stand of the rates of exchange...the stand of the rates between two countries is, one may say exclusively, affected by the quantity of the obligations or bills of exchange offered in opposition to them in another country; that is the rational theory of the rate of exchange. As for the shipment of those 12 millions, they were in the first place subscribed here; now, if the business were such, that these entire 12 millions would be deposited in cash in Calcutta, Bombay and Madras this sudden demand would strongly affect the price of silver, just as would be the case if the East India Company were to announce tomorrow, that it would increase its drafts from 3 millions to 12 millions. But one-half of these 12 mil- lions is invested...in the purchase of commodities in England...iron rails and lumber and other materials it is an investment of English capital, in England itself, for a certain kind of commodities to be shipped to In- dia, and that ends the matter." — 1798. Weguelin: "But the production of these commodities of iron and wood required for the railroads produces a heavy consumption of foreign commodities, and this could affect the rate of interest, could it not? " — " Assuredly."
Wilson thinks now, that iron largely represents labor, and that the wages paid for this labor largely represent imported goods (1799), and then he asks further: 1801. ^' But speaking quite generally: If the commodi- ties, which have been produced by means of the consumption of these imported commodities, are sent out in such a way, that we do not receive any returns for them, either in products or otherwise, would not that have the effect of making the rates of exchange unfavorable for us? " — " This principle is ex- actly what happened in England during the time of the great railway enterprises [1845]. For three or four years in suc- cession you invested 30 million pounds sterling in railroads and almost the whole in wages. You have maintained during three years in the construction of railroads, locomotives, cars, stations, a greater number of people than in all factory dis- tricts together. These people...expended their wages in the purchase of tea, sugar, liquor and other foreign com- Precious Metals and Rates of Exchange. 68 1 modities; these commodities must be imported; but it is cer- tain that during the time that this great investment was being made, the rates of exchange between England and other coun- tries were not materially disturbed. l\o drain of precious metal took place, on the contrary, rather an addition."
1802. Wilson insists that with a settled balance of trade and par rates between England and India the extra shipment of iron and locomotives " must affect the rate of exchange." Kewmarch cannot see it that way, so long as the rails are sent out as an investment of capital and India has no payment to make for them in one form or another; he adds: " I agree with the principle that no country can in the long run have an unfavorable rate of exchange with all countries, with whom it deals; an unfavorable rate of exchange with one country necessarily produces a favorable one with another." — Wilson retorts with this triviality: 1803. " But would not a trans- fer of capital be the same, whether the capital were sent in this form or that? " — " So far as an indebtedness is con- cerned, yes." — 1804. " Then, whether you send out precious metal or commodities, the effect of railroad construction in India on the market of capital here would be the same and would increase the value of capital just as though the whole had been sent out in precious metal? " If the prices of iron did not rise, it was certainly a proof that the " value " of the " capital " contained in the rails had not been increased. What is wanted is the value of money- capital, of the rate of interest. Wilson would like to identify money-capital with capital in general. The simple fact is, primarily, that 12 millions for Indian railroads are subscribed in England. This is a matter which has nothing directly to do with the rates of exchange, and the destination of the 12 millions is also immaterial for the money market. If the money market is in good condition, it need not produce any effect at all on it, just as the English railroad subscriptions in 1844 and 1845 left the money market untouched. If the money market is already somewhat difficult, then the rate of interest might indeed be affected by it, but certainly only in an upward direction, and this would have a favorable effect 682 Capitalist Production.
for England on the rates of exchange according to Wilson's theory, that is, it would work against the tendency to export precious metal; if not to India, then to some other country, Mr. Wilson jumps from one thing to another. In question 1C02 the rates of exchange are supposed to be affected, in question 1804 the " value of capital," two very different things. The rate of interest may affect the rates of exchange, and the rates may affect the rat© of interest, but the rate of interest may be stable while the rates of exchange fluctuate, and the rates of exchange may be stable while the rate of interest fluc- tuates. Wilson cannot understand, that the mere form, in which capital is shipped abroad, should make such a difference in the effect, that is, that the difference in the form of capital should have such an effect, not to mention its money form, which runs very much counter to the enlightened economy. Newmarch answers Wilson's question onesidedly inasmuch as he does not point out that he has jumped so suddenly and with- out reason from the rate of exchange to the rate of interest. Newmarch answers question 1804 uncertainly and doubtfully: " No doubt, if 12 millions are to be raised, it is immaterial, so far as the general rate of interest is concerned, whether these 12 millions are to be sent out in precious metals or in materials. I believe, however " [a flne transition, this how- ever, when he intends to say the exact opposite] " that this is not quite immaterial " [it is immaterial, but, however, it is not material] " because in the one case the six million pounds sterling would return immediately; in the other case they would not return so quickly. Therefore it would make some" [what definiteness!] "difference, whether the six mil- lions were invested here at home or sent entirely abroad." What does he mean by saying that the six millions would re- turn immediately? To the extent that the six million pounds sterling have been spent in England, they exist in rails, loco- motives, etc., which are shipped to India, whence they do not return, and their value returns very slowly through a sinking fund, whereas six millions in precious metals may return very quickly in their natural form. To the extent that six mil- lions have been spent in wages, they have been consumed; but Precious Metals and Rates of Exchange. 683 the money, in which they were paid, circulates in the coiintiy the same as ever or forms a reserve. The same is true of the profits of the producers of iron rails and of that portion of the six millions which makes good their constant capital. This ambiguous phrase of the return of values is used by ISTewanarch only in order to avoid saying directly: The money has re- mained in the country, and so far as it serves as loanable money-capital the difference for the money-market (aside from the possibility that the circulation might have swallowed more hard cash) is only this, that it is spent for the account of A instead of B. An investment of this kind, where the capital is transferred to other countries in commodities, not in pre- cious metals, cannot affect the rate of exchange, unless the production of these exported commodities requires an extra- import of other foreign commodities, and this, at any rate, does not affect the rate of exchange with the country in which the exported capital is invested. This production is not in- tended to settle for this extra import. The same takes place in every export on credit, no matter whether it be intended for investment as capital or for ordinary purposes of com- merce. Besides, such an extra import may also cause a reaction in the way of an extra demand for English goods, for instance, on the part of the colonies or of the United States.
Before that N^ewmarch said that owing to the drafts of the East India Company the exports from England to India were larger than the imports. Sir Charles Wood cross-examines him on this score. This excess of the English exports to In- dia over the imports from India is actually due to imports from India, for which England does not pay any equivalent. The drafts of the East India Company (now of the British government) resolve themselves into a tribute levied on India. For instance, in 1855 the imports from India to England amounted to 12,670,000 pounds sterling; the English exports to India amounted to 10,350,000 pounds sterling; balance in India's favor 2,250,000 pounds sterling. " If the matter were exhausted with this, then these 2,250,000 pounds sterling 684 Capitalist Production.
would have to be remitted to India in some form. But then come the invitations from the India House. The India House announces that it is in a position to issue drafts on the differ- ent presidencies in India to the amount of 3,250,000 pounds sterling. [This amount was levied for the London exj)enses of the East India Company and for the dividends due to the stockholders.] And this liquidates not merely the balance of 2,250,000 pounds sterling, which arose in a business way, but gives besides a surplus of one million." (1917.)
1922. Wood: "Then the effect of these drafts of the India House is not to increase the exports to India, but to reduce them to that extent? " [He means to say to reduce the necessity of covering the imports from India by exports to India to the same amount.] Mr. ]S[ewmarch explains this by saying that the British export for these 3,700,000 pounds ster- ling a "good government" to India (1925). Wood, know- ing very well the kind of " good government " exported to In- dia by the British, having been Minister to India, replies cor- rectly and ironically: 1926. "Then the exports, which, as you say, are caused by the India House drafts, are exports of good government, and not of commodities." — Since England exports a good deal " in this way " in the shape of " good gov- ernment " and for investment of capital in foreign countries, things which are quite independent of the ordinary run of business, tributes which consist either in payment for " good government " or in revenues from capital invested in the col- onies or elsewhere, tributes for which it does not have to pay any equivalent, it is evident, that the rates of exchange are not affected, when England simply consumes these tributes without making any exports in return for them. Hence it is also evident that the rates of exchange are not affected, when it reinvests these tributes, not in England, but produc- tively or unproductively in foreign, countries; for instance, when it sends ammunition to the Crimea with them. More- over, to the extent that the imports from abroad pass into the revenue of England — of cours», they must first have been paid, either in the form of tributes for which no equivalent return is made, or by exchanging things for these tributes be- Precious Metals and Rates of Exchange. 685 fore they have been paid, or by the ordinary course of com- merce — England can either consume them or reinvest them as capitaL Xeither the one nor the other thing touches the rates of exchange, and this is what Wilson overlooks. Whether a domestic or a foreign product forms a part of the revenue — and this last case requires merely an exchange of domestic for foreign products — the consumption of this revenue, be it pro- ductive or unproductive, alters nothing in the rates of ex- change, even though it may alter the scale of production. The following remarks should be judged by the foregoing explana- tion: 1934. Wood asks ISTewmarch, how the shipment of war supplies to the Crimea would affect the rates of exchange with Turkey. Kewmarch replies: " I do not see, that the mere shipment of war supplies would necessarily affect the rates of exchange, but the shipment of precious metals would surely affect these rates." In this case he distinguishes capital in the form of money from capital in other forms. But now Wilson asks: 1935. "If you promote an export on a large scale of some article for which no corresponding import takes place, you do not pay the foreign debts, which you have contracted by your imports, and for this reason you must affect the rates of ex- change by these transactions, since the foreign debts are not paid, because your export has no corresponding import. — This is true of countries in general." [Mr. Wilson forgets, that there are very considerable imports into England, for which no corresponding exports have ever taken place, except in the form of " good government " or of formerly exported capital for investment; at any rate imports which do not pass into the regular commercial movement. But these imports are again exchanged, for instance, for American products, and the fact that American goods are exported without any cor- responding imports does not alter the fact that the value of these imports may be consumed without any equivalent return abroad; they have been received without being balanced by any corresponding exports, and may also be used up without entering into the balance of trade. On the other hand, if 686 Capitalist Production.
these imports have already been paid by you, for instance, by credit given to foreign countries, then no debt is contracted through this, and the question has nothing to do with the in- ternational balance; it resolves itself into productive and un- productive expenditures, no matter whether the products so used are domestic or foi-eign.]
This lecture of Wilson's amounts to saying that every ex- port without a corresponding import is at the same time an import without a corresponding export, because foreign, hence imported, commodities enter into the production of the ex- ported article. The assumption is that every export of this kind is based on some unpaid import, or creates it, resulting in a debt to a foreign country. This is wrong, even aside from the two following circumstances. 1) England receives im- ports free of charge, for which it pays no equivalent, such as a portion of its Indian imports. It may exchange these for American imports, and may export the latter without any im- ports to counterbalance them; but at any rate, so far as this value is concerned, it has only exported something that did not cost it anything. 2) England may have paid for imports, for instance American imports, which form additional cap- ital; if it consumes these unproductively, for instance, using them as w^ar materials, this does not constitute any debt to- wards America and does not affect the rates of exchange with America. Newmarch contradicts himself in numbers 1934 and 1935, and Wood calls his attention to this, in number 1938: "If no portion of the commodities employed in the manufacture of articles, which we export without receiving any returns [war materials], comes from the country into which these articles are sent, how does that touch the rate of exchange w^ith that country? Suppose that commerce with Turkey is in the ordinary condition of equilibrium; how is the rate of exchange between us and Turkey affected by the export of w^ar materials to the Crimea? " — Here Newmarch loses his equanimity; he forgets that he has answered the same simple question correctly in No. 1934, and says: "We have, it seems to me, exhausted the practical question, and we are Precious Metals and Rates of Exchange. 687 now getting into a very high region of metaphysical discus- sion."
[Wilson has still another version of his claim, that the rate of exchange is affected by every transfer of capital from one country to another, no matter whether this takes place in the form of precious metals or of commodities. Wilson knows, of course, that the rate of exchange is affected by the rate of interest, particularly by the relation of the rates of interest current in any two countries whose rates of exchange are un- der discussion. If he can now demonstrate that any surplus of capital, and in the first place commodities of all kinds, in- cluding precious metals, contribute their share to influencing the rate of interest, then he makes a step nearer to his goal; a transfer of any considerable portion of this capital to some other country must then change the rate of interest in both countries, in opposite directions, and this must alter in a sec- ondary way the rate of exchange between both countries. — He says, then, in the " Economist/' 1847, page 475, which he edited at that time: 1) "It is evident, that such a surplus of capital, indicated by large supplies of all kinds, including precious metals, must lead necessarily, not only to lower prices of commodities in general, but to a lower rate of interest for the use of capital."
2) "If we have a stock of commodities on hand, large enough to supply the country for the coming two years, then a command of these commodities for a given period may be had at a much lower rate than if it would last only for two months."
3) All loans of money, in whatever form they may be made, are merely transfers of the command over commodities from one to another. If, therefore, commodities are super- abundant, then the money interest must be low, if they are scarce, it must be high."
4) " If commodities come in more abundantly, the number of sellers compared to the number of buyers must increase.
688 Capitalist Production.
and in proportion as the quantity exceeds tlie needs of the di- rect consumers, an ever larger portion must be stored up for later use. Under these circumstances an owner of commodi- ties will sell at lower conditions on future payment, or on credit, than he would if he were sure that his whole stock would be sold within a few weeks."
Our comment on sentence No. I, is that a strong addition to the precious metals may be made while production is simul- taneously contracted,, which is always the case in the period after a crisis. In the subsequent phase precious metals may come in from countries that produce above all precious metals; the imports of other commodities are generally balanced by the exports during this period. In these two phases the rate of interest is low and rises but slowly; we have already ex- plained the reason for this. This low rate of interest may be explained everj^vhere without any influence of any " Large supplies of any kind." And how is this influence to take place? The low price of cotton, for instance, renders pos- sible the high profits of the spinners, etc. Now Avhy is the rata of interest low? Surely not, because the profit, which may be made on borrowed capital, is high. But simply and solely, because under existing conditions the demand for loan cap- ital does not grow in proportion to this profit; in other words, because loan capital has a difi'erent movement than industrial capital. What the '' Economist " wants to prove is exactly the reverse, namely that the movements of loan capital are identical with those of industrial capital.
Comment on sentence No. 2). If we reduce tlie absurd as- sumption of a stock for two years ahead to a point where it begins to take on some meaning, it sigiiifies that the markets are overstocked. This would cause a falling of prices. Less would have to be paid for a bale of cotton. This would by no means justify the conclusion, that the money which is to be used for the payment of this cotton, is more easily borrowed. For this depends on the condition of the money market. If money can be borrowed more easily, it can be so only because the commercial credit is in such shape, that it has to make less use of bank credit than ordinarily. The commodities over- Precious Metals and Rates of Exchang<;. 689 crowding the market are means of subsistence or means of production. The low price of both increases in this case the profit of the industrial capitalist. Why should these low prices depress the rate of interest, unless it be through the contrast (not the identity) between the abundance of indus- trial capital and the scarcity of the demand for loan capital? The circumstances are such, that the merchant and the in- dustrial capitalist can more easily give credit to one another; owing to this facilitation of commercial credit, neither the in- dustrial nor the merchant need much bank credit; hence the rate of interest can be low. This low rate of interest has noth- ing to do with the increase of precious metals, although both of them may run parallel to each other and the same causes, which bring about the low prices of articles of import, may also produce a surplus of precious metals. If the import mar- ket were really overcrowded, it would prove a decrease of the demand for imjDorted articles, and this would be inexplicable at low prices, unless it be attributed to a contraction of indus- trial production at home; but this, again, would be inex- plicable, so long as there is an overimportation at low prices. All these absurdities are brought forward for the purpose of proving that a fall of prices is identical with a fall of interest. Both things may, indeed, exist side by side. But if they do, it will be an expression of the opposite directions, in which the movement of industrial capital and of loan capital takes place. It will not be an expression of their identity.
Comment on sentence N^o. 3). Why money interest should be low, when commodities exist in abundance, is hard to un- derstand, even after the foregoing remarks. If commodities are cheap, then I need, say, only 1,000 pounds sterling instead of 2,000 pounds sterling for a definite quantity which I may want to buy. But perhaps I might invest 2,000 pounds ster- ling nevertheless, and thus buy twice the quantity which I could have bought formerly. In this way I expand my busi- ness by advancing the same capital, which I may have to bor- row. I buy 2,000 pounds sterling's worth of commodities, the same as before. My demand on the money market there- fore remains the same, even though my demand on the com- 2R 690 Capitalist Production.
modity-market rises with the fall of the prices of commodities. But if this demand for commodities should decrease, that is, if production should not expand with the fall of the prices of commodities, a thing contrary to all laws of the " Economist," then the demand for loanable money-capital would be decreas- ing, although the profit would be increasing. But this in- creasing profit would create a demand for loan capital. For the rest, the low stand of the prices of commodities may be due to three causes. First, to a lack of demand. In that case the rate of interest is low, because production is para- lyzed, not because commodities are cheap, since this cheapness is but an expression of that paralysis. In the second place, it may be due to a supply which is excessive compared to the demand. This may be the result of an overcrowding of mar- kets, etc., which may lead to a crisis, and may go hand in hand with a high rate of interest during a crisis; or it may be the result of a fall in the value of commodities, so that the same demand may be satisfied at lower prices. Why should the rate of interest fall in the last case? Because the profits in- crease? If this should be due to the fact that less money-capital is required for the purpose of obtaining the same produc- tive or commodity-capital, it would merely prove that profit and interest stand in an inverse proportion to one another. Certainly this general statement of the " Economist " is wrong. Low money prices of commodities and a low rate of interest do not necessarily go together. Otherwise the rate of interest would be lowest in the poorest countries, in which the money prices of commodities are lowest, and highest in the richest countries, in which the money prices of products of agricul- ture are highest. In a general way the " Economist " admits: If the value of money falls, it exerts no influence on the rate of interest. 100 pounds sterling bring 105 pounds sterling the same as ever. If the 100 pounds sterling are worth less, so are the 105 pounds sterling or the 5 pounds interest. This relation is not affected by the appreciation or depreciation of the original sum. Considered as a value, a definite quantity of commodities is equal to a definite sum of money. If this value rises, it is equal to a larger sum of money; the reverse