of precious metals, cakes place as soon as the returns are no lunger easy, the markets overstocked, and the seeming pros- perity held up only by credit; in other words, as soon as a very much increased demand for loan capital exists and the rate of interest has, for this reason, reached at least its medium level. Under these circumstances, which are re- flected by the drain of precious metals, the effect of the continued withdrawal of capital in a foi*m, in which it is directly loanable money-capital, is considerably intensified. This must have a direct influence on the rate of interest. But instead of restricting the credit business, the rise of the rate of interest extends it and leads to an overstraining of all its resources. This period, therefore, precedes the crash.
N'ewmarch is asked, B. A. 1857, 'Eo. 1520: " The amount of the circulating bills of exchange, then, rises with the rate of interest?" — "It seems so." — 1522. "In quiet, ordinary times the ledger is the actual instrument of ex- change; but when difficulties arise, for instance, if the dis- count rate of the Bank is raised under circumstances such as I have mentioned...then the transactions resolve themselves quite of their own account into the draw- ing of bills; these bills are not only better suited to serve as a legal evidence of the making of some business transaction, but they are also better adapted to the purpose of making other purchases, and they are above all useful as a means of credit for taking up capital." — This is further intensified by the fact that as soon as signs of threatening conditions in- duce the bank to raise its rate of discount, which implies the possibility that the bank may at the same time cut dowTi the running time of the bills to be discounted by it, the general apprehension is spread, that this will grow worse. Every one, and first of all the credit swindler, will therefore strive to discount the future and have as many means of credit as possible at his command when the critical time comes. The above-mentioned reasons, then, amount in fact to this, thax. it is not the mere quantity of the imported or exported pre- cious metals which exerts its influence in this capacity but Precious Metals and Rates of Exchange. 671 that this quantity works its effect, first, by the specific character of precious metals of being capital in the form of money, and secondly, that it works like a feather, which, added to the weight on the scales, suffice to incline the occil- lating balance definitely to one side, that is, it works this ef- fect, because it arises under conditions, when a little excess decides in favor of one side or the other. Without these reasons it would be quite inexplicable, why a drain of gold amounting to about five or eight million pounds sterling, and this is the limit according to present experience, should be able to exert any considerable influence. This small minus or plus of capital, which seems insignificant even compared to the 70 million pounds in gold which circulate on an average in England, is a vanishing magnitude in a production of such volume as the English. ^^^ But it is just the development of the credit and banking business, which tends on the one hand to press all money- capital into the service of production (or what amounts to the same, to convert all money incomes into capital), and which on the other hand reduces the metal reserve to a minimum in a certain phase of the cycle, so that it can no longer perform the functions for which it is intended. It is the developed credit and banking system, which creates this oversensitiveness of the whole organism of the reserve below or above its average level is a relatively insignificant matter. On the other hand, even a very considerable drain of gold is relatively ineffective, unless it arises in the critical period of the industrial cycle.
In this explanation we have not considered the cases, in which a drain of gold takes place as a result of crop failures, etc. In this case the great and sudden disturbance of the equilibrium of production, whose expression this drain is, '"^ See, for instance, the ridiculous answer of Weguelin, who says that five millions of drained gold is so much capital less, and who attempts to explain in this way certain phenomena, which do not appear when the actual industrial capital is infinitely more raised or depressed in price, expanded or contracted. On the other hand, it is just as ridiculous to attempt to explain these phenomena directly as symptoms of an expansion or contraction of the mass of real capital (that is, the material elements of capital).
672 Capitalist Production.
requires no further explanation of its effects. These effects are so much greater, the more such a disturbance begins in a period, in which production works under high pressure.
We have also left out of consideration the function of the metal reserve as a security for the convertibility of the bank notes and as the cardinal point of the credit system. The central bank is the pivot of the credit system. And the metal reserve in its turn is the pivot of the bank.^^'^ The transition from the credit system to the monetary system is necessary, as I have already shown in Volume I, chapter III, under the head of "Means of Payment." That the greatest sacrifices of real wealth are necessary, in order to maintain the metallic basis in a critical moment, has been admitted by both Tooke and Loyd-Overstone. The controversy turns merely around a plus or minus, and around the more or less rational treatment of the inevitable.^ ^^ A certain quantity of metal, insignificant compared with the total production, is admitted to be the pivotal point of the system. Hence its beautiful theoretical dualism, aside from the appalling dem- onstration of this character in its capacity as the pivotal point of crises. So long as enlightened bourgeois economy treats of " Capital " in its official capacity, it looks down upon gold and silver with the greatest disdain, considering them as the most immaterial and useless forms of wealth. But as soon as it treats of the banking system, everything is reversed, and gold and silver become capital par excellence, for whose preservation every other form of capital and labor is to be sacrificed. But how are gold and silver distinguished from other forms of wealth? Xot by the magnitude of their value, for this is determined by the quantity of labor materialised "" Newmarch, B. A., 1857, No. 1364: "The metal reserve in the Bank of Eng- land is in fact...the central reserve or the central metal hoard, on the basis of which the entire business of the country is carried on. It is so to say the cardinal point, around which the entire business of the country has to turn; all other banks in the country consider the Bank of England as the central treasury, or the reservoir, from which they have to draw their reserves of hard cash; and the effect of the foreign rates of exchange falls always precisely upon this treasury and this reservoir."
"' " Practically, therefore, both Tooke and Loyd would meet an excessive de- mand for gold by a premature limitation of credits by raising the rate of interest and reducing advances of capital. Only Loyd causes by his illusion inconvenient and even dangerous [legal] limitations and rules." {Economist, 1847, p. 1417.)
Preciotts Metals and Rates of Exchange. 673 ill them; but by the fact that they represent independent in- carnations, exjDressions of the social character of wealth. [The wealth of society exists only as the wealth of private in- dividuals, who are its owners. It shows its social capacity only in the fact that these individuals exchange the qualita- tively different use-values mutually for the satisfaction of their wants. Under the capitalist production they can do so only by means of money. Thus the wealth of the individual is realised as a social wealth only by means of money. In money, in this thing, the social nature of this wealth is incar- nated.— F. E.] This social existence assumes the aspect of a world beyond, of a thing, matter, commodity, by the side of and outside of the real elements of social wealth. So long as production is in a state of flux, this is forgotten. Credit, likewise, in its capacity as a social form of wealth, crowds money out and usurps its place. It is the faith in the social character of production, which gives to the money-form of products the aspect of something disappearing and ideal. But as soon as credit is shaken — and this phase always ap- pears of necessity in the cycles of modern industry — all the real wealth is to be actually and suddenly transfonned into money, into gold and silver, a crazy demand, which, however, necessarily grows out of the system itself. And all the gold and silver, which is supposed to satisfy these enormous de- mands, amounts to a few millions in the cellars of the Bank.112 In the effects of the gold drains, then, the fact that pro- duction as a social process is not subject to social control is strikingly emphasized by the existence of the social forai of wealth outside out of it as a separate thing. The capi- talist system of production, it is true, shares this with former systems of production, so far as they rest on the trade with commodities and private exchange. But only in it does this become ajDparent in the most striking and gTotesque form of 11; " Ygy qyjtg agree that there is no other way to modify the demand for gold than by raising the rate of interest?" — Chapman, associate member of the great bill brokers' firm of Overend Gurney & Co.: "That is my opinion. If our gold falls to a certain point, the best we can do is to ring the alarm bell at once and tc say: We are on the decline, and whoever sends gold abroad, must do so at his own peril." — B. A. 1S57, Evidence No. 5057.
2Q 674 Capitalist Production.
the most absurd contradiction and nonsense, because, in tbe first place, production for tbe direct use of tbe producers is most completely abolished under tbe capitalist system, so tbat wealth exists only as a social process expressed by the inter- relations of production and circulation; and in tbe second place, because capitalist production forever strives to over- come this metallic barrier^ tbe material and phantastic bar- rier of wealth and its movements, in proportion as tbe credit system develops, but forever breaks its head on this same barrier.
In tbe crisis the demand is made, tbat all bills of exchangG, securities, and commodities shall be simultaneously convertible into bank money, and this whole bank money consists of gold.
II. Tlie Bale of Exchange.
[Tbe barometer for tbe international movement of the money metals is the rate of exchange. If England has more payments to make to Germany than Germany to England, the price of marks, expressed in sterling, rises in London, and the price of sterling, expressed in marks, falls in Ham- burg and Berlin. If this overbalance of monetary obliga- tions of England toward Germany is not equalised, for in- stance, by overpurchases of Germany in England, the ster- ling price for marks on bills of exchange on Germany must rise to a point, where it will pay to send metal (gold coin or bullion) from England to Germany in payment of obligations, instead of sending bills of exchange. This is the typical course of things.
If this export of precious metals assumes a larger scope and lasts longer, then the English bank reserve is touched, and the English money market, with the bank of England at the head, must take precautionary measures. These con- sist mainly, as we have already seen, in tbe raising of tbe rate of interest. When the drain of gold is considerable, the money market is always difficult, that is, the demand for Precious Metals and Rates of Exchange. 675 loan capital in the form of money exceeds the supply by far, and tlie raising of the rate of interest follows quite naturally from this; the rate of discount fixed by the Bank of England corresponds to this condition and asserts itself on the market. However, there are cases, when the drain of metal is due to other than the ordinary combinations of business (for instance, to loans of foreign states, investment of capital in foreign countries, etc.), when the London money market in that respect does not justify such an effective raise of the rate of interest; in that case the Bank of England must first make money " scarce " by heavy loans in the " open market " and thus create artificially a condition, which justifies a raise of the rate of interest, or renders it necessary; a maneuver, which becomes from year to year more difficult for it. — How this raising of the rate of interest affects the rates of exchange, is shown by the following testimony before the Committe of the Lower House concerning bank legislation in 185Y (quoted as B. A., or B. C, 1857.)
John Stuart Mill: 2176. "When the business has become difficult...a considerable fall in the price of securi- ties takes place...foreigners order the buying of rail- road shares here in England, or English owners of foreign railroad shares sell them to foreign countries...to that extent the transfer of gold is avoided." — 2182. " A large and rich class of bankers and dealers in securities, by whom the equalisation of the rate of interest and the equalisa- tion of the commercial barometric pressure between the dif- ferent countries is generally accomplished...is al- ways on the lookout for the purchase of securities, which promise a rise in price...the proper place to buy them will be tlie country which sends gold abroad." — 2183. " These investments of capital took place to a large extent in 1847, enough to reduce the drain of gold."
J. G. Hubbard, Ex-Giovernor, and since 1838 a Director of the Bank of England: 2515. " There are a large number of European securities...which have a European circu- lation in all the various money markets, and these papers, as 676 Capitalist Production.
soon as they fall by one or two per cent, in one market, are at once brought up in order to be transferred to markets, where their value has still maintained itself." — 2565. "Are not foreign countries considerably in debt to merchants in Eng- land? "—..." Very considerably." — 2566. " The col- lection of these debts might, tlierefore, suffice by itself to ex- plain a very large accumulation of capital in England 'l " — " In the year 1847 our position w'as finally restored by our drawing a line through so and so many millions, which Amer- ica and Russia formerly owed to England." [England owed these same countries at the same time " so and so many mil- lions " for corn and did not forget to " draw a line " also through the greater portion of these by the bankruptcy of the English debtors. See the report on Bank Acts, 1857, in chapter XXX of this work.] — 2572. " In 1847 the rate of exchange between England and Petersburg stood very high. When the government letter was issued, which authorized the Bank of England to issue bank notes without adhering to the legally prescribed limit of 1-1 millions [beyond the gold reserve], the condition was that the discount should be kept at 8%. At that moment, and at that rate of discount, it was a profitable business to have gold shipped from Petersburg to London and to lend it out after its arrival at 8% until tlie three months' bills of exchange should become due, whicli had been drawn against the sold gold."- — ■ 2573. " In all operationc with gold many points must be taken into consideration; it depends on the rate of exchange and on the rate of interest, at which money may be invested until the bills drawn against it become due."
III. Rate of Exchange with Asia.
The following points are important, partly because they show that England must take refuge to other countries, when its rate of exchange with Asia is unfavorable. These are countries, whose imports from Asia are paid by way of Eng- land. On the other part they are important, because Mr, Wilson makes once more the silly attempt here, to identify the effect of an export of precious metal on the rates of ex* Precious Metals and Rates of Exchange. 677 change with the effect of an export of capital in general upon these rates; the export being in either case not for the pur- pose of paying or buying, but of investing capital. In the first place it goes without saying, that whether so and so many millions of pounds sterling are sent to India in precious metals or railroad rails^ in order to be invested in railroads there, these are merely two different forms of transferring the same amount of capital to another country. And this is a form of transfer^ which does not enter into accounts of the ordinary mercantile businesses, and for which the ex- porting country expects no other returns than later on the annual revenue from the income of these railroads. If this export is made in the form of precious metal, it will exert a direct influence upon the money market and with it upon the rate of interest of the country exporting this precious metal, at least under the previously outlined conditions, if not neces- sarily under all circumstances, since precious metal is directly loanable money-capital and the basis of the entire money- system. This export also affects directly the rate of ex- change. For precious metal is exported only for the reason and to the extent that the bills of exchange, say, on India, which are offered in the London money market, do not sufiice for the making of these extra payments. In other words, there is a demand for Indian bills of exchange which ex- ceeds their supply, and so the rates turn for a time against England, not because it is in debt to India, but because it has to send extraordinary sums to India. In the long run such a shipment of precious metal to India must have the effect of increasing the Indian demand for British goods, be- cause it indirectly increases the consuming power of India for European goods. But if tlie capital is shipped in the shape of rails, etc., it cannot have any influence on the rates of exchange, since India has no return payment to make for it. For the same reason this need not have any influence on the money market. Wilson seeks to establish the fact of such an influence by declaring that such an extra expendi- ture will bring about an extra demand for money' accommoda- tion and will thus influence the rate of interest. This may 678 Capitalist Production.
be the case; but to maintain that it must take place under all circumstances is totally wrong. No matter whether the rails are shipped and laid on English or Indian soil, they represent nothing else but a definite expansion of English production in a definite sphere. To contend that an expansion of produc- tion, even to a large volume, cannot take place without driv- ing the rate of interest higher, is absurd. The money ac- commodation may grow, that is, the amount of business trans- acted by operations of credit; but these operations may in- crease also while the rate of interest remains unchanged. This was actually the case during the railroad mania in Eng- land during the forties. The rate of interest did not rise. And it is evident, that, so far as actual capital, in this case commodities, are concerned, the effect on the money market ■will be just the same, whether these commodities are intended for foreign countries or for inland consumption, A difference could be discovered only in the case that the investment of cap- ital on the part of England in foreign countries would have a restraining influence upon its commercial exports, that is, exports for which payment must be made in return, or to the extent that these investments of capital are general symptoms indicating the overstraining of credit and the beginning of swindling operations.
In the following Wilson asks questions and Newmarch an- swers them.
1786. " You said before, with reference to the silver de- mand for Eastern Asia, that in your opinion the rates of ex- change with India are in favor of England, in spite of the considerable wealth of metal continually sent to Eastern Asia; have you any reasons for this? " — " To be sure...I find that the actual value of the exports of the United King- dom to India amounted to 7,420,000 pounds sterling in 1851; to this must be added the amount of the bills of exchange of the India House, that is, the funds which the East Indian Company draws from India for the payment of its own ex- penses. These drafts amounted in that year to 3,200,000 pounds sterling; so that the total exports of the United King- dom to India amounted to 10,620,000 pounds sterling. In Precious Metals and Rates of Exchange. 679 1855 the actual value of the exports of commodities had risen to 10,350,000 pounds sterling; the drafts of the India House were 3,700,000 pounds sterling; the total exports therefore 14,050,000 pounds sterling. For 1851, I believe, we have no means of ascertaining the actual value of the imports of com- modities from India to England; but we have for 1854 and 1855. In 1855 the entire actual value of these imports of commodities from India to England was 12,670,000 pounds sterling and this sum, compared to the 14,050,000 pounds ster- ling, leaves a balance in favor of England, in the direct com- merce between the two countries, amounting to 1,380,000 pounds sterling."
Thereupon Wilson remarks that the rates of exchange are also touched by the indirect commerce. For instance, the ex- ports from India to Australia and ISTorth America are covered by drafts on London, and therefore affect the rate of exchange quite in the same way as though the commodities had gone directly from India to England. Furthermore, when India and China are taken together, the balance is against England, since China has continually heavy payments to make to India for opium, and England has to make payment to China, and the amounts go by this circuitous route to India. (1787, 1789. Wilson asks now, whether the effect on the rates of exchange will not be the same, no matter whether the capital goes out in the form of iron rails or locomotives, or in the form of metal coin. I^ewmarch gives the correct answer: The 12 million pounds sterling, which have been sent during the last years to India for railroad construction served to buy an annual income, which India has to pay at regular terms to England. So far as any immediate effect on the precious metal market is concerned, the investment of 12 million pounds sterling can exert any influence only to the extent that metal had to be sent out for an actual investment in money.
1797. Weguelin asks: " If no returns are made for these rails, how can it be said that they affect the rate of exchange? " — "I do not believe that that portion of the expenditure, which is sent abroad in the form of commodities, affects the 68o Capitalist Production.