Suppose the bank makes a loan to A against securities put up by them. A needs the money to pay B, who holds a bill of exchange, for goods supplied to A. Having been paid, B then deposits these notes with the bank. Instead of A owing B, A is now in debt to the bank. The notes issued by the bank have returned to it, so the circulation has not increased. But, the bank is now also in debt to B, because B has deposited the notes with the bank, which now form part of the bank's liabilities, “... and B thus disposes of a corresponding portion of the capital of the bank.” (p 454)
A second way that notes return is if B owes the bank, and A pays B, who uses these notes to repay their debt to the bank. In that case, the bank has had its debt repaid with its own notes. B no longer owes the bank, but now A owes the bank.
This brings us back to the question, considered previously, of to what extent the bank's advance to A is an advance of capital or simply currency. Engels says that Marx’s comments, in this passage, were unintelligible, and so he provides a repetition of the distinction between the two, set out earlier.
If no security is provided, A receives an advance of capital, in money form. If A provides securities, such as government bonds, share certificates etc., he has exchanged capital in one illiquid form, for capital in a liquid form, so no advance of capital has occurred, only an advance of money. The reason they obtain a loan against this security, rather than selling the security, might be because selling the security, at the present time, might be considered disadvantageous. For example, if you expect the price of the shares to rise sharply, you wouldn't want to sell them. It would be worth paying interest on the borrowed money instead.
In fact, as set out in Capital II, shares, bonds etc. are not really capital, but only fictitious capital. They give a claim to a share of future surplus value. But, the owner of the shares handed over value for their purchases, and the bank takes them as collateral, on the basis of this value.
If A has the bank discount a bill, it is neither an advance of capital or currency, but a straightforward sale or exchange. The bank takes ownership of the bill and pays A a certain amount of money for it.
Where a private bank issues notes, these may circulate as currency in the local area, or may return to the bank as deposits. But, they may return to the bank in the hands of persons who require their conversion into gold or Bank of England bank notes. In that case, the bank must transfer a portion of its own capital.
The assets held by the bank, as security, for the loans it provides, thereby form part of the bank capital, for example, where a bank makes a loan for the purchase of a house, until such time as the loan is repaid.
But, where the bank needs itself to make payments, it requires money to do so, which may require the sale of these assets. If the assets held by the bank are insufficient, then the bank will be seen to have inadequate capital. It will be insolvent.
This is the situation that arose in 2007, when the credit crunch began, and which resulted in the financial crisis of 2008. In fact, the insolvency of the banks has not been resolved, but the injection of huge amounts of liquidity has enabled the inflated prices of shares, bonds and property to be temporarily maintained, and therefore, the illusion to be perpetuated that the banks have adequate capital.
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