Capital III, Chapter 30 - Part 10

As Marx points out, a large portion of potential money-capital from businesses had been diverted into speculation in railway shares. That meant businesses had to fund their own activities by resort to credit and loan capital. That was fine so long as the boom conditions meant credit was freely available, and loans could be had at low interest rates. That, of course, changes rapidly as a result of the credit crunch.

But, the “floating capital”, i.e. circulating capital of the firms, when invested in railway shares, has nothing to do with causing a shortage of either gold or bank notes. In fact, when railway shares were bought, the payment for them placed large deposits of cash into the banks, and thereby considerably increased bank capital, and the banks ability to make available loan capital.

To the extent that the railway companies used the influx of funds from share sales to actually invest in productive-capital, the money then circulated within the economy, as it was used to pay for the purchase of materials, construction activity, wages for workers and so on. In other words, the money that was not used as circulating capital in one set of businesses appears as circulating capital in these other businesses.

What effect the speculation in railway shares, by the merchants and manufacturers, did have is that, when the credit crunch occurs, the interest they have to pay on their loans increases substantially, and they are left with their capital tied up in an illiquid form. They find themselves short of liquidity, as credit dries up. The problem is not a shortage of money-capital, but of money.

In order to obtain liquidity, they are forced to discount more bills, at higher rates of interest, and to put up their shares and other securities to try to obtain loans, as well as to sell these securities to obtain liquidity. The consequence is then a financial panic and collapse of the prices of that fictitious capital.

“But there were also other circumstances which bankrupted very rich firms in this line: 

"They had large means, but not available. The whole of their capital was locked up in estates in the Mauritius, or indigo factories, or sugar factories. Having incurred liabilities to the extent of £500,000-600,000, they had no available assets to pay their bills, and eventually it proved that to pay their bills they were entirely dependent upon their credit." (Ch. Turner, big East Indian merchant in Liverpool, No. 730,loc. Cit.)” (p 487)

As was seen previously, in order to obtain liquidity, to fund this speculation, numerous other swindles were undertaken, which involved sending out shipments of goods solely in order to obtain loans against the bills of exchange, which inevitably meant that huge quantities of commodities were being over produced. In Theories of Surplus Value, Marx deals with the arguments put forward, earlier in the century, by Mill and Ricardo, which argued that no general overproduction was possible. They argued, on the basis of Say's Law, that rather the cause was underconsumption by those countries to whom Britain was exporting. Marx relates the same argument here.

“And now, naively expressed, comes the characteristic credo of the English manufacturer: 

"Our commerce with no foreign market is limited by their power to purchase the commodity, but it is limited in this country by our capability of consuming that which we receive in return for our manufactures." 

(The relatively poor countries, with whom England trades, are, of course, able to pay for and consume any amount of English products, but unfortunately wealthy England cannot assimilate the products sent in return.)” (p 487)

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