“In such times of prosperity the reflux passes off smoothly and easily. The retailer securely pays the wholesaler, the wholesaler pays the manufacturer, the manufacturer pays the importer of raw materials, etc. The appearance of rapid and reliable refluxes always keeps up for a longer period after they are over. In reality by virtue of the credit that is under way, since credit refluxes take the place of the real ones. The banks scent danger as soon as their clients deposit more bills of exchange than money.” (p 447)
Marx makes note of a comment he had made in the Contribution To The Critique of Political Economy.
“In periods of predominant credit, the velocity of the circulation of money increases faster than commodity-prices, whereas in times of declining credit commodity-prices drop slower than the velocity of circulation.” (p 448)
The opposite is true in periods of economic contraction. Fewer workers are employed, wages fall etc. so less money is required for the circulation of revenues. But, during such periods, firms reduce the credit they are prepared to give, and demand more in cash payment, so the requirement for money, for the transfer of capital rises relatively.
Marx then examines this in relation to the claim of Fullarton that,
“A demand for capital on loan and a demand for additional circulation are quite distinct things, and not often found associated." (Fullarton, 1. c., p. 82, title of Chapter 5.)” (p 448)
The fact that a capitalist requires more liquidity, during periods of prosperity, does not at all mean that their demand for capital must increase. It is only an increased demand for capital in this particular form.
“What increases is merely his demand for this particular form in which he expends his capital. The demand refers only to the technical form, in which he throws his capital into circulation. Just as in the case of a different development of the credit system, the same variable capital, for example, or the same quantity of wages, requires a greater mass of means of circulation in one country than in another; in England more than in Scotland, for instance, and in Germany more than in England. Likewise in agriculture, the same capital active in the reproduction process requires different quantities of money in different seasons for the performance of its function.” (p 449)
So, for example, where workers are paid by cheque, rather than with cash, there is less need for money to pay the same amount, or even a greater amount in wages. But also, as seen in Capital II, where the prosperity goes along with an increase in the rate of turnover of capital, an amount of money used to advance capital, may reflux at a faster or slower pace, for example, in agriculture depending on the season.
If, as part of the prosperity, the rate of turnover of capital rises, the demand for liquidity may increase, and yet, because the capital turns over more quickly, the demand for capital may fall. On the other hand, the opposite may be true. An increased quantity of fixed capital may be bought on credit. The additional raw materials will also be bought on credit . But, the value transferred from the materials, and wear and tear on fixed capital, will be realised in money, in respect of the sale of the final products.
“But the contrast drawn by Fullarton is not correct. It is by no means the strong demand for loans as he says, which distinguishes the period of depression from that of prosperity, but the ease with which this demand is satisfied in periods of prosperity, and the difficulties which it meets in periods of depression. It is precisely the enormous development of the credit system during a prosperity period, hence also the enormous increase in the demand for loan capital and the readiness with which the supply meets it in such periods, which brings about a shortage of credit during a period of depression. It is not, therefore, the difference in volume of demand for loans which characterises both periods.” (p 450)
In other words, the demand for money-capital may be high, both in times of prosperity and in times of crisis. In times of prosperity, the increased supply of potential money-capital, resulting from the increased mass of profits, makes it easier to meet the demand. The rate of interest falls, encouraging the extension of further credit. This extension of the reproductive process on the back of this credit, means that when the mass of profit ceases to expand, at its former rate, as the general annual rate of profit starts to fall, the supply of potential money-capital falls relative to the demand, which causes interest rates to rise.
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