632 Capitalist Production.
multaueously on London amounted to 100 or 120 million pounds sterling. This did not include the local bills on provincial j)laces.
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 con- cerning 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 Currency Under the Credit System. 633 else but to come together and make our payments in first drafts, checks on the Treasury Department, Smith, Payne & 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 capi- tal, 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 pre- vent 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 employ- ment?— 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 inten- tion of intensifying the panic, or drawing advantages from its results " [5358] 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 634 Capitalist Production.
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 i-uin 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 manu- facturer, who exports to the continent, or who imports his raw material, he knows nothing of the other, w'ho deals in gold bullion." (5046.) — And thus it happened, that one fine day Gurney and Chapman thmselves " 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 ac- complished 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 securi- ties [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 \ Currency Under the Credit System. 635 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 cir- culation 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 be- comes scarce, then the money lenders say: " You draw on us and we will endorse/' and when a provincial banker dis- counts 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. Gil- bart, An Inquiry into the Causes of the Pressure, etc., p. 31.)
This is corroborated in a somewhat modified form by New- march, B. A. 1857, No. 1426: " There is no connection be- tween 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 trans- actions 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 636 Capitalist Production.
payable at some future date, but raise doubts against a circu- lation 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 mil- lions 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 1817, 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 avail- able loan capital) out of the market. To transform a strin- gency 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 posi- tion 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. a^L m I Currency Under the Credit System. 637 The Bank of England has a capital of 14,553,000 pounds sterling, and commands besides about 3 million pounds ster- ling of a " Eemainder," that is, undistributed profits, and furthei-more 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-mar- ket may be estimated at about 120 million pounds sterling; and of these 120 millions tlie 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 additioucil, even if ficti- tious, capital for it to the nominal amount of these unpro- tected 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 dia 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? '' — " Assur- edly."
The same is true, of course, of the private banks issuing notes. In his answers IN^os. 1866 to 1868 Newmarch con- siders 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 econo- mist in the least, since profit is under all circumstances the 638 Co pi f alls f Production.
appropriation of national labor. Is there anything more in- sane than, for instance, the Bank of England in 1797 to 1817, whose notes have credit only by the backing of the state, tak- ing payment from the state, and from the public, in the form of interest ou 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. Ac- cording to the same ISTewmarch the provincial banks, as men- tioned 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 re- turn. With these bills the bank serves its customers, since it follows the rule not to issue the bills of exchange received from its fecal customers any more, in order that the business transaction- of these customers may not become known in their own neighborhood. These bills received from London do not only 3rve for the purpose of being issued to customers, who have to make payments direct to London, unless these custom- ers 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 v f the bankers secures local credit for them. In Lancashire oj instance, all the local banks' own notes and a lar^c porti; f the notes of the Bank of England, have oen crowded out of the circulation by such bills. (Ibidem, We see acre, then, how the banks create credit and capital, 1) by the issue o- 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 regula- tion of the market rate of interest. In times of normal busi- ness it may happen, that the Bank cannot prevent a moderate Jrain of gold from its metal reserve by raising the rate of dis- Currency Under the Credit System. 639 count,^°* because the demand for means of payment is satis- fied 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 Gljm, Mills, Currie & 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 brok- ers 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 in- stitution 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 Bknk of England gives the cheap- est service, and when lowest, then the brokers are the cheap- est? " — " That will always be the case, for the Bank of Eng- land 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 in- terest, which ia already above the average, still higher. " As soon as the Bank of EnglanJ tightens the screw, all purchases for export into foreign countries cease...the export- ers wait, till the depression of prices has reached its lowest "■* 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 l^i,i { o;. 2J/<Sj in July to 3 and 4% in August, and when it lost fully 414 million pounc'; sterling in gold in spite of this, it raised the rate of interest to 5%, whereupon gold ilowed back to it and the bank rate was reduced to 4% in September an J C ^ in October. But this bank rate was not recognized in the market. " \ 'len the bank rate was 5%, the market rate was 3^% and the rate for money '.'i%; when the bank rate fell to 4%, the rate of discount was 2J^% and i:.uoney rati 1|4%; when the bank rate was 3%, the rate of discount was l.-iVo and the money rate a trifle lower." {Daily News, January 18, 640 Capitalist Production.
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 ex- change 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 contin- ues its business with a smaller amount of precious metal."
But, says friend Samuel Gurney, " These great fluctua- tions of the rate of interest are advantageous for the bankers and money dealers — ■ all fluctuations in business are advan- tageous for him who is posted." And even though the Gur- neys skim the cream off the ruthless exploitation of the pre- carious 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 prof- its, which of their own account fall into the lap of the direc- tors, 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, Currency Under the Credit System. 641 p. 120.) If we estimate the total profits of the Bank of Ire- land, 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 Declared bonus 1,225,000 Increased assets 1,214,800 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 man- ner — 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 ex- ploit national and international production only in the interest of production and of tlie exploited themselves, he will surely be taught better by the following homily on the high moral dignity of the bankers: "The bank establishments are re- ligious 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 so- ciety of noisy and extravagant friends? How anxious he is to stand well in the estimation of the banker, to appear al- ways respectable! The knit brow of the banker has more in- fluence 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 con- sequence of which his banking accommodation might be re- stricted or cancelled? The advice of the banker is more im- portant 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.)
20 642 Capitalist Production.
CHAPTER XXXIV.
THE CUEKENCY PEINCIPLE AND THE ENGLISH BANK LAWS [In a former work ^°^ the theory of Ricardo on the value of money as related to the prices of commodities has been ana- lysed; we can, therefore, confine ourselves here to the in- dispensable. According to Eicardo, 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 pro- portion to the quantity and price of the commodities to be handled. If the quantity of the money rises above this pro- portion, 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 the;y can obtain normal prices. " Since gold itself may become, both as coin and bul- lion, 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 agTee, 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 de- preciation, not of paper as compared with gold, but of gold "° Karl Marx, A Contribution to the Critique of Political Economy, Berlin, 1859, pages 236 and following.
English Bank Lazus of 1844. 643 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 fun- damental principle of Sir Robert Peel's Bank legislation of We need not repeat here the demonstration of the incorrect- ness of this Eicardian 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 theor- ists, 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 iso- lated 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 con- fronted Ricardo; they were the great storms of the world market in which the conflict of all the elements of the capital- ist process of production discliarge themselves, and whose origin and remedy were sought in the most superficial and abstract sphere of this process;, the sphere of money-circula- tion. 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 com- mercial 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 ex- plained...The different wording leaves the problem as little changed as would its translation from German into 644 Capitalist Production.
English. Eicardo's theory of money was exceedingly con- venient, 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 Kicardo, 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 peri- odically, because there is periodically too much or too little money in circulation. Should a rise of prices happen to coin- cide 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 statis- tically, 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 Ki- cardo's theory of metallic currency, their acute and violent form, their crisis form, belongs to the period of advanced