, a mere fluctuation in the distribution of private property, without any influence upon production or upon the realization of profit (by the sale of commodities). Speculative gains or losses arise only from variations in the current valuations of claims to interest. They are neither profit, nor parts of surplus value, but originate in fluctuations in the valuations of that part of surplus value which the corporation assigns to the shareholders; fluctuations which, as we shall see, do not necessarily arise from changes in the volume of profit actually realized. They are pure marginal gains. Whereas the capitalist class as a whole appropriates a part of the labour of the proletariat without giving anything in return, speculators gain only from each other. One's loss is the other's gain. 'Les affaires, c'est l'argent des autres.'

Speculation consists in taking advantage of price changes, though not of changes in commodity prices. Unlike the productive capitalist the speculator does not care whether commodity prices rise or fall; all that concerns him is the price of his titles to interest. These prices depend upon the amount of profit, which can rise or fall, whether prices rise, fall, or remain stationary. The decisive factor affecting profit is not the absolute level of prices, but the relationship between costs and prices: But it is also unimportant to the speculator whether profits rise or fall ; he is only concerned with being able to foresee these fluctuations. His interests, therefore, are entirely different from those of the productive capitalist or the money capitalist who desire the maximum stability of profit, and whenever possible, a constantly increasing profit. Increases in commodity prices only have an influence upon speculation in so far as they are an indication of increased profit. Speculation is affected only by such changes in profits as are either bound to occur, or can be expected. But the profit which an enterprise produces is distributed to the owners of productive capital or to holders of shares without regard to speculation. The speculator as such does not derive his gain from the increase in profit. He can gain just as easily from a fall in profit. In general, therefore, he does not think in terms of a rise in profit but in terms of changes in the price of securities induced by a rise or fall in profit. He does not hold securities in the hope of sharing in the higher profit - as an investor does - but seeks to gain by buying and selling his securities. His gain does not arise from a share in the profit, for he gains also from declining profits, but from price changes, which means that at a particular time he can buy securities more cheaply than he sold them, or sell them more dearly than he bought them. If all speculators played the same side of the market, that is, if they all simultaneously placed the same higher or lower value on securities' there would not be any speculative gains at all. These arise only because contradictory valuations are made, only one of which can turn out to be correct. The different valuations made by buyers and sellers, at a particular time, result in losses for some speculators and gains for others. The profit of one is the other's loss; and this is in sharp contrast with the profit of the productive capitalist; for the profit of the capitalist class is not a loss for the working class, which cannot expect, under normal capitalist conditions, to receive more than the value of its labour power.

What are the factors which speculators must reckon with in their operations? The principal objects of speculation are securities which do not bear a fixed rate of interest. Their price fluctuations depend essentially upon two factors: the level of profit and the rate of interest. Theoretically, the level of profit is given by the average rate of profit. But the latter is simply the expression of innumerable individual profit, which may diverge widely from the average. An outsider, however, is not in a position to know the level of any individual profit, for this is determined not only by general factors, such as the amount of surplus value and the quantity of invested capital, but also by all the fortuitous variations in market prices and by the entrepreneur's skill in taking advantage of business opportunities. The external observer can see only the market price of the commodity; he cannot have any knowledge of the really decisive factor, which is the relation between market price and cost price. Even the entrepreneur frequently does not know what this relation is until he has made an exact calculation at the end of a period of turnover. Moreover, aside from the actual amount of profit, a whole series of more or less arbitrary factors affect the sum which is actually paid out on the securities; among them the level 91 depreciation, bonuses, allocations to reserves, etc. These factors give the directors of an enterprise the power, within limits, to fix in an arbitrary fashion the amount of profit available for distribution and so influence stock market prices. At all events, the majority of speculators are completely in the dark about the crucial factor which determines the price of shares. A general, more or less superficial knowledge of an enterprise will avail them little should they wish to take advantage of the slight price differences which sometimes occur, or of those movements in the price of its securities which result from the capitalization of changed profits. Conversely, the intimate knowledge of an enterprise which an insider enjoys gives him the confidence and ability to use this knowledge for speculative gain with scarcely any risk.

It is a different matter with respect to the second factor which determines share prices : the rate of interest. As we have seen, the activities of speculators depend upon differences of opinion about the probable movement of share prices; such differences, for instance, as those which arise from uncertainty about future profits. The rate of interest, on the other hand, is like the market price of commodities; at any given time it has a definite magnitude, which is known to all speculators.

Furthermore, changes in the rate of interest - or at least their direction - can be predicted with a high degree of probability, except when there are sudden and more or less powerful disturbances, caused by extraordinary events such as wars, revolutions, or natural disasters, which react directly upon the demand for money. Besides, the influence of fluctuations in the rate of interest upon share prices tends to diminish; thus during a depression, a low rate of interest usually prevails, speculative activity is sluggish, confidence is impaired, and share prices are low, in spite of the low rate of interest. Conversely, during a period of prosperity and unlimited speculation, the effect of a high rate of interest is lost in the general anticipation of increased stock market gains. Hence, although the level of the rate of interest is a more certain factor than any estimate of future profits, it is still essentially the latter which determines the direction and intensity of speculation. It is, therefore, precisely the uncertain, incalculable factor which speculators are obliged to take into consideration. In short, no certain foresight is possible in speculative activity, which is essentially a groping in the dark. Stock market speculation is like a game of chance or a wager, but for insiders it is a wager a coup stiff.

As in the case of all prices, we can distinguish the real causal factors which determine stock market prices from the incidental influences expressed in changes in the relation between supply and demand. This distinction is, of course, of no concern to the speculator, who is interested only in the price changes themselves, not in their causes. Nevertheless, it is speculation itself, and the ever changing moods and expectations of speculators, arising largely from their uncertainties, which produces the ceaseless fluctuations in supply and demand and hence the changes in the price of shares. Every price change, in turn, provides the impetus for a fresh wave of speculation, new commitments and changes of position, and further changes in supply and demand. In this way, speculation creates an ever ready market for the securities which it controls itself, and thus gives other capitalist groups the opportunity to convert their fictitious capital into real capital, to change from one investment in fictitious capital to another, and to convert fictitious capital back into money capital at any time.

But the uncertainty which characterizes speculation has still another consequence; it creates the possibility of influencing the direction of speculative activity, through the large speculators drawing in the small ones. Since the speculator is not 'in the know' (frequently even with regard to general conditions, and invariably when it is a matter of particular cases) he tends to be influenced by superficial indications, by the mood and the general trend of the market. This mood, however, can be manufactured, and is actually manufactured, by the big speculators, who can be regarded more or less correctly as 'insiders'. The petty speculators follow their lead. The big speculators stiffen the market by making large purchases, thus driving up the price of shares, and once the trend is under way demand increases further as a result of the purchases by all those people who think they are following the example of the big speculators, so that prices continue to rise although the latter have already withdrawn. They can now either take their profit, or maintain the higher price level for a longer or shorter time, depending upon their aims. In this case, disposal over a larger sum of capital gives rise directly to a superior position on the market because market trends themselves are determined by the way in which this capital is used. In the sphere of production, a large capital enjoys an advantage because it can produce more cheaply and so reduce prices, but in the stock market, capital acts upon prices directly. The large dealers in securities, the banks, can take advantage of this situation to push speculation in a particular direction. They need only drop a hint to their numerous customers to buy or sell certain securities, in order to bring about, in most cases, a change in the relation between supply and demand, which is thus known to them in advance, and like all foreknowledge in the field of speculation produces a profit for them. We can now also appreciate the importance of the hangers-on, the outsiders, and the public at large. Gains and losses among professional speculators may balance out, but the great public which simply follows the lead of the big speculators, and continues in the same course after the latter have already pulled out with the gains they have made - these naive people who believe the moment has now come for them to share in the fruits of prosperity - are the ones who have to bear the losses, and to pay the balances arising with every turn in the business cycle or in the mood of the stock exchange, which are pocketed by the speculators as the reward for their 'productive activity'.

Nevertheless, the fact that speculation is unproductive, that it is a form of gambling and betting (and is rightly regarded as such by public opinion) does not run counter to its necessity in a capitalist society, at least during a certain period of capitalist development. Obviously, it is nothing but an apologetic artifice to regard everything which is necessary in capitalist society as being productive. The truth is rather that the anarchy of capitalist production, the antagonism between those who own and those who use the means of production, and the capitalist mode of distribution, all generate a large volume of expenses and payments which contribute nothing to the increase of wealth, which would be eliminated in an organized society, and in this sense are unproductive. The fact that they are necessary in capitalist society does not show that they are productive but simply testifies against the way in which this society is organized. Speculation is essential, however, if the stock exchange is to carry out its various functions, which we shall now examine more closely.

2. The functions of the stock exchange

The function of the stock exchange changes in the course of economic development. Originally it provided for the circulation of currency and bills; for which purpose it was only necessary to accumulate free money capital which could be invested in such bills. Later, it became a market for fictitious capital, which first emerged with the development of state credit. It became the market for state loans. But it was radically transformed when industrial capital began to assume the form of fictitious capital, and the corporate form of enterprise began to spread throughout industry. The resources at the disposal of the stock exchange now increase rapidly and without limit, and on the other hand the existence of the stock exchange as a market which is always available is a prerequisite for the conversion of industrial capital into fictitious capital and for the reduction of dividends to interest.

The development of a market for fictitious capital makes speculation possible. In turn, speculation is necessary to keep this market open for business at all times, and so give money capital as such the possibility of transforming itself into fictitious capital, and from fictitious capital back into money capital, whenever it chooses. For the fast that marginal gains can be made by buying and selling is a constant stimulus to engage in these activities and to ensure the permanent existence of an active market. The essential function of the stock exchange is to provide such a market for the investment of money capital. Only in this way is the investment of capital as money capital made possible on a large scale. For if capital is to function as money capital it must in the first place yield a steady income (interest), and second, the principal itself must flow back, or if it does not actually flow back it must always be recoverable through the sale of titles to interest. The stock exchange first made possible the mobilization of capital. From a legal standpoint this mobilization involves a transformation, and at the same time a duplication, of property rights. Ownership of the actual means of production is transferred from individuals to a legal entity, which consists, to be sure, of the totality of these individuals, but in which the individual as such no longer has ownership rights in the property. The individual has only a claim upon the yield; his property, which once meant real, unrestricted control over the means of production, and hence over the management of production itself, has been transformed into a mere claim to income and has been deprived of control over production.

From an economic standpoint, however, the mobilization of capital consists in the possibility for the capitalist to withdraw his invested capital in the form of money at any time, and to transfer it to other branches of production. The higher the organic composition of capital becomes, the less possible is it to make this change by altering the real structure of the material components of productive capital. The tendency to equalize the rate of profit encounters increasing obstacles in the growing difficulty of withdrawing productive capital, which consists in the main of fixed capital, from a particular branch of production. The process of equalization which actually takes place is very slow, gradual, and imperfect, occurring mainly as a result of the investment of newly accumulated surplus value in those spheres with a higher rate of profit, and the withholding of new investment from those with a lower rate of profit. The rate of interest, in contrast to the rate of profit, is equal and uniform throughout the system at any given time. The equivalence of all capital - which, for the individual capitalist, consists not in the fact that they are equal in value, but that equal values produce equal yields - finds a satisfactory expression, first of all, in the uniformity and equality of the rate of interest. The capitalist is indifferent to the use value of his capital, to the specific field in which it is invested at any time; for him it is only a sum of value which breeds surplus value, is only regarded from this quantitative aspect, as an entitlement to profit.

Hence the actual differences in yield (profit) lead to differences in the valuation of capitals of equal size. If there are two capitals which have a value of 100, one of which produces a profit of 10, while the other produces a profit of 5, the first will be valued at twice the amount of the second. These disparities in profit as between different units of capital lead on one side, through the striving of each individual capitalist to maximize his profit, to competition among the various capitals for spheres of investment, and thus to the tendency towards an equalization of rates of profit (and the prior equalization of rates of surplus value), and the establishment of a general average rate of profit. On the other side, since inequalities in rates of profit constantly re-emerge, and constantly provoke movements of capital, the individual capitalist can only surmount them by valuing his capital in terms of its income, capitalized at the current rate of interest. If this valuation is to be achieved in practice, if capitalists are really to be equal, if the equality of everything which yields profit is finally to be accomplished, the capital must always be realizable in accordance with this standard of valuation, and realizable in the socially valid form, as money. Only then is the equality of the rate of profit achieved for every individual capitalist. But this realization is an inversion of the real relationship. Capital no longer appears as a definite magnitude which determines the amount of profit. On the contrary, it is profit which seems to be a fixed magnitude determining the magnitude of the capital. This way of determining the magnitude of capital emerges in practice whenever a corporation is formed, makes possible promoter's profit, and determines its level. The real relationships seem to have been stood on their head. No wonder that those economists who observe economic affairs through the eyes of stock exchange operators regard any presentation of the real conditions as being itself perverse and absurd!

The equality of all capital is thus realized by its being valued according to its yield. But it is only realized, like all capital which is given a value in this way, on the stock exchange, the market for capitalized titles to interest (fictitious capital). If the inherent tendency of capitalism, its need to place all the available social wealth at the disposal of the capitalist class, in the form of capital, and to ensure the same yield for each unit of capital, obliges it to mobilize capital, and thus to make a valuation of it as mere interest-bearing capital, then it is the function of the stock exchange to facilitate this mobilization, by providing the machinery for the transfer of capital.

The mobilization of capital transforms an increasing proportion of capitalist property into titles to income, and in so doing it makes capitalist production increasingly independent of the movement of capitalist property. The trading in income titles which goes on in the stock exchange involves only the transfer of property, which can take place quite independently of the course of production, and without any effect upon it. The movement of property has now acquired independence, and is no longer determined by the processes of production. In the past, a transfer of property also involved a transfer of the capitalist entrepreneurial function, and vice versa, but this is no longer the case. And whereas, in earlier times, the principal cause of changes in the distribution of property was the variability of achievements in production, and industrial competition was thus a crucial determinant of the distribution of property, this cause, still operative today, is now supplemented by others which stem from the circulation of income titles and may produce movements of property which neither originate in any change in production relations nor exert any influence on production.

In the circulation of commodities the transfer of goods and the transfer of ownership go hand in hand. In simple commodity production the transfer of goods seems to be the essential thing, the incentive for transferring property; and the latter is only the means for accomplishing the former. The determining motive for production is still the creation of use value, the satisfaction of needs. But in capitalist commodity circulation the circulation of goods also involves the realization of the profit which arose in production, and this profit is the mainspring of economic activity. In capitalist society the transfer of labour power, as a commodity, to capitalists augments their property through the production of surplus value. The circulation of securities, on the other hand, involves only a transfer of property, the circulation of mere paper titles to property, without any corresponding transfer of goods. In this case, the movement of property is not accompanied by the movement of goods, and capitalist property has lost any direct connection with use value. The market for this circulation of property in itself is the stock exchange.

Mobilization, the creation of fictitious capital, is in itself an important cause of the emergence of capitalist property outside the process of production. Capitalist property used to arise essentially from the accumulation of profit, but the creation of fictitious capital now opens up the possibility of promoter's profit. By this means, a large part of the profit is channelled into the hands of the great money powers, who alone are in a position to give industrial capital the form of fictitious capital. This profit does not flow to them in the way dividends are paid to shareholders, in the form of fragmented annual payments, but is capitalized as promoter's profit, and received in the form of money, both relatively and absolutely considerable in amount, which can immediately function as new capital. Thus every new enterprise pays, from the very outset, a tribute to its promoters, who have done nothing for it and need never have any dealings with it. It is a process which is always concentrating large new sums of money in the hands of the big money powers.

A process of concentration of property takes place in the stock exchange, quite independently of concentration in industry. The big capitalists, who are thoroughly familiar with the activities of the corporations, and have a comprehensive view of business conditions, are thus able to foresee the future trend of share prices. The strength of their capital enables them, through appropriate buying and selling, to influence stock exchange prices themselves, and to collect the resulting profit. This power also makes it possible for them to intervene in the market, amid universal acclaim, in order to buy up securities during a crisis or panic, and later sell them at a profit when conditions have returned to normal. In short, they are in the know, and 'all fluctuations of business are advantageous to those in the know' as that crafty banker Samuel Gurney assured a committee of the House of Lords.

An essential element in the functioning of the stock exchange as a means of endowing industrial capital, through its transformation into fictitious capital, with the character of money capital for the individual capitalist, is the size of the market, because its character as money depends upon the real possibility of selling shares and bonds at any time without substantial losses. That is why there is a tendency to concentrate all transactions to the greatest possible extent in a single market; hence all bank and stock exchange business is increasingly concentrated in the main centre of economic life, in the capital city, while the provincial stock exchanges are becoming progressively less important. In Germany the Berlin stock exchange surpasses all others in importance. Outside Berlin only the stock exchanges in Hamburg and Frankfurt are of some account, but their importance is declining.

According to petty bourgeois theory the development of shareholding should bring about the 'democratization of capital' ; but petty bourgeois practice, which is always more sensible, tries to limit share ownership to the capitalists. The representatives of big business practice subscribe wholeheartedly to such warnings as the following, in the comfortable knowledge that they will have little effect: 'Anyone who needs a fixed income', the authoritative Arnhold maintains, 'should not buy shares.' He goes on to say that the fluctuating return on shares will only be a source of capital losses for anyone who has to live on the interest he receives, because high dividends will probably encourage him to increase his expenditure. Such a person will not sell his holdings when prices are high, but as a rule decides to sell when he becomes uneasy about the small dividends and low share prices (as he always does, because he has no insight into the real condition of the business, and must therefore rely upon the market quotations and the `verdict' of the stock exchange), or for some other reason.

3. Stock exchange operations

Transactions on the stock exchange involve a kind of buying and selling which differs radically from other kinds, not by virtue-of its procedure, but because of the commodity which is dealt in. The crucial factor from an economic standpoint is not the technique employed in such operations, but their substance; and an account of these technical details would be more appropriate in a manual for practical dealers than in a theoretical treatise. Nevertheless, these technical aspects of the subject acquire a more general interest and importance to the extent that the manner of conducting the transactions facilitates certain results which stem from the nature of these operations.

The distinctive regulations which govern the conduct of stock exchange transactions - the practices of the stock exchange - are primarily designed to promote the maximum utilization of credit, the curtailment of risk, and the greatest possible rapidity of turnover. The maximum utilization of credit is already made possible by the nature of the 'commodities' involved. Primarily these 'commodities' are claims to money, either in the direct form of bills or in the indirect form of claims to capitalist profit. As such claims to money, stock exchange values are all equivalent and interchangeable, differing from each other only quantitatively. Even the so-called qualitative differences which exist between the different types of stock exchange paper, as for example those between fixed interest certificates and shares, as well as differences in their reliability, are always converted into quantitative differences by stock exchange transactions, and cannot be expressed otherwise than as differences in valuation. These differences, however, unlike differences in the price of different brands of the same commodity, which are primarily the result of differences in their costs of production, arise exclusively from differences in the supply-demand ratios. When, for example, a sugar share and a railway share give the same return, the railway share may still be quoted at a higher price because more people want to buy the railway share in the belief that it promises more stable earnings. Qualitative differences in the security of the yield are given quantitative expression in share quotations. This interchangeability of stock exchange values thus makes it possible for most purchase and sale transactions to cancel each other out, leaving only a small proportion of the difference to be settled by payment in cash.

The granting of credit is associated with such transactions, since money functions merely as account money and only a small amount is needed for cash payments. In order to reduce these payments to a minimum, there are special institutions to settle the claims which result from purchase and sale operations. For this purpose, however, it is essential that the prices at which transactions on the stock market are concluded should be known; hence, stock exchange quotations are public. At the same time the publication of share prices achieves the main purpose of the stock exchange; namely, to be the market where securities can be traded at any time, and at a known price. Since the price which can be obtained at any time is fixed it becomes much easier to provide the other form of credit - loans - than it was previously in the case of payment credit, because the creditor now knows exactly the price of the object on which he is lending money. The speculator deposits as security with his creditor the papers which he has paid for with the borrowed money. At the same time there emerges a new and surer way of using money capital to earn interest, by using stock exchange securities as collateral.

The provision of credit enables the speculator to take advantage even of minor price fluctuations, in so far as he can extend his operations far beyond the limits of his own resources, and thereby make a good profit, through the scale of his transactions, despite the small extent of the fluctuations. On the other side, credit has not only permitted speculation to increase, and to take advantage of market conditions at any time, but has also had the effect, since speculative operations are always accompanied by counter-operations, of moderating price fluctuations. The use of credit also gives a further advantage to the large speculator. The weight of his resources is multiplied by the use of credit, which grows much more rapidly than his own wealth.

Another distinctive feature of stock exchange transactions is the speed with which they are concluded, which results from a certain informality of procedure. This rapidity is due essentially to the need to take advantage of slight, short-term price fluctuations. The rapid changes in supply and demand, and the speed with which market quotations vary, make it extremely important to conclude transactions as fast as possible. Every new turnover gives speculators a new possibility to make a profit. Hence any time-consuming formality is abhorrent, and in this sphere the expression `time is money' is literally true. Hence, also, the hostility to any legal specification of settlement times, and to legislative intervention in general, which would always involve a loss of time.

Futures trading, which defers the completion of all transactions to the same date, is the best way to take advantage of credit. Since such transactions are mainly the work of speculators, buying and selling are synchronized in such a way that most of the transactions offset each other, leaving only the balances to be settled in money (and most of these payments, for that matter, are also settled by credit or by book transfers in the banks). Money may also be needed in cases where there is only a sale or a purchase, but such transactions are few compared with those which cancel each other out. Here, too, the effect of credit is to expand the market. Futures trading allows a great extension of operations : securities which are dealt in for future delivery always find a market, and it is always possible, therefore, to bring a speculative operation to an end by buying or selling, to realize the profit or minimize the loss, unless the market is disrupted by a panic. Furthermore, since actual possession of the securities is not involved when speculating in futures, but the aim is simply to make a marginal profit, and the securities can be sold at any time, the extent of the commitment is determined not by the price of the securities, but only by the amount of the marginal differences which may arise from the speculation. At the same time, the securities actually available on the market are required only to the extent that the speculative operations of buying and selling do not cancel out. The volume of dealings entered into is therefore likewise independent of the total sum of prices for the securities actually available on the market and can be many times that amount. Furthermore, the typical conditions under which deals are concluded give the most complete assurance that such transactions will be completed very speedily.

The greater simplicity of the futures market, the increased possibility of cancelling out purchases and sales, reduces the amount of capital which is needed in order to take part in speculation. Accordingly, the circle of people who can participate in speculation has been extended, and the scale of individual transactions has increased. The futures market is expanded as against the market for cash operations. At the same time it absorbs fewer resources in order to maintain and develop speculative operations, and so affects less strongly the rate of interest on the capital which is made available for speculation. However, since a great deal of speculation is always carried on with borrowed capital, and the rate of interest on this capital has a strong influence upon the continuation of speculation, there is always a general tendency for the futures market to continue to promote speculation. This greater continuity of operations results in smaller variations in the relation between supply and demand, and more moderate fluctuations in share prices. At the same time, given the large scale of the transactions, much smaller fluctuations are sufficient to induce speculators to engage in their activities. A similar consequence follows from the fact that futures operations also make it possible to sell securities for speculative purposes, so that it is easier here to counteract a one-sided increase in the supply than it is on the cash market.

Trading in futures makes it possible to invest capital, which will only become due at a later date, at predetermined prices, or to obtain capital on favourable terms for use at a later date. In addition, there is the expansion of the market, already mentioned, which futures trading assures through the ease of obtaining credit and of business procedures generally. The absorbent capacity of the futures market is greater than that of the cash market, and this facilitates the issue of securities by making it possible for the issue houses to place their offerings gradually without depressing the price of securities. Trading in futures is also the standard method of carrying out arbitrage operations and equalizing price differences between the various stock exchanges.

Speculation requires that a certain quantity of securities should be made available for its own purposes. A security which is in 'safe' hands, and has been withdrawn from the market as an investment for a long period of time, cannot serve the purposes of speculation. The same is true of securities which have a very small aggregate value. In such a case, small purchases and sales can exert a strong influence on the price level and give a few capitalists the opportunity, by buying up all the available 'material', to dictate monopoly prices to their competitors. Speculation presupposes a large market which cannot be too easily dominated; monopoly is the death of speculation.

As we have seen, credit transactions always go hand in hand with speculative operations. What is involved in speculation is not the total sum of quoted security prices, but the size of the possible variations in price. In accepting securities as collateral, the supplier of credit cannot extend himself beyond the sum which is guaranteed against changes in price. Thus, for example, if the price of a security subject to relatively small fluctuations is 110, a speculator can pledge it as collateral at any time and obtain 90 for it, and need then only advance 20 out of his own funds. This is the most common method by which stockbrokers, bankers and banks extend credit to enable their clients to participate in stock exchange transactions. The withdrawal of such credit, or making it more difficult to obtain, is a favourite means of putting these clients 'out of commission', making it impossible for them to go on speculating, forcing them to unload their securities at any price, and by this sudden increase in supply, depressing prices and enabling creditors to pick up these securities very cheaply. In this case too the provision of credit is a means of expropriating small debtors.

The provision of credit for the really large speculators is arranged in an entirely different manner. In this case the speculators obtain the necessary funds on a contango basis. In a formal sense, such contango operations consist of buying and selling. If a bullish speculator wants to hold on to his securities beyond settlement day until the next due date, because he hopes for a further rise in their price in the interim, he simply sells them to a money capitalist and buys them back for the next term. The interest which the lender receives on his money is contained in the difference between purchase and sale price. But this is only a matter of form. In reality, the lender has simply taken over the securities for the specified period of time, and has assumed the place of the speculator. Yet there is a difference between him and the speculator in that he assumes no risk and does not seek any speculative profit, but has merely invested his money for that period of time and received interest on it. It is the specific form in which the advance is made that is important here. For since the credit transaction here takes the form of a purchasing transaction, ownership of the securities is transferred during the interim period to the supplier of credit. This enables him to make such use as he pleases of the securities during that time, and this may be important where industrial shares are concerned. It may be a matter, for example, of a bank securing a decisive voice in the decisions taken by a general shareholders' meeting, thanks to its large shareholdings. Through contango business the bank is enabled to acquire temporary ownership of the shares and thus to obtain control of the corporation. By reducing charges, and thus making contango arrangements more attractive, a bank may find it easier to obtain these securities from speculators. Quite frequently the banks co-operate with each other in this field, in order to eliminate competition in contango business for certain securities during a given period of time." In this way shares acquire a dual function. They serve, on the one hand, as objects of speculation and as the source of marginal profits. At the same time they also serve the banks in their effort to gain a controlling influence in the corporations and to impose their will on the shareholders' meetings without being obliged to make long-term investments of their funds in the shares concerned."

Other things being equal, the extent of stock exchange speculation depends essentially upon the volume of money which is available to speculators. For the frequency of turnover of the securities - and every turnover brings a marginal profit - is obviously independent of the number of existing securities. This accounts for the influence which banks have upon stock exchange speculation, for by granting or withholding credit they affect very strongly the scale of speculation. The greatest demand for credit arises from contango operations. Very considerable sums, of floating capital, for the most part, are invested in these operations," and such investments have an influence in establishing the rates for call money. During periods when money is less mobile, they also have an influence on the discount rate and thus on the movement of gold. By restricting the supply of credit, therefore, the banks can directly influence the rate of interest, because in this case the supply of credit is to an exceptional degree at the discretion of the banks. These are purely financial transactions which have no crucial effect, one way or the other, on the course of the economy. It is a different matter when credit is being supplied to traders and industrialists, for in this case a sudden and excessive restriction of credit would be bound to lead to a collapse and an acute crisis.

The development of the banking system has been accompanied by a change in the organization of trading in securities. At first the banker is simply a broker who handles a business affair for his client. But the more the capital resources of the bank and its interest in the share market increase, the more actively does it go into business on its own account. A great many of the transactions no longer take place on the stock exchange, but instead the bank simply cancels out the orders of its clients against one another, and only the outstanding balance is settled on the stock exchange or covered by the bank's own funds. Up to a certain point, then, the sums which will be provided for buying and selling on the stock exchange are at the discretion of the bank, and this gives it a means of influencing the movement of security prices. The bank thus ceases to be simply a middleman in securities trading and becomes a dealer itself. 'In fact, banking today is no longer a brokerage business, but has become a business which trades on its own account.'

At the same time the large bank also takes over part of the function of stock exchange, and itself becomes a securities market; all that remains for the stock exchange is the balance which cannot be cleared in the banks. `A large bank represents in itself a volume of supply and demand such as was previously represented only by one of the larger stock exchanges.'

With the increasing concentration of the banking system the power of the big banks over the stock exchange has grown enormously, especially during those periods when the participation of the general public in stock exchange speculation declines.

Considering the way in which affairs have developed on the stock exchange, one should speak today of the trend in banking rather than the trend of the stock exchange, because the big banks are increasingly turning the latter into a subservient instrument and directing its movements as they see fit. Just as last spring there was much talk of how an unfavourable forecast of business conditions by one of the big banks gave the external impetus to the sudden collapse of security prices, which had, of course, more profound inherent causes, so the contrary attempts by the haute banque this week to reassure and stimulate have brought about a change of mood on the stock exchange, which is now alert to auspicious signs instead of paying attention only to the unfavourable aspects.

In addition to this powerful influence on the trend of the stock market, the banks, as a result of their increasingly close relations with industry, now have an intimate knowledge of the situation of particular enterprises, can anticipate their earnings, and under certain conditions influence the level of earnings as they wish. All these factors enable the banks to carry on all their speculations with considerable security. The declining importance of the stock exchanges is obviously connected with this development of the large banks.

On the stock exchange capitalist property appears in its pure form, as a title to the yield, and the relation of exploitation, the appropriation of surplus labour, upon which it rests, becomes conceptually lost. Property ceases to express any specific relation of production and becomes a claim to the yield, apparently unconnected with any particular activity. Property is divorced from any connection with production, with use value. The value of any property seems to be determined by its yield, a purely quantitative relationship. Number is everything; the thing itself is nothing! The number alone is real, and since what is real is not a number, the relationship is more mystical than the doctrine of the Pythagoreans. All property is capital - and not simply property. Debts are also capital, as every state loan demonstrates. All capital is equal, and is embodied in those printed certificates which rise and fall in value on the stock exchange. The actual formation of value is a process which remains entirely outside the sphere of property owners but determines their property in a completely mysterious way.

The magnitude of property seems to have nothing to do with labour; the direct connection between labour and the yield on capital is already partially obscured in the rate of profit, and completely so in the rate of interest. The apparent transformation of all capital into interest-bearing capital, which the fictitious capital form involves, makes any insight into this relationship impossible. It seems absurd to connect interest, which is always fluctuating and can change regardless of what is happening in the sphere of production, with labour. Interest seems to be a consequence of the ownership of capital as such, a Tóros, the fruit of capital which is endowed with productive powers. It is fluctuating and indeterminate, and the 'value of property , a category, fluctuates along with it. This 'value' seems just as mysterious and indefinite as the future itself. The mere passage of time seems to produce interest, and Böhm-Bawerk has founded his theory of the interest on capital upon this illusion.

9. The Commodity Exchange

The stock exchange is the birthplace of the trade in securities. As it develops, so also do the investment banks, which compete with it, and at the same time use it as an intermediary. The futures business, while it facilitates the trade in securities, is not essential to it, and has no decisive influence upon prices. The situation is different in the case of commodity trading which follows stock exchange procedures.

The turnover of securities on the stock exchange has the function of mobilizing capital. By the sale of shares the fictitious capital of individual capitalists (which had previously been converted into industrial capital) is reconverted into money capital. Such turnovers are unique, having nothing in common with the trade in commodities except the formal character of purchase and sale, which is the universal economic form in which values and property are transferred. Trade in commodities is entirely different ; for it is in the circulation of commodities that the metabolism of society takes place. From the outset, the commodity exchange and the stock exchange are differentiated from each other just as commodities are from securities. Putting them in the same category as 'exchanges' is bound to create confusion if this fundamental distinction is disregarded, and especially if speculation is identified with trade. The concept of trade in commodities according to stock exchange procedures - that is, the specific characteristics of the commodity exchange which distinguish it from other types of trade - therefore requires closer examination.

We generally say that trade is exchange trading if it takes place on an exchange; that is, at a place in which numerous merchants gather. But it is obvious that whether merchants do business over their own counters or in another place, on the exchange, is a purely technical distinction, not an economic one. On the exchange, deals may be concluded more quickly, and traders may have a better view of the market as a whole, but these are still technical, not economic, differences.

The difference remains merely technical even if one important function of the individual merchant, namely the testing and confirmation of the quality of goods, becomes redundant when only commodities of a standard quality can be supplied to the market. Whether these conditions of delivery are met or not is decided, in disputed cases, by expert bodies of the exchange itself. The elimination of this function, for the individual merchant, is a precondition for commodity exchange trading, which also requires, however, other economic circumstances.

Only commodities of a standard quality are traded on the commodity exchange. For this purpose, each commodity has to be a fixed use value, a standard commodity, any unit of which can be replaced by any other. It is as a quantum of equal use value that the commodity has become an exchangeable good. The mass of commodities is distinguishable only quantitatively on the commodity exchange. According to the nature of the commodity, and the exchange regulations, a given quantity - so many kilograms, so many sacks - is taken as the unit in concluding a deal. Hence only those commodities are suited to commodity exchange trading which are by their nature readily interchangeable, or can be made so by relatively simple and inexpensive regulations.

The interchangeability of commodities is a natural attribute of their use value, which some commodities have and others lack. But more than this is required for commodity exchange trading. In an ordinary commercial transaction the manufacturer sells his commodity to the merchant at its price of production, and the latter then sells it to the consumer with his trading profit added. Such a transaction becomes feasible as a commodity exchange operation only if a marginal profit in the form of a speculative gain can be added to the commercial profit. The precondition for speculation, however, is frequent variations of price; and the commodities most suitable for trading on the exchange are those which undergo considerable price fluctuations over relatively short periods of time. These are primarily agricultural products (wheat, cotton), and those semi-finished or finished goods, the prices of which are strongly influenced by sharp fluctuations in the price of the raw materials from which they are produced, e.g. sugar.

According to Robinow, futures trading in England developed first in metals, talc, etc. With the introduction of the telegraph and steamship lines it was extended to overseas products which are only produced seasonally, and are then thrown on to the market all at once, while consumption is spread over the whole year. The reason for futures trading is therefore the short period of production as against the long circulation time resulting from continuous consumption. The introduction of futures operations in the securities business was stimulated by the interchangeability of the objects dealt in, which themselves, as capitalized claims to income and thus representatives of money, are interchangeable. In commodity trading, however, the introduction of futures operations resulted from specific circumstances in the turnover of commodities, such as the difference between their time of production and their period of circulation. Only the requirements of futures trading lead to the creation, often by artificial means, of fully interchangeable commodities; that is to say, commodities of which every unit has the same use value as every other. When price fluctuations cease, as a result of the formation of cartels, as for example in oil, then commodity exchange transactions in such products also cease, or become purely nominal.

A third important factor, directly related to those already noted, is that it is seldom possible to control price fluctuations by adjusting supply to demand. This is particularly difficult in the case of agricultural products. The supply of such products is more or less fixed, once the crops are harvested, and it can only be adjusted to the demand for them over a long period of time. And finally, it should be noted that the supply of such commodities as are traded on the commodity exchange must be large enough to preclude the danger of a 'ring' being formed, or the market 'cornered' for the establishment of a monopoly price would eliminate price fluctuations and hence speculation.

The distinctive feature of commodity exchange trading is that by standardizing the use value of a commodity it makes the commodity, for everyone, a pure embodiment of exchange value, a mere bearer of price. Any money capital is now in a position to be converted into such a commodity, with the result that people outside the circle of professional, expert merchants hitherto engaged in the trade can be drawn into buying and selling these commodities. The commodities are equivalent to money; the buyer is spared the trouble of investigating their use value, and they are subject only to slight fluctuations in price. Their marketability and hence their convertibility into money at any time is assured because they have a world market; all that need be considered is whether the price differences will result in a profit or a loss. Thus they have become just as suitable objects of speculation as any other claims to money; for instance, securities. In futures trading, therefore, the commodity is simply an exchange value. It becomes a mere representative of money, whereas money is usually a representative of the value of a commodity. The essential meaning of trade - the circulation of commodities - is lost, and along with it the characteristics of, and the contrast between, commodity and money. This contrast reappears only when speculation ceases, because the market has been cornered, and suddenly money has to take the place of the profane commodity which is no longer available. Just as money plays an evanescent role in the circulation process, so does the commodity in commodity speculation, Similarly, speculation turns over much larger quantities of commodities than really exist, just as more money is turned over on paper than is actually available.

Eventually, of course, all futures trading in commodities must be followed by a real transfer of commodities from producers to consumers ; there must be real trading operations rather than speculation, and indeed these operations are a precondition for speculation. A series of futures operations has to begin with a producer (or his agent, the merchant), and terminate with a consumer (for example, the miller). We can regard the matter in the following way : some part of the stock of commodities always remains at the disposal of the speculators, serving merely as a reserve stock whose composition naturally varies, which would otherwise be stored elsewhere and would be at the disposal of other capitalist agents, not the speculators but producers and merchants, and would eventually reach the consumers. This stockpile must always be of a certain minimum size, to avert the danger of the market being cornered and rings being formed.

When speculators get their hands on these commodities, a whole new wave of buying and selling begins. This sequence of purchase and sale transactions is purely speculative; its object is to reap a marginal profit. These are not commercial operations, but speculative dealings. The categories of purchase and sale do not have the function, in this case, of circulating commodities, or moving them from producers to consumers, but have taken on an imaginary character. Their object is the acquisition of a marginal profit. The price of a commodity which a merchant sells on the exchange already includes the normal trading profit. If the manufacturer had sold it directly, he would simply have acted as his own dealer and pocketed the trading profit himself. The exchange, however, buys and sells in a purely speculative fashion, and speculators make a marginal gain, not a profit. If one gains, another loses. Nevertheless, this continuous chain of transactions ensures that it is always possible to convert a commodity on the exchange into money, and thus permits, to a certain extent, the investment of money in the commodity, and its reconversion into money at any time. Hence, a commodity which is dealt in on the exchange becomes suitable as a security for money which is temporarily idle. The banks, therefore, can use their capital in a new way by underwriting such commodities, or carrying them on a time basis, up to a certain proportion of their price. But when bank capital is used to participate in trading operations, it is used in the appropriate form, as interest-bearing capital. The commodities into which it has converted its money can be reconverted at any time into money. A well-managed bank will never tie up more money in these commodities than it can reconvert even under the most unfavourable conditions. The bank can be sure of recovering its money because there exists a commodity exchange in which a continuous round of buying and selling, which constitutes speculation, goes on. Consequently, the bank's money is not tied up, but remains money capital which has been invested in accordance with banking practice only in interest-bearing investments. Nevertheless, the entry of bank capital into this field provides both speculators and merchants with opportunities for expanding their operations. They can now purchase commodities without paying the full price in cash. Instead, they only need that amount of money which will cover any possible marginal differences, the balance being supplied by the bank. For speculators, this is tantamount to an expansion of their operations. Speculation is thus encouraged even if the price differentials are slight, provided the volume of trading grows; and so indeed the number of transactions steadily increases, while price differentials diminish.

An entirely different, and much more interesting, question concerns the effect which bank capital has on trade. Traders too can now have commodities underwritten, and need only pay interest on the borrowed capital. But, profit is not produced in trading. Trade only realizes the average profit corresponding to the size of the capital employed. Since the trader now has access to a larger volume of credit, he need only use a small capital of his own to turn over the same volume of commodities as before. The trading profit on his own capital is consequently spread over a larger quantity of commodities, thus reducing the commercial mark-up on the price of these commodities. Since trading profit is only a deduction from industrial profit, the latter will increase proportionately, while the price of the commodity for the consumer remains the same. The incursion of bank capital thus has three consequences : (1) it increases industrial profit; (2) it reduces commercial profit, both in the aggregate and per unit of commodity; and (3) it converts a part of the commercial profit into interest. This last is a necessary consequence of the substitution of bank capital for a part of commercial capital, which has been made possible by commodity exchange trading.

It should be noted here that, with the exception of consumer credit, interest is always a portion of profit or ground rent. Nevertheless, it is also important to observe that borrowed capital which is employed in production serves as industrial capital, and therefore produces a profit. Since it only receives interest, it increases the industrial capitalist's profit by the difference between the average profit and the interest paid on the borrowed capital. In trade, where no profit is produced, but commercial capital has to be paid the average rate of profit out of the general fund of profit, bank capital works in a different way. It receives interest, but produces no profit for the merchant, who receives the average profit on his capital, excluding the capital borrowed from the bank, plus the interest on the latter, which he then pays over to the bank. Trade now requires less commercial capital and consequently a smaller amount of profit. The profit thus saved remains with its producer, industrial capital. Bank capital functions here like any other progressive measure which reduces commercial costs. The different effect is due simply to the fact that industrial capital produces surplus value while commercial capital does not.

This tendency is reinforced by another circumstance. Futures operations on the exchange create a stable market for those commodities in which they deal. The producer or importer can always sell his commodities, and so the circulation time of his capital is reduced. As we know already, however, every such contraction of circulation time releases capital. Hence, in this way too, the futures trade reduces the amount of capital required to carry out purely commercial operations, the circulation of commodities, which served only to realize profit, not to produce it.

The futures trade is the most satisfactory form for all speculation, since every kind of speculation is a way of taking advantage of price differences which occur over periods of time. Speculation is not production, and since time represents a sheer loss to a speculator unless he is engaged in buying or selling, he must be able to exploit immediately all price differences, including those which will occur in the future. He must therefore be able to buy or sell at any moment, for any future moment of time, and this is precisely the essential characteristic of futures trading. In this way speculation creates a price for every instant of the year. It thus gives manufacturers and merchants the possibility of avoiding the unforeseen consequences of price movements, of protecting themselves against price fluctuations, and of passing on the risks of price changes to the speculators. The manufacturer of unrefined sugar is willing to pay 100,000 marks for beets today, when he can sell the unrefined sugar on the exchange for 130,000,000 marks, for delivery on a stipulated future date. If he sells unrefined sugar at this price today, he will not be affected by any ensuing price fluctuations and will have secured his own profit. Futures trading is thus a means by which industrialists and merchants can confine themselves to their proper function. A part of the reserve capital which would otherwise be needed as an insurance against such price fluctuations, and thus tied up in industry or commerce, is thereby set free. Part of it is now used for speculation on the exchange, but since such capital is more concentrated on the exchange, it may be smaller in total than the capital which was dispersed in small units among individual industrialists and merchants.

Capitalist profit originates in production and is realized in circulation. It is natural that both producers and merchants should try to insure their profits against fortuitous price fluctuations occurring during circulation, when production has long since ended, and the amount of profit for the producer, and for the merchant who has already bought the commodity, is settled. At a certain stage of development, and for those commodities which are liable to particularly large and unpredictable price fluctuations because the output of them is governed by natural (for example, climatic) conditions, futures trading serves this aim. It smoothes out, so far as possible, the price fluctuations resulting from speculation, but can only do so by creating smaller and more frequent oscillations. This speculation, which is completely senseless from the standpoint of society, appears necessary because it brings about the required volume of participation by buyers and sellers, so that the necessary quantity of commodities is always being traded. This insurance against price fluctuations brings the market price increasingly close to the price of production. A specific class of capitalists, the speculators, is formed, who assume the burden of these price fluctuations. The question is: how does their capital realize its value?

In dealing with speculation in securities, we saw that this capital produces a marginal gain. The profit of one speculator is the loss of another. As a rule it is the large speculators, who can afford to wait, and can themselves influence the trend of prices, and the knowledgeable insiders, who profit at the expense of small speculators and outsiders. The only problem which remains is whether speculators also get a risk premium. The risk premium is frequently alluded to, but very little studied. The first thing to establish is that the risk premium is not the source of profit and cannot explain it. Profit originates in production and is equivalent to the surplus value incorporated in the surplus product of the worker, which has cost the capitalist class nothing. Varying degrees of risk, or to put it another way, varying degrees of certainty that the profit which originates in production will actually be realized in circulation, can only bring about variations in the distribution of profit. Those branches of industry which have a higher risk, which must express itself in greater losses, seek higher prices so that in the end the rate of profit on their capital will be equal to the average rate of profit. It is clear that in so far as the special circumstances prevailing in any branch of production tend to reduce its yield, these circumstances must be offset by a level of prices high enough to assure the equality of the rate of profit. Thus, the price of optical lenses must include the cost of the glass which is spoilt during the pouring process. They form part of the cost of production. Similarly the average amount of damage and wastage which occurs while commodities are in transit to the market must be included in their price. The position is entirely different in the case of risk arising from fortuitous events in the course of circulation, which alter the costs of production themselves. For example, if there is a product still on the market, which was manufactured with old machines, while new ones allow it to be produced in half the time, there is no compensation for such a 'risk'. The sellers of this product will have to bear the loss.

The same conditions apply in the case of products which are most frequently dealt in on the futures market. The uncertainty may arise, for example, from the fact that the price of German grain is determined not only by the outcome of the German harvest, that is, by the German costs of production which would be directly expressed in the price, but also by American, Indian, Russian, etc. costs of production. For these price factors, there is no adjustment in the price of German grain.

In so far as large, unforeseen fluctuations occur in circulation, the capitalists in such a branch of production must maintain reserves which will enable them to cover losses arising from price fluctuations, and to continue their production without interruption. This reserve fund is a part of the necessary circulation capital, and an average rate of profit is calculated for it. The profit imputed to it may therefore be regarded as the risk premium. Productive capitalists may still need such a reserve fund even when the futures trade has developed, for the latter cannot eliminate in any way those price fluctuations which result from a change in the conditions of production. The impact of the world market upon domestic prices must be borne by the producer.

The commodity market can insure only against those fluctuations which arise in the course of circulation. The miller insures the price at which he sells flour on a given day by buying grain on the same day. The grain dealer insures his profit by selling the grain which he has bought today, on the commodity exchange, for delivery on an agreed future date. The insurance consists in the fact that he ensures a definite current price for a later date when he will actually have to meet his obligation. In other words, purchase and sale have taken place concurrently, rather than independently and unilaterally, for the merchant or producer. This presupposes, however, that there is a large and constantly receptive market such as the futures trade creates, and along with that, agents who do not seek insurance for themselves, but anticipate the later state of the market; in short, speculators who take over the risk from the merchant who has insured himself. Their profit, therefore, is not a risk premium, but a marginal profit, which must be compensated by a corresponding loss. This characteristic of speculative gains has as its consequence that professional speculators only thrive when large numbers of outsiders participate in speculation and bear the losses. Speculation cannot flourish without the participation of the `public'.

Increasing concentration gradually makes this kind of insurance unnecessary. For a commercial enterprise which has become sufficiently large the favourable and unfavourable circumstances tend to balance out. The large commercial firm provides its own 'insurance' and does without the futures market. Furthermore, the small speculators are gradually forced out because they have to foot the bill more and more frequently. The development of shares, and of speculation in securities, draws them away from the commodity exchange. Finally, the syndicates and trusts bring to an abrupt end speculation in those commodities which they control.

If we ask which business circles find the futures market necessary the answer is that the medium-size merchant has the most pressing need of it. It also has a certain utility for the producer to the extent that he would otherwise be obliged to undertake these important commercial functions himself. This will be the case if the processing of goods is already done by large capitalist enterprises, while the production of raw materials remains fragmented. In these circumstances the commodity exchange provides the necessary concentration of the products. A good example is to be found in the period when modern commercial milling was developing. The commodity exchange brings about this kind of concentration more quickly and more thoroughly than would be the case if a wholesale trade had first to be developed. The futures market is particularly desirable for commerce in those products which have a long circulation time, are produced by widely scattered plants which are difficult to supervise, with a variable yield which is difficult to _ anticipate, and hence are characterized by considerable, irregular price fluctuations during circulation.

Once futures trading is well established, participation becomes increasingly necessary for both merchants and producers, because the futures market is a major factor in price formation. On the other hand, if the futures trade were limited to the professional traders, it would be deprived of its most important function; namely the possibility of insuring oneself by unloading the losses due to price fluctuations upon the speculators.

Since speculators have no desire to hold on to speculative objects for any length of time, it is evident that every speculator is always a seller as well as a buyer. The bearish speculator, selling a commodity, will become a buyer of it in order to cover himself. But he buys and sells at different times and takes advantage of price fluctuations within this period of time, whereas the security of real trading consists precisely in avoiding such fluctuations, thus allowing sale and purchase to take place at the prices which prevail at a given time.

The speculator takes advantage of price fluctuations which are produced, not by him, but by the actual trade in goods. Such fluctuations may arise either from a fortuitous relation between supply and demand, or from more profound changes in the cost of production of a commodity. Supply and demand by the speculators then change the price level further, and produce fluctuations which must in the end cancel each other out just because every speculator is a buyer as well as seller. Naturally, this does not prevent one speculative trend - for example, a 'bullish' trend - from becoming dominant for a time, and so long as this trend persists the price will be higher than the actual trading in goods would dictate. Thus speculation causes more frequent, and therefore, in many cases, smaller price fluctuations, which cancel each other out in the long run.

The futures trade concentrates all business in one place, and gives the wholesale merchants in the vicinity of the exchange a preponderance over the provincial merchants, who are gradually disappearing. But it also makes possible, on the commodity exchange itself, the entry of previous. outsiders, who now compete with the old established houses. That is why the introduction of the futures trade frequently meets with opposition from the old professional merchants. The futures traders, by and large, are less qualified than the traditional professional merchants, and the participation of bank capital enables people who have little capital of their own to become involved. Yet even here concentration occurs, on a new basis, and in general one has the impression that the participation of mere speculators, and of outsiders, in the futures markets is declining. Conversely, the abolition of the futures trade would strengthen the position of the large merchants who can do without this insurance.

One of the dangers of futures trading lies in the possibility of 'cornering'. If the seller does not deliver the commodity on the specified date, the buyer has the right to buy it on the market itself, on the seller's account. If the available supply of the commodity does not meet the demand, because the buyer has previously had the available stock bought up, very high fictitious prices will result, determined entirely by the decisions of buyers, and the sellers are then at their mercy. Cornering is all the easier the smaller the available stocks of the commodity. This situation can also be contrived artificially if the terms of delivery in futures trading specify a very high standard of quality for the commodity. Conversely, if the standard is lowered cornering is made more difficult. Cornering is usually possible only in special circumstances and for brief periods; for example, when grain stocks are low just before the harvest, and most of the old supply has already been sold. But unusually high prices generally cause supplies to appear on the market which were thought to have been long since consumed. If these new supplies exceed the demand from the buyers, the `corner' collapses. In general, even successful 'corners' only involve the expropriation of groups of speculators who are outsiders, and they have only a slight effect on the actual commerce and the real prices.

As is well known, the German Stock Exchange law of 22 June 1896 has partly abolished the futures trade, and partly made it more difficult. The grain trade has greatly declined, especially since court decisions jeopardized delivery contracts regulated by commercial law. Hence 'the circle of people taking part in the delivery business has grown even smaller until it scarcely suffices to carry on the trade'. This has also increased the difficulties of the insurance business. What have the consequences been?

Already there are some large firms which believe that, because of the difficulties involved, they can get along better without insurance on the futures market, and these firms, helped by several years of stable and even rising prices, have achieved quite satisfactory profits. But, generally speaking, the more reliable firms regard such procedures as dangerous speculation and prefer to content themselves with a smaller but more certain profit. . . . In the present situation it is quite evident that the two or three large firms referred to are capturing an increasing share of the whole business. In this case, as in the case of banking, legislation has favoured concentration. But it is very doubtful whether the trend in this direction will, in the long run, really satisfy those who praise the success of this legislation so highly today. Widespread competition would provide far better guarantees of more favourable prices to farmers than do prices dictated by giant firms.

The provincial merchants are all the more interested in the delivery business because the sale of futures enables them to offer their goods as collateral on more favourable terms. Since these commodities have already been sold at a firm price, they cannot lose in value, should prices fall. The merchant can thus once again obtain capital and is in a position to buy new lots of grain from the producers at good prices.

By reducing the circulation time for productive capitalists, and assuming the risks, speculators can have an effect upon production itself. Before trading in futures was introduced it was mainly the partial producer who had to bear the risk. When this is no longer necessary, and there is no further need to hold stocks of the commodity, which are now concentrated at the location of the commodity exchange, this restricted productive function ceases to be enough. By combining his business with another one the partial producer becomes a full-fledged entrepreneur. He can do this all the more easily because a part of his circulation and reserve capital has been set free. It is in this way that independent wool carders have become superfluous, because the risk which they had to carry previously has now been transferred to the futures trade. They now become spinners themselves; or conversely, spinners merge with wool-carding firms.

Futures trading saves the producers circulation capital, first by reducing the circulation time, and second by reducing their self-insurance (reserve fund) against price fluctuations. This strengthens the capital resources of the large enterprises, which are the principal beneficiaries of the futures market. The capital which is thus set free becomes productive capital.

The division of labour within enterprises is not determined solely by technological considerations, but also by commercial factors. Many partial processes, especially the conversion of raw materials into semi-manufactured goods, remain independent simply because the partial producers also perform important commercial functions. They take over the raw materials from the producers or importers, with whom they share the risks involved in price fluctuations. This independence becomes superfluous if the manufacturer can protect himself against risk without their help by resorting to the futures market. He then processes the raw material in his own plant. The elimination of the commercial function renders the technological independence superfluous. There is also a tendency here to eliminate the middleman. It is true that commodity markets give the appearance of multiplying trading operations, but as we have seen, such purchases and sales are forms of speculation, not trading operations.

We have seen that the futures trade is a means of enabling bank capital to participate in commodity trading by the provision of credit, either against collateral, or through contango operations. But the bank can also use its great capital resources and its general overview of the market to engage in speculation on its own account with comparative safety. Its numerous connections, extending over a wide range of futures markets, and its knowledge of the market, give it the opportunity to engage in safe arbitrage dealings, which bring considerable profits because of the large scale on which they are conducted. The bank can carry on such speculative dealings all the more safely the larger the quantity of the commodity that it controls and the greater its influence over the supply. That is why the bank tries to extend its control over the commodities which are dealt in on the futures market. The bank tries to obtain the commodity directly from the producer and to exclude other dealers. It either buys the commodity outright, or operates on a commission basis; and in the latter case it can afford to accept a much smaller profit, in competition with other dealers, because it is also able to gain speculative profits, and to employ a far larger volume of credit. The bank uses the influence it possesses through its other business connections with industry, in order to take the place of the merchant in relation to the industrialist. Once the bank has control of the marketing, the mutual relations between the bank and industry become closer. The bank's interest in the price of the commodity is no longer exclusively that of a speculator; it desires a high price in the interest of the enterprise with which it has all kinds of credit connections. At the same time, since the bank wants to acquire the greatest possible control over the commodity, it seeks connections with as many enterprises as possible, and so acquires an interest in an entire branch of industry. The bank's interest, therefore, is to protect this branch of industry as much as possible against the impact of a depression, and so it will use its influence to accelerate the process of cartelization, which will, to be sure, make the bank's speculative activity on the domestic market (though not on the world market) superfluous, but will amply compensate it by participation, in various ways, in the cartel's profits. This is a development which has occurred whenever historical factors have prevented the emergence of a strong and effective wholesale trade, either generally or in a specific branch of production. In Austria, for example, the banks penetrated the sugar industry, and with somewhat less success, the oil industry, through commerce, and became the animators of the trend towards cartelization in these industries, which are now heavily dependent upon them. Thus the futures trade encourages a development, which is in any case a general trend, that culminates in the elimination of the futures trade itself.

Monopolistic combines are completely eliminating the commodity exchanges. This is self-evident, because they establish long-term prices and thus make it impossible to take advantage of price fluctuations. The `division over time', of course, continues as before, which would only surprise someone like Professor Ehrenberg! The German coal syndicate and the steel combine have made exchange quotations at Essen and Düsseldorf purely nominal.

Thus the Essen coal exchange is nothing more than a folder containing a list of coal quotations which is carried regularly from the coal syndicate building to the hall of the exchange, while the whole so-called Düsseldorf commodity exchange consists of an epistle which an industrialist conveys at regular intervals to the governing body of the exchange.

The same is true of the futures trade in alcohol:

It has been noted quite correctly that a part of the trade through the central office (for the regulation of alcohol sales) had become insignificant, and that a part of the wholesale trade no longer found a place in the syndicate. This is the part which is mainly concerned with commodity exchange business. The commission and brokerage business, and all the merchants who had no direct dealings with producers, have become superfluous with the creation of the syndicate and have been eliminated.

The actual traders have been transformed into agents of the syndicate, working on a fixed commission (30 to 40 pfennigs), and it seems that their number has been kept more or less constant. In 1906 there were 202 such agents, selling about 40 per cent of the output.

To the extent that the profits of the commodity exchange derive, from commercial profit, they accrue to producers if the exchange is eliminated. This is also the case with those profits which arise from differences between the time of production (the 'working season') and the time of consumption. For example, the price of alcohol is higher in summer than in winter. At the end of the working season, the output is turned over to dealers. Summer prices are higher because they must cover storage costs, loss of interest, etc. But the distillers must sell as soon as possible after the end of the season, and the supply becomes excessive. Conversely, there is no production during the summer, the supply cannot be increased, and the dealers have enough capital not to be obliged to release the commodity at an unfavourable time. The difference between the capital resources of the dealers (who also have at their disposal bank capital against collateral or on a contango basis) and the capital resources of the often small-scale producers plays a role in determining the price; not, of course, the price which consumers pay but that which is paid by the dealer to the producer. These conditions can be changed by a cartel of producers in their own favour and to the detriment of merchants. Mr Stern, the managing director of the Zentrale für Spiritusverwertung, expresses this concisely when he says : `The syndicate allows the price to rise after the end of the distilling season to the advantage of the distillers; the free market, to the advantage of speculators.'

Cartelization is particularly advantageous in agricultural production - and the agricultural producers' 'co-operatives' are often nothing but embryonic or small-scale cartels - for it is precisely here that capitalist regulation by the price mechanism is least appropriate, and the anarchy of capitalist society is least compatible with the natural and technical conditions of agricultural production. By contrast with its success in industry, capitalism cannot realize the ideal of a rational system of production in agriculture. This contradiction between capitalist price formation and the natural and technical conditions of agricultural production is brought to a head by the existence of a futures market, which makes price fluctuations continuous. Hence there is a tendency to blame the futures trade, with its frequently dramatic changes in the movement of prices - brought about, or at least exaggerated, by speculation - for a situation which is the fault of the whole capitalist mode of production. If this is demagogically exploited it can easily lead to a vigorous movement against the futures trade among agricultural producers.

In so far as a cartel is able to diminish economic anarchy it is particularly effective in the domain of agriculture. Agriculture is inherently subject to extreme variations of output from year to year, in accordance with natural conditions, and the volume of products directly affects prices. An abundant yield exerts a strong deflationary pressure on prices, and increases consumption for that year. The depressed prices will result in production being restricted in the following year. If there is, in addition, a poor harvest, shortages will occur, driving up prices sharply and reducing consumption drastically. Small-scale, fragmented production is more or less helpless in the face of such phenomena. A cartel, on the other hand, has a much greater influence upon price formation, because it is able to stockpile in good time, and this, together with the regulation of production, enables it to prevent excessive price fluctuations. It is true, of course, that the capitalist cartel uses this power in order to maintain high prices over the long term by reducing output, but none the less it creates more stable conditions for agricultural producers.

Mr Stern, the managing director mentioned earlier, observes :

The syndicate can store a very considerable, though not unlimited, surplus. In a free market, an excessive surplus causes a fall in prices, which only stops when they have fallen below the cost of production. The syndicate can separate the export price from the domestic price. If the available surplus is directed abroad, the price level for the entire output on the free market depends upon the income from exports. For example: in 1893-4 there was a surplus of 20,000,000 litres [of alcohol], by no means a dangerous surplus, but enough to depress the average price for that year to 31 marks. Had the syndicate exported an extra 10,000,000 litres that year, sustaining a loss of 5 to 8 marks per 100 litres, or a total of 500,000 to 800,000 marks, on these exports, then the whole distillery trade would have been spared a very considerable loss, for if I assume that the price would have been 5 marks higher for the output as a whole, then taking into account the loss of 500,000 to 800,000 marks on exports, the value of the entire output of some 300,000,000 litres would have been increased by some 15,000,000 marks.

The exchange did not allow stocks to increase substantially, and very quickly offset any surplus by a decline in production. The surplus stocks of alcohol at the end of the season (30 September) during the period when a free market prevailed was regularly about 30 million litres. In several years the stocks were smaller, falling on one occasion by 9 million litres, but only once, in 1893-4, were they larger, by some 15 million litres. These fluctuations of 10 million litres or so, up or down, amount to only 3 to 5 per cent of total output, but they are enough to put an intense pressure on prices. Even small surpluses make the speculator nervous, and he gets rid of them when he anticipates a good harvest. The apparent equilibrium of the exchange was fundamentally nothing but a state of anxiety and nervousness.

He continues by explaining why he does not like equalization through the exchange: 'The exchange achieves equilibrium at low prices' - whereas his employers, the cartelized distillers and alcohol producers only desire equilibrium at high prices.

Many advocates of the futures trade also argue that it is an instrument for the more precise determination of prices. The futures market embraces a larger number of expert participants and the outcome of so many expert opinions must generally be more accurate than those of a smaller number. But the quality of being a good grain dealer does not endow a person with the mystical ability to foresee the size of the coming harvest. Such an ability is possessed neither by a single grain dealer, nor by any number of them, however great. Perhaps the saying 'Understanding has always been confined to the few' does not apply to the gentry of the commodity exchange, but whatever other Old Testament qualities they may possess, they are certainly not endowed with the gift of prophecy. In reality, futures prices are purely speculative. Even a syndicate like the alcohol syndicate, which undoubtedly has a direct influence upon domestic price formation, and would therefore be in a position to make tenders for futures, does so with extreme reluctance. The managing director of the alcohol syndicate, Untucht, declares :

We have always had certain difficulties with futures tenders. If it had been up to us we would have been more cautious about them. . . . When someone offers a product, he must know in advance how much of it he will have in order to fix a price. Naturally, we can determine this only after several months of the season have passed. Even then, we cannot be sure of avoiding mistakes, for it is the output of the spring months which determines whether the output for the entire season will be large or small; and this is especially the case when the overall situation is not too clear. One must concede, however, that the head office of the syndicate, which has an overall view of production, and controls about 80 per cent of the output, has more reliable information than is available to the commodity ex change operators.

The reason for wishing to know futures prices is that the processing industry must know the price of its raw materials when it has to make tenders. If the raw materials season does not coincide with the time when the processing industry orders materials, it will need to know futures prices, especially in the case of commodities subject to sharp price fluctuations. In this way the processor transfers the risk to the supplier of his raw materials. But syndicates also use their power to free themselves of this risk, either by maintaining stable prices, or by setting futures prices so high that in that way too they avoid all risk. Herr Untucht is quite frank about it: 'Since we face uncertain conditions, we have been very prudent [sic !] and set our prices too high rather than too low.' And in a memorandum by the syndicate, it is noted :

In the first four years of the syndicate's existence, futures tenders were issued promptly at the beginning of each business year, but since 1904-5 we have adopted the practice of not quoting general supply prices until we have formed some idea of how production is developing.

In the German stock exchange inquiry, those members of the commission who were not businessmen themselves (like Privy Counsellor Wiener, and the Independent Conservative deputy, von Gamp) took the view that the securities business was legitimate, but market transactions based on marginal price differences were not, whereas the businessmen consistently rejected this distinction. The former simply could not understand that in all capitalist transactions the use value of a commodity is a matter of complete indifference, and at most a regrettable necessity (a conditio sine qua non). The pure margin business is actually the most complete expression of the fact that for the capitalist only exchange value is essential. The margin business is indeed the most legitimate offspring of the basic capitalist spirit. It is business-in-itself, from which the profane phenomenal form of value - the use value - has been abstracted. It is only natural that this economic thing-in-itself should appear as something transcendental to non-capitalist epistemologists who, in their anger, describe it as a swindle. They do not see that behind the empirical reality of every capitalist transaction there stands the transcendental business-in-itself, which alone explains the empirical reality. The remarkable thing is that the protagonists of use value themselves forget the concept of use value as soon as they .come into contact with the exchange. All transactions are then regarded as equally real, whether they concern titles to income or commodities, provided the titles or commodities are actually delivered. They ignore completely the fact that the circulation of securities is quite immaterial to the metabolism of society, whereas the circulation of commodities is its lifeblood.

An example will show the idiocies which result from this indifference to use value. In order to be exchangeable a commodity must conform to certain fixed and definite standards; a specific weight for a given volume, a particular colour, aroma, etc. Only then does it constitute the 'type' or brand suitable for delivery. The 'type' used in the coffee futures trade in Hamburg was of inferior quality. Accordingly, all superior brands of coffee were adulterated by adding black beans, kernels, etc. In Berlin the type was superior, so that the additives incorporated in Hamburg had to be carefully removed in order to make the coffee fit for delivery. A most remarkable instance of unproductive capitalist costs !But there is still better to come. In Hamburg, the market was cornered, and supplies of coffee became scarce. The only coffee available was that mixed with kernels, etc. Superior brands, because they did not conform to the quality required, had to pay a premium. In other words, a fine had to be paid for supplying the better grades of coffee! But this is a consistent application of capitalist logic; for the buyer, the member of the combine, is not at all concerned with use value, but exclusively with exchange value. Exchange value determines the whole of economic action, the aim of which is not the production or supply of use values, but the achievement of profit.

The apologists of the capitalist mode of production attempt to demonstrate the necessity of all its particular features by identifying the specific economic, and therefore historical, form which results from capitalist production with its technological content, which is always necessary and permanent, whereas the form is transitory; and on the basis of this erroneous identification they then infer the necessity of the form. Thus they insist strongly that every social labour process must be managed and supervised from above, in order to demonstrate the necessity of capitalist management, which arises from private ownership of the means of production, and hence the necessity of this private ownership itself. They regard commerce not as a specific act of circulation but as a way of distributing goods among consumers. Ehrenberg, for example, explains trade as distribution through space and speculation as distribution through time. And since distribution, naturally, is always necessary at a certain level of technological development, so trade and speculation are always necessary, their elimination an impossibility, a Utopia. If 'necessary' is then identified with 'productive', one arrives with Ehrenberg at the grotesque conclusion that speculation is just as much a branch of production as agriculture. And why not, when land and shares alike yield money? Commerce is simply confused with transportation, packing, sorting, etc., and speculation is identified with storage; operations which are, of course, essential in any technologically developed mode of production. Even a sagacious person like Professor Lexis, who certainly deserves to be taken more seriously than Ehrenberg, becomes confused in his testimony concerning the futures trade because he too fails to see that, unlike real trade in commodities, market trading in commodity futures is a specific form of economic activity. He ignores the role of speculation, and tries to demonstrate that the futures trade is a necessity, by attempting to depict it as genuine trade.

His opponent, Gamp, then has no difficulty in showing that the futures trade creates an enormous number of commodity turnovers which contribute nothing whatsoever to the distribution of commodities from the producer to the consumer. Lexis points out that futures trading makes it easier to find buyers. That is correct; only this 'buyer' is not usually the consumer, but another 'seller', namely a speculator. It is quite mistaken to attempt to derive trade, especially the futures 'trade' and speculation in futures, from some absolute requirement of distribution. Trade only meets distribution needs in a capitalist society, and even within capitalist society it is only a transitory necessity, as its elimination by syndicates and trusts demonstrates. Anyone who regards trade as 'productive', that is, as not merely realizing profit but producing it, faces an insoluble dilemma; he lauds the saving in trading costs as one of the advantages of cartelization, but then implicity admits that this is only an advantage if commercial operations produce a deficit, or in other words, are unproductive.

In fact, the futures trade is only a necessity in so far as: (1) it allows the productive capitalists (industrialists and merchants) to reduce their circulation time to zero, and thereby to protect themselves against price fluctuations during the period of circulation by transferring the burden to the speculators whose specific function it is to cope with them; (2) it permits money (bank) capital to replace commercial capital in carrying out a part of the commercial functions, the return on this part of the operating being interest, rather than average profit, with the difference between them going to increase industrial (entrepreneurial) profit; and (3) futures trading allows money capital - and this is closely related to the second point - to be converted into commercial capital while retaining its character as money capital, which opens the way for bank capital to extend its domination over trade and industry, and to impose upon an ever larger part of productive capital' the character of money capital which is under the control of the bank.

10. Bank Capital and Bank Profit

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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