The massive nature of the sum of money which has to be transformed back into capital in this way is the result of the massive scale of the reproduction process; but considered for itself, as money capital for loan, it is not itself a sum of reproductive capital.
The most important thing in our presentation so far is the point that the expansion of that portion of revenue that is destined for consumption (and in this connection we ignore the worker, since his revenue = the variable capital) presents itself first of all as an accumulation of money capital. There is thus an element in the accumulation of money capital that is essentially separate from the genuine accumulation of industrial capital; for the portion of the annual product designed for consumption is in no way capital. A part of it replaces capital, i.e. the constant capital of the producers of means of consumption, but in so far as it really is transformed into capital, it exists in kind as the natural form of the revenue of this constant capital’s producers. The same money that represents revenue, that serves simply to mediate consumption, is regularly transformed for a certain period into loanable money capital. In as much as this money represents wages, it is at the same time the money form of variable capital; and in as much as it replaces the constant capital of the producers of means of consumption, it is the money form that their constant capital temporarily assumes, and serves to purchase the elements of their constant capital that are to be replaced in kind. Neither in one form nor the other does it in itself represent accumulation, even though its volume grows with the scale of the reproduction process. But it temporarily performs the function of money for loan, i.e. of money capital. In this respect, therefore, the accumulation of money capital must always reflect a greater accumulation of capital than is actually taking place, in so far as the expansion of individual consumption, because mediated by money, appears as an accumulation of money capital, since it supplies the money form for genuine accumulation, for money that initiates new capital investments.
The accumulation of money capital for loan thus partly represents nothing more than the fact that all money into which industrial capital is transformed in the course of its circuit assumes the form, not of money that the reproductive agents advance but of money that they borrow; so that in actual fact the advance of money that must occur in the reproduction process appears as an advance of borrowed money. Here, on the basis of commercial credit, one party lends another the money that he needs in the reproduction process. But this takes the form that the banker to whom one section of reproductive agents lend money lends this in turn to the other section of reproductive agents, which makes the banker appear as the benefactor; while at the same time disposal over this capital passes entirely to the bankers as intermediaries.
There are still some special forms of the accumulation of money capital to be explained. Capital may be set free, for example, by a fall in the price of the elements of production, raw materials, etc. If the industrialist cannot directly expand his reproduction process, one part of his money capital is ejected from the circuit as superfluous and is transformed into money capital for loan. Secondly, however, capital is released in the money form, particularly in the case of the merchant, as soon as there are any interruptions to business. If the merchant has settled a whole series of deals and these interruptions mean that he can only begin a new series later, the money that is realized represents for him simply a hoard, superfluous capital. But at the same time it directly represents an accumulation of money capital for loan. In the first case, the accumulation of money capital expresses the repetition of the reproduction process under more favourable conditions, the genuine release of a portion of capital previously tied up, enabling the reproduction process to be expanded with the same monetary means. In the second case, on the other hand, there is simply an interruption in the flow of transactions. But in both cases, money is transformed into loanable money capital, representing an accumulation of it, and has the same effect on the money market and the rate of interest, even though in the one case the genuine accumulation process is promoted, while in the other case it is inhibited. Finally, accumulation of money capital is effected by various people who have feathered their nests and withdrawn from the reproduction process. The greater the profits made in the course of the industrial cycle, the more of these people there are. In this case the accumulation of capital for loan expresses on the one hand a genuine accumulation (in its relative volume); on the other hand simply the degree to which industrial capitalists are transformed into simple money capitalists.
As far as the other portion of the profit is concerned, that not destined to be consumed as revenue, this is transformed into money capital only if it cannot be directly used to expand business in the sphere of production in which the profit was made. This can happen for two reasons: either because this sphere is saturated with capital; or else because in order to function as capital, the accumulation must first have attained a certain volume, according to the due proportions for investment of new capital in this particular business. It is then firstly transformed into money capital for loan and serves to expand production in other spheres. Taking all other circumstances as equal, the amount of profit destined for transformation back into capital will depend on the amount of profit made and hence on the expansion of the reproduction process itself. But if this new accumulation comes up against difficulties of application, against a lack of spheres of investment, i.e. if branches of production are saturated and loan capital is over-supplied, this plethora of loanable money capital proves nothing more than the barriers of capitalist production. The resulting credit swindling demonstrates that there is no positive obstacle to the use of this excess capital. But there is an obstacle set up by its own laws of valorization, by the barriers within which capital can valorize itself as capital. A plethora of money capital as such does not necessarily signify overproduction, or even a lack of spheres of employment for capital.
The accumulation of loan capital simply means that money is precipitated as loanable money. This process is very different from a genuine transformation into capital; it is. simply the accumulation of money in a form in which it can be transformed into capital. As we have shown, however, this accumulation can express elements that are very different from genuine accumulation. With genuine accumulation constantly expanding, this expanded accumulation of money capital can be in part its result, in part the result of elements that accompany it but are quite different from it, and in part also the result even of blockages in genuine accumulation. The very fact that the accumulation of loan capital is augmented by these elements that are independent of genuine accumulation, even if they accompany it, must lead to a regular plethora of money capital at certain phases of the cycle, and this plethora develops as the credit system improves. At the same time as this, there develops the need to pursue the production process beyond its capitalist barriers: too much trade, too much production, too much credit. This must also happen always in forms that bring about a reaction.
As far as the accumulation of money capital from ground-rent, wages, etc. goes, it is unnecessary to go into this here. The only element to be stressed is that as capitalist production and its division of labour progress, the job of genuine saving and abstinence (by hoarders), in so far as this supplies elements of accumulation, is left to those who receive the minimum of such elements, and often enough lose what they have saved, as workers do when banks collapse. For the industrial capitalist does not ‘save’ his capital but rather disposes of the savings of others in proportion to the size of this capital; while the money capitalist makes the savings of other people into his capital, and the credit that the reproductive capitalists give one another, and that the public give them, he makes into his own source of private enrichment. The final illusion of the capitalist system, that capital is the offspring of a person’s own work and savings, is thereby demolished. Not only does profit consist in the appropriation of other people’s labour, but the capital with which this labour of others is set in motion and exploited consists of other people’s property, which the money capitalist puts at the disposal of the industrial capitalist and for which he in turn exploits him.
We still need to say something about credit capital.
How often the same piece of money can serve as loan capital depends entirely, as we have already developed above, on:
(1) How often it realizes commodity values in sale or in payment, i.e. transfers capital, as well as how often it realizes revenue. How often it comes into someone else’s hands as realized value, whether that of capital or of revenue, hence depends evidently on the scale and volume of real transactions.
(2) This depends on economy in payments and the development and organization of the credit system.
(3) It depends finally on the linkage and speed of action of credits, so that if the money is precipitated at one point as a deposit, it is immediately sent out again as a loan.
Even on the assumption that the form in which the loan capital exists is simply that of actual money, gold or silver – the commodity whose material serves as a measure of value – a large portion of this money capital is still necessarily always merely fictitious, i.e. a title to value, just like value tokens. In as much as money functions in the circuit of capital, it certainly forms money capital at one point, but it is not transformed into loanable money capital; it is rather exchanged for the elements of productive capital, or paid out as a means of circulation when revenue is realized, so that it cannot be transformed into loan capital for its possessor. In so far as it is transformed into loan capital and the same money repeatedly represents loan capital, it is still clear that it only exists at one point as metal money; at all other points it exists simply in the form of a claim to capital. The accumulation of these claims, on our assumptions, arises from a genuine accumulation, i.e. from the transformation of the value of commodity capital, etc. into money; and yet the accumulation of these claims or titles as such is still different both from the genuine accumulation from which it arises and from the future accumulation (the new production process) which is mediated by the lending of money.
Prima facie, loan capital always exists in the form of money,9later as a claim to money, since the money in which it originally existed is now in the hands of the borrower in the actual money form. For the lender, it has been transformed into a claim to money, into an ownership title. The same quantity of actual money can therefore represent very different quantities of money capital. Mere money, whether it represents realized capital or realized revenue, becomes loan capital by the simple act of lending it out, by its transformation into a deposit, if we consider the general form in the developed credit system. The deposit is money capital for the depositor. But in the hands of the banker it may only be potential money capital, lying idle in his safe instead of in that of its owner.10
As material wealth increases, the class of money capitalists grows. On the one hand there is an increase in the number and wealth of the retired capitalists, the rentiers; and secondly the credit system must be further developed, which means an increase in the number of bankers, money-lenders, financiers, etc. With the expansion of available money capital, the volume of interest-bearing paper, government paper, shares, etc. also expands, as explained already. At the same time, however, so does the demand for available money capital, since the jobbers who speculate in this paper play a major role in the money market. If all purchases and sales of this paper were simply the expression of genuine capital investment, it would be right to say that they could have no effect on the demand for loan capital, since if A sells his paper, he withdraws just as much money as B puts into paper. Even then, however, in view of the fact that the paper certainly exists, while the capital that it originally represented does not (at least not as money capital), a new demand for money capital of this kind is always created to that extent. But at all events it is then money capital, which was previously at B’s disposition, and is now at A’s.
B.A. 1857, no. 4886. ‘Do you consider that it is a correct description of the causes which determined the rate of discount, to say that it is fixed by the quantity of capital on the market, which is applicable to the discount of mercantile bills, as distinguished from other classes of securities?’ – (Chapman:) ‘No, I think that the question of interest is affected by all convertible securities of a current character; it would be wrong to limit it simply to the discount of bills, because it would be absurd to say that when there is a great demand for money upon’ (the deposit of) ‘Consols, or even upon Exchequer bills, as has ruled very much of late, at a rate much higher than the commercial rate, our commercial world is not affected by it; it is very materially affected by it.’ – ‘4890. When sound and current securities, such as bankers acknowledge to be so, are on the market, and people want to borrow money upon them, it certainly has its effect upon commercial bills; for instance, I can hardly expect a man to let me have money at 5 per cent upon commercial bills, if he can lend his money at the same moment at 6 per cent upon Consols, or whatever it may be; it affects us in the same manner; a man can hardly expect me to discount bills at 5 1/2 per cent, if I can lend my money at 6 per cent.’ – ‘4892. We do not talk of investors who buy their £2,000, or £5,000, or £10,000, as affecting the money-market materially. If you ask me as to the rate of interest upon’ (a deposit of)‘Consols, I allude to people, who deal in hundreds of thousands of pounds, who are what are called jobbers, who take large portions of loans, or make purchases on the market, and have to hold that stock till the public take it off their hands at a profit; these men, therefore, want money.’
With the development of the credit system, large and concentrated money markets are created, as in London, which are at the same time the major seats of dealings in these securities. The bankers put the public’s money capital at the disposal of this gang of dealers on a massive scale, and so the brood of gamblers multiplies.
‘Money upon the Stock Exchange is, generally speaking, cheaper than it is elsewhere,’ said the then Governor of the Bank of England before the House of Lords Secret Committee (C. D. 1848, printed 1857, no. 219).
We have already shown in dealing with interest-bearing capital that the average interest over a period of several years is determined, other things being equal, by the average rate of profit, and not by profit of enterprise, which is no more than profit minus interest.*
Also mentioned already, and to be investigated further below, is the fact that the variations in commercial interest – the interest charged by money-lenders for discounting and loans within the world of trade – also show a phase in the course of the industrial cycle in which the rate of interest rises above its minimum and reaches the average medium level (which it then later exceeds), this movement being the result of a rise in profits.
Two things however should be noted here.
Firstly, if the interest rate remains high for a long period of time (and here we are speaking of the interest rate in a particular country, such as England, where the average rate of interest is given for a relatively long period and is also expressed in the interest paid for long-term loans – what we might call private interest), this is prima facie evidence that the rate of profit during this period is also high, but it does not necessarily prove that the rate of profit of enterprise is high. This latter distinction more or less disappears for capitalists working predominantly with their own capital; they realize the high rate of profit, since they pay their interest to themselves. The possibility of a high rate of interest of longer duration – we are not referring here to the specific phase of pressure on the money market – is given by the high rate of profit. It is possible however that this high rate of profit, after deducting the high rate of interest, leaves only a low rate of profit of enterprise. The latter may contract, while the high rate of profit continues. This is possible because enterprises once embarked upon must be continued. In this phase, operations are conducted largely with credit capital (other people’s); and the high rate of profit may in places be speculative and prospective. It is possible to pay interest at a high rate with a high rate of profit but a declining profit of enterprise. It can be paid – and this is partly the case in periods of speculation – not out of profits but out of the borrowed capital itself, and this situation can last a good while.
Secondly, to say that the demand for money capital and hence the interest rate rises because the profit rate is high is not the same as saying that the demand for industrial capital rises and that this is why the interest rate is high.
In times of crisis the demand for loan capital, and with it the interest rate, reaches its maximum; the rate of profit as good as disappears, and with it the demand for industrial capital. In times such as these everyone borrows simply to pay, to settle commitments already entered into. In the period when business revives after the crisis, on the other hand, loan capital is demanded in order to buy, and to transform the money capital into productive or commercial capital. And then it is demanded either by the industrial capitalist or by the merchant. The industrial capitalist invests it in means of production and labour-power.
The rising demand for labour-power can never be in itself a reason for a rising rate of interest, in so far as this is determined by the profit rate. Higher wages are never a cause of higher profit, even though, taking particular phases of the industrial cycle, they may be one of its results.
The demand for labour-power may increase because the exploitation of labour is proceeding under particularly favourable conditions, but the rising demand for labour-power and hence for variable capital does not in and of itself increase profits but rather reduces them in proportion. Yet the demand for variable capital may increase, and thus also the demand for money capital, while this in turn increases the rate of interest. The market price of labour-power then rises above its average, a more than average number of workers come to be employed, while at the same time the rate of interest rises, because the demand for money capital rises in these conditions. An increased demand for labour-power raises the price of this commodity just like any other, without raising profits, which depend principally on the relative cheapness of this particular commodity. At the same time, however, under the conditions we have assumed, this demand raises the rate of interest, by increasing the demand for money capital. If the money capitalist, instead of lending out money, should transform himself into an industrialist, the fact that he has to pay more for labour would not in and of itself increase his profit but would rather lead to a proportionate reduction in it. The combination of circumstances may still be such that his profit rises, but this is never because he pays more for labour. The latter circumstance, however, in as much as it increases the demand for money capital, is sufficient to raise the interest rate. If wages rise for whatever reason, in otherwise unfavourable conjunctures, the rise in wages causes the profit rate to fall, although the rate of interest rises to the extent that the wage rise increases the demand for money capital.
Apart from labour, what Overstone calls the ‘demand for capital’ consists simply of the demand for commodities. The demand for commodities raises their price, whether this demand rises above the average, or the supply falls below its average. If the industrial capitalist or merchant now has to pay £150, for example, for the same quantity of commodities for which he formerly paid £100, he would have to borrow £150 instead of £100 and would therefore have to pay £7 1/2, at a 5 per cent rate of interest, instead of £5. The amount of interest he has to pay rises, because of the rise in the amount of capital borrowed.
Mr Overstone’s entire aim is to present the interests of loan capital and industrial capital as identical, while his Bank Act is precisely calculated to exploit the difference between these interests for the benefit of money capital.
It is possible that the demand for commodities, in the case where their supply has fallen below the average, absorbs no more money capital than before. The same sum, and perhaps a smaller one, has to be paid for their overall value, but a smaller quantity of use-values is received for this sum. In this case, the demand for loanable money capital remains the same, i.e. the interest rate will not rise, even though the demand for commodities has risen in relation to their supply and the commodities’ price has therefore risen as well. The rate of interest can only be affected when the total demand for loan capital grows, and under the above assumptions this is not the case.
The supply of an article, however, may fall below its average, as is the case with a harvest failure in corn, cotton, etc., while the demand for loan capital grows on the speculation that prices will rise still higher, the most immediate means to make them rise being to withdraw a part of the supply temporarily from the market. In order to pay for the commodities bought without selling them, gold is obtained by way of commercial ‘bill of exchange operations’. In this case the demand for loan capital grows, and the rate of interest may rise as a result of this attempt to block the supply of commodities to the market artificially. The higher rate of interest then expresses an artificial reduction in the supply of commodity capital.
On the other hand the demand for an article may increase 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 even fall, because more commodities are to be had with the same sum of money. There could also be a speculative formation of stocks, partly for use at a favourable moment for the purpose of production, partly in expectation of a later rise in price. In this case, the demand for loan capital could grow, so that the higher rate of interest would be an expression of capital investment in the formation of excessive stocks of the elements of productive capital. All we are considering here is the demand for loan capital as it is influenced by the demand and supply for commodity capital. We have already explained earlier how the changing condition of the reproduction process in the various phases of the industrial cycle affects the supply of loan capital. The trivial statement that the market rate of interest is determined by the supply and demand for (loan) capital is cunningly conflated by Overstone with his own assumption in which loan capital is identical with capital in general, and he seeks in this way to transform the money-lender into the only capitalist and his capital into the only capital.
In times of pressure, the demand for loan capital is a demand for means of payment and nothing more than this; in no way is it a demand for money as means of purchase. The interest rate can then rise very high, irrespective of whether real capital – productive and commodity capital – is abundant or scarce. 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. This is the point at which both sides in the present controversy in the theory of crises are simultaneously right and wrong. Those who say there is simply a lack of means of payment either have in mind the owners of bona fide securities or else they are fools who believe it the duty of a bank, and within its power, to transform every bankrupt swindler into a solvent capitalist by means of paper tokens. Those who say there is simply a lack of capital are either merely splitting hairs, since in times such as these inconvertible capital is present on a massive scale as a result of over-importing and overproduction, or else they are just referring to those credit-jobbers who actually are put in a position where they can no longer obtain other people’s capital to operate with and then demand that the bank should not only help them pay for the capital lost but also enable them to continue their swindling.
It is the foundation of capitalist production that money confronts commodities as an autonomous form of value, or that exchange-value must obtain an autonomous form in money, and this is possible only if one particular commodity becomes the material in whose value all other commodities are measured, this thereby becoming the universal commodity, the commodity par excellence, in contrast to all other commodities. This must show itself in two ways, particularly in developed capitalist countries, which replace money to a large extent either by credit operations or by credit money. In times of pressure, when credit contracts or dries up altogether, money suddenly confronts commodities absolutely as the only means of payment and the true existence of value. Hence the general devaluation of commodities and the difficulty or even impossibility of transforming them into money, i.e. into their own purely fantastic form. Secondly, however, credit money is itself only money in so far as it absolutely represents real money to the sum of its nominal value. With the drain of gold, its convertibility into money becomes problematic, i.e. its identity with actual gold. Hence we get forcible measures, putting up the rate of interest, etc. in order to guarantee the conditions of this convertibility. This can be more or less intensified by erroneous legislation based on incorrect theories of money and enforced on the nation in the interest of money-dealers such as Overstone and company. But the basis for it is provided by the basis of the mode of production itself. A devaluation of credit money (not to speak of a complete loss of its monetary character, which is in any case purely imaginary) would destroy all the existing relationships. The value of commodities is thus sacrificed in order to ensure the fantastic and autonomous existence of this value in money. In any event, a money value is only guaranteed as long as money itself is guaranteed. This is why many millions’ worth of commodities have to be sacrificed for a few millions in money. This is unavoidable in capitalist production, and forms one of its particular charms. In former modes of production, this does not happen, because given the narrow basis on which these move, neither credit nor credit money is able to develop. As long as the social character of labour appears as the monetary existence of the commodity and hence as a thing outside actual production, monetary crises, independent of real crises or as an intensification of them, are unavoidable. It is evident on the other hand that, as long as a bank’s credit is not undermined, it can alleviate the panic in such cases by increasing its credit money, whereas it increases this panic by contracting credit. The entire history of modern industry shows that metal would be required only to settle international trade and its temporary imbalances, if production at home were organized. The suspension of cash payments by the so-called national banks, which is resorted to as the sole expedient in all extreme cases, shows that even now no metal money is needed at home.
It would be ridiculous to say of two individuals that they both have an unfavourable balance of payments in their dealings with one another. If they are each mutually debtor and creditor, it is clear that when their claims do not balance, one of them must be debtor to the other for the remainder. With nations, this is in no way the case. And this fact is recognized by all economists in the statement that the balance of payments may be favourable or unfavourable for a country, even though the balance of trade must ultimately balance out. The balance of payments is distinct from the balance of trade in that it is that balance of trade which must be settled at a particular date. The effect of crises, then, is to compress the difference between the balance of payments and the balance of trade into a short period of time; and the specific conditions that develop in nations affected by a crisis, and hence by the arrival of this date of payment, already involve a contraction of this kind in the settlement period. Firstly, the shipment of precious metals abroad; then the forced selling of goods sent on consignment; the export of commodities in order to sell them off cheaply or obtain money advances on them at home; the recall of credit, the fall in security values, the forced selling of foreign securities, the attraction of foreign capital to invest in these devalued securities, and finally bankruptcy, which settles a whole series of claims. In this connection, metal is often still sent to the country where the crisis has broken out, because drafts on it are uncertain and payment in metal more secure. Added to this is the fact that, in relation to Asia, all capitalist countries are generally debtors simultaneously, either directly or indirectly. Once these various factors exert their full effect on the other countries involved, these too experience an export of gold or silver, i.e. their payments fall due, and the same phenomenon is repeated.
In the case of commercial credit, interest, as the difference between the credit price and the cash price, is involved in the price of a commodity only in so far as bills of exchange have a longer term than usual. In other cases not. And this is explained by the fact that each person takes this credit from one direction and extends it in another. (This does not tally with my own experience. – F. E.) But in so far as discounting is involved here in this way, it is not governed by this commercial credit, but rather by the money market.
If the demand and supply of money capital, which determines the rate of interest, were identical with the demand and supply of real capital, as Overstone maintains, then according to whether we considered various different commodities or the same commodity at different stages (raw material, semi-finished goods, finished product), interest would have to be both low and high at the same time. In 1844 the Bank of England’s interest rate fluctuated between 4 per cent (from January to September) and 2 1/2–3 per cent (from November to the end of the year). In 1845 it was 2 1/2, 2 3/4 and 3 per cent from January to October, and between 3 and 5 per cent during the remaining months. The average price of fair Orleans cotton was 6 1/4d. in 1844 and 4 7/8d. in 1845. On 3 March 1844, the Liverpool cotton stock was 627,042 bales, and on 3 March 1845, 773,800 bales. To judge from the low price of cotton, the rate of interest should have been low in 1845, which was in fact the case for the greater part of the year. But to judge from the yarn, it should still have been high, for prices were relatively high and, profits absolutely so. From cotton at 4d. a lb. in 1845, yarn could be spun at a cost of 4d. (good secunda mule twist no. 40), which thus cost the spinner a total of 8d.; but he could sell this in September and October 1845 at <img>d. or 1ld. per lb. (See evidence of Wylie, below.)
The whole question can be resolved in the following way.
The demand and supply for loan capital would be identical with the demand and supply for capital in general (although this last phrase is absurd; for the industrialist or merchant, commodities are a form of his capital, but he never demands capital as such, but always a particular commodity, buying and paying for it as a commodity, corn or cotton, irrespective of the role it has to fulfil in the circuit of his capital), if there were no money-lenders and instead of them the lending capitalist owned machines, raw material, etc. and lent these out or hired them, as houses are rented now, to industrial capitalists who were themselves the owners of a section of these objects. In conditions such as these, 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. It is evident however that the division of profit between lender and borrower would then be completely dependent, in the first place, on the ratio in which this capital is borrowed and in which it is the property of the person using it.
According to Mr Weguelin (B. A 1857), the rate of interest is determined by ‘the amount of unemployed capital’ (252); it is ‘but an indication of a large amount of capital seeking employment’ (271). Later this unemployed capital is called ‘floating capital’ (485), and by this he understands ‘the Bank of England notes and other kinds of circulation in the country, for instance, the country banks circulation and the amount of coin which is in the country… I include in floating capital the reserves of the bankers’ (502, 503) and later also gold bullion (503). Thus the same Mr Weguelin says that the Bank of England exerts great influence upon the rate of interest in times when ‘we’ (the Bank of England) ‘are holders of the greater portion of the unemployed capital’ (1198), whereas according to the above evidence of Mr Overstone, the Bank of England ‘is no place for capital’. Mr Weguelin further says: ‘I think the rate of discount is governed by the amount of unemployed capital which there is in the country. The amount of unemployed capital is represented by the reserve of the Bank of England, which is practically a reserve of bullion. When, therefore, the bullion is drawn upon, it diminishes the amount of unemployed capital in the country and consequently raises the value of that which remains’ (1258).
John Stuart Mill says (2102): ‘The Bank is obliged to depend for the solvency of its Banking Department upon what it can do to replenish the reserve in that department; and therefore as soon as it finds that there is any drain in progress, it is obliged to look to the safety of its reserve, and to commence contracting its discounts or selling securities.’
Taking the Banking Department by itself, the reserve is a reserve for deposits only. According to the Overstones, the Banking Department should simply act as a banker, without regard to the ‘automatic’ note issue. But in times of real pressure, the Bank of England keeps a very sharp eye on the metal reserve, independently of the reserve of the Banking Department, which consists simply of notes; and it must do so, if it does not want to go broke. For to the same extent that the metal reserve disappears, so too does the reserve of banknotes, and no one should know this better than Mr Overstone, who so wisely established this very device in his 1844 Bank Act.