Capital III, Chapter 29 - Part 11

In a precursor to the development of the wide range of derivatives that exist today, Marx refers to the way credit and interest-bearing capital leads to a situation where capital seems to double and treble itself. For example, today a mortgage is issued against the security of a house. The loan acts as interest-bearing capital. But, the mortgage itself is then packaged into a bundle and sold as a mortgage backed security. The MBS then appears to be the interest bearing capital, and the mortgage not the house is then the security.

Marx details the beginnings of what today are mutual funds, unit trusts, and investment trusts, in which a large number of small amounts can be amalgamated into a large fund, which can then be invested across a range of shares to avoid large losses from any one share.

Marx quotes Adam Smith, who describes how, just as the same piece of money can be used to perform several purchases, so it can be used to make several loans. If A lends £1,000 to W, who uses it to buy £1,000 of commodities from B, B may then use this £1,000 received to lend to X, who then buys £1,000 of goods from C, who then lends this £1,000 to Y.

The same £1,000 has sufficed to make three loans totalling £3,000, as well as to enable £3,000 of commodities to be bought. Yet, assuming the basis of the loans was sound, they could all be repaid. Although, it may not seem it, this is different than had A simply lent £1,000 to B, who then lends it to C. In that case, the same capital would simply have transferred hands. But, in fact, three separate capitals have been lent in the previous example, using the same £1,000. That is as a result of these separate capitals circulating three separate commodity-capitals.

“The number of capitals which it actually represents depends on the number of times that it functions as the value-form of various commodity-capitals.” (p 472)

Marx then quotes from “The Currency Theory Reviewed”, to demonstrate how this can lead to a given amount of deposits being expanded into a much greater quantity, what today is called the credit multiplier.

“"It is unquestionably true that the £1,000 which you deposit at A today may be reissued tomorrow, and form a deposit at B. The day after that, reissued from B, it may form a deposit at C... and so on to infinitude; and that the same £1,000 in money may, thus, by a succession of transfers, multiply itself into a sum of deposits absolutely indefinite. It is possible, therefore, that nine-tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers who are respectively accountable for them.... Thus in Scotland, for instance, currency has never exceeded £3 million, the deposits in the banks are estimated at £27 million. Unless a run on the banks be made, the same £1,000 would, if sent back upon its travels, cancel with the same facility a sum equally indefinite. As the same £1,000, with which you cancel your debt to a tradesman today, may cancel his debt to the merchant tomorrow, the merchant's debt to the bank the day following, and so on without end; so the same £1,000 may pass from hand to hand, and bank to bank, and cancel any conceivable sum of deposits." (The Currency Theory Reviewed, pp. 62-63.)” (p 472)

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