Recovering B offers no difficulties at all. For the merchant it is simply
 the realised purchase price, and the price of production for the manufacturer.
 It is the price paid by the merchant, and in reselling he recovers B as part of
 his selling price; in addition to this B, he makes a profit on B, as previously
 explained. For example, let the commodity cost £100. Suppose the profit is 10%.
 In that case, the commodity is sold at 110. The commodity previously cost 100,
 and the merchant's capital of 100 merely adds 10 to it.
Now if we look at K, it is at most as large as, but in fact smaller than,
 the portion of constant capital which the producer would use up in buying and
 selling, but then it would form an addition to the constant capital he requires
 directly in production. This portion, nonetheless, must be continually
 recovered in the price of the commodity, or, what amounts to the same, a
 corresponding portion of the commodity must be continually expended in this
 form, or, from the standpoint of the total capital of society, must be
 continually reproduced in this form. This portion of the advanced constant
 capital would have a limiting effect on the rate of profit, just as the entire
 mass of it directly invested in production. In so far as the industrial
 capitalist leaves the commercial part of his business to the merchant, he need
 not advance this part of the capital. The merchant advances it in his stead. In
 a way, he does this but nominally, since a merchant neither produces, nor
 reproduces, the constant capital consumed by him (the actual handling costs).
 Its production appears a separate business, or at least a part of the business,
 of some industrial capitalists who thus play a role similar to those who supply
 constant capital to producers of necessities of life. First, therefore, the
 merchant has this constant capital recovered for him and, secondly, receives
 his profit on it. Through both of these, therefore, the industrial capitalist's
 profit is reduced. But owing to economising and concentration which are bound
 up with division of labour, it shrinks less than it would if he himself had to
 advance this capital. The reduction in the rate of profit is less, because the
 capital thus advanced is less.
So far, then, the selling price is made up of B + K + the profit on B + K.
 This portion of it offers no further difficulties. But now b, the variable
 capital advanced by the merchant, enters into it.
The resultant selling price is B + K + b + the profit on B + K + the profit
 on b.
B merely recovers the purchase price and adds nothing to it but the profit
 on B. K adds the profit on K, and K itself; but K + the profit on K, the part
 of the circulation costs advanced in the form of constant capital + the
 corresponding average profit, would be larger in the hands of the industrial
 capitalist than in the merchant's. The shrinking of the average profit appears
 in the form of the full average profit calculated after deducting B + K from
 the advanced industrial capital, with the deduction from the average profit on
 B + K paid to the merchant, so that this deduction appears as the profit of a
 specific capital, merchant's capital.
But the situation is different with respect to b + the profit on b, or, in
 the present case, where the rate of profit is assumed = 10%, with b + 1/10 b.
 And the real difficulty lies here.
What the merchant buys with b is, according to our assumption, nothing but
 commercial labour, hence labour required to perform the functions of
 circulating capital, C — M and M — C. But commercial labour is the
 labour generally necessary for a capital to operate as merchant's capital, to
 help convert commodities into money and money into commodities. It is labour
 which realises, but does not create, values. And only in so far as a capital
 performs these functions — hence a capitalist performs these operations,
 or this work with his capital — does it serve as merchant's capital and
 participate in regulating the general rate of profit, i.e., draw its
 dividends out of the total profit. But (b + the profit on b) appears to
 include, first, payment for labour (for it makes no difference whether the
 industrial capitalist pays the merchant for his own labour, or the labour of
 the clerks paid by the merchant), and, secondly, the profit on the payment for
 this labour, which the merchant would have to perform in person. First,
 merchant's capital gets its b refunded, and, secondly, he makes the profit on
 it. This arises from the fact, therefore, that, first, it requires payment for
 the work whereby it operates as merchant's capital, and that,
 secondly, it demands the profit, because it operates as capital, i.e.,
 because it performs work for which profit is paid to it as functioning capital.
 This is, therefore, the question to be solved.
Let us assume that B = 100, b = 10, and the rate of profit = 10%. We take it
 that K = 0, in order to leave out of consideration this element of the purchase
 price, which does not belong here and has already been accounted for. Hence,
 the selling price would = B + p + b + p (= B + Bp' + b + bp'; where p' stands
 for the rate of profit) = 100 + 10 + 10 + 1 = 121.
But if b were not invested by the merchant in wages — since b is paid
 only for commercial labour, hence labour required, to realise the value of the
 commodity — capital thrown on the market by industrial capital —
 the matter would stand as follows: to buy or sell for B = 100, the merchant
 would devote his time, and we wish to assume that this is the only time at his
 disposal. The commercial labour represented by b, or 10, if paid for by profit
 instead of wages, would presuppose another merchant's capital = 100, since at
 10% this makes b = 10. This second B = 100 would not additionally go into the
 price of commodities, but the 10% would. There would, hence, be two operations
 at 100 = 200, that would buy commodities at 200 + 20 = 220.
Since merchant's capital is absolutely nothing but an individualised form of
 a portion of industrial capital engaged in the process of circulation, all
 questions referring to it must be solved by representing the problem primarily
 in a form; in which the phenomena peculiar to merchant's capital do not yet
 appear independently, but still in direct connection with industrial capital,
 as a branch of it. As an office, distinct from a workshop, mercantile capital
 operates continually in the circulation process. It is here — in the
 office of the industrial capitalist himself — that we must first analyse
 the b now under consideration.
There is duplication, therefore. On the one hand, the functions as
 commodity-capital and money-capital (hence further designated as merchant's
 capital) are general definite forms assumed by industrial capital. On the other
 hand, specific capitals, and therefore specific groups of capitalists, are
 exclusively devoted to these functions; and these functions thus develop into
 specific spheres of self-expansion of capital.
In the case of mercantile capital, the commercial functions and circulation
 costs are found only in individualised form. That side of industrial capital
 which is devoted to circulation, continuously exists not only in the shape of
 commodity-capital and money-capital, but also in the office alongside the
 workshop. But it becomes independent in the case of mercantile capital. In the
 latter's case, the office is its only workshop. The portion of capital employed
 in the form of circulation costs appears much larger in the case of the big
 merchant than in that of the industrialist, because besides their own offices
 connected with every industrial workshop, that part of capital which would have
 to be so applied by the entire class of industrial capitalists is concentrated
 in the hands of a few merchants, who in carrying out the functions of
 circulation also provide for the growing expenses incidental to their
 continuation.
To industrial capital the costs of circulation appear as unproductive
 expenses, and so they are. To the merchant they appear as a source of his
 profit, proportional, given the general rate of profit, to their size. The
 outlay to be made for these circulation costs is, therefore, a productive
 investment for mercantile capital. And for this reason, the commercial labour
 which it buys is likewise immediately productive for it.
If, for example, a certain merchant's capital is £100, and for these £100 the merchant buys commodities and sells them for £110, then his capital of £100 has completed one turnover, and the number of such turnovers per year depends on the number of times this movement M — C — M' is repeated.
We here leave entirely out of consideration the costs which may be concealed in the difference between the purchase price and the selling price, since these do not alter in any way the form, which we are now analysing.
The number of turnovers of a given merchant's capital, therefore, is analogous in this case to the repeated cycles of money as a mere medium of circulation. Just as the same thaler buys ten times its value in commodities in making ten cycles, so the same money-capital of the merchant, when turned over ten times, buys ten times its value in commodities, or realises a total commodity-capital of ten times its value; a merchant's capital of 100, for instance, a ten-fold value = 1,000. But there is this difference: In the cycle of money as a medium of circulation it is the same piece of money that passes through different hands, thus repeatedly performing the same function and hence making up for the mass of the circulating pieces of money by its velocity. But in the merchant's case it is the same money capital, the same money-value, regardless of what pieces of money it may be composed, which repeatedly buys and sells commodity-capital to the amount of its value and which therefore returns to the same hands, the same point of departure as M + DM, i.e., value plus surplus-value. This characterises its turnover as a capital turnover. It always withdraws more money from circulation than it throws in. It is self-evident, at any rate, that an accelerated turnover of merchant's capital (given a developed credit system, the function of money as a means of payment predominates) implies a more rapid circulation of the same quantity of money.
A repeated turnover of commercial capital, however, never connotes more than repeated buying and selling; while a repeated turnover of industrial capital connotes the periodicity and renovation of the entire reproduction process (which includes the process of consumption). For merchant's capital this appears merely as an external condition. Industrial capital must continually bring commodities to the market and withdraw them from it, in order that rapid turnover of merchant's capital may remain possible. If the process of reproduction is slow, then so is the turnover of merchant's capital. True, merchant's capital promotes the turnover of productive capital, but only in so far as it shortens its time of circulation. It has no direct influence on the time of production, which is also a barrier to the period of turnover of industrial capital. This is the first barrier for the turnover of merchant's capital. Secondly, aside from the barrier formed by reproductive consumption, the turnover of merchant's capital is ultimately limited by the velocity and volume of the total individual consumption, since all the commodity-capital which is part of the consumption-fund depends on it.
However (aside from the turnovers in the world of commerce, in which one merchant always sells the same commodity to another, and this sort of circulation may appear highly prosperous in times of speculation), the merchant's capital, in the first place, curtails phase C — M for productive capital. Secondly, under the modern credit system it disposes of a large portion of the total social money-capital, so that it can repeat its purchases even before it has definitely sold what has previously been purchased. And it is immaterial in this case, whether our merchant sells directly to the ultimate consumer, or there are a dozen other intermediate merchants between them. Owing to the immense elasticity of the reproduction process, which may always be pushed beyond any given bounds, it does not encounter any obstacle in production itself, or at best a very elastic one. Aside from the separation of C — M and M — C, which follows from the nature of the commodities, a fictitious demand is then created. In spite of its independent status, the movement of merchant's capital is never more than the movement of industrial capital within the sphere of circulation. But by virtue of its independent status it moves, within certain limits, independently of the bounds of the reproduction process and thereby even drives the latter beyond its bounds. This internal dependence and external independence push merchant's capital to a point where the internal connection is violently restored through a crisis.
Hence the phenomenon that crises do not come to the surface, do not break out, in the retail business first, which deals with direct consumption, but in the spheres of wholesale trade, and of banking, which places the money-capital of society at the disposal of the former.
The manufacturer may actually sell to the exporter, and the exporter, in his turn, to his foreign customer; the importer may sell his raw materials to the manufacturer, and the latter may sell his products to the wholesale merchant, etc. But at some particular imperceptible point the goods lie unsold, or else, again, all producers and middlemen may gradually become overstocked. Consumption is then generally at its highest, either because one industrial capitalist sets a succession of others in motion; or because the labourers employed by them are fully employed and have more to spend than usual. The capitalists' expenditures increase together with their growing income. Besides, as we have seen (Book II, Part III), continuous circulation takes place between constant capital and constant capital (even regardless of accelerated accumulation). It is at first independent of individual consumption because it never enters the latter. But this consumption definitely limits it nevertheless, since constant capital is never produced for its own sake but solely because more of it is needed in spheres of production whose products go into individual consumption. However, this may go on undisturbed for some time, stimulated by prospective demand, and in such branches, therefore, the business of merchants and industrialists goes briskly forth. The crisis occurs when the returns of merchants who sell in distant markets (or whose supplies have also accumulated on the home market) become so slow and meagre that the banks press for payment, or promissory notes for purchased commodities become due before the latter have been resold. Then forced sales take place, sales in order to meet payments. Then comes the crash, which brings the illusory prosperity to an abrupt end.
But the superficiality and meaninglessness of the turnover of merchant's capital are still greater, because the turnover of one and the same merchant's capital may simultaneously or successively promote the turnovers of several productive capitals.
The turnover of merchant's capital does not just promote the turnovers of several industrial capitals, it can also expedite the opposite phases of the metamorphosis of commodity-capital. For instance, the merchant buys linen from the manufacturer and sells it to the bleacher. In this case, therefore the turnover of the same merchant's capital — in fact, the same C — M, a realisation of the linen — represents two opposite phases for two different industrial capitals. Inasmuch as the merchant sells for productive consumption, his C — M is always M — C for one industrial capitalist, and his M — C always C — M for another industrial capitalist.
If we leave out K, the circulation costs, as we do in this chapter, if, in other words, we leave aside that portion of capital which the merchant advances along with the money required to purchase commodities, it follows that we also omit DK, the additional profit made on this additional capital. This is thus the strictly logical and mathematically correct mode of analysis if we want to see how profit and turnover of merchant's capital affect prices.
The following circumstances, among others, help to maintain that popular prejudice, which, like all false conceptions of profit, etc., arises from the observation of pure commerce and merchants' prejudice:
First: phenomena of competition, which, however, apply merely to the distribution of mercantile profit among individual merchants, the shareholders of the total merchant's capital; if one, for example, sells cheaper, in order to drive his competitors off the field.
Secondly: an economist of the calibre of Professor Roscher may still imagine in Leipzig that it was "common sense and humanitarian" [Roscher, Die Grundlagen der Nationalökonomie, 3. Auflage, 1858, S. 192. — Ed.] grounds, which produced the change in selling prices, and that it was not a result of a revolutionised mode of production.
Thirdly: if production prices fall due to greater productivity of labour, and selling prices fall for the same reason, the demand, and with it the market-prices, often rise even faster than the supply, so that selling prices yield more than the average profit.
Fourthly: a merchant may reduce his selling price (which is never more than a reduction of the usual profit that he adds to the price) so as to turn over a larger capital more rapidly. All these are matters that only concern competition between the merchants themselves.
We have already shown in Book I [English edition: Vol. 1, pp. 519-20. — Ed]. that high or low commodity-prices do not determine either the mass of surplus-value produced by a given capital, or the rate of surplus-value; although the price of a commodity, and with it the share of surplus-value in this price, are greater or smaller, depending on the relative quantity of commodities produced by a given quantity of labour. The prices of every specified quantity of a commodity are, so far as they correspond to the values, determined by the total quantity of labour incorporated in this commodity. If little labour is incorporated in much commodity, the unit price of the commodity is low and the surplus-value in it is small. How this labour incorporated in a commodity breaks up into paid and unpaid labour and what portion of its price, therefore, represents surplus-value, has nothing to do with this total quantity of labour, nor, consequently, with the price of the commodity. But the rate of surplus-value does not depend on the absolute magnitude of the surplus-value contained in the unit price of the commodity. It depends on its relative magnitude, its proportion to the wages contained in the same commodity. The rate of surplus-value may therefore be large, while the absolute magnitude of surplus-value in each unit of the commodity is small. This absolute magnitude of surplus-value in each piece of the commodity depends primarily on the productivity of labour, and only secondarily on its division into paid and unpaid labour.
Now, in the case of the commercial selling price, the price of production is a given external precondition.
The high commercial commodity-prices in former times were due 1) to the high prices of production, i.e., the unproductiveness of labour; 2) to the absence of a general rate of profit, with merchant's capital absorbing a much larger quota of surplus-value than would have fallen to its share if capitals enjoyed greater general mobility. The ending of this situation, in both its aspects, is therefore the result of the development of the capitalist mode of production.
The turnovers of merchant's capital vary in duration, their annual number consequently being greater or smaller, in different branches of commerce. Within the same branch the turnover is more or less rapid in the different phases of the economic cycle. Yet there is an average number of turnovers, determined by experience.
We have already seen that the turnover of merchant's capital differs from that of industrial capital. This is in the nature of things. One single phase in the turnover of industrial capital appears as a complete turnover of an independently constituted merchant's capital, or yet of its part. It also stands in a different relation to profit and price determination.
In the case of industrial capital, its turnover expresses, on the one hand, the periodicity of reproduction, and, therefore, the mass of commodities thrown on the market in a certain period depends on it. On the other hand, its time of circulation creates a barrier, an extensible one, and exerts more or less of a restraint on the creation of value and surplus-value, because it affects the volume of the production process. The turnover, therefore, acts as a determining element on the mass of annually produced surplus-value, and hence on the formation of the general rate of profit, but it acts as a limiting, rather than positive, element. For merchant's capital, on the contrary, the average rate of profit is a given magnitude. The merchant's capital does not directly participate in creating profit or surplus-value, and joins in shaping the general rate of profit only in so far as it draws a dividend proportionate to its share in the total capital, out of the mass of profit produced by industrial capital.
1) absolutely smaller, because a disproportionately smaller part of the total product was produced as commodities, and passed as commodity-capital into circulation, falling into the hands of merchants. It was smaller, because the commodity-capital was smaller. But at the same time it was proportionately larger, not only because its turnover was slower and not only in relation to the mass of commodities turned over by it. It was larger also because the price of this mass of commodities, and hence the merchant's capital to be advanced for it, were greater than under capitalist production on account of a lower productivity of labour, so that the same value was incorporated in a smaller mass of commodities.
2) It is not only that a larger mass of commodities is produced on the basis of capitalist production (taking into account also the reduced value of this mass of commodities), but the same mass of products, for instance, of corn, also forms a greater commodity mass, i.e., more and more of it becomes an object of commerce. As a consequence, there is an increase not only of the mass of merchant's capital, but of all capital applied in circulation, such as in marine shipping, railways, telegraph, etc.
3) However, and this is an aspect which belongs to the discussion of "competition among capitals": idle or only half-functioning merchant's capital grows with the progress of the capitalist mode of production, with the ease of entering retail trade, with speculation, and the redundance of released capital.
But, assuming the relative magnitude of merchant's capital to total capital to be given, the difference of turnovers in the various branches of commerce does not affect either the magnitude of the total profit falling to the share of merchant's capital, or the general rate of profit. The merchant's profit is not determined by the mass of commodity-capital turned over by him, but by the dimensions of the money-capital advanced by him to promote this turnover. If the general annual rate of profit is 15%, and the merchant advances £100, which he turns over once a year, he will sell his commodities at 115. If his capital turns over five times a year, he will sell a commodity-capital he bought at 100 at 103 five times a year, hence in a year a commodity-capital of 500 at 515. This gives the same annual profit of 15 on his advanced capital of 100. If this were not so, merchant's capital would yield a much higher profit, proportionate to the number of its turnovers, than industrial capital, which would be in conflict with the law of the general rate of profit.
Hence, the number of turnovers of merchant's capital in the various branches of commerce has a direct influence on the mercantile prices of commodities. The amount added to the mercantile price, the aliquot part of mercantile profit of a given capital, which falls upon the price of production of a commodity, is in inverse proportion to the number of turnovers, or the velocity of turnover, of merchants' capitals in the various lines of commerce. If a certain merchant's capital is turned over five times a year, it will add to a commodity-capital of equal value but 1/5 of what another merchant's capital, which turns over just once a year, adds to a commodity-capital of equal value.
The modification of selling prices by the average period of turnover of capitals in different branches of commerce amounts to this: The same mass of profits, determined for any given magnitude of merchant's capital by the general annual rate of profit, hence determined independently of the specific character of the commercial operations of this capital, is differently distributed — proportionately to the rate of turnover — over masses of commodities of equal value, so that, for instance, if a merchant's capital is turned over five times a year, 15/5 = 3% if once a year, 15%, is added to the price of the commodities.
The same percentage of commercial profit in different branches of commerce, therefore, increases the selling prices of commodities by quite different percentages of their values, all depending on their periods of turnover.
On the other hand, in the case of industrial capital, the period of turnover does not in any way affect the magnitude of the value of individual commodities produced, although it does affect the mass of values and surplus-values produced in a given time by a given capital, because it affects the mass of exploited labour. This is concealed, to be sure, and seems to be otherwise as soon as one turns to prices of production. But this is due solely to the fact that, according to previously analysed laws, the prices of production of various commodities deviate from their values. If we look upon the process of production as a whole, and upon the mass of commodities produced by the total industrial capital, we shall at once find the general law vindicated.
While, therefore, a closer inspection of the influence of the period of turnover on the formation of values by industrial capital leads us back to the general law and to the basis of political economy, that the values of commodities are determined by the labour-time contained in them, the influence of the turnovers of merchant's capital on mercantile prices reveals phenomena which, without benefit of a very far-reaching analysis of the connecting links, seem to point to a purely arbitrary determination of prices; namely, that they are fixed by a capital simply bent upon pocketing a certain quantity of profit in a year. Due particularly to this influence of turnovers, it appears that within certain limits the process of circulation as such determines commodity-prices independently of the process of production. All superficial and false conceptions of the process of reproduction as a whole are derived from examinations of merchant's capital and from the conceptions which its peculiar movements call forth in the minds of circulation agents.
If, as the reader will have realised to his great dismay, the analysis of the actual intrinsic relations of the capitalist process of production is a very complicated matter and very extensive; if it is a work of science to resolve the visible, merely external movement into the true intrinsic movement, it is self-evident that conceptions which arise about the laws of production in the minds of agents of capitalist production and circulation will diverge drastically from these real laws and will merely be the conscious expression of the visible movements. The conceptions of the merchant, stockbroker, and banker, are necessarily quite distorted. Those of the manufacturers are vitiated by the acts of circulation to which their capital is subject, and by the levelling of the general rate of profit. [2] Competition likewise assumes a completely distorted role in their minds. If the limits of value and surplus-value are given, it is easy to grasp how competition of capitals transforms values into prices of production and further into mercantile prices, and surplus-value into average profit. But without these limits, it is absolutely unintelligible why competition should reduce the general rate of profit to one level instead of another, e.g., make it 15% instead of 1,500%. Competition can at best only reduce the general rate of profit to one level. But it contains no element by which it could determine this level itself.
From the standpoint of merchant's capital, therefore, it is the turnover which appears to determine prices. On the other hand, while the rate of turnover of industrial capital, in so far as it enables a certain capital to exploit more or less labour, exerts a determining and limiting influence on the mass of profit, and thus on the general rate of profit, this rate of profit obtains for merchant's capital as an external fact, its internal connection with the production of surplus-value being entirely obliterated. If, under otherwise equal circumstances and particularly the same organic composition, the same industrial capital is turned over four times a year instead of twice, it produces twice as much surplus-value and, consequently, profit. And this is apparent as soon, and as long, as this capital has a monopoly on an improved method of production, which makes this accelerated turnover possible. Conversely, differences in the periods of turnover in different branches of commerce manifest themselves in the fact that profit made on the turnover of a given commodity-capital is in inverse proportion to the number of times the money-capital turns over this commodity-capital. Small profits and quick returns appear to the shopkeeper to be the principle which he follows out of sheer principle.
For the rest, it is self-evident that regardless of alternating, mutually compensating, speedier and slower turnovers, this law of turnover of merchant's capital holds good in each branch of commerce only for the average turnovers made by the entire merchant's capital invested in each particular branch. The capital of A, who deals in the same branch as B, may make more or less than the average number of turnovers. In this case the others make less or more. This does not alter the turnover of the total mass of merchant's capital invested in this line. But it is of decisive moment for the individual merchant or shopkeeper. In this case he makes an extra profit, just as industrial capitalists make extra profits if they produce under better than average conditions. If competition compels him, he can sell cheaper than his competitors without lowering his profit below the average. If the conditions which would enable him to turn over his capital more rapidly, are themselves for sale, such as a favourable shop location, he can pay extra rent for it, i.e., convert a portion of his surplus-profit into ground-rent.
The purely technical movements performed by money in the circulation process of industrial, and, as we may now add, of commercial capital (since it takes over a part of the circulation movement of industrial capital as its own, peculiar movement), if individualised as a function of some particular capital performing just these, and only these, operations as its specific operations, convert this capital into money-dealing capital. A portion of industrial capital, and, more precisely, also of commercial capital, not only obtains all the time in the form of money, as money-capital in general, but as money-capital engaged precisely in these technical functions. A definite part of the total capital dissociates itself from the rest and stands apart in the form of money-capital, whose capitalist function consists exclusively in performing these operations for the entire class of industrial and commercial capitalists. As in the case of commercial capital, a portion of industrial capital engaged in the circulation process in the form of money-capital separates from the rest and performs these operations of the reproduction process for all the other capital. The movements of this money-capital are, therefore, once more merely movements of an individualised part of industrial capital engaged in the reproduction process.
It is only when, and in so far as, capital is newly invested — which also applies to accumulation — that capital in money-form appears as the starting-point and the end result of the movement. But for all capitals already engaged in the process, these first and last points appear merely as points of transit. Since, as already seen in the case of simple commodity-circulation, from the moment of leaving the sphere of production to the moment of its re-entry industrial capital undergoes the metamorphosis C' — M — C, M in fact represents the end result of one phase of the metamorphosis, just to become the starting-point of the reverse phase, which supplements it. And although the C — M of industrial capital is always M — C — M for merchant's capital, the actual process for the latter is continually also C — M — C once it has begun to function. But it performs the acts C — M and M — C simultaneously. This is to say that there is not just one capital in the stage C — M while another is in the stage M — C, but that the same capital buys continually and sells continually at one and the same time because of the continuity of the production process. It is to be found always in both stages at one and the same time. While one of its parts turns into money, later to be reconverted into commodities, another turns simultaneously into commodities, to be reconverted into money.
It all depends on the form of the commodity exchange whether the money serves here as a means of circulation or of payment. In both cases the capitalist has to pay out money constantly to many persons, and to receive money continually from many persons. This purely technical operation of disbursing and receiving money is in itself labour which, as long as the money serves as a means of payment, necessitates drawing up payment balances and acts of balancing accounts. This labour is a cost of circulation, i.e., not labour creating value. It is shortened in being carried out by a special section of agents, or capitalists, for the rest of the capitalist class.
A definite portion of the capital must be on hand constantly as a hoard, as potential money-capital — a reserve of means of purchase, a reserve of means of payment, and idle capital in the form of money waiting to be put to work. Another portion streams back continually in this form. Aside from collecting, paying, and book-keeping, this entails safekeeping the hoard, which is an operation all in itself. It is, indeed, a continuous conversion of the hoard into means of circulation and means of payment, and its restoration by means of money secured through sales and from payments due. This constant movement of the part of capital existing as money, dissociated from the function of capital itself, this purely technical function, causes its own labour and expense, classified as costs of circulation.
The division of labour brings it about that these technical operations, dependent upon the functions of capital, should be performed for the entire capitalist class as much as possible by a special section of agents or capitalists as their exclusive function — or that these operations should be concentrated in their hands. We have here, as in merchant's capital, division of labour in a two-fold sense. It becomes a specialised business, and because performed as a specialised business for the money-mechanism of the whole class, it is concentrated and conducted on a large scale. A further division of labour takes place within it, both through division into various independent branches, and through segmentation of work within these branches (large offices, numerous book-keepers and cashiers, and far-reaching division of labour). Paying and receiving money, settling accounts, keeping current accounts, storing money, etc. — all this, dissociated from the acts necessitating these technical operations, makes money-dealing capital of the capital advanced for these functions.
The various operations, whose individualisation into specific businesses gives rise to the money trade, spring from the different purposes of money itself and from its functions, which capital in its money-form must therefore likewise carry out.
I have pointed out earlier that finance developed originally from the exchange of products between different communities. [1]
Trading in money, commerce in the money-commodity, first developed therefore out of international commerce. Ever since different national coins have existed merchants buying in foreign countries have had to exchange their national coins for local coins, and vice versa, or to exchange different coins for uncoined pure silver or gold — the world-money. Hence the exchange business which is to be regarded as one of the natural foundations of modern finance.[2] Out of it developed banks of exchange, in which silver (or gold) serves as world-money — now called bank money or commercial money — as distinct from currency. Exchange transactions, in the sense of mere notes of payment to travellers from a money-changer in one country to a changer in another country, developed back in Rome and Greece out of the actual money-changing.
Trading in gold and silver as commodities (raw materials for the making of luxury articles) is the natural basis of the bullion trade, or the trade which acts as a medium for the functions of money as universal money. These functions, as previously explained (Buch I, Kap. III, 3, c [ English edition: Ch. III, 3, c. — Ed.]), are two-fold: currency movement back and forth between the various national spheres of circulation in order to balance international payments and in connection with the migrations of capital in quest of interest; simultaneously, flow of precious metals from their sources of production via the world-market and their distribution among the various national spheres of circulation. Goldsmiths acted as bankers still during the greater part of the 17th century in England. We shall completely disregard the way in which the balancing of international accounts developed further in the bill jobbing, etc., and everything referring to transactions in valuable papers; in short, we shall leave out of consideration all special forms of the credit system, which do not as yet concern us here.
National money discards its local character in the capacity of universal money; one national currency is expressed in another, and thus all of them are finally reduced to their content of gold or silver, while the latter, being the two commodities circulating as world-money, are simultaneously reduced to their reciprocal value-ratio, which changes continually. It is this intermediate operation which the money trader makes his special occupation. Money-changing and the bullion trade are thus the original forms of the money trade, and spring from the two-fold functions of money — as national money and world-money.
The capitalist process of production, just as commerce in general, even under pre-capitalist methods, imply:
First, the accumulation of money as a hoard, i.e., here as that part of capital which must always be on hand in the form of money as a reserve fund of means of payment and purchase. This is the first form of a hoard, as it reappears under the capitalist mode of production, and as it appears generally with the development of merchant's capital, at least for the purposes of this capital. Both remarks apply to national, as well as international, circulation. The hoard is in continuous flux, pours ceaselessly into circulation, and returns ceaselessly from it. The second form of a hoard is that of idle, temporarily unemployed capital in the shape of money, including newly accumulated and not yet invested money-capital. The functions entailed by this formation of a hoard are primarily those of safekeeping, bookkeeping, etc.
Secondly, however, this involves outlays of money for purchases, collecting money from sales, making and receiving payments, balancing payments, etc. The money-dealer performs all these services at first as a simple cashier of the merchants and industrial capitalists. [3]
The money trade becomes fully developed, even in its first stages, as soon as its ordinary functions are supplemented by lending and borrowing and by credit. Of this more in the next part, which deals with interest-bearing capital.
The bullion trade itself, the transfer of gold or silver from one country to another, is merely the result of trading in commodities. It is determined by the rate of exchange which expresses the standing of international payments and the interest rates in the different markets. The bullion trader as such acts merely as an intermediary of the results.
In discussing money and the way its movements and forms develop out of simple commodity-circulation, we saw (Book 1 Ch. III) that the movements of the mass of money circulating as means of purchase and payment depend on the metamorphosis of commodities, on the volume and velocity of this metamorphosis, which we now know to be but a phase in the entire process of reproduction. As for securing the money materials — gold and silver — from their sources of production, this resolves itself into a direct exchange of commodities, an exchange of gold and silver as commodities for other commodities. Hence, it is itself as much a phase of the exchange of commodities as the securing of iron or other metals. However, so far as the movement of precious metals on the world-market is concerned (we here leave aside movements expressing the transfer of capital by loans — a type of transfer which also obtains in the shape of commodity-capital), it is quite as much determined by the international exchange of commodities as the movement of money as a national means of purchase and payment is determined by the exchange of commodities in the home market. The inflow and outflow of precious metals from one national sphere of circulation to another, inasmuch as this is caused merely by a depreciation of the national currency, or by a double standard, are alien to money circulation as such and merely represent corrections of deviations brought about arbitrarily by state decrees. Finally, as concerns the formations of hoards which constitute reserve funds for means of purchase and payment, be it for home or foreign trade, and which also merely represent a form of temporarily idle capital, they are in both cases necessary precipitates of the circulation process.
Money-dealing in its pure form, which we consider here, i.e., set apart from the credit system, is thus concerned only with the technique of a certain phase of commodity-circulation, namely, that of money circulation and the different functions of money arising in its circulation.
This substantially distinguishes dealing in money from the dealing in commodities, which promotes the metamorphosis of commodities and their exchange, or even gives this process of the commodity-capital the appearance of a process of a capital set apart from industrial capital. While, therefore, commercial capital has its own form of circulation, M — C — M, in which the commodity changes hands twice and thus provides a reflux of money, as distinct from C — M — C, in which money changes hands twice and thus promotes commodity exchange, there is no such special form in the case of money-dealing capital.
In so far as money-capital is advanced by a separate class of capitalists in this technical promotion of money circulation — a capital which on a reduced scale represents the additional capital the merchants and industrial capitalists would otherwise have to advance themselves for these purposes — the general form of capital, M — M', occurs here as well. By advancing M, the advancing capitalist secures M + ΔM. But promotion of M — M' does not here concern the material, but only the technical, processes of the metamorphosis.
It is evident that the mass of money-capital with which the money-dealers operate is the money-capital of merchants and industrial capitalists in the process of circulation, and that the money-dealers' operations are actually operations of merchants and industrial capitalists, in which they act as middlemen.
It is equally evident that the money-dealers' profit is nothing but a deduction from the surplus-value, since they operate with already realised values (even when realised in the form of creditors' claims).
Just as in the commodity trade, there is a duplication of functions, because a part of the technical operations connected with money circulation must be carried out by the dealers and producers of commodities themselves.
The particular form in which commercial and money-dealing capitals accumulate money will be discussed in the next part.
It is self-evident from what has gone before that nothing could be more absurd than to regard merchant's capital, whether in the shape of commercial or of money-dealing capital, as a particular variety of industrial capital, such as, say, mining, agriculture, cattle-raising, manufacturing, transport, etc., which are side lines of industrial capital occasioned by the division of social labour, and hence different spheres of investment. The simple observation that in the circulation phase of its reproduction process every industrial capital performs as commodity-capital and as money-capital the very functions which appear as the exclusive functions of the two forms of merchant's capital, should rule out such a crude notion. On the other hand, in commercial and money-dealing capital the differences between industrial capital as productive capital and the same capital in the sphere of circulation are individualised through the fact that the definite forms and functions which capital assumes for the moment appear as independent forms and functions of a separate portion of the capital and are exclusively bound up with it. The transmuted form of industrial capital and the material differences between productive capitals applied in different branches of industry, which arise from the nature of these various branches, are worlds apart.
Aside from the crudity with which the economist generally considers distinctions of form, which really concern him only from their substantive side, this misconception by the vulgar economist is explained on two additional counts. First, his inability to explain the peculiar nature of mercantile profit; and, secondly, his apologetic endeavours to deduce commodity-capital and money-capital, and later commercial capital and money-dealing capital as forms arising necessarily from the process of production as such, whereas they are due to the specific form of the capitalist mode of production, which above all presupposes the circulation of commodities, and hence of money, as its basis.
If commercial capital and money-dealing capital do not differ from grain production any more than this differs from cattle-raising and manufacturing, it is plain as day that production and capitalist production are altogether identical, and that, among other things, the distribution of the social products among the members of a society, be it for productive or individual consumption, must just as consistently be handled by merchants and bankers as the consumption of meat by cattle-raising and that of clothing by their manufacture. [1]
The great economists, such as Smith, Ricardo, etc., are perplexed over mercantile capital being a special variety, since they consider the basic form of capital, capital as industrial capital, and circulation capital (commodity-capital and money-capital) solely because it is a phase in the reproduction process of every capital. The rules concerning the formation of value, profit, etc., immediately deduced by them from their study of industrial capital, do not extend directly to merchant's capital. For this reason, they leave merchant's capital entirely aside and mention it only as a kind of industrial capital. Wherever they make a special analysis of it, as Ricardo does in dealing with foreign trade, they seek to demonstrate that it creates no value (and consequently no surplus-value). But whatever is true of foreign trade, is also true of home trade.
Hitherto we have considered merchant's capital merely from the standpoint, and within the limits, of the capitalist mode of production. However, not commerce alone, but also merchant's capital, is older than the capitalist mode of production, is, in fact, historically the oldest free state of existence of capital.
Since we have already seen that money-dealing and the capital advanced for it require nothing more for their development than the existence of wholesale commerce, and further of commercial capital, it is only the latter which we must occupy ourselves with here.
Since merchant's capital is penned in the sphere of circulation, and since its function consists exclusively of promoting the exchange of commodities, it requires no other conditions for its existence — aside from the undeveloped forms arising from direct barter — outside those necessary for the simple circulation of commodities and money. Or rather, the latter is the condition of its existence. No matter what the basis on which products are produced, which are thrown into circulation as commodities — whether the basis of the primitive community, of slave production, of small peasant and petty bourgeois, or the capitalist basis, the character of products as commodities is not altered, and as commodities they must pass through the process of exchange and its attendant changes of form. The extremes between which merchant's capital acts as mediator exist for it as given, just as they are given for money and for its movements. The only necessary thing is that these extremes should be on hand as commodities, regardless of whether production is wholly a production of commodities, or whether only the surplus of the independent producers' immediate needs, satisfied by their own production, is thrown on the market. Merchant's capital promotes only the movements of these extremes, of these commodities, which are preconditions of its own existence.
The extent to which products enter trade and go through the merchants' hands depends on the mode of production, and reaches its maximum in the ultimate development of capitalist production, where the product is produced solely as a commodity, and not as a direct means of subsistence. On the other hand, on the basis of every mode of production, trade facilitates the production of surplus-products destined for exchange, in order to increase the enjoyments, or the wealth, of the producers (here meant are the owners of the products). Hence, commerce imparts to production a character directed more and more towards exchange-value.
The metamorphosis of commodities, their movement, consists 1) materially, of the exchange of different commodities for one another, and 2) formally, of the conversion of commodities into money by sale, and of money into commodities by purchase. And the function of merchant's capital resolves itself into these very acts of buying and selling commodities. It therefore merely promotes the exchange of commodities; yet this exchange is not to be conceived at the outset as a bare exchange of commodities between direct producers. Under slavery, feudalism and vassalage (so far as primitive communities are concerned) it is the slave-owner, the feudal lord, the tribute-collecting state, who are the owners, hence sellers, of the products. The merchant buys and sells for many. Purchases and sales are concentrated in his hands and consequently are no longer bound to the direct requirements of the buyer (as merchant).
But whatever the social organisation of the spheres of production whose commodity exchange the merchant promotes, his wealth exists always in the form of money, and his money always serves as capital. Its form is always M — C — M'. Money, the independent form of exchange-value, is the point of departure, and increasing the exchange-value an end in itself. Commodity exchange as such and the operations effecting it — separated from production and performed by non-producers — are just a means of increasing wealth not as mere wealth, but as wealth in its most universal social form, as exchange-value. The compelling motive and determining purpose are the conversion of M into M + ΔM. The transactions M — C and C — M', which promote M — M', appear merely as stages of transition in this conversion of M into M + ΔM. This M — C — M', the characteristic movement of merchant's capital, distinguishes it from C — M — C, trade in commodities directly between producers, which has for its ultimate end the exchange of use-values.
The less developed the production, the more wealth in money is concentrated in the hands of merchants or appears in the specific form of merchants' wealth.
Within the capitalist mode of production — i.e., as soon as capital has established its sway over production and imparted to it a wholly changed and specific form — merchant's capital appears merely as a capital with a specific function. In all previous modes of production, and all the more, wherever production ministers to the immediate wants of the producer, merchant's capital appears to perform the function par excellence of capital.
There is, therefore, not the least difficulty in understanding why merchant's capital appears as the historical form of capital long before capital established its own domination over production. Its existence and development to a certain level are in themselves historical premises for the development of capitalist production 1) as premises for the concentration of money wealth, and 2) because the capitalist mode of production presupposes production for trade, selling on a large scale, and not to the individual customer, hence also a merchant who does not buy to satisfy his personal wants but concentrates the purchases of many buyers in his one purchase. On the other hand, all development of merchant's capital tends to give production more and more the character of production for exchange-value and to turn products more and more into commodities. Yet its development, as we shall presently see, is incapable by itself of promoting and explaining the transition from one mode of production to another.
Within capitalist production merchant's capital is reduced from its former independent existence to a special phase in the investment of capital, and the levelling of profits reduces its rate of profit to the general average. It functions only as an agent of productive capital. The special social conditions that take shape with the development of merchant's capital, are here no longer paramount. On the contrary, wherever merchant's capital still predominates we find backward conditions. This is true even within one and the same country, in which, for instance, the specifically merchant towns present far more striking analogies with past conditions than industrial towns.[2]
The independent and predominant development of capital as merchant's capital is tantamount to the non-subjection of production to capital, and hence to capital developing on the basis of an alien social mode of production which is also independent of it. The independent development of merchant's capital, therefore, stands in inverse proportion to the general economic development of society.
Independent mercantile wealth as a predominant form of capital represents the separation of the circulation process from its extremes, and these extremes are the exchanging producers themselves. They remain independent of the circulation process, just as the latter remains independent of them. The product becomes a commodity by way of commerce. It is commerce which here turns products into commodities, not the produced commodity which by its movements gives rise to commerce. Thus, capital appears here first as capital in the process of circulation. It is in the circulation process that money develops into capital. It is in circulation that products first develop as exchange-values, as commodities and as money. Capital can, and must, form in the process of circulation, before it learns to control its extremes — the various spheres of production between which circulation mediates. Money and commodity circulation can mediate between spheres of production of widely different organisation, whose internal structure is still chiefly adjusted to the output of use-values. This individualisation of the circulation process, in which spheres of production are interconnected by means of a third, has a two-fold significance. On the one hand, that circulation has not as yet established a hold on production, but is related to it as to a given premise. On the other hand, that the production process has not as yet absorbed circulation as a mere phase of production. Both, however, are the case in capitalist production. The production process rests wholly upon circulation, and circulation is a mere transitional phase of production, in which the product created as a commodity is realised and its elements of production, likewise created as commodities, are replaced. That form of capital — merchant's capital — which developed directly out of circulation appears here merely as one of the forms of capital occurring in its reproduction process.
The law that the independent development of merchant's capital is inversely proportional to the degree of development of capitalist production is particularly evident in the history of the carrying trade, as among the Venetians, Genoese, Dutch, etc., where the principal gains were not thus made by exporting domestic products, but by promoting the exchange of products of commercially and otherwise economically undeveloped societies, and by exploiting both producing countries.[3] Here, merchant's capital is in its pure form, separated from the extremes — the spheres of production between which it mediates. This is the main source of its development. But this monopoly of the carrying trade disintegrates, and with it this trade itself, proportionately to the economic development of the peoples, whom it exploits at both ends of its course, and whose lack of development was the basis of its existence. In the case of the carrying trade this appears not only as the decline of a special branch of commerce, but also that of the predominance of the purely trading nations, and of their commercial wealth in general, which rested upon the carrying trade. This is but a special form, in which is expressed the subordination of merchants to industrial capital with the advance of capitalist production. The behaviour of merchant's capital wherever it rules over production is strikingly illustrated not only by the colonial economy (the so-called colonial system) in general, but quite specifically by the methods of the old Dutch East India Company.
Since the movement of merchant's capital is M — C — M', the merchant's profit is made, first, in acts which occur only within the circulation process, hence in the two acts of buying and selling; and, secondly, it is realised in the last act, the sale. It is therefore profit upon alienation. Prima facie, a pure and independent commercial profit seems impossible so long as products are sold at their value. To buy cheap in order to sell dear is the rule of trade. Hence, not the exchange of equivalents. The conception of value is included in it in so far as the various commodities are all values, and therefore money. In respect to quality they are all expressions of social labour. But they are not values of equal magnitude. The quantitative ratio in which products are exchanged is at first quite arbitrary. They assume the form of commodities inasmuch as they are exchangeables, i.e., expressions of one and the same third. Continued exchange and more regular reproduction for exchange reduces this arbitrariness more and more. But at first not for the producer and consumer, but for their go-between, the merchant, who compares money-prices and pockets the difference. It is through his own movements that he establishes equivalence.
Merchant's capital is originally merely the intervening movement between extremes which it does not control, and between premises which it does not create.
Just as money originates from the bare form of commodity-circulation, C — M — C, not only as a measure of value and a medium of circulation, but also as the absolute form of commodity, and hence of wealth, or hoard, so that its conservation and accumulation as money becomes an end in itself, so, too, does money, the hoard, as something that preserves and increases itself through mere alienation, originate from the bare form of the circulation of merchant's capital, M — C — M'.
The trading nations of ancient times existed like the gods of Epicurus in the intermediate worlds of the universe, or rather like the Jews in the pores of Polish society. The trade of the first independent flourishing merchant towns and trading nations rested as a pure carrying trade upon the barbarism of the producing nations, between whom they acted the middleman.
In the pre-capitalist stages of society commerce ruled industry. In modern society the reverse is true. Of course, commerce will have more or less of a counter-effect on the communities between which it is carried on. It will subordinate production more and more to exchange-value by making luxuries and subsistence more dependent on sale than on the immediate use of the products. Thereby it dissolves the old relationships. It multiplies money circulation. It encompasses no longer merely the surplus of production, but bites deeper and deeper into the latter, and makes entire branches of production dependent upon it. Nevertheless this disintegrating effect depends very much on the nature of the producing community.
So long as merchant's capital promotes the exchange of products between undeveloped societies, commercial profit not only appears as out-bargaining and cheating, but also largely originates from them. Aside from the fact that it exploits the difference between the prices of production of various countries (and in this respect it tends to level and fix the values of commodities), those modes of production bring it about that merchant's capital appropriates an overwhelming portion of the surplus-product partly as a mediator between communities which still substantially produce for use-value, and for whose economic organisation the sale of the portion of their product entering circulation, or for that matter any sale of products at their value, is of secondary importance; and partly, because under those earlier modes of production the principal owners of the surplus-product with whom the merchant dealt, namely, the slave-owner, the feudal lord, and the state (for instance, the oriental despot) represent the consuming wealth and luxury which the merchant seeks to trap, as Adam Smith correctly scented in the passage on feudal times quoted earlier. Merchant's capital, when it holds a position of dominance, stands everywhere for a system of robbery,[4] so that its development among the trading nations of old and modern times is always directly connected with plundering, piracy, kidnapping slaves, and colonial conquest; as in Carthage, Rome, and later among the Venetians, Portuguese, Dutch, etc.
The development of commerce and merchant's capital gives rise everywhere to the tendency towards production of exchange-values, increases its volume, multiplies it, makes it cosmopolitan, and develops money into world-money. Commerce, therefore, has a more or less dissolving influence everywhere on the producing organisation, which it finds at hand and whose different forms are mainly carried on with a view to use-value. To what extent it brings about a dissolution of the old mode of production depends on its solidity and internal structure. And whither this process of dissolution will lead, in other words, what new mode of production will replace the old, does not depend on commerce, but on the character of the old mode of production itself. In the ancient world the effect of commerce and the development of merchant's capital always resulted in a slave economy; depending on the point of departure, only in the transformation of patriarchal slave system devoted to the production of immediate means of subsistence into one devoted to the production of surplus-value. However, in the modern world, it results in the capitalist mode of production. It follows therefrom that these results spring in themselves from circumstances other than the development of merchant's capital.
It is in the nature of things that as soon as town industry as such separates from agricultural industry, its products are from the outset commodities and thus require the mediation of commerce for their sale. The leaning of commerce towards the development of towns, and, on the other hand, the dependence of towns upon commerce, are so far natural. However, it depends on altogether different circumstances to what measure industrial development will go hand in hand with this development. Ancient Rome, in its later republican days, developed merchant's capital to a higher degree than ever before in the ancient world, without showing any progress in the development of crafts, while in Corinth and other Grecian towns in Europe and Asia Minor the development of commerce was accompanied by highly developed crafts. On the other hand, quite contrary to the growth of towns and attendant conditions, the trading spirit and the development of merchant's capital occur frequently among unsettled nomadic peoples.
There is, consequently, a three-fold transition. First, the merchant becomes directly an industrial capitalist. This is true in crafts based on trade, especially crafts producing luxuries and imported by merchants together with the raw materials and labourers from foreign lands, as in Italy from Constantinople in the 15th century. Second, the merchant turns the small masters into his middlemen, or buys directly from the independent producer, leaving him nominally independent and his mode of production unchanged. Third, the industrialist becomes merchant and produces directly for the wholesale market.
The first theoretical treatment of the modern mode of production — the mercantile system — proceeded necessarily from the superficial phenomena of the circulation process as individualised in the movements of merchant's capital, and therefore grasped only the appearance of matters. Partly because merchant's capital is the first free state of existence of capital in general. And partly because of the overwhelming influence which it exerted during the first revolutionising period of feudal production — the genesis of modern production. The real science of modern economy only begins when the theoretical analysis passes from the process of circulation to the process of production. Interest-bearing capital is, indeed, likewise a very old form of capital. But we shall see later why mercantilism does not take it as its point of departure, but rather carries on a polemic against it.
In our first discussion of the general, or average, rate of profit (Part II of this book) we did not have this rate before us in its complete form, the equalisation of profit appearing only as equalisation between industrial capitals invested in different spheres. This was supplemented in the preceding part, which dealt with the participation of merchant's capital in this equalisation, and also commercial profit. The general rate of profit and the average profit now appeared in narrower limits than before. It should be remembered in the course of our analysis that in any future reference to the general rate of profit or to average profit we mean this latter connotation, hence only the final form of average rate. And since this rate is the same for mercantile, as well as industrial, capital, it is no longer necessary, so far as this average profit is concerned, to make a distinction between industrial and commercial profit. Whether industrially invested in the sphere of production, or commercially in the sphere of circulation, capital yields the same average annual profit pro rata to its magnitude.
Money — here taken as the independent expression of a certain amount of value existing either actually as money or as commodities — may be converted into capital on the basis of capitalist production, and may thereby be transformed from a given value to a self-expanding, or increasing, value. It produces profit, i.e., it enables the capitalist to extract a certain quantity of unpaid labour, surplus-product and surplus-value from the labourers, and to appropriate it. In this way, aside from its use-value as money, it acquires an additional use-value, namely that of serving as capital. Its use-value then consists precisely in the profit it produces when converted into capital. In this capacity of potential capital, as a means of producing profit, it becomes a commodity, but a commodity sui generis. Or, what amounts to the same, capital as capital becomes a commodity.[1]
Suppose the annual average rate of profit is 20%. In that case a machine valued at £100, employed as capital under average conditions and an average amount of intelligence and purposive effort, would yield a profit of £20. A man in possession of £100, therefore, possesses the power to make £120 out of £100, or to produce a profit of £20. He possesses a potential capital of £100. If he gives these £100 to another for one year, so the latter may use them as real capital, he gives him the power to produce a profit of £20 — a surplus-value which costs this other nothing, and for which he pays no equivalent. If this other should pay, say, £5 at the close of the year to the owner of the £100 out of the profit produced, he would thereby pay the use-value of the £100 — the use-value of its function as capital, the function of producing a profit of £20. The part of the profit paid to the owner is called interest, which is just another name, or special term, for a part of the profit given up by capital in the process of functioning to the owner of the capital, instead of putting it into its own pocket.
It is plain that the possession of £100 gives their owner the power to pocket the interest — that certain portion of profit produced by means of his capital. If he had not given the £100 to the other person, the latter could not have produced any profit, and could not at all have acted as a capitalist with reference to these £100. [2]
To speak here of natural justice, as Gilbart does (see note), is nonsense. The justice of the transactions between agents of production rests on the fact that these arise as natural consequences out of the production relationships. The juristic forms in which these economic transactions appear as wilful acts of the parties concerned, as expressions of their common will and as contracts that may be enforced by law against some individual party, cannot, being mere forms, determine this content. They merely express it. This content is just whenever it corresponds, is appropriate, to the mode of production. It is unjust whenever it contradicts that mode. Slavery on the basis of capitalist production is unjust; likewise fraud in the quality of commodities.
The £100 produce the profit of £20 because they function as capital, be it industrial or mercantile. But the sine qua non of this function as capital is that they are expended as capital, i.e., are expended in purchasing means of production (in the case of industrial capital) or commodities (in the case of merchant's capital). But to be expended, they must be available. If A, the owner of the £100, were either to spend them for personal consumption, or to keep them as a hoard, they could not have been invested as capital by B in his capacity of functioning capitalist. B does not expend his own capital, but A's; however, he cannot expend A's capital without A's consent. Therefore, it is really A who originally expends the £100 as capital, albeit his function as capitalist is limited to this outlay of £100 as capital. In respect to these £100, B acts as capitalist only because A lends him the £100, thus expending them as capital.
Let us first consider the singular circulation of interest-bearing capital. We shall then secondly have to analyse the peculiar manner in which it is sold as a commodity, namely loaned instead of relinquished once and for all.
The point of departure is the money which A advances to B. This may be done with or without security. The first-named form, however, is the more ancient, save advances on commodities or paper, such as bills of exchange, shares, etc. These special forms do not concern us at this point. We are dealing here with interest-bearing capital in its usual form.
In B's possession the money is actually converted into capital, passes through M — C — M' and returns to A as M', as M+ΔM, where ΔM represents the interest. For the sake of simplicity we shall not consider here the case, in which capital remains in B's possession for a long term and interest is paid at regular intervals.
The movement, therefore, is
M — M — C — M' — M'.
What appears duplicated here, is 1) the outlay of money as capital, and 2) its reflux as realised capital, as M' or M+ΔM.
In the movement of merchant's capital, M — C — M', the same commodity changes hands twice, or more than twice, if merchant sells to merchant. But every such change of place of the same commodity indicates a metamorphosis, a purchase or sale of the commodity, no matter how often the process may be repeated, until it enters consumption.
On the other hand, the same money changes hands twice in C — M — C, but this indicates the complete metamorphosis of the commodity, which is first converted into money and then from money back into another commodity.
But in interest-bearing capital the first time M changes hands is by no means a phase either of the commodity metamorphosis, or of reproduction of capital. It first becomes one when it is expended a second time, in the hands of the active capitalist who carries on trade with it, or transforms it into productive capital. M's first change of hands does not express anything here, beyond its transfer from A to B — a transfer which usually takes place under certain legal forms and stipulations.
This double outlay of money as capital, of which the first is merely a transfer from A to B, is matched by its double reflux. As M', or M + ΔM, it flows back out of the process to B, the person acting as capitalist. The latter then transfers it back to A, but together with a part of the profit, as realised capital, as M + ΔM, in which ΔM is not the entire profit, but only a portion of the profit — the interest. It flows back to B only as what he had expended, as functioning capital, but as the property of A. To make its reflux complete, B must consequently return it to A. But in addition to the capital, B must also turn over to A a portion of the profit, a part which goes under the name of interest, which he had made with this capital since A had given him the money only as a capital, i.e., as value which is not only preserved in its movement, but also creates surplus-value for its owner. It remains in B's hands only so long as it is functioning capital. And with its reflux — on the stipulated date — it ceases to function as capital. When no longer acting as capital, however, it must again be returned to A, who had never ceased being its legal owner.
The form of lending, which is peculiar to this commodity, to capital as commodity, and which also occurs in other transactions instead of that of sale, follows from the simple definition that capital obtains here as a commodity, or that money as capital becomes a commodity.
A distinction should be made here.
We have seen (Book II, Chap. I), and recall briefly at this point, that in the process of circulation capital serves as commodity-capital and money-capital. But in neither form does capital become a commodity as capital.
As soon as productive capital turns into commodity-capital it must be placed on the market to be sold as a commodity. There it acts simply as a commodity. The capitalist then appears only as the seller of commodities, just as the buyer is only the buyer of commodities. As a commodity the product must realise its value, must assume its transmuted form of money, in the process of circulation by its sale. It is also quite immaterial for this reason, whether this commodity is bought by a consumer as a necessity of life, or by a capitalist as means of production, i.e., as a component part of his capital. In the act of circulation commodity-capital acts only as a commodity, not as a capital. It is commodity-capital, as distinct from an ordinary commodity, 1) because it is weighted with surplus-value, the realisation of its value, therefore, being simultaneously the realisation of surplus-value; but this alters nothing about its simple existence as a commodity, as a product with a certain price; 2) because its function as a commodity is a phase in its process of reproduction as capital, and therefore its movement as a commodity being only a partial movement of its process, is simultaneously its movement as capital. Yet it does not become that through the sale as such, but only through the connection of the sale with the whole movement of this specific quantity of value in the capacity of capital.
In the same way as money-capital it really acts simply as money, i.e., as a means of buying commodities (the elements of production). The fact that this money is simultaneously money-capital, a form of capital, does not emerge from the act of buying, the actual function which it here performs as money, but from the connection of this act with the total movement of capital, since this act, performed by capital as money, initiates the capitalist production process.
But in so far as they actually function, i.e., actually play a role in the process, commodity-capital acts here only as a commodity and money-capital only as money. At no time during the metamorphosis, viewed by itself, does the capitalist sell his commodities as capital to the buyer, although to him they represent capital; nor does he give up money as capital to the seller. In both cases be gives up his commodities simply as commodities, and money simply as money, i.e., as a means of purchasing commodities.
It is only in connection with the entire process, at the moment where the point of departure appears simultaneously as the point of return, in M — M' or C — C', that capital in the process of circulation appears as capital (whereas in the process of production it appears as capital through the subordination of the labourer to the capitalist and the production of surplus value). In this moment of return, however, the connection disappears. What we have then is M', or M + ΔM, a sum of money equal to the sum originally advanced plus an increment — the realised surplus-value (regardless of whether the amount of value increased by ΔM exists in the form of money, or commodities, or elements of production). And it is precisely at this point of return where capital exists as realised capital, as an expanded value, that it never enters the circulation in this form — in so far as this point is fixed as a point of rest, whether real or imaginary — but rather appears to have been withdrawn from circulation as a result of the whole process. Whenever it is again expended, it is never given up to another as capital, but is sold to him as an ordinary commodity, or given to him as ordinary money in exchange for commodities. It never appears as capital in its process of circulation, only as commodity or money, and at this point this is the only form of its existence for others. Commodities and money are here capital not because commodities change into money, or money into commodities, not in their actual relations to sellers or buyers, but only in their ideal relations to the capitalist himself (subjectively speaking), or as phases in the process of reproduction (objectively speaking). Capital exists as capital in actual movement, not in the process of circulation, but only in the process of production, in the process by which labour-power is exploited.
The matter is different with interest-bearing capital, however, and it is precisely this difference which lends it its specific character. The owner of money who desires to enhance his money as interest-bearing capital, turns it over to a third person, throws it into circulation, turns it into a commodity as capital; not just capital for himself, but also for others. It is not capital merely for the man who gives it up, but is from the very first given to the third person as capital, as a value endowed with the use-value of creating surplus-value, of creating profit; a value which preserves itself in its movement and returns to its original owner, in this case the owner of money, after performing its function. Hence it leaves him only for a specified time, passes but temporarily out of the possession of its owner into the possession of a functioning capitalist, is therefore neither given up in payment nor sold, but merely loaned, merely relinquished with the understanding that, first, it shall return to its point of departure after a definite time interval, and, second, that it shall return as realised capital — a capital having realised its use-value, its power of creating surplus-value.
Commodities loaned out as capital are loaned either as fixed or as circulating capital, depending on their properties. Money may be loaned out in either form. It may be loaned as fixed capital, for instance, if it is paid back in the form of an annuity, whereby a portion of the capital flows back together with the interest. Certain commodities, such as houses, ships, machines, etc., can be loaned out only as fixed capital by the nature of their use-values. Yet all loaned capital, whatever its form, and no matter how the nature of its use-value may modify its return, is always only a specific form of money-capital. Because what is loaned out is always a definite sum of money, and it is this sum on which interest is calculated. Should whatever is loaned out be neither money nor circulating capital, it is also paid back in the way fixed capital returns. The lender periodically receives interest and a portion of the consumed value of the fixed capital itself, this being an equivalent for the periodic wear and tear. And at the end of the stipulated term the unconsumed portion of the loaned fixed capital is returned in kind. If the loaned capital is circulating capital, it is likewise returned in the manner peculiar to circulating capital.
The manner of reflux is, therefore, always determined by the actual circuit described by capital in the act of reproduction and by its specific varieties. But as for loaned capital, its reflux assumes the form of return payments, because its advance, by which it is transferred, possesses the form of a loan.
In this chapter we treat only of actual money-capital, from which the other forms of loaned capital are derived.
The loaned capital flows back in two ways. In the process of reproduction it returns to the functioning capitalist, and then its return repeats itself once more as transfer to the lender, the money-capitalist, as return payment to the real owner, its legal point of departure.
In the actual process of circulation, capital appears always as a commodity or as money, and its movement always is broken up into a series of purchases and sales. In short, the process of circulation resolves itself into the metamorphosis of commodities. It is different, when we consider the process of reproduction as a whole. If we start out with money (and the same is true if we start out with commodities, since we begin with their value, hence view them sub specie as money), we shall see that a certain sum of money is expended and returns after a certain period with an increment. The advanced sum of money returns together with a surplus-value. It has remained intact and increased in making a certain cycle. But now, being loaned out as capital, money is loaned as just the sum of money which preserves and expands itself, which returns after a certain period with an increment, and is always ready to perform the same process over again. It is expended neither as money nor as a commodity, thus, neither exchanged against a commodity when advanced in the form of money, nor sold in exchange for money when advanced as a commodity; rather, it is expended as capital. This relation to itself, in which capital presents itself when the capitalist production process is viewed as a whole and as a single unity, and in which capital appears as money that begets money, is here imparted to it as its character, its designation, without any intermediary movement. And it is relinquished with this designation when loaned out as money-capital.
A queer conception of the role of money-capital is hold by Proudhon (Gratuité du Crédit. Discussion entre M. F. Bastiat et M. Proudhon, Paris, 1850). Loaning seems an evil to Proudhon because it is not selling. Loaning for an interest is
The object — money, a house, etc. — does not change owners as in selling and buying. But Proudhon does not see that no equivalent is received in return for money given away in the form of interest-bearing capital. True, the object is given away in every act of buying and selling, so far as there are processes of exchange at all. Ownership of the sold article is always relinquished. But its value is not given up. In a sale the commodity is given away, but not its value, which is returned in the form of money, or in what is here just another form of it — promissory notes, or titles of payment. When purchasing, the money is given away, but not its value, which is replaced in the form of commodities. The industrial capitalist retains the same value in his hands throughout the process of reproduction (excluding surplus-value), but in different forms.
Inasmuch as there is an exchange, i.e., an exchange of articles, there is no change in the value. The same capitalist always retains the same value. But so long as surplus-value is produced by the capitalist, there is no exchange. As soon as an exchange occurs, the surplus-value is already incorporated in the commodities. If we view the entire circuit made by capital, M — C — M', rather than individual acts of exchange, we shall see that a definite amount of value is continually advanced, and that this same amount plus surplus-value, or profit, is withdrawn from circulation. The actual acts of exchange do not, at any rate, reveal how this process is promoted. And it is precisely this process of M as capital, on which the interest of the money-lending capitalist rests, and from which it is derived.
Here the hatter represents the productive capitalist as distinct from the loan capitalist. Proudhon has obviously failed to grasp the secret of how the productive capitalist can sell commodities at their value (equalisation through prices of production is here immaterial to his conception) and receive a profit over and above the capital he flings into exchange. Suppose the price of production of 100 hats = £115, and that this price of production happens to coincide with the value of the hats, which means that the capital producing the hats is of the same composition as the average social capital. Should the profit = 15%, the hatter makes a profit of £15 by selling his commodities at their value of £115. They cost him only £100. If he produced them with his own capital, he pockets the entire surplus of £15 but if with borrowed capital, he may have to give up £5 as interest. This alters nothing in the value of the hats, only in the distribution among different persons of the surplus-value already contained in this value. Since, therefore, the value of the hats is not affected by the payment of interest, it is nonsense on Proudhon's part to say:
How little Proudhon understood the nature of capital is shown in the following statement, in which he describes the movement of capital in general as a movement peculiar to interest-bearing capital:
What is it that still puzzles him in the peculiar movement of interest-bearing capital? The categories: buying, price, giving up articles, and the immediate form in which surplus-value appears here; in short, the phenomenon that capital as such has become a commodity, that selling, consequently, has turned into lending and price into a share of the profit.
In the first introductory act the lender gives his capital to the borrower. In the supplemental and closing act the borrower returns the capital to the lender. As concerns the transaction between these two — and aside from the interest for the present — as concerns the movement of the loaned capital between lender and borrower, therefore, the two acts (separated by a longer or shorter time interval, during which the actual reproduction process of the capital takes place) embrace the entire movement. And this movement, disposing on condition of returning, constitutes per se the movement of lending and borrowing, that specific form of conditionally alienating money or commodities.
In the actual movement of capital its return is a phase in the process of circulation. The money is first converted into means of production; production transforms them into commodities; through sale of the commodities they are reconverted into money and return in this form into the hands of the capitalist who had originally advanced the capital in the form of money. But in the case of interest-bearing capital, the return, like alienation, is the result of a legal transaction between the owner of the capital and a second party. We see only the alienation and the return payment. Whatever passes in the interim is obliterated.
But since money advanced as capital has the property of returning to the person who advanced it, to the one who expended it as capital, and since M — C — M' is the immanent form of the movement of capital, the owner of the money can, for this very reason, loan it out as capital, as something that has the property of returning to its point of departure, of preserving, and increasing, its value in the course of its movement. He gives it away as capital, because it returns to its point of departure after having been employed as capital, hence can be restored by the borrower after a certain period precisely because it has come back to him.
Loaning money as capital — its alienation on the condition of it being returned after a certain time-presupposes, therefore, that it will be actually employed as capital, and that it actually flows back to its starting-point. The real cycle made by money as capital is, therefore, the premise for the legal transaction by which the borrower must return the money to the lender. If the borrower does not use the money as capital, that is his own business. The lender loans it as capital, and as such it is supposed to perform the functions of capital, which include the circuit of money-capital until it returns to its starting-point in the form of money.
The acts of circulation, M — C and C — M', in which a certain amount of value functions as money or commodities, are but intermediate processes, mere phases of the total movement. As capital, it performs the entire movement M — M'. It is advanced as money or a sum of values in one form or another, and returns as a sum of values. The lender of money does not expend it in purchasing commodities, or, if this sum of values is in commodity-form, does not sell it for money. He advances it as capital, as M — M', as a value, which returns to its point of departure after a certain term. He lends instead of buying or selling. This lending, therefore, is the appropriate form of alienating value as capital, instead of alienating it as money or commodities. It does not follow, however, that lending cannot also take the form of transactions which have nothing to do with the capitalist process of reproduction.
We have so far only considered the movements of loaned capital between its owner and the industrial capitalist. Now we must inquire into interest.
The lender expends his money as capital; the amount of value, which he relinquishes to another, is capital, and consequently returns to him. But the mere return of it would not be the reflux of the loaned sum of value as capital, but merely the return of a loaned sum of value. To return as capital, the advanced sum of value must not only be preserved in the movement but must also expand, must increase in value, i.e., must return with a surplus-value, as M + ΔM, the latter being interest or a portion of the average profit, which does not remain in the hands of the operating capitalist, but falls to the share of the money-capitalist.
The fact that the latter has relinquished it as capital implies that it must be restored to him as M + ΔM. Later, we shall also have to turn our attention to the form in which interest is paid in the meantime at fixed intervals, but without the capital, whose return follows at the end of a lengthy period.
What does the money-capitalist give to the borrower, the industrial capitalist? What does he really turn over to him? It is only this act of handing over money which changes lending money into alienation of money as capital, i.e., alienation of capital as a commodity.
It is only by this act of alienating that capital is loaned by the money-lender as a commodity, or that the commodity at his disposal is given to another as capital.
What is alienated in an ordinary sale? Not the value of the sold commodity, for this merely changes its form. The value exists ideally in a commodity as its price before it actually passes as money into the hands of the seller. The same value and the same amount of value merely change their form. In the one instance they exist in commodity-form, in the other in the form of money. What is really alienated by the seller, and, therefore, passes into the individual or productive consumption of the buyer, is the use-value of the commodity — the commodity as a use-value.
What, now, is the use-value which the money-capitalist gives up for the period of the loan and relinquishes to the productive capitalist — the borrower? It is the use-value which the money acquires by being capable of becoming capital, of performing the functions of capital, and creating a definite surplus-value, the average profit (whatever is above or below it appears here as a mere accident) during its process, besides preserving its original magnitude of value. In the case of the other commodities the use-value is ultimately consumed. Their substance disappears, and with it their value. In contrast, the commodity-capital is peculiar in that its value and use-value not only remain intact but also increase, through consumption of its use-value.
It is this use-value of money as capital — this faculty of producing an average profit — which the money-capitalist relinquishes to the industrial capitalist for the period, during which he places the loaned capital at the latter's disposal.
Money thus loaned has in this respect a certain similarity with labour-power in its relation to the industrial capitalist. With the difference that the latter pays for the value of labour-power, whereas he simply pays back the value of the loaned capital. The use-value of labour-power for the industrial capitalist is that labour-power creates more value (profit) in its consumption than it possesses itself, and than it costs. This additional value is use-value for the industrial capitalist. And in like manner the use-value of loaned capital appears as its faculty of begetting and increasing value.
The money-capitalist, in fact, alienates a use-value, and thus whatever he gives away is given as a commodity. It is to this extent that the analogy with a commodity per se is complete. In the first place, it is a value which passes from one hand to another. In the case of an ordinary commodity, a commodity as such, the same value remains in the hands of the buyer and seller, only in different forms; both have the same value which they had before the transaction, and which they had alienated — the one in the form of a commodity, the other in the form of money. The difference is that in a loan the money-capitalist is the only one in the transaction who gives away value; but he preserves it through the prospective return. In the loan transaction just one party receives value, since only one party relinquishes value. — In the second place, a real use-value is relinquished on the one side, and received and consumed on the other. But in contrast to ordinary commodities this use-value is value in itself, namely the excess over the original value realised through the use of money as capital. The profit is this use-value.
The use-value of the loaned money lies in its being able to serve as capital and, as such, to produce the average profit under average conditions.[4]
What, now, does the industrial capitalist pay, and what is, therefore, the price of the loaned capital?
Both of them, lender and borrower, expend the same sum of money as capital. But it is only in the hands of the latter that it serves as capital. The profit is not doubled by the double existence of the same sum of money as capital for two persons. It can serve as capital for both of them only by dividing the profit. The portion which falls to the lender is called interest.
The entire transaction, as assumed, takes place between two kinds of capitalists — the money-capitalist and the industrial or merchant capitalist.
It must always be borne in mind that here capital as capital is a commodity, or that the commodity here discussed is capital. All the relations in evidence here would therefore be irrational from the standpoint of an ordinary commodity, or from that of capital in so far as it acts as a commodity-capital in the process of reproduction. Lending and borrowing, instead of selling and buying, is a distinction which here springs from the specific nature of the commodity-capital. Similarly, the fact that it is interest, not the price of the commodity, which is paid here. If we want to call interest the price of money-capital, then it is an irrational form of price quite at variance with the conception of the price of commodities.[6] The price is here reduced to its purely abstract and meaningless form, signifying that it is a certain sum of money paid for something serving in one way or another as a use-value; whereas the conception of price really signifies the value of some use-value expressed in money.
Interest, signifying the price of capital, is from the outset quite an irrational expression. The commodity in question has a double value, first a value, and then a price different from this value, while price represents the expression of value in money. Money-capital is nothing but a sum of money, or the value of a certain quantity of commodities fixed in a sum of money. If a commodity is loaned out as capital, it is only a disguised form of a sum of money. Because what is loaned out as capital is not so and so many pounds of cotton, but so much and so much money existing in the form of cotton as its value. The price of capital, therefore, refers to it as to a sum of money, even if not currency, as Mr. Torrens thinks (see Footnote 59). How, then, can a sum of value have a price besides its own price, besides the price expressed in its own money-form? Price, after all, is the value of a commodity (this is also true of the market-price, whose difference from value is not one of quality, but only one of quantity, referring only to the magnitude of value) as distinct from its use-value. A price which differs from value in quality is an absurd contradiction.[7]
Capital manifests itself as capital through self-expansion. The degree of its self-expansion expresses the quantitative degree in which it realises itself as capital. The surplus-value or profit produced by it — its rate or magnitude — is measurable only by comparison with the value of the advanced capital. The greater or lesser self-expansion of interest-bearing capital is, therefore, likewise only measurable by comparing the amount of interest, its share in the total profits, with the value of the advanced capital. If, therefore, price expresses the value of the commodity, then interest expresses the self-expansion of money-capital and thus appears as the price paid for it to the lender. This shows how absurd it is from the very first to apply hereto the simple relations of exchange through the medium of money in buying and selling, as Proudhon does. The basic premise is precisely that money functions as capital and may thus be transferred as such, i.e., as potential capital, to a third person.
Capital, however, appears here as a commodity, inasmuch as it is offered on the market, and the use-value of money is actually alienated as capital. Its use-value, however, lies in producing profit. The value of money or of commodities employed as capital does not depend on their value as money or as commodities, but on the quantity of surplus-value they produce for their owner. The product of capital is profit. On the basis of capitalist production it is merely a different use of money — whether it is expended as money; or advanced as capital. Money, or commodities, are in themselves potentially capital, just as labour-power is potential capital. Because, 1) money may be converted into elements of production and is, as is, merely an abstract expression of them — their existence as value; 2) the material elements of wealth have the property of potentially becoming capital, because their supplementary opposite, which makes them into capital, namely wage-labour, is available on the basis of capitalist production.
The contradictory social features of material wealth — its antagonism to labour as wage-labour — are expressed in capitalist property as such independently of the production process. This particular fact, set apart from the process of capitalist production itself, from which it constantly results and as whose constant result it serves as a constant prerequisite, expresses itself in that money and commodities alike are latent, potential, capital, so that they may be sold as capital, and in that they can in this form command the labour of others bestowing a claim to appropriate the labour of others, and therefore represent self-expanding values. It also becomes clearly apparent that this relationship, and not the labour offered as an equivalent on the part of the capitalist, supplies the title and the means to appropriate the labour of others.
In the case of interest-bearing capital everything appears superficial: the advance of capital as mere transfer from lender to borrower; the reflux of realised capital as mere transfer back, as a return payment with interest, by borrower to lender. The same is true of the fact, immanent in the capitalist mode of production, that the rate of profit is not only determined by the relation of profit made in one single turnover to advanced capital-value, but also by the length of this period of turnover, hence determined as profit yielded by industrial capital within definite spans of time. In the case of interest-bearing capital this likewise appears on the surface to mean that a definite interest is paid to the lender for a definite time span.
With his usual insight into the internal connection of things, the romantic Adam Müller says (Elemente der Staatskunst, Berlin, 1809, Dritter Theil, S. 138);
He does not see how the time of production and the time of circulation enter into the determination of commodity-prices, and how this is just what determines the rate of profit for a given period of turnover of capital, whereas interest is determined by precisely this determination of profit for a given period. His sagacity here, as elsewhere, consists in observing the clouds of dust on the surface and presumptuously declaring this dust to be something mysterious and important.
The subject of this chapter, like all the other phenomena of credit we shall come across later on, cannot be analysed here in detail. The competition between lenders and borrowers and the resultant minor fluctuations of the money-market fall outside the scope of our inquiry. The circuit described by the rate of interest during the industrial cycle requires for its presentation the analysis of this cycle itself, but this likewise cannot be given here. The same applies to the greater or lesser approximate equalisation of the rate of interest in the world-market. We are here concerned with the independent form of interest-bearing capital and the individualisation of interest, as distinct from profit.
Since interest is merely a part of profit paid, according to our earlier assumption, by the industrial capitalist to the money-capitalist, the maximum limit of interest is the profit itself, in which case the portion pocketed by the productive capitalist would = 0. Aside from exceptional cases, in which interest might actually be larger than profit, but then could not be paid out of the profit, one might consider as the maximum limit of interest the total profit minus the portion (to be subsequently analysed) which resolves itself into wages of superintendence. The minimum limit of interest is altogether indeterminable. It may fall to any low. Yet in that case there will always be counteracting influences to raise it again above this relative minimum.
Let us first assume that there is a fixed relation between the total profit and that part of it which has to be paid as interest to the money-capitalist. It is then clear that the interest will rise or fall with the total profit, and the latter is determined by the general rate of profit and its fluctuations. For instance, if the average rate of profit were = 20% and the interest = ¼ of the profit, the rate of interest would = 5%; if the average rate of profit were = 16%, the rate of interest would = 4%. With the rate of profit at 20%, the rate of interest might rise to 8%, and the industrial capitalist would still make the same profit as he would at a rate of profit = 16% and a rate of interest = 4%, namely 12%. Should interest rise only to 6% or 7%, he would still keep a larger share of the profit. If the interest amounted to a constant quota of the average profit, it would follow that the higher the general rate of profit, the greater the absolute difference between the total profit and the interest, and the greater the portion of the total profit pocketed by the productive capitalist, and vice versa. Take it that interest = 1/5 of the average profit. One-fifth of 10 is 2; the difference between total profit and interest = 8. One-fifth of 20 = 4; difference = 20 - 4 = 16; 1/5 of 25 = 5; difference = 25 - 5 = 20; 1/5 of 30 = 6; difference = 30 - 6 = 24; 1/5 of 35 = 7; difference = 35 - 7 = 28. The different rates of interest of 4, 5, 6, 7% would here always represent no more than 1/5, or 20% of the total profit. If the rates of profit are different, therefore, different rates of interest may represent the same aliquot parts of the total profit, or the same percentage of the total profit. With such constant proportions of interest, the industrial profit (the difference between the total profit and the interest) would rise proportionately to the general rate of profit, and conversely.
All other conditions taken as equal, i.e., assuming the proportion between interest and total profit to be more or less constant, the functioning capitalist is able and willing to pay a higher or lower interest directly proportional to the level of the rate of profit.[1]
Since we have seen that the rate of profit is inversely proportional to the development of capitalist production, it follows that the higher or lower rate of interest in a country is in the same inverse proportion to the degree of industrial development, at least in so far as the difference in the rate of interest actually expresses the difference in the rates of profit. It shall later develop that this need not always be the case. In this sense it may be said that interest is regulated through profit, or, more precisely, the general rate of profit. And this mode of regulating interest applies even to its average.
In any event the average rate of profit is to be regarded as the ultimate determinant of the maximum limit of interest.
The fact that interest is to be related to average profit will be considered presently at greater length. Whenever a specified entity, such as profit, is to be divided between two parties, the matter naturally hinges above all on the magnitude of the entity which is to be divided, and this, the magnitude of the profit, is determined by its average rate. Suppose the general rate of profit, hence the magnitude of profit, for a capital of given size, say, = 100, is assumed as given. Then the variations of interest will obviously be inversely proportional to those of the part of profit remaining in the hands of the producing capitalist, working with a borrowed capital. And the circumstances determining the amount of profit to be distributed, of the value produced by unpaid labour, differ widely from those which determine its distribution between these two kinds of capitalists, and frequently produce entirely opposite effects. [2]
If we observe the cycles in which modern industry moves — state of inactivity, mounting revival, prosperity, over-production, crisis, stagnation, state of inactivity, etc., which fall beyond the scope of our analysis — we shall find that a low rate of interest generally corresponds to periods of prosperity or extra profit, a rise in interest separates prosperity and its reverse, and a maximum of interest up to a point of extreme usury corresponds to the period of crisis.[3] The summer of 1843 ushered in a period of remarkable prosperity; the rate of interest, still 4½% in the spring of 1842, fell to 2% in the spring and summer of 1843;[4] in September it fell as low as 1½% (Gilbart, I, p. 166); whereupon it rose to 8% and higher during the crisis of 1847.
It is possible, however, for low interest to go along with stagnation, and for moderately rising interest to go along with revived activity.
The rate of interest reaches its peak during crises, when money is borrowed at any cost to meet payments. Since a rise in interest implies a fall in the price of securities, this simultaneously offers a fine opportunity to people with available money-capital, to acquire at ridiculously low prices such interest-bearing securities as must, in the course of things, at least regain their average price as soon as the rate of interest falls again.[5]
However, the rate of interest also has a tendency to fall quite independently of the fluctuations in the rate of profit. And, indeed, due to two main causes:
II. The development of the credit system and the attendant ever-growing control of industrialists and merchants over the money savings of all classes of society that is effected through the bankers, and the progressive concentration of these savings in amounts which can serve as money-capital, must also depress the rate of interest. More about this later.
With reference to the determination of the rate of interest, Ramsay says that it
To determine the average rate of interest we must 1) calculate the average rate of interest during its variations in the major industrial cycles; and 2) find the rate of interest for investments which require long-term loans of capital.
The average rate of interest prevailing in a certain country — as distinct from the continually fluctuating market rates — cannot be determined by any law. In this sphere there is no such thing as a natural rate of interest in the sense in which economists speak of a natural rate of profit and a natural rate of wages. Massie has rightly said in this respect (p.49):
It follows from the aforesaid that there is no such thing as a "natural" rate of interest. But if, unlike the general rate of profit, there is on the one hand no general law to determine the limits of the average interest, or average rate of interest as distinct from the continually fluctuating market rates of interest, because it is merely a question of dividing the gross profit between two owners of capital under different title; on the other hand, the rate of interest — be it the average or the market rate prevalent in each particular case — appears as a uniform, definite and tangible magnitude in a quite different way from the general rate of profit. [9]
The rate of interest is similarly related to the rate of profit as the market-price of a commodity is to its value. In so far as the rate of interest is determined by the rate of profit, this is always the general rate of profit and not any specific rate of profit prevailing in some particular branch of industry, and still less any extra profit which an individual capitalist may make in a particular sphere of business.[10] It is a fact, therefore, that the general rate of profit appears as an empirical, given reality in the average rate of interest, although the latter is not a pure or reliable expression of the former.
It is indeed true that the rate of interest itself varies in accordance with the different classes of securities offered by borrowers, and in accordance with the length of time for which the money is borrowed; but it is uniform in each of these classes at a given moment. This distinction, then, does not militate against a fixed and uniform appearance of the rate of interest. [11]
The average rate of interest appears in every country over fairly long periods as a constant magnitude, because the general rate of profit varies only at longer intervals — in spite of constant variations in specific rates of profit, in which a change in one sphere is offset by an opposite change in another. And its relative constancy is revealed precisely in this more or less constant nature of the average, or common, rate of interest.
As concerns the perpetually fluctuating market rate of interest, however, it exists at any moment as a fixed magnitude, just as the market-price of commodities, because in the money-market all loanable capital continually faces functioning capital as an aggregate mass, so that the relation between the supply of loanable capital on one side, and the demand for it on the other, decides the market level of interest at any given time. This is all the more so, the more the development, and the attendant concentration, of the credit system gives to loanable capital a general social character and throws it all at once on the money-market. On the other hand, the general rate of profit is never anything more than a tendency, a movement to equalise specific rates of profit. The competition between capitalists — which is itself this movement toward equilibrium — consists here of their gradually withdrawing capital from spheres in which profit is for an appreciable length of time below average, and gradually investing capital into spheres in which profit is above average. Or it may also consist in additional capital distributing itself gradually and in varying proportions among these spheres. It is continual variation in supply and withdrawal of capital in regard to these different spheres, and never a simultaneous mass effect, as in the determination of the rate of interest.
In emphasising this difference between the rate of interest and the rate of profit, we still omit the following two points, which favour consolidation of the rate of interest: 1) the historical pre-existence of interest-bearing capital and the existence of a traditional general rate of interest; 2) the far greater direct influence exerted by the world-market on establishing the rate of interest, irrespective of the economic conditions of a country, as compared with its influence on the rate of profit.
The average profit does not obtain as a directly established fact, but rather is to be determined as an end result of the equalisation of opposite fluctuations. Not so with the rate of interest. It is a thing fixed daily in its general, at least local, validity — a thing which serves industrial and mercantile capitals even as a prerequisite and a factor in the calculation of their operation. It becomes the general endowment of every sum of money of £100 to yield £2, 3, 4, 5. Meteorological reports never denote the readings of the barometer and thermometer with greater accuracy than stock exchange reports denote the rate of interest, not for one or another capital, but for capital in the money-market, i.e., for loanable capital generally.
In the money-market only lenders and borrowers face one another. The commodity has the same form-money. All specific forms of capital in accordance with its investment in particular spheres of production or circulation are here obliterated. It exists in the undifferentiated homogeneous form of independent value-money. The competition of individual spheres does not affect it. They are all thrown together as borrowers of money, and capital confronts them all in a form, in which it is as yet indifferent to the prospective manner of its investment. It obtains most emphatically in the supply and demand of capital as essentially the common capital of a class — something industrial capital does only in the movement and competition of capital between the various individual spheres. On the other hand, money-capital in the money-market actually possesses the form, in which, indifferent to its specific employment, it is divided as a common element among the various spheres, among the capitalist class, as the requirements of production in each individual sphere may dictate. Moreover, with the development of large-scale industry money-capital, so far as it appears on the market, is not represented by some individual capitalist, not the owner of one or another fraction of the capital in the market, but assumes the nature of a concentrated, organised mass, which, quite different from actual production, is subject to the control of bankers, i.e., the representatives of social capital. So that, as concerns the form of demand, loanable capital is confronted by the class as a whole, whereas in the province of supply it is loanable capital which obtains en masse.
These are some of the reasons why the general rate of profit appears blurred and hazy alongside the definite interest rate, which may fluctuate in magnitude, but always confronts borrowers as given and fixed because it varies uniformly for all of them. Just as variations in the value of money do not prevent it from having the same value vis-à-vis all commodities. Just as the daily fluctuations in market-prices of commodities do not prevent them from being daily reported in the papers. So the rate of interest is regularly reported as "the price of money." It is so, because capital itself is being offered here in the form of money as a commodity. The fixation of its price is thus a fixation of its market-price, as with all other commodities. The rate of interest, therefore, always appears as the general rate of interest, as so much money for so much money, as a definite quantity. The rate of profit, on the other hand, may vary even within the same sphere for commodities with the same price, depending on different conditions under which different capitals produce the same commodity, because the rate of profit of an individual capital is not determined by the market-price of a commodity, but rather by the difference between market-price and cost-price. And these different rates of profit can strike a balance — first within the same sphere and then between different spheres — only through continual fluctuation.
(Note for later elaboration.) A specific form of credit: It is known that when money serves as a means of payment instead of a means of purchase, the commodity is alienated, but its value is realised only later. If payment is not made until after the commodity has again been sold, this sale does not appear as the result of the purchase; rather it is through this sale that the purchase is realised. In other words, the sale becomes a means of purchase. Secondly: titles to debts, bills of exchange, etc., become means of payment for the creditor. Thirdly: the compensation of titles to debts replaces money.
Interest, as we have seen in the two preceding chapters, appears originally,
 is originally, and remains in fact merely a portion of the profit,
 i.e., of the surplus-value, which the functioning capitalist,
 industrialist or merchant has to pay to the owner and lender of money-capital
 whenever he uses loaned capital instead of his own. If he employs only his own
 capital, no such division of profit takes place; the latter is then entirely
 his. Indeed, as long as the owners of the capital employ it on their own in the
 reproduction process, they do not compete in determining the rate of interest.
 This alone shows that the category of interest — impossible without
 determining the rate of interest — is alien to the movements of
 industrial capital as such.
It is indeed only the separation of capitalists into money-capitalists and
 industrial capitalists that transforms a portion of the profit into interest,
 that generally creates the category of interest; and it is only the competition
 between these two kinds of capitalists which creates the rate of interest.
As long as capital functions in the process of reproduction — assuming
 that it even belongs to the industrial capitalist and he has no need of paying
 it back to a lender — the capitalist, as a private individual, does not
 have at his disposal this capital itself, but only the profit, which he may
 spend as revenue. As long as his capital functions as capital, it belongs to
 the process of reproduction, is tied up in it. He is, indeed, its owner, but
 this ownership does not enable him to dispose of it in any other way, so long
 as he uses it as capital for the exploitation of labour. The same is true of
 the money-capitalist. So long as his capital is loaned out and thereby serves
 as money-capital, it brings him interest, a portion of the profit, but he
 cannot dispose of the principal. This is evident whenever he loans out his
 capital for, say, a year, or more, and receives interest at certain stipulated
 times without the return of his principal. But even the return of the principal
 makes no difference here. If he gets it back, he must always loan it out again,
 so long as it is to function for him as capital — here as money-capital.
 As long as he keeps it in his own hands, it does not collect interest and does
 not act as capital; and as long as it does gather interest and serve as
 capital, it is out of his hands. Hence the possibility of loaning out capital
 for all time. The following remarks by Tooke directed against Bosanquet are,
 therefore, entirely wrong. He quotes Bosanquet (Metallic, Paper and Credit
 Currency, London, 1842, p. 73):
To this Tooke adds the following marginal note:
If interest were = 0, the industrial capitalist operating on borrowed
 capital would stand on a par with a capitalist using his own capital. Both
 would pocket the same average profit, and capital, whether borrowed or owned,
 serves as capital only as long as it produces profit. The condition of return
 payment would alter nothing. The nearer the rate of interest approaches zero,
 falling, for instance, to 1%, the nearer borrowed capital is to being on a par
 with owner's capital. So long as money-capital is to exist as money-capital, it
 must always be loaned out, and indeed at the prevailing rate of interest, say
 of 1%, and always to the same class of industrial and commercial capitalists.
 So long as these function as capitalists, the sole difference between the one
 working with borrowed capital and the other with his own is that the former
 must pay interest and the latter must not; the one pockets the entire profit p,
 and the other p - i, the profit minus the interest. The nearer interest
 approaches zero, the nearer p - i approaches p, and hence the nearer the two
 capitals are to being on a par. The one must pay back the capital and borrow
 anew; yet the other must likewise advance it again and again to the production
 process, so long as his capital is to function, and cannot dispose of it
 freely, independent of this process. The sole remaining difference between the
 two is the obvious difference that one is the owner of his capital, and the
 other is not.
The question which now arises is this. How does this purely quantitative
 division of profit into net profit and interest turn into a qualitative one? In
 other words, how is it that a capitalist who employs solely his own, not
 borrowed capital, classifies a portion of his gross profit under the specific
 category of interest and as such calculates it separately? And, furthermore,
 how is it that all capital, whether borrowed or not, is differentiated as
 interest-bearing capital from itself as capital producing a net profit?
It is understood that not every accidental quantitative division of profit
 turns in this manner into a qualitative one. For instance, some industrial
 capitalists join hands to operate a business and then divide the profit among
 themselves in accordance with some legal agreement. Others do their business,
 each on his own, without any partners. These last do not calculate their profit
 under two heads — one part as individual profit, and the other as company
 profit for their non-existent partners. In this case the quantitative division
 therefore does not become a qualitative one. This occurs whenever ownership
 happens to be vested in several juridical persons. It does not occur whenever
 this is not the case.
In order to answer this question, we must dwell somewhat longer on the
 actual point of departure in the formation of interest; that is, we must
 proceed from the assumption that the money-capitalist and industrial capitalist
 really confront one another not just as legally different persons, but as
 persons playing entirely different roles in the reproduction process, or as
 persons in whose hands the same capital really performs a two-fold and wholly
 different movement. The one merely loans it, the other employs it
 productively.
Interest, therefore, becomes firmly established in a way that it no longer
 appears as a division of gross profit of indifference to production, which
 occurs occasionally when the industrial capitalist happens to operate with
 someone else's capital. His profit splits into interest and profit of
 enterprise even when he operates on his own capital. A merely quantitative
 division thus turns into a qualitative one. It occurs regardless of the
 fortuitous circumstance whether the industrial capitalist is, or is not, the
 owner of his capital. It is not only a matter of different quotas of profit
 assigned to different persons, but two different categories of profit which are
 differently related to the capital, hence related to different aspects of the
 capital.
Now that this division of gross profit into interest and profit of
 enterprise has become a qualitative one, it is easy to discover the reasons why
 it acquires this character of a qualitative division for the total capital and
 the entire class of capitalists.
Firstly, this follows from the simple empirical circumstance that
 the majority of industrial capitalists, even if in different numerical
 proportions, work with their own and with borrowed capital, and that at
 different times the proportion between one's own and borrowed capital
 changes.
Secondly, the transformation of a portion of the gross profit into
 the form of interest converts its other portion into profit of enterprise. The
 latter is, indeed, but the opposite form assumed by the excess of gross profit
 over interest as soon as this exists as an independent category. The entire
 analysis of the problem how gross profit is differentiated into interest and
 profit of enterprise, resolves itself into the inquiry of how a portion of the
 gross profit becomes universally ossified and individualised as interest. Yet
 historically interest-bearing capital existed as a completed traditional form,
 and hence interest as a completed sub-division of surplus-value produced by
 capital, long before the capitalist mode of production and its attendant
 conceptions of capital and profit. Thus it is that to the popular mind
 money-capital, or interest-bearing capital, is still capital as such, as
 capital par excellence. Thus it is, on the other hand, that up to the
 time of Massie the notion prevailed that it is money as such which is paid in
 interest. The fact that loaned capital yields interest whether actually
 employed as capital or not — even when borrowed only for consumption
 — lends strength to the idea that this form of capital exists
 independently. The best proof of the independence which interest possessed
 during the early periods of the capitalist mode of production in reference to
 profit, and which interest-bearing capital possessed in reference to industrial
 capital, is that it was discovered (by Massie [[J. Massie] An Essay on the
 Governing Causes of the Natural Rate of Interest, London, 1750. —
 Ed.] and after him by Hume [D. Hume, "On Interest." In: "Essays and
 Treatises on Several Subjects," Vol. I, London, 1764. — Ed.] )
 as late as the middle of the 18th century, that interest is but a portion of
 the gross profit, and that such a discovery was at all necessary.
Thirdly, whether the industrial capitalist operates on his own or
 on borrowed capital does not alter the fact that the class of money-capitalists
 confronts him as a special kind of capitalists, money-capital as an independent
 kind of capital, and interest as an independent form of surplus-value peculiar
 to this specific capital.
Qualitatively speaking, interest is surplus-value yielded by the
 mere ownership of capital; it is yielded by capital as such, even though its
 owner remains outside the reproduction process. Hence it is surplus-value
 realised by capital outside of its process.
Quantitatively speaking, that portion of profit which forms
 interest does not seem to be related to industrial or commercial capital as
 such, but to money-capital, and the rate of this portion of surplus-value, the
 rate of interest, reinforces this relation. Because, in the first place, the
 rate of interest is independently determined despite its dependence upon the
 general rate of profit, and, in the second place, like the market-price of
 commodities, it appears in contrast to the intangible rate of profit as a
 fixed, uniform, tangible and always given relation for all its variations. If
 all capital were in the hands of the industrial capitalists there would be no
 such thing as interest and rate of interest. The independent form assumed by
 the quantitative division of gross profit creates the qualitative one. If the
 industrial capitalist were to compare himself with the money-capitalist, it
 would be his profit of enterprise alone, the excess of his gross profit over
 the average interest — the latter appearing to be empirically given by
 virtue of the rate of interest — that would distinguish him from the
 other person. If, on the other hand, he compares himself with the industrial
 capitalist working with his own, instead of borrowed, capital, the latter
 differs from him only as a money-capitalist in pocketing the interest instead
 of paying it to someone else. The portion of gross profit distinguished from
 interest appears to him in either case as profit of enterprise, and interest
 itself as a surplus-value yielded by capital as such, which it would yield even
 if not applied productively.
This is correct in the practical sense for the individual capitalist. He has
 the choice of making use of his capital by lending it out as interest-bearing
 capital, or of expanding its value on his own by using it as productive
 capital, regardless of whether it exists as money-capital from the very first,
 or whether it still has to be converted into money-capital. But to apply it to
 the total capital of society, as some vulgar economists do, and to go so far as
 to define it as the cause of profit, is, of course, preposterous. The idea of
 converting all the capital into money-capital, without there being people who
 buy and put to use means of production, which make up the total capital outside
 of a relatively small portion of it existing in money, is, of course, sheer
 nonsense. It would be still more absurd to presume that capital would yield
 interest on the basis of capitalist production without performing any
 productive function, i.e., without creating surplus-value, of which
 interest is just a part; that the capitalist mode of production would run its
 course without capitalist production. If an untowardly large section of
 capitalists were to convert their capital into money-capital, the result would
 be a frightful depreciation of money-capital and a frightful fall in the rate
 of interest; many would at once face the impossibility of living on their
 interest, and would hence be compelled to reconvert into industrial
 capitalists. But we repeat that it is a fact for the individual capitalist. For
 this reason, even when operating with his own capital, he necessarily considers
 the part of his average profit which equals the average interest as fruit of
 his capital as such, set apart from the process of production; and as distinct
 from this portion singled out as interest, he considers the surplus of the
 gross profit as mere profit of enterprise.
Fourthly, [A blank in the manuscript].
We have seen, therefore, that the portion of profit which the functioning
 capitalist has to pay to the owner of borrowed capital is transformed into an
 independent form for a portion of the profit, which all capital as such,
 whether borrowed or not, yields under the name of interest. How large this
 portion is depends on the average rate of interest. Its origin is only still
 revealed in the fact that the functioning capitalist, when owner of his
 capital, does not compete — at least not actively — in determining
 the interest rate. The purely quantitative division of the profit between two
 persons who have different legal titles to it has turned into a qualitative
 division, which seems to spring from the very nature of capital and profit.
 Because, as we have seen, as soon as a portion of profit universally assumes
 the form of interest, the difference between average profit and interest, or
 the portion of profit over and above the interest, assumes a form opposite to
 interest — the form of profit of enterprise. These two forms, interest
 and profit of enterprise, exist only as opposites. Hence, they are not related
 to surplus-value, of which they are but parts placed under different
 categories, heads or names, but rather to one another. It is because one
 portion of profit turns into interest, that the other appears as profit of
 enterprise.
By profit we here always mean average profit, since variations do not
 concern us in this analysis, be they of individual profits or of profits in
 different spheres — hence variations caused by the competitive struggle
 and other circumstances affecting the distribution of the average profit, or
 surplus-value. This applies generally to this entire inquiry.
Interest is then net profit, as Ramsay calls it, which the ownership of
 capital yields as such, either simply to the lender, who remains outside the
 reproduction process, or to the owner who employs his capital productively. But
 in the latter's case, too, capital yields this net profit to him not in his
 capacity of productive capitalist, but of money-capitalist, of lender of his
 own capital as interest-bearing capital to himself as to a functioning
 capitalist. Just as the conversion of money, and of value in general, into
 capital is the constant result of capitalist production, so is its existence as
 capital its constant precondition. By its ability to be transformed into means
 of production it continually commands unpaid labour and thereby transforms the
 processes of production and circulation of commodities into the production of
 surplus-value for its owner. Interest is, therefore, the expression of the fact
 that value in general-materialised labour in its general social form-value
 which assumes the form of means of production in the actual process of
 production, confronts living labour-power as an independent power, and is a
 means of appropriating unpaid labour; and that it is such a power because it
 confronts the labourer as the property of another. But on the other hand, this
 antithesis to wage-labour is obliterated in the form of interest, because
 interest-bearing capital as such has not wage-labour, but productive capital
 for its opposite. The lending capitalist as such faces the capitalist
 performing his actual function in the process of reproduction, not the
 wage-worker, who, precisely under capitalist production, is expropriated of the
 means of production. Interest-bearing capital is capital as property
 as distinct from capital as a function. But so long as capital does
 not perform its function, it does not exploit labourers and does not come into
 opposition to labour.
On the other hand, profit of enterprise is not related as an opposite to
 wage-labour, but only to interest.
Firstly, assuming the average profit to be given, the rate of the
 profit of enterprise is not determined by wages, but by the rate of interest.
 It is high or low in inverse proportion to it [1]
Secondly, the functioning capitalist derives his claim to profits
 of enterprise, hence the profit of enterprise itself, not from his ownership of
 capital, but from the function of capital, as distinct from the definite form
 in which it is only inert property. This stands out as an immediately apparent
 contrast whenever he operates with borrowed capital, and interest and profit of
 enterprise therefore go to different persons. The profit of enterprise springs
 from the function of capital in the reproduction process, hence as a result of
 the operations, the acts by which the functioning capitalist promotes this
 function of industrial and commercial capital. But to represent functioning
 capital is not a sinecure, like representing interest-bearing capital. On the
 basis of capitalist production, the capitalist directs the process of
 production and circulation. Exploiting productive labour entails exertion,
 whether he exploits it himself or has it exploited by someone else on his
 behalf. Therefore, his profit of enterprise appears to him as distinct from
 interest, as independent of the ownership of capital, but rather as the result
 of his function as a non-proprietor — a labourer.
He necessarily conceives the idea for this reason that his profit of
 enterprise, far from being counterposed to wage-labour and far from being the
 unpaid labour of others, is itself rather a wage or wages of
 superintendence of labour, higher than a common labourer's, 1) because the work
 is far more complicated, and 2) because he pays them to himself. The fact that
 his function as a capitalist consists in creating surplus-value, i.e.,
 unpaid labour, and creating it under the most economical conditions, is
 entirely lost sight of in the contrast that interest falls to the share of the
 capitalist even when he does not perform the function of a capitalist and is
 merely the owner of capital; and that, on the other hand, profit of enterprise
 does fall to the share of the functioning capitalist even when he is not the
 owner of the capital on which he operates. He forgets, due to the antithetical
 form of the two parts into which profit, hence surplus-value, is divided, that
 both are merely parts of the surplus-value, and that this division alters
 nothing in the nature, origin, and way of existence of surplus-value.
In the process of reproduction the functioning capitalist represents capital
 as the property of another vis-à-vis the wage-labourers, and the
 money-capitalist, represented by the functioning capitalist, takes a hand in
 exploiting labour. The fact that the investing capitalist can perform his
 function of making the labourers work for him, or of employing means of
 production as capital, only as the personification of the means of production
 vis-à-vis the labourers, is forgotten in the contradiction between the function
 of capital in the reproduction process and the mere ownership of capital
 outside of the reproduction process.
In fact, the form of interest and profit of enterprise assumed by the two
 parts of profit, i.e., of surplus-value, expresses no relation to
 labour, because this relation exists only between labour and profit, or rather
 the surplus-value as a sum, a whole, the unity of these two parts. The
 proportion in which the profit is divided, and the different legal titles by
 which this division is sanctioned, are based on the assumption that profit is
 already in existence. If, therefore, the capitalist is the owner of the capital
 on which he operates, he pockets the whole profit, or surplus-value. It is
 absolutely immaterial to the labourer whether the capitalist does this, or
 whether he has to pay a part of it to a third person as its legal proprietor.
 The reasons for dividing the profit among two kinds of capitalists thus turn
 imperceptibly into the reasons for the existence of the profit, the
 surplus-value, that is to be divided, and which capital as such derives from
 the reproduction process regardless of any subsequent division. Since interest
 is opposed to profit of enterprise, and profit of enterprise to interest, and
 since they are both counterposed to one another, but not to labour, it follows
 that profit of enterprise plus interest, i.e., profit, and further
 surplus-value, are derived — from what? From the antithetical form of its
 two parts! But profit is produced before its division is undertaken, and before
 there can be any thought of it.
Interest-bearing capital remains as such only so long as the loaned money is
 actually converted into capital and a surplus is produced with it, of which
 interest is a part. But this does not rule out that drawing interest,
 regardless of the process of production, is its organic property. So does
 labour-power preserve its property of producing value only so long as it is
 employed and materialised in the labour-process; yet this does not argue
 against the fact that it is potentially, as a power, an activity which creates
 value, and that as such it does not spring from the process of production, but
 rather antecedes it. It is bought as such a capacity for creating value. One
 might also buy it without setting it to work productively; for purely personal
 ends, for instance, for personal services, etc. The same applies to capital. It
 is the borrower's affair whether he employs it as capital, hence actually sets
 in motion its inherent property of producing surplus-value. What he pays for,
 is in either case the potential surplus-value inherently contained in capital
 as a commodity.
Let us now consider profit of enterprise in greater detail.
Since the specific social attribute of capital under capitalist production
 — that of being property commanding the labour-power of another — becomes
 fixed, so that interest appears as a part of surplus-value produced by capital
 in this interrelation, the other part of surplus-value — profit of
 enterprise — must necessarily appear as coming not from capital as such,
 but from the process of production, separated from its specific social
 attribute, whose distinct mode of existence is already expressed by the term
 interest on capital. But the process of production, separated from capital, is
 simply a labour-process. Therefore, the industrial capitalist, as distinct from
 the owner of capital, does not appear as operating capital, but rather as a
 functionary irrespective of capital, or, as a simple agent of the
 labour-process in general, as a labourer, and indeed as a wage-labourer.
Interest as such expresses precisely the existence of the conditions of
 labour as capital, in their social antithesis to labour, and in their
 transformation into personal power vis-à-vis and over labour. It represents the
 ownership of capital as a means of appropriating the products of the labour of
 others. But it represents this characteristic of capital as something which
 belongs to it outside the production process and by no means is the result of
 the specifically capitalist attribute of this production process itself.
 Interest represents this characteristic not as directly counterposed to labour,
 but rather as unrelated to labour, and simply as a relationship of one
 capitalist to another. Hence, as an attribute outside of and irrelevant to the
 relation of capital to labour. In interest, therefore, in that specific form of
 profit in which the antithetical character of capital assumes an independent
 form, this is done in such a way that the antithesis is completely obliterated
 and abstracted. Interest is a relationship between two capitalists, not between
 capitalist and labourer.
On the other hand, this form of interest lends the other portion of profit
 the qualitative form of profit of enterprise, and further of wages of
 superintendence. The specific functions which the capitalist as such has to
 perform, and which fall to him as distinct from and opposed to the labourer,
 are presented as mere functions of labour. He creates surplus-value not because
 he works as a capitalist, but because he also works,
 regardless of his capacity of capitalist. This portion of surplus-value is thus
 no longer surplus-value, but its opposite, an equivalent for labour performed.
 Due to the alienated character of capital, its antithesis to labour, being
 relegated to a place outside the actual process of exploitation, namely to the
 interest-bearing capital, this process of exploitation itself appears as a
 simple labour-process in which the functioning capitalist merely performs a
 different kind of labour than the labourer. So that the labour of exploiting
 and the exploited labour both appear identical as labour. The labour of
 exploiting is just as much labour as exploited labour. The social form of
 capital falls to interest, but expressed in a neutral and indifferent form. The
 economic function of capital falls to profit of enterprise, but abstracted from
 the specific capitalist character of this function.
The same thing passes through the mind of the capitalist in this case as in
 the case of the reasons indicated in Part II of this book for compensation in
 the equalisation to average profit. These reasons for compensation which enter
 the distribution of surplus-value as determinants are distorted in a
 capitalist's mind to appear as bases of origin and the (subjective)
 justifications of profit itself.
The conception of profit of enterprise as the wages of supervising labour,
 arising from the antithesis of profit of enterprise to interest, is further
 strengthened by the fact that a portion of profit may, indeed, be separated,
 and is separated in reality, as wages, or rather the reverse, that a portion of
 wages appears under capitalist production as integral part of profit. This
 portion, as Adam Smith correctly deduced, presents itself in pure form,
 independently and wholly separated from profit (as the sum of interest and
 profit of enterprise), on the one hand, and on the other, from that portion of
 profit which remains, after interest is deducted, as profit of enterprise in
 the salary of management of those branches of business whose size, etc.,
 permits of a sufficient division of labour to justify a special salary for a
 manager.
The labour of supervision and management is naturally required wherever the
 direct process of production assumes the form of a combined social process, and
 not of the isolated labour of independent producers.[2] However, it has a double nature.
On the one hand, all labour in which many individuals co-operate necessarily
 requires a commanding will to co-ordinate and unify the process, and functions
 which apply not to partial operations but to the total activity of the
 workshop, much as that of an orchestra conductor. This is a productive job,
 which must be performed in every combined mode of production.
On the other hand — quite apart from any commercial department —
 this supervision work necessarily arises in all modes of production based on
 the antithesis between the labourer, as the direct producer, and the owner of
 the means of production. The greater this antagonism, the greater the role
 played by supervision. Hence it reaches its peak in the slave system.[3] But it is indispensable
 also in the capitalist mode of production, since the production process in it
 is simultaneously a process by which the capitalist consumes labour-power. Just
 as in despotic states, supervision and all-round interference by the government
 involves both the performance of common activities arising from the nature of
 all communities, and the specific functions arising from the antithesis between
 the government and the mass of the people.
In the works of ancient writers, who had the slave system before them, both
 sides of the work of supervision are as inseparably combined in theory as they
 were in practice. Likewise in the works of modern economists, who regard the
 capitalist mode of production as absolute. On the other hand, as I shall
 presently illustrate with an example, the apologists of the modern slave system
 utilise the work of supervision quite as much as a justification of slavery, as
 the other economists do to justify the wage system.
The villicus in Cato's time:
Aristotle:
Aristotle says in just so many words that supremacy in the political and
 economic fields imposes the functions of government upon the ruling powers, and
 hence that they must, in the economic field, know the art of consuming
 labour-power. And he adds that this supervisory work is not a matter of great
 moment and that for this reason the master leaves the "honour" of this drudgery
 to an overseer as soon as he can afford it.
The work of management and supervision — so far as it is not a special
 function determined by the nature of all combined social labour, but rather by
 the antithesis between the owner of means of production and the owner of mere
 labour-power, regardless of whether this labour-power is purchased by buying
 the labourer himself, as it is under the slave system, or whether the labourer
 himself sells his labour-power, so that the production process also appears as
 a process by which capital consumes his labour — this function arising
 out of the servitude of the direct producers has all too often been quoted to
 justify this relationship. And exploitation, the appropriation of the unpaid
 labour of others, has quite as often been represented as the reward justly due
 to the owner of capital for his work; but never better than by a champion of
 slavery in the United States, a lawyer named O'Connor, at a meeting held in New
 York on December 19, 1859, under the slogan of "Justice for the South."
Now, the wage-labourer, like the slave, must have a master who puts him to
 work and rules over him. And assuming the existence of this relationship of
 lordship and servitude, it is quite proper to compel the wage-labourer to
 produce his own wages and also the wages of supervision, as compensation for
 the labour of ruling and supervising him, or
The labour of supervision and management, arising as it does out of an
 antithesis, out of the supremacy of capital over labour, and being therefore
 common to all modes of production based on class contradictions like the
 capitalist mode, is directly and inseparably connected, also under the
 capitalist system, with productive functions which all combined social labour
 assigns to individuals as their special tasks. The wages of an
 epitropos, or régisseur, as he was called in feudal France,
 are entirely divorced from profit and assume the form of wages for skilled
 labour whenever the business is operated on a sufficiently large scale to
 warrant paying for such a manager, although, for all that, our industrial
 capitalists are far from "attending to affairs of state or studying
 philosophy."
It has already been remarked by Mr. Ure [4] that it is not the industrial capitalists, but the
 industrial managers who are "the soul of our industrial system." Whatever
 concerns the commercial part of an establishment we have already said all that
 is necessary in the preceding part.
The wages of management both for the commercial and industrial manager are
 completely isolated from the profits of enterprise in the co-operative
 factories of labourers, as well as in capitalist stock companies. The
 separation of wages of management from profits of enterprise, purely accidental
 at other times, is here constant. In a co-operative factory the antagonistic
 nature of the labour of supervision disappears, because the manager is paid by
 the labourers instead of representing capital counterposed to them. Stock
 companies in general — developed with the credit system — have an
 increasing tendency to separate this work of management as a function from the
 ownership of capital, be it self-owned or borrowed. Just as the development of
 bourgeois society witnessed a separation of the functions of judges and
 administrators from land-ownership, whose attributes they were in feudal times.
 But since, on the one hand, the mere owner of capital, the money-capitalist,
 has to face the functioning capitalist, while money-capital itself assumes a
 social character with the advance of credit, being concentrated in banks and
 loaned out by them instead of its original owners, and since, on the other
 hand, the mere manager who has no title whatever to the capital, whether
 through borrowing it or otherwise, performs all the real functions pertaining
 to the functioning capitalist as such, only the functionary remains and the
 capitalist disappears as superfluous from the production process.
It is manifest from the public accounts of the co-operative factories in
 England [6] that —
 after deducting the manager's wages, which form a part of the invested variable
 capital much the same as wages of other labourers — the profit was higher
 than the average profit, although at times they paid a much higher interest
 than did private manufacturers. The source of greater profits in all these
 cases was greater economy in the application of constant capital. What
 interests us in this, however, is the fact that here the average profit ( =
 interest + profit of enterprise) presents itself actually and palpably as a
 magnitude wholly independent of the wages of management. Since the profit was
 higher here than average profit, the profit of enterprise was also higher than
 usual.
The same situation is observed in relation to some capitalist stock
 companies, such as joint-stock banks. The London and Westminster Bank paid an
 annual dividend of 30% in 1863, while the Union Bank of London and others paid
 15%. Aside from the directors' salary the interest paid for deposits is here
 deducted from gross profit. The high profit is to be explained here by the
 moderate proportion of paid-in capital to deposits. For instance, in the case
 of the London and Westminster Bank, in 1863: paid-in capital, £1,000,000;
 deposits, £14,540,275. As for the Union Bank of London, in 1863: paid-in
 capital, £600,000; deposits, £12,384,173.
Profit of enterprise and wages of supervision, or management, were confused
 originally due to the antagonistic form assumed in respect to interest by the
 surplus of profit. This was further promoted by the apologetic aim of
 representing profit not as a surplus-value derived from unpaid labour, but as
 the capitalist's wages for work performed by him. This was met on the part of
 socialists by a demand to reduce profit actually to what it pretended to be
 theoretically, namely, mere wages of supervision. And this demand was all the
 more obnoxious to theoretical embellishment, the more these wages of
 supervision, like any other wage, found their definite level and definite
 market-price, on the one hand, with the development of a numerous class of
 industrial and commercial managers,[7] and the more they fell, on the other, like all
 wages for skilled labour, with the general development which reduces the cost
 of production of specially trained labour-power.[8] With the development of co-operation on the part of
 the labourers, and of stock enterprises on the part of the bourgeoisie, even
 the last pretext for the confusion of profit of enterprise and wages of
 management was removed, and profit appeared also in practice as it undeniably
 appeared in theory, as mere surplus-value, a value for which no equivalent was
 paid, as realised unpaid labour. It was then seen that the functioning
 capitalist really exploits labour, and that the fruit of his exploitation, when
 working with borrowed capital, was divided into interest and profit of
 enterprise, a surplus of profit over interest.
On the basis of capitalist production a new swindle develops in stock
 enterprises with respect to wages of management, in that boards of numerous
 managers or directors are placed above the actual director, for whom
 supervision and management serve only as a pretext to plunder the stockholders
 and amass wealth. Very curious details concerning this are to be found in
 The City or the Physiology of London Business; with Sketches on Change, and
 the Coffee Houses, London, 1845.
The remuneration of the directors of such companies for each weekly meeting
 is at least one guinea. The proceedings of the Court of Bankruptcy show that
 these wages of supervision were, as a rule, inversely proportional to the
 actual supervision performed by these nominal directors.
The relations of capital assume their most externalised and most fetish-like form in interest-bearing capital. We have here M — M', money creating more money, self-expanding value, without the process that effectuates these two extremes. In merchant's capital, M — C — M', there is at least the general form of the capitalistic movement, although it confines itself solely to the sphere of circulation, so that profit appears merely as profit derived from alienation; but it is at least seen to be the product of a social relation, not the product of a mere thing. The form of merchant's capital at least presents a process, a unity of opposing phases, a movement that breaks up into two opposite actions — the purchase and the sale of commodities. This is obliterated in M — M', the form of interest-bearing capital. For instance, if £1,000 are loaned out by a capitalist at a rate of interest of 5%, the value of £1,000 as a capital for one year = C + Ci', where C is the capital and i' the rate of interest. Hence, 5% = 5/100 = 1/20, and 1,000 + 1,000 × 1/20 = £1,050. The value of £1,000 as capital = £1,050, i.e., capital is not a simple magnitude. It is a relationship of magnitudes, a relationship of the principal sum as a given value to itself as a self-expanding value, as a principal sum which has produced a surplus-value. And capital as such, as we have seen, assumes this form of a directly self-expanding value for all active capitalists, whether they operate on their own or borrowed capital.
This, too, becomes distorted. While interest is only a portion of the profit, i.e., of the surplus-value, which the functioning capitalist squeezes out of the labourer, it appears now, on the contrary, as though interest were the typical product of capital, the primary matter, and profit, in the shape of profit of enterprise, were a mere accessory and by-product of the process of reproduction. Thus we get the fetish form of capital and the conception of fetish capital. In M — M' we have the meaningless form of capital, the perversion and objectification of production relations in their highest degree, the interest-bearing form, the simple form of capital, in which it antecedes its own process of reproduction. It is the capacity of money, or of a commodity, to expand its own value independently of reproduction — which is a mystification of capital in its most flagrant form.
For vulgar political economy, which seeks to represent capital as an independent source of value, of value creation, this form is naturally a veritable find, a form in which the source of profit is no longer discernible, and in which the result of the capitalist process of production — divorced from the process — acquires an independent existence.
It is not until capital is money-capital that it becomes a commodity, whose capacity for self-expansion has a definite price quoted every time in every prevailing rate of interest.
As interest-bearing capital, and particularly in its direct form of interest-bearing money-capital (the other forms of interest-bearing capital, which do not concern us here, are derivatives of this form and presuppose its existence), capital assumes its pure fetish form, M — M' being the subject, the saleable thing. Firstly, through its continual existence as money, a form, in which all its specific attributes are obliterated and its real elements invisible. For money is precisely that form in which the distinctive features of commodities as use-values are obscured, and hence also the distinctive features of the industrial capitals which consist of these commodities and conditions of their production. It is that form, in which value — in this case capital — exists as an independent exchange-value. In the reproduction process of capital, the money-form is but transient — a mere point of transit. But in the money-market capital always exists in this form. Secondly, the surplus-value produced by it, here again in the form of money, appears as an inherent part of it. As the growing process is to trees, so generating money (tocoz) appears innate in capital in its form of money-capital.
In interest-bearing capital the movement of capital is contracted. The intervening process is omitted. In this way, a capital = 1,000 is fixed as a thing, which in itself = 1,400, and which is transformed after a certain period into 1,100 just as wine stored in a cellar improves its use-value after a certain period. Capital is now a thing, but as a thing it is capital. Money is now pregnant. [Goethe, Faust, Part I, Scene 5. — Ed] As soon as it is loaned out, or invested in the reproduction process (inasmuch as it yields interest to the functioning capitalist as its owner, separate from profit of enterprise), interest on it grows, no matter whether it is awake or asleep, is at home or abroad, by day or by night. Thus interest-bearing money-capital (and all capital is money-capital in terms of its value, or is considered as the expression of money-capital) fulfils the most fervent wish of the hoarder.
It is this ingrown existence of interest in money-capital as in a thing (this is how the production of surplus-value through capital appears here), which occupies Luther's attention so thoroughly in his naive onslaught against usury. After demonstrating that interest may be demanded if the failure to repay a loan on a definite date to a lender who himself required it to make some payment, caused a loss to him, or resulted in his missing an opportunity to make a profit on a bargain, for instance, in buying a garden, Luther continues:
The conception of capital as a self-reproducing and self-expanding value, lasting and growing eternally by virtue of its innate properties — hence by virtue of the hidden quality of scholasticists — has led to the fabulous fancies of Dr. Price, which outdo by far the fantasies of the alchemists; fancies, in which Pitt believed in all earnest, and which he used as pillars of his financial administration in his laws concerning the sinking fund.
His fancy flies still higher in his Observations on Reversionary Payments, etc., London, 1772. There we read:
What a pretty theoretical introduction to the national debt of England!
Price was simply dazzled by the gargantuan dimensions obtained in a geometrical progression. Since he took no note of the conditions of reproduction and labour, and regarded capital as a self-regulating automaton, as a mere number that increases itself just as Malthus [An Essay on the Principle of Population, London, 1798, pp. 25-26. — Ed] did with respect to population in his geometrical progression, he was struck by the thought that he had found the law of its growth in the formula s = c(1 + i)n, in which s = the sum of capital + compound interest, c = advanced capital, i = rate of interest (expressed in aliquot parts of 100) and n stands for the number of years in which this process takes place.
Pitt takes Dr. Price's mystification quite seriously. In 1786 the House of Commons had resolved to raise £1 million for the public weal. According to Price, in whom Pitt believed, there was, of course, no better way than to tax the people, so as to "accumulate" this sum after raising it, and thus to spirit away the national debt through the mystery of compound interest. The above resolution of the House of Commons was soon followed up by Pitt with a law which ordered the accumulation of £250,000,
In his speech of 1792, in which Pitt proposed that the amount devoted to the sinking fund be increased, he mentioned machines, credit, etc., among the causes of England's commercial supremacy, but as
With Dr. Price's aid Pitt thus converts Smith's theory of accumulation into enrichment of a nation by means of accumulating debts, and thus arrives at the pleasant progression of an infinity of loans — loans to pay loans.
It had already been noted by Josiah Child, the father of modern banking, that £100 at 10% would produce in 70 years by compound interest £102,400. (Traité sur le commerce, etc., par J. Child, traduit, etc., Amsterdam et Berlin, 1754, p. 115. Written in 1669.)
How thoughtlessly Dr. Price's conception is applied by modern economists, is shown in the following passage from the Economist:
In its capacity of interest-bearing capital, capital claims the ownership of all wealth which can ever be produced, and everything it has received so far is but an instalment for its all-engrossing appetite. By its innate laws, all surplus-labour which the human race can ever perform belongs to it. Moloch.
In conclusion, the following hodge-podge by the romantic Müller:
It is impossible to concoct a more hair-raising absurdity in so few lines. Leaving aside the droll confusion of labourer and capitalist, value of labour-power and interest on capital, etc., the charging of compound interest is supposed to be explained by the fact that capital is loaned out to bring in compound interest. The method employed by our Müller is thoroughly characteristic of the romanticism in all walks of life. It is made up of current prejudices, skimmed from the most superficial semblance of things. This incorrect and trite content should then be "exalted" and rendered sublime through a mystifying mode of expression.
The process of accumulation of capital may be conceived as an accumulation of compound interest in the sense that the portion of profit (surplus-value) which is reconverted into capital, i.e., serves to absorb more surplus-labour, may be called interest. But:
1) Aside from all incidental interference, a large part of available capital is constantly more or less depreciated in the course of the reproduction process, because the value of commodities is not determined by the labour-time originally expended in their production, but by the labour-time expended in their reproduction, and this decreases continually owing to the development of the social productivity of labour. On a higher level of social productivity, all available capital appears, for this reason, to be the result of a relatively short period of reproduction, instead of a long process of accumulation of capital.[2]
2) As demonstrated in Part III of this book, the rate of profit decreases in proportion to the mounting accumulation of capital and the correspondingly increasing productivity of social labour, which is expressed precisely in the relative and progressive decrease of the variable as compared to the constant portion of capital. To produce the same rate of profit after the constant capital set in motion by one labourer increases ten-fold, the surplus labour-time would have to increase ten-fold, and soon the total labour-time, and finally the entire 24 hours of a day, would not suffice, even if wholly appropriated by capital. The idea that the rate of profit does not shrink is, however, the basis of Price's progression and in general the basis of "all-engrossing capital with compound interest."[3]
The identity of surplus-value and surplus-labour imposes a qualitative limit upon the accumulation of capital. This consists of the total working-day, and the prevailing development of the productive forces and of the population, which limits the number of simultaneously exploitable working-days. But if one conceives of surplus-value in the meaningless form of interest, the limit is merely quantitative and defies all fantasy.
Now, the concept of capital as a fetish reaches its height in interest-bearing capital, being a conception which attributes to the accumulated product of labour, and at that in the fixed form of money, the inherent secret power, as an automaton, of creating surplus-value in geometrical progression, so that the accumulated product of labour, as the Economist thinks, has long discounted all the wealth of the world for all time as belonging to it and rightfully coming to it. The product of past labour, the past labour itself, is here pregnant in itself with a portion of present or future living surplus-labour. We know, however, that in reality the preservation, and to that extent also the reproduction of the value of products of past labour is only the result of their contact with living labour; and secondly, that the domination of the products of past labour over living surplus-labour lasts only as long as the relations of capital, which rest on those particular social relations in which past labour independently and overwhelmingly dominates over living labour.
An exhaustive analysis of the credit system and of the instruments which it
 creates for its own use (credit-money, etc.) lies beyond our plan. We merely
 wish to dwell here upon a few particular points, which are required to
 characterise the capitalist mode of production in general. We shall deal only
 with commercial and bank credit. The connection between the development of this
 form of credit and that of public credit will not be considered here.
I have shown earlier (Buch I, Kap. III, 3, b [English edition: Ch. III, 3,
 b. — Ed.]) how the function of money as a means of payment, and
 therewith a relation of creditor and debtor between the producer and trader of
 commodities, develop from the simple circulation of commodities. With the
 development of commerce and of the capitalist mode of production, which produces
 solely with an eye to circulation, this natural basis of the credit system is
 extended, generalised, and worked out. Money serves here, by and large, merely
 as a means of payment, i.e., commodities are not sold for money, but for
 a written promise to pay for them at a certain date. For brevity's sake, we may
 put all these promissory notes under the general head of bills of exchange. Such
 bills of exchange, in their turn, circulate as means of payment until the day on
 which they fall due; and they form the actual commercial money. Inasmuch as they
 ultimately neutralise one another through the balancing of claims and debts,
 they act absolutely as money, although there is no eventual transformation into
 actual money. Just as these mutual advances of producers and merchants make up
 the real foundation of credit, so does the instrument of their circulation, the
 bill of exchange, form the basis of credit-money proper, of bank-notes, etc.
 These do not rest upon the circulation of money, be it metallic or
 government-issued paper money, but rather upon the circulation of bills of
 exchange.
W. Leatham (banker of Yorkshire) writes in his Letters on the Currency, 2nd ed., London, 1840:
(he means of the bank-notes)
(pp. 43-44). J.W. Bosanquet, Metallic, Paper and Credit
 Currency, London, 1842:
(where the
 London bankers exchange due bills and filed cheques)
(In 1889, the total turnover of the Clearing House amounted to £7,618.75 million, which, in roughly 300 business days, averages £25½ million daily. — F. E.]
Tooke says the following about credit in general:
Ch. Coquelin, Du Crédit et des Banques dans L'Industrie, Revue
 des Deux Mondes, 1842, Tome 31:
The other side of the credit system is connected with the development of
 money-dealing, which, of course, keeps step under capitalist production with the
 development of dealing in commodity. We have seen in the preceding part (Chap.
 XIX) how the care of the reserve funds of businessmen, the technical operations
 of receiving and disbursing money, of international payments, and thus of the
 bullion trade, are concentrated in the hands of the money-dealers. The other
 side of the credit system — the management of interest-bearing capital, or
 money-capital, develops alongside this money-dealing as a special function of
 the money-dealers. Borrowing and lending money becomes their particular
 business. They act as middlemen between the actual lender and the borrower of
 money-capital. Generally speaking, this aspect of the banking business consists
 of concentrating large amounts of the loanable money-capital in the bankers'
 hands, so that, in place of the individual money-lender, the bankers confront
 the industrial capitalists and commercial capitalists as representatives of all
 moneylenders. They become the general managers of money-capital. On the other
 hand by borrowing for the entire world of commerce, they concentrate all the
 borrowers vis-à-vis all the lenders. A bank represents a centralisation
 of money-capital, of the lenders, on the one hand, and on the other a
 centralisation of the borrowers. Its profit is generally made by borrowing at a
 lower rate of interest than it receives in loaning.
The loanable capital which the banks have at their disposal streams to them
 in various ways. In the first place, being the cashiers of the industrial
 capitalists, all the money-capital which every producer and merchant must have
 as a reserve fund, or receives in payment, is concentrated in their hands. These
 funds are thus converted into loanable money-capital. In this way, the reserve
 fund of the commercial world, because it is concentrated in a common treasury,
 is reduced to its necessary minimum, and a portion of the money-capital which
 would otherwise have to lie slumbering as a reserve fund, is loaned out and
 serves as interest-bearing capital. In the second place, the loanable capital of
 the banks is formed by the deposits of money-capitalists who entrust them with
 the business of loaning them out. Furthermore, with the development of the
 banking system, and particularly as soon as banks came to pay interest on
 deposits, money savings and the temporarily idle money of all classes were
 deposited with them. Small amounts, each in itself incapable of acting in the
 capacity of money-capital, merge together into large masses and thus form a
 money power. This aggregation of small amounts must be distinguished as a
 specific function of the banking system from its go-between activities between
 the money-capitalists proper and the borrowers. In the final analysis, the
 revenues, which are usually but gradually consumed, are also deposited with the
 banks.
The loan is made (we refer here strictly to commercial credit) by
 discounting bills of exchange — by converting bills of exchange into money
 before they come due — and by advances of various kinds: direct advances on
 personal credit, loans against securities, such as interest-bearing paper,
 government paper, stocks of all sorts, and, notably, overdrafts against bills of
 lading, dock warrants, and other certified titles of ownership of commodities
 and overdrawing deposits, etc.
The credit given by a banker may assume various forms, such as bills of
 exchange on other banks, cheques on them, credit accounts of the same kind, and
 finally, if the bank is entitled to issue notes — bank-notes of the bank
 itself. A bank-note is nothing but a draft upon a banker, payable at any time to
 the bearer, and given by the banker in place of private drafts. This last form
 of credit appears particularly important and striking to the layman, first,
 because this form of credit-money breaks out of the confines of mere commercial
 circulation into general circulation, and serves there as money; and because in
 most countries the principal banks issuing notes, being a peculiar mixture of
 national and private banks, actually have the national credit to back them, and
 their notes are more or less legal tender; because it is apparent here that the
 banker deals in credit itself, a bank-note being merely a circulating token of
 credit. But the banker also has to do with credit in all its other forms, even
 when he advances the cash money deposited with him. In fact, a bank-note simply
 represents the coin of wholesale trade, and it is always the deposit which
 carries the most weight with banks. The best proof of this is furnished by the
 Scottish banks.
Special credit institutions, like special forms of banks, need no further
 consideration for our purpose.
We shall revert to this passage later, in Chapter XXVIII.
Reports of Committees, Vol. VIII. Commercial Distress, Vol. 11, Part I,
 1847-48, Minutes of Evidence. (Further quoted as Commercial Distress, 1847-48.)
 In the forties, when discounting bills of exchange in London, 21-day drafts of
 one bank on another were often accepted in lieu of banknotes. (Testimony of J.
 Pease, country banker, Nos. 4638 and 4645.) According to the same report,
 bankers were in the habit of giving such bills of exchange regularly in payment
 to their customers whenever money was tight. If the receiver wanted bank-notes,
 he had to rediscount this bill. For the banks this amounted to a privilege of
 coining money. Messrs. Jones, Lloyd and Co. made payments in this way "from
 time immemorial," as soon as money was scarce and the rate of interest rose
 above 5%. The customer was glad to get such banker's bills because bills from
 Jones, Loyd and Co. were easier discounted than his own; besides, they often
 passed through twenty to thirty hands. (Ibid., Nos. 901 to 904, 905,
 992.)
All these forms serve to make the payments claim transferable.
The following from J. W. Gilbart's The History and Principle of Banking, London, 1834:
Economising on reserve funds, deposits, cheques:
Centralisation of local transactions in the hands of the banks is effected 1) through branch banks. Country banks have branch establishments in the smaller towns of their district, and London banks in different districts of the city. 2) Through agencies.
The Currency Theory Reviewed, etc., pp. 62-63:
[We have seen that Gilbart knew even in 1834 that
The easier it is to obtain advances on unsold commodities, the more such advances are taken, and the greater the temptation to manufacture commodities, or dump already manufactured commodities in distant markets, just to obtain advances of money on them. To what extent the entire business world of a country may be seized by such
 swindling, and what it finally comes to, is amply illustrated by the history of
 English business during 1845-47. It shows us what credit can accomplish. Before
 passing on to the following examples, a few preliminary remarks.
At the close of 1842 the pressure which English industry suffered almost
 uninterruptedly since 1837, began to lift. During the following two years
 foreign demand for English manufactured goods increased still more; 1845 and
 1846 marked a period of greatest prosperity. In 1843 the Opium War had opened
 China to English commerce. The new market gave a new impetus to the further
 expansion of an expanding industry, particularly the cotton industry. "How
 can we ever produce too much? We have to clothe 300 million people," a
 Manchester manufacturer said to this writer at the time. But all the newly
 erected factory buildings, steam-engines, and spinning and weaving machines did
 not suffice to absorb the surplus-value pouring in from Lancashire. With the
 same zeal as was shown in expanding production, people engaged in building
 railways. The thirst for speculation of manufacturers and merchants at first
 found gratification in this field, and as early as in the summer of 1844. Stock
 was fully underwritten, i.e., so far as there was money to cover the
 initial payments. As for the rest, time would show! But when further payments
 were due — Question 1059, C. D. 1848/57, indicates that the capital invested
 in railways in 1846-47 amounted to £75 million — recourse had to be
 taken to credit, and in most cases the basic enterprises of the firm had also to
 bleed.
And in most cases these basic enterprises were already over-burdened. The
 enticingly high profits had led to far more extensive operations than justified
 by the available liquid resources. Yet there was credit-easy to obtain and
 cheap. The bank discount rate stood low: 1¾ to 2¾% in 1844, less than
 3% until October 1845, rising to 5% for a while (February 1846), then dropping
 again to 3¼% in December 1846. The Bank of England had an unheard-of supply
 of gold in its vaults. All inland quotations were higher than ever before. Why
 then allow this splendid opportunity to escape? Why not go in for all one was
 worth? Why not send all one could manufacture to foreign markets which pined for
 English goods? And why should not the manufacturer himself pocket the double
 gain arising from selling yarn and fabrics in the Far East, and the return cargo
 in England?
Thus arose the system of mass consignments to India and China against
 advance payments, and this soon developed into a system of consignments purely
 for the sake of getting advances, as described in greater detail in the
 following notes, which led inevitably to over-flooding the markets and a crash.
I. A document issued by the House of Lords in 1848 deals with the colossal
 depreciation of government paper and bonds during the 1847 crisis. According to
 it the depreciation of October 23, 1847, compared with the level in February of
 the same year, amounted to:
II. With reference to the swindle in East Indian trade, in which drafts were
 no longer drawn because commodities were being bought, but rather commodities
 were bought to be able to make out discountable drafts convertible into money,
 the Manchester Guardian of November 24, 1847, remarks:
Mr. A in London instructs a Mr. B to buy from the manufacturer C in
 Manchester commodities for shipment to a Mr. D in East India. B pays C in six
 months' drafts to be made out by C on B. B secures himself by six months' drafts
 on A. As soon as the goods are shipped A makes out six months' drafts on D
 against the mailed bill of lading.
[This fraudulent procedure remained in vogue so long as goods to and from
 India had to round the Cape in sailing vessels. But ever since they are being
 shipped in steamboats via the Suez Canal this method of fabricating fictitious
 capital has been deprived of its basis — the long freight voyage. And ever
 since the telegraph informs the English businessman about the Indian market and
 the Indian merchant about the English market, on the same day this method has
 become totally impracticable. — F.E.]
III. The following is taken from the quoted Report on Commercial Distress,
 1847-48:
The period of prosperity in England from 1844 to 1847, was, as described
 above, connected with the first great railway swindle. The above-named report
 makes the following reference to the effect of this swindle on business in
 general:
(This is corroborated in numerous statements made by bankers in C. D. 1848-57.)
Samuel Gurney (head of the ill-famed firm of Overend, Gurney and Co.) similarly says:
A. Hodgson, Director of the Liverpool Joint-Stock Bank, shows how much bills
 of exchange may constitute a reserve for bankers:
Speculative bills.
Swindling in the East Indian and Chinese Market, 1847. — Charles Turner (head of one of the leading East Indian houses in Liverpool):
IV. In 1848 a secret committee of the House of Lords investigated the causes
 of the 1847 crisis. The evidence given to the committee was not published,
 however, until 1857 (Minutes of Evidence, taken before the Secret Committee of
 the H. of L. appointed to inquire into the Causes of Distress, etc., 1857;
 quoted as C.D. 1848/57). Here Mr. Lister, Director of the Union Bank of
 Liverpool, testified, among other things, to the following:
"2500. Were those bills ... upon which the banks had sustained a loss
 by holding them, principally bills upon corn or bills upon cotton?" — "They were bills upon all kinds of produce, corn and cotton and sugar, all foreign produce of all descriptions. There was scarcely any thing perhaps with the exception of
 oil, that did not go down." — "2506. A broker who accepts a bill
 will not accept it without a good margin as to the value."
"2512. There are two kinds of bills drawn against produce; the first
 is the original bill drawn abroad upon the merchant, who imports it.... The
 bills which are drawn against produce frequently fall due before the produce
 arrives. The merchant, therefore, when it arrives, if he has not sufficient
 capital, has to pledge that produce with the broker till he has time to sell
 that produce. Then anew species of bill is immediately drawn by the merchant in
 Liverpool upon the broker, on the security of that produce.... Then it is the
 business of the banker to ascertain from the broker whether he has the produce,
 and to what extent he has advanced upon it. It is his business to see that the
 broker has property to protect himself if he makes a loss."
"2516. We also receive bills from abroad.... A man buys a bill abroad
 on England, and sends it to a house in England; we cannot tell whether that bill
 is drawn prudently or imprudently, whether it is drawn for produce or for wind."
"2533. You said that almost every kind of foreign produce was sold at a
 great loss. Do you think that that was in consequence of undue speculation in
 that produce? — It arose from a very large import, and there not being an
 equal consumption to take it off. It appears that consumption fell off a great
 deal." — "2534. In October produce was almost unsaleable."
How a general sauve qui peut develops at the height of a crisis is
 revealed in the same report by a first-rate expert, the esteemed crafty Quaker,
 Samuel Gurney, of Overend, Gurney and Co.:
V. Concerning the mutual satiation of the two markets Mr. Alexander, a
 merchant in the East India trade, testifies before the Committee of the, Lower
 House on the Bank Act of 1857 (quoted as B.C. 1857):
So that the Indian market is, therefore, drugged by England, and the English by India. This was, indeed, the case in the summer of 1857, barely ten years after the bitter experience of
 1847!
Of 1845 the same work says:
[meaning, as we shall presently see, idle money-capital rather than means of
 circulation — F.E.]
The following extracts are also taken from the parliamentary Report on
 Commercial Distress, 1847-48. — Owing to the crop failure and famine of
 1846-47 large-scale imports of foodstuffs became necessary.
Russell's letter suspended the Bank Act. — The previously mentioned
 Charles Turner testifies:
The aforementioned S. Gurney said [1664]:
In 1847 England paid at least £9 million gold to foreign countries for
 imported foodstuffs. Of this amount £7½ million came from the Bank of England
 and 1½ million from other sources (p. 245). — Morris, Governor of the
 Bank of England:
Again Morris, when questioned by Lord G. Bentinck:
Now to the commentaries on such heroism. Disraeli questions Mr. W. Cotton, a
 Director and former Governor of the Bank of England:
Mr. Pease, a country banker, had the following to say concerning hoarding in
 banks during the crisis of 1847:
How much a money-dealer takes advantage of times of crisis is revealed by
 Tooke:
Let us now take another parliamentary report cited earlier: Report of Select
 Committee on Bank Acts, communicated from the Commons to the Lords, 1857
 (quoted further as B. C. 1857). In it Mr. Norman, Director of the Bank of
 England and a leading figure among the champions of the Currency Principle, is
 interrogated as follows:
There is, to begin with, a vulgar conception of capital as "commodities used
 in production." In so far as these commodities serve as capital, their value as
 capital, as distinct from their value as commodities, is
 expressed in the profit which is derived from their productive or mercantile
 employment. And the rate of profit under all circumstances has something to do
 with the market-price of the purchased commodities and with their supply and
 demand, but is determined by entirely different circumstances. And there is no
 doubt that the interest rate is generally limited by the rate of profit. But
 Mr. Norman should tell us just how this limit is determined. And it is
 determined by the supply and demand of money-capital as distinguished
 from the other forms of capital. It could be further asked: How are demand and
 supply of money-capital determined? It is doubtlessly true that a tacit
 connection exists between the supply of material capital and the supply of
 money-capital; and, likewise, that the demand of industrial capitalists for
 money-capital is determined by conditions of actual production. Instead of
 enlightening us on this point, Norman offers us the sage opinion that the
 demand for money-capital is not identical with the demand for money as such;
 and this sagacity alone, because he, Overstone, and the other Currency
 prophets, constantly have pricks of conscience since they are striving to make
 capital out of means of circulation as such through the artificial intervention
 of legislation, and to raise the interest rate.
Now to Lord Overstone, alias Samuel Jones Loyd, as he is asked to explain
 why he takes 10% for his "money" because "capital" is so scarce in his
 country.
Voilà ce que parler veut dire. [This is what had to be said.
 — Ed.]
Take his example of 1847. The official bank-rate stood at 3 to 3½% in
 January; 4 to 4½% in February. In March it was generally 4%. April (panic) 4 to
 7½%. May 5 to 5½%, June, on the whole, 5%. July 5%. August 5 to 5½%. September
 5% with trifling variations of 5¼, 5½, 6%. October 5, 5½, 7%. November 7-10%.
 December 7 to 5%. — In this case the interest rose because profits
 decreased and the money-values of commodities fell enormously. If, therefore,
 Overstone says here that the rate of interest rose in 1847 because the value of
 capital rose, he cannot mean anything by value of capital but the value of
 money-capital, and the value of money-capital is the rate of interest, and
 nothing else. But later he showed the cloven hoof and identified the value of
 capital with the rate of profit.
As for the high rate of interest paid in 1856, Overstone was indeed ignorant
 of the fact that this was partially a symptom that the credit jobbers were
 coming to the fore, who paid interest not from their profit, but with the
 capital of others; he maintained just a few months before the crisis of 1857
 that "business is quite sound."
He testified furthermore: [B.C. 1857]
Here, then, we learn, at last, what the meaning of "value of capital" is.
 Furthermore, the rate of profit may be high for a lengthy period, and yet the
 profit of enterprise may fall and the rate of interest rise to a point where it
 swallows the greater portion of the profit.
This is just as logical as if he were to say: The rise in the rate of profit
 has been in consequence of the rise in commodity-prices by speculation, and to
 complain that the rise in prices destroys its own cause, namely, speculation,
 is a logical absurdity, etc. That anything can ultimately destroy its own cause
 is a logical absurdity only for the usurer enamoured of the high interest rate.
 The greatness of the Romans was the cause of their conquests, and their
 conquests destroyed their greatness. Wealth is the cause of luxury and luxury
 has a destructive effect on wealth. The wiseacre! The idiocy of the present-day
 bourgeois world cannot be better described than by the respect, which the
 "logic" of the millionaire — the dunghill aristocrat — inspired in
 all England. Furthermore, if a high rate of profit and an expansion of business
 may be causes of a high interest rate, a high rate of interest is by no means
 therefore a cause of high profit. The question is precisely whether such a high
 interest (as was actually discovered during the crisis) continued or, what is
 more, reached its climax after the high rate of profit had long gone the way of
 all flesh.
The increase in the "value of capital" springing from a high rate of profit
 is identified by Overstone with an increase caused by a greater demand for
 money-capital. This demand may climb for reasons quite independent of the rate
 of profit. He himself cites the example of its rise in 1847 as a result of the
 depreciation of real capital. Depending on what suits his purpose, he ascribes
 the value of capital to real capital or money-capital.
The dishonesty of our banking lord, and his narrow-minded banker's point of
 view with its didactic flavouring are further revealed in the following:
Mr. Overstone declares that it is "impossible" to answer this question.
(This question itself lumps together the rate of profit of enterprise with
 the rate of profit, and. passes over the fact that the rate of profit is the
 common source of interest and profit of enterprise. The interest rate may leave
 the rate of profit untouched, but not the profit of enterprise. Overstone
 replied:)
(Yes, if they can do so without ruining themselves. So long as their profit
 is high, they pay the discount because they wish to, and when it is low,
 because they have to.)
(Halte-là! because he wants to anticipate the return in money of
 his tied-up capital and to prevent his business from stopping; because he must
 meet payments due. He demands more capital only when business is good, or when
 he speculates on another's capital, though business may be bad. The discount is
 by no means simply a device to expand business.)
This smug logician assumes that bills of exchange are discounted only for
 the purpose of expanding business, and that business is expanded because it is
 profitable. The first assumption is wrong. The ordinary businessman discounts,
 in order to anticipate the money-form of his capital and thereby to keep his
 process of reproduction in flow; not in order to expand his business or secure
 additional capital, but in order to balance the credit he gives by the credit
 he receives. And if he wants to expand his business on credit, discounting
 bills will do him little good because it is merely conversion of the
 money-capital which he already has in his hands from one form into another; he
 will rather take a direct loan for a longer period. The credit swindler will
 get his accommodation bills discounted to expand his business activity, to
 cover one squalid business deal by another; not to make profits but to obtain
 possession of another's capital.
After Mr. Overstone has thus identified discounting with borrowing
 additional capital (instead of with converting bills representing capital into
 hard cash), he beats an instant retreat as soon as the screws are applied to
 him.
But it is a very unlimited point of view, on the other hand, which enables
 Mr. Overstone quite suddenly to understand only his, banker's capital, as
 "capital," and to assume that the man who discounts a bill of exchange with him
 is a man without capital, just because his capital exists in the form of
 commodities, or because the money-form of his capital is a bill of exchange,
 which Mr. Overstone converts into another money-form.
(The examiner wishes to press him to explain the rate of interest, so far as
 it is influenced by the amount of bullion in the Bank, on the basis of the rate
 of interest, so far as it is influenced by the value of capital.)
The examiner, Cayley, unmoved by this poor joke, continues:
But what Cayley says is this: If a rise of interest rate together with a
 contraction of the gold reserve, is an indication of an expansion in business,
 then a fall of the interest rate together with an expansion of the gold
 reserve, must be an indication of a contraction of business. Overstone has no
 answer to this.
(Precisely this is the mistake, to conceive money as an instrument; it is a
 form of capital.)
Here he declares point-blank that manufacturers and merchants are not
 capitalists, and that the capitalist's capital is only money-capital.
Here he is stuck.
He is then asked whether merchants' bills of exchange represent commodities
 which have been sold or shipped. He denies that these bills represent the value
 of commodities in the same way that a bank-note represents gold. (3740, 3741.)
 This is somewhat insolent.
Drawing bills of exchange is converting commodities into a form of
 credit-money, just as discounting bills of exchange is converting this
 credit-money into another, namely bank-notes. At any rate, Mr. Overstone admits
 here that the purpose of discounting is to obtain money. A while ago he said
 that discounting was a way not of converting capital from one form into
 another, but of obtaining additional capital.
Their purpose is to obtain means of payment for due bills of exchange on
 themselves, on account of the prevailing lack of credit, so that they will not
 have to let their commodities go below price. If they have no capital at all
 themselves, they receive it along with the means of payment, because they
 receive value without an equivalent. The urge to obtain money as such consists
 always in the wish to convert value from the form of commodities or creditor's
 claims into the form of money. Hence, even aside from the crises, the great
 difference between borrowing capital and discount, the latter being a mere
 conversion of money claims from one form into another, or into real money.
[I take the liberty at this point in my capacity of editor to interpolate a
 few remarks.
With respect to Norman, as well as Loyd-Overstone, the banker is always the
 one who "advances capital" to others, and his customers are those who demand
 "capital" from him. Thus, Overstone says that people have bills of exchange
 discounted through him, "because they wish to obtain the command of
 capital" (3729), and that it is pleasant for such people if they can
 "get command of capital at a low rate of interest" (3730). "Money is
 the instrument for obtaining capital" (3736), and during a panic the
 great desire of the mercantile community is to "get the command of
 capital" (3743). For all of Loyd-Overstone's confusion over what
 capital is, it is at least clear that he designates what the banker gives to
 his client as capital, as a capital which the client did not formerly possess,
 but which was advanced to him to supplement what he already possessed.
The banker has become so accustomed to act as distributor (through loans) of
 the social capital available in money-form that he considers every function
 whereby he hands out money, as loaning. All the money he pays out appears to
 him as a loan. If the money is directly loaned, this is literally true. If it
 is invested in the bill-discounting business, it is in fact advanced by himself
 until the bill becomes due. The notion thus grows on him that all the payments
 he makes are advances; furthermore, that they are advances not merely in the
 sense that every investment of money with the object of deriving interest or
 profit, is economically considered an advance of money which the owner of money
 concerned, in his capacity of private individual, makes to himself in his
 capacity as entrepreneur, but advances in the definite sense that the banker
 lends his client a sum of money which augments the capital already at the
 latter's disposal.
It is this conception, which, transferred from the banker's office to
 political economy, has created the confusing controversy, whether that which
 the banker places at his client's disposal in hard cash is capital or mere
 money, a medium of circulation, or currency. To decide this —
 fundamentally simple — controversy, we must put ourselves in the place of
 a bank client. It all depends on what this customer requests and receives.
If the bank allows its client a loan simply on his personal credit, without
 any security on his part, then the matter is clear. He then certainly receives
 an advance of definite value as a supplement to the capital he has already
 invested. He receives it in the form of money; hence, not merely money, but
 also money-capital.
If, on the other hand, he receives the advance against securities, etc.,
 then it is an advance in the sense of money paid to him on condition that he
 pay it back. But it is not an advance of capital. For the securities also
 represent capital, and a larger amount at that than the advance. The recipient
 therefore receives less capital-value than he deposits as security; this
 represents for him no acquisition of additional capital. He does not enter into
 the transaction because he needs capital — he has that in his securities
 — but because he needs money. Here we, therefore, have an advance of
 money, not of capital.
If the loan is granted by discounting bills, then even the form of
 an advance disappears. Then it is purely a matter of buying and selling. The
 bill passes by endorsement into the possession of the bank, while the money
 passes into the possession of the client. There is no question of any return
 payment on his part. If the client buys hard cash with a bill of exchange or
 some similar instrument of credit, it is no more and no less an advance than
 were he to buy cash money with his other commodities, such as cotton, iron, or
 corn. Still less can this be called an advance of capital. Every
 purchase and sale between one merchant and another is a transfer of capital.
 But an advance of capital occurs only when the transfer of capital is not
 reciprocal, but unilateral and for a period of time. An advance of capital
 through discount can, therefore, only occur when a bill is a speculative one,
 which does not represent any sold commodities, and no banker will take such a
 bill if he is aware of its nature. In the regular discounting business the bank
 client does not, therefore, receive an advance, either of capital or of money.
 What he receives is money for sold commodities.
The cases in which the customer demands and receives capital from a bank are
 thus clearly distinguished from those, in which he merely receives an advance
 of money, or buys money from the bank. And since least of all Mr.
 Loyd-Overstone ever advanced his funds without collateral except on the rarest
 occasions (he was the banker of my firm in Manchester), it is likewise evident
 that his lyric descriptions of the great quantities of capital loaned by
 generous bankers to manufacturers in need of capital are gross inventions.
By the way, in Chapter XXXII Marx says essentially the same thing: "The
 demand for means of payment is a mere demand for convertibility into
 money, so far as merchants and producers have good securities to offer; it
 is a demand for money-capital whenever there is no collateral, so that
 an advance of means of payment gives them not only the form of money
 but also the equivalent they lack, whatever its form, with which to
 make payment." — And again in Chapter XXXIII: "Under a developed system
 of credit, with the money concentrated in the hands of bankers, it is they,
 at least nominally, who advance it. This advance refers only to money
 in circulation. It is an advance of circulation, not an advance of
 capitals which it circulates." Mr. Chapman, who should know, likewise
 corroborates this conception of the discounting business: B. C. 1857:
We shall, however, return to this subject in Chapter XXVIII. — F.
 E.]
(Then comes the old Ricardian theory of money.)
(But a moment ago it was capital = money or gold, and a little before that
 he had explained the rise in interest rate by a high rate of profit, due to an
 expansion rather than a contraction of business or capital.)
(This shrewd banker doubles first the business activity and then the demand
 for capital with which it is to be doubled. All he sees is his client, who asks
 Mr. Loyd for more capital by which to double the volume of his business.)
Here the fish is caught in the net again. The first difficulty is to
 discount a bill of exchange, or to obtain a loan against the security of
 commodities. It is the difficulty of converting capital, or a commercial token
 of capital into money. And this difficulty is manifested, among other things,
 in a high rate of interest. But as soon as the money is obtained, what is the
 second difficulty? Does anyone ever find any difficulty in getting rid of his
 money when it is merely a matter of paying? And if it is a matter of buying,
 has anyone ever had any difficulty in purchasing during times of crisis? And,
 for the sake of argument, should this refer to a specific dearth in corn,
 cotton, etc., this difficulty could only appear in the price of these
 commodities, not in the value of money-capital, i.e., not in the rate
 of interest; and this difficulty is overcome, in the final analysis, by the
 fact that our man now has the money to buy them.
At last we have what he means by capital. He converts money into capital by
 "entrusting" it, less euphemistically, by loaning it at interest.
After Mr. Overstone has stated that a change in the rate of discount is not
 essentially connected with a change in quantity of the gold reserve in a bank,
 or in the quantity of available money, but that there is at best only a
 coincidence in time, he repeats:
Here, at last, we have the connection between a high rate of profit and a
 demand for capital as Overstone conceives it. Now, a high rate of profit
 prevailed in, for example, 1844-45 in the cotton industry, because raw cotton
 was cheap, and remained so, whereas the demand for cotton goods was strong. The
 value of capital (and in an earlier statement Overstone calls capital that
 which everyone needs in his business), in this case therefore the value of raw
 cotton, was not increased for the manufacturer. The high rate of profit may
 have induced some cotton manufacturer to obtain money on credit for the purpose
 of expanding his business. Thereby his demand rose for money-capital,
 but for nothing else.
This is superlative. The arbitrary provision that the Bank may make out as
 many paper notes as it has gold in the treasury and 14 million more, implies,
 of course, that its issue of notes fluctuates with the fluctuations of the gold
 reserve. But since the present "means of information which we possess" clearly
 showed that the mass of notes, which the Bank can thus manufacture (and which
 the issue department transfers to the banking department) — that this
 circulation between the two departments of the Bank of England, fluctuating
 with the fluctuations of the gold reserve, does not determine the fluctuations
 in the circulation of bank-notes outside the Bank of England, then the latter
 — the real circulation — becomes a matter of indifference to the
 bank administration, and the circulation between the two departments of the
 Bank, whose difference from the real circulation is mirrored in the reserve,
 alone becomes decisive. To the outside world this internal circulation is
 significant only because the reserve indicates how close the Bank is
 approaching the legal maximum of its note issue, and how much its clients can
 still receive from the banking department.
The following is a brilliant example of Overstone's mala fides:
And with this he retires, but not into the chamber of a student. [2]
The general remarks, which the credit system so far elicited from us, were the following:
I. Its necessary development to effect the equalisation of the rate of profit, or the movements of this equalisation, upon which the entire capitalist production rests.
II. Reduction of the costs of circulation.
1) One of the principal costs of circulation is money itself, being value in itself. It is economised through credit in three ways.
A. By dropping away entirely in a great many transactions.
B. By the accelerated circulation of the circulating medium.[1] This corresponds in part with what is to be said under 2). On the one hand, the acceleration is technical; i.e., with the same magnitude and number of actual turnovers of commodities for consumption, a smaller quantity of money or money tokens performs the same service. This is bound up with the technique of banking. On the other hand, credit accelerates the velocity of the metamorphoses of commodities and thereby the velocity of money circulation.
C. Substitution of paper for gold money.
2) Acceleration, by means of credit, of the individual phases of circulation or of the metamorphosis of commodities, later the metamorphosis of capital, and with it an acceleration of the process of reproduction in general. (On the other hand, credit helps to keep the acts of buying and selling longer apart and serves thereby as a basis for speculation.) Contraction of reserve funds, which may be viewed in two ways: as a reduction of the circulating medium, on the one hand, and, on the other, as a reduction of that part of capital which must always exist in the form of money.[2]
III. Formation of stock companies. Thereby:
1) An enormous expansion of the scale of production and of enterprises, that was impossible for individual capitals. At the same time, enterprises that were formerly government enterprises, become public.
2) The capital, which in itself rests on a social mode of production and presupposes a social concentration of means of production and labour-power, is here directly endowed with the form of social capital (capital of directly associated individuals) as distinct from private capital, and its undertakings assume the form of social undertakings as distinct from private undertakings. It is the abolition of capital as private property within the framework of capitalist production itself.
3) Transformation of the actually functioning capitalist into a mere manager, administrator of other people's capital, and of the owner of capital into a mere owner, a mere money-capitalist. Even if the dividends which they receive include the interest and the profit of enterprise, i.e., the total profit (for the salary of the manager is, or should be, simply the wage of a specific type of skilled labour, whose price is regulated in the labour-market like that of any other labour), this total profit is henceforth received only in the form of interest, i.e., as mere compensation for owning capital that now is entirely divorced from the function in the actual process of reproduction, just as this function in the person of the manager is divorced from ownership of capital. Profit thus appears (no longer only that portion of it, the interest, which derives its justification from the profit of the borrower) as a mere appropriation of the surplus-labour of others, arising from the conversion of means of production into capital, i.e., from their alienation vis-à-vis the actual producer, from their antithesis as another's property to every individual actually at work in production, from manager down to the last day-labourer. In stock companies the function is divorced from capital ownership, hence also labour is entirely divorced from ownership of means of production and surplus-labour. This result of the ultimate development of capitalist production is a necessary transitional phase towards the reconversion of capital into the property of producers, although no longer as the private property of the individual producers, but rather as the property of associated producers, as outright social property. On the other hand, the stock company is a transition toward the conversion of all functions in the reproduction process which still remain linked with capitalist property, into mere functions of associated producers, into social functions.
Before we go any further, there is still the following economically important fact to be noted: Since profit here assumes the pure form of interest, undertakings of this sort are still possible if they yield bare interest, and this is one of the causes, stemming the fall of the general rate of profit, since such undertakings, in which the ratio of constant capital to the variable is so enormous, do not necessarily enter into the equalisation of the general rate of profit.
This is the abolition of the capitalist mode of production within the capitalist mode of production itself, and hence a self-dissolving contradiction, which prima facie represents a mere phase of transition to a new form of production. It manifests itself as such a contradiction in its effects. It establishes a monopoly in certain spheres and thereby requires state interference. It reproduces a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation. It is private production without the control of private property.
The co-operative factories of the labourers themselves represent within the old form the first sprouts of the new, although they naturally reproduce, and must reproduce, everywhere in their actual organisation all the shortcomings of the prevailing system. But the antithesis between capital and labour is overcome within them, if at first only by way of making the associated labourers into their own capitalist, i.e., by enabling them to use the means of production for the employment of their own labour. They show how a new mode of production naturally grows out of an old one, when the development of the material forces of production and of the corresponding forms of social production have reached a particular stage. Without the factory system arising out of the capitalist mode of production there could have been no co-operative factories. Nor could these have developed without the credit system arising out of the same mode of production. The credit system is not only the principal basis for the gradual transformation of capitalist private enterprises into capitalist stock companies, but equally offers the means for the gradual extension of co-operative enterprises on a more or less national scale. The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other.
So far we have considered the development of the credit system — and the implicit latent abolition of capitalist property — mainly with reference to industrial capital. In the following chapters we shall consider credit with reference to interest-bearing capital as such, and to its effect on this capital, and the form it thereby assumes; and there are generally a few more specifically economic remarks still to be made.
But first this:
The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced because a large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner, who anxiously weighs the limitations of his private capital in so far as he handles it himself. This simply demonstrates the fact that the self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system.[4] Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection. At the same time credit accelerates the violent eruptions of this contradiction — crises — and thereby the elements of disintegration of the old mode of production.
The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to a new mode of production. It is this ambiguous nature, which endows the principal spokesmen of credit from Law to Isaac Péreire with the pleasant character mixture of swindler and prophet.
The distinction between currency and capital, as Tooke, Wilson, and others draw it, whereby the differences between medium of circulation as money, as money-capital generally, and as interest-bearing capital (moneyed capital in the English sense) are thrown together pell-mell, comes down to two things.[1]
Currency circulates on the one hand as coin (money), so far as it promotes the expenditure of revenue, hence the traffic between the individual consumers and the retail merchants, to which category belong all merchants who sell to the consumers — to the individual consumers as distinct from productive consumers or producers. Here money circulates in the function of coin, although it continually replaces capital. A certain portion of money in a particular country is continually devoted to this function, although this portion consists of perpetually changing individual coins. In so far as money promotes the transfer of capital, however, either as a means of purchase (medium of circulation) or as a means of payment, it is capital. It is, therefore, neither its function as a means of purchase, nor that as a means of payment, which distinguishes it from coin, for it may also act as a means of purchase between one dealer and another so far as they buy from one another in hard cash, and also as a means of payment between dealer and consumer so far as credit is given and the revenue consumed before it is paid. The difference is, therefore, that in the second case this money not only replaces the capital for one side, the seller, but is expended, advanced, by the other side, the buyer, as capital. The difference, then, is in fact that between the money-form of revenue and the money-form of capital, but not that between currency and capital, for a certain quantity of money circulates in the transactions between dealers as well as in the transactions between consumers and dealers. It is, therefore, equally currency in both functions. Tooke's conception introduces confusion into this question in various ways:
1) By confusing the functional distinctions;
2) By introducing the question of the quantity of money circulating together in both functions;
3) By introducing the question of the relative proportions of the quantities of currency circulating in the two functions and thus in the two spheres of the process of reproduction.
Furthermore, in returning to the retailer, circulating money restores the money-form of his capital.
To reduce the difference between circulation as circulation of revenue and circulation of capital into a difference between currency and capital is, therefore, altogether wrong. This mode of expression is in Tooke's case due to his simply assuming the standpoint of a banker issuing his own bank-notes. Those of his notes which are continually in the public's hands (even if consisting of ever different notes) and serving as currency cost him nothing, save the cost of the paper and the printing. They are circulating certificates of indebtedness (bills of exchange) made out in his own name, but they bring him money and thus serve as a means of expanding his capital. They differ from his capital, however, whether it be his own or borrowed. That is why there is a special distinction for him between currency and capital, which, however, has nothing to do with the definition of these terms as such, least of all with that made by Tooke.
The distinct attribute — whether it serves as the money-form of revenue or of capital — changes nothing in the character of money as a medium of circulation; it retains this character no matter which of the two functions it performs. True, money serves more as an actual medium of circulation (coin, means of purchase) when acting as the money-form of revenue, due to the dispersion of purchases and sales, and because the majority of disbursers of revenue, the labourers, can buy relatively little on credit; whereas in the traffic of the business world, where the medium of circulation is the money-form of capital, money serves mainly as a means of payment, partly on account of the concentration, and partly on account of the prevailing credit system. But the distinction between money as a means of payment and money as a means of purchase (means of circulation) is a distinction that refers to the money itself. It is not a distinction between money and capital. More copper and silver circulate in the retail business, and more gold in the wholesale business. Yet the distinction between silver and copper on the one hand, and gold on the other, is not the distinction between circulation and capital.
Ad 2) Introducing the question of the quantity of money circulating together in both functions: So far as money circulates, be it as a means of purchase or as a means of payment — no matter in which of the two spheres and independently of its function of realising revenue or capital — the quantity of its circulating mass comes under the laws developed previously in discussing the simple circulation of commodities (Vol. I, Ch. III, 2, b). The velocity of circulation, hence the number of repetitions of the same function as means of purchase and means of payment by the same pieces of money in a given term, the mass of simultaneous purchases and sales, or payments, the sum of the prices of the circulating commodities, and finally the balances of payments to be settled in the same period, determine in either case the mass of circulating money, of currency. Whether money so employed represents capital or revenue for the payer or receiver, is immaterial, and in no way alters the matter. Its mass is simply determined by its function as a medium of purchase and payment.
Ad 3) On the question of the relative proportions of the amounts of currency circulating in both functions and thus in both spheres of the reproduction process. Both spheres of circulation are connected internally, for, on the one hand, the mass of revenues to be spent expresses the volume of consumption, and, on the other, the magnitude of the masses of capital circulating in production and commerce expresses the volume and velocity of the reproduction process. Nevertheless, the same circumstances have a different effect, working even in opposite directions, upon the quantities of money circulating in both functions or spheres, or on the amount of currency, as the English put it in banking parlance. And this gives new cause for Tooke's vulgar distinction between capital and currency. The fact that the gentlemen of the Currency Theory confuse two different things is no reason to present them as two different concepts.
In times of prosperity, intense expansion, acceleration and vigour of the reproduction process, labourers are fully employed. Generally, there is also a rise in wages which makes up in some measure for their fall below average during other periods of the business cycle. At the same time, the revenues of the capitalists grow considerably. Consumption increases generally. Commodity-prices also rise regularly, at least in the various vital branches of business. Consequently, the quantity of circulating money grows at least within definite limits, since the greater velocity of circulation, in turn, sets up certain barriers to the growth of the amount of currency. Since that portion of the social revenue which consists of wages is originally advanced by the industrial capitalist in the form of variable capital, and always in money-form, it requires more money for its circulation in times of prosperity. But we must not count this twice — first as money required for the circulation of variable capital, and then as money required for the circulation of the labourers' revenue. The money paid to the labourers as wages is spent in retail trade and returns about once a week to the banks as the retailers' deposits, after negotiating miscellaneous intermediary transactions in smaller cycles. In times of prosperity the reflux of money proceeds smoothly for the industrial capitalists, and thus the need for money accommodation does not increase because more wages have to be paid and more money is required for the circulation of their variable capital.
The total result is that the mass of circulating media serving the expenditure of revenue grows decidedly in periods of prosperity.
As concerns the circulation required for the transfer of capital, hence required exclusively between capitalists, a period of brisk business is simultaneously a period of the most elastic and easy credit. The velocity of circulation between capitalist and capitalist is regulated directly by credit, and the mass of circulating medium required to settle payments, and even in cash purchases, decreases accordingly. It may increase in absolute terms, but decreases relatively under all circumstances compared to the expansion of the reproduction process. On the one hand, greater mass payments are settled without the mediation of money; on the other, owing to the vigour of the process, there is a quicker movement of the same amounts of money, both as means of purchase and of payment. The same quantity of money promotes the reflux of a greater number of individual capitals.
On the whole, the currency of money in such periods appears full, although its Department II (transfer of capital) is, at least relatively, contracted, while its Department I (expenditure of revenue) expands in absolute terms.
The refluxes express the reconversion of commodity-capital into money, M — C — M', as we have seen in the discussion of the reproduction process, Book II, Part I. Credit renders the reflux in money-form independent of the time of actual reflux both for the industrial capitalist and the merchant. Both of them sell on credit; their commodities are thus alienated before they are reconverted into money for them, hence before they flow back to them in money-form. On the other hand, they buy on credit, and in this way the value of their commodities is reconverted, be it into productive capital or commodity-capital, even before this value has really been transformed into money, i.e., before the commodity-price is due and paid for. 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. See the testimony of the Liverpool bank director, p. 398. [Present edition: Ch. XXV. — Ed.]
To insert what I have noted earlier: "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." (Zur Kritik der politischen Oekonomie, 1859, S. 83, 84.)
The reverse is true in a period of crisis. Circulation No. I contracts, prices fall, similarly wages; the number of employed labourers is reduced, the mass of transactions decreases. On the contrary, the need for money accommodation increases in circulation No. II with the contraction of credit. We shall examine this point in greater detail immediately.
There is no doubt that with the decrease of credit which goes hand in hand with stagnation in the reproduction process, the circulation mass required for No. I, the expenditure of revenue, contracts, while that required for No. II, the transfer of capital, expands. But to what extent this statement coincides with what is maintained by Fullarton and others still remains to he analysed:
In the first place it is evident that in the first of the two cases mentioned above, during times of prosperity, when the mass of the circulating medium must increase, the demand for it increases. But it is likewise evident that, when a manufacturer draws more or less of his deposit out of a bank in gold or bank-notes because he has to expend more capital in the form of money, his demand for capital does not thereby increase. 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.
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.
As we have previously remarked, both periods are primarily distinguished by the fact that the demand for currency between consumers and dealers predominates in periods of prosperity, and the demand for currency between capitalists predominates in periods of depression. During a depression the former decreases, and the latter increases.
What strikes Fullarton and others as decisively important is the phenomenon that in such periods when securities in possession of the Bank of England are on the increase, its circulation of notes decreases, and vice versa. The level of the securities, however, expresses the volume of the pecuniary accommodation, the volume of discounted bills of exchange and of advances made against marketable collateral. Thus Fullarton says in the above passage that the securities in the hands of the Bank of England fluctuate mostly in an opposite direction to its circulation, and this corroborates the view long held by private banks that no bank can increase its issue of bank-notes beyond a certain point determined by the needs of its public; but if a bank wants to make advances beyond this limit, it must make them out of its capital, hence it must either realise on securities or utilise deposits which it would otherwise have invested in securities.
This, however, reveals also what Fullarton means by capital. What does capital signify here? That the Bank can no longer make advances with its own bank-notes, or promissory notes, which, of course, cost it nothing. But what does it make advances with in that case? With the sums realised from the sale of securities held in reserve, i.e., government bonds, stocks, and other interest-bearing paper. And what does it get in payment for the sale of such paper? Money-gold or bank-notes, so far as the latter are legal tender, such as those of the Bank of England. What the bank advances, therefore, is under all circumstances money. This money, however, now constitutes a part of its capital. If it advances gold, this is understandable. If it advances notes, then these notes represent capital, because it has given up some actual value for them, such as interest-bearing paper. In the case of private banks the notes secured by them through the sale of securities cannot be anything else, in the main, but Bank of England notes or their own notes, since others would hardly be taken in payment for securities. If it is the Bank of England itself, then its own notes, which it receives in return, cost it capital, that is, interest-bearing paper. Besides, it thereby withdraws its own notes from circulation. Should it reissue these notes, or issue new notes in their stead to the same amount, they now represent capital. And they do so equally well, when used for advances to capitalists, or when used later, when the demand for such pecuniary accommodation decreases, for reinvestment in securities. In all these cases the term capital is employed only from the banker's point of view, and means that the banker is compelled to loan more than his mere credit.
As is known, the Bank of England makes all its advances in its own notes. Now, if despite this, as a rule, the bank-note circulation of the Bank decreases in proportion as the discounted bills of exchange and collateral in its hands, and thus its advances increase — what becomes of the notes thrown into circulation? How do they return to the Bank?
But it significantly affects the question, whether there is a drain of gold, or not. Capital is transferred in the form of precious metal, because it either cannot be transferred at all, or only at a great loss in the shape of commodities. The fear which the modern banking system has of gold drain exceeds anything ever imagined by the monetary system, which considers precious metals as the only true wealth. Take, for instance, the following evidence of the Governor of the Bank of England, Morris, before the Parliamentary Committee on the crisis of 1847-48:
It is gold which here stands for the only true wealth.
Fullarton quotes the discovery by Tooke that
This discovery proves that such drains of gold occur generally after a period of animation and speculation, as
This, naturally, is at once the best refutation of the claim of the advocates of the Currency Theory, that
On the contrary, while the Bank of England generally carries a strong gold reserve during a period of prosperity, this hoard is generally formed during the slack period, which follows after a storm.
All this sagacity concerning the drain of gold, then, amounts to saying that the demand for international media of circulation and payment differs from the demand for internal media of circulation and payment (and it goes without saying, therefore, that "the existence of a drain does not necessarily imply any diminution of the internal demand for circulation," as Fullarton has it on page 112 of his work) and that the export of precious metal and its being thrown into international circulation is not the same as throwing notes or specie into internal circulation. As for the rest, I have shown on a previous occasion [English edition: Vol. 1. — Ed.] that the movements of a hoard concentrated as a reserve fund for international payments have as such nothing to do with the movements of money as a medium of circulation. At any rate, the question. is complicated by the fact that the different functions of a hoard, which I have developed from the nature of money — such as its function as a reserve fund of means of payment to cover due bills in domestic business; the function of a reserve fund of currency; and finally, the function of a reserve fund of world-money — are here attributed to one sole reserve fund. It also follows from this that under certain circumstances a drain of gold from the Bank to the home market may combine with a drain abroad. The question is further complicated however by the fact that this hoard is arbitrarily burdened with the additional function of serving as a fund guaranteeing the convertibility of bank-notes in countries, in which the credit system and credit-money are developed. And in addition to all this comes 1) the concentration of the national reserve fund in one single central bank, and 2) its reduction to the smallest possible minimum. Hence, also, Fullarton's complaint (p.143):
However, if we now leave aside the drain of gold, how can a bank that issues notes, like the Bank of England, increase the amount of money accommodation granted by it without increasing its issue of bank-notes?
So far as the bank itself is concerned, all the notes outside its walls, whether circulating or in private hoards, are in circulation, i.e., are out of its hands. Hence, if the bank extends its discounting and money-lending business, its advances on securities, all the bank-notes issued by it for that purpose must return, for otherwise they would increase the volume of circulation, something which is not supposed to happen. This return may take place in two ways.
First: The bank pays A notes against securities; A uses them to pay for bills of exchange due to B, and B deposits notes once more in the bank. This brings to a close the circulation of these notes, but the loan remains.
The notes, which the bank advanced to A, have now returned to it; but it is the creditor of A, or whoever may have been the drawer of the bill discounted by A, and the debtor of B for the amount of value expressed in these notes, and B thus disposes of a corresponding portion of the capital of the bank.
Secondly: A pays to B, and B himself, or C, to whom he pays the notes, uses these notes to pay bills due to the bank, directly or indirectly. In that case the bank is paid in its own notes. This concludes the transaction (pending A's return payment to the bank).
To what extent, now, shall the bank's advance to A be regarded as an advance of capital, or as a mere advance of means of payment?[3]
[This depends on the nature of the loan itself. Three cases must be distinguished.
First case. — A receives from the bank amounts loaned on his own personal credit, without giving any security for them. In this case he does not merely receive means of payment, but also unquestionably a new capital, which he may employ in his business and realise as an additional capital until the maturity date.
Second case. — A has given to the bank securities, national bonds, or stocks as collateral, and received for them, say, up to two-thirds of their momentary value as a cash loan. In this case he has received the means of payment he needed, but no additional capital, for he entrusted to the bank a larger capital-value than he received from it. But this larger capital-value was, on the one hand, unavailable for his momentary needs (means of payment), because invested in a particular interest-bearing form; on the other hand, A had his own reasons for not wanting to convert this capital-value directly into means of payment by selling it. His securities served, among other things, as a reserve capital, and he set them in motion as such. The transaction between A and the bank, therefore, consists in a temporary mutual transfer of capital, so that A does not receive any additional capital (quite the contrary!) although he receives the desired means of payment. For the bank, on the other hand, this transaction constitutes a temporary lodgement of money-capital in the form of a loan, a conversion of money-capital from one form into another, and this conversion is precisely the essential function of the banking business.
Third case. — A had the bank discount a bill of exchange and received its value in cash after the deduction of discount. In this case he sold a non-convertible money-capital to the bank for the amount of value in convertible form. He sold his still running bill for cash money. The bill is now the property of the bank. It does not alter the matter that A as last endorser of the bill is responsible for it to the bank in default of payment. He shares this responsibility with the other endorsers and with the drawer of the bill, all of whom are duly responsible to him. In this case, therefore, we do not have a loan, but only an ordinary purchase and sale. For this reason, A has nothing to pay back to the bank. It reimburses itself by cashing the bill when it becomes due. Here, too, a transfer of capital has taken place between A and the bank, and in exactly the same manner as in the sale and purchase of any other commodity, and for this very reason A did not receive any additional capital. What he needed and received were means of payment, and he received them by having the bank convert one form of his money-capital — his bill — into another — money.
It is therefore only in the first case that there is any question of a real advance of capital; in the second and third cases, the matter can be so regarded only in the sense that every investment of capital implies an "advance of capital." In this sense the bank advances money-capital to A; but for A it is money-capital at best in the sense that it is a portion of his capital in general. And he requires it and uses it not specifically as capital, but rather as specifically a means of payment. Otherwise, every ordinary sale of commodities by which means of payment are secured might be considered as receiving an advance of capital. — F. E.]
In the case of private banks which issue their own notes we have this difference, that if their notes remain neither in local circulation, nor return to them in the form of deposits, or in payment for due bills of exchange, they fall into the hands of persons who compel the private bank to cash these notes in gold or in notes of the Bank of England. In this event, therefore, its loan in fact represents an advance of notes of the Bank of England, or, what amounts to the same thing for the private bank, of gold, hence a portion of its bank capital. The same holds good in case the Bank of England itself, or some other bank, which has a fixed legal maximum for its issue of notes, must sell securities to withdraw its own notes from circulation and then issue them once more in the shape of advances; in that case, the bank's own notes represent a portion of its mobilised bank capital.
Even if the circulation were purely metallic, it would be possible 1) for a drain of gold [Marx evidently refers here to a drain of gold that would, at least partially, go abroad — F. E.] to empty the treasury, and 2) since gold would be chiefly wanted by the bank to make payments (in settlement of erstwhile transactions), the advance against collateral could grow considerably, but would flow back to it in the form of deposits or in payment of due bills of exchange; so that, on one side, the total treasure of the bank would decrease with an increase of the securities in its hands, while on the other, it would now be holding the same amount, which it possessed formerly as owner, as debtor of its depositors, and finally the total quantity of currency would decrease.
Our assumption so far has been that the loans are made in notes, so that they carry with them at least a fleeting, even if instantly disappearing, increase in the issue of notes. But this is not necessary. Instead of a paper note, the bank may open a credit account for A, in which case this A, the bank's debtor, becomes its imaginary depositor. He pays his creditors with cheques on the bank, and the recipient of these cheques passes them on to his own banker, who exchanges them for the cheques outstanding against him in the clearing house. In this case no mediation of notes takes place at all, and the entire transaction is confined to the fact that the bank settles its own debt with a cheque drawn on itself, and its actual recompense consists in its claim on A. In this case the bank has loaned a portion of its own bank capital, because its own debt claims, to A.
In so far as this demand for pecuniary accommodation is a demand for capital, it is so only for money-capital. It is capital only from the standpoint of the banker, namely gold (in the case of gold exports abroad) or notes of the National Bank, which a private bank can obtain only by purchase against an equivalent, and which, therefore, represent capital for it. Or, again, it is a case of interest-bearing papers, government bonds, stocks, etc., which must be sold in order to obtain gold or bank-notes. Such papers, however, if in government bonds, are capital only for the buyer, for whom they represent the purchase price, the capital he invested in them. In themselves they are not capital, but merely debt claims. If mortgages, they are mere titles on future ground-rent. And if they are shares of stock, they are mere titles of ownership, which entitle the holder to a share in future surplus-value. All of these are not real capital. They do not form constituent parts of capital, nor are they values in themselves. By way of similar transactions money belonging to the bank may be transformed into deposits, so that the bank becomes the debtor instead of owner of this money, and holds it under a different title of ownership. However important this may be to the bank, it alters nothing in the mass of reserve capital, or even of money-capital available in a particular country. Capital, therefore, represents here only money-capital, and, if not available in the actual form of money, it represents a mere title on capital. This is very important, since a scarcity of, and pressing demand for, banking capital is confounded with a decrease of actual capital, which conversely is in such cases rather abundant in the form of means of production and products, and swamps the markets.
Should circulation as a means of payment increase at a higher rate than it decreases as a means of purchase, the aggregate circulation would increase, although the money serving as a means of purchase would decrease considerably in quantity. And this actually occurs in certain periods of crisis, namely, when credit collapses completely and when not only commodities and securities are unsaleable but bills of exchange are undiscountable and nothing counts any more but money payment, or, as the merchant puts it, cash. Since Fullarton et al. do not understand that the circulation of notes as means of payment is the characteristic feature of such periods of money shortage, they treat this phenomenon as accidental.
In the discussion of money as a means of payment (Vol. I, Ch. III, 3, b) we have already explained, in what manner, when the chain of payments is suddenly interrupted, money turns from its ideal form into a material and, at the same time, absolute form of value vis-à-vis the commodities. This was illustrated by some examples (footnotes 100 and 101). This interruption itself is partly an effect, partly a cause of the instability of credit and of the circumstances accompanying it, such as overstocking of markets, depreciation of commodities, interruption of production, etc.
It is evident, however, that Fullarton transforms the distinction between money as a means of purchase and money as a means of payment into a false distinction between currency and capital. This is again due to the narrow-minded banker's conception of circulation.
It might yet be asked: which is it, capital or money in its specific function as a means of payment that is in short supply in such periods of stringency? And this is a well-known controversy.
In the first place, so far as the stringency is marked by a drain of gold, it is evidently international means of payment that are demanded. But money in its specific capacity of international means of payment is gold in its metallic actuality, as a valuable substance in itself, as a quantity of value. It is at the same time capital, not capital as commodity-capital, but as money-capital, capital not in the form of commodities but in the form of money (and, at that, of money in the eminent sense of the word, in which it exists as universal world-market commodity). It is not a contradiction here between a demand for money as a means of payment and a demand for capital. The contradiction is rather between capital in its money-form and capital in its commodity-form; and the form which is here demanded and in which alone it can function, is its money-form.
Aside from this demand for gold (or silver) it cannot be said that there is any dearth whatever of capital in such periods of crisis. Under extraordinary circumstances, such as rise in the price of corn, or a cotton famine, etc., this may be the case; but these phenomena are not necessary or regular accompaniments of such periods; and the existence of such a lack of capital cannot be assumed beforehand without further ado from the mere fact that there is a heavy demand for pecuniary accommodation. On the contrary. The markets are overstocked, swamped with commodity-capital. Hence, it is not, in any case, a lack of commodity-capital which causes the stringency. We shall return to this question later.
It is now necessary to examine the component parts of bank capital in greater detail.
We have just seen that Fullarton and others transform the distinction between money as a medium of circulation and money as a means of payment — also universal money in so far as it concerns a drain of gold — into a distinction between currency and capital.
The peculiar role played by capital in this instance is the reason why bankers' economics teaches that money is indeed capital par excellence as insistently as enlightened economics taught that money is not capital.
In subsequent analyses, we shall demonstrate that money-capital is being confused here with moneyed capital in the sense of interest-bearing capital, while in the former sense, money-capital is always merely a transient form of capital — in contradistinction to the other forms of capital, namely, commodity-capital and productive capital.
Bank capital consists of 1) cash money, gold or notes; 2) securities. The latter can be subdivided into two parts: commercial paper or bills of exchange, which run for a period, become due from time to time, and whose discounting constitutes the essential business of the banker; and public securities, such as government bonds, treasury notes, stocks of all kinds, in short, interest-bearing paper which is however significantly different from bills of exchange. Mortgages may also be included here. The capital composed of these tangible component parts can again be divided into the banker's invested capital and into deposits, which constitute his banking capital, or borrowed capital. In the case of banks which issue notes, these must be included. We shall leave the deposits and notes out of consideration for the present. It is evident at any rate that the actual component parts of the banker's capital (money, bills of exchange, deposit currency) remain unaffected whether the various elements represent the banker's own capital or deposits, i.e., the capital of other people. The same division would remain, whether he were to carry on his business with only his own capital or only with deposited capital.
The form of interest-bearing capital is responsible for the fact that every definite and regular money revenue appears as interest on some capital, whether it arises from some capital or not. The money income is first converted into interest, and from the interest one can determine the capital from which it arises. In like manner, in the case of interest-bearing capital, every sum of value appears as capital as long as it is not expended as revenue; that is, it appears as principal in contrast to possible or actual interest which it may yield.
The matter is simple. Let the average rate of interest be 5% annually. A sum of £500 would then yield £25 annually if converted into interest-bearing capital. Every fixed annual income of £25 may then be considered as interest on a capital of £500. This, however, is and remains a purely illusory conception, except in the case where the source of the £25, whether it be a mere title of ownership or claim, or an actual element of production such as real estate, is directly transferable or assumes a form in which it becomes transferable. Let us take the national debt and wages as illustrations.
We shall now consider labour-power in contrast to the capital of the national debt, where a negative quantity appears as capital — just as interest-bearing capital, in general, is the fountainhead of all manner of insane forms, so that debts, for instance, can appear to the banker as commodities. Wages are conceived here as interest, and therefore labour-power as the capital yielding this interest. For example, if the wage for one year amounts to £50 and the rate of interest is 5%, the annual labour-power is equal to a capital of £1,000. The insanity of the capitalist mode of conception reaches its climax here, for instead of explaining the expansion of capital on the basis of the exploitation of labour-power, the matter is reversed and the productivity of labour power is explained by attributing this mystical quality of interest-bearing capital to labour-power itself. In the second half of the 17th century, this used to be a favourite conception (for example, of Petty), but it is used even nowadays in all seriousness by some vulgar economists and more particularly by some German statisticians.[1] Unfortunately two disagreeably frustrating facts mar this thoughtless conception. In the first place, the labourer must work in order to obtain this interest. In the second place, he cannot transform the capital-value of his labour-power into cash by transferring it. Rather, the annual value of his labour-power is equal to his average annual wage, and what he has to give the buyer in return through his labour is this same value plus a surplus-value, i.e., the increment added by his labour. In a slave society, the labourer has a capital-value, namely, his purchase price. And when he is hired out, the hirer must pay, in the first place, the interest on this purchase price, and, in addition, replace the annual wear and tear on the capital.
The formation of a fictitious capital is called capitalisation. Every periodic income is capitalised by calculating it on the basis of the average rate of interest, as an income which would be realised by a capital loaned at this rate of interest. For example, if the annual income is £100 and the rate of interest 5%, then the £100 would represent the annual interest on £2,000, and the £2,000 is regarded as the capital-value of the legal title of ownership on the £100 annually. For the person who buys this title of ownership, the annual income of £100 represents indeed the interest on his capital invested at 5%. All connection with the actual expansion process of capital is thus completely lost, and the conception of capital as something with automatic self-expansion properties is thereby strengthened.
Even when the promissory note — the security — does not represent a purely fictitious capital, as it does in the case of state debts, the capital-value of such paper is nevertheless wholly illusory. We have previously seen in what manner the credit system creates associated capital. The paper serves as title of ownership which represents this capital. The stocks of railways, mines, navigation companies, and the like, represent actual capital, namely, the capital invested and functioning in such enterprises, or the amount of money advanced by the stockholders for the purpose of being used as capital in such enterprises. This does not preclude the possibility that these may represent pure swindle. But this capital does not exist twice, once as the capital-value of titles of ownership (stocks) on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises. It exists only in the latter form, and a share of stock is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it. A may sell this title to B, and B may sell it to C. These transactions do not alter anything in the nature of the problem. A or B then has his title in the form of capital, but C has transformed his capital into a mere title of ownership to the anticipated surplus-value from the stock capital.
To the extent that the depreciation or increase in value of this paper is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value.
Unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital.
All this paper actually represents nothing more than accumulated claims, or legal titles, to future production whose money or capital value represents either no capital at all, as in the case of state debts, or is regulated independently of the value of real capital which it represents.
In all countries based on capitalist production, there exists in this form an enormous quantity of so-called interest-bearing capital, or moneyed capital. And by accumulation of money-capital nothing more, in the main, is connoted than an accumulation of these claims on production, an accumulation of the market-price, the illusory capital-value of these claims.
A part of the banker's capital is now invested in this so-called interest-bearing paper. This is itself a portion of the reserve capital, which does not perform any function in the actual business of banking. The most important portion of this paper consists of bills of exchange, that is, promises to pay made by industrial capitalists or merchants. For the money-lender these bills of exchange are interest-bearing, in other words, when he buys them, he deducts interest for the time which they still have to run. This is called discounting. It depends on the prevailing rate of interest, how much of a deduction is made from the sum represented by the bill of exchange.
Finally, the last part of the capital of a banker consists of his money reserve in gold and notes. The deposits, unless tied up by agreement for a certain time, are always at the disposal of the depositors. They are in a state of continual fluctuation. But while one depositor draws on his account, another deposits, so that the general average sum total of deposits fluctuates little during periods of normal business.
The reserve funds of the banks, in countries with developed capitalist production, always express on the average the quantity of money existing in the form of a hoard, and a portion of this hoard in turn consists of paper, mere drafts upon gold, which have no value in themselves. The greater portion of banker's capital is, therefore, purely fictitious and consists of claims (bills of exchange), government securities (which represent spent capital), and stocks (drafts on future revenue). And it should not be forgotten that the money-value of the capital represented by this paper in the safes of the banker is itself fictitious, in so far as the paper consists of drafts on guaranteed revenue (e.g., government securities), or titles of ownership to real capital (e.g., stocks), and that this value is regulated differently from that of the real capital, which the paper represents at least in part; or, when it represents mere claims on revenue and no capital, the claim on the same revenue is expressed in continually changing fictitious money-capital. In addition to this, it must be noted that this fictitious banker's capital represents largely, not his own capital, but that of the public, which makes deposits with him, either interest-bearing or not.
Deposits are always made in money, in gold or notes, or in drafts upon these. With the exception of the reserve fund, which contracts or expands in accordance with the requirements of actual circulation, these deposits are in fact always in the hands of the industrial capitalists and merchants, on the one hand, whose bills of exchange are thereby discounted and who thus receive advances; on the other hand, they are in the hands of dealers in securities (exchange brokers), or in the hands of private parties who have sold their securities, or in the hands of the government (in the case of treasury notes and new loans). The deposits themselves play a double role. On the one hand, as we have just mentioned, they are loaned out as interest-bearing capital and are, therefore, not in the safes of the banks, but figure merely on their books as credits of the depositors. On the other hand, they function merely as such book entries, in so far as the mutual claims of the depositors are balanced by cheques on their deposits and can be written off against each other. In this connection, it is immaterial whether these deposits are entrusted to the same banker, who can thus balance the various accounts against each other, or whether this is done in different banks, which mutually exchange cheques and pay only the balances to one another.
With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands.[3] The greater portion of this "money-capital" is purely fictitious. All the deposits, with the exception of the reserve fund, are merely claims on the banker, which, however, never exist as deposits. To the extent that they serve in clearing-house transactions, they perform the function of capital for the bankers — after the latter have loaned them out. They pay one another their mutual drafts upon the non-existing deposits by balancing their mutual accounts.
Adam Smith says with regard to the role played by capital in the loaning of money:
Since the same piece of money can be used for various purchases, corresponding to its velocity of circulation, it can similarly be used for various loans, since the purchases take it from one person to another, and a loan is but a transfer from one person to another without the mediation of a purchase. To every seller, money represents the transformed shape of his commodities. Nowadays, when every value is expressed as capital-value, it represents in the various loans various capitals in succession. This is simply another way of expressing the earlier statement that it can successively realise various commodity-values. At the same time it serves as a medium of circulation, in order to transfer the real capitals from person to person. In the case of loans, it does not pass from person to person as a medium of circulation. As long as it remains in the hands of the lender, it is in his hands not a medium of circulation, but the value existence of his capital. And in this form he transfers it when lending it to another. If A had lent the money to B, and B to C, without the mediation of purchases, the same money would not represent three capitals, but only one — a single capital-value. 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.
The same thing that Adam Smith says about loans in general also applies to deposits, which are merely another name for the loans which the public makes to the bankers. The same pieces of money may serve as the instruments for any number of deposits.
Just as everything in this credit system is doubled and trebled and transformed into a mere phantom of the imagination, so it is with the "reserve fund," where one would at last hope to grasp on to something solid.
Let us listen once more to Mr. Morris, Governor of the Bank of England:
Ultimately, then, the reserve funds actually merge with the reserve fund of the Bank of England.[4] However, this reserve fund also has a double existence. The reserve fund of the banking department is equal to the surplus of notes which the Bank is authorised to issue over and above the notes in circulation. The legal maximum of the note issue is £14 million (for which no bullion reserve is required; it is the approximate amount owed by the state to the Bank) plus the amount of the Bank's supply of precious metal. If the supply of precious metal in the Bank amounts to £14 million, the Bank can thus issue £28 million in notes, and if £20 million of these are in circulation, the reserve fund of the banking department is £8 million. These £8 million's worth of notes are then legally the banker's capital at the disposal of the Bank, and at the same time the reserve fund for its deposits. Now, if a drain of gold takes place, whereby the supply of precious metal in the Bank is reduced by £6 million — requiring the destruction of an equivalent number of notes — the reserve of the banking department would fall from £8 million to £2 million. On the one hand, the Bank would raise its rate of interest considerably; on the other hand, the banks having deposits with it, and the other depositors, would observe a large decrease in the reserve fund covering their own credits in the Bank. In 1857, the four largest stock banks of London threatened to call in their deposits, and thereby bankrupt the banking department, unless the Bank of England would secure a "government letter" suspending the Bank Act of 1844. [5] In this way the banking department could fail, as in 1847, while any number of millions (e.g., 8 million in 1847) are held in its issue department to guarantee the convertibility of the circulating notes. But this is again illusory.
The only difficult questions, which we are now approaching in connection with the credit system, are the following:
First: The accumulation of the actual money-capital. To what extent is it, and to what extent is it not, an indication of an actual accumulation of capital, i.e., of reproduction on an extended scale? Is the so-called plethora of capital — an expression used only with reference to the interest-bearing capital, i.e., moneyed capital — only a special way of expressing industrial over-production, or does it constitute a separate phenomenon alongside of it? Does this plethora, or excessive supply of money-capital, coincide with the existence of stagnating masses of money (bullion, gold coin and bank-notes), so that this superabundance of actual money is the expression and external form of that plethora of loan capital?
Secondly: To what extent does a scarcity of money, i.e., a shortage of loan capital, express a shortage of real capital (commodity-capital and productive capital)? To what extent does it coincide, on the other hand, with a shortage of money as such, a shortage of the medium of circulation?
In so far as we have hitherto considered the peculiar form of accumulation of money-capital and of money wealth in general, it has resolved itself into an accumulation of claims of ownership upon labour. The accumulation of the capital of the national debt has been revealed to mean merely an increase in a class of state creditors, who have the privilege of a firm claim upon a certain portion of the tax revenue.[6] By means of these facts, whereby even an accumulation of debts may appear as an accumulation of capital, the height of distortion taking place in the credit system becomes apparent. These promissory notes, which are issued for the originally loaned capital long since spent, these paper duplicates of consumed capital, serve for their owners as capital to the extent that they are saleable commodities and may, therefore, be reconverted into capital.
Titles of ownership to public works, railways, mines, etc., are indeed, as we have also seen, titles to real capital. But they do not place this capital at one's disposal. It is not subject to withdrawal. They merely convey legal claims to a portion of the surplus-value to be produced by it. But these titles likewise become paper duplicates of the real capital; it is as though a bill of lading were to acquire a value separate from the cargo, both concomitantly and simultaneously with it. They come to nominally represent non-existent capital. For the real capital exists side by side with them and does not change hands as a result of the transfer of these duplicates from one person to another. They assume the form of interest-bearing capital, not only because they guarantee a certain income, but also because, through their sale, their repayment as capital-values can be obtained. To the extent that the accumulation of this paper expresses the accumulation of railways, mines, steamships, etc., to that extent does it express the extension of the actual reproduction process — just as the extension of, for example, a tax list on movable property indicates the expansion of this property. But as duplicates which are themselves objects of transactions as commodities, and thus able to circulate as capital-values, they are illusory, and their value may fall or rise quite independently of the movement of value of the real capital for which they are titles. Their value, that is, their quotation on the Stock Exchange, necessarily has a tendency to rise with a fall in the rate of interest — in so far as this fall, independent of the characteristic movements of money-capital, is due merely to the tendency for the rate of profit to fall; therefore, this imaginary wealth expands, if for this reason alone, in the course of capitalist production in accordance with the expressed value for each of its aliquot parts of specific original nominal value.[7]
Gain and loss through fluctuations in the price of these titles of ownership, and their centralisation in the hands of railway kings, etc., become, by their very nature, more and more a matter of gamble, which appears to take the place of labour as the original method of acquiring capital wealth and also replaces naked force. This type of imaginary money wealth not only constitutes a very considerable part of the money wealth of private people, but also of banker’s capital, as we have already indicated.
In order to quickly settle this question, let us point out that one could also mean by the accumulation of money-capital the accumulation of wealth in the hands of bankers (money-lenders by profession), acting as middlemen between private money-capitalists on the one hand, and the state, communities, and reproducing borrowers on the other. For the entire vast extension of the credit system, and all credit in general, is exploited by them as their private capital. These fellows always possess capital and incomes in money-form or in direct claims on money. The accumulation of the wealth of this class may take place completely differently than actual accumulation, but it proves at any rate that this class pockets a good deal of the real accumulation.
Let us reduce the scope of the problem before us. Government securities, like stocks and other securities of all kinds, are spheres of investment for loanable capital — capital intended for bearing interest. They are forms of loaning such capital. But they themselves are not the loan capital, which is invested in them. On the other hand, in so far as credit plays a direct role in the reproduction process, what the industrialist or merchant needs when he wishes to have a bill discounted or a loan granted is neither stocks nor government securities. What he needs is money. He, therefore, pledges or sells those securities if he cannot secure money in any other way. It is the accumulation of this loan capital with which we have to deal here, and more particularly accumulation of loanable money-capital. We are not concerned here with loans of houses, machines, or other fixed capital. Nor are we concerned with the advances industrialists and merchants make to one another in commodities and within the compass of the reproduction process; although we must also investigate this point beforehand in more detail. We are concerned exclusively with money loans, which are made by bankers, as middlemen, to industrialists and merchants.
Let us then, to begin with, analyse commercial credit, that is, the credit which the capitalists engaged in reproduction give to one another. It forms the basis of the credit system. It is represented by the bill of exchange, a promissory note with a definite term of payment, i.e., a document of deferred payment. Everyone gives credit with one hand and receives credit with the other. Let us completely disregard, for the present, banker’s credit, which constitutes an entirely different sphere. To the extent that these bills of exchange circulate among the merchants themselves as means of payment again, by endorsement from one to another — without, however, the mediation of discounting — it is merely a transfer of the claim from A to B and does not change the picture in the least. It merely replaces one person by another. And even in this case, the liquidation can take place without the intervention of money. Spinner A, for example, has to pay a bill to cotton broker B, and the latter to importer C. Now, if C also exports yarn, which happens often enough, he may buy yarn from A on a bill of exchange and the spinner A may pay the broker B with the broker’s own bill which was received in payment from C. At most, a balance will have to be paid in money. The entire transaction then consists merely in the exchange of cotton and yarn. The exporter represents only the spinner, and the cotton broker, the cotton planter.
Two things are now to be noted in the circuit of this purely commercial credit.
First: The settlement of these mutual claims depends upon the return flow of capital, that is, on C — M, which is merely deferred. If the spinner has received a bill of exchange from a cotton goods manufacturer, then manufacturer can pay if the cotton goods which he has on the market have been sold in the interim. If the corn speculator has a bill of exchange drawn upon his agent, the agent can pay the money if the corn has been sold in the interim at the expected price. These payments, therefore, depend on the fluidity of reproduction, that is, the production and consumption processes. But since the credits are mutual, the solvency of one depends upon the solvency of another; for in drawing his bill of exchange, one may have counted either on the return flow of the capital in his own business or on the return flow of the capital in a third party’s business whose bill of exchange is due in the meantime. Aside from the prospect of return flow of capital, payment can only be possible by means of reserve capital at the disposal of the person drawing the bill of exchange, in order to meet his obligations in case the return flow of capital should be delayed.
Secondly: This credit system does not do away with the necessity for cash payments. For one thing, a large portion of expenses must always be paid in cash, e.g., wages, taxes, etc. Furthermore, capitalist B, who has received from C a bill of exchange in place of cash payment, may have to pay a bill of his own which has fallen due to D before C’s bill becomes due, and so he must have ready cash. A complete circuit of reproduction as that assumed above, i.e., from cotton planter to cotton spinner and back again, can only constitute an exception; it will be constantly interrupted at many points. We have seen in the discussion of the reproduction process (Vol II, Part III) that the producers of constant capital exchange, in part, constant capital among themselves. As a result, the bills of exchange can, more or less, balance each other out. Similarly, in the ascending line of production, where the cotton broker draws on the cotton spinner, the spinner on the manufacturer of cotton goods, the manufacturer on the exporter, the exporter on the importer (perhaps of cotton again). But the circuit of transactions, and, therefore, the turn about of the series of claims, does not take place at the same time. For example, the claim of the spinner on the weaver is not settled by the claim of the coal-dealer on the machine-builder. The spinner never has any counter-claims on the machine-builder, in his business, because his product, yarn, never enters as an element in the machine-builder’s reproduction process. Such claims must, therefore, be settled by money.
The limits of this commercial credit, considered by themselves, are 1) the wealth of the industrialists and merchants, that is, their command of reserve capital in case of delayed returns; 2) these returns themselves. These returns may be delayed, or the prices of commodities may fall in the meantime or the commodities may become momentarily unsaleable due to a stagnant market. The longer the bills of exchange run, the larger must be the reserve capital, and the greater the possibility of a diminution or delay of the returns through a fall in prices or a glut on the market. And, furthermore, the returns are so much less secure, the more the original transaction was conditioned upon speculation on the rise or fall of commodity-prices. But it is evident that with the development of the productive power of labour, and thus of production on a large scale: 1) the markets expand and become more distant from the place of production; 2) credits must, therefore, be prolonged; 3) the speculative element must thus more and more dominate the transactions. Production on a large scale and for distant markets throws the total product into the hands of commerce; but it is impossible that the capital of a nation should double itself in such a manner that commerce should itself be able to buy up the entire national product with its own capital and to sell it again. Credit is, therefore, indispensable here; credit, whose volume grows with the growing volume of value of production and whose time duration grows with the increasing distance of the markets. A mutual interaction takes place here. The development of the production process extends the credit, and credit leads to an extension of industrial and commercial operations.
In the first stage, credit promotes the actual successive phases in the production of the same article; in the second, credit merely promotes the transfer of the article, including its transportation, from one merchant to another, in other words, the process C — M. But here also the commodity is at least in the process of circulation, that is, in a phase of the reproduction process.
It follows, then, that it is never idle capital which is loaned here, but capital which must change its form in the hands of its owner; it exists in a form that for him is merely commodity-capital, i.e., capital which must be retransformed, and, to begin with, at least converted into money. It is, therefore, the metamorphosis of commodities that is here promoted by credit; not merely C — M, but also M — C and the actual production process. A large quantity of credit within the reproductive circuit (banker’s credit excepted) does not signify a large quantity of idle capital, which is being offered for loan and is seeking profitable investment. It means rather a large employment of capital in the reproduction process. Credit, then, promotes here 1) as far as the industrial capitalists are concerned, the transition of industrial capital from one phase into another, the connection of related and dovetailing spheres of production; 2) as far as the merchants are concerned, the transportation and transition of commodities from one person to another until their definite sale for money or their exchange for other commodities.
The maximum of credit is here identical with the fullest employment of industrial capital, that is, the utmost exertion of its reproductive power without regard to the limits of consumption. These limits of consumption are extended by the exertions of the reproduction process itself. On the one hand, this increases the consumption of revenue on the part of labourers and capitalists, on the other hand, it is identical with an exertion of productive consumption.
As long as the reproduction process is continuous and, therefore, the return flow assured, this credit exists and expands, and its expansion is based upon the expansion of the reproduction process itself. As soon as a stoppage takes place, as a result of delayed returns, glutted markets, or fallen prices, a superabundance of industrial capital becomes available, but in a form in which it cannot perform its functions. Huge quantities of commodity-capital, but unsaleable. Huge quantities of fixed capital, but largely idle due to stagnant reproduction. Credit is contracted 1) because this capital is idle, i.e., blocked in one of its phases of reproduction because it cannot complete its metamorphosis; 2) because confidence in the continuity of the reproduction process has been shaken; 3) because the demand for this commercial credit diminishes. The spinner, who curtails his production and has a large quantity of unsold yarn in stock, does not need to buy any cotton on credit; the merchant does not need to buy any commodities on credit because he has more than enough of them.
Hence, if there is a disturbance in this expansion or even in the normal flow of the reproduction process, credit also becomes scarce; it is more difficult to obtain commodities on credit. However, the demand for cash payment and the caution observed toward sales on credit are particularly characteristic of the phase of the industrial cycle following a crash. During the crisis itself, since everyone has products to sell, cannot sell them, and yet must sell them in order to meet payments, it is not the mass of idle and investment-seeking capital, but rather the mass of capital impeded in its reproduction process, that is greatest just when the shortage of credit is most acute (and therefore the rate of discount highest for banker’s credit). The capital already invested is then, indeed, idle in large quantities because the reproduction process is stagnant. Factories are closed, raw materials accumulate, finished products flood the market as commodities. Nothing is more erroneous, therefore, than to blame a scarcity of productive capital for such a condition. It is precisely at such times that there is a superabundance of productive capital, partly in relation to the normal, but temporarily reduced scale of reproduction, and partly in relation to the paralysed consumption.
Let us suppose that the whole of society is composed only of industrial capitalists and wage-workers. Let us furthermore disregard price fluctuations, which prevent large portions of the total capital from replacing themselves in their average proportions and which, owing to the general interrelations of the entire reproduction process as developed in particular by credit, must always call forth general stoppages of a transient nature. Let us also disregard the sham transactions and speculations, which the credit system favours. Then, a crisis could only be explained as the result of a disproportion of production in various branches of the economy, and as a result of a disproportion between the consumption of the capitalists and their accumulation. But as matters stand, the replacement of the capital invested in production depends largely upon the consuming power of the non-producing classes; while the consuming power of the workers is limited partly by the laws of wages, partly by the fact that they are used only as long as they can be profitably employed by the capitalist class. The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.
A real lack of productive capital, at least among capitalistically developed nations, can be said to exist only in times of general crop failures, either in the principal foodstuffs or in the principal industrial raw materials.
However, in addition to this commercial credit we have actual money credit. The advances of the industrialists and merchants among one another are amalgamated with the money advances made to them by the bankers and money-lenders. In discounting bills of exchange the advance is only nominal. A manufacturer sells his product for a bill of exchange and gets this bill discounted by some bill-broker. In reality, the latter advances only the credit of his banker, who in turn advances to the broker the money-capital of his depositors. The depositors consist of the industrial capitalists and merchants themselves and also of workers (through savings-banks) — as well as ground-rent recipients and other unproductive classes. In this way every individual industrial manufacturer and merchant gets around the necessity of keeping a large reserve fund and being dependent upon his actual returns. On the other hand, the whole process becomes so complicated, partly by simply manipulating bills of exchange, partly by commodity transactions for the sole purpose of manufacturing bills of exchange, that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash. The best proof of this is furnished, for instance, by the Reports on Bank Acts of 1857 and 1858, in which all bank directors, merchants, in short all the invited experts with Lord Overstone at their head, congratulated one another on the prosperity and soundness of business — just one month before the outbreak of the crisis in August 1857. And, strangely enough, Tooke in his History of Prices succumbs to this illusion once again as historian for each crisis. Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place.
We revert now to the accumulation of money-capital.
Not every augmentation of loanable money-capital indicates a real accumulation of capital or expansion of the reproduction process. This becomes most evident in the phase of the industrial cycle immediately following a crisis, when loan capital lies around idle in great quantities. At such times, when the production process is curtailed (production in the English industrial districts was reduced by one-third after the crisis of 1847), when the prices of commodities are at their lowest level, when the spirit of enterprise is paralysed, the rate of interest is low, which in this case indicates nothing more than an increase in loanable capital precisely as a result of contraction and paralysation of industrial capital. It is quite obvious that a smaller quantity of a circulation medium is required when the prices of commodities have fallen, the number of transactions decreased, and the capital laid out for wages reduced; that, on the other hand, no additional money is required to function as world-money after foreign debts have been liquidated either by the export of gold or as a result of bankruptcies; that, finally, the volume of business connected with discounting bills of exchange diminishes in proportion with the reduced number and magnitudes of the bills of exchange them-selves. Hence the demand for loanable money-capital, either to act as a medium of circulation or as a means of payment (the investment of new capital is still out of the question), decreases and this capital, therefore, becomes relatively abundant. Under such circumstances, however, the supply of loanable money-capital also increases, as we shall later see.
Thus, the situation after the crisis of 1847 was characterised by "a limitation of transaction and a great superabundance of money." (Commercial Distress, 1847-48, Evidence No. 1664.) The rate of interest was very low because of the "almost perfect destruction of commerce and the almost total want of means of employing money" (loc. cit., p. 45, testimony of Hodgson, Director of the Royal Bank of Liverpool). What nonsense these gentlemen concocted (and Hodgson is, moreover, one of the best of them) in order to explain these facts, can be seen from the following remark:
How the conversion of floating capital into fixed capital reduces the money-capital of a country is unintelligible. For, in the case of railways, e.g., in which capital was mainly invested at that time, neither gold nor paper is used for viaducts and rails, and the money for the railway stocks, to the extent that it had been deposited solely in payment, performed exactly the same functions as any other money deposited in banks and even increased the loanable money-capital temporarily, as already shown above; but to the extent that it had actually been spent for construction, it circulated in the country as a medium of purchase and of payment. Only in so far as fixed capital cannot be exported, so that with the impossibility of its export the available capital secured from returns for exported articles also drops out of the picture — including the returns in cash or bullion — only to that extent could the money-capital be affected. But at that time English export articles were also piled up in huge quantities on the foreign markets without being able to be sold. It is true, the floating capital of the merchants and manufacturers of Manchester, etc., who had a portion of their normal business capital tied up in railway stocks and were therefore dependent upon borrowed capital for running their business, had become fixed, and they, therefore, had to suffer the consequences. But it would have been the same, if the capital belonging to their business, but withdrawn from it, had been invested, say, in mines instead of railways-mining products like iron, coal, copper being themselves in turn floating capital. The actual reduction of available money-capital through crop failures, corn imports, and gold exports constituted, naturally, an event that had nothing to do with the railway swindle.
One of the principal causes of the crisis of 1847 was the colossal flooding of the market and the fabulous swindle in the East Indian trade with commodities. But there were also other circumstances which bankrupted very rich firms in this line:
See also Gardner (No. 4872, loc. cit.):
And now, naively expressed, comes the characteristic credo of the English manufacturer:
(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.)
In 1857, on the other hand, the losses and failures fell mainly upon the merchants, since the manufacturers left them the task of flooding the foreign markets "on their own account."
An expansion of money-capital, which arises out of the fact that, in view of the expansion of banking (see, below, the example of Ipswich, where in the course of a few years immediately preceding 1857 the deposits of the capitalist farmers quadrupled), what was formerly a private hoard or coin reserve is always converted into loanable capital for a definite time, does not indicate a growth in productive capital any more than the increasing deposits with the London stock banks when the latter began to pay interest on deposits. As long as the scale of production remains the same, this expansion leads only to an abundance of loanable money-capital as compared with the productive. Hence the low rate of interest.
After the reproduction process has again reached that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended; this forms, indeed, the "sound" basis again for a ready flow of returns and extended production. In this state the rate of interest is still low, although it rises above its minimum. This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. On the other hand, those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers. To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level. It reaches its maximum again as soon as the new crisis sets in. Credit suddenly stops then, payments are suspended, the reproduction process is paralysed, and with the previously mentioned exceptions, a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital.
On the whole, then, the movement of loan capital, as expressed in the rate of interest, is in the opposite direction to that of industrial capital. The phase wherein a low rate of interest, but above the minimum, coincides with the "improvement" and growing confidence after a crisis, and particularly the phase wherein the rate of interest reaches its average level, exactly midway between its minimum and maximum, are the only two periods during which an abundance of loan capital is available simultaneously with a great expansion of industrial capital. But at the beginning of the industrial cycle, a low rate of interest coincides with a contraction, and at the end of the industrial cycle, a high rate of interest coincides with a superabundance of industrial capital. The low rate of interest that accompanies the "improvement" shows that the commercial credit requires bank credit only to a slight extent because it is still self-supporting.
The industrial cycle is of such a nature that the same circuit must periodically reproduce itself, once the first impulse has been given.[8] During a period of slack, production sinks below the level, which it had attained in the preceding cycle and for which the technical basis has now been laid. During prosperity — the middle period — it continues to develop on this basis. In the period of over-production and swindle, it strains the productive forces to the utmost, until it exceeds the capitalistic limits of the production process.
It is clear that there is a shortage of means of payment during a period of crisis. The convertibility of bills of exchange replaces the metamorphosis of commodities themselves, and so much more so exactly at such times the more a portion of the firms operates on pure credit. Ignorant and mistaken bank legislation, such as that of 1844-45, can intensify this money crisis. But no kind of bank legislation can eliminate a crisis.
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. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realised again. The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production.
Incidentally in connection with the superabundance of industrial capital which appears during crises the following should be noted: commodity-capital is in itself simultaneously money-capital, that is, a definite amount of value expressed in the price of the commodities. As use-value it is a definite quantum of objects of utility, and there is a surplus of these available in times of crises. But as money-capital as such, as potential money-capital, it is subject to continual expansion and contraction. On the eve of a crisis, and during it, commodity-capital in its capacity as potential money-capital is contracted. It represents less money-capital for its owner and his creditors (as well as security for bills of exchange and loans) than it did at the time when it was bought and when the discounts and mortgages based on it were transacted. If this is the meaning of the contention that the money-capital of a country is reduced in times of stringency, this is identical with saying that the prices of commodities have fallen. Such a collapse in prices merely balances out their earlier inflation.
The incomes of the unproductive classes and of those who live on fixed incomes remain in the main stationary during the inflation of prices which goes hand in hand with over-production and over-speculation. Hence their consuming capacity diminishes relatively, and with it their ability to replace that portion of the total reproduction which would normally enter into their consumption. Even when their demand remains nominally the same, it decreases in reality.
In 1857, the crisis broke out in the United States. A flow of gold from England to America followed. But as soon as the bubble in America burst, the crisis broke out in England and the gold flowed from America to England. The same took place between England and the continent. The balance of payments is in times of general crisis unfavourable to every nation, at least to every commercially developed nation, but always to each country in succession, as in volley firing, i.e., as soon as each one’s turn comes for making payments; and once the crisis has broken out, e.g., in England, it compresses the series of these terms into a very short period. It then becomes evident that all these nations have simultaneously over-exported (thus over-produced) and over-imported (thus over-traded), that prices were inflated in all of them, and credit stretched too far. And the same break-down takes place in all of them. The phenomenon of a gold drain then takes place successively in all of them and proves precisely by its general character 1) that gold drain is just a phenomenon of a crisis, not its cause; 2) that the sequence in which it hits the various countries indicates only when their judgement-day has come, i.e., when the crisis started and its latent elements come to the fore there.
It is characteristic of the English economic writers — and the economic literature worth mentioning since 1830 resolves itself mainly into a literature on currency, credit, and crises — that they look upon the export of precious metals in times of crisis, in spite of the turn in the rates of exchange, only from the standpoint of England, as a purely national phenomenon, and resolutely close their eyes to the fact that all other European banks raise their rate of interest when their bank raises its own in times of crisis, and that, when the cry of distress over the drain of gold is raised in their country today, it is taken up in America tomorrow and in Germany and France the day after.
In other words, in so far as a crisis in England is intensified by bank legislation, this legislation is a means of cheating the corn-exporting countries in periods of famine, first on their corn and then on the money for the corn. A prohibition on the export of corn during such periods for countries which are themselves labouring more or less under scarcities, is, therefore, a very rational measure to thwart this plan of the Bank of England to "meet obligations" for corn imports "by bankruptcies." It is after all much better that the corn producers and speculators lose a portion of their profit for the good of their own country than their capital for the good of England.
It follows from the above that commodity-capital, during crises and during periods of business depression in general, loses to a large extent its capacity to represent potential money-capital. The same is true of fictitious capital, interest-bearing paper, in so far as it circulates on the stock exchange as money-capital. Its price falls with rising interest. It falls, furthermore, as a result of the general shortage of credit, which compels its owners to dump it in large quantities on the market in order to secure money. It falls, finally, in the case of stocks, partly as a result of the decrease in revenues for which it constitutes drafts and partly as a result of the spurious character of the enterprises which it often enough represents. This fictitious money-capital is enormously reduced in times of crisis, and with it the ability of its owners to borrow money on it on the market. However, the reduction of the money equivalents of these securities on the stock exchange list has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners.
We are still not finished with this question: to what extent does the accumulation of capital in the form of loanable money-capital coincide with actual accumulation, i.e., the expansion of the reproduction process.
The transformation of money into loanable money-capital is a much simpler matter than the transformation of money into productive capital. But two things should be distinguished here:
1) the mere transformation of money into loan capital;
2) the transformation of capital or revenue into money, which is transformed into loan capital.
It is only the latter point which can involve a positive accumulation of loan capital connected with an actual accumulation of industrial capital.
We have seen, on the other hand, that an accumulation of loan capital can take place without any actual accumulation, i.e., by mere technical means such as an expansion and concentration of the banking system; and a saving in the circulation reserve, or in the reserve fund of private means of payment, which are then always transformed into loan capital for a short time. Although this loan capital, which, for this reason, is also called floating capital, always retains the form of loan capital only for short periods of time (and should indeed also be used for discounting only for short periods of time), there is a continual ebb and flow of it. If one draws some away, another adds to it. The mass of loanable money-capital thus grows quite independently of the actual accumulation (we are not speaking here at all about loans for a number of years but only of short-term ones on bills of exchange and deposits).
That is to say, there is considerable fluctuation in that portion of the deposits which the bankers have not loaned out again, but which figures as their reserve and for the greater part also as the reserve of the Bank of England, where they are deposited. Finally, the same gentleman says: floating capital may be bullion, that is, bar and coin (503). It is truly wonderful how in this credit gibberish of the money-market all categories of political economy receive a different meaning and a different form. Floating capital is the expression there for circulating capital, which is, of course, something quite different, and money is capital, and bullion is capital, and bank-notes are circulation, and capital is a commodity, and debts are commodities, and fixed capital is money invested in hard-to-sell paper!
By making advances to the bill-broker on bills of exchange which this broker has already discounted once, the banker does, in fact, rediscount them; but in reality, very many of these bills have already been rediscounted by the bill-broker, and with the same money that the banker uses to rediscount the bills of the bill-broker, the latter rediscounts new bills. What this leads to is shown by the following:
Concerning this rediscounting and the assistance which this purely technical increase of loanable money-capital gives to credit swindles, the following extract from the Economist is of interest:
This is how credits are "nicely" devoured. The rural depositor fancies that he deposits only with his banker, and fancies furthermore that when his banker lends to others, it is done to private persons whom he knows. He has not the slightest suspicion that this banker places his deposit at the disposal of some London bill-broker, over whose operations neither of them have the slightest control.
We have already seen how large public enterprises, such as railways, may momentarily increase loan capital, owing to the circumstance that the deposited amounts always remain at the disposal of the bankers for a certain length of time until they are really used.
Incidentally, the mass of loan capital is quite different from the quantity of circulation. By the quantity of circulation we mean here the sum of all the bank-notes and coin, including bars of precious metals, existing and circulating in a country. A portion of this quantity constitutes the reserve of the banks which continuously vary in magnitude.
The variations in the interest rate (aside from those occurring over longer periods or the variation in the interest rate among various countries; the former are dependent upon variations in the general rate of profit, the latter on differences in the rates of profit and in the development of credit) depend upon the supply of loan capital (all other circumstances, state of confidence, etc. being equal), that is, of capital loaned in the form of money, coin and notes; in contradistinction to industrial capital, which, as such — in commodity-form — is loaned by means of commercial credit among the agents of reproduction themselves.
However, the mass of this loanable money-capital is different from, and independent of, the mass of circulating money.
For example, if £20 were loaned five times per day, a money-capital of £100 would be loaned, and this would imply at the same time that this £20 would have served, moreover, at least four times as a means of purchase or payment; for, if no purchase and payment intervened — so that it would not have represented at least four times the converted form of capital (commodities, including labour-power) — it would not constitute a capital of £100, but only five claims of £20 each.
In countries with a developed credit, we can assume that all money-capital available for lending exists in the form of deposits with banks and money-lenders. This is at least true for business as a whole. Moreover, in times of flourishing business, before the real speculation gets underway — when credit is easy and confidence is growing — most of the functions of circulation are settled by a simple transfer of credit, without the help of coin or paper money.
The mere possibility of large sums of deposits existing when a relatively small quantum of a medium of circulation is available, depends solely on:
1) the number of purchases and payments which the same coin performs;
2) the number of return excursions, whereby it goes back to the banks as deposits, so that its repeated function as a means of purchase and payment is promoted through its renewed transformation into deposits. For example, a small dealer deposits weekly with his banker £100 in money; the banker pays out a portion of the deposit of a manufacturer with this; the latter pays it to his workers; and the workers use it to pay the small dealer, who deposits it in the bank again. The £100 deposited by this small dealer have served, therefore, first, to pay the manufacturer a deposit of his; secondly, to pay the workers; thirdly, to pay the dealer himself; fourthly, to deposit another portion of the money-capital of the same small dealer; thus at the end of twenty weeks, if he himself did not have to draw against this money, he would have deposited £2,000 in the bank by means of the same £100.
To what extent this money-capital is idle, is shown only by the ebb and flow in the reserve fund of the banks. Therefore, Mr. Weguelin, Governor of the Bank of England in 1857, concludes that the gold of the Bank of England is the "only" reserve capital:
The actual or declared value of the exported products from Great Britain and Ireland in the prosperity year of 1824 was £40,396,300. With the crisis of 1825, the amount of exports then falls below this sum and fluctuates between 35 and 39 million annually. With the return of prosperity in 1834, it rises above the former maximum to £41,649,191, and reaches in 1836 the new maximum of £53,368,571. Beginning with 1837, it falls again to 42 million, so that the new minimum is already higher than the old maximum, and then fluctuates between 50 and 53 million. The return of prosperity lifts the amount of exports in 1844 to £58,500,000, whereby the peak of 1836 is again already far exceeded. In 1845, it reaches £60,111,082; it then falls to something over 57 million in 1846, reaches in 1847 almost 59 million, in 1848 almost 53 million, rises in 1849 to 63,500,000, in 1853 to nearly 99 million, in 1854 to 97 million, in 1855 to 94,500,000, in 1856 almost 116 million and reaches a peak of 122 million in 1857. It falls in 1858 to 116 million, rises already in 1859 to 130 million, in 1860 to nearly 136 million, in 1861 only 125 million (the new low is here again higher than the former peak), in 1863 to 146,500,000.
Of course, the same thing could be demonstrated in the case of imports, which shows the expansion of the market; here it is only a matter of the scale of production. [Of course, this holds true of England only for the time of its actual industrial monopoly; but it applies in general to the whole complex of countries with modern large-scale industries, as long as the world-market is still expanding. — F. E.]
We will consider here the accumulation of money-capital, in so far as it is not an expression either of a stoppage in the flow of commercial credit or of an economy — whether it be an economy in the actual circulating medium or in the reserve capital of the agents engaged in reproduction.
Aside from these two cases, an accumulation of money-capital can arise through an unusual inflow of gold, as in 1852 and 1853 as a result of the new Australian and Californian gold mines. This gold was deposited in the Bank of England. The depositors received notes for it, which they did not directly redeposit with bankers. By this means the Circulating medium was unusually increased. (Testimony of Weguelin, Bank Committee, 1857, No. 1329.) The Bank strove to utilise these deposits by lowering its discount to 2%. The mass of gold accumulated in the Bank rose during six months of 1853 to 22-23 million.
If the interest rate is low, this depreciation of the money-capital falls principally upon the depositors, not upon the banks. Before the development of stock banks, ¾ of all the deposits in England lay in the banks without yielding interest. While interest is now paid on them, it amounts to at least 1% less than the current rate of interest.
As for the money accumulation of the other classes of capitalists, we disregard that portion of it which is invested in interest-bearing paper and accumulates in this form. We consider only that portion which is thrown upon the market as loanable money-capital.
The mass of money to be transformed back into capital in this manner is a result of the enormous reproduction process, but considered by itself, as loanable money-capital, it is not itself a mass of reproductive capital.
The most important point of our presentation so far is that the expansion of the part of the revenue intended for consumption (leaving out of consideration the worker, because his revenue is equal to the variable capital) shows itself at first as an accumulation of money-capital. A factor, therefore, enters into the accumulation of money-capital that is essentially different from the actual accumulation of industrial capital; for the portion of the annual product which is intended for consumption does not by any means become capital. A portion of it replaces capital, i.e., the constant capital of the producers of means of consumption, but to the extent that it is actually transformed into capital, it exists in the natural form of the revenue of the producers of this constant capital. The same money, which represents the revenue and serves merely for the promotion of consumption, is regularly transformed into loanable money-capital for a period of time. In so far as this money represents wages, it is at the same time the money-form of the variable capital; and in so far as it replaces the constant capital of the producers of means of consumption, it is the money-form temporarily assumed by their constant capital and serves to purchase the components of their constant capital to be replaced in kind. Neither in the one nor in the other form does it express in itself accumulation, although its quantity increases with the growth of the reproduction process. But it performs temporarily the function of loanable money, i.e., of money-capital. In this respect, therefore, the accumulation of money-capital must always reflect a greater accumulation of capital than actually exists, owing to the fact that the extension of individual consumption, because it is promoted by means of money, appears as an accumulation of money-capital, since it furnishes the money-form for actual accumulation, i.e., for money which permits new investments of capital.
Thus, the accumulation of loanable money-capital expresses in part only the fact that all money into which industrial capital is transformed in the course of its circuit assumes the form not of money advanced by the reproductive capitalists, but of money borrowed by them; so that indeed the advance of money that must take place in the reproduction process appears as an advance of borrowed money. In fact, on the basis of commercial credit, one person lends to another the money required for the reproduction process. But this now assumes the following form: the banker, who receives the money as a loan from one group of the reproductive capitalists, lends it to another group of reproductive capitalists, so that the banker appears in the role of a supreme benefactor; and at the same time, the control over this capital falls completely into the hands of the banker in his capacity as middleman.
A few special forms of accumulation of money-capital still remain to be mentioned. For example, capital is released by a fall in the price of the elements of production, raw materials, etc. If the industrial capitalist cannot expand his reproduction process immediately, a portion of his money-capital is expelled from the circuit as superfluous and is transformed into loanable money-capital. Secondly, however, capital in the form of money is released especially by the merchant, whenever interruptions in his business take place. If the merchant has completed a series of transactions and cannot begin a new series because of such interruptions until later, the money realised represents for him only a hoard, surplus-capital. But at the same time, it represents a direct accumulation of loanable money-capital. In the first case, the accumulation of money-capital expresses a repetition of the reproduction process under more favourable conditions, an actual release of a portion of formerly tied-up capital; in other words, an opportunity for expanding the reproduction process with the same amount of money. But in the other case, it expresses merely an interruption in the flow of transactions. However, in both cases it is converted into loanable money-capital, represents its accumulation, influences equally the money-market and the rate of interest — although it expresses a promotion of the actual accumulation process in one case and its obstruction in the other. Finally, accumulation of money-capital is influenced by the number of people who have feathered their nests and have withdrawn from reproduction. Their number increases as more profits are made in the course of the industrial cycle. In this case, the accumulation of loanable money-capital expresses, on the one hand, an actual accumulation (in accordance with its relative extent), and, on the other hand, only the extent of the transformation of the industrial capitalists into mere money-capitalists.
As for the other portion of profit, which is not intended to be consumed as revenue, it is converted into money-capital only when it is not immediately able to find a place for investment in the expansion of business in the productive sphere in which it has been made. This may be due to two causes. Either because this sphere of production is saturated with capital, or because accumulation must first reach a certain volume before it can serve as capital, depending on the investment magnitudes of new capital required in this particular sphere. Hence it is converted for a while into loanable money-capital and serves in the expansion of production in other spheres. Assuming all other conditions being equal, the quantity of profits intended for transformation back into capital will depend on the quantity of profits made and thus on the extension of the reproduction process itself. But if this new accumulation meets with difficulties in its employment, through a lack of spheres for investment, i.e., due to a surplus in the branches of production and an over-supply of loan capital, this plethora of loanable money-capital merely shows the limitations of capitalist production. The subsequent credit swindle proves that no real obstacle stands in the way of the employment of this surplus-capital. However, an obstacle is indeed immanent in its laws of expansion, i.e., in the limits in which capital can realise itself as capital. A plethora of money-capital as such does not necessarily indicate over-production, not even a shortage of spheres of investment for capital.
The accumulation of loan capital consists simply in the fact that money is precipitated as loanable money. This process is very different from an actual transformation into capital; it is merely the accumulation of money in a form in which it can be transformed into capital. But this accumulation can reflect, as we have shown, events which are greatly different from actual accumulation. As long as actual accumulation is continually expanding, this extended accumulation of money-capital may be partly its result, partly the result of circumstances which accompany it but are quite different from it, and, finally, even partly the result of impediments to actual accumulation. If for no other reason than that accumulation of loan capital is inflated by such circumstances, which are independent of actual accumulation but nevertheless accompany it, there must be a continuous plethora of money-capital in definite phases of the cycle and this plethora must develop with the expansion of credit. And simultaneously with it, the necessity of driving the production process beyond its capitalistic limits must also develop: over-trade, over-production, and excessive credit. At the same time, this must always take place in forms that call forth a reaction.
As far as accumulation of money-capital from ground-rent, wages, etc., is concerned, it is not necessary to discuss that matter here. Only one aspect should be emphasised and that is that the business of actual saving and abstinence (by hoarders), to the extent that it furnishes elements of accumulation, is left by the division of labour, which comes with the progress of capitalist production, to those who receive the minimum of such elements, and who frequently enough lose even their savings, as do the labourers when banks fail. On the one hand, the capital of the industrial capitalist is not "saved" by himself, but he has command of the savings of others in proportion to the magnitude of his capital; on the other hand, the money-capitalist makes of the savings of others his own capital, and of the credit, which the reproductive capitalists give to one another and which the public gives to them, a private source for enriching himself. The last illusion of the capitalist system, that capital is the fruit of one’s own labour and savings, is thereby destroyed. Not only does profit consist in the appropriation of other people’s labour, but the capital, with which this labour of others is set in motion and exploited, consists of other people’s property, which the money-capitalist places at the disposal of the industrial capitalists, and for which he in turn exploits the latter.
A few remarks remain to be made about credit capital.
How often the same piece of money can figure as loan capital, wholly depends, as we have already previously shown, on:
1) how often it realises commodity-values in sale or payment, thus transfers capital, and furthermore how often it realises revenue. How often it gets into other hands as realised value, either of capital or of revenue, obviously depends, therefore, on the extent and magnitude of the actual transactions;
2) this depends on the economy of payments and the development and organisation of the credit system;
3) finally, the concatenation and velocity of action of credits, so that when a deposit is made at one point it immediately starts off as a loan at another.
Even assuming that the form in which loan capital exists is exclusively that of real money, gold or silver — the commodity whose substance serves as a measure of value — a large portion of this money-capital is always necessarily purely fictitious, that is, a title to value — just as paper money. In so far as money functions in the circuit of capital, it constitutes indeed, for a moment, money-capital; but it does not transform itself into loanable money-capital; it is rather exchanged for the elements of productive capital, or paid out as a medium of circulation in the realisation of revenue, and cannot, therefore, transform itself into loan capital for its owner. But in so far as it is transformed into loan capital, and the same money repeatedly represents loan capital, it is evident that it exists only at one point in the form of metallic money; at all other points it exists only in the form of claims to capital. With the assumption made, the accumulation of these claims arises from actual accumulation, that is, from the transformation of the value of commodity-capital, etc., into money; but nevertheless the accumulation of these claims or titles as such differs from the actual accumulation from which it arises, as well as from the future accumulation (the new production process), which is promoted by the lending of this money.
Prima facie loan capital always exists in the form of money,[9] later as a claim to money, since the money in which it originally exists is now in the hands of the borrower in actual money-form. For the lender it has been transformed into a claim to money, into a title of ownership. The same mass of actual money can, therefore, represent very different masses of money-capital. Mere money, whether it represents realised capital or realised revenue, becomes loan capital through the simple act of lending, through its transformation into a deposit, if we consider the general form in a developed credit system. The deposit is money-capital for the depositor. But in the hands of the banker it may be only potential money-capital, which lies idle in his safe instead of in its owner’s.[10]
With the growth of material wealth the class of money-capitalists grows; on the one hand, the number and the wealth of retiring capitalists, rentiers, increases; and on the other hand, the development of the credit system is promoted, thereby increasing the number of bankers, money-lenders, financiers, etc. With the development of the available money-capital, the quantity of interest-bearing paper, government securities, stocks, etc., also grows as we have previously shown. However, at the same time the demand for available money-capital also grows, the jobbers, who speculate with this paper, playing a prominent role on the money-market. If all the purchases and sales of this paper were only an expression of actual investments of capital, it would be correct to say that they could have no influence on the demand for loan capital, since when A sells his paper, he draws exactly as much money as B puts into the paper. But even if the paper itself exists though not the capital (at least not as money-capital) originally represented by it, it always creates pro tanto a new demand for such money-capital. But at any rate it is then money-capital, which was previously at the disposal of B but is now at the disposal of A.
With the development of the credit system; great concentrated money-markets are created, such as London, which are at the same time the main seats of trade in this paper. The bankers place huge quantities of the public’s money-capital at the disposal of this unsavoury crowd of dealers, and thus this brood of gamblers multiplies.
In the discussion on interest-bearing capital, we have already shown that the average interest over a long period of years, other conditions remaining equal, is determined by the average rate of profit; not profit of enterprise, which is nothing more than profit minus interest. [Present edition: Ch. XXII. — Ed.]
It has also been mentioned, and will be further analysed in another place, that also for the variations in commercial interest, that is, interest calculated by the money-lenders for discounts and loans within the commercial world, a phase is reached, in the course of the industrial cycle, in which the rate of interest exceeds its minimum and reaches its mean level (which it exceeds later) and that this movement is a result of a rise in profits.
In the meantime, two things are to be noted here.
First: When the rate of interest stays up for a long time (we are speaking here of the rate of interest in a given country like England, where the average rate of interest is given over a lengthy period of time, and also shows itself in the interest paid on long-term loans — what could be called private interest), it is prima facie proof that the rate of profit is high during this period, but it does not prove necessarily that the rate of profit of enterprise is high. This latter distinction is more or less removed for capitalists, who operate mainly with their own capital; they realise the high rate of profit, since they pay the interest to themselves. The possibility of a high rate of interest of long duration is present when the rate of profit is high; this does not refer, however, to the phase of actual squeeze. But it is possible that this high rate of profit may leave only a low rate of profit of enterprise, after the high rate of interest has been deducted. The rate of profit of enterprise may shrink, while the high rate of profit continues. This is possible because the enterprises must be continued, once they have been started. During this phase, operations are carried on to a large extent with pure credit capital (capital of other people); and the high rate of profit may be partly speculative and prospective. A high rate of interest can be paid with a high rate of profit but decreasing profit of enterprise. It can be paid (and this is done in part during times of speculation), not out of the profit, but out of the borrowed capital itself, and this can continue for a while.
Secondly: The statement that the demand for money-capital, and therefore the rate of interest, grows, because the rate of profit is high, is not identical with the statement that the demand for industrial capital grows and therefore the rate of interest is high.
In times of crisis, the demand for loan capital, and therefore the rate of interest, reaches its maximum; the rate of profit, and with it the demand for industrial capital, has to all intents and purposes disappeared. During such times, everyone borrows only for the purpose of paying, in order to settle previously contracted obligations. On the other hand, in times of renewed activity after a crisis, loan capital is demanded for the purpose of buying and for the purpose of transforming money-capital into productive or commercial capital. And then it is demanded either by the industrial capitalist or the merchant. The industrial capitalist invests it in means of production and in labour-power.
The rising demand for labour-power can never by itself be a cause for a rising rate of interest, in so far as the latter is determined by the rate of profit. Higher wages are never a cause for higher profits, although they may be one of the consequences of higher profits during some particular phases of the industrial cycle.
The demand for labour-power can increase because the exploitation of labour takes place under especially favourable circumstances, but the rising demand for labour-power, and thus for variable capital, does not in itself increase the profit; it, on the contrary, lowers it pro tanto. But the demand for variable capital can nevertheless increase at the same time, thus also the demand for money-capital — which can raise the rate of interest. The market-price of labour-power then rises above its average, more than the average number of labourers are employed, and the rate of interest rises at the same time because under such circumstances the demand for money-capital rises. The rising demand for labour-power raises the price of this commodity, as every other, increases its price; but not the profit, which depends mainly upon the relative cheapness of this commodity in particular. But it raises at the same time — under the assumed conditions — the rate of interest, because it increases the demand for money-capital. If the money-capitalist, instead of lending the money, should transform himself into an industrial capitalist, the fact that he has to pay more for labour-power would not increase his profit but would rather decrease it correspondingly. The state of business may be such that his profit may nevertheless rise, but it would never be so because he pays more for labour. The latter circumstance, in so far as it increases the demand for money-capital, is, however, sufficient to raise the rate of interest. If wages should rise for some reason during an otherwise unfavourable state of business, the rise in wages would lower the rate of profit, but raise the rate of interest to the extent that it increased the demand for money-capital.
Leaving labour aside, the thing called "demand for capital" by Overstone consists only in a demand for commodities. The demand for commodities raises their price, either because it rises above average, or because the supply of commodities falls below average. If the industrial capitalist or merchant must now pay, e.g., £150 for the same amount of commodities for which he used to pay £100, he would now have to borrow £150 instead of the former £100, and if the rate of interest were 5%, he would now have to pay an interest of £7½ as compared with £5 formerly. The amount of interest to be paid by him would rise because he now has to borrow more capital.
The whole endeavour of Mr. Overstone consists in representing the interests of loan capital and industrial capital as being identical, whereas his Bank Act is precisely calculated to exploit this very difference of interests to the advantage of money-capital.
It is possible that the demand for commodities, in case their supply has fallen below average, does not absorb any more money-capital than formerly. The same sum, or perhaps a smaller one, has to be paid for their total value, but a smaller quantity of use-values is received for the same sum. In this case, the demand for loanable capital will be unchanged and therefore rate of interest will not rise, although the demand for commodities would have risen as compared to their supply and consequently the price of commodities would have become higher. The rate of interest cannot be affected, unless the total demand for loan capital increases, and this is not the case under the above assumptions.
The supply of an article can also fall below average, as it does when crop failures in corn, cotton, etc., occur; and the demand for loan capital can increase because speculation in these commodities counts on further rise in prices and the easiest way to make them rise is to temporarily withdraw a portion of the supply from the market. But in order to pay for the purchased commodities without selling them, money is secured by means of the commercial "bill of exchange operations." In this case, the demand for loan capital increases, and the rate of interest can rise as a result of this attempt to artificially prevent the supply of this commodity from reaching the market. The higher rate of interest then reflects an artificial reduction in the supply of commodity-capital. On the other hand, the demand for an article can grow because its supply has increased and the article sells below its average price.
In this case, the demand for loan capital can remain the same, or even fall, because more commodities can be had for the same sum of money. Speculative stock-piling could also occur, either for the purpose of taking advantage of the most favourable moment for production purposes, or in expectation of a future rise in prices. In this case, the demand for loan capital could grow, and the rise in the rate of interest would then be a reflection of capital investment in surplus stock-piling of elements of productive capital. We are only considering here the demand for loan capital as it is influenced by the demand for, and supply of, commodity-capital. We have already discussed how the varying state of the reproduction process in the phases of the industrial cycle influences the supply of loan capital. The trivial proposition that the market rate of interest is determined by the supply and demand of (loan) capital is shrewdly jumbled up by Overstone with his own postulate, namely, that loan capital is identical with capital in general; and in this way he tries to transform the usurer into the only capitalist and his capital into the only capital.
In times of stringency, the demand for loan capital is a demand for means of payment and nothing else; it is by no means a demand for money as a means of purchase. At the same time, the rate of interest may rise very high, regardless whether real capital, i.e., productive and commodity capital, exists in abundance or is scarce. The demand for means of payment is a mere demand for convertibility into money, so far as merchants and producers have good securities to offer; it is a demand for money-capital whenever there is no collateral, so that an advance of means of payment gives them not only the form of money but also the equivalent they lack, whatever its form, with which to make payment. This is the point where both sides of the controversy on the prevalent theory of crises are at the same time right and wrong. Those who say that there is merely a lack of means of payment, either have only the owners of bona fide securities in mind, or they are fools who believe that it is the duty and power of banks to transform all bankrupt swindlers into solvent and respectable capitalists by means of pieces of paper. Those who say that there is merely a lack of capital, are either just quibbling about words, since precisely at such times there is a mass of inconvertible capital as a result of over-imports and over-production, or they are referring only to such cavaliers of credit who are now, indeed, placed in the position where they can no longer obtain other people’s capital for their operations and now demand that the bank should not only help them to pay for the lost capital, but also enable them to continue with their swindles.
In the case of two individuals, it would be ridiculous to say that in their transactions with one another both have an unfavourable balance of payments. If they are reciprocally creditor and debtor of one another, it is evident that when their claims do not balance, one must be the creditor and the other the debtor for the balance. With nations this is by no means the case. And that this is not the case is acknowledged by all economists when they admit that the balance of payments can be favourable or unfavourable for a nation, though its trade balance must ultimately be settled. The balance of payments differs from the balance of trade in that it is a balance of trade which must be settled at a definite time. What the crises now accomplish is to narrow the difference between the balance of payments and the balance of trade to a short interval; and the specific conditions which develop in the nation suffering from a crisis and, therefore, having its payments become due — these conditions already lead to such a contraction of the time of settlement. First, shipping away precious metals; then selling consigned commodities at low prices; exporting commodities to dispose of them or to obtain money advances on them at home; increasing the rate of interest, recalling credit, depreciating securities, disposing of foreign securities, attracting foreign capital for investment in these depreciated securities, and finally bankruptcy, which settles a mass of claims. At the same time, metal is still often sent to the country where a crisis has broken out, because the drafts drawn on it are insecure and payment in specie is most trustworthy. Furthermore, in regard to Asia, all capitalist nations are usually simultaneously — directly or indirectly — its debtors. As soon as these various circumstances exert their full effect upon the other involved nation, it likewise begins to export gold and silver, in short, its payments become due and the same phenomena are repeated.
In commercial credit, the interest — as the difference between credit price and cash price — enters into the price of commodities only in so far as the bills of exchange have a longer than ordinary running time. Otherwise it does not. And this is explained by the fact that everyone takes credit with one hand and gives it with the other. [This does not agree with my experience. — F.E.] But in so far as discount in this form enters here, it is not regulated by this commercial credit, but by the money-market.
If supply and demand of money-capital, which determine the rate of interest, were identical with supply and demand of actual capital, as Overstone maintains, the interest would be simultaneously low and high, depending on whether various commodities or various phases (raw material, semi-finished product, finished product) of the same commodity were being considered. In 1844, the rate of interest of the Bank of England fluctuated between 4% (from January to September) and 2½ and 3% (from November to the end of the year). In 1845, it was 2½, 2¾, and 3% from January to October, and between 3 and 5% during the remaining months. The average price of fair Orleans cotton was 6¼d. in 1844 and 4 7/8d. in 1845. On March 3, 1844, the cotton supply in Liverpool was 627,042 bales, and on March 3, 1845, it was 773,800 bales. To judge by the low price of cotton, the rate of interest should have been low in 1845, and it was indeed for the greater part of this time. But to judge by the yarn, the rate of interest should have been high, for the prices were relatively high and the profits absolutely high. From cotton at 4d. per pound, yarn could be spun, in 1845 with a spinning cost of 4d. (good secunda mule twist No. 40), or a total cost of 8d. to the spinner, which he could sell in September and October 1845 at 10½ or 11½d. per pound. (See the testimony of Wylie below.)
The entire matter can be resolved as follows:
Supply and demand of loan capital would be identical with supply and demand of capital generally (although this last statement is absurd; for the industrial or commercial capitalist a commodity is a form of his capital, yet he never asks for capital as such, but only for the particular commodity as such, he buys and pays for it as a commodity, e.g., corn or cotton, regardless of the role that it has to play in the circuit of his capital), if there were no money-lenders, and if in their stead the lending capitalists were in possession of machinery, raw materials, etc., which they would lend or hire out, as houses are rented out now, to the industrial capitalists, who are themselves owners of some of these objects. Under such circumstances, the supply of loan capital would be identical with the supply of elements of production for the industrial capitalist and commodities for the merchant. But it is clear that the division of profit between the lender and borrower would then, to begin with, completely depend on the relation of the capital which is lent to that which is the property of the one who employs it.
According to Mr. Weguelin (B. A. 1857), the rate of interest is determined by "the amount of unemployed capital" (252); it is "but an indication of a large amount of capital seeking employment" (271); later this unemployed capital becomes "floating capital" (485) and by this he means "the Bank of England notes and other kinds of circulation in the country, for instance, the country banks circulation and the amount of coin which is in the country. I include in floating capital the reserves of the bankers" (502, 503), and later also gold bullion (503). Thus the same Mr. Weguelin says that the Bank of England exerts great influence upon the rate of interest in times, when "we" [the Bank of England] "are holders of the greater portion of the unemployed capital" (1198), while, according to the above testimony of Mr. Overstone, the Bank of England "is no place for capital." Mr. Weguelin further says:
J. Stuart Mill says (2102):
The reserve, in so far as only the banking department is considered, is a reserve for the deposits only. According to the Overstones, the banking department is supposed to act only as a banker, without regard to the "automatic" issue of notes. But in times of actual stringency the Bank, independently of the reserve of the banking department which consists only of notes, keeps a sharp eye on the bullion reserve, and must do so if it does not wish to fail. For, to the extent that the bullion reserve dwindles, so the reserve of bank-notes also dwindles, and no one should be better informed of this than Mr. Overstone, who precisely by his Bank Act of 1844 has so sagaciously arranged this.
We have seen previously that one and the same bank-note can constitute deposits in several banks. Similarly, it can also constitute various deposits in the same bank. The banker discounts, with the note which A has deposited, B's bill of exchange, B pays C, and C deposits the same note in the same bank that issued it.
We have already demonstrated in the discussion of simple money circulation (Vol I, Ch. III, 2) that the mass of actual circulating money, assuming the velocity of circulation and economy of payments as given, is determined by the prices of commodities and the quantity of transactions. The same law governs the circulation of notes.
In the following table, the annual average number of notes of the Bank of England, in so far as they were in the hands of the public, are recorded, namely, the 5- and 10-pound notes, the 20- to 100-pound notes, and the larger denominations between 200 and 1,000 pounds sterling; also the percentages of the total circulation that each one of these groupings constitutes. The amounts are in thousands, i.e., the last three figures are omitted.
(B. A. 1858, p. XXVI.) The total sum of circulating bank-notes, therefore, positively decreased from 1844 to 1857, although commercial business, as indicated by exports and imports, had more than doubled. The smaller bank-notes of £5 and £10 increased, as the table shows, from £9,263,000 in 1844 to £10,659,000 in 1857. And this took place simultaneously with the particularly heavy increase in gold circulation at that time. On the other hand, there was a decrease in the notes of higher denominations (£200 to £1,000) from £5,856,000 in 1852 to £3,241,000 in 1857, i.e., a decrease of more than £2½ million. This is explained as follows:
To what small minimum the use of money in wholesale trade has been reduced, can be deduced from the table reprinted in Book I (Ch. III, Footnote), which was presented to the Bank Committee by Morrison, Dillon & Co., one of the largest of those London firms from which a small dealer can buy his entire assortment of commodities.
According to the testimony of W. Newmarch before the Bank Committee 1857, No. 1741, other circumstances also contributed to economy in the circulating medium: penny postage, railways, telegraphy, in short, the improved means of communication; thus England can now carry on five to six times more business with about the same circulation of bank-notes. This is also essentially due to the withdrawal from circulation of notes of higher denomination than £10. Here Newmarch sees a natural explanation for the phenomenon that in Scotland and Ireland, where one-pound notes also circulate, note circulation has risen by about 31% (1747). The total circulation of bank-notes in the United Kingdom, including one-pound notes, is said to be £39 million (1749). The gold circulation, £70 million (1750). In Scotland, the circulation of notes was £3,120,000 in 1834; £3,020,000 in 1844; and £4,050,000 in 1854 (1752).
From these figures alone, it is evident that banks issuing notes can by no means increase the number of circulating notes at will, as long as these notes are at all times exchangeable for money. [Inconvertible paper money is not considered here at all; inconvertible bank-notes can become a universal medium of circulation only where they are actually backed by state credit, as is the case in Russia at present. They then fall under the laws of inconvertible paper money issued by the state, which have already been developed in Book I (Ch. III, 2, c) "Coin and Symbols of Value." — F.E.]
The quantity of circulating notes is regulated by the turnover requirements, and every superfluous note wends its way back immediately to the issuer. Since in England only the notes of the Bank of England circulate universally as legal means of payment, we can disregard at this point the insignificant, and merely local, note circulation of the country banks.
Before the Bank Committee 1858, Mr. Neave, Governor of the Bank of England, testifies:
Testimony of Thomas Tooke before the Committee of Lords on Commercial Distress (C. D. 1848/57), No. 3094:
J. C. Wright, a banker for 30 years in Nottingham, having explained at length the impossibility for a country bank to be able to keep more notes in circulation than the public needs and wants, says about notes of the Bank of England (C. D. 1848/57), No. 2844:
The same holds true for Scotland, where almost nothing but paper circulates, because there as well as in Ireland one-pound notes are also in use and "the Scotch hate gold." Kennedy, Director of a Scottish bank, declares that banks could not even contract their circulation of notes and
Similarly, Anderson, Director of the Union Bank of Scotland, states (ibid., No. 3578):
The same applies to Ireland, as indicated in the testimony of the Governor of the Bank of Ireland, MacDonnell, and the Director of the Provincial Bank of Ireland, Murray, before the same Committee.
Note circulation is just as independent of the state of the gold reserve in the vaults of the bank which guarantees the convertibility of these notes, as it is of the will of the Bank of England.
Of course, this applies only under present conditions prevailing in England, and even here only in so far as legislation does not decree a different relationship between the note issue and metal reserve.
Hence only the requirements of business itself exert an influence on the quantity of circulating money-notes and gold. To be noted here, in the first instance, are the periodic fluctuations, which repeat themselves annually regardless of the general condition of business, so that for the past 20 years
Thus, in August of every year a few millions, generally in gold, pass from the Bank of England into domestic circulation to pay the harvest expenses; since wages are the principal payments to be made here, bank-notes are less serviceable in England for this purpose. By the close of the year this money has streamed back to the Bank. In Scotland, there are almost nothing but one-pound notes instead of sovereigns; here, then, the note circulation is expanded in the corresponding situation, namely, twice a year — in May and November — from 3 million to 4 million; after a fortnight the return flow begins, and is almost completed in one month. (Anderson, C. D. 1848/57, Nos. 3595-3600.)
The note circulation of the Bank of England also experiences a momentary fluctuation every three months because of the quarter]y payment of "dividends," that is, interest on the national debt, whereby bank-notes are first withdrawn from circulation and then again released to the public; but they flow back very soon again. Weguelin (B. A. 1857, No. 38) states that this fluctuation in the note circulation amounts to 2½. Mr. Chapman of the notorious firm of Overend, Gurney & Co., however, estimates the amount of disturbance thus created in the money-market as being much higher.
Far more significant and enduring are the fluctuations in quantity of circulating medium corresponding to the various phases of the industrial cycle. Let us listen to another associe of that firm on this question, the esteemed Quaker Samuel Gurney (C. D. 1848/57, No. 2645):
[As long as the state of business is such that returns of loans made come in regularly and credit thus remains unshaken, the expansion and contraction of circulation depend simply upon the requirements of industrialists and merchants. Since gold, at least in England, does not come into question in the wholesale trade and the circulation of gold, aside from seasonal fluctuations, may be regarded as rather constant over a long period of time, the note circulation of the Bank of England constitutes a sufficiently accurate measure of these changes. In the period of stagnation following a crisis, circulation is smallest; with the renewed demand, a greater need for circulating medium develops, which increases with rising prosperity; the quantity of circulating medium reaches its apex in the period of over-tension and over-speculation — the crisis precipitously breaks out and overnight bank-notes which yesterday were still so plentiful disappear from the market and with them the discounters of bills, lenders of money on securities, and buyers of commodities. The Bank of England is called upon for help — but even its powers are soon exhausted, for the Bank Act of 1844 compels it to contract its note circulation at the very moment when the whole world cries out for notes; when owners of commodities cannot sell, yet are called upon to pay and are prepared for any sacrifice, if only they can secure bank-notes.
Once the crisis has broken out, it becomes from then on only a question of means of payment. But since every one is dependent upon someone else for the receipt of these means of payment, and no one knows whether the next one will be able to meet his payments when due, a regular stampede ensues for those means of payment available on the market, that is, for bank-notes. Everyone hoards as many of them as he can lay hand on, and thus the notes disappear from circulation on the very day when they are most needed. Samuel Gurney (C. D. 1848/57, No. 1116) estimates the amount of bank notes brought under lock and key in October 1847, at a time of such alarm, to have reached £4 to £5 million. — F.E.)
In this connection, the cross-examination of Chapman, Gurney's associate who has been previously mentioned, before the Bank Committee of 1857 is especially interesting. I present here its principal contents in context, although certain points are touched upon which we shall not examine until later.
Mr. Chapman has the following to say:
4967. The notes are then indeed unproductive.
An illustration: One morning there was a great demand for money in the Stock Exchange; nobody knew its cause; somebody asked Chapman to lend him £50,000 at 7%. Chapman was astonished, for his rate of interest was much lower; he accepted. Soon after that the man returned, borrowed another £50,000 at 7½%, then £100,000 at 8%, and wanted still more at 8½%. Then even Chapman became uneasy. Later it turned out that a considerable sum of money had been suddenly withdrawn from the market. But, says Chapman,
It must never be forgotten that, although £19 to £20 million in notes are almost constantly supposed to be in the hands of the public, nevertheless, the portion of these notes which actually circulates, and, on the other hand, the portion which is held idle by the banks as a reserve, continually and significantly vary with respect to each other. If this reserve is large, and therefore the actual circulation small, it means, from the point of view of the money-market, that the circulation is full, money is plentiful; if the reserve is small, and therefore the actual circulation full, in the language of the money-market the circulation is low, money is scarce — in other words, the portion representing idle loan capital is small. A real expansion or contraction of the circulation, that is independent of the phases of the industrial cycle — with the amount needed by the public, however, remaining the same — occurs only for technical reasons, for instance, on the dates when taxes or the interest on the national debt are due. When taxes are paid, more notes and gold than usual flow into the Bank of England and, in effect, contract the circulation without regard to its needs. The reverse takes place when the dividends on the national debt are paid out. In the former case, loans are made from the Bank in order to obtain circulating medium. In the latter case, the rate of interest falls in private banks because of the momentary growth of their reserves. This has nothing to do with the absolute quantity of circulating medium; it does, however, concern the banking firm which sets this circulating medium in motion and for which this process consists in the alienation of loan capital and for which it pockets the profits thereby.
In the one case, there is merely a temporary displacement of circulating medium, which the Bank of England balances by short-term loans at low interest shortly before the quarterly taxes and also before the quarterly dividends on the national debt become due; the issue of these supernumerary notes first fills up the gap caused by the payment of taxes, while their return payment to the Bank soon thereafter brings back the excess of notes obtained by the public through the payment of dividends.
In the other case, low or full circulation is always simply a matter of different distribution of the same quantity of circulating medium into active circulation and deposits, i.e., an instrument of loans.
On the other hand, if, for example, the number of notes issued is increased on the basis of a flow of gold into the Bank of England, these notes assist in discounting bills outside of the Bank and return to it through the repayment of loans, so that the absolute quantity of circulating notes is only momentarily increased.
If the circulation is full because of business expansion (which may take place even though prices are relatively low), then the rate of interest can be relatively high because of the demand for loan capital as a result of rising profits and increased new investments. If it is low, because of business contraction, or perhaps because credit is very plentiful, the rate of interest can be low even though prices are high. (See Hubbard. Present edition: Ch. XXXIII. — Ed)
The absolute amount of circulation has a determining influence on the rate of interest only in times of stringency. The demand for full circulation can either reflect merely a demand for a hoarding medium (disregarding the reduced velocity of the money circulation and the continuous conversion of the same identical pieces of money into loan capital) owing to lack of credit, as was the case in 1847 when the suspension of the Bank Act did not cause any expansion of the circulation, but sufficed to draw forth the hoarded notes and to channel them into circulation; or it may be that more means of circulation are actually required under the circumstances, as was the case in 1857 when the circulation actually expanded for some time after the suspension of the Bank Act.
Otherwise, the absolute quantity of circulation has no influence whatever upon the rate of interest, since — assuming the economy and velocity of currency to be constant — it is determined in the first place by commodity-prices and the quantity of transactions (whereby one of these generally neutralises the effect of the other), and finally by the state of credit, whereas it by no means exerts the reverse effect upon the latter; and, secondly, since commodity-prices and interest do not necessarily stand in any direct correlation to each other.
During the life of the Bank Restriction Act (1797-1819) a surplus of currency existed and the rate of interest was always much higher than after the resumption of cash payments. Later, it fell rapidly with the restriction of the note issue and rising bill quotations. In 1822, 1823, and 1832, the general circulation was low, and so was the rate of interest. In 1824, 1825, and 1836, the circulation was full and the rate of interest rose. In the summer of 1830 the circulation was full and the rate of interest low. Since the gold discoveries, money circulation throughout Europe has expanded, and the rate of interest risen. Therefore, the rate of interest does not depend upon the quantity of circulating money.
The difference between the issue of circulating medium and the lending of capital is best demonstrated in the actual reproduction process. We have seen (Vol. II, Part III) in what manner the different component parts of production are exchanged for one another. For example, variable capital consists materially of the means of subsistence of the labourers, a portion of their own product. But this is paid out to them piecemeal in money. The capitalist has to advance this, and it is very greatly dependent on the credit system organisation whether he can pay out the new variable capital the following week with the old money which he paid out in the previous week. The same holds for exchange among various component parts of the total social capital, for instance, between means of consumption and means of production of means of consumption. The money for their circulation, as we have seen, must be advanced by one or both of the exchanging parties. It remains thereupon in circulation, but returns after the exchange has been completed to the one who advanced it, since it had been advanced by him over and above his actually employed industrial capital (Vol. II, Ch. XX). Under a developed system of credit, with the money concentrated in the hands of bankers, it is they, at least nominally, who advance it. This advance refers only to money in circulation. It is an advance of circulation, not an advance of capitals which it circulates.
Chapman states that the custom of banks to invest their surplus money-capital for short periods in consols and treasury notes has decreased considerably of late, ever since it has become customary to lend this money at call, i.e., payable on demand. He personally considers the purchase of such paper for his business very impractical. He, therefore, invests his money in reliable bills of exchange, some of which become due every day, so that he always knows how much ready money he can count on from day to day. [5101 to 5105.]
Even the growth of exports expresses itself more or less for every country, but particularly for the country granting credit, as an increasing demand on the domestic money-market, which is not felt, however, until a period of stringency. When exports increase, British manufacturers usually draw long-term bills of exchange on the export merchants against consignments of British goods (5126).
Wilson inquires of Chapman (5131), whether bills of exchange on England are not drawn simultaneously with the loading of these imported raw materials and colonial goods and whether these bills of exchange do not arrive simultaneously with the bills of lading. Chapman believes so, but does not profess to know anything about such "commercial" transactions and suggests that experts in this field be questioned. — In exporting to America, remarks Chapman, "the goods are symbolised in transit" 5133; this gibberish is supposed to mean that the English export merchant draws against his commodities bills of exchange with a four-month term on one of the big American banking houses in London and this firm receives collateral from America.
[Hence even Chapman does not regard the discounting of bills as an advance of money, but as a purchase of commodities. — F.E.]
In 5144 the esteemed Wilson asks:
5148. Wilson asks the arch-usurer Chapman, whether he does not regard his high rate of interest as a sign of great prosperity and a high rate of profit. Chapman, evidently surprised at the naïveté of this sycophant, affirms this, of course, but has enough integrity to add the following:
Both forget that a high rate of interest can also indicate, as it did in 1857, that the country is undermined by the roving cavaliers of credit who can afford to pay a high interest because they pay it out of other people's pockets (whereby, however, they help to determine the rate of interest for all), and meanwhile they live in grand style on anticipated profits. Simultaneously, precisely this can incidentally provide a very profitable business for manufacturers and others. Returns become wholly deceptive as a result of the loan system. This also explains the following, which should require no explanation so far as the Bank of England is concerned, since it discounts at a lower rate than others when the interest rate is high.
[Chapman made this statement on July 21, 1857, a couple of months before the crash.]
For business was indeed a great deal sounder then.
A very amusing part of Chapman's testimony reveals how these people really regard public money as their own and assume for themselves the right to constant convertibility of the bills of exchange discounted by them. The questions and replies show great naïveté. It becomes the obligation of legislation to make those bills which are accepted by large firms convertible at all time; to ensure that the Bank of England should under all circumstances continue to rediscount them for bill-brokers. And yet three of such bill-brokers went bankrupt in 1857, owing about 8 million and their own infinitesimally small capital compared with these debts.
This is the convertibility of the commercial bill as compared with the convertibility of bank-notes.
As did Mr. Chapman later before the court of assizes in the Davidson case. See the Great City Frauds. [S. Laing, New Series of the Great City Frauds of Cole, Davison, and Cordon, London. — Ed.]
[In this case it is then a question of a supply of money, not of capital or loan capital.]
On the other hand, the private capitalists, etc., who have money do not let go of it at any interest, for they say after the manner of Chapman,
Hence the sudden change of the credit system into a monetary system during crises.
Aside from the domestic panic during crises, one can speak of the quantity of money only in so far as it concerns bullion, universal money. And this is precisely what Chapman excludes; he speaks only of 23 million in bank-notes.
The same Chapman:
In the first place, this reserve of world-market money had then been reduced to its minimum. Secondly, it served at the same time as security for the convertibility of credit-money, bank-notes. It combined in this manner two quite different functions, both of which, however, stem from the nature of money, since real money is always world-market money, and credit-money always rests upon world-market money.
In 1847, without the suspension of the Bank Act of 1844,
That Chapman had an inkling of the imminent crisis, after all:
On Tuesday, October 23, the Bank Act was suspended and the crisis was thus broken.
Chapman believes (5274) that the bills of exchange running simultaneously on London amount to £100 or £120 million. This does not include local bills made on provincial firms.
This was due to the fear caused by the squeeze in which the Eastern Bank found itself for a period of time (March 1856).
5290-92. As soon as the panic is over,
5302. Chapman does not explain the uneasiness that exists when the bank reserve decreases as being due to apprehension concerning deposits, but rather that all those who suddenly may be compelled to pay large sums of money are well aware they may be driven to seek their last refuge in the bank when there is a stringency in the money-market; and
It is pretty, incidentally, to observe how the reserve as a real magnitude dwindles away. Bankers hold a minimum for current business needs either in their own hands or the Bank of England. Bill-brokers hold the "loose bank money of the country" without any reserve. And the Bank of England has nothing to offset its liabilities for deposits but the reserves of bankers and others, together with some public deposits, etc., which it permits to drop to a very low level, for instance, to £2 million. Aside from these £2 million in paper, then, this whole swindle has absolutely no other reserve but the bullion reserve in times of stringency (and this reduces the reserve, because the notes which come in to replace outgoing bullion must be cancelled), and thus every reduction of this reserve by drain on gold increases the crisis.
Particularly clever is Chapman's reply to a question posed by Cayley (a Birmingham man of the Attwood school) regarding Overstone's conception of capital:
Concerning the hoarding of bank-notes "with a view to aggravate the pressure and to take advantage of the consequences" he says that this can very easily occur. Three large banks would be sufficient.
And we may well believe Mr. Chapman on this score, although he finally broke his own neck, commercially speaking, in an attempt at making "enormous profit out of the ruin of victims." For while his associate Gurney says: Every change in business is advantageous for one who is well informed, Chapman says:
And thus it happened that one fine day Gurney and Chapman themselves "were not well informed" and went into ill-famed bankruptcy.
We have previously seen that note issue does not in all cases signify an advance of capital. The following testimony by Tooke before the C. D. Committee of Lords, 1848, indicates merely that an advance of capital, even if accomplished by the bank through an issue of new notes, does not unqualifiedly signify an increase in the number of circulating notes:
Aside from bank-notes, wholesale trade has another medium of circulation, which is far more important to it, namely, bills of exchange. Mr. Chapman showed us how essential it is for the regular flow of business that good hills of exchange be accepted in payment everywhere and under all conditions.
How are these two media of circulation related to one another?
Gilbart writes on this score:
This is corroborated in somewhat modified form by Newmarch, B. A. 1857, No. 1426:
However, the bills of exchange drawn at such times are by no means only the short-term bank-bills mentioned by Gilbart. On the contrary, they are largely bills of accommodation, which represent no real transaction at all, or simply transactions made for the sole purpose of drawing bills of exchange on them; we have presented sufficient illustrations of both. Hence the Economist (Wilson) says in comparing the security of such bills with that of bank-notes:
The quantity of circulating bills of exchange, therefore, like that of bank-notes, is determined solely by the requirements of commerce; in ordinary times, there circulated in the fifties in the United Kingdom, in addition to 39 million in bank-notes, about 300 million in bills of exchange — of which 100-120 million were made out on London alone. The volume of circulating bills of exchange has no influence on note circulation and is influenced by the latter only in times of money tightness, when the quantity of hills increases and their quality deteriorates. Finally, in a period of crisis, the circulation of bills collapses completely; nobody can make use of a promise to pay since everyone will accept only cash payment; only the bank-note retains, at least thus far in England, its ability to circulate, because the nation with its total wealth backs up the Bank of England.
We have seen that even Mr. Chapman, who after all was himself a magnate on the money-market in 1857, complains bitterly that there were several large money-capitalists in London strong enough to disrupt the whole money-market at any given moment and thereby bleed white the smaller money-dealers. There were several such money sharks, he said, who could considerably intensify a stringency by selling one or two million's worth of consols and thereby withdrawing an equal amount of bank-notes (and simultaneously available loan capital) from the market. The joint action of three large banks would suffice to transform a stringency into a panic by a similar manoeuvre.
The largest capital power in London is, of course, the Bank of England, which, however, is prevented by its status as a semi-government institution from showing its domination in such a brutal manner. Nevertheless it also knows enough about ways and means of feathering its nest, particularly since the Bank Act of 1844.
The Bank of England has a capital of £14,553,000, and in addition has at its disposal about £3 million "balance," that is, undistributed profits, as well as all money collected by the government for taxes, etc., which must be deposited with the Bank until it is needed. If we add to this the sum of other deposits, about £30 million in ordinary times, and the bank-notes issued without reserve backing, we shall find that Newmarch made a rather conservative estimate in stating (B. A. 1857, No. 4889):
In so far as the Bank issues notes which are not covered by the bullion reserve in its vaults, it creates symbols of value that constitute for it not only circulating medium, but also additional — even if fictitious — capital to the nominal amount of these unbacked notes. And this additional capital yields additional profit. — In B. A. 1857, Wilson questions Newmarch:
The same is true, of course, for private banks issuing notes. In his replies Nos. 1866 to 1868, Newmarch considers two-thirds of all bank-notes issued by them (the last third has to be covered by bullion reserve in these banks) as "the creation of so much capital", because this amount of coin is saved. The profit of the banker as a result of this may not be larger than that of other capitalists. The fact remains that he draws the profit out of this national saving of coin. The fact that a national saving becomes a private profit does not shock the bourgeois economist in the least, since profit is generally the appropriation of national labour. Is there anything more absurd, for instance, than the Bank of England (1797 to 1817) — whose notes have credit only thanks to the state — taking payment from the state, i.e., from the public, in the form of interest on government loans, for the power granted it by the state to transform these same notes from paper into money and then to lend it back to the state?
The banks, incidentally, have still other means of creating capital. Again according to Newmarch, the country banks, as mentioned above, are accustomed to send their superfluous funds (that is, Bank of England notes) to London bill-brokers, in return for discounted bills of exchange. With these bills of exchange, the bank serves its customers, since it follows a rule not to reissue bills of exchange received from its local customers, in order to prevent their business transactions from becoming known in their own neighbourhood. These bills received from London not only serve the purpose of being issued to customers who have to make direct payments in London, in the event they do not prefer to get the bank's own draft on London; they also serve to settle payments locally, since the banker's endorsement secures local credit for them. Thus, in Lancashire, for instance, all the local banks' own notes and a large portion of Bank of England notes have been pushed out of circulation by such bills. (Ibid.,1568 to 1574.)
Thus we see here how banks create credit and capital by 1) issuing their own notes, 2) writing out drafts on London running up to 21 days, but paid in cash to them immediately on issue and 3) paying out discounted bills of exchange, which are endowed with credit primarily and essentially by endorsement through the bank — at least as far as concerns the local district.
The power of the Bank of England is revealed by its regulation of the market rate of interest. In times of normal activity, it may happen that the Bank cannot prevent a moderate drain of gold from its bullion reserve by raising the discount rate [12] because the demand for means of payment is satisfied by private banks, stock banks and bill-brokers, who have gained considerably in capital power during the last thirty years. In such case, the Bank of England must have recourse to other means. But the statement made by banker Glyn (of Glyn, Mills, Currie & Co.) before the C. D. 1848/57 still holds good for critical periods:
Nevertheless, the Bank of England, being a public institution under government protection and enjoying corresponding privileges, cannot exploit its power as ruthlessly as does private business. For this reason Hubbard remarks before the Banking Committee (B. A. 1857):
But it is a serious event in business life nevertheless when, in time of stringency, the Bank of England puts on the screw, as the saying goes, that is, when it raises still higher the interest rate which is already above average.
But, says friend Samuel Gurney,
And even though the Gurneys skim off the cream by ruthlessly exploiting the precarious state of business, whereas the Bank of England cannot do so with the same liberty, nevertheless it also makes a very pretty profit — not to mention the personal profits falling into the laps of its directors, as a result of their exceptional opportunity for ascertaining the general state of business. According to data submitted to the Lords' Committee of 1817 when cash payments were resumed, these profits accruing to the Bank of England for the entire period from 1797 to 1817 were as follows:
This, on a capital of £11,642,400 over a period of 19 years. (D. Hardcastle, Banks and Bankers, 2nd ed., London, 1843, p. 120.) If we estimate the total gain of the Bank of Ireland, which also suspended cash payments in 1797, by the same method, we obtain the following result:
This, on a capital of £3 million. (Ibid., pp. 363-64.)
Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.
Should anyone still doubt that these esteemed bandits exploit the national and world production solely in the interests of production and the exploited themselves, he will surely learn better from the following homily on the high moral worth of bankers:
(Compilation by Marshall, Cashier of the Bank of England, in Report on Bank Act, 1857. Appendix II, pp. 300-01.)
[In a former work, Ricardo's theory on the value of money as related to commodity-prices has been analysed; we can, therefore, confine ourselves here to the indispensable. According to Ricardo, the value of metallic money is determined by the labour-time incorporated in it, but only as long as the quantity of money stands in correct relationship to the amount and price of commodities to be exchanged. If the quantity of money rises above this ratio, its value falls and commodity-prices rise; if it fails below the correct ratio, its value rises and commodity-prices fall — assuming all other conditions equal. In the first case, the country in which this excess gold exists will export the gold whose value has depreciated and import commodities; in the second case, gold will flow to those countries in which it is assessed above its value, while the under-assessed commodities flow from these countries to other markets, where they command normal prices. Since under these circumstances "gold itself may become, either as coin or bullion, a token of metallic value of greater or smaller magnitude than its own value, it is self-evident that convertible bank-notes in circulation must share the same fate. Although bank-notes are convertible, and therefore their real value corresponds to their nominal value, the aggregate currency consisting of metal and of convertible notes may appreciate or depreciate in accordance with its aggregate quantity, for reasons already stated, rising above or falling below the level determined by the exchange-value of circulating commodities and the metallic value of gold.... This depreciation, not of paper as compared with gold, but of gold and paper taken together, or of the aggregate currency of a country, is one of Ricardo's principal discoveries which Lord Overstone and Co. pressed into their service and made a fundamental principle of Sir Robert Peel's bank legislation of 1844 and 1845." (Zur Kritik der Politischen Ökonomie, p.155.)
We need not here repeat a demonstration of the incorrectness of this Ricardian theory which is given in the cited work. We are merely interested in the way Ricardo's theses were elaborated by that school of bank theorists who dictated Peel's above-mentioned Bank Acts.
"The commercial crises of the 19th century, especially the great crises of 1825 and 1836, did not result in any new developments in the Ricardian theory of money, but they did furnish new applications for it. These were no longer isolated economic phenomena, such as the depreciation of precious metals in the 16th and 17th centuries according to Hume, or the depreciation of paper money in the 18th and early 19th centuries according to Ricardo; these were instead the violent storms in the world-market wherein the conflict of all elements of the capitalist production process discharges itself, and whose origin and cure were sought in the most superficial and abstract sphere of this process, the sphere of money circulation. The actual theoretical assumption from which the school of economic weather prophets proceeds, is actually reduced to the dogma that Ricardo discovered the laws governing the purely metallic currency. The only thing remaining for them to do was to subordinate credit and bank-note circulation to these laws.
The critique of this school was furnished by Thomas Tooke, James Wilson (in the Economist of 1844 to 1847) and John Fullarton. But we have seen on several occasions, particularly in Chapter XXVIII of this book, how incompletely they, too, saw through the nature of gold, and how unclear they were about the relationship of money and capital. We quote here merely a few instances in connection with the transactions of the Committee of the Lower House of 1857 concerning Peel's Bank Acts (B. C. 1857). — F.E.]
J. G. Hubbard, former Governor of the Bank of England, testifies:
He presents two tables covering the years 1834 to 1843, and 1845 to 1853, which show that the price variations of fifteen major commercial articles were quite independent of the export and import of gold and the interest rate. On the other hand, they show a close connection between the export and import of gold, which is, indeed, the "representative of our uninvested capital," and the interest rate.
The fifteen major articles on which the following tables of Hubbard are based include cotton, cotton yarn, cotton fabrics, wool, woollen cloth, flax, linen, indigo, pig-iron, tin, copper, tallow, sugar, coffee, and silk.
I. 1834-1843
Price changes on 15 major items
II. 1844-1853
Price changes on 15 major items
Hubbard comments in this regard:
Since the demand and supply of commodities regulate their market-prices, it becomes evident here how wrong Overstone is in identifying the demand for loanable money-capital (or rather the deviations of supply therefrom), as expressed by the discount rate, with the demand for actual "capital." The contention that commodity-prices are regulated by fluctuations in the quantity of currency is now concealed by the phrase that discount rate fluctuations express fluctuations in the demand for actual material capital, as distinct from money-capital. We have seen that before the same Committee both Norman and Overstone actually contended this, and that the latter especially was compelled to resort to very lame subterfuges, until he was finally cornered (Chap. XXVI). It is indeed an old humbug that changes in the existing quantity of gold in a particular country must raise or lower commodity-prices within this country by increasing or decreasing the quantity of the medium of circulation. If gold is exported, then, according to this Currency Theory, commodity-prices must rise in the country importing this gold, and thereby the value of exports from the gold-exporting country on the gold-importing country's market; on the other hand, the value of the gold-importing country's exports would fall on the gold-exporting country's market while it would rise on the domestic market, i.e., the country receiving the gold. But, in fact, a decrease in the quantity of gold raises only the interest rate, whereas an increase in the quantity of gold lowers the interest rate; and if not for the fact that the fluctuations in the interest rate enter into the determination of cost-prices, or in the determination of demand and supply, commodity prices would be wholly unaffected by them.
In the same report, N. Alexander, head of a large firm doing business with India, expresses the following views on the heavy drain of silver to India and China in the mid-fifties. This was partly due to the Chinese Civil War, which checked the sale of English fabrics in China, and partly due to the disease among silkworms in Europe, which sharply reduced silkworm breeding in Italy and France:
In other words, silver, the money metal of that continent, was sent to Asia instead of commodities, not because commodity-prices had risen in the country which produced them (England), but because prices had fallen, as a result of over-imports in the country which imported them; and this despite the fact that the silver was received by England from France and had to be paid for partly in gold. According to the Currency Theory, prices should have fallen in England and risen in India and China as a result of such imports.
Another illustration. Before the Lords' Committee (C. D. 1848/57), Wylie, one of the first Liverpool merchants, testifies as follows:
This shows the self-interest of Overstone's sagacity according to which money should be "dear" because capital is "scarce." On March 3, 1844, the bank interest rate stood at 3%; in October and November of 1847 it rose to 8 and 9%, and was still 4% on March 3, 1848. The prices of cotton were depressed far below the price which corresponded to the state of supply by the complete stoppage of sales and the panic with its ensuing high rate of interest. As a result, there was an enormous decrease in imports in 1848, on the one hand, and, on the other, a decrease in production in America; hence a new rise in cotton prices in 1849. According to Overstone, the commodities were too dear because there was too much money in the country.
How nicely Overstone confuses prices, or the value of commodities, with the value of money, that is, the interest rate. In his reply to Question 2026, Wylie sums up his general judgement of the Currency Theory, based on which Cardwell and Sir Charles Wood, in May 1847,
He says, furthermore, concerning the effects of this Bank Act on business in general:
We see, then, that the suspension of this Bank Act was received with relief in the provinces as well.
[The crisis of 1837 with its protracted aftermath, followed in 1842 by a regular post-crisis, and the self-interested blindness of industrialists and merchants, who absolutely refused to see any over-production — for such a thing was absurd and impossible according to vulgar economy — had ultimately achieved that confusion of thought which enabled the Currency School to put its dogma into practice on a national scale. The bank legislation of 1844 and 1845 was passed.
The Bank Act of 1844 divides the Bank of England into an issue department and a banking department. The former receives securities — principally government obligations — amounting to 14 million, and the entire metal hoard, of which not more than one-quarter is to consist of silver, and issues notes to the full amount of the total. In so far as these notes are not in the hands of the public, they are held in the banking department and, together with the small amount of coin required for daily use (about one million), constitute its ever ready reserve. The issue department gives the public gold for notes and notes for gold; the remaining transactions with the public are carried on by the banking department. Private banks in England and Wales authorised in 1844 to issue their own notes retained this privilege, but their note issue was fixed; if one of these banks ceases to issue its own notes, the Bank of England can increase its unbacked notes by two-thirds of the quota thus made available; in this way its issue was increased by 1892 from £14 to £16½ million (to be exact, £16,450,000).
Thus, for every five pounds in gold which leave the bank treasury, a five-pound note returns to the issue department and is destroyed; for every five sovereigns going into the treasury a new five-pound note comes into circulation. In this manner, Overstone's ideal paper circulation, which strictly follows the laws of metallic circulation, is carried out in practice, and by this means, according to the advocates of the Currency Theory, crises are made impossible for all time.
It should also be mentioned that the 1844 legislation still shows traces recalling the first twenty years of the 19th century, the period when specie payments were suspended and notes devaluated. The fear that notes may lose their credit is still plainly in evidence. But this fear is quite groundless, since even in 1825 the issue of a discovered old supply of one-pound notes, which had been taken out of circulation, broke the crisis and proved thereby that the credit of the notes remained unshaken even in times of the most general and deepest mistrust. And this is quite understandable; for, after all, the entire nation backs up these symbols of value with its credit. — F.E.]
Let us now turn to a few comments on the effect of the Bank Act. John Stuart Mill believes that the Bank Act of 1844 [In the German 1894 edition this reads: 1847. — Ed] kept down over-speculation. Happily this sage spoke on June 12, 1857. Four months later the crisis broke out. He literally congratulated the "bank directors and the commercial public generally" on the fact that they
The sagacious Mr. Mill thinks that if one-pound notes are issued
Does Mr. Mill assume, then, that manufacturers will pay higher wages because they pay them in paper instead of gold? Or does he believe that if a manufacturer receives his loan in £100 notes and exchanges them for gold, these wages would constitute less demand than if paid immediately in one-pound notes? And does he not know that, for instance, in certain mining districts wages were paid in the notes of local banks, so that several labourers together received one five-pound note? Does this increase their demand? Or will bankers advance money to manufacturers more easily and in larger quantities in small notes than in large ones?
[This singular fear which Mill has for one-pound notes would be inexplicable if his whole work on political economy did not reveal an eclecticism which shows no hesitation in the face of any contradiction. On the one hand, he agrees on many points with Tooke as opposed to Overstone; on the other, he believes that commodity-prices are determined by the quantity of available money. He is thus by no means convinced that, all other conditions being equal, a sovereign will find its way into the coffers of the Bank for every one-pound note issued. He fears that the quantity of circulating medium could be increased and thereby devaluated, that is, commodity-prices might rise. This and nothing more is concealed behind the above-mentioned apprehension. — F.E.)
Tooke expresses the following views before the C. D. 1848/57 concerning the division of the Bank into two departments and the excessive precautions taken to safeguard the cashing of notes:
Before the Committee on B. A. 1857, Newmarch testifies:
Of special interest is the testimony of Palmer, a Director of the Bank of England since 1811 and for a while its Governor, before the Lords' Committee on C. D. 1848/57:
The purpose was to make money dear; aside from the Currency Theory, the separation of the two bank departments and the requirement for Scottish and Irish banks to hold gold in reserve for backing notes issued beyond a certain amount had the same purpose. This brought about a decentralisation of the national metal reserve, which decreased its capability of correcting unfavourable exchange rates. All the following stipulations aim to raise the interest rate: that the Bank of England shall not issue notes exceeding 14 million except against gold reserve; that the banking department shall be administered as an ordinary bank, forcing the interest rate down when money is plentiful and driving it, up when money is scarce; limiting the silver reserve, the principal means of rectifying the rates of exchange with the continent and Asia; the regulations concerning the Scottish and Irish banks, which never require gold for export but must now keep it under the pretence of ensuring an actually illusory convertibility of their notes. The fact is that the Act of 1844 caused a run on the Scottish banks for gold in 1857 for the first time. Nor does the new bank legislation make any distinction between a drain of gold abroad or for domestic purposes, although it goes without saying that their effects are quite different. Hence the continual large fluctuations in the market rate of interest. With reference to silver, Palmer says on two separate occasions, 992 and 994, that the Bank can buy silver for notes only when the rate of exchange is favourable for England, i.e., silver is superfluous; for:
In his opinion, the Bank did not have to raise the interest rate above its old level of 5% in times of stringency, so long as unfavourable exchange rates do not drain gold to foreign countries. Were it not for the Act of 1844, the Bank would be able to discount all first-class bills presented to it without difficulty. [1018-20.] But under the Act of 1844 and in the state in which the Bank found itself in October 1847,
And this high interest rate was precisely the purpose of the Act.
So speaks a man who has occupied a post for 39 years in the administration of the Bank of England. Let us now listen to a private banker, Twells, an associate of Spooner, Attwood & Co. since 1801. He is alone among the witnesses before the B. C. 4857 who provides us with an insight into the country's actual state of affairs and who sees the crisis approaching. In other respects, however, he is a sort of little-shilling man from Birmingham, like his associates, the Attwood brothers, who are the founders of this school. (See Zur Kritik der pol. Oek., S. 59.) He testifies:
4494. He declares that business is not profitable now. The following remarks of his are important because they show that he saw the latent existence of the crisis when none of the others had even an inkling of it.
4495. He relates the following case: A Frenchman sends a broker in Mincing Lane commodities for £3,000 to be sold at a certain price. The broker cannot obtain the requested price, and the Frenchman cannot sell below this price. The commodities remain unsold, but the Frenchman needs money. The broker therefore makes him an advance of £1,000 and has the French man draw a bill of exchange of £1,000 for three months on the broker against his commodities as security. At the end of the three months the bill becomes due, but the commodities still remain unsold. The broker must then pay the bill, and although he possesses security for £3,000, he cannot convert it into cash and as a result faces difficulties. In this manner, one person drags another down with him.
This man, then, is by no means of Overstone's opinion that a high rate of interest is the same as dear capital.
The following shows how business is now conducted:
We have seen that the credit of Bank of England notes is considered beyond question by all experts. Nevertheless, the Bank Act completely ties up nine to ten million in gold for the convertibility of these notes. The sacredness and inviolability of this reserve is thereby carried much farther than among hoarders of olden times. Mr. Brown (Liverpool) testifies, C. D. 1847/57:
The building contractor E. Capps, already cited earlier, whose testimony is also used to illustrate the modern building system in London (Vol. II, Ch. XII), sums up his opinion of the Bank Act of 1844 as follows [B. A. 1857]:
As mentioned before, the Scottish banks were forced by the Bank Act of 1845 into a system resembling that of the English. They were obliged to hold gold in reserve for their note issue beyond the limit fixed for each bank. The effect of this may be seen from the following testimony before the C. D. 1848/57.
Kennedy, Director of a Scottish bank:
The sum of about £900,000 in gold, which the Scottish banks are compelled to keep since 1845, can only be injurious in his opinion and
Furthermore, Anderson, Director of the Union Bank of Scotland:
Finally, we quote an article from the Economist (Wilson):
This system was disturbed by the Act of 1845:
[And what does the father of the Bank Act, banker Samuel Jones Loyd, alias Lord Overstone, say to all this?
Already in 1848 he repeated before the Lords' Committee on Commercial Distress that
in spite of the fact that the mere authority to increase the note issue, given by the Government's Letter of October 25, 1847, had sufficed to take the edge off the crisis.
He holds to the view that
And yet the depressed condition of the manufacturing industry had for months consisted in material commodity-capital filling the warehouses to overflowing and being actually unsaleable; so that for precisely this reason, material productive capital lay wholly or partly idle, in order not to produce still more unsaleable commodity-capital.
And before the Bank Committee of 1857 he says:
To this song of praise by Overstone before the Committee on July 14, the antistrophe was given on November 12 of the same year in the shape of a letter to the Bank's management, in which the government suspended the miracle-working law of 1844 to save what could still be saved. — F. E.]
It should be noted in regard to the accumulation of notes in times of stringency, that it is a repetition of the hoarding of precious metal as used to take place in troubled times in the most primitive conditions of society. The Act of 1844 is interesting in its operation because it seeks to transform all precious metal existing in the country into a circulating medium; it seeks to equate a drain of gold with a contraction of the circulating medium and a return flow of gold with an expansion of the circulating medium. As a result, the experiment proved the contrary to be the case. With a single exception, which we shall mention shortly, the quantity of circulating notes of the Bank of England has never, since 1844, reached the maximum which it was authorised to issue. The crisis of 1857 proved on the other hand that this maximum does not suffice under certain circumstances. From November 13 to 30, 1857, a daily average of £488,830 above this maximum was circulating (B. A. 1858, p. XI). The legal maximum was at that time £14,475,000, plus the amount of metal reserve in the vaults of the Bank.
Concerning the outflow and inflow of precious metal, the following is to be noted:
First, a distinction should be made between the back and forth movement of metal within a region which does not produce any gold and silver, on the one hand, and, on the other, the flow of gold and silver from their sources of production to various other countries and the distribution of this additional metal among them.
Before the gold mines of Russia, California and Australia made Their influence felt, the supply since the beginning of the 19th century sufficed only for the replacement of worn-out coins, for general use in articles of luxury, and for the export of silver to Asia.
However, in the first place, silver exports to Asia have since increased extraordinarily, owing to the Asiatic trade of America and Europe. The silver exported from Europe was largely replaced by the additional supply of gold. Secondly, a portion of the newly imported gold was absorbed by internal money circulation. It is estimated that up to 1857 about 30 million in gold were added to England's internal circulation.[14] Furthermore, the average level of metal reserves in all the central banks of Europe and America increased since 1844. The expansion of domestic money circulation resulted at the same time in bank reserves growing more rapidly in the period of stagnation following upon the panic, because of the larger quantity of gold coins thrust out of domestic circulation and immobilised. Finally, the consumption of precious metal for luxury articles increased since the discovery of new gold deposits as a consequence of the increased wealth.
Secondly, precious metal flows back and forth between countries which do not produce any gold or silver, the same country continually importing, and also exporting. It is only the preponderance of this movement in one or another direction which, in the final analysis, determines whether a drain or an augmentation has taken place, since the mere oscillations and frequently parallel movements largely neutralise one another. But for this reason, in so far as the result is concerned, the continuity and, in the main, the parallel course of both movements is overlooked. A greater import or a greater export of precious metal is always interpreted to be solely the effect and expression of the relation between the imports and exports of commodities, whereas it is simultaneously indicative of the relation between exports and imports of precious metal itself, quite independent of commodity trade.
Thirdly, the preponderance of imports over exports, and vice versa, is measured on the whole by the increase or decrease in metal reserves of the central banks. The greater or lesser precision of this criterion naturally depends primarily on the degree of centralisation of the banking business in general. For on this depends the extent that precious metal in general accumulated in the so-called national banks represents the national metal reserve. But assuming this to be the case, the criterion is not accurate because an additional import may be absorbed under certain circumstances by domestic circulation and the growing consumption of gold and silver in producing luxury articles; furthermore, because without additional import, a withdrawal of gold coin for domestic circulation could take place, and thus the metal reserve could decrease even without a simultaneous increase in exports.
Fourthly, an export of metal assumes the aspect of a drain when the movement of decrease continues for a long time, so that the decrease represents a tendency of movement and depresses the metal reserve of the bank considerably below its average level, down to approximately its average minimum. This minimum is more or less arbitrarily fixed, in so far as it is differently determined in every individual case by legislation concerning backing for the cashing of notes, etc. Concerning the quantitative limits which such a drain can reach in England, Newmarch testified before the Committee on B. A. 1857, Evidence No. 1494:
In 1847, the lowest gold reserve level of the Bank of England, occurring on October 23, showed a decrease of £5,198,156 as compared with that of December 26, 1846, and a decrease of £6,453,748 as compared with the highest level of 1846 (August 29).
Sixthly, with the exception of perhaps 1837, the real crisis always broke out only after a change in the rates of exchange, that is, as soon as the import of precious metal had again gained preponderance over its export.
In 1825, the real crash came after the drain on gold had ceased. In 1839, there was a drain on gold, but it did not bring about a crash. In 1847, the drain on gold ceased in April and the crash came in October. In 1857, the drain on gold to foreign countries had ceased in early November, and the crash did not come until later that same month.
This is particularly evident in the crisis of 1847, when the drain on gold ceased in April after causing a slight preliminary crisis, and the real business crisis did not come until October.
The following testimony was presented at the Secret Committee of the House of Lords on Commercial Distress, 1848. This evidence was not printed until 1857 (also cited as C. D. 1848/57).
Evidence of Tooke:
J. Morris, Governor of the Bank of England:
Palmer, ex-governor and a Director of the Bank of England since 1811:
The drain of bullion, which created an independent money panic in April 1847 was here therefore, as always, but a precursor of the crisis, and a turn had already taken place before it broke out. In 1839, a heavy drain of bullion took place for grain, etc., while business was strongly depressed, but there was no crisis or money panic.
Seventhly, as soon as general crises have spent themselves, gold and silver — leaving aside the inflow of new precious metal from the producing countries — distribute themselves once more in the proportions in which they existed in a state of equilibrium as individual hoards of the various countries. Other conditions being equal, the relative magnitude of a hoard in each country will be determined by the role of that country in the world-market. They flow from the country which had more than its normal share to those with less than a normal amount. These movements of outgoing and incoming metal merely restore the original distribution among the various national reserves. This redistribution, however, is brought about by the effects of various circumstances, which will be taken up in our treatment of rates of exchange. As soon as the normal distribution is once more restored — beginning with this moment — a stage of growth sets in and then again a drain. [This last statement applies, of course, only to England, as the centre of the world money-market. — F.E.]
Eighthly, a drain of metal is generally the symptom of a change in the state of foreign trade, and this change in turn is a premonition that conditions are again approaching a crisis.[15]
Ninthly, the balance of payments can favour Asia against Europe and America.[16]
An import of precious metal takes place mainly during two periods. On the one hand, it takes place in the first phase of a low interest rate, which follows upon a crisis and reflects a restriction of production; and then in the second phase, when the interest rate rises, but before it attains its average level. This is the phase during which returns come quickly, commercial credit is abundant, and therefore the demand for loan capital does not grow in proportion to the expansion of production. In both phases, with loan capital relatively abundant, the superfluous addition of capital existing in the form of gold and silver, i.e., a form in which it can primarily serve only as loan capital, must seriously affect the rate of interest and concomitantly the atmosphere of business in general.
On the other hand, a drain, a continued and heavy export of precious metal, takes place as soon as returns no longer flow, markets are overstocked, and an illusory prosperity is maintained only by means of credit; in other words, as soon as a greatly increased demand for loan capital exists and the interest rate, therefore, has reached at least its average level. Under such circumstances, which are reflected precisely in a drain of precious metal, the effect of continued withdrawal of capital, in a form in which it exists directly as loanable money-capital, is considerably intensified. This must have a direct influence on the interest rate. But instead of restricting credit transactions, the rise in interest rate extends them and leads to an over-straining of all their resources. This period, therefore, precedes the crash.
Newmarch is asked, B. A. 1857:
In the given explanation we have not considered cases in which a drain of gold takes place as a result of crop failures, etc. In such cases the large and sudden disturbance of the equilibrium of production, which is expressed by this drain, requires no further explanation as to its effect. This effect is that much greater the more such a disturbance occurs in a period when production is in full swing.
Among the effects of the gold drain, then, the fact that production as social production is not really subject to social control, is strikingly emphasised by the existence of the social form of wealth as a thing external to it. The capitalist system of production, in fact, has this feature in common with former systems of production, in so far as they are based on trade in commodities and private exchange. But only in the capitalist system of production does this become apparent in the most striking and grotesque form of absurd contradiction and paradox, because, in the first place, production for direct use-value, for consumption by the producers themselves, is most completely eliminated under the capitalist system, so that wealth exists only as a social process expressed as the intertwining of production and circulation; and secondly, with the development of the credit system, capitalist production continually strives to overcome the metal barrier, which is simultaneously a material and imaginative barrier of wealth and its movement, but again and again it breaks its back on this barrier.
In the crisis, the demand is made that all bills of exchange, securities and commodities shall be simultaneously convertible into bank money, and all this bank money, in turn, into gold.
[The rate of exchange is known to be the barometer for the international movement of money metals. If England has more payments to make to Germany than Germany to England, the price of marks, expressed in sterling, rises in London, and the price of sterling, expressed in marks, falls in Hamburg and Berlin. If this preponderance of England's payment obligations towards Germany is not balanced again, for instance, by a preponderance of purchases by Germany in England, the sterling price of bills of exchange in marks on Germany must rise to the point where it will pay to send metal (gold coin or bullion) from England to Germany in payment of obligations, instead of sending bills of exchange. This is the typical course of events.
If this export of precious metal assumes a larger scope and lasts for a longer period, then the English bank reserve is affected, and the English money-market, particularly the Bank of England, must take protective measures. These consist mainly, as we have already seen, in raising the interest rate. When the drain on gold is considerable, the money-market as a rule becomes tight, that is, the demand for loan capital in the form of money significantly exceeds the supply and the higher interest rate follows quite naturally from this; the discount rate fixed by the Bank of England corresponds to this situation and asserts itself on the market. However there are cases when the drain on bullion is due to other than ordinary combinations of business transactions (for instance, loans to foreign states, investment of capital in foreign countries, etc.), and the London money-market as such does not justify an effective rise in the interest rate; the Bank of England must then first "make money scarce," as the phrase goes, through heavy loans in the "open market" and thus artificially create a situation which justifies, or renders necessary, a rise in the interest rate; such a manoeuvre becomes more difficult from year to year. — F.E.]
How this raising of the interest rate affects the rates of exchange is shown by the following testimony before the Committee of the Lower House concerning bank legislation in 1857 (quoted as B. A. or B. C. 1857).
J. G. Hubbard, ex-Governor, and a Director of the Bank of England since 1838:
[At the same time, England owed these same countries "so and so many millions" for grain and also did not fail to "draw a line" through the greater portion of these millions via the bankruptcy of the English debtors. See the report on Bank Acts, 1857, Chapter XXX above. — F.E.]
In the following, Wilson puts the questions and Newmarch replies.
Thereupon Wilson remarks that the rates of exchange are also affected by indirect commerce. For instance, exports from India to Australia and North America are covered by drafts on London, and therefore affect the rate of exchange just as though the commodities had gone directly from India to England. Furthermore, when India and China are considered together, the balance is against England, since China has constantly to make heavy payments to India for opium, and England has to make payments to China, so that the sums go by this circuitous route to India (1787, 1788).
1791. Wilson now asks if the effect on the rates of exchange will not be the same whether capital
Newmarch correctly answers:
1797. [Weguelin asks:) "If no return is made for this iron (rails), how can it be said to affect the exchanges? — I do not think that that part of the expenditure which is sent out in the form of commodities affects the computation of the exchange.... The computation of the exchange between two countries is affected, one might say, solely by the quantity of obligations or bills offering in one country, as compared with the quantity offering in the other country against it; that is the rationale of the exchange. Now, as regards the transmission of those £12,000,000, the money in the first place is subscribed in this country ... now, if the nature of the transaction was such that the whole of that £12,000,000 was required to be laid down in Calcutta, Bombay, and Madras in treasure ... a sudden demand would very violently operate upon the price of silver, and upon the exchange, just the same as if the India Company were to give notice tomorrow that their drafts were to be raised from £3,000,000 to £12,000,000. But half of those £12,000,000 is spent ... in buying commodities in this country ... iron rails and timber, and other materials it is an expenditure in this country of the capital of this country for a particular kind of commodity to be sent out to India, and there is an end of it." — "1798. [Weguelin:] But the production of those articles of iron and timber necessary for the railways produces a large consumption of foreign articles, which might affect the exchange? — Certainly."
Wilson now thinks that iron represents labour to a large extent, and that the wage paid for this labour largely represents imported goods (1799), and then questions further:
1802. Wilson insists that with an equalised trade balance and par rates between England and India the extra shipment of iron and locomotives "would affect the exchanges with India." Newmarch cannot see it that way so long as the rails are sent out as capital investment and India has no payment to make for them in one form or another; he adds:
Wilson retorts with this triviality:
[a fine transition, this "however," when he intends to say the exact opposite]
[it is immaterial, but, nevertheless, it is not immaterial]
[what definiteness!]
What does he mean when he says six million would return immediately? In so far as the £6 million have been expended in England, they exist in rails, locomotives, etc., which are shipped to India, whence they do not return; their value returns very slowly through amortisation, whereas the six million in precious metal may perhaps return very quickly in kind. In so far as the six million have been expended in wages, they have been consumed; but the money used for payment circulates in the country the same as ever, or forms a reserve. The same holds true for the profits of rail producers and that portion of the six million which replaces their constant capital. Thus, this ambiguous statement about returns is used by Newmarch only to avoid saying directly: The money has remained in the country, and in so far as it serves as loanable money-capital the difference for the money-market (aside from the possibility that circulation could have absorbed more coin) is only that it is charged to the account of A instead of B. An investment of this kind, where capital is transferred to other countries in commodities, not in precious metal, can affect the rate of exchange (but not the rate of exchange with the country in which the exported capital is invested) only in so far as the production of these exported commodities requires an additional import of other foreign commodities. This production then cannot balance out the additional import. However, the same thing happens with every export on credit, no matter whether intended for capital investment or ordinary commercial purposes. Moreover, this additional import can also call forth by way of reaction an additional demand for English goods, for instance, on the part of the colonies or the United States.
Previously (1786), Newmarch stated that, owing to drafts of the East India Company, exports from England to India were larger than imports. Sir Charles Wood cross-examines him on this score. This preponderance of English exports to India over imports from India is actually brought about by imports from India for which England does not pay any equivalent. The drafts of the East India Company (now the East India government) reserve themselves into a tribute levied on India. For instance, in 1855, imports from India to England amounted to £12,670,000; English exports to India amounted to £10,350,000; balance in India's favour £2,250,000. [i.e, approximately 2¼ million: more precisely, £2,320,000. — Ed.]
[This amount was levied for the London expenses of the East India Company and for the dividends to be paid to stockholders.]
[This should read: to reduce the necessity of covering the imports from India by exports to that country to the same amount.] Mr. Newmarch explains this by saying that the British import "good government" into India for these £3,700,000 (1925). Wood, as a former Minister for India, knows full well the kind of "good government" which the British import to India, and correctly replies with irony:
Since England exports a good deal "in this way" for "good government" and as capital investment in foreign countries — thus obtaining imports which are completely independent of the ordinary run of business, tribute partly for exported "good government" and partly in the form of revenues from capital invested in the colonies or elsewhere, i.e., tribute for which it does not have to pay any equivalent — it is evident that the rates of exchange are not affected when England simply consumes this tribute without exporting anything in return. Hence, it is also evident that the rates of exchange are not affected when it reinvests this tribute, not in England, but productively or unproductively in foreign countries; for instance, when it sends munitions for it to the Crimea. Moreover, to the extent that imports from abroad enter into the revenue of England — of course, they must be paid for in the form of tribute, for which no equivalent return is necessary, or by exchange for this unpaid tribute or in the ordinary course of commerce — England can either consume them or reinvest them as capital. In neither case are the rates of exchange affected, and this is overlooked by the sage Wilson. Whether a domestic or a foreign product constitutes a part of the revenue — whereby the latter case merely requires an exchange of domestic for foreign products — the consumption of this revenue, be it productive or unproductive, alters nothing in the rates of exchange, even though it may alter the scale of production. The following should be read with the foregoing in mind:
1934. Wood asks Newmarch how the shipment of war supplies to the Crimea would affect the rate of exchange with Turkey. Newmarch replies:
In this case he thus distinguishes capital in the form of money from capital in other forms. But now Wilson asks:
[Mr. Wilson forgets that there are very considerable imports into England for which corresponding exports have never taken place, except in the form of "good government" or of previously exported investment capital; in any case imports which do not enter into normal commercial movement. But these imports are again exchanged, for instance, for American products, and the circumstance that American goods are exported without corresponding imports does not alter the fact that the value of these imports can be consumed without an equivalent flow abroad; they have been received without reciprocal exports and can therefore be consumed without entering into the balance of trade],
[but, if you have previously paid for these imports, for instance, by credit given abroad, then no debt is contracted thereby, and the question has nothing to do with the international balance; it resolves itself into productive and unproductive expenditures, no matter whether the products so consumed are domestic or foreign],
This lecture by Wilson amounts to saying that every export with no corresponding import is simultaneously an import with no corresponding export, because foreign, i.e., imported, commodities enter into the production of the exported article. The assumption is that every export of this kind is based on, or creates, an unpaid import and thus presupposes a debt abroad. This is wrong, even when the following two circumstances are disregarded: 1) England receives certain imports free of charge for which it pays no equivalent, e.g., a portion of its Indian imports. It can exchange these for American imports and export the latter without importing in return; in any case, so far as the value is concerned, it has only exported something that has cost it nothing. 2) England may have paid for imports, for instance, American imports, which constitute additional capital; if it consumes these unproductively, for instance, as war materials, this does not constitute any debt towards America and does not affect the rate of exchange with America. Newmarch contradicts himself in Nos. 1934 and 1935, and Wood calls this to his attention in No. 1938:
Here Newmarch loses his equanimity; he forgets that he has answered the same simple question correctly in No. 1934, and says:
[Wilson has still another version of his claim that the rate of exchange is affected by every transfer of capital from one country to another, no matter whether in the form of precious metal or commodities. Wilson knows, of course, that the rate of exchange is affected by the interest rate, particularly by the relation of the rates of interest prevailing in the two countries whose mutual rates of exchange are under discussion. If he can now demonstrate that surpluses of capital in general, i.e., in the first place, commodities of all kinds including precious metal, have a hand in influencing the interest rate, then he is a step closer to his goal; a transfer of any considerable portion of this capital to some other country must then change the interest rate in both countries, with the change taking place in opposite directions. Thereby, in a secondary way, the rate of exchange between both countries is also altered. — F. E.]
He then says in the Economist, May 22, 1847, page 574, which he edited at the time:
"No doubt, however, such abundance of capital as is indicated by large stocks of commodities of all kinds, including bullion, would necessarily lead, not only to low prices of commodities in general, but also to a lower rate of interest for the use of capital. If we have a stock of commodities on hand, which is sufficient to serve the country for two years to come, a command over those commodities would be obtained for a given period, at a much lower rate than if the stocks were barely sufficient to last us two months. All loans of money, in whatever shape they are made, are simply a transfer of a command over commodities from one to another. Whenever, therefore, commodities are abundant, the interest of money must be low, and when they are scarce, the interest of money must be high. As commodities become abundant, the number of sellers, in proportion to the number of buyers, increases, and, in proportion as the quantity is more than is required for immediate consumption, so must a larger portion be kept for future use. Under these circumstances, the terms on which a holder becomes willing to sell for a future payment, or on credit, become lower than if he were certain that his whole stock would be required within a few weeks".
In regard to the statement, it is to be noted that a large influx in precious metal can take place simultaneously with a contraction in production, as is always the case in the period following a crisis. In the subsequent phase, precious metal may come in from countries which mainly produce precious metal; imports of other commodities are generally balanced by exports during this period. In these two phases, the interest rate is low and rises but slowly; we have already discussed the reason for this. This low interest rate could always be explained without recourse to the influence of any "large stocks of commodities of all kinds." And how is this influence to take place? The low price of cotton, for instance, renders possible the high profits of the spinners, etc. Now why is the interest rate low? Surely not because the profit, which may be made on borrowed capital, is high. But simply and solely because, under existing conditions, the demand for loan capital does not grow in proportion to this profit; in other words, because loan capital has a movement different from industrial capital. What the Economist wants to prove is exactly the reverse, namely, that the movements of loan capital are identical with those of industrial capital.
The Economist states:
Precisely the opposite obtains during crises. Commodities are superabundant, inconvertible into money, and therefore the interest rate is high; in another phase of the cycle the demand for commodities is great and therefore quick returns are made, but at the same time, prices are rising and because of the quick returns the interest rate is low.
The opposite is again true in the slack period following a crisis. Commodities are scarce, absolutely speaking, not with reference to demand; and the interest rate is low.
In regard to the statement, it is pretty evident that an owner of commodities, provided he can sell the latter at all, will get rid of them at a lower price when the market is glutted than he would when there is a prospect of the existing supply becoming rapidly exhausted. But why the interest rate should fall because of that is not so clear.
If the market is glutted with imported commodities, the interest rate may rise as a result of an increased demand on the part of the owners for loan capital, in order to avoid dumping their commodities on the market. The interest rate may fall, because the fluidity of commercial credit may keep the demand for bank credit relatively low.
The Economist mentions the rapid effect on rates of exchange in 1847 of the raising of the interest rate and other circumstances exerting pressure on the money-market. But it should be borne in mind that the gold drain continued until the end of April in spite of the change in the rates of exchange; a turn did not take place here until early May.
On January 1, 1847, the metal reserve of the Bank was £15,066,691; the interest rate 3½%; three months' rates of exchange on Paris 25.75; on Hamburg 13.10; on Amsterdam 12.3¼. On March 5, the metal reserve had fallen to £11,595,535; the discount had risen to 4%; the rate of exchange fell to 25.67½ on Paris; 13.9¼ on Hamburg; and 12.2½ on Amsterdam. The drain of gold continued. See the following table:
In 1847, the total export of precious metal from England amounted to £8,602,597.
Of this to the
In spite of the change in the rates at the end of March, the drain of gold continued for another full month, probably to the United States.
India alone has to pay 5 million in tribute for "good government," interest and dividends on British capital, etc., not counting the sums sent home annually by officials as savings from their salaries, or by English merchants as part of their profit to be invested in England. Every British colony continually has to make large remittances for the same reason. Most of the banks in Australia, the West Indies, and Canada, have been founded with English capital, and the dividends are payable in England. In the same way, England owns many foreign securities — European, North American and South American — on which it draws interest. In addition to this it has interests in foreign railways, canals, mines, etc., with corresponding dividends. Remittance on all these items is made almost exclusively in products over and above the amount of English exports. On the other hand what is sent from England to owners of English securities abroad and for consumption by Englishmen abroad, is insignificant in comparison.
The question, so far as it concerns the balance of trade and the rates of exchange, is "at any particular moment one of time."
The foreign rates of exchange can change:
Parity for the rate of exchange of £1 is: Paris, 25 francs 20 cent.; Hamburg, 13 marks banko 10.5 shillings; Amsterdam, 11 florins 97 cent. To the extent that the Paris rate of exchange exceeds 25.20 francs, it becomes more favourable to the English debtor of France, or the buyer of French commodities. In both cases he needs fewer pounds sterling in order to accomplish his purpose. — In remoter countries, where precious metal is not easily obtained when bills of exchange are scarce and insufficient for remittances to be made to England, the natural effect is to drive up the prices of such products as are generally shipped to England since a greater demand arises for them, in order to send them to England in place of bills of exchange; this is often the case in India.
An unfavourable rate of exchange, or even a drain on gold, can take place when there is a great abundance of money in England, the interest rate is low and the price for securities is high.
In the course of 1848 England received large quantities of silver from India, since good bills of exchange were rare and mediocre ones were not readily accepted in consequence of the crisis of 1847 and the general lack of credit in business with India. All this silver had barely arrived before it found its way to the continent, where the revolution led to the formation of many hoards. The bulk of the same silver made the trip back to India in 1850, since the rate of exchange now made this profitable.
Interest-bearing capital, or, as we may call it in its antiquated form, usurer's capital, belongs together with its twin brother, merchant's capital, to the antediluvian forms of capital, which long precede the capitalist mode of production and are to be found in the most diverse economic formations of society.
The existence of usurer's capital merely requires that at least a portion of products should be transformed into commodities, and that money should have developed in its various functions along with trade in commodities.
The development of usurer's capital is bound up with the development of merchant's capital and especially that of money-dealing capital. In ancient Rome, beginning with the last years of the Republic, when manufacturing stood far below its average level of development in the ancient world, merchant's capital, money-dealing capital, and usurer's capital developed to their highest point within the ancient form.
We have seen (English edition: Vol. I, pp. 130-34. — Ed.) that hoarding necessarily appears along with money. But the professional hoarder does not become important until he is transformed into a usurer.
The merchant borrows money in order to make a profit with it, in order to use it as capital, that is, to expend it. Hence in earlier forms of society the money-lender stands in the same relation to him as to the modern capitalist. This specific relation was also experienced by the Catholic universities.
In all the forms in which slave economy (not the patriarchal kind, but that of later Grecian and Roman times) serves as a means of amassing wealth, where money therefore is a means of appropriating the labour of others through the purchase of slaves, land, etc., money can be expanded as capital, i.e., bear interest, for the very reason that it can be so invested.
The characteristic forms, however, in which usurer's capital exists in periods antedating capitalist production are of two kinds. I purposely say characteristic forms. The same forms repeat themselves on the basis of capitalist production, but as mere subordinate forms. They are then no longer the forms which determine the character of interest-bearing capital. These two forms are: first, usury by lending money to extravagant members of the upper classes, particularly landowners; secondly, usury by lending money to small producers who possess their own conditions of labour — this includes the artisan, but mainly the peasant, since particularly under pre-capitalist conditions, in so far as they permit of small independent individual producers, the peasant class necessarily constitutes the overwhelming majority of them.
Both the ruin of rich landowners through usury and the impoverishment of the small producers lead to the formation and concentration of large amounts of money-capital. But to what extent this process does away with the old mode of production, as happened in modern Europe, and whether it puts the capitalist mode of production in its stead, depends entirely upon the stage of historical development and the attendant circumstances.
Usurer's capital as the characteristic form of interest-bearing capital corresponds to the predominance of small-scale production of the self-employed peasant and small master craftsman. When the labourer is confronted by the conditions of labour and by the product of labour in the shape of capital, as under the developed capitalist mode of production, he has no occasion to borrow any money as a producer. When he does any money borrowing, he does so, for instance, at the pawnshop to secure personal necessities. But wherever the labourer is the owner, whether actual or nominal, of his conditions of labour and his product, he stands as a producer in relation to the money-lender's capital, which confronts him as usurer's capital. Newman expresses the matter insipidly when he says the banker is respected, while the usurer is hated and despised, because the banker lends to the rich, whereas the usurer lends to the poor. (F. W. Newman, Lectures on Political Economy, London, 1851, p. 44.) He overlooks the fact that a difference between two modes of social production and their corresponding social orders lies at the heart of the matter and that the situation cannot be explained by the distinction between rich and poor. Moreover, the usury which sucks dry the small producer goes hand in hand with the usury which sucks dry the rich owner of a large estate. As soon as the usury of the Roman patricians had completely ruined the Roman plebeians, the small peasants, this form of exploitation came to an end and a pure slave economy replaced the small-peasant economy.
Usury thus exerts, on the one hand, an undermining and destructive influence on ancient and feudal wealth and ancient and feudal property. On the other hand, it undermines and ruins small-peasant and small-burgher production, in short, all forms in which the producer still appears as the owner of his means of production. Under the developed capitalist mode of production, the labourer is not the owner of the means of production, i.e., the field which he cultivates, the raw materials which he processes, etc. But under this system separation of the producer from the means of production reflects an actual revolution in the mode of production itself. The isolated labourers are brought together in large workshops for the purpose of carrying out separate but interconnected activities; the tool becomes a machine. The mode of production itself no longer permits the dispersion of the instruments of production associated with small property; nor does it permit the isolation of the labourer himself. Under the capitalist mode of production usury can no longer separate the producer from his means of production, for they have already been separated.
Usury centralizes money wealth where the means of production are dispersed. It does not alter the mode of production, but attaches itself firmly to it like a parasite and makes it wretched. It sucks out its blood, enervates it and compels reproduction to proceed under ever more pitiable conditions. Hence the popular hatred against usurers, which was most pronounced in the ancient world where ownership of means of production by the producer himself was at the same time the basis for political status, the independence of the citizen.
To the extent that slavery prevails, or in so far as the surplus product is consumed by the feudal lord and his retinue, while either the slave-owner or the feudal lord fall into the clutches of the usurer, the mode of production still remains the same; it only becomes harder on the labourer. The indebted slave holder or feudal lord becomes more oppressive because he is himself more oppressed. Or he finally makes way for the usurer, who becomes a landed proprietor or a slave-holder himself, like the knights in ancient Rome. The place of the old exploiter, whose exploitation was more or less patriarchal because it was largely a means of political power, is taken by a hard, money mad parvenu. But the mode of production itself is not altered thereby.
Usury has a revolutionary effect in all pre-capitalist modes of production only in so far as it destroys and dissolves those forms of property on whose solid foundation and continual reproduction in the same form the political organization is based. Under Asian forms, usury can continue a long time, without producing anything more than economic decay and political corruption. Only where and when the other prerequisites of capitalist production are present does usury become one of the means assisting in establishment of the new mode of production by ruining the feudal lord and small-scale producer, on the one hand, and centralizing the conditions of labour into capital, on the other.
Usurer's capital employs the method of exploitation characteristic of capital yet without the latter's mode of production. This condition also repeats itself within bourgeois economy, in backward branches of industry or in those branches which resist the transition to the modern mode of production. For instance, if we wish to compare the English interest rate with the Indian, we should not take the interest rate of the Bank of England, but rather, e.g., that charged by lenders of small machinery to small producers in domestic industry.
The really important and characteristic domain of the usurer, however, is the function of money as a means of payment. Every payment of money, ground-rent, tribute, tax, etc., which becomes due on a certain date, carries with it the need to secure money for such a purpose. Hence from the days of ancient Rome to those of modern times, wholesale usury relies upon tax-collectors, fermiers gènèraux, receveurs gènèraux. Then, there develops with commerce and the generalization of commodity- production the separation, in time, of purchase and payment. The money has to be paid on a definite date. How this can lead to circumstances in which the money-capitalist and usurer, even nowadays, merge into one is shown by modern money crises. This same usury, however, becomes one of the principal means of further developing the necessity for money as a means of payment — by driving the producer ever more deeply into debt and destroying his usual means of payment, since the burden of interest alone makes his normal reproduction impossible. At this point, usury sprouts up out of money as a means of payment and extends this function of money as its very own domain.
The credit system develops as a reaction against usury. But this should not be misunderstood, nor by any means interpreted in the manner of the ancient writers, the church fathers, Luther or the early socialists. It signifies no more and no less than the subordination of interest-bearing capital to the conditions and requirements of the capitalist mode of production.
On the whole, interest-bearing capital under the modern credit system is adapted to the conditions of the capitalist mode of production. Usury as such does not only continue to exist, but is even freed, among nations with a developed capitalist production, from the fetters imposed upon it by all previous legislation. Interest-bearing capital retains the form of usurer's capital in relation to persons or classes, or in circumstances where borrowing does not, nor can, take place in the sense corresponding to the capitalist mode of production; where borrowing takes place as a result of individual need, as at the pawnshop; where money is borrowed by wealthy spendthrifts for the purpose of squandering; or where the producer is a non-capitalist producer, such as a small farmer or craftsman, who is thus still, as the immediate producer, the owner of his own means of production; finally where the capitalist producer himself operates on such a small scale that he resembles those self-employed producers.
What distinguishes interest-bearing capital — in so far as it is an essential element of the capitalist mode of production — from usurer's capital is by no means the nature or character of this capital itself. It is merely the altered conditions under which it operates, and consequently also the totally transformed character of the borrower who confronts the money-lender. Even when a man without fortune receives credit in his capacity of industrialist or merchant, it occurs with the expectation that he will function as capitalist and appropriate unpaid labour with the borrowed capital. He receives credit in his capacity of potential capitalist. The circumstance that a man without fortune but possessing energy, solidity, ability and business acumen may become a capitalist in this manner — and the commercial value of each individual is pretty accurately estimated under the capitalist mode of production — is greatly admired by apologists of the capitalist system. Although this circumstance continually brings an unwelcome number of new soldiers of fortune into the field and into competition with the already existing individual capitalists, it also reinforces the supremacy of capital itself, expands its base and enables it to recruit ever new forces for itself out of the substratum of society. In a similar way, the circumstance that the Catholic Church in the Middle Ages formed its hierarchy out of the best brains in the land, regardless of their estate, birth or fortune, was one of the principal means of consolidating ecclesiastical rule and suppressing the laity. The more a ruling class is able to assimilate the foremost minds of a ruled class, the more stable and dangerous becomes its rule.
The initiators of the modern credit system take as their point of departure not an anathema against interest-bearing capital in general, but on the contrary, its explicit recognition.
We are not referring here to such reactions against usury which attempted to protect the poor against it, like the Monts-de-piètè (1350 in Sarlins in Franche-Comté, later in Perugia and Savona in Italy, 1400 and 1479). These are noteworthy mainly because they reveal the irony of history, which turns pious wishes into their very opposite during the process of realization. According to a moderate estimate, the English working-class pays 100% to the pawnshops, the modern successors of Monts-de-piètè [21] We are also not referring to the credit fantasies of such men as Dr. Hugh Chamberleyne or John Briscoe, who attempted during the last decade of the 17th century to emancipate the English aristocracy from usury by means of a farmers' bank using paper money based on real estate. [22]
The credit associations established in the 12th and 14th centuries in Venice and Genoa arose from the need for marine commerce and the wholesale trade associated with it to emancipate themselves from the domination of outmoded usury and the monopolization of the money business. While the actual banks founded in those city-republics assumed simultaneously the shape of public credit institutions from which the state received loans on future tax revenues, it should not be forgotten that the merchants founding those associations were themselves prominent citizens of those states and as much interested in emancipating their government as they were in emancipating themselves from the exactions of usurers, [23] and at the same time in getting tighter and more secure control over the state. Hence, when the Bank of England was to be established, the Tories also protested:
The Bank of Amsterdam, in 1609, was not epoch-making in the development of the modern credit system any more than that of Hamburg in 1619. It was purely a bank for deposits. The checks issued by the bank were indeed merely receipts for the deposited coined and uncoined precious metal, and circulated only with the endorsement of the acceptors. But in Holland commercial credit and dealing in money developed hand in hand with commerce and manufacture, and interest-bearing capital was subordinated to industrial and commercial capital by the course of development itself. This could already be seen in the low interest rate. Holland, however, was considered in the 17th century the model of economic development, as England is now. The monopoly of old-style usury, based on poverty, collapsed in that country of its own weight.
During the entire 18th century there is the cry, with Holland referred to as an example, for a compulsory reduction of the rate of interest (and legislation acts accordingly), in order to subordinate interest-bearing capital to commercial and industrial capital, instead of the reverse. The main spokesman for this movement is Sir Josiah Child, the father of ordinary English private banking. He declaims against the monopoly of usurers in much the same way as the wholesale clothing manufacturers, Moses & Son, do when leading the light against the monopoly of "private tailors." This same Josiah Child is simultaneously the father of English stock-jobbing. Thus, this autocrat of the East India Company defends its monopoly in the name of free trade. Versus Thomas Manley (Interest of Money Mistaken — Thomas Manley was not the author of this book. It was published anonymously in London in 1668. — Ed.) he says:
This violent battle against usury, this demand for the subordination of interest-bearing capital to industrial capital, is but the herald of the organic creations that establish these prerequisites of capitalist production in the modern banking system, which on the one hand robs usurer's capital of its monopoly by concentrating all idle money reserves and throwing them on the money market, and on the other hand limits the monopoly of the precious metal itself by creating credit-money.
The same opposition to usury, the demand for the emancipation of commerce, industry and the state from usury, which are observed here in the case of Child, will be found in all writings on banking in England during the last third of the 17th and the early 18th centuries. We also find colossal illusions about the miraculous effects of credit, abolition of the monopoly of precious metal, its displacement by paper, etc. The Scotsman William Paterson, founder of the Bank of England and the Bank of Scotland, is by all odds Law the First.
Even before the establishment of the Bank of England a plan was proposed in 1683 for a National Bank of Credit, which had for its purpose, among others,
After many endeavors this Bank of Credit was established in Devonshire House on Bishopsgate Street. It made loans to industrialists and merchants on the security of deposited goods to the amount of three-quarters of their value, in the form of bills of exchange. In order to make these bills of exchange capable of circulating, a number of people in each branch of business were organized into a society, from which every possessor of such bills would be able to obtain goods with the same facility as if he were to offer them cash payment. This bank's business did not flourish. Its machinery was too complicated, and the risk too great in case of a commodity depreciation.
If we go by the actual content of those records which accompany and theoretically promote the formation of the modern credit system in England, we shall not find anything in them but — as one of its conditions — the demand for a subordination of interest-bearing capital and of loanable means of production in general to the capitalist mode of production. On the other hand, if we simply cling to the phraseology, we shall be frequently surprised by the agreement — including the mode of expression with the illusions of the followers of Saint-Simon about banking and credit.
Just as in the writings of the physiocrats the cultivateur does not stand for the actual tiller of the soil, but for the big farmer, so the travailleur with Saint-Simon, and continuing on through his disciples, does not stand for the labourer, but for the industrial and commercial capitalist.
In fact, one should bear in mind that only in his last work, Le Nouveau Christianisme, Saint-Simon speaks directly for the working-class and declares their emancipation to be the goal of his efforts. All his former writings are, indeed, mere encomiums of modern bourgeois society in contrast to the feudal order, or of industrialists and bankers in contrast to marshals and juristic law-manufacturers of the Napoleonic era. What a difference compared with the contemporaneous writings of Owen! [24] For the followers of Saint-Simon, the industrial capitalist likewise remains the travailleur par excellence, as the above-quoted passage indicates. After reading their writings critically, one will not be surprised that their credit and bank fantasies materialized in the credit mobilier, founded by an ex-follower of Saint-Simon, Emile Péreire. This form, incidentally, could become dominant only in a country like France, where neither the credit system nor large-scale industry had reached the modern level of development. This was not at all possible in England and America. The embryo of Crédit mobilizer is already contained in the following passages from Doctrine de Saint-Simon. Exposition. Premiere annèe, 1828-29, 3me ed., Paris, 1831. It is understandable that bankers can lend money more cheaply than the capitalists and private usurers. These bankers are, therefore,
But the authors themselves add in a footnote:
Travailleur here means capitaliste industriel. Incidentally, it is wrong to regard the means at the command of the modern banking system merely as the means of idle people. In the first place, it is the portion of capital which industrialists and merchants temporarily hold in the form of idle money, as a money reserve or as capital to be invested. Hence it is idle capital, but not capital of the idle. In the second place, it is the portion of all revenue and savings in general which is to be temporarily or permanently accumulated. Both are essential to the nature of the banking system.
But it should always be borne in mind that, in the first place, money — in the form of precious metal — remains the foundation from which the credit system, by its very nature, can never detach itself. Secondly, that the credit system presupposes the monopoly of social means of production by private persons (in the form of capital and landed property), that it is itself, on the one hand, an immanent form of the capitalist mode of production, and on the other, a driving force in its development to its highest and ultimate form.
The banking system, so far as its formal organization and centralization is concerned, is the most artificial and most developed product turned out by the capitalist mode of production, a fact already expressed in 1697 in Some Thoughts of the Interests of England. This accounts for the immense power of an institution such as the Bank of England over commerce and industry, although their actual movements remain completely beyond its province and it is passive toward them. The banking system possesses indeed the form of universal book-keeping and distribution of means of production on a social scale, but solely the form. We have seen that the average profit of the individual capitalist, or of every individual capital, is determined not by the surplus-labour appropriated at first hand by each capital, but by the quantity of total surplus-labour appropriated by the total capital, from which each individual capital receives its dividend only proportional to its aliquot part of the total capital. This social character of capital is first promoted and wholly realized through the full development of the credit and banking system. On the other hand this goes farther. It places all the available and even potential capital of society that is not already actively employed at the disposal of the industrial and commercial capitalists so that neither the lenders nor users of this capital are its real owners or producers. It thus does away with the private character of capital and thus contains in itself, but only in itself, the abolition of capital itself. By means of the banking system the distribution of capital as a special business, a social function, is taken out of the hands of the private capitalists and usurers. But at the same time, banking and credit thus become the most potent means of driving capitalist production beyond its own limits, and one of the most effective vehicles of crises and swindle.
The banking system shows, furthermore, by substituting various forms of circulating credit in place of money, that money is in reality nothing but a particular expression of the social character of labour and its products, which, however, as antithetical to the basis of private production, must always appear in the last analysis as a thing, a special commodity, alongside other commodities.
Finally, there is no doubt that the credit system will serve as a powerful lever during the transition from the capitalist mode of production to the mode of production of associated labour; but only as one element in connection with other great organic revolutions of the mode of production itself. On the other hand, the illusions concerning the miraculous power of the credit and banking system, in the socialist sense, arise from a complete lack of familiarity with the capitalist mode of production and the credit system as one of its forms. As soon as the means of production cease being transformed into capital (which also includes the abolition of private property in land), credit as such no longer has any meaning. This, incidentally, was even understood by the followers of Saint-Simon. On the other hand, as long as the capitalist mode of production continues to exist, interest-bearing capital, as one of its forms, also continues to exist and constitutes in fact the basis of its credit system. Only that sensational writer, Proudhon, who wanted to perpetuate commodity-production and abolish money, [25] was capable of dreaming up the monstrous crèdit gratuit, the ostensible realization of the pious wish of the petty-bourgeois estate.
In Religion saint-simonienne, èconomie politique et Politique, we read on page 45:
Therefore, credit disappears with this constitution of property. We read, furthermore, on page 98, that the present banks
The notion that the banks themselves should take over the management and distinguish themselves
contains the Crédit mobilier in embryo. In the same way, Charles Pecqueur demands that the banks (which the followers of Saint-Simon call a Système general des banques) "should rule production." Pecqueur is essentially a follower of Saint-Simon, but much more radical. He wants
Usury, like commerce, exploits a given mode of production. It does not create it, but is related to it outwardly. Usury tries to maintain it directly, so as to exploit it ever anew; it is conservative and makes this mode of production only more pitiable. The less elements of production enter into the production process as commodities, and emerge from it as commodities, the more does their origination from money appear as a separate act. The more insignificant the role played by circulation in the social reproduction, the more usury flourishes.
That money wealth develops as a special kind of wealth, means in respect to usurer's capital that it possesses all its claims in the form of money claims. It develops that much more in a given country, the more the main body of production is limited to natural services, etc., that is, to use-values.
Usury is a powerful lever in developing the preconditions for industrial capital in so far as it plays the following double role, first, building up, in general, an independent money wealth alongside that of the merchant, and, secondly, appropriating the conditions of labour, that is, ruining the owners of the old conditions of labour.
To what extent the granting of loans to landowners, and thus to the pleasure-seeking wealthy in general, still prevailed in the last third of the 17th century, even in England, before the development of modern credit, may be seen, among others, in the works of Sir Dudley North. He was not only one of the first English merchants, but also one of the most prominent theoretical economists of his time:
Poland in the 18th century:
"Warsaw carried on a large bustling business in bills of exchange which, however, had as its principal basis and aim the usury of its bankers. In order to secure money, which they could lend to spendthrift gentry at 8% and more, they sought and obtained abroad open exchange credit, that is, credit that had no commodity trade as its basis, but which the foreign drawee continued to accept as long as the returns from these manipulations did not fail to come in. However, they paid heavily for this through bankruptcies of men like Tapper and other highly respected Warsaw bankers." (J. G. Büsch, Theoretisch-praktische Darstellung der Handlung, etc., 3rd ed., Hamburg, 1808, Vol. II, pp. 232, 233.)
For our purposes it is necessary to study the modern form of landed
 property, because our task is to consider the specific conditions of production
 and circulation which arise from the investment of capital in agriculture.
 Without this, our analysis of capital would not be complete. We therefore
 confine ourselves exclusively to the investment of capital in agriculture
 itself, that is, in producing the principal agricultural crop which feeds a
 given people. We can use wheat for this purpose, because it is the principal
 means of subsistence in modern capitalistically developed nations. (Or, instead
 of agriculture, we can use mining because the laws are the same for both.)
One of the big contributions of Adam Smith was to have shown that
 ground-rent for capital invested in the production of such agricultural
 products as flax and dye-stuffs, and in independent cattle-raising, etc., is
 determined by the ground-rent obtained from capital invested in the production
 of the principal article of subsistence. [Smith, An Inquiry into the Nature
 and Causes of the Wealth of Nations, Aberdeen, London, 1848, pp. 105-16.
 — Ed.] In fact, no further progress has been made in this regard
 since then. Any limitations or additions would belong in an independent study
 of landed property, not here. Hence, we shall not speak of landed property
 ex professo — in so far as it does not refer to land destined
 for wheat production — but shall merely refer to it on occasion by way of
 illustration.
It should be noted for the sake of completeness that we also include water,
 etc., in the term land, in so far as it belongs to someone as an accessory to
 the land.
Before we proceed to the problem itself, several more preliminary remarks
 are necessary to avoid misunderstanding.
The prerequisites for the capitalist mode of production therefore are the
 following: The actual tillers of the soil are wage labourers employed by a
 capitalist, the capitalist farmer who is engaged in agriculture merely as a
 particular field of exploitation for capital, as investment for his capital in
 a particular sphere of production. This capitalist farmer pays the landowner,
 the owner of the land exploited by him, a sum of money at definite periods
 fixed by contract, for instance, annually (just as the borrower of
 money-capital pays a fixed interest), for the right to invest his capital in
 this specific sphere of production. This sum of money is called ground-rent, no
 matter whether it is paid for agricultural land, building lots, mines, fishing
 grounds, or forests, etc. It is paid for the entire time for which the
 landowner has contracted to rent his land to the capitalist farmer.
 Ground-rent, therefore, is here that form in which property in land is realised
 economically, that is, produces value. Here, then, we have all three classes
 — wage-labourers, industrial capitalists, and landowners constituting
 together, and in their mutual opposition, the framework of modern society.
A.A. Walton, in his History of the Landed Tenures of Great Britain and
 Ireland, London, 1865, says on this score (pp.96, 97):
In agriculture proper this process does not yet appear quite as plainly as
 when the land is used for building purposes. By far the largest portion of land
 used in England for building purposes but not sold as a freehold is leased by
 the landowners for 99 years or, if possible, for a shorter term. After the
 lapse of this period the buildings fall into the hands of the landowner
 together with the land itself.
It is evident in these circumstances that when the census for England 
 and Wales in 1861 gives the total population as 20,066,224 and the number of
 landlords as 36,032, the proportion of owners to the number of houses and to
 population would look completely different if the large landlords were placed
 on one side and the small ones on the other.
This illustration of ownership in buildings is important. In the first
 place, it clearly shows the difference between actual ground-rent and interest
 on fixed capital incorporated in the land, which may constitute an addition to
 ground-rent. Interest on buildings, like that on capital incorporated in the
 land by the tenant in agriculture, falls into the hands of the industrial
 capitalist, the building speculator, or the tenant, so long as the lease lasts,
 and has in itself nothing to do with ground-rent, which must be paid on stated
 dates annually for the use of the land. Secondly, it shows that capital
 incorporated in the land by others ultimately passes into the hands of the
 landlord together with the land, and that the interest for it inflates his
 rent.
Some writers, acting either as spokesmen of landlordism and taking up the
 cudgels against the attacks of bourgeois economists, or in an endeavour to
 transform the capitalist system of production from a system of contradictions
 into one of "harmonies," like Carey, have tried to represent ground-rent, the
 specific economic expression of landed property, as identical with interest.
 This would eliminate the opposition between landlords and capitalists. The
 opposite method was employed in the early stages of capitalist production. In
 those days, landed property was still regarded by popular conception as the
 pristine and respectable form of private property, while interest on capital
 was decried as usury. Dudley North, Locke and others, therefore, represented
 interest on capital as a form analogous to ground-rent, just as Turgot deduced
 the justification for interest from the existence of ground-rent. — Aside
 from the fact that ground-rent may, and does, exist in its pure form without
 any addition for interest on capital incorporated in the land, those more
 recent writers forget that, in this way, the landlord not only receives
 interest on other persons' capital that costs him nothing, but also pockets
 this capital of others without recompense. The justification of landed
 property, like that of all other forms of property corresponding to a certain
 mode of production, is that the mode of production itself is a transient
 historical necessity, and this includes the relations of production and
 exchange which stem from it. It is true, as we shall see later, that landed
 property differs from other kinds of property in that it appears superfluous
 and harmful at a certain stage of development, even from the point of view of
 the capitalist mode of production.
Ground-rent may in another form be confused with interest and thereby its
 specific character overlooked. Ground-rent assumes the form of a certain sum of
 money, which the landlord draws annually by leasing a certain plot on our
 planet. We have seen that every particular sum of money may be capitalised,
 that is, considered as the interest on an imaginary capital. For instance, if
 the average rate of interest is 5%, then an annual ground-rent of £200 may be
 regarded as interest on a capital of £4,000. Ground-rent so capitalised
 constitutes the purchase price or value of the land, a category which like the
 price of labour is prima facie irrational, since the earth is not the
 product of labour and therefore has no value. But on the other hand, a real
 relation in production is concealed behind this irrational form. If a
 capitalist buys land yielding a rent of £200 annually and pays £4,000 for it,
 then he draws the average annual interest of 5% on his capital of £4,000, just
 as if he had invested this capital in interest-bearing papers or loaned it
 directly at 5% interest. It is the expansion of a capital of £4,000 at 5%. On
 this assumption, he would recover the purchase price of his estate through its
 revenues in twenty years. In England, therefore, the purchase price of land is
 calculated in so many years' purchase which is merely another way of expressing
 the capitalisation of ground-rent. It is in fact the purchase price-not of the
 land, but of the ground-rent yielded by it — calculated in accordance
 with the usual interest rate. But this capitalisation of rent assumes the
 existence of rent, while rent cannot inversely be derived and explained from
 its own capitalisation. Its existence, independent of its sale, is rather the
 starting-point for the inquiry.
It follows, then, that the price of land may rise or fall inversely as the
 interest rate rises or falls if we assume ground-rent to be a constant
 magnitude. If the ordinary interest rate should fall from 5% to 4%, then the
 annual ground-rent of £200 would represent the annual realisation from a
 capital of £5,000 instead of £4,000. The price of the same piece of land would
 thus have risen from £4,000 to £5,000, or from 20 years' to 25 years' purchase.
 The converse would take place in the opposite case. This is a movement of the
 price of land which is independent of the movement of ground-rent itself and
 regulated only by the interest rate. But as we have seen that the rate of
 profit has a tendency to fall in the course of social progress, and, therefore,
 the interest rate has the same tendency, so far as it is regulated by the rate
 of profit; and that, furthermore, the interest rate shows a tendency to fall in
 consequence of the growth of loanable capital, apart from the influence of the
 rate of profit, it follows that the price of land has a tendency to rise, even
 independently of the movement of ground-rent and the prices of the products of
 the land, of which rent constitutes a part.
The confusion of ground-rent itself with the interest form which it assumes
 for the buyer of the land — a confusion resulting from complete lack of
 familiarity with the nature of ground-rent — must necessarily lead to the
 most absurd conclusions. Since landed property is considered in all ancient
 countries as a particularly genteel form of property, and its purchase also as
 an eminently safe capital investment, the interest rate at which ground-rent is
 bought is generally lower than that of other long-term investments of capital,
 so that a buyer of real estate draws, for instance, only 4% on his purchase
 price, whereas he would draw 5% for the same capital in other investments. In
 other words, he pays more capital for ground-rent than he would for the same
 annual amount of income from other investments. This leads Mr. Thiers to
 conclude in his generally very poor work on La Propriété (a reprint of
 his speech in the French National Assembly in 1849 directed against Proudhon)
 [Proudhon's speech was published in "Compte rendu des seances de
 l'Assemblée Nationale,” Tome II, Paris, 1849, pp. 666-71. —
 Ed.] that ground-rent is low, whereas it merely proves that its
 purchase price is high.
The fact that capitalised ground-rent appears as the price or value of land,
 so that land, therefore, is bought and sold like any other commodity, serves
 some apologists as a justification for landed property since the buyer pays an
 equivalent for it, the same as for other commodities; and the major portion of
 landed property has changed hands in this way. The same reason in that case
 would also serve to justify slavery, since the returns from the labour of the
 slave, whom the slave-holder has bought, merely represent the interest on the
 capital invested in this purchase. To derive a justification for the existence
 of ground-rent from its sale and purchase means in general to justify its
 existence by its existence.
As important as it may be for a scientific analysis of ground-rent —
 that is, the independent and specific economic form of landed property on the
 basis of the capitalist mode of production — study it in its pure form
 free of all distorting and obfuscating irrelevancies, it is just as important
 for an understanding of the practical effects of landed property even for a
 theoretical comprehension of a multitude of facts which contradict the concept
 and nature of ground-rent and yet appear as modes of existence of ground-rent
 — to learn the sources which give rise to such muddling in theory.
In practice, naturally, everything appears as ground-rent that is paid as
 lease money by tenant to landlord for the right to cultivate the soil. No
 matter what the composition of this tribute and no matter what its sources, it
 has this in common with the actual ground-rent — that the monopoly of the
 so-called landed proprietor of a portion of our planet enables him to levy such
 tribute and impose such an assessment. It has this in common with the actual
 ground-rent — that it determines the price of land, which, as we have
 indicated earlier, is nothing but the capitalised income from the lease of the
 land.
We have already seen that interest for the capital incorporated in the land
 may constitute such an extraneous component of ground-rent, a component which
 must become a continually growing extra charge on the total rent of a country
 as economic development progresses. But aside from this interest, it is
 possible that the lease money may conceal in part, and in certain cases in its
 entirety, i.e., in complete absence of the actual ground-rent when the land is,
 therefore, actually worthless — a deduction from the average profit or
 from the normal wages, or both. This portion, whether of profit or wages,
 appears here as ground-rent, because instead of falling to the industrial
 capitalist or the wage-worker, as would normally be the case, it is paid to the
 landlord in the form of lease money. Economically speaking, neither the one nor
 the other of these portions constitutes ground-rent; but, in practice, it
 constitutes the landlord's revenue, an economic realisation of his monopoly,
 much as actual ground-rent, and it has just as determining an influence on land
 prices.
We are not speaking now of conditions in which ground-rent, the manner of
 expressing landed property in the capitalist mode of production, formally
 exists without the existence of the capitalist mode of production itself, i.e.,
 without the tenant himself being an industrial capitalist, nor the type of his
 management being a capitalist one. Such is the case, e.g., in Ireland.
 The tenant there is generally a small farmer. What he pays to the landlord in
 the form of rent frequently absorbs not merely a part of his profit, that is,
 his own surplus labour (to which he is entitled as possessor of his own
 instruments of labour), but also a part of his normal wage, which he would
 otherwise receive for the same amount of labour. Besides, the landlord, who
 does nothing at all for the improvement of the land, also expropriates his
 small capital, which the tenant for the most part incorporates in the land
 through his own labour. This is precisely what a usurer would do under similar
 circumstances, with just the difference that the usurer would at least risk his
 own capital in the operation. This continual plunder is the core of the dispute
 over the Irish Tenancy Rights Bill. The main purpose of this Bill is to compel
 the landlord when ordering his tenant off the land to indemnify the latter for
 his improvements on the land, or for his capital incorporated in the land.
 Palmerston used to wave this demand aside with the cynical answer;
Nor are we referring to exceptional circumstances in which the landlord may
 enforce a high rental — even in countries with capitalist production
 — that stands in no relation to the yield from the soil. Of such a
 nature, for example, is the leasing of small patches of land to labourers in
 English factory districts, either as small gardens or for amateur spare-time
 farming. (Reports of Inspectors of Factories.)
We are referring to ground-rent in countries with developed capitalist
 production. Among English tenants, for instance, there are a number of small
 capitalists who are destined and compelled by education, training, tradition,
 competition, and other circumstances to invest their capital as tenants in
 agriculture. They are forced to be satisfied with less than the average profit,
 and to turn over part of it to the landlords as rent. This is the only
 condition under which they are permitted to invest their capital in the land,
 in agriculture. Since landlords everywhere exert considerable, and in England
 even overwhelming, influence on legislation, they are able to exploit this
 situation for the purpose of victimising the entire class of tenants. For
 instance, the Corn Laws of 1815 — a bread tax, admittedly imposed upon
 the country to secure for the idle landlords a continuation of their abnormally
 increased rentals during the anti-Jacobin war — had indeed the effect,
 excluding cases of a few extraordinarily rich harvests, of maintaining prices
 of agricultural products above the level to which they would have fallen had
 corn imports been unrestricted. But they did not have the effect of maintaining
 prices at the level decreed by the lawmaking landlords to serve as normal
 prices in such manner as to constitute the legal limit for imports of foreign
 corn. But the leaseholds were contracted in an atmosphere created by these
 normal prices. As soon as the illusion was dispelled, a new law was passed,
 containing new normal prices, which were as much the impotent expression of a
 greedy landlord's fantasy as the old ones. In this way, tenants were defrauded
 from 1815 up to the thirties. Hence the standing problem of agricultural
 distress during this entire period. Hence the expropriation and the ruin of a
 whole generation of tenants during this period and their replacement by a new
 class of capitalists.[31]
Here, then, high ground-rent is directly identified with low wages. And in
 so far as the level of land prices is determined by this
 circumstance-increasing rent — a rise in the value of land is identical
 with a depreciation of labour, the high price of land is identical with the low
 price of labour.
The same is true of France.
Illustrations of rent representing deductions, on the one hand, from average
 profit and, on the other, from average wages:
Morton, [Here Marx quotes John Lockart Morton. — Ed.] real
 estate agent and agricultural mechanic who was previously quoted, states that
 it has been observed in many localities that rent for large estates is lower
 than for small ones because
However, this difference is supposed to be gradually disappearing in
 England; this he attributes largely to the emigration precisely of the class of
 small tenants. The same Morton illustrates with an example in which clearly the
 wage of the tenant himself, and even more surely that of his labourers, suffers
 a deduction for ground-rent. This takes place in the case of leaseholds with
 less than 70 to 80 acres (30-34 ha.) where a two-horse plough cannot be
 maintained.
Extraordinary sagacity on the part of Monsieur Léonce de Lavergne,
 Membre de l'Institut et de la Société Centrale d'Agriculture. In his
 Economie Rurale de l'Angleterre (quoted from the English translation, London,
 1855), he makes the following comparison of the annual advantage derived from
 cattle which is employed in France but not in England where it is replaced by
 horses (p.42):
But the greater total for England is obtained here because according to his
 own testimony milk is twice as expensive in England as in France whereas he
 assumes the same prices for meat in both countries (p.35); therefore, English
 milk production shrinks to £8 million and the total to £28 million, which is
 the same as in France. It is indeed rather too much when Mr. Lavergne allows
 the quantities and price differences to enter simultaneously into his
 calculations so that when England produces certain articles more dearly than
 France — this appears to be an advantage of English agriculture, whereas
 at best it signifies a larger profit for the tenants and landlords.
That Mr. Lavergne is not only familiar with the economic achievements of
 English agriculture, but also subscribes to the prejudices of the English
 tenants and landlords, is shown on page 48:
Not only does Mr. Lavergne believe that other plants do not do so, but also
 believes that fodder crops and root crops enrich the soil:
No wonder that Mr. Lavergne, who believes these English rustic fairy-tales,
 also believes that the wages of English farm labourers have lost their former
 abnormality since the duties on corn have been lifted. (See what has been
 previously said on this point. Buch I, Kap. XXIII, 5, pp.704 to 729. [English
 edition: Ch. XXV, 5, pp. 673-96. — Ed.] But let us also listen
 to Mr. John Bright's speech in Birmingham, December 14, 1865. After mentioning
 the 5 million families entirely unrepresented in Parliament, he continues:
It is shown in what follows how surplus-labour, and consequently
 surplus-product, is generally confused with ground-rent that qualitatively and
 quantitatively specifically determined, at least on the basis of the capitalist
 mode of production, part of the surplus-product. The natural basis of
 surplus-labour in general, that is, a natural prerequisite without which such
 labour cannot be performed, is that Nature must supply — in the form of
 animal or vegetable products of the land, in fisheries, etc. — the
 necessary means of subsistence under conditions of an expenditure of labour
 which does not consume the entire working day. This natural productivity of
 agricultural labour (which includes here the labour of simple gathering,
 hunting, fishing and cattle-raising) is the basis of all surplus-labour, as all
 labour is primarily and initially directed toward the appropriation and
 production of food. (Animals also supply at the same time skins for warmth in
 colder climates; also cave-dwellings, etc.)
The same confusion between surplus-product and ground-rent is found
 differently expressed by Mr. Dove. [P. Dove, The Elements of Political
 Science, Edinburgh, 1854, pp.264, 273. — Ed.] Originally
 agricultural and industrial labour were not separated; the latter was an
 adjunct of the former. The surplus-labour and the surplus-product of the
 land-cultivating tribe, house commune, or family included both agricultural and
 industrial labour. Both went hand in hand. Hunting, fishing and agriculture
 were impossible without suitable tools. Weaving, spinning, etc., were first
 carried on as an agrarian side line.
Finally, it should be borne in mind in considering the various forms of
 manifestation of ground-rent, that is, the lease money paid under the heading
 of ground-rent to the landlord for the use of the land for purposes of
 production or consumption, that the price of things which have in themselves no
 value, i.e., are not the product of labour, such as land, or which at least
 cannot be reproduced by labour, such as antiques and works of art by certain
 masters, etc., may be determined by many fortuitous combinations. In order to
 sell a thing, nothing more is required than its capacity to be monopolised and
 alienated.
There are three main errors to be avoided in studying ground-rent, and which
 obscure its analysis.
1) Confusing the various forms of rent pertaining to different stages of
 development of the social production process.
Whatever the specific form of rent may be, all types have this in common:
 the appropriation of rent is that economic form in which landed property is
 realised, and ground-rent, in turn, presupposes the existence of landed
 property, the ownership of certain portions of our planet by certain
 individuals. The owner may be an individual representing the community, as in
 Asia, Egypt, etc.; or this landed property may be merely incidental to the
 ownership of the immediate producers themselves by some individual as under
 slavery or serfdom; or it may be a purely private ownership of Nature by
 non-producers, a mere title to land; or, finally, it may be a relationship to
 the land which, as in the case of colonists and small peasants owning land,
 seems to be directly included — in the isolated and not socially
 developed labour — in the appropriation and production of the products of
 particular plots of land by the direct producers.
This common element in the various forms of rent, namely that of being the
 economic realisation of landed property, of legal fiction by grace of which
 certain individuals have an exclusive right to certain parts of our planet
 — makes it possible for the differences to escape detection.
3) It is precisely in the economic realisation of landed property, in the
 development of ground-rent, that the following characteristic peculiarity comes
 to the fore, namely that its amount is by no means determined by the actions of
 its recipient, but is determined rather by the independent development of
 social labour in which the recipient takes no part. It may easily happen,
 therefore, that something is regarded as a peculiarity of rent (and of the
 products of agriculture in general), which is really a common feature of all
 branches of production and all their products where the basis is
 commodity-production — and, in particular, capitalist production, which
 is in its entirety commodity production.
The amount of ground-rent (and with it the value of land) grows with social
 development as a result of the total social labour. On the one hand, this leads
 to an expansion of the market and of the demand for products of the soil, and,
 on the other, it stimulates the demand for land itself, which is a prerequisite
 of competitive production in all lines of business activity, even those which
 are not agricultural. More exactly — if one considers only the actual
 agricultural rent — rent, and thereby the value of the land, develops
 with the market for the products of the soil, and thus with the increase in the
 non-agricultural population, with its need and demand for means of subsistence
 and raw materials. It is in the nature of capitalist production to continually
 reduce the agricultural population as compared with the non-agricultural,
 because in industry (in the strict sense) the increase of constant capital in
 relation to variable capital goes hand in hand with an absolute increase,
 though relative decrease, in variable capital; on the other hand, in
 agriculture the variable capital required for the exploitation of a certain
 plot of land decreases absolutely; it can thus only increase to the extent that
 new land is taken into cultivation, but this again requires as a prerequisite a
 still greater growth of the non-agricultural population.
In fact, we are not dealing here with a characteristic peculiarity of
 agriculture and its products. On the contrary, the same applies to all other
 branches of production and products where the basis is commodity-production and
 its absolute form, capitalist production.
These products are commodities, or use-values, which have an exchange-value
 that is to be realised, to be converted into money, only in so far as other
 commodities form an equivalent for them, that is, other products confront them
 as commodities and values; thus, in so far as they are not produced as
 immediate means of subsistence for the producers themselves, but as
 commodities, as products which become use-values only by their transformation
 into exchange-values (money), by their alienation. The market for these
 commodities develops through the social division of labour; the division of
 productive labours mutually transforms their respective products into
 commodities, into equivalents for each other, making them mutually serve as
 markets. This is in no way peculiar to agricultural products.
No producer, whether industrial or agricultural, when considered by himself
 alone, produces value or commodities. His product becomes a value and a
 commodity only in the context of definite social interrelations. In the first
 place, in so far as it appears as the expression of social labour, hence in so
 far as the individual producer's labour-time counts as a part of the social
 labour-time in general; and, secondly, this social character of his labour
 appears impressed upon his product through its pecuniary character and through
 its general exchangeability determined by its price.
Therefore, if, on the one hand, surplus-value or, still more narrowly, the
 surplus-product in general is explained instead of rent, the mistake is made,
 on the other hand, of ascribing exclusively to agricultural products a
 characteristic which belongs to all products in their capacity as commodities
 and values. This is vulgarised still more by those who pass from the general
 determination of value over to the rea1isation of the value of a specific
 commodity. Every commodity can realise its value only in the process of
 circulation, and whether it realises its value, or to what extent it does so,
 depends on prevailing market conditions.
It is not a singularity of ground-rent, then, that agricultural products
 develop into, and as, values, i.e., that they confront other commodities as
 commodities, and that non-agricultural products confront them as commodities;
 or that they develop as specific expressions of social labour. The singularity
 of ground-rent is rather that together with the conditions in which
 agricultural products develop as values (commodities), and together with the
 conditions in which their values are realised, there also grows the power of
 landed property to appropriate an increasing portion of these values, which
 were created without its assistance; and so an increasing portion of
 surplus-value is transformed into ground-rent.
In the analysis of ground-rent we shall begin with the assumption that products paying such a rent, products in which a portion of the surplus-value, and therefore also a portion of the total price, resolves itself into ground-rent, i.e., that agricultural as well as mining products are sold at their prices of production like all other commodities. (It suffices for our purposes to confine ourselves to agricultural and mining products.) In other words, their selling prices are made up of the elements of their cost (the value of consumed constant and variable capital) plus a profit determined by the general rate of profit and calculated on the total advanced capital, whether consumed or not. We assume, then, that average selling prices of these products are equal to their prices of production. The question now arises how it is possible for ground-rent to develop under these conditions, i.e., how it is possible for a portion of the profit to become transformed into ground-rent, so that a portion of the commodity-price falls to the landlord.
In order to demonstrate the general character of this form of ground-rent, let us assume that most of the factories of a certain country derive their power from steam-engines, while a smaller number derive it from natural waterfalls. Let us further assume that the price of production in the former amounts to 115 for a quantity of commodities which have consumed a capital of 100. The 15% profit is calculated not solely on the consumed capital of 100, but on the total capital employed in the production of this commodity-value. We have previously shown that this price of production is not determined by the individual cost-price of every single industrial producer, but by the average cost-price of the commodity under average conditions of capital in the entire sphere of production. It is, in fact, the market-price of production, the average market-price as distinct from its oscillations. It is in general in the form of the market-price, and, furthermore, in the form of the regulating market-price, or market-price of production, that the nature of the value of commodities asserts itself, its determination not by the labour-time necessary in the case of any individual producer for the production of a certain quantity of commodities, or of some individual commodity, but by the socially necessary labour-time; that is, by the labour-time, required for the production of the socially necessary total quantity of commodity varieties on the market under the existing average conditions of social production
As definite figures are immaterial in this case, we shall assume furthermore that the cost-price in factories run on water-power is only 90 instead of 100. Since the regulating market-price of production of this quantity of commodities = 115, with a profit of 15%, the manufacturers who operate their machines on water power will also sell their commodities at 115, i.e., the average price regulating the market-price. Their profit would then be 25 instead of 15; the regulating price of production would allow them a surplus-profit of 10% not because they sell their commodities above the price of production, but because they sell them at the price of production, because their commodities are produced, or their capital operates, under exceptionally favourable conditions, i.e., under conditions which are more favourable than the average prevailing in this sphere.
Two things become evident at once:
First, the surplus-profit of the producers who use a natural waterfall as motive power is to begin with in the same class with all surplus-profit (and we have already analysed this category when discussing prices of production) which is not the fortuitous result of transactions in the circulation process, of the fortuitous fluctuations in market-prices. This surplus-profit, then, is likewise equal to the difference between the individual price of production of these favoured producers and the general social price of production regulating the market in this entire production sphere. This difference is equal to the excess of the general price of production of the commodities over their individual price of production. The two regulating limits of this excess are, on the one hand, the individual cost-price, and thus the individual price of production, and, on the other hand, the general price of production. The value of commodities produced with water-power is smaller because a smaller total quantity of labour is required for their production, i.e., less labour — in materialised form — enters into the constant capital as part of the latter.
Since the level of the general price of production is one of the limits of this surplus-profit, the level of the general rate of profit being one of its factors, this surplus-profit can only arise from the difference between the general and the individual price of production, and consequently from the difference between the general and the individual rate of profit. An excess above this difference presupposes the sale of products above, not at, the price of production regulated by the market.
Secondly, thus far, the surplus-profit of the manufacturer using natural water-power instead of steam does not differ in any way from any other surplus-profit. All normal surplus-profit, that is, all surplus-profit not due to fortuitous sales or market-price fluctuations is determined by the difference between the individual price of production of the commodities of a particular capital and the general price of production, which regulates the market-prices of the commodities produced by the capital in this sphere of production in general, or, in other words, the market-prices of commodities of the total capital invested in this sphere of production.
But now we come to the difference.
To what circumstance does the industrial capitalist in the present case owe his surplus-profit, the surplus resulting for him personally from the price of production regulated by the general rate of profit?
He owes it in the first instance to a natural force — the motive power of the waterfall — which is found readily available in Nature and is not itself a product of labour like the coal which transforms water into steam. The coal, therefore, has value, must be paid for by an equivalent, and has a cost. The waterfall is a natural production agent in the production of which no labour enters.
But this is not all. The manufacturer who operates with steam also employs natural forces which cost him nothing yet make the labour more productive and increase the surplus-value and thereby the profit, inasmuch as they thus cheapen the manufacture of the means of subsistence required for the labourers. These natural forces are thus quite as much monopolised by capital as the social natural forces of labour arising from co-operation, division of labour, etc. The manufacturer pays for coal, but not for the capacity of water to alter its physical state, to turn into steam, not for the elasticity of the steam, etc. This monopolisation of natural forces, that is, of the increase in labour-power produced by them, is common to all capital operating with steam-engines. It may increase that portion of the product of labour which represents surplus-value in relation to that portion which is transformed into wages. In so far as it does this, it raises the general rate of profit, but it does not create any surplus-profit, for this consists of the excess of individual profit over average profit. The fact that the application of a natural force, a waterfall, creates surplus-profit in this case, cannot therefore be due solely to the circumstance that the increased productivity of labour here results from the application of a natural force. Other modifying circumstances are necessary.
Conversely. The mere application of natural forces in industry may influence the level of the general rate of profit because it affects the quantity of labour required to produce the necessary means of subsistence. But in itself it does not create any deviation from the general rate of profit, and this is precisely the point in which we are interested here. Furthermore, the surplus-profit which some individual capital otherwise realises in a particular sphere of production — for deviations of the rates of profit in various spheres of production are continually balanced out into an average rate — is due, aside from fortuitous deviations, to a reduction in cost-price, in production costs. This reduction arises either from the fact that capital is used in greater than average quantities, so that faux frais of production are reduced, while the general causes increasing the productiveness of labour (cooperation, division of labour, etc.) can become effective to a higher degree, with more intensity, because their field of activity has become larger; or it may arise from the fact that, aside from the amount of functioning capital, better methods of labour, new inventions, improved machinery, chemical manufacturing secrets, etc., in short, new and improved, better than average means of production and methods of production are used. The reduction in cost-price and the surplus-profit arising from it are here the result of the manner in which the functioning capital is invested. They result either from the fact that the capital is concentrated in the hands of one person in extraordinarily large quantities (a condition that is cancelled out as soon as equal magnitudes of capital are used on the average), or from the fact that a certain magnitude of capital functions in a particularly productive manner (a condition that disappears as soon as the exceptional method of production becomes general or is surpassed by a still more developed one).
Now let us assume that the waterfalls, along with the land to which they belong, are held by individuals who are regarded as owners of these portions of the earth, i.e., who are landowners. These owners prevent the investment of capital in the waterfalls and their exploitation by capital. They can permit or forbid such utilisation. But a waterfall cannot be created by capital out of itself. Therefore, the surplus-profit which arises from the employment of this waterfall is not due to capital, but to the utilisation of a natural force which can be monopolised, and has been monopolised, by capital. Under these circumstances, the surplus-profit is transformed into ground-rent, that is, it falls into possession of the owner of a waterfall. If the manufacturer pays the owner of a waterfall £10 annually, then his profit is £15, that is, 15% on the £100 which then make up his cost of production; and he is just as well or possibly better off than all other capitalists in his sphere of production who operate with steam. It would not alter matters one bit if the capitalist himself should be the owner of a waterfall. He would, in such a case, pocket as before the surplus-profit of £10 in his capacity as waterfall owner, and not in his capacity as capitalist; and precisely because this surplus does not stem from his capital as such, but rather from the control of a limited natural force distinct from his capital which can be monopolised, is it transformed into ground-rent.
First, it is evident that this rent is always a differential rent, for it does not enter as a determining factor into the general production price of commodities, but rather is based on it. It invariably arises from the difference between the individual production price of a particular capital having command over the monopolised natural force, on the one hand, and the general production price of the total capital invested in the sphere of production concerned, on the other.
Secondly, this ground-rent does not arise from the absolute increase in the productiveness of employed capital, or labour appropriated by it, since this can only reduce the value of commodities; it is due to the greater relative fruitfulness of specific separate capitals invested in a certain production sphere, as compared with investments of capital which are excluded from these exceptional and natural conditions favouring productiveness. For instance, if the use of steam should offer overwhelming advantages not offered by the use of water-power, despite the fact that coal has value and the water-power has not, and if these advantages more than compensated for the expense, then, the water-power would not be used and could not produce any surplus-profit, and therefore could not produce any rent.
Thirdly, the natural force is not the source of surplus-profit, but only its natural basis, because this natural basis permits an exceptional increase in the productiveness of labour. In the same way, use-value is in general the bearer of exchange-value, but not its cause. If the same use-value could be obtained without labour, it would have no exchange-value, yet it would retain, as before, the same natural usefulness as use-value. On the other hand, nothing can have exchange-value unless it has use-value, i.e., unless it is a natural bearer of labour. Were it not for the fact that the various values are averaged out into prices of production, and the various individual prices of production into a general price of production regulating the market, the mere increase in productivity of labour through utilisation of the waterfall would merely lower the price of commodities produced with the aid of this waterfall, without increasing the share of profit contained in these commodities. Similarly, on the other hand, this increased productivity of labour itself would not be converted into surplus-value were it not for the fact that capital appropriates the natural and social productivity of the labour used by it as its own.
Fourthly, the private ownership of the waterfall in itself has nothing to do with the creation of the surplus-value (profit) portion, and therefore, of the price of the commodity in general, which is produced by means of the waterfall. This surplus-profit would also exist if landed property did not exist; for instance, if the land on which the waterfall is situated were used by the manufacturer as unclaimed land. Hence landed property does not create the portion of value which is transformed into surplus-profit, but merely enables the landowner, the owner of the waterfall, to coax this surplus-profit out of the pocket of the manufacturer and into his own. It is not the cause of the creation of such surplus-profit, but is the cause of its transformation into the form of ground-rent, and therefore of the appropriation of this portion of the profit, or commodity-price, by the owner of the land or waterfall.
Now that we have described the general concept of differential rent, we shall pass on to its consideration in agriculture proper. What applies to agriculture will also apply on the whole to mining.
Ricardo is quite right in the following observations:
[He means differential rent, for he assumes that no other rent but differential rent exists.] He should have added, "on equal areas of land" in so far as it is a matter of ground-rent and not surplus-profit in general.
In other words, surplus-profit, if normal and not due to accidental occurrences in the circulation process, is always produced as a difference between the products of two equal quantities of capital and labour, and this surplus-profit is transformed into ground-rent when two equal quantities of capital and labour are employed on equal areas of land with unequal results. Moreover, it is by no means absolutely necessary for this surplus-profit to arise from the unequal results of equal quantities of invested capital. The various investments may also employ unequal quantities of capital. Indeed, this is generally the case. But equal proportions, for instance £100 of each, produce unequal results; that is, their rates of profit are different. This is the general prerequisite for the existence of surplus-profit in any sphere of capital investment. The second prerequisite is the transformation of this surplus-profit into the form of ground-rent (of rent in general as a form distinct from profit); it must be investigated in each case when, how, under what conditions this transformation takes place.
Ricardo is also right in the following observation, provided it is limited to differential rent:
However, among these causes are not merely the general ones (fertility and location), but also 1) the distribution of taxes, depending on whether it operates uniformly or not; the latter is always the case when, as in England, it is not centralised and when the tax is levied on land, not on rent; 2) the inequalities arising from a difference in agricultural development in different parts of the country, since this line of production, owing to its traditional character, evens out with more difficulty than manufacture; and 3) the inequality in distribution of capital among capitalist tenants. Since the invasion of agriculture by the capitalist mode of production, transformation of independently producing peasants into wage-workers, is in fact the last conquest of this mode of production, these inequalities are greater here than in any other line of production.
Having made these preliminary remarks, I will first present a brief summary of the characteristic features of my analysis in contradistinction to that of Ricardo, etc.
We shall first consider the unequal results of equal quantities of capital applied to different plots of land of equal size; or, in the case of unequal size, results calculated on the basis of equal areas.
The two general causes of these unequal results — quite independent of capital — are: 1) Fertility. (With reference to this first point, it will be necessary to discuss what is meant by natural fertility of land and what factors are involved.) 2) The location of the land. This is a decisive factor in the case of colonies and in general determines the sequence in which plots of land can be cultivated. Furthermore, it is evident that these two different causes of differential rent — fertility and location — may work in opposite directions. A certain plot of land may be very favourably located and yet be very poor in fertility, and vice versa. This circumstance is important, for it explains how it is possible that bringing into cultivation the land of a certain country may equally well proceed from the better to the worse land as vice versa. Finally, it is clear that the progress of social production in general has, on the one hand, the effect of evening out differences arising from location as a cause of ground-rent, by creating local markets and improving locations by establishing communication and transportation facilities; on the other hand, it increases the differences in individual locations of plots of land by separating agriculture from manufacturing and forming large centres of production, on the one hand, while relatively isolating agricultural districts, on the other.
All these influences upon the differential fertility of various plots of land are such that from the standpoint of economic fertility, the level of labour productivity, in this case the capacity of agriculture to make the natural soil fertility immediately exploitable — a capacity which differs in various periods of development — is as much a factor in so-called natural soil fertility as its chemical composition and other natural properties.
We assume, then, the existence of a particular stage of development in agriculture. We assume furthermore that the hierarchical arrangement of soil types accords with this stage of development, as is, of course, always the case for simultaneous capital investments on different plots of land. Differential rent may then form either an ascending or a descending sequence, for although the sequence is given for the totality of actually cultivated plots of land, a series of movements leading to its formation has invariably taken place.
Let us assume the existence of four kinds of soil: A, B, C, D. Let us furthermore assume the price of one quarter of wheat = £3, or 60 shillings. Since the rent is solely differential rent, this price of 60 shillings per quarter for the worst soil is equal to the price of production, that is, equal to the capital plus average profit. Let A be this worst soil, which yields 1 quarter = 60 shillings for each 50 shillings spent; hence the profit amounts to 10 shillings, or 20%.
Let B yield 2 quarters = 120 shillings for the same expenditure. This would mean 70 shillings of profit, or a surplus-profit of 60 shillings.
Let C yield 3 quarters = 180 shillings for the same expenditure; total profit = 130 shillings; surplus-profit = 120 shillings.
Let D yield 4 quarters = 240 shillings = 180 shillings of surplus-profit.
We would then have the following sequence:
TABLE I
The respective rents are: D = 190sh. — 10sh., or the difference between D and A; C = 130sh. — 10sh., or the difference between C and A; B = 70sh. — 10sh., or the difference between B and A; and the total rent for B, C, D = 6 quarters = 360 shillings, equal to the sum of the differences between D and A, C and A, B and A.
This sequence, which represents a given product in a given condition may, considered abstractly (we have already offered the reasons why this may be the case in reality), descend from D to A, from fertile to less and less fertile soil, or rise from A to D, from relatively poor to more and more fertile soil, or, finally, may fluctuate, i.e., now rising, now descending — for instance from D to C, from C to A, and from A to B.
The process in the case of a descending sequence was as follows: The price of a quarter of wheat rose gradually from, say, 15 shillings to 60 shillings. As soon as the 4 quarters produced by D (we may consider these 4 quarters as so many million quarters) no longer sufficed, the price of wheat rose to a point where the supply shortage could be produced by C. That is to say, the price of wheat must have risen to 20 shillings per quarter. When it had risen to 30 shillings per quarter, B could be taken under cultivation, and when it reached 60 shillings A could be taken under cultivation; and the capital invested did not have to content itself with a rate of profit lower than 20%. In this manner, a rent was established for D, first of 5 shillings per quarter = 20 shillings for the 4 quarters produced by it; then of 15 shillings per quarter = 60 shillings, then of 45 shillings per quarter = 180 shillings for 4 quarters.
If the rate of profit of D originally was similarly = 20 %, then its total profit on 4 quarters of wheat was also but 10 shillings, but this represented more grain when the price was 15 shillings than it does when the price is 60 shillings. But since the grain enters into the reproduction of labour-power, and part of each quarter has to make good some portion of wages and another constant capital, the surplus-value under these conditions was higher, and thus other things being equal the rate of profit too. (The matter of rate of profit will have to be specially analysed, and in greater detail.)
On the other hand, if the sequence were in the reverse order, that is, if the process initiated from A, then the price of wheat at first would rise above 60 shillings per quarter when new land would have to be taken under cultivation. But since the necessary supply would be produced by B, a supply of 2 quarters, the price would fall to 60 shillings again, for B produced wheat at a cost of 30 shillings per quarter, but sold it at 60 shillings because the supply just sufficed to cover the demand. Thus a rent was formed, first of 60 shillings for B, and in the same way for C and D; it is assumed throughout that the market-price remained at 60 shillings, although C and D produced wheat having an actual value of 20 and 15 shillings per quarter respectively, because the supply of the one quarter produced by A was needed as much as ever to satisfy the total demand. In this case, the increase in demand above supply, which was first satisfied by A, then by A and B, would not have made it possible to cultivate B, C and D successively, but would merely have caused a general extension of the sphere of cultivation, and the more fertile lands might only later come under cultivation.
In the first sequence, an increase in price would raise the rent and decrease the rate of profit. Such a decrease might be entirely or partially checked by counteracting circumstances. This point will have to be treated later in more detail. It should not be forgotten that the general rate of profit is not determined uniformly in all spheres of production by the surplus-value. It is not the agricultural profit which determines industrial profit, but vice versa. But of this more anon.
In the second sequence the rate of profit on invested capital would remain the same. The amount of profit would be represented by less grain; but the relative price of grain, compared with that of other commodities, would have risen. However, the increase in profit wherever such an increase takes place, becomes separated from the profit in the form of rent, instead of flowing into the pockets of the capitalist tenant farmer and appearing as a growing profit. The price of grain, however, could remain unchanged under the conditions assumed here.
The development and growth of differential rent would remain the same for fixed as well as for increasing prices, and for a continuous progression from worse to better soils as well as for a continuous retrogression from better to worse soils.
Thus far we have assumed: 1) that the price rises in one sequence and remains stationary in the other; 2) that there is a continuous progression from better to worse soil, or from worse to better soil.
But now let us assume that the demand for grain rises from its original figure of 10 to 17 quarters; furthermore, that the worst soil A is displaced by another soil A, which produces 1 ⅓ quarters at a price of production of 60 shillings (50sh. cost plus 10sh. for 20% profit), so that its price of production per quarter = 45 shillings; or, perhaps, the old soil A may have improved through continuous rational cultivation, or be cultivated more productively at the same cost, for instance through the introduction of clover, etc., so that its output with the same investment of capital rises to 1 ⅓ quarters. Let us also assume that soil types B, C and D yield the same output as previously, but that new soil types have been introduced, for instance, A' with a fertility lying between A and B, and also B' and B" with a fertility between B and C. We should then observe the following phenomena:
First: The price of production of a quarter of wheat, or its regulating market-price, falls from 60 shillings to 45 shillings, or by 25%.
Second: The cultivation proceeds simultaneously from more fertile to less fertile soil, and from less fertile to more fertile soil. Soil A' is more fertile than A, but less fertile than the hitherto cultivated soils B, C and D. B' and B" are more fertile than A, A' and B, but less fertile than C and D. The sequence thus proceeds in crisscross fashion. Cultivation does not proceed to soil absolutely less fertile than A, etc., but to relatively less fertile soil with respect to the hitherto most fertile soil types C and on the other hand, cultivation does not proceed to soil absolutely more fertile, but to relatively more fertile soil with respect to the hitherto least fertile soil A, or A and B.
Thirdly: The rent on B falls; likewise the rent on C and D; but the total rental in grain rises from 6 quarters to 7 ⅔ the amount of cultivated and rent-yielding land increases, and the amount of produce rises from 10 quarters to 17. The profit, although it remains the same for A, rises if expressed in grain, but the rate of profit itself might rise, because the relative surplus-value does. In this case, the wage, i.e., the investment of variable capital and therefore the total outlay, is reduced because of the cheapening of means of subsistence. This total rental expressed in money falls from 360 shillings to 345 shillings.
TABLE II
(* In the German 1894 edition this reads: 25 2/7. — Ed.)
Let us draw up the new sequence. [See p. 655 — Ed.]
Finally, if only soil types A, B, C and D were cultivated as before, but their productiveness rose in such a way that A produced 2 quarters instead of 1 quarter, B — 4 quarters instead of 2, C — 7 quarters instead of 3, and D — 10 quarters instead of 4, so that the same causes affect the various types of soil differently, the total production increases from 10 quarters to 23. Assuming that demand absorbs these 23 quarters through an increase in population and a fall in prices, we should obtain the following result:
TABLE III
The numerical proportions in this and in other tables are chosen at random but the assumptions are quite rational.
The first and principal assumption is that an improvement in agriculture acts differently upon different soils, and in this case affects the best types of soil, C and D, more than types A and B. Experience has shown that this is generally the case, although the opposite may also take place. If the improvement affected the poorer soils more than the better ones, rent on the latter would have fallen instead of risen. But in our table, we have assumed that the absolute growth in fertility of all soil types is simultaneously accompanied by an increase in greater relative fertility of the better soil types, C and D; this means an increase in the difference between the product at the same capital investment, and thus an increase in differential rent.
A comparison of these three tables (whereby sequence I is to be taken twice, rising from A to D, and descending from D to A), which may be considered either as given gradations under some stage of society, for instance, as existing side by side in three different countries, or as succeeding one another in different periods of development within the same country, shows:
1) The sequence, when complete, whatever the course of its formative process may have been, invariably appears as being in a descending line; for when analysing rent the point of departure will always be land yielding the maximum rent, and only finally do we come to land yielding no rent.
2) The price of production on the worst soil, i.e., which yields no rent, is always the one regulating the market-price, although the latter in Table I, if its sequence were formed in an ascending line, only remained fixed because better and better soil was constantly drawn into cultivation. In such a case, the price of grain produced on the best soil is a regulating one ill so far as it depends upon the quantity produced on such soil to what extent soil type A remains the regulator. If B, C and D should produce more than demand requires, A would cease to be the regulator. Storch has this point hazily in mind when he adopts the best soil type as the regulating one. (H. Storch, Cours d'économie politique, ou Exposition des principes qui determinent la prospérité des nations, Tome II, St.-Petersbourg, 1815, pp. 78-79. — Ed.) In this manner, the American price of grain regulates the English price.
3) Differential rent arises from differences in the natural fertility of the soil which is given for every given stage of agricultural development (leaving aside for the present the question of location); in other words, from the limited area of the best land, and from the circumstance that equal amounts of capital must be invested on unequal types of soil, so that an unequal product results from the same amount of capital.
4) The existence of a differential rent and of a graduated differential rent can develop equally well in a descending sequence, which proceeds from better to worse soils, as in an ascending one, which progresses in the opposite direction from worse to better soils; or it may be brought about in checkered fashion by alternating movements. (Sequence I may be formed by proceeding from D to A, or from A to D; sequence II comprises both types of movement.)
5) Depending on its mode of formation, differential rent may develop along with a stationary, rising or falling price of the products of the land. In the case of a falling price, total production and total rental may rise, and rent may develop on hitherto rentless land, even though the worst soil A may have been displaced by a better one or may itself have improved, and even though the rent may decrease on other land which is better, or even the best (Table II); this process may also be connected with a fall in total rent (in money). Finally, at a time when prices fall on account of a general improvement in cultivation, so that the product of the worst soil and its price decrease, the rent on some of the better soils may remain the same, or may fall, while it may rise on the best ones. Nevertheless, the differential rent of every soil, compared with the worst soil, depends, if the difference in quantity of products is given, upon the price, say, of a quarter of wheat. But when the price is given, differential rent depends upon the magnitude of the difference in quantity of products, and if with an increasing absolute fertility of all soils that of the better ones grows relatively more than that of the worse ones, the magnitude of this difference grows proportionately. In this way (see Table I), when the price is 60 shillings, the rent on D is determined by its differential product as compared with A; in other words, by the surplus of 3 quarters. The rent is therefore = 3 × 60 = l80 shillings. But in Table III, where the price = 30 shillings, the rent is determined by the quantity of surplus-product of D as compared with A = 8 quarters; we therefore obtain 8 × 30 = 240 shillings.
This takes care of the first false assumption regarding differential rent — still found among West, Malthus, and Ricardo — namely, that it necessarily presupposes a movement toward worse and worse soil, or an ever-decreasing fertility of the soil. ([West] Essay on the Application Of Capital to Land, London, 1815. Malthus, Principles of Political Economy, London, 1836. Malthus, An Inquiry into the Nature and Progress of Rent, and the Principles by which it is regulated, London, 1815. Ricardo, On the Principles of Political Economy, and Taxation, Third edition, London, 4824, Chap. 11. —Ed.) It can be formed, as we have seen, with a movement toward better and better soil; it can be formed when a better soil takes the lowest position that was formerly occupied by the worst soil; it can be connected with a progressive improvement in agriculture. The precondition is merely the inequality of different kinds of soil. So far as the increase in productivity is concerned, it assumes that the increase in absolute fertility of the total area does not eliminate this inequality, but either increases it, leaves it unchanged, or merely reduces it.
From the beginning to the middle of the 18th century, England's grain prices constantly fell in spite of the falling prices of gold and silver, while at the same time (viewing this entire period as a whole) there was an increase in rent, in the over-all amount of rent, in the area of cultivated land, in agricultural production, and in population. This corresponds to Table I taken in conjunction with Table II in an ascending line, but in such a way that the worst land A is either improved or eliminated from the grain-producing area; however, this does not mean that it was not used for other agricultural or industrial purposes.
From the early 19th century (date to be specified more precisely) until 1815 there is a constant rise in grain prices, accompanied by a steady increase in rent, in the over-all amount of rent, in the area of cultivated land, in agricultural production, and in population. This corresponds to Table I in a descending line. (Cite some sources here on the cultivation of inferior land in that period.)
In Petty's and Davenant's time, farmers and landowners complained about improvements and the bringing into cultivation of new land; the rent on better lands decreased, and the total amount of rent increased through the extension of the area of land yielding rent.
(These three points should be illustrated later by quotations; likewise for the difference in fertility of various cultivated sections of land in a particular country.)
Regarding differential rent in general, it is to be noted that the market-value is always above the total price of production of the total quantity of products. As an example, let us take Table I. Ten quarters of total product are sold for 600 shillings because the market-price is determined by the price of production of A, which amounts to 60 shillings per quarter. But the actual price of production is:
The actual price of production of these 10 quarters is 240 shillings; but they are sold for 600 shillings, i.e., at 250% of the price of production. The actual average price for 1 quarter is 24 shillings; the market-price is 60 shillings, i.e., also 250% of the production price.
This is determination by market-value as it asserts itself on the basis of capitalist production through competition; the latter creates a false social value. This arises from the law of market-value, to which the products of the soil are subject. The determination of the market-value of products, including therefore agricultural products, is a social act, albeit a socially unconscious and unintentional one. It is based necessarily upon the exchange-value of the product, not upon the soil and the differences in its fertility. If we suppose the capitalist form of society to be abolished and society organised as a conscious and planned association, then the 10 quarters would represent a quantity of independent labour-time equal to that contained in 240 shillings. Society would not then buy this agricultural product at two and a half times the actual labour-time embodied in it and the basis for a class of landowners would thus be destroyed. This would have the same effect as a reduction in price of the product to the same amount resulting from foreign imports. While it is, therefore, true that, by retaining the present mode of production, but assuming that the differential rent is paid to the state, prices of agricultural products would, everything else being equal, remain the same, it is equally wrong to say that the value of the products would remain the same if capitalist production were superseded by association. The identity of the market-price for commodities of the same kind is the manner whereby the social character of value asserts itself on the basis of capitalist production and, in general, any production based on the exchange of commodities between individuals. What society overpays for agricultural products in its capacity of consumer, what is a minus in the realisation of its labour-time in agricultural production, is now a plus for a portion of society, for the landlords.
A second circumstance, important for the analysis to be given under II of the next chapter, is the following:
It is not merely a matter of rent per acre, or per hectare, nor generally of a difference between the price of production and market-price, nor between the individual and the general price of production per acre, but it is also a question of how many acres of each type of soil are under cultivation. The point of importance here relates directly only to the magnitude of the rental, that is, the total rent of the entire cultivated area; but it serves us at the same time as a stepping-stone to the consideration of a rise in the rate of rent although there is no rise in prices, nor increase in the differences in relative fertility of the various types of soil if prices fall.
We had above:
TABLE I
Now let us assume that the number of cultivated acres is doubled in every category. We then have:
TABLE Ia
Let us assume two more cases. Suppose in the first case production expands on the two poorest types of soil in the following manner:
TABLE Ib
And, finally, let us assume an unequal expansion of production and cultivated area for the four soil categories:
TABLE Ic
In the first place, the rent per acre remains the same in all these cases — I, Ia, Ib and Ic — for, in fact, the result of the same investment of capital per acre of the same soil type has remained unchanged. We have only assumed what is true of any country at any given moment; namely, that various soil types exist in definite ratios to the total cultivated area. And we also assumed what is always true of any two countries being compared, or of the same country at different periods, namely, that the proportions in which the total cultivated area is distributed among the different soil types vary.
In comparing Ia with I we see that if the cultivation of land in all four categories increases in the same proportion a doubling of the cultivated acreage doubles the total production, and that the same applies to the rent in grain and money.
However, if we compare Ib and then Ic with I, we see that in both cases a tripling of the area under cultivation occurs. It increases in both cases from 4 acres to 12, but in Ib classes A and B contribute most to the increase, with A yielding no rent and B yielding the smallest amount of differential rent. Thus, out of the 8 newly cultivated acres, A and B account for 3 each, i.e., 6 together, whereas C and D account for I each, i.e., 2 together. In other words, three-quarters of the increase is accounted for by A and B, and only one-quarter by C and D. With this premise, in Ib compared with I the trebled area of cultivation does not result in a trebled product, for the product does not increase from 10 to 30, but only to 26. On the other hand, since a considerable part of the increase concerns A, which does not yield any rent, and since the major part of the increase on better soils concerns B, the rent in grain rises only from 6 to 14 quarters, and the rent in money from £18 to £42.
But if we compare Ic with I, where the land yielding no rent does not increase in area and the land yielding a minimum rent increases but slightly, while C and D account for the major part of the increase, we find that when the cultivated area is trebled production increases from 10 to 36 quarters, i.e., to more than three times its original amount. The rent in grain increases from 6 to 24 quarters or to four times its original amount; and similarly money-rent, from £18 to £72.
In all these cases it is in the nature of things that the price of the agricultural product remains unchanged. The total rental increases in all cases with the extension of cultivation, unless it takes place exclusively on the worst soil, which does not yield any rent. But this increase varies. Should this extension involve the better soil types and the total output, consequently, increase not merely in proportion to the expansion of the area, but rather more rapidly, then the rent in grain and money increases to the same extent. Should it be the worst soil, and the types of soil close to it, that are principally involved in the expansion (whereby it is assumed that the worst soil represents a constant type), the total rental does not increase in proportion to the extension of cultivation. Thus, given two countries in which soil A, yielding no rent, is of the same quality, the rental is inversely proportional to the aliquot part represented by the worst soil and the inferior soil types in the total area under cultivation, and therefore inversely proportional to the output, assuming equal capital investments on equal total land areas. A relationship between the quantity of the worst and the quantity of the better cultivated land in the total land area of a given country thus has an opposite influence on the total rental than the relationship between the quality of the worst cultivated land and the quality of the better and best has on the rent per acre and — other circumstances remaining the same — on the total rental. Confusion between these two points has given rise to all kinds of erroneous objections raised against differential rent.
The total rental, then, increases by the mere extension of cultivation, and by the consequent greater investment of capital and labour in the land. But the most important point is this: Although it is our assumption that the ratio of rents per acre for the various kinds of soil remains the same, and therefore also the rate of rent considered with reference to capital invested in each acre, yet the following is to be observed: If we compare Ia with I, the case in which the number of cultivated acres and the capital invested in them have been proportionately increased, we find that as the total production has increased proportionately to the expanded cultivated area, i.e., as both have been doubled, so has the rental. It has risen from £18 to £36, just as the number of acres has risen from 4 to 8.
If we take the total area of 4 acres, we find that the total rental amounted to £18 and thus the average rent, including the land which does not yield any rent, is £4½. Such a calculation might be made, say, by a landlord owning all 4 acres; and in this way the average rent is statistically computed for a whole country. The total rental of £18 is obtained by the investment of a capital of £10. We call the ratio of these two figures the rate of rent; in the present case it is therefore 180%.
The same rate of rent obtains in Ia, where 8 instead of 4 acres are cultivated, but all types of land have contributed to the increase in the same proportion. The total rental of £36 yields for 8 acres and an invested capital of £20 an average rent of £4½ per acre and a rate of rent of 180%.
But if we consider Ib, where the increase has taken place mainly upon two inferior categories of soil, we obtain a rent of £42 for 12 acres, or an average rent of £3½ per acre. The total invested capital is £30, and therefore the rate of' rent = 140%. The average rent per acre has thus decreased by £1, and the rate of rent has fallen from 180 to 140%. Here then we have a rise in the total rental from £18 to £42, but a drop in average rent calculated per acre as well as on the basis of capital; the drop takes place parallel to an increase in production, but not proportionately. This occurs even though the rent for all types of soil, calculated per acre as well as on the basis of capital outlay, remains the same. This occurs because three-quarters of the increase is accounted for by soil A, which does not yield any rent, and soil B, which yields only minimum rent.
If the total expansion in Case Ib had taken place solely on soil A, we should have 9 acres on A, I acre on B, I acre on C and I acre on D. The total rental would be £18, the same as before; the average rent for the 12 acres therefore would be £1½ per acre; and a rent of £18 on an invested capital of £30 would give a rate of rent of 60%. The average rent, calculated per acre as well as on the basis of invested capital, would have greatly decreased, while the total rental would not have increased.
Finally, let us compare Ic with I and Ib. Compared with I, the area has been trebled, and also the invested capital. The total rental is £72 for 12 acres, or £6 per acre — as against £4½ in Case I. The rate of rent on the invested capital (£72:£30) is 240% instead of 180%. The total output has risen from 10 to 36 quarters.
Compared with Ib, where the total number of cultivated acres, the invested capital, and the differences between the cultivated soil types are the same, but the distribution different, the output is 36 quarters instead of 26 quarters, the average rent per acre is £6 instead of £3½, and the rate of rent with reference to the same invested total capital is 240% instead of 140%.
It is necessary to make the following additional points with reference to the form of differential rent considered under heading I; they also apply in part to differential rent II:
Secondly, progress in extending cultivated land generally takes place either toward inferior soil or on the various given types of soil in varying proportions, depending on the manner in which they are met. Extension on inferior soil is naturally never made voluntarily, but can only result from rising prices, assuming a capitalist mode of production, and can only result from necessity under any other mode of production. However, this is not absolutely so. Poor soil may be preferred to a relatively better soil on account of location, which is of decisive importance for every extension of cultivation in young countries; furthermore, even though the soil formation in a certain region may generally be classified as fertile, it may nevertheless consist of a motley confusion of better and worse soils, so that the inferior soil may have to be cultivated if only because it is found in the immediate vicinity of the superior soil. If inferior soil is surrounded by superior soil, then the latter gives it the advantage of location in comparison with more fertile soil which is not yet, or is about to become, part of the cultivated area.
Thus, the State of Michigan was one of the first Western States to become an exporter of grain. Yet its soil on the whole is poor. But its proximity to the State of New York and its water-ways via the Lakes and Erie Canal initially gave it the advantage over the States endowed by Nature with more fertile soil, but situated farther to the West. The example of this State, as compared with the State of New York, also demonstrates the transition from superior to inferior soil. The soil of the State of New York, particularly its western part, is incomparably more fertile, especially for the cultivation of wheat. This fertile soil was transformed into infertile soil by rapacious methods of cultivation, and now the soil of Michigan appeared as the more fertile.
Thirdly, it is a mistaken assumption that the land in colonies and, in general, in young countries which can export grain at cheaper prices, must of necessity be of greater natural fertility. The grain is not only sold below its value in such cases, but below its price of production, i.e., below the price of production determined by the average rate of profit in the older countries.
The fact that we, as Johnston says (p.223),
is primarily the result of economic conditions. The entire population of such an area as Michigan, for instance, is at first almost exclusively engaged in farming, and particularly in producing agricultural mass products, which alone can be exchanged for industrial products and tropical goods. Its entire surplus production appears, therefore, in the form of grain. This from the outset sets apart the colonial states founded on the basis of the modern world-market from those of earlier, particularly ancient, times. They receive through the world-market finished products, such as clothing and tools which they would have to produce themselves under other circumstances. Only on such a basis were the Southern States of the Union enabled to make cotton their staple crop. The division of labour on the world-market makes this possible. Hence, if they seem to have a large surplus production considering their youth and relatively small population, this is not so much due to the fertility of their soil, nor the fruitfulness of their labour, but rather to the one-sided form of their labour, and therefore of the surplus-produce in which such labour is incorporated.
Furthermore, a relatively inferior soil which is newly cultivated and never before touched by civilisation provided the climatic conditions are then not completely unfavourable, has accumulated a great deal of plant food that is easily assimilated — at least in the upper layers of the soil — so that it will yield crops for a long time without the application of fertilisers and even with very superficial cultivation. The western prairies have the additional advantage of hardly requiring any clearing expenses since Nature has made them arable.[33a] In less fertile areas of this kind, the surplus is not produced as a result of the high fertility of the soil, i.e., the yield per acre, but as a result of the large acreage which may be superficially cultivated, since such land costs the cultivator nothing, or next to nothing as compared with older countries. This is the case, for instance, where share cropping exists, as in parts of New York, Michigan, Canada, etc. A family superficially cultivates, say, 100 acres, and although the output per acre is not large, the output from 100 acres yields a considerable surplus for sale. In addition to this, cattle may be grazed on natural pastures at almost no cost, without requiring artificial grass meadows. It is the quantity of the land, not its quality, which is decisive here. The possibility of such superficial cultivation is naturally more or less rapidly exhausted, namely, in inverse proportion to the fertility of the new soil and in direct proportion to the export of its products.
Property relations in countries with maturer civilisations, with their determination of the price of uncultivated soil by that of the cultivated, etc., make such an extensive economy impossible.
That this soil, therefore, need not be exceedingly rich, as Ricardo imagines, nor that soils of equal fertility need be cultivated, may be seen from the following. In the State of Michigan 465,900 acres were planted in 1848 to wheat which yielded 4,739,300 bushels, or an average of 10 1/5 bushels per acre after deducting seed grain, this leaves less than 9 bushels per acre. Of the 29 counties of this State, 2 produced an average of 7 bushels, 3 an average of 8 bushels, 2—9, 7—10, 6—11, 3—12, 4—13 bushels, and only one county produced an average of 16 bushels, and another 18 bushels per acre (l. c., p. 225).
For practical cultivation higher soil fertility coincides with greater capability of immediate exploitation of such fertility. The latter may be greater in a naturally poor soil than in a naturally rich one; but it is the kind of soil which a colonist will take up first, and must take up when capital is wanting.
Finally, the extension of cultivation to larger areas — aside from the case just mentioned, in which recourse must be had to soil inferior than that cultivated hitherto — to the various kinds of soil from A to D, thus, for instance, the cultivation of larger tracts of B and C does not by any means presuppose a previous rise in grain prices any more than the preceding annual expansion of cotton spinning, for instance, requires a constant rise in yarn prices. Although considerable rise or fall in market-prices affects the volume of production, regardless of it there is in agriculture (just as in all other capitalistically operated lines of production) nevertheless a continuous relative over-production, in itself identical with accumulation, even at those average prices whose level has neither a retarding nor exceptionally stimulating effect on production. Under other modes of production this relative overproduction is effected directly by the population increase, and in colonies by steady immigration. The demand increases constantly, and, in anticipation of this new capital is continually invested in new land, although this varies with the circumstances for different agricultural products. It is the formation of new capitals which in itself brings this about. But so far as the individual capitalist is concerned, he measures the volume of his production by that of his available capital, to the extent that he can still control it himself. His aim is to capture as big a portion as possible of the market. Should there be any over-production, he will not take the blame upon himself, but places it upon his competitors. The individual capitalist may expand his production by appropriating a larger aliquot share of the existing market or by expanding the market itself.
Thus far we have considered differential rent only as the result of varying productivity of equal amounts of capital invested in equal areas of land of different fertility, so that differential rent was determined by the difference between the yield from the capital invested in the worst, rentless soil and that from the capital invested in superior soil. We had side by side capitals invested in different plots of land, so that every new investment of capital signified a more extensive cultivation of the soil, an expansion of cultivated area. In the last analysis, however, differential rent was by its nature merely the result of the different productivity of equal capitals invested in land. But can it make any difference if capitals of different productivity are invested successively in the same plot of land or side by side in different plots of land, provided the results are the same?
To begin with, there is no denying that, in so far as the formation of surplus-profit is concerned, it is immaterial whether £3 in production price per acre of A yield 1 qr, so that £3 is the price of production and the regulating market-price of 1 qr, while £3 in production price per acre of B yield 2 qrs, and thereby £3 of surplus-profit, similarly, £3 in production price per acre of C yield 3 qrs and £6 of surplus-profit, and, finally, £3 in production price per acre of D yield 4 qrs and £9 of surplus-profit; or whether the same result is achieved by applying these £12 in production price, or £10 of capital, with the same success in the same sequence upon one and the same acre. It is in both cases a capital of £10, whose value portions of £2½ each are successively invested — whether in four acres of varying fertility side by side, or successively in one and the same acre of land — and because of their varying outputs, one portion yields no surplus-profit, whereas the other portions yield surplus-profit proportionate to their difference in yield with respect to rentless investment.
The surplus-profit and the various rates of surplus-profit for the different value portions of capital are formed in the same manner in both cases. And the rent is nothing but a form of this surplus-profit, which constitutes its substance. But at any rate, in the second method, there are some difficulties concerning the transformation of surplus-profit into rent, this change of form, which includes the transfer of surplus-profit from the capitalist tenant to the landowner. This accounts for the obstinate resistance of English tenants to official agricultural statistics. And it accounts for their struggle against the landlords over the determination of actual results derived from their capital investment (Morton). For rent is fixed when land is leased, and after that the surplus-profit arising from successive investments of capital flows into the pockets of the tenant as long as the lease lasts. This is why the tenants have fought for long leases, and, on the other hand, due to the greater power of the landlords, an increase in the number of tenancies at will has taken place, i.e., leases which can be cancelled annually.
It is therefore evident from the very outset that, even if immaterial for the law of formation of surplus-profit, it makes a considerable difference for the transformation of surplus-profit into ground-rent whether equal capitals are invested side by side in equal areas of land with unequal results, or whether they are invested successively in the same land. The latter method confines this transformation, on the one hand, within narrower limits, on the other hand, within more variable limits. For this reason, the work of the tax-assessor, as Morton shows in his Resources of Estates, becomes a very important, complicated and difficult profession in countries practising intensive cultivation (and, economically speaking, we mean nothing more by intensive cultivation than the concentration of capital upon the same plot rather than its distribution among several adjoining pieces of land). If soil improvements are of a more permanent nature the artificially increased differential fertility of the soil coincides with its natural differential fertility as soon as the lease expires, and therefore the assessment of the rent corresponds to the determination of the rent on plots of different fertilities in general. On the other hand, in so far as the formation of surplus-profit is determined by the magnitude of operating capital, the amount of rent for a certain amount of operating capital is added to the average rent of the country and thus provision is made for the new tenant to command sufficient capital to continue cultivation in the same intensive manner.
In the study of differential rent II, the following points are still to be emphasised.
First, its basis and point of departure, not just historically, but also in so far as concerns its movements at any given period of time, is differential rent I, that is, the simultaneous cultivation side by side of soils of unequal fertility and location; in other words, the simultaneous application, side by side, of unequal portions of the total agricultural capital upon plots of land of unequal quality.
Secondly, in the differential rent in form II, the differences in distribution of capital (and ability to obtain credit) among tenants are added to the differences in fertility. In manufacturing proper, each line of business rapidly develops its own minimum volume of business and a corresponding minimum of capital, below which no individual business can be conducted successfully. In the same way, each line of business develops a normal average amount of capital above this minimum, which the bulk of producers should, and do, command. A larger volume of capital can produce extra profit; a smaller volume does not so much as yield the average profit. The capitalist mode of production spreads in agriculture but slowly and unevenly, as may be observed in England, the classic land of the capitalist mode of production in agriculture. In so far as the free importation of grain does not exist, or its effect is but limited because the volume is small, producers working inferior soil, and thus under worse than average conditions of production, determine the market-price. A large portion of the total mass of capital invested in husbandry, and in general available to it, is in their hands.
It is true that the peasant, for example, expends much labour on his small plot of land. But it is labour isolated from objective social and material conditions of productivity, labour robbed and stripped of these conditions.
This circumstance enables the actual capitalist tenants to appropriate a portion of surplus-profit — a fact which would not obtain, at least so far as this point is concerned, if the capitalist mode of production were as evenly developed in agriculture as in manufacture.
Let us first consider just the formation of surplus-profit with differential rent II, without for the present bothering about the conditions under which the transformation of this surplus-profit into ground-rent may take place.
It is then evident that differential rent II is merely differently expressed differential rent I, but identical to it in substance. The variation in fertility of various soil types exerts its influence in the case of differential rent I only in so far as unequal results are attained by capitals invested in the soil, i.e., the amount of products obtained either with respect to equal magnitudes of capital, or proportionate amounts. Whether this inequality takes place for various capitals invested successively in the same land or for capitals invested in several plots of differing soil type — this can change nothing in the difference in fertility nor in its product and can therefore change nothing in the formation of differential rent for the more productively invested portions of capital. It is still the soil which, now as before, shows different fertility with the same investment of capital, save that here the same soil performs for a capital successively invested in different portions what various kinds of soil do in the case of differential rent I for different equal portions of social capital invested in them.
If the same capital of £10, which is shown in Table I to be invested in the form of independent capitals of £2½ each by various tenants in each acre of the four soil types A, B, C and D, were instead successively invested in one and the same acre D, so that the first investment yielded 4 qrs, the second 3, the third 2, and the fourth 1 qr (or in the reverse order), then the price of the quarter furnished by the least productive capital, namely = £3, would not yield any differential rent, but would determine the price of production, so long as the supply of wheat whose price of production is £3 were needed. And since our assumption is that the capitalist mode of production prevails, so that the price of £3 includes the average profit made by a capital of £2½ generally, the other three portions of £2½ each will yield surplus-profit in accordance with the difference in output, since this output is not sold at its own price of production, but at the price of production of the least productive investment of £2½; the latter investment does not yield any rent and the price of its products is determined by the general law of prices of production. The formation of surplus-profit would be the same as in Table I.
The output from D would now be = 4 + 1 + 3 + 2 = 10 qrs whereas formerly it was = 4 qrs. But the price per quarter as regulated by B would have fallen to £1½. The difference between D and B would be = 10 - 2 = 8 qrs, at £1½ per quarter = £12, whereas the money-rent from D was previously = £9. This should be noted. Calculated per acre, the magnitude of rent would have risen by 33⅓% in spite of the decreasing rate of surplus-profit on the two additional capitals of £2½ each.
We see from this to what highly complicated combinations differential rent in general, and in form II coupled with form I, in particular, may give rise, whereas Ricardo, for instance, treats it very one-sidedly and as though it were a simple matter. As in the above case, a fall in the regulating market-price and at the same time rise in rent from fertile soils may take place so that both the absolute product and the absolute surplus-product increase. (In differential rent I, in descending order, the relative surplus-product and thus the rent per acre may increase, although the absolute surplus-product per acre remains constant or even decreases.) But at the same time, productiveness of the investments of capital made successively in the same soil decreases, although a large portion of them falls to the more fertile soils. From a certain point of view — as concerns both output and prices of production — the productivity of labour has risen. But from another point of view, it has decreased because the rate of surplus-profit and the surplus-product per acre decrease for the various investments of capital in the same land.
Differential rent II, with decreasing productiveness of successive investments of capital, would necessarily be accompanied by a rise in price of production and an absolute decrease in productivity only if investments of capital could be made in none but the worst soil A. If an acre of A, which with an investment of capital of £2½ yielded 1 qr at a price of production of £3, should only yield a total of 1½ qrs with an additional outlay of £2½, i.e., a total investment of £5, then the price of production of this 1½ qrs = £6 or that of 1 qr = £4. Every decrease in productivity with a growing investment of capital would here mean a relative decrease in output per acre, whereas upon superior soils it would only signify a decrease in the superfluous surplus-product.
But by the nature of things, with the development of intensive cultivation, i.e., with successive investments of capital in the same soil, this will take place more advantageously, or to a greater extent on better soils. (We are not referring to permanent improvements by which a hitherto useless soil is converted into useful soil.) The decreasing productiveness of successive investments of capital must, therefore, have principally the effect indicated above. The better soil is selected because it affords the best promise that capital invested in it will be profitable, since it contains the most natural elements of fertility, which need but be utilised.
When, after the abolition of the Corn Laws, cultivation in England became still more intensive, a great deal of former wheat land was devoted to other purposes, particularly cattle pastures, while the fertile land best suited for wheat was drained and otherwise improved. The capital for wheat cultivation was thus concentrated in a more limited area.
In this case — and all possible surplus rates between the greatest surplus-product of the best soil and the output of rentless soil A coincide here with an absolute, rather than a relative, increase in surplus-product per acre — the newly formed surplus-profit (potential rent) does not represent a portion of a former average profit transformed into rent (a portion of the output in which the average profit formerly was expressed) but an additional surplus-profit, which is transformed out of this form into rent.
On the other hand, only in such case where the demand for grain increased to such an extent that the market-price rose above the price of production of A, so that the surplus-product of A, B, or any other kind of soil could be supplied only at a price higher than £3 would the decrease in yield from an additional investment of capital in any of the soil types A, B, C and D be accompanied by a rise in price of production and the regulating market-price. In so far as this lasted for a lengthy period of time without resulting in the cultivation of additional soil A (of at least the quality of A), or without a cheaper supply resulting from other circumstances, wages would rise in consequence of the increase in the price of bread, everything else being equal, and the rate of profit would fall accordingly. In this case, it would be immaterial, whether the increased demand were satisfied by bringing under cultivation soil of inferior quality than A, or by additional investments of capital, in any of the four types of soil. Differential rent would then increase together with a falling rate of profit.
This one case, in which the decreasing productiveness of subsequent additional capitals invested in already cultivated soils may lead to an increase in price of production, a fall in rate of profit, and the formation of higher differential rent — for the latter would increase under the given circumstances upon all kinds of soil just as though soil of inferior quality than A were regulating the market-price — has been labelled by Ricardo as the only case, the normal case — to which he reduces the entire formation of differential rent II.
This would also be the case if only type A soil were cultivated and successive investments of capital in it were not accompanied by a proportional increase in produce.
Here then, in the case of differential rent II, one completely loses sight of differential rent I.
Except for this case, in which the supply from the cultivated soils is either insufficient and the market-price thus continually higher than the price of production until new additional soil of inferior quality is taken under cultivation, or until the total product from the additional capital invested in various kinds of soil can be supplied only at a higher price of production than that hitherto prevailing — save for this case, the proportional drop in productivity of the additional capitals leaves the regulating price of production and the rate of profit unchanged. For the rest, three additional cases are possible:
a) If the additional capital invested in any one of the types of soil A, B, C or D yields only the rate of profit determined by the price of production of A, then no surplus-profit, and therefore no potential rent, is formed, any more than there would be if additional type A soil had been cultivated.
b) If the additional capital yields a larger product, new surplus-profit (potential rent) is, of course, formed provided the regulating price remains the same. This is not necessarily the case; it is not the case, in particular, when this additional production throws soil A out of cultivation and thus out of the sequence of competing soils. In this case, the regulating price of production falls. If this were accompanied by a fall in wages, or if the cheaper product were to enter into the constant capital as one of its elements, the rate of profit would rise. If the increased productivity of the additional capital had taken place upon the best soils C and D, it would depend entirely upon the degree of increased productivity and the amount of additional new capital to what extent the formation of increased surplus-profit (and thus increased rent) would be associated with the fall in prices and the rise in the rate of profit. The latter may also rise without a fall in wages, through a cheapening of the elements of constant capital.
c) If the additional investment of capital takes place with decreasing surplus-profit, but in such manner that the yield from the additional outlay still leaves a surplus above the yield from the same capital invested in A, a new formation of surplus-profit takes place under all circumstances, unless the increased supply excludes soil A from cultivation. This may take place simultaneously upon D, C, B and A. But, on the other hand, if the worst soil A is squeezed out of cultivation, then the regulating price of production falls and it will depend upon the relation between the reduced price of 1 qr and the increased number of quarters forming surplus-profit whether the surplus-profit expressed in money, and consequently the differential rent, rises or falls. But at any rate, it is noteworthy here that with decreasing surplus-profit from successive investments of capital the price of production may fall, instead of rising, which it seemingly should do at first sight.
These additional investments of capital with decreasing surplus yields correspond entirely to the case in which, e.g., four new independent capitals of £2½ each would be invested in soils with fertility between A and B, B and C, C and D, and yielding 1½, 2⅓, 2⅔, and 3 qrs respectively. Surplus-profit (potential rent) would take shape on all these soils for all four additional capitals, although the rate of surplus-profit, compared with that for the same investment of capital on the correspondingly better soil, would have decreased. And it would be immaterial whether these four capitals were invested in D, etc., or distributed between D and A.
We now come to an essential difference between the two forms of differential rent.
Under differential rent I, with constant price of production and constant differences, the average rent per acre, or the average rate of rent on capital, may increase together with the rental. But the average is a mere abstraction. The actual amount of rent, calculated per acre or with respect to capital, remains the same here.
On the other hand, under the same conditions, the amount of rent calculated per acre may increase although the rate of rent, measured relative to invested capital, remains the same.
This shows that the amount of rent in produce and money per acre, and therefore the price of land, may rise, while the price of production, the rate of profit, and the differences remain unchanged (and therefore the rate of surplus-profit or of rent, calculated with respect to capital, remains unchanged).
The same may take place with decreasing rates of surplus-profit, and therefore of rent, that is, with decreasing productivity of the additional outlays of capital that still yield rent. If the second investments of capital of £2½ had not doubled the output, but B had yielded only 3½ qrs, C — 5 qrs, and D — 7 qrs, [In the German 1894 edition this reads: 6 qrs. — Ed.] then the differential rent for the second £2½ of capital in B would be only ½ qr instead of 1, on C — 1 qr instead of 2 and on D — 2 qrs instead of 3. The proportions between rent and capital for the two successive investments would then be as follows:
In spite of this decreased rate of relative productivity of capital, and thus of the surplus-profit calculated on capital, the rent in grain and money would have increased on B from 1 to 1½ qrs (from £3 to £4½), on C — from 2 to 3 qrs (from £6 to £9), and on D — from 3 to 5 qrs (from £9 to £15). In this case, the differences for the additional capitals, compared with the capital invested in A, would have decreased, the price of production would have remained the same, but the rent per acre, and consequently the price of land per acre, would have risen. The combinations of differential rent II, which presupposes differential rent I as its basis, will now be taken up.
The assumption here implies that the market-price is regulated as before by the capital invested in the worst soil A.
I. If the additional capital invested in any one of the rent-bearing soils — B, C, D — produces only as much as the same capital upon soil A, i.e., if it yields only the average profit at the regulating price of production, but no surplus-profit, then the effect upon the rent is nil. Everything remains as before. It is the same as though an arbitrary number of acres of A quality, i.e., of the worst soil, has been added to the cultivated area.
II. The additional capitals yield additional produce proportional to their magnitude on every one of the various soils; in other words, the volume of production grows according to the specific fertility of each soil type — in proportion to the magnitude of the additional capital. In Chapter XXXIX, we started with the following Table I:
TABLE I
This is now transformed into:
TABLE II
It is not necessary in this case that the investment of capital be doubled in all soils, as in the table. The law is the same so long as additional capital is invested in one, or several, of the rent-bearing soils, no matter in what proportion. It is only necessary that production should increase upon every soil in the same ratio as the capital. The rent increases here merely in consequence of an increased investment of capital in the soil, and in proportion to this increase. This increase in produce and rent in consequence of, and proportionately to, the increased outlay of capital is just the same as regards the quantity of produce and rent, as when the cultivated area of the rent-bearing plots of land of the same quality had been increased and taken under cultivation with the same outlay of capital as that previously invested in the same types of soils. In the case of Table II, for instance, the result would remain the same, if the additional capital of £2½ per acre were invested in an additional acre of B, C and D.
Furthermore, this assumption does not imply a more productive investment of capital, but only an outlay of more capital upon the same area with the same success as before.
All relative proportions remain the same here. Of course, if we do not consider the proportional differences, but consider the purely arithmetic ones, then the differential rent may change upon the various soils. Let us assume, for instance, that additional capital has been invested only in B and D. The difference between D and A is then = 7 qrs whereas previously it was = 3, the difference between B and A = 3 qrs, whereas previously it was = 1; that between C and B = -1, whereas previously it was = +1, etc. But this arithmetic difference, which is decisive in differential rent I in so far as it expresses the difference in productivity with equal outlays of capital, is here quite immaterial, because it is merely a consequence of different additional investments of capital, or of no additional investment, while the difference for each equal portion of capital upon the various plots of land remains unchanged.
III. The additional capitals yield surplus-produce and thus form surplus-profit, but at a decreasing rate, not in proportion to their increase.
TABLE III
But this is the law: The rent increases absolutely upon all these soils, even if not in proportion to the additional capital invested.
The rate of surplus-profit, considering both the additional capital and the total capital invested in the soil, decreases; but the absolute magnitude of the surplus-profit increases; just as the decreasing rate of profit on capital in general is, in the main, accompanied by an increase in the absolute amount of profit. Thus the average surplus-profit of a capital invested in B = 90% on the capital, whereas it was = 120% for the first outlay of capital. But the total surplus-profit increases from 1 qr to 1½ qrs, or from £3 to £4½. The total rent — considered by itself rather than in relation to the doubled magnitude of the advanced capital — has risen absolutely. The differences in rents from various soils and their relative proportions may vary here; but this variation in differences is a consequence, not cause, of the increase in rents in relation to one another.
IV. The case in which additional investments of capital in the better soils yield more produce than the original ones requires no further analysis. It goes without saying that under this assumption the rent per acre will increase, and proportionately more than the additional capital, no matter in which kind of soil the outlay has been made. In this case, the additional investment of capital is accompanied by improvements. This includes the cases in which an additional outlay of less capital produces the same or a greater effect than an additional outlay of more capital did formerly. This case is not quite identical with the former one, and the distinction is important in all investments of capital. For instance, if 400 yields a profit of 40, and 200 employed in a certain form yields a profit of 40, then the profit has risen from 10% to 20%, and to that extent it is the same as though 50 employed in a more effective form yields a profit of 10 instead of 5. We assume here that the profit is associated with a proportional increase in output. But the difference is that I must double the capital in the one case, whereas in the other, the effect I produce is doubled with the capital employed hitherto. It is by no means the same whether I produce: 1) the same output as before with half as much living and materialised labour, or 2) twice the output as before with the same labour, or 3) four times the former output with twice the labour. In the first case, labour — in a living or materialised form — is released, and may be employed otherwise; the power to dispose of capital and labour increases. The release of capital (and labour) is in itself an augmentation of wealth; it has exactly the same effect as though this additional capital has been obtained by accumulation, but it saves the labour of accumulation.
Assume that a capital of 100 has produced an output of ten metres. The 100 includes constant capital, living labour and profit. Thus a metre costs 10. Now, if I can produce 20 metres with the same capital of 100, then a metre costs 5. If, on the other hand, I can produce 10 metres with a capital of 50, then a metre likewise costs 5, and should the former supply of commodities suffice a capital of 50 is released. If I have to invest a capital of 200 in order to produce 40 metres, then a metre also costs 5. The determination of value, and also the price, does not permit any difference to be discerned here; no more than the amount of output proportional to the outlay of capital. But in the first case, additional capital is saved [In the German 1894 edition this reads: capital is released. — Ed.] to be used perhaps to double production if necessary; in the second case, capital is released, [Ibid.: additional capital is saved. — Ed.] in the third case, the increased output can only be obtained by augmenting the invested capital, although not in the same proportion as when the increased output was to have been supplied by the old productive power. (This belongs in Part I.)
From the viewpoint of capitalist production, the employment of constant capital is always cheaper than that of variable capital, not as regards increasing the surplus-value, but rather as regards reducing the cost-price — and saving of costs even in the element creating surplus-value, in labour, performs this service for the capitalist and makes profit for him so long as the regulating price of production remains the same. This presupposes, in fact, the development of credit and an abundance of loan capital corresponding to the capitalist mode of production. On the one hand, I employ £100 additional constant capital, if £100 is the output of five labourers during the year; on the other hand, £100 in variable capital. If the rate of surplus-value = 100%, then the value created by the five labourers = £200; on the other hand, the value of £100 constant capital = £100 and as capital it is perhaps = £105, if the interest rate = 5%. The same sums of money express very different values, from the viewpoint of the output they produce, depending on whether they are advanced to production as magnitudes of value of constant or of variable capital. Furthermore, as regards the cost of the commodities from the viewpoint of the capitalist, there is also this difference, that of the £100 constant capital only the wear and tear enters into the value of the commodity in so far as this money is invested in fixed capital, whereas the £100 invested in wages must be completely reproduced in the commodity.
In the case of colonists, and independent small producers in general, who have no access to capital at all or only at high interest rates, that part of the output which represents wages is their revenue, whereas for the capitalist it constitutes an advance of capital. The former, therefore, regards this expenditure of labour as the indispensable prerequisite for the labour-product, which is the thing that interests him above all. But, as regards his surplus-labour, after deducting the necessary labour, it is evidently realised in the surplus-product; and as soon as he can sell the latter, or use it for himself, he looks upon it as something that cost him nothing, because it cost him no materialised labour. It is only the expenditure of the latter which appears to him as alienation of wealth. Of course, he tries to sell as high as possible; but even a sale below value and below the capitalist price of production still appears to him as profit, unless this profit is anticipated by debts, mortgages, etc. For the capitalist, on the other hand, the investment of both variable and constant capital represents an advance of capital. The relatively larger advance of the latter reduces the cost-price, and in fact the value of the commodities, everything else being equal. Hence, although profit arises only from surplus-labour, consequently only from the employment of variable capital, it may still seem to the individual capitalist that living labour is the most expensive element in his price of production which should be reduced to a minimum before all else. This is but a capitalistically distorted form of the fact that the relatively greater use of congealed labour, as compared with living labour, signifies an increase in the productivity of social labour and a greater social wealth. From the viewpoint of competition, everything appears thus distorted and turned topsy-turvy.
When we refer to surplus-product here, this should always be understood to mean that aliquot part of the output which represents surplus-profit. Ordinarily, we mean by excess product or surplus-product that portion of the output which represents the total surplus-value, or in some cases that portion which represents the average profit. The specific meaning which this term assumes in the case of rent-bearing capital gives rise to misunderstanding, as previously pointed out.
The price of production may fall when additional investments of capital take place with an unaltered, falling, or rising rate of productivity.
In this case, the assumption, therefore, is that the output increases proportionally to the capital invested in the various soils and in accordance with their respective qualities. This means for constant differences in soils that the surplus-product increases in proportion to the increased investment of capital. This case, then, excludes any additional investment of capital in soil A which might affect the differential rent. For this soil, the rate of surplus-profit = 0; thus, it remains = 0 since we have assumed that the productiveness of the additional capital, and therefore the rate of surplus-profit, remain the same.
But under these conditions the regulating price of production can only fall, because it is the price of production of the next best soil, of B, or any better soil than A, rather than that of A, which becomes the regulator; so that the capital is withdrawn from A, or perhaps from A and B if the price of production of C should become the regulating one, and thus all soils inferior to C would be eliminated from the competition among grain-producing soils. The prerequisite for this is, under the assumed conditions, that the additional yield from the additional investments of capital satisfy the demand, so that the output from the inferior soil A, etc., become superfluous for the re-establishment of a full supply.
Thus, let us take, for instance, Table II, but in such a way that 18 qrs instead of 20 satisfy the demand. Soil A would drop out; B * and its price of production of 30 shillings per quarter would become regulating. The differential rent then assumes the following form:
TABLE IV
[* In the German 1894 edition this reads: D. — Ed.]
Compared with Table II, the ground-rent would hence have fallen from £36 to £9, and in grain from 12 qrs to 6 qrs; total output would have fallen only by 2 qrs, from 20 to 18. The rate of surplus-profit calculated on the capital would have fallen to one-third, i.e., from 180% to 60%. [Ibid.: one-half, from 180% to 90%. — Ed.] Thus, the fall in the price of production is accompanied here by a decrease of the rent in grain and money.
Compared with Table I, there is merely a decrease in money-rent; the rent in grain is in both cases 6 qrs; but in the one case it = £18, and in the other £9. For soil C, [Ibid.: for soil C and D. — Ed.] the rent in grain, compared with Table I, has remained the same. In fact, it is owing to the additional production resulting from the uniformly acting additional capital that the yield from A has been excluded from the market, and thereby soil A has been eliminated as a competing producing agent, and it is owing to this fact that a new differential rent I has been formed in which the better soil B plays the same role as did formerly the inferior soil A.
Consequently, on the one hand, the rent from B has disappeared; on the other hand, nothing has been altered in the differences between B, C and D by the investment of additional capital — in accordance with our assumption. For this reason, that part of the output which is transformed into rent is reduced.
If the above result — the satisfaction of the demand with A excluded — had been accomplished, perchance, by the investment of more than double the capital in C or D, or in both, then the matter would assume a different aspect. For example, if the third investment of capital were made in C:
TABLE IVa
In this case, compared with Table IV, the output from C has risen from 6 to 9 qrs, the surplus-product from 2 to 3 qrs, and the money-rent from £3 to £4½. Compared with Table II, where the latter was £12, and Table I, where it was £6, the money-rent has, on the other hand, decreased. The total rental in grain = 7 qrs and has fallen compared with Table II (12 qrs) and risen compared with Table I (6 qrs); in money (£10½) it has fallen compared with both (£18 and £36).
If the third investment of capital of £2½ had been employed on soil B, it would indeed have altered the quantity of production, but would not have affected the rent, since, according to our assumption, the successive investments do not produce any differences upon the same soil and soil B does not yield any rent.
If we assume, on the other hand, that the third investment of capital takes place upon D instead of C, we have the following, Table IVb:
Here the total product is 22 qrs, more than double that of Table I, although the invested capital is only £17½ as against £10, that is, not twice the amount. The total product is also larger by 2 qrs than that of Table II, although the invested capital in the latter is larger — namely, £20.
Compared with Table I, the rent in grain from soil D has increased from 3 [In the German 1894 edition this reads: 2. — Ed.] to 6 qrs, whereas the money-rent, £9, has remained the same. Compared with Table II, the grain-rent from D is the same, namely, 6 qrs, but the money-rent has fallen from £18 to £9.
Comparing the total rents, the grain-rent from Table IVb = 8 qrs is larger than that from Table I = 6 qrs and than that from Table IVa = 7 qrs; but it is smaller than that from Table II = 12 qrs. The money-rent from Table IVb = £12 is larger than that from Table IVa = £10½ and smaller than that from Table 1 = £18 and that from Table II = £36.
In order that the total rental may, under the conditions of Table IVb (with the elimination of rent from B), be equal to that of Table I, we need £6 more of surplus-product, that is, 4 qrs at £1½, which is the new price of production. We then have a total rental of £18 again as in Table I. The magnitude of the required additional capital will vary according to whether we invest it in C or D, or divide it between the two.
On C, £5 capital yields 2 qrs of surplus-product; consequently, £10 additional capital yields 4 qrs of additional surplus-product. On D, £5 additional capital would suffice to produce 4 qrs of additional grain-rent under the conditions assumed here, namely that the productivity of the additional investments of capital remains the same. We should then obtain the following results:
TABLE IVc
TABLE IVd
The total money rental would be exactly one-half of what it was in Table II, where the additional capitals were invested at constant prices of production.
The most important thing is to compare the above tables with Table I.
The value of the total product in Table I = £30; the rent = £18, or more than one-half of it. The value of the total product in IVd = £45, of which the rent = £18, or less than one-half.
Now, the reason why in spite of the fall in price by £1½ per quarter, i.e., a fall of 50%, and in spite of the reduction in competing soil from 4 to 3 acres, the total money-rent remains the same and the total grain-rent is doubled, while, calculated per acre, both the grain-rent and money-rent rise, is that more quarters of surplus-product are produced. The price of grain falls by 50%, and the surplus-product increases by 100%. But in order to obtain this result, the total production under the conditions assumed by us must be trebled, and the investment of capital in the superior soils must be more than doubled. At what rate the latter must increase depends in the first place upon the distribution of additional capital investments among the better and best soils, always assuming that the productivity of the capital invested in each soil type increases proportionately to its magnitude.
If the fall in price of production were smaller, less additional capital would be required to produce the same money-rent. If the supply required to throw soil A out of cultivation — and this depends not merely upon the output per acre of A, but also upon the share held by A in the entire cultivated area — thus, if the supply required for this purpose were larger, and thereby also the amount of additional invested capital required in soils better than A, then, other circumstances remaining the same, the money and grain rents would have increased still more, although soil B would have ceased yielding money and grain rents. If the capital eliminated from A had been = £5, the tables to be compared for this case would be tables II and IVd. The total product would have increased from 20 to 30 qrs. The money-rent would be only half as large, or £48 instead of £36; the grain-rent would be the same, namely = 12 qrs.
If a total product of 44 qrs = £66 could be produced upon D with a capital = £27½ — corresponding to the old rate for D, 4 qrs per £2½ capital — then the total rental would once more reach the level attained in Table II, and the table would appear as follows:
The total production would be 54 qrs as against 20 qrs in Table II, and the money-rent would be the same, = £36. But the total capital would be £37½, whereas in Table II it was = 20. The total invested capital would be double almost, while production would be nearly treble; the grain-rent would be double and the money-rent would remain the same. Hence, if the price falls — while productivity remains the same — as a result of the investment of additional money-capital in the better soils which yield rent, that is, all soils better than A, then the total capital has a tendency not to increase at the same rate as production and grain-rent; thus the increase in grain-rent may compensate for the loss in money-rent due to the falling price. The same law also manifests itself in that the invested capital must be proportionately larger as more is invested in C than D, i.e., in soils yielding less rent rather than in soils yielding more rent. The point is simply this: in order that the money-rent may remain the same or rise, a definite additional quantity of surplus-product must be produced, and the greater the fertility of the soils yielding surplus-product, the less capital this requires. If the difference between B and C, and C and D, were still greater, still less additional capital would be required. The specific proportion is determined by 1) the ratio of fall in price, in other words, by the difference between soil B, which does not yield rent now, and soil A, which formerly was the soil not yielding rent; 2) the ratio of the differences between the soils better than B upwards; 3) the amount of newly invested additional capital, and 4) its distribution among the soils of varying quality.
In fact, we see that this law merely expresses what was already ascertained in the first case: When the price of production is given, no matter what its magnitude, the rent may increase as a result of additional capital investment. For owing to the elimination of A, we now have a new differential rent I with B as the worst soil and £1½ per quarter as the new price of production. This applies to Table IV as well as to Table II. It is the same law, except that our point of departure is soil B instead of A, and our price of production is taken as £1½ instead of £3.
The important thing here is this: To the extent that so much and so much additional capital was necessary in order to withdraw the capital from soil A and create the supply without it, we find that this may be accompanied by an unaltered, rising, or falling rent per acre, if not from all plots of land then at least from some, and so far as the average of the cultivated plots is concerned. We have seen that grain-rent and money-rent do not maintain a uniform relation to one another. It is merely due to tradition that grain-rent is still of any importance in economics. One might demonstrate equally well that, e.g., a manufacturer can buy much more of his yarn with his profit of £5 than he could formerly with a profit of £10. It shows at any rate, that messieurs landlords, when they are simultaneously owners or shareholders in manufacturing establishments, sugar-refineries, distilleries, etc., may in their capacity as producers of their own raw materials still make a considerable profit when the money-rent is falling.[1]
This introduces nothing new into the problem, in so far as the price of production may also fall in this case, as in the case just considered, only when additional investments of capital in better soils than A render the output from A superfluous and the capital is therefore withdrawn from A, or A is employed for the production of other products. This case has been exhaustively discussed above. It was shown that the rent in grain and money per acre may increase, decrease, or remain unchanged.
For convenience in making comparisons we reproduce the following table:
TABLE IV
Now let us assume that a quantity of 16 qrs supplied by B, C, and D at a decreasing rate of productivity suffices to exclude A from cultivation. In such case, Table III is transformed into the following:
TABLE V
[* In the German 1894 edition this reads 51 2/5. — Ed.]
[** Ibid. 137 1/5 — Ed.]
[*** Ibid.: 4. — Ed.]
[**** Here, as well as in tables VI, VII, VII I, IX and X the land which yields no rent is left out of consideration. — Ed.]
Here, at a decreasing rate of productivity of the additional capital, and a varying decrease for the various soil types, the regulating price of production has fallen from £3 to £1 5/7. The investment of capital has risen by one-half-from £10 to £15. The money-rent has fallen by almost one-half-from £18 to £9 3/7, but the grain-rent has fallen by only 1/12 — from 6 qrs to 5½ qrs. The total output has risen from 10 to 16, or by 60%. The grain-rent constitutes a little more than one-third of the total product. The advanced capital is to the money-rent as 15:9 3/7, whereas formerly this ratio was 10:18.
This differs from Variant I at the beginning of this chapter, where the price of production falls while the rate of productivity remains the same, merely in that when a given amount of additional produce is required to exclude soil A this occurs here more quickly.
The effect may vary in accordance with the distribution of investments among the various soils for a falling, as well as an increasing, productivity of the additional capital investments. In so far as this varying effect balances out the differences, or accentuates them, the differential rent of the better soils, and thereby the total rental too, will fall or rise, as was already the case in differential rent I. In other respects, everything depends upon the magnitude of the land area and capital excluded together with A, and upon the relative magnitude of advanced capital required with a rising productivity in order to produce the additional output to meet the demand.
The only point worthwhile analysing here, and which really takes us back to the investigation of the way in which this differential profit is transformed into differential rent, is the following:
In the first case, where the price of production remains the same the additional capital which may be invested in soil A does not affect the differential rent as such, since soil A, as before, does not yield any rent, the price of its produce remains the same, and it continues to regulate the market.
In the second case, Variant I, where the price of production falls while the rate of productivity remains the same, soil A will necessarily be excluded, and still more so in Variant II (falling price of production with falling rate of productivity), since otherwise the additional capital invested in soil A would have had to raise the price of production. But here, in Variant III of the second case, where the price of production falls because the productivity of the additional capital rises, this additional capital may under certain circumstances be invested in soil A as well as in the better soils.
Let us assume that when invested in soil A an additional capital of £2½ produces 1 1/5 qrs instead of 1 qr.
TABLE VI
Aside from being compared with the basic Table I, this table should be compared with Table II, where a two-fold investment of capital is associated with a constant productivity, proportional to the investment of capital.
No soil yields any produce without an investment of capital. This is the case even for simple differential rent, differential rent I; when it is said that one acre of soil A, which regulates the price of production, yields so much and so much produce at such and such a price, and that superior soils B, C and D yield so much differential produce, and therefore so much and so much money-rent at the regulating price of production, it is always assumed that a definite amount of capital is invested which, under the prevailing conditions of production, is considered normal. In the same way, a certain minimum capital is required for every individual branch of industry in order that the commodities may be produced at their price of production.
If this minimum is altered as a result of successive investments of capital associated with improvements on the same soil, it occurs gradually. So long as a certain number of acres, say, of A, do not receive this additional working capital, a rent is produced upon the better cultivated acres of A due to the unaltered price of production, and the rent from all superior soils, B, C and D, is increased. But as soon as the new method of cultivation has become general enough to be the normal one, the price of production falls; the rent from the superior plots declines again, and that portion of soil A that does not possess the working capital, which has now become the average, must sell its produce below its individual price of production, i.e., below the average profit.
In the case of a falling price of production, this also occurs even with decreasing productivity of the additional capital — as soon as the required total product is supplied, in consequence of increased investment of capital, by the superior soils, and thus, e.g., the working capital is withdrawn from A, i.e., A no longer competes in the production of this particular product, e.g., wheat. The quantity of capital which is now required, on an average, to be invested in the better soil B, the new regulator, now becomes normal: and when one speaks of the varying fertility of plots of land, it is assumed that this new normal quantity of capital per acre is employed.
On the other hand, it is evident that this average investment of capital, say, in England, of £8 per acre prior to 1848, and £12 subsequent to that year, will constitute the standard in concluding leases. For the farmer expending more than this, the surplus-profit is not transformed into rent for the duration of the contract. Whether this takes place after expiration of the contract or not will depend upon the competition among the farmers who are in a position to make the same extra capital advance. We are not referring here to such permanent soil improvements that continue to provide the increased output with the same or even with a decreasing outlay of capital. Such improvements, although products of capital, have the same effect as natural differences in the quality of the land.
We see, then, that a factor comes into consideration in the case of differential rent II which does not appear in the case of differential rent I as such, since the latter can continue to exist independently of any change in the normal investment of capital per acre. It is, on the one hand, the blurring of results from various investments, of capital in regulating soil A, whose output flow simply appears as a normal average output per acre. It is, on the other hand, the change in the normal minimum, or in the average magnitude of invested capital per acre, so that this change appears as a property of the soil. It is, finally, the difference in the manner of transforming surplus-profit into the form of rent.
Table VI shows, furthermore, compared with tables I and II, that the grain-rent has more than doubled in relation to I, and has increased by 1 1/5 qrs in relation to II; while the money-rent has doubled in relation to I, but has not changed in relation to II. It would have increased considerably if (other conditions remaining the same) more of the additional capital had been allocated to the superior soils, or if on the other hand the effect of the additional capital on A had been less appreciable, and thus the regulating average price per quarter from A had been higher.
If the increase in productiveness by means of additional capital should produce varying results for the various soils, this would produce a change in their differential rents.
In any case, it has been shown that the rent per acre, for instance with a doubled investment of capital, may not only double, but may more than double — while the price of production falls in consequence of an increased rate of productivity of the additional capital invested, i.e., when this productivity grows at a higher rate than the advanced capital. But it may also fall if the price of production should fall much lower as a result of a more rapid increase in productiveness of soil A.
Let us assume that the additional investments of capital, for instance in B and C, do not increase the productivity at the same rate as they do for A, so that the proportional differences decrease for B and C and the increase in output does not make up for the fall in price. Then, compared with Table II, the [money] rent from D would remain unchanged, and that from B and C would fall.
TABLE VIa
Finally, the money-rent would rise if more additional capital were invested in the superior soils with the same proportional increase in productiveness than in A, or if the additional investments of capital in the superior soils were effective at an increasing rate of productivity. In both cases the differences would increase.
The money-rent falls when the improvement due to additional investment of capital reduces the differences completely, or in part, and affects A more than B and C. The smaller the increase in productivity of the superior soils, the more it falls. It depends upon the extent of inequality produced, whether the grain-rent shall rise, fall or remain stationary.
The money-rent rises, and similarly the grain-rent, either when — the proportional difference in additional fertility of the various soils remaining unaltered — more capital is invested in the rent-bearing soils than in rentless soil A, and more in soils yielding higher rent than in those yielding lower rents; or when the fertility — the additional capital remaining equal — increases more on the better and best soils than on A, i.e., the money and grain rents rise in proportion to this increase in fertility of the better soils above that of the poorer ones.
But under all circumstances, there is a relative rise in rent when increased productive power is the result of an addition of capital, and not merely the result of increased fertility with unaltered investment of capital. This is the absolute point of view, which shows that here, as in all former cases, the rent and increased rent per acre (as in the case of differential rent I on the entire cultivated area — the magnitude of the average rental) are the result of an increased investment of capital in land, no matter whether this capital functions with a constant rate of productivity at constant or decreasing prices or with a decreasing rate of productivity at constant or falling prices, or with an increasing rate of productivity at falling prices. For our assumption: constant prices with a constant, falling, or rising rate of productivity of the additional capital, and falling prices with a constant, falling, or rising rate of productivity, resolves itself into: a constant rate of productivity of the additional capital at constant or falling prices, a falling rate of productivity at constant or falling prices, and a rising rate of productivity at constant and falling prices. Although the rent may remain stationary, or may fall, in all these cases, it would fall more if the additional investment of capital, other circumstances remaining the same, were not a prerequisite for the increased productiveness. The additional capital, then, is always the cause for the relatively high rent, although absolutely it may have decreased.
[A rising price of production presupposes that the productivity of the poorest quality land yielding no rent decreases. The assumed regulating price of production cannot rise above £3 per quarter unless the £2½ invested in soil A produce less than 1 qr, or the £5 — less than 2 qrs, or unless an even poorer soil than A has to be taken under cultivation.
For constant, or even increasing, productivity of the second investment of capital this would only be possible if the productivity of the first investment of capital of ½ had decreased. This case occurs often enough. For instance, when with superficial ploughing the exhausted top soil yields ever smaller crops, under the old method of cultivation, and then the subsoil, turned up through deeper ploughing, produces better crops than before with more rational cultivation. But, strictly speaking, this special case does not apply here. The decrease in productivity of the first £2½ of invested capital signifies for the superior soils, even when the conditions are assumed to be analogous there, a decrease in differential rent I; yet here we are considering only differential rent II. But since this special case cannot occur without presupposing the existence of differential rent II, and represents in fact the reaction of a modification of differential rent I upon II, we shall give an illustration of it [see Table VII — Ed.].
The money-rent and proceeds are the same as in Table II. The increased regulating price of production makes good what has been lost in quantity of produce; since this price and the quantity of produce are inversely proportional, it is evident that their mathematical product will remain the same.
In the above case, it was assumed that the productiveness of the second investment of capital was greater than the original productivity of the first investment. Nothing changes if we assume the second investment to have only the same productivity as the first, as shown in the following table:
Here, too, the price of production rising at the same rate compensates in full for the decrease in productivity in the case of yield as well as money-rent.
The third case appears in its pure form only when the productivity of the second investment of capital declines, while that of the first remains constant — which was always assumed in the first and second cases. Here differential rent I is not affected, i.e., the change affects only that part which arises from differential rent II. We shall give two illustrations: in the first we assume that the productivity of the second investment of capital has been reduced to ½, in the second to ¾.
Table IX is the same as Table VIII, except for the fact that the decrease in productivity in VIII occurs for the first, and in IX for the second investment of capital.
In this table, too, the total proceeds, the money-rent and rate of rent remain the same as in tables II, VII and VIII, because produce and selling price are again inversely proportional, while the invested capital remains the same.
But how do matters stand in the other possible case when the price of production rises, namely, in the case of a poor quality soil not worth cultivating until then that is taken under cultivation?
Let us suppose that a soil of this sort, which we shall designate by a, enters into competition. Then the hitherto rentless soil A would yield rent, and the foregoing tables VII, VIII and X would assume the following forms:
By interpolating soil a there arises a new differential rent I; upon this new basis, differential rent II likewise develops in an altered form. Soil a has different fertility in each of the above three tables; the sequence of proportionally increasing fertilities begins only with soil A. The sequence of rising rents also behaves similarly. The rent of the worst rent-bearing soil, previously rentless, is a constant which is simply added to all higher rents. Only after deducting this constant does the sequence of differences clearly become evident for the higher rents, and similarly its parallel in the fertility sequence of the different soils. In all the tables, the fertilities from A to D are related as 1 : 2 : 3 : 4, and correspondingly the rents:
in VIIa, as 1 : (1 + 7) : (1 + 2 × 7) : (1 + 3 × 7),
in VIIIa, as 1 1/5 : (1 1/5 + 7 1/5) : (1 1/5 + 2 × 7 1/5) : (1 1/5 + 3 × 7 1/5),
and in Xa, as ⅔ : (⅔ + 6⅔) : (⅔ + 2 × 6⅔) : ⅔ + 3 × 6⅔).
In brief, if the rent from A = n, and the rent from the soil of next higher fertility = n + m, then the sequence is as follows: n : (n + m) : (n + 2m) : (n + 3m), etc. — F. E.]
[Since the foregoing third case had not been elaborated in the manuscript — only the title is there — it was the task of the editor to fill in the gap, as above, to the best of his ability. However, in addition, it still remains for him to draw the general conclusions from the entire foregoing analysis of differential rent II, consisting of three principal cases and nine subcases. The illustrations presented in the manuscript, however, do not suit this purpose very well. In the first place, they compare plots of land whose yields for equal areas are related as 1 : 2 : 3 : 4; i.e., differences, which exaggerate greatly from the very first, and which lead to utterly monstrous numerical values in the further development of the assumptions and calculations made upon this basis. Secondly, they create a completely erroneous impression. If for degrees of fertility related as 1 : 2 : 3 : 4, etc., rents are obtained in the sequence 0 : 1 : 2 : 3, etc., one feels tempted to derive the second sequence from the first, and to explain the doubling, tripling, etc., of rents by the doubling, tripling, etc., of the total yields. But this would be wholly incorrect. The rents are related as 0 : 1 : 2 : 3 : 4 even when the degrees of fertility are related as n : (n + 1) : (n + 2) : (n + 3) : (n + 4). The rents are not related as the degrees of fertility, but as the differences of fertility — beginning with the rentless soil as the zero point.
The original tables had to be offered to illustrate the text. But in order to obtain a perceptual basis for the following results of the investigation, I present below a new series of tables in which the yields are indicated in bushels (1/8 quarter, or 36.35 litres) and shillings ( = marks).
The first of these, Table XI, corresponds to the former Table I. It shows the yields and rents for soils of five different qualities, A to E, with a first capital investment of 50 shillings, which added to 10 shillings profit = 60 shillings total price of production per acre. The yields in grain are made low: 10, 12, 14, 16, 18 bushels per acre. The resulting regulating price of production is 6 shillings per bushel.
The following 13 tables correspond to the three cases of differential rent II treated in this and the two preceding chapters with an additional invested capital of 50 shillings per acre in the same soil with constant, falling and rising prices of production. Each of these cases, in turn, is presented as it takes shape for:
1) constant, 2) falling, and 3) rising productivity of the second investment of capital in relation to the first. This yields a few other variants, which are especially useful for illustration purposes.
For case I: Constant price of production — we have:
For case II: Falling price of production — we have:
For case III: Rising price of production — two eventualities are possible: soil A may remain rentless and continue to regulate the price, or poorer soil than A enters into competition and regulates the price, in which case A yields rent.
First eventuality: Soil A remains the regulator.
Second eventuality: An inferior quality soil (designated as a) enters into competition; soil A yields rent.
These three variants conform to the general conditions of the problem and require no further comment.
The tables now follow:
For second capital invested in the same soil:
First Case: Price of production remains unaltered.
Variant 1: Productivity of the second investment of capital remains the same.
Variant 2: Productivity of the second investment of capital declines; no second investment in soil A.
1) Soil B ceases to yield rent.
[* In the German 1894 edition this reads: 20. — Ed.]
2) Soil B does not become completely rentless.
Variant 3: Productivity of the second investment of capital increases; here, too, no second investment in Soil A.
Second Case: Price of production declines.
Variant 1: Productivity of the second investment of capital remains the same. Soil A is excluded from competition and soil B becomes rentless.
Variant 2: Productivity of the second investment of capital declines; soil A is excluded from competition and soil B becomes rentless.
Variant 3: Productivity of the second investment of capital increases; soil A remains in competition; soil B yields rent.
Case: Price of production rises.
A) Soil A remains rentless and continues to regulate the price.
Variant 1: Productivity of the second investment of capital remains the same: this requires decreasing productivity of the first investment of capital.
Variant 2: Productivity of the second investment of capital decreases; which does not exclude constant productivity of the first investment.
B) An inferior soil (designated as a) becomes the price regulator and soil A thus yields rent. This makes admissible for all variants constant productivity of the second investment.
Variant 1: Productivity of the second investment of capital remains the same.
Variant 2: Productivity of the second investment of capital declines.
Variant 3: Productivity of the second investment increases.
These tables lead to the following conclusions:
In the first place, the sequence of rents behaves exactly as the sequence of fertility differences — taking the rentless regulating soil as the zero point. It is not the absolute yield, but only the differences in yield which are the factors determining rent. Whether the various soils yield 1, 2, 3, 4, 5 bushels, or whether they yield 11, 12, 13, 14, 15 bushels per acre, the rents in both cases form the sequence 0, 1, 2, 3, 4 bushels, or their equivalent in money.
But far more important is the result with respect to the total rent yields for repeated investment of capital in the same land.
In five out of the thirteen analysed cases, the total rent doubles when the investment of capital is doubled; instead of l0x12 shillings it becomes 10 × 24 shillings = 240 shillings. These cases are:
Case I, constant price, variant 1: constant production rise (Table XII).
Case II, falling price, variant 3: increasing production rise (Table XVIII).
Case III, increasing price, first eventuality (where soil A remains the regulator), in all three variants (tables XIX, XX and XXI).
In four cases the rent more than doubles, namely:
Case I, variant 3, constant price, but increasing production rise (Table XV) The total rent climbs to 330 shillings.
Case III, second eventuality (where soil A yields rent), in all three variants (Table XXII, rent = 15 × 30 = 450 shillings; Table XXIII, rent = 5 × 20 + 10 × 28 = 380 shillings; Table XXIV, rent = 5 × 15 + 15 × 33¾ = 581¼ shillings).
In one case the rent rises, but not to twice the amount yielded by the first investment of capital:
Case I, constant price, variant 2: falling productivity of the second investment, under conditions whereby B does not become completely rentless (Table XIV, rent = 4 × 6 + 6 × 21 = 150 shillings).
Finally, only in three cases does the total rent remain at the same level with a second investment — for all soils taken together — as with the first investment (Table XI); these are the cases in which soil A is excluded from competition and B becomes the regulator and thereby rentless soil. Thus, the rent for B not only vanishes but is also deducted from every succeeding term of the rent sequence; the result is thus determined. These cases are:
Case I, variant 2, when the conditions are such that soil A is excluded (Table XIII). The total rent is 6 × 20, or 10 × 12 = 120, as in Table XI.
Case II, variants I and 2. Here soil A is necessarily excluded in accordance with the assumptions (tables XVI and XVII) and the total rent is again 6 × 20 = 10 × 12 = 120 shillings.
Thus, this means: In the great majority of all possible cases the rent rises — per acre of rent-bearing land as well as particularly in its total amount — as a result of an increased investment of capital in the land. Only in three out of the thirteen analysed cases does its total remain unaltered. These are the cases in which the lowest quality soil — hitherto the regulator and rentless — is eliminated from competition and the next quality soil takes its place, i.e., becomes rentless. But even in these cases, the rents upon the superior soils rise in comparison with the rents due to the first capital investment; when the rent for C falls from 24 to 20, then those for D and E rise from 36 and 48 to 40 and 60 shillings respectively.
A fall in the total rents below the level for the first investment of capital (Table XI) would be possible only if soil B as well as soil A were to be excluded from competition and soil C were to become regulating and rentless.
Thus, the more capital is invested in the land, and the higher the development of agriculture and civilisation in general in a given country, the more rents rise per acre as well as in total amount, and the more immense becomes the tribute paid by society to the big landowners in the form of surplus-profits — so long as the various soils, once taken under cultivation, are all able to continue competing.
This law accounts for the amazing vitality of the class of big landlords. No social class lives so sumptuously, no other class claims the right it does to traditional luxury in keeping with its "estate," regardless of where the money for this purpose may be derived, and no other class piles debt upon debt so lightheartedly. And yet it always lands again on its feet — thanks to the capital invested by other people in the land, which yields it a rent, completely out of proportion to the profits reaped therefrom by the capitalist.
However, the same law also explains why the vitality of the big landlord is gradually being exhausted.
When the English corn duties were abolished in 1846, the English manufacturers believed that they had thereby turned the land-owning aristocracy into paupers. Instead, they became richer than ever. How did this occur? Very simply. In the first place, the farmers were now compelled by contract to invest £12 per acre annually instead of £8. And secondly, the landlords, being strongly represented in the Lower House too, granted themselves a large government subsidy for drainage projects and other permanent improvements on their land. Since no total displacement of the poorest soil took place, but rather, at worst, it became employed for other purposes — and mostly only temporarily — rents rose in proportion to the increased investment of capital, and the landed aristocracy consequently was better off than ever before.
But everything is transitory. Transoceanic steamships and the railways of North and South America and India enabled some very singular tracts of land to compete in European grain markets. These were, on the one hand, the North American prairies and the Argentine pampas — plains cleared for the plough by Nature itself, and virgin soil which offered rich harvests for years to come even with primitive cultivation and without fertilisers. And, on the other hand, there were the land holdings of Russian and Indian communist communities which had to sell a portion of their produce, and a constantly increasing one at that, for the purpose of obtaining money for taxes wrung from them — frequently by means of torture — by a ruthless and despotic state. These products were sold without regard to price of production, they were sold at the price which the dealer offered, because the peasant perforce needed money without fail when taxes became due. And in face of this competition — coming from virgin plains as well as from Russian and Indian peasants ground down by taxation — the European tenant farmer and peasant could not prevail at the old rents. A portion of the land in Europe fell decisively out of competition as regards grain cultivation, and rents fell everywhere; our second case, variant 2 — falling prices and falling productivity of the additional investment of capital — became the rule for Europe; and therefore the lament of landlords from Scotland to Italy and from southern France to East Prussia. Fortunately, the plains are far from being entirely brought under cultivation; there are enough left to ruin all the big landlords of Europe and the small ones into the bargain — F.E.]
The headings under which rent should be analysed are:
Over-all conclusions to be drawn from the consideration of differential rent in general are the following:
First, the formation of surplus-profit may take place in various ways. On the one hand, based on differential rent I, that is, on the investment of the entire agricultural capital in land consisting of soils of varying fertility. Or, in the form of differential rent II, based on the varying differential productivity of successive investments of capital in the same land, i.e., a greater productivity — expressed, e.g., in quarters of wheat — than is secured with the same investment of capital in the worst land — rentless, but which regulates the price of production. But no matter how this surplus-profit may arise, its transformation into rent, i.e., its transfer from farmer to landlord, always presupposes that the various actual individual production prices of the partial outputs of the individual successive investments of capital (i.e., independent of the general price of production by which the market is regulated) have previously been reduced to an individual average price of production. The excess of the general regulating production price of the output per acre over this individual average production price constitutes and is a measure of the rent per acre. In the case of differential rent I, the differential results are in themselves distinguishable because they take place upon different portions of land — distinct from one another and existing side by side — given an investment of capital per acre and a degree of cultivation considered normal. In the case of differential rent II, they must first be made distinguishable; they must in fact be transformed back into differential rent I, and this can only take place in the indicated way. For example, let us take Table III, S. 226.
Secondly, assuming a decreasing rate of productivity for the additional investments of capital whose limit, so far as the new formation of surplus-profit is concerned, is that investment of capital which just covers the price of production, i.e., which produces a quarter as dearly as the same investment of capital in an acre of soil A, namely, at £3, according to our assumption — it follows from what has just been said: that the limit, where the total investment of capital in an acre of B would no longer yield any rent, is reached when the individual average production price of output per acre of B would rise to the price of production per acre of A.
If only investments of capital are made in B that yield the price of production, i.e., yield no surplus-profit nor new rent, then this indeed raises the individual average price of production per quarter, but does not affect the surplus-profit, and eventually the rent, formed by previous investments of capital. For the average price of production always remains below that of A, and when the price excess per quarter decreases, the number of quarters increases proportionately, so that the total excess in price remains unaltered.
In the case assumed, the first two investments of capital in B amounting to £5 yield 3½ quarters, thus according to our assumption 1½ quarters of rent = £4½. Now, if a third investment of £2½ is made, but one which yields only an additional quarter, then the total price of production (including 20% profit) of the 4½ quarters = £9; thus the average price per quarter = £2. The average price of production per quarter upon B has thus risen from £1 5/7 to £2, and the surplus-profit per quarter, compared with the regulating price of A, has fallen from £1 2/7 to £1. But 1 × 4½ = £4½ just as formerly 1 2/7 × 3½ = £4½.
Let us assume that a fourth and fifth additional investment of capital, amounting to £2½ each, are made in B, which do no more than produce a quarter at its general price of production. The total product per acre would then be 6½ quarters and their price of production £15. The average price of production per quarter for B would have risen again — from £2 [In the German 1894 edition this reads: 1. — Ed.] to £2 4/13 — and the surplus-profit per quarter, compared with the regulating price of production of A, would have dropped again — from £1 to £ 9/13. But these £9/13 would now have to be calculated upon the basis of 6½ quarters instead of 4½ quarters. And 9/13 × 6½ = 1 × 4½ = 4½.
It follows from this, firstly, that no increase in the regulating price of production is necessary under these circumstances, in order to make possible additional investments of capital in the rent-bearing soil — even to the point where the additional capital completely ceases to produce surplus-profit and continues to yield only the average profit. It follows furthermore that the total surplus-profit per acre remains the same here, no matter how much surplus-profit per quarter may decrease; this decrease is always balanced by a corresponding increase in the number of quarters produced per acre. In order that the average price of production might reach the level of the general price of production (hence £3 for soil B), it is necessary that supplementary investments be made whose output has a higher price of production than the regulating one of £3. But we shall see that this alone does not suffice without further ado to raise the average price of production per quarter of B to the general price of production of £3.
Let us assume that soil B produced:
1) 3½ quarters whose price of production is, as before, £6, i.e., two investments of capital amounting to £2½ each both yielding surplus-profit, but of decreasing amount.
2) 1 quarter at £3, an investment of capital in which the individual price of production is equal to the regulating price of production.
3) 1 quarter at £4, an investment of capital in which the individual price of production is higher by 33% than the regulating price.
We should then have 5½ quarters per acre for £13 with an investment of a capital of £10 7/10; this is four times the original invested capital, but not quite three times the output of the first investment of capital.
5½ quarters at £13 gives an average price of production of £2 4/11 per quarter, i.e., an excess of £7/11 per quarter, assuming the regulating price of production of £3. This excess may be transformed into rent. 5½ quarters sold at the regulating price of production of £3 yield £16½. After deducting the production price of £13, a surplus-profit, or rent, of £3½ remains, which, calculated at the present average price of production per quarter of B, that is, at £24/11 per quarter, represents 1 25/52 quarters. The money-rent would be lower by £1 and the grain-rent by about ½ quarter, but in spite of the fact that the fourth additional investment of capital in B not only fails to yield surplus-profit, but yields less than the average profit, surplus-profit, and rent still continue to exist. Let us assume that, in addition to investment 3), investment 2) also produces at a price exceeding the regulating price of production. Then the total production is: 3½ quarters for £6 + 2 quarters for £8; total 5½ quarters for £14 production price. The average price of production per quarter would be £2 6/11 and would leave an excess of £5/11. The 5½ quarters, sold at £3, give a total of £16½; deducting the £14 production price leaves £2½ for rent. At the present average price of production upon B, this would be equivalent to 55/56 of a quarter. In other words, rent is still yielded although less than before.
This shows, at any rate, that with additional investments of capital in the better soils whose output costs more than the regulating price of production the rent does not disappear — at least not within the bounds of admissible practice — although it must decrease. It will decrease in proportion, on the one hand, to the aliquot part formed by this less productive capital in the total investment of capital, and on the other hand, in proportion to the decrease in its productiveness. The average price of its produce would still lie below the regulating price and would thus still permit surplus-profit to be formed that could be transformed into rent.
Let us now assume that, as a result of four successive investments of capital (£2½, £2½, £5 and £5) with decreasing productivity, the average price per quarter of B coincides with the general price of production.
The farmer, in this case, sells every quarter at its individual price of production, and consequently the total number of quarters at their average price of production per quarter, which coincides with the regulating price of £3. Hence he still makes a profit of 20% = £3 upon his capital of £15. But the rent is gone. What has become of the excess in this equalisation of the individual prices of production per quarter with the general price of production?
The surplus-profit from the first £2½ was £3, from the second £2½ it was £1½; total surplus-profit from ⅓ of the invested capital, that is, from £5 = £4½ = 90%.
In the case of investment 3), the £5 not only fails to yield surplus-profit, but its output of 1½ quarters, sold at the general price of production, gives a deficit of £1½. Finally, in the case of investment 4), which likewise amounts to £5 its output of I quarter, sold at the general price of production, gives a deficit of £3. Both investments of capital together thus give a deficit of £4½, which is equal to the surplus-profit of £4½, realised from investments 4) and 2).
The surplus-profit and deficit balance out. Therefore the rent disappears. In fact, this is possible only because the elements of surplus-value, which formed surplus-profit or rent, now enter into the formation of the average profit. The farmers makes this average profit of £3 on £15, or 20%, at the expense of the rent.
The equalisation of the individual average price of production of B to the general price of production of A, which regulates the market-price, presupposes that the difference of the individual price of the produce from the first investments of capital below the regulating price is more and more compensated and finally balanced out by the difference of the price of the produce from the subsequent investments of capital above the regulating price. What appears as surplus-profit, so long as the produce from the first investments of capital is sold by itself, thus gradually becomes part of its average price of production, and thereby enters into the formation of the average profit, until it is finally completely absorbed by it.
If only £5 are invested in B instead of £15 and the additional 2½ quarters of the last table are produced by taking 2½ new acres of A under cultivation with an investment of £2½ per acre, then the additional invested capital would amount to only £6¼, i.e., the total investment in A and B for the production of these 6 quarters would be only £11¼, instead of £15, and their total price of production, including profit, £13½. The 6 quarters would still be sold for £18, but the investment of capital would have decreased by £3¾, and the rent from B would be £4½ per acre, as before. It would be different if the production of the additional 2½ quarters required that a soil inferior to A, for instance, A-1 and A-2, be taken under cultivation; so that the price of production per quarter would be: for 1½ quarters on soil A-1 = £4, and for the last quarter on soil A-2 = £6. In this case, £6 would be the regulating price of production per quarter. The 3½ quarters from B would then be sold for £21 instead of £10½, which would mean a rent of £15 instead of £4½, or, a rent in grain of 2½ quarters instead of 1½ quarters. Similarly, a quarter on A would now yield a rent of £3 = ½ quarter.
Before discussing this point further, another observation:
The average price of a quarter from B is equalised, i.e., coincides with the general production price of £3 per quarter, regulated by A, as soon as that portion of the total capital which produces the excess of 1½ quarters is balanced by that portion of the total capital which produces the deficit of 1½ quarters. How soon this equalisation is effected, or how much capital with under-productiveness must be invested in B for this purpose, will depend, assuming the surplus-productivity of the first investments of capital to be given, upon the relative under-productiveness of the later investments compared with an investment of the same amount in the worst, regulating soil A, or upon the individual price of production of their produce, compared with the regulating price.
The following conclusions can now be drawn from the foregoing:
First: So long as the additional capitals are invested in the same land with surplus-productivity, even if the surplus-productivity is decreasing, the absolute rent per acre in grain and money increases, although it decreases relatively, in proportion to the advanced capital (in other words, the rate of surplus-profit or rent). The limit is established here by that additional capital which yields only the average profit, or for whose produce the individual price of production coincides with the general price of production. The price of production remains the same under these circumstances, unless the production from the poorer soils becomes superfluous as a result of increased supply. Even when the price is falling, these additional capitals may within certain limits still produce surplus-profit, though less of it.
Secondly: The investment of additional capital yielding only the average profit, whose surplus-productivity therefore = 0, does not alter in any way the amount of the existing surplus-profit, and consequently of rent. The individual average price per quarter increases thereby upon the superior soils; the excess per quarter decreases, but the number of quarters which contain this decreased excess increases, so that the mathematical product remains the same.
Thirdly: Additional investments of capital, the produce of which has an individual price of production exceeding the regulating price — the surplus-productivity is therefore not merely = 0, but less than zero, or a negative quantity, that is, less than the productivity of an equal investment of capital in the regulating soil A — bring the individual average price of production of the total output from the superior soil closer and closer to the general price of production, i.e., reduce more and more the difference between them which constitutes the surplus-profit, or rent. An increasingly greater part of what constituted surplus-profit or rent enters into the formation of the average profit. But nevertheless, the total capital invested in an acre of B continues to yield surplus-profit, although the latter decreases as the amount of capital with under-productiveness increases and to the extent of this under-productiveness. The rent, with increasing capital and increasing production, in this case decreases absolutely per acre, not merely relatively with reference to the increasing magnitude of the invested capital, as in the second case.
The rent can be eliminated only when the individual average price of production of the total output from the better soil B coincides with the regulating price, so that the entire surplus-profit from the first more productive investments of capital is consumed in the formation of average profit.
The minimum limit of the drop in rent per acre is that point at which it disappears. But this point does not occur as soon as the additional investments of capital are under-productive, but rather as soon as the additional investment of under-productive capital becomes so large in magnitude that its effect is to cancel the over-productiveness of the first investments of capital, so that the productiveness of the total invested capital becomes the same as that of the capital invested in A, and the individual average price per quarter of B becomes therefore the same as that per quarter of A.
In this case too, the regulating price of production, £3 per quarter, would remain the same, although the rent had disappeared. Only beyond this point would the price of production have to rise in consequence of an increase either in the extent of under-productiveness of the additional capital or in the magnitude of the additional capital of equal under-productiveness. For instance, if, in the above table 2½ quarters were produced instead of 1½ quarters upon the same soil at £4 per quarter, we would have had a total of 7 quarters for £22 price of production; a quarter would have cost £3 1/7 it would thus be £1/7 above the general price of production, and the latter would therefore have to rise.
For a long time, then, additional capital with under-productiveness, or even increasing under- productiveness, might be invested until the individual average price per quarter from the best soils became equal to the general price of production, until the excess of the latter over the former — and thereby the surplus-profit and the rent — entirely disappeared.
And even then, the disappearance of rent from the better soils would only signify that the individual average price of their produce coincides with the general price of production, so that an increase in the latter would not yet be required.
In the above illustration, upon better soil B — which is however the lowest in the sequence of better or rent-bearing soils — 3½ quarters were produced by a capital of £5 with surplus-productiveness and 2½ quarters by a capital of £10 with under-productiveness, i.e., a total of 6 quarters; 5½ of this total is thus produced by the latter portions of capital with under-productiveness. And it is only at this point that the individual average price of production of the 6 quarters rises to £3 per quarter and thus coincides with the general price of production.
Under the law of landed property, however, the latter 2½ quarters could not have been produced in this way at £3 per quarter, except when they could be produced upon 2½ new acres of soil A. The case in which the additional capital produces only at the general price of production, would have constituted the limit. Beyond this point, the additional investment of capital in the same land would have had to cease.
Indeed, if, the farmer once pays £4½ rent for the first two investments of capital, he must continue to pay it, and every investment of capital which produced a quarter for more than £3 [In the German 1894 edition this reads: for less than £3. — Ed.] would result in a deduction from his profit. The equalisation of the individual average price, in the case of under-productiveness, is thereby prevented.
Let us take this case in the previous illustration, where the price of production for soil A, £3 per quarter, regulates the price for B.
[* In the German 1894 edition this reads: 3. — Ed.]
The price of production for the 3½ quarters in the first two investments of capital is likewise £3 per quarter for the farmer, since he has to pay a rent of £4½; thus the difference between his individual price of production and the general price of production is not pocketed by him. For him, then, the excess in produce price for the first two investments of capital cannot serve to balance out the deficit incurred by the produce in the third and fourth investments of capital.
The 1½ quarters from investment 3 cost the farmer £6, profit included: but at the regulating price of £3 per quarter, he can sell them for only £4½. In other words, he would not only lose his whole profit, but &#163½, or 10% of his invested capital of £5, over and above it. The loss of profit and capital in the case of investment 3 would amount to £4½, and in the case of investment 4 to £3, i.e., a total of £4½, or just as much as the rent from the better investments of capital; the individual price of production for the latter, however, cannot take part in equalising the individual average price of production of the total product from B, because the excess is paid out as rent to a third party.
If it were necessary, to meet the demand, to produce the additional 1½ quarters by the third investment of capital the regulating market-price would have to rise to £4 per quarter. In consequence of this rise in the regulating market-price, the rent from B would rise for the first and second investments, and rent would he formed upon A.
Thus although differential rent is but a formal transformation of surplus-profit into rent, and property in land merely enables the owner in this case to transfer the surplus-profit of the farmer to himself, we find nevertheless that successive investment of capital in the same land, or, what amounts to the same thing, the increase in capital invested in the same land, reaches its limit far more rapidly when the rate of productiveness of the capital decreases and the regulating price remains the same; in fact a more or less artificial barrier is reached as a consequence of the mere formal transformation of surplus-profit into ground-rent, which is the result of landed property. The rise in the general price of production, which becomes necessary here within more narrow limits than otherwise, is in this case not merely the cause of the increase in differential rent, but the existence of differential rent as rent is at the same time the reason for the earlier and more rapid rise in the general price of production — in order to ensure thereby the increased supply of produce that has become necessary.
The following should furthermore be noted:
By an additional investment of capital in soil B, the regulating price could not, as above, rise to £4 if soil A were to supply the additional produce below £4 by a second investment of capital, or if new and worse soil than A, whose price of production were indeed higher than £3 but lower than £4, were to enter into competition. We see, then, that differential rent I and differential rent II, while the first is the basis of the second, serve simultaneously as limits for one another, whereby now a successive investment of capital in the same land, now an investment of capital side by side in new additional land, is made. In like manner they limit each other in other cases; for instance, when better soil is taken up.
Let us assume the demand for grain is rising, and the supply can only result from successive investments of capital under conditions of under-productiveness in the rent-bearing soils, or by additional investment of capital, also with decreasing productivity, in soil A, or by the investment of capital in new lands of inferior quality than A.
Let us take soil B as representative of the rent-bearing soils.
The additional investment of capital demands an increase in the market-price above the hitherto prevailing price of production of £3 per quarter, in order to make possible the increased production upon B of one quarter (which may here stand for one million quarters, just as every acre may stand for one million acres). Increased output may also be yielded by soils C and D, etc., the soils bearing the highest rent, but only with decreasing surplus-productiveness; but it is assumed that the quarter from B is necessary in order to meet the demand. If this quarter is more cheaply produced by investing more capital in B than with the same addition of capital to A, or by descending to soil A - 1, which may, e.g., require £4 to produce a quarter, whereas the addition to capital A might do so for £3¾, then the additional capital on B will regulate the market-price.
A produces a quarter for £3, as heretofore. Similarly B, as before, produces a total of 3½ quarters at an individual price of production of £6 for its total output. Now, if an additional £4 of production price (including profit) becomes necessary on B in order to produce an additional quarter, whereas it could have been produced on A for £3¾, then it would naturally be produced on A, rather than on B. Let us assume, then, that it can be produced on B with the additional price of production of £3½. In this case, £3½ would become the regulating price for the entire output. B would now sell its present output of 4½ quarters for £l5¾. Of this £6 is the price of production for the first 3½ quarters and the £3½ for the last quarter, i.e., a total of £9½. This leaves a surplus-profit for rent = £6¼ as against the former £4½. In this case, an acre of A would also yield a rent of £1½; but it would not be the worst soil A, but rather the better soil B that would regulate the price of production of £3½. Of course, we assume here that new soil of quality A and equally favourable location as that hitherto cultivated is not available, but that either a second investment of capital in the already cultivated plot A at a higher price of production, or the cultivation of an even poorer soil A-1, is required. As soon as differential rent II comes into force through successive investments of capital, the limits of the rising price of production may be regulated by better soil; and the worst soil, the basis of differential rent I, may also yield rent. This, even with a single differential rent, all cultivated land would yield rent. We would then have the following two tables, where by price of production we mean the sum of the invested capital plus 20% profit; in other words, on every £2½ of capital £½ of profit or a total of £3.
This is the state of affairs before the new capital of £3½, which yields only one quarter, is invested in B. After this investment, the situation looks as follows:
[This, again, is not quite correctly calculated. First of all, the cost of the 4½ qrs for farmer B is, in the first place, £9½: in price of production and, secondly, £4½ in rent, i.e., a total of £14; average per quarter = £3½. This average price of his total production thus becomes the regulating market-price. Thus, the rent on A would amount to £1/9 instead of £½, and that on B would remain £4½ as heretofore; 4½ qrs at £3½ = £14 and, if we deduct £9½ in price of production, £4½ remain for surplus-profit. We see, then, that in spite of the required change in numerical values this illustration shows how, by means of differential rent II, better soil, already yielding rent, may regulate the price and thus transform all soil, even hitherto rentless, into rent-bearing soil. — F. E.]
The grain-rent must rise as soon as the regulating price of production of the grain rises, i.e., as soon as the price of production of a quarter of grain from the regulating soil, or the regulating invested capital in one of the various soil types, rises. It is the same as though all soils had become less productive and produced, e.g., only 5/7 quarter instead of 1 quarter with every new investment of £2½. Whatever else they produce in grain with the same investment of capital is transformed into surplus-product, which represents the surplus-profit and therefore the rent. Assuming the rate of profit remains the same, the farmer can buy less grain with his profit. The rate of profit may remain the same if wages do not rise — either because they are depressed to the physical minimum, i.e., below the normal value of labour-power; or because the other articles of consumption needed by the labourer and supplied by manufacture have become relatively cheaper; or because the working day has become longer or more intensive, so that the rate of profit in non-agricultural lines of production, which, however, regulates the agricultural profit, has remained the same or has risen; or, finally, because more constant and less variable capital is employed in agriculture, even though the amount of capital invested is the same.
We have thus considered the first method by which rent may arise on the hitherto worst soil A without taking still worse soil under cultivation; that is, rent may arise from the difference between its individual, hitherto regulating, price of production and the new, higher price of production, whereby the last additional capital employed under conditions of under-productiveness upon the better soil supplies the necessary additional produce.
If the additional produce had to be supplied by soil A-1, which cannot produce a quarter for less than £4, then the rent per acre of A would have risen to £1. But, in this case, soil A-1 would have taken the place of A as the worst cultivated soil, and the latter would have moved into the lowest position in the sequence of rent-bearing soils. Differential rent I would have changed. This case, then, is not included in the consideration of differential rent II, which arises from the varying productiveness of successive investments of capital in the same piece of land.
But aside from this, differential rent may arise on soil A in two other ways.
With the price unchanged — any given price, even a lower one compared to former ones — when the additional investment of capital results in surplus-productiveness, which prima facie, and up to a certain point must always be the case precisely on the worst soil.
Secondly, however, when the productiveness of successive investments of capital in soil A decreases.
It is assumed in both cases that the increased production is required to meet demand.
But from the point of view of differential rent, a peculiar difficulty arises here owing to the previously developed law — according to which it is always the individual average price of production per quarter for the total production (or the total outlay of capital) which acts as the determining factor. In the case of soil A, however, there is not, as in the cases of the better soils, another price of production which limits for new investments of capital the equalisation of the individual with the general price of production. For the individual price of production of A is precisely the general price of production regulating the market-price.
Let us assume:
1) When the productiveness of successive investments of capital is increasing, 1 acre of A will produce 3 qrs instead of 2 qrs given an investment of £5 — corresponding to a price of production of £6. The first investment of £2½ yielded 1 qr, the second — 2 qrs. In this case, a price of production of £6 will yield 3 qrs, so that the average cost of a quarter will be £2; i.e., if the 3 qrs are sold at £2 per quarter, then A, as heretofore, does not yield any rent, but only the basis of differential rent II has been altered; the regulating price of production is now £2 instead of £3; a capital of £2½ now produces an average of 1½ qrs on the worst soil, instead of 1 qr, and now this is the official productivity for all better soils given an investment of £2½. From now on, a portion of their former surplus-product enters into the formation of their necessary output, just as a portion of their surplus-profit enters into forming the average profit.
2) When the productiveness of additional capitals is decreasing. Let us assume that soil A-1 requires £4 to produce the additional quarter, whereas soil A produces it for £3¾, i.e., more cheaply, but still £¾ more dearly than the quarter produced by its first investment of capital. In this case, the total price of the two quarters produced upon A would = £6¾; thus the average price per quarter = £3 3/8. The price of production would rise, but only by £3/8, whereas it would rise by another 3/8 or to £3¾, if the additional capital were invested in new land which produced at £3¾, and it would thus bring about a proportional increase in all other differential rents.
The price of production of £3 3/8 per quarter for A would thus be equalised to its average price of production with an increased investment of capital, and would be the regulating price; thus, it would not yield any rent, since it would not produce any surplus-profit.
However, if this quarter, produced by the second investment of capital, were sold for £3¾, soil A would now yield a rent of £¾, and indeed, on all acres of A in which no additional investment of capital had taken place and which thus would still produce at £3 per quarter. So long as any uncultivated fields of A remain, the price could rise only temporarily to £3¾. Competition from new fields of A would hold the price of production at £3 until all land of type A, whose favourable location enables it to produce a quarter at less than £3¾, would be exhausted. This is then what we would assume, although the landlord, so long as an acre of land yields rent, will not let a tenant farmer have another acre rent-free.
It would again depend to what extent a second investment of capital in the available soil A had become general, whether the price of production is equalised at the average price or whether the individual price of production of the second investment of capital becomes regulating at £3¾. The latter occurs only when the landowner has sufficient time until demand is satisfied to fix as rent the surplus-profit derived at the price of £3¾ per qr.
Concerning decreasing productiveness of the soil with successive investments of capital, see Liebig. [Liebig, Die Chemie in ihrer Anwendung auf Agricultur und Physiologie, Braunschweig, 1862. — Ed.] We have observed that the successive decrease in surplus-productiveness of invested capital invariably increases the rent per acre, so long as the price of production remains constant, and that this may occur even with a falling price of production.
But, in general, the following is to be noted.
From the standpoint of the capitalist mode of production, a relative increase in the price of products always takes place when these products cannot be secured unless an expenditure or payment not previously made is incurred. For by the replacement of capital consumed in production we mean only the replacement of values represented by certain means of production. Natural elements entering as agents into production, and which cost nothing, no matter what role they play in production, do not enter as components of capital, but as a free gift of Nature to capital, that is, as a free gift of Nature's productive power to labour, which, however, appears as the productiveness of capital, as all other productivity under the capitalist mode of production. Therefore, if such a natural power, which originally costs nothing, takes part in production, it does not enter into the determination of price, so long as the product which it helped to produce suffices to meet the demand. But if in the course of development, a larger output is demanded than that which can be supplied with the help of this natural power, i.e., if this additional output must be created without the help of this natural power, or by assisting it with human labour-power, then a new additional element enters into capital. A relatively larger investment of capital is thus required in order to secure the same output. All other circumstances remaining the same, a rise in the price of production takes place.
(From a note-book "begun in mid-February 1876." [F.E.])
Differential rent and rent as mere interest on capital incorporated in the soil.
The so-called permanent improvements — which change the physical, and, in part, also the chemical conditions of the soil by means of operations requiring an expenditure of capital, and which may be regarded as an incorporation of capital in the soil — nearly all amount to giving a particular piece of land in a certain limited locality such properties as are naturally possessed by some other piece of land elsewhere, sometimes quite near by. One piece of land is naturally level, another has to be levelled; one possesses natural drainage, another requires artificial drainage; one is endowed by Nature with a deep layer of top soil, another needs artificial deepening; one clay soil is naturally mixed with the proper amount of sand, another has to be treated to obtain this proportion; one meadow is naturally irrigated or covered with layers of silt, another requires labour to obtain this condition, or, in the language of bourgeois economics, it requires capital.
It is indeed a truly amusing theory, whereby here, in the case of one piece of land whose comparative advantages have been acquired, rent is interest, whereas in the case of another piece of land which possesses these advantages naturally, it is not interest. (In fact, this is so distorted in practice that since rent really coincides in the one case with interest, it is falsely also called interest in the other cases, where this is positively not the case.) However, land yields rent after capital is invested not because capital is invested, but because the invested capital makes this land more productive than it formerly was. Assuming that all the land of a given country requires this investment of capital, every piece of land which has not received it must first pass through this stage, and the rent (interest yielded in the given case) borne by land already provided with investment of capital constitutes differential rent just as though it naturally possessed this advantage and the other land had first to acquire it artificially.
This rent too, which may be resolved into interest, becomes pure differential rent as soon as the invested capital is amortised. Otherwise, one and the same capital would have to exist twice as capital.
A most amusing phenomenon is that all opponents of Ricardo who oppose the idea that value determination is based exclusively on labour rather than regarding differential rent as arising from differences in soil, point out that here Nature rather than labour determines value; but at the same time they credit this determination to the location of the land, or — and to an even greater extent — the interest on capital put into the land during its cultivation. The same labour produces the same value in a product created during a given period of time; but the magnitude or quantum of this product, and consequently also the portion of value associated with some aliquot part of this product, depends for a given quantity of labour solely upon the quantum of product, and the latter, in turn, depends upon the productivity of the given quantum of labour rather than the absolute magnitude of this quantum. It is immaterial whether this productivity is due to Nature or to society. Only in the case when the productivity itself costs labour, and consequently capital, does it increase the price of production by a new element — which Nature by itself does not do.
In the analysis of differential rent we proceeded from the assumption that the worst soil does not pay any ground-rent; or, to put it more generally, only such land pays ground-rent whose product has an individual price of production below the price of production regulating the market, so that in this manner a surplus-profit arises which is transformed into rent. It is to be noted, to begin with, that the law of differential rent as such is entirely independent of the correctness or incorrectness of this assumption.
Let us call the general price of production, by which the market is regulated, P. Then, P coincides with the individual price of production of the output of the worst soil A; i.e., its price pays for the constant and variable capital consumed in production plus the average profit ( = profit of enterprise plus interest).
The rent in this case is equal to zero. The individual price of production of the next better soil B is = P´, and P > P´; that is, P pays for more than the actual price of production of the product of soil B. Let us now assume that P - P´ = d; d, the excess of P over P´, is therefore the surplus-profit which the farmer of soil type B realises. This d is transformed into rent, which must be paid to the landlord. Let P´´ be the actual price of production of the third type of soil C, and P - P´´ = 2d; then this 2d is converted into rent; similarly, let P´´´ be the individual price of production of the fourth type of soil D, and P - P´´´ = 3d, which is transformed into ground-rent, etc. Now let us assume the premise for soil A, that rent = 0 and therefore the price of its product = P + 0, is erroneous. Assume rather that it, too, yields rent = r. In that case, two different conclusions follow.
First: The price of the product of soil A would not be regulated by the price of production on the latter, but would include an excess above this price, i.e., would be = P + r. Because assuming the capitalist mode of production to be functioning normally, that is, assuming that the excess r which the farmer pays to the landlord represents neither a deduction from wages nor from the average profit of capital, the farmer can only pay it by selling the product above its price of production, thus, yielding him surplus-profit if he did not have to turn over this excess to the landlord in the form of rent. The regulating market-price of the total output on the market derived from all soils would then not be the price of production which capital generally yields in all spheres of production, i.e., a price equal to costs plus average profit, but rather the price of production plus the rent, P + r, and not P. For the price of the product of soil A represents generally the limit of the regulating general market-price, i.e., the price at which the total product can be supplied, and to that extent it regulates the price of this total product.
But secondly: Although the general price of agricultural products would in this case be significantly modified, the law of differential rent would nevertheless in no way lose its force. For if the price of the product of soil A, and thereby the general market-price = P + r, the price for soils B, C, D, etc., would likewise = P + r. But since P - P´ = d for soil B, then (P + r) - (P´ + r) would likewise = d, and P - P´´ = (P + r) - (P´´ + r) = 2d for soil C; and finally P - P´´´ = (P + r) - (P´´´ + r) = 3d for soil D, etc. Thus the differential rent would be the same as before and would be regulated by the same law, although the rent would include an element independent of this law and would show a general increase together with the price of the agricultural product. It follows, then, that no matter what the case may be as regards the rent of the least fertile soils, the law of differential rent is not only independent of it, but that the only manner of grasping differential rent in keeping with its character is to let the rent on soil A = 0. Whether this actually = 0 or > 0 is immaterial so far as the differential rent is concerned, and, in fact, does not come into consideration.
The law of differential rent, then, is independent of the results of the following study.
If we were now to inquire more deeply into the basis of the assumption that the product of the worst soil A does not yield any rent, the answer would of necessity be as follows: If the market-price of the agricultural product, say grain, attains that level where an additional investment of capital in soil A results in the usual price of production, i.e., the usual average profit on the capital is yielded, then this condition suffices for investing the additional capital in soil A. In other words, this condition is sufficient for the capitalist to invest new capital yielding the usual profit and to employ it in the normal manner.
It should be noted here that in this case, too, the market-price must be higher than the price of production of A. For as soon as the additional supply is created, it is evident that the relation between supply and demand becomes altered. Formerly the supply was insufficient. Now it is sufficient. Hence the price must fall. In order to fall, it must have been higher than the price of production of A. But due to the fact that soil A newly taken under cultivation is less fertile, the price does not fall again as low as when the price of production of soil B regulated the market. The price of production of A constitutes the limit, not for the temporary but for the relatively permanent rise of the market-price. On the other hand, if the new soil taken under cultivation is more fertile than the hitherto regulating soil A, and yet only suffices to meet the increased demand, then the market-price remains unchanged. The investigation of the question whether the poorest type of soil yields rent, however, coincides in this case too with our present inquiry, for here too the assumption that soil A does not yield any rent would be explained by the fact that the market-price is sufficient for the capitalist farmer to exactly cover, with this price, the invested capital plus the average profit; in brief, it would be explained by the fact that the market-price yields him the price of production of his commodities.
First: When the landlord is himself a capitalist, or the capitalist is himself a landlord. In this case he may himself manage his land as soon as market-price has risen sufficiently to enable him to get, from what is now soil A, the price of production, that is, replacement of capital plus average profit. But why? Because for him landed property does not constitute an obstacle to the investment of capital. He can treat his land simply as an element of Nature and therefore be guided solely by considerations of expansion of his capital, by capitalist considerations. Such cases occur in practice, but only as exceptions. Just as capitalist cultivation of the soil presupposes the separation of functioning capital from landed property, so does it as a rule exclude self-management of landed property. It is immediately evident that this case is a purely accidental one. If the increased demand for grain requires the cultivation of a larger area of soil type A than is in the hands of self-managing proprietors, in other words, if a part of it must be rented to be at all cultivated, then this hypothetical lifting of the limitation created by landed property to the investment of capital at once collapses. It is an absurd contradiction to start out with the differentiation under the capitalist mode of production between capital and land, farmers and landlords, and then to turn round and assume that landlords, as a rule, manage their own land wherever and whenever capital would not draw rent from the cultivation of the soil if landed property were not separate and distinct from it. (See the passage by Adam Smith concerning mining rent, quoted below.) This abolition of landed property is fortuitous. It may or may not occur.
Secondly: In the total area of a leasehold there may be certain portions which do not yield any rent at the existing level of market-prices, so that they are in fact loaned gratis; but the landlord does not look upon it in that light, because he sees the total rental of the leased land, not the specific rent of the individual component plots. In this case, as regards the rentless component plots of the leasehold, landed property as a limitation to the investment of capital is eliminated for the capitalist farmer; and this, indeed, by contract with the landlord himself. But he does not pay rent for these plots merely because he pays rent for the land associated with them. A combination is here presupposed whereby poorer soil A does not have to be resorted to as a distinctly new field of production in order to produce the deficit supply, but rather whereby it merely constitutes an inseparable part of the better land. But the case to be investigated is precisely that in which certain pieces of land of soil type A must be independently managed, i.e., for the conditions generally prevailing under the capitalist mode of production, they must be independently leased.
Differential rent has the peculiarity that landed property here merely intercepts the surplus-profit which would otherwise flow into the pocket of the farmer, and which the latter may actually pocket under certain circumstances during the period of his lease. Landed property is here merely the cause for transferring a portion of the commodity-price which arises without the property having anything to do with it (indeed, in consequence of the fact that the price of production which regulates the market-price is determined by competition) and which resolves itself into surplus-profit — the cause for transferring this portion of the price from one person to another, from the capitalist to the landlord. But landed property is not the cause which creates this portion of the price, or the rise in price upon which this portion of the price is premised. On the other hand, if the worst soil A cannot be cultivated — although its cultivation would yield the price of production — until it produces something in excess of the price of production, rent, then landed property is the creative cause of this rise in price. Landed property itself has created rent. This fact is not altered, if, as in the second case mentioned, the rent now paid on soil A constitutes differential rent compared with the last additional investment of capital in old leaseholds, which pay only the price of production. For the circumstance that soil A cannot be cultivated until the regulating market-price has risen high enough to permit rent to be yielded from soil A — only this circumstance is the basis here for the fact that the market-price rises to a point which enables the last investments in the old leaseholds to yield, indeed, only their price of production, but a price of production which, at the same time, yields rent on soil A. The fact that the latter has to pay rent at all is, in this case, the cause for the differential rent between soil A and the last investments in the old leaseholds.
When stating, in general, that soil A does not pay any rent — assuming the price of grain is regulated by the price of production — we mean rent in the categorical sense of the word. If the farmer pays "lease money" which constitutes a deduction from the normal wages of his labourers, or from his own normal average profit, he does not pay rent, i.e., an independent component of the price of his commodities distinct from wages and profit. We have already indicated that this continually takes place in practice. In so far as the wages of the agricultural labourers in a given country are, in general, depressed below the normal average level of wages, so that a deduction from wages, a part of the wages, as a general rule enters into rent, this does not constitute an exceptional case for the farmer cultivating the worst soil. In the same price of production which makes cultivation of the worst soil possible these low wages already form a constituent element, and the sale of the product at the price of production does not therefore enable the farmer cultivating this soil to pay any rent. The landlord can also lease his land to some labourer, who may be satisfied to pay to the former in the form of rent, all or the largest part of that which he realises in the selling price over and above the wages. In all these cases, however, no real rent is paid in spite of the fact that lease money is paid. But wherever conditions correspond to those under the capitalist mode of production, rent and lease money must coincide. Yet it is precisely this normal condition which must be analysed here.
The mere legal ownership of land does not create any ground-rent for the owner. But it does, indeed, give him the power to withdraw his land from exploitation until economic conditions permit him to utilise it in such a manner as to yield him a surplus, be it used for actual agricultural or other production purposes, such as buildings, etc. He cannot increase or decrease the absolute magnitude of this sphere, but he can change the quantity of land placed on the market. Hence, as Fourier already observed, it is a characteristic fact that in all civilised countries a comparatively appreciable portion of land always remains uncultivated.
Thus, assuming the demand requires that new land be taken under cultivation, whose soil, let us say, is less fertile than that hitherto cultivated — will the landlord lease it for nothing, just because the market-price of the product of the land has risen sufficiently to return to the farmer the price of production, and thereby the usual profit, on his investment in this land? By no means. The investment of capital must yield him rent. He does not lease his land until he can be paid lease money for it. Therefore, the market-price must rise to a point above the price of production, i.e., to P + r, so that rent can be paid to the landlord. Since according to our assumption, landed property does not yield anything until it is leased, is economically valueless until then, a small rise in the market-price above the price of production suffices to bring the new land of poorest quality on the market.
The following question now arises: Does it follow from the fact that the worst soil yields ground-rent which cannot be derived from any difference in fertility that the price of the product of the land is necessarily a monopoly price in the usual sense, or a price into which the rent enters like a tax, with the sole distinction that the landlord levies the tax instead of the state? It goes without saying that this tax has its specific economic limits. It is limited by additional investments of capital in the old leaseholds, by competition from products of the land coming from abroad — assuming their import is unrestricted — by competition among the landlords themselves, and finally by the needs of the consumers and their ability to pay. But this is not the question here. The point is whether the rent paid on the worst soil enters into the price of the products of this soil — which price regulates the general market-price according to our assumption — in the same way as a tax placed on a commodity enters into its price, i.e., as an element that is independent of the value of the commodity.
This, by no means, necessarily follows, and the contention that it does has been made only because the distinction between the value of commodities and their price of production has heretofore not been understood. We have seen that the price of production of a commodity is not at all identical with its value, although the prices of production of commodities, considered in their totality, are regulated only by their total value, and although the movement of production prices of various kinds of commodities, all other circumstances being equal, is determined exclusively by the movement of their values. It has been shown that the price of production of a commodity may lie above or below its value, and coincides with its value only by way of exception. Hence, the fact that products of the land are sold above their price of production does not at all prove that they are sold above their value; just as the fact that products of industry, on the average, are sold at their price of production does not prove that they are sold at their value. It is possible for agricultural products to be sold above their price of production and below their value, while, on the other hand, many industrial products yield the price of production only because they are sold above their value.
The relation of the price of production of a commodity to its value is determined solely by the ratio of the variable part of the capital with which the commodity is produced to its constant part, or by the organic composition of the capital producing it. If the composition of the capital in a given sphere of production is lower than that of the average social capital, i.e., if its variable portion, which is used for wages, is larger in its relation to the constant portion, used for the material conditions of labour, than is the case in the average social capital, then the value of its product must lie above the price of production. In other words, because such capital employs more living labour, it produces more surplus-value, and therefore more profit, assuming equal exploitation of labour, than an equally large aliquot portion of the social average capital. The value of its product, therefore, is above the price of production, since this price of production is equal to capital replacement plus average profit, and the average profit is lower than the profit produced in this commodity. The surplus-value produced by the average social capital is less than the surplus-value produced by a capital of this lower composition. The opposite is the case when the capital invested in a certain sphere of production is of a bigger composition than the social average capital. The value of commodities produced by it lies below their price of production, which is generally the case with products of the most developed industries.
If the capital in a certain sphere of production is of a lower composition than the average social capital, then this is, in the first place, merely another way of saying that the productivity of the social labour in this particular sphere of production is below the average; for the level of productivity attained is manifested in the relative preponderance of constant over variable capital, or in the continual decrease — for the given capital — of the portion used for wages. On the other hand, if the capital in a certain sphere of production is of a higher composition, then this reflects a development of productiveness that is above the average.
Leaving aside actual works of art, whose consideration by their very nature is excluded from our discussion, it is self-evident, moreover, that different spheres of production require different proportions of constant and variable capital in accordance with their specific technical features, and that living labour must play a bigger role in some, and smaller in others. For instance, in the extractive industries, which must be clearly distinguished from agriculture, raw material as an element of constant capital is wholly absent, and even auxiliary material rarely plays an important role. In the mining industry, however, the other part of constant capital, i.e., fixed capital, plays an important role. Nevertheless, here too, progress may be measured by the relative increase of constant capital in relation to variable capital.
If the composition of capital in agriculture proper is lower than that of the average social capital, then, prima facie, this expresses the fact that in countries with developed production agriculture has not progressed to the same extent as the processing industries. Such a fact could be explained — aside from all other circumstances, including in part decisive economic ones — by the earlier and more rapid development of the mechanical sciences, and in particular their application compared with the later and in part quite recent development of chemistry, geology and physiology, and again, in particular, their application to agriculture. Incidentally, it is an indubitable and long-known fact [36] that the progress of agriculture itself is constantly expressed by a relative growth of constant capital as compared with variable capital. Whether the composition of agricultural capital is lower than that of the average social capital in a specific country where capitalist production prevails, for instance England, is a question which can only be decided statistically, and for our purposes it is superfluous to go into it in detail. In any case, it is theoretically established that the value of agricultural products can be higher than their price of production only on this assumption. In other words, a capital of a certain size in agriculture produces more surplus-value, or what amounts to the same, sets in motion and commands more surplus-labour (and with it employs more living labour generally) than a capital of the same size of average social composition.
This assumption, then, suffices for that form of rent which we are analysing here, and which can obtain only so long as this assumption holds good. Wherever this assumption no longer holds, the corresponding form of rent likewise no longer holds.
If the average composition of the non-agricultural social capital were = 85c + 15v, and the rate of surplus-value = 100%, then the price of production would = 115. If the composition of the agricultural capital were = 75c + 25v and the rate of surplus-value were the same, then the value of the agricultural product and the regulating market-price would = 125. If the agricultural and the non-agricultural product should be equalised to the same average price (we assume for the sake of brevity the total capital in both lines of production to be equal), then the total surplus-value would = 40, or 20%, on the 200 of capital. The product of the one as well as the other would be sold at 120. In an equalisation into prices of production, the average market-prices of the non-agricultural product would thus lie above, and those of the agricultural product below, their value. If the agricultural products were sold at their full value, they would be higher by 5, and the industrial products lower by 5, than they are in the equalisation. If market conditions do not permit the sale of the agricultural products at their full value, to the full surplus above the price of production, then the effect lies between the two extremes; the industrial products are sold somewhat above their value, and the agricultural products somewhat above their price of production.
Although landed property may drive the price of agricultural produce above its price of production, it does not depend on this, but rather on the general state of the market, to what degree market-price exceeds the price of production and approaches the value, and to what extent therefore the surplus-value created in agriculture over and above the given average profit shall either be transformed into rent or enter into the general equalisation of the surplus-value to average profit. At any rate this absolute rent arising out of the excess of value over the price of production is but a portion of the agricultural surplus-value, a conversion of this surplus-value into rent, its being filched by the landlord; just as the differential rent arises out of the conversion of surplus-profit into rent, its being filched by the landlord under a generally regulating price of production. These two forms of rent are the only normal ones. Apart from them the rent can be based only upon an actual monopoly price, which is determined neither by price of production nor by value of commodities, but by the buyers’ needs and ability to pay. Its analysis belongs under the theory of competition, where the actual movement of market-prices is considered.
If all the land suitable for agriculture in a certain country were leased — assuming the capitalist mode of production and normal conditions to be general — there would not be any land not paying rent; but there might be some capitals, certain parts of capitals invested in land, that might not yield any rent. For as soon as the land has been rented, landed property ceases to act as an absolute barrier against the investment of necessary capital. Still, it continues to act as a relative barrier even after that, in so far as the reversion to the landlord of the capital incorporated in the land circumscribes the activity of the tenant within very definite limits. Only in this case all rent would be transformed into differential rent, although this would not be a differential rent determined by any difference in soil fertility, but rather by the difference between the surplus-profits arising from the last investments of capital in a particular soil type and the rent paid for the lease of the worst quality land. Landed property acts as an absolute barrier only to the extent that the landlord exacts a tribute for making land at all accessible to the investment of capital. When such access has been gained, he can no longer set any absolute limits to the size of any investment of capital in a given plot of land. In general, housing construction meets a barrier in the ownership by a third party of the land upon which the houses are to be built. But, once this land has been leased for the purpose of housing construction, it depends upon the tenant whether he will build a large or a small house.
If the average composition of agricultural capital were equal to, or higher than, that of the average social capital, then absolute rent — again in the sense just described — would disappear; i.e., rent which differs equally from differential rent as well as that based upon an actual monopoly price. The value of agricultural produce, then, would not lie above its price of production, and the agricultural capital would not set any more labour in motion, and therefore would also not realise any more surplus-labour than the non-agricultural capital. The same would take place, were the composition of agricultural capital to become equal to that of the average social capital with the progress of civilisation.
It seems to be a contradiction, at first glance, to assume that, on the one hand, the composition of agricultural capital rises, in other words, that its constant component increases with respect to its variable, and, on the other hand, that the price of the agricultural product should rise high enough to permit rent to be yielded by new and worse soil than that previously cultivated, a rent which in this case could originate only from an excess of market-price over the value and price of production, in short, a rent derived solely from a monopoly price of the product.
It is necessary to make a distinction here.
But aside from this, the peculiar nature of agriculture must be taken into account.
Suppose labour-saving machinery, chemical aids, etc., are more extensively used in agriculture, and that therefore constant capital increases technically, not merely in value, but also in mass, as compared with the mass of employed labour-power, then in agriculture (as in mining) it is not only a matter of the social, but also of the natural, productivity of labour which depends on the natural conditions of labour. It is possible for the increase of social productivity in agriculture to barely compensate, or not even compensate, for the decrease in natural power — this compensation will nevertheless be effective only for a short time — so that despite technical development there, no cheapening of the product occurs, but only a still greater increase in price is averted. It is also possible that the absolute mass of products decreases with rising grain prices, while the relative surplus-product increases; namely, in the case of a relative increase in constant capital which consists chiefly of machinery or animals requiring only replacement of wear and tear, and with a corresponding decrease in variable capital which is expended in wages requiring constant replacement in full out of the product.
Moreover, it is also possible that with progress in agriculture only a moderate rise in market-price above the average is necessary, in order to cultivate and draw a rent from poorer soil, which would have required a greater rise in market-price if technical aids were less developed.
The fact that in larger-scale cattle-raising, for example, the mass of employed labour-power is very small compared with constant capital as represented in cattle itself, could be taken to refute the assertion that more labour-power, on a percentage basis, is set in motion by agricultural capital than by the average social capital outside of agriculture. But it should be noted here that we have taken as determining for rent analysis that portion of agricultural capital which produces the principal plant foodstuffs providing the chief means of subsistence among civilised nations. Adam Smith — and this is one of his merits — has already demonstrated that a quite different determination of prices is to be observed in cattle-raising, and, for that matter, generally for capitals invested in land which are not engaged in raising the principal means of subsistence, e.g., grain. Namely in that case the price is determined in such a way that the price of the product of the land — which is used for cattle-raising, say as an artificial pasture, but which could just as easily have been transformed into cornfields of a certain quality — must rise high enough to produce the same rent as on arable land of the same quality. In other words, the rent of cornfields becomes a determining element in the price of cattle, and for this reason Ramsay has justly remarked that the price of cattle is in this manner artificially raised by the rent, by the economic expression of landed property, in short, through landed property. [G. Ramsay, An Essay on the Distribution of Wealth, Edinburgh, 1836, pp. 278-79. — Ed.]
In this case, likewise, as distinct from grain-rent, the differential rent is in favour of the worst soil.
Absolute rent explains some phenomena, which, at first sight, seem to make merely a monopoly price responsible for the rent. To go on with Adam Smith’s example, take the owner of some Norwegian forest, for instance, which exists independent of human activity, i.e., it is not a product of silviculture. If the proprietor of this forest receives a rent from a capitalist who has the timber felled, perhaps in consequence of a demand from England, or if this owner has the timber felled himself acting in the capacity of capitalist, then a greater or smaller amount of rent will accrue to him in timber, apart from the profit on invested capital. This appears to be a pure monopoly charge derived from a pure product of Nature. But, as a matter of fact, the capital here consists almost exclusively of a variable component expended in labour, and thus sets more surplus-labour in motion than another capital of the same size. The value of the timber, then, contains a greater surplus of unpaid labour, or of surplus-value, than that of a product of a capital of a higher organic composition. For this reason the average profit can be derived from this timber, and a considerable surplus in the form of rent can fall to the share of the owner of the forest. Conversely, it may be assumed that, owing to the ease with which timber-felling may be extended, in other words, its production rapidly increased, the demand must rise very considerably for the price of timber to equal its value, and thereby for the entire surplus of unpaid labour (over and above that portion which falls to the capitalist as average profit) to accrue to the owner in the form of rent.
We have assumed that the land newly brought under cultivation is of still inferior quality to the worst previously cultivated. If it is better, it yields a differential rent. But here we are analysing precisely the case wherein rent does not appear as a differential rent. There are only two cases possible. The newly cultivated soil is either inferior to, or just as good as the previously cultivated soil. If inferior, then the matter has already been analysed. It remains only to analyse the case in which it is just as good.
As already developed in our analysis of differential rent, the progress of cultivation may just as well bring equally good, or even better soils under the plough as worse soil.
First. Because in differential rent (or any rent in general, since even in the case of non-differential rent the question always arises whether, on the one hand, the soil fertility in general, and, on the other hand, its location, admit of its cultivation at the regulating market-price so as to yield a profit and rent) two conditions work in opposing directions, now cancelling one another, now alternately exerting the determining influence. The rise in market-price — provided the cost-price of cultivation has not fallen, i.e., no technical progress has given a new impetus to further cultivation — may bring under cultivation more fertile soil formerly excluded from competition by virtue of its location. Or it may so enhance the advantage of the location of the inferior soil that its lesser fertility is counterbalanced by it. Or, without any rise in market-price the location may bring better soils into competition through improvement in means of communication, as can be observed on a large scale in the prairie States of North America. In countries of older civilisation the same also takes place constantly if not to the same extent as in the colonies, where, as Wakefield correctly observes, location is decisive. [[E. Wakefield] England and America. A Comparison of the Social and Political State of both Nations, Vol. I, London, 1833, pp. 214-15. — Ed.] To sum up, then, the contradictory influences of location and fertility, and the variableness of the location factor, which is continually counterbalanced and perpetually passes through progressive changes tending towards equalisation, alternately carry equally good, better or worse land areas into new competition with the older ones under cultivation.
Secondly. With the development of natural science and agronomy the soil fertility is also changed by changing the means through which the soil constituents may be rendered immediately serviceable. In this way, light soil types in France and in the eastern counties of England, which were regarded as inferior at one time, have recently risen to first place. (See Passy. [H. Passy, Rente du sol. In: Dictionnaire de l’économie politique, Tome II. Paris. 1854, p. 515. — Ed.]) On the other hand, soil considered inferior not for bad chemical composition but for certain mechanical and physical obstacles that hindered its cultivation, is converted into good land as soon as means to overcome these obstacles have been discovered.
Thirdly. In all ancient civilisations, old historical and traditional relations, for instance, in the form of state-owned lands, communal lands, etc., have purely arbitrarily withheld from cultivation large tracts of land, which only return to it little by little. The succession in which they are brought under cultivation depends neither upon their good quality nor siting, but upon wholly external circumstances. In tracing the history of English communal lands turned successively into private property through the Enclosure Bills and brought under the plough, nothing would be more ridiculous than the fantastic idea that a modern agricultural chemist, such as Liebig, had indicated the selection of land in this succession, designating certain fields for cultivation owing to chemical properties and excluding others. What was more decisive in this case was the opportunity which makes the thief; the more or less plausible legalistic subterfuges of the big landlords to justify their appropriation.
To the extent that the agricultural rent proper is purely a monopoly price, the latter can only be small, just as the absolute rent can only be small here under normal conditions whatever the excess of the product’s value over its price of production. The essence of absolute rent, therefore, consists in this: Given the same rate of surplus-value, or degree of labour exploitation, equally large capitals in various spheres of production produce different amounts of surplus-value, in accordance with their varying average composition. In industry these various masses of surplus-value are equalised into an average profit and distributed uniformly among the individual capitals as aliquot parts of the social capital. Landed property hinders such an equalisation among capitals, invested in land, whenever production requires land for either agriculture or extraction of raw materials, and takes hold of a portion of the surplus-value, which would otherwise take part in equalising to the general rate of profit. The rent, then, forms a portion of the value, or, more specifically, surplus-value, of commodities, and instead of falling into the lap of the capitalists, who have extracted it from their labourers, it falls to the share of the landlords, who extract it from the capitalists. It is hereby assumed that the agricultural capital sets more labour in motion than an equally large portion of non-agricultural capital. How far the discrepancy goes, or whether it exists at all, depends upon the relative development of agriculture as compared with industry. It is in the nature of the case that this difference must decrease with the progress of agriculture, unless the proportionate decrease of variable as compared with constant capital is still greater in the case of industrial than in the case of agricultural capital.
This absolute rent plays an even more important role in the extractive industry proper, where one element of constant capital, raw material, is wholly lacking and where, excluding those lines in which capital consisting of machinery and other fixed capital is very considerable, by far the lowest composition of capital prevails. Precisely here, where the rent appears entirely attributable to a monopoly price, unusually favourable market conditions are necessary for commodities to be sold at their value, or for rent to equal the entire excess of a commodity’s surplus-value over its price of production. This applies, for instance, to rent from fisheries, stone quarries, natural forests, etc. [37]
That it is the ground-rent, and not the house, which forms the actual object
 of building speculation in rapidly growing cities, especially where
 construction is carried on as an industry, e.g., in London, has already been
 illustrated in Book II, Chapter XII, in the testimony of a big building
 speculator in London, Edward Capps, given before the Select Committee on Bank
 Acts of 1857. He stated there, No.5435:
And parenthetically it should not be forgotten that after the lapse of the
 lease, generally at the end of 99 years, the land with all its buildings and
 its ground-rent — usually increased in the interim twice or three times,
 reverts from the building speculator or his legal successor to the original
 last landlord.
Mining rent proper is determined in the same way as agricultural rent.
In the following analysis of the price of land we leave out of consideration
 all fluctuations of competition, all land speculation, and also small landed
 property, in which land forms the principal instrument of producers and must,
 therefore, be bought by them at any price.
I. The price of land may rise without the rent rising, namely:
1) by a mere fall in interest rate, which causes the rent to be sold more
 dearly, and thereby the capitalised rent, or price of land, rises;
2) because the interest on capital incorporated in the land rises.
II. The price of land may rise, because the rent increases.
The rent may increase, because the price of the product of the land rises,
 in which case the rate of differential rent always rises, whether the rent on
 the worst cultivated soil be large, small or non-existent. By rate we mean the
 ratio of that portion of surplus-value converted into rent to the invested
 capital which produces the agricultural product. This differs from the ratio of
 surplus-product to total product, for the total product does not comprise the
 entire invested capital, namely, the fixed capital, which continues to exist
 alongside the product. On the other hand, it covers the fact that on soils
 yielding differential rent an increasing portion of the product is transformed
 into an excess of surplus-product. The increase in price of agricultural
 product of the worst soil first creates rent and thereby the price of land.
The rent, however, may also increase without a rise in price of the
 agricultural product. This price may remain constant, or even decrease.
If the price remains constant, the rent can grow only (apart from monopoly
 prices) because, on the one hand, given the same amount of capital invested in
 the old lands, new lands of better quality are cultivated, which merely
 suffice, however, to cover the increased demand, so that the regulating
 market-price remains unchanged. In this case, the price of the old lands does
 not rise, but the price of the newly cultivated lands rises above that of the
 old ones.
The price of land, however, may also rise even when the price of the
 agricultural product decreases.
In this case, the differential rent, and with it the price of the better
 lands, may have risen, owing to further differentiations. Or, if this is not
 the case, the price of the agricultural product may have fallen by virtue of
 greater labour productivity but in such a manner that the increased production
 more than counterbalances this. Let us assume that one quarter cost 60
 shillings. Now, if the same acre, with the same capital, should produce two
 quarters instead of one, and the price of one quarter should fall to 40
 shillings, then two quarters would cost 80 shillings, so that the value of the
 product of the same capital invested in the same acre would have risen by
 one-third, despite the fall in price per quarter by one-third. How this is
 possible without selling the product above its price of production or above its
 value, has been developed in the analysis of differential rent. As a matter of
 fact it is possible only in two ways. Either bad soil is excluded from
 competition, but the price of the better soil increases with the increase in
 differential rent, i.e., the general improvement affects the various soil types
 differently. Or, the same price of production (and the same value, if absolute
 rent is paid) expresses itself on the worst soil through a larger mass of
 products, when labour productivity has become greater. The product represents
 the same value as before, but the price of its aliquot parts has fallen, while
 their number has increased. This is impossible when the same capital has been
 employed; for in this case the same value always expresses itself through any
 portion of the product. It is possible, however, when additional capital has
 been expended for gypsum, guano, etc., in short, for improvements the effects
 of which extend over several years. The stipulation is that the price of an
 individual quarter falls, but not to the same extent as the number of quarters
 increases.
III. These different conditions under which rent may rise, and with it the
 price of land in general, or of particular kinds of land, may partly compete,
 or partly exclude one another, and can only act alternately. But it follows
 from the foregoing that the consequence of a rise in the price of land does not
 necessarily signify also a rise in rent, or that a rise in rent, which always
 brings with it a rise in the price of land, is not necessarily contingent upon
 an increase in the agricultural product.[42]
The whole difficulty in analysing rent, therefore, consists in explaining the excess of agricultural profit over the average profit, not the surplus-value, but the excess of surplus-value characteristic of this sphere of production; in other words, not the "net product", but the excess of this net product over the net product of other branches of industry. The average profit itself is a product formed under very definite historical production relations by the movement of social processes, a product which, as we have seen, requires very complex adjustment. To be able to speak at all of a surplus over the average profit, this average profit itself must already be established as a standard and as a regulator of production in general as is the case under capitalist production. For this reason there can be no talk of rent in the modern sense, a rent consisting of a surplus over the average profit, i.e., over and above the proportional share of each individual capital in the surplus-value produced by the total social capital, in social formations where it is not capital which performs the function of enforcing all surplus-labour and appropriating directly all surplus-value. And where therefore capital has not yet completely, or only sporadically, brought social labour under its control. It reflects naïveté, e.g., of a person like Passy (see below), when he speaks of rent in primitive society as a surplus over profit [Passy, Rente du sol. In: Dictionnaire de l’économie politique, Tome II. Paris, 1854, p. 511. — Ed.] — a historically defined social form of surplus-value, but which, according to Passy, might almost as well exist without any society.
For the older economists, who in general merely begin analysing the capitalist mode of production, still undeveloped in their day, the analysis of rent offers either no difficulty at all, or only a difficulty of a completely different kind. Petty, Cantillon, and in general those writers who are closer to feudal times, assume ground-rent to be the normal form of surplus-value in general, [ [Petty] A Treatise on Taxes and Contributions, London, 1667, pp. 23-24; [Richard Cantillon] Essai sur la nature du commerce en géneral, Amsterdam, 1756. — Ed.] whereas profit to them is still amorphously combined with wages, or at best appears to be a portion of surplus-value extorted by the capitalist from the landlord. These writers thus take as their point of departure a situation where, in the first place, the agricultural population still constitutes the overwhelming majority of the nation, and, secondly, the landlord still appears as the person appropriating at first hand the surplus-labour of the direct producers by virtue of his monopoly of landed property, where landed property, therefore, still appears as the main condition of production. For these writers the question could not yet be posed, which, inversely, seeks to investigate from the viewpoint of capitalist production how landed property manages to wrest back again from capital a portion of the surplus-value produced by it (that is, filched by it from the direct producers) and already appropriated directly.
The physiocrats, furthermore, are correct in stating that in fact all production of surplus-value, and thus all development of capital, has for its natural basis the productiveness of agricultural labour. If man were not capable of producing in one working-day more means of subsistence, which signifies in the strictest sense more agricultural products than every labourer needs for his own reproduction, if the daily expenditure of his entire labour power sufficed merely to produce the means of subsistence indispensable for his own individual requirements, then one could not speak at all either of surplus-product or surplus-value. An agricultural labour productivity exceeding the individual requirements of the labourer is the basis of all societies, and is above all the basis of capitalist production, which disengages a constantly increasing portion of society from the production of basic foodstuffs and transforms them into "free heads," as Steuart [Steuart, An Inquiry Into the Principles of Political Economy, Vol. I, Dublin, 1770, p. 396. — Ed.] has it, making them available for exploitation in other spheres.
But what can be said of more recent writers on economics, such as Daire, Passy, etc., who parrot the most primitive conceptions concerning the natural conditions of surplus-labour and thereby surplus-value in general, in the twilight of classical economy, indeed on its very death-bed, and who imagine that they are thus propounding something new and striking on ground-rent [Daire, Introduction. In: Physiocrats, 1. Teil, Paris, 1846; Passy, Rente du sol. In: Dictionnaire de l’économie politique, Tome II, Paris, 1854, p. 511. — Ed.] long after this ground-rent has been investigated as a special form and become a specific portion of surplus-value? It is particularly characteristic of vulgar economy that it echoes what was new, original, profound and justified during a specific outgrown stage of development, in a period when it has turned platitudinous, stale, and false. It thus confesses its complete ignorance of the problems which concerned classical economy. It confounds them with questions that could only have been posed on a lower level of development of bourgeois society. The same holds true of its incessant and self-complacent rumination of the physiocratic phrases concerning free trade. These phrases have long since lost all theoretical interest, no matter how much they may engage the practical attention of this or that state.
The specific economic form, in which unpaid surplus-labour is pumped out of direct producers, determines the relationship of rulers and ruled, as it grows directly out of production itself and, in turn, reacts upon it as a determining element. Upon this, however, is founded the entire formation of the economic community which grows up out of the production relations themselves, thereby simultaneously its specific political form. It is always the direct relationship of the owners of the conditions of production to the direct producers — a relation always naturally corresponding to a definite stage in the development of the methods of labour and thereby its social productivity — which reveals the innermost secret, the hidden basis of the entire social structure and with it the political form of the relation of sovereignty and dependence, in short, the corresponding specific form of the state. This does not prevent the same economic basis — the same from the standpoint of its main conditions — due to innumerable different empirical circumstances, natural environment, racial relations, external historical influences, etc. from showing infinite variations and gradations in appearance, which can be ascertained only by analysis of the empirically given circumstances.
Finally, labour rent in itself implies that, all other circumstances remaining equal, it will depend wholly upon the relative amount of surplus-labour, or enforced labour, to what extent the direct producer shall be enabled to improve his own condition, to acquire wealth, to produce an excess over and above his indispensable means of subsistence, or, if we wish to anticipate the capitalist mode of expression, whether he shall be able to produce a profit for himself, and how much of a profit, i.e., an excess over his wages which have been produced by himself. Rent here is the normal, all-absorbing, so to say legitimate form of surplus-labour, and far from being excess over profit, which means in this case being above any other excess over wages, it is rather that the amount of such profit, and even its very existence, depends, other circumstances being equal, upon the amount of rent, i.e., the enforced surplus-labour to be surrendered to the landowners.
Money-rent, as a transmuted form of rent in kind, and in antithesis to it, is, nevertheless, the final form, and simultaneously the form of dissolution of the type of ground-rent which we have heretofore considered, namely ground-rent as the normal form of surplus-value and of the unpaid surplus-labour to be performed for the owner of the conditions of production. In its pure form, this rent, like labour rent and rent in kind, represents no excess over profit. It absorbs the profit, as it is understood. In so far as profit arises beside it practically as a separate portion of excess labour, money-rent like rent in its earlier forms still constitutes the normal limit of such embryonic profit, which can only develop in relation to the possibilities of exploitation, be it of one’s own excess labour or that of another, which remains after the performance of the surplus-labour represented by money-rent. Should any profit actually arise along with this rent, then this profit does not constitute the limit of rent, but rather conversely, the rent is the limit of the profit. However, as already indicated, money-rent is simultaneously the form of dissolution of the ground-rent considered thus far, coinciding prima facie with surplus-value and surplus-labour, i.e., ground-rent as the normal and dominant form of surplus-value.
In its further development money-rent must lead — aside from all intermediate forms, e.g., the small peasant tenant farmer — either to the transformation of land into peasants’ freehold, or to the form corresponding to the capitalist mode of production, that is, to rent paid by the capitalist tenant farmer.
With money-rent prevailing, the traditional and customary legal relationship between landlord and subjects who possess and cultivate a part of the land, is necessarily turned into a pure money relationship fixed contractually in accordance with the rules of positive law. The possessor engaged in cultivation thus becomes virtually a mere tenant. This transformation serves on the one hand, provided other general production relations permit, to expropriate more and more the old peasant possessors and to substitute capitalist tenants in their stead. On the other hand, it leads to the former possessor buying himself free from his rent obligation and to his transformation into an independent peasant with complete ownership of the land he tills. The transformation of rent in kind into money-rent is furthermore not only inevitably accompanied, but even anticipated, by the formation of a class of propertyless day-labourers, who hire themselves out for money. During their genesis, when this new class appears but sporadically, the custom necessarily develops among the more prosperous peasants subject to rent payments of exploiting agricultural wage-labourers for their own account, much as in feudal times, when the more well-to-do peasant serfs themselves also held serfs. In this way, they gradually acquire the possibility of accumulating a certain amount of wealth and themselves becoming transformed into future capitalists. The old self-employed possessors of land themselves thus give rise to a nursery school for capitalist tenants, whose development is conditioned by the general development of capitalist production beyond the bounds of the country-side. This class shoots up very rapidly when particularly favourable circumstances come to its aid, as in England in the 16th century, where the then progressive depreciation of money enriched them under the customary long leases at the expense of the landlords.
The average profit and the price of production regulated thereby are formed outside of relations in the country-side and within the sphere of urban trade and manufacture. The profit of the rent-paying peasant does not enter into it as an equalising factor, for his relation to the landlord is not a capitalist one. In so far as he makes profit, i.e., realises an excess above his necessary means of subsistence, either by his own labour or through exploiting other people’s labour, it is done behind the back of the normal relationship, and other circumstances being equal, the size of this profit does not determine rent, but on the contrary, it is determined by the rent as its limit. The high rate of profit in the Middle Ages is not entirely due to the low composition of capital, in which the variable component invested in wages predominates. It is due to swindling on the land, the appropriation of a portion of the landlord’s rent and of the income of his vassals. If the country-side exploits the town politically in the Middle Ages, wherever feudalism has not been broken down by exceptional urban development — as in Italy, the town, on the other hand, exploits the land economically everywhere and without exception, through its monopoly prices, its system of taxation, its guild organisation, its direct commercial fraudulence and its usury.
One might imagine that the mere appearance of the capitalist farmer in agricultural production would prove that the price of agricultural products, which from time immemorial have paid rent in one form or another, must be higher, at least at the time of this appearance, than the prices of production of manufacture whether it be because the price of such agricultural products has reached a monopoly price level, or has risen as high as the value of the agricultural products, and their value actually is above the price of production regulated by the average profit. For were this not so, the capitalist farmer could not at all realise, at the existing prices of agricultural produce, first the average profit out of the price of these products, and then pay out of the same price an excess above this profit in the form of rent. One might conclude from this that the general rate of profit, which guides the capitalist farmer in his contract with the landlord, has been formed without including rent, and, therefore, as soon as it assumes a regulating role in agricultural production, it finds this excess at hand and pays it to the landlord. It is in this traditional manner that, for instance, Herr Rodbertus explains the matter. [J. Rodbertus, Sociale Briefe an von Kirchmann, Dritter Brief: Widerlegung der Ricardo’schen Lehre von der Grundrente und Begründung einer neuen Rententheorie. See also K. Marx, Theorien über den Mehrwert. 2. Teil, 1957, pp. 3-106, 142-54. — Ed.] But:
First. This appearance of capital as an independent and leading force in agriculture does not take place all at once and generally, but gradually and in particular lines of production. It encompasses at first, not agriculture proper, but such branches of production as cattle-breeding, especially sheep-raising, whose principal product, wool, offers at the early stages a constant excess of market-price over price of production during the rise of industry, and this does not level out until later. Thus in England during the 16th century.
Secondly. Since this capitalist production appears at first but sporadically, the assumption cannot be disputed that it first extends only to such land categories as are able, through their particular fertility, or their exceptionally favourable location, to generally pay a differential rent.
Thirdly. Let us even assume that at the time this mode of production appeared — and this indeed presupposes an increasing preponderance of urban demand — the prices of agricultural products were higher than the price of production, as was doubtless the case in England during the last third of the 17th century. Nevertheless, as soon as this mode of production has somewhat extricated itself from the mere subordination of agriculture to capital, and as soon as agricultural improvement and the reduction of production costs, which necessarily accompany its development, have taken place, the balance will be restored by a reaction, a fall in the price of agricultural produce, as happened in England in the first half of the 18th century.
Rent, thus, as an excess over the average profit cannot be explained in this traditional way. Whatever may be the existing historical circumstances at the time rent first appears, once it has struck root it cannot exist except under the modern conditions earlier described.
Finally, it should be noted in the transformation of rent in kind into money-rent that along with it capitalised rent, or the price of land, and thus its alienability and alienation become essential factors, and that thereby not only can the former peasant subject to payment of rent be transformed into an independent peasant proprietor, but also urban and other moneyed people can buy real estate in order to lease it either to peasants or capitalists and thus enjoy rent as a form of interest on their capital so invested; that, therefore, this circumstance likewise facilitates the transformation of the former mode of exploitation, the relation between owner and actual cultivator of the land, and of rent itself.
We have now arrived at the end of our elaboration of ground-rent.
In all these forms of ground-rent, whether labour rent, rent in kind, or money-rent (as merely a changed form of rent in kind), the one paying rent is always supposed to be the actual cultivator and possessor of the land, whose unpaid surplus-labour passes directly into the hands of the landlord. Even in the last form, money-rent in so far as it is "pure," i.e., merely a changed form of rent in kind — this is not only possible, but actually takes place.
As a transitory form from the original form of rent to capitalist rent, we may consider the metayer system, or share-cropping, under which the manager (farmer) furnishes labour (his own or another’s), and also a portion of working capital, and the landlord furnishes, aside from land, another portion of working capital (e.g., cattle), and the product is divided between tenant and landlord in definite proportions which vary from country to country. On the one hand, the farmer here lacks sufficient capital required for complete capitalist management. On the other hand, the share here appropriated by the landlord does not bear the pure form of rent. It may actually include interest on the capital advanced by him and an excess rent. It may also absorb practically the entire surplus-labour of the farmer, or leave him a greater or smaller portion of this surplus-labour. But, essentially, rent no longer appears here as the normal form of surplus-value in general. On the one hand, the sharecropper, whether he employs his own or another’s labour, is to lay claim to a portion of the product not in his capacity as labourer, but as possessor of part of the instruments of labour, as his own capitalist. On the other hand, the landlord claims his share not exclusively on the basis of his land-ownership, but also as lender of capital.[44a]
A survival of the old communal ownership of land, which had endured after the transition to independent peasant farming, e.g., in Poland and Rumania, served there as a subterfuge for effecting a transition to the lower forms of ground-rent. A portion of the land belongs to the individual peasant and is tilled independently by him. Another portion is tilled in common and creates a surplus-product, which serves partly to cover community expenses, partly as a reserve in cases of crop failure, etc. These last two parts of the surplus-product, and ultimately the entire surplus-product including the land upon which it has been grown, are more and more usurped by state officials and private individuals, and thus the originally free peasant proprietors, whose obligation to till this land in common is maintained, are transformed into vassals subject either to corvée-labour or rent in kind; while the usurpers of common land are transformed into owners, not only of the usurped common lands, but even the very lands of the peasants themselves.
We need not further investigate slave economy proper (which likewise passes through a metamorphosis from the patriarchal system mainly for home use to the plantation system for the world-market) nor the management of estates under which the landlords themselves are independent cultivators, possessing all instruments of production, and exploiting the labour of free or unfree bondsmen, who are paid either in kind or money. Landlord and owner of the instruments of production, and thus the direct exploiter of labourers included among these elements of production, are in this case one and the same person. Rent and profit likewise coincide then, there occurring no separation of the different forms of surplus-value. The entire surplus-labour of the labourers, which is manifested here in the surplus-product, is extracted from them directly by the owner of all instruments of production, to which belong the land and, under the original form of slavery, the immediate producers themselves. Where the capitalist outlook prevails, as on American plantations, this entire surplus-value is regarded as profit; where neither the capitalist mode of production itself exists, nor the corresponding outlook has been transferred from capitalist countries, it appears as rent. At any rate, this form presents no difficulties. The income of the landlord, whatever it may be called, the available surplus-product appropriated by him, is here the normal and prevailing form, whereby the entire unpaid surplus-labour is directly appropriated, and landed property forms the basis of such appropriation.
Further, proprietorship of land parcels. The peasant here is simultaneously the free owner of his land, which appears as his principal instrument of production, the indispensable field of employment for his labour and his capital. No lease money is paid under this form. Rent, therefore, does not appear as a separate form of surplus-value, although in countries in which otherwise the capitalist mode of production is developed, it appears as a surplus-profit compared with other lines of production; but as surplus-profit which, like all proceeds of his labour in general, accrues to the peasant.
This form of free self-managing peasant proprietorship of land parcels as the prevailing, normal form constitutes, on the one hand, the economic foundation of society during the best periods of classical antiquity, and on the other hand, it is found among modern nations as one of the forms arising from the dissolution of feudal land ownership. Thus, the yeomanry in England, the peasantry in Sweden, the French and West German peasants. We do not include colonies here, since the independent peasant there develops under different conditions.
The free ownership of the self-managing peasant is evidently the most normal form of landed property for small-scale operation, i.e., for a mode of production, in which possession of the land is a prerequisite for the labourer’s ownership of the product of his own labour, and in which the cultivator, be he free owner or vassal, always must produce his own means of subsistence independently, as an isolated labourer with his family. Ownership of the land is as necessary for full development of this mode of production as ownership of tools is for free development of handicraft production. Here is the basis for the development of personal independence. It is a necessary transitional stage for the development of agriculture itself. The causes which bring about its downfall show its limitations. These are: Destruction of rural domestic industry, which forms its normal supplement as a result of the development of large-scale industry; a gradual impoverishment and exhaustion of the soil subjected to this cultivation; usurpation by big landowners of the common lands, which constitute the second supplement of the management of land parcels everywhere and which alone enable it to raise cattle; competition, either of the plantation system or large-scale capitalist agriculture. Improvements in agriculture, which on the one hand cause a fall in agricultural prices and, on the other, require greater outlays and more extensive material conditions of production, also contribute towards this, as in England during the first half of the 18th century.
Proprietorship of land parcels by its very nature excludes the development of social productive forces of labour, social forms of labour, social concentration of capital, large-scale cattle-raising, and the progressive application of science.
Usury and a taxation system must impoverish it everywhere. The expenditure of capital in the price of the land withdraws this capital from cultivation. An infinite fragmentation of means of production, and isolation of the producers themselves. Monstrous waste of human energy. Progressive deterioration of conditions of production and increased prices of means of production — an inevitable law of proprietorship of parcels. Calamity of seasonal abundance for this mode of production.[45]
One of the specific evils of small-scale agriculture where it is combined with free land-ownership arises from the cultivator’s investing capital in the purchase of land. (The same applies also to the transitory form, in which the big landowner invests capital, first, to buy land, and second, to manage it as his own tenant farmer.) Owing to the changeable nature which the land here assumes as a mere commodity, the changes of ownership increase,[46] so that the land, from the peasant’s viewpoint, enters anew as an investment of capital with each successive generation and division of estates, i.e., it becomes land purchased by him. The price of land here forms a weighty element of the individual unproductive costs of production or cost-price of the product for the individual producer.
The price of land is nothing but capitalised and therefore anticipated rent. If capitalist methods are employed by agriculture, so that the landlord receives only rent, and the farmer pays nothing for land except this annual rent, then it is evident that the capital invested by the landowner himself in purchasing the land constitutes indeed an interest-bearing investment of capital for him, but has absolutely nothing to do with capital invested in agriculture itself. It forms neither a part of the fixed, nor of the circulating, capital employed here;[47] it merely secures for the buyer a claim to receive annual rent, but has absolutely nothing to do with the production of the rent itself. The buyer of land just pays his capital out to the one who sells the land, and the seller in return relinquishes his ownership of the land. Thus this capital no longer exists as the capital of the purchaser; he no longer has it; therefore it does not belong to the capital which he can invest in any way in the land itself. Whether he bought the land dear or cheap, or whether he received it for nothing, alters nothing in the capital invested by the farmer in his establishment, and changes nothing in the rent, but merely alters the question whether it appears to him as interest or not, or as higher or lower interest respectively.
Take, for instance, the slave economy. The price paid for a slave is nothing but the anticipated and capitalised surplus-value or profit to be wrung out of the slave. But the capital paid for the purchase of a slave does not belong to the capital by means of which profit, surplus-labour, is extracted from him. On the contrary. It is capital which the slave-holder has parted with, it is a deduction from the capital which be has available for actual production. It has ceased to exist for him, just as capital invested in purchasing land has ceased to exist for agriculture. The best proof of this is that it does not reappear for the slave-holder or the landowner except when he, in turn, sells his slaves or land. But then the same situation prevails for the buyer. The fact that he has bought the slave does not enable him to exploit the slave without further ado. He is only able to do so when he invests some additional capital in the slave economy itself.
The same capital does not exist twice, once in the hands of the seller, and a second time in the hands of the buyer of the land. It passes from the hands of the buyer to those of the seller, and there the matter ends. The buyer now no longer has capital, but in its stead a piece of land. The circumstance that the rent produced by a real investment of capital in this land is calculated by the new landowner as interest on capital which he has not invested in the land, but given away to acquire the land, does not in the least alter the economic nature of the land factor, any more than the circumstance that someone has paid £1,000 for 3% consols has anything to do with the capital out of whose revenue the interest on the national debt is paid.
In fact, the money expended in purchasing land, like that in purchasing government bonds, is merely capital in itself, just as any value sum is capital in itself, potential capital, on the basis of the capitalist mode of production. What is paid for land, like that for government bonds or any other purchased commodity, is a sum of money. This is capital in itself, because it can be converted into capital. It depends upon the use put to it by the seller whether the money obtained by him is really transformed into capital or not. For the buyer, it can never again function as such, no more than any other money which he has definitely paid out. It figures in his accounts as interest-bearing capital, because he considers the income, received as rent from the land or as interest on state indebtedness, as interest on the money which the purchase of the claim to this revenue has cost him. He can only realise it as capital through resale. But then another, the new buyer, enters the same relationship maintained by the former, and the money thus expended cannot be transformed into actual capital for the expender through any change of hands.
In the case of small landed property the illusion is fostered still more that land itself possesses value and thus enters as capital into the price of production of the product, much as machines or raw materials. But we have seen that rent, and therefore capitalised rent, the price of land, can enter as a determining factor into the price of agricultural products in only two cases. First, when as a consequence of the composition of agricultural capital — a capital which has nothing to do with the capital invested in purchasing land — the value of the products of the soil is higher than their price of production, and market conditions enable the landlord to realise this difference. Second, when there is a monopoly price. And both are least of all the case under the management of land parcels and small land-ownership because precisely here production to a large extent satisfies the producers’ own wants and is carried on independently of regulation by the average rate of profit. Even where cultivation of land parcels is conducted upon leased land, the lease money comprises, far more so than under any other conditions, a portion of the profit and even a deduction from wages; this money is then only a nominal rent, not rent as an independent category as opposed to wages and profit.
The expenditure of money-capital for the purchase of land, then, is not an investment of agricultural capital. It is a decrease pro tanto in the capital which small peasants can employ in their own sphere of production. It reduces pro tanto the size of their means of production and thereby narrows the economic basis of reproduction. It subjects the small peasant to the money-lender, since credit proper occurs but rarely in this sphere in general. It is a hindrance to agriculture, even where such purchase takes place in the case of large estates. It contradicts in fact the capitalist mode of production, which is on the whole indifferent to whether the landowner is in debt, no matter whether he has inherited or purchased his estate. The nature of management of the leased estate itself is not altered whether the landowner pockets the rent himself or whether he must pay it out to the holder of his mortgage.
The price of land, this element foreign to production in itself, may therefore rise here to such a point that it makes production impossible (Dombasle).
The fact that the price of land plays such a role, that purchase and sale, the circulation of land as a commodity, develops to this degree, is practically a result of the development of the capitalist mode of production in so far as a commodity is here the general form of all products and all instruments of production. On the other hand, this development takes place only where the capitalist mode of production has a limited development and does not unfold all of its peculiarities, because this rests precisely upon the fact that agriculture is no longer, or not yet, subject to the capitalist mode of production, but rather to one handed down from extinct forms of society. The disadvantages of the capitalist mode of production, with its dependence of the producer upon the money-price of his product, coincide here therefore with the disadvantages occasioned by the imperfect development of the capitalist mode of production. The peasant turns merchant and industrialist without the conditions enabling him to produce his products as commodities.
The conflict between the price of land as an element in the producers’ cost-price and no element in the price of production (even though the rent enters as a determining factor into the price of the agricultural product, the capitalised rent, which is advanced for 20 years or more, by no means enters as a determinant) is but one of the forms manifesting the general contradiction between private land-ownership and a rational agriculture, the normal social utilisation of the soil. But on the other hand, private land ownership, and thereby expropriation of the direct producers from the land — private land-ownership by the one, which implies lack of ownership by others — is the basis of the capitalist mode of production.
Here, in small-scale agriculture, the price of land, a form and result of private land-ownership, appears as a barrier to production itself. In large-scale agriculture, and large estates operating on a capitalist basis, ownership likewise acts as a barrier, because it limits the tenant farmer in his productive investment of capital, which in the final analysis benefits not him, but the landlord. In both forms, exploitation and squandering of the vitality of the soil (apart from making exploitation dependent upon the accidental and unequal circumstances of individual producers rather than the attained level of social development) takes the place of conscious rational cultivation of the soil as eternal communal property, an inalienable condition for the existence and reproduction of a chain of successive generations of the human race. In the case of small property, this results from the lack of means and knowledge of applying the social labour productivity. In the case of large property, it results from the exploitation of such means for the most rapid enrichment of farmer and proprietor. In the case of both through dependence on the market-price.
All critique of small landed property resolves itself in the final analysis into a criticism of private ownership as a barrier and hindrance to agriculture. And similarly all counter-criticism of large landed property. In either case, of course, we leave aside all secondary political considerations. This barrier and hindrance, which are erected by all private landed property vis-à-vis agricultural production and the rational cultivation, maintenance and improvement of the soil itself, develop on both sides merely in different forms, and in wrangling over the specific forms of this evil its ultimate cause is forgotten.
Small landed property presupposes that the overwhelming majority of the population is rural, and that not social, but isolated labour predominates; and that, therefore, under such conditions wealth and development of reproduction, both of its material and spiritual prerequisites, are out of the question, and thereby also the prerequisites for rational cultivation. On the other hand, large landed property reduces the agricultural population to a constantly falling minimum, and confronts it with a constantly growing industrial population crowded together in large cities. It thereby creates conditions which cause an irreparable break in the coherence of social interchange prescribed by the natural laws of life. As a result, the vitality of the soil is squandered, and this prodigality is carried by commerce far beyond the borders of a particular state (Liebig). [ Liebig, Die Chemie in ihrer Anwendung auf Agricultur und Physiologie, Braunschweig, 1862. — Ed.]
While small landed property creates a class of barbarians standing halfway outside of society, a class combining all the crudeness of primitive forms of society with the anguish and misery of civilised countries, large landed property undermines labour-power in the last region, where its prime energy seeks refuge and stores up its strength as a reserve fund for the regeneration of the vital force of nations — on the land itself. Large-scale industry and large-scale mechanised agriculture work together. If originally distinguished by the fact that the former lays waste and destroys principally labour-power, hence the natural force of human beings, whereas the latter more directly exhausts the natural vitality of the soil, they join hands in the further course of development in that the industrial system in the countryside also enervates the labourers, and industry and commerce on their part supply agriculture with the means for exhausting the soil.
Furthermore, since as previously [Present edition: Ch. XXIII. — Ed.] demonstrated interest appears as the specific characteristic product of capital and profit of enterprise on the contrary appears as wages independent of capital, the above trinity formula reduces itself more specifically to the following:
Capital — interest, land — ground-rent, labour — wages, where profit, the specific characteristic form of surplus-value belonging to the capitalist mode of production, is fortunately eliminated.
On closer examination of this economic trinity, we find the following:
First, the alleged sources of the annually available wealth belong to widely dissimilar spheres and are not at all analogous with one another. They have about the same relation to each other as lawyer’s fees, red beets and music.
Capital, land, labour! However, capital is not a thing, but rather a definite social production relation, belonging to a definite historical formation of society, which is manifested in a thing and lends this thing a specific social character. Capital is not the sum of the material and produced means of production. Capital is rather the means of production transformed into capital, which in themselves are no more capital than gold or silver in itself is money. It is the means of production monopolised by a certain section of society, confronting living labour-power as products and working conditions rendered independent of this very labour-power, which are personified through this antithesis in capital. It is not merely the products of labourers turned into independent powers, products as rulers and buyers of their producers, but rather also the social forces and the future [? illegible] [A later collation with the manuscript showed that the text reads as follows: "die Gesellschaftlichen Kräfte und Zusammenhängende Form dieser Arbeit" (the social forces of their labour and socialised form of this labour). — Ed.] form of this labour, which confront the labourers as properties of their products. Here, then, we have a definite and, at first glance, very mystical, social form, of one of the factors in a historically produced social production process.
And now alongside of this we have the land, inorganic nature as such, rudis indigestaque moles, ["A rude and undigested mass", Ovid, Metamorphoses, Book I, 7. — Ed] in all its primeval wildness. Value is labour. Therefore surplus-value cannot be earth. Absolute fertility of the soil effects nothing more than the following: a certain quantity of labour produces a certain product — in accordance with the natural fertility of the soil. The difference in soil fertility causes the same quantities of labour and capital, hence the same value, to be manifested in different quantities of agricultural products; that is, causes these products to have different individual values. The equalisation of these individual values into market-values is responsible for the fact that the
"advantages of fertile over inferior soil ... are transferred from the cultivator or consumer to the landlord". (Ricardo, Principles, London, 1821, p.62.)
And finally, as third party in this union, a mere ghost — "the" Labour, which is no more than an abstraction and taken by itself does not exist at all, or, if we take... [illegible] [As has been established by later reading of the manuscript, it reads here: "wenn wir das Gemeinte nehmen" (if we take that which is behind it). — Ed.], the productive activity of human beings in general, by which they promote the interchange with Nature, divested not only of every social form and well-defined character, but even in its bare natural existence, independent of society, removed from all societies, and as an expression and confirmation of life which the still non-social man in general has in common with the one who is in any way social.
The first striking thing about this formula is that side by side with capital, with this form of an element of production belonging to a definite mode of production, to a definite historical form of social process of production, side by side with an element of production amalgamated with and represented by a definite social form are indiscriminately placed: the land on the one hand and labour on the other, two elements of the real labour process, which in this material form are common to all modes of production, which are the material elements of every process of production and have nothing to do with its social form.
In a capitalist society, this surplus-value, or this surplus-product (leaving aside chance fluctuations in its distribution and considering only its regulating law, its standardising limits), is divided among capitalists as dividends proportionate to the share of the social capital each holds. In this form surplus-value appears as average profit which falls to the share of capital, an average profit which in turn divides into profit of enterprise and interest, and which under these two categories may fall into the laps of different kinds of capitalists. This appropriation and distribution of surplus-value, or surplus-product, on the part of capital, however, has its barrier in landed property. Just as the operating capitalist pumps surplus-labour, and thereby surplus value and surplus-product in the form of profit, out of the labourer, so the landlord in turn pumps a portion of this surplus-value, or surplus-product, out of the capitalist in the form of rent in accordance with the laws already elaborated.
Hence, when speaking here of profit as that portion of surplus-value falling to the share of capital, we mean average profit (equal to profit of enterprise plus interest) which is already limited by the deduction of rent from the aggregate profit (identical in mass with aggregate surplus-value); the deduction of rent is assumed. Profit of capital (profit of enterprise plus interest) and ground-rent are thus no more than particular components of surplus-value, categories by which surplus-value is differentiated depending on whether it falls to the share of capital or landed property, headings which in no whit however alter its nature. Added together, these form the sum of social surplus-value. Capital pumps the surplus-labour, which is represented by surplus-value and surplus-product, directly out of the labourers. Thus, in this sense, it may be regarded as the producer of surplus-value. Landed property has nothing to do with the actual process of production. Its role is confined to transferring a portion of the produced surplus-value from the pockets of capital to its own. However, the landlord plays a role in the capitalist process of production not merely through the pressure he exerts upon capital, nor merely because large landed property is a prerequisite and condition of capitalist production since it is a prerequisite and condition of the expropriation of the labourer from the means of production, but particularly because he appears as the personification of one of the most essential conditions of production.
Finally, the labourer in the capacity of owner and seller of his individual labour-power receives a portion of the product under the label of wages, in which that portion of his labour appears which we call necessary labour, i.e., that required for the maintenance and reproduction of this labour-power, be the conditions of this maintenance and reproduction scanty or bountiful, favourable or unfavourable.
[Here one folio sheet of the manuscript is missing.]
... Differential rent is bound up with the relative soil fertility, in other words, with properties arising from the soil as such. But, in the first place, in so far as it is based upon the different individual values of the products of different soil types, it is but the determination just mentioned; secondly, in so far as it is based upon the regulating general market-value, which differs from these individual values, it is a social law carried through by means of competition, which has to do neither with the soil nor the different degrees of its fertility.
It might seem as if a rational relation were expressed at least in "labour — wages." But this is no more the case than with "land — ground-rent." In so far as labour is value-creating, and is manifested in the value of commodities, it has nothing to do with the distribution of this value among various categories. In so far as it has the specifically social character of wage-labour, it is not value-creating. It has already been shown in general that wages of labour, or price of labour, is but an irrational expression for the value, or price of labour-power; and the specific social conditions, under which this labour-power is sold, have nothing to do with labour as a general agent in production. Labour is also materialised in that value component of a commodity which as wages forms the price of labour-power; it creates this portion just as much as the other portions of the product; but it is materialised in this portion no more and no differently than in the portions forming rent or profit. And, in general, when we establish labour as value-creating, we do not consider it in its concrete form as a condition of production, but in its social delimitation which differs from that of wage-labour.
Even the expression "capital — profit" is incorrect here. If capital is viewed in the only relation in which it produces surplus-value, namely, its relation to the labourer whereby it extorts surplus-labour by compulsion exerted upon labour-power, i.e., the wage-labourer, then this surplus-value comprises, outside of profit (profit of enterprise plus interest), also rent, in short the entire undivided surplus-value. Here, on the other hand, as a source of revenue, it is placed only in relation to that portion falling to the share of the capitalist. This is not the surplus-value which it extracts generally but only that portion which it extracts for the capitalist. Still more does all connection vanish no sooner the formula is transformed into "capital — interest."
If we at first considered the disparity of the above three sources, we now note that their products, their offshoots, or revenues, on the other band, all belong to the same sphere, that of value. However, this is compensated for (this relation not only between incommensurable magnitudes, but also between wholly unlike, mutually unrelated, and non-comparable things) in that capital, like land and labour, is simply considered as a material substance, that is, simply as a produced means of production, and thus is abstracted both as a relation to the labourer and as value.
Landed property, capital and wage-labour are thus transformed from sources of revenue — in the sense that capital attracts to the capitalist, in the form of profit, a portion of the surplus-value extracted by him from labour, that monopoly in land attracts for the landlord another portion in the form of rent; and that labour grants the labourer the remaining portion of value in the form of wages — from sources by means of which one portion of value is transformed into the form of profit, another into the form of rent, and a third into the form of wages — into actual sources from which these value portions and respective portions of the product in which they exist, or for which they are exchangeable, arise themselves, and from which, therefore, in the final analysis, the value of the product itself arises.[50]
Finally, capital as an independent source of surplus-value is joined by landed property, which acts as a barrier to average profit and transfers a portion of surplus-value to a class that neither works itself, nor directly exploits labour, nor can find morally edifying rationalisations, as in the case of interest-bearing capital, e.g., risk and sacrifice of lending capital to others. Since here a part of the surplus-value seems to be bound up directly with a natural element, the land, rather than with social relations, the form of mutual estrangement and ossification of the various parts of surplus-value is completed, the inner connection completely disrupted, and its source entirely buried, precisely because the relations of production, which are bound to the various material elements of the production process, have been rendered mutually independent.
In our description of how production relations are converted into entities and rendered independent in relation to the agents of production, we leave aside the manner in which the interrelations, due to the world-market, its conjunctures, movements of market-prices, periods of credit, industrial and commercial cycles, alternations of prosperity and crisis, appear to them as overwhelming natural laws that irresistibly enforce their will over them, and confront them as blind necessity. We leave this aside because the actual movement of competition belongs beyond our scope, and we need present only the inner organisation of the capitalist mode of production, in its ideal average, as it were.
In preceding forms of society this economic mystification arose principally with respect to money and interest-bearing capital. In the nature of things it is excluded, in the first place, where production for the use-value, for immediate personal requirements, predominates; and, secondly, where slavery or serfdom form the broad foundation of social production, as in antiquity and during the Middle Ages. Here, the domination of the producers by the conditions of production is concealed by the relations of dominion and servitude, which appear and are evident as the direct motive power of the process of production. In early communal societies in which primitive communism prevailed, and even in the ancient communal towns, it was this communal society itself with its conditions which appeared as the basis of production, and its reproduction appeared as its ultimate purpose. Even in the medieval guild system neither capital nor labour appear untrammelled, but their relations are rather defined by the corporate rules, and by the same associated relations, and corresponding conceptions of professional duty, craftsmanship, etc. Only when the capitalist mode of production — [The manuscript breaks off here — Ed.]
For the purposes of the following analysis we may leave out of consideration the distinction between price of production and value, since this distinction disappears altogether when, as here, the value of the total annual product of labour is considered, i.e., the product of the total social capital.
On the other hand, wages, which form the third specific form of revenue, are always equal to the variable component part of capital, i.e., the component part which is laid out in purchasing living labour-power, paying labourers rather than in means of labour. (The labour which is paid in the expenditure of revenue is itself paid in wages, profit, or rent, and therefore does not form any value portion of commodities by which it is paid. Hence it is not considered in the analysis of commodity-value and of the component parts into which it is divided.) It is the materialisation of that portion of the total working-day of the labourer in which the value of variable capital and thus the price of labour is reproduced; that portion of commodity-value in which the labourer reproduces the value of his own labour-power, or the price of his labour. The total working-day of the labourer is divided into two parts. One portion in which he performs the amount of labour necessary to reproduce the value of his own means of subsistence; the paid portion of his total labour, the portion necessary for his own maintenance and reproduction. The entire remaining portion of the working-day, the entire excess quantity of labour performed above the value of the labour realised in his wages, is surplus-labour, unpaid labour, represented in the surplus-value of his total commodity-production (and thus in an excess quantity of commodities), surplus-value which in turn is divided into differently named parts, into profit (profit of enterprise plus interest) and rent.
The entire value portion of commodities, then, in which the total labour of the labourers added during one day, or one year, is realised, the total value of the annual product, created by this labour, is divided into the value of wages, into profit and into rent. For this total labour is divided into necessary labour, by which the labourer creates that value portion of the product with which he is himself paid, that is, his wages, and into unpaid surplus-labour, by which he creates that value portion of the product which represents surplus-value and which is later divided into profit and rent. Aside from this labour, the labourer performs no labour, and aside from the total value of the product, which assumes the forms of wages, profit and rent, he creates no value. The value of the annual product, in which the new labour added by the labourer during the year is incorporated, is equal to the wage, or the value of the variable capital plus the surplus-value, which in turn is divided into profit and rent.
The entire value portion of the annual product, then, which the labourer creates in the course of the year, is expressed in the annual value sum of the three revenues, the value of wages, profit, and rent. Evidently, therefore, the value of the constant portion of capital is not reproduced in the annually created value of product, for the wages are only equal to the value of the variable portion of capital advanced in production, and rent and profit are only equal to the surplus-value, the excess of value produced above the total value of advanced capital, which equals the value of the constant capital plus the value of the variable capital.
It is completely irrelevant to the problem to be solved here that a portion of the surplus-value converted into the form of profit and rent is not consumed as revenue, but is accumulated. That portion which is saved up as an accumulation fund serves to create new, additional capital, but not to replace the old capital, be it the component part of old capital laid out for labour-power or for means of labour. We may therefore assume here, for the sake of simplicity, that the revenue passes wholly into individual consumption. The difficulty is two-fold. On the one hand the value of the annual product, in which the revenues, wages, profit and rent, are consumed, contains a portion of value equal to the portion of value of constant capital used up in it. It contains this portion of value in addition to that portion which resolves itself into wages and that which resolves itself into profit and rent. Its value is therefore = wages + profit + rent + C (its constant portion of value). How can an annually produced value, which only = wages + profit + rent, buy a product the value of which = (wages + profit + rent) + C? How can the annually produced value buy a product which has a higher value than its own?
On the other hand, if we leave aside that portion of constant capital which did not pass over into the product, and which therefore continues to exist, although with reduced value, as before the annual production of commodities; in other words, temporarily leaving out of consideration the employed, but not consumed, fixed capital, then the constant portion of advanced capital is seen to have been wholly transferred to the new product in the form of raw and auxiliary materials, whereas a part of the means of labour has been wholly consumed and another part only partially, and thus only a part of its value has been consumed in production. This entire portion of constant capital consumed in production must be replaced in kind. Assuming all other circumstances, particularly the productive power of labour, to remain unchanged, this portion requires the same amount of labour for its replacement as before, i.e., it must be replaced by an equivalent value. If not, then reproduction itself cannot take place on the former scale. But who is obliged to perform this labour, and who does perform it?
As to the first difficulty: Who is obliged to pay for the constant portion of value contained in the product, and with what? — It is assumed that the value of constant capital consumed in production reappears as a part of the value of the product. This does not contradict the assumptions of the second difficulty. For it has already been demonstrated in Book I (Kap. V) [English edition: Ch. VII.—Ed.] ("The Labour Process and the Process of Producing Surplus-Value") how the old value remains simultaneously preserved in the product through the mere addition of new labour, although this does not reproduce the old value and does no more than add to it, creates merely additional value; but that this results from labour, not in so far as it is value-creating, i.e., labour in general, but in its function as definite productive labour. Therefore, no additional labour was necessary to preserve the value of the constant portion in the product in which the revenue, i.e., the entire value created during the year, is expended. But to be sure, new additional labour is required to replace the value and use-value of constant capital consumed during the preceding year, without the replacement of which no reproduction at all is possible.
All newly added labour is represented in the value newly created during the year, and this in turn is divided into the three revenues: wages, profit and rent. — Thus, on the one hand, no excess social labour remains for the replacement of the consumed constant capital, which must be replaced partially in kind and according to its value, and partially merely according to its value (for pure wear and tear on fixed capital). On the other hand, the value annually created by labour, divided into wages, profit and rent, and to be expended in this form, appears not to suffice to pay for, or buy, the constant portion of capital, which must be contained, outside their own value, in the annual product.
It is seen that the problem presented here has already been solved in the consideration of reproduction of the total social capital — Book II, Part III. We return to it here, in the first place, because surplus-value had not been developed there in its revenue forms: profit (profit of enterprise plus interest) and rent, and could not, therefore, be treated in these forms; and then, also because precisely in the form of wages, profit and rent there is contained an incredible blunder in analysis, which pervades all political economy since Adam Smith.
As already indicated, we leave out of consideration in both classes the fixed portion of constant capital, which continues to exist in kind and, so far as its value is concerned, independently of the annual product of both classes.
Let us take the previous scheme (Book II, Chapter XX, II) for simple reproduction:
According to this, the producers and landlords of II consume 500v + 500s = 1,000 as revenue; 2,000c remains to be replaced. This is consumed by the labourers, capitalists and those who draw rent from I, whose income = 1,000v + 1,000s = 2,000. The consumed product of II is consumed as revenue by I, and the portion of the revenue of I representing an unconsumable product is consumed as constant capital by II. It remains then to account for the 4,000c of I. This is replaced out of the product of I itself, which = 6,000, or rather = 6,000 - 2,000; for these 2,000 have already been converted into constant capital for II. It should be noted, of course, that these numbers have been chosen arbitrarily, and so the relation between the value of the revenues of I and the value of the constant capital of II appears arbitrary. It is evident, however, that so far as the process of reproduction is normal and takes place under otherwise equal circumstances, i.e., leaving aside the accumulation, the sum of the values of wages, profit and rent in Class I must equal the value of the constant portion of capital of Class II. Otherwise either Class II will not be able to replace its constant capital, or Class I will not be able to convert its revenue from unconsumable into consumable form.
In order to avoid unnecessary difficulty, one should distinguish gross output and net output from gross income and net income.
The gross output, or gross product, is the total reproduced product. With the exception of the employed but not consumed portion of fixed capital, the value of the gross output, or gross product, equals the value of capital advanced and consumed in production, that is, constant and variable capital plus surplus-value, which resolves itself into profit and rent. Or, if we consider the product of the total social capital instead of that of an individual capital, the gross output equals the material elements forming the constant and variable capital, plus the material elements of the surplus-product in which profit and rent are represented.
The gross income is that portion of value and that portion of the gross product measured by it which remains after deducting that portion of value and that portion of the product of total production measured by it which replaces the constant capital advanced and consumed in production. The gross income, then, is equal to wages (or the portion of the product destined to again become the income of the labourer) + profit + rent. The net income, on the other hand, is the surplus-value, and thus the surplus-product, which remains after deducting wages, and which, in fact, thus represents the surplus-value realised by capital and to be divided with the landlord, and the surplus-product measured by it.
Thus, we saw that the value of each individual commodity and the value of the total commodity-product of each individual capital is divided into two parts: one replaces only constant capital, and the other, although a fraction of it flows back as variable capital — thus also flows back in the form of capital — nevertheless is destined to be wholly transformed into gross income, and to assume the form of wages, profit and rent, the sum of which makes up the gross income. Furthermore, we saw that the same is true of the value of the annual total product of a society. A difference between the product of the individual capitalist and that of society exists only in so far as: from the standpoint of the individual capitalist the net income differs from the gross income, for the latter includes the wages, whereas the former excludes them. Viewing the income of the whole society, national income consists of wages plus profit plus rent, thus, of the gross income. But even this is an abstraction to the extent that the entire society, on the basis of capitalist production, bases itself on the capitalist standpoint and thereby considers only the income resolved into profit and rent as net income.
On the other hand, the fantasy of men like Say, to the effect that the entire yield, the entire gross output, resolves itself into the net income of the nation or cannot be distinguished from it, that this distinction therefore disappears from the national viewpoint, is but the inevitable and ultimate expression of the absurd dogma pervading political economy since Adam Smith, that in the final analysis the value of commodities resolves itself completely into income, into wages, profit and rent.[51]
The fundamentally erroneous dogma to the effect that the value of commodities in the last analysis may be resolved into wages + profit + rent also expresses itself in the proposition that the consumer must ultimately pay for the total value of the total product; or also that the money circulation between producers and consumers must ultimately be equal to the money circulation between the producers themselves (Tooke); all these propositions are as false as the axiom upon which they are based.
The difficulties, which lead to this erroneous and prima facie absurd analysis, are briefly these:
1) The fundamental relationship of constant and variable capital, hence also the nature of surplus-value, and thereby the entire basis of the capitalist mode of production, are not understood. The value of each partial product of capital, each individual commodity, contains a portion of value = constant capital, a portion of value = variable capital (transformed into wages for labourers), and a portion of value = surplus-value (later split into profit and rent). Thus, how is it possible for the labourer with his wages, the capitalist with his profit, the landlord with his rent, to be able to buy commodities, each of which contains not only one of these constituent elements, but all three of them; and how is it possible for the sum of the values of wages, profit and rent, that is, the three sources of revenue together, to be able to buy the commodities which go to make up the total consumption of the recipients of these incomes — commodities containing an additional component of value, namely constant capital, outside these three components of value? How should they buy a value of four with a value of three? [53]
We presented our analysis in Book II, Part III.
2) The method is not grasped whereby labour, in adding a new value, preserves the old value in a new form without producing this old value anew.
3) The pattern of the process of reproduction is not understood — how it appears not from the standpoint of individual capital, but rather from that of the total capital; the difficulty is not understood how it is that the product in which wages and surplus-value, in short, the entire value produced by all the labour newly added during the year, is realised, replaces the constant part of its value and yet at the same time resolves itself into value limited solely by the revenues; and furthermore how it is that the constant capital consumed in production can be replaced in substance and value by new capital, although the total sum of newly added labour is realised only in wages and surplus-value, and is fully represented in the sum of the values of both. It is precisely here that the main difficulty lies, in the analysis of reproduction and the relations of its various component parts, both as concerns their material character and their value relationships.
5) Aside from the confusion which the transformation of values into prices of production brings about, another arises due to the transformation of surplus-value into different, special, mutually independent forms of revenue applying to the various elements of production, i.e., into profit and rent. It is forgotten that the fact that the values of commodities are the basis, and that the division of these commodity-values into distinct constituent parts, and the further development of these constituents of value into forms of revenue, their transmutation into relations of various owners of different factors of production to these individual components of value, their distribution among these owners according to definite categories and titles, itself alters nothing in value determination and its law. Just as little is the law of value changed by the circumstance that the equalisation of profit, i.e., the distribution of the total surplus-value among the various capitals, and the obstacles which landed property partially (in absolute rent) puts in the way of this equalisation, bring about a divergence between the regulating average prices and the individual values of commodities. This again affects merely the addition of surplus-value to the various commodity-prices, but does not abolish surplus-value itself, nor the total value of commodities as the source of these various component parts of price.
This is the quid pro quo which we shall consider in the next chapter, and which is inevitably linked with the illusion that value arises out of its own component parts. And namely, the various component values of the commodity acquire independent forms as revenues, and as such revenues they are related back to the particular material elements of production as their sources of origin instead of to the value of the commodity as their source. They are actually related back to those sources — however, not as components of value, but rather as revenues, as components of value falling to the share of these particular categories of agents in production: the labourer, the capitalist and the landlord. But then one might fancy that these constituents of value, rather than arising out of the division of commodity-value, conversely form it instead only through their combination, which leads to the pretty and vicious circle, whereby the value of commodities arises out of the sum of the values of wages, profit and rent, and the value of wages, profit and rent, in its turn, is determined by the value of commodities, etc. [54]
The whole difficulty arises from the fact that all newly added labour, in so far as the value created by it is not resolved into wages, appears as profit — interpreted here as a form of surplus-value in general — i.e., as a value which costs the capitalist nothing and which, of course, therefore does not have to replace for him anything advanced, any capital whatever. This value thus exists in the form of available additional wealth, in short, from the viewpoint of the individual capitalist, in the form of his revenue. But this newly created value can just as well be consumed productively as individually, equally well as capital or revenue. As a consequence of its natural form, some of it must be productively consumed. It is, therefore, evident that the annually added labour creates capital as well as revenue; as becomes evident in the process of accumulation. However, the portion of labour-power employed in the creation of new capital (thus analogous to that portion of the working-day employed by a savage, not for acquiring subsistence, but to fashion tools with which to acquire his subsistence) becomes invisible in that the entire product of surplus-labour first appears in the form of profit; a designation which indeed has nothing to do with this surplus-product itself, but refers merely to the individual relation of the capitalist to the surplus-value pocketed by him. In fact, the surplus-value created by the labourer is divided into revenue and capital; i.e., into articles of consumption and additional means of production. But former constant capital taken over from the previous year (leaving aside the portion impaired and thus pro tanto destroyed, thus so far as it does not have to be reproduced — and such disturbances in the process of reproduction fall under insurance) is not reproduced as concerns value by the newly added labour.
We see, furthermore, that a portion of the newly added labour is continually absorbed in the reproduction and replacement of consumed constant capital, although this newly added labour resolves itself solely into revenue, into wages, profit and rent. But it is thereby overlooked 1) that one value portion of the product of this labour is no product of this new additional labour, but rather pre-existing and consumed constant capital; that the portion of the product in which this part of value appears is thus also not transformed into revenue, but replaces the means of production of this constant capital in kind; 2) that the portion of value in which this newly added labour actually appears is not consumed as revenue in kind, but replaces the constant capital in another sphere, where it is transformed into a natural form, in which it may be consumed as revenue, but which in its turn is again not entirely a product of newly added labour.
In so far as reproduction obtains on the same scale, every consumed element of constant capital must be replaced in kind by a new specimen of the same kind, if not in quantity and form, then at least in effectiveness. If the productiveness of labour remains the same, then this replacement in kind implies replacing the same value which the constant capital had in its old form. But should the productiveness of labour increase, so that the same material elements may be reproduced with less labour, then a smaller portion of the value of the product can completely replace the constant part in kind. The excess may then be employed to form new additional capital or a larger portion of the product may be given the form of articles of consumption, or the surplus-labour may be reduced. On the other hand, should the productiveness of labour decrease, then a larger portion of the product must be used for the replacement of the former capital, and the surplus-product decreases.
The reconversion of profit, or generally of any form of surplus-value, into capital shows — leaving aside the historically defined economic form and considering it merely as the simple formation of new means of production — that the situation still prevails whereby the labourer performs labour to produce means of production beyond the labour for acquiring his immediate means of subsistence. Transformation of profit into capital is no more than employing a portion of excess labour to form new, additional means of production. That this takes place in the shape of a transformation of profit into capital signifies merely that it is the capitalist rather than the labourer who disposes of excess labour. That this excess labour must first pass through a stage in which it appears as revenue (whereas, e.g., in the case of a savage it appears as excess labour directly destined for the production of means of production) means simply that this labour, or its product, is appropriated by the non-worker. However, what is actually transformed into capital is not profit as such. Transformation of surplus-value into capital signifies merely that the surplus-value and surplus-product are not consumed individually as revenue by the capitalist. But, what is actually so transformed is value, materialised labour, or the product in which this value is directly manifested, or for which it is exchanged after having been previously transformed into money. And when the profit is transformed back into capital, this definite form of surplus-value, or profit, does not form the source of the new capital. The surplus-value is thereby merely changed from one form into another. But it is not this change of form which turns it into capital. It is the commodity and its value which now function as capital. However, that the value of the commodity is not paid for — and only by this means does it become surplus-value — is quite irrelevant for the materialisation of labour, the value itself.
The misunderstanding is expressed in various forms. For instance, that the commodities which compose the constant capital also contain elements of wages, profit and rent. Or, on the other hand, that what is revenue for the one is capital for another, and that therefore these are but subjective relations. Thus the yarn of the spinner contains a portion of value representing profit for him, Should the weaver buy the yarn, he realises the profit of the spinner, but for himself this yarn is merely a part of his constant capital.
Aside from the previous remarks made concerning the relations between revenue and capital, the following is to be noted: That which, as regards value, passes along with the yarn as a constituent element into the capital of the weaver, is the value of the yarn. In what manner the parts of this value have been resolved for the spinner himself into capital and revenue, or, in other words, into paid and unpaid labour, is completely irrelevant for the value determination of the commodity itself (aside from modifications through the average profit). Back of this still lurks the idea that the profit, or surplus-value in general, is an excess above the value of the commodity, which can only be made by an extra charge, mutual cheating, or gain through selling. When the price of production is paid, or even the value of the commodity, the component values of the commodity which appear to the seller in the form of revenue are naturally also paid. Monopoly prices, of course, are not referred to here.
Secondly, it is quite correct to say that the component parts of commodities which make up the constant capital, like any other commodity-value, may be reduced to portions of value which resolve themselves for the producers and the owners of the means of production into wages, profit and rent. This is merely a capitalist form of expression for the fact that all commodity-value is but the measure of the socially necessary labour contained in a commodity. But it has already been shown in Book I that this nowise prevents the commodity-product of any capital from being split into separate parts, of which one represents exclusively the constant portion of capital, another the variable portion of capital, and a third solely surplus-value.
Storch expresses the opinion of many others when he says:
In the first place, it is a false abstraction to regard a nation whose mode of production is based upon value, and furthermore is capitalistically organised, as an aggregate body working merely for the satisfaction of the national wants.
Secondly, after the abolition of the capitalist mode of production, but still retaining social production, the determination of value continues to prevail in the sense that the regulation of labour-time and the distribution of social labour among the various production groups, ultimately the book-keeping encompassing all this, become more essential than ever.
It has been shown that the value of commodities, or the price of production regulated by their total value, resolves itself into:
1) A portion of value replacing constant capital, or representing past labour, which was used up in the form of means of production in making the commodity; in a word, the value, or price, which these means of production carried into the production process of the commodities. We are not referring at all here to individual commodities, but to commodity-capital, that is, the form in which the product of the capital during a definite period of time, say a year, manifests itself; the individual commodity forms one element of commodity-capital, which, moreover, so far as its value is concerned, resolves itself into the same analogous constituents.
2) The portion of value representing variable capital, which measures the income of the labourer and is transformed into wages for him; i.e., the labourer has reproduced these wages in this variable portion of value; in short, the portion of value which represents the paid portion of new labour added to the above constant portion in the production of the commodities.
3) Surplus-value, i.e., the portion of value of the produced commodities in which the unpaid labour, or surplus-labour, is incorporated. This last portion of value, in its turn, assumes the independent forms which are at the same time forms of revenue: the forms of profit on capital (interest on capital as such and profit of enterprise on capital as functioning capital) and ground-rent, which is claimed by the owner of the land participating in the production process. The components 2) and 3), that is, the portion of value which always assumes the revenue forms of wages (of course only after the latter have first gone through the form of variable capital), profit and rent, is distinguished from the constant component 1) by the fact that in it is embodied that entire value in which the new additional labour added to the constant part, to the means of production of the commodities, is materialised. Now, apart from the constant portion, it is correct to say that the value of a commodity, i.e., to the extent that it represents newly added labour, continually resolves itself into three parts, which constitute three forms of revenue, namely, wages, profit and rent, [55] the respective magnitudes of whose value, that is, the aliquot portions which they constitute in the total value, are determined by various specific laws developed above. But, it would be a mistake to state the converse, namely, that the value of wages, rate of profit and rate of rent form independent constituent elements of value, whose synthesis gives rise to the value of commodities, apart from the constant component; in other words, it would be a mistake to say that they are constituent elements of the value of commodities, or of the price of production.[56]
The difference is easily seen.
Let us assume that the value of the product of a capital of 500 is equal to 400c + 100v + 150s = 650; let the 150s in turn, be divided into 75 profit + 75 rent. We will also assume, in order to forestall useless difficulties, that this is a capital of average composition, so that its price of production and its value coincide; this coincidence always takes place whenever the product of such an individual capital may be considered as the product of some portion — corresponding to its magnitude — of the total capital.
Here wages, measured by variable capital, form 20% of the advanced capital; surplus-value, calculated on the total capital, forms 30%, namely 15% profit and 15% rent. The entire value component of the commodity representing the newly added labour is equal to 100v + 150s = 250. Its magnitude does not depend upon its division into wages, profit and rent. We see from the relation of these parts to each other that labour-power, which is paid with 100 in money, say £100, has supplied a quantity of labour represented by money to the amount of £250. We see from this that the labourer performed 1½ times as much surplus-labour as he did labour for himself. If the working-day = 10 hours, then he worked 4 hours for himself and 6 hours for the capitalist. Therefore, the labour of the labourers paid with £100 is expressed in a money-value of £250. Apart from this value of £250, there is nothing to divide between labourer and capitalist, between capitalist and landlord. It is the total value newly added to the value of the means of production, i.e., 400. The specific commodity-value of 250 thus produced and determined by the quantity of labour materialised in it constitutes the limit, therefore, for the dividends which the labourer, capitalist and landlord will be able to draw from this value in the form of revenue — wages, profit and rent.
Let us assume that a capital of the same organic composition, that is, the same proportion between employed living labour-power and constant capital set in motion, is compelled to pay £150 instead of £100 for the same labour-power which sets in motion the constant capital of 400. And let us further assume that profit and rent share in the surplus-value in different proportions. Since we have assumed that the variable capital of £150 sets the same quantity of labour in motion as did the variable capital of £100, the newly produced value would = 250, as before, and the value of the total product would be 650, also as before, but we would then have 400c + 150v + 100s and these 100s would divide, say, into 45 profit and 55 rent. The proportion in which the newly produced total value would be distributed as wages, profit and rent would now be very different; similarly, the magnitude of the advanced total capital would be different, although it only sets the same total quantity of labour in motion. Wages would amount to 27 3/11%, profit — 8 2/11%, and rent — 10% of the advanced capital; thus, the total surplus-value would be somewhat over 18%.
As a result of the increase in wages, the unpaid portion of total labour would be different and thereby the surplus-value too. If the working-day contained 10 hours, the labourer would have worked 6 hours for himself and only 4 hours for the capitalist. The proportions of profit and rent would also be different; the reduced surplus-value would be divided in a different proportion between the capitalist and the landlord. Finally, since the value of the constant capital would have remained the same and the value of the advanced variable capital would have risen, the reduced surplus-value would express itself in a still more reduced rate of gross profit, by which we mean in this case the ratio of the total surplus-value to the total advanced capital.
The change in the value of wages, in the rate of profit, and in the rate of rent, whatever the effect of the laws regulating the proportions of these parts to each other, could only move within the limits set by the newly produced commodity-value of 250. An exception could only take place if rent should be based on a monopoly price. This would nowise alter the law, but merely complicate the analysis. For if we consider only the product itself in this case, then only the division of surplus-value would be different. But if we consider its relative value as compared with other commodities, then we should find solely this difference — that a portion of the surplus-value had been transferred from them to this particular commodity.
To recapitulate:
On the other hand, all other circumstances remaining the same, i.e., if the same quantity of employed labour is still represented by 250, then, if the value of the means of production employed should rise or fall, the value of the same quantity of products would rise or fall by the same magnitude. 450c + 100v + 150s gives a product-value = 700; but 350c + 100v + 150s gives a value for the same quantity of products of only 600, as against a former 650. Hence, if the advanced capital, set in motion by the same quantity of labour, increases or decreases, then the value of the product rises or falls, other circumstances remaining the same, if the increase or decrease in advanced capital is due to a change in the magnitude of the value of the constant portion of capital. On the other hand, the value of the product remains unchanged if the increase or decrease in advanced capital is caused by a change in the magnitude of the value of the variable portion of capital, assuming the labour productivity remains the same. In the case of the constant capital, the increase or decrease in its value is not compensated for by any opposite movement. But in the case of the variable capital, assuming the labour productivity remains the same, an increase or decrease in its value is compensated for by the opposite movement on the part of the surplus-value, so that the value of the variable capital plus the surplus-value, i.e., the value newly added by labour to the means of production and newly incorporated in the product, remains the same.
But if the increase or decrease in the value of the variable capital or wages is due to a rise or fall in the price of commodities, i.e., a decrease or increase in the productiveness of the labour employed by this investment of capital then the value of the product is affected. But the rise or fall in wages in this case is not a cause, but merely an effect.
On the other hand, assuming the constant capital in the above illustration to remain = 400c, if the change from 100v + 150s to 150v + 100s, i.e., the increase in variable capital, should be due to a decrease in the productiveness of labour, not in this particular branch of industry, say, cotton spinning, but perhaps in agriculture which provides the labourer’s foodstuffs, i.e., due to a rise in the price of these foodstuffs, then the value of the product would remain unchanged. The value of 650 would still be represented by the same quantity of cotton yarn.
It follows, furthermore, from the above: If the decrease in the expenditure of constant capital is due to economies, etc., in lines of production whose products enter into the labourer’s consumption, then this, just like the direct increase in the productivity of the employed labour itself, may lead to a decrease in wages due to a cheapening of the means of subsistence of the labourer, and may lead, therefore, to an increase in the surplus-value; so that the rate of profit in this case would grow for two reasons, namely, on the one hand, because the value of the constant capital decreases, and on the other hand, because the surplus-value increases. In our consideration of the transformation of surplus-value into profit, we assumed that wages do not fall, but remain constant, because there we had to investigate the fluctuations in the rate of profit, independent of the changes in the rate of surplus-value. Moreover, the laws developed there are general ones, and also apply to investments of capital whose products do not enter into the labourer’s consumption, whereby changes in the value of the product, therefore, are without influence upon the wages.
Finally, if equalisation of surplus-value into average profit meets with obstacles in the various spheres of production in the form of artificial or natural monopolies, and particularly monopoly in landed property, so that a monopoly price becomes possible, which rises above the price of production and above the value of the commodities affected by such a monopoly, then the limits imposed by the value of the commodities would not thereby be removed. The monopoly price of certain commodities would merely transfer a portion of the profit of the other commodity-producers to the commodities having the monopoly price. A local disturbance in the distribution of the surplus-value among the various spheres of production would indirectly take place, but it would leave the limit of this surplus-value itself unaltered. Should the commodity having the monopoly price enter into the necessary consumption of the labourer, it would increase the wage and thereby reduce the surplus-value, assuming the labourer receives the value of his labour-power as before. It could depress wages below the value of labour-power, but only to the extent that the former exceed the limit of their physical minimum. In this case the monopoly price would be paid by a deduction from real wages (i.e.. the quantity of use-values received by the labourer for the same quantity of labour) and from the profit of the other capitalists. The limits within which the monopoly price would affect the normal regulation of the prices of commodities would be firmly fixed and accurately calculable.
Thus just as the division of the newly added value of commodities, and, in general, value resolvable into revenue, finds its given and regulating limits in the relation between necessary and surplus labour, wages and surplus-value, so does the division of surplus-value itself into profit and ground-rent find its limits in the laws regulating the equalisation of the rate of profit. As regards the division into interest and profit of enterprise, the average profit itself forms the limit for both taken together. It furnishes the given magnitude of value which they may split among themselves and which alone can be so divided. The specific ratio of this division is here fortuitous, i.e., it is determined exclusively by conditions of competition. whereas in other cases the balancing of supply and demand is equivalent to elimination of the deviations in market-prices from their regulating average prices, i.e., elimination of the influence of competition, it is here the only determinant. But why? Because the same production factor, capital, has to divide its share of the surplus-value between two owners of the same production factor. But the fact that there is no definite, regular limit here for the division of the average profit does not remove its limit as part of the commodity-value; just as the fact that two partners in a certain business divide their profit unequally due to different external circumstances does not affect the limits of this profit in any way.
Hence, although the portion of the commodity-value in which the new labour added to the value of the means of production is incorporated is divided into various parts, which in the form of revenue assume mutually independent forms, this is no reason for now considering wages, profit and ground-rent as the constituent elements which, in combination or taken all together, are the source of the regulating price (natural price, prix necessaire) of the commodities themselves; so that it is not the commodity-value, after deducting the constant portion of value, which would be the original unit that divides into these three parts, but rather, conversely, the price of each of these three parts would be independently determined, and the price of the commodities would then be formed by adding these three independent magnitudes together. In reality, the commodity-value is the magnitude which precedes the sum of the total values of wages, profit and rent, regardless of the relative magnitudes of the latter. In the above erroneous conception, wages, profit and rent are three independent magnitudes of value, whose total magnitude produces, limits and determines the magnitude of the commodity-value.
In the first place it is evident that if wages, profit and rent were to form the price of commodities, this would apply as much to the constant portion of the commodity-value as to the other portion, in which variable capital and surplus-value are incorporated. Thus, this constant portion may here be left entirely out of consideration, since the value of the commodities of which it is composed would likewise resolve itself into the sum of the values of wages, profit and rent. As already noted, this conception, then, denies the very existence of such a constant portion of value.
It is furthermore evident that value loses all meaning here. Only the conception of price still remains, in the sense that a certain amount of money is paid to the owner of labour-power, capital and land. But what is money? Money is not a thing, but a definite form of value, hence, value is again presupposed. Let us say, then, that a definite amount of gold or silver is paid for these elements of production, or that it is mentally equated to them. But gold and silver (and the enlightened economist is proud of this discovery) are themselves commodities like all other commodities. The price of gold and silver is therefore likewise determined by wages, profit and rent. Hence we cannot determine wages, profit and rent by equating them to a certain amount of gold and silver, for the value of this gold and silver, by means of which they should be evaluated as in their equivalent, should be first determined precisely by them, independently of gold and silver, i.e., independently of the value of any commodity, which value is precisely the product of the above three factors. Thus, to say that the value of wages, profit and rent consists in their being equivalent to a certain quantity of gold and silver, would merely be saying that they are equal to a certain quantity of wages, profit and rent.
Take wages first. For it is necessary to make labour the point of departure, even in this view of the matter. How, then, is the regulating price of wages determined, the price about which its market-prices oscillate?
Let us say that it is determined by the supply and demand of labour-power. But what sort of labour-power demand is this? It is a demand made by capital. The demand for labour is therefore tantamount to the supply of capital. In order to speak of a supply of capital, we should know above all what capital is. Of what does capital consist? If we take its simplest aspect, it consists of money and commodities. But money is merely a commodity-form. Capital, then, consists of commodities. But the value of commodities, according to our assumption, is determined, in the first instance, by the price of the labour producing the commodities, by wages. Wages are here presupposed and are treated as a constituent element of the price of commodities. This price then should be determined by the ratio of available labour to capital. The price of the capital itself is equal to the price of the commodities of which it is composed. The demand by capital for labour is equal to the supply of capital. And the supply of capital is equal to the supply of a quantity of commodities of given price, and this price is regulated in the first place by the price of labour, and the price of labour in turn is equal to that portion of the commodity-price constituting the variable capital, which is granted to the labourer in exchange for his labour; and the price of the commodities constituting this variable capital is again determined, in turn, primarily by the price of labour; for it is determined by the prices of wages, profit and rent. In order to determine wages, we cannot, therefore, presuppose capital, for the value of the capital is itself determined in part by wages.
Moreover, dragging competition into this problem does not help at all. Competition makes the market-prices of labour rise or fall. But suppose supply and demand of labour are balanced. How are wages then determined? By competition. But we have just assumed that competition ceases to act as a determinant, that its influence is cancelled due to equilibrium between its two mutually opposing forces. Indeed, it is precisely the natural price of wages that we wish to find, i.e., the price of labour that is not regulated by competition, but which, on the contrary, regulates the latter.
Nothing remains but to determine the necessary price of labour by the necessary means of subsistence of the labourer. But these means of subsistence are commodities, which have a price. The price of labour is therefore determined by the price of the necessary means of subsistence and the price of the means of subsistence, like that of all other commodities, is determined primarily by the price of labour. Therefore, the price of labour determined by the price of the means of subsistence is determined by the price of labour. The price of labour is determined by itself. In other words, we do not know how the price of labour is determined. Labour in this case has a price in general, because it is considered as a commodity. In order, therefore, to speak of the price of labour, we must know what price in general is. But we do not learn at all in this way what price in general is.
Thus, nothing remains but to declare rate of profit, and therefore profit, to be in some unaccountable manner a definite extra charge added to the price of commodities, which up to this point was determined by wages. The only thing that competition tells us is that this rate of profit must be a given magnitude. But we knew this before — when we dealt with general rate of profit and "necessary price" of profit.
It is quite unnecessary to wade through this absurd process anew in the case of ground-rent. One can see without doing this that, when carried out more or less consistently, it makes profit and rent merely appear as definite extra charges added by unaccountable laws to the price of commodities, a price primarily determined by wages. In short, competition has to shoulder the responsibility of explaining all the meaningless ideas of the economists, whereas it should rather be the economists who explain competition.
Now, disregarding here the illusion of a profit and rent being created by circulation, i.e., price components arising through sale — and circulation can never give what it did not first receive — the matter simply amounts to this:
Let the price of a commodity determined by wages = 100; let the rate of profit be 10% of wages, and the rent 15% of wages. Then the price of the commodity determined by the sum of wages, profit and rent = 125. This additional 25 cannot arise from the sale of the commodity. For all who sell one another commodities sell at 125 that which costs 100 in wages; which is the same as if they had all sold at 100. Thus, the operation must be considered independently of the circulation process.
The splitting of the value of commodities after subtracting the value of the means of production consumed in their creation; the splitting of this given quantity of value, determined by the quantity of labour incorporated in the produced commodities, into three component parts, which assume, as wages, profit and rent, independent and mutually unrelated forms of revenue — this splitting appears in a perverted form on the surface of capitalist production, and consequently in the minds of those captivated by the latter.
Let the total value of a certain commodity = 300, of which 200 is the value of the means of production, or elements of constant capital, consumed in its production. This leaves 100 as the amount of new value added to the commodity during its process of production. This new value of 100 is all that is available for division among the three forms of revenue. If we let wages = x, profit = y and ground-rent = z, then the sum of x + y + z will always = 100 in our case. But to the industrialists, merchants and bankers, and to the vulgar economists, this appears quite different. For them, the value of the commodity, after subtracting the value of the means of production consumed by it, is not given = 100, this 100 then being divided into x, y and z. But rather, the price of the commodity simply consists of the value of wages, the value of profit and the value of rent, which magnitudes are determined independently of the value of the commodity and of each other, so that x, y and z are each given and determined independently, and only from the sum of these magnitudes, which the may be smaller or larger than 100, is the magnitude of value of the commodity itself obtained by adding these component values together. This quid pro quo is inevitable because:
First: The component parts of the value of a commodity, appear as independent revenues in relation to one another, and as such are related to three very dissimilar production factors, namely labour, capital and land, and therefore they seem to arise from the latter. Ownership of labour-power, capital and land is the cause for these various component values of commodities falling to the share of the respective owners, and thus transforming themselves into revenue for them. But the value does not arise from a transformation into revenue; it must rather exist before it can be converted into revenue, before it can assume this form. The illusion that the opposite is true is strengthened all the more as the determination of the relative magnitudes of these three components in relation to one another follows different laws, whose connection with, and limitation by, the value of the commodities themselves nowise appear on the surface.
Thirdly: Let us assume that according to direct experience the values of a commodity, or the prices of production — which merely appear to be independent of the values — always coincide with the market-prices of the commodity rather than merely prevailing as the regulating average prices by constant compensation of the continual fluctuations in market-price. Let us assume, furthermore, that reproduction always takes place under the same unaltered conditions, i.e., labour productivity remains constant in all elements of capital. Finally, let us assume that the component value of the commodity-product, which is formed in every sphere of production by the addition of a new quantity of labour — i.e., a newly produced value — to the value of the means of production, always split into constant proportions of wages, profit and rent, so that the wage actually paid always directly coincides with the value of labour-power, the profit actually realised — with the portion of the total surplus-value which falls to the share of every independently functioning part of the total capital by virtue of the average rate of profit, and the actual rent is always limited by the bounds within which ground-rent on this basis is normally confined. In a word, let us assume that the division of the socially produced values and the regulation of the prices of production takes place on a capitalist basis, but that competition is eliminated.
To be sure, experience and appearance now also demonstrate that market-prices, in whose influence the capitalist actually sees the only determination of value, are by no means dependent upon such anticipation, so far as their magnitude is concerned; that they do not correspond to whether the interest or rent were set high or low. But the market-prices are constant only in their variation, and their average over longer periods results precisely in the respective averages of wages, profit and rent as the constant magnitudes, and therefore, in the last analysis, those dominating the market-prices.
On the other hand, it seems plain on reflection that if wages, profit and rent are creators of value since they seem to be presupposed in the production of value, and are assumed by the individual capitalist in his cost-price and price of production, then the constant portion, whose value enters as given into the production of every commodity, is also a creator of value. But the constant portion of capital is no more than a sum of commodities and, therefore, of commodity-values. Thus we should arrive at the absurd tautology that commodity-value is the creator and cause of commodity-value.
However, if the capitalist were at all interested in reflecting about this — and his reflections as capitalist are dictated exclusively by his interests and self-interested motives — experience would show him that the product which he himself produces enters into other spheres of production as a constant portion of capital, and that products of these other production spheres enter into his own product as constant portions of capital. Since the additional value, so far as his new production is concerned, seems to be formed, from his point of view, by the magnitudes of wages, profit and rent, then this also holds good for the constant portion consisting of the products of other capitalists. And thus, the price of the constant portion of capital, and thereby the total value of the commodities, reduces itself in the final analysis, although in a manner which is somewhat unaccountable, to a sum of values resulting from the addition of independent creators of value — wages, profit and rent — which are regulated according to different laws and arise from different sources.
Fourthly: Whether the commodities are sold at their values or not, and hence the determination of value itself, is quite immaterial for the individual capitalist. It is, from the very outset, a process that takes place behind his back and is controlled by the force of circumstances independent of himself, because it is not the values, but the divergent prices of production, which form the regulating average prices in every sphere of production. The determination of value as such interests and has a determining effect on the individual capitalist and the capital in each particular sphere of production only in so far as the reduced or increased quantity of labour required to produce commodities, as a consequence of a rise or fall in productiveness of labour, enables him in one instance to make an extra profit, at the prevailing market-prices, and compels him in another to raise the price of his commodities, because more wages, more constant capital, and thus more interest, fall upon each portion of the product, or individual commodity. It interests him only in so far as it raises or lowers the cost of production of commodities for himself, thus only in so far as it makes his position exceptional.
In the competition of individual capitalists among themselves as well as in the competition on the world-market, it is the given and assumed magnitudes of wages, interest and rent which enter into the calculation as constant and regulating magnitudes; constant not in the sense of being unalterable magnitudes, but in the sense that they are given in each individual case and constitute the constant limit for the continually fluctuating market-prices. For instance, in competition on the world-market it is solely a question of whether commodities can be sold advantageously with existing wages, interest and rent at, or below, existing general market-prices, i.e., realising a corresponding profit of enterprise. If wages and the price of land are low in one country, while interest on capital is high, because the capitalist mode of production has not been developed generally, whereas in another country wages and the price of land are nominally high, while interest on capital is low, then the capitalist employs more labour and land in the one country, and in the other relatively more capital. These factors enter into calculation as determining elements in so far as competition between these two capitalists is possible. Here, then, experience shows theoretically, and the self-interested calculation of the capitalist shows practically, that the prices of commodities are determined by wages, interest and rent, by the price of labour, capital and land, and that these elements of price are indeed the regulating constituent factors of price.
Of course, there always remains an element here which is not assumed, but which results from the market-price of commodities, namely, the excess above the cost-price formed by the addition of the aforementioned elements: wages, interest and rent. This fourth element seems to be determined by competition in each individual case, and in the average case by the average profit, which in its turn is regulated by this same competition, only over longer periods.
Fifthly: On the basis of the capitalist mode of production, it becomes so much a matter of course to split up the value, in which newly added labour is represented, into the forms of revenue, of wages, profit and ground-rent, that this method is applied (leaving aside earlier stages of history, from which we gave illustrations in our study of ground-rent) even where the preconditions for these forms of revenue are missing. That is, all is subsumed by analogy under these forms of revenue.
When an independent labourer — let us take a small farmer, since all three forms of revenue may here be applied — works for himself and sells his own product, he is first considered as his own employer (capitalist), who makes use of himself as a labourer, and second as his own landlord, who makes use of himself as his own tenant. To himself as wage-worker he pays wages, to himself as capitalist he gives the profit, and to himself as landlord he pays rent. Assuming the capitalist mode of production and the relations corresponding to it to be the general basis of society, this subsumption is correct, in so far as it is not thanks to his labour, but to his ownership of means of production — which have assumed here the general form of capital — that he is in a position to appropriate his own surplus-labour. And furthermore, to the extent that he produces his product as commodities, and thus depends upon its price (and even if not, this price is calculable), the quantity of surplus-labour which he can realise depends not on its own magnitude, but on the general rate of profit; and likewise any eventual excess above the amount of surplus-value determined by the general rate of profit is, in turn, not determined by the quantity of labour performed by him, but can be appropriated by him only because he is owner of the land. Since such a form of production not corresponding to the capitalist mode of production may thus be subsumed under its forms of revenue — and to a certain extent not incorrectly — the illusion is all the more strengthened that capitalist relations are the natural relations of every mode of production.
Of course, if wages are reduced to their general basis, namely, to that portion of the product of the producer’s own labour which passes over into the individual consumption of the labourer; if we relieve this portion of its capitalist limitations and extend it to that volume of consumption which is permitted, on the one hand, by the existing productivity of society (that is, the social productivity of his own individual labour as actually social), and which, on the other hand, the full development of the individuality requires; if, furthermore, we reduce the surplus-labour and surplus-product to that measure which is required under prevailing conditions of production of society, on the one side to create an insurance and reserve fund, and on the other to constantly expand reproduction to the extent dictated by social needs; finally, if we include in No. 1 the necessary labour, and in No. 2 the surplus-labour, the quantity of labour which must always be performed by the able-bodied in behalf of the immature or incapacitated members of society, i.e., if we strip both wages and surplus-value, both necessary and surplus labour, of their specifically capitalist character, then certainly there remain not these forms, but merely their rudiments, which are common to all social modes of production.
Moreover, this method of subsumption was also characteristic of previous dominant modes of production, e.g., feudalism. Production relations which nowise corresponded to it, standing entirely beyond it, were subsumed under feudal relations, e.g., in England, the tenures in common socage (as distinct from tenures on knight’s service), which comprised merely monetary obligations and were feudal in name only.
The new value added by the annual newly added labour — and thus also that portion of the annual product in which this value is represented and which may be drawn out of the total output and separated from it — is thus split into three parts, which assume three different forms of revenue, into forms which express one portion of this value as belonging or falling to the share of the owner of labour-power, another portion to the owner of capital, and a third portion to the owner of landed property. These, then, are relations, or forms of distribution, for they express the relations under which the newly produced total value is distributed among the owners of the various production factors.
From the common viewpoint these distribution relations appear as natural relations, as relations arising directly from the nature of all social production, from the laws of human production in general. It cannot, indeed, be denied that pre-capitalist societies disclose other modes of distribution, but the latter are interpreted as undeveloped, unperfected and disguised, not reduced to their purest expression and their highest form and differently shaded modes of the natural distribution relations.
The only correct aspect of this conception is: Assuming some form of social production to exist (e.g., primitive Indian communities, or the more ingeniously developed communism of the Peruvians), a distinction can always be made between that portion of labour whose product is directly consumed individually by the producers and their families and — aside from the part which is productively consumed — that portion of labour which is invariably surplus-labour, whose product serves constantly to satisfy the general social needs no matter how this surplus-product may be divided, and no matter who may function as representative of these social needs. Thus, the identity of the various modes of distribution amounts merely to this: they are identical if we abstract from their differences and specific forms and keep in mind only their unity as distinct from their dissimilarity.
A more advanced, more critical mind, however, admits the historically developed character of distribution relations,[56a] but nevertheless clings all the more tenaciously to the unchanging character of production relations themselves, arising from human nature and thus independent of all historical development.
On the other hand, scientific analysis of the capitalist mode of production demonstrates the contrary, that it is a mode of production of a special kind, with specific historical features; that, like any other specific mode of production, it presupposes a given level of the social productive forces and their forms of development as its historical precondition: a precondition which is itself the historical result and product of a preceding process, and from which the new mode of production proceeds as its given basis; that the production relations corresponding to this specific, historically determined mode of production — relations which human beings enter into during the process of social life, in the creation of their social life — possess a specific, historical and transitory character; and, finally, that the distribution relations essentially coincident with these production relations are their opposite side, so that both share the same historically transitory character.
In the study of distribution relations, the initial point of departure is the alleged fact that the annual product is apportioned among wages, profit and rent. But if so expressed, it is a misstatement. The product is apportioned on one side to capital, on the other to revenue. One of these revenues, wages, never itself assumes the form of revenue, revenue of the labourer, until after it has first confronted this labourer in the form of capital. The confrontation of produced conditions of labour and of the products of labour generally, as capital, with the direct producers implies from the outset a definite social character of the material conditions of labour in relation to the labourers, and thereby a definite relationship into which they enter with the owners of the means of production and among themselves during production itself. The transformation of these conditions of labour into capital implies in turn the expropriation of the direct producers from the land, and thus a definite form of landed property.
If one portion of the product were not transformed into capital, the other would not assume the forms of wages, profit and rent.
On the other hand, if the capitalist mode of production presupposes this definite social form of the conditions of production, so does it reproduce it continually. It produces not merely the material products, but reproduces continually the production relations in which the former are produced, and thereby also the corresponding distribution relations.
It may be said, of course, that capital itself (and landed property which it includes as its antithesis) already presupposes a distribution: the expropriation of the labourer from the conditions of labour, the concentration of these conditions in the hands of a minority of individuals, the exclusive ownership of land by other individuals, in short, all the relations which have been described in the part dealing with primitive accumulation (Buch I, Kap. XXIV) [English edition: Part VIII — Ed]. But this distribution differs altogether from what is understood by distribution relations when the latter are endowed with a historical character in contradistinction to production relations. What is meant thereby are the various titles to that portion of the product which goes into individual consumption. The aforementioned distribution relations, on the contrary, are the basis of special social functions performed within the production relations by certain of their agents, as opposed to the direct producers. They imbue the conditions of production themselves and their representatives with a specific social quality. They determine the entire character and the entire movement of production.
Capitalist production is distinguished from the outset by two characteristic features.
First. It produces its products as commodities. The fact that it produces commodities does not differentiate it from other modes of production; but rather the fact that being a commodity is the dominant and determining characteristic of its products. This implies, first and foremost, that the labourer himself comes forward merely as a seller of commodities, and thus as a free wage-labourer, so that labour appears in general as wage-labour. In view of what has already been said, it is superfluous to demonstrate anew that the relation between capital and wage-labour determines the entire character of the mode of production. The principal agents of this mode of production itself, the capitalist and the wage-labourer, are as such merely embodiments, personifications of capital and wage-labour; definite social characteristics stamped upon individuals by the process of social production; the products of these definite social production relations.
The characteristic 1) of the product as a commodity, and 2) of the commodity as a product of capital, already implies all circulation relations, i.e., a definite social process through which the products must pass and in which they assume definite social characteristics; it likewise implies definite relations of the production agents, by which the value-expansion of their product and its reconversion, either into means of subsistence or into means of production, are determined. But even apart from this, the entire determination of value and the regulation of the total production by value results from the above two characteristics of the product as a commodity, or of the commodity as a capitalistically produced commodity. In this entirely specific form of value, labour prevails on the one hand solely as social labour; on the other hand, the distribution of this social labour and the mutual supplementing and interchanging of its products, the subordination under, and introduction into, the social mechanism, are left to the accidental and mutually nullifying motives of individual capitalists. Since these latter confront one another only as commodity-owners, and everyone seeks to sell his commodity as dearly as possible (apparently even guided in the regulation of production itself solely by his own free will), the inner law enforces itself only through their competition, their mutual pressure upon each other, whereby the deviations are mutually cancelled. Only as an inner law, vis-à-vis the individual agents, as a blind law of Nature, does the law of value exert its influence here and maintain the social equilibrium of production amidst its accidental fluctuations.
Furthermore, already implicit in the commodity, and even more so in the commodity as a product of capital, is the materialisation of the social features of production and the personification of the material foundations of production, which characterise the entire capitalist mode of production.
The second distinctive feature of the capitalist mode of production is the production of surplus-value as the direct aim and determining motive of production. Capital produces essentially capital, and does so only to the extent that it produces surplus-value. We have seen in our discussion of relative surplus-value, and further in considering the transformation of surplus-value into profit, how a mode of production peculiar to the capitalist period is founded hereon — a special form of development of the social productive powers of labour, but confronting the labourer as powers of capital rendered independent, and standing in direct opposition therefore to the labourer’s own development. Production for value and surplus-value implies, as has been shown in the course of our analysis, the constantly operating tendency to reduce the labour-time necessary for the production of a commodity, i.e., its value, below the actually prevailing social average. The pressure to reduce cost-price to its minimum becomes the strongest lever for raising the social productiveness of labour, which, however, appears here only as a continual increase in the productiveness of capital.
The authority assumed by the capitalist as the personification of capital in the direct process of production, the social function performed by him in his capacity as manager and ruler of production, is essentially different from the authority exercised on the basis of production by means of slaves, serfs, etc.
Whereas, on the basis of capitalist production, the mass of direct producers is confronted by the social character of their production in the form of strictly regulating authority and a social mechanism of the labour-process organised as a complete hierarchy — this authority reaching its bearers, however, only as the personification of the conditions of labour in contrast to labour, and not as political or theocratic rulers as under earlier modes of production — among the bearers of this authority, the capitalists themselves, who confront one another only as commodity-owners, there reigns complete anarchy within which the social interrelations of production assert themselves only as an overwhelming natural law in relation to individual free will.
Only because labour pre-exists in the form of wage-labour, and the means of production in the form of capital — i.e., solely because of this specific social form of these essential production factors — does a part of the value (product) appear as surplus-value and this surplus-value as profit (rent), as the gain of the capitalist, as additional available wealth belonging to him. But only because this surplus-value thus appears as his profit do the additional means of production, which are intended for the expansion of reproduction, and which constitute a part of this profit, present themselves as new additional capital, and the expansion of the process of reproduction in general as a process of capitalist accumulation.
Although the form of labour as wage-labour is decisive for the form of the entire process and the specific mode of production itself, it is not wage-labour which determines value. In the determination of value, it is a question of social labour-time in general, the quantity of labour which society generally has at its disposal, and whose relative absorption by the various products determines, as it were, their respective social importance. The definite form in which the social labour-time prevails as decisive in the determination of the value of commodities is of course connected with the form of labour as wage-labour and with the corresponding form of the means of production as capital, in so far as solely on this basis does commodity-production become the general form of production.
Let us moreover consider the so-called distribution relations themselves. The wage presupposes wage-labour, and profit — capital. These definite forms of distribution thus presuppose definite social characteristics of production conditions, and definite social relations of production agents. The specific distribution relations are thus merely the expression of the specific historical production relations.
And now let us consider profit. This specific form of surplus-value is the precondition for the fact that the new creation of means of production takes place in the form of capitalist production; thus, a relation dominating reproduction, although it seems to the individual capitalist as if he could in reality consume his entire profit as revenue. However, he thereby meets barriers even in the form of insurance and reserve funds laws of competition, etc., which hamper him and prove to him in practice that profit is not a mere distribution category of the individually consumable product. The entire process of capitalist production is furthermore regulated by the prices of the products. But the regulating prices of production are themselves in turn regulated by the equalisation of the rate of profit and its corresponding distribution of capital among the various social spheres of production. Profit, then, appears here as the main factor, not of the distribution of products, but of their production itself, as a factor in the distribution of capitals and labour itself among the various spheres of production. The division of profit into profit of enterprise and interest appears as the distribution of the same revenue. But it arises, to begin with, from the development of capital as a self-expanding value, a creator of surplus-value, i.e., from this specific social form of the prevailing process of production. It evolves credit and credit institutions out of itself, and thereby the form of production. As interest, etc., the ostensible distribution forms enter into the price as determining production factors.
Ground-rent might seem to be a mere form of distribution, because landed property as such does not perform any, or at least any normal, function in the process of production itself. But the circumstance that 1) rent is limited to the excess above the average profit, and that 2) the landlord is reduced from the manager and master of the process of production and of the entire process of social life to the position of mere lessor of land, usurer in land and mere collector of rent, is a specific historical result of the capitalist mode of production. The fact that the earth received the form of landed property is a historical precondition for this. The fact that landed property assumes forms which permit the capitalist mode of operation in agriculture is a product of the specific character of this mode of production. The income of the landlord may be called rent, even under other forms of society. But it differs essentially from rent as it appears in this mode of production.
The so-called distribution relations, then, correspond to and arise from historically determined specific social forms of the process of production and mutual relations entered into by men in the reproduction process of human life. The historical character of these distribution relations is the historical character of production relations, of which they express merely one aspect. Capitalist distribution differs from those forms of distribution which arise from other modes of production, and every form of distribution disappears with the specific form of production from which it is descended and to which it corresponds.
The view which regards only distribution relations as historical, but not production relations, is, on the one hand, solely the view of the initial, but still handicapped, criticism of bourgeois economy. On the other hand, it rests on the confusion and identification of the process of social production with the simple labour-process, such as might even be performed by an abnormally isolated human being without any social assistance. To the extent that the labour-process is solely a process between man and Nature, its simple elements remain common to all social forms of development. But each specific historical form of this process further develops its material foundations and social forms. Whenever a certain stage of maturity has been reached, the specific historical form is discarded and makes way for a higher one. The moment of arrival of such a crisis is disclosed by the depth and breadth attained by the contradictions and antagonisms between the distribution relations, and thus the specific historical form of their corresponding production relations, on the one hand, and the productive forces, the production powers and the development of their agencies, on the other hand. A conflict then ensues between the material development of production and its social form.[57]
In England, modern society is indisputably most highly and classically developed in economic structure. Nevertheless, even here the stratification of classes does not appear in its pure form. Middle and intermediate strata even here obliterate lines of demarcation everywhere (although incomparably less in rural districts than in the cities). However, this is immaterial for our analysis. We have seen that the continual tendency and law of development of the capitalist mode of production is more and more to divorce the means of production from labour, and more and more to concentrate the scattered means of production into large groups, thereby transforming labour into wage-labour and the means of production into capital. And to this tendency, on the other hand, corresponds the independent separation of landed property from capital and labour,[58] or the transformation of all landed property into the form of landed property corresponding to the capitalist mode of production.
The first question to he answered is this: What constitutes a class? — and the reply to this follows naturally from the reply to another question, namely: What makes wage-labourers, capitalists and landlords constitute the three great social classes?
At first glance — the identity of revenues and sources of revenue. There are three great social groups whose members, the individuals forming them, live on wages, profit and ground-rent respectively, on the realisation of their labour-power, their capital, and their landed property.
However, from this standpoint, physicians and officials, e.g., would also constitute two classes, for they belong to two distinct social groups, the members of each of these groups receiving their revenue from one and the same source. The same would also be true of the infinite fragmentation of interest and rank into which the division of social labour splits labourers as well as capitalists and landlords-the latter, e.g., into owners of vineyards, farm owners, owners of forests, mine owners and owners of fisheries.
[Here the manuscript breaks off.]