Friday, 23 December 2016

Capital III, Engels Supplement - Part 12

The Stock Exchange 

The second part of Engels' Supplement is an abbreviated analysis of the development of the Stock Exchange, whose growth and importance rose significantly in the period after that covered by Marx in his manuscripts.

The foundation of that development was outlined by Marx in Capital, in the analysis of the concentration and centralisation of capital, and the expansion of credit. These developments, as Marx outlines in Capital I, where he first refers to the expropriation of the expropriators, and in Capital III, where he details the process of this expropriation of the big private capitals by socialised capital, in the form of the joint stock companies, and the worker co-operatives, goes along with corresponding social changes, and creates the economic and social forms required for a transition to socialism.

As Engels outlines, these material conditions that Marx sets out in Capital, create the necessity for the development of this socialised capital, because the individual private ownership of capital begins to form a fetter on its further accumulation. On the one hand, rising masses of profit are realised in money form by individual capitalists, that are too large to be directly reinvested in their own company. On the other hand, they are not large enough to finance the capital required by many of the new large industries, which could only be financed by a pooling together of this money-capital. Hence the provision of this capital had to be socialised, just as the production process had itself been socialised, and turned into a collective and co-operative effort.

“Since the crisis of 1866 accumulation has proceeded with ever-increasing rapidity, so that in no industrial country, least of all in England, could the expansion of production keep up with that of accumulation, or the accumulation of the individual capitalist be completely utilised in the enlargement of his own business; English cotton industry as early as 1845; the railway swindles. But with this accumulation the number of rentiers, people who were fed up with the regular tension in business and therefore wanted merely to amuse themselves or to follow a mild pursuit as directors or governors of companies, also rose. And third, in order to facilitate the investment of this mass floating around as money-capital, new legal forms of limited liability companies were established wherever that had not yet been done, and the liability of the shareholder, formerly unlimited, was also reduced ± [more or less] (joint-stock companies in Germany, 1890. Subscription 40 per cent!).” (p 908-9)

If the material conditions previously described by Marx established the process whereby this expansion of socialised capital was necessary, this latter point made by Engels about the development of limited liability, facilitated its accomplishment. Joint stock companies had, in fact, existed for a couple of centuries. The Bazacle Milling Company, of Toulouse, is reported to have issued 96 shares, around 1250, but, in more recent times, the first joint stock company in England is The Company of Merchant Adventurers to New Lands, which had 250 shareholders in 1553. However, as Engels states, these companies remained fairly insignificant for a long period, as capital remained a monopoly in the hands of private capitalists and their families.

“In 1865 the stock exchange was still a secondary element in the capitalist system. Government bonds represented the bulk of exchange securities, and even their sum-total was still relatively small. Besides, there were joint-stock banks, predominant on the continent and in America, and just beginning to absorb the aristocratic private banks in England, but still relatively insignificant en masse. Railway shares were still comparatively weak compared to the present time. There were still only few directly productive establishments in stock company form — and, like the banks, most of all in the poorer countries: Germany, Austria, America, etc. The "minister’s eye" was still an unconquered superstition.” (p 908)

What creates the condition for its expansion is the development of limited liability. That arose with the passing of the Limited Liability Act in 1855. Prior to limited liability, there was an obvious obstacle to the expansion of the joint stock company. On the one hand, the shareholders, the lenders of money-capital, provided this capital without any day to day management themselves over the way it was used. As Marx points out, this means that those taking the decisions of what to do with other people's money do so in a different context than does the individual private capitalist, who was concerned to try to not take decisions that would diminish their capital.

On the other hand, the owner of the shares in these companies had effectively written a blank cheque to the company, because however much money it owed, if it went bust, was the shared liability of all its shareholders. Obviously few investors were going to be happy about writing a blank cheque to be given to company managers to spend, over whom they had no effective day to day control, and for potential losses that grew larger and larger by the day, as the scale of capitalist production grew.

That problem was overcome by the introduction of limited liability, which restricted the financial liability of each shareholder to only the money they had initially paid to buy their share. This meant that they still did not have direct day to day control over the professional managers, but the use of additional tiers of directors over those managers was intended to deal with that problem. In law, 

"A company is an entity distinct alike from its shareholders and its directors.” (Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 by Greer LJ.

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