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 circula- tion, unless one considers at the same time...the con- dition 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 re- mains unshaken, the expansion and contraction of the cur- rency 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 I'egarded as a rather constant magnitude for a long time, the circulation of the notes of the Bank of England forms a suf- ficiently 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 over- tension 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 dis- counters of bills, the lenders of money on securities, the buyers 620 Capitalist Production.
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 above- mentioned banker Wright, 1. c. l^o. 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 de- pendent 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.
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 Currency Under the Credit System. 621 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 tlie 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 7^%, then, 100,000 at 8%, and wanted still more at 8|%. 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 un- employed by the banks as a reserve, continually differ con- siderably from one another. If this reserve is large, and there- fore 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 cir- culation is low, money is scarce, that is to say, the portion rep- resenting 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 Avhen 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 622 Capitalist Production.
without regard to its needs. The reverse takes place when the interest on the national debt is paid. In the first ease, 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 circula- tion, 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 tlieir 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 rela- tively 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 ac- count 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 ve- Currency Under the Credit System. 623 locity of the circulation of money and that of the conversion of the same identical pieces of money into loan capital) ow- ing to lack of credit, as was the case in 1847, when the sus- pension 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 circum- stances, 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 in- fluence upon the rate of interest, since the circulation, assum- ing 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 gener- ally 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, fi.nally, 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 \yas 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 inter- est 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 624 • Capitalist Production.
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 ont 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 r)v both of the exchanging parties. It remains thereupon in the circulation, but returns after the consummation of the exchange always to him wdio 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 tlie 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 un- employed surplus to you and other London firms? " — " Yes. " — 5100. " On the other hand, the factory districts of Lancashire and Yorkshire have bills of exchange dis- counted by you for business purposes? " — " Yes. " — 5101. " So that in this way the superfluous money of a certain dis- trict is utilised for the requirements of another district? " — *' Quite right."
Chapman says that the custom of the banks to invest tlieir 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 Currency Under the Credit System. 625 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 tlie manufacturers usually draw bills of exchange of long duration on the ex- port 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 in- nocent 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 cor- responding 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 tliat more expert men be asked. — In the export to America, says Chapman, the " commodities are symbolised in transit "; this 2N 626 Capitalist Production.
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? " — 7 " 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 184:7 in almost every case]. " Eor instance, a dealer in manufactured goods, in Manchester, buys commodities and ships them through a resjDonsible firm in London; as soon as the London firm has convinced itself, that everything has been packed as per agree- ment, 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 hanker has the hill of exchange; the hanher 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 com- modities.— F. E.] — 5140. "But still this constitutes always a part of tlie demands on the money-market in Lon- don? " — " LTndoubtedly; 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, m Currency Under the Credit System, 627 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 con- sequence 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 con- siderable 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 naivete 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 tliem, whether it be profitable or not; but if it lasts" [the high rate of interest] " it would indicate prosperity." — Both of them 628 Capitalist Production.
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 in- terest, 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 re- turns become wholly deceptive by the loan system. This ex- plains also the following statements, which require no ex- planation 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 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 Currency Under the Credit System. 629 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 con- vertible 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 sit- uation, that a man would have to suspend payment, because he holds accepts by Smith, Payne & Co., to Jones, Loyd & 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 circum- stances." — 5184. " You believe, then, that the institutions of currency should be arranged in such a way that a com- mercial bill of undoubted solidity should at all times be con- vertible 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 com- mercial bills becoming inconvertible, to the extent that such 630 Capitalist Production.
bills are undoubtedly solid and legitimate." — This is the con- vertibility 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 Gi^eat 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 tlie state in anticipation of the dividends, somebody must be there, wdio 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, w^hen 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 ar- rive at 2^ 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, i Currency Under the Credit System. 631 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 busi- 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 Wednes- day, 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 si-