Hence, if this expansion is disturbed, or even the normal exertion of the process of reproduction infringed, credit also becomes scarce; it is more difficult to get commodities on credit. It is particularly the demand for cash payment and the caution observed toward sales on credit which are characteristic of that phase of the industrial cycle, which follows a crash. In the crisis itself, when every one has things to sell, cannot sell them, and yet must sell them, if he would secure means of payment, it is not the mass of the unemployed and investment seeking capital, but rather the mass of capital tied up in his process of reproduction, that is greatest just when the lack of credit is most felt (and the rate of discount highest in banking credit). The hitherto invested capital is then, indeed, unemployed, because the process of reproduction lags. Factories are closed, raw materials accumulate, finished products swamp the market as commodities. Nothing is more erroneous, therefore, than to blame a scarcity of productive capital for such a condition. It is precisely at such times that there is a superabundance of productive capital, partly so far as the normal, but temporarily contracted, scale of reproduction is concerned, partly with regard to the paralysed consumption.

Let us suppose that the whole society is composed only of industrial capitalists and wage workers. Let us furthermore make exceptions of fluctuations of prices, which prevent large portions of the total capital from reproducing themselves under average conditions and which, owing to the general interrelations of the entire process of reproduction, such as are developed particularly by credit, must always call forth general stoppages of a transient nature. Let us also make abstraction of the bogus transactions and speculations, which the credit system favors. In that case, a crisis could be explained only by a disproportion of the consumption of the capitalists and the accumulation of their capitals. But as matters stand, the reproduction of the capitals invested in production depends largely upon the consuming power of the non-producing classes; while the consuming power of the laborers is handicapped partly by the laws of wages, partly by the fact that it can be exerted only so long as the laborers can be employed at a profit for the capitalist class. The last cause of all real crises always remains the poverty and restricted consumption of the masses as compared to the tendency of capitalist production to develop the productive forces in such a way, that only the absolute power of consumption of the entire society would be their limit.

A real lack of productive capital, at least among capitalistically developed nations, can be said to exist only in times of general crop failures, either in the principal means of subsistence, or in the principal raw materials of industry.

However, in addition to this commercial credit we have the money credit strictly so-called. The loans of the industrials and merchants among one another go hand in hand with loans made to then by the banker and money lender in the form of money. In the discounting of bills of exchange the loan is but nominal. A manufacturer sells his product for a bill of exchange and gets this bill discounted at some bill broker's. In reality this broker loans only the credit of his banker, and this banker loans to the broker the money of his depositors, made up of the industrial capitalists and merchants themselves, of drawers of ground rent and other unproductive classes, but also of laborers (in saving banks). In this way every industrial manufacturer and merchant gets around the necessity of keeping a large reserve fund and being dependent upon his actual returns. On the other hand the whole process becomes so complicated, partly by the making of bogus checks, partly by operations with commodities for the mere purpose of writing bills of exchange, that the semblance of a solid business and a smooth run of returns may persist even after returns come in only at the expense of swindled money lenders or swindled producers. Thus the business appears almost too sound just on the eve of a crash. The best proof of this is furnished, for instance, by the Reports on Bank Acts of 1857 and 1858, in which all bank directors, merchants, in short, all the summoned experts, with Lord Overstone at their head, congratulated one another on the prosperity and soundness of business—just one month before the eruption of the crisis of August, 1857. And, queer enough, Tooke in his History of Prices passes through the same illusion as the historian of every crisis. Business is always thoroughly sound and the campaign in full swing, until the collapse suddenly overtakes them.

We revert now to the accumulation of money-capital.

Not every augmentation of loanable capital indicates a real accumulation of capital or expansion of the process of reproduction. This becomes most evident in the phase of the industrial cycle following immediately after a crisis, when loanable capital lies fallow in masses. In such moments, in which the process of production is restricted (production in the English industrial districts was reduced by one-third after the crisis of 1847), prices of commodities at their lowest level, the spirit of enterprise paralysed, the rat of interest is low, and it indicates then merely an increase of loanable capital precisely because the industrial capital has been laid lame. It is quite obvious, that less currency is required, when the prices of commodities have fallen, the number of transactions decreased, and the capital invested in wages contracted; that, on the other hand, additional money is required for the function of world money after the debts to foreign countries have been settled either by the exportation of gold or by bankruptcies; that, finally, the volume of the business of discounting bills diminishes with the number and amounts of bills of exchange. Hence the demand for loanable capital, either in the form of means of circulation or of means of payment (the investment of new capital being out of the question for a while), decreases and it becomes relatively abundant. At the same time, the supply of loanable capital increases also positively under such circumstances, as we shall see later.

Thus "a reduction of transactions and a great super-abundance of money" prevailed after the crisis of 1847 ( Commercial Distress, 1847-48, Evidence No. 1664.) The rate of interest was very low on account of the "almost complete annihilation of commerce and nearly utter absence of a possibility of investing money" (1. c., p. 45, Testimony of Hodgson, Director of the Royal Bank of Liverpool). What nonsense those gentlemen concocted (and Hodgson is one of the best of them) in order to explain these facts, may be seen from the following phrase: "The stringency (1847) arose from an actual reduction of the money-capital in the country, caused partly by the necessity of paying for the imports from all quarters of the globe in gold, and partly by the conversion of floating capital into fixed." How the conversion of circulating capital into fixed capital should reduce the money-capital of a country is unintelligible. For in the case of railroads, e.g., in which capital was mainly invested at that time, neither gold nor paper are used up for viaducts and rails, and the money for the railroad stocks, to the extent that it had been deposited for subscriptions, performed exactly the same functions as any other money deposited in banks and even increased the loanable money-capital temporarily, as shown above. But to the extent that it had been spent for construction, it circulated in the country as a means of circulation and payment. Only so far as fixed capital cannot be exported, so that with the impossibility of its export the available capital secured by returns from exported articles is eliminated, including the returns in bullion or cash, might the money-capital be affected. But English export articles were likewise piled up in masses on the foreign markets without being salable. It is true, the floating capital of the merchants and manufacturers of Manchester, etc., who had tied up a portion of their normal business capital in railroad stocks and were therefore dependent upon loan capital for the continuation of their business, had become fixed, and they had to put up with the consequences. But it would have been the same, if the capital belonging to their business, but withdrawn from it, had been invested, say, in mines instead of railroads, mining products like iron, coal, copper being themselves floating capital.

The actual reduction of available money-capital through crop failure, corn imports, and gold exports constituted an event that had nothing to do with the railroad swindles.—"Nearly all commercial firms had begun to starve their business more or less, in order to invest the money in railroads."—The very extensive loans, which were made to railroads by commercial firms, misled the latter to depend far too much through the discounting of bills upon the banks and to carry on the commercial business in this way" (the same Hodgson, 1. c., p. 67). "In Manchester immense losses were sustained through speculation in railroads" (R. Gardner, previously mentioned in volume I chapter XV, 3, c, p. 449, American edition, and in other places, Evidence No. 4877, 1. c.).

One of the principal causes of the crisis of 1847 was the colossal overcrowding of the markets and the unbounded swindle in the East Indian trade with commodities. But there were also other circumstances, which bankrupted very rich firms in this line: "They had plenty of means, but these could not be made available. Their entire capital was tied up in real estate in Mauritius, or in indigo and sugar factories. After they had assumed obligations to the tune of 5-600,000 pounds sterling, they had no means at hand to pay their bills of exchange, and finally it was found that, in order to pay their bills, they would have to rely entirely upon credit" (Ch. Turner, great East Indian merchant in Liverpool, No. 730, 1. c.).—See furthermore Gardner, No. 4872, 1. c.: Immediately after the Chinese treaty such great prospects for a tremendous extension of our trade with China were held out to this country, that many large factories were built expressly for this business, for the purpose of manufacturing the cotton goods mainly demanded in the Chinese markets, and these were added to all our already existing factories."—4874. "How did this business come out?"—"Most disastrously, so that it defies almost every description; I do not believe, that of all the shipments to China in 1844 and 1845 more than two-thirds of the amount have ever returned; tea being the principal article of return export, and such great prospects having been held out to us, we manufacturers counted without fail on a large reduction of the tea tax."—And now, naively expressed, comes the characteristic confession of faith of the English manufacturer: "Our trade with a foreign market is not limited by its capacity of consuming our products, it is rather limited here at home by our capacity of consuming the products, which we receive in return for our industrial products." (The relatively poor countries, with whom England trades, are supposed to be able to pay for and consume any amount of English products, but unfortunately wealthy England cannot digest the products sent in return.)—4876. "At first I shipped a few commodities out, and these were sold at a loss of about 15% in the full conviction that the price, at which my agents could buy tea, would yield so large a profit through its sale here, that this loss would be made good; but instead of making a profit, I lost sometimes 25% and even as much as 50%."—4877. "Did the manufacturers export for their own account?"—"Principally; the merchants, it seems, saw very soon that they did not make anything, and they encouraged the manufacturers to make consignments rather than to participate in them themselves."—In 1857, on the other hand, the losses and failures fell mainly upon the merchants, since the manufacturers left to them the task of overcrowding the foreign markets "for their own account."

An expansion of the money-capital arising from the fact that in consequence of the expansion of the banking business a former private hoard or coin reserve may be converted into loanable capital for a short while, does not indicate a growth of the productive capital any more than the increasing deposits of the London stock banks, as soon as they began to pay interest on deposits. (See the example of Ipswich farther along, where in the course of a few years immediately preceding 1857 the deposits of the capitalist farmers were quadrupled.) So long as the scale of production remains the same, this expansion leads only to an abundance of the loanable money-capital compared to the productive. Hence the rate of interest is low.

After the process of reproduction has again reached that state of prosperity, which precedes that of overexertion, the commercial credit once more arrives at a great expansion, which has then indeed for its "sound" basis a flow of easy returns and more extended production. In this state the rate of interest is still low, although it rises above its minimum. This is in fact the only time, of which it may be said, that a low rate of interest, and consequently a relative abundance, of loanable capital, coincide with a real expansion of industrial capital. The facility and regularity of the returns, together with an extensive commercial credit, secures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. Moreover, those knights now appear in large numbers, who work without any reserve capital, or even without any capital at all and operate wholly on a credit basis. To this is added the great expansion of the fixed capital of all forms, and the inauguration of vast masses of new enterprises of wide scope. The interest now rises to its average level. It arrives once more at its maximum, as soon as the new crisis comes in, when credit suddenly stops, payments are suspended, the process of reproduction is delayed, and a superabundance of industrial capital is unemployed, with the above-mentioned exceptions, while there is an almost absolute lack of loan capital.

On the whole, then, the movements of loan capital, as expressed in the rate of interest, tend in a direction opposite to that of industrial capital. That phase in which a low rate of interest rising just above its minimum coincides with an "improvement" and a growing confidence after a crisis, and particularly that phase, in which the rate of interest reaches its average level, midway between its minimum and maximum, are the only two periods in which an abundance of loan capital is available simultaneously with a great expansion of industrial capital. But at the beginning of the industrial cycle a low rate of interest coincides with a contraction, and at the end of an industrial cycle a high rate of interest coincides with a superabundance, of industrial capital. The low rate of interest, which indicates an "improvement," shows that commercial credit requires the assistance of banking credit but to a slight degree, because it still stands on its own legs.

The industrial cycle is of such a character, that the same cycle must periodically reproduce itself, once that the first impulse has been given. 100

In the condition of lassitude production sinks below the level, which it had reached in the preceding cycle, and for which the technical basis has now been laid. During prosperity, the middle period, it continues to develop on this basis. In the period of overproduction and swindle it exerts the productive forces to the utmost, even beyond the capitalistic limits of the process of production.

That means of payment are scarce during the period of crisis, goes without saying. The convertibility of bills of exchange has substituted itself for the metamorphosis of commodities themselves, and so much more so at such times, as a portion of the firms operates purely on credit. An ignorant and mistaken legislation, such as that of 1844-45, may intensify a money crisis. But no manner of bank legislation can abolish a crisis.

In a system of production, in which the entire connection of the process of reproduction rests upon credit, a crisis must obviously occur through a tremendous rush for means of payment, when credit suddenly ceases and nothing but cash payment goes. At first glance, therefore, the whole crisis seems to be merely a credit crisis and money crisis. And in fact it is but a question of the convertibility of bills of exchange into cash money. But the majority of these bills represent actual sales and purchases, and it is the extension of these far beyond the demands of society which is at the bottom of the whole crisis. At the same time an enormous quantity of these bills represents mere swindles, and this becomes apparent now, when they burst. There are furthermore unlucky speculations made with the money of other people. Finally there are commodity-capitals, which have either become depreciated or unsalable or returns that can never more be realized. This entire artificial system of forced expansion of the process of reproduction cannot, of course, be remedied by having some bank, like the Bank of England, give to the swindlers the needed capital in the shape of paper notes and buy up all the depreciated commodities at their old nominal values. Moreover, everything appears turned upside down here, since no real prices and their real basis appear in this paper world, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in the centers, in which the whole money business of the country is crowded together, like London, this reversion becomes apparent; the entire process becomes unintelligible. It is not quite so in the industrial centers.

By the way, we make the following remarks about the superabundance of industrial capital, which shows itself during crises: The commodity-capital is in itself also a money-capital, that is, a definite sum of money expressed in the price of the commodities. As a use-value it is a definite quantity of useful objects, and there is a superfluity of them at the time of the crisis. But as a money-capital in itself, as a potential money-capital, it is subject to continual expansion and contraction. On the eve of a crisis, and during its sway, commodity-capital in its capacity as a potential money-capital is contracted. It represents less money-capital for its owner and his creditors (likewise as a security for bills of exchange and loans), than it did at the time when it was bought and when the discounts and loans made on it were transacted. If this is the meaning of the contention, that the money-capital of a country is reduced in times of stringency, it is identical with the statement, that the prices of commodities have fallen. Such a collapse of prices merely balances their inflation in preceding periods.

The incomes of the unproductive classes and of those, who live on fixed incomes, remain for the greater part stationary during the inflation of prices going hand in hand with an overproduction and overspeculation. Hence their consuming capacity diminishes relatively, and with it their ability to reproduce that portion of the total reproduction, which should enter normally into consumption. Even though their demand should remain nominally the same, it decreases actually.

With reference to the imports and exports we remark, that all countries become successively implicated in a crisis, and that then it becomes evident, that all of them, with few exceptions, have exported and imported too much, so that there is a balance of payment against all of them. The trouble, therefore, is not with the balance of payment. For instance, England suffers from an export of gold. It has imported too much. But at the same time all other countries are overcrowded with English goods. They have also imported too much, or too much have been imported into them. (There is, indeed, a difference between that country, which exports on credit, and those countries, which export little or nothing on credit. But in that case, these last countries import on credit; and this is not the case only when commodities are sent to them on consignment.) The crisis may first break out in England, in that country which gives most of the credit and takes least of it, because the balance of payment due, which must be squared immediately, is against it, even though the general balance of trade is for it. This is explained partly by the credit which it has granted, partly by the mass of capitals loaned to foreign countries, so that a large quantity of returns come back to it in the shape of commodities, aside from actual trade returns. (However, the crisis broke out sometimes in America, that country in which most of the trade and capital credit is taken from England.) The crash in England, introduced and accompanied by an export of gold, settles England's balance of payment, partly by a bankruptcy of its importers (about which more is said farther on), partly by throwing off a portion of its commodity-capital at cut prices to foreign countries, partly by the sale of foreign securities, the purchase of English securities, etc. Now it is the turn of some other country. The balance of payment was momentarily in its favor. But now the time normally allowed between the balance of payment and balance of trade has been reduced by the crisis or entirely abolished. All payments are now supposed to be made immediately. The same thing is now repeated here. England now has a return of gold, the other country an export of gold. What appears in one country as excessive imports, appears in the other as excessive exports, and vice versa. But overimports and overexports have taken place in all countries (we are not alluding now to any crop failures, but to a general crisis); that is, there has been a general overproduction, promoted by credit and the inflation of prices that goes with it.

In 1857, the crisis broke out in the United States. An export of gold from England to America followed. But as soon as the inflation in America collapsed, the crisis broke out in England and the gold export went from America to England. The same took place between England and the continent. The balance of payment is in times of general crisis against every nation, at least against every commercially developed nation, but always the one succeeding the other, like firing in squads, as soon as the turn of each comes for making payments. And once the crisis has broken out, say, in England, it compresses the succession of these terms of payment into a very short period. It then becomes evident, that all these nations have simultaneously overexported (and overproduced) and overimported (and overtraded), that prices were inflated in all of them, and credit overdrawn. And the same collapse follows in all of them. The phenomenon of gold exports then shows itself successively in all of them, and proves by this very generality, 1), that the gold exports are but an evidence of a crisis, not its cause; 2), that the succession, in which the gold exports take place in different countries, indicates only the time when their turn has come to settle their affairs, the time when the crisis seizes them and causes an eruption of its latent forces.

It is characteristic for the English economic writers—and the economic literature worth mentioning since 1830 resolves itself mainly into a literature on currency, credit, crisis—that they look upon the exports of precious metals in times of crisis, in spite of the alteration of quotations on bills, merely from the standpoint of England, as a purely national phenomenon, and completely close their eyes against the fact, that all other European banks raise their rate of interest, when their own bank raises its in times of crisis, and that, when the cry of distress over the exports of gold is raised in their country today, it is taken up in America tomorrow and in Germany and France the day after.

In 1847, "the obligations of England had to be fulfilled" [mostly for corn]. "Unfortunately they were mostly fulfilled by bankruptcies." [The wealthy England got its breath by bankruptcies in its obligations toward the Continent and America.] "But so far as they were met by bankruptcies, they were fulfilled by the export of precious metals." ( Report of Committee on Bank Acts, 1857.) In other words so far as a crisis is intensified by bank legislation, this legislation is a means of cheating the corn-exporting countries in periods of famine, robbing them first of their corn and then of the money for the corn. A prohibition of the export of corn in such periods and in such countries, which are themselves suffering more or less from stringencies, is, therefore, a very rational measure to thwart the above plan of the Bank of England for "meeting obligations on corn imports by bankruptcies." It is in that case much better that the corn producers and speculators should lose a portion of their profit for the good of their own country than their capital for the good of England.

It follows from the above, that the commodity-capital largely loses its capacity of representing potential money-capital during a crisis, and during periods of business depression in general. The same is true of fictitious capital, interest-bearing papers, so far as they circulate in the stock exchanges as money-capital. Their price falls with a rise of interest. It falls furthermore through a general lack of credit, which compels their owner to throw them in masses on the market, in order to secure money. It falls, finally, in the case of stocks, partly in consequence of the spurious character of the enterprises which they represent, partly in consequence of a decrease of the revenues, for which they constitute drafts. The fictitious capital is enormously reduced in times of crisis, and with it the power of its owners to loan money on it in the market. However, the reduction of the money denomination of these securities in the stock exchange quotations has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners.

CHAPTER XXXI.: MONEY-CAPITAL AND ACTUAL CAPITAL. II.
(Continued.)

WE have not yet come to the end of the question, to what extent the accumulation of capital in the form of loanable money-capital coincides with the actual accumulation, the expansion of the process of reproduction.

The conversion of money into loanable money-capital is a far simpler matter than the transformation of money into productive capital. But two things should be distinguished here.

It is only the last named point, which can imply a positive accumulation of loan capital connected with an actual accumulation of industrial capital.

CHAPTER XXXII.: MONEY-CAPITAL AND ACTUAL CAPITAL. III.
(Concluded.)

THE mass of the money thus reconverted into capital is a result of the voluminous process of reproduction, but considered by itself, as loanable money-capital, it is not itself a mass of reproductive capital.

The most important point of our presentation so far is, that the expansion of that part of the revenue which is intended for consumption (leaving out of consideration the laborer, because his revenue is equal to the variable capital) represents itself in the first instance as an accumulation of money-capital. The accumulation of money-capital, therefore, presents a factor, which is essentially different from the actual accumulation of industrial capital; for that portion of the annual product, which is intended for consumption, does not become capital in any way. One portion of it replaces capital, namely the constant capital of the producers of means of consumption, but to the extent that it is actually converted into capital, it exists in the natural form of the revenue of the producers of this constant capital. The same money, which represents the revenue and serves merely for the promotion of consumption, is regularly transformed into loanable money-capital, for a certain time. So far as this money represents wages, it is at the same time the money-form of the variable capital; and so far as it replaces the constant capital of the producers of means of consumption, it is the money-form temporarily assumed by their constant capital and serves for the purchase of the natural elements of the constant capital to be replaced by them. Neither in the one nor in the other form does it express in itself any accumulation, although its mass increases with the volume of the process of reproduction. But it performs temporarily the function of loanable money, of money-capital. In this respect the accumulation of money-capital must reflect a greater accumulation of capital than is actually existing, owing to the fact that the extension of individual consumption, being promoted by money, appears as an accumulation of money-capital, whereby it furnishes the money-form for the actual accumulation of money opening new investments of capital.

The accumulation of money, then, expresses in part nothing else but the fact that all money, into which the industrial capital is transformed in the course of its cycle, assumes the form, not of money advanced by the reproductive capitalists, but of money borrowed by them; so that indeed the advance of money necessary in the process of reproduction appears as an advance of borrowed money. On the basis of commercial credit one capitalist loans indeed to another the money required for the process of reproduction. But this assumes now the form of a transaction, in which the banker, who receives the money as a loan from one portion of the reproductive capitalists, lends it to another portion of these reproductive capitalists, so that the banker appears in the role of a dispenser of blessings; at the same time the disposition of this capital drifts wholly into the hands of the banker in his capacity as a middleman.

A few special forms of accumulation of money-capital still remain to be mentioned. Capital is releases, for instance, by a fall in the price of the elements of production, raw materials, etc. If the industrial capitalist cannot expand his process of reproduction immediately, then a portion of his money-capital is expelled from the cycle as superfluous and converted into loanable money-capital. In the second place, capital in the form of money is released especially by the merchant, whenever any interruption of his business takes place. If the merchant has disposed of a series of transactions and cannot begin a new series on account of such interruptions until later, then his realised money represents for him but a hoard, superfluous capital. But at the same time it represents directly an accumulation of loanable money-capital. In the first case, the accumulation of money-capital expresses a repetition of the process of reproduction under more favorable conditions, an actual release of a portion of formerly tied up capital, in other words, an opportunity for expanding the process of reproduction with the same amount of money. But in the other case it expresses merely an interruption in the flow of transactions. However, in both cases it is converted into loanable money-capital, represents its accumulation, influences equally the money-market and the rate of interest, although it expresses a promotion of the accumulation in the actual process in one case and its obstruction in the other. Finally an accumulation of money-capital is brought about by that section of people, who have made their little pile and have withdrawn from reproduction. In proportion as more profits are made in the course of the industrial cycle, their number increases. In their case the accumulation of loanable money-capital expresses on the one hand an actual accumulation (considering its relative volume), and on the other hand the extent of the transformation of industrial capitalists into mere money-capitalists.

As for the other portion of profit, which is not intended to be consumed as revenue, it is converted into money-capital only when it is not immediately able to find a place for investment in the expansion of the productive sphere in which it has been made. This may be due to two causes. Either the sphere of production may be saturated with capital. Or it may be because accumulation must first have reached a certain volume, before it can serve as capital, according to the proportions of the investment of new capital required in this particular sphere. Hence it is converted for a while into loanable money-capital and serves in the expansion of production in other spheres. Assuming all other circumstances to remain unaltered, the mass of profits required for reconversion into capital will depend on the mass of profits made and thus on the extension of the process of reproduction itself. But if this new accumulation meets with difficulties in its employment, through a lack of spheres for investment, due to the overcrowding of the lines of production and an oversupply of loan capital, then such a plethora of loanable money-capital proves merely that capitalist production has its limits. The subsequent swindle with credit proves, that no positive obstacle stands in the way of the employment of this superfluous capital. The obstacle is merely one immanent in its laws of self-expansion, namely the limits in which capital can expand itself as such. A plethora of money-capital does not necessarily indicate an overproduction, nor even a lack of spheres of investment for capital.

The accumulation of loan-capital consists simply in the fact that money is precipitated as loanable money. This process is very different from an actual transformation into capital; it is merely the accumulation of money in a form, in which it may be invested as capital. But this accumulation may, as we have shown, indicate facts, which are greatly different from actual accumulation. So long as actual accumulation is continually expanding, this extended accumulation of money-capital may be partly its result, partly the result of circumstances, which accompany it but are quite different from it, partly also the result of impediments to actual accumulation. Since accumulation of loan-capital is swelled by such circumstances, which are independent of actual accumulation but nevertheless accompany it, there must be a plethora of money-capital in definite phases of the cycle for this reason alone, if for no other, and this plethora must develop with the organisation of credit. And simultaneously with it must also develop the necessity of driving the process of production beyond its capitalistic limits, by overproduction, excessive commerce, extreme credit. And this must take place in forms that call forth a reaction.

So far as accumulation of money-capital from ground rent, wages, etc., is concerned, it is superfluous to discuss that here. Only one thing must be mentioned, namely that the business of actual saving and abstinence (by people forming hoards), to the extent that it furnishes elements of accumulation, is left in the division of labor, which comes with the progress of capitalist production, to those who receive the smallest share of such elements, and who frequently enough lose even their savings, as do the laborers when banks fail. On the one hand the capital of the industrial capitalist is not "saved" by himself, but he has command of the savings of others in proportion to the magnitude of his capital; on the other hand the money-capitalist makes of the savings of others his own capital, and of the credit, which the reproductive capitalists give to one another, and which the public gives to them, a source for enriching himself. The last illusion of the capitalist system, to the effect that capital is the fruit of ones own labor and saving, is thereby destroyed. Not only does profit consist of the appropriation of other people's labor, but the capital, with which this labor of others is set in motion and exploited, consists of other people's property, which the money-capitalist places at the disposal of the industrial capitalist, at the same time exploiting the latter in his turn.

A few remarks remain to be made about credit-capital.

How often the same piece of money may figure as a loan capital, depends, as we have previously indicated.

Even assuming that the form, in which loan capital exists, is merely that of actual money, of gold or silver, of that commodity whose substance serves as a measure of value, a large portion of this money-capital is necessarily purely fictitious, that is a title to some value just as the tokens of value. So far as money functions in the cycle of capital, it forms indeed for the moment a money-capital; it is rather exchanged for the elements of productive capital, or paid out as a medium of circulation in the realisation of revenue, and cannot, therefore, convert itself into loan capital for its owner. But so far as it is converted into loan capital, and the same money repeatedly represents loan capital, it is evident that it exists only at one point in the form of metallic money; at all other points it exists only in the form of title on capital. The accumulation of these titles, according to our analysis, arises from the actual accumulation, that is, from the transformation of the values of commodity-capital, etc., into money; but nevertheless the accumulation of these titles as such differs from the actual accumulation, from which it arises, and from the future accumulation, from which it arises, and from the future accumulation (the new process of production), which is promoted by the loaning of this money.

In the first instance loan capital exists always in the form of money, 101 later as a title on money, since the money, in which it originally existed, is now held in the hand of the borrower as actual money. For the lender it has been transformed into title on money, a title of ownership. The same mass of actual money may, therefore, represent very different masses of money-capital. Mere money, whether it represent realised capital or realised revenue, becomes a loan capital through the simple act of loaning, by its conversion into a deposit, if we look upon the general form under a developed credit system. The deposit is a money-capital for the depositor. But in the hands of the banker it may be only a potential money-capital, which lies fallow in his strongbox instead of that of its owner. 102

With the growth of material wealth grows the class of money-capitalists; on one side the number and the wealth of retiring capitalists living on their incomes increases; on the other hand the development of the credit system is promoted, and with it the number of bankers, money lenders, financiers, etc.

With the development of the available money-capital grows also the mass of interest-bearing papers, government bonds, stocks, etc., as we have shown previously. At the same time grows also the demand for available money-capital, since the jobbers, who speculate in these securities, play a prominent role on the money-market. If all the purchases and sales of these papers were only an expression of actual investments of capital, it would be correct to say, that they can have no influence on the demand for loan capital, since, when A sells his paper, he draws exactly as much money as B puts into the paper. But even if the paper itself exists, though not the capital (at least not as money-capital) originally represented by it, it always creates to that extent a demand for such money-capital. But at any rate it is then money-capital, which was previously at the disposal of B and is not at the command of A.

B.A. 1857. No. 4886. "Is it in your opinion a correct statement of the causes determining the rate of discount, when I say that it is regulated by the quantity of capital existing on the market, which is available for the discounting of commercial bills, as distinguished from other kinds of securities?" [Chapman]: "No, I hold that the rate of interest is affected by all convertible securities of current character; it would be wrong to limit the question simply to the discounting of bills; for when there is a strong demand for money on consols [deposited] or even treasury notes, as was strongly the case of late, and at a much higher than the commercial rate of interest, it would be absurd to say that our commercial world is not influenced by it; it is very essentially touched by it."—4890. "When good and current securities, such as bankers accept, are on the market, and the owners take up money on them, it has surely an effect on the commercial world; for instance, I cannot expect that a man should give me his money at 5% on a commercial bill, when he can lend this money out at the same time at 6% on consols, etc.; it affects us in the same way; nobody can expect of me that I should discount his bills at 5½%, when I can lend my money out at 6%."—4892. "Of people, who buy securities as fixed investments of capital for 2,000, or 5,000, or 10,000 pounds sterling, we do not speak as though they had any essential influence upon the money-market. When you ask me for the rate of interest on [a deposit of] consols, I speak of people, who transact business to the amount of hundreds of thousands, of so-called jobbers, who underwrite large amounts of public loans, or buy them on the market, and who must hold these papers until they can get rid of them at a profit; these people must take up money for this purpose."

With the development of the credit system great concentrated money-markets are created, such as London, which are at the same time the main seats of trade in such securities. The bankers place the money-capital of the public in masses at the disposal of this unsavory crowd of dealers, and thus this breed of gamblers multiplies. "Money is generally cheaper at the stock exchange than anywhere else," says the incumbent of the Governor's chair of the Bank of England in 1848 before the secret Committee of Lords, C. D. 1848, printed, 1857, No. 219.)

In the discussion of the interest-bearing capital we have already shown, that the average interest for a long period of years, other circumstances remaining the same, is determined by the average rate of profit; this does not mean profits of enterprise, which are themselves nothing but profit minus interest.

It has also been mentioned, and will be further analysed in another place, that the variations of commercial interest, that is, of interest calculated by the money lenders for discounts and loans within the commercial world, meet in the course of the industrial cycle a phase, in which the rate of interest exceeds its minimum and reaches its average level, which it exceeds later, and that this movement is a result of a rise in profits.

However, two things must be noted here.

First: When the rate of interest stays up for a long time (we are speaking here of the rate of interest of a certain country, for instance England, where the average rate of interest is a fact for a certain long time, and presents itself also in the interest paid on loans for a long period, called private interest), it is an evident proof of the fact, that the rate of profit is high during this period, but it does not prove necessarily, that the rate of profits of enterprise is high. This last distinction is more or less removed for capitalists, who operate mainly with their own capital; they realise the high rate of profit, since they pay their own interest. The possibility of a high rate of interest of long duration is present when the rate of profit is high; this does not refer, however, to the phase of the actual stringency. But it is possible, that this high rate of profit may leave but a low rate of profit of enterprise, after the high rate of interest has been deducted. The rate of profit of enterprise may shrink, while the high rate of profit continues. This is possible, because the enterprises must be continued after they have once been started. During this phase operations are carried on to a large extent with a pure credit capital (capital of other people); and the high rate of profit may be speculative, prospective, in some places. A high rate of interest may be paid with a high rate of profit, while profit of enterprise is declining. It may be paid (and this is done in part during times of speculation), not out of the profit, but out of the borrowed capital of another, and this may continue for a long time.

Secondly: The expression, that the demand for money-capital, and with it the rate of interest, grows, while the rate of profit is high, is not the same as that which is to the effect that the demand for industrial capital grows and with it the rate of interest is high.

In times of crisis the demand for loan capital, and with it the rate of interest, reach their maximum; the rate of profit, and with it the demand for industrial capital, are almost gone. In such times every one borrows only for the purpose of paying, in order to settle previously contracted obligations. On the other hand, in times of renewed activity after a crisis, loan capital is demanded for the purpose of buying, and for the purpose of transforming money-capital into productive and commodity-capital. And then it is in demand either by the industrial capitalist or the merchant. The industrial capitalist invests it in means of production and in labor-power.

The rising demand for labor-power can never be by itself a cause for a rising rate of interest, so far as this is determined by the rate of profit. A higher wage is never a cause of higher profits, although it may be one of the consequences of higher profits, in some particular phases of the industrial cycle.

The demand for labor-power may increase, because the exploitation of labor takes place under especially favorable circumstances, but the rising demand for labor-power, and thus for variable capital, does not in itself increase the profit; it rather lowers it to that extent. But the demand for variable capital may nevertheless increase with the demand for labor-power, and to that extent the demand for money-capital, and this may raise the rate of interest. The market price of labor-power then rises above its average, more than the average number of laborers are employed, and the rate of interest rises at the same time, because the demand for money-capital rises under such circumstances. The rising demand for labor-power makes this commodity dearer like any other, increases its price, but not the profit, which rests mainly upon the relative cheapness of just this commodity. But it raises under the given assumptions also the rate of interest, because it increases the demand for money-capital. If the money-capitalist, instead of loaning the money, should transform himself into an industrial capitalist, then the fact that he has to pay more for labor-power would not increase his profit, but would rather decrease it in proportion. The constellation of conditions may be such, that his profit may rise nevertheless, but it will be in spite of the fact that he pays more for labor-power, and not because of it. This last circumstance, so far as it increases the demand for money-capital, is on the other hand sufficient to raise the rate of interest. If wages should rise for some reasons while the constellation is unfavorable, then the rise in wages would lower the rate of profit, but raise the rate of interest in proportion as it would increase the demand for money-capital.

Leaving the question of labor aside, the thing called "demand for capital" by Overstone consists only in a demand for commodities. The demand for commodities raises their price, either because it may rise above the average, or because the supply of commodities may fall below the average. If the industrial capitalist or the merchant must now pay 150 pounds sterling for the same mass of commodities for which he used to pay 100 pounds sterling, he would have to borrow 150 pounds sterling whereas he had to borrow but 100 pounds sterling formerly, and if the rate of interest were 5%, he would now have to pay 7½ pounds sterling of interest as against 5 pounds sterling of former times. The mass of the interest to be paid by him would rise because he now has to borrow more capital.

The whole attempt of Mr. Overstone consists in pretending that the interests of loan capital and of industrial capital are identical whereas his Bank Acts are precisely calculated to exploit the difference of these interests for the benefit of money-capital.

It is possible, that the demand for commodities, in case their supply has fallen below average, does not absorb any more money-capital than formerly. The same sum, or perhaps a smaller one, has to be paid for their total value, but a smaller quantity of use-values is received for the same sum. In this case the demand for loanable money-capital will remain the same, and the rate of interest will not rise, although the demand for commodities would have risen as compared to their supply, and consequently the price of commodities would have become higher. The rate of interest cannot be touched, unless the total demand for loan capital increases, and this is not the case under the above assumption.

The supply of an article may also fall below average, as it does in case of crop failures of corn, cotton, etc., and the demand for loan capital may increase, because the speculation in these commodities calculates on a rise in their prices and the first means of making them rise is to curtail for a while a portion of their supply on the market. But in order to pay for the bought commodities without selling them, money is secured by means of the commercial bill system. In this case the demand for loan capital increases, and the rate of interest may rise in consequence of this attempt to prevent by artificial means the supply of this commodity to the market. The higher rate of interest expresses in that case an artificial reduction of the supply of commodity-capital.

On the other hand the demand for an article may rise, because its supply has increased and the article stands below its average price.

In this case the demand for loan-capital may remain the same or may even fall, because more commodities can be had for the same sum of money. A speculative formation of a supply might also occur, either for the purpose of taking advantage of a favorable moment for the ends of production, or in expectation of a future rise in prices. In this case the demand for loan capital might grow, and the rise in the rate of interest would then be an expression of an investment of capital in the formation of an extra supply of elements of productive capital. We consider here merely that demand for loan capital, which is influenced by the demand and supply of commodity-capital. We have explained on a previous occasion, that the changing condition of the process of reproduction in the phases of the industrial cycle has its effect upon the supply of loan capital. The trivial statement to the effect that the market rate of interest is determined by the supply and demand of (loan) capital, is shrewdly mixed up by Overstone with his own assumption, according to which loan capital is identical with capital in general, and in this way he tries to transform the usurer into the only capitalist and his capital into the only capital.

In times of stringency the demand after loan capital is a demand for means of payment and nothing else; it is by no means a demand for money as a means of payment. The rate of interest may rise very high at the same time, regardless of whether real capital, that is, productive and commodity-capital, exists in abundance or is scarce. The demand for means of payment is a mere demand for convertibility into money, to the extent that the merchants and producers can offer good security; it is a demand for money-capital in so far as it is not this other, in other words, so far as an advance of means of payment gives them not merely the form of money, but also the equivalent which they lack for making payment in whatever form. This is the point, where both sides of the current theory are right and wrong in their opinion about crisis. Those who say that there is merely a lack of means of payment, have either the owners of bona fide securities alone in view, or they are fools who believe that it is the duty and power of banks to transform all bankrupt swindlers into solvent and solid capitalists by means of pieces of paper. Those who say that there is merely a lack of capital, are either harping on words, since in such times there is a mass of inconvertible capital in consequence of over-imports and overproduction, or they are referring only to such knights of credit as are now placed in conditions, where they cannot any longer get other people's capital for their operations, and who now demand that the bank should not only help them to pay for the lost capital, but also enable them to continue their swindling.

It is a basic principle of capitalist production, that the money, as an independent form of value, must stand opposed to commodities, or that exchange-value must assume an independent form in money, and this is possible only by making of one definite commodity the material, whose value measures all other commodities, so that it thus becomes the general commodity, the commodity par excellence as distinguished from all other commodities. This must become evident in two respects, particularly among capitalistically developed nations, who substitute other things for large masses of money, partly through credit operations, partly through credit money. In times of stringency, when credit shrinks or ceases entirely, money suddenly becomes the only means of payment and the only true existence of absolute value as opposed to all other commodities. Hence a universal depreciation of commodities, difficulty or even impossibility of transforming them into money, that is, into their own purely phantastic form. In the second place, credit money itself is but money in so far as it absolutely takes the place of actual money to the amount of its nominal value. With the export of gold its own convertibility becomes problematical, that is, its identity with actual money. Hence forcible measures, raising of the rate of interest, etc., for the purpose of safeguarding the conditions of this convertibility. This may be carried more or less to excess by mistaken legislation, resting upon false theories of money and enforced upon the nation by the interests of the money dealers, of Overstone and his like. The basis, however, is given with the basis of the mode of production itself. A depreciation of credit money (not to mention its imaginary depreciation) would unsettle all existing relations. The value of commodities is therefore sacrificed, for the purpose of safeguarding the phantastic and independent existence of this value in money. As money-value it is secured only so long as money itself is secure. For the sake of a few millions of money many millions of commodities must therefore be sacrificed. This is inevitable under capitalist production and constitutes one of its beauties. In former modes of production this does not occur, because on the narrow basis, upon which they move, neither credit nor credit money can develop to any extent. So long as the social character of labor appears as the money-existence of commodities, and thus as a thing outside of actual production, money crises are inevitable, either independently of crises or intensifying them. On the other hand it is obvious that, so long as the credit of a bank is not shaken, it will alleviate the panic in such cases by increasing the credit money, and intensify it by contracting this money. All history of modern industry shows that metal would indeed be required only for the balancing of international commerce, whenever its equilibrium is disturbed momentarily, if only national production were properly organised. That the inland market does not need any metal even now is shown by the suspension of cash payments of the so-called national banks, that resort to this expedient whenever extreme cases require it as the sole relief.

In the case of two individuals it would be ridiculous to say that both of them have a balance of payment against one another in their mutual transactions. If they are mutually creditors and debtors of one another, it is evident that to the extent that their claims do not balance, one must be the creditor and the other the debtor for the remainder. But in the case of nations this is by no means so. And that it is not so is acknowledged by all economists through the statement, that the balance of payment may be for or against a nation, even if its balance of trade must ultimately be settled. The balance of payment differs from the balance of trade in so far as payment is a balance of trade which must be settled at a definite period. What crises accomplish is the crowding of the difference between the balance of payment and the balance of trade into a short time; and the definite conditions, which develop in the nation suffering from a crisis and facing the term when payment becomes due, carry with them such a contraction of the time of settlement. These conditions are, first the shipping away of precious metals; then the throwing away of consigned commodities; the exportation of commodities for the purpose of getting rid of them or of securing loans on them in the home market; the rising of the rate of interest, the calling in of credits, the falling of securities, the selling out of foreign securities, the attraction of foreign capital for investment in these depreciated securities, and finally bankruptcy, which settles a mass of obligations. While this is going on, metal is often sent for some time into the country, where a crisis has broken out, because bills of exchange on it are unsafe and payment is best made in metal. This is further explained by the fact that in the case of a country like Asia all capitalist nations are generally direct or indirect debtors of it at the same time. As soon as these different circumstances exert their full effect upon the other involved nation, it likewise begins its export of gold and silver on account of the expiration of the date of payment, and the same phenomena are repeated.

In commercial credit the interest, being the credit price as distinguished from the cash price, enters only in so far into the price of commodities as the bills of exchange have a longer running time than the ordinary. Otherwise it does not. And this is explained by the fact that every one takes credit with one hand and gives it with the other. [This does not agree with my experience. F. E.] But so far as discount in this form enters into consideration here, it is not regulated by this commercial credit, but by the money-market.

If the demand and supply of money-capital, which determine the rate of interest, were identical with the demand and supply of actual capital, as Overstone maintains, then the interest would be simultaneously high or low according to different commodities, or different phases of the same commodity (raw material, partly finished product, finished product). In 1844 the rate of interest of the Bank of England fluctuated between 4% from January to September to 2½ and 3% from November to the end of the year. In 1845 it was 2½, 2¾, 3% from January to October, and between 3 and 5% during the remaining months. The average price of fair Orleans cotton was 6¼ d. in 1844 and 4 7/8 d. in 1845. On March 3, 1844, the cotton supply in Liverpool was 627,042 bales, and on March 3, 1845, it was 773,800 bales. To judge by the low price of cotton, the rate of interest should have been low in 1845, and it was indeed for the greater part of this time. But to judge by the yarn the rate of interest should have been high, for the prices were relatively and the profit absolutely high. From cotton at 4 d. per pound a yarn could be spun in 1845 with a spinning cost of 4 d. (No. 40 good second mule twist), or a total cost of 8 d. to the spinner, which he could sell in September and October 1845 at 10½ or 11½ d. per pound. (See the testimony of Wylie farther on.)

This whole question may be decided by the following considerations:

A supply and demand of loan capital would be identical with a demand and supply of capital in general (although this last phrase is absurd; for the industrial or commercial capitalist a commodity is a form of his capital, yet he never asks for capital as such, but only for this particular commodity as such, buys and sells it as a commodity, corn or cotton, regardless of the role which it has to play in the rotation of his capital), if there were no money lenders, and if in their stead the lending capitalists were in possession of machinery, raw materials, etc., which they would rent or loan just as houses are now, to the industrial capitalists, who are themselves part owners of these things. Under such circumstances the supply of loan capital would be identical with the supply of elements of production for the industrial capitalist, and of commodities for the merchant. But it is evident, that then the division of profit between the lender and borrower would depend primarily upon the proportion, in which this capital is loaned and in which it is the property of the one who employs it.

According to Mr. Weguelin (B. A. 1857) the rate of interest is determined by "the mass of unemployed capital" (252); it is "but an index of the mass of unemployed capital seeking investment" (271); later this unemployed capital becomes a "floating capital" (485) and by this he means " notes of the Bank of England and other means of circulation in the country, for instance the notes of provincial banks and the coins existing in the country....I include in the floating capital also the reserves of the banks" (502,503), and later he includes also gold bullion (503). Thus the same Mr. Weguelin says that the Bank of England has a great influence upon the rate of interest in times, when "we" (the Bank of England) actually have the greater portion of the unemployed capital in our hands (1198), while according to the above testimony of Mr. Overstone the Bank of England "is no place for capital." Mr. Weguelin further says: "In my opinion the rate of discount is regulated by the quantity of the unemployed capital in the country. The quantity of unemployed capital is represented by the reserve. of the Bank of England, which is in fact a metal reserve. Hence when the metal hoard is reduced, it reduces the quantity of unemployed capital in the country and consequently raises the value of the remaining quantity." (1258.) J. Stuart Mill says, 1102: "The Bank is compelled, in order to keep its banking department solvent, to do its utmost to fill the reserve of this department, hence as soon as it finds that a drain begins, it must secure its reserve and either reduce its discounts or sell securities."—The reserve, so far as only the banking department is concerned, is a reserve for the deposits only. According to the Overstones the banking department is supposed to act only as a banker, without regard to any "automatic" issue of notes. But in times of actual stringency this institution, independently of the reserve of the banking department, which consists only of notes, keeps a sharp eye on the metal reserve, and must do so, if it would not fail. For in proportion as the metal reserve dwindles, disappears also the reserve of bank notes, and no one should know this better than Mr. Overstone, who has so wisely arranged this by his Bank Acts of 1844.

CHAPTER XXXIII.: THE CURRENCY UNDER THE CREDIT SYSTEM.

"THE great regulator of the velocity of circulation is credit. This explains, why a sharp stringency in the money-market generally coincides with a full circulation." ( The Currency Question Reviewed, p. 65.) This is to be taken in a double sense. On one hand all methods, which save currency, are based upon credit. On the other hand, take, for instance, a 500 pound note. A gives it today to B in payment for a bill of exchange; B deposits it on the same day in his bank; his banker discounts with it on the same day a bill of exchange for C; C pays it to his bank, the bank gives it to the bill broker as a loan, etc. The velocity with which this note circulates here in purchases and sales is promoted by the velocity with which it always returns to some one in the form of a deposit and passes over to some one else in the form of a loan. The mere economising of the currency appears most highly developed in the Clearing House, the mere exchange of due bills of exchange, and the function of money preferentially as a means of payment for balancing mere remainders. But the existence of these bills rests itself upon credit, which the industrials and merchants mutually give to each other: If this credit declines, so does the number of bills, particularly of long time ones, and consequently also the effectiveness of this method of balancing accounts. And this economy, which consists in the elimination of money from the transactions, and which rests entirely upon the function of money as a means of payment, which in its turn rests again upon credit, can be only of two kinds (aside from the more or less developed technique in the concentration of these payments): Mutual claims of indebtedness, represented by bills of exchange or checks, are balanced either by the same banker, who merely transcribes the claim from the account of one to that of another, or by different bankers squaring accounts against each other. 103

The concentration of 8 to 10 million bills of exchange in the hands of one bill broker, such as the firm of Overend, Gurney 8 Co., was one of the principal means of expanding the scale of these balances locally. By this economy the effectiveness of the currency is increased, so far as a smaller quantity of it is required for the mere balancing of accounts. On the other hand the velocity of the money circulating as currency (by which it is likewise economised) depends entirely upon the flow of purchases and sales, or also on the concatenation of payments, so far as they are made successively in money. But credit promotes and increases the velocity of currency. A single piece of money, for instance, may perform only five rotations, and remains for a certain time in each hand, as a mere medium of circulation, without the intervention of credit, when A, its original owner, buys from B, then B from C, then C from D, then D from E, then E from F, that is, when its transition from one hand to another is due only to actual sales and purchases. But when B deposits the money received from A in his bank and his banker issues it in the discounting of bills to C, and he buys from D, and D deposits it in his bank, and his banker lends it to E, who buys from F, then even its velocity as a mere medium of circulation (means of purchase) is promoted by several credit operations: the depositing of this money by B in his bank, the discounting of his banker for C, the depositing of D in his bank, and the discounting of this banker for E; four credit operations. Without these credit operations the same piece of money would not have performed five purchases successively in a given time. The fact that it changed hands without the promotion of actual sales and purchases, by deposits and discounts, has here accelerated its change of hands in the series of actual transactions.

We have seen previously, that one and the same bank note may be a deposit in different banks. It may also form different deposits in the same bank. The banker discounts with the note, which A has deposited, the bill of B, and B pays it over to C, who deposits the same note in the same bank that issued it.

We have already demonstrated in the discussion of the simple circulation of commodities (Volume I, Chapter III, 2), that the mass of the actually circulating money, assuming the velocity of currency and the economy of payments to be given, is determined by the prices of commodities and the mass of transactions. The same law rules the circulation of notes.

In the following table, the annual averages of the notes of the Bank of England are set down, so far as they were in the hands of the public, namely the amounts of 5 and 10 pound notes, those of 20 to 100 pound notes, and those of the larger notes between 200 and 1000 pounds sterling; together with the percentages of the total circulation supplied by each one of these classes. The amounts stand for thousands, the last three figures being left out.

(B. A. 1858, p. I, II.) The total mass of circulating bank notes has, therefore, positively decreased from 1844 to 1857, although the commercial business had more than doubled, as indicated by exports and imports. The smaller bank notes of 5 and 10 pounds sterling increased, as the table shows, from 9,263,000 in 1844 to 10,659,000 pounds sterling in 1857. And this took place simultaneously with the very heavy increase in the gold circulation of that time. On the other hand, there was a decrease of the notes of higher denominations (200 to 1000 pounds sterling) from 5,856,000 in 1852 to 3,241,000 pounds sterling in 1857, a decrease of more than 2½ millions. This is explained as follows: "On June 8, 1854, the private bankers of London permitted the stock banks to take part in the erection of the Clearing House, and soon after that the final clearing was established in the Bank of England. The daily balances were settled by transcribing them on the accounts, which the different banks keep in the Bank of England. By the introduction of this system the notes of high denomination, which the banks formerly used for balancing their mutual accounts, have become superfluous." (B. A. 1858, p. V.)

To what a small minimum the use of money in wholesale trade has been reduced, may be seen in the table published in Volume I, Chapter III, page 157, footnote 1, which was furnished to the Committee on Bank Acts by Morrison Dillon 8 Co., one of the largest of those London firms, from whom a small dealer can buy his entire stock of commodities of all kinds.

According to the testimony of W. Newmarch before the B. A. 1857, No. 1741, still other circumstances contributed to the economy in currency: The penny postage, the railroads, the telegraphs, in short, the improved means of communication; so that England can now carry on a five to six times larger business with about the same circulation of bank notes. It is also declared to be due to a marked degree to the withdrawal of the notes of a higher denomination than 10 pounds sterling from the circulation. This appears to him as a natural explanation for the fact that in Scotland and Ireland, where also one pound notes circulate, the circulation of notes has risen by about 31% (1747). The total circulation of bank notes in the United Kingdom, including the one pound notes, is said to be 39 millions (1749). The gold circulation 70 millions (1750). In Scotland the circulation of notes was 3,120,000 pounds sterling in 1834; 3,020,000 pounds sterling in 1844; and 4,050,000 pounds sterling in 1854 (1752).

From these facts alone it is evident, that it lies by no means with the banks issuing notes to increase the number of circulating notes, so long as these notes are at all times exchangeable for money. [Inconvertible bank notes are not taken into consideration at all here; inconvertible bank notes can become universal means of circulation only under conditions, in which they are actually backed up by national credit, as is the case of Russia at present. In that case they fall under the laws of the inconvertible national paper money, which have been developed already in Volume I, Chapter III, 2, c, Coin and Symbols of Value. —F. E.]

The quantity of circulating notes is regulated by the requirements of commerce, and every superfluous note wanders back immediately to the issuing party. Since in England only the notes of the Bank of England circulate universally as the legal means of payment, we may neglect at this point the slight and merely local circulation of the provincial banks.

In B. A. 1858 Mr. Neave, Governor of the Bank of England testifies: No. 947. Question: "Whatever measures you may take, the amount of notes, you say, remains the same, that is, about 20 million pounds sterling?"—Answer: "In ordinary times the wants of the public seem to require about 20 million pounds sterling."—At certain periodically recurring times each year this is increased by one or one and half millions. If the public needs more, they can always, as I said, get them from the Bank of England."—948. "You said that during the panic the public did not want to allow you to reduce the amount of the notes; will you state your reasons?"—"In times of panic the public, it seems to me, has full power to secure notes; and of course, so long as the Bank has any obligation, the public can take notes from the Bank on this obligation."—949. "It seems, then, that at all times about 20 million notes of the Bank of England are required?"—"20 million notes in the hands of the public; it changes. It is 18½, 19, 20 millions, etc.; but on an average you may say 19-20 millions."

Testimony of Thomas Tooke before the Committee of Lords on Commercial Distress (C. D. 1848-57) No. 3094: "The Bank has no power to expand the amount of its notes in the hands of the public at its own arbitrary will; it has the power to reduce the amount of notes in the hands of the public, but only by means of a very forcible operation."

J. C. Wright, for 30 years a banker in Nottingham, having explained at length the impossibility, that a provincial bank should be able to set more notes into circulation than the public needs, says of the notes of the Bank of England: (C. D. 1848-57) No. 2844: "I know of no limit" (for the issue of notes) "for the Bank of England, but every surplus of the circulation will pass over into the deposits and thus assume another form."

The same holds good for Scotland, where almost nothing but paper circulates, because there as well as in Ireland one pound notes are also in vogue and "the Scotch hate gold." Kennedy, Director of a Scotch bank, declares that banks cannot even contract their circulation of notes, and is "of opinion that, so long as inland transactions require notes or gold in order to be carried on, the bankers must furnish as much currency as these transactions need—either on demand of their depositors or otherwise....The Scotch banks can contract their business, but they cannot exert any control over their issue of notes." (Ibidem, No. 3446-48.) In like manner Anderson, Director of the Union Bank of Scotland, answers question No. 3678, asked ibidem: "Does the system of mutually exchanging notes" [among the Scotch banks] "prevent an overissue of notes on the part of the individual bank?"—"Yes; but we have a more effective means than the exchange of notes" [which has really nothing to do with this, but does indeed guarantee the ability of the notes of each bank to circulate throughout all of Scotland], "and that is the general custom in Scotland of keeping a bank account; every one who has any money at all has also an account in some bank and turns in daily all the money which he does not need immediately for himself, so that at the end of every business day all the money is in the banks, except what each carries in his pockets."

The same applies to Ireland, as shown by the testimony of the Governor of the Bank of Ireland, MacDonnell, and the Director of the Provincial Bank of England, Murray, before the same Committee.

The circulation of notes is just as independent of the state of the gold reserve in the cellars of the bank, which guarantees the convertibility of these notes, as it is of the will of the Bank of England. "On September 18, 1846, the circulation of the notes of the Bank of England was 20,900,000 pounds sterling and its metal reserve was 16,273,000 pounds sterling; on April 5, 1847, the circulation was 20,815,000 pounds sterling and the metal reserve was 10,246,000 pounds sterling. Hence no contraction of the currency took place in spite of the export of 6 million pounds sterling of precious metal." (J. G. Kinnear, The Crisis and the Currency, London, 1847, p. 5.) Of course, this applies only to the conditions which prevail in England at present, and even there only so far as legislation does not decide differently concerning the relation between the issue of notes and the metal reserve.

Hence only the requirements of business itself exert an influence on the quantity of circulating money—notes and gold. In the first instance the periodical fluctuations, which repeat themselves every year, should be noted here, regardless of the general condition of business, so that for 20 years "in a certain month the circulation is high, in another low, and in a third definite month a middle point occurs." (Newmarch, B. A. 1857, No. 1650.)

For instance, in August of every year a few millions, generally in gold, pass from the Bank of England into inland circulation, in order to pay the expenses of the harvest; since the principal payments to be made here are wages, bank notes are less serviceable in England for this purpose. By the close of the year this money has returned to the Bank. In Scotland there are almost nothing but one pound notes instead of Sovereigns; in this case, then, it is the circulation of notes which is expanded during the aforesaid term, and at another, that is, twice a year, in May and November, by about 3 or 4 millions; within fourteen days the reflux begins, and it is almost completed in one month. (Anderson, l. c., No., 3595-3600.)

The circulation of the notes of the Bank of England also experiences every quarter a momentary fluctuation on account of the quarterly payment of the "dividends," that is, the interest on the national debt by which bank notes are first withdrawn from circulation and then once more distributed between the public. But they return very soon. Weguelin (B. A. 1857, No. 38) states that this fluctuation of the circulation of notes amounts to two and half millions. Mr. Chapman of the notorious firm of Overend, Gurney 8 Co., however, calculates the disturbance created by this fluctuation in the money market at a far higher figure. "If you take 6 or 7 millions for taxes out of the circulation, for the purpose of paying dividends with them, there must be somebody, who places this amount within reach in the meantime." (B. A. 1857, No. 5196.)

Far more considerable and lasting are the fluctuations in the amount of the currency corresponding to the various phases of the industrial cycle. Let us listen to another member of that firm, the worthy Quaker Samuel Gurney (C. D. 1848-57, No. 2645): "At the end of October (1847) there were 20,800,000 pounds sterling in notes in the hands of the public. At that time a great difficulty prevailed in the matter of securing bank notes in the money market. This arose from the general apprehension that it would not be possible to secure them on account of the limitation of the Bank Acts of 1844. At present [March, 1848] the amount of bank notes in the hands of the public is...17,700,000 pounds sterling, but as there is no commercial alarm now, this is much more than is needed. There is no banker or no money dealer in London, who has not more bank notes than he can use."—2650. "The amount of bank notes...out side of the keeping of the Bank of England forms a totally inadequate exponent of the actual state of the circulation, unless one considers at the same time...the condition of the commercial world and of credit."—2651. "The feeling that we have a surplus at the present amount of currency in the hands of the public arises to a large degree from our present condition of great stagnation. With high prices and a brisk business 17,700,000 pounds sterling would give us a feeling of shortness."

In this connection, a special interest attaches to the cross-examination of the associate of Gurney, the aforementioned Chapman, before the B. A. of 1857. I reproduce its principal contents summarily, although it touches also upon certain other points, which we shall have to analyse later.

Mr. Chapman has the following to say:

4963. "I do not hesitate to say, that I do not consider it right, that the money market should be in the power of any one individual capitalist (such as exist in London), who can create an enormous scarcity of money and a stringency, when the circulation just happens to be low....That is possible...there is more than one capitalist, who can take notes to the amount of one or two million pounds sterling out of the currency, when it suits his purpose."—4995. A great speculator can sell one or two million pounds worth of consols and thus take the money out of the market. Something similar to this has happened quite recently, "it creates a very violent crisis."—

4967. The notes are then indeed unproductive. "But that is nothing, when it serves a great purpose; its great purpose is to throw down the prices of funds, to create a money stringency, and to do that is quite within his power."—An illustration: One morning there was a great demand for money in the Money Exchange; nobody knew its cause; somebody asked Chapman to lend him 50,000 pounds sterling at 7%. Chapman was astonished, his rate of interest was much lower; he accepted. Soon after that the man returned, took up another 50,000 pounds sterling at 7½%, then, 100,000 at 8%, and wanted still more at 8½%. Then even Chapman became frightened. Later it was found out that suddenly a considerable sum of money had been withdrawn from the market. But, says Chapman, "nevertheless I had loaned out a considerable amount of money at 8%; I was afraid to go farther; I did not know what was coming."

It must not be forgotten, that, although 19 to 20 millions in notes are continually supposed to be in the hands of the public, nevertheless that portion of notes, which actually circulates, and on the other hand that portion, which is held unemployed by the banks as a reserve, continually differ considerably from one another. If this reserve is large, and therefore the actual circulation small, it means from the point of view of the money-market, that the circulation is full, money is plentiful; if the reserve is small, and the actual circulation full, then the language of the money-market says that the circulation is low, money is scarce, that is to say, the portion representing unemployed loan capital is small. A real expansion or contraction of the circulation in such a way, that it remains independent of the phases of the industrial cycle and leaves unchanged the amount needed by the public, occurs only for technical reasons, for instance, on the dates when taxes are due or the interest on a national debt. When taxes are paid, notes and gold beyond the ordinary amount flow into the Bank of England and practically contract the circulation without regard to its needs. The reverse takes place when the interest on the national debt is paid. In the first case, loans are demanded from the bank in order to secure currency. In the last case, the rate of interest falls in the private banks on account of the momentary growth of their reserves. This has nothing to do with the absolute mass of currency, but only with the banking firm that sets this currency into circulation, and for whom this process represents itself as a loaning of loan capital, the profit of which it pockets.

In the one case there is a temporary displacement of the circulating medium, which the Bank of England balances by short loans at low interest shortly before the quarterly taxes or the quarterly dividends on the nationel debt become due; The issue of these supernumerary notes first fills up the gap caused by the payment of the taxes, while their return to the bank soon after brings back the excess of notes thrown into circulation by the payment of dividends to the public.

In the other case a low or full circulation means simply a different distribution of the same mass of currency into active circulation and deposits, which serve as an instrument of loans.

On the other hand, if the number of notes is increased by a flow of gold into the Bank of England, then these notes assist in the discounting of bills outside of the bank and return to it by the payment of loans, so that the absolute mass of the circulating notes is but momentarily increased.

If the circulation is full on account of the expansion of business (which may take place even though prices be relatively low), then the rate of interest may be relatively high on account of the demand for loan capital in consequence of rising profits and increased new investments. If it is low, on account of the contraction of business, or, perhaps, on account of a great fluidity of credit, then the rate of interest may be low even though prices be high. (See Hubbard.)

The absolute quantity of the circulation has a determining influence on the rate of interest only in times of stringency. The demand for a full circulation may either express merely a demand for means of hoarding (aside from the reduced velocity of the circulation of money and that of the conversion of the same identical pieces of money into loan capital) owing to lack of credit, as was the case in 1847, when the suspension of the Bank Acts did not cause any expansion of the circulation, but sufficed to draw forth the hoarded notes and to throw them into circulation. Or it may be that more means of circulation are actually required under prevailing circumstances, as was the case in 1857, when the circulation actually expanded for some time after the suspension of the Bank Acts.

Otherwise the absolute mass of the circulation has no influence upon the rate of interest, since the circulation, assuming the economy and velocity of the currency to be constant, is determined in the first place by the prices of commodities and the mass of the transactions (one of these elements generally paralysing the action of the other), and in the second place by the state of credit, whereas it does not by any means exert any reverse influence on the state of credit; and, finally, since the prices of commodities and interest have not necessarily any connection with each other.

During the Bank Restriction Act (1797-1820) there was a superfluity of currency, the rate of interest was always much higher than it became since cash payments were resumed. Later it fell rapidly with the restriction of the issue of notes and rising quotations of bills. In 1822, 1823, and 1832 the general circulation was low, and so was the rate of interest. In 1824, 1825, and 1836 the circulation was full and the rate of interest rose. In the summer of 1830 the circulation was full, the rate of interest low. Since the discoveries of gold the gold circulation of all Europe has expanded, the rate of interest risen. The rate of interest, then, does not depend upon the quantity of the circulating money.

The difference between the issue of currency and loans of capital is best shown in the real process of reproduction. We have seen, there (Volume II, Part III), in what manner the different component parts of the production are exchanged for one another. For instance, the variable capital consists substantially of the means of subsistence of the laborers, a portion of their own product. But this is paid over to them piecemeal in money. The capitalist has to advance this, and it depends very much on the organization of the credit system, whether he can pay out the new variable capital next week with the old money, which he paid out last week. The same holds good with regard to the acts of exchange between the different component parts of the total social capital, for instance, between the articles of consumption and the means of production of articles of consumption. The money for their circulation must, as we have seen, be advanced by one or both of the exchanging parties. It remains thereupon in the circulation, but returns after the consummation of the exchange always to him who advanced it, since it had been advanced by him in excess of his actually employed industrial capital (Volume II, Chapter XX.). Under a developed credit system, when the money is concentrated in the hands of the banks, it is they, at least nominally, who advance it. This advance refers only to the money existing in circulation. It is an advance of currency, not of the capitals, which the credit system circulates.

Chapman 5062. "There may be times, when the bank notes in the hands of the public constitute a very large amount, and yet none may be had." Money exists also during a panic. But every one takes good care not to convert it into loanable capital; every one holds on to it for the purpose of meeting real payments.

5099. "The banks in the rural districts send their unemployed surplus to you and other London firms?"—"Yes."—5100. "On the other hand, the factory districts of Lancashire and Yorkshire have bills of exchange discounted by you for business purposes?"—"Yes."—5101. "So that in this way the superfluous money of a certain district is utilised for the requirements of another district?"—"Quite right."

Chapman says that the custom of the banks to invest their surplus money-capital for a short time in consols and treasury notes has decreased considerably of late, since the custom has been introduced to loan this money at call, reclaimable from day to day. For his own person he considers the purchase of such papers as very impracticable for his business. He prefers to invest his surplus money-capital in good bills of exchange, a part of which becomes due every day, so that he can always be sure of knowing how much ready money he can count on from day to day. [5001 to 5005.]

Even the growth of exports assumes more and more for every country, but particularly for the country granting the credit, the aspect of an increasing demand on the inland money-market, which is not felt, however, until the time of stringency. In times of increasing exports the manufacturers usually draw bills of exchange of long duration on the export merchant who receives consignments of British goods. (5126.)—5127. "It is not frequently the case, that an agreement exists, to renew these bills from time to time?"—[Chapman:] "This is a matter which they keep secret; we should not admit any such bills....It may surely take place, but I cannot say anything about this." [The innocent Chapman.] 5123. "When a great increase takes place in the exports, such as that of last year which alone amounted to 20 million pounds sterling, does not that in itself lead to a large demand for capital in order to discount bills representing these exports?"—"Undoubtedly."—5130. "Since England as a rule gives credit to foreign countries for all its exports, would not that imply the absorption of a corresponding additional capital for the time it lasts?"—"England gives an enormous credit; but in return it takes credit for its raw materials. Drafts as are made out against us by America always for sixty days, and by other countries for ninety days. On the other hand we give credit; when sending goods to Germany, we give two or three months."

Wilson asks Chapman (5131), whether bills on England are not drawn simultaneously with the loading of these raw materials and colonial goods destined for importation, and whether these bills do not arrive together with the bills of lading. Chapman thinks so, but does not know anything about these "commercial" transactions, and suggests that more expert men be asked.—In the export to America, says Chapman, the "commodities are symbolised in transit"; this gibberish signifies that the English export merchant draws against his goods on one of the great American banking firms in London by means of a bill of exchange running for four months, and this firm receives collateral from America.

5136. "Are not negotiations with far distant countries carried on by the merchant, who waits for his capital until the goods are sold?"—"There may be some firms of great private wealth, who are able to invest their own capital without taking advances on goods; but these goods are mainly transformed into advances by the endorsement of well known firms.—5137. "These firms are established in...London, Liverpool, and elsewhere."—5138. "It makes no difference, then, whether the manufacturer has to give up his own money, or whether he gets some merchant in London or Liverpool to advance it; it always remains an advance made in England?"—"Quite right. The manufacturer has to do with this only in a few cases" [but in 1847 in almost every case]. "For instance, a dealer in manufactured goods, in Manchester, buys commodities and ships them through a responsible firm in London; as soon as the London firm has convinced itself, that everything has been packed as per agreement, he draws a bill running for six months on this London firm against these commodities bound for India, China, or some other country; then the banking world comes in and discounts this bill for him; so that about the time, when he has to pay for these commodities...."—5139. "But even if this dealer now has the money, the banker had to advance it to him first?"—" The banker has the bill of exchange; the banker has bought the bill; he utilises his banking capital in this form, that is in the discounting of commercial bills." [Hence even Chapman does not regard the discounting of bills as an advance of money, but as a purchase of commodities.—F. E.]—5140. "But still this constitutes always a part of the demands on the money-market in London?"—"Undoubtedly; this is the essential occupation of the money-market and of the Bank of England. The Bank of England is just as glad to get these bills as we, it knows that they are a good investment."—5141. "In this way, in proportion as the export business grows, the demand in the money-market grows likewise?"—"In proportion as the prosperity of the country grows, we" [the Chapmans] "partake in it."—5142. "If, then, the various fields of investment of capital expand suddenly, the natural consequence is a rise of the rate of interest?"—"There is no doubt of it."

In 5143 Chapman cannot "quite understand, that with our large exports we had so much use for gold."

In 5144 the venerable Wilson asks: "Cannot it be that we are giving more credit on our exports than we are taking on our imports?"—"For myself, I should doubt this point. If any one gets accepts on his Manchester goods shipped to India, you cannot accept for less than ten months. We had, and this is quite certain, to pay America for its cotton some time before India paid us; but what effect this has, to analyse that is a very fine point."—5145. "When we, as we did last year, had an increase in the exports of manufactured goods to the amount of 20 million pounds sterling, we must have had before that a very considerable increase in the imports of raw materials" [and even in this way overexports are identical with overimports, and overproduction with over-commerce] "in order to produce this increased quantity of goods?"—"Undoubtedly; we must have had a very considerable balance to pay; that is, the balance must have been against us at the time, but in the long run the quotations of bills of exchange with America are in our favor, and we have received for some time large shipments of precious metals from America."

5148. Wilson asks the arch usurer Chapman, whether he does not regard his high interest as a sign of great prosperity and a high rate of profit. Chapman, evidently surprised at the naïveté of this sycophant, assents to this, of course, but is sincere enough to add the following clause: "There are some, who cannot help themselves in any other way; they have obligations to fulfill, and they must fulfill them, whether it be profitable or not; but if it lasts" [the high rate of interest] "it would indicate prosperity."—Both of them forget that a high rate of interest may also indicate that, as it did in 1857, the roving knights of credit are infesting the country, and that these gentlemen can afford to pay a high interest, because they pay it out of other people's pockets (whereby they take part in the fixing of the rate of interest for all others) and meanwhile live in grand style on anticipated profits. At the same time this may indeed result in a very profitable business for manufacturers and others. The returns become wholly deceptive by the loan system. This explains also the following statements, which require no explanation so far as the Bank of England is concerned, because it discounts at a lower rate than others when the rate of interest is high.

5156. "I may well say," says Chapman, "that the amounts of our discounts are at their maximum at the present, when we had a high rate of interest for such a long time." [Chapman said this on July 21, 1857, a few months before the crash.]—5157. "In 1852" [when the rate of interest was low] "they were not so high by far." For the business was indeed a great deal sounder then.

5159. "If the market were overflowing with money...and the banking discount low, we should have a decrease of bills of exchange....In 1852 we were in an entirely different phase. The exports and imports of the country were then nothing as compared to the present."—5161. "Under this high rate of discount our discounting business is as high as in 1854." [When the rate of interest was from 5 to 5½%.]

Very amusing is that part of the testimony of Chapman, in which he shows that his class regard the money of the public indeed as their property and pretend to have a right to having the bills discounted by them always converted. The ingenuousness of the questions and answers is great. It becomes the duty of legislation to make the bills accepted by large firms always convertible; to take pains that the Bank of England should under all circumstances continue to give discount to the bill brokers. And yet three of these bill brokers failed in 1857 for about 8 millions, while their own capital was infinitesimal compared to their debts.—5177. "Do you mean to say by this that in your opinion they" [that is bills accepted by the Barings or Loyds] "should be convertible by compulsion, in the way that a note of the Bank of England is now convertible into gold by compulsion?"—"I am of the opinion, that it would be a very lamentable thing, if it were not discountable; a very extraordinary situation, that a man would have to suspend payment, because he holds accepts by Smith, Payne 8 Co., to Jones, Loyd 8 Co., and cannot discount them."—5178. "Is not an accept of the Barings an obligation, to pay a certain amount of money when the bill becomes due?"—"That is quite right; but Messrs. Baring, if they undertake such an obligation, like every merchant who accepts such an obligation, do not dream in the least that they shall have to pay in Sovereigns; they figure on paying in the Clearing House."—5180. "Do you mean, then, that a sort of machinery should be thought out, by means of which the public would be empowered to receive money before the bill becomes due, by having somebody else discount it?"—"No, not by the accepting party; but if you mean to say that we shall not have the possibility to have commercial bills discounted, then we must change the whole constitution of things."—5182. "You believe, then, that it" [a commercial bill] "should be convertible into money, exactly like a note of the Bank of England must be convertible into gold?"—"Very decidedly, under certain circumstances."—5184. "You believe, then, that the institutions of currency should be arranged in such a way that a commercial bill of undoubted solidity should at all times be convertible in money like a bank note?"—"That I believe."—5185. "You do not go so far as to say either the Bank of England or anybody else should be compelled by law to convert it?"—"I go indeed so far as to say that if we make a law for the regulation of the currency, we should take steps to prevent the possibility of inland commercial bills becoming inconvertible, to the extent that such bills are undoubtedly solid and legitimate."—This is the convertibility of the commercial bill against the convertibility of bank notes.

5189. "The money dealers of the country represent in fact only the public."—So did Mr. Chapman later before the jury in the Davison case. See the Great City Frauds.

5196. "During the quarterly terms" [when the dividends are paid] "it is...absolutely necessary, that we should turn to the Bank of England. If you take 6 or 7 millions out of the revenue of the state in anticipation of the dividends, somebody must be there, who will in the meantime advance this amount."—[In this case it is a question of a supply of money, not of capital or loan capital.]

5169. "Every one familiar with our commercial world must know that if we are in such circumstances that treasury notes become unsalable, that obligations of the East Indian Company are completely useless, that the best commercial bills cannot be discounted, a great apprehension must reign among those whose business places them in a position where they must make payment immediately on simple demand in customary currency, and this is the case with all bankers. The effect of this is then that everybody doubles his reserves. Now just look what the effect of this is in the whole country, when every country banker, of whom there are about 500, has to instruct his London correspondent to remit to him 5,000 pounds sterling in bank notes. Even if we take such a small amount as this for an average, which is quite absurd, we arrive at 2½ million pounds sterling, which are withdrawn from circulation. How are they to be replaced?"

On the other hand the private capitalists, etc., who have money do not care to let go of it at any interest, for they say, according to Chapman, 5194: "We prefer to have no interest at all rather than to be in doubt, whether we can get the money when we need it."

5173. "Our system is this: We have 300 million pounds sterling worth of obligations, the payment of which in coin of the realm may be demanded at any moment; and this coin of the realm, if we use all of it for this purpose, amounts to 23 million pounds sterling, or thereabout; is not that a condition, which may throw us into convulsions at any moment?" Hence we have in times of crisis the sudden change of the credit system into a monetary system.

Aside from the panic in the home market during crises, there can be any mention of the quantity of money only in so far as it concerns metal, which is the world money. And this is precisely what Chapman excludes; he speaks only of 23 millions in bank notes.

The same Chapman, 5218. "The original cause of the disturbance of the money-market" [in April and later in October] "was undoubtedly in the quantity of money required for the regulation of the quotations of bills of exchange, in consequence of the extraordinary imports of the year."

In the first place, this reserve of world market money had then been reduced to its minimum. In the second place it served at the same time as a security for the convertibility of the credit money, the bank notes. It combined in this way two quite different functions, which, however, proceed both of them from the nature of money, since real money is always world money, and the credit money always rests upon the world money.

In 1847, without the suspension of the Bank Acts of 1844, "the Clearing Houses could not have carried on their business." (5221.)

That Chapman nevertheless had a suspicion of the coming crisis, is shown by the following statement: 5236. "There are certain conditions of the money-market (and the present one is not far removed from that), in which money is very difficult, and one has to have recourse to a bank."

5239. "As for the amounts taken by us out of the bank on Friday, Saturday and Monday, October 19, 1847, we should have been only too grateful on the following Wednesday, if we could have gotten back the bills of exchange; the money returned to us immediately after the panic was over."—On Tuesday, October 23, the Bank Acts were suspended, and this broke the crisis.

Chapman believes (5274) that the bills running simultaneously on London amounted to 100 or 120 million pounds sterling. This did not include the local bills on provincial places.

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 concerning 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 else but to come together and make our payments in first drafts, checks on the Treasury Department, Smith, Payne 8 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 capital, 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 prevent 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 employment?—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 intention 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 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 ruin 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 manufacturer, who exports to the continent, or who imports his raw material, he knows nothing of the other, who deals in gold bullion." (5046.)—And thus it happened, that one fine day Gurney and Chapman themselves "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 accomplished 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 securities [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 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 circulation 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 becomes scarce, then the money lenders say: "You draw on us and we will endorse," and when a provincial banker discounts 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. Gilbart, An Inquiry into the Causes of the Pressure, etc., p. 31.)

This is corroborated in a somewhat modified form by Newmarch, B. A. 1857, No. 1426: "There is no connection between 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 transactions 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 payable at some future date, but raise doubts against a circulation 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 millions 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 1847, 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 available loan capital) out of the market. To transform a stringency 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 position 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.

The Bank of England has a capital of 14,553,000 pounds sterling, and commands besides about 3 million pounds sterling of a "Remainder," that is, undistributed profits, and furthermore 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-market may be estimated at about 120 million pounds sterling; and of these 120 millions the 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 additional, even if fictitious, capital for it to the nominal amount of these unprotected 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 the 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?"—"Assuredly."

The same is true, of course, of the private banks issuing notes. In his answers Nos. 1866 to 1868 Newmarch considers 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 economist in the least, since profit is under all circumstances the appropriation of national labor. Is there anything more insane than, for instance, the Bank of England in 1797 to 1817, whose notes have credit only by the backing of the state, taking payment from the state, and from the public, in the form of interest on 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. According to the same Newmarch the provincial banks, as mentioned 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 return. With these bills the bank serves its customers, since it follows the rule not to issue the bills of exchange received from its local customers any more, in order that the business transactions of these customers may not become known in their own neighborhood. These bills received from London do not only serve for the purpose of being issued to customers, who have to make payments direct to London, unless these customers 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 of the bankers secures local credit for them. In Lancashire, for instance, all the local banks' own notes and a large portion of the notes of the Bank of England, have been crowded out of the circulation by such bills. ( Ibidem, 1568 to 1574.)

We see here, then, how the banks create credit and capital, 1) by the issue of 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 regulation of the market rate of interest. In times of normal business it may happen, that the Bank cannot prevent a moderate drain of gold from its metal reserve by raising the rate of discount, 104 because the demand for means of payment is satisfied 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 Glyn, Mills, Currie 8 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 brokers 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 institution 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 Bank of England gives the cheapest service, and when lowest, then the brokers are the cheapest?"—"That will always be the case, for the Bank of England 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 interest, which is already above the average, still higher. "As soon as the Bank of England tightens the screw, all purchases for export into foreign countries cease...the exporters wait, till the depression of prices has reached its lowest 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 exchange 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 continues its business with a smaller amount of precious metal." (L. c., p. 52.)

But, says friend Samuel Gurney, "These great fluctuations of the rate of interest are advantageous for the bankers and money dealers—all fluctuations in business are advantageous for him who is posted." And even though the Gurneys skim the cream off the ruthless exploitation of the precarious 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 profits, which of their own account fall into the lap of the directors, 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:

on a capital of 11,642,100 pounds sterling in 19 years. (D. Hardcastle, Banks and Bankers, 2nd edition, London, 1843, p. 120.) If we estimate the total profits of the Bank of Ireland, which also suspended specie payments in 1797, by the same principle, we obtain the following result:

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 manner—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 exploit national and international production only in the interest of production and of the exploited themselves, he will surely be taught better by the following homily on the high moral dignity of the bankers: "The bank establishments are religious 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 society of noisy and extravagant friends? How anxious he is to stand well in the estimation of the banker, to appear always respectable! The knit brow of the banker has more influence 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 consequence of which his banking accommodation might be restricted or cancelled? The advice of the banker is more important 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.)

CHAPTER XXXIV.: THE CURRENCY PRINCIPLE AND THE ENGLISH BANK LAWS OF 1844.

J. G. Hubbard, former Governor of the Bank of England, testifies:—2400. "The effect of the gold exports...absolutely does not touch prices of commodities. It does, however, affect very much the prices of securities, because in proportion as the rate of interest changes, the values of the commodities impersonating this interest must necessarily be strongly affected."—He presents two tables covering the years 1834 to 1843 and 1844 to 1853, which prove that the movement of prices of fifteen of the most important commercial articles was quite independent of the export and import of gold and of the rate of interest. On the other hand they prove a close connection between the export and import of gold, which is indeed the "representative of our capital seeking investment," and the rate of interest.—"In 1847 a very large amount of American securities was transferred back to America, also Russian securities to Russia, and other continental papers to the countries from which we derived our imports of corn."

The fifteen principal articles mentioned in the following tables of Hubbard are: Cotton, cotton yarn, cotton fabrics, wool, wool cloth, flax, linen, indigo, raw iron, white sheet metal, copper, tallow, sugar, coffee, silk.

Hubbard remarked with reference to this: "Just as in the 10 years from 1834 to 1843, so in the years from 1844 to 1853 fluctuations in the gold of the bank were accompanied in every case by an increase or decrease of the loanable value of the money advanced at a discount; and on the other hand the changes in the prices of inland commodities showed a complete independence from the amount of the currency, as shown by the gold fluctuations of the Bank of England." ( Bank Acts Report, 1857, II, pages 290 and 291.)

Since the demand and supply of commodities regulates their market-prices, it becomes evident here, that Overstone is wrong when he identifies the demand for loanable capital (or rather the discrepancies of its supply from demand), as expressed by the rate of discount, with the demand for actual "capital." The contention that the prices of commodities are regulated by the fluctuations in the quantity of the currency is now concealed under the phrase that the fluctuations in the rate of discount express fluctuations in the demand for actual material capital, as distinguished from money-capital. We have seen that both Norman and Overstone actually made this contention before the same Committee, and that especially the latter was compelled to take refuge in very lame subterfuges, until he was finally cornered. (Chapter XXVI.) It is indeed the old fib that changes in the quantity of gold existing in a certain country, by increasing or reducing the quantity of the medium of circulation in that country, must raise or lower the prices of commodities in this country. If gold is exported, then, according to this currency theory, the prices of commodities must rise in the country importing this gold, and this must enhance the value of the exports of the gold exporting country on the market of the gold importing country; on the other hand, the value of the exports of the gold importing country would fall on the markets of the gold exporting country, while it would rise in the home country, which receives the gold. But in fact the reduction of the quantity of gold raises only the rate of interest, whereas an increase in the quantity of gold lowers the rate of interest; and were it not for the fact that the fluctuations of the rate of interest are taken into account in the determination of cost-prices, or in the determination of demand and supply, the prices of commodities would be wholly unaffected by them.

In the same report N. Alexander, Chief of a great Indian firm, expresses himself in the following manner on the heavy drains of silver to India and China about the middle of the fifties, partly in consequence of the Chinese Civil War, which checked the sale of English fabrics in China, and partly of the epidemic among silk worms in Europe, which reduced the output of silk in Italy and France considerably:

4337. "Is the drain toward China or India."—"They send the silver to India, and with a goodly portion of it they buy opium, all of which goes to China in order to form a fund for the purchase of silk; and the condition of the markets in India (in spite of the accumulation of silver there) makes it more profitable for the merchant to send out silver than to send fabrics or other English factory goods."—4338. "Did not a heavy drain come out of France, by which we secured the silver?"—"Yes, a very heavy one."—4344. "Instead of importing silk from France and Italy, we ship it there in large quantities, both Bengal and Chinese."

In other words, silver, the money metal of that continent, was sent to Asia instead of commodities, not because the prices of commodities had risen in the country which had produced them (England), but because prices had fallen on account of overimport in that country which received them; and this in spite of the fact that the silver was received by England from France and had to be paid partly in gold. According to the Currency Theory prices should have fallen by such imports in England and risen in India and China.

Another illustration. Before the Lords' Committee (C. D. 1848-1857), Wylie, one of the first Liverpool merchants, testifies as follows:—1994. "At the end of 1845 there was no better paying business and none that yielded greater profits [than cotton spinning]. The supply of cotton was large and good, workable cotton could be had at 4 d. per pound, and such cotton could be spun into good second mule twist No. 40 at about 8 d. total expense to the spinner. This yarn was sold in large quantities in September and October, 1845, and equally large contracts made for delivery at 10½ and 11½ d. per pound, and in some instances the spinners realised a profit which equalled the purchase price of the cotton."—1996. "The business remained profitable until the beginning of 1846."—2000. "On March 3, 1844, the cotton supply [672,042 bales] was more than double of what it is today [on March 7, 1848, when it was 301,070 bales], and yet the price was 1¼ d. per pound dearer." [6¼ d. as against 5 d.]—At the same time yarn, good second mule twist No. 40, had fallen from 11½ to 12 d. to 9½ d. in October and 7¾ d. at the end of December, 1847; yarn was sold at the purchase price of the cotton from which it had been spun ( Ibidem, No. 2021 and 2023). This proves the selfinterest of Overstone's wisdom to the effect that money is supposed to be "Dearer" when capital is "scarce." On March 3, 1844, the bank rate of interest stood at 3%; in October and November, 1847, it rose to 8 and 9% and was still 4% on March 7, 1848. The prices of cotton were depressed far below that price which corresponded to the condition of the supply, by the complete stopping of sales and the panic with its correspondingly high rate of interest. The consequence of this was on the one hand an enormous decrease of the imports in 1848, and on the other a decrease of production in America; consequently a new rise in cotton prices in 1849. According to Overstone the commodities were too dear, because there was too much money in the country.

2002. "The recent deterioration in the condition of the cotton industry is not due to the lack of raw materials, since the price is lower, although the supply of raw cotton is considerably reduced." But Overstone tangles himself up in a nice confusion of the price, or value, of commodities, with the value of money, that is, the rate of interest. In his reply to question 2026, Wylie sums up his general judgment of the Currency Theory, on which Cardwell and Sir Charles Wood based in May, 1847, their contention that it would be necessary "to carry the Bank Act of 1844 out in its full scope."—"These principles seem to me to be of a nature to give to money an artificially high value and to all commodities a ruinously low value."—He says furthermore concerning the effects of this Bank Act on business in general: "Since four months' bills of exchange, which are the regular drafts of manufacturing towns on merchants and bankers for purchased commodities intended for export to the United States, could no longer be discounted except at great sacrifices, the carrying out of orders was prevented to a large degree, until after the Government Letter of October 25." [Suspension of Bank Acts], "when these four months' bills became once more discountable." (2097.)—We see, then, that the suspension of this Bank Act was felt as a relief also in the provinces.—2102. "Last October [1847] nearly all American buyers, who purchase commodities here, immediately curtailed their purchases as much as possible; and when the news of the dearth of money reached America, all new orders stopped."—2134. "Corn and sugar were special cases. The corn market was affected by the crop prospects, and sugar was affected by the enormous supplies and imports."—2163. "Of our money obligations to America...many were liquidated by forced sales of consigned goods, and many, I fear, were liquidated by bankruptcies here."—2196. "If I remember correctly, as much as 70% interest was paid on our Stock Exchange in October, 1847. "

[The crisis of 1837, with its protracted aftereffects, which were followed in 1842 by a regular aftercrisis, and the self-interested blindness of the industrials and merchants, who would not notice any overproduction to save their lives— for such a thing was a nonsense and an impossibility according to vulgar economy—had ultimately accomplished that confusion of thought, which permitted the Currency School to put their dogma into practice on a national scale. The Bank legislation of 1844 and 1845 was passed.

The Bank Act of 1844 divides the Bank of England into an issue department for notes and a banking department. The issue department receives securities, principally government debts, to the amount of 14 millions and the entire metal treasure, which shall consist of not more than one-quarter in silver, and issues notes to the full amount of both of them. To the extent that these are not in the hands of the public, they are held in the banking department and form its ever ready reserve together with the small amount of coin required for daily use (about one million). The issue department gives to the public gold for notes and notes for gold; the remainder of the transactions with the public is carried on by the banking department. The private banks authorised in England and Wales to issue their own notes retain this privilege, but their issue of notes is fixed; if one of these banks stops issuing its own notes, then the Bank of England may raise its uncovered amount of notes by two-thirds of the deposited allowance; in this way its allowance rose by 1892 from 14 to 16½ million pounds sterling (exactly 16,450,000 pounds sterling).

For every five pounds in gold, then, which leave the bank treasury, a five pound note returns to the issue department and is destroyed; for every five sovereigns going into the treasury a new five pound note passes into circulation. In this way Overstone's ideal paper circulation, which follows strictly the laws of metallic circulation, is practically carried out, and by this means crises are forever made impossible, according to the claims of the Currency advocates.

But in reality the separation of the Bank into two independent departments robbed the management of the possibility of disposing freely of its entire available means in critical moments, so that cases might occur, in which the banking department might be confronted with a bankruptcy, while the issue department still possessed several millions in gold and its entire 14 millions of securities untouched. And this could take place so much more easily, as there is one period in almost every crisis, when heavy exports of gold flow to foreign countries, which must be covered in the main by the metal reserve of the bank. But for every five pounds in gold, which then go to foreign countries, the circulation of the home country is deprived of one five pound note, so that the quantity of the currency is reduced precisely at a time, when the largest quantity of it is most needed. The Bank Act of 1844 thus directly challenges the commercial world to think betimes of laying up a reserve fund of bank notes on the eve of a crisis, in other words, to hasten and intensify the crisis; by this artificial intensification of the demand for money accommodation, that is for means of payment, and its simultaneous restriction of the supply, which take effect at the decisive moment, this Bank Act drives the rate of interest to a hitherto unknown hight; hence, instead of doing away with crises, the Act rather intensifies them to a point, where either the entire commercial world must go to pieces, or the Bank Act. Twice, on October 25, 1847, and on November 12, 1857, the crisis had risen to this culmination; then the government released the Bank from its limitation in the matter of issuing notes, by suspending the Act of 1844, and this sufficed in both cases to break the crisis. In 1847 the assurance sufficed, that bank notes would again be issued for first class securities, in order to bring to light the 4 to 5 millions of hoarded notes and throw them back into circulation; in 1857 the issue of notes exceeding the legal amount did not quite reach one million, and this was out for a very short time.

It may also be noted that the legislation of 1844 still shows traces of a recollection of the first twenty years of the nineteenth century, the time of the suspension of specie payments of the bank and the depreciation of notes. The fear that the notes might lose their credit is still plainly visible. But this is a very groundless fear, since already in 1825 the issue of some discovered old supply of one pound notes, which had been out of circulation, broke the crisis and proved, that even then the credit of the notes remained unshaken in times of the most universal and strong distrust. And this is easily explained. For the entire nation backs up these symbols of value with its credit.—F. E.]

Let us now listen to a few statements on the effect of the Bank Act. John Stuart Mill believes that the Bank Act of 1844 kept down overspeculation. Happily this wise man spoke on June 12, 1857. Four months later the crisis had broken out. He literally congratulates the "bank directors and the commercial public in general" on the fact that they "understand the nature of a commercial crisis far better than formerly, and the very great injury which they inflict upon themselves and the public by promoting overspeculation." (B. C., 1857, No. 2031.)

Wise Mr. Mill thinks that, if one pound notes are issued "as loans to manufacturers and others, who pay wages...then the notes may get into the hands of others who spend them for purposes of consumption, and in this case the notes constitute in themselves a demand for commodities and may temporarily tend to promote a raise in prices." Mr. Mill assumes, then, that the manufacturers will pay higher wages, because they pay them in paper instead of gold? Or does he believe that when a manufacture receives his loan in 100 pound notes and changes them for gold, then these wages would constitute less of a demand than they would when paid at the same time in one pound notes? And does he not know that, for instance, in certain mining districts wages were paid in notes of local banks, so that several laborers together received a five pound note? Does this increase the demand for them? Or will the bankers advance money to the manufacturers more easily in small than in large notes, and make the loan larger?

[This peculiar fear of one pound notes on the part of Mill would be inexplicable, if his whole work on political economy did not show his eclecticism, which recoils from no contradictions. On the one hand he agrees in many things with Tooke against Overstone, on the other hand he believes in the determination of the prices of commodities by the quantity of the existing money. He is thus by no means convinced, that, all other circumstances remaining unchanged, a sovereign wanders into the vaults of the Bank for every one pound note issued. He fears that the quantity of the currency could be increased and thereby depreciated, that is, the prices of commodities might be enhanced. This and nothing else is concealed behind his above-mentioned apprehension.—F. E.]

Concerning the bipartition of the Bank, and the excessive precaution to safeguard the cashing of notes, Tooke expresses himself before the C. D. 1848-57 as follows:

The greater fluctuations of the rate of interest in 1847, as compared with 1837 and '39, are due merely to the separation of the Bank into two departments (3010).—"The security of the banknotes was not affected, neither in 1825, nor in 1837 nor in 1839 (3015).—The demand for gold in 1825 aimed only to fill out the vacant space created by the complete disavowal of the one pound notes of the provincial banks; this vacant space could be filled out only by gold, until the Bank of England also issued one pound notes (3022).—In November and December, 1825, not the least demand existed for gold to export (3023).

"As for a disavowal of the Bank at home and abroad, a suspension of the payment of dividends and deposits would have much more serious consequences than a suspension of payment on bank notes (3028).

3035. Would you not say that every circumstance, which would in the last instance endanger the convertibility of the bank notes, might create new and serious difficulties in a moment of commercial stringency?—"Not at all."

In the course of 1847 "an increased issue of notes might, perhaps, have contributed to replenish the gold reserve of the Bank, as it did in 1825." (3058).

Before the Committee on B. A. 1857, Newmarch testifies: 1357. "The first bad effect...of this separation of the two departments (of the Bank) and of the necessarily resulting bipartition of the gold reserve was that the banking business of the Bank of England, that is, that entire branch of its operations, which brought it into direct touch with the commerce of the country, was continued with only one-half of its former reserve. In consequence of this division of the reserve it happened that, as soon as the reserve of the banking department shrank in the least, the Bank was compelled to raise its rate of discount. This reduced reserve thus caused a series of abrupt changes in the rate of discount."—"Of such changes there have been since 1844" [until June, 1857] "some 60 in number, whereas they amounted to hardly one dozen before 1844 within a similar period."

Of special interest is the testimony of Palmer, who was a director of the Bank of England since 1811 and for a while its Governor, before the Lords' Committee on C. D. 1848-57:

828. "In December, 1825, the Bank had retained only about 1,100,000 pounds sterling in gold. At that time it would have failed inevitably, if this act had existed then [meaning the Act of 1844]. In December it issued, I believe, 5 or 6 million notes in one week, and this relieved the panic of that time considerably."

825. "The first period [since July 1, 1825], when the present bank legislation would have collapsed, if the Bank had attempted to carry its hitherto initiated transactions through, was on February 28, 1837. There were then from 3,900,000 to 4,000,000 pounds sterling in the possession of the Bank, and it would have retained no more than 650,000 pounds sterling in reserve. Another period is 1839, and it lasted from July 9 to December 5."—826. "What was the amount of the reserve in this case?"—"The reserve was minus altogether 200,000 pounds sterling on September 5. On November 5, it rose to about 1 or 1½ millions."—830. "The Act of 1844 would have prevented the Bank from assisting the American business in 1837."—"Three of the principal American firms failed....Nearly every firm in the American business was ruled out of credit, and if the Bank had not come to the rescue, I do not believe that more than one or two firms could have maintained themselves."—836. "The panic of 1837 is not to be compared with that of 1847. That of 1837 confined itself mainly to the American business."—838. (At the beginning of June the management of the Bank discussed the question, how to remedy the panic.) "Whereupon some of the gentlemen defended the view...that the correct principle would be to raise the rate of interest, so that the prices of commodities would fall; in brief, to make money dear and commodities cheap, by which the foreign payment would be accomplished."—906. "The introduction of an artificial limitation of the powers of the Bank by the Act of 1844, in place of the old and natural limit of its powers, that is, the actual amount of its metal supply, makes business artificially difficult and thus effects prices in a way which was quite unnecessary without this Act."—968. "Under the effect of the Act of 1844 the metal reserve of the Bank, under ordinary circumstances, cannot be reduced materially below 9½ millions. This would create a pressure on prices and credit, which would bring about such a change in the foreign exchange rates, that the gold imports would rise and increase the amount of gold in the issue department."—996.

"Under the present limitation you [the Bank] have not command of silver which is required in times when silver is needed in order to affect foreign rates."—999. "What was the purpose of the rule limiting the silver supply of the Bank to one-fifth of its metal reserve?"—"I cannot answer this question!"

The purpose was to make money dearer; so was, aside from the Currency Theory, the separation of the two bank departments and the compulsion for Scotch and Irish banks to hold gold in reserve for the issue of notes beyond a certain amount. This brought about a decentralisation of the national metal supply, which rendered this supply less able to correct unfavorable bill rates. All these rules aim at a raise of the rate of interest: That the Bank of England shall not issue notes beyond 14 millions except against its gold reserve; that the banking department shall be managed like an ordinary bank, pressing the rate of interest down when money is plentiful and driving it up when money is scarce; the limitation of the silver supply, the principal means of rectifying the rates of bills on the continent and in Asia! the rules concerning the Scotch and Irish banks, who never need any money for export and yet must keep it now under the pretence of an actually imaginary convertibility of their notes. The fact is that the Act of 1844 caused for the first time in 1857 a run on the Scotch banks for gold. Nor did the new bank legislation make any distinction between a drain of gold toward foreign countries and a drain to inland markets, although their effects are evidently different. Hence the continual great fluctuations of the market rate of interest. With reference to silver Palmer says twice, No. 992 and 994, that the Bank can buy silver for notes only when the rates on bills are favorable to England, so that silver is superfluous; for (1003) "the only purpose for which a considerable portion of the metal reserve may be kept in silver is that of facilitating foreign payments during the time when the rates on bills are against England."—1008. "Silver is a commodity which, being money in all the rest of the whole world, is for this reason the most fitting commodity...For this purpose" [payments abroad]. "Only the United States have taken exclusively gold during recent times."

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 countries. 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 was 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 interest was precisely the purpose of the Act.

1029. "I must make a great distinction between the effect of the rate of interest on the foreign 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 of the Bank of England. Let us now hear a private banker, Twells who had been an associate of Spooner, Attwoods 8 Co. since 1801. He is the only one among all the witnesses before the B. C. 1857, who gives us 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: 4488. "How do you think the Act of 1844 has operated?"—"Should I answer you as a banker, I would say that it has operated splendidly, for it has furnished to the bankers and [money-] capitalists 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 arrangements with confidence....It has made the lending of money a very profitable business."—4489. The Bank Act "Enables the London Stock Bank to pay to its stockholders 20 to 22%?"—"One of them paid recently 18%, and I believe another 20%; they have good grounds for standing determinedly 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 always 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 latent 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, 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 becomes 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 way one drags down another.—4496. "As for the heavy exports—when the business is depressed in the home market, it calls for the 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. "Nevertheless the imports are very large; does not that indicate 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 commodities 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 enormous 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 precisely the case which we have seen often enough of late; business firms have failed, without leaving one shilling's worth of assets."