‘In England there takes place a steady accumulation of additional wealth, which has a tendency ultimately to assume the form of money. Now, next in urgency, perhaps, to the desire to acquire money, is the wish to part with it again for some species of investment that shall yield either interest or profit; for money itself, as money, yields neither. Unless, therefore, concurrently with this ceaseless influx of surplus capital, there is a gradual and sufficient extension of the field for its employment, we must be subject to periodical accumulations of money seeking investment, of more or less volume, according to the movement of events. For a long series of years, the grand absorbent of the surplus wealth of England was our public debt… As soon as in 1816 the debt reached its maximum, and operated no longer as an absorbent, a sum of at least seven-and-twenty million per annum was necessarily driven to seek other channels of investment. What was more, various return payments of capital were made… Enterprises which entail a large capital and create an opening from time to time for the excess of unemployed capital… are absolutely necessary, at least in our country, so as to take care of the periodical accumulations of the superfluous wealth of society, which is unable to find room in the usual fields of application’ (The Currency Theory Reviewed, London, 1845, pp. 32–4).
Of 1845, the same author says: ‘Within a very recent period prices have sprung upwards from the lowest point of depression… Consols touch par… The bullion in the vaults of the Bank of England has… exceeded in amount the treasure held by that establishment since its institution. Shares of every description range at prices on the average wholly unprecedented, and interest has declined to rates which are all but nominal. If these be not evidences that another heavy accumulation of unemployed wealth exists at this hour in England, that another period of speculative excitement is at hand’ (ibid., p. 36).
‘Although… the import of bullion is no sure sign of gain upon the foreign trade, yet, in the absence of any explanatory cause, it does prima facie represent a portion of it’ (J. G. Hubbard, The Currency and the Country, London, 1843, pp. 40–41). ‘Suppose… that at a period of steady trade, fair prices… and full, but not redundant circulation, a deficient harvest should give occasion for an import of corn, and an export of gold to the value of five million. The circulation’ (meaning, as we shall presently see, idle money-capital rather than means of circulation – F. E.) ‘would of course be reduced by the same amount. An equal quantity of the circulation might still be held by individuals, but the deposits of merchants at their bankers, the balances of bankers with their money-broker, and the reserve in their till, will all be diminished, and the immediate result of this reduction in the amount of unemployed capital will be a rise in the rate of interest. I will assume from 4 per cent to 6. Trade being in a sound state, confidence will not be shaken, but credit will be more highly valued’ (ibid., p. 42). ‘But imagine… that all prices fall… The superfluous currency returns to the bankers in increased deposits – the abundance of unemployed capital lowers the rate of interest to a minimum, and this state of things lasts until either a return of higher prices or a more active trade call the dormant currency into service, or until it is absorbed by investments in foreign stocks or foreign goods’ (p. 68).
The following extracts are again taken from the parliamentary report on Commercial Distress 1847–8. The harvest failure and famine of 1846–7 made a major import of foodstuffs necessary. ‘These circumstances caused the imports of the country to be very largely in excess over… exports… a considerable drain upon the banks, and an increased application to the discount brokers… for the discount of bills… They began to scrutinize the bills… The facilities of houses then began to be very seriously curtailed, and the weak houses began to fail. Those houses which… relied upon their credit… went down. This increased the alarm that had been previously felt; and the bankers and others finding that they would not rely with the same degree of confidence that they had previously done upon turning their bills and other money securities into bank-notes, for the purpose of meeting their engagements, still further curtailed their facilities, and in many cases refused them altogether; they locked up their bank-notes, in many instances to meet their own engagements; they were afraid of parting with them… The alarm and confusion were increased daily; and unless Lord John Russell… had issued the letter to the Bank… universal bankruptcy would have been the issue’ (pp. 74–5).
Russell’s letter suspended the Bank Act. The above-mentioned Charles Turner testified: ‘Some houses had large means, but not available. The whole of their capital was locked up in estates in the Mauritius, or indigo factories, or sugar factories. Having incurred liabilities to the extent of £500,000 or £600,000 they had no available assets to pay their bills, and eventually it proved that to pay their bills they were entirely dependent upon their credit’ (p. 81).
And Samuel Gurney, as already mentioned: ‘At present (1848) there is a limitation of transaction and a great super-abundance of money.’ – ‘1763. I do not think it was owing to the want of capital; it was owing to the alarm that existed that the rate of interest got so high.’
In 1847 England paid at least £9 million abroad in gold for the import of foodstuffs. £7 1/2 million of this came from the Bank of England and £1 1/2 million from other sources (p. 301). Morris, Governor of the Bank of England: ‘The public stocks in the country and canal and railway shares had already by the 23rd of October 1847 been depreciated in the aggregate to the amount of £114,752,225’ (p. 312). Again Morris, when questioned by Lord G. Bentinck: ‘Are you not aware that all property invested in stocks and produce of every description was depreciated in the same way; that raw cotton, raw silk and unmanufactured wool were sent to the continent at the same depreciated price… and that sugar, coffee and tea were sacrificed as at forced sales? – It was… inevitable that the country should make a considerable sacrifice for the purpose of meeting the efflux of bullion which had taken place in consequence of the large importation of food.’ – ‘Do not you think it would have been better to trench upon the £8,000,000 lying in the coffers of the Bank than to have endeavoured to get the gold back again at such a sacrifice? – No, I do not.’
Now for the commentary on this heroism. Disraeli examines Mr W. Cotton, a director of the Bank of England and former Governor: ‘What was the rate of dividend paid to the Bank proprietors in 1844? – It was 7 per cent for the year.’ – ‘What is the dividend… for 1847? – 9 per cent.’ – ‘Does the Bank pay the income tax for its proprietors in this year? – It does.’ – ‘Did it do so in 1844? – It did not.’83 – ‘Then this Bank Act (of 1844) has worked very well for the proprietors?… The result is, that since the passing of the Act, the dividend to the proprietors has been raised from 7 per cent to 9 per cent, and the income tax, that previously to the Act was paid by the proprietors, is now paid by the Bank? – It is so’ (Nos. 4356–61).
On the question of hoarding by the banks during the crisis of 1847, Mr Pease, a country banker, had this to say: ‘4605. As the Bank was obliged still to raise its rate of interest, every one seemed apprehensive; country bankers increased the amount of bullion in their hands, and increased their reserve of notes, and many of us who were in the habit of keeping, perhaps, a few hundred pounds of gold and bank-notes, immediately laid up thousands in our desks and drawers, as there was an uncertainty about discounts, and about our bills being current in the market, a general hoarding ensued.’
A committee member remarked: ‘4691. Then, whatever may have been the cause during the last 12 years, the result has been rather in favour of the Jew and money-dealer, than the productive classes generally.’
Tooke also explains how much the money-dealer exploits a period of crisis: ‘In the hardware districts of Warwickshire and Staffordshire, a great many orders for goods were declined to be accepted in 1847, because the rate of interest which the manufacturer had to pay for discounting his bills more than absorbed all his profit’ (No. 5451).
Let us now take another parliamentary report which has already been quoted: Report of Select Committee on Bank Acts, communicated from the Commons to the Lords, 1857 (quoted from now on as B. A. 1857). In this, Mr Norman, a director of the Bank of England and a leading spokesman for the Currency Principle,* is questioned as follows:
‘3635. You stated, that you consider that the rate of interest depends, not upon the amount of notes, but upon the supply and
demand of capital. Will you state what you include in “capital”, besides notes and coin? – I believe that the ordinary definition of “capital” is commodities or services used in production.’ – ‘3636. Do you mean to include all commodities in the word “capital” when you speak of the rate of interest? – All commodities used in production.’ – ‘3637. You include all that in the word “capital”, when you speak of what regulates the rate of interest? – Yes. Supposing a cotton manufacturer to want cotton for his factory, the way in which he goes to work to obtain it is, probably, by getting an advance from his banker, and with the notes so obtained he goes to Liverpool, and makes a purchase. What he really wants is the cotton; he does not want the notes or the gold, except as a means of getting the cotton. Or he may want the means of paying his workmen; then again, he borrows the notes, and he pays the wages of the workmen with the notes; and the workmen, again, require food and lodging, and the money is the means of paying for those.’ – ‘3638. But interest is paid for the money? – It is, in the first instance; but take another case. Supposing he buys the cotton on credit, without going to the bank for an advance, then the difference between the ready-money price and the credit price at the time at which he is to pay for it is the measure of the interest. Interest would exist if there was no money at all.’
This complacent rubbish is entirely worthy of this pillar of the Currency Principle. First the discovery, worthy of a genius, that banknotes or gold are means of buying something, and that people do not borrow them for their own sake. And what is the interest rate supposed to be governed by on this assumption? By the demand and supply of commodities, which is what we have always been told governs the market price of commodities. But quite different rates of interest are compatible with the same market prices. Now the cunning emerges. He is faced with the correct remark, ‘But interest is paid for the money’, which of course implies the question: What has the interest that the banker receives without in any way dealing in commodities got to do with these commodities? And do not manufacturers receive the same rate of interest for money they put out in completely different markets, i.e. in markets where there is a quite different relationship between the demand and supply of the commodities needed for production? – To this question, our celebrated genius replies that, if the manufacturer buys cotton on credit, then ‘the difference between the ready-money price and the credit price at the time at which he is to pay for it is the measure of the interest’. Quite the opposite. The prevailing rate of interest, the regulation of which it is the task of our genius Norman to explain, is the measure of the difference between the cash price and the price on credit. First of all, the cotton is for sale at its cash price. This is determined by the market price, which is itself governed by the state of demand and supply. Say that the price is £1,000. This concludes the transaction between the manufacturer and the cotton broker, as far as buying and selling is concerned. But now there is a second transaction as well. This is one between lender and borrower. The value of £1,000 is advanced to the manufacturer in cotton, and he has to pay it back in money, say in three months’ time. The interest on £1,000 for three months, as determined by the market rate of interest, then forms the extra charge over and above the cash price. The price of cotton is determined by supply and demand. But the price for the advance of the cotton’s value for three months, for the £1,000, is determined by the rate of interest. And this circumstance, i.e. that the cotton itself is transformed in this way into money capital, proves to Mr Norman that interest would exist even if money did not. If there was no money at all, there would certainly not be a general rate of interest.
The first thing to note is a vulgar conception of capital as ‘commodities used in production’. In so far as these commodities figure as capital, they express their value as capital, as distinct from their value as commodities, in the profit that is made from their productive or commercial use. And the rate of profit necessarily has always something to do with the market price of the commodities bought and the demand and supply for them, even if it is determined by quite different factors. There is no doubt at all that the rate of profit forms a general limit to the rate of interest. But what Mr Norman is supposed to tell us is just how this limit is determined. And it is determined, by the demand and supply for money capital as distinct from other forms of capital. It could now be asked further: how is the demand and supply for money capital determined? There is beyond doubt a tacit connection between the supply of material capital and the supply of money capital, and it is equally clear that the industrial capitalists’ demand for money is determined by the circumstances of actual production. Instead of enlightening us on this subject, Norman offers us the wisdom that the demand for money capital is not identical with the demand for money as such; and this only because Overstone, he, and the other currency prophets always have at the back of their minds a bad conscience about the way they are seeking by way of artificial legislative intervention to make the means of circulation into capital as such, and to raise the rate of interest.
Now to Lord Overstone, alias Samuel Jones Loyd, when he has to explain why he takes 10 per cent for his ‘money’ because ‘capital’ is so scarce.
‘3653. The fluctuations in the rate of interest arise from one of two causes: an alteration in the value of capital’ (Superb! The value of capital, generally speaking, is precisely the rate of interest! A change in the rate of interest, therefore, is derived here from a change in the rate of interest. ‘The value of capital’, as we have already shown, never means anything else in theory. Or else, if Lord Overstone understands by value of capital the rate of profit, then this penetrating thinker comes back to the fact that the interest rate is governed by the profit rate!) ‘or an alteration in the amount of money in the country. All great fluctuations of interest, great either in their duration or in the extent of the fluctuation, may be distinctly traced to alterations in the value of capital. Two more striking practical illustrations of that fact cannot be furnished than the rise in the rate of interest in 1847 and during the last two years (1855–6); the minor fluctuations in the rate of interest, which arise from an alteration in the quantity of money, are small both in extent and in duration. They are frequent, and the more rapid and frequent they are, the more effectual they are for accomplishing their destined purpose,’ i.e. to enrich bankers like Overstone. Friend Samuel Gurney expresses himself very naïvely on this before the House of Lords committee, C. D. 1848[–57]: ‘1324. Do you think that the great fluctuations in the rate of interest which have taken place in the last year are advantageous or not to bankers or dealers in money? – I think they are advantageous to dealers in money. All fluctuations in trade are advantageous to the knowing man.’ – ‘1325. May not the banker suffer eventually from the high rates of interest, by impoverishing his best customers? – No; I do not think it has that effect perceptibly.’
Voilà ce que parler veut dire [That’s what I call talking].
We shall return to the question of how the rate of interest is influenced by the sum of money available. But it must be noted at this point already that Overstone is guilty here again of a quid pro quo. In 1847, the demand for money capital decreased for various reasons. (Before October there was no worry about monetary tightness, or the ‘quantity of money’ as he called it above.) Dearer corn, rising cotton prices, the unsaleability of sugar on account of overproduction, railway speculation and crash, the flooding of foreign markets with cotton goods, the forcible export and import trade with India described above, for the purpose of speculation in bills of exchange. All these things, overproduction in industry as well as underproduction in agriculture, i.e. quite different reasons, led to a rise in the demand for money capital, i.e. for credit and money. The increased demand for money capital had its origins in the course of the production process itself. But whatever the cause, it was the demand for money capital that made the rate of interest, the value of money capital, rise. If Overstone is trying to say that the value of money capital rose because it rose, this is a tautology. But if by ‘value of capital’ what he means here is a rise in the profit rate as a cause of the rise in the rate of interest, this immediately proves to be false. The demand for money capital, and thus the ‘value of capital’, can rise even though profit is falling; as soon as the relative supply of money capital falls, its ‘value’ rises. What Overstone is trying to prove is that the crisis of 1847, and the high rate of interest that accompanied it, had nothing to do with the ‘quantity of money’ present, i.e. with the provisions of the 1844 Bank Act which he had inspired; although it actually did have something to do with it, as soon as fear of exhaustion of the Bank’s reserve (and this was a creation of Overstone’s) added monetary panic to the 1847–8 crisis. But this is not the point here. There was a dearth of money capital brought about by the excessive size of operations, in comparison with the means available, and brought to a head by a disturbance in the reproduction process that resulted from the harvest failure, the over-investment in railways, overproduction particularly in cotton goods, swindling in the Indian and Chinese trade, speculation, excessive imports of sugar, and so on. What people who had bought corn at 120 shillings per quarter lacked, when the price fell to 60 shillings, was the 60 shillings too much which they had paid, and the corresponding credit for this in loans with the corn as security. It was in no way a lack of banknotes that prevented them from converting their corn into money at the former price of 120 shillings. The same with those who had imported too much sugar, which became unsaleable. The same with the gentlemen who had tied up their floating capital in railways and had found a replacement by conducting their ‘legitimate’ business on credit. All this, for Overstone, is expressed in ‘a moral-sense of the enhanced value of money’. But this enhanced value of money capital corresponded directly to the fallen monetary value of real capital (commodity capital and productive capital). The value of capital in the one form rose, because the value of capital in the other form fell. Overstone, however, tries to identify these two values of two different kinds of capital in a single unique value of capital, and moreover by opposing both of them to a lack of means of circulation, of ready money. The same amount of money capital, however, can be loaned with very different quantities of the circulation medium.
Let us take his own example of 1847. The official Bank rate was as follows. January, 3–3 1/2 per cent; February, 4–4 1/2 per cent; March, generally 4 per cent; April (panic), 4–7 1/2 per cent; May, 5–5 1/2 per cent; June, mostly 5 1/2 per cent; July, 5 per cent; August, 5–5 1/2 per cent; September, 5 per cent, with minor variations of 5 1/4, 5 1/2 and 6 per cent; October, 5, 5 1/2, 7 per cent; November, 7–10 per cent; December, 7–5 per cent. – In this case interest rose because profits declined and the money values of commodities fell enormously. So if Overstone says on this that the rate of interest rose in 1847 because the value of capital rose, he can only mean by the value of capital the value of money capital, and the value of money capital is precisely the rate of interest and nothing else. But later on he gives the game away and identifies the value of capital with the rate of profit.
As far as the high interest rate paid in 1856 is concerned, Overstone was in fact unaware that this was in part a symptom that the kind of credit-jobbers were coming to the fore who paid interest not out of their profits, but out of other people’s capital; he contended only a few months before the crisis of 1857 that ‘business is perfectly sound’.
He went on to testify: ‘3722. That idea of the profits of trade being destroyed by a rise in the rate of interest is most erroneous. In the first place, a rise in the rate of interest is seldom of any long duration; in the second place, if it is of long duration, and of great extent, it is really a rise in the value of capital, and why does value of capital rise? Because the rate of profit is increased.’
Here, then, we finally learn what the ‘value of capital’ means. Besides, the rate of profit can remain high for a long period, even though profit of enterprise falls and the interest rate rises, so that interest comes to absorb the greater part of profits.
‘3724. The rise in the rate of interest has been in consequence of the great increase in the trade of the country, and the great rise in the rate of profits; and to complain of the rise in the rate of interest as being destructive of the two things, which have been its own cause, is a sort of logical absurdity, which one does not know how to deal with.’
This is about as logical as if he had said: The increased profit rate has been in consequence of a rise in commodity prices brought about by speculation, and to complain that the rise in prices destroys its own cause, i.e. speculation, is a logical absurdity, etc. Only for a usurer enamoured of his high rate of interest is it a logical absurdity that a thing can ultimately destroy its own cause. The greatness of the Romans was the cause of their conquests, and it was their conquests that destroyed their greatness. Wealth is the cause of luxury, and luxury has a destructive effect on wealth. The artful dodger! There is no better sign of the idiocy of the present bourgeois world than the respect that the ‘logic’ of this millionaire, this ‘dung-hill aristocrat’, enjoyed throughout England. Moreover, if a high rate of profit and the expansion of business can be the cause of a high interest rate, this in no way means that a high interest rate is the cause of high profits. And the question is precisely whether this high interest persisted (as was actually discovered in the crisis) or even reached its climax after the high rate of profit had gone the way of all flesh.
‘3718. With regard to a great rise in the rate of discount, that is a circumstance entirely arising from the increased value of capital, and the cause of that increased value of capital I think any person may discover with perfect clearness. I have already alluded to the fact that during the thirteen years this Act has been in operation, the trade of this country has increased from £45,000,000 to £120,000,000. Let any person reflect upon all the events which are involved in that short statement; let him consider the enormous demand upon capital for the purpose of carrying on such a gigantic increase of trade, and let him consider at the same time that the natural source from which that great demand should be supplied, namely, the annual savings of this country, has for the last three or four years been consumed in the unprofitable expenditure of war. I confess that my surprise is, that the rate of interest is not much higher than it is; or, in other words, my surprise is, that the pressure for capital to carry on these gigantic operations, is not far more stringent than you have found it to be.’
What an amazing jumble of words from our usurer logician! Here he is again with his increased value of capital! He seems to imagine that on the one hand there was this enormous expansion of the reproduction process, i.e. an accumulation of real capital, and that on the other hand there was a ‘capital’ for which an ‘enormous demand’ developed, in order to bring about this gigantic increase of trade! But wasn’t this gigantic increase in production itself the increase in capital, and if it created a demand, did it not create at the same time the supply, and at the same time also an increased supply of money capital? If the rate of interest rose to a very high level, this was simply because the demand for money capital grew still more quickly than the supply, which means that, as industrial production expanded, it was conducted to a greater extent on the basis of credit. In other words, the real industrial expansion gave rise to an increased demand for ‘accommodation’, and this latter demand is evidently what our banker understands by the ‘enormous demand upon capital’. But it was certainly not just the expansion of demand for capital that raised the export trade from £45 million to £120 million. And what does Overstone mean, moreover, when he says that the annual savings of the country consumed by the Crimean war form the natural source from which this great demand should have been supplied? Firstly, how then did England accumulate in 1792–1815, which was a war of a quite different order from the little Crimean war? Secondly, if the natural source dried up, from what source did capital flow? As is well known, England did not take out any loans from foreign countries. If there was an artificial source as well as this natural one, it would certainly be the method most favoured by a nation to use the natural source in war and the artificial source in business. But if there was only the old money capital, could its effectiveness be doubled by a high rate of interest? Mr Overstone evidently believes that the country’s annual savings (which in this case were allegedly consumed) are simply transformed into money capital. But if there was no real accumulation, i.e. a rise in production and an increase in the means of production, what would be the good of an accumulation of claims on this production in the money form?
The rise in the ‘value of capital’ which follows from the high rate of profit is lumped together by Overstone with the rise that follows from an increased demand for money capital. This demand may arise from causes completely independent of the rate of profit. He himself adduces as an example that in 1847 it rose as a result of the devaluation of real capital. According to whether it suits him, he relates the value of capital either to real capital or to money capital.
A further sign of our banking lord’s dishonesty, as well as his restricted banker’s point of view, is given in the following passage: (3728. Question:) ‘You have stated that the rate of discount is of no material moment you think to the merchant; will you be kind enough to state what you consider the ordinary rate of profit?’ – Lord Overstone declares it ‘impossible’ to give an answer. ‘3729. Supposing the average rate of profit to be, say, from 7 to 10 per cent, a variation of from 2 to 7 or 8 per cent in the rate of discount must materially affect the rate of profit, must it not?’
(The question itself confuses the rate of profit of enterprise with the rate of profit, and overlooks the fact that the profit rate is the common source of both interest and profit of enterprise. The interest rate can leave the rate of profit unaffected, but not profit of enterprise. Overstone’s response:)
‘In the first place parties will not pay a rate of discount which seriously interrupts their profits; they will discontinue their business rather than do that.’
(Certainly, if they could do so without being ruined. As long as their profits are high, they pay the discount rate because they wish to, and when it is low, they pay it because they have to.)
‘What is the meaning of discount? Why does a person discount a bill?… Because he wants to obtain the command of a greater quantity of capital.’
(Halte-là [hold it]! Because he wants to anticipate the return in money of his tied-up capital, and prevent his business coming to a standstill. Because he has to meet payments that are due. He requires more capital only if the business is going well, or if he is speculating with someone else’s capital, even when business is bad. Discounting is in no way simply a means for expanding his business.)
‘And why does he want to obtain the command of a greater quantity of capital? Because he wants to employ that capital; and why does he want to employ that capital? Because it is profitable to him to do so; it would not be profitable to him to do so if the discount destroyed his profit.’
Our self-satisfied logician assumes that bills are discounted only in order to expand a business, and that the business is expanded because it is profitable. The first assumption is false. The ordinary businessman discounts his bills to anticipate the money form of his capital and in this way keep the reproduction process going; not to expand his business or spend additional capital, but rather to balance the credit he gives with the credit he takes. If he does want to expand his business on credit, it is little use to him to get bills of exchange discounted, as this simply converts money capital that he already has from one form to another; he would rather take out a fixed loan for a longer period. The credit swindler, however, gets his accommodation bills discounted to expand his business and to cover one squalid deal with another; not to make profit, but to get his hands on other people’s capital.
After Lord Overstone has identified discounting in this way with borrowing extra capital (instead of with converting bills of exchange that represent capital into cash), he immediately retracts as soon as the screws are applied. (3730. Question:) ‘Merchants being engaged in business, must they not for a certain period carry on their operations in despite of any temporary increase in the rate of discount?’ – (Overstone:) ‘There is no doubt that in any particular transaction, if a person can get his command of capital at a low rate of interest rather than at a high rate of interest, taken in that limited view of the matter, that is convenient to him.’
But it is not at all a limited view of the matter when Lord Overstone suddenly comes to understand by ‘capital’ simply his banking capital, and to see the man who discounts a bill of exchange with him as a man without capital, since his capital exists in the commodity form, or the money form of his capital is a bill which Lord Overstone converts into another money form.
3732. ‘With reference to the Act of 1844, can you state what has been about the average rate of interest in proportion to the amount of bullion in the Bank; would it be a fact that when the amount of bullion has been about £9,000,000 or £10,000,000 the rate of interest has been 6 or 7 per cent, and that when it has been £16,000,000, the rate of interest has been, say, from 3 to 4 per cent?’ (The questioner is trying to compel him to explain the rate of interest, as influenced by the amount of bullion in the Bank, on the basis of the rate of interest influenced by the value of capital.) ‘I do not apprehend that that is so… but if it is, then I think we must take still more stringent measures than those adopted by the Act of 1844, because if it be true that the greater the store of bullion, the lower the rate of interest, we ought to set to work, according to that view of the matter, to increase the store of bullion to an indefinite amount, and then we should get the interest down to nothing.’
The questioner, Cayley, undisturbed by this bad joke, continues: ‘3733. If that be so, supposing that £5,000,000 of bullion was to be restored to the Bank, in the course of the next six months the bullion then would amount, say, to £16,000,000, and supposing that the rate of interest was thus to fall to 3 or 4 per cent, how could it be stated that that fall in the rate of interest arose from a great decrease of the trade of the country? – I said that the recent rise in the rate of interest, not that the fall in the rate of interest, was closely connected with the great increase in the trade of the country.’
But what Cayley said was this. If a rise in the rate of interest, together with a contraction in the gold reserve, is a sign of an expansion of business, then a fall in the rate of interest, together with an expansion in the gold reserve, must be a sign of a contraction of business. Overstone has no answer to this.
(3736. Question:) ‘I observed you’ (in the original text always ‘your Lordship’) ‘to say that money was the instrument for obtaining capital.’ (This is precisely the confusion, to see it as an instrument; it is a form of capital.) ‘Under a drain of bullion (of the Bank of England) is not the great strain, on the contrary, for capitalists to obtain money?’ – (Overstone:) ‘No, it is not the capitalists, it is those who are not capitalists, who want to obtain money and why do they want to obtain money?… Because through the money they obtain the command of the capital of the capitalist to carry on the business of the persons who are not capitalists.’
He now explains in so many words that manufacturers and merchants are not capitalists, and that the capitalist’s only capital is simply his money capital. ‘3737. Are not the parties who draw bills of exchange capitalists? – The parties who draw bills of exchange may be, and may not be, capitalists.’ Now he is stuck.
The question is then asked whether the merchants’ bills of exchange do not represent commodities that they have sold or shipped. He denies that these bills represent the value of commodities in the same way as banknotes represent gold. (3740, 3741.) This is a little insolent.
‘3742. Is it not the merchant’s object to get money? – No; getting money is not the object in drawing the bill; getting money is the object in discounting the bill.’
Drawing bills of exchange is transforming commodities into a form of credit money, just as discounting bills is transforming this credit money into a different money, i.e. banknotes. Overstone at least concedes that the purpose of discounting is to receive money. Previously he had claimed that discounting was not to transform capital from one form into the other, but simply to obtain additional capital.
‘3743. What is the great desire of the mercantile community under pressure of panic, such as you state to have occurred in 1825, 1837 and 1839; is their object to get possession of capital or the legal tender? – Their object is to get the command of capital to support their business.’
Their object is to obtain means of payment for bills on themselves that fall due, on account of the shortage of credit that has set in, and not to have to unload their commodities below their proper price. If they do not have any capital at all themselves, of course they obtain capital with these means of payment, since they obtain value without an equivalent. The demand for money as such always consists simply in the desire to convert value from the form of commodities or creditor’s claims into the form of money. Hence, even aside from crises, the great distinction between borrowing capital and discounting, the latter being simply the transformation of monetary claims from one form into another, or into actual money itself.
(As editor, I permit myself an interpolation here.
For both Norman and Loyd-Overstone, the banker is always someone who ‘advances capital’, and his client the person who demands ‘capital’ from him. Thus Overstone says that someone has a bill of exchange discounted with him ‘because he wants to obtain capital’ (3729), and that it is convenient for this person if he ‘can get his command over capital at a low rate of interest’ (3730). ‘Money is the instrument for obtaining capital’ (3736), and in time of panic the great desire of the entire business community is ‘to get the command of capital’ (3742). [All emphases are Engels’s.] For all Loyd-Overstone’s confusion as to what capital is, it emerges clearly enough that what he describes as capital is what the banker gives his client, a capital that the client did not possess previously and which is advanced to him, being in addition to what the client previously disposed of.
The banker has grown so accustomed to figuring as distributor of the available social capital in the money form (distributing it in loans) that any function in which he hands out money appears to him as a loan. All money that he pays out appears to him as an advance. If the money is directly given out as a loan, this is literally correct. If it is used to discount bills of exchange, it is in fact an advance for him until the bill falls due. Thus the idea is reinforced in his mind that he can make no payments that are not advances. And, moreover, advances not just in the sense that any investment of money with the object of making interest or profit is considered in economics as an advance which the owner of the money makes in his capacity as private person, to himself in his capacity as entrepreneur. But rather advances in the specific sense that the banker transfers a sum to his client as a loan, which increases by that much the capital at the latter’s disposal.
It is this idea, transferred from the banker’s office to political economy, that has led to the confusing controversy as to whether what the banker makes available to his clients in cash is capital or mere money, means of circulation, ‘currency’. In order to decide this basically simple question, we have to put ourselves in the position of the bank’s client. The question is what he requires and obtains.
If the bank grants the client a loan simply on his personal credit, without any security on his part, the matter is clear. He receives without condition an advance of a certain value in addition to the capital that he previously applied. He receives it in the money form; not just money, but money capital.
But if the advance is made against securities, etc., which have to be deposited with the bank, it is an advance in the sense that money is paid to him under condition of its repayment, but it is not an advance of capital. For these securities also represent capital, and moreover a higher amount than the advance. The recipient thus receives less capital value than he deposits; and this is in no way an acquisition of extra capital for him. He does not undertake the transaction because he needs capital, but rather because he needs money. Thus there is an advance of money here, but not an advance of capital.
If the advance is made by discounting bills of exchange, the form of an advance also disappears. There is just a simple sale and purchase. The bill becomes by endorsement the property of the bank, the money becoming the property of the client. There is no question now of repayment. If the client uses a bill of exchange or a similar instrument of credit to buy cash, this is no more an advance than if he had bought the cash with some commodity or other, cotton, iron or corn. And still less can there be any question here of an advance of capital. Every purchase and sale between one dealer and another is a transfer of capital. But there is only an advance when the transfer of capital is not reciprocal, but is rather one-sided and for a certain period of time. Thus there can only be a capital advance with the discount of a bill if the bill is an accommodation bill, not representing any commodities sold, and this no banker will accept if he recognizes it for what it is. In the regular discount business, therefore, the bank’s client does not receive any advance, either in capital or in money, but he receives money for the commodity he has sold.
The cases where the client seeks and obtains capital from the bank are thus quite clearly distinct from those where he simply obtains an advance of money, or buys something from the bank. And as Loyd-Overstone in particular is accustomed only in the rarest of cases to advance his funds without collateral (he was my firm’s banker in Manchester), it is equally clear that his pretty description of the masses of capital that the generous bankers advance to manufacturers in need is sheer invention.
In Chapter 32 Marx says essentially the same thing: ‘The demand for means of payment is simply a demand for convertibility into money, in so far as the merchants and producers are able to offer good security; it is a demand for money capital, in so far as this is not the case, i.e. in so far as an advance of means of payment gives them not only the money form, but also the equivalent that they lack for payments, in whatever form this might be’ [p. 648]. And in Chapter 33: ‘When the credit system is developed, so that money is concentrated in the hands of the banks, it is they who advance it, at least nominally. This advance is only related to the money in circulation. It is an advance of circulation, not an advance of the capitals it circulates’ [p. 664, Engels’s emphasis]. Mr Chapman, too, who ought to know, confirms the above interpretation of the discount business (B. A. 1857): ‘The banker has the bill, the banker has bought the bill’ (Evidence. Question 5139) [Engels’s emphasis].
We shall come back to this theme again in Chapter 28. – F. E.)
‘3744. Will you be good enough to describe what you actually mean by the term “capital”?’ – (Overstone:) ‘Capital consists of various commodities, by means of which trade is carried on; there is fixed capital and there is circulating capital. Your ships, your docks, your wharves… are fixed capital; your provisions, your clothes, etc., are circulating capital.’
‘3745. Is the country oppressed under a drain of bullion? – Not in the rational sense of the word.’ (Then comes the old Ricardian theory of money.)… ‘In the natural state of things the money of the world is distributed amongst the different countries of the world in certain proportions, those proportions being such that under that distribution (of money) the intercourse between any one country and all the other countries of the world jointly will be an intercourse of barter; but disturbing circumstances will arise to affect that distribution, and when those arise, a certain portion of the money of any given country passes to other countries.’ – ‘3746. Your Lordship now uses the term “money”. I understood you before to say that it was a loss of capital. – That what was a loss of capital?’ – ‘3747. The export of bullion? – No, I did not say so. If you treat bullion as capital, no doubt it is a loss of capital; it is parting with a certain proportion of those precious metals which constitute the money of the world.’ – ‘3748. I understood Your Lordship to say that an alteration in the rate of discount was a mere sign of an alteration in the value of capital? – I did.’ – ‘3749. And that the rate of discount generally alters with the state of the store of bullion in the Bank of England? – Yes, but I have already stated that the fluctuations in the rate of interest, which arise from an alteration in the quantity of money’ (what he therefore means here is the quantity of actually existing gold) ‘in a country, are very small.’
‘3750. Then, does Your Lordship mean that there is a less capital than there was, when there is a more continuous yet temporary increase in the rate of discount than usual? – Less, in one sense of the word. The proportion between capital and the demand for it is altered; it may be by an increased demand, not by a diminution of the quantity of capital.’
(But it was this very capital that was just now money or gold, and a little earlier on the rise in the rate of interest was explained by a high rate of profit, that arose from the expansion of the business or capital, not from its contraction.)
‘3751. What is the capital which you particularly allude to? – That depends entirely upon what the capital is which each person wants. It is the capital which the country has at its command for conducting its business, and when that business is doubled, there must be a great increase in the demand for the capital with which it is to be carried on.’
(This artful banker first doubles business activity, and then the demand for capital with which this is to be doubled. All he ever sees is his client, who asks Mr Loyd for a bigger capital to double his business with.)
‘Capital is like any other commodity’ (but according to Mr Loyd capital is nothing but the totality of commodities), ‘it will vary in its price’ (hence commodities change their price twice, once as commodities and the other time as capital) ‘according to the supply and demand.’
‘3752. The changes in the rate of discount are generally connected with the changes in the amount of gold which there is in the coffers of the Bank. Is it that capital to which Your Lordship refers? – No.’ – ‘3753. Can Your Lordship point to any instance in which there has been a large store of capital in the Bank of England connected with a high rate of discount? – The Bank of England is not a place for the deposit of capital, it is a place for the deposit of money.’ – ‘3754. Your Lordship has stated that the rate of interest depends upon the amount of capital; will you be kind enough to state what capital you mean, and whether you can point to any instance in which there has been a large store of bullion in the Bank and at the same time a high rate of interest? – It is very probable’ (aha!) ‘that the accumulation of bullion in the Bank may be coincident with a low rate of interest, because a period in which there is a diminished demand for capital’ (namely, money-capital; the period to which reference is made here, 1844 and 1845, was a period of prosperity) ‘is a period, during which, of course, the means or instrument through which you command capital may accumulate.’ – ‘3755. Then you think that there is no connection between the rate of discount and the amount of bullion in the coffers of the Bank? – There may be a connection, but it is not a connection of principle’ (his Bank Act of 1844, however, made it a principle of the Bank of England to regulate the interest rate by the quantity of bullion in its possession), ‘there may be a coincidence of time.’ – ‘3758. Do I rightly understand you to say, that the difficulty of merchants in this country, under a state of pressure, in consequence of a high rate of discount, is in getting capital, and not in getting money? – You are putting two things together which I do not join in that form; their difficulty is in getting capital, and their difficulty also is in getting money… The difficulty of getting money and the difficulty of getting capital is the same difficulty taken in two successive stages of its progress.’
Now the fish is caught again. The first difficulty is to discount a bill or obtain an advance by depositing commodities as security. It is the difficulty of transforming capital or a commercial token of value for capital into money. And this difficulty is expressed, among other things, in a high rate of interest. But once the money is received, where then is the second difficulty? If it is only a question of paying, does anyone ever have difficulty in getting rid of his money? And if it is a question of buying, when has anyone ever found difficulty in buying in times of crisis? And even assuming that this refers to a particular case, with an increase in the price of corn, cotton, etc., the difficulty could still not present itself in the value of the money capital, i.e. the rate of interest, but would rather do so in the price of the commodity; and this difficulty is already solved in that our man now has the money that he needs to buy it with.
‘3760. But a higher rate of discount is an increased difficulty of getting money? – It is an increased difficulty of getting money, but it is not because you want to have the money; it is only the form’ (and this form brings profit into the banker’s pocket) ‘in which the increased difficulty of getting capital presents itself according to the complicated relations of a civilized state.’
3763. (Overstone’s reply:) ‘The banker is the go-between who receives deposits on the one side, and on the other applies those deposits, entrusting them, in the form of capital, to the hands of persons who, etc.’
Here we finally have what he means by capital. He transforms money into capital by ‘entrusting’ it, as he puts it rather euphemistically, i.e. lending it out at interest.
After Lord Overstone had previously said that a change in the discount rate was not essentially connected with a change in the amount of the bank’s gold reserve, or the amount of money present, but was at most connected by coincidence in time, he repeats:
‘3805. When the money in the country is diminished by a drain, its value increases, and the Bank of England must conform to that alteration in the value of money’ (i.e. in the value of money as capital, or in other words, in the rate of interest, for the value of money as money, compared with commodities, remains the same), ‘which is meant by the technical term of raising the rate of interest.’
‘(3819.) I never confound those two.’ – Meaning money and capital, for the simple reason that he never distinguished between them.
‘(3834.) The very large sum, which had to be paid’ (for corn in 1847), ‘which was in point of fact capital, for the supply of the necessary provisions of the country.’
‘(3841.) The variations in the rate of discount have no doubt a very close relation to the state of the reserve’ (of the Bank of England), ‘because the state of the reserve is the indicator of the increase or the decrease of the quantity of money in the country; and in proportion as the money in the country increases or decreases, the value of that money will increase or decrease, and the bank-rate of discount will conform to that change.’
Here, therefore, he concedes what he denied categorically in no. 3755.
‘3842. There is an intimate connection between them.’ Namely, a connection between the amount of gold in the Issue Department and the reserve of notes in the Banking Department. Here he explains the changes in the rate of interest in terms of the changes in the quantity of money. What he says about this is false. The reserve can decline because the money in circulation in the country increases. This is the case if the public accept more notes and there is no decline in the metal reserve. But then the interest rate rises, because the banking capital of the Bank of England is limited by the Act of 1844. Overstone, however, cannot speak of this, since according to this Act the two departments of the Bank have nothing to do with one another.
‘3859. A high rate of profit will always create a great demand for capital; a great demand for capital will raise the value of it.’
Here at last we have the connection between the high profit rate and the demand for capital, as Overstone conceives it. Now in 1844–5, for example, there was a high rate of profit in the cotton industry, since raw cotton was cheap and remained so despite a strong demand for cotton goods. The value of capital (and from an earlier passage, Overstone means by capital that which every person needs in his business), i.e. in this case the value of the raw cotton, was not increased for the manufacturers. Now the high rate of profit may have caused many cotton manufacturers to expand their businesses. In this way their demand for money capital would rise, but not for anything else.
‘3889. Bullion may or may not be money, just as paper may or may not be a bank-note.’
‘3896. Do I correctly understand Your Lordship that you give up the argument, which you used in 1840, that the fluctuations in the notes out of the Bank of England ought to conform to the fluctuations in the amount of bullion? – I give it up so far as this… that now with the means of information which we possess, the notes out of the Bank of England must have added to them the notes which are in the banking reserve of the Bank of England.’
This is superlative. The arbitrary stipulation that the Bank prints as many paper notes as it has gold in its reserve, plus £14 million more, naturally means that its note issue fluctuates with the fluctuations in the gold reserve. But since the present ‘means of information which we possess’ show clearly that the mass of notes that the Bank may manufacture (and which the Issue Department transfers to the Banking Department) – that this circulation between the two departments of the Bank of England, which fluctuates with the fluctuations in its money reserve, does not determine the fluctuations in the circulation of banknotes outside the walls of the Bank of England, it follows that the latter, the real circulation, now becomes completely immaterial for the Bank’s management, and the circulation between the two departments of the Bank, whose difference from the real circulation is shown by the reserve, becomes the sole decisive factor. For the world outside, this is important only in so far as the reserve indicates how close the Bank is to the legal maximum of its note issue, and how much its clients can still obtain from the Banking Department.
The following is a brilliant example of Overstone’s mala fides.*
‘4243. Does the quantity of capital, do you think, oscillate from month to month to such a degree as to alter its value in the way exhibited of late years in the oscillations in the rate of discount? – The relation between the demand and the supply of capital may undoubtedly fluctuate, even within short periods… If France tomorrow put out a notice that she wishes to borrow a very large loan, there is no doubt that it would immediately cause a great alteration in the value of money, that is to say, in the value of capital, in this country.’
‘4245. If France announces, that she wants suddenly, for any purpose, 30 millions’ worth of commodities there will be a great demand for capital, to use the more scientific and the simpler term.’
‘4246. The capital, which France would wish to buy with her loan, is one thing, and the money with which she buys it is another, is it the money, which alters in value, or not? – We seem to be reviving the old question, which I think is more fit for the chamber of a student than for this committee room.’
And with this he retires, though not into the chamber of a student.84