Capital: A Critique of Political Economy, Vol. III. The Process of Capitalist Production as a Whole

Karl Marx
Marx, Karl
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Frederick Engels, ed. Ernest Untermann, trans.
First Pub. Date
Chicago: Charles H. Kerr and Co.
Pub. Date
Das Kapital, based on the 1st edition.
37 of 55

Part V, Chapter XXXIV


[In a former work*105 the theory of Ricardo on the value of money as related to the prices of commodities has been analysed; we can, therefore, confine ourselves here to the indispensable. According to Ricardo, the value of metallic money is determined by the labor time incorporated in it, but only so long as the quantity of money stands in the right proportion to the quantity and price of the commodities to be handled. If the quantity of the money rises above this proportion, its value falls, the prices of commodities rise; if its quantity falls below the normal proportion, then its value rises and the prices of commodities fall—assuming all other circumstances to remain unchanged. In the first case the country, in which this excess of gold exists, will export the depreciated gold and import commodities; in the second case the gold will flow to those countries, in which it is held above its value, while the depreciated commodities flow from these countries to other markets, where they can obtain normal prices. "Since gold itself may become, both as coin and bullion, a token of value of greater or smaller magnitude than its bullion value, it is self-evident that convertible bank notes in circulation have to share the same fate. Although bank notes are convertible, i.e. their real value and nominal value agree, the aggregate currency consisting of metal and of convertible notes may appreciate or depreciate according as to whether it rises or falls, for reasons already stated, above or below the level determined by the exchange-value of the commodities in circulation and the bullion value of gold....This depreciation, not of paper as compared with gold, but of gold and paper together, or of the aggregate currency of a country, is one of the principal discoveries of Ricardo, which Lord Overstone and Co. pressed into their service and made a fundamental principle of Sir Robert Peel's Bank legislation of 1844 and 1845." (L. c. p. 241.)
We need not repeat here the demonstration of the incorrectness of this Ricardian theory, which is given in the same place. We are here merely interested in the way in which Ricardo's theses were elaborated by that school of bank theorists, who dictated the above named Bank Acts of Peel.
"The commercial crises of the nineteenth century, namely, the great crises of 1825 and 1836, did not result in any new developments in the Ricardian theory of money, but they did furnish new applications for it. They were no longer isolated economic phenomena, such as the depreciation of the precious metals in the sixteenth and seventeenth centuries which interested Hume, or the depreciation of paper money in the eighteenth and early nineteenth centuries which confronted Ricardo; they were the great storms of the world market in which the conflict of all the elements of the capitalist process of production discharge themselves, and whose origin and remedy were sought in the most superficial and abstract sphere of this process, the sphere of money-circulation. The theoretical assumption from which the school of economic weather prophets proceeds, comes down in the end to the illusion that Ricardo discovered the laws governing the circulation of purely metallic currency. The only thing that remained for them to do was to subject to the same laws the circulation of credit and bank note currency.
"The most general and most palpable phenomenon in commercial crises is the sudden general decline of prices following a prolonged general rise. The general decline of prices of commodities may be expressed as a rise in the relative value of money with respect to all commodities, and the general rise of prices as a decline of the relative value of money. In either expression the phenomenon is described but not explained....The different wording leaves the problem as little changed as would its translation from German into English. Ricardo's theory of money was exceedingly convenient, because it lends to a tautology the semblance of a statement of casual connection. Whence comes the periodic general fall of prices? From the periodic rise of the relative value of money. Whence the general periodic rise of prices? From the periodic decline of the relative value of money. It might have been stated with equal truth that the periodic rise and fall of prices is due to their periodic rise and fall....The tautology once admitted as a statement of cause, the rest follows easily. A rise of prices of commodities is caused by a decline of the value of money and a decline of the value of money is caused, as we know from Ricardo, by a redundant currency, i.e., by a rise of the volume of currency over the level determined by its own intrinsic value and the intrinsic value of the commodities. In the same manner, the general decline of prices of commodities is explained by the rise of the value of money above its intrinsic value in consequence of an inadequate currency. Thus, prices rise and fall periodically, because there is periodically too much or too little money in circulation. Should a rise of prices happen to coincide with a contracted currency, and a fall of prices with an expanded one, it may be asserted in spite of those facts that in consequence of a contraction or expansion of the volume of commodities in the market which cannot be proved statistically, the quantity of money in circulation has, although not absolutely, yet relatively increased or declined. We have seen that according to Ricardo these universal fluctuations must take place even with a purely metallic currency, but that they balance each other through their alternations; thus, e.g., an inadequate currency causes a fall of prices, the fall of prices leads to an export of commodities abroad, this export causes again an import of gold from abroad, which, in its turn, brings about a rise of prices; the opposite movement taking place in case of a redundant currency, when commodities are imported and money is exported. But, since in spite of these universal fluctuations of prices which are in perfect accord with Ricardo's theory of metallic currency, their acute and violent form, their crisis form, belongs to the period of advanced credit, it is perfectly clear that the issue of bank notes is not exactly regulated by the laws of metallic currency. Metallic currency has its remedy in the import and export of precious metals, which immediately enter circulation and thus, by their influx or efflux, cause the prices of commodities to fall or rise. The same effect on prices must now be exerted by banks by the artificial imitation of the laws of metallic currency. If gold is coming in from abroad it proves that the currency is inadequate, that the value of money is too high and the prices of commodities too low, and, consequently, that bank notes must be put in circulation in proportion to the newly imported gold. On the other hand, notes have to be withdrawn from circulation in proportion to the export of gold from the country. That is to say, the issue of bank notes must be regulated by the import and export of the precious metals or by the rate of exchange. Ricardo's false assumption that gold is only coin, and that therefore all imported gold swells the currency, causing prices to rise, while all exported gold reduces the currency, leading to a fall of prices, this theoretical assumption is turned into a practical experiment of putting in every case an amount of currency in circulation equal to the amount of gold in existence. Lord Overstone (the banker Jones Loyd), Colonel Torrens, Norman, Clay, Arbuthnot and a host of other writers, known in England as the adherents of the 'Currency Principle,' not only preached this doctrine, but with the aid of Sir Robert Peel succeeded in 1844 and 1845 in making it the basis of the present English and Scotch bank legislation. Its ignominious failure, theoretical as well as practical, following upon experiments on the largest national scale, can be treated only after we take up the theory of credit." (L. c. pages 255 to 259.)
The critique of this school was furnished by Thomas Tooke, James Wilson (in the "Economist" of 1844 to 1847) and John Fullarton. But how incompletely they themselves had seen through the nature of gold, and how unclear they were about the relation of money and capital, we have shown several times, particularly in chapter XXVIII of this volume. We quote here merely a few instances in connection with the transactions of the Committee of the Lower House of 1857 concerning Peel's Bank Acts (B. C. 1857).—F. E.]


J. G. Hubbard, former Governor of the Bank of England, testifies:—2400. "The effect of the gold exports...absolutely does not touch prices of commodities. It does, however, affect very much the prices of securities, because in proportion as the rate of interest changes, the values of the commodities impersonating this interest must necessarily be strongly affected."—He presents two tables covering the years 1834 to 1843 and 1844 to 1853, which prove that the movement of prices of fifteen of the most important commercial articles was quite independent of the export and import of gold and of the rate of interest. On the other hand they prove a close connection between the export and import of gold, which is indeed the "representative of our capital seeking investment," and the rate of interest.—"In 1847 a very large amount of American securities was transferred back to America, also Russian securities to Russia, and other continental papers to the countries from which we derived our imports of corn."


The fifteen principal articles mentioned in the following tables of Hubbard are: Cotton, cotton yarn, cotton fabrics, wool, wool cloth, flax, linen, indigo, raw iron, white sheet metal, copper, tallow, sugar, coffee, silk.

Table. Click to enlarge in new window.

Table. Click to enlarge in new window.


Hubbard remarked with reference to this: "Just as in the 10 years from 1834 to 1843, so in the years from 1844 to 1853 fluctuations in the gold of the bank were accompanied in every case by an increase or decrease of the loanable value of the money advanced at a discount; and on the other hand the changes in the prices of inland commodities showed a complete independence from the amount of the currency, as shown by the gold fluctuations of the Bank of England." (Bank Acts Report, 1857, II, pages 290 and 291.)


Since the demand and supply of commodities regulates their market-prices, it becomes evident here, that Overstone is wrong when he identifies the demand for loanable capital (or rather the discrepancies of its supply from demand), as expressed by the rate of discount, with the demand for actual "capital." The contention that the prices of commodities are regulated by the fluctuations in the quantity of the currency is now concealed under the phrase that the fluctuations in the rate of discount express fluctuations in the demand for actual material capital, as distinguished from money-capital. We have seen that both Norman and Overstone actually made this contention before the same Committee, and that especially the latter was compelled to take refuge in very lame subterfuges, until he was finally cornered. (Chapter XXVI.) It is indeed the old fib that changes in the quantity of gold existing in a certain country, by increasing or reducing the quantity of the medium of circulation in that country, must raise or lower the prices of commodities in this country. If gold is exported, then, according to this currency theory, the prices of commodities must rise in the country importing this gold, and this must enhance the value of the exports of the gold exporting country on the market of the gold importing country; on the other hand, the value of the exports of the gold importing country would fall on the markets of the gold exporting country, while it would rise in the home country, which receives the gold. But in fact the reduction of the quantity of gold raises only the rate of interest, whereas an increase in the quantity of gold lowers the rate of interest; and were it not for the fact that the fluctuations of the rate of interest are taken into account in the determination of cost-prices, or in the determination of demand and supply, the prices of commodities would be wholly unaffected by them.


In the same report N. Alexander, Chief of a great Indian firm, expresses himself in the following manner on the heavy drains of silver to India and China about the middle of the fifties, partly in consequence of the Chinese Civil War, which checked the sale of English fabrics in China, and partly of the epidemic among silk worms in Europe, which reduced the output of silk in Italy and France considerably:


4337. "Is the drain toward China or India."—"They send the silver to India, and with a goodly portion of it they buy opium, all of which goes to China in order to form a fund for the purchase of silk; and the condition of the markets in India (in spite of the accumulation of silver there) makes it more profitable for the merchant to send out silver than to send fabrics or other English factory goods."—4338. "Did not a heavy drain come out of France, by which we secured the silver?"—"Yes, a very heavy one."—4344. "Instead of importing silk from France and Italy, we ship it there in large quantities, both Bengal and Chinese."


In other words, silver, the money metal of that continent, was sent to Asia instead of commodities, not because the prices of commodities had risen in the country which had produced them (England), but because prices had fallen on account of overimport in that country which received them; and this in spite of the fact that the silver was received by England from France and had to be paid partly in gold. According to the Currency Theory prices should have fallen by such imports in England and risen in India and China.


Another illustration. Before the Lords' Committee (C. D. 1848-1857), Wylie, one of the first Liverpool merchants, testifies as follows:—1994. "At the end of 1845 there was no better paying business and none that yielded greater profits [than cotton spinning]. The supply of cotton was large and good, workable cotton could be had at 4 d. per pound, and such cotton could be spun into good second mule twist No. 40 at about 8 d. total expense to the spinner. This yarn was sold in large quantities in September and October, 1845, and equally large contracts made for delivery at 10½ and 11½ d. per pound, and in some instances the spinners realised a profit which equalled the purchase price of the cotton."—1996. "The business remained profitable until the beginning of 1846."—2000. "On March 3, 1844, the cotton supply [672,042 bales] was more than double of what it is today [on March 7, 1848, when it was 301,070 bales], and yet the price was 1¼ d. per pound dearer." [6¼ d. as against 5 d.]—At the same time yarn, good second mule twist No. 40, had fallen from 11½ to 12 d. to 9½ d. in October and 7¾ d. at the end of December, 1847; yarn was sold at the purchase price of the cotton from which it had been spun (Ibidem, No. 2021 and 2023). This proves the selfinterest of Overstone's wisdom to the effect that money is supposed to be "Dearer" when capital is "scarce." On March 3, 1844, the bank rate of interest stood at 3%; in October and November, 1847, it rose to 8 and 9% and was still 4% on March 7, 1848. The prices of cotton were depressed far below that price which corresponded to the condition of the supply, by the complete stopping of sales and the panic with its correspondingly high rate of interest. The consequence of this was on the one hand an enormous decrease of the imports in 1848, and on the other a decrease of production in America; consequently a new rise in cotton prices in 1849. According to Overstone the commodities were too dear, because there was too much money in the country.


2002. "The recent deterioration in the condition of the cotton industry is not due to the lack of raw materials, since the price is lower, although the supply of raw cotton is considerably reduced." But Overstone tangles himself up in a nice confusion of the price, or value, of commodities, with the value of money, that is, the rate of interest. In his reply to question 2026, Wylie sums up his general judgment of the Currency Theory, on which Cardwell and Sir Charles Wood based in May, 1847, their contention that it would be necessary "to carry the Bank Act of 1844 out in its full scope."—"These principles seem to me to be of a nature to give to money an artificially high value and to all commodities a ruinously low value."—He says furthermore concerning the effects of this Bank Act on business in general: "Since four months' bills of exchange, which are the regular drafts of manufacturing towns on merchants and bankers for purchased commodities intended for export to the United States, could no longer be discounted except at great sacrifices, the carrying out of orders was prevented to a large degree, until after the Government Letter of October 25." [Suspension of Bank Acts], "when these four months' bills became once more discountable." (2097.)—We see, then, that the suspension of this Bank Act was felt as a relief also in the provinces.—2102. "Last October [1847] nearly all American buyers, who purchase commodities here, immediately curtailed their purchases as much as possible; and when the news of the dearth of money reached America, all new orders stopped."—2134. "Corn and sugar were special cases. The corn market was affected by the crop prospects, and sugar was affected by the enormous supplies and imports."—2163. "Of our money obligations to America...many were liquidated by forced sales of consigned goods, and many, I fear, were liquidated by bankruptcies here."—2196. "If I remember correctly, as much as 70% interest was paid on our Stock Exchange in October, 1847."


[The crisis of 1837, with its protracted aftereffects, which were followed in 1842 by a regular aftercrisis, and the self-interested blindness of the industrials and merchants, who would not notice any overproduction to save their lives—for such a thing was a nonsense and an impossibility according to vulgar economy—had ultimately accomplished that confusion of thought, which permitted the Currency School to put their dogma into practice on a national scale. The Bank legislation of 1844 and 1845 was passed.


The Bank Act of 1844 divides the Bank of England into an issue department for notes and a banking department. The issue department receives securities, principally government debts, to the amount of 14 millions and the entire metal treasure, which shall consist of not more than one-quarter in silver, and issues notes to the full amount of both of them. To the extent that these are not in the hands of the public, they are held in the banking department and form its ever ready reserve together with the small amount of coin required for daily use (about one million). The issue department gives to the public gold for notes and notes for gold; the remainder of the transactions with the public is carried on by the banking department. The private banks authorised in England and Wales to issue their own notes retain this privilege, but their issue of notes is fixed; if one of these banks stops issuing its own notes, then the Bank of England may raise its uncovered amount of notes by two-thirds of the deposited allowance; in this way its allowance rose by 1892 from 14 to 16½ million pounds sterling (exactly 16,450,000 pounds sterling).


For every five pounds in gold, then, which leave the bank treasury, a five pound note returns to the issue department and is destroyed; for every five sovereigns going into the treasury a new five pound note passes into circulation. In this way Overstone's ideal paper circulation, which follows strictly the laws of metallic circulation, is practically carried out, and by this means crises are forever made impossible, according to the claims of the Currency advocates.


But in reality the separation of the Bank into two independent departments robbed the management of the possibility of disposing freely of its entire available means in critical moments, so that cases might occur, in which the banking department might be confronted with a bankruptcy, while the issue department still possessed several millions in gold and its entire 14 millions of securities untouched. And this could take place so much more easily, as there is one period in almost every crisis, when heavy exports of gold flow to foreign countries, which must be covered in the main by the metal reserve of the bank. But for every five pounds in gold, which then go to foreign countries, the circulation of the home country is deprived of one five pound note, so that the quantity of the currency is reduced precisely at a time, when the largest quantity of it is most needed. The Bank Act of 1844 thus directly challenges the commercial world to think betimes of laying up a reserve fund of bank notes on the eve of a crisis, in other words, to hasten and intensify the crisis; by this artificial intensification of the demand for money accommodation, that is for means of payment, and its simultaneous restriction of the supply, which take effect at the decisive moment, this Bank Act drives the rate of interest to a hitherto unknown hight; hence, instead of doing away with crises, the Act rather intensifies them to a point, where either the entire commercial world must go to pieces, or the Bank Act. Twice, on October 25, 1847, and on November 12, 1857, the crisis had risen to this culmination; then the government released the Bank from its limitation in the matter of issuing notes, by suspending the Act of 1844, and this sufficed in both cases to break the crisis. In 1847 the assurance sufficed, that bank notes would again be issued for first class securities, in order to bring to light the 4 to 5 millions of hoarded notes and throw them back into circulation; in 1857 the issue of notes exceeding the legal amount did not quite reach one million, and this was out for a very short time.


It may also be noted that the legislation of 1844 still shows traces of a recollection of the first twenty years of the nineteenth century, the time of the suspension of specie payments of the bank and the depreciation of notes. The fear that the notes might lose their credit is still plainly visible. But this is a very groundless fear, since already in 1825 the issue of some discovered old supply of one pound notes, which had been out of circulation, broke the crisis and proved, that even then the credit of the notes remained unshaken in times of the most universal and strong distrust. And this is easily explained. For the entire nation backs up these symbols of value with its credit.—F. E.]


Let us now listen to a few statements on the effect of the Bank Act. John Stuart Mill believes that the Bank Act of 1844 kept down overspeculation. Happily this wise man spoke on June 12, 1857. Four months later the crisis had broken out. He literally congratulates the "bank directors and the commercial public in general" on the fact that they "understand the nature of a commercial crisis far better than formerly, and the very great injury which they inflict upon themselves and the public by promoting overspeculation." (B. C., 1857, No. 2031.)


Wise Mr. Mill thinks that, if one pound notes are issued "as loans to manufacturers and others, who pay wages...then the notes may get into the hands of others who spend them for purposes of consumption, and in this case the notes constitute in themselves a demand for commodities and may temporarily tend to promote a raise in prices." Mr. Mill assumes, then, that the manufacturers will pay higher wages, because they pay them in paper instead of gold? Or does he believe that when a manufacture receives his loan in 100 pound notes and changes them for gold, then these wages would constitute less of a demand than they would when paid at the same time in one pound notes? And does he not know that, for instance, in certain mining districts wages were paid in notes of local banks, so that several laborers together received a five pound note? Does this increase the demand for them? Or will the bankers advance money to the manufacturers more easily in small than in large notes, and make the loan larger?


[This peculiar fear of one pound notes on the part of Mill would be inexplicable, if his whole work on political economy did not show his eclecticism, which recoils from no contradictions. On the one hand he agrees in many things with Tooke against Overstone, on the other hand he believes in the determination of the prices of commodities by the quantity of the existing money. He is thus by no means convinced, that, all other circumstances remaining unchanged, a sovereign wanders into the vaults of the Bank for every one pound note issued. He fears that the quantity of the currency could be increased and thereby depreciated, that is, the prices of commodities might be enhanced. This and nothing else is concealed behind his above-mentioned apprehension.—F. E.]


Concerning the bipartition of the Bank, and the excessive precaution to safeguard the cashing of notes, Tooke expresses himself before the C. D. 1848-57 as follows:


The greater fluctuations of the rate of interest in 1847, as compared with 1837 and '39, are due merely to the separation of the Bank into two departments (3010).—"The security of the banknotes was not affected, neither in 1825, nor in 1837 nor in 1839 (3015).—The demand for gold in 1825 aimed only to fill out the vacant space created by the complete disavowal of the one pound notes of the provincial banks; this vacant space could be filled out only by gold, until the Bank of England also issued one pound notes (3022).—In November and December, 1825, not the least demand existed for gold to export (3023).


"As for a disavowal of the Bank at home and abroad, a suspension of the payment of dividends and deposits would have much more serious consequences than a suspension of payment on bank notes (3028).


3035. Would you not say that every circumstance, which would in the last instance endanger the convertibility of the bank notes, might create new and serious difficulties in a moment of commercial stringency?—"Not at all."


In the course of 1847 "an increased issue of notes might, perhaps, have contributed to replenish the gold reserve of the Bank, as it did in 1825." (3058).


Before the Committee on B. A. 1857, Newmarch testifies: 1357. "The first bad effect...of this separation of the two departments (of the Bank) and of the necessarily resulting bipartition of the gold reserve was that the banking business of the Bank of England, that is, that entire branch of its operations, which brought it into direct touch with the commerce of the country, was continued with only one-half of its former reserve. In consequence of this division of the reserve it happened that, as soon as the reserve of the banking department shrank in the least, the Bank was compelled to raise its rate of discount. This reduced reserve thus caused a series of abrupt changes in the rate of discount."—"Of such changes there have been since 1844" [until June, 1857] "some 60 in number, whereas they amounted to hardly one dozen before 1844 within a similar period."


Of special interest is the testimony of Palmer, who was a director of the Bank of England since 1811 and for a while its Governor, before the Lords' Committee on C. D. 1848-57:


828. "In December, 1825, the Bank had retained only about 1,100,000 pounds sterling in gold. At that time it would have failed inevitably, if this act had existed then [meaning the Act of 1844]. In December it issued, I believe, 5 or 6 million notes in one week, and this relieved the panic of that time considerably."


825. "The first period [since July 1, 1825], when the present bank legislation would have collapsed, if the Bank had attempted to carry its hitherto initiated transactions through, was on February 28, 1837. There were then from 3,900,000 to 4,000,000 pounds sterling in the possession of the Bank, and it would have retained no more than 650,000 pounds sterling in reserve. Another period is 1839, and it lasted from July 9 to December 5."—826. "What was the amount of the reserve in this case?"—"The reserve was minus altogether 200,000 pounds sterling on September 5. On November 5, it rose to about 1 or 1½ millions."—830. "The Act of 1844 would have prevented the Bank from assisting the American business in 1837."—"Three of the principal American firms failed....Nearly every firm in the American business was ruled out of credit, and if the Bank had not come to the rescue, I do not believe that more than one or two firms could have maintained themselves."—836. "The panic of 1837 is not to be compared with that of 1847. That of 1837 confined itself mainly to the American business."—838. (At the beginning of June the management of the Bank discussed the question, how to remedy the panic.) "Whereupon some of the gentlemen defended the view...that the correct principle would be to raise the rate of interest, so that the prices of commodities would fall; in brief, to make money dear and commodities cheap, by which the foreign payment would be accomplished."—906. "The introduction of an artificial limitation of the powers of the Bank by the Act of 1844, in place of the old and natural limit of its powers, that is, the actual amount of its metal supply, makes business artificially difficult and thus effects prices in a way which was quite unnecessary without this Act."—968. "Under the effect of the Act of 1844 the metal reserve of the Bank, under ordinary circumstances, cannot be reduced materially below 9½ millions. This would create a pressure on prices and credit, which would bring about such a change in the foreign exchange rates, that the gold imports would rise and increase the amount of gold in the issue department."—996.


"Under the present limitation you [the Bank] have not command of silver which is required in times when silver is needed in order to affect foreign rates."—999. "What was the purpose of the rule limiting the silver supply of the Bank to one-fifth of its metal reserve?"—"I cannot answer this question!"


The purpose was to make money dearer; so was, aside from the Currency Theory, the separation of the two bank departments and the compulsion for Scotch and Irish banks to hold gold in reserve for the issue of notes beyond a certain amount. This brought about a decentralisation of the national metal supply, which rendered this supply less able to correct unfavorable bill rates. All these rules aim at a raise of the rate of interest: That the Bank of England shall not issue notes beyond 14 millions except against its gold reserve; that the banking department shall be managed like an ordinary bank, pressing the rate of interest down when money is plentiful and driving it up when money is scarce; the limitation of the silver supply, the principal means of rectifying the rates of bills on the continent and in Asia! the rules concerning the Scotch and Irish banks, who never need any money for export and yet must keep it now under the pretence of an actually imaginary convertibility of their notes. The fact is that the Act of 1844 caused for the first time in 1857 a run on the Scotch banks for gold. Nor did the new bank legislation make any distinction between a drain of gold toward foreign countries and a drain to inland markets, although their effects are evidently different. Hence the continual great fluctuations of the market rate of interest. With reference to silver Palmer says twice, No. 992 and 994, that the Bank can buy silver for notes only when the rates on bills are favorable to England, so that silver is superfluous; for (1003) "the only purpose for which a considerable portion of the metal reserve may be kept in silver is that of facilitating foreign payments during the time when the rates on bills are against England."—1008. "Silver is a commodity which, being money in all the rest of the whole world, is for this reason the most fitting commodity...For this purpose" [payments abroad]. "Only the United States have taken exclusively gold during recent times."


In his opinion the Bank would not have to raise the rate of interest above its old level of 5% in times of stringency, so long as no unfavorable bill rates draw the gold to foreign countries. Were it not for the Act of 1844, the Bank would then be able to discount all first class bills presented to it without any difficulty. [1018 to 20.] But with the Act of 1844, and in the condition, in which the Bank was in October, 1847, "there was no rate of interest which the Bank could ask from creditable firms, which they would not have paid willingly in order to continue their payments." And this high rate of interest was precisely the purpose of the Act.


1029. "I must make a great distinction between the effect of the rate of interest on the foreign demand [for precious metal] and a raise of the rate of interest for the purpose of stemming a rush on the bank during a period of lacking credit inland."—1023. "Before the act of 1844, when the rates were in favor of England, and unrest, yea, a positive panic, reigned in the country, no limit was set to the issue of notes, by which alone this condition of stringency could be relieved."


So speaks a man who had sat 39 years in the management of the Bank of England. Let us now hear a private banker, Twells who had been an associate of Spooner, Attwoods & Co. since 1801. He is the only one among all the witnesses before the B. C. 1857, who gives us an insight into the actual condition of the country and who sees the approach of the crisis. For the rest he is a sort of Little-Shilling-Man from Birmingham, for his associates, the brothers Attwood, are the founders of this school. (See A Contribution to the Critique of Political Economy, p. 100.) He testifies: 4488. "How do you think the Act of 1844 has operated?"—"Should I answer you as a banker, I would say that it has operated splendidly, for it has furnished to the bankers and [money-] capitalists of all sorts a rich harvest. But it has operated very badly for the honest and thrifty business man, who needs steadiness in discount, in order that he may make his arrangements with confidence....It has made the lending of money a very profitable business."—4489. The Bank Act "Enables the London Stock Bank to pay to its stockholders 20 to 22%?"—"One of them paid recently 18%, and I believe another 20%; they have good grounds for standing determinedly by the Bank Act."—4490. "Small business men and respectable merchants, who have no large pinches them hard....The only means which I have of learning this is such a surprising quantity of their drafts, which are not paid. These drafts are always small, about 20 to 100 pounds sterling, many of them are not paid and go back for lack of payment to all parts of the country, and this is always a sign of stringency among—the small dealers."—4494. He declares that the business is not profitable now. His following remarks are important, because he saw the latent existence of the crisis, when none of the others suspected it as yet.


4494. "The prices in Mincing Lane keep up pretty well so far, but nothing is sold, one cannot sell anything at any price; one maintains himself at the nominal price."—4495 He relates the following case: A Frenchman sends to a broker in Mincing Lane commodities for 3,000 pounds sterling for sale at a certain price. The broker cannot make the price, the Frenchman cannot sell below his price. The commodities remain unsold, but the Frenchman needs money. The broker therefore makes him an advance of 1,000 pounds sterling in such a way, that the Frenchman draws a check of 1,000 pounds sterling for three months on the broker with his commodities for a security. At the end of the three months the bill becomes due, but the commodities are still unsold. The broker must then pay for the bill, and although he has security for 3,000 pounds sterling, he cannot raise them and gets into difficulties. In this way one drags down another.—4496. "As for the heavy exports—when the business is depressed in the home market, it calls for the necessarily a heavy export."—4497. "Do you believe that the home consumption has decreased?"—"Very considerably—quite enormously—the small dealers are the best authority in this."—4498. "Nevertheless the imports are very large; does not that indicate a strong consumption?"—"Yes, if you can sell; but many warehouses are full of these things; in the example, which I have just related, 3,000 pounds sterling worth of commodities have been imported, which are unsalable."


4514. "If money is dear, would you say that capital is then cheap?"—"Yes, sir."—This man, then, is by no means of Overstone's opinion that a high rate of interest is the same as dear capital.


The following shows how the business is carried on now.—4516...."Others go in very heavily, do an enormous business in exports and imports, far beyond the limit to which their capital entitles them; there cannot be the least doubt about this. These people may be lucky in this; they may make great fortunes by some lucky stroke and pay up everything. This is in a large measure the system, by which nowadays a considerable portion of the business is carried on. Such people are willing to lose 20, 30 and 40% on a shipment; the next transaction may bring it back to them. If they fail in one thing after another, they are gone; and that is precisely the case which we have seen often enough of late; business firms have failed, without leaving one shilling's worth of assets."


4791. "The low rate of interest [during the last ten years] militates indeed against the bankers, but without laying the business books before you, I should have much difficulty in explaining to you, how much higher the profit [his own] is now than formerly. When the rate of interest is low, in consequence of excessive issues of notes, we have considerable deposits; when the rate of interest is high, it brings us direct profits."—4794. "When money may be had at a moderate rate of interest, we have more demand for it; we loan more; it works this way [for us, the bankers]. When it rises, we get more for it than when it is cheap; we get more than we ought to have."


We have seen that the credit of the notes of the Bank of England is considered impregnable by all experts. Nevertheless the Bank Act absolutely ties up nine to ten millions in gold for the convertibility of these notes. The sacredness and inviolability of this reserve is here carried much farther than among the hoard makers of olden times. Mr. Brown (Liverpool) testifies, C. D. 1848-57, 2311: "Concerning the good derived at that time from this money [the metal reserve in the issue department], it might just as well have been thrown into the sea; for not the least bit of it could be used, without breaking the Act of Parliament."


The building contractor, E. Capps, the same one who has been mentioned once before, and whose testimony is borrowed also to illustrate the modern building system in London (Volume II, chapter XII, pages 266 and 267), sums up his opinion of the Bank Act of 1844 in the following way (B. A. 1857): 5508. "You are, then, in general of the opinion that the present system [of bank legislation] is a very apt institution for bringing the profits of industry periodically into the money bag of the usurer?"—"That is my opinion. I know that it has worked that way in the building business."


We have already mentioned that the Scotch banks were pushed by the Bank Act of 1845 into a system approaching the English. They were placed under the obligation to hold gold in reserve for their issue of notes beyond a limit fixed for each bank. What the effect of this was, may be seen from the following testimony before the Bank Committee, 1857.


Kennedy, Director of a Scotch bank: 3375. "Was there anything in Scotland that might be called a circulation of gold, before the introduction of the Act of 1845?"—"Nothing of the kind."—3376. "Has an additional circulation of gold ensued since then?"—"Not in the least; the people dislike gold."—3450. "The sum of about 900,000 pounds sterling in gold, which the Scotch banks must keep since 1845, are in my opinion merely injurious and "absorb unprofitably an equal portion of the capital of Scotland."


Furthermore Anderson, Director of the Union Bank of Scotland: 3558. "The only heavy demand for gold made on the part of the Scotch banks upon the Bank of England occurred on account of the foreign rates of exchange?"—"That is so; and this demand is not reduced by the fact that we keep gold in Edinburgh."—3590. "So long as we deposited the same amount of securities in the Bank of England" [or in the private banks of England] "we have the same power as before to create a drain of gold from the Bank of England."


Finally we quote an article from the "Economist" (Wilson): "The Scotch banks keep unemployed amounts of cash with their London agents; these keep them in the Bank of England. This gives to the Scotch banks, within the limits of these amounts, command over the metal reserve of the bank, and here it is always in the place where it is needed, when foreign payments are to be made."—This system was disturbed by the Act of 1845: "In consequence of the act of 1845 for Scotland a strong outpour of gold coin from the Bank of England has taken place lately, in order to meet a mere possible demand in Scotland, which would probably never occur.—Since that time a considerable amount finds itself tied up regularly in Scotland, and another considerable amount is continually under way between London and Scotland. If a time comes when a Scotch banker expects an increased demand for his notes, a box of gold is sent on from London; if this time is past, the same box goes back to London, generally without having been opened." (Economist, October 23, 1847.)


[And what does the father of the Bank Act, Banker Samuel Jones Loyd, alias Lord Overstone, say to all this?
He repeated even in 1848 before the Lords' Committee on C. D. that "a money stringency and a high rate of interest, caused by a lack of sufficient capital, cannot be relieved by an increased issue of bank notes" (1514), in spite of the fact that the mere permission to increase the issue of notes, given by the government letter of October 25, 1847, had sufficed to break the point of the crisis.
He sticks to the idea that "the high rate of interest and the depressed condition of the manufacturing industry was the necessary consequence of the reduction of the material capital available for industrial and commercial purposes" (1604). And yet the depressed condition of the manufacturing industry had for months consisted in the fact that the material commodity-capital was filling the warehouses to overflowing and was almost unsalable; so that for this reason the material productive capital was wholly or partly fallow, in order not to produce still more unsalable commodity-capital.
And before the Bank Committee of 1857 he said: By a strict and prompt adherence to the principles of the Act of 1844 everything has passed off with regularity and ease, the money system is secure and unshaken, the prosperity of the country is undisputed, the public confidence in the Act of 1844 is daily gaining in strength. If this Committee desires still further practical proofs of the soundness of the principles on which this act rests, and of the beneficent consequences which it has guaranteed, then the true and sufficient answer is this: Look about you; consider the present condition of the business of this country; consider the satisfaction of the people; consider the wealth and prosperity of all classes of society; and then, after you have seen all this, this Committee will be able to decide, whether it will prevent a continuation of an Act, under which such success has been obtained." (B. C. 1857, No. 4189.)
To this song of praise, which Overstone emitted before the Committee on July 14, replied the song of defiance on November 12, of the same year, in the shape of the letter to the management of the Bank, in which the government suspended the miracle-working law of 1844, in order to save what could still be saved.—F. E.]

Notes for this chapter

Karl Marx, A Contribution to the Critique of Political Economy, Berlin, 1859, pages 236 and following.

Part V, Chapter XXXV.

End of Notes

37 of 55

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