I. A document issued by the House of Lords in 1848 gives information concerning the depreciation of government papers and bonds during the crisis of 1847. According to it the depreciation of October 23, 1847, compared to the stand of values in February of the same year, amounted to 93,824,- 217 pounds sterling in English government bonds, 1,358,288 pounds sterling in dock and canal stock, and to 19,579,- 820 pounds sterling in railroad stocks, a total of 114,762,325 pounds sterling.
II. With reference to the swindle in East Indian business, 2E 482 Capitalist Production.
in which it was no longer a question of making drafts, because commodities had been bought, bnt rather of buying commodi- ties in order to be able to make out discountable drafts which should be convertible into money, the " Manchester Chiard- ian " of November 24, 1848, remarks that Mr. A in London instructs a Mr. B to buy from the manufacturer C in Man- chester commodities for shipment to a Mr. D. in East India. B pays C in six-months-drafts to be made by C on B. B se- cures himself by six-months-drafts on A. As soon as the goods are shipped, and the bill of lading mailed, A makes out six- months-drafts on D. The buyer and shipper thus get posses- sion of funds many months before the goods are actually paid for. And it was a common custom to renew the drafts when due under the pretense of allowing time for turn-over in such a protracted business. Unfortunately the losses in this bu'^i- ness did not lead to its restriction, but to its extension. In proportion as the interested parties grew poor their need of making purchases increased, in order to find in new advances a compensation for capital lost in previous speculations. Pur- chases were then no longer regulated by supply and demand, but became the most important feature in the financial operations of a shaky firm. But this is only one side of the picture. What happened in the export of manufacturing goods here, occurred in the purchase and shipment of goods on the otlier side. Firms in India, which had credit enough to get their checks discounted, bought sugar, indigo, silk or cotton, not because the purchase prices as compared with the latest London quotations promised a profit, but because previous drafts on a London firm would soon be due and would have to be covered. What was simpler than to buy a cargo of sugar, to pay for it in ten-months-drafts on the London firm, and to send the bills of lading by overland mail to London? Less than two months later the bills of lading of these barely shipped goods, and thus the goods themselves, were pawned in Lombard Street, and the London house came into the possession of money eight months before the bills of exchange made out for these goods were due. And all this passed off smoothly, without interruption or difficulties, so long as the discounting firms found enough money to advance on bills of lading and dock warrants, and to discount the drafts of Indian firms on select firms of Mincing Lane to unlimited amounts.
Credit and Fictitious Capital. 483 [This fraudulent procedure remained in vogue so long as the goods from and to India had to sail around the Cape. But since they pass through the Suez Canal this method of creat- ing fictitious capital has lost its foundation, thanks to steam navigation and the shortening of the trip. And when the tele- graph reported the stand of the Indian market to the English and that of the English market to the Indian business man on the same day, this method was completely killed. F. E.]
III. The following is from the previously quoted report on Commercial Distress, 1847-48: In the last week of April, 1847, the Bank of England informed the Eoyal Bank of Liverpool, that it would henceforth reduce its discount busi- ness with the latter bank by one-half. This communication had a very disastrous effect, because the payments in Liverpool had lately been made far more in bills of exchange than in cash, and because the merchants, who ordinarily carried much cash money to the bank for the purpose of squaring their notes, had been able to bring only checks of late, which they had re- ceived themselves for their cotton and other products. This had assumed large proportions and caused the business diffi- culty. The endorsed checks, which the bank had to turn into cash for the merchants, had mostly been made out by outsiders, and had so far been balanced generally by the payments re- ceived for tho products. The checks which the merchants now brought in place of the former cash were bills of exchange for different lengths of time and of different kinds, a consider- able number being bank checks for three months from date, the majority being checks for cotton. These bills of ex- change, when bank checks, had been endorsed by London bankers, the others were endorsed by merchants in Brasilian, Amer- ican, Canadian, West Indian, etc., business...The merchants did not draw on one another, but the customers in the home country, who had bought products in Liverpool, covered them by drafts on London banks, or drafts on other firms in London, or on drafts of some one else. The commu- nication of the Bank of England caused a shortening of the running time of checks drawn against sales of foreign prod- ucts, which used to run frequently longer than three months, The period of prosperity in England, from 1844 to 1847 was, as described above, connected with the first great rail- 484 'Capitalist Production.
road swindle. The above-named report makes the foliowiug statements concerning the influence of this swindle on busi- ness in general: In April, 1847, nearly all commercial firms had begun to starve their business more or less, by investing a part of their commercial capital in railroads (p. 41.) — Loans were also made by private parties, bankers and insurance com- panies at a high rate of interest, for instance, at 8% (p. G6). These large advances of these business firms to railroads caused them to take up in their turn too much capital from banks on discount checks, by which to carry on their own business (p. 67. — ■ (Question): Would you say that the payments on railroad stocks contributed much to the pressure which bur- dened the money market in April and October 1847? (An- swer): I believe that they hardly contributed anything to the pressure in April. In my opinion they had rather strengthened than weakened the bankers going on into April, and perhaps even into the summer. For the actual employ- ment of the money followed by no means as rapidly as the de- posits; as a result most of the banks had a rather large amount of railroad stocks in their hands in the beginning of the year. [This is corroborated by numerous statements of bankers in C. D. 1848-57.] This gradually melted away in summer and was considerably smaller on December 31. One cause of the pressure in October was the gradual decrease of the railroad funds in the hands of bankers; between April 22, and Decem- ber 31, the balances of railroads in our hands were reduced by one-third. This effect was produced by railroad deposits in all of Great Britain; they have gradually stripped the banks of deposits (p. 43, 44). — Samuel Gurney (Chief of the ill- famed firm of Overend Gurney & Co.) says likewise: In 184G there was a much greater demand for capital for rail- ways, but it did not raise the rate of interest. There was a condensation of small sums into larger masses, and these larger masses were consumed in our market; so that on the whole the effect was to throw more money on the money market of the city, not so much to take it out.
A. Hodgson, Director of the Liverpool Joint Stock Bank, shows to what extent bills of exchange may form a reserve for bankers: It was our custom to hold at least nine-tenths of all our deposits, and all money received from our custo- mers, in our bill books in the shape of bills of exchange, Credit and Fictitious Capital. 485 which fell due from day to day...so much so, that the amount of bills due da,ily during the time of the crisis almost equaled the amount of demands for payment made on us every day (p. 53).
Speculative Bills. — No. 5092. " By whom were the bills of exchange (against sold cotton) mainly endorsed?" — (R. Gardner, the cotton manufacturer mentioned several times in this work): " By produce jobbers; one trader buys cotton, transfers it to some jobber, draws checks on this jobber, and gets these bills discounted." — 'No. 5094. " And these bills of exchange go to the Liverpool banks and are discounted by them? " — " Yes, and also by others...Had not this ac- commodation existed, which was mainly allowed by the Liver- pool banks, cotton would have been, in my opinion, from 1^ d to 2 d per pound cheaper last year." — No. 600. " You said that an enormous number of bills of exchange was in circu- lation, drawn by speculators upon cotton jobbers in Liver- pool; does the same apply to your advances on bills of ex- change for other colonial products than cotton? " — (A. Hodg- son, banker in Liverpool): " It refers to all kinds of colonial products, but most particularly to cotton." — No. 601. " Do you, as a banker, try to keep away from bills of exchange of this sort? " — " Not at all; we regard them as legitimate bills when kept within moderate bounds...This sort of bills is often prolong-ued."
Swindle in the East Indian and Chinese Market, 1847. — Charles Turner (Chief of one of the first East Indian firms in Liverpool): " We all know the occurrences, which have taken place in the matter of business to Mauritius and simi- lar businesses. The jobbers were accustomed to make ad- vances on goods, not only after their arrival, for the covering of the bills of exchange drawn for these goods, which is quite in order, and advances on bills of lading...they have also made advances on the product before it had been shipped, and in some cases before it had been manufactured. Eor in- stance, I had, in one case in Calcutta, bought bills of ex- change amounting to 6-7,000 pounds sterling; the proceeds of these goods went to Mauritius in order to assist in planting sugar there; the bills came to Enjrland, and more than half of them were protested; then, when the shipments of sugar finally arrived, by which these bills were to have been paid.
486 Capitalist Production.
it was found that this sugar had already been pawned to third parties, before it had been shipped, or even before it had been boiled (p. 78). Now the goods for the East Indian market must be paid to the manufacturer in cash; but this does not mean much, for if the buyer has some credit in London, he draws on London and discounts the drafts in London, where the discount is now low; he pays the manufacturer with the money so obtained...it takes at least twelve months before a shipper of goods to India receives his return shipment...a man with ten or fifteen thousand pounds sterling going into Indian business would secure credit from some London house to a considerable amount; he would give to this house 1% and draw on it with the understanding, tliat the proceeds of the goods sent to India are to be sent to this London house; but the tacit understanding on both sides is that the London house shall not have to make any advances of cash; in other words, the drafts are prolongued until the return shipments arrive. The bills of exchange are discounted in Liverpool, Manchester, London, some of them are held by Scotch banks " (p. Id). — No. 730. " There is a firm, which recently failed in London; the examination of its books revealed the following condition of affairs: Here is one firm in Manchester, and another in Calcutta; they opened a credit with the London firm for 200,000 pounds sterling; that is, the business friends of this Manchester firm, who sent consignments of goods from Glasgow and Manchester to the firm in Calcutta, drew on the London house up to the sum of 200,000 pounds sterling; at the same time the understand- ing was, that the Calcutta firm would also draw on the London finn up to the sum of 200,000 pounds sterling; these bills of exchange were sold in Calcutta, other bills of exchange were bought with the proceeds, and these were sent to Lon- don in order to enable the firm there to pay the first drafts made by the Glasgow or Manchester firm. In this way this firm sent bills of exchange amounting to 600,000 pounds sterling into the world." — No. 971. " At present, when a firm in Calcutta buys a ship's cargo (for England) and pays for it with its own drafts on its London correspondent, and when the bills of lading are sent here, these bills of lading are used immediately for the purpose of securing advances in Lombard Street; hence they have eight months time in which Credit and Fictitious Capital. 487 to make use of the money before their correspondents have to pay the drafts." — IV. In the year 1848 a secret committee of the Upper House was in session on an investigation of the causes of the crisis of 184Y. The testimony of the witnesses before this committee was not published, however, until 1857 (Minutes of Evidence, taken before the Secret Committee of the H. of L. appointed to inquire into the Causes of Distress, etc., 1857; quoted as C. D. 1848-57). Here Mr. Lister, the Di- rector of the Union Bank of Liverpool, testified among other things to the following: 2444. " There was, in the spring of 1847, an unwarranted extension of credit...be- cause business men transferred their capital from their busi- ness to railroads and nevertheless wanted to continue their business on the old scale. Every one thought probably at first that he could sell the railroad stocks at a profit and thus replace the money in the business. He found, perhaps, that this was impossible, and then secured credit in his business where he paid cash formerly. This gave rise to an extension of credit."
2500. " These bills of exchange, on which the banks that had accepted them incurred losses, were they bills mainly for corn or for cotton?...They were bills for products of all kinds, corn, cotton and sugar, and products of all sorts. There was at that time nothing, with the exception of oil, perhaps, that did not fall in price." — 2506. " A jobber, who accepts a bill of exchange, does not do so without being sufficiently secured, also against a fall in the price of the commodity which serves as a security."
2512. " Two kinds of bills of exchange are drawn for products. To the first kind belongs the original draft, which is made out on the other side on the importer...The drafts which are made out in this way for products are fre- quently due before the goods arrive. For this reason the iiierchant who has not enough money when the products ar- rive, must pawn them to some broker until he can sell them. Then a draft of the other kind is immediately drawn on the broker by the Liverpool merchant, on the strength of those products...it then becomes the business of the banker to ascertain, whether he has those goods and to what extent he has made advances on them. He must convince himself, 488 Capitalist Production.
that the broker has security, in order to make good eventual losses."
2516. "We receive also bills of exchange from foreign countries...Some one buys on the other side a bill of exchange on England, and sends it to some firm in Eng- land; we cannot tell by looking at this bill, whether it has been drawn reasonably or unreasonably, whether it represents products or wind."
2533. " You said that foreign, products of nearly all kinds are sold at a heavy loss. Do you believe, that this was due to unwarranted speculations in these products? " — " It arose from a very large import, while no adequate consump- tion existed to take care of it. From all indications the con- sumption fell off considerably." — 2537. " In October...products Avere almost unsaleable."
How it is tliat a general scramble for safety is made at the critical stage of a crisis is explained in the same report by an expert of the first order, the worthy and crafty Quaker, Samuel Giirney of Overend Gurney & Co.: 1262. " When a panic reigns, a business man does not ask himself, how profitably he can invest his bank notes, or whether he will lose 1 or 2% in the sale of his treasury notes or 3% bonds. Once that he is under the suggestions of fright, he cares nothing about gain or loss; he gets himself into a safe place, the rest of the world may do what it pleases."
V. Concerning the mutual unmasking of two markets Mr. Alexander, a merchant in the East Indian trade, testi- fies before the Committee of the Lower House on the Bank Acts of 1857 (quoted as B. C. 1857): 4330. " At present, if I invest 6 shillings in Manchester, I get 5 shillings back in India; if I invest 6 shillings in India, I get 5 shillings back in London." In this way the Indian market is ex- posed by England, and the English by India. And this took place in the summer of 1857, barely ten years after the bitter experience of 1847!
I Accumulation of Money-Capital. 489 CHAPTER XXVI.
ACCUMULATION OF MONEY-CAPITAL. ITS INFLUENCE ON THE RATE OF INTEREST.
" In England, a steady accumulation of additional wealth takes place, which has a tendency to assume ultimately the form of money. But next to the desire to acquire money, the most insistent desire is that of disposing of it by some kind of investment bringing interest or profit; for money as money does not bring wealth. Unless, therefore, a gradual and adequate extension of the field of investment takes place simultaneously with this steady accession of additional capital, we must be exposed to periodical accumulations of money seeking investment, which will be of greater or smaller importance according to circumstances. For a long series of years the national debt was the great means of absorbing the superfluous wealth of England. Since it reached its maxi- mum in 1816 and no longer acts as an absorbent, every year a sum of at least 27 millions has been seeking other fields of investment. Moreover, various return payments of capital were made...Enterprises which require a large cap- ital for their execution and make an opening from time to time for the excess of unemployed capital...are abso- lutely necessary, at least in our country, in order to take care of the periodical accumulations of the superfluous wealth of society, which cannot find room in the ordinary fields of in- vestment." (The Currency Question Reviewed, London, 1815, p. 32.) Of the year 1845 the same work says: " Within a very short period the prices have leaped upward from the lowest point of depression...The 3% na- tional debt stands almost at par...The gold in the vaults of the Bank of England exceeds all former amounts stored away there. Stocks of all kinds are quoted at prices, 490 Capitalist Production, which are unheard of in almost every case, and the rate of in- terest has fallen so much, that it is nearly nominal...All these are proofs that another heavy accumulation of un- employed wealth exists in England, that another period of speculative overheating is imminent." {Ibidem^ p 35.)
" Although the import of gold is not a reliable indication of profit in foreign commerce, nevertheless a part of this im- port of gold, in the absence of any other explanation, repre- sents on its face such a profit." (J. G. Hubbard, The Cur- rency and the Country, London, 1843, p. 41.) Take it that in a period of good steady business, profitable prices, and well supplied circulation of money, a crop failure gives rise to an export of 5 millions of gold and to an import of corn to the same amount. The circulation " (meaning, as we shall see immediately, the unemployed money-capital, not the medium of circulation. F. E.) "is reduced by the same amount. The private individuals may still possess means of circula- tion to the same amount, but the deposits of the merchants in the banks, the outstanding balances of the banks with their money brokers, and the reserves in their treasuries will all be reduced, and the immediate result of this reduction to the amount of the unemployed capital will be a rise in the rate of interest, say from 4% to 5%. Since business is sound, con- fidence is not shaken, but credit will be valued more highly." (Ihidem, p. 42.) " If the prices of commodities fall uni- versally, the superfluous money flows back to the banks in the form of increased deposits, the plethora of unemployed capi- tal reduces the rate of interest to a minimum, and this condi- tion of affairs lasts until either higher prices or a brisker business call the slumberi-ig money into service, or until it has been absorbed by investment in foreign securities or for- eign commodities." (P. 68.)
The following extracts are once more taken from the par- liamentarian report on Commercial Distress, 1847-57. — In consequence of the crop failure and famine of 1846—47 a heavy import of means of subsistence was necessary. " Hence a gi'eat excess of imports over exports...Hence a considerable drain of money from banks, and an increased Accuiniilation of Money-Capital. 491 demand upon the discount brokers from people who had bills of exchange to discount; the brokers began to inspect the bills of exchange more closely. The accommodation hitherto granted was seriously restricted, and weak houses failed. Those who relied wholly upon credit went to the wall. This increased the already marked unrest; bankers and others found, that they could not be as certain as formerly of transforming their bills of exchange and other securities into bank notes, in order to fulfill their obligations; they restricted the accom- modation still more and frequently refused it altogether; they locked their bank notes up in many instances, in order to meet their own future obligations; tliey preferred not to let go of them at all. The unrest and confusion increased daily, and without the letter of Lord John Russel the general bankruptcy was imminent." (P. 74-75.) The letter of Russel sus- pended the Bank Acts. — The previously mentioned Charles Turner testifies: " Some firms had large means, but they were not available. Their entire capital was tied up in real estate in Mauritius, or in indigo or sugar factories. Once that they had contracted obligations for 5 or 600,000 pounds sterling, they had no means free for the payment of bills of exchange, and finally it was seen, that they could pay their bills of exchange only by means of credit, and so far as that went." (P. 81.) — The aforesaid S. Gurney said: "At present (1848) there prevails a contraction of business and a great plethora of money. — No. 1763. I do not believe that it was a lack of capital, which drove the rate of interest so high; it was the alarm, the difficulty of obtaining bank notes."
In 1847 England paid at least nine million pounds sterling in gold to foreign countries for imported means of subsistence. Of this amount seven and a half millions came from the bank of England and one and a half million from other sources. (P. 245.) — Morris, the Governor of the Bank of England: " On October 23, 1847, the public funds and the canal and railroad stocks were already depreciated by 114,752,225 million pounds sterling." (P. 312.) The same Morris, when questioned by Lord G. Bentinck: " Is it not known to you that all capital invested in papers and products of all 492 Capitalist Production.
kinds was depreciated in the same way, that raw materials, cotton, silk, wool were sent to the continent at the same cut prices, and that sugar, coffee and tea were auctioned off in forced sales? " — " It was inevitable that the nation should make considerable sacrifices, in order to counteract the drain of gold caused by the enormous imports of means of subsist- ence." — " Don't you believe that it would have been better to touch the eight million pounds sterling stored in the vaults of the bank, instead of trying to recover the gold with such sacrifices? " — " I do not believe that." — Now to the com- mentaries on this heroism. Disraeli questions Mr. W. Cot- ton, the Director and former Giovernor of the Bank of Eng- land. " What was the dividend received by the stockholders of the bank in 1844? "— " It was 7% for that year."—" And the dividend for 1847?"— "Nine per cent."— " Does the bank pay the income tax for its stockholders in the current year?"— "Yes, Sir."— " Did it do so in 1844? "— " No, Sir." «^— " Then this Bank Act (of 1844) worked very much to the advantage of the stockholders...The result is, then, that since the introduction of the new Act the dividend of the stockholders has risen from 7% to 9%, and that the