Capital III, Chapter 25 - Part 3

In Capital I, in examining the development of money, it was seen that, in order to function, it required the development of various hoards and reserves. In Capital II, in examining the circulation of capital, the other side of this, from the standpoint of individual capitals, was examined. Each firm needs reserves of money and money-capital to cover the variations in its cash flow, in the different periods, during which it is making payments and obtaining receipts.

It requires hoards of money-capital that are the equivalent of the surplus value it realises, which is not immediately accumulated, as productive-capital, and it also requires money reserves, which are the equivalent of the value of wear and tear of fixed capital, which must be accumulated until such time as the fixed capital is replaced.

Nearly all of these hoards and reserves, apart from the small amounts retained as petty cash, the firm deposits with the bank. These bank deposits form part of the banks' reserves of money and money-capital, which it can make available, as interest-bearing capital. In fact, this very possibility, of creating interest bearing capital, enables the banks to pay interest on deposit accounts, and thereby attract additional sums.

In addition to the money of businesses, the provision of these interest-bearing, deposit accounts draws in the small savings of workers and the growing middle class. These small savings, which on their own could not function as capital, when amassed in the hands of the banks, can be thrown on to the money market en masse.

“This aggregation of small amounts must be distinguished as a specific function of the banking system from its go-between activities between the money-capitalists proper and the borrowers. In the final analysis, the revenues, which are usually but gradually consumed, are also deposited with the banks.” (p 403)

The credit or loans provided by the banks, for commercial purposes, take a number of forms. The first has been referred to. The bank takes a bill of exchange, and gives money in return. If say the bill has a value of £1,000, and is due for payment in 30 days time, the bank may pay £990 for it. The £10 difference constitutes the interest of 1% for the month, which it has charged. But, the bank may lend to the business by a range of means we are familiar with today. It may lend against the personal credit of the borrower, i.e. if it is some well established business or person; more often, it will lend against some form of collateral, such as government bonds, stocks, but also against other potential future income such as “overdrafts against bills of lading, dock warrants, and other certified titles of ownership of commodities and overdrawing deposits, etc.” (p 403)

The bank may itself issue bills of exchange drawn on other banks, or cheques, as well as establishing credit accounts as a means of providing credit. At a time when the individual banks, and not just the Bank of England, were allowed to issue bank notes, the bank note itself was a form of credit.

“A bank-note is nothing but a draft upon a banker, payable at any time to the bearer, and given by the banker in place of private drafts. This last form of credit appears particularly important and striking to the layman, first, because this form of credit-money breaks out of the confines of mere commercial circulation into general circulation, and serves there as money; and because in most countries the principal banks issuing notes, being a peculiar mixture of national and private banks, actually have the national credit to back them, and their notes are more or less legal tender; because it is apparent here that the banker deals in credit itself, a bank-note being merely a circulating token of credit. But the banker also has to do with credit in all its other forms, even when he advances the cash money deposited with him. In fact, a bank-note simply represents the coin of wholesale trade, and it is always the deposit which carries the most weight with banks.” (p 403-4)

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