[Pen-l] What is the Crisis About? Fictitious Capital or the Destruction of Wealth

[Charles Brown <cdb1003@xxxxxxxxxxx>]

Marx writes:
"To the extent that the depreciation or increase in value of this 
Âpaper is independent of the movement of value of the actual 
capital that it represents, the wealth of the nation is just as 
great before as after its depreciation or increase in value.

" 'The public stocks and canal and railway shares had 
already by the 23rd of October, 1847, been depreciated 
in the aggregate to the amount of Â114,752,225."
Â(Morris, Governor of the Bank of England, testimony in 
the Report on Commercial Distress, 1847-48 [No. 3800].)'
"Unless this depreciation reflected an actual stoppage of 
production and of traffic on canals and railways, or a suspension
Âof already initiated enterprises, or squandering capital in 
positively worthless ventures, the nation did not grow one cent poorer 
by the bursting of this soap bubble of nominal money-capital."[12]


Fictitious capital


http://en.wikipedia.org/wiki/Fictitious_capital
Fictitious capital is a concept used by Karl Marx in his
Âcritique of political economy. It is introduced in the third volume of Capital.[1]
Fictitious capital could be defined as a capitalisation 
on property ownership. Such ownership is real and legally 
enforced, as are the profits made from it. But the capital involved
Âis fictitious; it is "money that is thrown into circulation as 
capital without any material basis in commodities 
or productive activity".[2] Fictitious capital could also 
be defined as "tradeable paper claims to wealth", although 
tangible assets may themselves under certain conditions 
also be vastly inflated in price.[3]

Contents
ÂÂÂÂ* 1 Uses of the term 
ÂÂÂÂ* 2 Speculation and fictitious capital 
ÂÂÂÂ* 3 Illustrations 
ÂÂÂÂ* 3.1 Banking 
ÂÂÂÂ* 3.2 Public stocks 
ÂÂÂÂ* 4 See also 
ÂÂÂÂ* 5 ReferencesÂÂ
[edit] Uses of the term
Marx saw the origin of fictitious capital in the development 
of the credit system and the joint-stock system.
"The formation of a fictitious capital is called capitalisation."[4] 
It represents a claim on property rights. Such claims can take
Âmany forms, for example, a claim on future government 
tax revenue or a claim issued against a commodity that 
remains, as yet, unsold. The stocks, shares and bonds 
issued by companies and traded on stock markets are
Âalso fictitious capital.
A company may raise (non-fictitious) capital by issuing 
stocks, shares and bonds. This capital may thenÂbe used 
to generate surplus value. But once this capital is set in 
motion, the claims held by the owners of the share certificate, 
etc, are simply "marketable claims to a share in future surplus
Âvalue production". The stock market "is a market for
Âfictitious capital. It is a market for the circulation of property rights as such".[5]
Because the value of these claims does not function as 
capital, merely a claim on future surplus, "the capital-value of 
such paper is...wholly illusory... The paper serves as title of ownership which represents this capital. The stocks of railways, mines, navigation companies, and the like, 
represent actual capital, namely, the capital invested and functioning
Âin such enterprises, or the amount of money advanced by the 
stockholders for the purpose of being used as capital in such enterprises...
ÂBut this capital does not exist twice, once as the capital-value 
of titles of ownership (stocks) on the one hand and on the other hand 
as the actual capital invested, or to be invested, in those enterprises." 
The capital "exists only in the latter form", while the stock or share "is
Âmerely a title of ownership to a corresponding portion of the surplus-value
Âto be realised by it".[6]
The formation of fictitious capital is, for Marx, linked to the 
wider contradiction between the financial system in capitalism 
and its monetary basis. Marx writes: "With the development of 
interest-bearing capital and the credit system, all capital seems 
to double itself, and sometimes treble itself, by the various modes
Âin which the same capital, or perhaps even the same claim on a debt,
Âappears in different forms in different hands. The greater portion of 
this 'money-capital' is purely fictitious. All the deposits, with the 
exception of the reserve fund, are merely claims on the banker, 
which, however, never exist as deposits."[7] The expansion
Âof the credit system can, in periods of capitalist 
expansion, be beneficial for the system. But in periods of 
economic crisis and uncertainty, capitalists tend, Marx argues,
Âto look to the security of the "money-commodity" (gold) as the 
ultimate measure of value. Marx tends to assume the convertibility
Âof paper money into gold. However, the modern system of inconvertible
Âpaper money, backed by the authority of states, poses greater 
problems. Here, in periods of crisis, "the capitalist class 
appears to have a choice between devaluing money or commodities, 
between inflation or depression. In the event that monetary policy
Âis dedicated to avoiding both, it will merely end up incurring both".[8]

[edit] Speculation and fictitious capital
Profit can be made purely from trading in a variety of financial 
claims existing only on paper. This is an extreme form of the 
fetishism of commodities in which the underlying source of 
surplus-value in exploitation of labour power is disguised.
ÂIndeed, profit can be made by using only borrowed capital to engage
Âin (speculative) trade, not backed up by any tangible asset.
The price of fictitious capital is governed by a series of complex 
determinants. In the first instance they are governed by the 
"present and anticipated future incomes to which ownership 
entitles the holder, capitalised at the going rate of interest".[9]
ÂBut fictitious capital is also the object of speculation.
ÂThe market value of such assets can be driven up and 
artificially inflated, purely as a result of supply and demand 
factors which can themselves be manipulated for profit.
ÂThe inflated value can just as rapidly be punctured if large
Âamounts of capital are withdrawn.

[edit] Illustrations
[edit] Banking
Marx cites the case of a Mr Chapman who testified before 
the British Bank Acts Committee in 1857:
"though in 1857 he was himself still a magnate on the
Âmoney market, [Chapman] complained bitterly that there 
were several large money capitalists in London who were 
strong enough to bring the entire money market into disorder 
at a given moment and in this way fleece the smaller money 
dealers most shamelessly. There were supposed to be
Âseveral great sharks of this kind who could significantly 
intensify a difficult situation by selling one or two million pounds 
worth of Consols and in this way taking an equivalent sum of
Âbanknotes (and thereby available loan capital) out of the market. 
The collaboration of three big banks in such a manoeuvre would
Âsuffice to turn a pressure into a panic." [10]
Marx added that:
"The biggest capital power in London is of course 
the Bank of England, but its position as a semi-state 
institution makes it impossible for it to assert its domination
Âin so brutal a fashion. Nonetheless, it too is sufficiently capable 
of looking after itself... Inasmuch as the Bank issues notes that are
Ânot backed by the metal reserve in its vaults, it creates tokens of value 
that are not only means of circulation, but also forms additional - 
even if fictitious - capital for it, to the nominal value of these fiduciary
Ânotes. And this extra capital yields it an extra profit."[11]

[edit] Public stocks
Marx writes:
"To the extent that the depreciation or increase in value of this
Âpaper is independent of the movement of value of the actual 
capital that it represents, the wealth of the nation is just as 
great before as after its depreciation or increase in value.
" 'The public stocks and canal and railway shares had 
already by the 23rd of October, 1847, been depreciated 
in the aggregate to the amount of Â114,752,225."
Â(Morris, Governor of the Bank of England, testimony in 
the Report on Commercial Distress, 1847-48 [No. 3800].)'
"Unless this depreciation reflected an actual stoppage of 
production and of traffic on canals and railways, or a 
suspension of already initiated enterprises, or squandering 
capital in positively worthless ventures, the nation did not 
grow one cent poorer by the bursting of this soap bubble of nominal money-capital."[12]
[edit] See also
ÂÂÂÂ* Capital (economics) 
ÂÂÂÂ* Capital accumulation 
ÂÂÂÂ* Economic bubble 
ÂÂÂÂ* Economic crisis 
ÂÂÂÂ* Money creation 
ÂÂÂÂ* Speculation 
ÂÂÂÂ* Stock market bubble 
[edit] References
ÂÂÂÂ1. ^ Marx, Karl. Capital, volume III. http://www.marxists.org/archive/marx/works/1894-c3/.Â; 
ÂÂÂÂ2. ^ Harvey, David (2006). Limits to Capital. London: Verso. p.Â95. ISBN 9781844670956. 
ÂÂÂÂ3. ^ Itoh, Makoto; Lapavitsas, Costas (1998), Political Economy of Money and Finance, London and Basingstoke: Macmillan, ISBN 9780312211646Â 
ÂÂÂÂ4. ^ Marx, Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved on 2008-06-26Â 
ÂÂÂÂ5. ^ Harvey, David (2006). Limits to Capital. London: Verso. p.Â276. ISBN 9781844670956. 
ÂÂÂÂ6. ^ Marx, Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved on 2008-06-26Â 
ÂÂÂÂ7. ^ Marx, Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved on 2008-06-26Â 
ÂÂÂÂ8. ^ Harvey, David (2006). Limits to Capital. London: Verso. pp.Â294â296. ISBN 9781844670956. 
ÂÂÂÂ9. ^ Harvey, David (2006). Limits to Capital. London: Verso. pp.Â276â277. ISBN 9781844670956. 
ÂÂÂÂ10. ^ Marx, Karl. Capital, volume III. Penguin. p.Â674. 
ÂÂÂÂ11. ^ Marx, Karl. Capital, volume III. Penguin. pp.Â674â675. 
ÂÂÂÂ12. ^ Marx, Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved on 2008-06-26Â 
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