Thursday, 28 January 2016

Capital III, Chapter 25 - Part 1

Credit and Fictitious Capital

The analysis of the credit system lies outside the scope of Marx’s current work, but, like other features of capitalism, such as competition, which lie outside the scope of “Capital”, it is necessary to investigate their role, within the process of reproduction and circulation of capital. That has already been touched on in respect of the development of credit in the two previous volumes of “Capital”, in discussing how the exchange of commodities necessarily leads to an increasing role of money as means of payment rather than circulation.

“With the development of commerce and of the capitalist mode of production, which produces solely with an eye to circulation, this natural basis of the credit system is extended, generalised, and worked out. Money serves here, by and large, merely as a means of payment, i.e., commodities are not sold for money, but for a written promise to pay for them at a certain date. For brevity's sake, we may put all these promissory notes under the general head of bills of exchange.” (p 400)

These bills of exchange circulate, within the commercial world, as money, because the possessor of the bill can endorse it, and then pass it on as payment for their own purchases. They act increasingly as money, and in doing so reduce the need for actual money. If A owes B £10, and B owes C £10, and C owes D £10, then £10 of actual money is required. A pays it to B, who pays it to C etc. If A owes B £10, C £10 and D £10, then £30 of money is required, because here one payment does not cancel out another. But, if A pays B with a bill of exchange, B can then pass that bill to X in payment of £10 of goods bought from them. X may then endorse the bill, and use it as payment to C, for £10 of goods bought from them. A may simply pay C and D with bills of exchange, who in turn endorse them, and use them to pay for their own purchases. To the extent that all these transactions can simply be netted off against each other, the only actual money that then needs to change hands is that which remains to balance the difference.

“Just as these mutual advances of producers and merchants make up the real foundation of credit, so does the instrument of their circulation, the bill of exchange, form the basis of credit-money proper, of bank-notes, etc. These do not rest upon the circulation of money, be it metallic or government-issued paper money, but rather upon the circulation of bills of exchange.” (p 400-401)

Those who believe that the cause of capitalist crises is the introduction and expansion of credit, induced by the state, and its replacement of money based on gold, or some other precious metal, are, therefore, well off the mark. Credit money is developed by capital, naturally, alongside the existence of money based on gold and silver. It arises simply because the exchange of commodities, especially as it expands, necessitates exchange on the basis of payment, as opposed to its simple circulation.

Marx quotes a Yorkshire banker, W. Leatham , and J. W. Bosanquet  on the extent to which bills of exchange acted as money. Leatham, in his “Letters on the Currency” (1840) wrote that,

“The bills of exchange make up "one component part greater in amount than all the rest put together" (p. 3).” (p 401)

According to Leatham, the total value of bank notes, and bank liabilities, amounted to £153 million. By contrast, the quantity of gold available to back these notes amounted to only £14 million.

In tones familiar to anyone, following the financial crisis of 2008, he continues,

"The bills of exchange are not ... placed under any control, except by preventing the abundance of money, excessive and low rates of interest or discount, which create a part of them, and encourage their great and dangerous expansion. It is impossible to decide what part arises out of real bonâ fide transactions, such as actual bargain and sale, or what part is fictitious and mere accommodation paper, that is, where one bill of exchange is drawn to take up another running, in order to raise a fictitious capital, by creating so much currency. In times of abundance and cheap money this I know reaches an enormous amount" (p 401)

Illustrating the point made earlier that the circulation of bills of exchange reduced the need for actual money, Bosanquet, in his “Metallic, Paper and Credit Currency” (1842), writes that the London Clearing House settled payments of around £3 million per day, but only required around £200,000 to do so.

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