Capital III, Chapter 30 - Part 13

In Theories of Surplus Value, Marx describes two forms of economic crisis. The first form is that of the crisis of overproduction. As described in the foregoing, a period of high profits creates exuberance, new firms are established, often operating purely on credit,and loan capital. Production is ramped up, and the technical capacity of capital, ever expanding, throws larger and larger volumes of commodities on to the market, irrespective of whether that market can absorb them. Market prices fall below prices of production, and some capital cannot be reproduced. It has been overproduced.

At this point, those firms also default on payments, and given that all firms operate on mutual credit, given to each other, a default in payments by one large firm or by several firms can spread into a general failure of payments. This payments crisis, Marx calls a crisis of the second form. This crisis of the second form can appear first, prior to the crisis of overproduction, but it must always lead back to it. It is always that there was overproduction, but that it was hidden by the provision of credit.

“In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur — a tremendous rush for means of payment — when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis.” (p 490)

At the same time, the development of credit means that other factors exacerbate the situation. For example, a large number of bills of exchange represented pure swindle, to obtain cash. Moreover, there is “unsuccessful speculation with the capital of other people” (p 490), because loanable money-capital allows entrepreneurs to borrow social, money-capital, and use it in ventures they would not engage in with their own money. Moreover, the development of joint stock companies, especially with boards of directors, whose role is only to sit above the day to day professional managers, who are at times drawn closer to the other workers, means that these directors have the ability to control huge sums of capital, which again they are more likely to treat in a more cavalier manner than were it their own.

The private capitalist may have curtailed production if the rate of profit fell below a certain level, thereby preventing a crisis of overproduction occurring, but the shareholder is removed from such operational control, reduced to being merely a provider of money-capital, paid a small amount of interest, as dividends. Any fall in the rate of profit is compensated by the greater mass of profit, created on the huge mass of capital employed, whilst the directors and managers continue to draw their salaries anyway. So, production is always pushed to the limit and beyond, at which point the overproduction leads to masses of commodities that are either unsaleable, and have to be destroyed, or else can only be sold at massively reduced prices.

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