The Monetary Dimension

F. The Monetary Dimension

The state of affairs immediately prior to the upper turning point is patently not one of general excess supply; to the contrary, there are then manifestations of material and labor shortage and general prices are rising not falling. “Gluts” are the conspicuous feature of “stagnation” and begin to manifest themselves during crises (above, p. 142). There are some allusions to “overproduction” even before

the turning point, 19 but these should perhaps be understood not as glutted mar- kets, but rather as “overtrading” or “overextensions” of activity or “production at high pressure” or as “intoxicating prosperity” reflecting the speculative frenzy that precedes the crisis.

What now of the glut issue itself? Again we shall keep before us the observation in J. S. Mill’s “On the Influence of Consumption on Production,” that what is now sometimes called “Say’s Identity” holds good only in a barter economy (Mill 1963–91 [1844] 4: 276). Less often cited, though equally important, is a formula- tion in the Principles addressed against the “overproduction” error of those such as Malthus, Sismondi, and Chalmers who, on Mill’s reading, maintained that expan- sion of output in aggregate is accompanied by deficiency of purchasing power thus precluding sale at unchanged prices and profits (Mill 1963–91 [1848] 3: 571). The source of the error was seen to lie in a misconceived appeal to “mercantile facts,” which pointed only to temporary price and profit movements, the problem of profitability residing precisely in their non-permanent character. Here we find all the key elements of the earlier essay with its allowance for excess commodity supply and counterpart in excess demand for money to hold (574). Although the “immediate cause” of the crisis – and the advent of excess commodity supply – is “a contraction of credit,” the underlying problem remains the preceding “excess of speculative purchases,” implying that suppliers of credit become fearful and call in loans.

19 There is, for example, an ambiguous reference to a “superabundance of industrial capital” and surplus of real goods or “objects of utility . . . available in times of crises,” representing

“[o]n the eve of a crisis, and during it” – in consequence of falling commodity prices – “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 . . . ” (MECW 37: 489–90; emphasis added). But the conclusion reduces the problem: “It follows from the above that commodity capital, during crises and periods of business depression in general, loses to a large extent its capacity to represent potential money capital” (492; emphasis added).

151 Now Marx became familiar with the Unsettled Questions soon after its appear-

F. The Monetary Dimension

ance, copying out passages in his Manchester Notebooks for 1845 (MECW 36: 533–43). Yet he makes no mention of Mill when in Capital 1 he condemns the “childish dogma” relating to Say’s Identity precisely along Mill’s lines and in very similar terms, concluding: “If the interval in time between . . . the sale and the pur- chase become too pronounced, the intimate connexion between them, their oneness, asserts itself by producing – a crisis” (MECW 35: 123; emphasis added). A footnote refers to a citation in the Grundrisse of James Mill’s barter assumption (MECW 29: 332–4; see also Chapter 9, p. 282), as if J. S. Mill had never written at all. 20

But all this is merely a preliminary to the main analysis of the crisis in Capital 1 which is also broadly in line with that of Mill. In the first place, Marx writes of that phase of every industrial and commercial cycle entailing a panic demand for money to hold, which replaces the desire to acquire commodities characterising the period of “intoxicating prosperity” immediately preceding (MECW 35: 148–9). Here he cites his Grundrisse regarding the implications for the crisis of the contraction of credit: “The sudden reversion from a system of credit to a system of hard cash heaps theoretical fright on top of the practical panic; and the dealers by whose agency circulation is affected, shudder before the impenetrable mystery in which their own economic relations are involved [MECW 29: 378–9].” 21

The passage refers to some unidentified “cause” that sets off a transition to excess demand for money; certainly on “the eve of the crisis,” during the period of “intoxicating prosperity,” such excess is not yet manifest. It is only safe to say that excess demand for money to hold accompanies the crisis – and that “money famine” continues during the period of depression which follows – with credit contraction contributing to excess money demand. Marx’s opposition to Currency School reasoning also suggests that he considered variations in excess money demand as

a consequence rather than cause of changes in activity. Thus, with reference to the high prices characterizing “prosperity” and the low prices characterizing periods of “crisis” – intending by the latter in this context not the upper turning point itself but the “phase” of depression – Marx complains that the Currency School “concludes from this that with high prices too much, with low prices too little money is in circulation” (615 and note). The causality relation was in fact the reverse. As for credit variation, that too is formally represented as symptomatic of the industrial cycle rather than a causal feature: “The superficiality of political economy shows itself in the fact that it looks upon the expansion and contraction of credit, which is a mere symptom of the periodic changes of the industrial cycle, as their cause. As the heavenly bodies once thrown into a certain definite motion,

20 An unstated obligation to Sismondi is emphasized in Sowell 2006: 174–5. 21 Relevant also is the discussion in Capital 1 of deviations from the average quantity of money in circulation, which are said to be relatively small except for “excessive perturbations periodically arising from industrial and commercial crises, or, less frequently, from fluctuations in the value of money” (MECW 35: 133).

The Cyclical Dimension

always repeats this, so is it with social production as soon as it is once thrown into this movement of alternate expansion and contraction” (627). Taking this line Marx undermines the entire notion of one-way causation; he himself goes on to allow that “[e]ffects, in their turn, become causes, and the varying accidents of the whole process, which always reproduces its own conditions, take on the form of periodicity.”

For all that, brief comments on the decennial crisis of 1866 do perhaps accord credit a degree of independence in precipitating the collapse. Thus writing in late March 1867 Marx describes the effect of the “cotton famine” (elsewhere dated 1861–63 or 1861–65), in redirecting “capital” from its regular investments to the money market, “the crisis assum[ing], at this time, an especially financial charac- ter”(661); and we also find mention of the preceding period of “overproduction” or “overtrading” in iron shipbuilding, particularly the credit-financed speculative ventures which ended precipitously upon the collapse of credit.

Chapter 18 of Capital 3 (“Turnover of Merchants’ Capital”) also contains rele- vant material, conspicuously the absence just prior to the upper turning point, of any indication of imminent collapse of retail sales (see above p. 149). According to this account, crises break out not because of circumstances relating (immediately)

to the “production” process and final sale, 22 but rather because of circumstances pertaining to merchants’ capital and bank accommodation. For though “the move- ment of merchant’s capital is never more than the movement of industrial capital within the sphere of circulation,” it has a certain “independent status” allowing it to operate “within certain limits, independently of the bounds of the reproduc- tion 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” (MECW 37: 303). Consequently, “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.” Nonetheless, it is perhaps not justified to exaggerate the independent role of merchant’s capital and banking accommodation. For “[t]he 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.” Accordingly, even if the calling in of loans by the banks may be said to trigger the crash, we must yet refer back to the circumstance that “at some par- ticular imperceptible point” wholesalers’ stocks begin to accumulate unduly – and

22 But see above p. 149, regarding reduced purchasing power with rising prices on the part of fixed-income recipients and unproductive classes.

153 this despite still buoyant consumer demand – awakening concern on the part of

F. The Monetary Dimension

banks. Having said this, it remains true that “speculative frenzy” was held responsible for decline in the real sector (see above, pp. 140–1); and to the extent that specu- lation was encouraged by the credit system the latter may in one sense legitimately

be accorded ultimate responsibility. Two chapters in Capital 3 are particularly rele- vant in this regard. Chapter 25 on “Credit and Fictitious Capital” cites a Manchester Guardian report of November 1847 regarding “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 con- vertible into money” (407); and there is reference to evidence of “swindling” in the East Indian and Chinese markets drawn from the Parliamentary Report on Com- mercial Distress 1847–8 relating to the practice of brokers “not only of advancing upon goods after their arrival to meet the bills drawn against those goods, which is perfectly legitimate, and upon the bills of lading . . . but . . . [advancing] upon the produce before it was shipped, and in some cases before it was manufactured” (409). Marx also alludes to evidence relating to the “first great railway swindle” during the prosperity 1844–47 and the grave consequences for business in general of excessive reliance on bank credit (408, 410, 485–6). All of this seems to allow an “independent” role for credit.

Chapter 30 formally concerns “money loans, which are made by bankers as mid- dlemen, to industrialists and merchants,” for example, by discounting their bills of exchange; but “commercial credit,” or “the advances industrialists and merchants make to one another in commodities and within the compass of the reproduc- tion process” is analyzed as a preliminary (477). Both issues are relevant for us. Setting aside provisionally the banking sector Marx sets out by consideration of “commercial credit” and confirms the source of the 1847 crisis in speculation. As a preliminary, he elaborates the indispensability of credit for the reproduction pro- cess and real growth and conversely the extension accorded the sphere of credit by such expansion, with scope for “the speculative element” rising pari passu with the increasing distance from markets that characterises large-scale production, and the corresponding increase in the “time duration” of the credit instrument, emphasizing in this manner the interdependence of the credit and production pro-

cesses (479–80). 23 Commercial credit relates in these accounts to inter-firm finance

23 See also Chapter 15 (“Internal Contradictions of the Law of the Tendency of the Rate of Profit to Fall”), citing the Economic Manuscripts (MECW 32: 127–88):

It must be added that definite, presupposed, price relations govern the process of reproduction, so that the latter is halted and thrown into confusion by a general drop in prices. This confusion and stagnation paralyses the function of money as a medium of payment, whose development is geared to the development of capital and is based on those presupposed price relations. The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to

The Cyclical Dimension

of the industrial and trading activities comprising the “reproduction” process – recall J. S. Mill’s “book credit” – allowing a short-circuiting of C-M-C by avoiding repeated commodity sales for money (480–1). In sum: “Credit . . . 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” (481). 24

In all this, it is the mutually reinforcing production and credit processes that receive emphasis. Marx, it is true, seems in the end to accord precedence to the former, with credit variation the passive reflection of output variation. For he goes on to maintain that “[a]s 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,” whereas “if there is a disturbance in [the] expansion or even in the normal flow of the reproduction process, credit also becomes scarce; it is more difficult to obtain commodities on credit” (481–2). But once again to the extent that the source of the “disturbance” in the real sector is to be found in the operation of the contemporary credit system this apparent passivity must be qualified.

There remains the elaboration of “money credit” in Chapter 30. Bank lending, it is first explained, is made from the money capital of the depositors comprising industrialists, workers and landlords (483). And here Marx again alludes to the common practice, touched on in Chapter 25, of “manipulating” bills of exchange or of transactions entered into in order to “manufacture” such bills for discount: “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” (486). Moreover, the outcome of such practices was to camouflage indications of an imminent “crash,” providing an explanation for the emerging difficulties in the wholesale sector at a time when retail sales are still buoyant; even the experts were confounded: “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” (483). Similarly: “Tooke in his History of Prices [Tooke 1848: 329–48; Tooke and Newmarch 1857 6: 218–29] succumbs to this illusion

violent and acute crises, to sudden and forcible depreciations [of capital], to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction. (MECW

37: 253); emphasis added). 24 Marx adds : “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” (MECW 37: 481).

155 once again as historian for each crisis. Business is always thoroughly sound and the

F. The Monetary Dimension

campaign in full swing, until suddenly the debacle takes place” (484). 25 In Marx’s account, at the crisis stage itself the demand for credit remains high just when the willingness to offer credit contracts, merchants now demanding cash payment; and at such periods “the shortage of credit is most acute” and

“therefore the rate of discount highest for banker’s credit” (482). 26 By contrast, “in the phase of the industrial cycle immediately following a crisis . . . loan capital lies idle in great quantities. And 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” (484). 27

The cycle is described once again at the close of Chapter 30. The emphasis is on the necessary repetition of its phases “once the first impulse is given”: “The industrial cycle is of such a nature that the same circuit must periodically reproduce itself, once the first impulse has been given. 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 overproduction and swindle, it strains the productive forces to the utmost, even beyond the capitalistic limits of the production process” (488–9). Here the emphasis is upon the inevitability of crisis, entailing excess demand for money (“means of payment”), and which legislation could not possibly eliminate but certainly could aggravate: “It is self-evident 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” (489). The inevitability of crisis is thus attributed to the extensive use of credit and the consequential rush for cash payments when credit failed. Marx does insists that while the crisis appeared to be “merely a credit and money crisis,” the matter went

25 Commencement of unplanned inventory accumulation even when activity at the final con- sumption level remains buoyant – such accumulations setting in motion forced sales to satisfy

emergency demands for cash payment – is alluded to also in Capital 2 (MECW 36: 80–1). 26 See also regarding the altered values, during crises, of “fictitious capital, interest-bearing

paper”: “Its price falls with rising interest. It falls, furthermore, as a result of the shortage of credit, which compels its owners to dump it in large quantities on the market in order to secure money” (MECW 37: 492). Stock prices also fall. 27 One of Marx’s objectives set out at the outset of Chapter 30 was to discern the relation between variation in interest-bearing “money” capital – loanable funds in effect – and real accumulation, whether in particular its accumulation indicated “reproduction on an extended scale” (MECW 37: 475). The present passage denies such a relation.

The Cyclical Dimension

deeper since the mass of bills of exchange on the market represented “actual sales and purchases” – though “extend[ing] far beyond the needs of society” – and it is this that constituted “the basis of the whole crisis;” even so, to this must be added large amounts representing “plain swindle, which now reaches the light of day” (indicating that the issue of fallacious bills of exchange occurs earlier in the cycle but had been camouflaged as we have seen above, p. 154), “unsuccessful speculation,” depreciated commodity capital and the like. He goes on to opine that the Bank of England could not solve the problem – reflecting as it does “[t]he entire artificial system of forced expansion of the reproduction process” – by providing 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.” But the Bank could certainly assuage the problem to some extent. 28

Marx adds that in the great monetary centers all connection with “real processes” disappears from sight: “ . . . 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.” Certainly Marx sought to distance himself from those who focused too heavily on monetary explanations of the cycle; and he insisted in Capital 2 that “what appears as a crisis in the money market is in reality an expression of abnormal condition in the very process of production and reproduction” (MECW

36: 317). Yet we have found that, time and again, Marx finds himself – malgr´e lui – obliged to allow a certain, even considerable, degree of autonomy to the money market and to credit in accounting for the cycle.

A final illustration, again from Capital 3, may be drawn from an important summary statement in Chapter 27 (“The Role of Credit in Capitalist Production”) which reinforces the responsibility of the credit system for cyclical perturbations, at least the “violent eruptions,” by reference to the separation of ownership and control under joint-stock arrangement: “The credit system appears as the main lever of overproduction and overspeculation 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 ” (MECW 37: 438). Thus while “the credit system accelerates the material development of the productive forces and the establishment of the world market,” it also “accelerates the violent eruptions” of such development in crises “and thereby the elements of disintegration of the old mode of production” (439).

28 I refer to Marx’s citations from the Parliamentary Report on Commercial Distress 1847–48 regarding the crop failure of 1846–47, which had necessitated large-scale food imports paid

for in gold, a resultant drain on the banks and reduction in credit and finally suspension of the 1844 Bank Act to prevent the worst consequences (MECW 37: 413).

G. Inter- and Intra-Departmental Imbalance