Bank capital (including other funds) is supplied to industrial capitalists in a variety of ways; by providing them with the opportunity to overdraft their own deposit accounts, by opening open credit accounts or transactions on current accounts. There is no fundamental difference between these three methods. What really matters is the purpose for which the funds are used, that is, whether they are used as fixed or working capital.
To the extent that banks tie up their funds, they are required to keep a relatively large equity capital as a reserve fund and as a guarantee of continuous deposit convertibility. Thus, banks that provide long-term loans, as opposed to purely depository banks, must have significant capital at their disposal. In England, the ratio of paid-in share capital to liabilities is extremely low: “In a well-run London and County Bank, the ratio was 4.38 to 100 in 1900.” On the other hand, this ratio also explains why the dividends of UK deposit banks are so high.
Originally, the main credit instrument was a bill of exchange, used as a credit of payment by productive capitalists – industrial and commercial – in their relations with each other; its result is credit money. When credit is concentrated in the hands of banks, investment credit becomes more and more important in comparison with a payment loan. At the same time, the credit that industrialists lend to each other can change its shape. Since all of their money capital is in liquid form in the banks, it makes no difference to them whether they lend to each other through commercial bills of exchange or claims on their bank loan. Bank credit, thus, can be replaced by bills, and the circulation of the latter begins to decrease. Industrial and commercial bills of exchange are being replaced by bank bills, which are based on the obligations of the industrialist to the bank.
The shift from commercial to investment lending is also evident in international markets. In the early stages of development, England (and the policy of the Netherlands was similar in the early period of capitalism) provided commercial loans to countries that bought English products, while paying for most of its imports in cash. Today the situation is different: the loan is provided not exclusively or mainly in the form of a commercial loan, but for capital investments, the purpose of which is to gain control over foreign production. Today, the main international bankers are not so much industrialized countries as the United States and Germany; first of all France, and then Holland and Belgium, which already financed English capitalism in the seventeenth and eighteenth centuries, are the main providers of investment credit. England in this regard occupies an intermediate position. This explains the differences in the movement of gold to and from the central banks of these countries. For a long time London was the only truly free market for gold and therefore the center of the gold trade, so the movement of gold through the Bank of England served as an indicator of international credit relations. Free movement of gold was impeded by the policy of gold prizes in France, and in Germany by various policies of the Reichsbank leadership. Since the credit provided by England so far is still largely commercial credit, the fluctuations in England’s gold reserves depend mainly on the state of industry and commerce, as well as on the balance of payments. The Banque de France, on the other hand, enjoys a much greater degree of discretion, thanks to its huge gold reserves and relatively small commercial obligations. Whenever there is any disturbance in the commercial credit market, the Bank of France comes to the rescue of the Bank of England.
In this relative independence of a bank loan from an ordinary commercial loan, it is important that it gives the banker certain advantages. Each merchant and industrialist has obligations that must be fulfilled within a certain time frame, but his ability to fulfill these obligations now depends on the decisions of his banker, who can make them impossible to fulfill by limiting credit. This was not the case when the bulk of the loans were commercial loans, and banks were only traders in promissory notes. In such circumstances, the banker himself was dependent on the state of affairs and the payment of bills and had to avoid, as far as possible, any restrictions on the credit required by the business, because otherwise he could destroy the entire structure of commercial credit. Consequently, expanding his own credit to the fullest, even to the point that he overdid it and incurred bankruptcy. Today, when commercial loans are much less important than investment loans, the bank can dominate and control the situation is much more efficient.