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Conversion of Capital or Revenue into Money that is Transformed into Loan Capital. - Karl Marx, Capital: A Critique of Political Economy. Volume III: The Process of Capitalist Production as a Whole 
Capital: A Critique of Political Economy. Volume III: The Process of Capitalist Production as a Whole, by Karl Marx. Ed. Federick Engels. Trans. from the 1st German edition by Ernest Untermann (Chicago: Charles H. Kerr and Co. Cooperative, 1909).
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Conversion of Capital or Revenue into Money that is Transformed into Loan Capital.
We will consider the accumulation of money-capital here in so far as it is not an expression, either of a relaxation in the flow of credit, or of greater economy, whether it be an economy in the actually circulating medium or in the reserve capital of the agents engaged in reproduction.
Aside from these two cases, an accumulation of money-capital may arise through extraordinary imports of gold, such as those of 1852 and 1853 resulting from the output of the new Australian and Californian mines. This gold was deposited in the Bank of England. The depositors took notes instead, which they did not at once redeposit in banks. By this means the circulating medium was unusually increased. (Testimony of Weguelin, B. C. 1857, No. 1329.)
The Bank strove to utilise these deposits by lowering its discount to 2%. The mass of gold accumulated in the Bank rose during six months of 1853 to 22 or 23 millions.
The accumulation of all capitalists lending money naturally takes place always in the form of direct money, whereas we have seen that the actual accumulation of industrial capitalists is accomplished, as a rule, by an increase of the elements of reproductive capital itself. Hence the development of the credit system and the enormous concentration of the money-lending business into the hands of great banks must by itself alone accelerate the accumulation of loanable capital, as a form distinguished from actual accumulation. This rapid development of loan capital is, therefore, a result of actual accumulation, for it is a consequence of the development of the process of reproduction, and the profit that forms the source of accumulation for these money-capitalists is but a deduction from the surplus-value, which the reproductive capitalists filch from production (and it is at the same time a portion of the interest on the savings of others). The loan capital accumulates at the expense of both the industrial and commercial capitalists. We have seen that in the unfavorable phases of the industrial cycle the rate of interest may rise so high, that it temporarily devours the whole profit in particularly handicapped lines of business. At the same time the prices of the public securities and other securities also fall. It is at such times that the money-capitalists buy up these depreciated papers in masses, which soon regain their former level in later phases or rise above it. Then they are sold again and a portion of the money-capital of the public appropriated through them. That portion, which is not sold yields a higher interest, because it was bought below price. But the money-capitalists convert all profits made by them and reconverted into capital first into loanable money-capital. An accumulation of such money-capital, as distinguished from the actual accumulation that is its mother, takes place, obviously, even if we consider only the money-capitalists, bankers, etc., by themselves, that is, an accumulation of this particular class of capitalists. And it must grow with every expansion of the credit system such as goes with the expansion of the process of reproduction.
If the rate of interest is low, then the depreciation of the money-capital falls principally upon the depositors, not upon the banks. Before the development of stock banks three-fourths of all deposits rested in the English banks without returning any interest. If interest is now paid on them, it amounts to at least 1% less than the current rate of interest.
As for the money accumulation of the other classes of capitalists, we leave aside that portion of it, which is invested in interest-bearing papers and accumulates in this form. We consider merely that portion, which is thrown upon the market as loanable money-capital.
In the first place, we have here that portion of the profit, which is not spent as revenue, but intended for accumulation, yet at the same time not immediately of any use for the industrial capitalists in their own business. This profit exists originally in the form of commodity-capital, a part of whose value it constitutes, and is realised with it in money. Now, if it is not reconverted into the production elements of commodity-capital (we leave out of consideration for the present the merchant, whom we shall have to discuss separately), then it must remain for a while in the form of money. This mass increases with the mass of capital itself, even when the rate of profit declines. That portion, which is to be spent as revenue, is gradually consumed, but forms in the meantime a loan capital of the banker in the form of a deposit. Thus even the growth of that portion of profit, which is spent as revenue, expresses itself in a gradual and continually repeated accumulation of loan capital. The same is true of that other portion, which is intended for accumulation. With the development of the credit system, then, and its organisation, even the increase of revenue, that is, of the consumption of the industrial and commercial capitalists, expresses itself as an accumulation of loan capital. And this holds good of all revenues which are consumed gradually, in other words, of ground rent, wages in their higher form, incomes of unproductive classes, etc. All of them assume for a certain time the form of a money revenue and are, therefore, convertible into deposits and thus into loan capital. All revenue, whether it be intended for consumption or accumulation, so long as it exists in some form of money, is a part of the value of commodity-capital transformed into money, and is, for this reason, an expression and result of the actual accumulation, but not the productive capital itself. When a spinner has exchanged his yarn for cotton, while he has exchanged that portion, which forms his revenue, for money, then the real existence of his industrial capital is the yarn, which has passed into the hands of the weaver or, perhaps, of some private consumer, and this yarn is the existence of both the capital-value and surplus-value contained in it, whether it be intended for reproduction or consumption. The magnitude of the surplus-value transformed into money depends upon the magnitude of the surplus-value contained in the yarn. But as soon as it has been transformed into money, this money is but the existence of the value of this surplus-value. And as such it becomes an element of loan capital. To this end nothing more is required than that it should be transformed into a deposit, if it had not been loaned out by its owner. But in order to be reconverted into productive capital, it must have reached a certain minimum limit.
MONEY-CAPITAL AND ACTUAL CAPITAL. III.
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(B. A. 1858, p. I, II.) The total mass of circulating bank notes has, therefore, positively decreased from 1844 to 1857, although the commercial business had more than doubled, as indicated by exports and imports. The smaller bank notes of 5 and 10 pounds sterling increased, as the table shows, from 9,263,000 in 1844 to 10,659,000 pounds sterling in 1857. And this took place simultaneously with the very heavy increase in the gold circulation of that time. On the other hand, there was a decrease of the notes of higher denominations (200 to 1000 pounds sterling) from 5,856,000 in 1852 to 3,241,000 pounds sterling in 1857, a decrease of more than 2½ millions. This is explained as follows: "On June 8, 1854, the private bankers of London permitted the stock banks to take part in the erection of the Clearing House, and soon after that the final clearing was established in the Bank of England. The daily balances were settled by transcribing them on the accounts, which the different banks keep in the Bank of England. By the introduction of this system the notes of high denomination, which the banks formerly used for balancing their mutual accounts, have become superfluous." (B. A. 1858, p. V.)
To what a small minimum the use of money in wholesale trade has been reduced, may be seen in the table published in Volume I, Chapter III, page 157, footnote 1, which was furnished to the Committee on Bank Acts by Morrison Dillon 8 Co., one of the largest of those London firms, from whom a small dealer can buy his entire stock of commodities of all kinds.
According to the testimony of W. Newmarch before the B. A. 1857, No. 1741, still other circumstances contributed to the economy in currency: The penny postage, the railroads, the telegraphs, in short, the improved means of communication; so that England can now carry on a five to six times larger business with about the same circulation of bank notes. It is also declared to be due to a marked degree to the withdrawal of the notes of a higher denomination than 10 pounds sterling from the circulation. This appears to him as a natural explanation for the fact that in Scotland and Ireland, where also one pound notes circulate, the circulation of notes has risen by about 31% (1747). The total circulation of bank notes in the United Kingdom, including the one pound notes, is said to be 39 millions (1749). The gold circulation 70 millions (1750). In Scotland the circulation of notes was 3,120,000 pounds sterling in 1834; 3,020,000 pounds sterling in 1844; and 4,050,000 pounds sterling in 1854 (1752).
From these facts alone it is evident, that it lies by no means with the banks issuing notes to increase the number of circulating notes, so long as these notes are at all times exchangeable for money. [Inconvertible bank notes are not taken into consideration at all here; inconvertible bank notes can become universal means of circulation only under conditions, in which they are actually backed up by national credit, as is the case of Russia at present. In that case they fall under the laws of the inconvertible national paper money, which have been developed already in Volume I, Chapter III, 2, c, Coin and Symbols of Value.—F. E.]
The quantity of circulating notes is regulated by the requirements of commerce, and every superfluous note wanders back immediately to the issuing party. Since in England only the notes of the Bank of England circulate universally as the legal means of payment, we may neglect at this point the slight and merely local circulation of the provincial banks.
In B. A. 1858 Mr. Neave, Governor of the Bank of England testifies: No. 947. Question: "Whatever measures you may take, the amount of notes, you say, remains the same, that is, about 20 million pounds sterling?"—Answer: "In ordinary times the wants of the public seem to require about 20 million pounds sterling."—At certain periodically recurring times each year this is increased by one or one and half millions. If the public needs more, they can always, as I said, get them from the Bank of England."—948. "You said that during the panic the public did not want to allow you to reduce the amount of the notes; will you state your reasons?"—"In times of panic the public, it seems to me, has full power to secure notes; and of course, so long as the Bank has any obligation, the public can take notes from the Bank on this obligation."—949. "It seems, then, that at all times about 20 million notes of the Bank of England are required?"—"20 million notes in the hands of the public; it changes. It is 18½, 19, 20 millions, etc.; but on an average you may say 19-20 millions."
Testimony of Thomas Tooke before the Committee of Lords on Commercial Distress (C. D. 1848-57) No. 3094: "The Bank has no power to expand the amount of its notes in the hands of the public at its own arbitrary will; it has the power to reduce the amount of notes in the hands of the public, but only by means of a very forcible operation."
J. C. Wright, for 30 years a banker in Nottingham, having explained at length the impossibility, that a provincial bank should be able to set more notes into circulation than the public needs, says of the notes of the Bank of England: (C. D. 1848-57) No. 2844: "I know of no limit" (for the issue of notes) "for the Bank of England, but every surplus of the circulation will pass over into the deposits and thus assume another form."
The same holds good for Scotland, where almost nothing but paper circulates, because there as well as in Ireland one pound notes are also in vogue and "the Scotch hate gold." Kennedy, Director of a Scotch bank, declares that banks cannot even contract their circulation of notes, and is "of opinion that, so long as inland transactions require notes or gold in order to be carried on, the bankers must furnish as much currency as these transactions need—either on demand of their depositors or otherwise....The Scotch banks can contract their business, but they cannot exert any control over their issue of notes." (Ibidem, No. 3446-48.) In like manner Anderson, Director of the Union Bank of Scotland, answers question No. 3678, asked ibidem: "Does the system of mutually exchanging notes" [among the Scotch banks] "prevent an overissue of notes on the part of the individual bank?"—"Yes; but we have a more effective means than the exchange of notes" [which has really nothing to do with this, but does indeed guarantee the ability of the notes of each bank to circulate throughout all of Scotland], "and that is the general custom in Scotland of keeping a bank account; every one who has any money at all has also an account in some bank and turns in daily all the money which he does not need immediately for himself, so that at the end of every business day all the money is in the banks, except what each carries in his pockets."
The same applies to Ireland, as shown by the testimony of the Governor of the Bank of Ireland, MacDonnell, and the Director of the Provincial Bank of England, Murray, before the same Committee.
The circulation of notes is just as independent of the state of the gold reserve in the cellars of the bank, which guarantees the convertibility of these notes, as it is of the will of the Bank of England. "On September 18, 1846, the circulation of the notes of the Bank of England was 20,900,000 pounds sterling and its metal reserve was 16,273,000 pounds sterling; on April 5, 1847, the circulation was 20,815,000 pounds sterling and the metal reserve was 10,246,000 pounds sterling. Hence no contraction of the currency took place in spite of the export of 6 million pounds sterling of precious metal." (J. G. Kinnear, The Crisis and the Currency, London, 1847, p. 5.) Of course, this applies only to the conditions which prevail in England at present, and even there only so far as legislation does not decide differently concerning the relation between the issue of notes and the metal reserve.
Hence only the requirements of business itself exert an influence on the quantity of circulating money—notes and gold. In the first instance the periodical fluctuations, which repeat themselves every year, should be noted here, regardless of the general condition of business, so that for 20 years "in a certain month the circulation is high, in another low, and in a third definite month a middle point occurs." (Newmarch, B. A. 1857, No. 1650.)
For instance, in August of every year a few millions, generally in gold, pass from the Bank of England into inland circulation, in order to pay the expenses of the harvest; since the principal payments to be made here are wages, bank notes are less serviceable in England for this purpose. By the close of the year this money has returned to the Bank. In Scotland there are almost nothing but one pound notes instead of Sovereigns; in this case, then, it is the circulation of notes which is expanded during the aforesaid term, and at another, that is, twice a year, in May and November, by about 3 or 4 millions; within fourteen days the reflux begins, and it is almost completed in one month. (Anderson, l. c., No., 3595-3600.)
The circulation of the notes of the Bank of England also experiences every quarter a momentary fluctuation on account of the quarterly payment of the "dividends," that is, the interest on the national debt by which bank notes are first withdrawn from circulation and then once more distributed between the public. But they return very soon. Weguelin (B. A. 1857, No. 38) states that this fluctuation of the circulation of notes amounts to two and half millions. Mr. Chapman of the notorious firm of Overend, Gurney 8 Co., however, calculates the disturbance created by this fluctuation in the money market at a far higher figure. "If you take 6 or 7 millions for taxes out of the circulation, for the purpose of paying dividends with them, there must be somebody, who places this amount within reach in the meantime." (B. A. 1857, No. 5196.)
Far more considerable and lasting are the fluctuations in the amount of the currency corresponding to the various phases of the industrial cycle. Let us listen to another member of that firm, the worthy Quaker Samuel Gurney (C. D. 1848-57, No. 2645): "At the end of October (1847) there were 20,800,000 pounds sterling in notes in the hands of the public. At that time a great difficulty prevailed in the matter of securing bank notes in the money market. This arose from the general apprehension that it would not be possible to secure them on account of the limitation of the Bank Acts of 1844. At present [March, 1848] the amount of bank notes in the hands of the public is...17,700,000 pounds sterling, but as there is no commercial alarm now, this is much more than is needed. There is no banker or no money dealer in London, who has not more bank notes than he can use."—2650. "The amount of bank notes...out side of the keeping of the Bank of England forms a totally inadequate exponent of the actual state of the circulation, unless one considers at the same time...the condition of the commercial world and of credit."—2651. "The feeling that we have a surplus at the present amount of currency in the hands of the public arises to a large degree from our present condition of great stagnation. With high prices and a brisk business 17,700,000 pounds sterling would give us a feeling of shortness."
[So long as the condition of business is such, that the returns on the loans given come in regularly and credit remains unshaken, the expansion and contraction of the currency depends simply upon the requirements of the industrials and merchants. Since gold does not enter into consideration in the wholesale trade, at least in England, and the circulation of gold aside from the fluctuations with the seasons, may be regarded as a rather constant magnitude for a long time, the circulation of the notes of the Bank of England forms a sufficiently accurate measure of these changes. In a dull period after a crisis the circulation is smallest, with the reanimation of the demand comes also a greater demand for currency, which increases with the rising prosperity; the quantity of currency reaches its culminating point in the period of overtension and overspeculation—suddenly the crisis breaks out and over night the bank notes, yesterday still so plentiful, have disappeared from the market and with them the discounters of bills, the lenders of money on securities, the buyers of commodities. The Bank of England is called on for help—but even its powers are soon exhausted, the Bank Act of 1844 compels it to contract its circulation of notes at the very moment when all the world cries out for notes, when the owners of commodities cannot sell and yet are supposed to pay and are ready to make any sacrifice, if they can only secure bank notes. "During the alarm," says the abovementioned banker Wright, l. c. No. 2930, "the country needs twice as much currency as in ordinary times, because the medium of circulation is stored up by bankers and others."
As soon as the crisis breaks out, it is henceforth only a question of means of payment. But since every one is dependent upon the other for the coming in of these means of payment, and no one knows whether the other will be able to meet his payments when due, a stampede takes place for the means of payment available on the market, that is, the bank notes. Every one accumulates as many of them as he can secure, and thus the notes disappear from the circulation on the very day when they are needed most. Samuel Gurney (C. D. 1848-57, No. 1116) states that the amount of bank notes brought under lock and key in a moment of such terror in October 1847 to have been 4 to 5 million pounds sterling.—F. E.]
In this connection, a special interest attaches to the cross-examination of the associate of Gurney, the aforementioned Chapman, before the B. A. of 1857. I reproduce its principal contents summarily, although it touches also upon certain other points, which we shall have to analyse later.
Mr. Chapman has the following to say:
4963. "I do not hesitate to say, that I do not consider it right, that the money market should be in the power of any one individual capitalist (such as exist in London), who can create an enormous scarcity of money and a stringency, when the circulation just happens to be low....That is possible...there is more than one capitalist, who can take notes to the amount of one or two million pounds sterling out of the currency, when it suits his purpose."—4995. A great speculator can sell one or two million pounds worth of consols and thus take the money out of the market. Something similar to this has happened quite recently, "it creates a very violent crisis."—
4967. The notes are then indeed unproductive. "But that is nothing, when it serves a great purpose; its great purpose is to throw down the prices of funds, to create a money stringency, and to do that is quite within his power."—An illustration: One morning there was a great demand for money in the Money Exchange; nobody knew its cause; somebody asked Chapman to lend him 50,000 pounds sterling at 7%. Chapman was astonished, his rate of interest was much lower; he accepted. Soon after that the man returned, took up another 50,000 pounds sterling at 7½%, then, 100,000 at 8%, and wanted still more at 8½%. Then even Chapman became frightened. Later it was found out that suddenly a considerable sum of money had been withdrawn from the market. But, says Chapman, "nevertheless I had loaned out a considerable amount of money at 8%; I was afraid to go farther; I did not know what was coming."
It must not be forgotten, that, although 19 to 20 millions in notes are continually supposed to be in the hands of the public, nevertheless that portion of notes, which actually circulates, and on the other hand that portion, which is held unemployed by the banks as a reserve, continually differ considerably from one another. If this reserve is large, and therefore the actual circulation small, it means from the point of view of the money-market, that the circulation is full, money is plentiful; if the reserve is small, and the actual circulation full, then the language of the money-market says that the circulation is low, money is scarce, that is to say, the portion representing unemployed loan capital is small. A real expansion or contraction of the circulation in such a way, that it remains independent of the phases of the industrial cycle and leaves unchanged the amount needed by the public, occurs only for technical reasons, for instance, on the dates when taxes are due or the interest on a national debt. When taxes are paid, notes and gold beyond the ordinary amount flow into the Bank of England and practically contract the circulation without regard to its needs. The reverse takes place when the interest on the national debt is paid. In the first case, loans are demanded from the bank in order to secure currency. In the last case, the rate of interest falls in the private banks on account of the momentary growth of their reserves. This has nothing to do with the absolute mass of currency, but only with the banking firm that sets this currency into circulation, and for whom this process represents itself as a loaning of loan capital, the profit of which it pockets.
In the one case there is a temporary displacement of the circulating medium, which the Bank of England balances by short loans at low interest shortly before the quarterly taxes or the quarterly dividends on the nationel debt become due; The issue of these supernumerary notes first fills up the gap caused by the payment of the taxes, while their return to the bank soon after brings back the excess of notes thrown into circulation by the payment of dividends to the public.
In the other case a low or full circulation means simply a different distribution of the same mass of currency into active circulation and deposits, which serve as an instrument of loans.
On the other hand, if the number of notes is increased by a flow of gold into the Bank of England, then these notes assist in the discounting of bills outside of the bank and return to it by the payment of loans, so that the absolute mass of the circulating notes is but momentarily increased.
If the circulation is full on account of the expansion of business (which may take place even though prices be relatively low), then the rate of interest may be relatively high on account of the demand for loan capital in consequence of rising profits and increased new investments. If it is low, on account of the contraction of business, or, perhaps, on account of a great fluidity of credit, then the rate of interest may be low even though prices be high. (See Hubbard.)
The absolute quantity of the circulation has a determining influence on the rate of interest only in times of stringency. The demand for a full circulation may either express merely a demand for means of hoarding (aside from the reduced velocity of the circulation of money and that of the conversion of the same identical pieces of money into loan capital) owing to lack of credit, as was the case in 1847, when the suspension of the Bank Acts did not cause any expansion of the circulation, but sufficed to draw forth the hoarded notes and to throw them into circulation. Or it may be that more means of circulation are actually required under prevailing circumstances, as was the case in 1857, when the circulation actually expanded for some time after the suspension of the Bank Acts.
Otherwise the absolute mass of the circulation has no influence upon the rate of interest, since the circulation, assuming the economy and velocity of the currency to be constant, is determined in the first place by the prices of commodities and the mass of the transactions (one of these elements generally paralysing the action of the other), and in the second place by the state of credit, whereas it does not by any means exert any reverse influence on the state of credit; and, finally, since the prices of commodities and interest have not necessarily any connection with each other.
During the Bank Restriction Act (1797-1820) there was a superfluity of currency, the rate of interest was always much higher than it became since cash payments were resumed. Later it fell rapidly with the restriction of the issue of notes and rising quotations of bills. In 1822, 1823, and 1832 the general circulation was low, and so was the rate of interest. In 1824, 1825, and 1836 the circulation was full and the rate of interest rose. In the summer of 1830 the circulation was full, the rate of interest low. Since the discoveries of gold the gold circulation of all Europe has expanded, the rate of interest risen. The rate of interest, then, does not depend upon the quantity of the circulating money.
The difference between the issue of currency and loans of capital is best shown in the real process of reproduction. We have seen, there (Volume II, Part III), in what manner the different component parts of the production are exchanged for one another. For instance, the variable capital consists substantially of the means of subsistence of the laborers, a portion of their own product. But this is paid over to them piecemeal in money. The capitalist has to advance this, and it depends very much on the organization of the credit system, whether he can pay out the new variable capital next week with the old money, which he paid out last week. The same holds good with regard to the acts of exchange between the different component parts of the total social capital, for instance, between the articles of consumption and the means of production of articles of consumption. The money for their circulation must, as we have seen, be advanced by one or both of the exchanging parties. It remains thereupon in the circulation, but returns after the consummation of the exchange always to him who advanced it, since it had been advanced by him in excess of his actually employed industrial capital (Volume II, Chapter XX.). Under a developed credit system, when the money is concentrated in the hands of the banks, it is they, at least nominally, who advance it. This advance refers only to the money existing in circulation. It is an advance of currency, not of the capitals, which the credit system circulates.
Chapman 5062. "There may be times, when the bank notes in the hands of the public constitute a very large amount, and yet none may be had." Money exists also during a panic. But every one takes good care not to convert it into loanable capital; every one holds on to it for the purpose of meeting real payments.
5099. "The banks in the rural districts send their unemployed surplus to you and other London firms?"—"Yes."—5100. "On the other hand, the factory districts of Lancashire and Yorkshire have bills of exchange discounted by you for business purposes?"—"Yes."—5101. "So that in this way the superfluous money of a certain district is utilised for the requirements of another district?"—"Quite right."
Chapman says that the custom of the banks to invest their surplus money-capital for a short time in consols and treasury notes has decreased considerably of late, since the custom has been introduced to loan this money at call, reclaimable from day to day. For his own person he considers the purchase of such papers as very impracticable for his business. He prefers to invest his surplus money-capital in good bills of exchange, a part of which becomes due every day, so that he can always be sure of knowing how much ready money he can count on from day to day. [5001 to 5005.]
Even the growth of exports assumes more and more for every country, but particularly for the country granting the credit, the aspect of an increasing demand on the inland money-market, which is not felt, however, until the time of stringency. In times of increasing exports the manufacturers usually draw bills of exchange of long duration on the export merchant who receives consignments of British goods. (5126.)—5127. "It is not frequently the case, that an agreement exists, to renew these bills from time to time?"—[Chapman:] "This is a matter which they keep secret; we should not admit any such bills....It may surely take place, but I cannot say anything about this." [The innocent Chapman.] 5123. "When a great increase takes place in the exports, such as that of last year which alone amounted to 20 million pounds sterling, does not that in itself lead to a large demand for capital in order to discount bills representing these exports?"—"Undoubtedly."—5130. "Since England as a rule gives credit to foreign countries for all its exports, would not that imply the absorption of a corresponding additional capital for the time it lasts?"—"England gives an enormous credit; but in return it takes credit for its raw materials. Drafts as are made out against us by America always for sixty days, and by other countries for ninety days. On the other hand we give credit; when sending goods to Germany, we give two or three months."
Wilson asks Chapman (5131), whether bills on England are not drawn simultaneously with the loading of these raw materials and colonial goods destined for importation, and whether these bills do not arrive together with the bills of lading. Chapman thinks so, but does not know anything about these "commercial" transactions, and suggests that more expert men be asked.—In the export to America, says Chapman, the "commodities are symbolised in transit"; this gibberish signifies that the English export merchant draws against his goods on one of the great American banking firms in London by means of a bill of exchange running for four months, and this firm receives collateral from America.
5136. "Are not negotiations with far distant countries carried on by the merchant, who waits for his capital until the goods are sold?"—"There may be some firms of great private wealth, who are able to invest their own capital without taking advances on goods; but these goods are mainly transformed into advances by the endorsement of well known firms.—5137. "These firms are established in...London, Liverpool, and elsewhere."—5138. "It makes no difference, then, whether the manufacturer has to give up his own money, or whether he gets some merchant in London or Liverpool to advance it; it always remains an advance made in England?"—"Quite right. The manufacturer has to do with this only in a few cases" [but in 1847 in almost every case]. "For instance, a dealer in manufactured goods, in Manchester, buys commodities and ships them through a responsible firm in London; as soon as the London firm has convinced itself, that everything has been packed as per agreement, he draws a bill running for six months on this London firm against these commodities bound for India, China, or some other country; then the banking world comes in and discounts this bill for him; so that about the time, when he has to pay for these commodities...."—5139. "But even if this dealer now has the money, the banker had to advance it to him first?"—"The banker has the bill of exchange; the banker has bought the bill; he utilises his banking capital in this form, that is in the discounting of commercial bills." [Hence even Chapman does not regard the discounting of bills as an advance of money, but as a purchase of commodities.—F. E.]—5140. "But still this constitutes always a part of the demands on the money-market in London?"—"Undoubtedly; this is the essential occupation of the money-market and of the Bank of England. The Bank of England is just as glad to get these bills as we, it knows that they are a good investment."—5141. "In this way, in proportion as the export business grows, the demand in the money-market grows likewise?"—"In proportion as the prosperity of the country grows, we" [the Chapmans] "partake in it."—5142. "If, then, the various fields of investment of capital expand suddenly, the natural consequence is a rise of the rate of interest?"—"There is no doubt of it."
In 5143 Chapman cannot "quite understand, that with our large exports we had so much use for gold."
In 5144 the venerable Wilson asks: "Cannot it be that we are giving more credit on our exports than we are taking on our imports?"—"For myself, I should doubt this point. If any one gets accepts on his Manchester goods shipped to India, you cannot accept for less than ten months. We had, and this is quite certain, to pay America for its cotton some time before India paid us; but what effect this has, to analyse that is a very fine point."—5145. "When we, as we did last year, had an increase in the exports of manufactured goods to the amount of 20 million pounds sterling, we must have had before that a very considerable increase in the imports of raw materials" [and even in this way overexports are identical with overimports, and overproduction with over-commerce] "in order to produce this increased quantity of goods?"—"Undoubtedly; we must have had a very considerable balance to pay; that is, the balance must have been against us at the time, but in the long run the quotations of bills of exchange with America are in our favor, and we have received for some time large shipments of precious metals from America."
5148. Wilson asks the arch usurer Chapman, whether he does not regard his high interest as a sign of great prosperity and a high rate of profit. Chapman, evidently surprised at the naïveté of this sycophant, assents to this, of course, but is sincere enough to add the following clause: "There are some, who cannot help themselves in any other way; they have obligations to fulfill, and they must fulfill them, whether it be profitable or not; but if it lasts" [the high rate of interest] "it would indicate prosperity."—Both of them forget that a high rate of interest may also indicate that, as it did in 1857, the roving knights of credit are infesting the country, and that these gentlemen can afford to pay a high interest, because they pay it out of other people's pockets (whereby they take part in the fixing of the rate of interest for all others) and meanwhile live in grand style on anticipated profits. At the same time this may indeed result in a very profitable business for manufacturers and others. The returns become wholly deceptive by the loan system. This explains also the following statements, which require no explanation so far as the Bank of England is concerned, because it discounts at a lower rate than others when the rate of interest is high.
5156. "I may well say," says Chapman, "that the amounts of our discounts are at their maximum at the present, when we had a high rate of interest for such a long time." [Chapman said this on July 21, 1857, a few months before the crash.]—5157. "In 1852" [when the rate of interest was low] "they were not so high by far." For the business was indeed a great deal sounder then.
5159. "If the market were overflowing with money...and the banking discount low, we should have a decrease of bills of exchange....In 1852 we were in an entirely different phase. The exports and imports of the country were then nothing as compared to the present."—5161. "Under this high rate of discount our discounting business is as high as in 1854." [When the rate of interest was from 5 to 5½%.]
Very amusing is that part of the testimony of Chapman, in which he shows that his class regard the money of the public indeed as their property and pretend to have a right to having the bills discounted by them always converted. The ingenuousness of the questions and answers is great. It becomes the duty of legislation to make the bills accepted by large firms always convertible; to take pains that the Bank of England should under all circumstances continue to give discount to the bill brokers. And yet three of these bill brokers failed in 1857 for about 8 millions, while their own capital was infinitesimal compared to their debts.—5177. "Do you mean to say by this that in your opinion they" [that is bills accepted by the Barings or Loyds] "should be convertible by compulsion, in the way that a note of the Bank of England is now convertible into gold by compulsion?"—"I am of the opinion, that it would be a very lamentable thing, if it were not discountable; a very extraordinary situation, that a man would have to suspend payment, because he holds accepts by Smith, Payne 8 Co., to Jones, Loyd 8 Co., and cannot discount them."—5178. "Is not an accept of the Barings an obligation, to pay a certain amount of money when the bill becomes due?"—"That is quite right; but Messrs. Baring, if they undertake such an obligation, like every merchant who accepts such an obligation, do not dream in the least that they shall have to pay in Sovereigns; they figure on paying in the Clearing House."—5180. "Do you mean, then, that a sort of machinery should be thought out, by means of which the public would be empowered to receive money before the bill becomes due, by having somebody else discount it?"—"No, not by the accepting party; but if you mean to say that we shall not have the possibility to have commercial bills discounted, then we must change the whole constitution of things."—5182. "You believe, then, that it" [a commercial bill] "should be convertible into money, exactly like a note of the Bank of England must be convertible into gold?"—"Very decidedly, under certain circumstances."—5184. "You believe, then, that the institutions of currency should be arranged in such a way that a commercial bill of undoubted solidity should at all times be convertible in money like a bank note?"—"That I believe."—5185. "You do not go so far as to say either the Bank of England or anybody else should be compelled by law to convert it?"—"I go indeed so far as to say that if we make a law for the regulation of the currency, we should take steps to prevent the possibility of inland commercial bills becoming inconvertible, to the extent that such bills are undoubtedly solid and legitimate."—This is the convertibility of the commercial bill against the convertibility of bank notes.
5189. "The money dealers of the country represent in fact only the public."—So did Mr. Chapman later before the jury in the Davison case. See the Great City Frauds.
5196. "During the quarterly terms" [when the dividends are paid] "it is...absolutely necessary, that we should turn to the Bank of England. If you take 6 or 7 millions out of the revenue of the state in anticipation of the dividends, somebody must be there, who will in the meantime advance this amount."—[In this case it is a question of a supply of money, not of capital or loan capital.]
5169. "Every one familiar with our commercial world must know that if we are in such circumstances that treasury notes become unsalable, that obligations of the East Indian Company are completely useless, that the best commercial bills cannot be discounted, a great apprehension must reign among those whose business places them in a position where they must make payment immediately on simple demand in customary currency, and this is the case with all bankers. The effect of this is then that everybody doubles his reserves. Now just look what the effect of this is in the whole country, when every country banker, of whom there are about 500, has to instruct his London correspondent to remit to him 5,000 pounds sterling in bank notes. Even if we take such a small amount as this for an average, which is quite absurd, we arrive at 2½ million pounds sterling, which are withdrawn from circulation. How are they to be replaced?"
On the other hand the private capitalists, etc., who have money do not care to let go of it at any interest, for they say, according to Chapman, 5194: "We prefer to have no interest at all rather than to be in doubt, whether we can get the money when we need it."
5173. "Our system is this: We have 300 million pounds sterling worth of obligations, the payment of which in coin of the realm may be demanded at any moment; and this coin of the realm, if we use all of it for this purpose, amounts to 23 million pounds sterling, or thereabout; is not that a condition, which may throw us into convulsions at any moment?" Hence we have in times of crisis the sudden change of the credit system into a monetary system.
Aside from the panic in the home market during crises, there can be any mention of the quantity of money only in so far as it concerns metal, which is the world money. And this is precisely what Chapman excludes; he speaks only of 23 millions in bank notes.
The same Chapman, 5218. "The original cause of the disturbance of the money-market" [in April and later in October] "was undoubtedly in the quantity of money required for the regulation of the quotations of bills of exchange, in consequence of the extraordinary imports of the year."
In the first place, this reserve of world market money had then been reduced to its minimum. In the second place it served at the same time as a security for the convertibility of the credit money, the bank notes. It combined in this way two quite different functions, which, however, proceed both of them from the nature of money, since real money is always world money, and the credit money always rests upon the world money.
In 1847, without the suspension of the Bank Acts of 1844, "the Clearing Houses could not have carried on their business." (5221.)
That Chapman nevertheless had a suspicion of the coming crisis, is shown by the following statement: 5236. "There are certain conditions of the money-market (and the present one is not far removed from that), in which money is very difficult, and one has to have recourse to a bank."
5239. "As for the amounts taken by us out of the bank on Friday, Saturday and Monday, October 19, 1847, we should have been only too grateful on the following Wednesday, if we could have gotten back the bills of exchange; the money returned to us immediately after the panic was over."—On Tuesday, October 23, the Bank Acts were suspended, and this broke the crisis.
Chapman believes (5274) that the bills running simultaneously on London amounted to 100 or 120 million pounds sterling. This did not include the local bills on provincial places.
5287. "While in October, 1856, the amount of the notes in the hands of the public rose to 21,155,000 pounds sterling, there was nevertheless a very extraordinary difficulty in raising money; although the public had so much in its hands, we could not get our fingers on it."—This was due to the fear, caused by the panic, in which the Eastern Bank found itself for a time (March 1856).
5190-92. As soon as the panic is over, "all bankers who make their profits out of interest begin at once to employ their money."
5302. Chapman does not explain the unrest going with the decrease of the bank reserve out of the apprehension concerning the deposits, but attributes it to the fact that all those, who suddenly may be compelled to pay large sums of money, know very well that they may be driven to seek their last refuge in the bank, when a panic seizes the money-market; and "when the bank has a very small reserve, it is not glad to receive us; on the contrary."
By the way it is nice to observe the way in which the reserve dwindles away as a really existing magnitude. The bankers keep a minimum for their current business either in their own hands or with the Bank of England. The bill brokers hold the "loose bank money of the country" without any reserve. And the Bank of England has nothing to offset its debt for deposits but the reserves of bankers and others, together with some public deposits, etc., which it permits to be drained to its very lowest level, for instance to 2 millions. Aside from these 2 millions of paper, then, this whole swindle has no other reserve but the metal reserve in times of crisis (and this reduces the reserve, because the notes, which come in to replace outgoing metal, must be annulled), and thus every reduction of this reserve by the expenditure of gold increases the crisis.
5306. "If no money were available to settle the balances in the Clearing House, I do not see that we could do anything else but to come together and make our payments in first drafts, checks on the Treasury Department, Smith, Payne 8 Co., etc."—5307. "That is to say, if the government should fail to supply you with means of circulation, you would create one for yourself?"—"What are we going to do? The public comes in and takes the circulating medium out of our hands; it does not exist."—5308. "Then you would simply do in London what is done in Manchester every day?"—"Yes."
Particularly good is the reply of Chapman to a question asked by Cayley, a Birmingham man of the Attwood school, with regard to Overstone's conception of capital. 5315. "It has been stated before this Committee, that it is not money, but capital, which is demanded in a panic like that of 1847; what is your opinion on this?"—"I do not understand you; we deal only in money; I don't understand what you mean."—5316. "If you mean thereby" [namely by commercial capital] "the mass of money belonging to himself, which a man has in his business, if you call that capital, it forms generally a very small part of the money, with which he operates in his transactions by means of the credit given to him by the public"—that is, by the intervention of the Chapmans.
5339. "Is it from lack of wealth that we suspend our cash payments?—By no means....We have no lack of wealth, but we move under a most artificial system, and when we have an immense superincumbent demand for our medium of circulation, it may lead to conditions, which prevent us from securing this medium of circulation. Should the entire commercial industry of the country be laid lame on this account? Should we close all avenues of employment?—5338. "Should the question be asked, what we want to maintain, whether the cash payments or the industry of the country, I know which of the two I should drop."
Concerning the hoarding of bank notes "with the intention of intensifying the panic, or drawing advantages from its results"  he says that this may be done easily. Three large banks would be sufficient. 5383. "Should it not be known to you, a man familiar with the great firms of our metropolis, that capitalists utilise these crises to make enormous profits out of the ruin of those, who fall victims?"—"There can be no doubt of it."—And we may well believe Mr. Chapman on this score, although he finally broke his own neck in the attempt of making "enormous profits out of the ruin of his victims." For while his associate Gurney says "Every change in business is advantageous for him who is posted," Chapman says: "The one portion of society knows nothing about the other; there is, for instance, the manufacturer, who exports to the continent, or who imports his raw material, he knows nothing of the other, who deals in gold bullion." (5046.)—And thus it happened, that one fine day Gurney and Chapman themselves "were not posted" and went into an ill-famed bankruptcy.
We have seen previously, that the issuing of notes does not signify an advance of capital in all cases. The following testimony of Tooke before the C. D. Committee of Lords, 1848, proves merely that an advance of capital, even if accomplished by the bank by an issue of new notes, does not signify straightway an increase in the number of circulating notes.
3099. "Do you believe, that the Bank of England could extend its loans considerably, without bringing about an increased issue of notes?"—"There are abundant facts at hand to prove this. One of the most striking examples was in 1835, when the Bank made use of the West Indian deposits and of the loan from the East Indian Company to increase its loans to the public; at the same time the amount of notes in the hands of the public actually decreased somewhat....Something similar to this is noticeable in 1847 at the time of the paying of the railroad deposits in the Bank; the securities [in discount and deposits] rose to about 30 millions, while no appreciable effect took place on the amount of notes in the hands of the public."
Aside from the bank notes the wholesale trade has another medium of circulation, which is far more valuable to it, namely the bills of exchange. Mr. Chapman showed us, how essential it is for a regular flow of business that good bills of exchange should be taken in payment everywhere and under all conditions. If bills of exchange are no longer good, what in the world is to be done? How do these two media of circulation stand towards one another?
Gilbart says on this score: "The restriction of the amount of the circulation of notes increases regularly the amount of the circulation of bills of exchange. The bills are of two kinds—commercial bills and banker's bills—if money becomes scarce, then the money lenders say: "You draw on us and we will endorse," and when a provincial banker discounts a bill for some customer, he does not give him cash money, but his own draft for 21 days on his London agent. These bills serve as a medium of circulation." (G. W. Gilbart, An Inquiry into the Causes of the Pressure, etc., p. 31.)
This is corroborated in a somewhat modified form by Newmarch, B. A. 1857, No. 1426: "There is no connection between the fluctuations in the amount of the circulating bills and those of the circulating bank notes...the only rather uniform result is...that as soon as a stringency in the money-market occurs, such as is indicated by a raising of the rate of discount, the volume of the circulation of bills is considerably increased and vice versa."
However, the bills of exchange written in such times are by no means only the short bank bills mentioned by Gilbart. On the contrary, they are largely bills of accommodation, which represent no real business at all, or at least only transactions made for the purpose of drawing bills of exchange on them; we have given sufficient illustrations of both. Hence the "Economist" (Wilson) says in comparing the security of such bills with that of bank notes: "Bank notes payable on presentation can never stay out in excess, because the excess would always return to the bank for exchange, while two-months drafts may be issued in great superabundance, as there is no means of controlling their issue until they become due, when they may have been replaced by others. That a nation should admit the security of the circulation of bills payable at some future date, but raise doubts against a circulation of paper money payable on presentation, is completely unintelligible to us." (Economist, 1847, p. 572.)
The quantity of the circulating bills is, therefore, like that of the bank notes, merely determined by the requirements of commerce; in ordinary times the circulation of bills running in the fifties together with about 39 millions in bank notes amounted to about 300 millions, and from 100 to 120 millions of this were made out on London alone.
The volume of the circulation of bills has no influence on the circulation of notes, and is influenced by the latter only in times of stringency of money, when the quantity of bills increases and their quality deteriorates. Finally, at the time of a crisis, the circulation of bills fails completely; no man can make use of a promise to pay, since every one wants to accept only cash payment; only the bank note retains, at least so far in England, its ability to circulate, because the nation with its total wealth backs up the Bank of England.
We have seen that even Mr. Chapman, though himself a magnate of the money-market in 1847, complained bitterly, that there were a few large money-capitalists in London strong enough to carry disorder into the whole money-market at any given moment and thereby to bleed the smaller money dealers. There were several large sharks of this kind, he said, who could considerably intensify a stringency, by selling one or two millions worth of consols and thereby taking an equal amount of bank notes (and at the same time of available loan capital) out of the market. To transform a stringency into a panic by the same maneuver, the joint action of three large firms would be sufficient.
The greatest capital power in London is, of course, the Bank of England, which, however, is prevented by its position as a semi-government institution from making too brutal a use of its power. Nevertheless it also knows enough about ways and means of making money, particularly since the Bank Acts of 1844.
The Bank of England has a capital of 14,553,000 pounds sterling, and commands besides about 3 million pounds sterling of a "Remainder," that is, undistributed profits, and furthermore all moneys collected by the government for taxes, etc., which must be deposited there until they are needed. Add to this the amount of other deposits, about 30 million pounds sterling in ordinary times, and the bank notes issued without a reserve, and we shall find that Newmarch made a rather conservative estimate, when he said (B. A. 1857, No. 1889): "I have convinced myself, that the total amount of the funds employed continually in the [London] money-market may be estimated at about 120 million pounds sterling; and of these 120 millions the Bank of England commands a very considerable portion, about 15 to 20%."
So far as the Bank issues notes, which are not covered by the metal reserve in its vaults, it creates symbols of value, that form not only currency, but also additional, even if fictitious, capital for it to the nominal amount of these unprotected notes. And this additional capital yields an additional profit for it.—In B. A. 1857, Wilson asks Newmarch, No. 1563: "The circulation of a bank's own notes, that is, on an average the amount remaining in the hands of the public, forms an addition to the effective capital of that bank, does it not?"—"Assuredly."—1564. "All profits, then, which the bank derives from this circulation, is a profit arising from credit, not from a capital actually owned by it?"—"Assuredly."
The same is true, of course, of the private banks issuing notes. In his answers Nos. 1866 to 1868 Newmarch considers two-thirds of all bank notes issued by them (the last third has to be covered by a metal reserve in these banks) as "a creation of so much capital," because hard cash is saved to this amount. The profit of the banker may not be larger than that of other capitalists, notwithstanding all this. The fact remains, however, that he draws the profit out of this national saving of hard cash. The fact that a national saving becomes a private profit does not shock the bourgeois economist in the least, since profit is under all circumstances the appropriation of national labor. Is there anything more insane than, for instance, the Bank of England in 1797 to 1817, whose notes have credit only by the backing of the state, taking payment from the state, and from the public, in the form of interest on government loans for the power, granted to it by the state, to transform these same notes from paper into money and then to loan them to the state?
The banks have still other means of creating capital. According to the same Newmarch the provincial banks, as mentioned above, have the habit of sending their superfluous funds (that is, notes of the Bank of England) to London bill brokers, who send them discounted bills of exchange in return. With these bills the bank serves its customers, since it follows the rule not to issue the bills of exchange received from its local customers any more, in order that the business transactions of these customers may not become known in their own neighborhood. These bills received from London do not only serve for the purpose of being issued to customers, who have to make payments direct to London, unless these customers should prefer to get the bank's own draft on London; they serve also for the settlement of payments in the province, for the endorsement of the bankers secures local credit for them. In Lancashire, for instance, all the local banks' own notes and a large portion of the notes of the Bank of England, have been crowded out of the circulation by such bills. (Ibidem, 1568 to 1574.)
We see here, then, how the banks create credit and capital, 1) by the issue of their own notes, 2) by writing out drafts on London running as long as 21 days but paid to them in cash immediately on being written, and 3) by paying out discounted bills of exchange, which are endowed with credit primarily and essentially by endorsement through the bank, at least for the local district.
The power of the Bank of England is shown in its regulation of the market rate of interest. In times of normal business it may happen, that the Bank cannot prevent a moderate drain of gold from its metal reserve by raising the rate of discount,104 because the demand for means of payment is satisfied by the private banks, stock banks and bill brokers, who have gained considerably in capital power during the last thirty years. In that case the Bank of England must use other means. But for critical moments, the statement made by Banker Glyn (of Glyn, Mills, Currie 8 Co.) before the C. D. 1848-57 still holds good:—1709. "In times of great stringency in the country the Bank of England commands the rate of interest."—"In times of extraordinary stringency...when the discounts of the private bankers or brokers are relatively restricted, they fall to the Bank of England, and then it has the power to fix the market rate of interest."
It is true, that the Bank of England, being a public institution under government protection, cannot exploit its power ruthlessly, in the same way that private institutes may. For this reason Hubbard says before the Banking Committee B. A. 1857, No. 2844: "Is it not true, that when the rate of discount is highest, the Bank of England gives the cheapest service, and when lowest, then the brokers are the cheapest?"—"That will always be the case, for the Bank of England never comes down as low as its competitors, and when the rate is highest, it never goes quite so high."
But nevertheless it is a serious event in business life, when the Bank of England draws the screw tighter in times of crisis, as the saying is, that is, when it raises the rate of interest, which is already above the average, still higher. "As soon as the Bank of England tightens the screw, all purchases for export into foreign countries cease...the exporters wait, till the depression of prices has reached its lowest point, and only then and not before do they buy. But when this point is reached, the quotations have once more become settled—gold ceases to be exported, before this lowest point of the depression is reached. Purchases of commodities for export may possibly bring back a part of the money sent abroad, but they come too late to prevent the drain." (G. W. Gilbart, An Inquiry into the Causes of the Pressure on the Money Market, London, 1840, p. 37.)—"Another effect of the regulation of the currency by means of foreign quotations on bills of exchange is that it brings about an enormous rate of interest in times of crisis." (L. c., p. 40.)—"The costs arising out of the restoration of the quotations on bills of exchange fall upon the productive industry of the country, whereas in the course of this process the profit of the Bank of England is positively increased by the fact that it continues its business with a smaller amount of precious metal." (L. c., p. 52.)
But, says friend Samuel Gurney, "These great fluctuations of the rate of interest are advantageous for the bankers and money dealers—all fluctuations in business are advantageous for him who is posted." And even though the Gurneys skim the cream off the ruthless exploitation of the precarious condition of business, whereas the Bank of England cannot do this with the same liberty, nevertheless it also makes quite nice profits—not to mention the private profits, which of their own account fall into the lap of the directors, who have an exceptional opportunity to understand the general condition of business. According to a statement made before the Lord's Committee of 1817 on the matter of the resumption of specie payments these profits of the Bank of England for the entire period from 1797 to 1817 stood as follows:
|Bonuses and increased dividends...||7,451,136|
|New stock divided among proprietors...||7,276,500|
|Increased value of capital...||14,553,000|
on a capital of 11,642,100 pounds sterling in 19 years. (D. Hardcastle, Banks and Bankers, 2nd edition, London, 1843, p. 120.) If we estimate the total profits of the Bank of Ireland, which also suspended specie payments in 1797, by the same principle, we obtain the following result:
|Dividends as by returns due 1821...||4,736,085|
|Increased value of capital...||4,185,000|
on a capital of 3 million pounds sterling. (Ibidem, p. 163.)
Talk about centralisation! The credit system, which has its center in the so-called national banks and the great money lenders and usurers about them, is an enormous centralisation, and gives to this class of parasites a fabulous power, not only to despoil periodically the industrial capitalists, but also to interfere into actual production in a most dangerous manner—and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proofs of the growing power of these bandits, who are joined by the financiers and stock jobbers.
Should any one still dream that these honorable bandits exploit national and international production only in the interest of production and of the exploited themselves, he will surely be taught better by the following homily on the high moral dignity of the bankers: "The bank establishments are religious and moral institutions. How often has not the fear of being seen by the vigilant and disapproving eye of his banker deterred the young business man from seeking the society of noisy and extravagant friends? How anxious he is to stand well in the estimation of the banker, to appear always respectable! The knit brow of the banker has more influence over him than the moral preaching of his friends; does he not tremble to be suspected of being guilty of fraud or of the least false statement, for fear of causing suspicion, in consequence of which his banking accommodation might be restricted or cancelled? The advice of the banker is more important to him than that of the clergyman." (G. M. Bell, a Scotch bank director, in The Philosophy of Joint Stock Banking, London, 1840, pp. 46 and 47.)
THE CURRENCY PRINCIPLE AND THE ENGLISH BANK LAWS OF 1844.
[In a former work105 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.
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  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 8 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 capital...it 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.]
PRECIOUS METALS AND RATES OF EXCHANGE.
[101.] B. A. 1857. Testimony of Twells, banker, 4516. "As a banker, do you deal in capital or in money?"—"We deal in money."—4517. "How are the deposits paid into your bank?"—"In money."—4518. "How are they paid out?"—"In money."—"Might it be said, then, that they are anything else but money?"—"No."
Overstone (see chapter XXVI) tangles himself up continually between "capital" and "money." Value of money signifies with him also interest, in so far as it is determined by the mass of money; value of capital is supposed to be interest, so far as it is determined by the demand for productive capital and the profit made by it. He says, 4140. "The use of the term capital is very dangerous."—4148. "The gold exports from England are a reduction of the quantity of money in the country, and this must naturally cause an increased demand in the money-market in general" [but not in the capital-market, according to this]—4112. "In proportion as money leaves the country its quantity in the country is diminished. This diminution of the quantity remaining in the country creates an increased value of this money" [this signifies originally in his theory an increase in the value of money as money through a contraction of the currency, as compared to the values of commodities; in other words, an increase in the value of money is the same as a fall in the value of commodities. But since meanwhile even he has been convinced beyond peradventure, that the mass of the circulating money does not determine prices, it is now the contraction of money as a medium of circulation, which is supposed to raise its value as interest bearing capital, and thus the rate of interest]. "And this increased value of the still remaining money checks the export and continues, until it has brought back as much money as is necessary to restore the equilibrium."—A continuation of Overstone's contradictions follows later.
[102.] At this point the confusion starts in to the effect that both of these things are "money," namely the deposit as a claim to a payment from the banker, and the deposited money in the hands of the banker. Banker Twells, before the Committee on Bank Acts of 1857, takes the following example: "I start in business with 10,000 pounds sterling. With 5000 pounds sterling I buy commodities and place them in my stock. The other 5000 pounds sterling I deposit with some banker, in order to draw upon them as I need them. But I still consider the total as my capital, although 5000 pounds sterling exist in the form of a deposit or money." (4528)—This gives rise to the following nice debate.—4531. "Well, you have given your 5000 pounds sterling in bank notes to somebody else"—"Yes, Sir."—4532. "Then he has 5000 pounds sterling in deposits?"—"Yes, Sir."—4533. "And you have 5000 pounds sterling in deposits?"—"Quite right."—4534. "He has 5000 pounds sterling in money, and you have 5000 pounds sterling in money?"—"Yes, Sir."—4535. "But it is ultimately nothing but money?"—"No, Sir." This confusion is due, partly to the circumstance, that A, who has deposited 5000 pounds sterling, can draw on them and dispose of them as though he still had them. To that extent they serve him as a potential capital. In all cases, in which he draws on them, he destroys his deposit to that extent. If he draws out real money, and his own money has already been loaned to some one else, he is not paid with his own money, but with that of some other depositor. If he pays a debt to B with a check on his banker, and if banker of A has also a check on the banker of B, so that the two bankers merely exchange checks, then the money deposited by A has performed the function of money twice; first, in the hands of him who received the money deposited by A; secondly, in the hands of A himself. In this second function it is a balancing of claims of indebtedness (the claim of A on his banker, and the claim of this banker on the banker of B) without the intervention of money. Here the deposit acts twice as money, namely once as real money, and then as a claim on money. Mere titles to money may take the place of money only by a balancing of claims of indebtedness.
[103.] Average number of days, during which a bank note remained in circulation:
|Year||5 p. Note||10 p. Note||20-100 p.||200-500 p.||1000 p.|
Tabulation made by Marshall, Cashier of the Bank of England, in Report on Bank Acts, 1857, II, Appendix, p. 301-302.
[104.] In the general meeting of the stockholders of the Union Bank of London, on January 17, 1894, President Ritchie relates that the Bank of England raised the discount in 1893 from 2½% in July to 3 and 4% in August, and when it lost fully 4½ million pounds sterling in gold in spite of this, it raised the rate of interest to 5%, whereupon gold flowed back to it and the bank rate was reduced to 4% in September and 3% in October. But this bank rate was not recognized in the market. "When the bank rate was 5%, the market rate was 3½% and the rate for money 2½%; when the bank rate fell to 4%, the rate of discount was 2 3/8% and the money rate 1¾%; when the bank rate was 3%, the rate of discount was 1½% and the money rate a trifle lower." (Daily News, January 18, 1894.)—F. E.
[105.] Karl Marx, A Contribution to the Critique of Political Economy, Berlin, 1859, pages 236 and following.