The use of capital consists in its advance. It goes before all operations of labour and trade. It is the power that sets labour and trade in motion; just as the power of wind, or water, or steam, gives movement to wheels and pistons.
Let us briefly see how capital operates upon the three great branches of human industry, namely, upon agriculture, manufactures, and commerce.
A farmer having acquired capital, either by the former savings of himself or his fathers, or by borrowing from the savings of others, takes a certain number of acres of land. He changes his capital of money into other things which are equally capital;—into horses, and cows, and sheep, and agricultural instruments, and seed. He makes an advance in the hope of producing a profit. He therefore sets his horses to work;—he gets milk from his cows;—he shears his sheep;—he fattens his oxen;—and he put his tools into the hands of labourers, to prepare the ground for the reception of his seed. He is paying money away on every side, which he would not do if he did not expect a return, with a profit. By all these operations—by the work of his horses and his labourers—by the increase in number, and the increase in value of his flocks and herds,—and by the harvest after the seed-time,—new produce is created which produces a return of capital, and ought to produce a profit if that capital is properly expended. The hope of profit sets the capital to work, and the capital sets the labour to work. If there were no capital there would be no labour. Capital gives the labourer the power, which he has not in himself, of working for a profit.
A capitalist desires to set up a cotton manufactory. He erects buildings, he purchases machines, he buys cotton-wool, he engages workmen. The annual value of the buildings and of the machines,—that is the interest upon their cost, added to their loss by wear and tear—the price of the raw material, and the wages of the workmen, are all calculated to be paid out of the price at which the cotton thread will be sold. To engage in such large undertakings, in which the returns are slow, there must be great accumulation of capital. To engage in such large undertakings, in which the risk is considerable, there must be abundant enterprise. Without extensive accumulations of capital, which produce enterprise, they could not be engaged in at all.
Capital employed in commerce circulates through the world in a thousand forms; but it all comes back in produce to the country that sends it out. Nations that have no accumulated stock, that is no capital, have no commerce; and where there is no commerce there are no ships and no sailors; and there are no comforts besides those which spring up at the feet of the more fortunate individuals of such nations.
In all these operations of capital upon the enterprises of agriculture, manufactures, and commerce, another power, which is the result of accumulation, is more or less, in most cases, called into action. That power is Credit.
Credit, upon a large scale, arose from the difficulty of transmitting coined money from place to place, and particularly from one country to another; and hence the invention of bills of exchange. A bill of exchange is an order by one person on another, to pay to a specified person, or his order, a sum of money specified, at a certain time and a certain place. It is evident that the bill of exchange travels as much more conveniently than a bag of money, as the bag of money travels more conveniently than the goods which it represents. For instance a box of hardware from Birmingham might be exchanged for a case of wine from Bordeaux, by a direct barter between the tradesman at Birmingham and the tradesman at Bordeaux; but this sort of operation must be a very limited one. Through the agency of merchants, the hardware finds it way to Bordeaux, and the wine to Birmingham, without any direct exchange between either place, or without either having more of the commodity wanted than is required by the market,—that is, the supply proportioned to the demand of each town. Through the division of labour, the merchant who exports the hardware to Bordeaux, and the merchant who imports the wine from Bordeaux, are different people; and there are other people engaged in carrying on other transactions at and with Bordeaux, with whom these merchants come in contact. When, therefore, the merchant at Bordeaux has to pay for the hardware in England, he obtains a bill of exchange from some other merchant who has to receive money from England, for the wine which he has sent there. And thus not only is there no direct barter between the grower of the wine and the manufacturer of the hardware, but the wine and the hardware are each paid for without any direct remittance of coined money from France to England, but by a transfer of the debt due from one person to another in each country. By this transfer, the transaction between the buyer and the seller is at once brought to maturity; and by this operation the buyer and seller are each benefited, because the exchange which each desires is rendered incomparably more easy, because more speedy and complete. The same principle applies to transactions between commercial men in the same country. The order for payment, which stands in the place of coined money in one case, is called a Foreign bill of exchange; in the other an Inland bill of exchange.
The operation of credit in a country whose industry is in an advanced state of activity, is extended over all its commercial transactions, by the necessity of obtaining circulating capital for the carrying forward the production of any commodity, from its first to its last stages. A manufacturer has a large sum expended in workshops, warehouses, machinery, tools. This is called his plant, or fixed capital. He has capital invested also in the raw material which he intends to convert into some article of utility. He works up his raw material; he makes advances for the labour required in working it up. The article is at length ready for the market. The wholesale dealer, who purchases of the manufacturer, sells to a retailer, who is in the habit of buying upon credit, long or short, because the article remains a certain time in his hands before it reaches the consumer, who ultimately pays for it. From the time when a fleece of wool is taken from the sheep's back in Australia, till it is purchased in the shape of a coat in London, there are extensive outlays in every department, which could not be carried on steadily unless there were facilities of credit from one person concerned in the production to another person concerned in the production,—the whole credit being grounded upon the belief that the debt contracted in so many stages will be repaid by the sale of the cloth to the consumer. The larger operations of this credit are represented by bills of exchange, or engagements to pay at a given date; and these bills being converted into cash by a banker, furnish a constant supply of consumable commodities to all parties concerned in advancing the production, till the produce arrives in the hands of the consumer. To judge of the extent to which credit is carried in this country, it is only necessary to mention, that five millions sterling are daily paid in bills and cheques by the London bankers alone; that the Bank of England alone, in 1853, discounted bills to the amount of twenty-five millions sterling; and that the note circulation of the United Kingdom is about forty millions. Credit, undoubtedly, if conducted upon fair principles, represents some capital actually in existence, and therefore does not really add to the accumulation or capital of the producers. But it enables men in trade at once to have stock and circulating capital—to use even their houses and shops and manufactories and implements; and to give, at the same time, a security to others upon that fixed capital. This process is, as it were, as if they coined that fixed capital. The credit, which is rendered as secure as possible in all its stages by the accumulating securities of the drawer, acceptor, and endorsers of a bill of exchange, brings capital into activity,—it carries it directly to those channels in which it may be profitably employed,—it conducts it to those channels by a systematic mode of payment for its use, which we call interest, or discount;—and it therefore carries forward accumulation to its highest point of productiveness.
If the reader will turn to the passage in our third chapter, where Tanner describes the refusal of the traders to give him credit, he will see how capital, advanced upon credit, sets industry in motion. The Indians had accumulated no store of skins to exchange for the trader's store of guns, ammunition, traps, and blankets. The trader, although he possessed the articles which the Indians wanted, refused to advance them upon the usual credit; and they were consequently as useless to the Indians as if they had remained in a warehouse at Liverpool or Glasgow. When the credit was taken away from the Indians, they could no longer be exchangers. Their own necessities for clothing were too urgent to enable them to turn their attention from that supply to accumulate capital for exchange, after the winter had passed away. They hunted only for themselves. The trader went without his skins, and the Indians without their blankets. Doubtless, the keenness of commercial activity soon saw that this state of things was injurious even to the more powerful party, for the accustomed credit was presently restored to the Indians. It was the only means by which that balance of power could be quickly restored which would enable the parties again to become exchangers. Every exchange presupposes a certain equality in the exchangers; and credit, therefore, from the capitalist to the non-capitalist, must, in many cases, be the first step towards any transaction of mutual profit. If the Indians had adopted the resolution of Tanner, to do without the blankets for the winter, and had substituted the more imperfect clothing of skins,—and if the traders had persevered in their system of refusing credit, that is, of advancing capital,—the exchange of furs must have been suspended, until, by incessant industry, and repeated self-denial, the Indians had become capitalists themselves. They probably, after a long series of laborious accumulations, might have done without the credit—that is, have not consumed the goods which they received before they were in a condition to give their own goods as equivalents; and then, as it usually happens in the exchanges of civilized society, they would have ensured a higher reward for their labour. The credit rendered the labour of the Indians loss severe, inasmuch as it allowed them to work with the aid of the accumulations of others, instead of with their own accumulations. But it doubtless gave the traders advantage, and justly so, in the terms of the exchange. If the Indians had brought their furs to the mart where the dealers had brought their blankets, there would have been exchange of capital for capital. As the Indians had not accumulated any furs, and were only hoping to accumulate, there was, on the part of the white traders, an advance of a present good for a remote equivalent. The traders had doubtless suffered by the casualties which prevented the Indians completing their engagements. They made a sudden, and therefore an unjust, change in their system. The forbearance of the Indians shows their respect for the rights of property, and their consequent appreciation of their own interests. They might, possessing the physical superiority, have seized the blankets and ammunition of the traders. If so, their exchanges would have been at an end; the capital would have gone to stimulate other industry; the Indians would have ripped up the goose with the golden eggs.
It is easy to see that the employment of capital, through the agency of credit, in all the minute channels of advanced commerce, must wholly depend upon the faith which one man has in the stability and the honesty of another; and also upon the certainty of the protection of the laws which establish security of property, to enforce the fulfilment of the contract.