Finance Capital, Hilferding 1910


Money capital and productive capital during the depression

If we observe the accumulation process after a crisis, it is apparent that initially reproduction takes place on a reduced scale. Social production undergoes a contraction. Because of the 'solidarity of the branches of production' the sector in which overproduction first occurs does not matter. Overproduction in the leading sectors involves general overproduction; hence there is no productive accumulation, no expanded reconversion of profit into capital, no increase in the application of means of production. Productive accumulation has ceased. But what happens to individual accumulation and to particular branches of production? Production continues even if it is on a reduced scale. It is just as certain that a large number of enterprises, especially those which are most technically efficient in their own sector and those which operate in sectors producing the basic necessities of life, the consumption of which cannot be too severely curtailed, still make a profit. A part of this profit can be accumulated. But the rate of profit has fallen, and this decline may also reduce the rate of accumulation. Similarly, the total amount of profit has declined, and this too diminishes the possibility of accumulation. Furthermore, while one part of the capitalist class makes a profit, another part sustains losses which must be defrayed from additional capital if bankruptcy is to be avoided. Real production, however, is not expanded during a depression, and if accumulation takes place, it can only be accumulation in the form of money. Where does the money for the accumulating capitalists come from?

Let us recall the schema of reproduction :

I 4,000 C + 1,000 V + 1,000 S = 6,000

II 2,000 C + 500 V + 500 S = 3,000

This would represent production which has been reduced by the crisis. Capitalists, however, produce commodities, not money. In order to obtain money, and indeed more money than they already have at their disposal - for otherwise there would be no accumulation of money - they must convert their commodities into money and refrain from reconverting that money into commodities. If department II wants to accumulate say 250 out of its 500 S, it must sell consumer goods (and the producers must sell them to others in the same department because the turnover of II S takes place within department II) without itself buying commodities from other members of the same department. Thus 250 S remain unsaleable in department II. If one producer succeeds in selling then others are left with unsold stocks. Money capital is redistributed, and sellers receive money from the buyers, but the money does not return to the buyers because they cannot sell their 250 of commodities.

We arrive at the same result if we assume that capitalists in department I accumulate half of their surplus value. They would then be able to sell 1,000 V + 500 S in the form of means of production to II C, which would pay 1,500 in money for the purchase. Since I S does not buy 2,000 in consumer goods, but keeps 500 in consumer goods, II C therefore has 500 less in money, which remains in I as accumulated money. But if II C does not advance 1,000 in money for the purchase of means of production, and if we assume that I initiates the process, then I will buy 1,500 in consumer goods, II will use the 1,500 to buy means of production, leaving I with 500 unsaleable means of production. Its expectation of accumulation has not been realized. Department II restricts production still further, and begins the process of reproduction with 1,500 C and a correspondingly reduced variable capital. If it possessed 2,000 in money for its turnover with I C, it has now used only 1,500, while the 500 which previously functioned as money capital now lies idle, and to this must be added the reduction in the amount of money advanced as variable capital.

It is evident that the pure accumulation of money at the level of society as a whole is impossible on the assumption of reduced or stationary production. Only individual accumulation can take place, which simply means that accumulation by one capitalist changes the distribution of money capital in the hands of others, and this change is then bound to lead to new disruptions of reproduction. It makes no difference if we look at the class of gold producers themselves. In this case a direct accumulation of money is certainly possible, but this is limited by the size of the accumulated profit in this particular branch of production. The volume of sales by other industries is reduced in proportion to the amount of money thus accumulated, since it is accumulated and retained as a hoard. No matter how this factor is evaluated it is quantitatively too insignificant to play any part in the general process of accumulation.

Nor does the use of credit change matters. The 2,000 (V + S) of I must be sold for the 2,000 C of II. An accumulation of money would mean that I sells 2,000 but only buys back 1,500 from II. Whether these turnovers are accomplished by means of credit or not, the fact remains that I can only accumulate 500 in money or credit money - that is, claims upon future production - if II buys 2,000 from I. But II can only do this by paying for it either with its own commodities, which is excluded by our assumption, or out of a reserve fund of money, in which case I simply accumulates what II loses. It is incorrect to say, therefore, that the capital lying idle during a period of depression consists of money capital accumulated in the form of money or credit. It is money capital set free by the contraction of production, which was previously used to effect turnovers but has been rendered superfluous by the decrease in production. Its idleness reflects the idleness of productive capital. The forces of production, as a result of the contraction of production, are only partially employed. The newly produced constant capital is, stored up and finds no application in production. Money capital and the potentialities of the existing system of credit have become too large in relation to the diminished turnover, and so money capital lies idle in the banks awaiting utilization, the precondition for which is an expansion of production.

It is, by the way, an extraordinary notion of the theorists of crises to point precisely to this idle money capital as the most powerful stimulus to an enlargement of reproduction.[1] M if the shutdown of machinery, with its threat of material and moral deterioration, the underutilization of fixed capital in general, which involves not a sacrifice of profit but continuing losses, were not a much stronger incentive to expand production than a lowering of the rate of interest on money capital. The question is not whether the incentive to accumulate after a crisis is reinforced by money liquidity, but whether or not the expansion of reproduction is objectively possible. There is usually great money liquidity immediately after a crisis, and yet it may take years before prosperity is fully restored.[2]

It is very amusing to see how the views of business commentators in the bourgeois press change in accordance with the current state of the business cycle. In the German press, the recent crisis was attributed almost exclusively to dear money or to the scarcity of money capital. Now that the depression persists in spite of the continuing international liquidity they are slowly discovering that prosperity does not depend solely upon the condition of the money market.[3]

The misconceptions about the causes of money liquidity during a depression, and their significance for overcoming the depression, rest ultimately upon the failure to see beyond the determination of economic forms to the material determination of social production which is revealed by Marx's analysis in the second volume of Capital. One operates only with such economic concepts as 'capital', 'profit', 'accumulation', etc., and thinks that the problem is solved when one has shown the quantitative relations which make simple or expanded reproduction possible, or conversely, cause disturbances. In this way the fact is overlooked that these quantitative relations reflect qualitative conditions and that not only can value magnitudes, which are directly commensurable, be distinguished, but also specific use values which must possess definite qualities in production and consumption. It is also overlooked, in analysing the reproduction process, that there are not only distinct units of capital in general - so that, for example, a surplus or shortage of industrial capital can be 'compensated' by a corresponding amount of money capital - and not only units of fixed and circulating capital, but that it is a question of machines, raw materials and labour power of a very definite kind (required by the technology) which must be available as use values of this specific kind if disruptions are to be avoided.[4]

In fact, during a crisis, there is idle industrial capital (plant, machines, etc.) on one side, and idle money capital on the other. The same causes which make industrial capital idle also make money capital idle. Money does not circulate, or function as money capital, because industrial capital is not functioning. Money is not employed because industry is not employed. `Phoenix'[5] does not cease production because money capital is lacking, nor does it resume production because money capital is abundant ; on the contrary money is readily available because production has been reduced. The 'scarcity' of money capital is only a symptom of the stagnation of the circulation process, as a result of overproduction having already begun.

Credit, in the first place, replaces money as a medium of circulation, and second, it facilitates the transfer of money. Theoretically it is possible to ignore credit for the moment by assuming that there is a sufficient quantity of metallic money available for a purely metallic circulation.

It is characteristic of almost all modern crisis theorists that they explain business cycle phenomena in terms of changes in the interest rate, instead of explaining, conversely, the phenomena of the money market in terms of the conditions of production.[6] The reasons for this are not far to seek. The events on the money market are manifest, are discussed daily in the newspapers, and have a decisive influence on the course of the stock exchange and on speculation. In addition, the supply of loan capital at any given moment is a determinate sum, and must appear as a determinate sum, for otherwise it would be impossible to explain how supply and demand could determine the rate of interest. What is generally overlooked is that the supply of loan capital depends upon the state of production; first, upon its volume, and second, upon the proportionality .between branches of production, which has a decisive effect on the circulation time of commodities and hence on the velocity of circulation of credit money. What is also generally overlooked is the functional difference between commercial credit and capital (bank) credit, especially since this difference seems to be eliminated by the issue of bank notes, and with the development of the banking system all forms of credit take on the appearance of bank credit. If this distinction is ignored, however, the course of events on the money market appears in quite a different light, and the relation of dependence now seems to consist simply in the fact that the expansion of production requires more capital. Capital is more or less vaguely identified with money capital. Production expands, the demand for money capital increases, and the rate of interest rises. Finally, a shortage of money capital emerges, the high interest rate wipes out the profits from production, new investment ceases, and the crisis begins. Then during the depression money capital is accumulated instead of being converted into investment capital - a senseless notion since machines, docks, railways, are not produced from gold. The interest rate falls, money capitalists become dissatisfied with the low interest and once again invest their money in production. Prosperity begins afresh.

Leaving aside the barbaric confusion which underlies this conception of the economists, who refer to money, machines, and labour power as capital, and then think that one form of capital, say money, can simply be transmuted into another, such as machinery and labour power (or, as they would put it, circulation capital into investment capital), the contortions of this splendid 'theory', even from the purely statistical aspect, are pure nonsense. In the advanced capitalist countries, the range of variation of the interest rate is at most 5 per cent, judging by the fluctuations of the official discount rates between 2 per cent and 7 per cent; and in my view restrictive banking legislation or inadequate discount policies make these fluctuations larger than rational economic considerations would produce. Now money capital is demanded by producers in order to expand production; which means that the borrowed value, converted into productive capital, realizes value and yields a profit, the size of which depends, ceteris paribus, upon prices. The fluctuations in commodity prices during the business cycle, however, are far greater than 5 per cent. A glance at any table of prices would show that fluctuations of 50 per cent, 100 per cent, or even more, are not unusual. Profits may not increase to the same extent because costs of production also increase, but in any event the increase in industrialists' profits during periods of prosperity and at the peak of the cycle is vastly more than 5 per cent. If their profits did not decline for other reasons an interest rate of 7 per cent would certainly not halt the accumulation of capital. For example, if the Rhine-Westphalia Coal Syndicate could sell its entire output at peak prosperity prices, it would not hesitate for a moment to pay interest of even 10 per cent on its borrowed capital, which is only part of its total capital, since even on this part it would make an entrepreneurial profit far higher than the rate of interest.[7]

The extraordinary notion that interest gradually devours entrepreneurial profit is reinforced by the total confusion which reigns concerning categories such as 'profit', 'entrepreneurial profit', 'wages of management', `interest', 'dividends', etc. ; and with the growth of joint-stock companies this confusion has increased. Dividends are regarded as a kind of interest, though an interest which fluctuates in a remarkable way compared with the permanently fixed interest on loan capital. Loan capital and productive capital no longer seem to be distinguished by the fact that one bears interest and the other produces profit. Instead, both are regarded as interest-bearing capital, and the sole difference between them is that 'liquid' capital always yields a fixed interest which is announced daily on the stock exchange, while 'fixed' capital yields an interest which is only discovered when dividends are declared. The difference in the certainty of the yield is then attributed to the difference between 'liquid', that is, money capital, and 'fixed', that is, industrial capital. When all qualitative distinctions are confused in this way it is no wonder that so many extraordinary notions prevail concerning quantitative differences, and that people then imagine they have found in the fluctuations of the interest rate a sufficient explanation of the mechanism governing the sudden changes in the business cycle.


[1]Not only Tugan-Baranowsky, but also Otto Bauer in his otherwise penetrating and suggestive exposition of the Marxist theory of crises (Die Neue Zeit, XXIII, pp. 133 et seq.) succumbed to this temptation arising out of certain economic phenomena.

[2]This was the case, for instance, in the depression period after 1890. The entire year 1893 was marked by an unusually plentiful supply of money and low interest rates. The London bank rate was 2 per cent at the end of February 1894, while the private discount rate stood at 1 per cent in mid March. In mid January 1895 the private discount rate in London was between and 7/8 per cent. Yet in spite of the prolonged and extreme liquidity, the recovery began only in the second half of 1895.

[3]Recently, as theoretical analysis has fallen into neglect, a bad habit has spread which consists in drawing general conclusions from a small number of observations over a period of a few years, and elevating the experience of a partial phase of the industrial cycle, or at best the experience of a particular, unique cycle, to the level of general 'laws'. For that reason, others abjure all generalizations and console themselves with the folk wisdom of qui vivra verra. They deliberately reduce political economy to the level of a cheap joke.

[4]An extreme instance of this confusion is to be found in Tugan-Baranowsky's theory of crises. By taking account only of the formal economic categories of capitalist production, it overlooks the natural conditions of production which are common to all systems of production, whatever their historical form, and thus arrives at the curious conception of a system of production which exists only for the sake of production, while consumption is simply a tedious irrelevance. If this is 'madness' there is method in it, and a Marxist one at that, for it is just this analysis of the specific historical structure of capitalist production which is distinctively Marxist. It is Marxism gone mad, but still Marxism, and this is what makes the theory so peculiar and yet so suggestive. Without being quite aware of it, Tugan seems to sense this. Hence his vigorous polemic against the 'sound common sense' of his critics.

[5]The Phoenix Mining and Smelting Co., a well known pre-1914 German enterprise. [Ed.]

[6]And not only in recent times. 'The superficiality of political economy is shown among other things by the fact that it regards the expansion and contraction of credit, which is a mere symptom of the periodic changes in the industrial cycle, as their cause.' Capital, vol. I, p. 695. [MECW 35, p627]

[7]The following example shows that high interest rates do not produce a crisis. England had an adverse balance of payments in 1864. Cotton imports from America had fallen off in consequence of the Civil War, and imports of cotton from the East Indies and Egypt increased, thus raising total imports from these countries; for the East Indies from 15,000,000 in 1860 to 52,000,000 in 1864, and for Egypt from 10,000,000 to nearly 20,000,000. The bank raised its discount rate to check the outflow of bullion. During 1864 it fluctuated between 6 per cent and 9 per cent. Yet the crisis was confined entirely to the money market. 'The increases in commodity prices were insignificant and in spite of the high discount rates, which were to be met with only during periods of money shortage in the past, commerce and industry did not experience any marked disturbances . . . . Notwithstanding a continuous cotton shortage, English trade was certainly not depressed.' Tugan-Baranowsky, op. cit., p. 139.