IV. Finance capital and crises

16. The general conditions of crises[edit source]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Equilibrium conditions in the process of social reproduction[edit source]

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

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

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

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

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

I 4,000 C	+ 1,000 V	+ 1,000 S	= 6,000 means of production
II 2,000 C	+ 500 V	+ 500 S	= 3,000 means of consumption

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

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

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

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

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

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

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

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

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

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

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

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

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

Equilibrium conditions in the capitalist process of accumulation[edit source]

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

I Production of means of production	4,000 C	+ 1,000 V	+ 1,000 S	= 6,000
II Production of means of consumption	1,500 C	+ 750 V	+ 750 S	= 3,000
	Total value of the social product			= 9,000

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

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

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

Thus we now have the following schema:

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

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

Total =9,000 as above

Of these amounts, the following are capital:

I 4,400 C + 1,100 V (money) = 5,500
				= 7,900
II 1,600 C + 800 V (money) = 2,400

whereas production began with:

I 4,000 C + 1,000 V = 5,000
				= 7,250
II 1,500 C + 750 V = 2,250

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

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

I 4,400 C + 1,100 V + 1,100 S = 6,600
				= 9,800
II 1,600 C + 800 V + 800 S = 3,200

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

I 4,840 C + 1,210 V + 1,210 S = 5,500
				= 10,780
II 1,760 C + 880 V + 880 S = 3,520

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

17. The Causes of Crises[edit source]

If one considers the complicated relations of proportionality which must exist in production, despite its anarchic character, one is led to pose the question as to where the responsibility for maintaining these relations lies. Clearly, it is the price mechanism which performs this function, since prices regulate capitalist production, and changes in price determine the expansion or contraction of production, the initiation of a new line of production, etc. This also explains the necessity of an objective law of value as the only possible regulator of the capitalist economy. The disruption of these proportional relations must be explained in terms of a disruption in the specific regulatory mechanism of production, or in other words, in terms of a distortion of the price structure which prevents prices from giving a proper indication of the needs of production. Since such disruptions occur periodically, the distortions of the price structure must also be shown to be periodic.

The capitalist is not primarily concerned with the absolute price level of his product, but with the relation between the market price and the cost price, or in other words, with the level of profit. It is this which determines the branches of production in which he invests his capital. If there is a marked decline in profit, new investment is abandoned, particularly when it is a matter of large-scale investment in fixed capital, because such capital is tied up for a long time and the price of fixed capital is crucial in calculating the rate of profit.

As we already know, the organic composition of capital changes. For technological reasons, constant capital increases more rapidly than does variable capital, fixed capital than circulating capital. The relative reduction of the variable component of capital results in a fall in the rate of profit. A crisis involves a slump in sales. In capitalist society this presupposes a cessation of new capital investment, which in turn presupposes a fall in the rate of profit. This decline in the rate of profit is entailed by the change in the organic composition of capital, which has taken place as a result of the investment of new capital. A crisis is simply the point at which the rate of profit begins to fall. But the crisis is preceded by a long period of prosperity, in which prices and profits are high. How does this turn of fortune in the capitalist world occur, this transition from the blessed state of feverishly intense activity, high profits, and accelerated accumulation, to the hopelessness and despair of a slump in sales, dwindling profits and widespread idleness of capital?

Every industrial cycle begins with an expansion of production, the causes of which vary according to particular historical circumstances but which in general can be attributed to the opening of new markets, the establishment of new branches of production, the introduction of new technology, and the expansion of needs resulting from population growth. As demand increases prices and profits rise in particular branches of production, and they expand their output, which in turn increases the demand for products from those sectors of industry which supply their means of production. New investments of fixed capital, and the replacement of old and technically outmoded equipment, are undertaken on a large scale. The process becomes general as the expansion of each branch of industry creates a demand for the output of other industries. The various sectors of production feed upon each other and industry becomes its own best customer.

Thus the cycle begins with the renewal and growth of fixed capital, which is the main source of the incipient prosperity, and as the expansion continues this new investment is accompanied by the most intensive possible utilization of all the available forces of production.

To the same extent, therefore, that the magnitude of the value and the duration of the fixed capital develop with the evolution of the capitalist mode of production, so does the life of industry and of industrial capital develop in each particular investment into one of many years, say of ten years on average. If the development of fixed capital extends the length of this life on one side, it is on the other side shortened by the continuous revolution of the instruments of production, which likewise increases incessantly with the development of capitalist production. This implies a change in the instruments of production and the necessity of continuous replacement on account of their virtual depreciation long before they are worn out physically. One may assume that this life-cycle, in the essential branches of large-scale industry, now averages ten years. However, it is not a question here of the precise figure. So much at least is evident, that this cycle, extending over several years, through which capital is compelled to pass by its fixed part, furnishes a material basis for the periodical commercial crises in which business goes through successive periods of lassitude, average activity, frantic acceleration, and crisis. It is true that the periods in which capital is invested are different in time and place. But a crisis is always a starting point for a large amount of new investment. Therefore it the point of view of society, more or less of a new material basis for the next cycle of turnover.^[13]

But there is another cause of the rise in the rate of profit at the beginning of a period of prosperity, besides the increased demand previously described. Along with, and as a result of, the increase in demand, the turnover period of capital is shortened. The work period for a given output is reduced because the introduction of technical improvements makes it possible to produce more rapidly. For example, the auxiliary workers in mining are reduced to the minimum required to maintain output, machinery is more intensively utilized by speeding up its running time and especially by extending the working day (through the elimination of idle shifts, overtime, hiring of extra workers). Furthermore, the turnover time is shortened when sales go on uninterruptedly, and it is frequently reduced to zero because work is done to order. Many important branches of industry increase their sales in nearby domestic markets relative to sales in distant foreign markets, and this too shortens the circulation time. All these factors bring about a rise in the annual rate of profit, since the productive capital, including the variable capital which produces surplus value, is turned over more rapidly.

The shortening of turnover time also means that the industrialist has to advance a smaller amount of money capital in relation to his productive capital. In the first place, better use is made of the available productive capital without any greater outlay of money capital, or at least without a correspondingly greater outlay, as a result of shortening the period of work required by accelerating the tempo of machine operations, and in general by using more intensively the available elements of production. Second, the circulation time is reduced, and along with it the amount of capital which the capitalist must keep on hand during the period of circulation, in addition to the capital that is actually functioning in production. In this way the capital used only for purposes of circulation, unproductive capital, is diminished in relation to the profit-producing capital which functions in production. At the same time the contraction of the circulation period and the accelerated turnover reduce the amount of capital which is lying idle in the form of commodity stocks, which represents an unproductive expense. Thus the annual rate of surplus value and profit rises, the latter particularly sharply because of the reduction in the amount of capital devoted to circulation. At the same time the total sum of surplus value increases and along with it the opportunities for accumulation.

Industrial prosperity simply means, therefore, improved conditions for the valorization of capital. But the very conditions which at first make for prosperity contain within themselves potentialities which gradually worsen the conditions for valorization, until finally a point is reached where new capital investment ceases and there is an evident slump in sales.

For example, if the growth of demand in the first phase of the industrial cycle involves a rise in the rate of profit, this rise nevertheless occurs in circumstances which prepare the way for a later fall. During the period of prosperity there is a large amount of new capital investment, reflecting the latest advances in technology. As we know, however, technical improvements are expressed in a higher organic composition of capital, and this involves a decline in the rate of profit, a deterioration of the conditions for the valorization of capital. The rate of profit declines for two reasons: first, because the variable capital diminishes as a proportion of total capital, so that the same rate of surplus value represents a lower rate of profit; and second, because the larger the amount of fixed capital in relation to circulating capital the longer is the turnover period for capital, and this too involves a decline in the rate of profit.

There are other circumstances which extend the turnover time. At the peak of prosperity labour time per unit of output may increase as a result of a shortage of labour, especially skilled labour, to say nothing of wage disputes which are usually more widespread during such periods. There may also be disruptions of the work process, resulting from an overintensive utilization of the constant capital; for instance, through excessive speeding up of machines which may also be damaged by the employment of inexperienced workers, or by the neglect of repairs and maintenance in order to take full advantage of the brief period of industrial boom. As the cycle continues, turnover time increases again. Once domestic demand has been met, more distant foreign markets have to be sought, and the marketing of commodities and their reconversion into money takes a longer time. All these factors bring about a fall in the rate of profit in the second phase of prosperity.

There are also other factors to be considered. During prosperity the demand for labour power increases and its price rises. This involves a reduction in the rate of surplus value and hence in the rate of profit. Furthermore, the rate of interest rises gradually above its normal level for reasons which will be discussed later, and as a result the rate of entrepreneurial profit falls. Of course, the profit of bank capital is thereby increased (a consideration which is usually overlooked). Yet, during a period such as this, the banks are no longer in a position to make their funds available for the expansion of production. In the first place, speculation in both commodities and securities is in full spate and makes increasing demands on the supply of credit. Second, as we shall see presently, the circulation credit which producers extend to each other becomes inadequate to meet the increased demands, and here too the banks must help out. The banks will therefore tend to retain their profit in liquid form, as money, and this impedes its conversion into productive capital, and hence any real accumulation and expansion of the reproduction process. At the same time, this involves a disruption of the process of production, since as a result of the obstacles to the reconversion of the money capital which the banks have attracted by the higher rate of interest and have retained in money form, a part of the productive capital intended for expanded reproduction remains unsaleable. Thus the decline in entrepreneurial profit means increasingly unfavourable conditions for realization, and a lower level of accumulation for the whole capitalist class.

A crisis begins at the moment when the tendencies toward a falling rate of profit, described above, prevail over the tendencies which have brought about increases in prices and profits, as a result of rising demand. Two questions suggest themselves at this point. First, how do these tendencies, which presage the end of prosperity, assert themselves in and through capitalist competition? Second, why does this occur in the form of a crisis, suddenly rather than gradually? The latter question is less important, for it is the alternation of prosperity and depression which is crucial for the wavelike character of the business cycle, and the suddenness of the change is a secondary matter.

This much at least is clear: if price rises during prosperity were general and uniform they would remain purely nominal. If the prices of all commodities were to rise by 10 per cent or 100 per cent, their exchange relationship would remain unchanged.^[14] The rise in prices would then have no effect upon production; there would be no redistribution of capital among the various branches of production and no change in the proportional relations. If production is carried on in the proper proportions (as was shown in the schema presented earlier) these relations need not change and no disruption need occur. It is different, however, if the character of price changes is such as to exclude uniformity. The changed price structure may then bring about changes in the proportional relations among the various branches of production; for the changes in prices and profits crucially affect the allocation of capital among these different branches. This possibility becomes a reality once it is evident that the rise in prices must necessarily be accompanied by a shift in the distribution of capital. And indeed, the existence of factors which, prevent prices from rising uniformly can easily be shown.

Leaving aside revolutions in technology and considering only the ordinary, constant technical improvements, we may say that the greatest change in the organic composition of capital, which is responsible, in the last analysis, for the fall in the rate of profit, will occur where the use of machinery and of fixed capital in general is greatest. For the larger the amount of machinery, scientific knowledge, etc., that is already employed, the greater will be the opportunity for further rationalization of production, improved techniques, and more scientific methods. Hence the tendencies toward a higher organic composition of capital become even stronger. The higher organic composition of capital, however, is only the economic expression of increased productivity, which means a lower price for the same quantity of commodities. Newly invested capital, therefore, obtains an extra profit, and capital will flow into such spheres of investment. At this point a disruptive factor supervenes. The larger the extra profit to be made from these new investments the more capital flows into these spheres. This movement can only be corrected when the new products of these sectors of industry come on to the market, and oversupply depresses prices.^[15] In the meantime, however, the demand of such industries will also have driven up the prices of products in other sectors, which will now attract capital, though on a smaller scale because, owing to their lower level of technological, development, the extra profit is smaller. A further consequence is that the price rise is relatively greater in the latter sectors, since they have not increased their capital to the same extent. In the first sector of production the extra profit is considerable, in the second less so, but this situation is gradually equalized by a reduction in the extra profit through the inflow of capital in the first case, and by price increases as a result of a relatively smaller inflow of capital in the second.

With the development of capitalist production the sum of fixed capital grows, and along with it an increasing differentiation among the various industries with respect to the quantity of fixed capital they employ. The larger the amount of fixed capital, however, the longer is the period of time required to install new plant, and hence the greater the difference between various branches of industry in the time required to expand production. The longer it takes to invest in new plant the more difficult it is to adapt to the needs of consumption; and the longer supply lags behind demand the more strongly do prices rise and the more widespread does the pressure to accumulate capital become in such industries.

The larger the mass of fixed capital, the longer does it take for the changes to become effective and productivity to increase. Until that happens, however, supply will continue to lag behind demand. It takes much longer to increase the number of blast furnaces, sink new coal shafts, and complete new railways, than it does to expand textile or paper production. Thus, while a higher organic composition of capital intensifies the causes which must bring about, in the long run, a fall in the rate of profit, these sectors are able, nevertheless, because of the changed conditions of competition resulting from the slower growth of supply in relation to demand, to raise their prices more sharply than other branches of production. Not only do their profits not diminish ; on the contrary, the change in organic composition is accompanied by rising prices and profits, and indeed there is a general tendency for prices to rise more steeply where the organic composition of capital is most highly developed. Since capital flows into those sectors which have the highest profit, the new capital which is being accumulated will be largely diverted into them, and this will continue until the new investments have been completed and the stronger competition from new plants makes itself felt. There is thus a tendency toward overinvestment and overaccumulation of capital in the sectors with the highest organic composition in comparison with those which have a lower organic composition. This disproportion becomes apparent when the products of the first sector reach the market. The sale of these new products is impeded because production in those sectors with a lower organic composition has not increased equally, or at the same speed, but more rapidly though less intensively. This explains why crises are most severe in those branches of production which are technologically most advanced; for example, in the textile (cotton) industry at an earlier time, and subsequently in heavy industry. In general, a crisis is most severe where the turnover of capital is most prolonged and technical improvements and innovations are most advanced, and hence, for the most part, where the organic composition is highest.

The crisis itself depresses prices and profits below their normal level, that is, below the price of production and the average rate of profit respectively. Production contracts and the weaker concerns fail, leaving the field to those which can achieve an average profit even at the lower prices. But the average profit is now at a different level. It no longer reflects the organic composition which existed at the start of the industrial cycle, but the changed, higher organic composition of capital.

Conversely, the industries with a smaller amount of fixed capital are able to adapt more quickly to the requirements of consumption, price rises are more limited (leaving aside fluctuations in the prices of raw materials) and there is less pressure to accumulate capital. This is another reason for the emergence of disproportionality, through the concentration of new investment-seeking capital upon those branches of production with the most rapid and extreme price increases, and at the same time a reason for the fact that, in general, the effects of crises are more severe the more extensive the fixed capital, and most severe in those branches of production where the amount of fixed capital is greatest.

It should be added here that the larger the quantity of capital required at any given time by the level of technology in a particular branch of production, the more difficult it becomes to effect a precise quantitative adaptation of increased production to the increased consumption. It is technically irrational and hence uneconomic to increase steel production by making a new investment in a small steel works. The technological imperative here dictates the scale of expansion without any regard for whether such expansion corresponds with the needs of consumption. Expansion in the heavy industries, once all the available productive forces are fully utilized (and variations in the possibility of utilization are an important factor in making adjustments to minor fluctuations in demand) can only occur on a large scale, in sudden spurts, not on the modest scale characteristic of the early period of capitalism. The light industries are far more adaptable in this respect, and hence their price increases in the interim period are smaller.

In addition to these disproportions in the price structure which result from the diversity of organic composition there are others which arise from natural conditions. We have seen that there is a tendency to over-accumulation in those sectors which have a higher organic composition of capital. These sectors are not only large consumers of raw materials, but also supply raw materials and semi-manufactured goods (iron, coal) to other industries. Disruptions of proportionality may also occur here.

We have seen in Volume II that once the commodities have been converted into money, sold, a certain portion of this money must be reconverted into the material elements of constant capital, and this in proportion to the technical nature of any given sphere of production. In this respect, the most important element in all lines - aside from wages, or variable capital - is the raw material, including the auxiliary substances, which are particularly important in all lines of production that do not use any raw materials in the strict meaning of the term; for instance, in mining and extractive industries in general. . . . If the price of raw materials rises, it may be impossible to make it good fully out of the price of the commodities after deducting the wages. Violent fluctuations of price, therefore, cause interruptions, great collisions, or even catastrophes in the process of reproduction. It is especially the products of agriculture, raw materials taken from organic nature, which are subject to such fluctuations of value in consequence of changing yields, etc., leaving aside altogether the question of the credit system. . . . A second element, which is mentioned at this point only for the sake of completeness, since competition and the credit system are still outside the scope of our analysis, is this: it is in the nature of things that vegetable and animal substances which are dependent on certain laws of time for their growth and production, cannot be suddenly augmented in the same degree as, for instance, machines and other fixed capital or coal, ore, etc., whose augmentation, assuming the natural requirements to be present, can be accomplished in a very short time in an industrial country. It is therefore possible, and under a developed system of capitalist production even inevitable, that the production and augmentation of that portion of constant capital which consists of fixed capital, machinery, etc., should run ahead of that portion which consists of organic raw materials, so that the demand for these last materials grows more rapidly than their supply, and their price rises in consequence. The rise in prices carries with it the following results: (1) a shipping of raw materials from great distances, seeing that the rising price covers greater freight rates; (2) an increase in their production which, however, for natural reasons will not be felt until the following year; (3) the use of various hitherto unused substitutes and a better economizing of waste. If this rise in prices begins to exert a marked influence on production and supply, the turning point has generally arrived at which, on account of the protracted rise in the price of the raw material and of all commodities in which it is an element, demand falls so that a reaction in the price of raw material takes place. Aside from convulsions due to the depreciation of capital in various forms, this reaction is also accompanied by other circumstances which will be mentioned shortly.

It is already evident from the foregoing that the greater the development of capitalist production, the greater the means of suddenly and permanently increasing that portion of the constant capital which consists of machinery, etc., and the more rapidly accumulation takes place (as it does particularly in times of prosperity), the greater is the relative overproduction of machinery and other fixed capital, the more frequent the relative underproduction of vegetable and animal raw materials, and the more pronounced the above-mentioned rise in their prices and the subsequent reaction. And the convulsions increase correspondingly in frequency in so far as they are due to the violent price fluctuations of one of the main elements in the process of reproduction.^[16]

The closer we approach our own time in the history of production, so much more regularly do we find, especially in the essential branches of industry, the ever recurring alternation between relative appreciation and the resulting subsequent depreciation of raw ma terials obtained from organic nature.^[17]

These disruptions are complemented by others which arise from the manner in which fixed capital is reproduced. We have seen that in simple reproduction, the fixed capital which has been consumed must equal that which is to be newly invested. In fact, this condition is never strictly fulfilled, and to compensate for the discrepancy there must always be available on one side a surplus of elements of fixed capital, a stock of commodities, which represents, on the other side, a reserve of money capital. A certain amount of reserve stock, and a certain amount of hoarding, is a condition of reproduction, which would otherwise always come to a standstill at some point. The elasticity of capital itself also helps to smooth out minor fluctuations and makes possible the satisfaction of particularly urgent needs by speeding up production, overtime working, etc. The feverish harnessing of all the powers of production diminishes the stock of commodities on one side and of money on the other (both relatively and absolutely) and thus eliminates a factor which in normal times helps to compensate any imbalances. This reduction in the money capital reserve becomes absolute on the eve of the crisis, because on one side the industrialist capitalists' demand for money reaches a peak at such a time, and on the other side the demand for money as a means of payment rises rapidly, as the rate at which capital flows back begins to slow down, and along with it the supply of commercial credit. Any further decline in sales cannot now be met by drawing upon reserve money capital and hence leads to bankruptcy.

Proportionality may also be disrupted by a change in the relation between production and consumption. In times of prosperity both prices and profits rise. The rise in commodity prices must necessarily be greater than that in wages, or there would be no increase in profit. Consequently, the share of the entrepreneurial class in the new production increases more rapidly than does that of the workers. In absolute terms there is an increase in consumption, since the entrepreneurs, like the workers, will consume more. But accumulation increases still more rapidly, for this is a period in which the drive to accumulate capital is especially strong, and there is always an interval before luxury consumption begins to grow. The demand for luxury goods is in any case very elastic and easily accommodates itself to the drive toward accumulation. Thus there is a redeployment of profit ; a relatively larger part of it is accumulated, a relatively smaller part is devoted to consumption. This means that consumption does not keep pace with the increase in production. It should also be borne in mind that a certain part of consumption remains unchanged since it is based upon fixed salaries, or upon incomes which are not derived directly from production. Such income strata are only affected indirectly by fluctuations in production.

Thus, disproportional relations arise in the course of the business cycle from disturbances in the price structure. All the factors mentioned above involve deviations of market prices from production prices, and hence disruptions in the regulation of production, which depends for its extent and direction upon the structure of prices. It is clear that such disturbances must eventually lead to a slump in sales. They are also accompanied and mediated by various phenomena in the credit system, which we must now analyse.

18. Credit conditions in the course of the business cycle[edit source]

At the beginning of a period of prosperity a low rate of interest prevails, which rises only slowly and gradually. Loan capital is plentiful. The expansion of production, and hence of circulation, does indeed increase the demand for loan capital. But the increased demand is easily satisfied, first because the money capital which was lying idle during the depression is available, and second because the onset of a period of prosperity is accompanied by an expansion of circulation credit. Thus, while the commodity capital of industrialists and merchants, which has to be reconverted into money capital, has increased both in volume and in price, the necessary means for circulating it are supplied by the increased amount of credit money. Along with this increase in the amount of credit money its velocity of circulation is also accelerated as a result of the more rapid turnover of commodity capital. The increased supply of loan capital, brought about by the more extensive creation of credit money, is sufficient to meet the increased demand for loan capital without a rise in the interest rate.

In this period the supply of loan capital also grows because the amount of money capital which producers must have available during the turnover period (which depends upon the length of time involved) has diminished as a result of the reduction of turnover time, and the capital thus released comes on to the money market as loan capital.

As prosperity continues, however, these conditions change, and the gradual changes are reflected in the gradual rise in the interest rate. We saw earlier that during a period of prosperity the turnover time of capital is extended, and a disproportion emerges between the various branches of production. The extension of turnover time, that is, the greater sluggishness of sales, also means a slackening of the velocity of circulation of credit money. A bill which falls due in three months cannot be met if the commodity whose money form it represents is only paid for after four months. The bill must either be renewed or settled in cash. Renewal means having recourse to credit, to capital credit provided by the bank, and this involves an increased demand for bank credit. Demand for bank credit will be general because the need to renew bills will not just affect an individual capitalist, but a certain proportion of the whole class of productive capitalists. The increased demand for bank credit, which simply results from the fact that the circulation credit with which the productive capitalists provide each other is no longer adequate, as well as the increased demand for cash, has a direct effect in raising the interest rate.

Increasing disproportionality, which also signifies that sales are slumping, has the same effect. One commodity must be exchanged for another if credit money is to perform its function of replacing cash. If the reciprocal turnover of commodities comes to a halt then cash must take the place of credit money. The bill cannot be met when it falls due because the commodity which it represents has not been sold. If it is, nevertheless, to be redeemed that can only be done by recourse to bank credit which thus takes the place of circulation credit. It is a matter of indifference to the industrialist whether the bill which he has accepted in payment for his commodity is redeemed through circulation credit (which means, in the final analysis, that his commodity is exchanged for another commodity) or through bank credit (in which case his commodity has not as yet been definitively exchanged for another). Of course, he now has to pay a somewhat higher rate of interest, but he does not understand the reason for it, and even if he did understand, this would not change anything and would do him no good. In any case, prices and profits are still high, and he still needs the money capital which he can get for his bill in order to continue production on the same scale. He is quite unaware that the money capital with which he now operates no longer represents the converted form of his own commodity capital, which in reality has not yet been sold at all. Nor is he aware that he is now continuing production with additional money capital made available to him by the banker.

But this is a circumstance of the greatest importance. The incipient disproportionality must show itself in the formation of stocks of commodities. At some point in the circulation process the commodity must come to a halt. This stock of commodities would be bound to affect the market if the commodity had to be sold, in order to continue production with the money realized from its sale. This effect on the market, and the ensuing effect on prices and profits, is avoided by the banks making money capital available to the producers, and in this way credit obscures the incipient disproportionality. Production continues unchanged and is even greatly expanded in some branches where prices are particularly high, because the drawing in of money capital prevents commodities from exerting pressure on the market, thus causing prices to fall. Thus production appears to be in a perfectly healthy condition even though disproportionality between different branches of production has already developed.

The changes in the level of the interest rate, which are primarily determined by changes in the relations of proportionality in the course of the cycle, in turn exert a most powerful influence upon the founding of new enterprises, upon speculation in commodities and securities, and hence upon the whole state of stock exchange business. In the initial stages of prosperity the interest rate is low, and other things being equal this raises the market quotations of fictitious capital. The price of that part of fictitious capital, such as state bonds and bonds issued by public corporations, as well as some types of debentures, which has a fixed and guaranteed return, rises as a direct result of the fall in the rate of interest. In the case of shares a rise in their price following the decline in the interest rate is countered by the reduction of dividends and the greater uncertainty of yields, but prosperity eliminates this counter tendency, and share quotations rise as the rate of interest remains low, because yields increase and become more certain. At the same time speculation increases, with the aim of exploiting the rise in security prices, and the demand for shares grows, with the result that prices are driven still higher. The expansion of production leads to greater activity in the promotion of new companies, while existing ones increase their capital. The banks become very active in issuing shares, and the high level of share prices, together with the low interest rate, bring high profits from such issues. The new shares are quickly taken up on the stock exchange and are easily sold to the public, that is to capitalists who have loan capital available. It is in this period that promotional activity is most vigorous, and the profits made by the banks from their own issues are greatest. Money liquidity favours speculation, which is dependent upon the availability of credit for its operations. Thanks to the low rate of interest, speculation can exploit even small fluctuations in stock exchange prices such as occur during the initial phase of prosperity. The stock exchange is lively and the turnover considerable, and even though price fluctuations are modest, they tend overall to produce a higher level of quotations. This higher level, which results on one side from the increase in the volume of securities and their higher prices, and on the other side from the increased turnover, involves greater recourse to credit for settling balances, which now require larger sums of money. This is even more the case since during such periods 'bullish' predominates over 'bearish' speculation, purchases exceed sales, and -the balances which have finally to be settled are inflated. The increased demand for credit emanating from the stock exchange is not matched by an increased supply, unlike the increased demand of productive capitalists which is immediately met by an expansion of circulation credit. Hence the increased demand has a direct effect in raising the rate of interest, and reinforces those tendencies emerging in the sphere of production which operate in the same direction.

Similar developments occur in the field of commodity speculation, which also tries to take advantage of rising prices and to reinforce the upward trend. On one side, commodities are brought from other markets to a market where the price is particularly high, thus increasing the supply. Since one importer knows nothing about the activities of others, it is all too easy for the supply ultimately to exceed demand, producing a glut on the market. But on the other side speculation in commodities, like speculation on the stock market, strives to maintain, and if possible augment, the rise in prices. Commodities are withheld from the market for as long as possible in order to raise the price; and 'rings' and 'corners' are formed to force up prices by creating artificial shortages. In order to withhold commodities from the market it is again necessary to resort to credit, and this also contributes to the rise in the rate of interest.

Meanwhile, industrial prosperity has become general and has developed into a boom. Prices and profits reach their highest levels. Share prices rise as a result of higher yields. Speculation, which has on the whole shown a profit, has grown enormously. The prospect of speculative gains becomes infectious, and the general public is drawn increasingly into stock exchange dealings, thus providing the professional speculators with opportunity to expand their operations at the expense of the public. Since the interest rate is high the changes in stock exchange prices must be large enough to prevent the higher interest from absorbing speculative gains, if speculation is to be profitable. In fact, these fluctuations now become significant in another way, because the reports from industry are no longer entirely favourable, and although profits continue to rise, there is stagnation here and there, sales are no longer so buoyant, and access to credit begins to be more difficult once the banks begin to consider it hazardous to follow a policy conducive to speculation. This is particularly the case when, with the greater participation of the general public, there is a considerable increase in the number of people who engage in speculation without resources of their own, or with quite inadequate resources. Similar developments occur on the commodity market.

The rising rate of interest tends, however, to depress stock exchange prices, and eventually a point must be reached at which the effort of speculators to force up prices comes to a halt. This point is reached all the more quickly if some of the credit which was previously available is withdrawn from speculation. We have seen that as prosperity advances productive capitalists have to make increasing demands upon the banks, and to the reasons given for that situation we must now add another. The rate of interest is crucial for the level of promoter's profit. The high rate of interest which prevails during a boom reduces promoter's profit and consequently restricts share issues. In addition, at such a time speculation is already satiated and could not absorb further issues at the current high prices. The banks then confront the danger that they will be unable to dispose of the new issue, or will have to do so at relatively low prices.

The needs of industry are now met by the banks themselves. Instead of issuing shares they grant bank credits, on which the productive capitalists must pay the prevailing high rate of interest. But the greater the commitments of the banks to industry the less funds they are able to make available to speculators. Speculation, therefore, has to contract, and this means a decline in the demand for securities and a fall in stock exchange prices. Since the prevailing level of security prices was the basis of the credit made available for speculative purposes, it now becomes necessary to provide additional funds to support the paper which has served as collateral, or in some other way, as a basis of credit; funds which many of the speculators, and particularly their fellow travellers among the public, cannot supply. So there ensue forced sales of pledged shares, a sudden increase in the supply of shares, and a rapid fall in stock exchange prices. This fall in prices is exacerbated by the manoeuvres of the professional speculators who, having recognized the critical state of the market, now rush into 'bearish' operations. The fall in prices leads to a further restriction of credit and new forced sales ; the decline becomes a crash, and a stock exchange crisis and financial panic develops. There is a massive devaluation of paper securities, which fall rapidly below the level corresponding to their real yield at the normal rate of interest. This depreciated paper is then bought up by the large capitalists and banks, in order to be sold later at a higher price when the panic is over and share quotations have risen again. This continues until, in the course of the next cycle, the expropriation of some of the speculators, and the concentration of property in the hands of the money capitalists, again takes place, and the stock exchange performs its function of bringing about a concentration of property through the concentration of fictitious capital.

The immediate cause of a stock exchange crisis, therefore, is the changes which occur in the money market and in the credit situation, and since the advent of such a crisis depends directly upon the level of the interest rate, it can well precede the onset of a general commercial and industrial crisis. None the less, it is only a symptom, an omen, of the latter crisis, since the changes in the money market are indeed determined by the changes in production which lead to a crisis.^[18]

Developments similar to those in share speculation also occur in commodity speculation, except that here, in the nature of things, there is a closer connection with the conditions of production. Here too the rise in the rate of interest and the restriction of credit make it more difficult to withhold commodities from the market and so to maintain prices. At the same time the high level of prices encourages maximum production, increased imports, and restraint in consumption, until finally the market collapses. If the commodity is one whose price also affects the price of leading securities on the stock exchange, as is the case with copper, for example, the collapse of commodity speculation may also be the signal for a collapse of stock exchange speculation.

The change in money market conditions also has a decisive influence upon the amount and nature of bank profit. At the beginning of a period of prosperity the interest rate is low and the profits from share issues large. We have seen that in the course of the cycle they move in opposite directions. Moreover, during the whole period of the cycle the bank's profit from its commissions as an intermediary in the provision of circulation credit increases; the profit on money dealing capital also increases because productive capitalists are making more payments; and above all, as the rate of interest rises, bank capital takes an increasing share of the producers' profit at the expense of entrepreneurial gains, and of speculative profit at the expense of marginal gains. The higher the rate of interest, the greater is the share of finance capital in the fruits of prosperity. While prosperity lasts money capital increases its share of the profit made by productive capital.

We have also seen that in the course of the cycle there is an increasing demand for bank credit as soon as the volume of circulation credit has reached its maximum limit. The demand for bank credit develops because the expansion of production entails an increase in circulation, and that in turn requires increased means of circulation. Bank reserves are therefore gradually depleted and this eventually involves resort to the central bank of issue. Lagging sales retard the circulation of bills of exchange, thus reducing the volume of circulation credit and making it necessary for bank credit to fill the gap. But disproportionality, with all its consequences, continues to grow, and its effect upon bank credit is reinforced by the growing demands of speculation. Thus bank credit is gradually strained to the point where the banks are no longer able to expand credit without an excessive reduction in their reserves. When circulation can no longer be expanded through the use of credit there is a demand for cash, and as it flows into circulation in increasing volume reserves are again reduced and the banks are obliged to place further restrictions on the provision of credit. These restrictions mean that industry can no longer correct the dislocations arising from disproportionality, because the required money capital is not available. Commodities must be unloaded on the market in order to obtain means of payment no longer obtainable through credit. As a result prices begin to fall; but since the previous price level was the basis of all credit transactions, this means that bills drawn against these commodities cannot now be met from the proceeds of their sale. A demand for money in order to make payments arises at the very moment when the supply of money is contracting. For circulation credit declines rapidly as the fall in prices devalues bills and reduces the amount of money that can be obtained for them. At the same time, bank credit cannot be expanded because falling prices make it doubtful whether producers will be in a position to repay loans. Thus the very demand for payment leads to the impossibility of satisfying it, and credit stringency reaches a peak. Not only has the interest rate risen to its maximum, but it is impossible to obtain credit at all, for the convulsions in the credit system have as a consequence that all those who have cash available keep it for their own payments. There is only one way to obtain means of payment; namely, by converting commodities into money. Everyone wants to sell, and for the same reasons nobody wants to buy. Prices fall precipitously, but still commodities remain unsaleable. Sales come to a full stop, and circulation credit is annihilated; for no matter how much circulation is reduced the elimination of credit money reduces still more the means of circulation. Cash must take the place of credit and the demand for means of payment becomes a frantic demand for cash.

The consequences of this demand depend upon the specific circumstances; the collapse of commodity prices has a very detrimental effect on the cash position of industrialists, and makes it doubtful whether they will be able to repay their bank loans. If the bank has placed its funds with insolvent industrialists then the bankruptcy of the latter will also involve the bank, and the credit standing which it enjoyed on the basis of its deposits and the acceptance of the notes which it issued, is suddenly destroyed. There is a run on the bank and the repayment of deposits is demanded in cash, whereas only a minimum amount of such deposits has not been used to make loans. The deposits are wiped out and the panic may spread to the other banks, thus forcing them in turn to close their doors. A bank crisis breaks out. The collapse of the credit system, the reversion to a monetary system as Marx calls it, makes cash the only acceptable means of payment. But the quantity of cash available is inadequate for the needs of circulation, more particularly because there is massive hoarding of it as a result of the panic. In consequence a cash premium emerges, the intrinsic value of money disappears (even under a gold standard, as the recent American crisis once again demonstrated), and the value of money is determined by the socially necessary value required in circulation.

A long period of development separates the use of money as a means of circulation and payment from its function as loan capital. Money in the glittering form of gold is the first passionate love of youthful capitalism. The mercantilist theory is its breviary of love. It is a great and all-consuming passion, radiant with the glow of romanticism. For the sake of winning the beloved capitalism performs innumerable feats of heroism, discovers new worlds, fights ever-renewed wars, creates the modern state, and in its romantic ecstasy even destroys the very basis of all romanticism - the Middle Ages. But with advancing years comes wisdom. Classical theory teaches capitalism to despise the romantic façade and to build a solid family establishment in its own home, the capitalist factory. It looks back in horror upon the costly follies of its youth which led it to neglect domestic bliss. Ricardo instructs it in the damage done by its expensive liaison with gold and joins in lamenting the unproductiveness of the 'high price of bullion'. On commercial paper, bank notes, and bills of exchange, capitalism writes its farewell note to the loved one. But it still seeks to retain certain privileges, and the currency school requires from the more modest paper currency that it should conform to the traditions of its more glamorous predecessor. The tastes of ageing capitalism become ever more refined. Having enjoyed its youth to the full, an extravagant and intense passion no longer satisfies it, mystical longings arise, and salvation is sought in faith. John Law proclaims the new gospel. Capitalism, now satiated, abominates the flesh and seeks refuge in the spirit. Once again it experiences a supreme rapture, but suddenly the old desires, long denied, reawaken, the confidence in satisfaction through faith alone evaporates, and there is a frantic desire to make sure that the old virility remains. Credit collapses, and thus suddenly deserted capitalism returns in despair to its first love, to gold. Shaken by the fever of crisis, no sacrifice is too great in order to attain the loved one. Capitalism thought that it had long since liberated itself from the domination of gold, but now it experiences a bitter disillusionment, and shaken by panic recognizes its continuing dependence. But such crises are cathartic. Gradually capitalism comes to understand the nature of what it fears but cannot forsake. The vain effort to abandon gold is given up, and more jealously than ever capitalism endeavours to hold on to it, and especially to restrain its dangerous propensity to travel abroad. Nevertheless, the more capitalism succeeded in establishing its own domination, the less did it allow itself to be bound by this golden chain. The loved one, once so demanding, learns to be more modest and is eventually satisfied with the role of someone in reserve, to whom the incorrigible philanderer may return as a refuge after each fresh disappointment. Her demands may become excessive, and she may occasionally refuse her favours altogether, but these moods do not last long and things soon return to normal. Gold has lost, once and for all, its absolute domination.. .

A monetary crisis is not an absolutely necessary feature of the crisis, and may not always occur. Even during a crisis the turnover of commodities continues, even though on a much reduced scale. Within these limits circulation can be carried on with credit money, all the more so since the crisis does riot affect all branches of production simultaneously or with equal force. Indeed, the slump in sales seems to reach its lowest point only when the situation is complicated by a monetary and banking crisis. If the necessary credit money is made available for circulation the monetary crisis can be averted; and even a single bank whose credit position is unimpaired can do this by advancing credit to industrialists against their collateral. In fact, monetary crises have been avoided whenever such an expansion of the means of circulation was possible, and on the other hand they have always occurred when banks whose credit remained unimpaired were prevented from making credit money available. This was the case in England in 1847 and 1857; an incipient monetary crisis was cut short by suspending the Bank Act which arbitrarily limited the bank note issue (that is, credit money) to the amount of the gold reserve plus £14,000,000. In America, where the law restricts the circulation of credit money in an even more insane way, just when credit is most urgently needed, the monetary crisis of 1907 attained classic proportions.

If one considers the train of events on the national market, then it is evident that the reduction of the cash reserve is due not only to its being drained off into domestic circulation, but also to its flowing out of the country. We have seen that gold functions as world money for the settlement of international payment balances. There is an observable tendency for the balance of payments to deteriorate in a country which has reached the peak of the boom and is close to a crisis. Prices during the boom encourage imports, which rise far above their normal level, whereas exports do not increase to the same extent since the absorptive capacity of the domestic market remains considerable; and in the case of some important export commodities such as ores, coal, etc., there may even be a large absolute decline.

It should also be borne in mind that the principal imports of the advanced capitalist countries are agricultural products, consumer goods, and raw materials, while their exports are mainly manufactured goods. The former, however, are much more subject to speculation, and this alone, aside from other considerations, gives commerce, and market uncertain 'ties, a much more important role here. Hence excessive imports are more likely to occur, and on a larger scale, than excessive exports. The balance of trade, the most important element in the balance of payments, deteriorates and requires a larger quantity of gold for settlement.

Events on the money market take a difference course. In the first place, interest rates are highest in the country where the boom is greatest. Consequently a considerable amount of foreign money is invested there on a long-term or short-term basis. Furthermore, speculation in shares and commodities on the exchanges is in full swing and attracts foreign speculators, with the result that large sums of money flow into the country for the purchase of securities. The particular structure of the balance of payments at any given moment depends upon credit relations in international trade. England, where crises always tend to be preceded by a large outflow of gold, extends relatively large amounts of credit for the payment of its exports, but has little resort to credit to pay for the commodities it imports. This increases the imbalance which, as we have seen, tends to emerge in the balance of trade.

The deterioration of the balance of trade may itself be enough to cause a flight of gold, and any reduction in the gold reserve occurring at a time when credit is already strained generates alarm, drives the interest rate still higher, undermines confidence, and above all restricts speculation. Thus it may give the initial impetus to a stock exchange crisis. The effects of a deteriorating balance of trade may be reinforced by fluctuations in the balance of payments. The boom is an international phenomenon, although it may vary in its intensity and timing from one country to another. Let us assume that the boom began in the United States and has reached its peak there while England is only approaching the peak. The higher interest rates and vigorous speculation have attracted a large amount of English capital to America. Now, however, increasingly insistent demands are being made on the money market in England too and the interest rate as well as the volume of speculation rise to a high level. As a result, money previously invested on the American money market is withdrawn and invested in England just at the time when the American balance of trade has deteriorated. This accelerates the outflow of gold from America, leading to a contraction of credit there, and the outbreak of a stock exchange crisis which itself, as the forerunner of a general business crisis, worsens further the balance of payments situation. Foreign funds which had been invested in speculation are promptly withdrawn. This applies, of course, to funds invested in collateral and contango operations, which can be withdrawn, not to funds tied up in securities. At the beginning of the crisis foreign speculators also try to dispose of their declining securities, and these sales are augmented by the forced sales of those whose 'bullish' speculation now collapses. To the extent that foreign countries are involved the sale of securities has an adverse effect on the balance of payments.

At the same time, however, other factors may come into play which may change the course of events. The stock exchange crisis, and the banking crisis which may be associated with it, produce a violent convulsion in the credit system. The interest rate rises to an extremely high level and encourages the investment of foreign money capital. The depreciation of securities makes them attractive to foreign capitalists, and the substantial export of securities then improves the balance of payments. At the same time the balance of trade improves, the credit upheaval puts an end to speculation in commodities, and it soon becomes apparent that the domestic market is overstocked. Prices fall, a commercial crisis begins, and imports stagnate, while exports - as long as the situation in foreign markets, where the crisis has not yet begun, permits - are pushed in order to obtain means of payment.^[19] Bankruptcies begin to occur, but in so far as they affect those who have to pay foreign industrialists for imported goods, the bankruptcies cancel out such payments and to that extent improve the national balance of payments.^[20] Thus the export of gold is sooner or later brought to an end, depending upon the specific circumstances, before the onset of the crisis, and is replaced by an influx of gold during and after the crisis. The alternation between exports and imports of gold during a period of crisis represents changes in the areas in which the main incidence of the crisis is experienced.

A more pronounced outflow of gold always affects the interest rate at a time when, as a result of the emerging disproportionalities, circulation credit can no longer be expanded sufficiently to meet the requirements of circulation; but its specific effect is strongly influenced by banking legislation. The essence of mistaken banking legislation is that it severely restricts the expansion of circulation credit and prevents it from reaching those limits which would be reasonable from the standpoint of economic laws. It does so by establishing some arbitrary relation between circulation credit and a sum of values with which in reality it has absolutely no connection in terms of its own economic character. As we know, the bank note is simply another form of the draft, or bill of exchange, and this in turn is only a monetary form of the value of commodities. If the volume of banknotes is not related to the amount of bills and drafts - that is, in the final analysis, to the value of commodities in circulation, as happens in a strictly enforced system of so-called bank coverage for notes issued - but is related instead to a metallic reserve, as in England, or to government bonds, as in the United States, where this kind of insanity has reached a peak and debts are regarded as the best collateral for the amount of credit issued (such insanity being explicable by the insane character of fictitious capital), then an artificial limit is placed upon the supply of loan capital which must obviously have a direct effect upon the rate of interest. In England, where the volume of notes is fixed by law and the needs of circulation can be met only by metallic money (since every note issued in excess of £14,000,000^[21] simply represents gold in the coffers of the bank and is actually gold, therefore, in an economic sense) every considerable increase in the outflow of gold must pose a direct threat to circulation. Hence, even if business conditions are perfectly healthy, and credit has not been impaired, the bank cannot convert the same quantity of bills into its own notes to offset an outflow of gold, which may have resulted, for example, from increased imports of wheat following -a poor harvest in England. Consequently, whenever there is an outflow of gold, even if one can be sure that it will be temporary, the bank is obliged at once to raise the interest rate in order to protect its gold reserve, thus making credit more expensive; a measure, incidentally, which increases the profit of loan capital, including its own capital, at the expense of entrepreneurial profit. Moreover, the limitation makes it doubtful whether bills can be converted into bank notes, that is into legal tender, or at any rate into generally accepted means of payment. Thus the circulation of credit money required by increased circulation is arbitrarily restricted, although the state of production gives no grounds for this ; and it creates artificially, under these circumstances, a total interruption of the circulation of credit money, with its consequences in a monetary and banking crisis, all for the sake of a false theory, the practical application of which, however, brings loan capital advantages which are by no means purely theoretical.

Even more senseless is the situation in America, where the circulation of notes can only be increased if the banks purchase more government bonds. Since the supply of such bonds is limited, the increased demand leads immediately to an exceptional rise in their price, so that despite the high rate of interest the banks find it unprofitable to issue bank notes. If the banks refrain from purchasing bonds and hence from increasing the notes in circulation, there is an exorbitant rise in the interest rate, which not only ensures unusually large profits for the banks and banking capitalists, but makes them masters of the money market and establishes their dictatorship not only over speculation and the stock exchange, but also over production, through their role in share issues and the provision of credit. This is also one of the reasons why the American stock exchanges have acquired such immense importance in the process of concentrating property ownership in the hands of a few money capitalists. If the present banking legislation were to remain in force the redemption of the national debt (in the United States) would play havoc with the note circulation; a kind of madness which has method in it, for it is an excellent way of making money for loan capital and hence successfully resists all attempts at reform.

The restrictions imposed by banking legislation have only been tolerable, up to a point, because - partly as a result of the legislation - in such countries as England and America, where they are most stringent and harmful, the circulation of notes is supplemented by other types of credit money which make the legal regulations considerably less onerous. The development of clearing house arrangements and the use of cheques come under this heading. The clearing house effects a direct settlement of bills, and to the extent that bills cancel out they perform their function as money and do not need to be converted into bank notes. The same is true of cheques. A cheque is drawn upon the drawer's deposit, even though this deposit does not really exist because the bank has loaned it out. When I pay with a cheque drawn upon this non-existing deposit it is the same as if I paid with a bank note, which also has no metallic backing, but is backed, just like the deposits which have been loaned out, only by the bank's own securities. From an economic point of view the substance is the same even if the forms (and fortunately this is all that banking legislators pay attention to) differ. In addition to these various means of economizing on the circulation of notes (and the fact that one type of credit money can be substituted for another demonstrates their essential equivalence) there is also, in England, the further assurance that the splendid Bank Act would be suspended immediately any danger arose that it might be effectively applied.

The effects of bank note legislation may also weaken, or under certain conditions even completely eliminate, the tendencies which are expressed in changes in the balance of payments during a crisis. We saw earlier that changes in the balance of payments always occur as a result of the state of the balance of trade. The latter itself depends in the first place upon the natural conditions of production, and second, upon the level and stage of economic development. A country which has undergone a long period of economic development, is highly developed industrially, has a large export trade in means of production and a low level of raw material production, will have an adverse balance of trade. Thus England, the first country in which advanced capitalist production became established, was only able to promote its exports of means of production so vigorously by supplying them not only as commodities but as capital; that is to say, not by selling means of production abroad but by sending them abroad as capital investments. Thus, for example, when England made a railway loan to South America it was used to buy machines, locomotives, etc., from England. Such exports, which are at the same time exports of capital, cease to depend upon the simultaneous import of commodities. If it were simply a case of commodity exports, South America, for instance, could only import means of production from England over the long term if it could pay for them with commodities of its own, since it has not accumulated enough money to pay for so large a quantity of means of production out of its stock of metal. In fact, a large part of international trade involves this kind of exchange of commodities, which more or less balances out. But if commodities are exported as capital, the volume of exports becomes independent of commodity production in a country which is still undeveloped, and is limited only by its potentialities for capitalist development on one side, and by the accumulation of capital, the existence of a surplus of productive capital, in the advanced country on the other side. This is precisely the reason for the rapidity of capitalist expansion. It enables the most advanced capitalist countries to increase their industrial production and their exports far beyond their imports from the undeveloped countries. Hence the adverse balance of trade is matched by a favourable balance of payments, since the industrial countries receive regular payments in the shape of profits from the exported capital.

The precise influence of the tendencies which determine the import and export of gold depends upon the particular quantitative structure of the balance of trade and the balance of payments. If there is not such a regular outflow of gold from the United States as was the case in England in earlier crises, two distinct factors account for this. The first is the obstacles to the development of circulation credit arising from the legislation governing the issue of bank notes. This raises the interest rate in America above the European level, because the restricted volume of circulation credit is inadequate, and regularly attracts European money capital. It depends upon the pressure on credit in Europe whether it is possible, in a boom period, to draw this money capital back to Europe, thus producing an outflow of gold from America.

The structure of America's balance of trade may also bring about modifications. America is a country which exports predominantly raw materials. Assuming good harvests it is precisely in boom periods that the American balance of trade will improve greatly, since the prices of cotton, copper, and possibly also wheat will rise, and this improvement in the balance of trade may weaken, eliminate, or postpone those tendencies which lead to an outflow of gold, and hence also postpone the onset of a crisis, for which, however, the outflow of gold is by no means a conditio sine qua non.

In this connection it should be emphasized that the power of national banks to protect themselves against an outflow of gold varies considerably according to the reasons for which gold is required for export. For example, if the bank discount is 5 per cent in Berlin and only 3 per cent in Paris, French banks will have a motive for transferring funds from France to Germany to take advantage of the higher interest rate. The same thing may happen if there is lively speculative activity in Berlin in which French banks want to participate. Such transfers of gold do not arise from any compelling economic necessity, but are largely arbitrary movements of money capital. For this capital could just as well remain in France if capitalists were content with a lower interest rate or smaller stock market gains. These gold movements can therefore be prevented by appropriate banking policies. The simplest way of keeping these funds at home is to assure them of higher interest by raising the bank discount rate. At the same time this equalizes interest rates in the two countries. But the bank can also prevent such transfers of gold directly, if it is able to refuse to convert bank notes into gold. The Austro-Hungarian bank, which has suspended cash payments, has a legal right to do this; and the Bank of France, which can also make payments in silver, can therefore refuse to pay in gold, ultimately by exercising its right to charge a gold premium,^[22] and by thus raising the price, eliminate the advantage to be gained from the difference in interest and so remove the motive for exporting gold. The Bank of England and the German Reichsbank do not have such direct means at their disposal; but the latter attempts at least, by indirect pressure upon gold exporters, to restrict the export of gold when the money market is tight, a policy which, when confined to this particular case, is thoroughly rational from the point of view of the national economy. At the same time, this factual restriction of the mobility of money capital, or in other words, of the export of gold, is one of the factors which obstructs the equalization of national interest rates.

The situation is quite different, however, if there arises, for example, a demand for gold from the German Reichsbank because Germans have to pay for commodities or securities in England. They will initially buy sterling drafts on the Berlin exchange, but if the exchange rate rises above parity they will prefer to pay in gold. If the Reichsbank then refuses to provide gold, the German debtors, who are obliged either to pay or to be declared bankrupt, would once more have to obtain sterling drafts. Their demand would raise the price of bills above parity, involving a depreciation of German currency which it is the primary task of banking policy to prevent.

Hence an outflow of gold which results simply from financial transactions can be prevented by stopping the financial transactions themselves. Conversely, it is impossible to prevent an outflow of gold which is necessary in order to meet obligations already contracted in the course of trade in commodities and securities without devaluing the currency.

19. Money capital and productive capital during the depression[edit source]

If we observe the accumulation process after a crisis, it is apparent that initially reproduction takes place on a reduced scale. Social production undergoes a contraction. Because of the 'solidarity of the branches of production' the sector in which overproduction first occurs does not matter. Overproduction in the leading sectors involves general overproduction; hence there is no productive accumulation, no expanded reconversion of profit into capital, no increase in the application of means of production. Productive accumulation has ceased. But what happens to individual accumulation and to particular branches of production? Production continues even if it is on a reduced scale. It is just as certain that a large number of enterprises, especially those which are most technically efficient in their own sector and those which operate in sectors producing the basic necessities of life, the consumption of which cannot be too severely curtailed, still make a profit. A part of this profit can be accumulated. But the rate of profit has fallen, and this decline may also reduce the rate of accumulation. Similarly, the total amount of profit has declined, and this too diminishes the possibility of accumulation. Furthermore, while one part of the capitalist class makes a profit, another part sustains losses which must be defrayed from additional capital if bankruptcy is to be avoided. Real production, however, is not expanded during a depression, and if accumulation takes place, it can only be accumulation in the form of money. Where does the money for the accumulating capitalists come from?

Let us recall the schema of reproduction :

I 4,000 C + 1,000 V + 1,000 S = 6,000

II 2,000 C + 500 V + 500 S = 3,000

This would represent production which has been reduced by the crisis. Capitalists, however, produce commodities, not money. In order to obtain money, and indeed more money than they already have at their disposal - for otherwise there would be no accumulation of money - they must convert their commodities into money and refrain from reconverting that money into commodities. If department II wants to accumulate say 250 out of its 500 S, it must sell consumer goods (and the producers must sell them to others in the same department because the turnover of II S takes place within department II) without itself buying commodities from other members of the same department. Thus 250 S remain unsaleable in department II. If one producer succeeds in selling then others are left with unsold stocks. Money capital is redistributed, and sellers receive money from the buyers, but the money does not return to the buyers because they cannot sell their 250 of commodities.

We arrive at the same result if we assume that capitalists in department I accumulate half of their surplus value. They would then be able to sell 1,000 V + 500 S in the form of means of production to II C, which would pay 1,500 in money for the purchase. Since I S does not buy 2,000 in consumer goods, but keeps 500 in consumer goods, II C therefore has 500 less in money, which remains in I as accumulated money. But if II C does not advance 1,000 in money for the purchase of means of production, and if we assume that I initiates the process, then I will buy 1,500 in consumer goods, II will use the 1,500 to buy means of production, leaving I with 500 unsaleable means of production. Its expectation of accumulation has not been realized. Department II restricts production still further, and begins the process of reproduction with 1,500 C and a correspondingly reduced variable capital. If it possessed 2,000 in money for its turnover with I C, it has now used only 1,500, while the 500 which previously functioned as money capital now lies idle, and to this must be added the reduction in the amount of money advanced as variable capital.

It is evident that the pure accumulation of money at the level of society as a whole is impossible on the assumption of reduced or stationary production. Only individual accumulation can take place, which simply means that accumulation by one capitalist changes the distribution of money capital in the hands of others, and this change is then bound to lead to new disruptions of reproduction. It makes no difference if we look at the class of gold producers themselves. In this case a direct accumulation of money is certainly possible, but this is limited by the size of the accumulated profit in this particular branch of production. The volume of sales by other industries is reduced in proportion to the amount of money thus accumulated, since it is accumulated and retained as a hoard. No matter how this factor is evaluated it is quantitatively too insignificant to play any part in the general process of accumulation.

Nor does the use of credit change matters. The 2,000 (V + S) of I must be sold for the 2,000 C of II. An accumulation of money would mean that I sells 2,000 but only buys back 1,500 from II. Whether these turnovers are accomplished by means of credit or not, the fact remains that I can only accumulate 500 in money or credit money - that is, claims upon future production - if II buys 2,000 from I. But II can only do this by paying for it either with its own commodities, which is excluded by our assumption, or out of a reserve fund of money, in which case I simply accumulates what II loses. It is incorrect to say, therefore, that the capital lying idle during a period of depression consists of money capital accumulated in the form of money or credit. It is money capital set free by the contraction of production, which was previously used to effect turnovers but has been rendered superfluous by the decrease in production. Its idleness reflects the idleness of productive capital. The forces of production, as a result of the contraction of production, are only partially employed. The newly produced constant capital is, stored up and finds no application in production. Money capital and the potentialities of the existing system of credit have become too large in relation to the diminished turnover, and so money capital lies idle in the banks awaiting utilization, the precondition for which is an expansion of production.

It is, by the way, an extraordinary notion of the theorists of crises to point precisely to this idle money capital as the most powerful stimulus to an enlargement of reproduction.^[23] M if the shutdown of machinery, with its threat of material and moral deterioration, the underutilization of fixed capital in general, which involves not a sacrifice of profit but continuing losses, were not a much stronger incentive to expand production than a lowering of the rate of interest on money capital. The question is not whether the incentive to accumulate after a crisis is reinforced by money liquidity, but whether or not the expansion of reproduction is objectively possible. There is usually great money liquidity immediately after a crisis, and yet it may take years before prosperity is fully restored.^[24]

It is very amusing to see how the views of business commentators in the bourgeois press change in accordance with the current state of the business cycle. In the German press, the recent crisis was attributed almost exclusively to dear money or to the scarcity of money capital. Now that the depression persists in spite of the continuing international liquidity they are slowly discovering that prosperity does not depend solely upon the condition of the money market.^[25]

The misconceptions about the causes of money liquidity during a depression, and their significance for overcoming the depression, rest ultimately upon the failure to see beyond the determination of economic forms to the material determination of social production which is revealed by Marx's analysis in the second volume of Capital. One operates only with such economic concepts as 'capital', 'profit', 'accumulation', etc., and thinks that the problem is solved when one has shown the quantitative relations which make simple or expanded reproduction possible, or conversely, cause disturbances. In this way the fact is overlooked that these quantitative relations reflect qualitative conditions and that not only can value magnitudes, which are directly commensurable, be distinguished, but also specific use values which must possess definite qualities in production and consumption. It is also overlooked, in analysing the reproduction process, that there are not only distinct units of capital in general - so that, for example, a surplus or shortage of industrial capital can be 'compensated' by a corresponding amount of money capital - and not only units of fixed and circulating capital, but that it is a question of machines, raw materials and labour power of a very definite kind (required by the technology) which must be available as use values of this specific kind if disruptions are to be avoided.^[26]

In fact, during a crisis, there is idle industrial capital (plant, machines, etc.) on one side, and idle money capital on the other. The same causes which make industrial capital idle also make money capital idle. Money does not circulate, or function as money capital, because industrial capital is not functioning. Money is not employed because industry is not employed. `Phoenix'^[27] does not cease production because money capital is lacking, nor does it resume production because money capital is abundant ; on the contrary money is readily available because production has been reduced. The 'scarcity' of money capital is only a symptom of the stagnation of the circulation process, as a result of overproduction having already begun.

Credit, in the first place, replaces money as a medium of circulation, and second, it facilitates the transfer of money. Theoretically it is possible to ignore credit for the moment by assuming that there is a sufficient quantity of metallic money available for a purely metallic circulation.

It is characteristic of almost all modern crisis theorists that they explain business cycle phenomena in terms of changes in the interest rate, instead of explaining, conversely, the phenomena of the money market in terms of the conditions of production.^[28] The reasons for this are not far to seek. The events on the money market are manifest, are discussed daily in the newspapers, and have a decisive influence on the course of the stock exchange and on speculation. In addition, the supply of loan capital at any given moment is a determinate sum, and must appear as a determinate sum, for otherwise it would be impossible to explain how supply and demand could determine the rate of interest. What is generally overlooked is that the supply of loan capital depends upon the state of production; first, upon its volume, and second, upon the proportionality .between branches of production, which has a decisive effect on the circulation time of commodities and hence on the velocity of circulation of credit money. What is also generally overlooked is the functional difference between commercial credit and capital (bank) credit, especially since this difference seems to be eliminated by the issue of bank notes, and with the development of the banking system all forms of credit take on the appearance of bank credit. If this distinction is ignored, however, the course of events on the money market appears in quite a different light, and the relation of dependence now seems to consist simply in the fact that the expansion of production requires more capital. Capital is more or less vaguely identified with money capital. Production expands, the demand for money capital increases, and the rate of interest rises. Finally, a shortage of money capital emerges, the high interest rate wipes out the profits from production, new investment ceases, and the crisis begins. Then during the depression money capital is accumulated instead of being converted into investment capital - a senseless notion since machines, docks, railways, are not produced from gold. The interest rate falls, money capitalists become dissatisfied with the low interest and once again invest their money in production. Prosperity begins afresh.

Leaving aside the barbaric confusion which underlies this conception of the economists, who refer to money, machines, and labour power as capital, and then think that one form of capital, say money, can simply be transmuted into another, such as machinery and labour power (or, as they would put it, circulation capital into investment capital), the contortions of this splendid 'theory', even from the purely statistical aspect, are pure nonsense. In the advanced capitalist countries, the range of variation of the interest rate is at most 5 per cent, judging by the fluctuations of the official discount rates between 2 per cent and 7 per cent; and in my view restrictive banking legislation or inadequate discount policies make these fluctuations larger than rational economic considerations would produce. Now money capital is demanded by producers in order to expand production; which means that the borrowed value, converted into productive capital, realizes value and yields a profit, the size of which depends, ceteris paribus, upon prices. The fluctuations in commodity prices during the business cycle, however, are far greater than 5 per cent. A glance at any table of prices would show that fluctuations of 50 per cent, 100 per cent, or even more, are not unusual. Profits may not increase to the same extent because costs of production also increase, but in any event the increase in industrialists' profits during periods of prosperity and at the peak of the cycle is vastly more than 5 per cent. If their profits did not decline for other reasons an interest rate of 7 per cent would certainly not halt the accumulation of capital. For example, if the Rhine-Westphalia Coal Syndicate could sell its entire output at peak prosperity prices, it would not hesitate for a moment to pay interest of even 10 per cent on its borrowed capital, which is only part of its total capital, since even on this part it would make an entrepreneurial profit far higher than the rate of interest.^[29]

The extraordinary notion that interest gradually devours entrepreneurial profit is reinforced by the total confusion which reigns concerning categories such as 'profit', 'entrepreneurial profit', 'wages of management', `interest', 'dividends', etc. ; and with the growth of joint-stock companies this confusion has increased. Dividends are regarded as a kind of interest, though an interest which fluctuates in a remarkable way compared with the permanently fixed interest on loan capital. Loan capital and productive capital no longer seem to be distinguished by the fact that one bears interest and the other produces profit. Instead, both are regarded as interest-bearing capital, and the sole difference between them is that 'liquid' capital always yields a fixed interest which is announced daily on the stock exchange, while 'fixed' capital yields an interest which is only discovered when dividends are declared. The difference in the certainty of the yield is then attributed to the difference between 'liquid', that is, money capital, and 'fixed', that is, industrial capital. When all qualitative distinctions are confused in this way it is no wonder that so many extraordinary notions prevail concerning quantitative differences, and that people then imagine they have found in the fluctuations of the interest rate a sufficient explanation of the mechanism governing the sudden changes in the business cycle.

20. Changes in the character of crises. Cartels and crises[edit source]

The development of capitalist production brings about certain changes in the form of crises to which we must now turn our attention. In this account, however, I shall only be concerned to indicate the general lines of development, leaving it to detailed historical studies to depict the variations in the character of crises between particular countries in a comparative perspective.

Here I shall only try to reveal the general in the particular, which is all the more difficult since the development of capitalism has created an ever closer international interdependence of economic processes, such that when a crisis occurs in one country, all the features specific to the stage of technical and organizational development which it has reached have repercussions on the crises in other countries. For example, the events of the most recent European crisis of 1907 can only be understood as repercussions of the American crisis, the distinctive feature of which was an extremely severe monetary and banking crisis such as Europe had not experienced for a long time. This was responsible for some particular developments on the European money markets, and especially the severity of the crisis in some spheres, which might perhaps have been avoided if it had not been for the effects of the American crisis.

On the other hand, it is equally impossible to derive general laws about the changing character of crises from the history of crises in a single country such as England, precisely because the capitalist crisis is a phenomenon of the world market - all the more so if it is a prolonged crisis - and crises in a particular country may undergo various modifications as a result of distinctive features of its capitalist development, so that any generalization based upon this experience could only be misleading.^[30]

If we want to establish what changes are taking place in the phenomena of crises, therefore, we must be able to derive them from a theoretical analysis in order to be certain that we are dealing with tendencies inherent in capitalist development, rather than with specific phenomena peculiar to a particular phase of capitalism which may perhaps be purely accidental.

Capitalism develops in a society in which commodity production still occupies a relatively unimportant place. As it expands it generalizes commodity production, and establishes a national market and a constantly expanding world market. With the expansion of the market the conditions also develop in which crises can occur. As long as capitalist production is superimposed upon widespread production for use and non-capitalist, artisanal commodity production intended for a local market, the full impact of crises is felt only by the capitalist superstructure. They affect branches of production where sales may be brought almost to a standstill because the circulation which is absolutely indispensable for the turnover of goods in society is provided by handicraft production or by domestic production. A crisis may cause havoc in the capitalist sector of production, halting sales completely for a time provided the factors producing the crisis are powerful enough to paralyse production, which, as we shall see, is often the case in this period.

As capitalist production develops handicraft and domestic production are largely destroyed. The impact of a crisis is now felt by a system of production, the contraction of which is limited by the necessity of satisfying social needs on a much larger scale, both absolutely and relatively. With the growth of production there is an increase in that part which must be carried on under all circumstances, and whose continued operation prevents the almost complete stagnation of the production and circulation process. This is shown by the fact that the impact of a crisis is less severe in those branches of production which serve the needs of consumption, and all the less severe the more essential the consumer goods they produce and hence the greater the stability of consumption.

Changes in the character of crises are also bound to follow the advance of capitalist concentration. The ability of an enterprise to survive increases with its size. The smaller the firm, the more likely it is that a price collapse will lead to bankruptcy. The small entrepreneur may lose his entire market ; the fall in prices and stoppage of work make it impossible for him to convert his commodity capital into money capital. Since he does not have any reserve capital, and particularly in times of crisis cannot obtain credit, he is unable to meet his obligations. The crisis thus leads to a massive collapse of small capitalist enterprises, suspension of credit, wholesale bankruptcies, insolvencies, bank failures, and hence to a panic. The situation is aggravated by the greater technical disparities between firms. Modern plants exist alongside old plants, some of which date from the period of handicraft production or manufacture, and these become completely unviable when prices fall. Their collapse, in large numbers, also drags down enterprises which are in themselves technologically viable.^[31]

The large modern firm has quite a different relation to a crisis. Its output is so large that some part of it can continue even during a crisis. The American Steel Trust may perhaps be obliged to reduce its production by half during a crisis, but it need not reduce output below a certain minimum. Along with the concentration of firms the scale on which production can be maintained also increases.

As capitalist production develops there is therefore an increase, both absolute and relative, in that part of production which can be carried on under all circumstances and along with it an increase in the volume of commodity circulation which continues undisturbed during the crisis, and of the circulation credit based upon it. Hence the disruption of credit need not be as complete as in crises of the early period of capitalism. Furthermore, the development of a credit crisis into a banking crisis on one side and a monetary crisis on the other is made more difficult, first by the changes in the organization of credit, and second by the shift in the relations between commerce and industry.

A credit crisis develops into a monetary crisis if the collapse of credit produces a sudden scarcity of means of payment.^[32] This scarcity emerges less strongly the larger the volume of production which is maintained under all circumstances, for credit money can continue to perform its function to the same extent. The greater the volume of credit transactions the more commercial credit is replaced by bank credit, for the latter is less easily undermined than is the credit of individual industrialists. The decisive factor however is that there is no longer any shortage of means of payment because the development of credit has reduced the need for cash money, even during a crisis, since the use of cheques and clearing transactions continues; and the latter means of payment can be supplied by the banks of issue, whose credit remains unimpaired even in a crisis. We have seen that the circulation of bank notes is based upon the circulation of bills, which may contract if its foundation, commodity circulation, contracts. But it contracts more than does the circulation of commodities because commercial credit has been shaken. The bank now substitutes its own credit for commercial credit to the extent that the real circulation of commodities permits, and it can do so on this scale because the continued circulation of commodities provides an assurance that its claims will be honoured. It can therefore make its credit money available for the genuine needs of circulation and satisfy the demand for means of payment. In effect the bank restricts demand for means of payment to the real, essential needs of circulation, and wards off that well-nigh unlimited demand, arising from the fear that it will be impossible to obtain means of payment even against the best collateral, which goes beyond any actual need and leads to large- scale hoarding with a consequent further contraction of the means of payment. If the bank of issue is to act in this way, it is necessary, first, that its credit position should be sound (a condition which a well managed bank of issue should easily be able to fulfil), and second, that the increased note issue should not endanger convertibility. This second condition is met by a policy, dictated by the bank's own self-interest, of issuing bank notes during a crisis only against absolutely reliable collateral, which gives it the assurance that it is really satisfying only the requirements of circulation within the limits imposed by the crisis. Furthermore, convertibility is protected against unforeseen accidents by an adequate cash reserve, especially of gold. This condition is fulfilled, as capitalist production develops, by increased production of gold, by the accumulation of gold in the banks, and by restricting the function of this gold to that of a reserve. With the development of credit the function of gold is increasingly limited to settling the balances on international payments, and although the volume of international payments has increased enormously, the cash required for balancing these payments has not increased to the same extent, nor in proportion to the accumulated gold reserves in the older capitalist countries, as a result of the growing use of credit money in international transactions. This puts the banks of issue in a position to meet the increased demands upon them during a crisis. We are assuming of course that their economic functions are not hampered by legislative controls, as was the case in England with the Peel Act, and in the United States with the nonsensical coverage regulations which have produced typical monetary crises there.

The absence of a monetary crisis protects credit against a complete breakdown and is therefore also a safeguard against the occurrence of gal bank crisis. There is no run on the banks and mass withdrawal of deposits, and the banks, if they are otherwise solvent, can meet their obligations. Even where a bank crisis does not result from a credit and monetary crisis, but from the immobilization of bank resources in industry and losses on credit advances, capitalist development tends to mitigate the effects of crises on capital.

The concentration of banking plays an important part here. Through the enormous expansion of the sphere of business activity, and its extension to diverse national economic areas at different stages of capitalist development it allows a much greater spreading of risk. Furthermore, the increasing concentration of the banks is accompanied by a change in their position vis à vis speculation, commerce and industry. In the first place, this concentration involves a redistribution of power in their favour, thanks to their large capital resources. Not only is their capital quantitatively superior to that of their debtors, but they also have a qualitative advantage in disposing over capital which is constantly available, namely money capital This advantage precludes the possibility that a large, well-managed bank could become so dependent upon the fate of a single enterprise, or a few enterprises, in which it has invested its resources, as to be ruined by their failure during a crisis.

If one examines the causes which militate against a banking crisis the first thing to notice is that speculation, in both commodities and securities, has declined considerably in volume and importance. By speculation in commodities I mean here not only that which takes place on the commodity exchanges, but especially that which is involved in commodity trading, the demand for commodities by merchants who anticipate further price rises, and the accumulation of larger stocks in order to drive up prices by withholding supplies. Such speculation declines, in the first place, because of the elimination of commerce and the growth of direct dealings between producers and consumers, involving the transformation of independent merchants into agents of the syndicates and trusts, working on a fixed commission. To some extent this prevents speculation by merchants from driving prices far above the levels fixed by producers during a boom, and creating the illusion of a lively market when in reality effective demand has already begun to slacken.^[33]

But where wholesale trade (and it is only wholesale trade with which we are concerned in this context) has not lost its traditional position, to the benefit of industry or the commodity departments of the large banks, it shows a strong tendency towards concentration itself and sharply reduces the participation of small dealers and outsiders. However, where the commodity exchanges still have an important role, in certain specific conditions, speculative movements are increasingly dominated by the banks, because the development of the credit system gives them a growing control over the whole stock of money capital, and hence the power to confine speculative movements within certain limits.

Finally, commodity speculation is also curbed by the development of means of transport, which has made markets less remote, especially in the case of commodities which are particularly subject to speculation, and of news agencies which give the state of the markets minute by minute. The accumulation of unsaleable products in distant markets while at the point of production output continues on the same, or an increased, scale, becomes more difficult. Furthermore, the decline in the relative share of consumer goods means that speculation in colonial products, which often had a fateful importance in the earlier crises in England, now plays a lesser role; a situation to which the certainty and regularity of imports and the precision and speed of market reports also contribute. In addition, commodity speculation declines in importance with the growth in scale of the capital goods industries, whose products are not subject to speculation because they are increasingly produced to order.

The changes which have occurred in the character of industrial crises, and the growth of the banks' domination of industry, also tend to make the emergence of a banking crisis more difficult. As we have seen, the growing concentration of industrial enterprises gives them greater immunity against the ultimate consequences of a crisis, namely total bankruptcy. Their powers of resistance are further enhanced by the joint stock form of organization which, as I have noted, also greatly increases the influence of the banks upon industry. The joint-stock company has this effect because it makes possible the continuation of production without any profit, and even at a loss, since capital can be attracted more readily than is the case with an individually owned firm. Second, it is easier for the joint-stock company to accumulate reserves in good years in preparation for bad years. Third, it is easier to control more rigorously the use of resources and especially the application of borrowed capital. The banks exercise a direct control over the employment of capital in corporations which they support with credit, and this control is applied ever more systematically as the tendency for industry to become increasingly dependent upon the banks progresses. The use of credit for purposes other than those directly related to the conduct of the enterprise is prevented. In earlier crises, an important factor was that individual entrepreneurs engaged heavily in speculation and used their firms' capital for this purpose, while operating their business with borrowed capital. Today a controlling bank would not allow this.

It is, therefore, sheer dogmatism to oppose the banks' penetration of industry, which is a necessary and unavoidable tendency, arising from the laws of capitalist development, as a danger to the banks; and to take the organizationally backward English banking system, with its division of labour between deposit and merchant banks, as an ideal to be attained, if necessary, by legislative compulsion. This doctrinaire view mistakes the appearance of the English banking system for the reality, by overlooking the fact that in England too the banks place their accumulated funds at the disposal of industry, commerce and speculation. There are specific historical causes which explain why this is done through middlemen in England, and directly by the banks in Germany and, with some modifications, in the United States.^[34] None the less, the English system is an outmoded one and is everywhere on the decline because it makes control of the loaned-out bank capital more difficult, and hence obstructs the expansion of bank credit itself.

Finally, and here it will suffice to recall what was said in the chapter on the stock exchange, speculation in securities is also declining as a factor making for banking crises. As the power of the banks continues to grow, it is the banks which dominate the movements of speculation, rather than being dominated by them. The general importance of the stock exchange is declining, but more particularly as an aggravating factor in crises.

With the decline of speculation the psychology of the capitalist public has also been undergoing a change. However primitive the mentality of the speculator really is, notwithstanding the efforts of his admirers to discover in him all sorts of prophetic gifts and romantic plans for world improvement, the change in attitude of the speculating public can be explained by the commonplace view of the ordinary capitalist: 'losses make one a wiser man'. The mass psychoses which speculation generated at the beginning of the capitalist era, in those blessed times when every speculator felt like a god who creates a world out of nothing, seem to be gone for ever. The tulip swindle with its idyllic background of a poetic love of flowers, the South Sea Bubble, with its adventure-inspiring fantasies of unheard-of discoveries, Law's projects with their plans for world conquest, all gave way to the naked quest for marginal profit, which came to an end in the crash of 1873. Since then, faith in the magical power of credit and the stock exchange has disappeared, and despite Bontoux,^[35] the beautiful Catholic cult has been destroyed by a sober enlightenment which no longer wants to believe in an immaculate conception by the holy ghost of speculation, but accepts what is natural as natural, and leaves faith to the fools who remain. The stock exchange has lost its faithful and kept only its priests, who make their money from the faith of others. Since faith has become a business, the business of faith has declined. The seductive and lucrative craze has spent itself, the tulips have long since faded, and the coffee bush, though it still yields commercial profit, no longer produces true speculative gains. Prose has vanquished the poetry of gain.

The above-mentioned factors throw light on the causes which have changed the character of crises in so far as the latter result from large-scale bankruptcies, and from stock exchange, bank, credit, and money panics. While these causes do not preclude the occurrence of such crises, they do explain why it is more difficult for them to occur. Whether they do break out or not depends upon the severity of the disturbances and the suddenness of their appearance. Whether these disturbances could become so great as to bring about a failure of one of the large banks in Germany (assuming reasonably competent management) is a quaesto facti (a matter of fact) rather than a theoretical question. But all these factors leave unresolved the emergence of an industrial crisis, the cyclical alternation of prosperity and depression. The question arises whether the great change in the form of industrial organization, whether monopolies, through their alleged power to suspend the regulatory action of the capitalist mechanism - free competition - can bring about qualitative changes in the business cycle.

As we know, cartels can effect changes in the level of prices, which produce a different level of profit as between cartelized and non-cartelized branches of production. The phenomena of the business cycle then develop on the basis of these changes, and they are modified, in certain respects, by the existence of cartels. But other effects too have been, and are still, attributed to the cartels. They are supposed not only to modify the effects of crises, but to be able to eliminate them altogether, since they regulate production and can always adjust supply to demand. This view ignores completely the inherent nature of crises. Only if the cause of crises is seen simply as the overproduction of commodities resulting from the lack of an overall picture of the market can it be plausibly maintained that cartels are able to eliminate crises by restricting production.

That a crisis is synonymous with the overproduction of commodities, or is caused by overproduction, appears to be certain and undeniable. Is it not a palpable fact, apparent to everyone? Prices are low because supply exceeds demand, that is, because there is a surplus of commodities, and every glance at the market reports shows that warehouses are overstocked, goods unsaleable, that there is indeed overproduction of commodities. But the cartels are in a position to restrict the output of an entire branch of industry. Previously, this was accomplished by the blind operation of the law of price, which brought numerous firms to a standstill, and to bankruptcy, through a fall in prices; but now the same blessed shrinkage of production can be achieved more rapidly and painlessly by the collective wisdom of the cartelized directors of production. Nor is this all. Since the cartel can fix prices and take care of 'the balancing of supply and demand' eliminate speculation, and control and supervise trading (if it does not take it over completely) why should it not be possible, by adapting production precisely to demand, to eliminate crises altogether from this world and to deal with minor disturbances of economic life quickly, without any serious disruption?

This would be too good to be true. Anyone who simply equates crises with the overproduction of commodities misses precisely the essential point: the capitalist character of production. The products are not simply commodities, but products of capital, and overproduction during a crisis is not just overproduction of commodities, but overproduction of capital. This simply means that capital is invested in production in such volume that the conditions of its utilization have come into contradiction with the conditions of its valorization, so that the sale of products no longer yields a profit sufficient to ensure its further expansion and accumulation. The sale of commodities comes to a standstill because production has ceased to expand. That is why anyone who simply equates a capitalist crisis with the overproduction of commodities does not get beyond the first step in the analysis of crises. It is evident that we are not dealing merely with an overproduction of commodities from the fact that soon after a crisis the market shows itself able to absorb a much larger quantity of commodities. Each successive period of prosperity breaks the record set by its predecessor, even though the increase in market capacity cannot be explained either by population growth or by the growth of income available for consumption. There are quite different factors to be taken into account besides the mere capacity to consume.

Cartels do not diminish, but exacerbate, the disturbances in the regulation of prices which lead ultimately to disproportionalities, and so to the contradiction between the conditions of utilization and the conditions of valorization. The effect of cartels is to end competition within a given branch of production, or more precisely, to make it latent, so that it does not exert a downward pressure on prices in that branch of production ; and second, to establish competition among the cartelized sectors on the basis of a higher rate of profit than that which prevails in the non-cartelized industries. But cartels are powerless to alter the competition among capitals for spheres of investment, or the effects of accumulation on the price structure, and they cannot, therefore, prevent the emergence of disproportional relations.

We have seen that during a period of prosperity competition in a particular branch of production does not exert a downward pressure on prices, because demand exceeds supply and in such a case competition takes place among buyers, not among sellers. Only when supply outstrips demand does competition among sellers appear, and prices begin to fall. That cartels conform with the price structure, and do not determine it, follows from the mechanism of production. Let us assume that cartels maintain low prices during a period of prosperity; then there will be no increase in profit and no expansion of accumulation. If the prices of the cartelized industries remained low while those of non-cartelized industries rose, capital would flow out of the former, there would soon be overproduction of capital in the non-cartelized branches of production, matched by underproduction in the cartelized ones, hence an extreme disproportionality, leading to a general crisis; for a crisis is also possible when the volume of production remains unchanged, or even when it is reduced. In reality the cartel would probably have been shattered long before, because it would have frustrated instead of satisfying the striving for profit, and so lost its raison d'être. Partial regulation, involving the unification of a branch of industry into a single enterprise, has absolutely no influence upon the proportional relations in industry as a whole. The anarchy of production is not abolished by reducing the number of individual units while simultaneously increasing their strength and effectiveness ; indeed, it cannot be abolished at all in this gradual and piecemeal fashion. Planned production and anarchic production are not quantitative opposites such that by tacking on more and more 'planning' conscious organization will emerge out of anarchy. Such a transformation can only take place suddenly by subordinating the whole of production to conscious control. Who exercises this control, and is the owner of production, is a question of power. In itself, a general cartel which carries on the whole of production, and thus eliminates crises, is economically conceivable, but in social and political terms such an arrangement is impossible, because it would inevitably come to grief on the conflict of interests which it would intensify to an extreme point. But to expect the abolition of crises from individual cartels simply shows a lack of insight into the causes of crises and the structure of the capitalist system.

If cartels are not in a position to prevent crises, neither can they escape their effects. Naturally, if the crisis is identified with an overproduction of commodities, then the remedy is quite simple. The cartel curtails production and thus achieves more rapidly, and perhaps on a larger scale, what the crisis would in any case have accomplished by means of bankruptcies and plant slow-downs. The social consequences, namely unemployment and wage cuts, would of course be the same. But the cartelized capitalists would be able to maintain high prices by sharply curtailing supply. Prices will remain high, but profit will be reduced as a result of lower sales and higher costs of production. After a certain time the market will have absorbed the surplus output, and prosperity can return. This line of argument is as false as it is simple. Two conditions are necessary for prosperity to return: first, the restoration of proportionality, which is required in order to bring the depression to an end; and second, an expansion of production, without which there can be no prosperity. But the cartel policy which I have outlined above would actually make it more difficult to establish these two conditions. The curtailment of production means the cessation of all new capital investment, and the maintenance of high prices makes the effects of the crisis more severe for all those industries which are not cartelized, or not fully cartelized. Their profits will fall more sharply, or their losses will be greater, than is the case in the cartelized industries, and in consequence they will be obliged to make larger cuts in production. As a result, disproportionality will increase, the sales of cartelized industry will suffer still more, and it becomes evident that in spite of the severe curtailment of production, 'overproduction' persists and has even increased. Any further limitation of production means that more capital will be idle, while overheads remain the same, so that the cost per unit will rise, thus reducing profits still more despite the maintenance of high prices. The high prices attract outsiders, who can count on lower capital and labour costs since all other prices have fallen; thus they establish a strong competitive position and begin to undersell the cartel. The cartel will not be able to maintain prices any longer, and the price collapse spreads beyond cartelized industry. Artificial interventions are corrected, and the price structure follows the laws which the cartels vainly tried to bypass in their own case.^[36] On the basis of the new price structure a redistribution of capital among the various sectors of production then takes place, and gradually the relations of proportionality are restored ; the depression is overcome. Prosperity can then get under way as soon as technical innovations or new markets generate increased demand, which in turn attracts new investment of productive capital, especially fixed capital.

Cartels, then, do not eliminate the effects of crises. They modify them only to the extent that they can divert the main burden of a crisis to the noncartelized industries. The difference in the rate of profit between cartelized and non-cartelized industries, which on average is greater the stronger the cartel and the more secure its monopoly, diminishes during times of prosperity and increases during a depression. In the initial period of a crisis and depression the cartel may also be in a position to maintain high profits for longer than the independent industries, thus exacerbating the effects of the crisis for the latter. This circumstance is not without importance, because it is precisely during a crisis and its immediate aftermath that the situation of industrialists is most difficult and their independence most threatened. The fact that just at this time cartel policy denies them any relief in the form of reductions in the price of their raw materials, etc., is an important factor in worsening the situation of the non-cartelized industries and accelerating the process of concentration.

↑ Aside from its survival in the peasant economy, domestic production still has a rote in. capitalist society wherever the product of an enterprise itself becomes an element in reproduction (for instance, grain for sowing, coal which is consumed in coal mines, etc.). This type of production for use increases 'with the growth of combination. It is domestic production because the commodity is not intended for the market, but for use as an element of constant capital in the same enterprise which produced it. Nevertheless, it differs toto cælo [as heaven from earth] from the domestic production of previous social formations, directed to the satisfaction of needs, because it serves commodity production, not consumption.
↑ 'It is a pure tautology to say that crises are caused by the lack of effective consumption or effective consumers. The capitalist system does not know any other modes of consumption but paying ones, except that of the pauper or the thief. If any commodities are unsaleable, it means that no solvent purchasers have been found for them; in other words, consumers (whether commodities are bought in the last instance for productive or individual consumption). But if one were to attempt to clothe this tautology with a semblance of profounder justification by saying that the working class receive too small a portion of their own product, and the evil would be remedied by giving them a larger share of it, or raising their wages, we should reply that crises are precisely always preceded by a period in which wages rise generally and the working class actually get a larger share of the annual product intended for consumption. From the point of view of the advocates of healthy, "simple" (!) common sense, such a period should rather remove a crisis. It seems, then, that capitalist production comprises certain conditions which are independent of good or bad will and permit the working class to enjoy that relative prosperity only momentarily, and at that always as a harbinger of a coming crisis.' Capital, vol. II, pp. 475-6 [MECW, 36, pp410-11]. To which Engels adds this comment: 'Advocates of the theory of Rodbertus are requested to take note of this.'
↑ Capital, vol. III, pp. 286-7 [MECW, 37, pp242-3].
↑ 'But the problem is to follow the further development of the potential crisis – and a real crisis can only be explained by the actual movement of capitalist production, competition and credit in so far as it can be derived from the functional characteristics of capital, peculiar to capital as such, rather than to the forms it takes in commodities and money.' Marx, Theories of Surplus Value, chapter xvii, Section 10 [MECW, 32, p143].
↑ M. Tugan-Baranowsky deserves credit for calling attention to the significance of these investigations for the problem of crises in his Studien zur Theorie und Geschichte der Handelskrisen in England. The curious thing is that this needed to be pointed out at all.
↑ Capital, vol. II, p. 546 [MECW, 36, p 468].
↑ For further examples see Capital, vol. II, pp. 596 et seq [MECW, 36, p510ff].
↑ Capital, vol. II, pp. 576-7 [MECW, 36, p493].
↑ ibid., pp. 577 – 8 [ibid, pp 493-4].
↑ ibid., p. 581 [ibid, p 497].
↑ ibid., pp. 581 – 2 [ibid].
↑ ibid., pp. 582 – 3 [ibid, pp 497-8].
↑ Capital, vol. II, p. 211 [MECW 36, p ].
↑ At first sight a period of prosperity seems to be characterized by general and uniform price rises and a period of depression by a similar fall in prices. This is the reason why the cause of crises has been sought so long and so persistently in changes in the value of money. The superstitious faith in the quantity theory of money draws its strongest support from this view.
↑ 'Undoubtedly, the economic development of mining and the iron industry has been much too rapid in the Lorraine-Luxembourg area. The effects of this were particularly noticeable because the new concerns came into operation at a late stage, and for a long time, during the period of peak prosperity, helped to increase demand. But the new plants went into production at the end of 1899 and in the spring of 1900, when the high point of development had already passed, so that they merely increased the supply . . . . When they ceased to be consumers, and now appeared on the market with their own output, productive capacity increased enormously and overproduction became inevitable.' `Die Störungen im deutschen Wirtschaftsleben wärend der Jahre 1900 ff.' in Montan- und Eisenindustrie, vol. 2, p. 48.
↑ Capital, vol. III, pp. 139-41 [MECW 37, p 119-120].
↑ ibid., p. 143 [ibid, p122].
↑ I am considering the stock exchange crisis here, of course, only as a factor in the general commercial crisis. Stock exchange and speculative crises can also
occur as isolated phenomena, and a stock exchange crisis often emerges during the initial phase of industrial prosperity if speculators exploit the nascent upswing prematurely. This was the case in Vienna in 1895.
↑ Thus, during the last American monetary crisis cotton and wheat exports to Europe were vigorously promoted in order to obtain gold in return.
↑ This is, of course, an old experience. An anonymous 'Continental Merchant' said as much to the members of the famous Bullion Committee in 1810. 'In fact, I only know of two means to liquidate an unfavourable balance of trade. It is either by bullion or bankruptcy.' Report of Committee on the High Price of Bullion, reprinted in J. R. McCulloch, Scarce and Valuable Tracts on Paper Currency and Banking, p. 422.
↑ This refers to the time of Peel; today, the volume of notes not backed by gold can amount to some £18,500,000.
↑ 'The Bank of France often charges a premium when money is withdrawn, and if there is a strong demand from abroad this may amount to 8 per cent or even 10 per cent. Since foreign buyers only want gold, the discounter is obliged to add this premium to the domestic discount rate. In general, one can be sure that the gold premium will be used whenever discount rates abroad are high, and those in Paris significantly lower. It increases the interest on a three-month 5 per cent bill by about 2 per cent a year.' Sartorius, Das volksuirtschaftliche System . ..,p. 263.
↑ Not only Tugan-Baranowsky, but also Otto Bauer in his otherwise penetrating and suggestive exposition of the Marxist theory of crises (Die Neue Zeit, XXIII, pp. 133 et seq.) succumbed to this temptation arising out of certain economic phenomena.
↑ This was the case, for instance, in the depression period after 1890. The entire year 1893 was marked by an unusually plentiful supply of money and low interest rates. The London bank rate was 2 per cent at the end of February 1894, while the private discount rate stood at 1 per cent in mid March. In mid January 1895 the private discount rate in London was between ½ and 7/8 per cent. Yet in spite of the prolonged and extreme liquidity, the recovery began only in the second half of 1895.
↑ Recently, as theoretical analysis has fallen into neglect, a bad habit has spread which consists in drawing general conclusions from a small number of observations over a period of a few years, and elevating the experience of a partial phase of the industrial cycle, or at best the experience of a particular, unique cycle, to the level of general 'laws'. For that reason, others abjure all generalizations and console themselves with the folk wisdom of qui vivra verra. They deliberately reduce political economy to the level of a cheap joke.
↑ An extreme instance of this confusion is to be found in Tugan-Baranowsky's theory of crises. By taking account only of the formal economic categories of capitalist production, it overlooks the natural conditions of production which are common to all systems of production, whatever their historical form, and thus arrives at the curious conception of a system of production which exists only for the sake of production, while consumption is simply a tedious irrelevance. If this is 'madness' there is method in it, and a Marxist one at that, for it is just this analysis of the specific historical structure of capitalist production which is distinctively Marxist. It is Marxism gone mad, but still Marxism, and this is what makes the theory so peculiar and yet so suggestive. Without being quite aware of it, Tugan seems to sense this. Hence his vigorous polemic against the 'sound common sense' of his critics.
↑ The Phoenix Mining and Smelting Co., a well known pre-1914 German enterprise. [Ed.]
↑ And not only in recent times. 'The superficiality of political economy is shown among other things by the fact that it regards the expansion and contraction of credit, which is a mere symptom of the periodic changes in the industrial cycle, as their cause.' Capital, vol. I, p. 695. [MECW 35, p627]
↑ The following example shows that high interest rates do not produce a crisis. England had an adverse balance of payments in 1864. Cotton imports from America had fallen off in consequence of the Civil War, and imports of cotton from the East Indies and Egypt increased, thus raising total imports from these countries; for the East Indies from £15,000,000 in 1860 to £52,000,000 in 1864, and for Egypt from £10,000,000 to nearly £20,000,000. The bank raised its discount rate to check the outflow of bullion. During 1864 it fluctuated between 6 per cent and 9 per cent. Yet the crisis was confined entirely to the money market. 'The increases in commodity prices were insignificant and in spite of the high discount rates, which were to be met with only during periods of money shortage in the past, commerce and industry did not experience any marked disturbances . . . . Notwithstanding a continuous cotton shortage, English trade was certainly not depressed.' Tugan-Baranowsky, op. cit., p. 139.
↑ Incidentally, this is an error which Tugan-Baranowsky does not seem always to have avoided in the conclusion& which he draws from his excellent and reliable account of the history of crises in England.
↑ 'The crisis of 1857, and still more that of 1873, involved an unusually large number of enterprises (in the iron industry) which did not differ greatly in their productivity. The general collapse therefore included many firms which, from a technological point of view, were quite viable and deserved to survive. In the crisis of 1900 the giant enterprises of basic industry were operating alongside many firms which would be considered antiquated today, the nonintegrated firms which had risen to the top on the wave of prosperity. The fall in prices and the shrinkage of demand were calamitous for these nonintegrated firms, whereas the giant combines were either not affected at all, or only for a short time. That is why the recent crisis resulted in a greater degree of concentration than previous crises, for example the crisis of 1873 which, although it eliminated some firms, did not give the survivors a monopoly in the prevailing state of technology. Today, however, thanks to a complex technology, elaborate organization and large capital resources, a very high degree of monopoly is enjoyed by the giant concerns in the modern iron and electrical industries, and to a lesser extent in the machine tool industry, as well as in some engineering, transport and other firms. If this does not apply to some "light" industries, and the effects of crises have not essentially changed for them, it is all the more easy to see how the recent development of the banking system affects the first category of industry.' O. Jeidels, Die Verhältnisse der deutschen Grossbanken zur Industrie, p. 108.
↑ This condition alone is sufficient, regardless of any other fundamental causes that might bring about the crisis. In an account of the Amsterdam stock
exchange crash of 1773, the following description of the results of one big failure occurs: `No one knew what the loss would amount to, nor how many other firms it would ruin. The general uncertainty drove away credit, and suddenly it was impossible to obtain cash. Some feared that their bills would not be accepted; others were concerned that they would be unable to recover the sums which their debtors owed them; still others tried to take advantage of the general distress. Everyone was on the lookout for a chance to buy at the lowest prices, but feared to pay out any cash, and circulation almost came to a standstill.' Der Reichtum von Holland, pp. 444 et seq., cited by Sartorius von Waltershausen in Das volkswirtschaftliche System der Kapitalanlage im Ausland, p. 377.
Compare with this the following description of the condition of the German stock exchanges on the outbreak of war in 1870: 'On 4 July 1870 the mood of the Berlin stock exchange was excellent. It began to waver in the next few days, became very uneasy on 8 July, and on 11 July lost its head. The panic lasted 8 to 10 days and then, with the return of confidence, the downward trend came to an end . . . . Money had vanished from the stock exchange as if by a magic wand. The discount of the Bank of Prussia rose to 9 per cent and the rate for collateral loans rose to 10 per cent in Leipzig, 9 per cent in Lubeck and 8 per cent in Bremen. What had happened to the money which could easily be had a few days previously for 3 per cent and 3.5 per cent? The government could not possibly have absorbed the money for mobilization purposes, because at that time the note issuing banks in Germany were decentralized and much of the money was in the hands of banks which did not issue notes, or of private bankers. Most of the money stayed where it was, but was hoarded, and anyone who succeeded in getting any money added it to his hoard. Thus, for example, it was reported from Munich: "For a time, it was impossible to obtain 500 florins for the best paper and collateral. On the other hand, even private individuals felt obliged to create a cash reserve for themselves, whatever the sacrifice, in order to be prepared for the worst." In Frankfurt "the bankers had only one thought, to get back their loans, in view of the public clamour for the return of deposits. The rapid increase of clearing credits in the banks shows that both bankers and the public tried to assure themselves of a large supply of cash in preparation for any eventuality."
`The following is reported from Hanover concerning the premium on cash: "Every banker, and above all the Hanover Bank, thought only of himself . . . treasury certificates and the notes of the private banks in Prussia were proscribed, and the solid citizen who had done any business with money bills or Prussian bonds had to accept a loss of 5 per cent, while the peasant whose fear made him ready to sell at any price was forced to accept a loss of 10 per cent or even more." '
And just as this situation shows in embryo all the typical features of the recent American monetary crisis, so also were the remedies the same. `During the money shortage in the second half of July, various measures were taken to secure relief. In Bremen, the Senate and the City Council decided to recognize certain foreign gold coins as legal tender, but this was of little help because this money, like the city's own currency, was retained in private hoards. In Stuttgart, a clearing company was founded which issued six-month 3 per cent notes in denominations of 50 to 500 florins. Similar bonds were issued by the Hypotheken- and Wechselbank in Munich, and in Frankfurt leading banking houses offered the local bank of issue a collective guarantee. Precious metals were imported from abroad as quickly as possible. By the end of July, the banking and import houses of Bremen had acquired considerable sums in sovereigns. Frankfurt obtained gold from England and silver from Vienna. These measures proved to be reasonably effective in countering the shortage of money as a means of payment, but could not bring enough capital on to the loan market to satisfy government requirements.' Sartorius von Waltershausen, op. cit., pp. 323 et seq.
↑ To that extent, the following comment by Marx needs to be qualified in respect of present-day conditions: 'Under the modern credit system, it [merchant capital] disposes of a large portion of the total capital of society, so that it can repeat its purchases even before it has definitely sold its previous purchases . . . aside from the separation of C-M from M-C, which follows from the nature of the commodities, a fictitious demand is here created . . . . Hence, we note the phenomenon that crises do not show themselves nor break out first in the retail business, which deals with direct consumption, but in the spheres of wholesale business and banking by which the money capital of society is placed at the disposal of the wholesale business.' Capital, vol. III, pp. 358-9 [MECW 37, pp. 302-3].
↑ It makes no difference in this respect if a trust company is interposed between the bank and the enterprise, since it remains directly dependent upon the bank.
↑ Eugene Bontoux was a French engineer and financier who succeeded in enlisting the participation of French clerical and aristocratic circles in his speculative Union Generale for the construction of railways in Eastern Europe. The project collapsed in 1882. [Ed.]
↑ This is illustrated by the behaviour of the Steel Trust. It reduced its production to a minimum in 1907-1908 in order to maintain prices. A year later the iron market collapsed, dragging with it all the other metal markets.

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

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

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

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

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

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

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

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

[9] ., pp. 577 – 8 [ibid, pp 493-4].

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

[11] ., pp. 581 – 2 [ibid].

[12] ., pp. 582 – 3 [ibid, pp 497-8].

[13] Capital, vol. II, p. 211 [MECW 36, p ].

[14] At first sight a period of prosperity seems to be characterized by general and uniform price rises and a period of depression by a similar fall in prices. This is the reason why the cause of crises has been sought so long and so persistently in changes in the value of money. The superstitious faith in the quantity theory of money draws its strongest support from this view.

[15] 'Undoubtedly, the economic development of mining and the iron industry has been much too rapid in the Lorraine-Luxembourg area. The effects of this were particularly noticeable because the new concerns came into operation at a late stage, and for a long time, during the period of peak prosperity, helped to increase demand. But the new plants went into production at the end of 1899 and in the spring of 1900, when the high point of development had already passed, so that they merely increased the supply . . . . When they ceased to be consumers, and now appeared on the market with their own output, productive capacity increased enormously and overproduction became inevitable.' `Die Störungen im deutschen Wirtschaftsleben wärend der Jahre 1900 ff.' in Montan- und Eisenindustrie, vol. 2, p. 48.

[16] Capital, vol. III, pp. 139-41 [MECW 37, p 119-120].

[17] ., p. 143 [ibid, p122].

[18] I am considering the stock exchange crisis here, of course, only as a factor in the general commercial crisis. Stock exchange and speculative crises can also
occur as isolated phenomena, and a stock exchange crisis often emerges during the initial phase of industrial prosperity if speculators exploit the nascent upswing prematurely. This was the case in Vienna in 1895.

[19] Thus, during the last American monetary crisis cotton and wheat exports to Europe were vigorously promoted in order to obtain gold in return.

[20] This is, of course, an old experience. An anonymous 'Continental Merchant' said as much to the members of the famous Bullion Committee in 1810. 'In fact, I only know of two means to liquidate an unfavourable balance of trade. It is either by bullion or bankruptcy.' Report of Committee on the High Price of Bullion, reprinted in J. R. McCulloch, Scarce and Valuable Tracts on Paper Currency and Banking, p. 422.

[21] This refers to the time of Peel; today, the volume of notes not backed by gold can amount to some £18,500,000.

[22] 'The Bank of France often charges a premium when money is withdrawn, and if there is a strong demand from abroad this may amount to 8 per cent or even 10 per cent. Since foreign buyers only want gold, the discounter is obliged to add this premium to the domestic discount rate. In general, one can be sure that the gold premium will be used whenever discount rates abroad are high, and those in Paris significantly lower. It increases the interest on a three-month 5 per cent bill by about 2 per cent a year.' Sartorius, Das volksuirtschaftliche System . ..,p. 263.

[23] Not only Tugan-Baranowsky, but also Otto Bauer in his otherwise penetrating and suggestive exposition of the Marxist theory of crises (Die Neue Zeit, XXIII, pp. 133 et seq.) succumbed to this temptation arising out of certain economic phenomena.

[24] This was the case, for instance, in the depression period after 1890. The entire year 1893 was marked by an unusually plentiful supply of money and low interest rates. The London bank rate was 2 per cent at the end of February 1894, while the private discount rate stood at 1 per cent in mid March. In mid January 1895 the private discount rate in London was between ½ and 7/8 per cent. Yet in spite of the prolonged and extreme liquidity, the recovery began only in the second half of 1895.

[25] Recently, as theoretical analysis has fallen into neglect, a bad habit has spread which consists in drawing general conclusions from a small number of observations over a period of a few years, and elevating the experience of a partial phase of the industrial cycle, or at best the experience of a particular, unique cycle, to the level of general 'laws'. For that reason, others abjure all generalizations and console themselves with the folk wisdom of qui vivra verra. They deliberately reduce political economy to the level of a cheap joke.

[26] An extreme instance of this confusion is to be found in Tugan-Baranowsky's theory of crises. By taking account only of the formal economic categories of capitalist production, it overlooks the natural conditions of production which are common to all systems of production, whatever their historical form, and thus arrives at the curious conception of a system of production which exists only for the sake of production, while consumption is simply a tedious irrelevance. If this is 'madness' there is method in it, and a Marxist one at that, for it is just this analysis of the specific historical structure of capitalist production which is distinctively Marxist. It is Marxism gone mad, but still Marxism, and this is what makes the theory so peculiar and yet so suggestive. Without being quite aware of it, Tugan seems to sense this. Hence his vigorous polemic against the 'sound common sense' of his critics.

[27] The Phoenix Mining and Smelting Co., a well known pre-1914 German enterprise. [Ed.]

[28] And not only in recent times. 'The superficiality of political economy is shown among other things by the fact that it regards the expansion and contraction of credit, which is a mere symptom of the periodic changes in the industrial cycle, as their cause.' Capital, vol. I, p. 695. [MECW 35, p627]

[29] The following example shows that high interest rates do not produce a crisis. England had an adverse balance of payments in 1864. Cotton imports from America had fallen off in consequence of the Civil War, and imports of cotton from the East Indies and Egypt increased, thus raising total imports from these countries; for the East Indies from £15,000,000 in 1860 to £52,000,000 in 1864, and for Egypt from £10,000,000 to nearly £20,000,000. The bank raised its discount rate to check the outflow of bullion. During 1864 it fluctuated between 6 per cent and 9 per cent. Yet the crisis was confined entirely to the money market. 'The increases in commodity prices were insignificant and in spite of the high discount rates, which were to be met with only during periods of money shortage in the past, commerce and industry did not experience any marked disturbances . . . . Notwithstanding a continuous cotton shortage, English trade was certainly not depressed.' Tugan-Baranowsky, op. cit., p. 139.

[30] Incidentally, this is an error which Tugan-Baranowsky does not seem always to have avoided in the conclusion& which he draws from his excellent and reliable account of the history of crises in England.

[31] 'The crisis of 1857, and still more that of 1873, involved an unusually large number of enterprises (in the iron industry) which did not differ greatly in their productivity. The general collapse therefore included many firms which, from a technological point of view, were quite viable and deserved to survive. In the crisis of 1900 the giant enterprises of basic industry were operating alongside many firms which would be considered antiquated today, the nonintegrated firms which had risen to the top on the wave of prosperity. The fall in prices and the shrinkage of demand were calamitous for these nonintegrated firms, whereas the giant combines were either not affected at all, or only for a short time. That is why the recent crisis resulted in a greater degree of concentration than previous crises, for example the crisis of 1873 which, although it eliminated some firms, did not give the survivors a monopoly in the prevailing state of technology. Today, however, thanks to a complex technology, elaborate organization and large capital resources, a very high degree of monopoly is enjoyed by the giant concerns in the modern iron and electrical industries, and to a lesser extent in the machine tool industry, as well as in some engineering, transport and other firms. If this does not apply to some "light" industries, and the effects of crises have not essentially changed for them, it is all the more easy to see how the recent development of the banking system affects the first category of industry.' O. Jeidels, Die Verhältnisse der deutschen Grossbanken zur Industrie, p. 108.

[32] This condition alone is sufficient, regardless of any other fundamental causes that might bring about the crisis. In an account of the Amsterdam stock
exchange crash of 1773, the following description of the results of one big failure occurs: `No one knew what the loss would amount to, nor how many other firms it would ruin. The general uncertainty drove away credit, and suddenly it was impossible to obtain cash. Some feared that their bills would not be accepted; others were concerned that they would be unable to recover the sums which their debtors owed them; still others tried to take advantage of the general distress. Everyone was on the lookout for a chance to buy at the lowest prices, but feared to pay out any cash, and circulation almost came to a standstill.' Der Reichtum von Holland, pp. 444 et seq., cited by Sartorius von Waltershausen in Das volkswirtschaftliche System der Kapitalanlage im Ausland, p. 377.
Compare with this the following description of the condition of the German stock exchanges on the outbreak of war in 1870: 'On 4 July 1870 the mood of the Berlin stock exchange was excellent. It began to waver in the next few days, became very uneasy on 8 July, and on 11 July lost its head. The panic lasted 8 to 10 days and then, with the return of confidence, the downward trend came to an end . . . . Money had vanished from the stock exchange as if by a magic wand. The discount of the Bank of Prussia rose to 9 per cent and the rate for collateral loans rose to 10 per cent in Leipzig, 9 per cent in Lubeck and 8 per cent in Bremen. What had happened to the money which could easily be had a few days previously for 3 per cent and 3.5 per cent? The government could not possibly have absorbed the money for mobilization purposes, because at that time the note issuing banks in Germany were decentralized and much of the money was in the hands of banks which did not issue notes, or of private bankers. Most of the money stayed where it was, but was hoarded, and anyone who succeeded in getting any money added it to his hoard. Thus, for example, it was reported from Munich: "For a time, it was impossible to obtain 500 florins for the best paper and collateral. On the other hand, even private individuals felt obliged to create a cash reserve for themselves, whatever the sacrifice, in order to be prepared for the worst." In Frankfurt "the bankers had only one thought, to get back their loans, in view of the public clamour for the return of deposits. The rapid increase of clearing credits in the banks shows that both bankers and the public tried to assure themselves of a large supply of cash in preparation for any eventuality."
`The following is reported from Hanover concerning the premium on cash: "Every banker, and above all the Hanover Bank, thought only of himself . . . treasury certificates and the notes of the private banks in Prussia were proscribed, and the solid citizen who had done any business with money bills or Prussian bonds had to accept a loss of 5 per cent, while the peasant whose fear made him ready to sell at any price was forced to accept a loss of 10 per cent or even more." '
And just as this situation shows in embryo all the typical features of the recent American monetary crisis, so also were the remedies the same. `During the money shortage in the second half of July, various measures were taken to secure relief. In Bremen, the Senate and the City Council decided to recognize certain foreign gold coins as legal tender, but this was of little help because this money, like the city's own currency, was retained in private hoards. In Stuttgart, a clearing company was founded which issued six-month 3 per cent notes in denominations of 50 to 500 florins. Similar bonds were issued by the Hypotheken- and Wechselbank in Munich, and in Frankfurt leading banking houses offered the local bank of issue a collective guarantee. Precious metals were imported from abroad as quickly as possible. By the end of July, the banking and import houses of Bremen had acquired considerable sums in sovereigns. Frankfurt obtained gold from England and silver from Vienna. These measures proved to be reasonably effective in countering the shortage of money as a means of payment, but could not bring enough capital on to the loan market to satisfy government requirements.' Sartorius von Waltershausen, op. cit., pp. 323 et seq.

[33] To that extent, the following comment by Marx needs to be qualified in respect of present-day conditions: 'Under the modern credit system, it [merchant capital] disposes of a large portion of the total capital of society, so that it can repeat its purchases even before it has definitely sold its previous purchases . . . aside from the separation of C-M from M-C, which follows from the nature of the commodities, a fictitious demand is here created . . . . Hence, we note the phenomenon that crises do not show themselves nor break out first in the retail business, which deals with direct consumption, but in the spheres of wholesale business and banking by which the money capital of society is placed at the disposal of the wholesale business.' Capital, vol. III, pp. 358-9 [MECW 37, pp. 302-3].

[34] It makes no difference in this respect if a trust company is interposed between the bank and the enterprise, since it remains directly dependent upon the bank.

[35] Eugene Bontoux was a French engineer and financier who succeeded in enlisting the participation of French clerical and aristocratic circles in his speculative Union Generale for the construction of railways in Eastern Europe. The project collapsed in 1882. [Ed.]

[36] This is illustrated by the behaviour of the Steel Trust. It reduced its production to a minimum in 1907-1908 in order to maintain prices. A year later the iron market collapsed, dragging with it all the other metal markets.

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IV. Finance capital and crises

Contents

16. The general conditions of crises[edit source]

Equilibrium conditions in the process of social reproduction[edit source]

Equilibrium conditions in the capitalist process of accumulation[edit source]

17. The Causes of Crises[edit source]

18. Credit conditions in the course of the business cycle[edit source]

19. Money capital and productive capital during the depression[edit source]

20. Changes in the character of crises. Cartels and crises[edit source]

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IV. Finance capital and crises

16. The general conditions of crises[edit source]

Equilibrium conditions in the process of social reproduction[edit source]

Equilibrium conditions in the capitalist process of accumulation[edit source]

17. The Causes of Crises[edit source]

18. Credit conditions in the course of the business cycle[edit source]

19. Money capital and productive capital during the depression[edit source]

20. Changes in the character of crises. Cartels and crises[edit source]

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