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 coun- tries. 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 w^as 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 in- terest was precisely the purpose of the Act.
1029. " I must make a great distinction between the effect of the rate of interest on the foreig-n 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 2P 658 Capitalist Production.
of the Bank of England. Let ns now hear a private banker, Twells who had been an associate of Spooner, Attwoods & Co. since 1801. He is the only one among all the witnesses be- fore the B. C. 1857j who gives ns 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: 4188. "How do you think the Act of 1811 has operated? " — " Should I answer you as a banker, I would say that it has operated splen- didly, for it has furnished to the bankers and [money-] cap- italists 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 arrange- ments with confidence...It has made the lending of money a very profitable business." — 4189. The Bank Act " Enables the London Stock Bank to pay to its stockholders 20 to 22%? "— " One of them paid recently 18%, and I be- lieve another 20%; they have good grounds for standing de- terminedly 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 al- ways 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 la- tent 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.
English Bank Laws of 1844. 659 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 be- comes 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 Avay one drags down another. — 4496. " As for the heavy exports — when the business is depressed in the home market, it calls forth 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. " ]S[evertheless the imports are very large; does not that indi- cate 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 com- modities 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 enor- mous 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 pre- cisely the case which we have seen often enough of late; busi- ness firms have failed, without leaving one shilling's worth of assets."
66o Capitalist Production.
4791. " The low rate of interest [during the last ten years] militates indeed against the bankers, but without lay- ing the business books before you, I should have much diffi- culty 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 con- siderable 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. N^everthe- less 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 (Liver- pool) 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 modem building system in London (Vol- ume II, chapter XII, pages 266 and 267), sums up his opin- ion 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 institu- tion 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 4 English Bank Lazvs of 1844. ^^i 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? " — " Noth- ing of the kind." — 3376. " Has an additional circulation of gold ensued since then? " — " JSTot 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 oc- curred on account of the foreign rates of exchange? " — " Thai? 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 a^ before to create a drain of gold from the Bank of England."
Finally we quote an article from the " Economist " (Wil- son): " 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 tlie 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 dis- turbed 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 it- self tied up regularly in Scotland, and another considerable amount is continually under way between London and Scot- land. If a time comes when a Scotch banker expects an in- creased demand for his notes, a box of gold is sent on from London; if this time is past, the same box goes back to Lon- don, generally without having been opened." {Economist, 662 Capitalist Production.
[And what docs the father of the Bank Act, Banker Sam- uel 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 indus- try had for months consisted in the fact that the material com- modity-capital w^as filling the warehouses to overflowing and was almost unsalable; so that for this reason the material pro- ductive capital was wdiolly 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 princi- ples on which this act rests, and of the beneficent consequencos 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 peo- ple; consider the wealth and prosperity of all classes of so- ciety; 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.
To this song of praise, which Overstone emitted before the Committee on July 14, replied the song of defiance on No- vember 12, of the same year, in the shape of the letter to the English Bank Lazvs of 1844. 663 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.]
CHAPTFK XXXV.
PRECIOUS METALS AND RATES OF EXCHANGEl.
I. The Movements of the Gold Reserve.
Concerning the hoarding of notes in times of stringency we remark, that in such cases the hoarding of precious metals is repeated, which used to be resorted to in restless times during the most primitive conditions of society. The Act of 1844 is interesting in its effects for the reason that it seeks to trans- form all the precious metals existing in a certain country into currency; it seeks to identify a discharge of gold with a con- traction of the currency and an incoming flood of gold with an expansion of the currency. And so it happened that the experiment proved the contrary. With one sole exception, which we shall mention immediately, the quantity of the cir- culating notes of the Bank of England never reached the maximum, since 1844, which it was authorized to issue. And the crisis of 1857 proved, on the other hand, that this max- imum does not suffice under certain circumstances. From Xovember 13, to 30, 1857, a daily average of 488,830 pounds sterling circulated above this maximum (B. A. 1858, p. XI). The legal maximum was at that time 14,475,000 pounds sterling plus the amount of the metal reserve in the vaults of the bank.
Concerning the outgoing and incoming tide of precious metals the following remarks are made: 1) A distinction should be made between the back and forth movements of the metal within the districts which do not produce any gold and silver, and on the other hand, be- tween the flow of gold and silver from their sources of pro- 664 Capitalist Production.
duction to the different other countries and the distribution of this additional metal among these other countries.
Before the gold mines of Eussia, California and Australia exerted their influence, the supply since the beginning of the nineteenth century sufficed only to replace the wornout coins, to satisfy the demand for articles of luxury, and to promote the exports of silver to Asia.
However, the silver exports of Asia increased extraordina- rily since that time, owing to the Asiatic trade with America and Europe. The silver exported from Europe was largely replaced by the additional supply of gold. In the second place, a portion of the newly imported gold was absorbed by the internal money-circulation. It is estimated that u]3 to 1857 about 30 millions in gold were added to the internal circulation of England. -^^^ Eurthermore, the average volume of the metal reserves in all central banks of Europe and Amer- ica increased since 1844. The increase of the inland money circulation also carried with it tlje circumstance, that in the period of stagnation following upon the panic the bank re- serves grew more rapidly than before in consequence of the larger quantity of gold coins thrown out of inland circulation and held in a state of rest. Finally the consumption of pre- cious metals for articles of luxury increased since the dis- covery of new gold deposits in consequence of the growing wealth.
2) Between the countries that do not produce any gold and silver, precious metals flow back and forth; the same country continually imports some, and just as continually exports 106 'What effect this had on the money market, is shown by the following testi- mony of Newmarch: 1509. "Toward the close of 1853 considerable apprehension was felt by the public; in September the Bank of England raised its discount three times in succession...in the first days of October...a con- siderable degree of anxiety and alarm showed itself among the public. These apprehensions and this restlessness were largely alleviated before the end of No- vember, and were almost wholly removed by the arrival of five millions in precious metal from Australia. The same thing was repeated in the fall of 1854, when almost six millions in precious metals arrived in October and November. And in the fall of 1855, a time of excitement and restlessness, the same thing was repeated on the ar- rival of about eight millions in precious metals during the months of September, Octo- ber and November. At the end of 1856 we find the same thing takes place. In short, I could very well appeal to the experience of nearly every member of this committee as to whether we have not become accustomed to see a natural and complete remedy for a financial stringency in the arrival of a gold ship."
Precious Metals and Rates of Exchange. 665 some. It is onlj the predominance of this movement in one direction or the other which decides whether there is in the last instance a drain or an addition, since the merely oscillat- ing and frequently parallel movements largely neutralise one another. But for this reason, so far as this result is con- cerned, the continuity and the mainly parallel course of both movements is overlooked. It is always assumed that a plus in the imports or a plus in the exports of precious metals ap- pears only as an effect and concomitant of the proportion be- tween the imports and exports of commodities, whereas they are at the same time an expression of the proportion between the exports and imports of precious metals themselves, inde- pendent of the trade of commodities.
3) The predominance of the imports over the exports, and vice versa, is measured on the whole by the increase or de- crease of the metal reserve in the central banks. To what ex- tent this scale of measurement is more or less exact, depends, of course, primarily on the degree to which the banking 'busi- ness in general is centralised. For on this premise turns the question, to what extent the precious metal hoarded in the so-called national banks represents the national metal reserve at all. But assuming this to be the case, the scale of measure- ment is not exact, because an additional import may be ab- sorbed under certain circumstances by the inland circulation and the growing consumption of gold and silver in the mak- ing of articles of luxury; furthermore, because without an ad- ditional import a withdrawal of gold coin for inland circula- tion may take place and thus the metal reserve may decrease, even without a simultaneous increase of the export.
4) An export of metals assumes the aspect of a drain, when the movement continues for a long time, so that the decrease represents the tendency of the movement and de- presses the metal reserve of the bank considerably below its average level, down to about its average minimum. This minimum is in so far more or less arbitrarily^ fixed, as it is differently determined in every individual case by the legisla- tion concerning the backing of notes, etc., by cash. Concern- ing the quantitative lim.its, which such a drain may reach 666 Capitalist Production.
in England, j^ewmarch testified before the Committee on B. A., 1857, Evidence No. 1494: " To judge by experience, it is verj imlikely that the drain of metal as a result of some fluctuation in the foreign business will exceed three or four million pounds sterling." — In 1847 the lowest level of the gold reserve of the Bank of England, on October 23, showed a minus of 5,198,156 pounds sterling as compared to that of December 26, 1846, and a minus of 6,453,748 pounds sterling as compared to the highest level on August 29, 1846. 5) The functions of the metal reserve of the so-called national banks, which functions, however, do not by them- selves regulate the magnitude of this reserve, for it may grow through a mere paralisation of internal commerce, are three- fold: 1) It is a reserve fund for international payments, in one word a reserve fund of world money; 2 ) it is a reserve fund for the alternately expanding and contracting metal circulation of the inland markets; 3 ) it is a reserve fund for the payment of deposits and for the convertibility of notes, and this part of its function is connected with the function of the bank and has nothing to do with the functions of money as mere money. It may, therefore, also be touched by conditions, which affect eveiy one of these three functions. As an international fund it, may be touched by the balance of payment, no matter by what causes this may be determined, and whatever may be its proportion to the balance of trade. As a reserve fund for the metal circulation of the inland market it may be touched by its expansion or contraction. The third function, that of a fund guaranteeing the converti- bility of the notes, while it does not determine the independent movements of the metal reserve, has a double effect. If notes are issued, which replace the metallic money in the inland circulation (which may also consist of silver in countries where silver is a measure of value), then the second function of the reserve fund is eliminated. And a portion of the precious metal, which performed its function, will perma- nently wander into foreign countries. In this case no with- drawal of metallic money for inland circulation takes place, and this does away at the same time with the temporary Precious Metals and Rates of Exchange. 66";^ augmentation of the metal reserve by the immobilised part of the circulating metal coin. Furthemiore, if a minimum of a metal reserve must be kept under all circumstances, it affects in a peculiar way the results of a drain or an ad- dition of gold; it affects that part of the reserve, which the bank is compelled to maintain under all circumstances, or that part, which it seeks to get rid of as useless at a certain time. If the circulation were purely metallic and the bank- ing system concentrated, the bank would have to consider its metal reserve likewise as a security for the payment of its deposits, and a drain of metal might then cause such a panic as was witnessed in Hamburg in 1857.
6) With the exception of 1837, the real crisis broke out always after the rates of exchange had been altered, that is, as soon as the import of precious metal had increased over the export.
In 1825 the real crash came after the drain of gold had ceased. In 1839 a drain of gold took place without bringing a crash. In 1847 the drain of gold ceased in April and the crash came in October. In 1857 the drain of gold to foreign countries had ceased since the beginning of November, and the crash did not come until later in IN^ovember.
This stands out particularly in the crisis of 1847, when the drain of gold ceased already in April, after causing a slight preliminary crisis, and the real business crisis did not come until October.
The following evidence was given before the Secret Com- mittee of the House of Lords on Commercial Distress, 1848. This evidence was not printed until 1857 (also quoted as C.
Evidence of Tooke. In April, 1847, a stringency arose, which strictly speaking equalled a panic, but was of relatively short duration and not accompanied by any commercial failures of importance. In October the stringency was far more intensive than at any time during April, an almost unheard of number of commercial failures taking place (2196). — In April the rates of exchange, particularly with America, compelled us to export a considerable amount of 668 Capitalist Production.
gold in payment for unusually large imports; only by an ex- treme effort did the bank stop the drain and drive the rates higher (2197). — In October the rates of exchange favored England (2198). — The change in the rates of exchange had begun in the third week of April (3000). — They fluctuated in July and August; since the beginning of August they alvs^ays favored England (3001). — The drain of gold in August arose from a demand for internal circulation.
J. Morris, Governor of the Bank of England: Although the rate of exchange favored England since August, 1847, and an import of gold had taken place in consequence, the metal reserve of the bank decreased nevertheless. '' 2,200,000 pounds sterling went out' to the country, as a result of inland demand." (137) — This is explained on the one hand by an increased emplo^anent of laborers in railroad construction, ©n the other by a " desire of the bankers to possess their own gold reserve in times of crisis." (117.)
Palmer, Ex-Governor and since 1811 a Director of the Bank of England: 684. " During the entire period from the middle of April, 1847 to the day of the suspension of the Bank Act of 1844 the rates of exchange were in favor of England."
The drain of metal, which created in Aj)ril, 1847, an independent money panic, Avas here, as always, but a pre- cursor of the crisis and had already been turned back, when the crisis broke out. In 1839 a heavy drain of metal took place, for corn, etc., while the business was strongly depressed, but without any crisis and money panic.
7) As soon as the universal crises have spent themselves, the gold and silver, aside from an addition of new precious metals from the sources of production, distributes itself once more in such proportions as it showed in the form of the in- dividual reserve of the various countries in a condition of equilibrium. Other circumstances remaining the same, its relative magnitude in every country will be determined by the role of that country in the world market. It flows away from the country which had more than its normal portion into some other country. These mevements of outgoing and Precious Metals and Rates of Exchange. 669 incoming metal restore merely its original distribution among the various national reserves. This redistribution, however, is brought about by the effects of different circumstances, which will be mentioned in our treatment of rates of ex- change. As soon as the normal distribution is once more a fact, a stage of growth follows first, and then again a drain. [This last sentence applies, of course, only to England, as the center of the world's money market. — F.E.]
8) The drains of metal are generally a symptom of a change in the condition of foreign commerce, and this change in its turn is a premonition that conditions are approaching a crisis.
9) The balance of payment may favor Asia against Europe and America. ^'^^ An import of precious metals takes place to a point of pre- dominance in two phases. On the one hand it takes place in the first phase of a low rate of interest, which follows upon a crisis and expresses a restriction of production; and then in the second phase, in which the rate of interest rises, without, however, attaining its medium level. This is the phase, in which returns come easy, commercial profit is large, and therefore the demand for loan capital does not gi'ow in proportion to the expansion of production. In both phases, in which loan capital is relatively abundant, the superfluous addition of capital existing in the form of gold and silver, a form in which it can primarily serve only as loan capital, must seriously affect the rate of interest and with it the tone of the whole business.
On the other hand, a drain, a continued and heavy outpour >" According to Newmarch, a drain of gold to foreign countries may arise from three causes: 1) from purely commercial conditions, that is, if the imports have exceeded the exports, as was the case during the time from 1836 to 1844, and again in 1847, principally a heavy import of corn; 2) from a desire to secure the means for the investment of English capital in foreign countries, as in 1857 for railroads in India; and 3) from a necessity of making definite expenditures in foreign countries, as in 1853 and 1854 for purposes of war in the Orient.
"* 1918. Newmarch. " If you take India and China together, if you take into account the transactions between India and Australia, and the still more important ones between China and the United States, and in these instances the business is a three-cornered one and the equilibration takes place through our intervention then it is correct that the balance of trade was not only against England, but also against France and the United States." — (B. A., 1857.)
6/0 Capitalist Production.