Finance Capital, Hilferding 1910


Changes in the character of crises.
Cartels and crises

The development of capitalist production brings about certain changes in the form of crises to which we must now turn our attention. In this account, however, I shall only be concerned to indicate the general lines of development, leaving it to detailed historical studies to depict the variations in the character of crises between particular countries in a comparative perspective.

Here I shall only try to reveal the general in the particular, which is all the more difficult since the development of capitalism has created an ever closer international interdependence of economic processes, such that when a crisis occurs in one country, all the features specific to the stage of technical and organizational development which it has reached have repercussions on the crises in other countries. For example, the events of the most recent European crisis of 1907 can only be understood as repercussions of the American crisis, the distinctive feature of which was an extremely severe monetary and banking crisis such as Europe had not experienced for a long time. This was responsible for some particular developments on the European money markets, and especially the severity of the crisis in some spheres, which might perhaps have been avoided if it had not been for the effects of the American crisis.

On the other hand, it is equally impossible to derive general laws about the changing character of crises from the history of crises in a single country such as England, precisely because the capitalist crisis is a phenomenon of the world market - all the more so if it is a prolonged crisis - and crises in a particular country may undergo various modifications as a result of distinctive features of its capitalist development, so that any generalization based upon this experience could only be misleading.[1]

If we want to establish what changes are taking place in the phenomena of crises, therefore, we must be able to derive them from a theoretical analysis in order to be certain that we are dealing with tendencies inherent in capitalist development, rather than with specific phenomena peculiar to a particular phase of capitalism which may perhaps be purely accidental.

Capitalism develops in a society in which commodity production still occupies a relatively unimportant place. As it expands it generalizes commodity production, and establishes a national market and a constantly expanding world market. With the expansion of the market the conditions also develop in which crises can occur. As long as capitalist production is superimposed upon widespread production for use and non-capitalist, artisanal commodity production intended for a local market, the full impact of crises is felt only by the capitalist superstructure. They affect branches of production where sales may be brought almost to a standstill because the circulation which is absolutely indispensable for the turnover of goods in society is provided by handicraft production or by domestic production. A crisis may cause havoc in the capitalist sector of production, halting sales completely for a time provided the factors producing the crisis are powerful enough to paralyse production, which, as we shall see, is often the case in this period.

As capitalist production develops handicraft and domestic production are largely destroyed. The impact of a crisis is now felt by a system of production, the contraction of which is limited by the necessity of satisfying social needs on a much larger scale, both absolutely and relatively. With the growth of production there is an increase in that part which must be carried on under all circumstances, and whose continued operation prevents the almost complete stagnation of the production and circulation process. This is shown by the fact that the impact of a crisis is less severe in those branches of production which serve the needs of consumption, and all the less severe the more essential the consumer goods they produce and hence the greater the stability of consumption.

Changes in the character of crises are also bound to follow the advance of capitalist concentration. The ability of an enterprise to survive increases with its size. The smaller the firm, the more likely it is that a price collapse will lead to bankruptcy. The small entrepreneur may lose his entire market ; the fall in prices and stoppage of work make it impossible for him to convert his commodity capital into money capital. Since he does not have any reserve capital, and particularly in times of crisis cannot obtain credit, he is unable to meet his obligations. The crisis thus leads to a massive collapse of small capitalist enterprises, suspension of credit, wholesale bankruptcies, insolvencies, bank failures, and hence to a panic. The situation is aggravated by the greater technical disparities between firms. Modern plants exist alongside old plants, some of which date from the period of handicraft production or manufacture, and these become completely unviable when prices fall. Their collapse, in large numbers, also drags down enterprises which are in themselves technologically viable.[2]

The large modern firm has quite a different relation to a crisis. Its output is so large that some part of it can continue even during a crisis. The American Steel Trust may perhaps be obliged to reduce its production by half during a crisis, but it need not reduce output below a certain minimum. Along with the concentration of firms the scale on which production can be maintained also increases.

As capitalist production develops there is therefore an increase, both absolute and relative, in that part of production which can be carried on under all circumstances and along with it an increase in the volume of commodity circulation which continues undisturbed during the crisis, and of the circulation credit based upon it. Hence the disruption of credit need not be as complete as in crises of the early period of capitalism. Furthermore, the development of a credit crisis into a banking crisis on one side and a monetary crisis on the other is made more difficult, first by the changes in the organization of credit, and second by the shift in the relations between commerce and industry.

A credit crisis develops into a monetary crisis if the collapse of credit produces a sudden scarcity of means of payment.[3] This scarcity emerges less strongly the larger the volume of production which is maintained under all circumstances, for credit money can continue to perform its function to the same extent. The greater the volume of credit transactions the more commercial credit is replaced by bank credit, for the latter is less easily undermined than is the credit of individual industrialists. The decisive factor however is that there is no longer any shortage of means of payment because the development of credit has reduced the need for cash money, even during a crisis, since the use of cheques and clearing transactions continues; and the latter means of payment can be supplied by the banks of issue, whose credit remains unimpaired even in a crisis. We have seen that the circulation of bank notes is based upon the circulation of bills, which may contract if its foundation, commodity circulation, contracts. But it contracts more than does the circulation of commodities because commercial credit has been shaken. The bank now substitutes its own credit for commercial credit to the extent that the real circulation of commodities permits, and it can do so on this scale because the continued circulation of commodities provides an assurance that its claims will be honoured. It can therefore make its credit money available for the genuine needs of circulation and satisfy the demand for means of payment. In effect the bank restricts demand for means of payment to the real, essential needs of circulation, and wards off that well-nigh unlimited demand, arising from the fear that it will be impossible to obtain means of payment even against the best collateral, which goes beyond any actual need and leads to large- scale hoarding with a consequent further contraction of the means of payment. If the bank of issue is to act in this way, it is necessary, first, that its credit position should be sound (a condition which a well managed bank of issue should easily be able to fulfil), and second, that the increased note issue should not endanger convertibility. This second condition is met by a policy, dictated by the bank's own self-interest, of issuing bank notes during a crisis only against absolutely reliable collateral, which gives it the assurance that it is really satisfying only the requirements of circulation within the limits imposed by the crisis. Furthermore, convertibility is protected against unforeseen accidents by an adequate cash reserve, especially of gold. This condition is fulfilled, as capitalist production develops, by increased production of gold, by the accumulation of gold in the banks, and by restricting the function of this gold to that of a reserve. With the development of credit the function of gold is increasingly limited to settling the balances on international payments, and although the volume of international payments has increased enormously, the cash required for balancing these payments has not increased to the same extent, nor in proportion to the accumulated gold reserves in the older capitalist countries, as a result of the growing use of credit money in international transactions. This puts the banks of issue in a position to meet the increased demands upon them during a crisis. We are assuming of course that their economic functions are not hampered by legislative controls, as was the case in England with the Peel Act, and in the United States with the nonsensical coverage regulations which have produced typical monetary crises there.

The absence of a monetary crisis protects credit against a complete breakdown and is therefore also a safeguard against the occurrence of gal bank crisis. There is no run on the banks and mass withdrawal of deposits, and the banks, if they are otherwise solvent, can meet their obligations. Even where a bank crisis does not result from a credit and monetary crisis, but from the immobilization of bank resources in industry and losses on credit advances, capitalist development tends to mitigate the effects of crises on capital.

The concentration of banking plays an important part here. Through the enormous expansion of the sphere of business activity, and its extension to diverse national economic areas at different stages of capitalist development it allows a much greater spreading of risk. Furthermore, the increasing concentration of the banks is accompanied by a change in their position vis ā vis speculation, commerce and industry. In the first place, this concentration involves a redistribution of power in their favour, thanks to their large capital resources. Not only is their capital quantitatively superior to that of their debtors, but they also have a qualitative advantage in disposing over capital which is constantly available, namely money capital This advantage precludes the possibility that a large, well-managed bank could become so dependent upon the fate of a single enterprise, or a few enterprises, in which it has invested its resources, as to be ruined by their failure during a crisis.

If one examines the causes which militate against a banking crisis the first thing to notice is that speculation, in both commodities and securities, has declined considerably in volume and importance. By speculation in commodities I mean here not only that which takes place on the commodity exchanges, but especially that which is involved in commodity trading, the demand for commodities by merchants who anticipate further price rises, and the accumulation of larger stocks in order to drive up prices by withholding supplies. Such speculation declines, in the first place, because of the elimination of commerce and the growth of direct dealings between producers and consumers, involving the transformation of independent merchants into agents of the syndicates and trusts, working on a fixed commission. To some extent this prevents speculation by merchants from driving prices far above the levels fixed by producers during a boom, and creating the illusion of a lively market when in reality effective demand has already begun to slacken.[4]

But where wholesale trade (and it is only wholesale trade with which we are concerned in this context) has not lost its traditional position, to the benefit of industry or the commodity departments of the large banks, it shows a strong tendency towards concentration itself and sharply reduces the participation of small dealers and outsiders. However, where the commodity exchanges still have an important role, in certain specific conditions, speculative movements are increasingly dominated by the banks, because the development of the credit system gives them a growing control over the whole stock of money capital, and hence the power to confine speculative movements within certain limits.

Finally, commodity speculation is also curbed by the development of means of transport, which has made markets less remote, especially in the case of commodities which are particularly subject to speculation, and of news agencies which give the state of the markets minute by minute. The accumulation of unsaleable products in distant markets while at the point of production output continues on the same, or an increased, scale, becomes more difficult. Furthermore, the decline in the relative share of consumer goods means that speculation in colonial products, which often had a fateful importance in the earlier crises in England, now plays a lesser role; a situation to which the certainty and regularity of imports and the precision and speed of market reports also contribute. In addition, commodity speculation declines in importance with the growth in scale of the capital goods industries, whose products are not subject to speculation because they are increasingly produced to order.

The changes which have occurred in the character of industrial crises, and the growth of the banks' domination of industry, also tend to make the emergence of a banking crisis more difficult. As we have seen, the growing concentration of industrial enterprises gives them greater immunity against the ultimate consequences of a crisis, namely total bankruptcy. Their powers of resistance are further enhanced by the joint stock form of organization which, as I have noted, also greatly increases the influence of the banks upon industry. The joint-stock company has this effect because it makes possible the continuation of production without any profit, and even at a loss, since capital can be attracted more readily than is the case with an individually owned firm. Second, it is easier for the joint-stock company to accumulate reserves in good years in preparation for bad years. Third, it is easier to control more rigorously the use of resources and especially the application of borrowed capital. The banks exercise a direct control over the employment of capital in corporations which they support with credit, and this control is applied ever more systematically as the tendency for industry to become increasingly dependent upon the banks progresses. The use of credit for purposes other than those directly related to the conduct of the enterprise is prevented. In earlier crises, an important factor was that individual entrepreneurs engaged heavily in speculation and used their firms' capital for this purpose, while operating their business with borrowed capital. Today a controlling bank would not allow this.

It is, therefore, sheer dogmatism to oppose the banks' penetration of industry, which is a necessary and unavoidable tendency, arising from the laws of capitalist development, as a danger to the banks; and to take the organizationally backward English banking system, with its division of labour between deposit and merchant banks, as an ideal to be attained, if necessary, by legislative compulsion. This doctrinaire view mistakes the appearance of the English banking system for the reality, by overlooking the fact that in England too the banks place their accumulated funds at the disposal of industry, commerce and speculation. There are specific historical causes which explain why this is done through middlemen in England, and directly by the banks in Germany and, with some modifications, in the United States.[5] None the less, the English system is an outmoded one and is everywhere on the decline because it makes control of the loaned-out bank capital more difficult, and hence obstructs the expansion of bank credit itself.

Finally, and here it will suffice to recall what was said in the chapter on the stock exchange, speculation in securities is also declining as a factor making for banking crises. As the power of the banks continues to grow, it is the banks which dominate the movements of speculation, rather than being dominated by them. The general importance of the stock exchange is declining, but more particularly as an aggravating factor in crises.

With the decline of speculation the psychology of the capitalist public has also been undergoing a change. However primitive the mentality of the speculator really is, notwithstanding the efforts of his admirers to discover in him all sorts of prophetic gifts and romantic plans for world improvement, the change in attitude of the speculating public can be explained by the commonplace view of the ordinary capitalist: 'losses make one a wiser man'. The mass psychoses which speculation generated at the beginning of the capitalist era, in those blessed times when every speculator felt like a god who creates a world out of nothing, seem to be gone for ever. The tulip swindle with its idyllic background of a poetic love of flowers, the South Sea Bubble, with its adventure-inspiring fantasies of unheard-of discoveries, Law's projects with their plans for world conquest, all gave way to the naked quest for marginal profit, which came to an end in the crash of 1873. Since then, faith in the magical power of credit and the stock exchange has disappeared, and despite Bontoux,[6] the beautiful Catholic cult has been destroyed by a sober enlightenment which no longer wants to believe in an immaculate conception by the holy ghost of speculation, but accepts what is natural as natural, and leaves faith to the fools who remain. The stock exchange has lost its faithful and kept only its priests, who make their money from the faith of others. Since faith has become a business, the business of faith has declined. The seductive and lucrative craze has spent itself, the tulips have long since faded, and the coffee bush, though it still yields commercial profit, no longer produces true speculative gains. Prose has vanquished the poetry of gain.

The above-mentioned factors throw light on the causes which have changed the character of crises in so far as the latter result from large-scale bankruptcies, and from stock exchange, bank, credit, and money panics. While these causes do not preclude the occurrence of such crises, they do explain why it is more difficult for them to occur. Whether they do break out or not depends upon the severity of the disturbances and the suddenness of their appearance. Whether these disturbances could become so great as to bring about a failure of one of the large banks in Germany (assuming reasonably competent management) is a quaesto facti (a matter of fact) rather than a theoretical question. But all these factors leave unresolved the emergence of an industrial crisis, the cyclical alternation of prosperity and depression. The question arises whether the great change in the form of industrial organization, whether monopolies, through their alleged power to suspend the regulatory action of the capitalist mechanism - free competition - can bring about qualitative changes in the business cycle.

As we know, cartels can effect changes in the level of prices, which produce a different level of profit as between cartelized and non-cartelized branches of production. The phenomena of the business cycle then develop on the basis of these changes, and they are modified, in certain respects, by the existence of cartels. But other effects too have been, and are still, attributed to the cartels. They are supposed not only to modify the effects of crises, but to be able to eliminate them altogether, since they regulate production and can always adjust supply to demand. This view ignores completely the inherent nature of crises. Only if the cause of crises is seen simply as the overproduction of commodities resulting from the lack of an overall picture of the market can it be plausibly maintained that cartels are able to eliminate crises by restricting production.

That a crisis is synonymous with the overproduction of commodities, or is caused by overproduction, appears to be certain and undeniable. Is it not a palpable fact, apparent to everyone? Prices are low because supply exceeds demand, that is, because there is a surplus of commodities, and every glance at the market reports shows that warehouses are overstocked, goods unsaleable, that there is indeed overproduction of commodities. But the cartels are in a position to restrict the output of an entire branch of industry. Previously, this was accomplished by the blind operation of the law of price, which brought numerous firms to a standstill, and to bankruptcy, through a fall in prices; but now the same blessed shrinkage of production can be achieved more rapidly and painlessly by the collective wisdom of the cartelized directors of production. Nor is this all. Since the cartel can fix prices and take care of 'the balancing of supply and demand' eliminate speculation, and control and supervise trading (if it does not take it over completely) why should it not be possible, by adapting production precisely to demand, to eliminate crises altogether from this world and to deal with minor disturbances of economic life quickly, without any serious disruption?

This would be too good to be true. Anyone who simply equates crises with the overproduction of commodities misses precisely the essential point: the capitalist character of production. The products are not simply commodities, but products of capital, and overproduction during a crisis is not just overproduction of commodities, but overproduction of capital. This simply means that capital is invested in production in such volume that the conditions of its utilization have come into contradiction with the conditions of its valorization, so that the sale of products no longer yields a profit sufficient to ensure its further expansion and accumulation. The sale of commodities comes to a standstill because production has ceased to expand. That is why anyone who simply equates a capitalist crisis with the overproduction of commodities does not get beyond the first step in the analysis of crises. It is evident that we are not dealing merely with an overproduction of commodities from the fact that soon after a crisis the market shows itself able to absorb a much larger quantity of commodities. Each successive period of prosperity breaks the record set by its predecessor, even though the increase in market capacity cannot be explained either by population growth or by the growth of income available for consumption. There are quite different factors to be taken into account besides the mere capacity to consume.

Cartels do not diminish, but exacerbate, the disturbances in the regulation of prices which lead ultimately to disproportionalities, and so to the contradiction between the conditions of utilization and the conditions of valorization. The effect of cartels is to end competition within a given branch of production, or more precisely, to make it latent, so that it does not exert a downward pressure on prices in that branch of production ; and second, to establish competition among the cartelized sectors on the basis of a higher rate of profit than that which prevails in the non-cartelized industries. But cartels are powerless to alter the competition among capitals for spheres of investment, or the effects of accumulation on the price structure, and they cannot, therefore, prevent the emergence of disproportional relations.

We have seen that during a period of prosperity competition in a particular branch of production does not exert a downward pressure on prices, because demand exceeds supply and in such a case competition takes place among buyers, not among sellers. Only when supply outstrips demand does competition among sellers appear, and prices begin to fall. That cartels conform with the price structure, and do not determine it, follows from the mechanism of production. Let us assume that cartels maintain low prices during a period of prosperity; then there will be no increase in profit and no expansion of accumulation. If the prices of the cartelized industries remained low while those of non-cartelized industries rose, capital would flow out of the former, there would soon be overproduction of capital in the non-cartelized branches of production, matched by underproduction in the cartelized ones, hence an extreme disproportionality, leading to a general crisis; for a crisis is also possible when the volume of production remains unchanged, or even when it is reduced. In reality the cartel would probably have been shattered long before, because it would have frustrated instead of satisfying the striving for profit, and so lost its raison d'ętre. Partial regulation, involving the unification of a branch of industry into a single enterprise, has absolutely no influence upon the proportional relations in industry as a whole. The anarchy of production is not abolished by reducing the number of individual units while simultaneously increasing their strength and effectiveness ; indeed, it cannot be abolished at all in this gradual and piecemeal fashion. Planned production and anarchic production are not quantitative opposites such that by tacking on more and more 'planning' conscious organization will emerge out of anarchy. Such a transformation can only take place suddenly by subordinating the whole of production to conscious control. Who exercises this control, and is the owner of production, is a question of power. In itself, a general cartel which carries on the whole of production, and thus eliminates crises, is economically conceivable, but in social and political terms such an arrangement is impossible, because it would inevitably come to grief on the conflict of interests which it would intensify to an extreme point. But to expect the abolition of crises from individual cartels simply shows a lack of insight into the causes of crises and the structure of the capitalist system.

If cartels are not in a position to prevent crises, neither can they escape their effects. Naturally, if the crisis is identified with an overproduction of commodities, then the remedy is quite simple. The cartel curtails production and thus achieves more rapidly, and perhaps on a larger scale, what the crisis would in any case have accomplished by means of bankruptcies and plant slow-downs. The social consequences, namely unemployment and wage cuts, would of course be the same. But the cartelized capitalists would be able to maintain high prices by sharply curtailing supply. Prices will remain high, but profit will be reduced as a result of lower sales and higher costs of production. After a certain time the market will have absorbed the surplus output, and prosperity can return. This line of argument is as false as it is simple. Two conditions are necessary for prosperity to return: first, the restoration of proportionality, which is required in order to bring the depression to an end; and second, an expansion of production, without which there can be no prosperity. But the cartel policy which I have outlined above would actually make it more difficult to establish these two conditions. The curtailment of production means the cessation of all new capital investment, and the maintenance of high prices makes the effects of the crisis more severe for all those industries which are not cartelized, or not fully cartelized. Their profits will fall more sharply, or their losses will be greater, than is the case in the cartelized industries, and in consequence they will be obliged to make larger cuts in production. As a result, disproportionality will increase, the sales of cartelized industry will suffer still more, and it becomes evident that in spite of the severe curtailment of production, 'overproduction' persists and has even increased. Any further limitation of production means that more capital will be idle, while overheads remain the same, so that the cost per unit will rise, thus reducing profits still more despite the maintenance of high prices. The high prices attract outsiders, who can count on lower capital and labour costs since all other prices have fallen; thus they establish a strong competitive position and begin to undersell the cartel. The cartel will not be able to maintain prices any longer, and the price collapse spreads beyond cartelized industry. Artificial interventions are corrected, and the price structure follows the laws which the cartels vainly tried to bypass in their own case.[7] On the basis of the new price structure a redistribution of capital among the various sectors of production then takes place, and gradually the relations of proportionality are restored ; the depression is overcome. Prosperity can then get under way as soon as technical innovations or new markets generate increased demand, which in turn attracts new investment of productive capital, especially fixed capital.

Cartels, then, do not eliminate the effects of crises. They modify them only to the extent that they can divert the main burden of a crisis to the noncartelized industries. The difference in the rate of profit between cartelized and non-cartelized industries, which on average is greater the stronger the cartel and the more secure its monopoly, diminishes during times of prosperity and increases during a depression. In the initial period of a crisis and depression the cartel may also be in a position to maintain high profits for longer than the independent industries, thus exacerbating the effects of the crisis for the latter. This circumstance is not without importance, because it is precisely during a crisis and its immediate aftermath that the situation of industrialists is most difficult and their independence most threatened. The fact that just at this time cartel policy denies them any relief in the form of reductions in the price of their raw materials, etc., is an important factor in worsening the situation of the non-cartelized industries and accelerating the process of concentration.


[1]Incidentally, this is an error which Tugan-Baranowsky does not seem always to have avoided in the conclusion& which he draws from his excellent and reliable account of the history of crises in England.

[2]'The crisis of 1857, and still more that of 1873, involved an unusually large number of enterprises (in the iron industry) which did not differ greatly in their productivity. The general collapse therefore included many firms which, from a technological point of view, were quite viable and deserved to survive. In the crisis of 1900 the giant enterprises of basic industry were operating alongside many firms which would be considered antiquated today, the nonintegrated firms which had risen to the top on the wave of prosperity. The fall in prices and the shrinkage of demand were calamitous for these nonintegrated firms, whereas the giant combines were either not affected at all, or only for a short time. That is why the recent crisis resulted in a greater degree of concentration than previous crises, for example the crisis of 1873 which, although it eliminated some firms, did not give the survivors a monopoly in the prevailing state of technology. Today, however, thanks to a complex technology, elaborate organization and large capital resources, a very high degree of monopoly is enjoyed by the giant concerns in the modern iron and electrical industries, and to a lesser extent in the machine tool industry, as well as in some engineering, transport and other firms. If this does not apply to some "light" industries, and the effects of crises have not essentially changed for them, it is all the more easy to see how the recent development of the banking system affects the first category of industry.' O. Jeidels, Die Verhältnisse der deutschen Grossbanken zur Industrie, p. 108.

[3]This condition alone is sufficient, regardless of any other fundamental causes that might bring about the crisis. In an account of the Amsterdam stock

exchange crash of 1773, the following description of the results of one big failure occurs: `No one knew what the loss would amount to, nor how many other firms it would ruin. The general uncertainty drove away credit, and suddenly it was impossible to obtain cash. Some feared that their bills would not be accepted; others were concerned that they would be unable to recover the sums which their debtors owed them; still others tried to take advantage of the general distress. Everyone was on the lookout for a chance to buy at the lowest prices, but feared to pay out any cash, and circulation almost came to a standstill.' Der Reichtum von Holland, pp. 444 et seq., cited by Sartorius von Waltershausen in Das volkswirtschaftliche System der Kapitalanlage im Ausland, p. 377.

Compare with this the following description of the condition of the German stock exchanges on the outbreak of war in 1870: 'On 4 July 1870 the mood of the Berlin stock exchange was excellent. It began to waver in the next few days, became very uneasy on 8 July, and on 11 July lost its head. The panic lasted 8 to 10 days and then, with the return of confidence, the downward trend came to an end . . . . Money had vanished from the stock exchange as if by a magic wand. The discount of the Bank of Prussia rose to 9 per cent and the rate for collateral loans rose to 10 per cent in Leipzig, 9 per cent in Lubeck and 8 per cent in Bremen. What had happened to the money which could easily be had a few days previously for 3 per cent and 3.5 per cent? The government could not possibly have absorbed the money for mobilization purposes, because at that time the note issuing banks in Germany were decentralized and much of the money was in the hands of banks which did not issue notes, or of private bankers. Most of the money stayed where it was, but was hoarded, and anyone who succeeded in getting any money added it to his hoard. Thus, for example, it was reported from Munich: "For a time, it was impossible to obtain 500 florins for the best paper and collateral. On the other hand, even private individuals felt obliged to create a cash reserve for themselves, whatever the sacrifice, in order to be prepared for the worst." In Frankfurt "the bankers had only one thought, to get back their loans, in view of the public clamour for the return of deposits. The rapid increase of clearing credits in the banks shows that both bankers and the public tried to assure themselves of a large supply of cash in preparation for any eventuality."

`The following is reported from Hanover concerning the premium on cash: "Every banker, and above all the Hanover Bank, thought only of himself . . . treasury certificates and the notes of the private banks in Prussia were proscribed, and the solid citizen who had done any business with money bills or Prussian bonds had to accept a loss of 5 per cent, while the peasant whose fear made him ready to sell at any price was forced to accept a loss of 10 per cent or even more." '

And just as this situation shows in embryo all the typical features of the recent American monetary crisis, so also were the remedies the same. `During the money shortage in the second half of July, various measures were taken to secure relief. In Bremen, the Senate and the City Council decided to recognize certain foreign gold coins as legal tender, but this was of little help because this money, like the city's own currency, was retained in private hoards. In Stuttgart, a clearing company was founded which issued six-month 3 per cent notes in denominations of 50 to 500 florins. Similar bonds were issued by the Hypotheken- and Wechselbank in Munich, and in Frankfurt leading banking houses offered the local bank of issue a collective guarantee. Precious metals were imported from abroad as quickly as possible. By the end of July, the banking and import houses of Bremen had acquired considerable sums in sovereigns. Frankfurt obtained gold from England and silver from Vienna. These measures proved to be reasonably effective in countering the shortage of money as a means of payment, but could not bring enough capital on to the loan market to satisfy government requirements.' Sartorius von Waltershausen, op. cit., pp. 323 et seq.

[4]To that extent, the following comment by Marx needs to be qualified in respect of present-day conditions: 'Under the modern credit system, it [merchant capital] disposes of a large portion of the total capital of society, so that it can repeat its purchases even before it has definitely sold its previous purchases . . . aside from the separation of C-M from M-C, which follows from the nature of the commodities, a fictitious demand is here created . . . . Hence, we note the phenomenon that crises do not show themselves nor break out first in the retail business, which deals with direct consumption, but in the spheres of wholesale business and banking by which the money capital of society is placed at the disposal of the wholesale business.' Capital, vol. III, pp. 358-9 [MECW 37, pp. 302-3].

[5]It makes no difference in this respect if a trust company is interposed between the bank and the enterprise, since it remains directly dependent upon the bank.

[6]Eugene Bontoux was a French engineer and financier who succeeded in enlisting the participation of French clerical and aristocratic circles in his speculative Union Generale for the construction of railways in Eastern Europe. The project collapsed in 1882. [Ed.]

[7]This is illustrated by the behaviour of the Steel Trust. It reduced its production to a minimum in 1907-1908 in order to maintain prices. A year later the iron market collapsed, dragging with it all the other metal markets.