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introduction
To explain
commercial capital and banking capital, Marx began by discussing the
transformation of commodity capital and money capital into commercial capital
and money-dealing capital (Marx 1981: title of Part 4). His method was first to
divide the circuit of industrial capital, G-W…P…W’-G’, into production and
circulation. The capital in the circulation phase is called “merchant’s
capital”. Then the merchant capital is divided into “Commercial capital” and “Money-dealing
capital” (Marx 1981: 379). We can denote merchant capital as W’-G’-G-W, commercial
capital as W’-G’, and money-dealing capital as G’-G.
This method is, in terms of form, well balanced. However, Uno and
the Unoists criticized it and argued that, methodologically, the emergence of
specialized capital requires an explanation of how it can raise the profit rate
by reducing circulation capital and costs. Behaviors for higher profit by
individual capitals leads to the emergence of specialized capital. This method
is called the “Behavioral Approach”. Yamaguchi developed it and formulated the “Theory
of Differentiation and Emergence”, which explains the emergence of specialized
capital as differentiation or independence of the functions that are intrinsic to
the original industrial capital, through competition among individual capitals.
However, an open question remains as to whether this method explains
the concrete process — including transitional forms — through which specialized
capital emerges, or merely the possibility of reducing circulation capital and
costs. Standard texts such as Yamaguchi (1985) and Obata (2009) explain the
concrete process through which banking capital emerges, but, in contrast, they
did not address the concrete process through which commercial capital emerges. This
inconsistency remains unsolved.
Regarding the emergence of bank credit, Uno claimed that banks
collect idle money, which inevitably arises within the circuit of industrial
capital, and then lend it out. However, modern Unoist scholars have argued that
bank credit emerges from the development of commercial credit by the credit
intermediary, and banks issue new credit money in anticipation of future money reflux.
Their argument was influenced by the debate on inconvertible credit money
during the Banknote Controversy in Japan in the 1950s–60s (Iwata 2012b;
Okahashi 1957), as well as by the endogenous money supply theories developed
since the 1980s.
This paper will explain the concrete processes through which
different forms of capital or operations specializing in circulation such as commercial
credit or commercial capital emerge. Section 1 shows that idle money does not arise
equally among capitals. If circulation, namely salability, is completely
uncertain, some capitals have excessive idle money while others are short of
reserve funds for a long time. To utilize excessive reserve funds, there are
three ways: money lending, commercial credit and commercial capital. Section 2 argues
money lending. Contrary to the conventional view, it cannot lead to the
emergence of banks. Section 3 discusses commercial credit, which can serve as
embryonic form of bank credit. Section 4 discusses commercial credit, which
involves credit transactions among different capitals and can develop into
money-dealing capital, while suggesting further development toward banking
capital. Section 5 presents the conclusion and outlook.
1. Uncertainty of circulation and
bias of idle money
Industrial capital
faces the contradiction between the certainty of production and the
uncertainty of circulation. This contradiction can be temporarily
resolved by allocating reserve funds.
Let us consider this problem from a purely theoretical perspective.
In this case, production per unit time is constant, while sales per unit time
are unpredictable and independent of past.
We define:
𝑃: the value of products produced per unit of time
𝑆𝑖: the value of sold products per unit of time
Following Marx’s
premises in Chapter 15 of Capital, Volume II, we assume continuous
production at a constant pace and disregard profit and fixed capital (Iwata
2025).
Furthermore, we
assume that all products are sold in the average period. If we denote Xi = P− Si , then, E[Xi] = P− E[Si] = 0. However, in the uncertain circulation, even if the average of
is zero, its variance (or standard deviation) has a positive value.
When Xi = P − Si < 0, the capitalist must use its reserve funds to purchase materials
for production. The relation between production and sales is shown in the
following figure.
Figure 1 Circulation process of industrial capital
We assume that the
capitalist allocates R0 as initial reserve funds.
As long as R0 +ΣXi >0, the capitalist can continue its operation.
The key issue here
is whether the value of ΣXi fluctuates around 0 without excessive bias.
ΣXi can be expressed by the following recurrence relation: X(i+1)= Xi +εi
In that case, ΣXi follows a random walk. In random walk, even if the mean is zero, the
standard deviation increases in proportion to the square root of the number of
steps. For simplicity, we assume εi∼N(0,1) i.i.d (note 1).
(note 1. It means that the variables
follow a normal distribution with mean zero and standard deviation one, and are
independently and identically distributed.)
Since the
cumulative sum of Xi follows a
random walk, the values do not necessarily return to their initial
level. The figure below shows the nine random-walk series. Some series
fluctuate around the mean (zero), while others deviate from it for a long time.
Figure 2 Distribution
of Idle Money among Individual Capitals
This deviation implies
that some industrial capitals will continue to suffer from a lack of reserves,
while others accumulate excess reserves (note2)
. There are several ways to utilize excess
idle money: money lending, commercial credit and commercial capital (note3).
(note2.Of course, if there are differences in the ability to sell among industrial capitals, the deviation increases further. However, this section shows even if sales are completely uncertain and independent of individual ability to sell, some deviation inevitably arises.)
(note3. These three forms are an application of “polymorphic forms of commodity trade” in Obata 2009.)
2. Money lending
The simplest way
is to lend money to other capital. Uno explained the credit from excess idle
money in industrial capital as follows: “The money that industrial capitals
therefore deposit with banks is then loaned by the banks to other industrial
capitals for definite duration of time” (Uno 1980: 110).
However, after him, Unoist scholars such as Yamaguchi emphasized the
creation of credit money, which is the anticipation of future reflux of money
(Yamaguchi 1984: 45). For example, Yamaguchi argued bank credit emerges as a credit
intermediary (Yamaguchi 1985: 224-225) and deposit-taking only contributes to replenishing
reserve money. Following the terminology of Lapavitsas 2013, we can say Uno’s
method is based on goldsmith view and Yamaguchi’s is based on ‘bills’ view
(125). Yamaguchi’ credit money theory and bills view are compatible with the
endogenous money supply theories. These views are important not least because
modern money is completely inconvertible credit money. Therefore, excess money
can be utilized in way other than as loanable capital collected in the bank.
3. Commercial Credit
3.1 Uno and successors
Uno described commercial
credit as the method to save reserve funds (i.e., unproductive money capital)
(Uno 1980: 109). However, he did not clarify the conditions required for the
creditor capital. Yamaguchi pointed out two conditions for commercial credit (Yamaguchi
1985: 222-223). First, the seller must have sufficient idle money to continue
production without immediate payment. Second, the seller must be able to
anticipate the money reflux of the debtor, which requires information about the
salability of debtor’s commodity.
3.2 Gathering information by the
creditor
Certainly, there
are many ways for the debtor capital to get money (Lapavitsas 2003: chapter 4).
However, if we focus on commercial credit between industrial capitals, we
should examine the proceeding of capital circuit G-W…P…W’-G’, especially the
salability of the debtor’s commodity W’-G’, which is realization of value (note 4). Although
the accrual of surplus value …P…W’ is critical to capitalism and the class
relations, this topic belongs to the subject of Capital Volume II. Part
Four of Capital, Volume III, discusses the problem of realization (Marx 1981:
392, 394), which is often hidden under the assumption of “normal conditions” (Marx
1978: 335) (note 5).
(note 4. Regarding Marx’s distinction about production (surplus) value and its realization, see Fine 1985-86: 393.)
(note 5. As is well known, the difficulty of realization is referred to the salto mortale (Marx 1976: 200) )
As the creditor (seller) belongs to the same production chain as the
debtor (buyer), the creditor can gather information on the salability of the
commodity of the debtor. Traditionally, it is said that repeated cash
transactions form the basis of credit sales. However, if a buyer who always used
to pay in cash suddenly requests deferred payment, it is natural for the seller
to doubt the buyer’s ability to pay. Regardless of whether previous cash
transactions were repeated, what matters is the creditor’s ability to
anticipate the sale of the debtor’s commodity.
Naturally, industrial capital is concerned with the salability of
its own commodity, and it seeks information about the downstream part of the
production chain, including its ultimate stage, final consumption. Of course,
since information concerns uncertain and unpredictable circulation, not all
industrial capitals have equal access to it. Well-informed capitals are able to
develop credit operations.
3.3 From creditor to credit
intermediator
The premise for
commercial credit to function is that the creditor has strong sales and the
ability to assess the debtor’s creditworthiness. The creditor can utilize this premises
to increase its profit from credit operation.
Suppose that creditor B1 belongs to sector B, which
consists of many capitals {Bi} (i = 1, 2, 3…). And assume the buyers
from B1 belong to sector A, which consists of many capitals {Ai}
(i = 1, 2, 3…).
If B1’s inventory is depleted due to strong sales, it can
gain profit by credit intermediation. Since B1 has information about
the creditworthiness of some capital in sector A, for example Aj (j
=1,2,3,4) and B1 is trusted by other capitals in sector B due to B1’s
strong sales and solid money reflux, B1 can intermediate, for example,
A1 and B2, who does not have sufficient information of A1.
The simple form of credit intermediation is surety of A1’s debt by B1 (note 6).
(note 6. The following explanation is based on Obata 2009.)
Figure 3 Surety
Since B2
trusts B1’s surety rather than A1’s debt, A1’s
debt with surety of B1 is equivalent to B1’s own debt to
B2, which means the surety is equivalent to the exchange between A1’s
debt and B1’s debt.
Figure 4 Exchange of debts and purchase
This credit
relation can be expressed using financial statements. Since the balance sheet
cannot show interest or profit, we use a trial balance (See Appendix) that
integrates the balance sheet with the profit and loss statement. In Figure 4, “I_Cost”
and “I_revenue” refer to interest cost and interest revenue, respectively.
Figure 5 Exchange of debts and purchase, expressed by the trial balance
As the above
figure shows, B1 earns interest revenue by creating a larger claim
on A1 than its debt to B2. After paying interest to B2,
B1 retains the difference as profit from credit intermediation.
Thus, industrial capital can function as a credit intermediary. When
many other capitals place trust in B1, B1’s debt, held as
an asset by B2, can circulate as money—similar to the circulation of
a bill of exchange. This three–balance–sheet schema represents the embryonic
form of a bank, viewed from the perspective of credit creation or the bills
view.
However, a bank has many counterparts. For industrial capital to
evolve into a bank, it must first develop into commercial capital; and for
commercial capital to evolve into a bank, it must engage in money dealing,
which enables it to create its own debt money.
4. Commercial Capital
4.1 Differentiation and Emergence
of Commercial Capital
A third way to
utilize idle money is to take over the selling function of other industrial
capitals. The uncertainty of circulation includes differences in sales among
sellers within the same sector, a phenomenon referred to as “contingency in
individual sales” (Iwata 2020). If a capital sale out its inventory due to
strong sales, it can purchase the commodity from other capital and resell them.
First, it is natural to purchase the same commodity as its own. However, it can
expand the range of commodities to purchase. Similar to the movement of
industrial capital into other sectors, the capital can invest entirely in
circulation instead of renewing its fixed capital (Iwata 2020). By doing so,
the capital can expand its purchases beyond the limits of its own production,
thereby increasing its profits. This is the concrete process of the differentiation
and emergence of commercial capital.
Nex, let us show how profit is transferred.
Without considering circulation, the profit rate of industrial
capital is usually shown as S/(C+V). C is constant capital, V is variable capital and S is surplus
value. When circulation is considered, the profit rate is (S-k)/(C+V+B+k). B is capital used to purchase commodities, and k is the total
circulation cost, or the capital needed to cover it (note 7).
(note 7. This formula assumes a single turnover. If we consider more than one turnover, the numerator, s−k, becomes the product of the turnover number and S−k.)
When commercial capital is differentiated, profit should be
transferred. If we denote the transferred profit by S′ and assume the profit
rates of industrial and commercial capital are equal, the following equation holds: (S-S')/(C+V)= (S'-k)/(B+k).
From this equation, it follows that S’ = S‣(B+k)/(C+V+B+k)+ . This formula shows that commercial capital receives surplus value
in proportion to its own investment, and also receives compensation
corresponding to the circulation costs that industrial capital would otherwise
bear (Iwata 2021a). Thus, commercial capital becomes differentiated, and the profit
S’ is transferred to it.
4.2 Idle Money and Credit in
Commercial Capital
Without productive
fixed capital, the assumptions of continuous production no longer hold for
commercial capital. Commercial capital can easily change the kinds and
quantities of commodities it handles. If sales become stronger, they increase
purchases, and vice versa. Therefore, it does not have such inevitable idle
money as industrial capital does; in other words, the absence of continuous
production corresponds to the absence of idle money.
Commercial capital can expand the volume of its transactions beyond
the capital advanced for purchase (B), by using credit. As debtor, it requires
creditor industrial capital with sufficient idle money. In contrast, it can sell
on credit either by receiving credit from the latter or by reducing its own purchase.
More likely, commercial capital uses commercial credit in both purchase and
sale, obtaining credit from industrial capital with sufficient idle money.
4.3 From Commercial Capital to
Money-Dealing Capital
Another
characteristic of commercial capital is that it can both buy from and sell to
the same industrial capital, since it does not have productive fixed capital (Shibasaki
2016: 81). In other words, commercial capital can take over not only selling
process but also buying process from the same industrial capital.
If we describe the process step by step: first, industrial capital
sells its product to commercial capital on credit, based on its idle money.
Second, the industrial capital holds a claim on the commercial capital—idle
money now takes this form. Third, when the industrial capital purchases
commodities from the commercial capital, the previous claim is offset by a new
debt to it. This implies that money is dealt with as a liability on the balance
sheet of the commercial capital.
Historically, money-dealing capital has often been explained with
reference to the actual practices of dealing in different kinds of precious
metal coins or long-distance money remittances. Theoretically, however, it is
more appropriate to explain it as the operation of its own debt as money,
backed by commodities or other assets (Iwata 2022), not least for elucidating
the current inconvertible credit money as bank debt.
If this money-dealing function merges with the credit intermediation
discussed in Section 3.3, banking capital would emerge.
However, an open question remains here. Marx described the evolution
of credit system whose center is bank credit by two routes: form commercial
credit to bank credit (Marx 1981: 525) and money-dealing, integrated with
interest bearing capital (ibid, 528). The relation between them is not clear. The
two routes correspond to the arguments in sections 3 and 4 in the paper. Therefore,
here, I only point out the possibility that banking capital may emerge from the
integration of credit intermediation and money-dealing.
Conclusion
Under the gold
standard, the conventional view that banks collect idle money and lend it out
might have been rational. In contrast, in the modern era, money takes the form
of completely inconvertible credit money. This paper has argued that credit
money originates from the ways of utilizing idle money within the circuit of
industrial capital—namely, through money lending, commercial credit, and
commercial capital. In commercial credit, industrial capital can gather
information about its buyers and engage in credit intermediation. By contrast,
commercial capital can diversify its counterparties and take over both the
selling and buying processes of the same industrial capital, which leads to
money-dealing operations. When both functions are combined within a single
capital, banking capital emerges.
Of course, in a highly developed financial economy, it may appear
that financial claims and debts are confined within purely financial relations,
apart from industrial capital. However, from a theoretical standpoint, banks
and credit money can be derived from the profit-seeking activities of
industrial capital within circulation.
Nevertheless, some limitations remain. This paper leaves the issue
of the merger between credit intermediation and money-dealing operations for
future consideration. Uno and his successors were originally critical of Marx’s
concept of money-dealing capital, arguing that only the route from commercial
credit to bank credit should be adopted. However, their stance later changed
under the influence of theories of inconvertible credit money, such as the
endogenous money supply approach. Moreover, recent studies of Marx’s
manuscripts require us to reconsider the description in the current version of
Capital edited by Engels.
Despite these limitations, this paper has proposed a logical process
for the emergence of commercial credit, commercial capital, money-dealing
operations, and finally, banking capital.
Appendix: The Basic Concept of Trial
Balance
Profit = Revenue -
Cost
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