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Socialist Party of Great Britain - Capitalism In Crisis - Fictitious Capital.

Reading Capital

In Chapter I of CAPITAL Volume III Marx gave an overview of his investigations (Chapter 1: Cost Price and Profit [ p. 117). In Volume I he studied the process of capitalist production in which all secondary influences were left out. In CAPITAL Volume II, Marx next introduced the process of commodity circulation. He noted that he had passed from discussing an individual capital to social capital as a whole and that the production and circulation processes represented a unity. Volume III of CAPITAL went one step further. Not only did Marx continue looking at social capital in competition, introducing a new economic category; prices of production but he also showed how and why capitalism appears at it does “on the surface of society”; both in competition between capitalists and in “the everyday consciousness” of the agents of production. Marx’s discussion of fictitious capital takes place within a more general discussion on banking and money.

It was in the third volume of CAPITAL that Marx used and developed the term fictitious capital to highlight its role in banking and credit (see Chapter 29 Banking Capital’s Component Part page 594-606 Penguin edition). Smith used it in the WEALTH OF NATIONS and got the expression from Richard Cantillon, who, writing in 1755, used it in connection with the Mississippi Bubble in France of 1719-20 and the overlapping South Sea Bubble of 1720 in Britain, both of which Cantillon made money from. Despite the gaps in Marx's study of fictitious capital, it represents a valuable insight into his analysis of capitalism and develops his concept of commodity fetishism in the first volume of CAPITAL: “(the commodity) is nothing but the definite social relation between men themselves which assume here,…, the fantastic form of a relation between things” (Chapter 1 THE COMMODITY Part 4 pp 165 Penguin edition 1990).

Engels believed that Marx attributed substantial importance to the working of fictitious capital and joint stock companies. He collected a mass of Marx's unfinished writings on fictitious capital into a chapter 29 of the third volume of CAPITAL. The chapter leaves little doubt that Marx had intended fictitious capital to have an important bearing on his discussion of crises as it related to capital accumulation and joint stock companies.

Fictitious capital was a speculative form of capital created out of the national debt and the credit system and presented a distorted view of capitalism. Fictitious capital was not backed by the actual money supply or real business transactions. The growth of fictitious capital usually occurred in Marx’s day when interest rates were low and financial instruments like “promissory notes” begin to exchange as though they were money.

Fictitious capital was, for Marx, an outgrowth of the credit system. Fictitious capital was interest-bearing capital: stocks and bonds that were bought and sold and consequently had a circulation of their own on the market even though they do not represent any real capital. All forms of promissory notes not backed up by real capital were examples of fictitious capital. So too were Government bonds. The owner of the bond had a claim on future taxation but the bond had no link to any real capital.

Marx never gave a single definition once and for all to the concept of fictitious capital, any more than he explicitly defined, for example, labour power which he said had an “historical and moral element” (Chapter 6 The Sale and Purchase of Labour Power p. 275) or value which, under capitalist competition was modified to “prices of production” or any of the other categories which formed the groundwork for his critique of political economy. For Marx, such concepts were to be understood in terms of their interrelationship with the analysis of the commodity, an individual capital and on to social capital as a whole. In his words, these economic categories present "a rich totality of many determinations and relations" (GRUNDRISSE, 1973 Penguin p. 100).

In his discussion of fictitious capital, Marx commented on the development of capitalism of his own time:

“... a large portion of this money capital is still necessarily always merely fictitious i.e. a title to value just like value tokens. In as much as money functions in the circuit of capital, it certainly forms money capital at one point, but it is not transformed into loanable money capital; it is rather exchanged for the elements of productive capital, or paid out as a means of circulation when revenue is realized, so that it can be transformed into loan capital for its possessor.

He went on to say:

In so far as it is transformed into loan capital and the same money repeatedly represents loan capital, it is still clear that it only exists at one point as metal money; at all other points it exists simply in the form of a claim on capital. The accumulation of these claims,…,arises from a genuine accumulation,…from the transformation of the value of commodity capital, …, into money and yet the accumulation of these claims or titles as such is still different both from the genuine accumulation from which it arises and from the future accumulation…which is mediated by lending money” (ibid page 641).


Prima facie loan capital always exists in the form of money, later as a claim to money, since the money in which it originally exists is now in the hands of the borrower in actual money-form. For the lender it has been transformed into a claim to money, into a title of ownership. The same mass of actual money can, therefore, represent very different masses of money-capital. ... As material wealth increases the class of money-capitalists grows. On the one hand there is an increase in the number and wealth of the retired capitalists, the rentiers; and secondly the credit system must be further developed, which means an increase in the number of bankers, money-lenders, financiers, etc.


With the expansion of available money-capital, the volume of interest-bearing paper, government paper, shares, etc. also expands,…At the same time, however, so does the demand for available money-capital since the jobbers who speculate in this paper play a major role in the money market. If all purchases and sales of this paper were simply the expression of genuine capital investment, it would be right to say that they could have no effect on the demand for loan capital, since if A sells his paper, he withdraws as much money as B puts into paper. Even then, however, in view of the fact that the paper certainly exists, while the capital that it originally represented does not (…), a new demand for money capital of this kind is always created to that extent.”(ibid page 641-642)

On Banking Capital Marx wrote:

Banking capital consists of 1) cash money in the form of gold and notes; 2) securities. These latter may again be divided into two parts: commercial paper, current bills of exchange that fall due on specified dates, their discounting being the specific business of the banker; and public securities such as government bonds, treasury bills and stocks of all kinds, in short interest-bearing paper, which is essentially different from bills of exchange (CAPITAL Volume III Banking Capital’s Component Parts Chapter 29 page594)

And in relation to government bonds he gave an immediate clarification:

Let us take the national debt … as (an) exampl(e). The state has to pay its creditors a certain sum of interest each year for the capital it borrows. In this case the creditor cannot recall his capital from the debtor but can only sell the claim, his title of ownership. The capital itself has been consumed, spent by the state. It no longer exists. (ibid p. 595).

The bond which this credit represents is therefore only capital in appearance not in reality. No generation of surplus value has taken place through money-capital being invested in the exploitation of labour-power and the production of commodities. Instead these bonds have their own market in which they can be sold and re-sold as though they had a life of their own; “money breeding money”.

Marx declared interest-bearing capital to be the “most superficial and fetishized form” of the economic categories he had so far investigated (CAPITAL VOLUME III chapter 24 Interest-Beating Capital as the Superficial Form of the Capital relation page 515)

Marx and Fictitious Capital

We can take just one example of fictitious capital from Marx; the promissory note.

In Marx’s day the State had to pay its creditors a certain amount of interest on the capital it had borrowed. The creditor did not receive his original capital back but was given a claim, or title of ownership, which was called a “promissory note” which he could sell on to another person who sell it on again.

Marx stated:

Even when the promissory note — the security — does not represent a purely fictitious capital, as it does in the case of national debts, the capital-value of this security is still pure illusion. We have already seen how the credit system produces joint-stock capital. Securities purport to be ownership titles representing this capital. The shares in railways, mining, shipping companies, etc, represent real capital, i.e. capital invested and functioning in these enterprises, or the sum of money that was advanced by the share-holders to be spent in these enterprises as capital. It is no way ruled out here that these shares may simply be a fraud.


But the capital does not exist twice over, once as the capital value of the ownership titles, the shares, and then again as the capital actually invested or to be invested in the enterprises in question. It exists only in the latter form, and the share is nothing but an ownership title, pro rata, to the surplus-value which this capital is to realise. A may sell this title to B, and B may sell it to C. These transactions have no essential effect on the matter. A or B has then transformed his title into capital, but C has transformed his capital into a mere ownership title to the surplus-value expected from this share capital (ibid page 597-598).

Superficially it seems that capital has tripled itself, but in reality it is always the same capital, the initial capital is already spent and what appears as an accumulation of real capital is in reality the accumulation of legal title to an income somewhere in the future.

These bits of paper are not calculated on the basis of a real income, but on the expectation of a future return. Consequently there is a degree of speculation: whether of losses in bad periods or gains under favourable conditions. So, for example, as far as government bonds to cover the national debt, or more generally, promissory notes are concerned, it would only need the money market to hit some problem that provoked a rise in interest rates for them to be devalued. It’s the same for shares, should there be a change in the situation for whatever reason, it would alter the expectations of any future realisation of surplus value which these stocks represent.

Marx concluded:

In so far as the rise or fall in value of these securities is independent of the movement in the value of the real capital that they represent the wealth of the nation is just as great afterwards as before…As long as their depreciation was not the expression of any standstill in production and in railway and canal traffic, or an abandonment of undertakings already begun, or a squandering of capital in positively worthless enterprises, the nation was not a penny poorer by the bursting of these soap bubbles of nominal money capital (ibid page 599).

What Marx meant by this statement was that the gambling on the casinos of capitalism do not create any more wealth. Social wealth under capitalism expressed as the earned income of wages and salaries and unearned income as rent, interest and profit is created by the exploitation of labour power.

Marx had shown that the sum of social value equaled the sum of profit. How the capitalist class chose to re-invest, waste, redistribute or lose profit did not alter the reality of social wealth created by the working class.

Marx only left fragments which he would have worked up to a more detailed study of fictitious capital. Nevertheless, what he wrote is of interest in relation to the rise of giant corporations and the form of finance that has grown up with it; particularly sophisticated financial instruments like interest rate swaps of the 1980’s and today’s £516 trillion derivatives market which operates in a parallel shadow world to the rest of the banking system, insurance and the stock market.

Derivatives markets are a modern example of fictitious capital; the money fetish which believes money breeds money. Anything that carries a price can spawn a derivatives market as shown in the recent film “Crisis in the Credit System”. They are financial contracts sold to pass on to others. At the heart of this market is the credit derivative swap effectively an insurance policy against the default in the interest payment on a corporate bond. As markets spiraled into crisis, and banks and corporations began to default on bond payments many of these policies proved worthless. Just as more primitive financial instruments did during a crisis in Marx’s day; “plus ca change…”

Commodity Fetishism, Banking and Credit

Commodity fetishism is the attachment of certain powers or characteristics to commodities, thereby giving commodity exchange a degree of control over people. When we examine markets, we see only the exchange relations between commodities, and this appears to be a natural relationship. But behind these is a social relationship, one between buyers and sellers of labour power, between owners and non-owners of the means of production, and one that has developed over time to take a particular form at each stage of historical development.

When market exchange fully develops so that commodity exchange dominates economic life, the commodity seems to acquire properties of its own. As an economic system, capitalism derives a life of its own, dominating workers who lose their creative identity in the production of commodities. In particular, when labour power becomes a commodity, behind this is an exploitative social relationship.

In the first part of CAPITAL, Marx outlines several different stages of exchange and exchange value. Theoretically and historically, the simple, isolated or accidental form is the initial form of exchange, but as markets develop, exchange-values acquire a total and then a general form. In this development, exchange values become regularized, and one commodity takes on the role of universal equivalent. Once this becomes even further developed, so that this universal equivalent becomes generally acceptable, this equivalent is called money. The fetish properties associated with money reach their climax with banking, interest and credit.

Citing Dr Richard Price, whom Burke had challenged in his REFLECTIONS and whose recommendations influenced Pitt’s sinking fund scheme to pay off the National Debt, Marx wrote:

The conception of Capital as value that reproduces itself and increases in reproduction, by virtue of its innate property as ever, persisting and growing value…is behind Dr Price’s amazing fancies, which leave far behind the fantasies of the alchemists; fancies which Pitt quite seriously, and which he made the basis of his financial policy in his bills setting up the sinking fun” (CAPITAL VOLUME III Chapter 24 Interest Bearing Capital p. 519)

Marx develops his theory of fetishism from the commodity in the first volume of CAPITAL to money capital and onto the dark shadows cast by money capital over banking, interest, credit and joint stock companies. Invested in stocks, loans, annuities and bonds underwritten by the state “capital appears as a mysteriously self-creating source of interest – the source of its own increase” (ibid p. 517).

As Patrick Brantinger in his book “FICTIONS OF STATE: CULTURE AND CREDIT IN BRITAIN 1964-1994 (Cornell 1996) wrote:

In short, this is one version of Marx’s account of the production of something from nothing, gold out of paper or mere credit and prosperity out of its apparent opposite that the Augustans had also exposed and satirized as idolatry, alchemy and mystification” (p. 149).

Or as one modern wit has put it: “the 18th century had the South Sea Bubble, the 21st century has got the North Atlantic Sea Bubble”; a reference to Iceland and the collapse of its banking system and freezing of over $4 billion of savings from individuals, charities and Local Authorities in Britain.

Brantinger ends with this pessimistic observation on banking and credit:

But Marx is now dealing with a fetishism so pervasive and profound that it affects everything and everyone: there is no longer any clear outside to the belly of the whale called “capitalism”; the moneyed interest detested by Pope, Swift and Boligbroke has conquered everything” (p. 147).

Not everything. World Socialism stands outside the Whale. Capitalism is not so pervasive that it cannot be changed through revolution. The case against capitalism is compelling just because it is a world system of class exploitation, crisis and class struggle. The moneyed interest is an interest of a minority and while satire and cynicism change nothing conscious political action by a socialist majority can and does give a clear contour between private and common ownership of the means of production. There is still a world to win.

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